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 July 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 July 31, 1998, the number of shares outstanding of the issuer's common
stock was 1,619,820 shares.
Transitional Small Business Issuer Format (check one): YES [ ] NO [ X ]
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MONARCH AVALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(000's Omitted)
July 31, April 30,
1998 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,337 $1,738
Accounts receivable, net 756 973
Inventories, net 1,910 1,968
Other current assets 210 47
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TOTAL CURRENT ASSETS 4,213 4,726
PROPERTY AND EQUIPMENT 4,634 4,634
Less allowance for depreciation (4,117) (4,076)
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517 558
OTHER ASSETS AND DEFERRED CHARGES 48 45
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TOTAL ASSETS $4,778 $5,329
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 300 $ 352
Accrued expenses 698 723
Deferred subscription revenues 1,126 1,024
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TOTAL CURRENT LIABILITIES 2,124 2,099
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 July 31, 1998 and
April 30, 1998 527 527
Capital surplus 3,378 3,378
Retained (deficit) earnings (1,129) (553)
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2,776 3,352
Treasury stock at par - shares
outstanding 490,165 on July
31, 1998 and April 30, 1998 (122) (122)
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2,654 3,230
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,778 $5,329
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<FN>
See Notes to Consolidated Financial Statements.
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MONARCH AVALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended
July 31,
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1998 1997
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(000's omitted, except per share data)
<S> <C> <C>
Net sales $ 1,281 $ 1,628
Cost of goods sold 1,394 1,178
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Gross (loss) profit (113) 450
Selling, general and
administrative expenses 383 616
Research and development 90 113
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Operating expenses 473 729
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Loss from operations (586) (279)
Other income, net 10 23
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Loss before income taxes (576) (256)
Provision for income taxes 0 0
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Net loss (576) (256)
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Loss per share $ (.36) $ (.16)
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Weighted average shares
outstanding 1,619,820 1,619,820
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<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
MONARCH AVALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Three Months Ended
July 31,
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1998 1997
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(000's omitted)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from operations $ (576) $ (256)
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Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 41 13
Changes in accounts receivable,
inventories, other assets, accounts
payable, accrued expenses and
deferred subscription revenue 134 (164)
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Net cash used in operating activities (401) (407)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment 0 (59)
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Net cash used in investing activities 0 (59)
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Net decrease in cash and cash equivalents (401) (466)
Cash and cash equivalents at beginning of
period 1,738 2,131
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Cash and cash equivalents at end of period $1,337 $1,665
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<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
MONARCH AVALON, INC. AND SUBSIDIARIES
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 subsidiary, Girls' Life,
Inc.(Monarch and Girls' Life Inc. collectively referred to herein as "the
Company") have been prepared in accordance with the instructions to Form 10-QSB
and do not include all of the information and disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals
and charges) considered necessary for a fair presentation have been included.
All material intercompany balances between Monarch and its subsidiary have been
eliminated in consolidation. Operating results for the three months ended July
31, 1998 are not necessarily indicative of the results that may be expected for
the year ending April 30, 1999. The subsidiaries Creampuffs, Inc. and Broken
Windows, Inc. did not engage in any operations for the quarter ending July 31,
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, 1998.
NOTE B - ACCOUNTS RECEIVABLE
Accounts receivable are net of the following allowances:
July 31, 1998 April 30, 1998
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(000's Omitted)
Doubtful accounts $142 $142
Customer returns 45 45
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$187 $187
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:
July 31,1998 April 30, 1998
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(000's omitted)
Raw materials $ 656 $ 694
Work in progress 144 174
Finished goods 1,110 1,100
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$1,910 $1,968
The above components are shown net of lower of cost of market reserves of
$350,000 at July 31, 1998 and April 30, 1998. The Company values its
inventories at the lower of cost (first-in, first-out) or market.
NOTE D - SUBSEQUENT EVENTS
On August 14, 1998, the Company filed an 8-K for a report dated August 3, 1998
that announced that Monarch Avalon, Inc. had entered into a definitive agreement
to sell its games division to a newly formed subsidiary of Hasbro, Inc. for
$6,000,000 in cash. The assets being sold include trademarks, copyrights and
other intellectual property rights, inventory and tooling.
<PAGE>
ITEM II MONARCH AVALON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For purposes of this discussion references to "fiscal 1999" are to the fiscal
year ending April 30, 1999, and references to "fiscal 1998" are to the fiscal
year ended April 30, 1998.
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
Report on Form 10-QSB) 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
contained in the Company's Annual Report on Form 10-KSB for the year ended April
30, 1998 and incorporated herein by reference 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. Included in these risks is
the Company's history of losses, its efforts to identify and implement a
strategic alternative (sale of the games business to a subsidiary of Hasbro,
Inc.), its fluctuations in operating results and seasonality, its dependence on
new product introductions, the impact of product delays, the uncertainty of
market acceptance of its products and short product life cycles, competition and
other risks. 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.
RESULTS OF OPERATIONS
Monarch consists of two divisions, games and printing. Girls' Life, Inc., a
wholly-owned subsidiary, publishes a magazine.
Sales of products in the games division, primarily board games and software
games designed for use on microcomputers, are somewhat seasonal in nature
because of increased retail game sales during the Christmas season, while sales
of the Company's other products (envelopes, printing and graphic arts services
and Girls' Life magazine) are not seasonal. The timing of new releases of the
Company's games also may affect sales in the games division.
RESULTS FOR THE FIRST QUARTER OF FISCAL YEAR 1999 AND 1998
Net sales decreased by $347,000 or 21% in the first quarter of fiscal 1999 as
compared to the first quarter of fiscal 1998. Sales in the games division
decreased by $527,000 or 71% in the first quarter of fiscal 1999 compared to the
first quarter of fiscal 1998 as a result of increased returns of computer games
during the first quarter of fiscal 1999 compared to the first quarter in 1998.
Net of returns, computer game sales for the first quarter of fiscal 1999 was a
negative $75,000. On August 4, 1998, the Company announced that it has entered
into a definitive agreement to sell the games division of the Company to a newly
formed subsidiary of Hasbro, Inc. for $6,000,000 in cash. The assets being sold
include trademarks, copyrights and other intellectual property rights, inventory
and tooling. In light of the Company's agreement to sell the assets of the
games division, and pursuant to such agreement, the Company has taken steps to
cut costs in the games division. Such steps have included curtailment of the
research and dvelopment and sales and marketing activities of the games division
and layoffs of games division employuees. Management expects that the result of
such steps will be to further decrease sales of the games division during the
remainder of fiscal 1999. Sales in the printing division decreased by $3,000 in
the first quarter of fiscal 1999 or 0.5% from the first quarter of fiscal 1997
due to competition in the printing business. Sales of Girls' Life magazine in
the first quarter of fiscal 1999 increased by $184,000 or 58% from the first
quarter of fiscal 1998. The increase in sales of Girls' Life magazine relates
primarily to the increase in promotional and direct mailing advertising of the
magazine and increased revenue from newstand sales and advertising.
Gross profit decreased by $563,000 or 125% during the first quarter of fiscal
1999 compared to the first quarter of fiscal 1998. Consolidated gross margin
was a negative 9% of net sales during the first quarter of fiscal 1999 as
compared to 28% during the first quarter of fiscal 1998. The decrease in gross
margin primarily related to the return of computer games.
Operating expenses were 37% of net sales in the first quarter of fiscal 1999 as
compared to 45% in the first quarter of fiscal 1998. Operating expenses for the
first quarter of fiscal 1999 decreased by $256,000 or 35% from the same period
in fiscal 1998, primarily because of lower promotional and advertising expenses
for publishing sales and lower royalties and research and development costs for
game sales.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the Company has cash and cash equivalents of approximately
$1,337,000, a decrease of $401,000 from the amount at April 30, 1998. The
decrease resulted from cash used in operations of $401,000. The Company's cash
and cash equivalents are subject to variation based upon the timing of receipts
and the payment of payables.
At July 31, 1998, the Company has no debt with third party lenders.
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 under $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>
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
The Company filed three reports on Form 8-K during the three
months ended July 31, 1998.
On May 1, 1998, the Company filed a report on Form 8-K dated
November 12, 1997 to report, under Item Five of Form 8-K, a
lawsuit filed in the United States District Court for the
Central District of California pertaining to certain
CIVILIZATION game products.
On May 13, 1998, the Company filed a report on Form 8-K dated
May 13, 1998 to report, under Item Five of Form 8-K, the
Company applied for transfer of the Company's stock listing
from the Nasdaq National Market to the Nasdaq SmallCap Market.
On June 17, 1998, the Company filed a report on Form 8-K dated
June 17, 1998 to report, under Item Five of Form 8-K, the
Company had been advised by the staff of The Nasdaq Stock
Market that the Company's application to transfer the listing
of the Company's Common stock from the Nasdaq National Market
to the Nasdaq SmallCap Market had been approved effective June
18, 1998.
<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 9/14/98 By /s/ A. Eric Dott
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A. Eric Dott
Chariman of the Board
Date 9/14/98 /s/ A. Eric Dott
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A. Eric Dott
Chairman of the Board
(Principal Executive Officer)
Date 9/14/98 /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 quarter ended July 31,
1998, and is qualified in its entirety by reference to such financial statements
and the notes thereto.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Apr-30-1999
<PERIOD-START> May-01-1998
<PERIOD-END> Jul-31-1998
<CASH> 1,337
<SECURITIES> 0
<RECEIVABLES> 756
<ALLOWANCES> 137
<INVENTORY> 1,910
<CURRENT-ASSETS> 4,213
<PP&E> 4,634
<DEPRECIATION> 4,117
<TOTAL-ASSETS> 4,778
<CURRENT-LIABILITIES> 2,124
<BONDS> 0
0
0
<COMMON> 527
<OTHER-SE> 2,654
<TOTAL-LIABILITY-AND-EQUITY> 4,778
<SALES> 1,281
<TOTAL-REVENUES> 1,281
<CGS> 1,394
<TOTAL-COSTS> 1,867
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (576)
<INCOME-TAX> 0
<INCOME-CONTINUING> (576)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (576)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
