10-Q 1 third02.txt SIBONEY CORPORATION FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 Commission file number: 1-3952 SIBONEY CORPORATION (Exact name of registrant as specified in its charter) MARYLAND 73-0629975 (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 325 NORTH KIRKWOOD ROAD, SUITE 300, ST. LOUIS, MO 63122 (Address of principal executive offices) (Zip Code) 314-822-3163 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Title of class of Number of shares outstanding common stock as of the date of this report ----------------- ----------------------------- COMMON STOCK PAR VALUE 16,796,704 $.10 PER SHARE INDEX PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet, September 30, 2002 and December 31, 2001 3 Condensed Consolidated Statement of Stockholders' Equity, September 30, 2002 and December 31, 2001 4 Condensed Consolidated Statement of Operations, Three Months and Nine Months Ended September 30, 2002 and September 30, 2001 5 Condensed Consolidated Statement of Cash Flows, Nine Months Ended September 30, 2002 and September 30, 2001 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 ITEM 4. CONTROLS AND PROCEDURES 14 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 SIGNATURES 15 CERTIFICATIONS 16 2 PART I - FINANCIAL INFORMATION ------------------------------ SIBONEY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS ------
DECEMBER 31, SEPTEMBER 30, 2001 (SEE 2002 NOTE BELOW) ------------- ------------ CURRENT ASSETS -------------- Cash $1,034,605 $ 378,234 Accounts receivable 1,021,123 1,342,262 Inventories 361,484 285,777 Prepaid expenses 150,525 159,159 Deferred tax asset 348,500 480,000 ---------- ---------- TOTAL CURRENT ASSETS 2,916,237 2,645,432 PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION ---------------------- OF $733,151 AT SEPTEMBER 30, 2002 AND $613,784 AT DECEMBER 31, 2001) 425,106 324,581 OTHER ASSETS (NOTE 3) 2,613,423 2,466,234 ---------- ---------- $5,954,766 $5,436,247 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES ------------------- Current portion of long-term debt $ 334,208 $ 391,572 Current portion of capitalized lease obligation 27,033 9,889 Accounts payable 106,707 221,921 Accrued expenses 494,742 493,912 ---------- ---------- TOTAL CURRENT LIABILITIES 962,690 1,117,294 ---------- ---------- LONG-TERM LIABILITIES --------------------- Long-term debt 265,095 509,786 Capitalized lease obligation 67,031 1,724 Deferred tax liability 306,600 72,200 ---------- ---------- TOTAL LONG-TERM LIABILITIES 638,726 583,710 ---------- ---------- STOCKHOLDERS' EQUITY -------------------- Common stock: Authorized 100,000,000 shares (20,000,000 at December 31, 2001) at $0.10 par value; issued and outstanding 16,796,704 at September 30, 2002 and 16,744,024 at December 31, 2001 1,679,671 1,674,403 Additional paid-in capital 18,908 14,896 Retained earnings 2,654,771 2,045,944 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 4,353,350 3,735,243 ---------- ---------- $5,954,766 $5,436,247 ========== ========== NOTE: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date and condensed. See accompanying notes to unaudited condensed consolidated financial statements.
3 SIBONEY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
COMMON STOCK ------------------------- ADDITIONAL TOTAL PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ---------------------------------------------------------------------- BALANCE - DECEMBER 31, 2001 16,744,024 $1,674,403 $14,896 $2,045,944 $3,735,243 ISSUANCE OF COMMON STOCK 52,680 5,268 4,012 -- 9,280 NET INCOME 608,827 608,827 ---------------------------------------------------------------------- BALANCE - SEPTEMBER 30, 2002 16,796,704 $1,679,671 $18,908 $2,654,771 $4,353,350 ====================================================================== See accompanying notes to unaudited condensed consolidated financial statements.
4 SIBONEY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- REVENUES $ 6,857,462 $ 6,370,795 $ 1,915,641 $ 1,951,063 COST OF PRODUCT SALES 1,531,426 1,044,799 464,728 434,117 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,314,050 3,974,002 1,373,152 1,482,095 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS 1,011,986 1,351,994 77,761 34,851 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest Expense (39,049) (66,555) (10,359) (14,838) Miscellaneous 1,790 1,282 186 (978) ----------- ----------- ----------- ----------- TOTAL OTHER EXPENSE (37,259) (65,273) (10,173) (15,816) ----------- ----------- ----------- ----------- PROVISION (CREDIT) FOR INCOME TAXES 365,900 -- (5,100) -- ----------- ----------- ----------- ----------- NET INCOME $ 608,827 $ 1,286,721 $ 72,688 $ 19,035 =========== =========== =========== =========== EARNINGS PER COMMON SHARE - BASIC $0.04 $0.08 $0.00 $0.00 =========== =========== =========== =========== EARNINGS PER COMMON SHARE - DILUTED $0.03 $0.07 $0.00 $0.00 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 16,781,251 16,683,274 16,792,139 16,707,719 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 17,500,454 17,552,569 17,401,030 17,711,086 =========== =========== =========== =========== See accompanying notes to unaudited condensed consolidated financial statements.
5 SIBONEY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2002 2001 ---- ---- CASH FLOWS FROM OPERATIONS -------------------------- Net income $ 608,827 $ 1,286,721 Adjustments to reconcile net income to net cash provided by continuing operations: Depreciation 119,366 98,025 Amortization 411,216 364,315 Deferred income tax 365,900 -- Change in assets and liabilities: (Increase) decrease in accounts receivable 321,139 (282,473) Increase in inventories (75,707) (107,358) (Increase) decrease in prepaid expenses & deposits 9,156 (44,534) Increase (decrease) in accounts payable and accrued expenses (114,382) 61,179 ---------- ----------- NET CASH PROVIDED BY OPERATIONS 1,645,515 1,375,875 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES ------------------------------------ Payments for equipment (219,892) (169,339) Payments for capitalized software development cost (528,527) (375,716) Payments for assets of unrelated entity (30,402) (1,133,809) ---------- ----------- NET CASH USED IN INVESTING ACTIVITIES (778,821) (1,678,864) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES ------------------------------------ Proceeds from issuance of common stock 9,280 13,237 Proceeds from long-term debt -- 725,000 Proceeds from leases incurred 97,978 -- Payments on capital leases (15,528) (17,781) Principal payments on long-term debt (302,053) (286,776) ---------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (210,323) 433,680 ---------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 656,371 130,691 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 378,234 626,554 ---------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $1,034,605 $ 757,245 ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 43,467 $ 73,246 See accompanying notes to unaudited condensed consolidated financial statements.
6 SIBONEY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheet as of September 30, 2002, the condensed consolidated statement of stockholders' equity for the nine month period ended September 30, 2002, the condensed consolidated statement of operations for the nine-month and the three-month periods ended September 30, 2002 and 2001 and the condensed consolidated statement of cash flows for the nine-month periods then ended have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only recurring adjustments) necessary to present fairly the financial position at September 30, 2002 and the results of operations for all of the periods reported have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the period ended September 30, 2002 are not necessarily indicative of the operating results for the full year. Accounting Changes Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. There was no impairment of goodwill upon adoption of SFAS 142. Net income and income per share for the nine months and three months ended September 30, 2001 adjusted to exclude amortization expense was as follows: 7
NINE MONTHS ENDED THREE MONTHS ENDED ----------------- ------------------ SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 ------------------ ------------------ NET INCOME: Net income as reported $1,286,721 $19,035 Goodwill amortization 145,432 58,568 ---------- ------- Adjusted net income $1,432,153 $77,603 BASIC AND DILUTED INCOME PER SHARE: Net income per share, basic, as reported $0.08 $0.00 Net income per share, diluted, as reported $0.07 $0.00 Goodwill amortization, basic $0.01 $0.00 Goodwill amortization, diluted $0.01 $0.00 Adjusted net income per share, basic $0.09 $0.00 Adjusted net income per share, diluted $0.08 $0.00
2. INVENTORIES Inventories consist of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 ------------------ ----------------- Raw materials $246,712 $196,512 Finished goods 114,773 89,265 -------- -------- $361,484 $285,777 ======== ========
3. OTHER ASSETS Other assets consist of:
SEPTEMBER 30, 2002 DECEMBER 31, 2001 ------------------ ----------------- Software development costs $2,193,647 $1,665,120 Goodwill 1,186,616 1,156,214 Covenants not to compete 300,000 300,000 Deposits 3,600 4,123 ---------- ---------- 3,683,863 3,125,457 Less: Accumulated Amortization 1,070,440 659,223 ---------- ---------- $2,613,423 $2,466,234 ========== ==========
8 The Company capitalizes costs associated with the development of computer software for sale. Costs are capitalized at the point the Company determines that it is technologically feasible to produce the software title. Such costs are amortized on a modified declining balance method over a period of four years. Goodwill represents the purchase price of an acquired company's assets in excess of the fair value of those net assets at the date of acquisition and, prior to January 1, 2002, was being amortized on a straight-line basis over five years. Covenants not to compete are being amortized on a straight-line basis over two years, which is the life of the covenant agreements. Amortization expense charged against earnings amounted to:
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Software development costs 311,216 127,216 105,808 60,699 Goodwill -- 145,432 -- 58,568 Covenants not to compete 100,000 91,667 25,000 37,500 -------- -------- -------- -------- $411,216 $364,315 $130,808 $156,767 ======== ======== ========= ========
9 SIBONEY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's principal subsidiary, Siboney Learning Group, Inc. ("SLG"), publishes and distributes educational software, primarily for schools. The Company has 52 full-time employees. The Company has served the educational market for more than 35 years. Since 1986, the Company's main business has been publishing educational software in reading, language arts, math, science and English as a Second Language for students and teachers in levels kindergarten through adult. The Company is best known for its software which is designed to motivate students to master key skills and keep track of student progress for teachers to review. The Company's growing portfolio of products now includes more than 170 active titles that focus on teaching basic skills and new concepts while meeting the different learning needs of all students through time-on-task instruction. Popular titles include Math Concepts, Phonics Mastery, Reading Concepts, Touchdown Math, Diascriptive Reading and Process Writing. Siboney Learning Group currently offers five distinct product categories which are developed, marketed and supported by the same core team: GAMCO Educational Software; Orchard Teacher's Choice Software; Teacher Support Software; Educational Activities Software; and Journey. These products allow the Company to offer a comprehensive product selection to schools and adult education centers at a variety of budget levels. GAMCO Educational Software ("GAMCO"), the Company's original product, provides schools with single titles and series which the Company believes are highly motivating. GAMCO products are sold through the major national and regional school software dealers, the Company's inside sales force and its direct catalog and promotions. All GAMCO titles include management features that track student progress and allow teachers to modify the instruction to meet individual learning needs. In 1996, the Company launched Orchard Teacher's Choice Software ("Orchard"). Orchard offers schools and school districts a comprehensive curriculum-based solution with universal management and assessment. Orchard is sold through a network of dealers and direct and independent representatives who actively call on schools to sell larger curriculum- and technology-based learning solutions. Orchard includes universal management which tracks student progress across all programs, as well as pre- and post-test assessment that identifies problem areas and measures instructional gain. The Company believes that Orchard has become a recognized competitor in the growing Integrated Learning Systems market as a result of its motivating and balanced content, strong correlation to major national tests and state objectives, and its cost-effective pricing structure. The Company believes that its new Orchard For Your State ("OFYS") versions will help maintain Orchard's consistent growth in sales as schools look for proven ways to meet the new federal mandate for accountability in all states provided in the No Child Left Behind Act of 2001. Orchard For Your State offers schools and school districts state-specific versions of Orchard that are directly correlated to each state's educational standards. The No Child Left Behind Act of 2001 will require all students in grades three to eight 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) in all states to take important tests based upon each state's standards. Orchard For Your State is a direct response to, and solution for, the emerging critical need for state-specific accountability and instruction. The Company has recently released 21 state-specific versions of Orchard For Your State and is planning to release nine additional versions during the remainder of 2002. In July 2000, the Company purchased the software assets of Teacher Support Software ("TSS"). TSS is a 20-year-old software publisher best known for its popular tools for teachers, including Worksheet Magic, and its effective and comprehensive reading programs, including WordWorks. TSS products are sold through all of the Company's sales channels as single-title solutions and as part of comprehensive Orchard solutions. The Company has actively upgraded older TSS products to be compatible with the computers and networks found in schools today. In January 2001, the Company purchased the stock of Activity Records, Inc. and in so doing acquired Educational Activities, Inc.'s software products which are now called Educational Activities Software ("EAS"). EAS has been a leading publisher of software for the middle-school to adult learner market for over 20 years. Best known for its Diascriptive(R) Reading series, EAS has traditionally sold its products to schools, community colleges, adult learning centers and correctional facilities through a network of independent representatives. EAS is the Company's primary product offering for the adult learning market and allows the Company to achieve incremental sales growth in a growing market for instruction in basic skills for adults. In addition, the Company sells selected EAS titles to its K-12 school customers and has released a new comprehensive solution with universal management called Real Achievement based upon EAS titles and appropriate titles from the Company's portfolio of other software. In May 2001, the Company purchased the publishing assets of The Denali Project, L.L.C. ("Denali") based in Lansing, Michigan. This development team, now known as Siboney Learning Group Lansing, had developed a comprehensive and structured instructional software program in reading and math for grades three through eight. Their original product had never been actively marketed to schools. The Company has invested considerable time and resources into upgrading this product, now called Journey, which is being sold through the same channels that currently sell Orchard. The Company believes that Journey will be an attractive complementary product for Orchard due to its structure and sequencing of content, as well as the Company's first web-enabled product for K-12 school customers, when it is launched to meet demand for web-based delivery of instructional software. The Company also has generated sales of select products through a direct-to-the-home marketer of educational software. This alliance allows the Company to reach families in their homes without relying on expensive retail distribution. The Company also has certain natural resources interests, including coal, oil and gas, through Siboney Coal Company, Inc. and several other subsidiaries. These interests presently are not material to the Company's results of operations or financial condition. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods covered by the accompanying condensed consolidated financial statements. THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001 Total revenues decreased 1.8% or $35,422 during the three-month period ended September 30, 2002 compared to the third quarter of 2001, reflecting slightly lower sales at Siboney Learning Group and lower revenues at Siboney Coal Company. Sales of the Company's Orchard Teacher's Choice Software increased 18% during the third quarter of 2002 compared to the third quarter of 2001. The Company believes that Orchard's market success is attributable to its comprehensive offering of 140 titles and curriculum bundles which combine state-correlated assessment with targeted and effective instruction, delivered at costs which compare favorably to other integrated learning systems. In addition, Orchard sales increased as a result of the release of 21 state-specific versions of Orchard For Your State. An additional nine versions are expected to be released during the remainder of 2002. Cost of product sales increased 7.1% or $30,611 during the third quarter of 2002 compared to the third quarter of the previous year. This increase reflected greater royalty expenses from sales of licensed products and increased amortization of development expenses. As a result, cost of product sales as a percentage of revenue increased from 22.3% for the third quarter of 2001 to 24.3% for the third quarter of 2002. Selling, general and administrative expenses decreased 7.4% or $108,943 during the quarter ended September 30, 2002 compared to the third quarter of 2001. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS"). SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. Therefore, amortization expenses decreased by $71,070 for the third quarter of 2002 compared to the third quarter of 2001. In addition, catalog advertising expenses decreased by $43,461 for the third quarter of 2002 compared to the third quarter of 2001. Interest expense, net of interest income, decreased 30.2% or $4,479 during the quarter ended September 30, 2002 compared to the third quarter of 2001. This decrease was primarily the result of an overall decline in the average outstanding debt balances during the quarter and a shift in debt balances from higher interest to lower interest obligations. The Company recorded an income tax benefit of $5,100 for the three months ended September 30, 2002 to reflect a decrease in the expected utilization of the Company's deferred tax asset. This decrease in utilization was primarily the result of a decline in management's projection of the Company's annualized effective tax rate for 2002. The Company did not report a provision for income taxes in the quarter and year-to-date period ended September 30, 2001 as its utilization of the prior years' net operating losses in those periods was offset by a reduction in the deferred tax asset valuation allowance. The Company's net income for the third quarter of 2002, primarily for the reasons above, was $72,688, an increase of 281.9% or $53,653 compared to net income of $19,035 for the third quarter of 2001. Earnings per common share, basic and diluted, were $0.00 for the third quarter of 2002 and 2001. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001 Total revenues increased 7.6% or $486,667 during the nine-month period ended September 30, 2002 compared to the corresponding period of 2001, reflecting higher sales at Siboney Learning Group. Sales of the Company's Orchard Teacher's Choice Software increased 39.2% during the nine-month period ended September 30, 2002 compared to the corresponding period of 2001. The Company believes that Orchard's market success is attributable to its comprehensive offering of 140 titles and curriculum bundles which combine state-correlated assessment with targeted and effective instruction, delivered at costs which compare favorably to other integrated learning systems. In addition, Orchard sales increased as a result of the release of 21 state-specific versions of Orchard For Your State ("OFYS"). An additional 9 versions are expected to be released during the remainder of 2002. During the nine-month period ended September 30, 2002, there was no mining activity on property owned by Siboney Coal Company. Accordingly, the Company received the $30,000 minimum royalty payment compared to $139,154 received during the corresponding period of 2001. Cost of product sales increased 46.6% or $486,627 during the nine-month period ended September 30, 2002 compared to the first nine months of 2001. This increase reflected greater royalty expenses from sales of licensed products and increased amortization of development expenses. As a result, cost of product sales as a percentage of revenue increased from 16.4% for the first nine months of 2001 to 22.3% for the corresponding period of 2002. Selling, general and administrative expenses increased 8.6% or $340,048 during the nine-month period ended September 30, 2002 compared to the corresponding period of 2001, primarily due to higher selling-related expenses and higher salary, commission and other compensation-related expenses. The Company has increased staffing in both its sales department and product development group. In addition, more technical support staff was hired to support its growing number of products. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS"). SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. Therefore, amortization expenses decreased by $131,472 for the nine-month period ended September 30, 2001 compared to the same period of 2001. Interest expense, net of interest income, decreased 41.3% or $27,506 during the period ended September 30, 2002 compared to the first nine months of 2001. This decrease was primarily the result of an overall decline in the average outstanding debt balances during the period and a shift in debt balances from higher interest to lower interest obligations. The provision for income taxes of $365,900 recognized in the third quarter of 2002 represented the Company's current realization of its net deferred tax asset which related primarily to the carryforward of net operating losses incurred in prior years. The Company expects its available net operating loss carryforwards will be sufficient to offset any obligation to pay federal income taxes through 2002. The Company did not report a provision for income taxes in 2001 as its utilization of the prior years' net operating losses in those periods was offset by a reduction in the deferred tax asset valuation allowance. The Company's net income for the nine months ended September 30, 2002, primarily for the reasons above, 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) was $608,827, or $0.04 per share basic, $0.03 per share diluted. This was a decrease of 52.7% or $677,894 compared to net income of $1,286,721, or $0.08 per share basic, $0.07 diluted, for the corresponding period of 2001. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its business primarily with cash generated from operating activities, accessing its bank revolving line of credit and purchase money financing provided by the sellers of companies acquired. The line of credit agreement, which matures in June 2003, provides for maximum borrowings of $1.0 million and is secured by the Company's accounts receivable, equipment and inventory. The loan agreement requires the Company to maintain a net worth of at least $2.5 million. As of September 30, 2002, the Company reported a net worth of $4.4 million and no balance due under the Company's line of credit. The Company believes that it will be able to renew its line of credit and that its available capital resources are adequate to support its current business levels. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company presently does not use any derivative financial instruments to hedge its exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices or other market risks, nor does the Company invest in speculative financial instruments. Borrowings with the bank bear interest at prime rate and 0.25% above prime rate. Due to the nature of the Company's borrowings, it has concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required. ITEM 4. CONTROLS AND PROCEDURES Based on his evaluation on November 11, 2002, Timothy J. Tegeler, our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses. *** This report contains "forward-looking statements" as that term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any forward-looking statements are necessarily subject to significant uncertainties and risks. When used in this report, the words "believes," "anticipates," "intends," "expects" and similar expressions are intended to identify forward-looking statements. Actual results could be materially different as a result of various possibilities. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 14 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS As approved by the shareholders of the Company at the 2002 Annual Meeting of Shareholders, the Company's Amended and Restated Articles of Incorporation were amended to increase the total number of shares of stock authorized from 21,366,694 shares to 101,366,694 shares and to increase the number of shares of common stock authorized from 20,000,000 shares to 100,000,000 shares. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 99.1: Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350. (b) Reports on Form 8-K: A Report on Form 8-K was filed by the Registrant under Item 5 on September 18, 2002 restating the 1999, 2001 and 2002 financials showing the impact of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") on net income and net income per share had SFAS 142 been in effect beginning January 1, 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIBONEY CORPORATION November 12, 2002 By: /s/ Timothy J. Tegeler --------------------------- Timothy J. Tegeler Chief Executive Officer and Chief Financial Officer 15 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER I, Timothy J. Tegeler, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Siboney Corporation; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Effective Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 12, 2002 /s/ Timothy J. Tegeler --------------------------------- Timothy J. Tegeler Chief Executive Officer and Chief Financial Officer 16