Item 1 - Business
General
The principal businesses in which the Company engages, through its subsidiaries, are the publishing and distribution of educational software products and teaching aids and the holding of certain natural resource interests.
Subsidiaries And Industry Segments
The Company conducts its business through several wholly-owned subsidiaries which, at December 31, 1996, were 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, 1996, 1995 and 1994, which appears in Note 12 to the Consolidated Financial Statements on Page 27, 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 1996 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 and teaching aids.
In 1995, the Company formed the Siboney Learning Group Division and hired a new Executive Vice President, Ernest R. (Bodie) Marx, as President of the division. Mr. Marx has been an executive and proprietor of companies engaged in the educational software and related products business for more than 18 years. In August 1996, Mr. Marx was also elected President of Gamco.
The Company's purpose for forming the new division was to expand upon its interests in the publishing and distribution of educational software and related products by taking advantage of Mr. Marx's background and experience. Such expansion is expected to occur both through Gamco, which was made part of the new division and reports to Mr. Marx, and by other internal and external expansion. In 1996, Mr. Marx expanded the management team of the Siboney Learning Group Division in St. Louis, Missouri by adding a Director of Research and Development, a Director of Sales and a Director of Marketing.
The Company has been serving the educational market for more than 35 years. Today, 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. Popular Gamco titles include Money Challenge, Discover Time, the Touchdown Math series and Undersea Reading for Meaning. Gamco publishes over 100 titles for Macintosh, IBM and IBM compatible, and Apple II computers.
In 1996, Siboney Learning Group licensed school distribution rights to 21 new titles from Merit Audio Visual ("Merit"). Merit's line of reading and writing programs for grades 3 through 10 complements Gamco's existing products. The Merit software was launched in January 1997 as Gamco's Critical Concepts series and will be sold with Gamco's Skill Builders and Learning Games product lines.
In 1996, Siboney Learning Group implemented a customer targeted product promotional program, which is supported by a newly created four person inside sales group.
In 1996, Siboney Learning Group also developed a new approach to selling software titled Orchard: Teacher's Choice Software, which was introduced in January 1997. The Orchard program offers schools a comprehensive instructional software solution using existing titles. Orchard will be sold to schools by a network of exclusive dealers.
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 -- 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 (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. 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. 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. Gamco maintains a policy under which products may be returned within thirty days from the date of purchase if they do not meet a customer's satisfaction. For the year 1996, approximately 7% of sales were returned, of which 5% represented previewed sales returned within thirty days.
Dependence On Limited Number Of Customers -- In 1996, approximately 12% of 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 Gamco products.
Government Business -- Although a substantial portion of 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 -- Gamco's expenditures for research and development of new computer software products and upgrading and adapting existing software products were approximately $412,000, $391,000, and $345,000 in 1996, 1995 and 1994, respectively.
The development of Gamco products resulted in the release of five new and improved titles in 1994, five in 1995 and seven in 1996. As a result of continuing internal product development and the development of newly licensed software, the Company is expected to release more than 75 new and improved titles in 1997.
Competition -- 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 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 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 $78,033 in 1996, $70,596 in 1995 and $35,814 in 1994 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 6 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 to the U.S. company which owns the claim to the confiscated property for money damages.
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 did in August 1996 and again in February 1997. The Company can not predict whether the President will continue to postpone the effectiveness of this legislation.
PERSONNEL:
As of February 14, 1997, the Company had 25 employees, 2 of which were employed by the parent corporation, 5 by Siboney Learning Group and 18 by Gamco.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases 817 square feet of office space under a lease expiring on December 31, 1997 and an additional 850 square feet of office space, which is used by the Siboney Learning Group Division, under a lease which expires May 30, 1998. The second lease has a renewal option for one year on the same terms and conditions. These facilities are considered adequate to meet the needs of the Company for the foreseeable future.
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 the needs of Gamco and any acquired educational software operations 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:
1996 Bid 1995 Bid - ------------------------------------- -------------------------------------- Quarter High Low Quarter High Low - --------------------------------------------------------------------------------
First .14 .14 First .17 .13 Second .26 .14 Second .21 .13 Third .24 .19 Third .15 .13 Fourth .19 .16 Fourth .15 .15
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 14, 1997 was 17,236.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
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, 1996, and comments on the Company's financial position as of December 31, 1996.
RESULTS OF OPERATIONS:
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 nonproprietary 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.
1995 IN COMPARISON WITH 1994:
During 1995, the Company's consolidated revenues increased $52,665 to $2,359,492. Revenues from the educational products segment increased $19,116 to $2,284,529 while revenues from the natural resource segment increased $33,549 to $74,963. Educational product revenues increased because of increased outside printing sales made by Gamco's print shop. Sales of both proprietary and nonproprietary computer software and related products decreased slightly in the educational segment during the last half of the year due to educators' concerns about the federal budget impasse and its effect on future funding for school expenditures. Natural resource revenues increased due to more mining activity, which increased royalty payments earned by Siboney Coal.
Cost of product sales increased $30,858 to $523,055, which represented a decrease in gross margins from 78.4% to 77.2%, due primarily to the effect of increased material and overhead costs.
Selling, general and administrative expenses increased $222,745 to $1,974,356, primarily due to increased catalog and magazine advertising costs of approximately $50,000 and an increase in salaries and other costs totalling approximately $75,000 associated with the formation of the Siboney Learning Group Division.
The Company's loss from operations for 1995 was $137,919 compared to income from operations of $63,019 in 1994. The increase in consolidated revenues was offset by the increases in cost of sales and selling, general and administrative expenses.
The Consolidated Statement Of Operations for 1995 reflects a one-time charge against income of $66,368, which represents the cumulative effect on prior years of a change in accounting principle resulting from the implementation of Statement of Position 93-7, "Reporting on Advertising Costs". (See Note 15 to the Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
In 1996, cash and cash equivalents increased $175,906. This was primarily due to the net cash provided by the sale of the print shop building and equipment.
In 1995, cash and cash equivalents increased $29,733. This was primarily due to net cash provided by continuing operations.
Gamco's line of credit expired December 1, 1996 and was not renewed by the Company. There was no outstanding loan balance at December 31, 1996 and a $1,000 outstanding loan balance at December 31, 1995.
The Company considers its cash position adequate to fund its anticipated operations and capital expenditures.
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 1997 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 1997 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 1997 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 1997 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, 1996 And 1995.................................17 Consolidated Statement Of Stockholders' Equity For The Years Ended December 31, 1996, 1995 And 1994........................................18 Consolidated Statement Of Operations For The Years Ended December 31, 1996, 1995 And 1994........................................19 Consolidated Statement Of Cash Flows For The Years Ended December 31, 1996, 1995 And 1994..............................................20 Notes To Consolidated Financial Statements............................................21 - 30
(a) (2) Financial Statement Schedule:
V Valuation And Qualifying Accounts -- 1996, 1995 And 1994...................................................31
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.................................................33 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 1996.
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, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996, and the information as of December 31, 1996, 1995 and 1994 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 14, 1997
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For The Years Ended December 31, 1996, 1995 And 1994
CONSOLIDATED STATEMENT OF OPERATIONS
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 And 1994
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.
Notes To Financial Statements (Continued)
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 $412,000, $391,000 and $345,000 in 1996, 1995 and 1994, respectively.
Warranty Costs
The Company provides warranties on sales of educational products and all significant warranty costs are charged to operations as incurred.
Earnings (Loss) Per Share
Earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding of 16,462,245 in 1996, 16,366,287 in 1995, and 16,422,782 in 1994.
For 1996, 1995 and 1994, the weighted average number of common and common equivalent shares consisted of the following:
Revenues From Major Products And Major Customer
Revenue from proprietary educational software and other related products accounted for 83%, 79%, and 81% of Gamco's revenue in 1996, 1995 and 1994, respectively. In addition, 12%, 13% and 10% of Gamco's revenues were generated from catalog sales through one dealer in 1996, 1995 and 1994, respectively.
Notes To Financial Statements (Continued)
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 and teaching aids through the Company's subsidiary, Gamco Industries, Inc. (Gamco). Sales are made throughout the country by the distribution of catalogs printed by Gamco and through independent distributors.
2) The holding of interests in certain natural resources, including coal, oil and gas, through several subsidiaries. (See Note 6.)
Segment information which highlights the relative importance of each line of business is presented in Note 12 to the consolidated financial statements.
Discontinued operations relate primarily to Siboney Communications, Inc. (SCI), a subsidiary of the Company.
SCI's Board of Directors determined that it was in the best interest of SCI to liquidate SCI. On October 4, 1985 a petition under Chapter 7 of the United States bankruptcy Code was filed by SCI. Substantially all of SCI's assets were sold and distributed in 1986. The Company gave recognition to this decision in the December 31, 1984 financial statements.
In 1994, income from discontinued operations consisted primarily of reductions of estimated liabilities.
Notes To Financial Statements (Continued)
3. Accounts Receivable
Accounts receivable consist of:
1996 1995 -------------------------------
Accounts receivable $ 202,140 $ 225,279 Less: Allowance for doubtful accounts 49,703 47,130 - ---------------------------------------------------------------------------
$ 152,437 $ 178,149 ===========================================================================
Accounts receivable were pledged as collateral for notes payable (see Note 7).
4. Inventories
Inventories are summarized as follows:
1996 1995 -------------------------------
Raw materials $ 135,710 $ 128,063 Finished goods 39,229 102,173 - ---------------------------------------------------------------------------
$ 174,939 $ 230,236 ===========================================================================
Inventories were pledged as collateral for notes payable (see Note 7).
Inventories are net of reserve for obsolescence of $66,619 and $53,775 in 1996 and 1995, respectively.
5. Property, Plant And Equipment
Property, plant and equipment consist of:
1996 1995 --------------------------------
Land and improvements $ 23,997 $ 23,997 Buildings and improvements 157,417 431,893 Machinery and equipment 172,877 792,816 Office equipment, furniture and fixtures 270,204 239,083 - ---------------------------------------------------------------------------- 624,495 1,487,789 Less: Accumulated depreciation 451,942 1,111,190 - ----------------------------------------------------------------------------
$ 172,553 $ 376,599 ============================================================================
Depreciation charged against income amounted to $117,651 in 1996, $130,202 in 1995 and $124,162 in 1994.
Notes To Financial Statements (Continued)
The buildings and certain equipment were pledged as collateral for notes payable (see Note 7).
The building and equipment used by Gamco's print shop were sold in 1996.
6. Investments In Natural Resources
Investments in natural resources consist of:
1996 1995 -------------------------------
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 $78,033 under the lease in 1996, $70,596 in 1995, and $35,814 in 1994. 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.
Notes To Financial Statements (Continued)
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.
7. Notes Payable
At December 31, 1995, Gamco had a line of credit totalling $350,000, with an outstanding balance of $1,000. The line of credit was secured by the buildings, accounts receivable, inventories and certain equipment of Gamco. Interest was payable on the line of credit, to the extent used, at the prime commercial rate plus 1.5%. The note was paid off during 1996 and the line of credit expired December 1, 1996.
The weighted average interest rate was 8.90%, 10.33% and 8.76% for the years ended December 31, 1996, 1995 and 1994, respectively.
8. 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.
9. Deferred Compensation Plan
On January 1, 1994, the Company adopted a qualified, defined contribution profit sharing plan covering eligible full-time and part-time employees. The plan is qualified under Section 401(k) of the Internal Revenue Code, and allows employees to contribute on a tax deferred basis. The plan provides for matching contributions on a graduated scale, up to 3-1/2% 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 $26,246 in 1996 and $ 35,029 in 1995.
Notes To Financial Statements (Continued)
10. 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:
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 $5,184,550 at December 31, 1996 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.
11. Supplemental Cash Flow Information
The Company had no significant noncash investing or financing activities for the years ended December 31, 1996, 1995 and 1994.
12. Segment Information
The Company's business is primarily comprised of two industry segments: educational products and natural resources. The educational products segment principally sells educational software and teaching aids to schools. The natural resources segment principally receives royalties from its properties.
Notes To Financial Statements (Continued)
The Company's consolidated results of operations by business segment are as follows:
13. Stock Options
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.
Notes To Financial Statements (Continued)
Outstanding and exercisable stock options at December 31, 1996, 1995 and 1994 consist of the following:
During the year ended December 31, 1996, options for 200,000 shares were exercised at $.0275 per share.
No options were exercised in 1995 or 1994.
The proforma effects of applying Statement of Financial Accounting Standards No. 123, for options granted in 1995 are not deemed material.
14. Discontinued Operations
In 1994, income from discontinued operations arose from an adjustment to a previously established liability reserve relating to SCI which management determined to be no longer necessary.
15. 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.
Notes To Financial Statements (Continued)
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, 1996, $140,352 of advertising costs were capitalized. Advertising expense amounted to $531,849 in 1996, $547,850 in 1995 and $498,167 in 1994.
16. 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.
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December 31, 1996, 1995 And 1994
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: March 17, 1997 BY: /s/ Timothy J. Tegeler Timothy J. Tegeler President and Chief Executive and Financial Officer and Principal Accounting Officer
Date: March 17, 1997 BY: /s/ Timothy J. Tegeler Timothy J. Tegeler, Director
Date: BY: Thomas G. Keeton, Director
Date: March 17, 1997 BY: /s/ Rebecca M. Braddock Rebecca M. Braddock, Director
Date: March 17, 1997 BY: /s/ Alan G. Johnson Alan G. Johnson, Director
Date: March 20, 1997 BY: /s/ James P. Connaughton James P. Connaughton, Director
Date: March 20, 1997 BY: /s/ Ernest R. Marx Ernest R. Marx, Director
EXHIBIT INDEX
Exhibit No. 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................................N/A
3(b) Bylaws, filed as Exhibit 3(b) to the 1986 10-K and incorporated herein by this reference.........................N/A
21 Subsidiaries of the Company, filed herewith.........................................34
27 Financial Data Schedule (filed in EDGAR version only)......................................35