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 September 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, September 30,
1999 and December 31, 1998 3
Condensed Consolidated Statement Of Operations,
Three Months and Nine Months Ended September 30, 1999
and September 30, 1998 4
Condensed Consolidated Statement of Cash Flows,
Nine Months Ended September 30, 1999 and
September 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 11
Signatures 11
Exhibit Index 12
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
Assets
December 31,
September 30, 1998 (See
1999 note below)
- --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 437,915 $ 134,387
Investment 7,000 8,500
Accounts and notes receivable 365,069 274,204
Inventories (Note 2) 182,799 187,545
Prepaid expenses and deposits 86,950 77,774
----------- ------------
Total Current Asset 1,079,733 682,410
Property, Plant and Equipment (Net of
accumulated depreciation of $455,668 at
September 30, 1999 and $569,649 at
December 31, 1998)
186,796 198,820
----------- -----------
Capitalized Software Development Costs
(Net of accumulated amortization of
$3,746 at September 30, 1999 - Note 3) 145,986 --
---------- ------------
$ 1,412,515 $ 881,230
=========== ============
Liabilities and Stockholders' Equity
Current Liabilities
Current portion long term debt $ 21,905 $ 11,828
Accounts payable 68,814 85,508
Accrued expenses 166,752 148,579
----------- ------------
Total Current Liabilities 257,471 245,915
Long Term Debt 39,988 28,437
Total Liabilities 297,459 274,352
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 September 30, 1999 and
December 31, 1998 respectively
Unrealized holding gain on investment 1,652,535 1,651,835
Additional paid-in capital 7,000 8,500
Retained earnings (deficit) 493 300
Total Stockholders' Equity (544,972) (1,053,757)
----------- -------------
1,115,056 606,878
----------- -------------
$1,412,515 $ 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.
3
<PAGE>
<TABLE>
<CAPTION>
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended Three Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 2,647,766 1,918,734 729,149 596,408
Cost of Product Sales 401,287 260,708 111,345 84,469
Selling, General and
Administrative Expenses 1,775,524 1,589,080 586,822 522,289
------------ ----------- ----------- ----------
Income from Operations 470,955 68,946 30,982 (10,350)
------------ ---------- ----------- -----------
Other Income (Expense)
Gain on Sale of Assets 86,759 -- 86,759 --
Interest Income (Expense) (6,745) (3,592) (1,055) (174)
Miscellaneous (42,184) (16,976) (8,038) (6,052)
------------ ----------- ----------- -----------
Total Other Income (Expense) 37,830 (20,568) 77,666 (6,226)
------------ ----------- ----------- -----------
Net Income $ 508,785 $ 48,378 $ 108,648 $ (16,576)
============ =========== =========== ===========
Weighted Average Shares
Outstanding 16,525,344 16,518,344 16,525,344 16,518,344
============ =========== =========== ===========
Basic and Diluted Income
per Common Share $ .031 $ .003 $ .007 $ (.001)
============ =========== =========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
---- ----
Cash Flows from Operations
Net income from continuing operations $ 508,785 $ 48,378
Adjustments to reconcile net income
from continuing operations to net
cash provided by continuing operations:
Depreciation 44,830 46,296
Amortization 3,746 --
Gain on sale of assets (86,759) --
Change in assets and liabilities:
Increase in accounts and notes (90,865) (157,940)
receivable
(Increase) decrease in inventory 4,746 (23,768)
Increase in prepaid expenses
and deposits (9,176) (6,037)
Increase in accounts payable
and accrued expenses 1,479 63,224
----------- ---------
Net Cash Provided by (Used in) Operations 376,786 (29,847)
----------- ---------
Cash Flows from Investing Activities
Payments for equipment (66,577) (52,332)
Capitalized software development costs (149,732) --
Proceeds from sale of asset 156,339 --
---------- ---------
Net Cash Used in Investing Activities (59,970) (52,332)
---------- ----------
Cash Flows from Financing Activities
Payment on long-term debt (14,181) (10,997)
Proceeds from issuance of common stock 893 --
Net Cash Provided by Financing Activities (13,288) (10,997)
---------- ----------
Net Increase (Decrease) in Cash
and Cash Equivalents 303,528 (93,176)
Cash and Cash Equivalents -
Beginning of Period 134,387 289,752
---------- ----------
Cash and Cash Equivalents -
End of Period $ 437,915 $ 196,576
========== ==========
Supplemental Disclosure of
Cash Flow Information
Interest Paid $ 6,602 $ 6,408
----------- ---------
Non cash investing activities
for the 9 months ended September 30, 1999
included a capital lease for equipment
of $35,809
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SIBONEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 1999, the
condensed consolidated statement of operations for the nine-month and the
three-month periods ended September 30, 1999 and 1998 and the condensed
consolidated statement of cash flows for the nine-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 September 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 September 30, 1999 are not
necessarily indicative of the operating results for the full year.
2. INVENTORIES
Inventories consist of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials $ 89,849 $ 128,727
Finished goods 92,950 58,818
------- --------
$182,799 $ 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 declining balance method
over a period of four years. Amortization expense charged against
earnings amounted to $3,746 for the nine months ended September 30, 1999.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is engaged, through Siboney Learning Group, Inc. (formerly known as
Gamco Industries, Inc.), 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 sells through a network of independent
distributors throughout the United States as well as through its own catalogs
and sales force. Popular new software titles include Math Concepts in Motion,
Reading for Critical Thinking, Reading Concepts, Paragraph Power and the
Essential Language Series. 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
Siboney Learning Group continues to focus on two priorities: 1) increasing
distribution channels to schools for its instructional software titles and 2)
accelerating product development of new proprietary and licensed titles.
The Company has two major product lines which are sold primarily to K-12
schools. The GAMCO product line consists of over 100 individual titles in
reading, language and mathematics. These titles supplement teachers' efforts to
teach basic skills and new concepts becoming more important in today's
curriculum. GAMCO products are sold through the leading national software
catalog dealers, other school software dealers and through the Company's own
direct catalogs and inside sales force who sell the entire product line to the
Company's 12,000 school customers and 40,000 additional school prospects.
Orchard Teacher's Choice Software, introduced in 1997, is the Company's second
major product line. Orchard offers a comprehensive curricular solution with
universal management to schools looking for an integrated learning system.
Orchard is sold through a network of 30 dealers and sales representatives with
protected or exclusive territories who are experienced in selling the more
expensive Orchard product line to schools. Over 1,000 schools are currently
using Orchard.
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.
The Company has drastically accelerated its product development through internal
development and 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 the second 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 SEPTEMBER 30, 1999 vs. SEPTEMBER 30, 1998
During the third quarter of 1999, total revenues increased 22.3% or $132,741 to
$729,149 compared to the same period ended September 30,1998, reflecting higher
sales at Siboney Learning Group. Increased sales of Orchard Teacher's Choice
Software accounted for 60% of this quarterly increase in sales. This quarterly
increase in sales is particularly encouraging as the Company accounted for its
largest single order ever during the third quarter of 1998. If that one
exceptional order had been excluded, the Company's sales would have increased
70% during this quarter.
Cost of product sales increased 31.8% or $26,876 to $111,345 during the quarter
compared to the previous year's quarter due to the effect of higher royalties
paid. As a percentage of revenues, cost of product sales increased to 15.3%
compared to 14.2% 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.
Selling, general and administrative expenses increased 12.4% or $64,533 to
$586,822 during the quarter ended September 30, 1999 compared to the same
quarter in 1998, primarily due to higher expenses for salaries and related
payroll costs, rent, telephone and catalog advertising expense.
Other income and expense increased $83,892 during the third quarter of 1999
primarily due to the gain realized on the sale of its former distribution center
building in Big Spring, Texas. This operation was relocated to Saint
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Louis, Missouri the last part of June 1999.
The Company's net income for the third quarter of 1999, primarily for the
reasons above, was $108,648, an increase of 755.5% or $125,224 better than the
same quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 vs. SEPTEMBER 30, 1998
Revenues increased 38.0% or $729,032 to $2,647,766 during the nine month period
ended September 30, 1999 compared to the same period in 1998. Higher sales at
Siboney Learning Group were the result of new products developed and released in
the past 24 months and new school distribution strategies. 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 53.9% or $140,579 during the nine months ended
September 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 15.2% compared to 13.6% 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 11.7% or $186,444 to
$1,775,524 during the nine month period ended September 30, 1999 compared to the
same period in 1998, primarily due to higher salaries, related payroll expenses,
offices supplies, rent and telephone.
Total other expenses increased $58,398 during the nine month period of 1999
compared to 1998. The gain on sale of assets of $86,759 is primarily the result
of the sale of the Company's former distribution center building in Big Spring,
Texas. The increase in miscellaneous expenses during this period of 1999 is
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 nine month period ended September 30, 1999
primarily for the reasons stated above, was $508,785, an increase of 951.7% or
$460,407 better than the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased at September 30, 1999 to $437,915 compared to $134,387 at
December 31, 1998.
Accounts receivable increased 33.1% or $90,865 to $365,069 compared to
receivables of $274,204 at December 31, 1998 due to the higher sales volume at
Siboney Learning Group during August and September 1999, compared with November
and December 1998. This was consistent with Siboney Learning Group's experience
in the previous year.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Capitalized software development costs increased at September 30, 1999 compared
to December 31, 1998. Beginning in 1999 the Company began capitalizing the costs
associated with the development of computer software for sale.
Long-term debt increased at September 30, 1999 compared to December 31, 1998 due
to a capitalized lease incurred for new computer equipment.
The net worth of the Company at September 30, 1999 was $1,115,056 compared to
$606,878 at December 31, 1998, as a result of the retention of earnings during
the nine 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.
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.
10
<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 September 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: November 5, 1999 By: /s/ Timothy J. Tegeler
---------------------------------
Timothy J. Tegeler
President, Chief Executive
Officer and Chief Financial
Officer
11
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
-------------- ----------- ----
27(a) Financial Data Schedule
(Filed in EDGAR version only) 13
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 437,915
<SECURITIES> 7,000
<RECEIVABLES> 365,069
<ALLOWANCES> 11,707
<INVENTORY> 182,799
<CURRENT-ASSETS> 1,079,733
<PP&E> 642,464
<DEPRECIATION> 455,668
<TOTAL-ASSETS> 1,412,515
<CURRENT-LIABILITIES> 257,471
<BONDS> 0
0
0
<COMMON> 1,652,535
<OTHER-SE> 7,493
<TOTAL-LIABILITY-AND-EQUITY> 1,115,056
<SALES> 2,617,167
<TOTAL-REVENUES> 2,647,766
<CGS> 401,287
<TOTAL-COSTS> 401,287
<OTHER-EXPENSES> 1,775,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,239
<INCOME-PRETAX> 470,955
<INCOME-TAX> 0
<INCOME-CONTINUING> 470,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 508,785
<EPS-BASIC> .031
<EPS-DILUTED> .031
</TABLE>
