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Monarch Services Inc · 10KSB40 · For 4/30/98

Filed On 7/29/98   ·   Accession Number 202685-98-6   ·   SEC File 0-08512

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  As Of                Filer                Filing    For/On/As Docs:Size

 7/29/98  Monarch Services Inc              10KSB40     4/30/98    2:81K

Annual Report — Small Business — [X] Reg. S-B Item 405   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB40     Annual Report -- Small Business -- [X] Reg. S-B       35    149K 
                          Item 405                                               
 2: EX-27       Financial Data Schedule                                1      8K 


10KSB40   —   Annual Report — Small Business — [X] Reg. S-B Item 405
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Description of Business
3Item 1. BUSINESS - (Continued)
6Competition
7Item 2. DESCRIPTION OF PROPERTY The Company leases property at the following locations for the following purposes:
"Item 4. Submission of Matters to A Vote of Security-Holders
8Item 5. Market for Common Equity and Related Stockholder Matters
"Item 6. Management's Discussion and Analysis or Plan of Operation
11Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OR OPERATIONS (Continued)
18Item 7. Financial Statements
19Item 7. FINANCIAL STATEMENTS (Continued)
24Earnings Per Share
31Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"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
32Item 13. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
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SECURITES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- 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 ---------------------- 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 ]
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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."
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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.
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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.
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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.
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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.
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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.
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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.
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[Download Table] Item 7. FINANCIAL STATEMENTS Consolidated Statements of Financial Condition ------------------------------------------------------------------------ April 30, 1998 1997 ------------------------------------------------------------------------ (000's Omitted) 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.
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[Download Table] Item 7. FINANCIAL STATEMENTS (Continued) Consolidated Statements of Operations --------------------------------------------------------------------------- Year Ended April 30, 1998 1997 1996 --------------------------------------------------------------------------- (000's Omitted, except share information) 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.
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[Download Table] Item 7. FINANCIAL STATEMENTS (Continued) Consolidated Statements of Changes in Stockholders' Equity (000's omitted, except shares outstanding data) Total Shares Common Capital Retained Treasury Stockolders' Outstanding Stock Surplus Earnings Stock Equity ---------- ------ ------- -------- -------- ---------- 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.
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[Download Table] Item 7. FINANCIAL STATEMENTS (Continued) Consolidated Statements of Cash Flows ------------------------------------------------------------------------ Year Ended April 30, 1998 1997 1996 ------------------------------------------------------------------------ (000's Omitted) 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.
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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.
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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.
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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.
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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) =========== ========== ==========
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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.
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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.
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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.
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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.
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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
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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).
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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.
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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 -------------
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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
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EXHIBIT INDEX Exhibit Number -------------- 27 - Financial Data Schedule

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10KSB40 Filing   Date First   Last      Other Filings
4/30/9232
12/14/932
4/30/953132DEF 14A, PRE 14A
4/30/962410KSB
8/1/9631
10/4/9632DEF 14A
3/12/9722
4/21/9732
4/30/97183210KSB
6/11/9722
7/31/973110QSB
10/3/9727DEF 14A
10/31/973210QSB
11/26/9722
1/17/9822
For The Period Ended4/30/9813210KSB40/A
6/19/988
7/15/98116
7/17/9830
Filed On / Filed As Of7/29/983334
9/30/9827
4/30/992410KSB40
5/14/007
 
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