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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File Number: 1-3952
SIBONEY CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 73-0629975
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
325 NORTH KIRKWOOD ROAD, SUITE 300
ST. LOUIS, MISSOURI 63122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 314-822-3163
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
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 for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Echange Act Rule 12b-2). YES [ ] NO [ X]
The aggregate market value of the shares of Common Stock held by nonaffiliates
of registrant as of March 7, 2003 was $2,618,784. This value was based on the
average of the bid and asked prices on March 7, 2003.
As of March 7, 2003, the registrant had outstanding 16,996,704 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: THE DEFINITIVE PROXY STATEMENT OF REGISTRANT (TO BE FILED
PURSUANT TO REGULATION 14A) FOR REGISTRANT'S 2003 ANNUAL MEETING OF
SHAREHOLDERS, WHICH INVOLVES THE ELECTION OF DIRECTORS, IS INCORPORATED BY
REFERENCE INTO ITEMS 10, 11 AND 12.
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Page 1
INDEX
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PAGE
PART I
ITEM 1. Business................................................3 - 7
ITEM 2. Properties..............................................7 - 8
ITEM 3. Legal Proceedings...........................................8
ITEM 4. Submission of Matters to a Vote of Security Holders.........8
PART II
ITEM 5. Market for Registrant's Common Equity
and Related Stockholder Matters........................9 - 10
ITEM 6. Selected Financial Data....................................11
ITEM 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................................12 - 20
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk................................................20
ITEM 8. Financial Statements and Supplementary Information.........20
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.....................20
PART III
ITEM 10. Directors and Executive Officers of the
Registrant.................................................21
ITEM 11. Executive Compensation.....................................21
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters......21
ITEM 13. Certain Relationships and Related Transactions.............21
ITEM 14. Controls and Procedures....................................22
PART IV
ITEM 15. Exhibits, Financial Statements, Financial Statement
Schedule and Reports on Form 8-K......................23 - 50
SIGNATURES..........................................................51
EXHIBIT INDEX.......................................................52
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PART I
FORWARD-LOOKING STATEMENTS
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.
ITEM 1. BUSINESS
GENERAL
The Company was incorporated in the State of Maryland in 1955.
The principal business of the Company is the publishing and
distribution of educational software products.
DESCRIPTION OF BUSINESS AND PROPERTIES
BUSINESS - GENERAL DESCRIPTION AND CURRENT DEVELOPMENTS - The
Company's principal subsidiary, Siboney Learning Group,
publishes educational software, primarily for schools. The
Company's educational software is designed for use in teaching
reading, language arts, math, science and English as a Second
Language for students in grades kindergarten through adult.
The Company's software is intended to motivate learners to
master key skills and concepts that are stressed on
standardized tests and in textbooks. The Company has served
the educational market for more than 35 years.
The Company's growing portfolio of products now includes more
than 185 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. Most of the
Company's software titles include a management system that
tracks student progress and allows teachers to identify
problem areas for further instruction. These titles are sold
in a wide variety of product configurations to appeal to the
different budgets and spending patterns found in classrooms,
schools, school districts and adult learning centers.
Most of the Company's products are offered as single-title and
series solutions, primarily for classroom teachers or as
comprehensive solutions, for entire school buildings and
districts. The Company believes that its two-pronged product
strategy, affords the opportunity to deliver targeted and
cost-effective solutions to almost every educator or
educational institution looking for ways to use instructional
software to improve student performance.
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All of the Company's active titles are available on CD-ROM for
Windows and Macintosh computers and are compatible with the
different network configurations installed in schools today.
The Company's Research and Development team continuously
revises and upgrades products to keep up with changes in
computer hardware and networking operating systems, and
develops new titles which are designed to be compatible with
old and new operating systems. Popular titles include Math
Concepts, Reading Concepts, Guided Reading, Diascriptive
Reading, Process Writing, Phonics Mastery and Touchdown Math.
The Company believes that more than 40,000 schools, community
colleges and adult learning centers use the Company's
software.
Siboney Learning Group currently offers five distinct product
categories: Orchard Teacher's Choice Software; GAMCO
Educational Software; Teacher Support Software; Educational
Activities Software and Journey.
In 1996, the Company launched Orchard Software ("Orchard").
Orchard offers schools and school districts a comprehensive
and scalable curriculum-based solution with universal
management and assessment at a value-oriented price. The
Company believes that its new Orchard For Your State versions
launched in 2002 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 recently passed 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 in all states to take important tests based
upon each state's standards beginning in 2002. Orchard For
Your State is a direct response to, and solution for, the
emerging critical need for state-specific accountability and
instruction.
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. 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, its strong correlations to major national tests and
state objectives, and cost-effective pricing structures.
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.
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In July 2000, the Company purchased the software assets of
Teacher Support Software, Inc. ("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 now 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, by purchasing the stock of Activity Records,
Inc., the Company acquired Educational Activities, Inc.'s
software product, which is now called Educational Activities
Software ("EAS"). EAS has been a leading publisher of software
for the middle-school to adult learner market for more than 20
years. Best known for its Diascriptive 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 products.
In May 2001, the Company purchased the publishing assets of
the Denali Project 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 now 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 in 2003 to meet demand for web-based delivery of
instructional software.
The Company has sought to take its three strategically
acquired companies and two internal products, and integrate
them into one organization that is responsible for sales,
marketing, product development, product support, customer
service and fulfillment. The sales and marketing team is able
to take internally developed, licensed and acquired content to
the market through a hybrid, multiple channel network of
catalog dealers, professional field sales organizations,
direct field and inside sales representatives and its own
direct marketing efforts. This hybrid sales network allows the
Company to appeal to teachers purchasing individual titles
with their own personal funds or through a classroom budget,
with its growing library of over 185 titles. The Company also
can appeal to school administrators looking for building-wide
solutions to improve student achievement with its curriculum
series and its Orchard and Journey comprehensive software.
Finally, the Company can appeal to school districts looking
for more comprehensive district-wide solutions to improve test
scores with its Orchard For Your State and Journey software.
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The Company also has generated sales of selected products
which have been revised for the consumer market and sold
through a direct-to-the-home marketer of educational software.
This alliance allows the Company to achieve incremental sales
in the home market without incurring the costs of expensive
retail distribution.
SOURCES AND AVAILABILITY OF RAW MATERIALS -- Raw materials are
generally available and are purchased from a wide range of
suppliers. Shortages are not anticipated.
COPYRIGHTS AND LICENSES -- The Company holds various
copyrights and license rights, which are considered to be
material to its business. The licensing agreements under which
the Company licenses certain software provide for minimum
sales and related royalty payments by the Company over a
specified number of years and are renewable thereafter.
SEASONALITY -- The Company typically experiences its highest
levels of sales and accounts receivable in the educational
products business at the end of the school year (the second
quarter). However, seasonality does not have an overall
material adverse effect on the Company's operations.
WORKING CAPITAL ITEMS -- The Company does not purchase or
maintain material inventories in advance of sales of products,
although certain materials are purchased in larger quantities
in order to obtain volume discounts. The Company does not
routinely offer extended terms for payment, but historically
some public school districts and public educational
institutions have delayed making payment until appropriated
funds become available. Siboney Learning Group maintains an
"on approval" policy under which goods shipped subject to
customer approval are not billed upon delivery and can be
returned within 45 days. Invoices are sent after 45 days if
the goods are not returned. Siboney Learning Group also
maintains a general "satisfaction guaranteed" policy under
which GAMCO, TSS and EAS products may be returned within 12
months, and Orchard products within 90 days from the date of
purchase if a customer is not satisfied. Approximately 3% of
sales were returned in 2002.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS -- In 2002,
Brainstorm USA, LLC and Hart, Incorporated each accounted for
approximately 12% of the Company's revenues. No other customer
accounted for 10% or more of revenues.
BACKLOG -- The Company historically does not have a material
backlog of orders.
GOVERNMENT BUSINESS -- Sales of Siboney Learning Group's
computer software products are substantially dependent upon
expenditures of school districts and individual schools.
Although a substantial portion of Siboney Learning Group's
business is done with governmental subdivisions, such business
is not subject to price renegotiation or termination at the
election of the government.
ENVIRONMENTAL IMPACT -- Present federal, state and local
provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the
environment are not material to the Company.
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SOFTWARE DEVELOPMENT -- Software development 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.
Software development costs of $695,585, $539,360 and $290,514
were capitalized in 2002, 2001 and 2000, respectively.
Amortization expense charged against earnings amounted to
$407,416, $196,002 and $54,766 in 2002, 2001 and 2000,
respectively. Research and development costs not capitalized
are expensed in the year incurred and totaled approximately
$299,000, $346,000 and $342,000 in 2002, 2001 and 2000,
respectively.
COMPETITION -- Siboney Learning Group operates in highly
competitive markets, which are subject to ongoing
technological change and are expected to continue to require
relatively high research and development expenditures. A
number of the Company's competitors are significantly larger
and have substantially greater resources than the Company. The
Company competes on the basis of price and effectiveness of
software in achieving intended results. The comprehensive
learning systems market is dominated by three major
publishers: NCS Learn (Pearson), Plato Learning and Compass
Learning. The market for single-title solutions is more
fragmented. Major publishers in this market include
Riverdeep/The Learning Company and Renaissance Learning. Over
the past several years, the consolidation of educational
software publishers has resulted in a reduction of the number
of new software titles designed for schools.
PERSONNEL -- As of December 31, 2002, the Company had 54
full-time employees. The Company's employees are not
represented by any union.
WEBSITE -- Our website address is http://www.Siboney.com. Our
annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on From 8-K are all available, free of
charge, through our website as soon as practicable after we
file the reports with the SEC.
ITEM 2. PROPERTIES
The Company leases approximately 8,000 square feet of office
space in St. Louis, Missouri under a lease which expires June
30, 2005. Siboney Learning Group also leases approximately
7,000 square feet of warehouse facilities in St. Louis,
Missouri under a lease which expires May 31, 2004. The
Lansing, Michigan office leases approximately 1,700 square
feet of offices under a lease which expires May 31, 2004.
The Company also has certain natural resource interests
through several subsidiaries, which are not believed to be
material assets of the Company, individually or in the
aggregate.
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Page 7
Siboney Coal Company, Inc. ("Siboney Coal"), a subsidiary of
the Company, owns the fee and mineral interests in coal
properties aggregating approximately 1,425 acres in Johnson
and Martin Counties, Kentucky. Siboney Coal leases the
properties to a mining company under a lease which expires in
2112, which calls for an annual minimum royalty payment of
$30,000 plus royalties per ton of coal mined. Future revenues
in excess of the minimum payment from the coal lease are
dependent on mining operations of the lessee, which occurred
on the Company's property in 2000 and 2001 but ceased in 2002.
It is as yet unknown whether the lessee will conduct mining
activities on the Company's properties in 2003.
Other subsidiaries of the Company have royalty and working
interests in oil and gas leases and property rights. Revenues
from such leases and interests are not material. The present
value of estimated future net oil and gas reserves of the
Company's subsidiaries is presently not determinable, but is
not believed to be material.
Prior to 1958, the Company held oil exploration rights
covering approximately four million acres in Cuban territory,
which were expropriated. The Company filed claims against the
Cuban government with the U.S. Foreign Claims Settlement
Commission which certified the Company's loss as $2,454,000
plus 6% interest per annum from November 1959. No funds have
been appropriated to satisfy such claims. Accordingly, the
Company does not consider the collectibility of the claim to
be probable.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders of the Company
during the quarter ended December 31, 2002.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Sales of the Company's common stock are reported on
the Over-The-Counter "Bulletin Board" maintained by
Nasdaq.
Stock Price and Dividend Information
The following table sets forth the high and low bid
prices per share of common stock.
2002 2001
------------------------------ ------------------------------
QUARTER HIGH LOW QUARTER HIGH LOW
------------------------------ ------------------------------
First $.56 $.44 First $.54 $.45
Second .46 .31 Second .90 .59
Third .34 .25 Third .81 .68
Fourth .25 .17 Fourth .61 .55
The foregoing market quotations reflect interdealer
prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual
transactions.
(b) Holders
The number of holders of record of the Company's
common stock as of March 7, 2003 was 11,098.
(c) Dividends
No cash dividends were paid on the Company's common stock
in 2002 or 2001. The Company intends to continue its
historical pattern of utilizing cash generated by
operations to support future growth. Generally, the
payment of dividends is within the discretion of the
Board of Directors who will consider all relevant
factors in making determinations regarding future
dividends, if any.
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(d) Securities Authorized For Issuance Under Equity Compensation
Plans
See Part III, Item 12 on page 21.
(e) Recent Sales Of Unregistered Securities
The Company granted options to purchase its common stock
to employees under the Company's 1987 Non-Qualified
Stock Option Plan. The options granted under the Plan
were not registered under the Securities Act of 1933
(the "Act") based on an exemption from registration
provided by Rule 701 of the Act. This exemption allows
the Company to offer and sell its securities under the
Plan to its employees, directors, officers, or
consultants and advisors. The following table shows
the date of each grant of an option, the amount of the
Company's common stock subject to an option and the
exercise price for each option granted for the years
ended December 31, 2002, 2001 and 2000.
AMOUNT OF STOCK EXERCISE
DATE OF GRANT SUBJECT TO OPTION PRICE
----------------------------------------------
05/16/00 50,000 $0.56
05/16/00 50,000 0.56
05/16/00 50,000 0.56
05/22/01 100,000 0.515
05/22/01 25,000 0.515
07/17/01 200,000 0.655
05/16/02 50,000 0.38
05/16/02 60,000 0.38
12/16/02 200,000 0.23
Under the terms of the Plan, participants who have
been granted an option may exercise the option by
delivering to the Company a written notice stating the
number of shares of common stock with respect to which
the option is being exercised. In granting an option,
the Board may determine the time of exercise,
including whether the option will be exercisable
immediately or in installments at designated intervals
during the term of the option. No option may be
exercised more than five years from the date the
option is granted.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with our consolidated financial statements and
related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other
financial information appearing elsewhere in this Form 10-K.
The Statement of Operations data set forth below for each of
the years in the three-year period ended December 31, 2002 and
the Balance Sheet data as of December 31, 2002 and 2001 are
derived from, and qualified by reference to, our financial
statements appearing elsewhere in this Form 10-K. The
Statement of Operations data for the years ended December 1999
and 1998 and the Balance Sheet data as of December 31, 2000,
1999 and 1998 are derived from audited financial statements
not included herein.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------
Revenues $ 8,902,275 $ 8,280,373 $ 5,401,070 $ 3,309,021 $ 2,406,759
====================================================================================================================
Income (loss) from operations $ 1,204,015 $ 1,234,121 $ 1,126,819 $ 315,187 $ (129,222)
====================================================================================================================
Income (loss) before income
taxes $ 1,159,481 $ 1,155,588 $ 1,128,530 $ 407,783 $ (124,749)
====================================================================================================================
Net income (loss) $ 706,081 $ 1,238,388 $ 1,317,530 $ 543,783 $ (124,749)
====================================================================================================================
Earnings (loss) per common
share - basic $ 0.04 $ 0.07 $ 0.08 $ 0.03 $ (0.01)
====================================================================================================================
Weighted average number
of common shares
outstanding - basic 16,785,146 16,697,872 16,571,822 16,522,821 16,518,344
====================================================================================================================
Earnings (loss) per common
share - diluted {Note (a)} $ 0.04 $ 0.07 $ 0.08 $ 0.03 $ (0.01)
====================================================================================================================
Weighted average number
of common shares
outstanding - diluted 17,175,789 17,455,045 17,267,570 16,839,689 16,518,344
====================================================================================================================
Total assets - (at year-end) $ 5,871,235 $ 5,436,247 $ 3,427,112 $ 1,601,114 $ 881,230
====================================================================================================================
Long-term debt (at year-end) $ 211,768 $ 511,510 $ 210,298 $ 34,266 $ 28,437
====================================================================================================================
Total debt (at year-end) $ 635,416 $ 912,971 $ 307,734 $ 56,559 $ 40,265
====================================================================================================================
Stockholders' equity (at year-end) $ 4,450,604 $ 3,735,243 $ 2,486,223 $ 1,150,364 $ 606,878
====================================================================================================================
NOTE:
(a) For 1998, options on shares of common stock were not included
in computing diluted earnings per share because their effect
was antidilutive.
The Company paid no cash dividends during the five years in
the period ended December 31, 2002.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion analyzes the changes in the Company's
results of operations during the three years in the period ended
December 31, 2002 and comments on the Company's financial position
as of December 31, 2002.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in
the United States of America. As such, some accounting
policies have a significant impact on the amounts reported in
these financial statements. The preparation of our financial
statements requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of
our financial statements, and the reported amounts of revenue
and expenses during the reporting period. There can be no
assurance that actual results will not differ from those
estimates. We believe our most critical accounting policies
include software revenue recognition, stock-based
compensation, capitalization and amortization of software
development costs, and goodwill and other intangible assets as
explained below.
SOFTWARE REVENUE RECOGNITION
Substantially all of the Company's software sales are made
under contracts that call for only the delivery of software
with no additional obligations. Revenue is recognized at the
time of delivery, provided that there is a signed contract,
delivery of the product has taken place, the fee is fixed by
the contract and collectability is considered probable.
STOCK-BASED COMPENSATION
We account for our employee stock-based compensation plans in
accordance with APB Opinion No. 25 (APB No. 25), Accounting for
Stock Issued to Employees and Financial Accounting Standards
Board Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB Opinion
No. 25, and the disclosure provisions of SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure.
Accordingly, no compensation cost is recognized for our stock
options granted to employees when the exercise price of each
option equals or exceeds the fair value of the underlying
common stock as of the grant date for each stock option.
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PROPRIETARY SOFTWARE IN DEVELOPMENT
In accordance with Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed, we have capitalized
certain computer software development costs upon the
establishment of technological feasibility. Technological
feasibility is considered to have occurred upon completion of
a detailed program design that has been confirmed by
documenting and tracing the detailed program design to product
specifications and has been reviewed for high-risk development
issues, or to the extent a detailed program design is not
pursued, upon completion of a working model that has been
confirmed by testing to be consistent with the product design.
Amortization is provided based on the greater of the ratios
that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that
product, or the straight-line method over the estimated useful
life of the product. The estimated useful life for the
straight-line method is determined to be four years. Future
events such as market conditions, customer demand, or
technological obsolescence could cause us to conclude that the
software is impaired. The determination of the possible
impairment expense requires management to make estimates that
affect our consolidated financial statements.
GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002 we adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets"
(SFAS 142). SFAS 142 eliminates the amortization of goodwill
and instead requires that goodwill be tested for impairment at
least annually. Intangible assets deemed to have indefinite
life under SFAS 142, such as goodwill, are no longer
amortized, but instead reviewed at least annually for
impairment. Goodwill amortization amounted to $209,612 in
2001. Intangible assets with finite lives are amortized over
their useful lives. As part of the implementation of SFAS 142,
we were required to complete a transitional impairment test of
goodwill and other intangible assets. The fair value of the
Company's only operating business unit was estimated using a
market capitalization approach based on the quoted market
prices of the Company's common stock. There was no impairment
of goodwill upon the adoption of SFAS 142. Prospectively, we
will test our goodwill and intangible assets for impairment
not less frequently than as a part of our annual business
planning cycle during the fourth quarter of each fiscal year.
Future events such as market conditions or operational
performance could cause us to conclude that impairment exists.
Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations.
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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This standard
supersedes SFAS 121, Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of, and provides a single
accounting model for long-lived assets to be disposed of. This
standard significantly changes the criteria that would have to
be met to classify an asset as held-for-sale. This distinction
is important because assets to be disposed of are stated at
the lower of their fair values or carrying amounts and
depreciation is no longer recognized. The new rules also
supercede the provisions of APB Opinion 30, Reporting the
Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, with regard to
reporting the effects of a disposal of a segment of a business
and will require expected future operating losses from
Discontinued Operations to be displayed in Discontinued
Operations in the period in which the losses are incurred,
rather than as of the measurement date as presently required
by APB 30. This statement is effective for fiscal years
beginning after December 15, 2001. We adopted this statement
on January 1, 2002. The adoption of SFAS 144 did not have a
material impact on our operations or financial position.
In May 2002, the FASB issued SFAS 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. SFAS 145 eliminates Statement 4
(and Statement 64, as it amends Statement 4), which requires
gains and losses from extinguishments of debt to be aggregated
and, if material, classified as an extraordinary item, and
thus, the exception to applying Opinion 30 is also eliminated
as well. This statement is effective for years beginning after
May 2002 for the provisions related to the rescission of
Statements 4 and 64, and for all transactions entered into
beginning May 2002 for the provision related to the amendment
of Statement 13. The adoption of SFAS 145 did not have a
material impact on our operations or financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This
statement requires recording costs associated with exit or
disposal activities at their fair values when a liability has
been incurred. Under previous guidance, certain exit costs
were accrued upon management's commitment to an exit plan.
Adoption of this Statement is required with the beginning of
fiscal year 2003. We do not expect the adoption of SFAS 146 to
have a material impact on our operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. This
statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based employee compensation and requires prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and its effect on reported results. The Company
adopted this statement in 2002, which had no impact on our
operations or financial position.
- -------------------------------------------------------------------------------
Page 14
RESULTS OF OPERATIONS
2002 IN COMPARISON WITH 2001
The Company's consolidated revenues increased 8% to $8.9
million compared to $8.3 million in 2001. This growth took
place in another difficult funding year for K-12 schools as
expenditures for instructional materials declined by an
estimated 5% or more due to shortfalls in states' budgets and
the slow release of federal funds. Sales of the Company's
educational software grew 9.6%. This growth was entirely
organic as the Company did not make any acquisitions in 2002.
Sales of the Company's flagship Orchard Software product line
increased 30% in 2002, the fifth consecutive year of
significant increases in this comprehensive software product
line. The Company believes that Orchard For Your State, which
currently provides more than 30 states with state-specific
assessment tied to each state's learning standards, as well as
targeted instruction, at a value price, has established itself
as a well-received response to the accountability requirements
in the No Child Left Behind Act. This federal Act requires
each school to achieve adequate yearly progress in helping its
students reach minimum levels of academic proficiency.
Beginning in 2005, every student in grades 3-8 in every state
will be required to take high stakes tests in reading and math
tied to their state's standards. Schools currently are using
Orchard For Your State to help identify problem areas and
remediate those problems using Orchard's wide variety of
instructional content that has proven to be successful in more
than 4,000 schools. Orchard For Your State was first released
in May 2002 and allowed the Company to penetrate more schools
and school districts with its state-specific bundles during
the last half of 2002. In addition, the Company continues to
offer its Orchard Teacher's Choice Solution, with an upgrade
plan to Orchard For Your State, for schools whose budgets do
not allow for a purchase of a state-specific solution.
As a result of the increased need for school-wide
accountability as mandated in the No Child Left Behind Act,
the Company believes that its primary market of K-8 educators
is more interested in comprehensive solutions such as Orchard
Software, than single-title products, the sales of which have
continued to decline. Therefore, the Company has elected to
concentrate sales, marketing and development resources on its
major comprehensive software product offering - Orchard
Software - as well as complementary comprehensive software
solutions such as Journey and Real Achievement.
Journey, the comprehensive software product line acquired in
May 2001 as part of The Denali Project acquisition, did not
contribute meaningful sales in 2002. The Company has now
upgraded the product line to be competitive with other
structured comprehensive solutions and has begun the web
enabling of Journey. The Company believes that Journey offers
an alternative to Orchard with its structured and adaptive
curriculum and that, when web-enabled in 2003, Journey will be
a complement to a school's networked versions of Orchard
Software.
- -------------------------------------------------------------------------------
Page 15
Educational Activities Software, acquired in January 2001,
generated sales of $1,128,639 in 2002, a decrease of 6%
compared to 2001 when sales from this product line grew by
over 40%. This well-established product line of basic skills
software for older learners in grades 6 through adult is
published as single-title solutions under the Educational
Activities Software imprint, as well as comprehensive
solutions for reading, ESL/basic literacy, mathematics,
science and workplace readiness under the Real Achievement
imprint. The Company has committed development resources to
upgrading this product line and to web enable selected titles
since the older learner market appears to be increasingly
responsive to software delivered to students over the
Internet.
Sales of the Company's other single-title product lines, GAMCO
and Teacher Support Software, also continued to decline in
2002. This reflected an industry-wide trend that began in 2000
and caused the Company to focus its resources on the
development, sales and marketing of its comprehensive
solutions.
Revenues from the Company's coal properties in 2002 were
$30,000 compared to $187,000 in 2001. The decrease was due to
reduced mining activity on the Company's property.
Cost of products sold increased from $1.5 million in 2001 to
almost $2.0 million in 2002. This increase reflected increased
amortization of development expenses of $215,582, as well as
volume-and product mix-related increases in author royalties
and cost of materials.
Selling, general and administrative expenses increased from
$5.6 million in 2001 to $5.7 million in 2002. These SG&A
increases were due primarily to increased compensation
expenses as the Company built up its technical support
operation and sales management of its comprehensive software
product lines. At the same time, overall Company headcount was
54 people at the end of 2002 and 2001.
Income from operations remained constant at $1.2 million in
2002 and 2001. The Company continues to invest in upgrading,
marketing and supporting its current products and in creating
new research-based products that help teachers, schools and
school districts meet increased demands for accountability
with decreased funding. The Company believes that many other
school software publishers have reduced their investment in
product development and support.
Net interest expense decreased to $47,000 in 2002 from $87,000
in 2001, as the Company continued to pay down acquisition-related
debt.
- -------------------------------------------------------------------------------
Page 16
Income tax espense in 2002 increased by $536,200 compared to
2001 primarily as a result of the utilization of net operating
losses carried forward from prior years in 2002 not being
offset by a reduction in the related deferred tax asset
valuation allowance as done in 2001 as the allowance was fully
eliminated in 2001.
As a result of the foregoing, the Company's earnings before
interest, taxes, depreciation and amortization remained at
$1.9 million, unchanged from 2001, while net income decreased
to approximately $706,000, or $0.04 per share, in 2002
compared to $1.2 million, or $0.07 per share in 2001 as a
result of increased income tax expense.
2001 IN COMPARISON WITH 2000
The Company's consolidated revenues increased 53% to $8.3
million in 2001 compared to $5.4 million in 2000. Despite
funding shortages faced by many schools due to the slowdown in
the U.S. economy, sales of the Company's educational software
grew 57%, with sales of existing products growing 28% and
acquisitions accounting for the balance of the year-over-year
increase.
Sales of the Company's Orchard Teacher's Choice Software
increased 82% in 2001. The Company believes that Orchard's
market success has been 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. Sales during 2001 were
positively affected by reorders from current Orchard users,
which accounted for a substantial portion of orders received
in 2001, and by demand from new customers seeking to use
computer technology more effectively to remediate problems
with under-achieving students. Increased sales of curriculum
bundles with assessment programs sold to schools and school
districts resulted in an increase in the average net order
size from approximately $6,000 in 2000 to almost $10,000 in
2001.
Educational Activities Software, acquired in January 2001,
generated sales of $1,202,682 in 2001. Sales of this product
benefited from customer demand for software which focuses on
literacy, writing, English as a Second Language and workplace
readiness, targeting age-appropriate remedial instruction in
basic skills for older learners. The additional sales channels
accessed by the Company for the EAS products led to an
increase of more than 40% in sales of Educational Activities
Software compared to its pre-acquisition sales levels.
As a result of the increased emphasis in the marketplace on
more comprehensive integrated learning systems, such as
Orchard, sales of the Company's less expensive single title
products, GAMCO and Teacher Support Software, declined 25%.
This reflected an industry-wide trend which has continued from
2000. Given this trend, the Company has elected to concentrate
its sales, marketing and development resources on its
comprehensive solutions.
The Denali Project, acquired in May 2001, did not contribute
meaningful sales in the recently completed year. During the
year its structured and sequenced math and reading program,
now known as Journey, was completed.
- -------------------------------------------------------------------------------
Page 17
Revenues from the Company's coal properties in 2001 were
$187,000 compared to $240,000 in 2000. The decrease was due to
reduced mining activity on the Company's property.
Cost of products sold increased from $896,000 in 2000 to $1.5
million in 2001. This increase reflected greater royalty
expenses from sales of licensed products and increased
amortization of development expenses. As a result, gross
margin decreased from 83% in 2000 to 82% in 2001.
Selling, general and administrative expenses increased to $5.7
million in 2001 from $3.4 million in 2000. As a percentage of
sales, SG&A expenses increased to 68% in 2001 from 63% in
2000. These increases were due primarily to increased
compensation expense and amortization of acquisition-related
costs. Company head count increased to 54 people at the end of
2001 from 37 a year earlier. Increased staffing in the
Company's research and development department was due
principally to the addition of the six-person Lansing,
Michigan-based Denali Project operations in May 2001. The
Company also increased staffing in its technical support and
customer service operations due to the expanded installed base
of customers and the increase in the number of products the
Company sells and supports. Acquisition-related amortization
increased by $283,000 to $343,000 in 2001, reflecting
additional goodwill and non-compete costs incurred in
acquisitions occurring since July 2000.
Income from operations increased slightly in 2001, which
represented a decline as a percentage of revenues to 14.9%
from 20.9% in the prior year, primarily as a result of a 223%
increase in depreciation and amortization expenses to $680,000
from $211,000 in the prior year. This increase primarily
reflected the amortization of the significant investment made
by the Company in software development and acquisitions and
introduction of new products during the last several years. In
addition, the Company incurred approximately $240,000 of
additional expensed development costs for the Denali Project
Journey Software subsequent to the Denali acquisition in May
2001.
Net interest expense in 2001 increased to $87,000 from $1,300
in 2000 as a result of purchase money notes and bank
borrowings incurred to fund the three acquisitions.
As a result of the foregoing, the Company's earnings before
interest, depreciation, amortization and tax expenses
increased 43%, from $1.4 million to $1.9 million, while net
income of $1.2 million, or $0.07 per share, in 2001 decreased
slightly from $1.3 million, also $0.08 per share, in 2000.
- -------------------------------------------------------------------------------
Page 18
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business primarily with cash
generated from operating activities and 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 December 31, 2002, the Company
reported a net worth of $4.4 million. As of that date, there
were no borrowings outstanding 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.
The Company expects that cash generated from operations,
supplemented by cash on hand and its line of credit, will
provide adequate liquidity to fund the Company's operations
over the next year. However, the Company may be required to
access additional sources of funding if it pursues significant
future acquisitions or there are unanticipated adverse
developments in its operations.
The Company had the following contractual obligations at
December 31, 2002:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1 - 3 YEARS 3 - 5 YEARS 5 YEARS
--------------------------------------------------------------------------------------------------
FIRM OBLIGATIONS:
Long-term debt $549,473 $398,852 $150,621 -- --
Capital lease obligations
(including interest) 91,425 28,779 65,346 -- --
Operating leases 516,849 233,438 283,411 -- --
CONTINGENT OBLIGATIONS
Acquisition earn-out
payments - maximum 110,000 110,000 -- -- --
Guaranteed royalty payments -
minimum 190,000 70,000 120,000 -- --
The Company is instituting a voluntary odd-lot tender offer
program through which shareholders owning fewer than 100
shares of common stock of the Company may sell all of their
shares to the Company for $0.30 per share. The program begins
March 17, 2003 and expires on April 25, 2003 unless extended
by the Company. The purpose of the program is to provide a
convenient and cost-effective way for shareholders to sell
back their shares of the Company and for the Company to reduce
the cost of servicing small shareholders. The source of the
Company's funds will be cash on hand.
- -------------------------------------------------------------------------------
Page 19
ITEM 7A 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
The financial statements and supplementary information
required by this Item 8 are set forth at the pages indicated
in Item 15 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- -------------------------------------------------------------------------------
Page 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Proposal 1 -
Election of Directors - Information Concerning Nominees" and
"Information Concerning Executive Officers" in the Company's
definitive proxy statement to be filed under Regulation 14A
for the Company's 2003 annual meeting of shareholders, which
involves the election of directors, is incorporated herein by
this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the captions "Executive
Compensation," "Summary Compensation Table," "Option Grants in
Last Fiscal Year," and "Fiscal Year-End Option Values" in the
Company's definitive proxy statement to be filed under
Regulation 14A for the Company's 2003 annual meeting of
shareholders, which involves the election of directors, is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information regarding security ownership contained under the
caption "Proposal 1 Election of Directors - Information Concerning
Nominees" in the Company's definitive proxy statement to be
filed under Regulation 14A for the Company's 2003 annual meeting
of shareholders, which involves the election of directors, is
incorporated herein by this reference.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLAN [EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a)]
PLAN CATEGORY (a) (b) (c)
----------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 1,468,440 $0.38 748,200
Equity compensation plans
not approved by
security holders 1,375,000 0.23 7,225,000
----------------------------------------------------------------------------------------------------------
Total 2,843,440 7,973,200
==========================================================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
- -------------------------------------------------------------------------------
Page 21
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
It is the Chief Executive Officer's and the Chief Financial
Officer's responsibility to ensure that we maintain disclosure
controls and procedures designed to provide reasonable
assurance that material information, both financial and
non-financial, and other information required under the
securities laws to be disclosed is identified and communicated
to senior management on a timely basis. Our disclosure
controls and procedures include mandatory communication of
material events, automated accounting processing and
reporting, management review of monthly results and an
established system of internal controls.
During the fourth quarter of 2002, the management of the
Company, including the Chief Executive and Financial Officer,
evaluated the Company's disclosure controls and procedures.
Under rules promulgated by the SEC, disclosure controls and
procedures are defined as those "controls or other procedures
of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports filed or
submitted by it under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the Commission's rules and forms." There have been no
significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to
the date that management, including the Chief Executive and
Financial Officer, completed his evaluation.
- -------------------------------------------------------------------------------
Page 22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE
AND REPORTS ON FORM 8-K
PAGE
(a) (1) FINANCIAL STATEMENTS:
Report of Independent Certified Public
Accountants.................................24
Consolidated Balance Sheet at
December 31, 2002 and 2001..................25
Consolidated Statement of Operations
for the Years Ended December 31,
2002, 2001 and 2000.........................26
Consolidated Statement of Stockholders'
Equity for the Years Ended December 31,
2002, 2001 and 2000.........................27
Consolidated Statement of Cash Flows
for the Years Ended December 31,
2002, 2001 and 2000.........................28
Notes to Consolidated Financial
Statements.............................29 - 47
(a) (2) FINANCIAL STATEMENT SCHEDULE:
Schedule V - Valuation and Qualifying
Accounts 2002, 2001 and 2000................48
(a) (3) CERTIFICATION..................................49 - 50
(a) (4) SIGNATURES..........................................51
(a) (5) EXHIBITS - See Exhibit Index on page 52.
(b) REPORTS ON FORM 8-K
No current reports on Form 8-K were filed
during the quarter ended December 31, 2002.
- -------------------------------------------------------------------------------
Page 23
[RBG & CO. letterhead]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Siboney Corporation
St. Louis, Missouri
We have audited the accompanying consolidated balance sheet of Siboney
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the consolidated financial statement schedule listed in Item 15. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Siboney
Corporation and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America, and the
supporting schedule presents fairly, in all material respects, the information
required to be set forth therein.
/s/ RUBIN, BROWN, GORNSTEIN & CO. LLP
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
February 14, 2003
- -------------------------------------------------------------------------------
Page 24
SIBONEY CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31,
----------------------------------
2002 2001
----------------------------------
CURRENT ASSETS
Cash $ 568,947 $ 378,234
Accounts receivable (Notes 3 and 7) 1,613,674 1,342,262
Inventories (Notes 4 and 7) 402,144 285,777
Prepaid expenses 171,041 159,159
Deferred tax asset (Note 10) 48,000 480,000
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,803,806 2,645,432
PROPERTY AND EQUIPMENT (NOTES 5, 7 AND 8) 410,789 324,581
GOODWILL, NET 936,688 911,913
OTHER ASSETS (NOTE 6) 1,719,952 1,554,321
- -------------------------------------------------------------------------------------------------
$ 5,871,235 $ 5,436,247
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 7) $ 398,852 $ 391,572
Current portion of capitalized lease obligation (Note 8) 24,796 9,889
Accounts payable 294,192 221,921
Accrued expenses 397,423 493,912
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,115,263 1,117,294
- -------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt (Note 7) 150,621 509,786
Capitalized lease obligation (Note 8) 61,147 1,724
Deferred tax liability (Note 10) 93,600 72,200
- -------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 305,368 583,710
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock:
Authorized 100,000,000 shares in 2002, 20,000,000 shares
in 2001 at $0.10 par value; issued and outstanding
16,796,704 in 2002 and 16,744,024 in 2001 1,679,671 1,674,403
Additional paid-in capital 18,908 14,896
Retained earnings 2,752,025 2,045,944
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 4,450,604 3,735,243
- -------------------------------------------------------------------------------------------------
$ 5,871,235 $ 5,436,247
=================================================================================================
- -------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 25
SIBONEY CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2002 2001 2000
-------------------------------------------------------
REVENUES $ 8,902,275 $ 8,280,373 $ 5,401,070
COST OF PRODUCT SALES 1,970,833 1,479,635 895,580
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,727,427 5,566,617 3,378,671
- ---------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 1,204,015 1,234,121 1,126,819
- ---------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense, net (46,706) (87,056) (1,346)
Gain on sale and disposition of assets -- 6,000 --
Miscellaneous 2,172 2,523 3,057
- ---------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (44,534) (78,533) 1,711
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,159,481 1,155,588 1,128,530
INCOME TAX (EXPENSE) BENEFIT (NOTE 10) (453,400) 82,800 189,000
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 706,081 $ 1,238,388 $ 1,317,530
===================================================================================================
EARNINGS PER COMMON SHARE - BASIC $ 0.04 $ 0.07 $ 0.08
===================================================================================================
EARNINGS PER COMMON SHARE - DILUTED $ 0.04 $ 0.07 $ 0.08
===================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 16,785,146 16,697,872 16,571,822
===================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 17,175,789 17,455,045 17,267,570
===================================================================================================
- -------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 26
SIBONEY CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COMMON STOCK ADDITIONAL UNREALIZED RETAINED TOTAL
--------------------------- PAID-IN HOLDING EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL GAIN (DEFICIT) EQUITY
---------------------------------------------------------------------------------------
BALANCE - JANUARY 1, 2000 16,529,844 $ 1,652,985 $ 853 $ 6,500 $ (509,974) $ 1,150,364
ISSUANCE OF COMMON STOCK 128,500 12,850 7,479 -- -- 20,329
NET INCOME -- -- -- -- 1,317,530 1,317,530
NET DEPRECIATION ON
INVESTMENT -- -- -- (2,000) -- (2,000)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2000 16,658,344 1,665,835 8,332 4,500 807,556 2,486,223
ISSUANCE OF COMMON STOCK 85,680 8,568 6,564 -- -- 15,132
NET INCOME -- -- -- -- 1,238,388 1,238,388
NET APPRECIATION ON
INVESTMENT -- -- -- 1,500 -- 1,500
SALE OF INVESTMENT -- -- -- (6,000) -- (6,000)
- --------------------------------------------------------------------------------------------------------------------------
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 -- -- -- -- 706,081 706,081
- --------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2002 16,796,704 $ 1,679,671 $ 18,908 $ -- $ 2,752,025 $ 4,450,604
==========================================================================================================================
- -------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 27
SIBONEY CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 706,081 $ 1,238,388 $ 1,317,530
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 166,906 141,179 96,118
Amortization 538,042 538,947 114,456
Deferred income taxes 453,400 (82,800) (189,000)
Gain on sales and disposition of assets -- (6,000) --
Change in assets and liabilities:
Increase in accounts receivable (271,412) (642,396) (347,649)
Increase in inventories (116,367) (61,097) (35,672)
(Increase) decrease in prepaid expenses 33,865 (91,778) (8,135)
(Increase) decrease in deposits (2,462) 22,365 (26,488)
Increase (decrease) in accounts payable and
accrued expenses (24,218) 241,678 159,364
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,483,835 1,298,486 1,080,524
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for equipment (155,136) (194,257) (174,685)
Proceeds from sale of assets, net of related selling
expenses -- 6,000 --
Payments for software development costs (696,850) (539,360) (290,513)
Payments for assets of unrelated entities (29,135) (1,137,520) (352,620)
- ----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (881,121) (1,865,137) (817,818)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 9,280 15,132 20,329
Principal payments on capital lease obligation (23,649) (22,653) (22,293)
Proceeds from long-term debt -- 725,000 --
Principal payments on long-term debt (397,632) (399,148) (17,544)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (412,001) 318,331 (19,508)
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 190,713 (248,320) 243,198
CASH - BEGINNING OF YEAR 378,234 626,554 383,356
- ----------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 568,947 $ 378,234 $ 626,554
==========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 58,491 $ 87,371 $ 12,489
- ----------------------------------------------------------------------------------------------------------
Noncash investing and financing activities (Note 11)
- ----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 28
SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Siboney Corporation and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in
consolidation.
ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported revenues and expenses. Actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, accounts
receivable and accounts payable approximate fair value due to the
relatively short maturity of these instruments. The fair value of
investments is estimated based on quoted market price. The carrying
value of the long-term debt, including the current portion,
approximates fair value based on the incremental borrowing rates
currently available to the Company for financing with similar terms and
maturities.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for doubtful accounts equal to the
estimated collection losses that will be incurred in the collection of
all receivables. The estimated losses are based on historical
experience coupled with a review of the current status of the existing
receivables.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated
depreciation computed using principally the straight-line method.
Assets are depreciated over periods ranging from three to 39 years.
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
When assets are retired or otherwise disposed of, the cost of the
assets and the related accumulated depreciation are removed from the
respective accounts and any gain or loss realized from disposition is
reflected in operations.
ADVERTISING
The Company expenses the costs of advertising as incurred except for
direct response advertising, which is capitalized and amortized over
its expected period of future benefits. Direct response advertising
consists primarily of catalog advertising to which sales orders are
directly attributed. The capitalized cost of the advertising is
amortized over a 12-month period following the issuance of the catalog.
At December 31, 2002 and 2001, $95,993 and $99,094, respectively, of
advertising costs were capitalized. Advertising expense amounted to
$546,863 in 2002, $604,586 in 2001 and $447,133 in 2000.
REVENUE RECOGNITION
Revenue from sales of educational software products is generally
recognized upon product shipment, provided that no significant vendor
obligations remain and collection of the resulting receivable is deemed
probable. The Company maintains an "on approval" policy for most
products, under which goods shipped subject to customer approval are
not billed upon delivery and can be returned within 45 days. Invoices
are sent after 45 days if the goods are not returned. The Company also
maintains a general "satisfaction guaranteed" policy under which
non-Orchard products may be returned within 12 months and Orchard
products within 90 days from the date of sale if the customer is
dissatisfied. All conditions for revenue recognition are met at the
time of sale as defined in Statement of Financial Accounting Standards
No. 48 "Revenue Recognition When Right of Return Exists." The Company
does not experience significant product returns and, therefore, Company
management is of the opinion that no allowance for sales returns is
necessary.
SOFTWARE DEVELOPMENT COSTS
Software development 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.
WARRANTY COSTS
The Company provides warranties on sales of educational products and
all significant warranty costs are charged to operations when the costs
are probable and estimatable. Company management is of the opinion that
no allowance for warranty costs is necessary.
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
STOCK BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" (SFAS 123), in 1997. As
permitted by SFAS 123, the Company continues to measure compensation
expense for its stock-based employee compensation plans using the
intrinsic method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees."
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2002 2001 2000
----------------------------------------------------------
Net income, as reported $ 706,081 $ 1,238,388 $ 1,317,530
Deduct: total stock-based employee
compensation expense determined
under fair value-based method for all
awards, net of tax effects 108,231 77,001 173,504
- -------------------------------------------------------------------------------------------------------------
Pro forma net income $ 597,850 $ 1,161,387 $ 1,144,026
=============================================================================================================
Earnings per share:
Basic - as reported 0.04 0.07 0.08
Basic - pro forma 0.04 0.07 0.07
Diluted - as reported 0.04 0.07 0.08
Diluted - pro forma 0.03 0.07 0.07
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due, if any,
plus deferred taxes relating primarily to software development costs
and to operating losses that are available to offset future taxable
income and differences in the basis of accounting for software
development costs.
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and
Other Intangible Assets". SFAS 142 supersedes Accounting Principles
Board Opinion No. 17, Intangible Assets, and requires goodwill and
other intangible assets that have indefinite useful lives to no longer
be amortized; however, these assets must be tested at least annually
for impairment. SFAS 142 also requires an evaluation of existing
acquired goodwill and other intangible assets for proper classification
under the new requirements. In addition, intangible assets (other than
goodwill) that have finite useful lives will continue to be amortized
over their useful lives; however, the amortization period of such
intangible assets will no longer be limited to 40 years.
The Company adopted SFAS 142 effective January 1, 2002 and,
accordingly, has ceased amortizing amounts related to goodwill starting
January 1, 2002. The balance of goodwill is related to the Company's
subsidiary, Siboney Learning Group, Inc. (SLG). In accordance with SFAS
142, the Company performed a goodwill impairment review. However, since
SLG stock is not traded separately and because its assets account for
more than 99% of the consolidated assets, the Company used its
consolidated market capitalization as the fair value of the Company in
assessing impairment. The Company compared its fair value with the
carrying amount of assets and determined that none of the goodwill
recorded was impaired.
The following is a reconciliation of reported net income adjusted for
adoption of SFAS 142:
2002 2001 2000
----------------------------------------------------------
Reported net income $ 706,081 $ 1,238,388 $ 1,317,530
Add back: Goodwill amortization -- 209,612 34,690
- ----------------------------------------------------------------------------------------------------------
Pro forma net income $ 706,081 $ 1,448,000 $ 1,352,220
==========================================================================================================
Basic earnings per share - as reported $ 0.04 $ 0.07 $ 0.08
Basic earnings per share - pro forma 0.04 0.09 0.08
Diluted earnings per share - as reported 0.04 0.07 0.08
Diluted earnings per share - pro forma 0.04 0.08 0.08
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 143,
"Asset Retirement Obligations". The new standard requires entities to
record the fair value of a liability for an asset retirement obligation
in the period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002. Adoption
of SFAS No. 143 is not expected to impact the Company's consolidated
financial position or results of operations. The Company will adopt
SFAS No. 143 in 2003.
In 2002, the Company adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 eliminates the requirement to
classify gains and losses from the extinguishment of indebtedness as
extraordinary, requires certain lease modifications to be treated the
same as a sale-leaseback transaction, and makes other nonsubstantive
technical corrections to existing pronouncements. Adoption of SFAS No.
145 had no impact on the Company's consolidated financial position or
results of operations.
The Financial Accounting Standards Board has issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities".
This statement requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. The provisions of this
statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company will adopt SFAS No. 146
in 2003. Adoption of SFAS No. 146 is not expected to impact the
Company's consolidated financial position or results of operations.
2. OPERATIONS
The Company operates in only one segment.
The Company's operations consist of the publishing and distribution of
educational software products through Siboney Learning Group, a
wholly-owned subsidiary. Sales are made through a network of
independent distributors throughout the country as well as through its
own catalogs and sales force.
The Company also holds interests in certain coal, oil and gas natural
resources which are not considered to be material.
During 2001, the Company acquired certain assets or stock of various
unrelated entities. These acquisitions were accounted for using the
purchase method with the results of operations included in the
Company's consolidated statement of operations from the dates of
acquisition.
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
On January 1, 2001, the Company purchased the stock of an educational
software company for $844,383, including acquisition costs. The
acquisition was financed through a cash payment of $550,000 at closing
and a non-interest bearing note discounted at the Company's borrowing
rate at the time of acquisition and payable in 12 quarterly
installments of $25,000. The $550,000 cash payment was provided by
funds on hand in addition to a term loan from the Company's bank for
$325,000. The loan bears interest at 0.25% above the prime rate, with
monthly principal payments of $6,771 plus interest and is due in
January 2005. This note is secured by the Company's accounts
receivable, inventory and equipment.
On May 7, 2001, the Company acquired certain assets of an educational
software company for an aggregate price of $595,051, including
acquisition costs. The acquisition was financed through a cash payment
of $540,000 at or near closing and a non-interest bearing note
discounted at the Company's borrowing rate at the time of acquisition
and payable in one installment of $50,000 due one year after the sale.
The $540,000 cash payment was provided by funds on hand in addition to
a term loan from the Company's bank for $400,000. The loan bears
interest at 0.25% above the prime rate, with monthly principal payments
of $8,025 plus interest and is due in May 2004. This note is secured by
the Company's accounts receivable, inventory and equipment.
The total purchase price of the two acquisitions was allocated as
follows:
JANUARY 2001 MAY 2001
----------------------------------------
Goodwill $ 445,536 $ 363,650
Software development costs 298,847 131,401
Covenants not to compete 100,000 100,000
--------------------------------------------------------------------------------
$ 844,383 $ 595,051
================================================================================
See Note 17 for the pro forma effect of the acquisitions.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
2002 2001
----------------------------------------
Accounts receivable $ 1,676,827 $ 1,394,112
Less: Allowance for doubtful accounts 63,153 51,850
--------------------------------------------------------------------------------
$ 1,613,674 $ 1,342,262
================================================================================
Accounts receivable are pledged as collateral for notes payable
(Note 7).
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
4. INVENTORIES
Inventories consist of:
2002 2001
----------------------------------------
Raw materials $ 336,191 $ 196,512
Finished goods 65,953 89,265
--------------------------------------------------------------------------------
$ 402,144 $ 285,777
================================================================================
Inventories are pledged as collateral for notes payable (Note 7).
Inventories are net of a reserve for obsolescence of $29,300 and
$15,272 at December 31, 2002 and 2001, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
2002 2001
---------------------------------------
Leasehold improvements $ 70,223 $ 54,703
Office equipment, furniture and fixtures 679,113 577,264
Machinery and equipment 442,143 306,398
--------------------------------------------------------------------------------
1,191,479 938,365
Less: Accumulated depreciation 780,690 613,784
--------------------------------------------------------------------------------
$ 410,789 $ 324,581
================================================================================
Assets held under capital leases totaled $187,136 and $89,158 at
December 31, 2002 and 2001. Accumulated depreciation related to these
leased assets amounted to $103,249 and $77,301 at December 31, 2002 and
2001, respectively. Amortization expense of capital lease assets is
included in depreciation expense.
Depreciation charged to operations amounted to $166,906 in 2002,
$141,179 in 2001 and $96,118 in 2000.
Certain equipment is pledged as collateral for notes payable (Note 7).
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
6. GOODWILL AND OTHER ASSETS
GOODWILL
Goodwill represents the purchase price of the acquired companies'
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, which approximated the life of the
acquired assets. There was no amortization of goodwill charged to
operations in 2002 with the adoption of SFAS 142. Amortization of
goodwill charged to operations amounted to $209,612 in 2001 and $34,690
in 2000 (Note 1).
OTHER ASSETS
Other assets, net of accumulated amortization, consist of:
2002 2001
----------------------------------------
Software development costs $ 1,696,701 $ 1,408,532
Covenants not to compete 16,666 141,666
Deposits 6,585 4,123
--------------------------------------------------------------------------------
$ 1,719,952 $ 1,554,321
================================================================================
Software development 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.
During 2002 and 2001, $695,585 and $539,360, respectively, of software
development costs were capitalized. Through the acquisitions discussed
in Note 2, the Company capitalized an additional $430,248 of software
development costs in 2001. Amortization of software development costs
charged against earnings amounted to $407,416, $196,002 and $54,766 in
2002, 2001 and 2000, respectively. Software development costs not
capitalized are expensed in the year incurred and totaled approximately
$299,000, $346,000 and $342,000 in 2002, 2001 and 2000, respectively.
Covenants not to compete are being amortized on a straight-line basis
over two years, which is the life of the covenant agreements.
Amortization of these covenants charged to operations amounted to
$125,000, $133,333 and $25,000 in 2002, 2001 and 2000 respectively.
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
7. NOTES PAYABLE
Notes payable consist of the following:
2002 2001
------------------------------------
Notes payable - bank, face amount of $725,000,
secured by accounts receivable, inventory and
fixed assets, payable in monthly installments
of $8,025 and $6,771 plus interest at the bank's
prime rate plus 0.25%, final payments due in
May 2004 and January 2005 (Note 2) $ 303,797 $ 477,492
Notes payable - seller financed, face amount of
$546,646, unsecured, payable in quarterly
installments of $25,000 including interest at
the Company's implicit borrowing rate at the time
of acquisition of 10.25%, final payments due in
December 2003 and January 2004 (Note 2) 209,845 377,462
Note payable - finance company, unsecured,
payable in monthly installments of $5,265
including interest at 8.5%, final payment due
in July 2003 35,831 --
Note payable - seller financed, face amount
of $46,404, unsecured, paid in full in May
2002 including interest at the Company's
implicit borrowing rate at the time of
acquisition of 7.75% (Note 2) -- 46,404
- ------------------------------------------------------------------------------------------------
549,473 901,358
Less: Current maturities 398,852 391,572
- ------------------------------------------------------------------------------------------------
$ 150,621 $ 509,786
================================================================================================
The Company has a $1,000,000 revolving line-of-credit agreement with a
bank. The outstanding debt is due on demand, and if no demand is made,
the outstanding debt is due on June 1, 2003. The agreement, secured by
accounts receivable, inventory and equipment, requires monthly interest
payments on the outstanding balance at the lender's prime rate. As of
December 31, 2002 and 2001, no amounts were outstanding under the
line-of-credit agreement. The revolving credit agreement with the bank
requires the Company to maintain a minimum net worth of $2,500,000.
The weighted average interest rate on the Company's borrowings was
6.97%, 8.39% and 9.96% for the years ended December 31, 2002, 2001 and
2000, respectively. Interest expense amounted to $53,771, $96,186 and
$12,489 for the years ended December 31, 2002, 2001 and 2000,
respectively.
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The carrying value of these notes payable approximates their fair
value. The fair value of the Company's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
risk factors and maturities.
The scheduled maturities of long-term debt at December 31, 2002 are as
follows:
YEAR AMOUNT
---------------------------------------------------------
2003 $ 398,852
2004 143,850
2005 6,771
---------------------------------------------------------
$ 549,473
=========================================================
8. CAPITAL LEASES
The Company has entered into two capital lease agreements. One
agreement is for a computer equipment with a cost of $35,809. The lease
provides for payments which are the equivalent of principal and
interest at 7.8%, payable in monthly installments of $840, with final
payment due in February 2003. The other agreement is for a phone system
with a cost of $97,978. The lease provides for payments which are the
equivalent of principal and interest at 5.5%, payable in monthly
installments of $2,253, with final payment due in May 2006.
The future minimum annual lease payments under the capital leases are:
YEAR AMOUNT
---------------------------------------------------------
2003 $ 28,779
2004 27,039
2005 27,039
2006 11,268
---------------------------------------------------------
94,125
Less: Amount representing interest 8,182
---------------------------------------------------------
85,943
Less: Current maturities 24,796
---------------------------------------------------------
$ 61,147
=========================================================
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
9. DEFERRED COMPENSATION PLAN
On January 1, 1994, the Company adopted a qualified, defined
contribution profit sharing plan covering eligible full-time and
part-time employees. The plan is qualified under Section 401(k) of the
Internal Revenue Code, and allows employees to contribute on a tax
deferred basis. The plan provides for matching contributions on a
graduated scale, up to 3.6% of the employee's annual qualified wages.
The plan also provides for nonelective or discretionary contributions
by the Company in such amounts as the Board of Directors may annually
determine. The Company's contribution to the 401(k) plan was
approximately $62,500 in 2002, $67,000 in 2001 and $63,000 in 2000.
10. INCOME TAXES
The income tax (expense) benefit consists of:
2002 2001 2000
----------------------------------------------------------
Federal and state income tax
at statutory rates $ 343,000 $ 424,000 $ 342,000
Utilization of net operating loss
carryforwards (343,000) (424,000) (342,000)
Deferred income taxes (453,400) 82,800 189,000
----------------------------------------------------------------------------------------------
$ (453,400) $ 82,800 $ 189,000
==============================================================================================
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The Company's deferred tax assets and liabilities, as shown
in the accompanying consolidated balance sheet, include the following
components:
2002 2001
---------------------------------------
Deferred Tax Assets
Inventory obsolescence and uniform
capitalization $ 24,000 $ 19,600
Allowance for doubtful accounts 24,000 21,000
Goodwill, noncompete agreements and
purchased software development costs 205,100 96,500
Net operating loss carryovers 245,500 624,000
Property and equipment -- 3,200
-----------------------------------------------------------------------------------
Total deferred tax assets 498,600 764,300
-----------------------------------------------------------------------------------
Deferred Tax Liabilities
Property and equipment 15,000 --
Capitalized software development costs 529,200 356,500
-----------------------------------------------------------------------------------
Total deferred tax liabilities 544,200 356,500
-----------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ (45,600) $ 407,800
===================================================================================
Based on the Company's net income over the three years in the period
ended December 31, 2002 and on the Company's budgeted results of
operations for 2003, management has determined that no deferred tax
asset valuation allowance is necessary at December 31, 2002.
The deferred tax assets and liabilities include the following
components:
2002 2001
-----------------------------------
Net current deferred tax assets $ 48,000 $ 480,000
Net long-term deferred tax liabilities (93,600) (72,200)
-----------------------------------------------------------------------------------
$ (45,600) $ 407,800
===================================================================================
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The net operating loss carryovers for federal income tax purposes of
approximately $646,000 at December 31, 2002 are available to reduce
future taxable income as follows:
AMOUNT OF UNUSED
OPERATING LOSS
EXPIRATION DATE CARRYFORWARDS
--------------------------------------------------------
2017 $ 528,000
2018 118,000
--------------------------------------------------------
$ 646,000
========================================================
The reconciliation of the effective tax rate with the statutory federal
income tax rate is as follows:
2002 2001 2000
-----------------------------------------
Statutory rate 34% 34% 34%
State income taxes, net of federal benefits 4 4 4
Effect of expiration of net operating losses
carried forward -- 28 107
Realization of deferred tax asset valuation
allowance -- (76) (159)
Other 1 3 (3)
-------------------------------------------------------------------------------------------------
39% (7%) (17%)
=================================================================================================
11. SUPPLEMENTAL CASH FLOW INFORMATION
In 2002, the Company financed the purchase of assets of $97,978 through
a capital lease and the addition of prepaid expenses through a note
payable of $45,747.
In 2001, the Company financed the purchases of the assets of
educational software companies through notes payable of $302,038.
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
12. STOCK OPTION PLANS
The Company's 1997 Incentive Stock Option Plan (the "1997 Plan")
provides for granting to key employees of the Company or its
subsidiaries options to purchase a maximum of 2,400,000 shares of the
Company's common stock. The 1997 Plan provides for the granting of
options which qualify as incentive stock options, within the meaning of
Section 422 of the Internal Revenue Code. All options granted under the
1997 Plan must have an exercise price of not less than 100% of the fair
market value of the common stock on the date of grant. The 1997 Plan
has a maximum term of ten years.
The Board of Directors of the Company may, in its sole discretion,
amend, discontinue or terminate the Plan at any time, provided,
however, that it may not, without stockholder approval, change the
maximum number of shares for which options may be granted under the
Plan.
The Company also has a non-qualified stock option plan (the "1987
Plan") which provides for granting to eligible employees, directors,
consultants and contractors of the Company or its subsidiaries, options
to purchase authorized but unissued or reacquired shares of the
Company's common stock. The Board of Directors has full authority and
discretion in fixing the purchase price of the stock subject to each
option granted. The term of each option granted pursuant to the 1987
Plan shall not be more than five years from the date of grant.
The weighted-average fair value of options at date of grant for options
granted during 2002, 2001 and 2000 was $0.23, $0.46 and $0.44 per
option, respectively. The fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions.
2002 2001 2000
----------------------------------------------------------
Expected option life 2.6 YEARS 2.9 years 3.1 years
Risk free interest rate 2.92% 5.00% 6.00%
Expected volatility 93.84% 123.98% 107.27%
Expected dividend yield -- -- --
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
A summary of stock option activity for 2002, 2001 and 2000 is as
follows:
WEIGHTED
AVERAGE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE
-------------------------------------------------------
Balance - January 1, 2000 1,447,500 $0.1275 - $0.18 $ 0.14
Granted 540,000 $0.56 - $0.62 0.57
Exercised (128,500) $0.16 - $0.165 0.17
Forfeited/Expired (125,000) $0.1275 - $0.56 0.21
------------------------------------------------------------------------------------------------
Balance - December 31, 2000 1,734,000 $0.1275 -$0.62 0.27
Granted 753,900 $0.495 - $0.655 0.55
Exercised (85,680) $0.1275 - $0.515 0.18
Forfeited/Expired (77,900) $0.1275 - $0.56 0.49
------------------------------------------------------------------------------------------------
Balance - December 31, 2001 2,324,320 $0.1275 - $0.655 0.35
Granted 724,200 $0.23 - $0.38 0.32
Exercised (52,680) $0.1275 - $0.515 0.18
Forfeited/Expired (152,400) $0.16 - $0.56 0.40
------------------------------------------------------------------------------------------------
Balance - December 31, 2002 2,843,440 $0.1275 - $0.655 $ 0.35
================================================================================================
The following table summarizes information about stock options
outstanding at December 31, 2002:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------------------------- --------------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE NUMBER OF REMAINING YEARS AVERAGE NUMBER OF AVERAGE
PRICES OPTIONS OF CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------------
$0.1275 - $0.6550 2,843,440 2.6 $ 0.35 1,910,308 $0.31
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
13. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding of 16,785,146 in
2002, 16,697,872 in 2001 and 16,571,822 in 2000.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding of 17,175,789 in 2002, 17,455,045 in 2001 and 17,267,570 in
2000.
The determination of the numerator and denominator for the computation
of basic and diluted earnings per common share is as follows:
2002 2001 2000
----------------------------------------------------------------
Numerator for basic and diluted earnings
per share - income available to
common shareholders $ 706,081 $ 1,238,388 $ 1,317,530
=====================================================================================================
Denominator:
Weighted average number of common
shares used in basic EPS 16,785,146 16,697,872 16,571,822
Effect on dilutive securities:
Common stock options 390,643 757,173 695,748
-----------------------------------------------------------------------------------------------------
Weighted average number of common
shares and dilutive potential common
stock used in diluted EPS 17,175,789 17,455,045 17,267,570
=====================================================================================================
For additional disclosures regarding stock options, see Notes 1 and 12.
14. COMMITMENTS
LEASE COMMITMENTS
The Company leases office and warehouse space under operating leases
which expire at various dates through May 2005. Total rent expense
under all operating leases was $227,579, $196,238 and $109,381 in 2002,
2001 and 2000, respectively.
- -------------------------------------------------------------------------------
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The future minimum annual rentals under the remaining leases are as
follows:
YEAR AMOUNT
---------------------------------------------------------
2003 $ 233,438
2004 205,987
2005 77,424
---------------------------------------------------------
$ 516,849
=========================================================
GUARANTEED ROYALTY AGREEMENT
The Company has an agreement with a publishing company for software
licensing. The terms of the agreement require minimum royalty payments
up to 20% on sales of selected products.
The future minimum annual guaranteed royalties payable under the
agreement are as follows:
YEAR AMOUNT
---------------------------------------------------------
2003 $ 70,000
2004 120,000
---------------------------------------------------------
$ 190,000
=========================================================
15. SIGNIFICANT CUSTOMERS AND SUPPLIERS
In 2002, Brainstorm USA, LLC and Hart, Incorporated each accounted for
approximately 12% of the Company's revenues. In 2001 and 2000,
Brainstorm USA, LLC accounted for approximately 10% and 11%,
respectively, of the Company's revenues. Accounts receivable from these
two customers totaled approximately $342,000 at December 31, 2002.
There was not a significant concentration of accounts receivable from
customers at December 31, 2001.
There were no significant suppliers for 2002, 2001 and 2000.
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
16. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following are unaudited comparative quarterly summaries of the
consolidated results of operations of the Company for the years ended
December 31, 2002 and 2001. The summaries were prepared using
accounting principles generally accepted in the United States of
America and, in the opinion of the Company's management, include all
adjustments, consisting of normally recurring accruals, necessary for a
fair presentation of the results of operations for the respective
quarterly periods.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------------ ------------------------------------ ------------------ -------------------
PER PER PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE (1)
----------------------------------------------------------------------------------------------
2002 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
- ----
NET SALES $ 1,868 $ 3,074 $ 1,916 $ 2,044 $ 8,902
GROSS PROFIT 1,436 2,439 1,451 1,605 6,931
INCOME BEFORE
INCOME TAXES 45 862 68 184 1,159
NET INCOME 45 -- 491 0.03 73 -- 97 0.01 706 0.04
2001
- ----
NET SALES 2,001 2,418 1,951 1,910 8,280
GROSS PROFIT 1,703 2,106 1,517 1,475 6,801
INCOME (LOSS)
BEFORE INCOME
TAXES 477 791 19 (131) 1,156
NET INCOME (LOSS) 477 0.03 791 0.05 19 -- (49) -- 1,238 0.07
(1) Earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net
earnings per share will not necessarily equal the total for
the year. The per share amounts presented represent earnings
per share on both a basic and diluted basis.
17. PRO FORMA INFORMATION (UNAUDITED)
The following pro forma consolidated information of the Company, for
the years ended December 31, 2001 and 2000, gives effect to the
acquisitions disclosed in Note 2 as if they were effective January 1,
2001. The information gives effect to the acquisitions under the
purchase method of accounting.
The pro forma information may not be indicative of the results that
would have actually occurred if the acquisitions had been effective on
the dates indicated or of the results that may be obtained in the
future. The pro forma information should be read in conjunction with
the consolidated financial statements and notes thereto of the Company.
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SIBONEY CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
PRO FORMA
DECEMBER 31,
------------------------------------
(In thousands, except per share data) 2001 2000
----------------------------------------------------------------------------------
Net operating revenue $ 8,280 $ 7,206
Net income 1,118 1,178
Net income available to common stockholders 1,118 1,178
Earnings per common share - basic 0.07 0.07
Earnings per common share - diluted 0.06 0.06
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SIBONEY CORPORATION
- -------------------------------------------------------------------------------------------------------------
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED DECEMBER 31, 2002 AND 2001
ADDITIONS DEDUCTIONS
------------- ----------------
BALANCE AT CHARGED TO CHARGES FOR BALANCE AT
BEGINNING COSTS AND WHICH RESERVE END
DESCRIPTION OF PERIOD EXPENSES WAS CREATED OF PERIOD
- --------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from
the assets to which they apply:
Accounts receivable allowance
for doubtful accounts
2000 $ 12,857 $ 14,632 $ (9,466) $ 18,023
2001 18,023 47,220 (13,393) 51,850
2002 51,850 36,072 24,769 61,153
Inventory valuation account
2000 42,988 -- (23,662) 19,322
2001 19,322 -- (4,050) 15,272
2002 15,272 97,378 (83,350) 29,300
Deferred tax asset valuation
2000 1,523,000 -- (647,000) 876,000
2001 876,000 -- (876,000) --
2002 -- -- -- --
Investments in natural resources allowance
for depreciation and cost depletion of
natural resources
2000 145,821 -- -- 145,821
2001 145,821 -- -- 145,821
2002 145,821 -- -- 145,821
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CERTIFICATION
I, Timothy J. Tegeler, certify that:
1. I have reviewed this annual report on Form 10-K of Siboney Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation 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
registrant's board of directors (or persons performing the equivalent
functions):
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
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Page 49
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of my most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 7, 2003
/s/ Timothy J. Tegeler
--------------------------
Timothy J. Tegeler
Chairman of the Board and
Chief Executive and Financial Officer
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Page 50
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
-------------------
(Registrant)
Date: March 25, 2003 BY: /s/ Timothy J. Tegeler
---------------------------------------
Timothy J. Tegeler
Chief Executive and
Financial Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 25, 2003 BY: /s/ Timothy J. Tegeler
---------------------------------------
Timothy J. Tegeler, Director
Date: March 25, 2003 BY: /s/ William D. Edwards, Jr.
---------------------------------------
William D. Edwards, Jr., Director
Date: March 25, 2003 BY: /s/ Rebecca M. Braddock
---------------------------------------
Rebecca M. Braddock, Director
Date: March 25, 2003 BY: /s/ Alan G. Johnson
---------------------------------------
Alan G. Johnson, Director
Date: March 25, 2003 BY: /s/ Ernest R. Marx
---------------------------------------
Ernest R. Marx, Director
Date: March 25, 2003 BY: /s/ Lewis B. Shepley
---------------------------------------
Lewis B. Shepley, Director
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EXHIBIT INDEX
- -------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
3(a) Amended and Restated Articles of Incorporation, filed as
Exhibit 3(a) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1986 (the "1986 10-K") and incorporated
herein by this reference
3(b) Bylaws, filed as Exhibit 3(b) to the 1986 10-K and
incorporated herein by this reference
10(a) Line of Credit Note, as amended, between the Company and
Southwest Bank of St. Louis dated June 12, 1997, filed as Exhibit
10(a) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (the "1997 10-K") and incorporated herein
by this reference.
10(b) Software Distribution and License Agreement between the Company
and Merit Audio Visual, Inc. dated September 4, 1996, filed as
Exhibit 10(c) to the 1997 10-K and incorporated herein by this
reference.
10(c) Software License Agreement between the Company and Nectar
Foundation dated May 8, 1998 and Amendment to Software License
Agreement dated September 8, 1999, filed as Exhibit 10(d) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999 and incorporated herein by this reference.
10(d) Siboney Corporation 1997 Incentive Stock Option Plan, filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-8
dated September 9, 1997 and incorporated herein by this
reference.*
21 Subsidiaries of the Company, filed herewith
23 Consent of Rubin, Brown, Gornstein & Co. LLP, Independent
Auditors, filed herewith.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
* Management contract or compensatory plan
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