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UNITED STATES
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
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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)
325 NORTH KIRKWOOD ROAD, SUITE 300, ST. LOUIS, MO 63122
(Address of principal executive offices) (Zip Code)
314-822-3163
(Registrant's telephone number, including area code)
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Title of class of Number of shares outstanding
common stock as of the date of this report
----------------- -----------------------------
COMMON STOCK PAR VALUE 16,796,704
$.10 PER SHARE
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet, September 30,
2002 and December 31, 2001 3
Condensed Consolidated Statement of Stockholders' Equity,
September 30, 2002 and December 31, 2001 4
Condensed Consolidated Statement of Operations,
Three Months and Nine Months Ended September 30, 2002
and September 30, 2001 5
Condensed Consolidated Statement of Cash Flows, Nine
Months Ended September 30, 2002 and September 30, 2001 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 14
ITEM 4. CONTROLS AND PROCEDURES 14
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 15
CERTIFICATIONS 16
2
PART I - FINANCIAL INFORMATION
------------------------------
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
------
DECEMBER 31,
SEPTEMBER 30, 2001 (SEE
2002 NOTE BELOW)
------------- ------------
CURRENT ASSETS
- --------------
Cash $1,034,605 $ 378,234
Accounts receivable 1,021,123 1,342,262
Inventories 361,484 285,777
Prepaid expenses 150,525 159,159
Deferred tax asset 348,500 480,000
---------- ----------
TOTAL CURRENT ASSETS 2,916,237 2,645,432
PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION
- ----------------------
OF $733,151 AT SEPTEMBER 30, 2002 AND $613,784 AT DECEMBER 31,
2001) 425,106 324,581
OTHER ASSETS (NOTE 3) 2,613,423 2,466,234
---------- ----------
$5,954,766 $5,436,247
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Current portion of long-term debt $ 334,208 $ 391,572
Current portion of capitalized lease obligation 27,033 9,889
Accounts payable 106,707 221,921
Accrued expenses 494,742 493,912
---------- ----------
TOTAL CURRENT LIABILITIES 962,690 1,117,294
---------- ----------
LONG-TERM LIABILITIES
- ---------------------
Long-term debt 265,095 509,786
Capitalized lease obligation 67,031 1,724
Deferred tax liability 306,600 72,200
---------- ----------
TOTAL LONG-TERM LIABILITIES 638,726 583,710
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock:
Authorized 100,000,000 shares (20,000,000 at December 31,
2001) at $0.10 par value; issued and outstanding 16,796,704 at
September 30, 2002 and 16,744,024 at December 31, 2001 1,679,671 1,674,403
Additional paid-in capital 18,908 14,896
Retained earnings 2,654,771 2,045,944
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 4,353,350 3,735,243
---------- ----------
$5,954,766 $5,436,247
========== ==========
NOTE: The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date and condensed. See accompanying
notes to unaudited condensed consolidated financial statements.
3
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK
-------------------------
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------------------------------------------------------------------
BALANCE -
DECEMBER 31, 2001 16,744,024 $1,674,403 $14,896 $2,045,944 $3,735,243
ISSUANCE OF COMMON
STOCK 52,680 5,268 4,012 -- 9,280
NET INCOME 608,827 608,827
----------------------------------------------------------------------
BALANCE -
SEPTEMBER 30, 2002 16,796,704 $1,679,671 $18,908 $2,654,771 $4,353,350
======================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
4
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES $ 6,857,462 $ 6,370,795 $ 1,915,641 $ 1,951,063
COST OF PRODUCT SALES 1,531,426 1,044,799 464,728 434,117
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,314,050 3,974,002 1,373,152 1,482,095
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,011,986 1,351,994 77,761 34,851
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Expense (39,049) (66,555) (10,359) (14,838)
Miscellaneous 1,790 1,282 186 (978)
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE (37,259) (65,273) (10,173) (15,816)
----------- ----------- ----------- -----------
PROVISION (CREDIT) FOR INCOME TAXES 365,900 -- (5,100) --
----------- ----------- ----------- -----------
NET INCOME $ 608,827 $ 1,286,721 $ 72,688 $ 19,035
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE - BASIC $0.04 $0.08 $0.00 $0.00
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE - DILUTED $0.03 $0.07 $0.00 $0.00
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 16,781,251 16,683,274 16,792,139 16,707,719
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - DILUTED 17,500,454 17,552,569 17,401,030 17,711,086
=========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
5
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATIONS
- --------------------------
Net income $ 608,827 $ 1,286,721
Adjustments to reconcile net income to net
cash provided by continuing operations:
Depreciation 119,366 98,025
Amortization 411,216 364,315
Deferred income tax 365,900 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable 321,139 (282,473)
Increase in inventories (75,707) (107,358)
(Increase) decrease in prepaid expenses & deposits 9,156 (44,534)
Increase (decrease) in accounts payable and accrued expenses (114,382) 61,179
---------- -----------
NET CASH PROVIDED BY OPERATIONS 1,645,515 1,375,875
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Payments for equipment (219,892) (169,339)
Payments for capitalized software development cost (528,527) (375,716)
Payments for assets of unrelated entity (30,402) (1,133,809)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (778,821) (1,678,864)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from issuance of common stock 9,280 13,237
Proceeds from long-term debt -- 725,000
Proceeds from leases incurred 97,978 --
Payments on capital leases (15,528) (17,781)
Principal payments on long-term debt (302,053) (286,776)
---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (210,323) 433,680
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 656,371 130,691
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 378,234 626,554
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $1,034,605 $ 757,245
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 43,467 $ 73,246
See accompanying notes to unaudited condensed consolidated financial statements.
6
SIBONEY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 2002, the
condensed consolidated statement of stockholders' equity for the nine
month period ended September 30, 2002, the condensed consolidated
statement of operations for the nine-month and the three-month periods
ended September 30, 2002 and 2001 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 at September 30, 2002 and the results of operations for
all of the periods reported 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 Company's Annual
Report on Form 10-K for the year ended December 31, 2001. The results of
operations for the period ended September 30, 2002 are not necessarily
indicative of the operating results for the full year.
Accounting Changes
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 142 requires that goodwill and certain intangibles no longer
be amortized, but instead tested for impairment at least annually. There
was no impairment of goodwill upon adoption of SFAS 142.
Net income and income per share for the nine months and three months ended
September 30, 2001 adjusted to exclude amortization expense was as follows:
7
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
NET INCOME:
Net income as reported $1,286,721 $19,035
Goodwill amortization 145,432 58,568
---------- -------
Adjusted net income $1,432,153 $77,603
BASIC AND DILUTED INCOME PER SHARE:
Net income per share, basic, as reported $0.08 $0.00
Net income per share, diluted, as reported $0.07 $0.00
Goodwill amortization, basic $0.01 $0.00
Goodwill amortization, diluted $0.01 $0.00
Adjusted net income per share, basic $0.09 $0.00
Adjusted net income per share, diluted $0.08 $0.00
2. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Raw materials $246,712 $196,512
Finished goods 114,773 89,265
-------- --------
$361,484 $285,777
======== ========
3. OTHER ASSETS
Other assets consist of:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Software development costs $2,193,647 $1,665,120
Goodwill 1,186,616 1,156,214
Covenants not to compete 300,000 300,000
Deposits 3,600 4,123
---------- ----------
3,683,863 3,125,457
Less: Accumulated Amortization 1,070,440 659,223
---------- ----------
$2,613,423 $2,466,234
========== ==========
8
The Company capitalizes costs associated with the development of computer
software for sale. Costs are capitalized at the point the Company determines
that it is technologically feasible to produce the software title. Such
costs are amortized on a modified declining balance method over a period of
four years.
Goodwill represents the purchase price of an acquired company's assets in
excess of the fair value of those net assets at the date of acquisition and,
prior to January 1, 2002, was being amortized on a straight-line basis over
five years.
Covenants not to compete are being amortized on a straight-line basis over
two years, which is the life of the covenant agreements.
Amortization expense charged against earnings amounted to:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Software development costs 311,216 127,216 105,808 60,699
Goodwill -- 145,432 -- 58,568
Covenants not to compete 100,000 91,667 25,000 37,500
-------- -------- -------- --------
$411,216 $364,315 $130,808 $156,767
======== ======== ========= ========
9
SIBONEY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal subsidiary, Siboney Learning Group, Inc. ("SLG"),
publishes and distributes educational software, primarily for schools. The
Company has 52 full-time employees.
The Company has served the educational market for more than 35 years. Since
1986, the Company's main business has been publishing educational software
in reading, language arts, math, science and English as a Second Language
for students and teachers in levels kindergarten through adult. The Company
is best known for its software which is designed to motivate students to
master key skills and keep track of student progress for teachers to review.
The Company's growing portfolio of products now includes more than 170
active titles that focus on teaching basic skills and new concepts while
meeting the different learning needs of all students through time-on-task
instruction. Popular titles include Math Concepts, Phonics Mastery, Reading
Concepts, Touchdown Math, Diascriptive Reading and Process Writing.
Siboney Learning Group currently offers five distinct product categories
which are developed, marketed and supported by the same core team: GAMCO
Educational Software; Orchard Teacher's Choice Software; Teacher Support
Software; Educational Activities Software; and Journey. These products allow
the Company to offer a comprehensive product selection to schools and adult
education centers at a variety of budget levels.
GAMCO Educational Software ("GAMCO"), the Company's original product,
provides schools with single titles and series which the Company believes
are highly motivating. GAMCO products are sold through the major national
and regional school software dealers, the Company's inside sales force and
its direct catalog and promotions. All GAMCO titles include management
features that track student progress and allow teachers to modify the
instruction to meet individual learning needs.
In 1996, the Company launched Orchard Teacher's Choice Software ("Orchard").
Orchard offers schools and school districts a comprehensive curriculum-based
solution with universal management and assessment. Orchard is sold through a
network of dealers and direct and independent representatives who actively
call on schools to sell larger curriculum- and technology-based learning
solutions. Orchard includes universal management which tracks student
progress across all programs, as well as pre- and post-test assessment that
identifies problem areas and measures instructional gain. The Company
believes that Orchard has become a recognized competitor in the growing
Integrated Learning Systems market as a result of its motivating and
balanced content, strong correlation to major national tests and state
objectives, and its cost-effective pricing structure. The Company believes
that its new Orchard For Your State ("OFYS") versions will help maintain
Orchard's consistent growth in sales as schools look for proven ways to meet
the new federal mandate for accountability in all states provided in the No
Child Left Behind Act of 2001. Orchard For Your State offers schools and
school districts state-specific versions of Orchard that are directly
correlated to each state's educational standards. The No Child Left Behind
Act of 2001 will require all students in grades three to eight
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
in all states to take important tests based upon each state's standards.
Orchard For Your State is a direct response to, and solution for, the
emerging critical need for state-specific accountability and instruction.
The Company has recently released 21 state-specific versions of Orchard For
Your State and is planning to release nine additional versions during the
remainder of 2002.
In July 2000, the Company purchased the software assets of Teacher Support
Software ("TSS"). TSS is a 20-year-old software publisher best known for its
popular tools for teachers, including Worksheet Magic, and its effective and
comprehensive reading programs, including WordWorks. TSS products are sold
through all of the Company's sales channels as single-title solutions and as
part of comprehensive Orchard solutions. The Company has actively upgraded
older TSS products to be compatible with the computers and networks found in
schools today.
In January 2001, the Company purchased the stock of Activity Records, Inc.
and in so doing acquired Educational Activities, Inc.'s software products
which are now called Educational Activities Software ("EAS"). EAS has been a
leading publisher of software for the middle-school to adult learner market
for over 20 years. Best known for its Diascriptive(R) Reading series, EAS
has traditionally sold its products to schools, community colleges, adult
learning centers and correctional facilities through a network of
independent representatives. EAS is the Company's primary product offering
for the adult learning market and allows the Company to achieve incremental
sales growth in a growing market for instruction in basic skills for adults.
In addition, the Company sells selected EAS titles to its K-12 school
customers and has released a new comprehensive solution with universal
management called Real Achievement based upon EAS titles and appropriate
titles from the Company's portfolio of other software.
In May 2001, the Company purchased the publishing assets of The Denali
Project, L.L.C. ("Denali") based in Lansing, Michigan. This development
team, now known as Siboney Learning Group Lansing, had developed a
comprehensive and structured instructional software program in reading and
math for grades three through eight. Their original product had never been
actively marketed to schools. The Company has invested considerable time and
resources into upgrading this product, now called Journey, which is being
sold through the same channels that currently sell Orchard. The Company
believes that Journey will be an attractive complementary product for
Orchard due to its structure and sequencing of content, as well as the
Company's first web-enabled product for K-12 school customers, when it is
launched to meet demand for web-based delivery of instructional software.
The Company also has generated sales of select products through a
direct-to-the-home marketer of educational software. This alliance allows
the Company to reach families in their homes without relying on expensive
retail distribution.
The Company also has certain natural resources interests, including coal,
oil and gas, through Siboney Coal Company, Inc. and several other
subsidiaries. These interests presently are not material to the Company's
results of operations or financial condition.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
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, 2002 COMPARED TO SEPTEMBER 30, 2001
Total revenues decreased 1.8% or $35,422 during the three-month period ended
September 30, 2002 compared to the third quarter of 2001, reflecting
slightly lower sales at Siboney Learning Group and lower revenues at Siboney
Coal Company. Sales of the Company's Orchard Teacher's Choice Software
increased 18% during the third quarter of 2002 compared to the third quarter
of 2001. The Company believes that Orchard's market success is attributable
to its comprehensive offering of 140 titles and curriculum bundles which
combine state-correlated assessment with targeted and effective instruction,
delivered at costs which compare favorably to other integrated learning
systems. In addition, Orchard sales increased as a result of the release of
21 state-specific versions of Orchard For Your State. An additional nine
versions are expected to be released during the remainder of 2002.
Cost of product sales increased 7.1% or $30,611 during the third quarter of
2002 compared to the third quarter of the previous year. This increase
reflected greater royalty expenses from sales of licensed products and
increased amortization of development expenses. As a result, cost of product
sales as a percentage of revenue increased from 22.3% for the third quarter
of 2001 to 24.3% for the third quarter of 2002.
Selling, general and administrative expenses decreased 7.4% or $108,943
during the quarter ended September 30, 2002 compared to the third quarter of
2001. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS"). SFAS 142 requires that goodwill and certain intangibles no longer
be amortized, but instead tested for impairment at least annually.
Therefore, amortization expenses decreased by $71,070 for the third quarter
of 2002 compared to the third quarter of 2001. In addition, catalog
advertising expenses decreased by $43,461 for the third quarter of 2002
compared to the third quarter of 2001.
Interest expense, net of interest income, decreased 30.2% or $4,479 during
the quarter ended September 30, 2002 compared to the third quarter of 2001.
This decrease was primarily the result of an overall decline in the average
outstanding debt balances during the quarter and a shift in debt balances
from higher interest to lower interest obligations.
The Company recorded an income tax benefit of $5,100 for the three months
ended September 30, 2002 to reflect a decrease in the expected utilization
of the Company's deferred tax asset. This decrease in utilization was
primarily the result of a decline in management's projection of the
Company's annualized effective tax rate for 2002. The Company did not report
a provision for income taxes in the quarter and year-to-date period ended
September 30, 2001 as its utilization of the prior years' net operating
losses in those periods was offset by a reduction in the deferred tax asset
valuation allowance.
The Company's net income for the third quarter of 2002, primarily for the
reasons above, was $72,688, an increase of 281.9% or $53,653 compared to net
income of $19,035 for the third quarter of 2001. Earnings per common share,
basic and diluted, were $0.00 for the third quarter of 2002 and 2001.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001
Total revenues increased 7.6% or $486,667 during the nine-month period ended
September 30, 2002 compared to the corresponding period of 2001, reflecting
higher sales at Siboney Learning Group. Sales of the Company's Orchard
Teacher's Choice Software increased 39.2% during the nine-month period ended
September 30, 2002 compared to the corresponding period of 2001. The Company
believes that Orchard's market success is attributable to its comprehensive
offering of 140 titles and curriculum bundles which combine state-correlated
assessment with targeted and effective instruction, delivered at costs which
compare favorably to other integrated learning systems. In addition, Orchard
sales increased as a result of the release of 21 state-specific versions of
Orchard For Your State ("OFYS"). An additional 9 versions are expected to be
released during the remainder of 2002.
During the nine-month period ended September 30, 2002, there was no mining
activity on property owned by Siboney Coal Company. Accordingly, the Company
received the $30,000 minimum royalty payment compared to $139,154 received
during the corresponding period of 2001.
Cost of product sales increased 46.6% or $486,627 during the nine-month
period ended September 30, 2002 compared to the first nine months of 2001.
This increase reflected greater royalty expenses from sales of licensed
products and increased amortization of development expenses. As a result,
cost of product sales as a percentage of revenue increased from 16.4% for
the first nine months of 2001 to 22.3% for the corresponding period of 2002.
Selling, general and administrative expenses increased 8.6% or $340,048
during the nine-month period ended September 30, 2002 compared to the
corresponding period of 2001, primarily due to higher selling-related
expenses and higher salary, commission and other compensation-related
expenses. The Company has increased staffing in both its sales department
and product development group. In addition, more technical support staff was
hired to support its growing number of products. Effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" ("SFAS"). SFAS 142 requires that
goodwill and certain intangibles no longer be amortized, but instead tested
for impairment at least annually. Therefore, amortization expenses decreased
by $131,472 for the nine-month period ended September 30, 2001 compared to
the same period of 2001.
Interest expense, net of interest income, decreased 41.3% or $27,506 during
the period ended September 30, 2002 compared to the first nine months of
2001. This decrease was primarily the result of an overall decline in the
average outstanding debt balances during the period and a shift in debt
balances from higher interest to lower interest obligations.
The provision for income taxes of $365,900 recognized in the third quarter
of 2002 represented the Company's current realization of its net deferred
tax asset which related primarily to the carryforward of net operating
losses incurred in prior years. The Company expects its available net
operating loss carryforwards will be sufficient to offset any obligation to
pay federal income taxes through 2002. The Company did not report a
provision for income taxes in 2001 as its utilization of the prior years'
net operating losses in those periods was offset by a reduction in the
deferred tax asset valuation allowance.
The Company's net income for the nine months ended September 30, 2002,
primarily for the reasons above,
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
was $608,827, or $0.04 per share basic, $0.03 per share diluted. This was a
decrease of 52.7% or $677,894 compared to net income of $1,286,721, or $0.08
per share basic, $0.07 diluted, for the corresponding period of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business primarily with cash generated from
operating activities, accessing its bank revolving line of credit and
purchase money financing provided by the sellers of companies acquired. The
line of credit agreement, which matures in June 2003, provides for maximum
borrowings of $1.0 million and is secured by the Company's accounts
receivable, equipment and inventory. The loan agreement requires the Company
to maintain a net worth of at least $2.5 million. As of September 30, 2002,
the Company reported a net worth of $4.4 million and no balance due under
the Company's line of credit. The Company believes that it will be able to
renew its line of credit and that its available capital resources are
adequate to support its current business levels.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company presently does not use any derivative financial instruments to
hedge its exposure to adverse fluctuations in interest rates, foreign
exchange rates, fluctuations in commodity prices or other market risks, nor
does the Company invest in speculative financial instruments. Borrowings
with the bank bear interest at prime rate and 0.25% above prime rate.
Due to the nature of the Company's borrowings, it has concluded that there
is no material market risk exposure and, therefore, no quantitative tabular
disclosures are required.
ITEM 4. CONTROLS AND PROCEDURES
Based on his evaluation on November 11, 2002, Timothy J. Tegeler, our Chief
Executive Officer and Chief Financial Officer, has concluded that our
disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934, as amended) are effective. There
have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of
this evaluation, including any corrective actions with regard to significant
deficiencies or material weaknesses.
***
This report contains "forward-looking statements" as that term is defined in
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Any forward-looking statements are necessarily subject
to significant uncertainties and risks. When used in this report, the words
"believes," "anticipates," "intends," "expects" and similar expressions are
intended to identify forward-looking statements. Actual results could be
materially different as a result of various possibilities. Readers are
cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
14
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As approved by the shareholders of the Company at the 2002 Annual Meeting of
Shareholders, the Company's Amended and Restated Articles of Incorporation
were amended to increase the total number of shares of stock authorized from
21,366,694 shares to 101,366,694 shares and to increase the number of shares
of common stock authorized from 20,000,000 shares to 100,000,000 shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibit 99.1: Certification of periodic financial
report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, U.S.C. Section 1350.
(b) Reports on Form 8-K: A Report on Form 8-K was filed by the
Registrant under Item 5 on September 18, 2002 restating the
1999, 2001 and 2002 financials showing the impact of Statement
of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142") on net income and net income
per share had SFAS 142 been in effect beginning January 1, 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
November 12, 2002 By: /s/ Timothy J. Tegeler
---------------------------
Timothy J. Tegeler
Chief Executive Officer and
Chief Financial Officer
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
I, Timothy J. Tegeler, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Siboney
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period for which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Effective Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 12, 2002 /s/ Timothy J. Tegeler
---------------------------------
Timothy J. Tegeler
Chief Executive Officer and Chief
Financial Officer
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