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 March 31, 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 S. 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 16,518,344
$.10 per share
1
<PAGE>
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet, March 31,
1999 and December 31, 1998 3
Condensed Consolidated Statement of Operations,
Three Months Ended March 31, 1999 and March 31, 1998 4
Condensed Consolidated Statement of Cash Flows, Three
Months Ended March 31, 1999 and March 31, 1998 5
Notes to Condensed Consolidated Financial 6
Statements
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
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
Assets
DECEMBER 31,
March 31, 1998 (SEE
1999 NOTE BELOW)
Current Assets
Cash and cash equivalents $ 110,082 $ 134,387
Investment 8,500 8,500
Accounts and notes receivable 545,348 274,204
Inventories (Note 2) 218,819 187,545
Prepaid expenses and deposits 144,563 77,774
----------- ------------
Total Current Assets 1,027,312 682,410
Property, Plant and Equipment (Net of
accumulated depreciation of $581,462 at
March 31, 1999 and $569,649 at December
31, 1998) 190,953 198,820
----------- ------------
$ 1,218,265 $ 881,230
=========== ============
Liabilities and Stockholders' Equity
Current Liabilities
Current Portion Long Term Debt $ 13,155 $ 11,828
Note payable (Note 3) 126,097 --
Accounts payable 154,126 85,508
Accrued expenses 221,582 148,579
------- -----------
Total Current Liabilities 514,960 245,915
Long Term Debt 23,955 28,437
------------ -----------
Total Liabilities 538,915 274,352
Stockholders' Equity
Common stock:
Authorized 20,000,000 shares at $0.10
par value; issued and outstanding
16,518,344 shares 1,651,835 1,651,835
Unrealized holding gain on investment 8,500 8,500
Additional paid-in capital 300 300
Retained earnings (deficit) (981,285) (1,053,757)
------------ ------------
Total Stockholders' Equity 679,350 606,878
------------ -----------
$ 1,218,265 $ 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
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SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1999 1998
---- ----
Revenues $ 842,854 $ 521,682
Cost of Product Sales 149,117 75,655
Selling, General and
Administrative Expenses 615,327 529,153
----------- -----------
Income (Loss) from Operations 78,410 (83,126)
----------- -----------
Other Income (Expense)
Interest Income (Expense) (1,649) (398)
Miscellaneous (4,289) (1,278)
----------- -----------
Total Other Income (Expense) (5,938) (1,676)
----------- -----------
Net Income (Loss) $ 72,472 $ (84,802)
========== ============
Weighted Average Shares Outstanding
16,518,344 16,432,844
=========== ============
Basic and Diluted Income (Loss) per
Common Share $ .004 $ (.005)
=========== ============
See accompanying notes to condensed consolidated financial statements.
4
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SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998
---- ----
Cash Flows from Operations
Net income (loss) from continuing operations 72,472 $( 84,802)
Adjustments to reconcile net income (loss) from
continuing operations to net cash provided by
continuing operations:
Depreciation 11,813 14,407
Change in assets and liabilities:
Increase in accounts and notes 271,144) (138,509)
receivable
Increase in inventory (31,274) (6,881)
Decrease in prepaid expenses
and deposits (66,789) (30,113)
Decrease in accounts payable
and accrued expenses 141,621 87,738
---------- ----------
Net Cash Used in Operations (143,301) (158,160)
---------- ---------
Cash Flows from Investing Activities
Payments for equipment (3,946) (21,022)
---------- ----------
Cash Flows from Financing Activities
Borrowing under line-of-credit agreement 115,000 44,000
Payment on long-term debt (3,155) (4,922)
Net advances from note payable 11,097 --
---------- ----------
Net Cash Provided by Financing Activities 122,942 39,078
---------- ----------
Net Decrease in Cash and Cash Equivalents (24,305) (140,104)
Cash and Cash Equivalents - Beginning of Period 134,387 289,752
---------- ---------
Cash and Cash Equivalents - End of Period $ 110,082 $ 149,648
========== ==========
Supplemental Disclosure of Cash Flow Information
Interest Paid $ 2,064 $ 1,900
---------- ----------
Non cash investing activities for the 3 months
ended March 31, 1999 included a capital lease for
equipment of $53,350
See accompanying notes to condensed consolidated financial statements.
5
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SIBONEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 1999, the
condensed consolidated statement of operations for the three-month periods
ended March 31, 1999 and 1998 and the condensed consolidated statement of
cash flows for the three-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 March 31, 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 March 31, 1999 are not necessarily indicative of the
operating results for the full year.
2. INVENTORIES
Inventories consist of the following:
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Raw materials $ 106,702 $ 128,727
Finished goods 112,117 58,818
-------- --------
$ 218,819 $ 187,545
========= ========
3. 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, 1999. 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 March 31, 1999 there was $115,000 outstanding under the
line of credit agreement. As of December 31, 1998 no loan was outstanding
under the agreement.
6
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SIBONEY CORPORATION AND SUBSIDIARIES
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 Macintosh, Windows, DOS and Apple II
operating systems.
The Company also has certain natural resources 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 30 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 prospects.
The Company has drastically accelerated its product development through internal
development and through licensing transactions. During 1998, the Company
released 29 products for Windows, 25 titles for Macintosh and 34 new CD-ROMs
titles that can be used on Macintosh and Windows computers. In addition, the
Company signed two new licensing agreements with outside developers that will
allow the Company to offer new and tested product offerings in two curricular
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
areas which are growing in importance. In March 1998 the Company signed a
licensing agreement with ELS, Inc. to enhance and publish its Memory Master
series of software titles that teach phonics, sight words and spelling to young
learners. In May 1998, the Company signed a licensing agreement with NECTAR
Foundation to revise and distribute its highly successful series of innovative
math titles that reflect the National Council of Teachers of Mathematics'
Standards. These two new series were released in the first quarter of 1999. The
Company continues to explore other licensing opportunities during 1999.
The Company's revenue growth and success in 1998 and the first quarter of 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. During 1999, the Company expects to
release approximately 60 new and improved titles.
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 MARCH 31, 1999 vs. MARCH 31, 1998
Total revenues increased 61.6% during the three month period ended March 31,1999
compared to the same period in 1998, reflecting higher sales of the Siboney
Learning Group/Gamco division. Ninety percent of Siboney Learning Group's sales
were generated by products released over the past 21 months. Sales of Orchard
Teachers Choice Software increased 209% while sales of Gamco's Mac/Win CD's
increased 288%.
Cost of product sales increased 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 revenue, cost of product sales increased to 17.7% compared to
14.5% 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 on which the Company owes royalty payments.
Selling, general and administrative expenses increased during the quarter ended
March 31, 1999 compared to the same quarter in 1998, primarily due to higher
advertising costs, marketing expenses, salary and commission expenses and
general office expenses.
The Company's net income for the first quarter of 1999, primarily for the
reasons above, was $72,472, compared to a loss of $84,802 in the first quarter
of 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Sales at Siboney Learning Group/Gamco increased during February and March 1999,
compared with November and December 1998, consistent with our experience in the
previous year. As a result, cash decreased at March 31, 1999, compared to
December 31, 1998, in order to pay the increased level of expenses (including
increased prepaid expenses, primarily due to the cost of catalog mailings during
February 1999) associated with higher sales and fund the resultant higher level
of accounts receivable at March 31, 1999.
Note payable also increased at March 31, 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 and related expenses
during the fist quarter.
Accounts payable increased at March 31, 1999, primarily due to the expense of
printing and mailing catalogs and the Company's Annual Report. This is
consistent with the Company's experience in previous years.
Accrued expenses increased at March 31, 1999, as a result of royalties due on
higher sales of licensed software titles.
The net worth of the Company at March 31, 1999 was $679,350 compared to $606,878
at December 31, 1998, as a result of the retention of earnings during the three
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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 12.
b) Reports on Form 8-K: No reports on Form 8-K were filed by the
Registrant during the quarter ended March 31, 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: May 12, 1999 By: /s/ Timothy J. Tegeler
------------------------------
Timothy J. Tegeler
President, Chief Executive
Officer and Chief Financial
Officer
11
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EXHIBIT INDEX
Exhibit Number Description Page
-------------- ----------- ----
27(a) Financial Data Schedule
(Filed in EDGAR version only) 13
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 110,082
<SECURITIES> 8,500
<RECEIVABLES> 555,483
<ALLOWANCES> 10,135
<INVENTORY> 218,819
<CURRENT-ASSETS> 1,027,312
<PP&E> 772,415
<DEPRECIATION> 581,462
<TOTAL-ASSETS> 1,218,265
<CURRENT-LIABILITIES> 514,960
<BONDS> 0
0
0
<COMMON> 1,651,835
<OTHER-SE> 8,800
<TOTAL-LIABILITY-AND-EQUITY> 679,350
<SALES> 812,617
<TOTAL-REVENUES> 842,854
<CGS> 149,117
<TOTAL-COSTS> 149,117
<OTHER-EXPENSES> 615,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,064
<INCOME-PRETAX> 72,472
<INCOME-TAX> 0
<INCOME-CONTINUING> 72,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,472
<EPS-PRIMARY> .004
<EPS-DILUTED> .004
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