SECURITES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended April 30, 1998 Commission File No. 0-8512
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MONARCH AVALON, INC.
(Name of small business issuer in its charter)
DELAWARE 410-254-9200 52-1073628
(State or other jurisdiction (Issuer's telephone (I.R.S. Employer
of incorporation or number, including Identification No.)
organization) area code)
4517 Harford Road 21214
Baltimore, Maryland (Zip code)
(Address of principal executive offices)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.25 par value
(Title of each class)
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
twelve 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for the fiscal year ended April 30, 1998 are
$8,231,000.
As of July 15, 1998, the aggregate market value of the Issuer's common
stock held by non-affiliates was $1,484,966.
As of July 15, 1998, the number of shares outstanding of the Issuer's
common stock was 1,619,820.
-----------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed under Regulation 14A
for the annual meeting to be held October 1998 are incorporated by reference
into Part III.
Transitional small business disclosure format (check one):
Yes [ ] No [ X ]
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
(a) General Development of Business
Monarch Avalon, Inc. (the "Company") was incorporated in Delaware on December
20, 1976 as a commercial printing company and as the successor to a developer
and publisher of strategy board games that originally entered the games business
in 1958. On December 14, 1993, the Company incorporated a subsidiary, Girls'
Life, Inc. in Maryland. Girls' Life commenced substantial operations with the
release of its initial bi-monthly publication in August 1994.
(b) Financial Information About Industry Segments
See Note G "Segment Information" in the Notes to Consolidated Financial
Statements in Part II, Item 7 below.
(c) Narrative Description of Business
Principal Products
The Company operated in three business segments during 1998: games, printing
and publishing. All segments share certain facilities and operate under common
management. The games segment develops, manufactures and markets a wide variety
of strategy, sports and family-oriented board games, as well as a line of
software games designed for use on microcomputers. The games segment contributed
$2,844,000 in net sales or approximately 35% of the Company's total revenue in
1998.
Monarch Services, the printing segment, provides commercial printing and graphic
arts services to a wide range of business customers and manufactures envelopes.
Monarch Services also serves as the production facility for the games segment,
producing printed materials and boxes for games. Monarch Services also provides
printing services to the publishing segment, producing promotional and direct
mail literature for the magazine. Interdivision sales or transfers are
accounted for at prices comparable to unaffiliated customer sales. The printing
segment contributed $2,587,000 in net sales or approximately 31% of the
Company's total revenue in 1998.
Girls' Life, Inc. publishes a magazine for young girls ages seven to fourteen.
The magazine, Girls' Life, was launched in August 1994. It is a bi-monthly
publication but the magazine may eventually be published monthly. In September
1996 the Company announced a joint venture with the Girl Scouts of the U.S.A.
that gave the Company direct access to the Girl Scouts' mailing list, which
includes 860,000 girls and 60,000 adult troop leaders. The publishing segment
contributed $2,800,000 in net sales or approximately 34% of the Company's total
revenue in 1998.
The Games Segment
Board Games
The Company has a line of strategy, sports and family-oriented board games. The
Company's predecessor first entered the games market in 1958 when it introduced
its first strategy game. Since that time, it has become a significant player in
the strategy games portion of the games market, which consists primarily of
teenagers and adults who are "game hobbyists". The games are designed to be
challenging, and in many cases the typical playing time for a game is three to
six hours.
<PAGE>
Item 1. BUSINESS - (Continued)
The Company's sports and family-oriented board games are also designed for use
by the teenage and adult recreational market. The Company's predecessor entered
this portion of the games market in the mid 1960's and expanded through the
acquisition of the Sports Illustrated Games Division from Time, Inc. in 1976,
through agreements with independent games developers and through the internal
development of new games. The Company markets a variety of games including games
of mass-market appeal and wargame simulations.
Software Games
The Company also develops, produces and markets under the name "Microcomputer
Games" a line of software games which are designed for use on microcomputers.
The first games were introduced in June 1980. The line includes strategy, sports
and family-oriented games; some are derivations of the Company's existing board
games and others have been developed as unique computer games with playing
characteristics that could not be achieved in board games. Computer games sales
accounted for approximately 24% of total game sales for fiscal 1998.
Research and Product Development
Research and product development are essential aspects of the Company's game
business. The Company regularly receives ideas for games from outside creative
sources, and from time to time purchases rights to existing games from other
companies in the games business. In most cases, the Company enters into an
agreement requiring it to make payments of royalties based on game sales. The
cost of research and development for fiscal 1998 was approximately $443,000 and
approximately $394,000 for fiscal 1997. These costs were charged to operations
as incurred. See Statements of Operations and "Management's Discussion and
Analysis or Plan of Operation" in Part II, Items 7 and 6, respectively, below.
Copyrights and Trademarks
The Company's games and magazine are generally protected by registered
trademarks and copyrights in the United States and foreign countries to the
extent that such protection is available. Such protection is of considerable
importance in the games business. The duration of the protection provided by
these rights is generally in excess of the economic life of any particular game
or magazine issue.
Printing and Envelope Segment
Monarch Services offers a full line of printing and graphic arts services to a
wide range of customers in the industrial, financial and advertising fields. Its
services include offset and letterpress printing, design and idea conception,
finished art, and direct mailing. Monarch Services also manufactures various
types and sizes of envelopes to customer order.
Monarch Services is also the production arm for the games segment. It designs
the graphics for and prints all of the Company's games, and manufactures the
boxes in which the games are sold. Monarch Services also provides printing
services to Girls' Life magazine. It designs and prints promotional and direct
mail literature for the magazine. During fiscal 1998 game production and
publishing production accounted for approximately 25% of Monarch Services'
revenues on an interdivision basis. The loss of game and publishing production
would leave Monarch Services' with significant over capacity.
<PAGE>
Item 1. BUSINESS - (Continued)
Publishing Segment
GIRLS' LIFE
Girls' Life is intended to be an intelligent, non-condescending and easily read
magazine targeted to girls ages seven to fourteen. The philosophy behind the
graphic representation and every article presented is that girls are important,
independent, and intelligent people with opinions of their own. These articles
seek to reinforce that message and inspire confidence in a girl's thoughts,
opinions, and feelings. Editorial material is created by the magazine's staff as
well as through outside writers.
Marketing
The Company's games are marketed in the United States and abroad. In the United
States, board games are primarily sold to toy jobbers, toy stores, department
stores, large retail chains and book stores. The Company's line of games for
personal computers is sold primarily to software wholesalers and computer stores
which sell both hardware and software. Except for certain direct order sales to
consumers, all United States sales are made through sales representative
organizations which are paid on a commission basis. In fiscal 1998 and 1997,
games sales to the Company's ten largest United States customers accounted for
approximately 29% and 47%, respectively, of total game sales. Two customers of
computer games accounted for approximately 7% and 5%, respectively, of total
net sales in 1998.
The Company uses direct mail, trade and consumer publications, and trade shows
to introduce and promote its games.
Printing and graphic arts services and envelopes are marketed primarily in the
Baltimore-Washington area through Company sales personnel who are compensated on
a salary and commission basis.
Girls' Life is sold by subscription and on the newsstand. Subscriptions are sold
by direct-mail solicitation, insert cards and other traditional sources.
Newsstand copies are distributed internationally by Warner Publisher Services.
<PAGE>
Item 1. BUSINESS - (Continued)
Foreign Operations; Export Sales
Sales of games abroad are made to independent distributors located in various
countries. Export sales were $303,000 for fiscal 1998, $466,000 for fiscal 1997
and $561,000 for fiscal 1996. The following table shows for each of the
Company's last three fiscal years, export sales of its games and magazine to the
Company's four largest foreign markets.
Sales (in dollars)
Region 1998 1997 1996
--------------------------------------------------------------
Japan $ 10,800 $ 10,100 $ 21,900
Canada 70,000 143,000 102,300
United Kingdom 106,700 106,400 222,000
Australia 40,600 68,200 55,100
Seasonality; Customer Financing Terms
The Company's games business is somewhat seasonal in nature because of increased
retail game sales during the Christmas season. Sales are highest during the
periods August through October when retailers purchase stock for that season,
and February through April when large customers take deliveries in order to take
advantage of discounts and payment terms offered by the Company for volume
purchases on an "early buy" basis. The early purchase program, which is a common
industry practice, together with the need to maintain an inventory of finished
games in order to satisfy reorder requests quickly, results in a substantial
working capital requirement. To date, the Company has met this requirement
through the internal generation of funds. See "Management's Discussion and
Analysis or Plan of Operation" Item 6, below.
The Company's printing and publishing businesses are not seasonal in nature.
The Company offers credit terms to its trade customers for the purchase of its
products. Payments are due from the Company's trade customers based upon sales
and purchase arrangements which may vary depending upon the identity of the
customer and the nature of the product. In some instances, trade customers may
receive credit for unsold merchandise, or may exchange unsold merchandise for
new products. See Note C of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis or Plan of Operation" in Part II, Items 7
and 6, respectively, below, for a description of the Company's allowance for
doubtful accounts and for sales returns.
<PAGE>
Item 1. BUSINESS - (Continued)
Competition
There are a number of companies engaged in the sale of board and software games,
including a number which are significantly larger than the Company. While the
Company considers itself to be a player in the strategy games market, the
overall board game market, including sports and family games, is dominated by a
few large companies. The Company considers the primary competitive factors for
its line to be the challenge and play appeal of the computer and board games it
develops.
Competition in the games business is principally based on product quality and
features, the compatibility of computer games with popular platforms, company or
product line brand name recognition, access to distribution channels, marketing
effectiveness, reliability and ease of use, price and technical support.
Significant financial resources also have become a competitive factor in the
games business, principally due to the substantial cost of product development
and marketing that is required to support best-selling titles. In addition,
competitors with broad product lines and popular titles typically have greater
leverage with distributors and other customers who may be willing to promote
titles with less consumer appeal in return for access to such competitor's most
popular titles. Retailers typically have a limited amount of shelf space, and
there is intense competition among game producers for adequate levels of shelf
space and promotional support from retailers. The Company believes that its
pricing is generally competitive for the types of games that it sells.
Competition in the printing business is largely based on price, quality, range
of services offered, distribution capabilities, ability to service the
specialized needs of customers, availability of printing time on appropriate
equipment and use of state-of-the-art technology. The Company competes for
commercial business not only with large national printers, but also with smaller
regional printers.
Competition in the magazine industry is intense with numerous other publishers
and retailers, as well as other media, competing for readers and advertising
revenue. The Company considers the primary competitive factors to be the
underlying philosophy of Girls' Life and the market segment being served.
Raw Materials
The principal raw materials used by the Company are finished paper, paperboard
and ink. The Company generally purchases its requirements for each of these
items from single sources, but the Company believes there are, at present,
numerous sources from which its requirements could be met. The price of paper is
a significant expense of the Company's publishing and printing businesses and
began to rise around mid-year 1994 and continued to rise more dramatically in
1995 and early 1996. In mid-1996 paper prices began to fall. Paper price
increases may have an adverse effect on the Company's future results.
Employees
At April 30, 1998, the Company employed approximately 100 full time personnel,
including 17 executive and administrative personnel, 12 research and development
personnel and 71 production personnel. None of the Company's employees are
represented by a union.
<PAGE>
Item 1. BUSINESS - (Continued)
Item 2. DESCRIPTION OF PROPERTY
The Company leases property at the following locations for the following
purposes:
1. 4517 Harford Road, Baltimore, Maryland 21214. This property contains the
Company's offices as well as its printing plant. The property is leased through
2006.
2. 6500 Quad Avenue, Baltimore, Maryland 21205. This property contains a
manufacturing and warehouse facility and the lease expires on May 14, 2000.
The Company leases the Harford Road property from A. Eric Dott who is the
Chairman and a major stockholder of the Company. Although not negotiated at arms
length, management believes the terms of the lease with Mr. Dott are comparable
to lease terms for like properties in the same geographic area.
See "Certain Transactions" in the proxy statement of the Company for the 1998
Annual Meeting of Stockholders and Note F of Notes to Consolidated Financial
Statements included in Part II, Item 7, below. Management believes that the
Company's leased premises are generally adequate for the Company's business
going forward.
Item 3. LEGAL PROCEEDINGS
Companies in the game and publishing industries are, in the ordinary course of
business, made the subject of actions alleging copyright infringement and other
actions. Such actions may allege large damages. The Company has, on an
infrequent basis, had such claims made against it.
In mid-July, the Company settled the lawsuit, counterclaims and other claims
involving MicroProse, Inc., Spectrum Holobyte, Inc., MicroProse Software, Inc.,
Hartland Trefoil, Ltd. and Activision, Inc., that pertain to the Company's
Civilization products. Pursuant to such settlement, the Company paid $411,000
and assigned its rights in the Civilization products to MicroProse, Inc.
For the fiscal year ending April 30, 1998, the Company accrued $411,000 for
settlement fees relating to the lawsuit which was settled in July 1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
NONE
<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock Market Prices and Dividends
The Company's common stock is traded on the Nasdaq SmallCap Market under the
symbol MAHI. The number of stockholders of record on July 15, 1998 was 601.
Because the Company failed to comply with the market value of public float
requirements for continued listing on the Nasdaq National Market, effective with
the commencement of trading on June 19, 1998, the Company's Common Stock was
voluntarily delisted from the Nasdaq National Market and transferred to the
Nasdaq SmallCap Market.
High and low closing sale prices for the last two years as reported on the
Nasdaq National Market were:
Fiscal 1998 Fiscal 1997
Quarter Price Price
Ended High Low High Low
------- ------- ------- -------
July 31 3 2-1/4 2-1/4 1-3/8
October 31 3-1/4 1-11/16 2-1/16 1-5/8
January 31 2-1/4 2 2-7/16 2
April 30 2-1/4 2-1/4 2-5/8 2-1/4
Such prices reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions. The Company has not paid
any cash dividends since April 1987. Although the board of directors will
continue to review the Company's profitability with respect to the resumption of
dividends, there can be no assurance as to the timing or amount of any future
dividends.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CERTAIN CAUTIONARY INFORMATION
In connection with the Private Securities Litigation Reform Act of 1995
(the "Litigation Reform Act"), the Company is hereby disclosing certain
cautionary information to be used in connection with written materials
(including this Annual Report on Form 10-KSB) and oral statements made by or on
behalf of its employees and representatives that may contain "forward-looking
statements" within the meaning of the Litigation Reform Act. Such statements
consist of any statement other than a recitation of historical fact and can be
identified by the use of forward-looking terminology such as "may," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The listener or reader is
cautioned that all forward-looking statements are necessarily speculative and
there are numerous risks and uncertainties that could cause actual events or
results to differ materially from those referred to in such forward-looking
statements. The discussion below highlights some of the more important risks
identified by management, but should not be assumed to be the only factors that
could affect future performance. The reader or listener is cautioned that the
Company does not have a policy of updating or revising forward-looking
statements and thus he or she should not assume that silence by management over
time means that actual events are bearing out as estimated in such forward-
looking statements.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
OPERATING RESULTS.
The Company has reported a net loss of $1.725 million or $1.06 per share
for fiscal 1998. There can be no assurance that the Company's business
strategies and tactics will be successful and that the Company will be
profitable in future periods.
CASH FLOWS/PURSUIT OF STRATEGIC ALTERNATIVES.
The Company's cash and cash equivalents have declined by $393,000 during
fiscal 1998. Furthermore, the Company paid $411,000 in mid-July to settle a
lawsuit and certain related claims pertaining to the Company's Civilization
products. Management believes that existing cash and cash equivalents, together
with cash generated from operations and investing activities, will be sufficient
to meet the Company's liquidity and capital needs for the next 12 months.
Nevertheless, due to the Company's operating losses over the past three years
and its net losses for two of the past three years, which the Company attributes
primarily to its games business, the Company has determined to renew its efforts
to pursue strategic alternatives with respect to its games business, reduce
operations in the games business and to focus the Company's resources on the
printing business and the publishing business. The Company intends to limit the
use of cash in the games business by reducing its research and development
efforts and may reduce its games business workforce. Possible strategic
alternatives for the games business could include, among other things, a
possible business combination, disposition of assets or other similar
transactions. No agreements have been reached as to any such alternatives, and
satisfactory arrangements are not assured. There can be no assurance that the
Company will successfully implement a strategic alternative or that the Company
will have sufficient cash to meet its liquidity and capital needs for the
foreseeable future. In the event the Company's cash resources are insufficient
to meet its liquidity and capital needs, the Company may be required to obtain
alternative financing or significantly curtail its operations. There can be no
assurance that the Company will be successful in its pursuit of strategic
alternatives or in securing new financing, if necessary, or that the Company's
products will generate receivables and other assets sufficient to support an
adequate level of financing. Any curtailment of the Company's operations could
have a material adverse effect on the Company.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY.
The Company's operating results have varied significantly in the past and
are expected to vary significantly in the future as a result of the volatility
of the games industry and particularly the computer games market. This
variability is a result of factors such as: 1) volume of shipments of
significant new products, 2) the degree of market acceptance of the Company's
products, 3) the introduction of products competitive with those of the Company,
4) the timing and market acceptance of new product introductions, 5) the size
and growth rate of the consumer software and games market, 6) the seasonality of
sales, 7) development and promotional expenses relating to the introduction of
new products or new versions of existing products, 8) product returns and
markdowns, 9) changes in pricing policies by the Company and its competitors,
10) the accuracy of retailers' forecasts of consumer demand, 11) the timing of
orders from major customers, 12) order cancellations, 13) delays of shipment,
and 14) write-offs of advance royalty payments. Because a majority of the unit
sales for a computer
game typically occurs in the first 90 to 180 days following the introduction of
the game, the revenue of the Company's games business may increase significantly
in a period in which a major game, especially computer game, introduction
occurs and may decline in following periods or in periods in which there are no
major game introductions. Certain overhead and product development expenses are
fixed and do not vary directly in relation to revenue. Accordingly, to the
extent management's focus on strategic alternatives for the games business, its
commitment of resources to the printing business and publishing business, the
possible reduction of the games business workforce and the reduction of games
business research and development efforts limit the Company's ability to
introduce new games, the revenue of the games business could be materially and
adversely affected.
The games business is highly seasonal. Typically, net revenue is highest
during the last calendar quarter (which includes the holiday buying season),
declines in the first calendar quarter, is lowest in the second and increases in
the third calendar quarter. This seasonal pattern is due primarily to the
increased demand for games during the year-end holiday buying season. The
Company's net revenue, however, is largely dependent on releases of new games
and, as such, may not necessarily reflect the seasonal patterns of the industry
as a whole. The Company expects that its net revenue and operating results will
continue to fluctuate significantly in the future.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; PRODUCT DELAYS.
A significant portion of the revenue of the games division is generated by
products introduced during that fiscal year. The Company has depended on both
the timely introduction of successful new products or sequels to existing
products to replace declining revenue from older products and to provide
continued revenue from back-catalog products. If for any reason revenue from
new products or other activities fails to replace declining revenue from
existing products, or if revenue from back-catalog titles declines
significantly, the business, operating results and financial condition of the
games business may be materially and adversely affected. The Company expects
that its emphasis on pursuing strategic alternatives for the games business, the
possible reduction of the games business workforce and the reduction of games
business research and development efforts will limit the Company's introduction
of new games which could have a material adverse effect on the revenues of the
games business going forward.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OR OPERATIONS
(Continued)
UNCERTAINTY OF MARKET ACCEPTANCE; SHORT PRODUCT LIFE CYCLES.
The market for games, especially computer games, has been characterized by
shifts in consumer preferences and short product life cycles. Consumer
preferences for games are difficult to predict and few games achieve sustained
market acceptance. There can be no assurance that new products introduced by the
Company will achieve any significant degree of market acceptance, that such
acceptance will be sustained for any significant period, or that product life
cycles will be sufficient to permit the Company to recoup development, marketing
and other associated costs. In addition, if market acceptance is not achieved,
the Company could be forced to accept substantial product returns to maintain
its relationships with retailers and its access to distribution channels.
Failure of new products to achieve or sustain market acceptance or product
returns in excess of the Company's expectations would have a material adverse
effect on the Company's games business and its operating results.
COMPETITION
Each segment of the Company's business is intensely competitive and
populated by numerous competitors including large companies with substantially
greater financial, technical and marketing resources than those of the Company.
The board and computer game industries, including sports and family games, are
dominated by a few large companies. Competition in the games business is
principally based on product quality and features, the compatibility of computer
games with popular platforms, company or product line brand name recognition,
access to distribution channels, marketing effectiveness, reliability and ease
of use, price and technical support. Significant financial resources also have
become a competitive factor in the games business, principally due to the
substantial cost of product development and marketing that is required to
support best-selling titles. In addition, competitors with broad product lines
and popular titles typically have greater leverage with distributors and other
customers who may be willing to promote titles with less consumer appeal in
return for access to such competitor's most popular titles. Retailers typically
have a limited amount of shelf space, and there is intense competition among
game producers for adequate levels of shelf space and promotional support from
retailers. As the number of games products increases, the competition for shelf
space has intensified, resulting in greater leverage for retailers and
distributors in negotiating terms of sale, including price discounts and product
return policies. The Company expects that its emphasis on pursuing strategic
alternatives for the games business, the possible reduction of the games
business workforce and the reduction of games business research and development
efforts will limit the Company's ability to compete effectively in the games
business going forward.
Competition in the printing business is largely based on price, quality,
range of services offered, distribution capabilities, ability to service the
specialized needs of customers, availability of printing time on appropriate
equipment and use of state-of-the-art technology. The Company competes for
commercial business not only with large national printers, but also with smaller
regional printers. The Company also believes that excess capacity in the
industry, especially during periods of economic downturn, may result in downward
pricing pressure and intensified competition in the printing industry. Given
these factors, there can be no assurance that the Company will be able to
continue to compete successfully against existing or new competitors, and the
failure to do so may have a material adverse effect on the results of the
printing business. See "Business--Competition."
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
TECHNOLOGICAL CHANGE
Technology in the printing industry has evolved and continues to evolve. As
technology continues to evolve and as its customers' needs become more
specialized and sophisticated the Company will likely be required to invest
significant additional capital in new and improved technology in order to
maintain and enhance the quality and competitiveness of, and to expand, its
products and services. If the Company is unable to acquire new and improved
technology, facilities and equipment or to develop and introduce enhanced or new
products and services, the results of operations and cash flows of the Company's
printing business could be materially adversely affected.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; RISK OF
LITIGATION.
The Company holds copyrights on its products, manuals, advertising and
other materials and maintains trademark rights in the names of products owned by
the Company. The Company regards its software as proprietary and relies
primarily on a combination of trademark, copyright and trade secret laws,
employee and third-party nondisclosure agreements, and other methods to protect
its proprietary rights. Unauthorized copying is common within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be adversely affected. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products. As is common in the games business,
from time to time the Company receives notices from third parties claiming
infringement of intellectual property rights of such parties. The Company
investigates these claims and responds as it deems appropriate. Any claims or
litigation, with or without merit, could be costly and could result in a
diversion of resources and management's attention, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Adverse determinations in such claims or litigation could also have a
material adverse effect on the Company's business, operating results and
financial condition. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. Further, the Company enters into transactions in countries
where intellectual property laws are not well developed or are poorly enforced.
Legal protections of the Company's rights may be ineffective in such countries.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
DEPENDENCE ON DISTRIBUTORS; RISK OF CUSTOMER BUSINESS FAILURE; PRODUCT RETURNS.
Certain mass market retailers have established exclusive buying
relationships under which such retailers will buy games from only one
intermediary. In such instances, the price or other terms on which the Company
sells to such retailers may be adversely affected by the terms imposed by such
intermediary, or the Company may be unable to sell to such retailers on terms
which the Company deems acceptable. The loss of, or significant reduction in
sales attributable to, any of the Company's principal distributors or retailers
could materially adversely affect the Company's games business and its operating
results. Distributors and retailers in the games industry have from time to time
experienced significant fluctuations in their businesses and there have been a
number of business failures among these entities. The insolvency or business
failure of any significant distributor or retailer of the Company's products
could have a material adverse effect on the Company's games business and its
operating results. Sales are typically made on credit, with terms that vary
depending upon the customer and the nature of the product. The Company does not
hold collateral to secure payment owed or due. As a result of the foregoing, a
payment default by a significant customer could have a material adverse effect
on the Company's games business and its operating results. The Company also is
exposed to the risk of product returns from distributors and retailers. The
Company could be forced to accept substantial product returns to maintain its
relationships with retailers and its access to distribution channels. Excessive
product returns could have a material adverse effect on the Company's business,
operating results and financial condition.
RISK OF SOFTWARE DEFECTS.
Software products such as those offered by the Company in connection with
it's computer games activities frequently contain errors or defects. Despite
extensive product testing, in the past the Company has released products with
defects and has discovered software errors in certain of its product offerings
after their introduction. In particular, the PC hardware environment is
characterized by a wide variety of non-standard peripherals (such as sound cards
and graphics cards) and configurations that make pre-release testing for
programming or compatibility errors very difficult, time-consuming and costly.
There can be no assurance that, despite testing by the Company, errors will not
be found in new products or releases after commencement of commercial shipments,
resulting in a loss of or delay in market acceptance, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
EFFECT OF INCREASES IN PAPER AND POSTAGE COSTS
The price of paper is a significant expense of the Company's publishing and
printing businesses and began to rise around mid-year 1994 and continued to rise
more dramatically in 1995 and early 1996. In mid-1996 paper prices began to
fall. Paper price increases may have an adverse effect on the Company's future
results. Postage for product and magazine distribution is also a significant
expense of the Company. The Company uses the U.S. Postal Service for
distribution of many of its products and magazine. Postage costs increase
periodically and can be expected to increase in the future. No assurances can be
given that the Company can pass such cost increases through to its customers.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
LIMITED MARKET FOR PUBLISHING BUSINESS
The Girls' Life magazine is targeted to girls ages seven to fourteen. Since
Girls' Life's target audience is limited by age and gender, Girls' Life, unlike
other magazines that appeal to broader age groups, must replace a large portion
of its readership each year due to maturation of audience. Accordingly, Girls'
Life's promotional expenses that are designed to replace and expand its
readership may be higher than other magazines with comparable circulation.
There can be no assurance that Girls' Life will be able to replace its existing
reader and expand its circulation going forward. Any decrease in Girls' Life's
circulation, due to demographic or other factors, can be expected to have a
material adverse effect on the revenues of the Company's publishing business.
CONTROL BY PRINCIPAL STOCKHOLDERS
A. Eric Dott and, his son, Jackson Y. Dott, the Company's Chairman and
President, respectively, beneficially own an aggregate of [42]% of the
outstanding voting securities of the Company. Accordingly, these stockholders
have the ability, acting together, to exercise significant control over
fundamental corporate transactions requiring stockholder approval, including
without limitation the election of Directors, approval of merger transactions
involving the Company and sales of all or substantially all of the Company's
assets.
RESULTS OF OPERATIONS 1996 THROUGH 1998
Sales increased $367,000 or 5% in 1998 from 1997. The increase relates primarily
to Girls' Life sales which increased $1,620,000 or 137% in 1998 from 1997 as a
result of increased promotions and direct mail advertising of the magazine and
increased revenue from newsstand sales and advertising. Computer game sales
decreased $1,085,000 or 61% in 1998 from 1997 as a result of fewer new computer
game releases and the return of computer games in fiscal 1998. Board game sales
decreased $21,000 or 1% in 1998 from 1997. Printing sales decreased $147,000 or
5% from 1997 as a result of increased competition. The allowance for return of
computer games during fiscal 1998 was decreased $150,000 to account for
estimates of games returned or to be returned that relate to sales of computer
games.
In 1997 sales increased $1,345,000 or 21% from 1996. The increase related
primarily to game sales which increased $555,000 or 16% in 1997 from 1996 due to
new computer games releases and Girls' Life sales which increased $578,000 or
96% in 1997 from 1996 due to increased subscriptions and advertising revenue.
Computer game sales increased $790,000 or 79% in 1997 from 1996. Board game
sales decreased $235,000 or 11% in 1997 from 1996. Printing sales increased
$212,000 or 8% from 1996 related sales. Girls' Life sales of $1,180,000
accounted for 15% of total net sales for fiscal 1997. The allowance for doubtful
accounts at the end of fiscal 1996 was increased $50,000 to account for
estimates of uncollectible amounts related to the increased volume in sales of
the magazine.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
Foreign sales decreased $163,000 or 35% and $95,000 or 17% in 1998 and 1997,
respectively. The decreases in foreign sales in 1998 and 1997 relates primarily
to lower sales by dealers in Canada and the UK and the lack of new games
releases during both years.
Cost of goods sold as a percent of sales was 74% in 1998, 66% in 1997 and 72% in
1996. The increase in 1998 was primarily due to the decrease in game sales which
decreased $1,106,000 or 28% in 1998 from 1997 amd discontinued board games and
board game parts valued at $202,000 that were destroyed during the fourth
quarter of FY 1998. Printing sales continued to carry low margins as a result
of competitive market prices. Cost of goods sold as a percent of sales for
Girls' Life decreased to 72% in 1998 from 78% in 1997 due to increased sales of
$1,620,000 in 1998.
Selling, general and administrative expenses as a percentage of sales were 43%
in 1998, 30% in 1997, and 32% in 1996. The increase in 1998 of $1,177,000
primarily relates to higher promotional and advertising expenses for publishing
and computer game sales, increased royalty payments in the games segment, new
personnel associated with computer game sales and publishing and legal
settlement fees of $411,000. In July 1998 the Company settled a lawsuit and has
accrued the settlement costs of $411,000 at April 30, 1998. The increase in 1997
of $261,000 was principally due to the increase in selling, general and
administrative expenses in royalty and advertising expenses in the game sales
segment due to increased sales of computer games and increased promotional and
advertising expenses for Girls' Life magazine.
Research and development expenses increased $49,000 in 1998, and increased
$27,000 in 1997. The increase in 1998 and 1997 is due to the increase in
research and development costs associated with the release of new computer games
during both years.
Other income decreased $119,000 and increased $186,000 in 1998 and 1997,
respectively. The 1998 decrease and 1997 increase were primarily due to
unrealized gains attributed to marketable securities, a gain on the sale of
property and other miscellaneous items which occurred in 1997.
No provision (benefit) for current income taxes has been recorded for fiscal
years 1998, 1997 and 1996.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents decreased $393,000 in fiscal 1998 to $1,738,000, and
increased $165,000 in 1997. The decrease in 1998 resulted primarily from cash
used by operations of $415,000 and purchases of equipment in the amount of
$140,000, net of the proceeds from the sale of marketable securities of
$175,000. The increase in 1997 was principally the result of cash provided by
operations of $307,000 and other miscellaneous income items. The Company's cash
and cash equivalents are subject to variation based upon the timing of receipts
and the payment of payables. During 1998 and 1997, the Company maintained an
average balance for certificates of deposit and treasury bills of approximately
$1,670,000 and $1,510,000, respectively.
The Company leases its office, warehouse, and manufacturing facilities under
noncancellable operating leases. Annual commitments under these leases at April
30, 1998 are as follows: 1999 through 2000 - $327,000, 2001 through
2006 - $127,000. Certain of these leases are with the Company's Chairman and a
member of his family.
At April 30, 1998, the Company has no debt with third-party lenders.
During July 1998, cash and cash equivalents ranged from approximately $1.7
million to $1.3 million and was approximately $1 million at July 15, 1998 after
the payment of $411,000 to settle the Civilization lawsuit and related claims.
The Company's cash and cash equivalents are subject to variation based upon the
timing of receipts and the payment of payables. Management believes that
existing cash and cash equivalents, together with cash generated from operations
and investing activities, will be sufficient to meet the Company's liquidity and
capital needs for the next 12 months. Nevertheless, due to the Company's
operating losses over the past three years and its net losses for two of the
past three years, which the Company attributes primarily to its games business,
the Company has determined to renew its efforts to pursue strategic alternatives
with respect to its games business, reduce operations in the games business and
to focus the Company's resources on the printing business and the publishing
business. The Company intends to limit the use of cash in the games business by
reducing its research and development efforts and may reduce its games business
workforce. Possible strategic alternatives for the games business could
include, among other things, a possible business combination, disposition of
assets or other similar transactions. No agreements have been reached as to any
such alternatives, and satisfactory arrangements are not assured. There can be
no assurance that the Company will successfully implement a strategic
alternative or that the Company will have sufficient cash to meet its liquidity
and capital needs for the foreseeable future. In the event the Company's cash
resources are insufficient to meet its liquidity and capital needs, the Company
may be required to obtain alternative financing or significantly curtail its
operations. There can be no assurance that the Company will be successful in
its pursuit of strategic alternatives or in securing new financing, if
necessary, or that the Company's products will generate receivables and other
assets sufficient to support an adequate level of financing. Any curtailment of
the Company's operations could have a material adverse effect on the Company.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
IMPACT OF INFLATION AND CHANGING PRICES
Due to the highly competitive nature of the industry segments in which the
Company operates, increased costs were unable to be fully passed on to customers
in the three year period ended April 30, 1998.
Charges to depreciation represent the allocation of historical costs over past
years, and are significantly less than if they were based on the consumption of
current cost of productive assets. Assets replaced in future years will be
replaced at significantly higher costs but replacements are expected to produce
economies in production.
YEAR 2000 DISCLOSURE: The Company has reviewed existing computer
programs, including software and hardware, and plans to replace the existing
software and hardware by the end of 1998 at an estimated cost of $100,000.
Company management does not believe the change over to new software and hardware
will have a material effect on the Company's business, operations or financial
condition.
<PAGE>
<TABLE>
Item 7. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
<CAPTION>
- ------------------------------------------------------------------------
April 30, 1998 1997
- ------------------------------------------------------------------------
(000's Omitted)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,738 $2,131
Marketable securities, at fair value 0 148
Accounts receivable, net 973 1,213
Inventories, less allowance for
obsolescence (1998 and 1997
- $350,000)
Raw materials and component parts 694 752
Work in progress 174 112
Finished goods 1,100 1,206
----------------------
1,968 2,070
Prepaid expenses 47 134
----------------------
TOTAL CURRENT ASSETS 4,726 5,696
PROPERTY AND EQUIPMENT
Machinery, equipment, furniture and
fixtures 4,329 4,189
Leasehold improvements 305 305
Accumulated depreciation (4,076) (3,921)
----------------------
558 573
----------------------
INTANGIBLE ASSETS-NET 45 43
----------------------
$5,329 $6,312
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 352 $ 459
Accrued expenses 723 281
Deferred subscription revenue 1,024 617
----------------------
TOTAL CURRENT LIABILITIES 2,099 1,357
----------------------
COMMITMENTS AND CONTINGENCIES
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 April 30, 1998 and
April 30, 1997 527 527
Capital surplus 3,378 3,378
Retained (deficit) earnings (553) 1,172
----------------------
3,352 5,077
Treasury stock at par - 490,165 shares on
April 30, 1998 and April 30, 1997 (122) (122)
---------------------
TOTAL STOCKHOLDERS' EQUITY 3,230 4,955
---------------------
$5,329 $6,312
====================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Item 7. FINANCIAL STATEMENTS (Continued)
Consolidated Statements of Operations
<CAPTION>
- ---------------------------------------------------------------------------
Year Ended April 30, 1998 1997 1996
- ---------------------------------------------------------------------------
(000's Omitted, except share information)
<S> <C> <C> <C>
Net Sales - games $2,844 $3,950 $3,395
- printing and envelope
manufacturing 2,587 2,734 2,522
- publishing 2,800 1,180 602
-------------------------------------
8,231 7,864 6,519
-------------------------------------
Cost of goods sold - games 1,628 1,768 1,669
- printing and envelope
manufacturing 2,462 2,492 2,416
- publishing 2,016 920 616
-------------------------------------
6,106 5,180 4,701
-------------------------------------
Gross profit 2,125 2,684 1,818
-------------------------------------
Selling, general and
administrative expenses 3,502 2,325 2,064
Research and development 443 394 367
-------------------------------------
Operating expenses 3,945 2,719 2,431
-------------------------------------
Loss from operations (1,820) (35) (613)
-------------------------------------
Other:
Investment income 73 71 65
Realized and unrealized gain (loss)
on marketable securities 27 24 (37)
Gain on sale of building 0 67 0
Other (5) 52 0
-------------------------------------
95 214 28
-------------------------------------
Income (loss) before income taxes (1,725) 179 (585)
-------------------------------------
Provision for income taxes 0 0 0
-------------------------------------
Net income (loss) $(1,725) 179 $ (585)
-------------------------------------
Basic and diluted Income (loss)
per share $ (1.06) $ .11 $ (.36)
=====================================
Weighted average number of
shares outstanding 1,619,820 1,619,848 1,620,170
=====================================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Item 7. FINANCIAL STATEMENTS (Continued)
Consolidated Statements of Changes in Stockholders' Equity
(000's omitted, except shares outstanding data)
<CAPTION>
Total
Shares Common Capital Retained Treasury Stockolders'
Outstanding Stock Surplus Earnings Stock Equity
---------- ------ ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance
May 1, 1995 1,620,170 $ 527 $ 3,379 $ 1,578 $ (122) $ 5,362
Net Loss-1996 (585) (585)
----------------------------------------------------------
Balance
April 30, 1996 1,620,170 527 3,379 993 (122) 4,777
Purchase of
Stock for
Treasury (350) (1) (1)
Net Income-1997 179 179
----------------------------------------------------------
Balance
April 30, 1997 1,619,820 527 3,378 1,172 (122) 4,955
Net Loss-1998 (1,725) (1,725)
----------------------------------------------------------
Balance
April 30, 1998 1,619,820 $ 527 $ 3,378 $ (553) $ (122) $ 3,230
==========================================================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
Item 7. FINANCIAL STATEMENTS (Continued)
<CAPTION>
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------
Year Ended April 30, 1998 1997 1996
- ------------------------------------------------------------------------
(000's Omitted)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,725) $ 179 $( 585)
Adjustments to reconcile net (loss) --------------------------
income to net cash (used in) provided
by operating activities:
Depreciation 155 135 135
Amortization 58 14 15
Gain on disposal of property
and equipment 0 ( 66) ( 9)
Gain on sale of marketable
securities ( 27) 0 0
(Decrease) increase in accounts
receivable allowances ( 146) 157 ( 152)
Inventory write-off 0 90 0
Unrealized (gain) loss on marketable 0 ( 24) 37
securities
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable, gross 386 ( 521) 647
Inventories 55 ( 219) 196
Refundable income taxes 0 0 60
Prepaid expenses 87 ( 16) 9
Increase (decrease) in operating
liabilities:
Accounts payable ( 107) 161 ( 74)
Accrued expenses 442 53 ( 131)
Deferred subscription revenue 407 364 101
-------------------------
Total adjustments 1,310 128 834
-------------------------
Total cash (used in) provided by
operating activities ( 415) 307 249
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ( 140) ( 188) ( 16)
Purchases of intangible assets ( 13) ( 32) ( 3)
Cash proceeds from disposal of property
and equipment 0 79 109
Cash proceeds from the sale of marketable
securities 175 0 0
-------------------------
Total cash provided by (used in)
investing activities 22 ( 141) 89
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of stock for treasury 0 ( 1) 0
-------------------------
Total cash used in financing activities 0 ( 1) 0
-------------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ( 393) 165 338
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 2,131 1,966 1,628
-------------------------
CASH AND CASH EQUIVALENTS
END OF YEAR $ 1,738 $2,131 $1,966
=========================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES
Write-off of marketable securities $ 0 $ 18 $ 102
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements of Monarch Avalon, Inc. and its wholly-
owned Subsidiaries (collectively, "the Company"), include Monarch Avalon, Inc.
and its wholly-owned subsidiaries, Girls' Life, Inc., Creampuffs, Inc. and
Broken Windows, Inc.
Girls' Life, Inc. ("Girls' Life") was incorporated in December 1993 in the State
of Maryland and publishes a magazine for young girls ages seven to fourteen.
Substantial operations began in fiscal year 1995 with the release of its initial
bi-monthly publication in August 1994. Magazines are sold across North America
through a distributor and directly by Girls' Life through one and two year
subscriptions.
Creampuffs, Inc. was incorporated on March 12, 1997 in the State of Maryland as
a marketing company for others. This new subsidiary did not engage in any
operations in the years ending April 30, 1998 and 1997.
Broken Windows, Inc. was incorporated on June 11, 1997 in the State of Maryland
as a retail operation. On November 26, 1997, Broken Windows, Inc. opened a
retail store in Maryland 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.
Monarch Avalon, Inc. ("Monarch") consists of two divisions, games and printing,
and is incorporated in the State of Delaware. Monarch's game division develops,
manufactures and markets board and computer games. Games are sold primarily
through retail distributors across North America with some export sales to
foreign distributors in Japan, Europe, and Australia. Monarch's printing
division manufactures envelopes and provides printing and graphic arts services
to various commercial customers. Printing and envelope sales are predominantly
with commercial customers in various industries located in the Mid-Atlantic
region of the United States.
All material intercompany balances between Monarch Avalon, Inc. and Girls' Life
Inc., Creampuffs Inc. and Broken Windows, Inc. have been eliminated in
consolidation.
NOTE B - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
REVENUE RECOGNITION: Girls' Life Inc. recognizes revenue related to
subscriptions for its magazine according to the ratio of magazines issued to
total subscribed issues. Deferred subscription revenue represents amounts
collected for subscriptions of the magazine not yet issued.
Revenues from the sale of products by Monarch Avalon, Inc. are recorded upon
shipment to the customer. An accrual for customer returns, primarily related to
computer game sales, is recorded based upon current sales, the timing of those
sales and historical experience.
Revenues from the sale of products by Broken Windows, Inc. are recorded upon
receipt by the retail customer as a charge or cash sale.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS: For the purpose of reporting cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
ACCOUNTS RECEIVABLE: Monarch's principal customers are distributors and retail
stores worldwide (games) and commercial entities (printing). Receivables are
generally due within 30 days. However, the Company grants seasonal and other
payment terms to certain of its customers. Two customers of computer games
accounted for approximately 11% and 10%, respectively of total net sales in
1997. No one customer accounted for over 10% of total net sales in 1998 or 1996.
Girls' Life sells its magazine through a distributor and direct individual
subscriptions. Receivables consist of advertising income and sales of magazines
through the distributor for issues released prior to April 30.
INTANGIBLE ASSETS: Intangible assets consist of trademarks, copyrights and
goodwill and are amortized using the straight-line method over periods estimated
to be benefited. At April 30, 1998 and 1997, intangible assets are net of
accumulated amortization of $238,048 and $227,164 respectively.
INVENTORIES: The Company values inventories at the lower of cost (first
- -in, first-out) or market.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost and
depreciation is computed by the straight-line method over estimated useful
lives.
FINANCIAL INSTRUMENTS: The current carrying value of accounts receivable and
current liabilities is a reasonable estimate of their fair value due to the
short-term nature of such accounts.
MARKETABLE SECURITIES: The Company accounts for its investments in equity
securities under the accounting and reporting provisions of Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"). The Company has
classified its investments as trading securities based on its intended use. As
such, unrealized holding gains and losses are included in the consolidated
statements of operations. During fiscal years 1997 and 1996, certain investments
with no market value and a cost basis of approximately $18,000 and $102,000
respectively were written off. At April 30, 1997, the cost of marketable
securities exceeded the market value by approximately $54,000. The marketable
securities were sold during fiscal year 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are charged to
expense when incurred.
INCOME TAXES: The Company provides for income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS No. 109")
which requires an asset and liability approach to financial accounting and
reporting for income taxes (see Note D). Under SFAS No. 109, deferred tax assets
and liabilities are provided for differences between the financial statement and
tax basis of assets and liabilities that will result in future taxable income or
deductible amounts. The deferred tax assets and liabilities are measured using
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Income tax expense is computed as the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets or liabilities.
EARNINGS PER SHARE: The Company has adopted Statement of Financial Accounting
Standard No. 128 (SFAS 128), "Earnings Per Share" during the fiscal year ending
April 30, 1998. SFAS No. 128 establishes standards for computing and presenting
earnings per share. Basic earnings per share are based on the weighted average
number of shares of common stock outstanding during each year. Potential
dilutive common shares do not change basic earnings per share because their
effect would be antidilutive. The implementation of SFAS No. 128 did not have
an effect on the financial statements.
STOCK-BASED COMPENSATION ARRANGEMENTS: The Company applies APB Opinion No. 25
and related interpretations in accounting for stock based compensation
arrangements. Accordingly, no compensation has been recognized. Had
compensation costs been determined based on fair value at the grant date forward
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income or loss would not have been affected on a pro forma basis.
No adjustment to the Company's net income or loss is required for the years
ended April 30, 1998, 1997 and 1996.
NEW ACCOUNTING PRONOUNCEMENTS: The Company has adopted Statement of Financial
Accounting Standard No. 129 (SFAS 129), "Disclosure of Information about Capital
Structure" for the fiscal year ending April 30, 1998. SFAS 129 establishes
standards for disclosing information about an entity's capital structure. The
implementation of SFAS 129 did not have a material effect on the financial
statements.
The Company is required to adopt Statement of Financial Accounting Standard No.
130 (SFAS 130), "Reporting Comprehensive Income" for the fiscal year ending
April 30, 1999. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. The implementation of SFAS No. 130 will not have a
material effect on the financial statements.
The Company is required to adopt Statement of Financial Accounting Standard No.
131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information" for the fiscal year ending April 30, 1999. SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments. The implementation of SFAS No. 131 will not have a material
effect on the financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1998 1997
---- ----
Accounts Receivable-games $ 513,348 $ 885,682
-printing 398,943 353,125
-publishing 247,854 307,397
----------- -----------
Less: 1,160,145 1,546,204
Allowance for doubtful accounts (142,491) (138,628)
Allowance for customer returns ( 44,518) (194,518)
----------- -----------
$ 973,136 $1,213,058
=========== ===========
NOTE D-INCOME TAXES
A reconciliation of the effective tax rate for income taxes in the financial
statements to the Federal statutory rates is as follows:
- ------------------------------------------------------------------------
Year Ended April 30, 1998 1997 1996
- ------------------------------------------------------------------------
Federal income tax at statutory rate (34)% (34)% (34)%
Net operating losses and other tax credits 33 33 33
Non-deductible items and other 1 1 1
----- ----- -----
- % - % - %
===== ===== =====
The components of the deferred income tax provision (benefit) before reduction
for the valuation allowance are as follows:
- ------------------------------------------------------------------------
Year Ended April 30, 1998 1997 1996
- ------------------------------------------------------------------------
Depreciation $ 2,000 $ 5,000 $( 71,000)
Uniform Capitaliation (2,000) ( 1,000) ---
Allowances for accounts receivable 57,000 ( 61,000) 59,000
Amortization 3,000 ( 3,000) 1,000
Unrecognized benefit of change
in bases of assets 28,000 10,000 41,000
Net operating loss and other
tax credit carryforward (732,000) 172,000 (342,000)
----------- ---------- ----------
$(644,000) $ 122,000 $(312,000)
=========== ========== ==========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The deferred tax assets (liabilities) result from the following temporary
differences:
- ------------------------------------------------------------------------
April 30, 1998 1997
- ------------------------------------------------------------------------
Current:
Financial statement accruals, net $ 34,000 $ 62,000
Inventory reserves and uniform capitalization 153,000 151,000
Allowances for accounts receivable 73,000 130,000
---------- ---------
260,000 343,000
Non-current: ---------- ---------
Depreciation (18,000) (16,000)
Amortization 10,000 13,000
Net operating loss and other tax
credits-carryforwards 1,015,000 283,000
---------- ---------
1,007,000 280,000
---------- ---------
Net deferred tax asset 1,267,000 623,000
Valuation allowance (1,267,000) (623,000)
---------- ---------
$ --- $ ---
========== =========
In Fiscal 1998 and the five years prior to Fiscal 1997, the Company incurred
book and tax losses. As such, management has concluded that it is more likely
than not that the Company will not generate taxable income sufficient to realize
the tax benefit associated with future temporary differences and operating loss
carryforwards prior to their expiration; therefore, the Company has recorded a
full valuation reserve against the deferred tax asset. However, if significant
improvements in operations occur and taxable income is realized in future years,
a reduction in the valuation reserve will be necessary.
For tax purposes the Company had available, at April 30, 1998, net operating
loss carryforwards for regular Federal income tax of approximately $2,508,000
which will expire in the years 2010, 2011 and 2013. There were no cash payments
for income taxes in 1998, 1997 and 1996. In 1996, the Company received income
tax refunds of $60,000.
NOTE E - PROFIT-SHARING PLAN
Substantially all of the Company's employees participate in a profit-sharing
plan. Contributions are determined by the results of operations and can be
increased at the discretion of the Board. There were no contributions in 1998,
1997 and 1996.
NOTE F - COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases office, warehouse and manufacturing facilities.
Several of the leases provide for renewal options ranging from two to five
years. The Company generally must pay for property taxes, insurance and
maintenance costs related to the properties. Total rental expense for 1998, 1997
and 1996 was approximately $317,000, $298,000, and $298,000, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The future annual minimum rental commitments for non-cancellable operating
leases as of April 30, 1998 are as follows: 1999 through 2000 - $327,000, 2001
through 2006 - $127,000.
Certain facilities are leased annually for approximately $127,000 from the
Chairman of the Company and a member of his family.
LITIGATION: In July 1998 the Company settled a lawsuit and has accrued the
settlement costs of $411,000 at April 30, 1998. The Company is involved from
time to time in legal actions arising in its normal course of operations.
STOCK OPTIONS: During 1992 the Company's Chairman was granted a ten year option
to purchase up to 300,000 shares of the Company's common stock at the greater of
the book or market value of the stock as of the date of exercise. Such option
can only be exercised in the event of the following:
* An individual or entity acquires the Company's common stock to the extent
in which they have greater than twenty percent of the total number of
outstanding shares of the Company's common stock.
* An individual or entity makes a tender offer for thirty percent or more of the
Company's outstanding common stock.
* An individual or entity proposes the election of a director or slate of
directors opposed to any directors or slate of directors proposed by the
management of the Company.
The Chairman may only exercise the option within sixty days following any of the
above events.
On October 3, 1997, the stockholders approved the proposal to grant to each of
the Company's President and two outside directors options to purchase 40,000
unregistered shares of the Company's common stock for $2.00 per share and
approved the proposal to grant to the Company's Chairman, options to purchase
80,000 unregistered shares of the Company's common stock for $2.00 per share, a
price approximating the fair value of these shares at the dates of grant. The
options terminate on September 30, 1998.
No options have been exercised or canceled during the year ended April 30, 1998.
Options outstanding total 500,000 shares.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G - SEGMENT INFORMATION
The Company operates in three industry segments: Games, Printing and Publishing.
Operating profit (loss) represents net sales less all identifiable operating
expenses. General corporate expenses, income taxes and other income or expense
are excluded from segment operations.
($000 Omitted)
1998 1997 1996
---- ---- ----
Net Sales
-Games $2,844 $3,950 $3,395
-Printing 2,587 2,734 2,522
-Publishing 2,800 1,180 602
------- ------- -------
Total 8,231 $7,864 $6,519
======= ======= =======
Operating (loss) Profit:
-Games (1,489) $ 364 $ 369
-Printing ( 450) (313) (593)
-Publishing 262 ( 9) (226)
------- ------- -------
Total (1,677) 42 (450)
General Corporate Expenses, net (143) ( 77) (163)
Other Income, net 95 214 28
------- ------- -------
Income (loss) before income taxes (1,725) $ 179 $ (585)
======= ======= =======
($000 Omitted)
1998 1997 1996
---- ---- ----
Identifiable Assets:
-Games $2,204 $2,695 $2,357
-Printing 1,214 1,139 1,223
-Publishing 488 306 247
General Corporate 1,423 2,172 1,729
------- ------- -------
$5,329 $6,312 $5,556
======= ======= =======
Depreciation and Amortization:
-Games $ 102 $ 49 $ 50
-Printing 111 100 100
------- ------- -------
$ 213 $ 149 $ 150
======= ======= =======
Capital Expenditures:
-Games $ 65 $ 103 $ 11
-Printing 88 117 8
-Publishing - - -
------- ------- -------
$ 153 $ 220 $ 19
======= ======= =======
Corporate assets consist mainly of cash and cash equivalents, marketable
securities and certain other assets.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company sells its products in both the United States and foreign countries.
Export sales were approximately $303,000, for 1998, $466,000 for 1997, and
$561,000 for 1996.
Intersegment sales or transfers were $851,000 for 1998, $869,000 for 1997 and
$737,000 for 1996. These sales are not included in the sales shown above.
Intersegment sales are accounted for at prices comparable to unaffiliated
customer sales. All segments share certain facilities and operate under common
management. These expenses are allocated ratably to each segment.
-----------------------
Consolidated Quarterly Results of Operations
A summary of the unaudited consolidated quarterly results of operations for the
years ended April 30, 1998 and 1997 is as follows.
Fiscal 1998
Three Months Ended
--------------------------------------------
July 31 October 31 January 31 April 30
------- ---------- ---------- --------
(000 Omitted, except per share data)
Net Sales $1,628 $2,588 $1,748 $2,267
Gross Profit 468 1,084 31 542
Net (Loss) Income (256) 6 (686) (789)
Net (Loss) Income
per Common Share (.16) .00 (.42) (.48)
Fiscal 1997
Three Months Ended
--------------------------------------------
July 31 October 31 January 31 April 30
------- ---------- ---------- --------
(000 Omitted, except per share data)
Net Sales $1,177 $2,503 $2,315 $1,869
Gross Profit 237 919 1,105 423
Net (Loss) Income (177) 112 333 ( 89)
Net (Loss) Income
per Common Share (.11) .07 .21 (.06)
In July 1998, the Company settled a lawsuit and has accrued the settlement cost
of $411,000 in the three months ended April 30, 1998.
<PAGE>
Independent Auditors' Report
To the Stockholders and Board of Directors, Monarch Avalon, Inc. and
Subsidiaries, Baltimore, Maryland
We have audited the accompanying consolidated statements of financial condition
of Monarch Avalon, Inc. and Subsidiaries as of April 30, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended April 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Monarch Avalon, Inc. and
Subsidiaries as of April 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1998, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Baltimore, Maryland
July 17, 1998
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE
PART III
Information required in Part III, Items 9-12 is incorporated by
reference to the Company's proxy statement to be filed in
connection with the 1998 Annual Meeting of Stockholders.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Item 10. EXECUTIVE COMPENSATION
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
3.(a) The Company's Restated Certificate of Incorporation
dated October 14, 1982 (incorporated by reference to
Exhibit 3(a) to the Company's Form 10-KSB for the
fiscal year ended April 30, 1995).
(b) The Company's Restated and Amended Bylaws dated
August 17, 1981 (incorporated by reference to
Exhibit 3(b) to the Company's Form 10-KSB for
the fiscal year ended April 30,1995).
(c) Amendment to the Company's Restated and Amended
Bylaws (incorporated by reference to Exhibit 3(c) to
the Company's 10-K for the year ended April 30, 1986).
(d) Amendment to the Company's Restated and Amended
Bylaws (incorporated by reference to Exhibit 3(d) to
the Company's 10-K for the year ended April 30, 1990).
(e) Amendment dated November 6, 1987 to the Company's
Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3(d) to the Company's 10-Q
for the quarter ended October 31, 1987).
(f) Amendment to the Company's by-laws dated August
1, 1996 (incorporated by reference to Exhibit 3(f)
to the Company's 10-QSB for the quarter ended
July 31, 1997).
10. (a) Lease Agreement dated July 2, 1973 between the
Company as Lessee and A. Eric Dott and Esther J.
Dott as lessors (incorporated by reference to
Exhibit 10(a) to the Company's Form 10-KSB for
the fiscal year ended April 30, 1995).
<PAGE>
Item 13 EXHIBITS AND REPORTS ON FORM 8-K (Continued)
(b) Lease renewal and Amendment of Lease Agreement
dated July 1, 1983 between the Company and A. Eric
Dott and Esther J. Dott, renewing and amending
terms of the Lease Agreement in Exhibit 10(a)
(incorporated by reference to Exhibit 10(b) to
the Company's Form 10-KSB for the fiscal year
ended April 30, 1995).
(c) Option to Purchase Common Stock dated June 19,
1991 issued to A. Eric Dott, Chairman of the
Company (incorporated by reference to Exhibit
10(f) to the Company's 10-K for the year ended
April 30, 1992).
(d) Option to Purchase Common Stock dated October
4, 1996 issued to Helen D. Bentley, David F.
Gonano and Jackson Y. Dott (incorporated by
reference 10(d) to the Company's 10-KSB for the
year ended April 30, 1997).
(e) Option to Purchase Common Stock dated April
21, 1997 issued to A. Eric Dott, Chairman of
the Company (incorporated by reference to
Exhibit 10(e) to the Company's 10-KSB for the
year ended April 30, 1997).
21. Subsidiaries of the Registrant (incorporated
by reference to Exhibit 21 to the Company's
Form 10-QSB for the quarter ended October 31,
1997).
27. Financial Data Schedule.
(b) The Company did not file any report on Form 8-K
during the fourth quarter of the year ended
April 30, 1998.
<PAGE>
S I G N A T U R E S
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONARCH AVALON, INC.
By: /s/ A. Eric Dott
--------------------------
A. Eric Dott, Chairman
and Director
DATE: July 29, 1998
-------------
<PAGE>
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date July 29, 1998 /s/ Jackson Y. Dott
---------------- -------------------------------
Jackson Y. Dott, President
(Principal Executive Officer),
Treasurer and Director
Date July 29, 1998 /s/ David F. Gonano
---------------- -------------------------------
David F. Gonano, Director
Date July 29, 1998 /s/ Helen Delich Bentley
---------------- -------------------------------
Helen Delich Bentley, Director
Date July 29, 1998 /s/ Steven M. Szekely
---------------- -------------------------------
Steven M. Szekely, Executive
Vice-President and Secretary
Date July 29, 1998 /s/ A. Eric Dott
---------------- -------------------------------
A. Eric Dott, Chairman and
Director
Date July 29, 1998 /s/ Marshall Chadwell
---------------- -------------------------------
Marshall Chadwell, Controller
(Principal Financial Officer),
Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number
- --------------
27 - Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CAPTION>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
Article 5
The schedule contains summary financial information extracted from Monarch
Avalon, Inc.'s audited financial statements for the FiscalYear ended April 30,
1998, and is qualified in its entirety by reference to such financial statements
and the notes thereto.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Apr-30-1998
<PERIOD-START> May-01-1997
<PERIOD-END> Apr-30-1998
<CASH> 1,738
<SECURITIES> 0
<RECEIVABLES> 973
<ALLOWANCES> 350
<INVENTORY> 1,968
<CURRENT-ASSETS> 4,726
<PP&E> 4,634
<DEPRECIATION> 4,076
<TOTAL-ASSETS> 5,329
<CURRENT-LIABILITIES> 2,099
<BONDS> 0
0
0
<COMMON> 527
<OTHER-SE> 3,114
<TOTAL-LIABILITY-AND-EQUITY> 5,329
<SALES> 8,231
<TOTAL-REVENUES> 8,326
<CGS> 6,106
<TOTAL-COSTS> 10,051
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,725)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,725)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,725)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
