Item 1 - Business
General
The principal businesses in which the Company engages, directly and through its subsidiaries, are the publishing and distribution of educational software products and the holding of certain natural resource interests.
Industry Segments And Subsidiaries
At December 31, 1997, the Company conducted its business directly and through several wholly-owned subsidiaries, as follows:
A summary of the results of each of the Company's two industry segments, educational products and natural resources, for the years ended December 31, 1997, 1996 and 1995, which appears in Note 13 to the Consolidated Financial Statements on Page 28, is incorporated herein by reference.
Description Of Business And Properties By Industry Segment
Educational Products:
Siboney Learning Group Division/Gamco Industries, Inc.
Business - General Description And Current Developments -- The Company is engaged, through its Siboney Learning Group Division and Gamco Industries, Inc. ("Gamco"), a wholly-owned subsidiary, in the publishing and distribution of educational software.
The Company has served the educational market for more than 35 years. The Company's main business is publishing proprietary educational software in math, reading and language arts for students and teachers in grades kindergarten through grade 12. This software motivates students to master key skills which are stressed on standardized tests and in textbooks. Gamco sells through a network of independent distributors throughout the United States as well as through its own catalogs and sales force. Popular Gamco titles include Money Challenge, Discover Time, the Touchdown Math series and Undersea Reading for Meaning. Gamco publishes over 100 titles for Macintosh, Windows, DOS and Apple II operating systems.
In 1997, Siboney Learning Group expanded its distribution and product offering by launching Orchard: Teacher's Choice Software through a network of 25 dealers to complement its traditional distribution strategy of single title sales through dealer catalogs and its own catalogs. Orchard is a comprehensive instructional software solution for students who are struggling to master key skills. It provides schools with a universal management system that tracks student progress across all titles and a variety of instructional approaches that motivate students to learn. Orchard allows the Company to compete in the market for Integrated Learnings Systems which offer larger and more expensive curriculum-based software packages to schools needing to remediate their students.
In late 1997, the Company relocated most of its five person inside sales force to St. Louis and hired a new manager. The inside sales group focuses on selling the Company's proprietary software to more than 10,000 school customers and 30,000 additional school prospects.
During 1997, Siboney Learning Group accelerated its conversion of titles to the Windows, Macintosh and CD-ROM platforms, which are now the predominant systems used in schools. The Company released its first titles for Windows in June 1997 and launched its first CD-ROM titles in September. During the year, the Company converted 15 products for Windows, 25 titles for Macintosh, and produced 27 new CD-ROM titles.
Also in 1997, the Company entered into a licensing agreement with Intentional Educations to publish 12 early reading educational software titles in a hybrid multimedia CD-ROM format and commenced the sale of such products. The Company plans to continue its efforts to obtain additional licensing agreements in 1998.
Sources And Availability Of Raw Materials -- Raw materials are generally available and are purchased from a wide range of suppliers. Shortages are not anticipated.
Patents, Trademarks And Licenses --Siboney Learning Group/Gamco holds various patents, copyrights and license rights which are considered to be material to its business.
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 (April, May, June & July). However, seasonality is not deemed to have an overall material effect on the Company's operations.
Working Capital Items -- The Company does not engage in unusual practices relating to working capital items. Siboney Learning Group/Gamco does not purchase or maintain an unusually high amount of inventory in advance, although certain materials are purchased in larger quantities in order to obtain volume discounts. Siboney Learning Group/Gamco 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/Gamco maintains an "on approval" policy under which goods shipped subject to customer approval are not billed for and can be returned within 45 days. Invoices are sent after 45 days if the goods are not returned. Prior to 1998, a 30 day preview policy was followed by Siboney Learning Group/Gamco, under which goods made available on preview were invoiced when shipped and the invoice cancelled if the goods were returned. Sales of Orchard products are returnable within 90 days if the customer is dissatisfied. For the year 1997, approximately 8% of sales were returned, of which the majority represented previewed sales returned within thirty days. Siboney Learning Group/Gamco also maintains a general return policy under which products may be returned within 12 months from the date of purchase if they do not meet a customer's satisfaction.
Dependence On Limited Number Of Customers -- In 1997 approximately 10% of Siboney Learning Group/Gamco's revenues were generated from catalog sales through one dealer, Educational Resources, Inc.
Backlog -- The Company traditionally does not have a material backlog of orders for its educational products.
Government Business -- Although a substantial portion of Siboney Learning Group/Gamco's business is done with governmental subdivisions, such business is not subject to price renegotiation or termination for convenience of the buyer.
Environmental Impact -- Present federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to protection of the environment are not expected to materially affect the Company.
Research And Development --Siboney Learning Group/Gamco's expenditures for research and development of new computer software products and upgrading and adapting existing software products were approximately $440,000, $412,000 and $391,000 in 1997, 1996 and 1995, respectively.
The development of Siboney Learning Group/Gamco products resulted in the release of five new and improved titles in 1995, seven in 1996, and eighty-eight in 1997. As a result of continuing internal product development and the development of newly licensed software, the Company is expected to release approximately eighty new and improved titles in 1998.
Competition -- Siboney Learning Group/Gamco 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. Sales of Siboney Learning Group/Gamco's computer software products are substantially dependent upon expenditures of school districts and individual schools.
Natural Resources:
Siboney Coal Company, Inc.
Siboney Coal Company, Inc. ("Siboney Coal"), a subsidiary of the Company, owns the fee and mineral interests in certain coal properties in Johnson and Martin Counties, Kentucky. The properties consist of approximately 325 surface or fee acres which include mineral rights and approximately 1,120 acres of mineral rights alone.
Siboney Coal leases the coal properties to Mountaineer Land Company ("Mountaineer"), a subsidiary of Arch Coal Company (formerly Ashland Coal Company), under a twenty-five year lease entered into in 1987, under which mining operations have been conducted on and off since March 1990. Under the terms of the lease, Mountaineer has the right to mine the coal and pay a royalty to Siboney Coal. An advance royalty and certain royalties previously paid by Mountaineer are recoupable against future production royalties payable on coal mined and sold from the properties. The lease calls for annual payments of $30,000 plus royalties per ton of coal mined. The lease is cancellable on thirty days' prior written notice by the lessee. Siboney Coal earned $61,414 in 1997, $78,033 in 1996 and $70,596 in 1995 under the lease. Future revenues in excess of minimum royalties from the coal lease are dependent on mining operations of the lessee and at certain times have been, and in the future, may be discontinued.
For further discussion of the "Natural Resources Segment" see Note 7 to the Consolidated Financial Statements on Page 25.
Oil And Gas
Siboney Resources - Texas, Inc. ("Siboney Resources - Texas"), a subsidiary of the Company, has royalty interests in certain oil and gas leases in Texas. Revenues from such leases are not a material factor in the Company's consolidated revenues.
Axel Heiberg Oil Company ("Axel"), a subsidiary of the Company, holds a 2.28% working interest in oil and gas property rights on 1,843 acres in the Canadian Arctic Islands. Due to the high cost of exploration and recovery of oil and gas from this region, it is not anticipated that revenues will be generated from this interest in the foreseeable future.
Revenue and income after tax from oil and gas related operations are not significant to the Company. The present value of estimated future net oil and gas reserves of Axel and Siboney Resources - Texas is presently not determinable.
Prior to the takeover of Cuba by Fidel Castro in 1958, the Company and its predecessor held oil exploration rights covering approximately four million acres in Cuban territory. Following the expropriation of these properties by the Castro regime, the Company filed claims against the Cuban government with the United States Foreign Claims Settlement Commission, which was authorized under the International Claims Settlement Act of 1949, as amended, to determine the validity and value of claims of United States nationals against the Cuban government for properties which have been expropriated. The Commission certified the Company's loss to be $2,454,000 plus interest at 6% per annum from November 1959. No funds have ever been appropriated to satisfy such claims. Accordingly, the Company has not considered and currently does not consider the claim to be material and cannot determine the possibility of or the amount of any possible recovery.
In 1996, a new federal law, popularly known as the "Helms-Burton Act", was passed, which grants U.S. companies whose properties were confiscated by the Cuban government the right to bring action in U.S. federal district courts against foreign nationals that "traffic" in, or make use of, confiscated properties and provides that those companies are liable for money damages to the U.S. company which owns the claim to the confiscated property.
However, under the law, the President of the United States has the authority every six months to suspend the right of potential plaintiffs to file lawsuits, which he has done on several occasions, most recently in February 1998. The Company cannot predict whether the President will continue to postpone the effectiveness of this legislation.
Personnel:
As of February 13, 1998 the Company had 25 employees, 2 of which were employed by the parent corporation, and 23 by Siboney Learning Group/Gamco. The Company's employees are not represented by any union.
Item 2.
Item 2. Properties
The Company leased 817 square feet of office space under a lease which expired December 31, 1997 and an additional 850 square feet of office space which is used by Siboney Learning Group Division under a lease which expires May 30, 1998. Effective February 1, 1998, the Company entered into a new lease for 2,148 square feet and extended the lease term to May 30, 1999.
Gamco owns a 23,000 square foot building in Big Spring, Texas on 12 acres. Gamco utilizes 100% of the space available in the building.
The Company considers these facilities adequate to meet its needs for the foreseeable future.
The Company's subsidiaries operating in the natural resources segment own interests in certain coal, oil and gas properties. The present value of estimated future reserves of such properties is not presently determinable by the Company.
Item 3.
Item 3. Legal Proceedings
On October 4, 1985, the Company's subsidiary, Siboney Communications, Inc. ("SCI"), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The proceeding remains currently pending; however, substantially all of the assets of SCI were sold and distributed in 1986 under supervision of the Bankruptcy Court.
Item 4.
Item 4. Submission Of Matters To A Vote Of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
(a) Principal Market
The Company's common stock, par value $.10 per share, is traded in the over-the-counter market.
(b) Stock Price And Dividend Information
The following table sets forth the high and low bid prices per share of common stock as reported by market makers polled by the Company:
1997 Bid 1996 Bid -------------------------------- --------------------------------- Quarter High Low Quarter High Low ------- ---- --- ------- ---- --- First .14 .14 First .14 .14
Second .15 .14 Second .26 .14
Third .12 .12 Third .24 .19
Fourth .13 .11 Fourth .19 .16
The foregoing market quotations reflect interdealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.
(c) Approximate Number Of Holders Of Common Stock
The number of holders of record of the Company's common stock as of February 13, 1998 was 17,017.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis sets forth certain factors which produced changes in the Company's results of operations during the three years ended December 31, 1997, and comments on the Company's financial position as of December 31, 1997.
Results Of Operations:
1997 in Comparison with 1996:
During 1997, the Company's consolidated revenues decreased 2.8% or $57,180 to $1,957,088. Revenues from the educational products segment decreased 2.1% or $40,907 to $1,892,551 and revenues from the natural resource
segment decreased 20.1% or $16,273 to $64,537. A substantial drop in sales of old products, including Apple II software (which declined from approximately $281,000 in 1996 to approximately $134,000 in 1997) and non-proprietary products (which declined from approximately $279,000 in 1996 to approximately $40,000 in 1997), was partially offset by sales of new and newly converted titles. The Company introduced its first Windows and CD-ROM titles during the second half of 1997. The Company also improved its new Orchard: Teacher's Choice Software by developing a universal management program that tracks student progress across all titles. Of $1,892,551 of educational products revenues in 1997, approximately $615,000 occurred as a result of sales of new products and product distribution strategies. This compared to new product sales of approximately $65,000 in 1996. The Company also continues to expand through licensing agreements. Natural resource revenue decreased due to less mining activity, from which Siboney Coal receives royalty payments. Future royalty payments are dependent on the level of mining operations by the Company's lessee and are outside the control of the Company.
Cost of product sales from the educational products segment decreased $136,054 to $319,841. Even though sales and cost of sales were down, gross profit percentage increased from 76.4% to 83.1%. The reasons for the increase in gross profit percentage were the implementation of management's plan to eliminate low margin non-proprietary products and the sale of higher priced product licenses.
Selling, general and administrative expenses remained relatively constant as compared to 1996.
The Company's loss from operations for 1997, primarily for the reasons above, was $590,816. In 1996, the Company reported a loss from operations of $640,046, which was offset in part by a gain from the sale of assets and other income in connection with the sale of discontinued print shop operations, resulting in a net loss for the year of $315,276.
1996 in Comparison with 1995:
During 1996, the Company's consolidated revenues decreased $345,224 to $2,014,268. Revenues from the educational products segment decreased $351,071 to $1,933,458 while revenues from the natural resources segment increased $5,847 to $80,810. Educational product revenues decreased due to an overall industry decline in the school software business and a planned phase out of Gamco's sales of non-proprietary products. The most important factors behind the industry decline in school software sales were increased interest in and expenditures for equipment and access to the Internet, general confusion regarding the future of Apple's Macintosh computers, and delayed funding due to the spring federal budget impasse. Gamco was also negatively affected by increased interest in newer CD-ROM and Windows products in 1996, two areas where Gamco had no product offerings, but which the Company will introduce in 1997. Natural resource revenues increased slightly due to more mining activity, which increased royalty payments earned by Siboney Coal. Future royalty payments are dependent on the level of mining operations by the Company's lessee and are outside the control of the Company.
Cost of product sales from the educational products segment decreased $67,160 to $455,895. This decrease was due to the decline in sales. Gross profit, as a percentage of sales, decreased from 77.2% to 76.4%, due primarily to the impact of royalty advances paid by the Company for newly licensed products.
Selling, general and administrative expenses increased $224,063 to $2,198,419, primarily due to approximately $116,000 expended for the development of an inside sales department at Gamco and approximately $119,000 of increased administrative salaries associated with the expansion of the Siboney Learning Group Division.
The Company's loss from operations for 1996, for the reasons described above, was $640,046, which was offset in part by a gain from the sale of assets and other income in connection with the sale of discontinued print shop operations, resulting in a net loss for the year of $315,276. This compared to a loss from operations of $137,919 and net loss of $164,773 in 1995.
Liquidity And Capital Resources
The Company considers its cash position and line of credit availability adequate to fund its anticipated operations and capital expenditures based on anticipated continued improvements in the level and nature of educational products revenues and continued control of expenses. If such increased revenues and reduced losses or profitable operations do not occur, the Company's available line of credit could become subject to restriction, including the effect of the covenant therein to maintain the Company's net worth at not less than $750,000. Under such circumstances, the Company could be forced to reduce its operations.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two digits, rather than four, to define the applicable year. As a result, when moving from the year 1999 to 2000, without adjustment, such programs will assume the year 1900 rather than 2000, with various potential adverse effects. Consequently, most computer programs must be adjusted to assure that they will go forward and not backward.
Since 1996, the Company has been in the process of converting its educational products from old software programs to new programs or designing and introducing new programs. In doing so, it has taken the Year 2000 Issue into consideration. Therefore, the Company does not believe that the Year 2000 Issue will pose significant problems for the Company's products.
With respect to the Company's operating and accounting computer systems, the Company is presently converting its systems to new software systems. As a result, the Company also does not believe that the Year 2000 Issue will pose significant operating or accounting problems for the Company.
Item 8. Financial Statements And Supplementary Data
The financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14.
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
Not applicable.
PART III
Item 10. Directors And Executive Officers Of The Registrant
The information contained under the caption "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 1998 annual meeting of stockholders, which involves the election of directors, is incorporated herein by this reference.
Item 11. Executive Compensation
The information contained under the captions "Executive Compensation" and "Information As To Stock Options" in the Company's definitive proxy statement to be filed under Regulation 14A for the Company's 1998 annual meeting of stockholders, which involves the election of directors is incorporated herein by this reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The information regarding security ownership contained under the caption "Information Concerning Nominees" in the Company's definitive proxy statement to be filed under Regulation 14A for the Company's 1998 annual meeting of stockholders, which involves the election of directors, is incorporated herein by this reference.
Item 13. Certain Relationships And Related Transactions
The information contained under the caption "Transactions With Issuer And Others" in the Company's definitive proxy statement to be filed under Regulation 14A for the Company's 1998 annual meeting of stockholders, which involves the election of directors, is incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedule And Reports On Form 8-K PAGE
(a) (1) Financial Statements:
Report Of Independent Certified Public Accountants................ 16
Consolidated Balance Sheet At December 31, 1997 And 1996.......... 17
Consolidated Statement Of Stockholders' Equity For The Years Ended December 31, 1997, 1996 And 1995............................ 18
Consolidated Statement Of Operations For The Years Ended December 31, 1997, 1996 And 1995.................................. 19
Consolidated Statement Of Cash Flows For The Years Ended December 31, 1997, 1996 And 1995.................................. 20
Notes To Consolidated Financial Statements........................ 21-32
(a) (2) Financial Statement Schedule:
V Valuation And Qualifying Accounts -- 1997, 1996 And 1995........ 33
All other schedules and financial statements of the Registrant only are omitted because they are not required or the information is included in the financial statements or notes thereto.
(a) (3) Exhibit Index............................................... 35
Management Contracts and Compensatory Plans or arrangements required to be filed as Exhibits: None
(b) Reports on Form 8-K No Reports on Form 8-K were filed during the fourth quarter of 1997.
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, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997, and the information as of December 31, 1997, 1996 and 1995 and for the years then ended included in the supporting schedule which is listed in the Index to Consolidated Financial Statements. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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, 1996 and 1995 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles, and the supporting schedule presents fairly the information required to be set forth therein.
As described in Note 15 to the financial statements, the Company adopted Statement of Position 93-7, "Reporting on Advertising Costs".
/s/ Rubin, Brown, Gornstein & Co. LLP St. Louis, Missouri RUBIN, BROWN, GORNSTEIN & CO. LLP February 13, 1998
SIBONEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Assets December 31, ------------------------------- 1997 1996 ---- ---- Current Assets
Cash and cash equivalents $ 289,752 $ 775,830
Investment (Note 3) 27,500 --
Accounts receivable (Notes 4 and 8) 206,682 152,437
Inventories (Notes 5 and 8) 169,274 174,939
Prepaid expenses and deposits 106,646 160,033 ---------- ------------ Total Current Assets 799,854 1,263,239
Property, Plant And Equipment (Notes 6 And 8) 133,989 172,553
Investments In Natural Resources (Note 7) 5,101 5,101 ---------- ------------ $ 938,944 $ 1,440,893 =========== ===========
Liabilities And Stockholders' Equity
Current Liabilities
Accounts payable $ 76,634 75,280
Accrued expenses 111,683 91,191 ----------- ----------- Total Current Liabilities 188,317 166,471 ----------- -----------
Stockholders' Equity
Common stock: Authorized 20,000,000 shares at $0.10 par value; issued and outstanding 16,518,344 in 1997, and 15,766,694 in 1996 1,651,835 1,576,670
Unrealized holding gain on investment 27,500 --
Additional paid-in capital (Note 9) 300 13,028
Retained earnings (deficit) (Note 9) (929,008) (315,276) --------- --------- Total Stockholders' Equity 750,627 1,274,422 --------- --------- $ 938,944 $ 1,440,893 =========== ===========
See the accompanying notes to consolidated financial statements.
SIBONEY CORPORATION AND SUBSIDIARIES
See the accompanying notes to consolidated financial statements
SIBONEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
See the accompanying notes to consolidated financial statements
SIBONEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
See the accompanying notes to consolidated financial statements
SIBONEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 And 1995
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.
Cash And Cash Equivalents
The Company considers all investment instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount approximates fair value because of the short maturity of those instruments.
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
Raw materials inventory is valued at the lower of cost (first-in, first-out method) or market. Finished goods inventory is valued at the lower of cost or market of raw materials and an allowance for overhead, not in excess of market.
Property, Plant And Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation computed principally using the straight-line method. Assets are depreciated over periods ranging from two to thirty-five years.
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.
SIBONEY CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
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.
Right Of Return
The Company maintained a 30 day preview return policy, under which goods made available on preview are invoiced when shipped and cancelled if goods are returned. The Company also maintains a general return policy under which most products may be returned within 12 months 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 many non-preview product returns, and therefore, Company management is of the opinion that no allowance for sales returns is necessary.
Natural Resources
The investments in coal, oil and gas leases are carried at cost, less accumulated depreciation and depletion. Depreciation was provided using the straight-line method over three years, while cost depletion was provided primarily on the units-of-production method for producing properties.
Research And Development
Research and development costs are expensed in the year incurred and totalled approximately $440,000, $412,000, and $391,000 in 1997, 1996 and 1995, respectively.
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. No allowance is deemed necessary.
Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the Statement 128 requirements.
Stock Based Compensation
The Company adopted Financial Accounting Standards No. 123 (FAS 123) "Accounting for Stock Based Compensation" in 1997. As permitted by FAS 123, the Company continued to measure compensation expense for its stock-based employee compensation plans using the intrinsic method prescribed by APB No. 25, "Accounting for Stock Issued to Employees" and has provided in Note 14 pro forma disclosures of the effect on net income (loss) and earnings per share as if the fair value-based method prescribed by FAS 123 had been applied in measuring compensation expense.
Revenues From Major Products And Major Customer
Revenue from proprietary educational software and other related products accounted for 95%, 83% and 79% of Siboney Learning Group/Gamco's revenue in 1997, 1996 and 1995, respectively. In addition, 10%, 12% and 13% of Siboney Learning Group/Gamco's revenues were generated from catalog sales through one dealer in 1997, 1996 and 1995, respectively.
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 to operating losses and tax credits that are available to offset future taxable income. The Company accounts for investment tax credits using the flow-through method and thus reduces income tax expense in the year the related assets are placed in service or qualified progress payments are made.
2. Operations
The Company's continuing operations consist of the following two segments:
1) The publishing and distribution of educational software products through its Siboney Learning Group Division and Gamco Industries, Inc. ("Gamco"), 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.
2) The holding of interests in certain natural resources, including coal, oil and gas, through several subsidiaries. (See Note 7.)
Segment information which highlights the relative importance of each line of business is presented in Note 13 to the consolidated financial statements.
3. Investment
In accordance with Statement of Financial Standards No 115, investment is classified as available for sale and is carried at fair value with the net unrealized gain reflected as a component of stockholders' equity until realized. The investment listed was the result of a settlement in a bankruptcy, where the Company had previously expensed the amounts as a bad debt; therefore the investment is carried at no cost. The stock received in the settlement had a fair market value at December 31, 1997 of $27,500.
4. Accounts Receivable
Accounts receivable consist of:
1997 1996 ---- ---- Accounts receivable $ 256,513 $ 202,140
Less: Allowance for doubtful accounts 49,831 49,703 --------- --------- $ 206,682 $ 152,437 ========= =========
Accounts receivable are pledged as collateral for notes payable (see Note 8).
5. Inventories
Inventories are summarized as follows:
1997 1996 ---- ---- Raw materials $ 104,562 $ 135,710
Finished goods 64,713 39,229 --------- --------- $ 169,275 $ 174,939 ========= =========
Inventories are pledged as collateral for notes payable (see Note 8).
Inventories are net of reserve for obsolescence of $22,441 and $66,619 in 1997 and 1996, respectively.
6. Property, Plant And Equipment
Property, plant and equipment consist of: 1997 1996 ---- ---- Land and improvements $ 23,997 $ 23,997
Buildings and improvements 163,397 157,417
Machinery and equipment 172,877 172,877
Office equipment, furniture and fixtures 283,904 270,204 ---------- --------- 644,175 624,495
Less: Accumulated depreciation 510,186 451,942 ---------- --------- $ 133,989 $ 172,553 ========= =========
Depreciation charged against income amounted to $58,244 in 1997, $117,651 in 1996 and $130,202 in 1995.
The buildings and certain equipment are pledged as collateral for notes payable (see Note 8).
The building and equipment used by Gamco's print shop were sold in 1996.
7. Investments In Natural Resources
Investments in natural resources consist of: 1997 1996 ---- ---- Canadian exploratory permits $ 5,101 $ 5,101
Oil and Gas leases - Texas 145,821 145,821 ---------- ---------- 150,922 150,922 Less: Accumulated depreciation and cost depletion 145,821 145,821 ---------- ---------- $ 5,101 $ 5,101 ========== ==========
Coal Properties - Kentucky
Siboney Coal Company, Inc., a wholly-owned subsidiary, collects royalties under a twenty-five year lease with Mountaineer Land Company entered into in May 1987, under which Siboney Coal Company, the lessor, receives minimum annual payments of $30,000 plus royalties per ton of coal mined. The lessee can cancel the lease upon thirty days' prior written notification. The Company earned $60,415 under the lease in 1997, $78,033 in 1996 and $70,596 in 1995. Future royalty revenues from the coal lease are dependent on third party mining operations and at certain times have been, and may in the future be, discontinued.
Oil And Gas Leases In Texas
Siboney Resources - Texas, Inc., a wholly-owned subsidiary has royalty interests in certain oil and gas leases in Texas. Revenues from such leases are not a material factor in the Company's consolidated revenues.
Canadian Exploratory Permits
Axel Heiberg Oil Company ("Axel"), a wholly-owned subsidiary of the Company, holds a 2.28% working interest in oil and gas property rights on 1,843 acres in the Canadian Arctic Islands. Due to the high cost of exploration and recovery of oil and gas from this region, it is not anticipated that revenues will be generated in the foreseeable future.
Supplemental Oil And Gas Disclosures
Revenue and income after tax from oil and gas related operations are not significant to the Company. The present value of estimated future net oil and gas reserves is not presently determinable.
8. Notes Payable
The Company has a revolving line of credit agreement with a bank which provides funds based on 75% of eligible receivables, as defined by the agreement, with a maximum of $500,000. The outstanding debt is due on demand, and if no demand is made, then due on June 1, 1998. The agreement, secured by accounts receivable, equipment and inventory, requires monthly interest payments on the outstanding balance at 0.75% above the lender's prime rate. As of December 31, 1997 and 1996, no loans 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 $750,000.
The weighted average interest rate was 9.25%, 8.90% and 10.33% for the years ended December 31, 1997, 1996 and 1995, respectively.
9. Equity Transfer
Under Maryland General Corporation law, a Company may apply any part of its additional paid-in capital for the reduction or elimination of a retained deficit. The Board of Directors of the Company unanimously determined, by resolution, to eliminate the retained deficit reflected in the Stockholders' Equity section of the consolidated balance sheet at December 31, 1995 in the amount of $6,124,875.
10. 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 3-1/2% 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 $24,600 in 1997, $26,246 in 1996 and $35,029 in 1995.
11. Income Taxes
There is no provision for federal income taxes reflected in the financial statements due to the availability of net operating loss carryovers.
The net deferred tax asset includes the following components:
1997 1996 1995 ---- ---- ---- Deferred tax asset $ 1,765,000 $ 1,555,000 $ 1,603,000
Deferred tax asset valuation allowance (1,765,000) (1,555,000) (1,603,000) ------------ ------------ ----------- $ -- $ -- $ -- ============ ============ ============
State income taxes are shown as part of selling, general and administrative expenses.
The Company has net operating loss carryovers for federal income tax purposes of approximately $5,880,000 at December 31, 1997 available to reduce future taxable income, if any. The majority of the carryover expires at December 31, 2001 through December 31, 2010. Under the Tax Reform Act of 1986, the amount available for carryover could be reduced upon a substantial change in ownership.
In addition, the Company has investment tax credit carryovers of approximately $53,000 available to reduce future income taxes, if any, through December 31, 2000. This amount also creates a deferred tax asset of a like amount, which is offset completely by a valuation allowance.
12. Supplemental Cash Flow Information
The Company had no significant noncash investing or financing activities for the years ended December 31, 1997, 1996 and 1995.
13. Segment Information
The Company's business is primarily comprised of two industry segments: educational products and natural resources. The educational products segment principally publishes and distributes educational software to schools and school districts. The natural resources segment principally receives royalties from its properties.
The Company's consolidated results of operations by business segment are as follows: (In Thousands) ------------------------------------------- 1997 1996 1995 ---- ---- ---- Net Sales
Educational products $ 1,893 $ 1,933 $ 2,284
Natural resources 64 81 75 ------- ------- ------- Continuing operations $ 1,957 $ 2,014 $ 2,359 ======= ======= =======
Operating Income (Loss)
Educational products $ (391) $ (491) $ 52
Natural resources 54 69 69
General corporate (254) (218) (259) ------- ------ ------- Continuing operations $ (591) $ (640) $ (138) ======= ======= ======= Identifiable Assets
Educational products $ 790 $ 1,309 $ 1,584
Natural resources 109 116 81
General corporate 40 16 31 ------- ------- ------- Continuing operations $ 939 $ 1,441 $ 1,696 ======= ======= ======= Capital Expenditures
Educational products $ 20 $ 34 $ 71
Natural resources -- -- --
General corporate -- 6 2 ------- ------- ------- Continuing operations $ 20 $ 40 $ 73 ======= ======= ======= Depreciation, Depletion And Amortization
Educational products $ 56 $ 116 $ 129
Natural resources -- -- --
General corporate 2 2 1 ------- ------- ------- Continuing operations $ 58 $ 118 $ 130 ======= ======= ========
14. Stock Option Plans
In 1992, the Company granted options to purchase an aggregate of 1,025,000 shares of common stock to the directors of the Company. In addition, the Company granted options to purchase 175,000 shares to employees of Gamco Industries. All previously issued options either expired or were canceled prior to the issuance of the 1992 options. In 1995, the Company granted options to purchase an aggregate of 200,000 shares of common stock to a newly hired executive.
In 1997 the Company approved an incentive stock option plan for employees. Under the plan, the board, at its discretion, may authorize up to 800,000 shares. During 1997 the Company authorized 310,000 incentive stock options to employees. These options expire in 2002 or upon cessation of employment, which ever occurs earliest.
The Company applies APB Opinion No. 25 and related interpretations in accounting for the Option Plans. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant dates for awards under the Plan, consistent with the alternative method set forth under SFAS 123, the Company's net loss and net loss per common and equivalent share would have been increased. The pro forma amounts are indicated below:
1997 1996 1995 ---- ---- ---- Net Loss
As reported $ (571,688) $ (315,276) $ (164,773)
Pro forma (597,240) (342,522) (189,139)
Net Loss Per Common Share
As reported $ (0.0351) $ (0.0201) $ (0.0103)
Pro forma $ (0.0368) $ (0.0219) $ (0.0122)
The weighted-average fair value of options at date of grant for options granted during 1997, 1996 and 1995 was $0.062, $0.027 and $0.022 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.
1997 1996 1995 ---- ---- ---- Expected life 3.0 1.7 2.0
Interest rate 8.5% 8.5% 8.5%
Volatility 43.22% 83.03% 71.56%
Dividend Yield -- -- --
A summary of stock option activity for 1997, 1996 and 1995 is as follows:
Weighted Average Number Price Per Exercise Of Shares Share Price --------- --------------- -------- Balance - December 31, 1994 1,000,000 $0.0275 - $0.05 $0.0281
Granted 200,000 $0.165 $0.165
Exercised -- -- --
Forfeited/Expired -- -- -- --------- ---------------- ------- Balance - December 31, 1995 1,200,000 $0.0275 - $0.165 $0.0509
Granted -- -- --
Exercised (200,000) $0.0275 $0.0275
Forfeited/Expired -- -- -- --------- ---------------- ------- Balance - December 31, 1996 1,000,000 $0.0275 - $0.165 $0.0556
Granted 310,000 $0.16 $0.16
Exercised (765,000) $0.0275 - $0.16 $0.0291
Forfeited/Expired (135,000) $0.0275 - $0.16 $0.0207 --------- ---------------- ------- Balance - December 31, 1997 410,000 $0.16 - $0.165 $0.1624 ========= ================ =======
Outstanding and exercisable stock options at December 31, 1997 consist of the following:
Option Year Year Exercise Granted Expiring Price 1997 ------- -------- -------- ---- 1997 2002 .16 210,000 1995 2000 0.165 200,000 ------- 410,000 ===========
15. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share "(EPS)" is computed by dividing net income (loss) by the weighted average number of common shares outstanding of 16,249,565 in 1997, 15,613,269 in 1996 and 15,566,694 in 1995.
For 1995, 1996 and 1997, options on shares of common stock were not included in computing diluted EPS because their effect was antidilutive in each year.
16. Advertising - Change In Accounting Principle
During 1995, in accordance with a required change in generally accepted accounting principles, the Company changed its accounting method for advertising costs to comply with the Statement of Position 93-7 "Reporting on Advertising Costs". The cumulative effect on prior years of this change in accounting principle is a one-time charge to income of $66,368. Financial statements for prior years have not been restated.
The Company expenses the costs of advertising the first time the advertising takes place 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, 1997, $84,795 of advertising costs were capitalized. Advertising expense amounted to $433,640 in 1997, $531,849 in 1996 and $547,850 in 1995.
17. Commitments
In September 1996, the Company entered into a licensing agreement with an educational software publisher. The agreement provides for the Company to pay minimum royalties of $50,000 in 1996 and $100,000 in 1997 and 1998 and $50,000 in 1999. Subsequent to 1999, the agreement is renewable annually at minimum royalties of $50,000 per year.
SIGNATURES
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.
Siboney Corporation
Date: 3-26-98 BY: /s/ Timothy J. Tegeler Timothy J. Tegeler President and Chief Executive and Financial Officer and Principal Accounting Officer
Date: 3-26-98 BY: /s/ Timothy J. Tegeler Timothy J. Tegeler, Director
Date: BY: Thomas G. Keeton, Director
Date: 3-27-98 BY: /s/ Rebecca M. Braddock Rebecca M. Braddock, Director
Date: 3-27-98 BY: /s/ Alan G. Johnson Alan G. Johnson, Director
Date: 3-30-98 BY: /s/ Ernest R. Marx Ernest R. Marx, Director
EXHIBIT INDEX
Exhibit Number Description Page - -------------- ----------- ----
3(a) Amended and Restated Articles of Incorporation, filed as Exhibit 3(a) to the Company's 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.
4(a) Siboney Corporation 1997 Incentive Stock Option Plan, filed as Exhibit 4.1 to the Company's Form S-8 Registration Statement (Commission file no. 333-35247, 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 herewith.
10(b) Restated and Amended Coal Lease between the Company and Mountaineer Land Company dated May 15, 1987, filed herewith.
10(c) Software Distribution and License Agreement between the Company and Merit Audio Visual, Inc. dated September 4, 1996, filed herewith.
21 Subsidiaries of the Company, filed herewith.
23 Consent of Rubin, Brown, Gornstein & Co. LLP, independent auditors, filed herewith.
27 Financial Data Schedule (Filed in EDGAR version only)
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis sets forth certain factors which produced changes in the Company's results of operations during the three years ended December 31, 1997, and comments on the Company's financial position as of December 31, 1997.
Results Of Operations:
1997 in Comparison with 1996:
During 1997, the Company's consolidated revenues decreased 2.8% or $57,180 to $1,957,088. Revenues from the educational products segment decreased 2.1% or $40,907 to $1,892,551 and revenues from the natural resource
segment decreased 20.1% or $16,273 to $64,537. A substantial drop in sales of old products, including Apple II software (which declined from approximately $281,000 in 1996 to approximately $134,000 in 1997) and non-proprietary products (which declined from approximately $279,000 in 1996 to approximately $40,000 in 1997), was partially offset by sales of new and newly converted titles. The Company introduced its first Windows and CD-ROM titles during the second half of 1997. The Company also improved its new Orchard: Teacher's Choice Software by developing a universal management program that tracks student progress across all titles. Of $1,892,551 of educational products revenues in 1997, approximately $615,000 occurred as a result of sales of new products and product distribution strategies. This compared to new product sales of approximately $65,000 in 1996. The Company also continues to expand through licensing agreements. Natural resource revenue decreased due to less mining activity, from which Siboney Coal receives royalty payments. Future royalty payments are dependent on the level of mining operations by the Company's lessee and are outside the control of the Company.
Cost of product sales from the educational products segment decreased $136,054 to $319,841. Even though sales and cost of sales were down, gross profit percentage increased from 76.4% to 83.1%. The reasons for the increase in gross profit percentage were the implementation of management's plan to eliminate low margin non-proprietary products and the sale of higher priced product licenses.
Selling, general and administrative expenses remained relatively constant as compared to 1996.
The Company's loss from operations for 1997, primarily for the reasons above, was $590,816. In 1996, the Company reported a loss from operations of $640,046, which was offset in part by a gain from the sale of assets and other income in connection with the sale of discontinued print shop operations, resulting in a net loss for the year of $315,276.
1996 in Comparison with 1995:
During 1996, the Company's consolidated revenues decreased $345,224 to $2,014,268. Revenues from the educational products segment decreased $351,071 to $1,933,458 while revenues from the natural resources segment increased $5,847 to $80,810. Educational product revenues decreased due to an overall industry decline in the school software business and a planned phase out of Gamco's sales of non-proprietary products. The most important factors behind the industry decline in school software sales were increased interest in and expenditures for equipment and access to the Internet, general confusion regarding the future of Apple's Macintosh computers, and delayed funding due to the spring federal budget impasse. Gamco was also negatively affected by increased interest in newer CD-ROM and Windows products in 1996, two areas where Gamco had no product offerings, but which the Company will introduce in 1997. Natural resource revenues increased slightly due to more mining activity, which increased royalty payments earned by Siboney Coal. Future royalty payments are dependent on the level of mining operations by the Company's lessee and are outside the control of the Company.
Cost of product sales from the educational products segment decreased $67,160 to $455,895. This decrease was due to the decline in sales. Gross profit, as a percentage of sales, decreased from 77.2% to 76.4%, due primarily to the impact of royalty advances paid by the Company for newly licensed products.
Selling, general and administrative expenses increased $224,063 to $2,198,419, primarily due to approximately $116,000 expended for the development of an inside sales department at Gamco and approximately $119,000 of increased administrative salaries associated with the expansion of the Siboney Learning Group Division.
The Company's loss from operations for 1996, for the reasons described above, was $640,046, which was offset in part by a gain from the sale of assets and other income in connection with the sale of discontinued print shop operations, resulting in a net loss for the year of $315,276. This compared to a loss from operations of $137,919 and net loss of $164,773 in 1995.
Liquidity And Capital Resources
The Company considers its cash position and line of credit availability adequate to fund its anticipated operations and capital expenditures based on anticipated continued improvements in the level and nature of educational products revenues and continued control of expenses. If such increased revenues and reduced losses or profitable operations do not occur, the Company's available line of credit could become subject to restriction, including the effect of the covenant therein to maintain the Company's net worth at not less than $750,000. Under such circumstances, the Company could be forced to reduce its operations.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two digits, rather than four, to define the applicable year. As a result, when moving from the year 1999 to 2000, without adjustment, such programs will assume the year 1900 rather than 2000, with various potential adverse effects. Consequently, most computer programs must be adjusted to assure that they will go forward and not backward.
Since 1996, the Company has been in the process of converting its educational products from old software programs to new programs or designing and introducing new programs. In doing so, it has taken the Year 2000 Issue into consideration. Therefore, the Company does not believe that the Year 2000 Issue will pose significant problems for the Company's products.
With respect to the Company's operating and accounting computer systems, the Company is presently converting its systems to new software systems. As a result, the Company also does not believe that the Year 2000 Issue will pose significant operating or accounting problems for the Company.
Item 8.
Item 8. Financial Statements And Supplementary Data
The financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14.
Item 9.
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors And Executive Officers Of The Registrant
The information contained under the caption "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 1998 annual meeting of stockholders, which involves the election of directors, is incorporated herein by this reference.
Item 11.
Item 11. Executive Compensation
The information contained under the captions "Executive Compensation" and "Information As To Stock Options" in the Company's definitive proxy statement to be filed under Regulation 14A for the Company's 1998 annual meeting of stockholders, which involves the election of directors is incorporated herein by this reference.
Item 12.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The information regarding security ownership contained under the caption "Information Concerning Nominees" in the Company's definitive proxy statement to be filed under Regulation 14A for the Company's 1998 annual meeting of stockholders, which involves the election of directors, is incorporated herein by this reference.
Item 13.
Item 13. Certain Relationships And Related Transactions
The information contained under the caption "Transactions With Issuer And Others" in the Company's definitive proxy statement to be filed under Regulation 14A for the Company's 1998 annual meeting of stockholders, which involves the election of directors, is incorporated herein by this reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Financial Statement Schedule And Reports On Form 8-K PAGE
(a) (1) Financial Statements:
Report Of Independent Certified Public Accountants................ 16
Consolidated Balance Sheet At December 31, 1997 And 1996.......... 17
Consolidated Statement Of Stockholders' Equity For The Years Ended December 31, 1997, 1996 And 1995............................ 18
Consolidated Statement Of Operations For The Years Ended December 31, 1997, 1996 And 1995.................................. 19
Consolidated Statement Of Cash Flows For The Years Ended December 31, 1997, 1996 And 1995.................................. 20
Notes To Consolidated Financial Statements........................ 21-32
(a) (2) Financial Statement Schedule:
V Valuation And Qualifying Accounts -- 1997, 1996 And 1995........ 33
All other schedules and financial statements of the Registrant only are omitted because they are not required or the information is included in the financial statements or notes thereto.
(a) (3) Exhibit Index............................................... 35
Management Contracts and Compensatory Plans or arrangements required to be filed as Exhibits: None
(b) Reports on Form 8-K No Reports on Form 8-K were filed during the fourth quarter of 1997.
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, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997, and the information as of December 31, 1997, 1996 and 1995 and for the years then ended included in the supporting schedule which is listed in the Index to Consolidated Financial Statements. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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, 1996 and 1995 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles, and the supporting schedule presents fairly the information required to be set forth therein.
As described in Note 15 to the financial statements, the Company adopted Statement of Position 93-7, "Reporting on Advertising Costs".
/s/ Rubin, Brown, Gornstein & Co. LLP St. Louis, Missouri RUBIN, BROWN, GORNSTEIN & CO. LLP February 13, 1998
SIBONEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Assets December 31, ------------------------------- 1997 1996 ---- ---- Current Assets
Cash and cash equivalents $ 289,752 $ 775,830
Investment (Note 3) 27,500 --
Accounts receivable (Notes 4 and 8) 206,682 152,437
Inventories (Notes 5 and 8) 169,274 174,939
Prepaid expenses and deposits 106,646 160,033 ---------- ------------ Total Current Assets 799,854 1,263,239
Property, Plant And Equipment (Notes 6 And 8) 133,989 172,553
Investments In Natural Resources (Note 7) 5,101 5,101 ---------- ------------ $ 938,944 $ 1,440,893 =========== ===========
Liabilities And Stockholders' Equity
Current Liabilities
Accounts payable $ 76,634 75,280
Accrued expenses 111,683 91,191 ----------- ----------- Total Current Liabilities 188,317 166,471 ----------- -----------
Stockholders' Equity
Common stock: Authorized 20,000,000 shares at $0.10 par value; issued and outstanding 16,518,344 in 1997, and 15,766,694 in 1996 1,651,835 1,576,670
Unrealized holding gain on investment 27,500 --
Additional paid-in capital (Note 9) 300 13,028
Retained earnings (deficit) (Note 9) (929,008) (315,276) --------- --------- Total Stockholders' Equity 750,627 1,274,422 --------- --------- $ 938,944 $ 1,440,893 =========== ===========
See the accompanying notes to consolidated financial statements.
SIBONEY CORPORATION AND SUBSIDIARIES
See the accompanying notes to consolidated financial statements
SIBONEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
See the accompanying notes to consolidated financial statements
SIBONEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
See the accompanying notes to consolidated financial statements
SIBONEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 And 1995
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.
Cash And Cash Equivalents
The Company considers all investment instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount approximates fair value because of the short maturity of those instruments.
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
Raw materials inventory is valued at the lower of cost (first-in, first-out method) or market. Finished goods inventory is valued at the lower of cost or market of raw materials and an allowance for overhead, not in excess of market.
Property, Plant And Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation computed principally using the straight-line method. Assets are depreciated over periods ranging from two to thirty-five years.
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.
SIBONEY CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
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.
Right Of Return
The Company maintained a 30 day preview return policy, under which goods made available on preview are invoiced when shipped and cancelled if goods are returned. The Company also maintains a general return policy under which most products may be returned within 12 months 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 many non-preview product returns, and therefore, Company management is of the opinion that no allowance for sales returns is necessary.
Natural Resources
The investments in coal, oil and gas leases are carried at cost, less accumulated depreciation and depletion. Depreciation was provided using the straight-line method over three years, while cost depletion was provided primarily on the units-of-production method for producing properties.
Research And Development
Research and development costs are expensed in the year incurred and totalled approximately $440,000, $412,000, and $391,000 in 1997, 1996 and 1995, respectively.
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. No allowance is deemed necessary.
Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the Statement 128 requirements.
Stock Based Compensation
The Company adopted Financial Accounting Standards No. 123 (FAS 123) "Accounting for Stock Based Compensation" in 1997. As permitted by FAS 123, the Company continued to measure compensation expense for its stock-based employee compensation plans using the intrinsic method prescribed by APB No. 25, "Accounting for Stock Issued to Employees" and has provided in Note 14 pro forma disclosures of the effect on net income (loss) and earnings per share as if the fair value-based method prescribed by FAS 123 had been applied in measuring compensation expense.
Revenues From Major Products And Major Customer
Revenue from proprietary educational software and other related products accounted for 95%, 83% and 79% of Siboney Learning Group/Gamco's revenue in 1997, 1996 and 1995, respectively. In addition, 10%, 12% and 13% of Siboney Learning Group/Gamco's revenues were generated from catalog sales through one dealer in 1997, 1996 and 1995, respectively.
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 to operating losses and tax credits that are available to offset future taxable income. The Company accounts for investment tax credits using the flow-through method and thus reduces income tax expense in the year the related assets are placed in service or qualified progress payments are made.
2. Operations
The Company's continuing operations consist of the following two segments:
1) The publishing and distribution of educational software products through its Siboney Learning Group Division and Gamco Industries, Inc. ("Gamco"), 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.
2) The holding of interests in certain natural resources, including coal, oil and gas, through several subsidiaries. (See Note 7.)
Segment information which highlights the relative importance of each line of business is presented in Note 13 to the consolidated financial statements.
3. Investment
In accordance with Statement of Financial Standards No 115, investment is classified as available for sale and is carried at fair value with the net unrealized gain reflected as a component of stockholders' equity until realized. The investment listed was the result of a settlement in a bankruptcy, where the Company had previously expensed the amounts as a bad debt; therefore the investment is carried at no cost. The stock received in the settlement had a fair market value at December 31, 1997 of $27,500.
4. Accounts Receivable
Accounts receivable consist of:
1997 1996 ---- ---- Accounts receivable $ 256,513 $ 202,140
Less: Allowance for doubtful accounts 49,831 49,703 --------- --------- $ 206,682 $ 152,437 ========= =========
Accounts receivable are pledged as collateral for notes payable (see Note 8).
5. Inventories
Inventories are summarized as follows:
1997 1996 ---- ---- Raw materials $ 104,562 $ 135,710
Finished goods 64,713 39,229 --------- --------- $ 169,275 $ 174,939 ========= =========
Inventories are pledged as collateral for notes payable (see Note 8).
Inventories are net of reserve for obsolescence of $22,441 and $66,619 in 1997 and 1996, respectively.
6. Property, Plant And Equipment
Property, plant and equipment consist of: 1997 1996 ---- ---- Land and improvements $ 23,997 $ 23,997
Buildings and improvements 163,397 157,417
Machinery and equipment 172,877 172,877
Office equipment, furniture and fixtures 283,904 270,204 ---------- --------- 644,175 624,495
Less: Accumulated depreciation 510,186 451,942 ---------- --------- $ 133,989 $ 172,553 ========= =========
Depreciation charged against income amounted to $58,244 in 1997, $117,651 in 1996 and $130,202 in 1995.
The buildings and certain equipment are pledged as collateral for notes payable (see Note 8).
The building and equipment used by Gamco's print shop were sold in 1996.
7. Investments In Natural Resources
Investments in natural resources consist of: 1997 1996 ---- ---- Canadian exploratory permits $ 5,101 $ 5,101
Oil and Gas leases - Texas 145,821 145,821 ---------- ---------- 150,922 150,922 Less: Accumulated depreciation and cost depletion 145,821 145,821 ---------- ---------- $ 5,101 $ 5,101 ========== ==========
Coal Properties - Kentucky
Siboney Coal Company, Inc., a wholly-owned subsidiary, collects royalties under a twenty-five year lease with Mountaineer Land Company entered into in May 1987, under which Siboney Coal Company, the lessor, receives minimum annual payments of $30,000 plus royalties per ton of coal mined. The lessee can cancel the lease upon thirty days' prior written notification. The Company earned $60,415 under the lease in 1997, $78,033 in 1996 and $70,596 in 1995. Future royalty revenues from the coal lease are dependent on third party mining operations and at certain times have been, and may in the future be, discontinued.
Oil And Gas Leases In Texas
Siboney Resources - Texas, Inc., a wholly-owned subsidiary has royalty interests in certain oil and gas leases in Texas. Revenues from such leases are not a material factor in the Company's consolidated revenues.
Canadian Exploratory Permits
Axel Heiberg Oil Company ("Axel"), a wholly-owned subsidiary of the Company, holds a 2.28% working interest in oil and gas property rights on 1,843 acres in the Canadian Arctic Islands. Due to the high cost of exploration and recovery of oil and gas from this region, it is not anticipated that revenues will be generated in the foreseeable future.
Supplemental Oil And Gas Disclosures
Revenue and income after tax from oil and gas related operations are not significant to the Company. The present value of estimated future net oil and gas reserves is not presently determinable.
8. Notes Payable
The Company has a revolving line of credit agreement with a bank which provides funds based on 75% of eligible receivables, as defined by the agreement, with a maximum of $500,000. The outstanding debt is due on demand, and if no demand is made, then due on June 1, 1998. The agreement, secured by accounts receivable, equipment and inventory, requires monthly interest payments on the outstanding balance at 0.75% above the lender's prime rate. As of December 31, 1997 and 1996, no loans 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 $750,000.
The weighted average interest rate was 9.25%, 8.90% and 10.33% for the years ended December 31, 1997, 1996 and 1995, respectively.
9. Equity Transfer
Under Maryland General Corporation law, a Company may apply any part of its additional paid-in capital for the reduction or elimination of a retained deficit. The Board of Directors of the Company unanimously determined, by resolution, to eliminate the retained deficit reflected in the Stockholders' Equity section of the consolidated balance sheet at December 31, 1995 in the amount of $6,124,875.
10. 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 3-1/2% 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 $24,600 in 1997, $26,246 in 1996 and $35,029 in 1995.
11. Income Taxes
There is no provision for federal income taxes reflected in the financial statements due to the availability of net operating loss carryovers.
The net deferred tax asset includes the following components:
1997 1996 1995 ---- ---- ---- Deferred tax asset $ 1,765,000 $ 1,555,000 $ 1,603,000
Deferred tax asset valuation allowance (1,765,000) (1,555,000) (1,603,000) ------------ ------------ ----------- $ -- $ -- $ -- ============ ============ ============
State income taxes are shown as part of selling, general and administrative expenses.
The Company has net operating loss carryovers for federal income tax purposes of approximately $5,880,000 at December 31, 1997 available to reduce future taxable income, if any. The majority of the carryover expires at December 31, 2001 through December 31, 2010. Under the Tax Reform Act of 1986, the amount available for carryover could be reduced upon a substantial change in ownership.
In addition, the Company has investment tax credit carryovers of approximately $53,000 available to reduce future income taxes, if any, through December 31, 2000. This amount also creates a deferred tax asset of a like amount, which is offset completely by a valuation allowance.
12. Supplemental Cash Flow Information
The Company had no significant noncash investing or financing activities for the years ended December 31, 1997, 1996 and 1995.
13. Segment Information
The Company's business is primarily comprised of two industry segments: educational products and natural resources. The educational products segment principally publishes and distributes educational software to schools and school districts. The natural resources segment principally receives royalties from its properties.
The Company's consolidated results of operations by business segment are as follows: (In Thousands) ------------------------------------------- 1997 1996 1995 ---- ---- ---- Net Sales
Educational products $ 1,893 $ 1,933 $ 2,284
Natural resources 64 81 75 ------- ------- ------- Continuing operations $ 1,957 $ 2,014 $ 2,359 ======= ======= =======
Operating Income (Loss)
Educational products $ (391) $ (491) $ 52
Natural resources 54 69 69
General corporate (254) (218) (259) ------- ------ ------- Continuing operations $ (591) $ (640) $ (138) ======= ======= ======= Identifiable Assets
Educational products $ 790 $ 1,309 $ 1,584
Natural resources 109 116 81
General corporate 40 16 31 ------- ------- ------- Continuing operations $ 939 $ 1,441 $ 1,696 ======= ======= ======= Capital Expenditures
Educational products $ 20 $ 34 $ 71
Natural resources -- -- --
General corporate -- 6 2 ------- ------- ------- Continuing operations $ 20 $ 40 $ 73 ======= ======= ======= Depreciation, Depletion And Amortization
Educational products $ 56 $ 116 $ 129
Natural resources -- -- --
General corporate 2 2 1 ------- ------- ------- Continuing operations $ 58 $ 118 $ 130 ======= ======= ========
14. Stock Option Plans
In 1992, the Company granted options to purchase an aggregate of 1,025,000 shares of common stock to the directors of the Company. In addition, the Company granted options to purchase 175,000 shares to employees of Gamco Industries. All previously issued options either expired or were canceled prior to the issuance of the 1992 options. In 1995, the Company granted options to purchase an aggregate of 200,000 shares of common stock to a newly hired executive.
In 1997 the Company approved an incentive stock option plan for employees. Under the plan, the board, at its discretion, may authorize up to 800,000 shares. During 1997 the Company authorized 310,000 incentive stock options to employees. These options expire in 2002 or upon cessation of employment, which ever occurs earliest.
The Company applies APB Opinion No. 25 and related interpretations in accounting for the Option Plans. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant dates for awards under the Plan, consistent with the alternative method set forth under SFAS 123, the Company's net loss and net loss per common and equivalent share would have been increased. The pro forma amounts are indicated below:
1997 1996 1995 ---- ---- ---- Net Loss
As reported $ (571,688) $ (315,276) $ (164,773)
Pro forma (597,240) (342,522) (189,139)
Net Loss Per Common Share
As reported $ (0.0351) $ (0.0201) $ (0.0103)
Pro forma $ (0.0368) $ (0.0219) $ (0.0122)
The weighted-average fair value of options at date of grant for options granted during 1997, 1996 and 1995 was $0.062, $0.027 and $0.022 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.
1997 1996 1995 ---- ---- ---- Expected life 3.0 1.7 2.0
Interest rate 8.5% 8.5% 8.5%
Volatility 43.22% 83.03% 71.56%
Dividend Yield -- -- --
A summary of stock option activity for 1997, 1996 and 1995 is as follows:
Weighted Average Number Price Per Exercise Of Shares Share Price --------- --------------- -------- Balance - December 31, 1994 1,000,000 $0.0275 - $0.05 $0.0281
Granted 200,000 $0.165 $0.165
Exercised -- -- --
Forfeited/Expired -- -- -- --------- ---------------- ------- Balance - December 31, 1995 1,200,000 $0.0275 - $0.165 $0.0509
Granted -- -- --
Exercised (200,000) $0.0275 $0.0275
Forfeited/Expired -- -- -- --------- ---------------- ------- Balance - December 31, 1996 1,000,000 $0.0275 - $0.165 $0.0556
Granted 310,000 $0.16 $0.16
Exercised (765,000) $0.0275 - $0.16 $0.0291
Forfeited/Expired (135,000) $0.0275 - $0.16 $0.0207 --------- ---------------- ------- Balance - December 31, 1997 410,000 $0.16 - $0.165 $0.1624 ========= ================ =======
Outstanding and exercisable stock options at December 31, 1997 consist of the following:
Option Year Year Exercise Granted Expiring Price 1997 ------- -------- -------- ---- 1997 2002 .16 210,000 1995 2000 0.165 200,000 ------- 410,000 ===========
15. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share "(EPS)" is computed by dividing net income (loss) by the weighted average number of common shares outstanding of 16,249,565 in 1997, 15,613,269 in 1996 and 15,566,694 in 1995.
For 1995, 1996 and 1997, options on shares of common stock were not included in computing diluted EPS because their effect was antidilutive in each year.
16. Advertising - Change In Accounting Principle
During 1995, in accordance with a required change in generally accepted accounting principles, the Company changed its accounting method for advertising costs to comply with the Statement of Position 93-7 "Reporting on Advertising Costs". The cumulative effect on prior years of this change in accounting principle is a one-time charge to income of $66,368. Financial statements for prior years have not been restated.
The Company expenses the costs of advertising the first time the advertising takes place 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, 1997, $84,795 of advertising costs were capitalized. Advertising expense amounted to $433,640 in 1997, $531,849 in 1996 and $547,850 in 1995.
17. Commitments
In September 1996, the Company entered into a licensing agreement with an educational software publisher. The agreement provides for the Company to pay minimum royalties of $50,000 in 1996 and $100,000 in 1997 and 1998 and $50,000 in 1999. Subsequent to 1999, the agreement is renewable annually at minimum royalties of $50,000 per year.
SIGNATURES
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.
Siboney Corporation
Date: 3-26-98 BY: /s/ Timothy J. Tegeler Timothy J. Tegeler President and Chief Executive and Financial Officer and Principal Accounting Officer
Date: 3-26-98 BY: /s/ Timothy J. Tegeler Timothy J. Tegeler, Director
Date: BY: Thomas G. Keeton, Director
Date: 3-27-98 BY: /s/ Rebecca M. Braddock Rebecca M. Braddock, Director
Date: 3-27-98 BY: /s/ Alan G. Johnson Alan G. Johnson, Director
Date: 3-30-98 BY: /s/ Ernest R. Marx Ernest R. Marx, Director
EXHIBIT INDEX
Exhibit Number Description Page - -------------- ----------- ----
3(a) Amended and Restated Articles of Incorporation, filed as Exhibit 3(a) to the Company's 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.
4(a) Siboney Corporation 1997 Incentive Stock Option Plan, filed as Exhibit 4.1 to the Company's Form S-8 Registration Statement (Commission file no. 333-35247, 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 herewith.
10(b) Restated and Amended Coal Lease between the Company and Mountaineer Land Company dated May 15, 1987, filed herewith.
10(c) Software Distribution and License Agreement between the Company and Merit Audio Visual, Inc. dated September 4, 1996, filed herewith.
21 Subsidiaries of the Company, filed herewith.
23 Consent of Rubin, Brown, Gornstein & Co. LLP, independent auditors, filed herewith.
27 Financial Data Schedule (Filed in EDGAR version only)