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 JANUARY 31, 1998 COMMISSION FILE NO. 0-8512
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MONARCH AVALON, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 52-1073628
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(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
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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 January 31, 1998, 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>
January 31, April 30,
1998 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,540 $2,131
Investments (at lower of cost or market) 148 148
Accounts receivable, net 1,280 1,213
Inventories, net 2,221 2,070
Other current assets 313 134
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TOTAL CURRENT ASSETS 5,502 5,696
PROPERTY AND EQUIPMENT 4,612 4,494
Less allowance for depreciation (4,018) (3,921)
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594 573
OTHER ASSETS AND DEFERRED CHARGES 54 43
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TOTAL ASSETS $6,150 $6,312
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 514 $ 459
Accrued expenses 221 281
Deferred subscription revenues 1,396 617
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TOTAL CURRENT LIABILITIES 2,131 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 January 31, 1998 and
April 30, 1997 527 527
Capital surplus 3,378 3,378
Retained earnings 236 1,172
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4,141 5,077
Treasury stock at par - shares
outstanding 490,165 on January
31, 1998 and April 30, 1997 (122) (122)
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4,019 4,955
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,150 $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 Nine Months Ended
January 31, January 31,
---------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 1,748 $ 2,315 $ 5,963 $ 5,995
Cost of goods sold 1,717 1,210 4,381 3,734
------- ------- ------- -------
Gross profit 31 1,105 1,582 2,261
Selling, general and
administrative expenses 616 700 2,223 1,796
Research and development 118 108 347 294
------- ------- ------- -------
Operating expenses 734 808 2,570 2,090
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Income (loss) from operations (703) 297 (988) 1,171
Other income, net 17 36 52 96
------- ------- ------- -------
Income (loss) before income (686) 333 (936) 267
taxes
Provision for income taxes 0 0 0 0
------- ------- ------- -------
Net income (loss) (686) 333 (936) 267
------- ------- ------- -------
Income (loss) per share $ (0.42) $ 0.21 $ (0.58) $ 0.16
------- ------- ------- -------
Weighted average shares
outstanding 1,619,820 1,619,820 1,619,820 1,619,995
--------- --------- --------- ---------
<FN>
See notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
MONARCH AVALON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine Months Ended
January 31,
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1998 1997
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(000's omitted)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from operations $ (936) $ 267
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Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 97 115
Unrealized loss (gain) on investments 0 ( 3)
Changes in accounts receivable,
inventories, other assets, accounts
payable, accrued expenses and
deferred subscription revenue 366 (204)
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Net cash used in operating activities (473) 175
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (118) (126)
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Net cash provided by (used in) (118) (126)
investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock 0 ( 1)
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Net cash provided by (used in) 0 ( 1)
financing activities
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Net increase (decrease) in cash and cash
equivalents (591) 48
Cash and cash equivalents at beginning of
period 2,131 1,966
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Cash and cash equivalents at end of period $1,540 $2,014
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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 Broken Windows, Inc. (Monarch, Girls' Life Inc. and Broken Windows, 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 nine months ended January 31, 1998 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 November 26, 1997, Broken Windows, Inc. opened a retail store in Maryland,
trading as "Nickel Street", for the purpose of selling computer and board games
manufactured by Monarch Avalon, Inc. and computer and board games manufactured
by other companies. Products associated with Girls' Life Magazine were also
offered for sale to the general public. The retail store was closed on January
17, 1998.
NOTE B - ACCOUNTS RECEIVABLE
Accounts receivable are net of the following allowances:
January 31, 1998 April 30, 1997
---------------- --------------
(000's omitted)
Doubtful accounts $143 $139
Customer returns 194 194
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$337 $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:
January 31,1998 April 30, 1997
--------------- --------------
(000's omitted)
Raw materials $1,002 $ 752
Work in progress 153 112
Finished goods 1,066 1,206
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$2,221 $2,070
The above components are shown net of the inventory reserve of $350,000 to
reduce the amounts to lower of cost or market at January 31, 1998 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 two wholly-owned
active subsidiaries, Girls' Life, Inc., that publishes a magazine and Broken
Windows, Inc., t/a "Nickel Street" that operates a retail store.
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 THIRD QUARTER OF FISCAL YEAR 1998 AND 1997
Net sales decreased by $567,000 or 25% in the third quarter of fiscal 1998 as
compared to the third quarter of fiscal 1997. Sales in the games division
decreased by $766,000 or 56% in the third quarter of fiscal 1998 compared to the
third quarter of fiscal 1997 as a result of the decrease in the number of new
releases of computer games and returns of computer games in the third quarter of
fiscal 1998 compared to the third quarter in 1997. Sales in the printing
division decreased by $82,000 in the third quarter of fiscal 1998 or 11% from
the third quarter of fiscal 1997 as a result of increased competition. Sales of
Girls' Life magazine in the third quarter of fiscal 1998 increased by $267,000
or 141% from the third quarter of fiscal 1997. 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. Sales of Broken Windows, Inc. accounted for $14,000 or less than
1% of total net sales for the third quarter of fiscal 1998. Broken Windows,
Inc. had no sales for the third quarter of fiscal 1997.
Gross profit decreased by $1,074,000 or 97% during the third quarter of fiscal
1998 compared to the third quarter of fiscal 1997. Gross margin was 2% during
the third quarter of fiscal 1998 as compared to 48% during the third quarter of
fiscal 1997. The decrease in gross margin primarily relates to the decrease in
the sales of computer and board games and lower printing sales.
Operating expenses were 42% of net sales in the third quarter of fiscal 1998 as
compared to 35% in the third quarter of fiscal 1997. Operating expenses for the
third quarter of fiscal 1998 decreased by $74,000 or 9% from the same period in
fiscal 1997, primarily because of lower promotional costs which decreased by
$59,000 or 90% for Girls' Life magazine and lower royalty expense due to
decreases in computer game sales.
<PAGE>
RESULTS FOR THE FIRST NINE MONTHS OF FISCAL YEAR 1997 AND 1996
Net sales decreased by $32,000 or less than 1% in the first nine months of
fiscal 1998 as compared to the same period in fiscal 1997. Sales in the game
division for the first nine months of fiscal 1998 decreased by $863,000 or 26%
compared to the same period in fiscal 1997 as a result of fewer new computer
game releases and the return of computer games in the first nine months of
fiscal 1998. Sales in the printing division for the first nine months of fiscal
1998 decreased by $109,000 or 5% from the same period in fiscal 1997 as a result
of increased competition. Sales of Girls' Life magazine for the first nine
months of fiscal 1998 increased by $927,000 or 139% 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 decreased by $679,000 or 30% during the first nine months of fiscal
1998 compared to the same period in fiscal 1997. Gross margin was 27% during
the first nine months of fiscal 1998 as compared to 38% for the same period
during fiscal 1997. The decrease in gross margin primarily related to decreases
in both games and printing sales.
Operating expenses increased $480,000 or 23% for the first nine months of fiscal
1998 as compared to the same period in fiscal 1997. Operating expenses
represented 43% and 35% of net sales for the first nine months of fiscal 1998
and 1997, respectively. The increase in operating expenses primarily relates to
higher promotional and advertising expenses for publishing sales and new
personnel associated with computer game sales and publishing sales.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company has cash and cash equivalents of approximately
$1,540,000, a decrease of $591,000 from the amount at April 30, 1997. The
decrease resulted from cash used/provided by operations of $473,000, and
purchases of equipment in the amount of $118,000. The Company's cash and cash
equivalents are subject to variation based upon the timing of receipts and the
payment of payables.
At January 31, 1998, the Company has no debt with third party lenders.
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 5
NONE / NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS FOR FORM 8-K
(a) Exhibits
Number Description
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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 03/17/98 By /s/ A. Eric Dott
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A. Eric Dott
Chariman of the Board
Date 03/17/98 /s/ A. Eric Dott
-----------------------------
A. Eric Dott
Chairman of the Board
(Principal Executive Officer)
Date 03/17/98 /s/ Marshall Chadwell
-----------------------------
Marshall Chadwell
Chief Financial Officer
(Principal Accounting and
Financial Officer)
<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 period ended January 31,
1998, and is qualified in its entirety by reference to such financial statements
and the notes thereto.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Apr-30-1998
<PERIOD-START> May-01-1997
<PERIOD-END> Jan-31-1998
<CASH> 1,540
<SECURITIES> 148
<RECEIVABLES> 1,280
<ALLOWANCES> 337
<INVENTORY> 2,221
<CURRENT-ASSETS> 5,502
<PP&E> 4,612
<DEPRECIATION> 4,018
<TOTAL-ASSETS> 6,150
<CURRENT-LIABILITIES> 2,131
<BONDS> 0
0
0
<COMMON> 527
<OTHER-SE> 3,492
<TOTAL-LIABILITY-AND-EQUITY> 6,150
<SALES> 1,748
<TOTAL-REVENUES> 1,765
<CGS> 1,717
<TOTAL-COSTS> 2,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (686)
<INCOME-TAX> 0
<INCOME-CONTINUING> (686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (686)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
