UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR QUARTER ENDED OCTOBER 31, 1997 COMMISSION FILE NO. 0-8512
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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)
4517 Harford Road, Baltimore, Maryland 21214
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 410-254-9200
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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 past 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 [ X ] NO [ ]
As of October 31, 1997, the number of shares outstanding of the issuer's common
stock was 1,619,820 shares.
Transitional Small Business Issue Format (check one): YES [ ] NO [ X ]
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MONARCH AVALON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
October 31, April 30,
1997 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,715 $2,131
Investments (at lower of cost or market) 148 148
Accounts receivable, net 1,354 1,213
Inventories, net 2,236 2,070
Other current assets 349 134
------ ------
TOTAL CURRENT ASSETS 5,802 5,696
PROPERTY AND EQUIPMENT 4,600 4,494
Less allowance for depreciation (3,964) (3,921)
------ ------
636 573
OTHER ASSETS AND DEFERRED CHARGES 53 43
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TOTAL ASSETS $6,491 $6,312
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 596 $ 459
Accrued expenses 255 281
Deferred subscription revenues 935 617
------ ------
TOTAL CURRENT LIABILITIES 1,786 1,357
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
1,619,820 on October 31, 1997 and
April 30, 1997 527 527
Capital surplus 3,378 3,378
Retained earnings 922 1,172
------ ------
4,827 5,077
Treasury stock at par - shares
outstanding 490,165 on October
31,1997 and April 30, 1997 (122) (122)
------ ------
4,705 4,955
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,491 $6,312
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<FN>
See notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
MONARCH AVALON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
---------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 2,588 $ 2,503 $ 4,216 $ 3,680
Cost of goods sold 1,486 1,584 2,664 2,524
------- ------- ------- -------
Gross profit 1,102 919 1,552 1,156
Selling, general and
administrative expenses 991 731 1,607 1,096
Research and development 117 93 230 186
------- ------- ------- -------
Operating expenses 1,108 824 1,837 1,282
------- ------- ------- -------
Income (loss) from operations ( 6) 95 (285) (126)
Other income, net 12 17 35 60
------- ------- ------- -------
Income (loss) before income 6 112 (250) ( 66)
taxes
Provision for income taxes 0 0 0 0
------- ------- ------- -------
Net income (loss) 6 112 (250) ( 66)
------- ------- ------- -------
Income (loss) per share $ 0.0 $ 0.07 $ (0.15) $ (0.04)
------- ------- ------- -------
Weighted average shares
outstanding 1,619,820 1,619,961 1,619,820 1,620,065
--------- --------- --------- ---------
<FN>
See notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
MONARCH AVALON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Six Months Ended
October 31,
----------------
1997 1996
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(000's omitted)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from operations $ (250) $ ( 66)
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Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 43 72
Changes in accounts receivable,
inventories, other assets, accounts
payable, accrued expenses and
deferred subscription revenue (103) (303)
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Net cash used in operating activities (310) (297)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (106) (43)
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Net cash used in investing activities (106) (43)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock 0 ( 1)
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Net cash used in financing activities 0 ( 1)
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Net decrease in cash and cash equivalents (416) (341)
Cash and cash equivalents at beginning of
period 2,131 1,966
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Cash and cash equivalents at end of period $1,715 $1,625
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<FN>
See notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
MONARCH AVALON, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include Monarch
Avalon, Inc. ("Monarch") and its wholly-owned subsidiaries, Girls' Life, Inc.
and Creampuffs, Inc. (Monarch, Girls' Life Inc. and Creampuffs, 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 subsidiaries have been eliminated in
consolidation. Operating results for the three months ended October 31, 1997
are not necessarily indicative of the results that may be expected for the year
ending April 30, 1998. 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, 1997.
On May 22, 1997, the Company incorporated an additional subsidiary, Broken
Windows, Inc. in Maryland. There was no business transacted by Broken Windows,
Inc. for the six months ended October 31, 1997.
NOTE B - ACCOUNTS RECEIVABLE
Accounts receivable are net of the following allowances:
October 31, 1997 April 30, 1997
---------------- --------------
(000's omitted)
Doubtful accounts $139 $139
Customer returns 194 194
---- ----
$333 $333
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:
October 31,1997 April 30, 1997
--------------- --------------
(000's omitted)
Raw materials $ 982 $ 752
Work in progress 127 112
Finished goods 1,127 1,206
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$ 2,236 $2,070
The above components are shown net of lower of cost or market reserves of
$350,000 at October 31, 1997 and April 30, 1997. The Company values its
inventories at the lower of cost (first-in, first-out) or market.
<PAGE>
ITEM II MONARCH AVALON, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of this discussion references to "fiscal 1998" are to the fiscal
year ending April 30, 1998, and references to "fiscal 1997" are to the fiscal
year ended April 30, 1997.
RESULTS OF OPERATIONS
Monarch consists of two divisions, games and printing, and one wholly-owned
active subsidiary, Girls' Life, Inc., that 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' Life magazine) are not seasonal. The timing of new releases of the
Company's games also may affect sales in the game division.
RESULTS FOR THE SECOND QUARTER OF FISCAL YEAR 1998 AND 1997
Net sales increased by $ 85,000 or 3% in the second quarter of fiscal 1998 as
compared to the second quarter of fiscal 1997. Sales in the games division
decreased by $297,000 or 21% in the second quarter of fiscal 1998 compared to
the second quarter of fiscal 1997 as a result of the decrease in the number of
new releases of computer games in the second quarter of fiscal 1998 compared to
the second quarter in 1997. Sales in the printing division decreased by $91,000
in the second quarter of fiscal 1998 or 12% from the second quarter of fiscal
1997. Sales of Girls' Life magazine in the second quarter of fiscal 1998
increased by $473,000 or 134% from the second quarter of fiscal 1998. The
increase in sales of Girls' Life magazine relates primarily to the increase in
promotions and direct mail advertising of the magazine and increased revenue
from newsstand sales and advertising.
Gross profit increased by $183,000 or 20% during the second quarter of fiscal
1998 compared to the second quarter of fiscal 1997. Gross margin was 43% during
the second quarter of fiscal 1998 as compared to 37% during the second quarter
of fiscal 1997. The increase in gross margin primarily relates to the increase
in Girls' Life magazine sales.
Operating expenses were 43% of net sales in the second quarter of fiscal 1998 as
comparted to 33% in the second quarter of fiscal 1997. Operating expenses for
the second quarter of fiscal 1998 increased by $284,000 or 34% from the same
period in fiscal 1997, primarily because of higher advertising expenses which
increased by $63,000 or 175% associated with computer game sales, higher
promotional costs which increased by $251,000 or 398% for Girls' Life magazine
and higher salary expenses associated with game sales and publishing sales which
were partially offset by decreases in royalty expense due to decreases in
computer game sales and decreases in the use of outside services.
<PAGE>
RESULTS FOR THE FIRST SIX MONTHS OF FISCAL YEAR 1998 AND 1997
Net sales increased by $536,000 or 15% in the first six months of fiscal 1998 as
compared to the same period in fiscal 1997. Sales in the game division for the
first six months of fiscal 1998 decreased by $96,000 or 5% compared to the same
period in fiscal 1997 as a result of fewer computer game releases in the first
and second quarters of fiscal 1998. Sales in the printing division for the first
six months of fiscal 1998 decreased by $28,000 or 2% from the same period in
fiscal 1997. Sales of Girls' Life magazine for the first six months of fiscal
1998 increased by $660,000 or 138% compared to the same period in fiscal 1997 as
a result of increased promotions and direct mail advertising of the magazine and
increased revenue from newsstand sales and advertising.
Gross profit increased by $396,000 or 34% during the first six months of fiscal
1998 compared to the same period in fiscal 1997. Gross margin was 37% during
the first six months of fiscal 1998 as compared to 31% for the same period
during fiscal 1997. The increase in gross margin primarily related to increases
in publishing sales which carry a higher gross margin than games and printing
sales.
Operating expenses increased $555,000 or 43% for the first six months of fiscal
1998 as compared to the same period in fiscal 1997. Operating expenses
represented 44% and 35% of net sales for the first six months of fiscal 1998 and
1997, respectively. The increase in operating expenses primarily relates to
higher promotional and advertising expenses for publishing sales and higher
salary expenses associated with computer game sales and publishing sales.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, the Company has cash and cash equivalents of approximately
$1,715,000, a decrease of $416,000 from the amount at April 30, 1997. The
decrease resulted from cash used in operations of $310,000, and purchases of
equipment in the amount of $106,000. 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, 1997, the Company has no debt with third party lenders.
<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 3, 1997.
Results of the voting on the election of directors:
Directors FOR WITHHELD
- --------- --- --------
A. Eric Dott 1,213,166 70,299
David F. Gonano 1,213,166 70,133
Jackson Y. Dott 1,213,166 70,299
Helen Delich Bentley 1,213,166 72,070
Results of the voting on grant of stock options to Helen Delich
Bentley, David F. Gonano, Jackson Y. Dott and A. Eric Dott:
FOR AGAINST ABSTAIN
--- ------- -------
829,205 119,972 4,057
Results of the voting on the ratification of the appointment of
Deloitte & Touche LLP as the independent accountants for the fiscal year ending
April 30, 1998:
FOR AGAINST ABSTAIN
--- ------- -------
1,234,242 16,971 31,936
There were no broker non-votes on these matters.
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS FOR FORM 8-K
(a) Exhibits
Number Description
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21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports have been filed on Form 8-K during this
quarter.
<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 12/15/97 By /s/ A. Eric Dott
-----------------------------
A. Eric Dott
Chariman of the Board
Date 12/15/97 /s/ A. Eric Dott
-----------------------------
A. Eric Dott
Chairman of the Board
(Principal Executive Officer)
Date 12/15/97 /s/ Marshall Chadwell
-----------------------------
Marshall Chadwell
Chief Financial Officer
(Principal Accounting and
Financial Officer)
<PAGE>
EXHIBIT INDEX
21 Subsidiaries of the Registrant
27 Financial Data Schedule
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT MONARCH AVALON, INC.
Percent
Jurisdiction of Voting
in Which Securities
NAME OF CORPORATION Incorporated Owned
- ---------------------------------------------------------------------
Girls' Life, Inc. Maryland 100%
Creampuffs, Inc. Maryland 100%
Broken Windows, Inc. Maryland 100%
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CAPTION>
EXHIBIT 27
Article 5
The schedule contains summary financial information extracted from Monarch
Avalon, Inc.'s unaudited financial statements for the quarter ended October 31,
1997, and is qualified in its entirety by reference to such financial statements
and the notes thereto.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Apr-30-1998
<PERIOD-START> May-01-1997
<PERIOD-END> Oct-31-1997
<CASH> 1,715
<SECURITIES> 148
<RECEIVABLES> 1,354
<ALLOWANCES> 333
<INVENTORY> 2,236
<CURRENT-ASSETS> 5,802
<PP&E> 4,600
<DEPRECIATION> 3,964
<TOTAL-ASSETS> 6,491
<CURRENT-LIABILITIES> 1,786
<BONDS> 0
0
0
<COMMON> 527
<OTHER-SE> 4,705
<TOTAL-LIABILITY-AND-EQUITY> 6,491
<SALES> 2,588
<TOTAL-REVENUES> 2,600
<CGS> 1,486
<TOTAL-COSTS> 2,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6
<INCOME-TAX> 0
<INCOME-CONTINUING> 6
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
