Venable, Baetjer and Howard, LLP
Two Hopkins Plaza
Baltimore, Maryland 21201
Writer's Direct
Number:
(410) 244-7893
December 15, 1995
VIA EDGAR
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Monarch Avalon, Inc
Quarterly Report on Form 10-QSB
Ladies and Gentlemen:
On behalf of Monarch Avalon, Inc. (the "Company"), and
pursuant to Section 13(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder and Rule 101 of
Regulation S-T, transmitted for filing with the Securities
Exchange Commission is the Company's Quarterly Report on
Form 10-QSB, including financial statements, financial
statement schedules, exhibits and all other papers and
documents filed as a part thereof.
As the Company's Common Stock is traded on the
Nasdaq National Market, by copy of this letter we are filing
three copies of the enclosed materials with the National
Association of Securities Dealers, Inc.
Very truly yours,
/s/ Francis X. Gallagher, Jr.
Francis X. Gallagher, Jr.
Enclosures
cc: Nasdaq National Market
Mr. A. Eric Dott
Mr. Marshall Chadwell
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR QUARTER ENDED OCTOBER 31, 1995 COMMISSION FILE NO. 0-8512
MONARCH AVALON, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 52-1073628
(State or other jurisdiction of (IRS Employer
Identification No.)
incorporation or organization)
4517 Harford Road, Baltimore, Maryland
21214
(address of principal executive offices)
Registrant's telephone number, including area code 410-
254-9200
Not applicable
Former name, former address and former fiscal year, if changed since
last report
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
As of October 31, 1995, the number of shares outstanding of the issuer's
common stock was 1,620,170 shares.
Transitional Small Business Issue Format (check one): YES __ NO X
1
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(000's omitted)
October 31, April 30,
1995 1995
<S>
<C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,788 $1,628
Investments (at lower of cost or 159 161
market)
Account receivable, net 1,060 1,343
Inventories, net 2,024 2,138
Other current assets 216 186
TOTAL CURRENT ASSETS 5,247 5,456
PROPERTY AND EQUIPMENT 4,657 4,737
Less allowance for depreciation (4,113) (3,985)
544 752
OTHER ASSETS AND DEFERRED CHARGES 32
37
$5,823 $6,245
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable $234 $372
Accrued expenses 163 359
Deferred subscription revenue 197 153
TOTAL CURRENT LIABILITIES 594 884
STOCKHOLDERS' EQUITY
Preferred Stock-par value $.01
per share:
Authorized 100,000 shares; no
shares issued
Common Stock-par value $.25 per
share:
Authorized 3,000,000 shares;
shares issued-2,109,985; shares
outstanding 1,620,170 527 527
on October 31, 1995 and April 30,
1995
Capital surplus 3,379 3,379
Retained earnings 1,445 1,577
5,351 5,483
Treasury stock at par-489,815
shares on October 31, 1995 and (122)
April 30, 1995 (122)
5,229 5,361
5,823 6,245
See notes to Consolidated
Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MONARCH AVALON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
October 31, October 31,
1995 1994 1995 1994
(000's omitted, except (000's omitted, except
per share data) per share data)
<S> <C> <C> <C> <C>
Net sales $ $ $ $
1,774 1,819 3,309 3,190
Cost of goods sold
1,216 1,137 2,359 2,191
Gross profit
558 682 950 999
Selling, general and 474 495 918 968
administrative expenses
Research and development
96 60 193 166
570 555 1,111 1,134
(Loss) income from operations (12) 127 (161) (135)
Other income, net
16 18 29 40
Income (loss) before income 4 145 (132) (95)
taxes
Provision for income taxes
0 0 0 0
Net income (loss) $ $ $ $
4 145 (132) (95)
Income (loss) per share $ $ $ $
0 0.09 (0.08) (0.06)
Weighted average shares $1,620,170 $1,629,54 $1,620,17 $1,631,301
outstanding 5 0
See notes to Consolidated
Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MONARCH AVALON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
October 31,
1995 1994
(000's omitted)
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Loss ($132) ($295)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and 133 106
Amortization
Unrealized loss or 2 0
investments
Changes in, accounts receivable,
inventories, other assets,
accounts payable, accrued 77 (266)
expenses, and deferred
subscription revenue
Net cash provided by ( used 80 (255)
in) operating activities
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and (20) (82)
equipment
Cash proceeds from disposal of
property and equipment 100 0
Net cash provided by (used in) 80 (82)
investing activities
CASH FLOWS FROM
FINANCING ACTIVITIES:
Purchase of treasury stock 0 (50)
Net cash used in financing 0 (50)
activities
Net decrease in cash and cash 160 (387)
equivalents
Cash and cash equivalents at 1,628 2,675
beginning of period
Cash and cash equivalents at end $1,788 $2,288
of period
See notes to Consolidated
Financial Statements.
</TABLE>
4
<PAGE>
MONARCH AVALON, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements including
Monarch Avalon, Inc. ("Monarch") and its wholly owned subsidiary, Girls'
Life, Inc. (Monarch and Girl's Life, Inc. collectively referred to herein
as "the Company") have been prepared in accordance with the instructions
to Form 10-QSB and do not include all of the information and disclosures
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and charges) considered
necessary for a fair presentation have been included. All material
intercompany balances between Monarch and its subsidiary have been
eliminated in consolidation. Operating results for the six months ended
October 31, 1995 are not necessarily indicative of the results that may
be expected for the fiscal year ending April 30, 1996. For further
information, reference should be made to the financial statements and
notes included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1995.
NOTE B -- ACCOUNTS RECEIVABLE
Accounts receivable are net of the following allowances:
<TABLE>
<CAPTION>
October 31, 1995 April 30, 1995
(000's omitted)
<S> <C> <C>
Doubtful accounts $85 $85
Customer returns 107 243
$192 $328
</TABLE>
NOTE C -- INVENTORIES
For quarterly reporting purposes, Monarch values inventory using both
perpetual records and physical counts, while at year-end values are
determined solely on the basis of physical counts.
The major components of inventories consist of the following:
<TABLE>
<CAPTION>
October 31, April 30,
1995 1995
(000's
omitted)
<S> <C> <C>
Raw materials and $1,026 $1,202
component parts
Work in progress 150 210
Finished goods 848 726
$2,024 $2,138
</TABLE>
The above components are shown net of lower of cost of market reserves of
$350,000 at October 31, 1995 and April 30, 1995. The Company values its
inventories at the lower of cost (first-in, first-out) or market.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For purposes of this discussion references to "fiscal 1996" are to the
fiscal year ending April 30, 1996, and references to "fiscal 1995" are to
the fiscal year ended April 30, 1995.
RESULTS OF OPERATIONS
Monarch consists of two divisions, games and printing. Girls' Life,
Inc., a wholly-owned subsidiary, publishes a magazine.
Sales of products in the games division, primarily board games and
software games designed for use on microcomputers, are somewhat seasonal
in nature because of increased retail game sales during the Christmas
season, while sales of the Company's other products (envelopes, printing
and graphic arts services and Girls' Lifer magazine) are not seasonal.
The timing of new releases of the Company's games also may affect sales
in the games division.
RESULTS FOR THE SECOND QUARTER OF FISCAL 1996 AND 1995
Net sales increased by $45,000 or 2% in the second quarter of fiscal 1996
as compared to the second quarter of fiscal 1995. Sales in the games
division decreased by $218,000 or 19% in the second quarter of fiscal
1996 compared to the second quarter of fiscal 1995 as a result of sales
returns of computer games. Sales in the printing division increased by
$14,000 in the second quarter of fiscal 1996 or 2% from the second
quarter of fiscal 1995. Sales of Girls' Lifer magazine in the second
quarter of fiscal 1996 accounted for $159,000 or 9% of total net sales.
Gross profit decreased by $124,000 or 18% during the second quarter of
fiscal 1996. Consolidated gross margin was 31% of net sales during the
second quarter of fiscal 1996 as compared to 37% during the second
quarter of fiscal 1995. The decrease in gross margin primarily relates
to declines in game sales overall, which carry higher gross margins than
printing sales. While Girls' Lifer failed to cover its cost to publish,
subscription and advertising revenues from Girl's Lifer have continued to
increase.
Operating expenses were 32% of net sales in the second quarter of fiscal
1996 as compared to 31% in the second quarter of fiscal 1995. Operating
expenses for the second quarter of fiscal 1996 increased by $15,000 or 3%
from the same period in fiscal 1995, primarily because of increased
research and development measures.
Other income, which consists of interest income, dividends from
investments and unrealized losses on investments, was $16,000 during the
second quarter of fiscal 1996 as compared to $18,000 during the second
quarter of fiscal 1995. The decline is primarily due to unrealized
losses on investments recorded in the first quarter of fiscal 1996.
6
<PAGE>
RESULTS FOR THE FIRST SIX MONTHS OF FISCAL YEAR 1996 AND 1995
Net sales increased by $119,000 or 4% in the six months ended October 31,
1995 as compared to the same period in fiscal 1995. Sales in the game
division for the first six months of fiscal 1996 decreased by $292,000 or
18% compared to the same period in fiscal 1995 as a result of sales
returns of computer games. Sales in the printing division for the first
six months of fiscal 1996 increased by $109,000 or 9% from the same
period in fiscal 1995. Sales of Girls Lifer magazine of $302,000 in the
six months ended October 31, 1995 accounted for 9% of total net sales
during the period, compared to 1% for the same period in fiscal year
1995.
Gross profit decreased by $49,000 or 5% during the first six months of
fiscal 1996. Consolidated gross margin was 29% of net sales during the
six month period ended October 31,1995 as compared to 31% for the same
period during the same period in fiscal 1995. The decrease in gross
margin primarily related to decreases in game sales overall, which carry
higher gross margins than printing sales. Girls' Lifer failed to cover
its cost to publish for the first six months of fiscal 1996. However
subscription levels, newsstand sales and advertising income have
continued to increase.
Operating expenses declined $23,000 or 2% for the first six months of
fiscal 1996 as compared to the same period in fiscal 1995. Operating
expenses represented 34% and 35% of net sales for the six months ended
October 31, 1995 and 1994, respectively.
Other income decreased by $11,000 for the six months ended October 31,
1995 compared to the same period in fiscal 1995 as a result of lower
interest income on cash balances which have declined from October 31,
1994 to October 31, 1995.
As previously, reported, the Company is experiencing adverse trends in
each of the segments in which it does business. In its games segment,
the Company has been adversely affected by substantial marketing and
royalty expenses and difficult marketing conditions, including shorter
shelf lives and higher sales returns. In the printing segment, results
have been hurt by competitive pressures on sales prices. In its
publishing segment, the Company's costs to publish Girls' Lifer have
continued to exceed the magazine's revenues.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1995, the Company had cash and cash equivalents of
$1,788,000, an increase of $160,000 from the amount at April 30, 1995.
The increase resulted from cash provided by operations of $80,000, and
proceeds from the sale of certain idle printing equipment, which resulted
in cash provided by financing activities of $80,000. The Company's cash
and cash equivalents are subject to variation based upon the timing of
receipts and the payment of payables.
At October 31, 1995, the Company has no debt with third party lenders.
In view of these trends and those discussed under "Results of
Operations," in July 1995 the Company announced that it had retained
financial advisors to explore strategic business and financial
alternatives. These could include, among other things, possible business
combinations, dispositions of assets or divisions or other similar
transactions. No decisions have been reached as to any such
alternatives, and satisfactory arrangements are not assured.
8
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held on
October 6, 1995.
Results of the voting on the election of directors:
<TABLE>
<CAPTION>
Directors FOR WITHHELD
<S> <C> <C>
Charles C. Baum1,127,975 1,703
Helen D. Bentley1,128,275 1,403
A. Eric Dott1,128,275 1,403
Jackson Y. Dott1,127,150 2,528
</TABLE>
Results of the voting on the ratification of the
appointment of Deloitte & Touche, L.L.P. as the independent accountants
for the fiscal year ending April 30, 1996:
FOR AGAINST ABSTAIN
1,128,764 675 239
Results of the voting on grant of stock options to
Helen D. Bentley:
FOR AGAINST ABSTAIN
1,116,143 12,762 773
Results of the voting on extension of terms of stock
options for Charles C. Baum and Jackson Y. Dott:
FOR AGAINST ABSTAIN
1,111,218 13,369 5,091
There were no broker non-votes on these matters.
9
<PAGE>
ITEMS 1 THROUGH 3 AND 5
NONE / NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
27 Financial Data Schedule
(b) Forms 8-K
The Company did not file any reports on Form 8-K during the six months
ended October 31, 1995.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MONARCH AVALON, INC.
Date December 14, 1995 /s/ A. Eric Dott
A. Eric Dott
Chairman of Board
(Principal Executive Officer)
/s/ Marshall Chadwell
Marshall Chadwell
Chief Financial Officer
(Principal Financial Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Monarch
Avalon, Inc.'s unaudited financial statements for the six months ended
October 31, 1995, and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> OCT-31-1995
<CASH> 1,788
<SECURITIES> 159
<RECEIVABLES> 1,160
<ALLOWANCES> 0
<INVENTORY> 2,024
<CURRENT-ASSETS> 5,247
<PP&E> 4,657
<DEPRECIATION> 4,113
<TOTAL-ASSETS> 5,823
<CURRENT-LIABILITIES> 594
<BONDS> 0
<COMMON> 527
0
0
<OTHER-SE> 4,824
<TOTAL-LIABILITY-AND-EQUITY> 5,823
<SALES> 1,774
<TOTAL-REVENUES> 1,774
<CGS> 1,216
<TOTAL-COSTS> 1,786
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4
<INCOME-TAX> 0
<INCOME-CONTINUING> 4
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
