EXHIBIT 1
Michael R. Drayne
814 Woodside Parkway
Silver Spring, Maryland 20910
September 20, 2000
Board of Directors of Monarch Services, Inc.
4517 Harford Road
Baltimore, MD 21214
To the Board of Directors of Monarch Services, Inc.:
I am offended and gravely concerned by your oversight of the company's affairs,
and wish to express and explain my insistence that an abrupt change of course is
in order.
Monarch Services is owned by its shareholders. These shareholders have
installed you as directors for the sole purpose of serving as guardians of their
investment. Your obligation is to see that the company's affairs are managed so
as to protect and promote an increase in our investment's value.
Monarch's board can no longer be said to be fulfilling this obligation.
One example of a lack of proper concern for the shareholders' interests is the
company's large cash balance. The board has never justified to the shareholders
its decision to retain custody of such outsized cash balances. I believe that
most shareholders have invested in the company believing it to be a magazine
publisher, not a "blind pool." The funds should be returned to the shareholders
if they are not required to support the company's current or proposed
operations. Any other use of the funds should be put to a shareholder vote.
The current depressed stock price makes clear that the failure to take proper
action with respect to these funds has been to the detriment of shareholder
value.
Last year we learned that the directors had bestowed upon themselves cash
bonuses totaling $100,000. This seemed an extraordinarily generous amount for
the board of a small company to be directing to itself at a time when the
after-tax operating earnings of the publishing business could only have been a
few hundred thousand dollars more, and the stock price had been flat for a full
decade.
As I learned to my horror when I read this year's preliminary proxy statement,
however, the board bonus of 1999 was only a warm-up.
The rationale for stock options is described quite well, ironically, in the
opening paragraph of Monarch's Omnibus Stock Plan, which expresses the goal of
"providing key people with incentives to improve stockholder value." In my
view, the proper use of an option program at Monarch would have been to provide
an incentive to the management of Girls' Life to continue to improve the
revenues and profit margins of the business in the hope of reaping the rewards
of this through appreciation of the stock price.
An essential fact about stock options that often gets overlooked is that every
dollar of value that results from stock option grants comes from the
shareholders - either their cash is reduced or their interest is diluted. The
objective of a sound stock option program, therefore, is to promote sensible
trade-offs; shareholders should be willing to give up some potential value to
ensure that the people who are responsible for creating the value are given the
incentive to do so.
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I believe the board's use of the Omnibus Stock Plan is a disgrace. Far from
using the plan to further the creation of new value by key employees, it appears
that the board's principal concern was to enrich itself. It awarded to the
directors an extraordinary number of options to buy shares at the current
severely depressed price - which depression, after all, is very likely due in
part to factors that represent poor governance by the board, such as Eric Dott's
poison pill and the failure to appropriately address the issues of shareholder
value posed by the cash hoard. The directors have been given a free ride, to be
paid for out of the potential rewards for which the shareholders have paid cash.
My analysis is that if, over the vesting period, the stock price merely rose to
reflect the intrinsic value of the company today, with no additional creation of
value, the windfall to the insiders would be in the neighborhood of $1,000,000.
As the holder of approximately 5% of Monarch's shares, Swampoodle L.P.'s
contribution toward this largesse would therefore be about $50,000, which is a
sizable chunk of the amount it has invested, and a significant diminution of the
return I would have expected it to earn by risking its capital in this company.
How does their stewardship of our investment entitle the directors to
appropriate such a potentially large share of it?
For the outside directors whose own money is not at stake, and who rewarded
themselves so handsomely last year, to devalue Swampoodle L.P.'s investment by
laying such a large claim to it is unjustified and unseemly. For the
controlling shareholders, who already own 37% of the shares, to do so is simply
unconscionable.
As if the expression of the board's priorities conveyed by this action was not
clear enough, we also have the proposal to reincorporate the company in
Maryland. The meaning of this maneuver is so obvious as to render detailed
comment superfluous. It is intended to further entrench management, and render
the controlling interests immune to the consequences of failing to act according
to the interests of the outside shareholders. The preliminary proxy statement's
attribution of this proposal to a primary desire to save an annual fee of $3,000
was shameful and dishonest.
As strongly as I would feel about these issues in and of themselves, their true
importance results from the implications they have for the future prospects of
an investment in Monarch, and their relation to the single most important issue
before Monarch's directors and investors: the economic inefficiency of Monarch's
status as an independent, publicly-held company.
It seems reasonable to suppose that Girls' Life would have additional
opportunities to improve its revenues, and lower its costs, if it were owned by
a larger firm that published other magazines. But a more obvious handicap is
the drain on earnings of Monarch's corporate overhead, which ensures that the
company will have much lower profit margins than its competitors. The direct
costs of staying public consume a sizable share of the gross profit generated by
the magazine. I expect the costs of filing and registration fees, legal fees,
accountant's fees, proxy solicitation fees, stock transfer fees and whatever
else is required to remain public are at least $150,000 per year (and this year
they would have been much higher).
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The high cost of Monarch's public company status begs the question of what
purpose is being served by these expenditures. The reason for a company to be
public is because it can be an efficient way of raising large amounts of
capital, and because it affords liquidity to its owners. But Monarch doesn't
need capital; it has way too much already. And there is barely any liquidity in
the market for its shares; a recent sale of 200 shares sent the stock price down
almost 10%.
To all this I am sure the response of the board would be that improving business
performance will raise the share price so we can all make money. But share
prices don't just levitate on their own. They rise because there are
consistently more people interested in buying the stock than in selling it. So
where are these people going to come from, and what is it that they will see
when they consider an investment?
To be sure, they will see a company whose current management developed, from
scratch, what is today a thriving magazine. But they will also see the limited
liquidity, high expense base, unexplained cash hoard, poison pill, expensive and
misleadingly justified reincorporation, and insider self-dealing and destruction
of shareholder value via the stock option plan. How many investors are going to
be attracted to a $6 million market cap company that evidences contempt for its
shareholders?
Many of these issues, it is true, existed at the time Swampoodle initiated its
investment in Monarch. For some time, however, I was content, given the
undeniable achievement represented by Girls' Life, to give management the
opportunity to pursue its own course. My reward for this has been the contents
of the preliminary proxy statement, which have made it clear to me that
Swampoodle L.P.'s interests, and those of all the public shareholders, demand a
different approach.
For these reasons I call upon the board of directors of Monarch Services, Inc.,
to do the following:
1. Postpone the company's 2000 Annual Meeting of Stockholders;
2. Engage a qualified investment banking firm to conduct an independent
appraisal of the company's value; and, subsequently,
3. Propose for a vote at a rescheduled 2000 Annual Meeting of Stockholders
whatever course of action will most fully and immediately realize for the
public shareholders the value of their investment in the company, whether
that be restructuring, sale, liquidation or other actions as may be
appropriate.
I appreciate your consideration of this proposal.
Very truly yours,
Michael R. Drayne
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