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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2004

Commission file number: 1-3952

SIBONEY CORPORATION
(Exact name of registrant as specified in its charter)

325 North Kirkwood Road, Suite 300, St. Louis, MO      63122
                (Address of principal executive offices)                 (Zip Code)

314-822-3163
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [  ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

INDEX

PART I  FINANCIAL INFORMATION

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PART I - FINANCIAL INFORMATION
SIBONEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
Assets

NOTE: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date and condensed.

See accompanying notes to unaudited condensed consolidated financial statements.

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SIBONEY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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SIBONEY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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SIBONEY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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SIBONEY CORPORATION AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003

1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated balance sheet as of March 31, 2004, the condensed consolidated statement of stockholders' equity for the three-month period ended March 31, 2004, the condensed consolidated statement of operations for the three-month periods ended March 31, 2004 and 2003 and the condensed consolidated statement of cash flows for the three-month periods then ended have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 31, 2004 and the results of operations for all of the periods reported have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the period ended March 31, 2004 are not necessarily indicative of the operating results for the full year.

2.  INVENTORIES

        Inventories consist of:

3.  OTHER ASSETS

        Other assets consist of:

The Company capitalizes costs associated with the development of computer software for sale. Costs are capitalized at the point the Company determines that it is technologically feasible to produce the

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software title. Such costs are amortized at the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for the product or (b) the straight-line method over the remaining estimated economic life of the product. Amortization begins when the product is available for general release to customers.

Goodwill represents the purchase price of an acquired company’s assets in excess of the fair value of those net assets at the date of acquisition.

Covenants not to compete are being amortized on a straight-line basis over two years, which is the life of the covenant agreements.

Amortization expense charged against earnings amounted to:

4.  Stock Based Compensation

The Company applies APB Opinion No. 25 and related interpretations in accounting for all its stock option plans. Accordingly, no compensation cost has been recognized under these plans. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which was released in December 2002 as an amendment to SFAS No. 123. The following table illustrates the effect on net income (loss) and earnings per share if the fair value based method had been applied to all awards.

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SIBONEY CORPORATION AND SUBSIDIARIES

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company’s principal subsidiary, Siboney Learning Group, Inc. (“SLG”), publishes and distributes educational software, primarily for schools. The Company has 59 full-time employees.

The Company has served the educational market for more than 35 years. Since 1986, the Company’s main business has been publishing educational software in reading, language arts, math, science and English as a Second Language for students and teachers in levels kindergarten through adult. The Company is best known for its software which is designed to motivate students to master key skills and keep track of student progress for teachers to review.

The Company’s growing portfolio of products now includes more than 190 active titles that focus on teaching basic skills and new concepts while meeting the different learning needs of all students through time-on-task instruction. Popular titles include Math Concepts, Phonics Mastery, Reading Concepts, Touchdown Math, Diascriptive Reading and Process Writing.

Siboney Learning Group currently offers five distinct product categories which are developed, marketed and supported by the same core team: Orchard Teacher’s Choice Software; Teacher Support Software; Educational Activities Software; Journey; and GAMCO Educational Software. These products allow the Company to offer a wide range of product selection to schools and adult education centers at a variety of budget levels.

Orchard Teacher’s Choice Software (“Orchard”) offers schools and school districts a broad curriculum-based solution with universal management and assessment. Orchard is sold through a network of dealers and direct and independent representatives who actively call on schools to sell larger curriculum- and technology-based learning solutions. Orchard includes universal management which tracks student progress across all programs, as well as pre- and post-test assessment that identifies problem areas and measures instructional gain. The Company believes that Orchard has become a recognized competitor in the growing Integrated Learning Systems market as a result of its motivating and balanced content designed for instructional improvement, strong correlation to major national tests and state objectives, and its cost-effective pricing structure. The Company believes that its new Orchard For Your State (“OFYS”) versions will help maintain Orchard’s consistent growth in sales as schools look for proven ways to meet the new federal mandate for accountability in all states provided in the No Child Left Behind Act of 2001. Orchard For Your State offers schools and school districts state-specific versions of Orchard that are directly correlated to each state’s educational standards. The No Child Left Behind Act of 2001 will require all students in grades three to eight in all states to take important tests based upon each state’s standards. Orchard For Your State is a direct response to, and solution for, the emerging critical need for state-specific accountability and instructional improvement. The Company has released 33 state-specific versions of Orchard For Your State and is planning to release 7 additional versions during the remainder of 2004.

The Teacher Support Software (“TSS”) product line which was acquired in 2000, is best known for its popular tools for teachers, including Worksheet Magic, and its effective and comprehensive reading programs, including WordWorks. TSS products are sold through all of the Company’s sales channels as single-title solutions and as part of comprehensive Orchard solutions. The Company has actively

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

upgraded older TSS products to be compatible with the computers and networks found in schools today.

The Company’s Educational Activities Software (“EAS”) line, which was acquired in 2001, is best known for its Diascriptive Reading series, which is sold through a network of independent representatives to schools, community colleges, adult learning centers and correctional facilities. This line 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. The Company has committed developmental resources to web enable selected EAS titles since the older learner market appears to be increasingly responsive to software delivered to students over the Internet. 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.

Journey, the comprehensive software product line acquired in 2001 is being upgraded to be competitive with other structured comprehensive solutions. The Company believes that Journey is an attractive complementary product for Orchard due to its structured and sequenced content that adapts to individual learning needs. The Company is presently web-enabling Journey and the new web-enabled version is planned for release in 2004.

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 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.

The Company also has generated sales of select products through a direct-to-the-home marketer of educational software. This alliance allows the Company to reach families in their homes without relying on expensive retail distribution.

The Company also has certain natural resources interests, including coal, oil and gas, through Siboney Coal Company, Inc. and several other subsidiaries which are not believed to be material to the Company’s results of operations or financial condition.

The Company recently became aware that a new residential subdivision being developed in Johnson County, Kentucky encroaches on property owned by Siboney Coal Company, a subsidiary. As a result, the Company has agreed to enter into an agreement and signed a Quitclaim Deed transferring approximately 82 acres to the developers of the subdivision in return for $220,000.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations

The following is management’s discussion and analysis of certain significant factors which have affected the Company’s financial position and operating results during the periods covered by the accompanying condensed consolidated financial statements.

Three Months Ended March 31, 2004 Compared To March 31, 2003

Total revenues increased 73.7% or $1,127,425 during the three-month period ended March 31, 2004 compared to the first quarter of 2003, reflecting higher sales at Siboney Learning Group. Sales of the Company’s Orchard Software increased 81% during the first quarter of 2004 compared to the first quarter of 2003 while sales of the Company’s other product categories increased 15% compared to the first quarter of 2003. Two large district-wide orders for Orchard for Your State were primarily responsible for the increase in Orchard sales. The Company believes Orchard’s success in improving student achievement in individual school buildings is leading to district-wide orders in school districts facing increasing demands for Adequate Yearly Progress as mandated by the No Child Left Behind Act.

Cost of product sales increased 41.8% or $158,105 during the first quarter of 2004 compared to the first quarter of the previous year. This increase was primarily due to increased sales at Siboney Learning Group. Cost of product sales as a percentage of revenue decreased from 24.7% for the first quarter of 2003 to 20.2% for the first quarter of 2004 due to increased sales of higher margin Orchard Software during the first quarter of 2004.

Selling, general and administrative expenses increased 14.2% or $218,328 during the quarter ended March 31, 2004 compared to the first quarter of 2003, primarily due to increased salary and payroll-related expenses and increased commissions paid as the result of increased sales.

The Company’s net income for the first quarter of 2004, primarily for the reasons above, was $222,200 after income tax expense of $144,290 compared to a net loss of $241,986 after income tax benefit of $150,000 for the first quarter of 2003. Earnings per common share, basic and diluted, was $0.01 for the first quarter of 2004 compared to a loss of $0.01 per common share, basic and diluted, for the first quarter of 2003.

Liquidity and Capital Resources

Accounts receivable increased 18.9% or $289,489 at March 31, 2004 compared to December 31, 2003 due to increased sales during February and March 2004 compared to November and December 2003.

The Company has financed its business primarily with cash generated from operating activities, accessing its bank revolving line of credit and purchase money financing provided by the sellers of companies acquired. The line of credit agreement, which matures in June 2004 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 March 31, 2004, the Company reported a net worth of $5.2 million and there was no balance 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.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company presently does not use any derivative financial instruments to hedge its exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices or other market risks, nor does the Company invest in speculative financial instruments. Borrowings with the bank bear interest at prime rate and 0.25% above prime rate.

Due to the nature of the Company’s borrowings, it has concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required.

ITEM 4.  CONTROLS AND PROCEDURES

Based on his evaluation as of the end of the period covered by this report, Timothy J. Tegeler, the Company’s Chief Executive Officer and Chief Financial Officer, has concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective. There have been no changes in internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

***

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.

Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following: (1) the Company’s ability to enhance its existing products and introduce new products; (2) a delay or reduction in school purchases of the Company’s products due to governmental budgetary and funding constraints resulting in a reduction in the funds available to the Company’s school customers; (3) acceptance and demand for new educational products; (4) an overall decline in sales of the Company’s Orchard product category, which accounts for a significant portion of the Company’s revenue; (5) the impact of competitive products and pricing; (6) the Company’s ability to establish and protect its copyrights, licenses and other intellectual property rights; (7) seasonal variations due to, among other things, the budget and school year cycles of the Company’s school customers; and (8) the risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission.

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.

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PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

On March 8, 2004, the Board of Directors authorized a stock repurchase program under which the Company may purchase up to 1,000,000 shares of the Company’s common stock from time to time in the open market or in privately negotiated transactions. The Company made no purchases under the plan during the period covered by this report.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits: Exhibits required as part of this report are listed in the index appearing on page 14.

(b)   Reports on Form 8-K: None.

SIGNATURES

Pursuant to the requirements 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.

May 10, 2004

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Index to Exhibits

Exhibit

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