SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(X) Quarterly report for the quarterly period ended June 30, 1999
OR
( ) Transition Report Pursuant To Section 13 Or 15(d) of The Securities
Exchange Act of 1934
Commission file number 1-3952
SIBONEY CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 73-0629975
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
34 N. Brentwood Blvd., Ste. 211, P.O. Box 16184, St. Louis, MO 63105
(Address of principal executive offices) (Zip Code)
314-725-6141
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 [ ]
Title of class of Number of Shares
common stock outstanding as of this Report Date
----------------- ----------------------------------
Common stock, par value 16,525,344
$.10 per share
<PAGE>
INDEX
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet, June 30,
1999 and December 31, 1998 3
Condensed Consolidated Statement Of Operations,
Three Months and Six Months Ended June 30, 1999 and
June 30, 1998 4
Condensed Consolidated Statement of Cash Flows, Six
Months Ended June 30, 1999 and June 30, 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
Exhibit Index 13
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
Assets
DECEMBER 31,
June 30, 1998 (SEE
1999 NOTE BELOW)
- --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 193,870 $ 134,387
Investment 10,500 8,500
Accounts and notes receivable 650,598 274,204
Inventories (Note 2) 184,696 187,545
Prepaid expenses and deposits 69,496 77,774
----------- ------------
Total Current Asset 1,109,160 682,410
Property, Plant and Equipment
(Net of accumulated depreciation
of $596,258 at June 30, 1999 and
$569,649 at December 31, 1998) 225,121 198,820
----------- ------------
Capitalized Software Development Costs
(Net of accumulated amortization of
$1,673 at June 30, 1999 - Note 3) 100,824 --
---------- ------------
$ 1,435,105 $ 881,230
=========== ============
Liabilities and Stockholders' Equity
Current Liabilities
Current portion long term debt $ 21,396 $ 11,828
Note payable (Note 4) 155,000 --
Accounts payable 55,658 85,508
Accrued expenses 147,407 148,579
------------ -----------
Total Current Liabilities 379,461 245,915
Long Term Debt 45,736 28,437
------------ -----------
Total Liabilities 425,197 274,352
Stockholders' Equity
Common stock
Authorized 20,000,000 shares at
$0.10 par value; issued and outstanding
16,525,344 and 16,518,344 at
June 30, 1999 and December 31, 1998
respectively 1,652,535 1,651,835
Unrealized holding gain on investment 10,500 8,500
Additional paid-in capital 493 300
Retained earnings (deficit) (653,620) (1,053,757)
------------- -----------
Total Stockholders' Equity 1,009,908 606,878
------------ ------------
$ 1,435,105 $ 881,230
============ ===========
NOTE: The balance sheet at December 31, 1998 has been taken from the audited
financial statements at that date and condensed.
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $1,918,617 1,322,326 1,075,763 800,644
Cost of Product Sales 289,942 176,239 140,825 100,584
Selling, General and
Administrative Expenses 1,188,702 1,066,791 573,375 537,638
---------- ----------- ----------- ----------
Income from Operations
439,973 79,296 361,563 162,422
---------- ----------- ----------- ----------
Other Income (Expense)
Interest Income (Expense) (5,690) (3,418) (4,041) (3,020)
Miscellaneous (34,146) (10,924) (29,857) (9,646)
----------- ----------- ----------- -----------
Total Other Income (Expense) (39,836) (14,342) (33,898) (12,666)
----------- ----------- ----------- -----------
Net Income $ 400,137 $ 64,954 $ 327,665 $ 149,756
=========== =========== =========== ==========
Weighted Average Shares
Outstanding
16,519,659 16,517,193 16,520,959 16,517,193
=========== =========== =========== ==========
Basic and Diluted Income
per Common Share
$ .024 $ .004 $ .020 $ .009
=========== =========== =========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
---- ----
Cash Flows from Operations
Net income from continuing operations $ 400,137 $ 64,954
Adjustments to reconcile net income from
continuing operations to net
cash provided by continuing operations:
Depreciation 26,609 31,505
Amortization 1,673 --
Change in assets and liabilities:
Increase in accounts and notes (376,394) (220,624)
receivable
(Increase) decrease in inventory 2,849 (18,561)
Decrease in prepaid expenses
and deposits 8,278 16,998
Decrease in accounts payable
and accrued expenses (31,022) (8,432)
---------- ----------
Net Cash Provided by (Used in) Operations 32,130 (134,160)
---------- ----------
Cash Flows from Investing Activities
Payments for equipment (17,101) (29,544)
Capitalized software development costs (102,497) --
---------- ---------
Net Cash Used in Investing Activities (119,598) (29,544)
---------- ----------
Cash Flows from Financing Activities
Borrowing under line-of-credit agreement 155,000 94,000
Payment on long-term debt (8,942) (7,941)
Proceeds from issuance of common stock 893 --
---------- ---------
Net Cash Provided by Financing Activities 146,951 86,059
---------- ---------
Net Increase (Decrease) in Cash
and Cash Equivalents 59,483 (77,645)
Cash and Cash Equivalents -
Beginning of Period 134,387 289,752
---------- ---------
Cash and Cash Equivalents -
End of Period $ 193,870 $ 212,107
========== ==========
Supplemental Disclosure of Cash
Flow Information
Interest Paid $ 6,602 $ 5,625
---------- ---------
Non cash investing activities for
the 6 months ended June 30, 1999
included a capital lease for
equipment of $35,809
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SIBONEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1999, the condensed
consolidated statement of operations for the six-month and the three-month
periods ended June 30, 1999 and 1998 and the condensed consolidated
statement of cash flows for the six-month periods then ended have been
prepared by the Company, without audit. In the opinion of management, all
adjustments (which include only recurring adjustments) necessary to present
fairly the financial position and results of operations at June 30, 1999 and
for all periods have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998. The results of operations
for the period ended June 30, 1999 are not necessarily indicative of the
operating results for the full year.
2. INVENTORIES
Inventories consist of the following:
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
Raw materials $ 82,862 $ 128,727
Finished goods 101,834 58,818
------- --------
$184,696 $ 187,545
======== ========
3. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs associated with the development of computer
software for sale. Costs are capitalized at the point in which the Company
determines that it is technologically feasible to produce the software
title. Such costs are amortized on a straight-line basis over a period of
five years. Amortization expense charged against earnings amounted to
$1,673 for the six months ended June 30, 1999.
4. NOTE PAYABLE
The Company has a revolving line of credit agreement with a bank which
provides funds based on 75% of eligible receivables, as defined by the
agreement, with a maximum of $500,000. The outstanding debt is due on
demand, and if no demand is made, then on August 1, 2000. The agreement,
secured by accounts receivable, equipment and inventory, requires monthly
interest payments on the outstanding balance at 0.75% above the lender's
prime rate. As of June 30, 1999 there was $155,000 outstanding under the
line of credit agreement. As of December 31, 1998 no loan was outstanding
under the agreement. Subsequent to the end of the quarter, the Company has
repaid the line-of-credit balance in full.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is engaged, through its Siboney Learning Group Division and Gamco
Industries, Inc. ("Gamco"), a wholly-owned subsidiary, in the publishing and
distribution of educational software. The Company has served the educational
market for more than 35 years. The Company's main business is publishing
proprietary educational software in math, reading and language arts for students
and teachers in grades kindergarten through grade 12. This software motivates
students to master key skills which are stressed on standardized tests and in
textbooks. Siboney Learning Group/Gamco sells through a network of independent
distributors throughout the United States as well as through its own catalogs
and sales force. Popular Gamco software titles include Money Challenge, Discover
Time, the Touchdown Math series, Undersea Reading for Meaning and new titles
including Reading Concepts, Paragraph Power and Reading for Critical Thinking.
The Company publishes over 200 titles for Windows, Macintosh, DOS and Apple II
operating systems.
The Company also has certain natural resource interests, including coal, oil and
gas, through several subsidiaries.
OVERVIEW OF THE COMPANY
Since its inception in 1995, the Siboney Learning Group Division has focused on
two priorities: 1) increasing distribution channels to schools for its
instructional software titles and 2) accelerating product development of new
proprietary titles and new versions of existing proprietary titles for new
computer platforms.
In addition to selling its GAMCO software to K-12 schools through the leading
national software catalog dealers, other school software dealers and through its
own direct catalogs, the Company has set up two new channels to reach schools
more effectively and aggressively. Orchard Teacher's Choice Software, which
offers a comprehensive curricular solution with universal management, is sold
through a network of thirty dealers with protected or exclusive territories
whose sales representatives call on schools. These dealers sell the more
expensive Orchard packaged product to schools and to school districts looking
for an integrated learning system.
The Company has also built an inside sales force of six sales representatives
who focus on selling software titles to the Company's 12,000 school customers
and 40,000 additional school prospects.
The Company has recently entered into distribution arrangements with two
resellers who will take selected titles from the Company to create software
bundles sold directly to consumers.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company has drastically accelerated its product development through internal
development and through licensing transactions. After releasing over 80 new
titles or versions in 1998, the Company has introduced 27 new math and reading
titles in 1999 for the Macintosh and Windows hybrid CD-ROM format. The math
titles focus on key concepts stressed in the National Council of Teachers of
Mathematics Standards which have been incorporated into most state-specific
standards. The early reading titles emphasize phonics and phonemic awareness for
grades K-2.
In addition, the Company signed agreements to create two more major new series
in 1999 which will be launched in early 2000. The Company will publish a new
science series for grades 4-8 which is currently being developed and tested by
the NECTAR Foundation. The Company is also working with several successful
reading authors to create a new reading comprehension series for grades 1-4.
The Company also completed the final steps of its planned relocation from Big
Spring, Texas to Saint Louis, Missouri during this quarter by moving its
customer service and distribution center operations to Saint Louis. In July the
Company closed the sale of its former Texas facility.
The Company's revenue growth and success in 1999 can be directly attributed to
its increased distribution to schools and its stream of new titles and new
versions which are meeting schools' needs for quality content on new computer
platforms. The Company now believes it is in a position to explore how to
deliver special versions of its software to home schoolers and consumers, two
customer groups that it does not currently reach, through the Internet and
e-commerce in 2000.
RESULTS OF OPERATION
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods covered by the accompanying condensed consolidated
financial statements.
THREE MONTHS ENDED JUNE 30, 1999 vs. JUNE 30, 1998
During the second quarter of 1999, total revenues increased 34.4% or $275,119 to
$1,075,763 compared to the same period ended June 30,1998, reflecting higher
sales at the Siboney Learning Group/Gamco division. Ninety three percent of
Siboney Learning Group's sales were generated by products developed and released
during the past 24 months. Sales of Orchard Teachers Choice Software increased
149% while sales of Gamco's Mac/Win CD's increased 103%.
Cost of product sales increased 40% or $40,241 to $140,825 during the quarter
compared to the previous year's quarter due to higher revenues and the effect of
higher royalties paid. As a percentage of revenues, cost of product sales
increased to 13.1% compared to 12.6% in the prior year, primarily due to
royalties paid on sales of newly licensed software titles. The Company expects
the cost of sales as a percentage of revenue to remain higher compared to 1998
as a result of the increased sales of products, mainly its Math Concepts titles,
on which the Company owes royalty payments.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Selling, general and administrative expenses increased 6.6% or $35,737 to
$573,375 during the quarter ended June 30, 1999 compared to the same quarter in
1998, primarily due to higher expenses for salaries and related payroll
expenses, office supplies, rent and telephone.
Total other expenses increased during the second period of 1999 compared to the
same period in 1998 due to relocation expenses incurred. The Company completed
the relocation of its distribution center from Big Spring, Texas to Saint Louis,
Missouri the last part of June, 1999.
The Company's net income for the second quarter of 1999, primarily for the
reasons above, was $327,665, an increase of 118.8% or $177,909 better than the
same quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1999 vs. JUNE 30, 1998
Revenues increased 45.1% or $596,291 to $1,918,617 during the six month period
ended June 30, 1999 compared to the same period in 1998. Higher sales at Siboney
Learning Group/Gamco were the result of new products developed and released in
the past 24 months and new school distribution strategies. The Company has
repositioned itself to deliver new titles and new formats perceived to be
desirable by the school educators it serves. Siboney Learning Group's
established network of Orchard dealers is producing stronger sales of more
expensive curriculum-based solutions in addition to the single program titles
historically sold by the Company through catalogs.
Cost of product sales increased 64.5% or $113,703 during the six months ended
June 30, 1999 compared to the same period in 1998 due to higher revenues and the
effect of higher royalties paid. As a percentage of revenues, costs of product
sales increased to 15.1% compared to 13.3% in the prior year, primarily due to
royalties paid on sales of newly licensed software titles. The Company expects
to cost of sales as a percentage of revenue to remain higher compared to 1998 as
a result of the increased sales of products on which the Company owes royalty
payments.
Selling, general and administrative expenses increased 11.4% or $121,911 to
$1,188,702 during the six month period ended June 30, 1999 compared to the same
period in 1998, primarily due to higher advertising costs, higher salaries,
related payroll expenses, offices supplies, rent and telephone.
Total other expenses increased $25,494 during the second half of 1999 compared
to 1998 primarily due to relocation expenses incurred for the relocation of the
Company's distribution center from Big Spring, Texas to Saint Louis, Missouri.
The Company's net income for the six month period ended June 30, 1999 primarily
for the reasons stated above, was $400,137, an increase of 516% or $335,183
better than the same period in 1998.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash increased at June 30, 1999 to $193,870 compared to $134,387 at December 31,
1998.
Accounts receivable increased 137.3% or $376,394 to $650,598 compared to
receivables of $274,204 at December 31, 1998 due to the higher sales volume at
Siboney Learning Group/Gamco during May and June 1999, compared with November
and December 1998. This was consistent with Siboney Learning Group/Gamco's
experience in the previous year.
Note payable increased at June 30, 1999 compared to December 31, 1998 as a
result of the Company drawing down on its line-of-credit to meet increased
working capital requirements associated with higher sales during the second
quarter. The Company has repaid the line-of-credit in full since the end of the
second quarter.
Long-term debt increased at June 30, 1999 compared to December 31, 1998 due to a
capitalized lease incurred for new computer equipment.
The net worth of the Company at June 30, 1999 was $1,009,908 compared to
$606,878 at December 31, 1998, as a result of the retention of earnings during
the six month period.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits, rather than four, to define the applicable year. As a result,
when moving from the year 1999 to 2000, without adjustment, such programs will
assume the year 1900 rather than 2000, with various potential adverse effects.
Consequently, most computer programs must be adjusted to assure that they will
go forward and not backward.
The Company utilizes computer technologies throughout its business to carry on
its day to day operations. Computer technologies include hardware and software
used by the Company both in developing its products and in operating its
business. The Company has recently converted its operating and accounting system
to software which has been warranted to be Y2K compliant.
The Company is initiating communications and developing a monitoring program
with all of its significant suppliers to determine Y2K compliance. While the
Company is not presently aware of any significant exposure, there can be no
assurance that the systems of third parties on which the Company relies will be
converted in a timely manner, or that failure to convert by another company
would not have a material adverse effect on the Company.
Management anticipates that the most reasonably likely worst-case scenario would
involve a temporary interruption of certain operations.
The cost of determining the Company's exposure to risks associated with Y2K
compliance and correction is estimated to be less than $1,000 and is not deemed
material to its results of operations for the fiscal year.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Educational software produced by the Company is used in conjunction with popular
operating systems, namely Macintosh, DOS and the Windows series. The Company
produces single title programs and multiple title programs. Single title
programs which are operated in DOS have no dates in their management systems.
Single title programs which the Company produces for Macintosh or Windows
operating systems record student performance by raw score percentage followed by
date entered, which is automatically provided by the underlying operating
system. Dates used by the company's single title programs are displayed in two
digit (i.e., 07-10-99) configuration. Storage of this information is by most
recent entry and is only displayed and retrieved on a "last information entered,
first displayed" basis. It is not sorted on a date basis and therefore is not
subject to the Y2K problem. Multiple title programs use a management system
which displays dates in a four digit (i.e., 07-10-1999) configuration and thus
are not subject to Y2K issues.
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: See Exhibit Index on page 13.
b) Reports on Form 8-K: No reports on Form 8-K were filed by the
Registrant during the quarter ended June 30, 1999.
SIGNATURES
----------
Pursuant to the requirements of 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.
SIBONEY CORPORATION
Date: July 30, 1999 By: /s/ Timothy J. Tegeler
------------------------------------
Timothy J. Tegeler
President, Chief Executive
Officer and Chief Financial
Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
-------------- ----------- ----
27(a) Financial Data Schedule
(Filed in EDGAR version only) 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 193,870
<SECURITIES> 10,500
<RECEIVABLES> 662,083
<ALLOWANCES> 11,485
<INVENTORY> 184,696
<CURRENT-ASSETS> 1,109,160
<PP&E> 821,379
<DEPRECIATION> 596,258
<TOTAL-ASSETS> 1,435,105
<CURRENT-LIABILITIES> 379,461
<BONDS> 0
0
0
<COMMON> 1,652,535
<OTHER-SE> 10,993
<TOTAL-LIABILITY-AND-EQUITY> 1,009,908
<SALES> 1,888,018
<TOTAL-REVENUES> 1,918,617
<CGS> 289,942
<TOTAL-COSTS> 289,942
<OTHER-EXPENSES> 1,188,702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,602
<INCOME-PRETAX> 439,973
<INCOME-TAX> 0
<INCOME-CONTINUING> 439,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 400,137
<EPS-BASIC> .024
<EPS-DILUTED> .024
</TABLE>
