UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
For
The Fiscal Year Ended December 31, 2004
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 |
|
incorporation
or organization) |
|
Identification
No.) |
| |
|
|
|
325
North Kirkwood Road, Suite 300 |
|
|
|
St.
Louis, Missouri |
|
63122 |
|
(Address
of principal executive offices) |
|
(Zip
Code) |
| |
|
|
|
Registrant’s
telephone number, including area code: |
|
314-822-3163 |
|
|
|
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, par value $.10 per share
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports); and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). YES [ ] NO
[ X]
The
aggregate market value of the shares of Common Stock held by non-affiliates of
registrant as of June 30, 2004 was $6,008,944. This value was based on the
average of the bid and asked prices on June 30, 2004.
As of
March 22, 2005, the registrant had outstanding 17,345,419 shares of Common
Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III: The definitive proxy statement of registrant (to be filed pursuant to
Regulation
14A) for Registrant’s 2005 Annual Meeting of Shareholders, which involves
the
election of directors, is incorporated by reference into Items 10, 11, 12 and
14.
|
|
| |
|
PAGE |
|
PART
I |
|
|
| |
|
|
|
| |
|
Business |
3 -
7 |
| |
|
|
|
| |
|
Properties |
7 -
8 |
| |
|
|
|
| |
|
Legal
Proceedings |
8 -
9 |
| |
|
|
|
| |
|
Submission
of Matters to a Vote of Security Holders |
9 |
| |
|
|
|
|
PART
II |
|
|
| |
|
|
| |
|
Market
for Registrant’s Common Equity |
|
| |
|
and
Related Stockholder Matters |
10
- 11 |
| |
|
|
|
| |
|
Selected
Financial Data |
12 |
| |
|
|
|
| |
|
Management’s
Discussion and Analysis |
|
| |
|
of
Financial Condition and Results of Operations |
13
- 19 |
| |
|
|
|
| |
|
Quantitative
and Qualitative Disclosures About Market Risk |
20 |
| |
|
|
|
| |
|
Financial
Statements and Supplementary Information |
20 |
| |
|
|
|
| |
|
Changes
in and Disagreements with Accountants |
|
| |
|
on
Accounting and Financial Disclosure |
20 |
| |
|
|
|
| |
|
Controls
and Procedures |
20 |
| |
|
|
|
| |
|
Other
Information |
21 |
| |
|
|
|
|
PART
III |
|
|
| |
|
|
| |
|
Directors
and Executive Officers of the Registrant |
22 |
| |
|
|
|
| |
|
Executive
Compensation |
22 |
| |
|
|
|
| |
|
Security
Ownership of Certain Beneficial |
|
| |
|
|
|
| |
|
Owners
and Management and Related Stockholder Matters |
23 |
| |
|
|
|
| |
|
Certain
Relationships and Related Transactions |
23 |
| |
|
|
|
| |
|
Principal
Accountant Fees and Services |
24 |
| |
|
|
|
|
PART
IV |
|
|
| |
|
|
| |
|
Exhibits
and Financial Statement Schedule |
25
- 49 |
| |
|
|
|
|
|
50 |
| |
|
|
|
51
- 52 |
PART
I
Forward-Looking
Statements
This
report contains “forward-looking statements” as that term is defined in Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Any forward-looking statements are necessarily subject to significant
uncertainties and risks. When used in this report, the words “believes,”
“anticipates,” “intends,” “expects” and similar expressions are intended to
identify forward-looking statements. Actual results could be materially
different as a result of various possibilities.
Factors
that could cause actual results to differ materially from the forward-looking
statements include, but are not limited to, the following: (1) customers’
dependence on government funding to purchase the Company’s products; (2)
constant changes in the technologies used to build and deliver the Company’s
products; (3) well-established and well-funded competitors; (4) the Company’s
ability to retain key personnel; (5) the Company’s ability to motivate its
independent dealer representatives to sell the Company’s products; (6) changes
in the market acceptance and demand for curriculum-based educational software;
and (7) the risks detailed from time to time in the Company’s filings with the
Securities and Exchange Commission (“SEC”).
No
assurances can be given that the results contemplated in any forward-looking
statements will be achieved or will be achieved in any particular timetable. The
Company assumes no obligation to publicly correct or update any forward-looking
statements as a result of events or developments subsequent to the date of this
report. The reader is advised, however, to consult any further disclosures the
Company makes on related subjects in reports to the SEC.
General
Unless
the context indicates otherwise, references to the “Company” in this report
include Siboney Corporation and its subsidiaries.
The
Company was incorporated in the State of Maryland in 1955. The principal
business of the Company is the publishing of educational software products in
core academic areas, primarily for schools.
Business
- - General Description And Current Developments - The
Company’s principal subsidiary, Siboney Learning Group, Inc. publishes
standards-based educational software products for reading, language,
mathematics, science and English as a Second Language, primarily for K-12
schools and school districts. The Company publishes five product lines,
including two comprehensive software product lines -- Orchard Software for Your
State and Journey -- and three titles-based product lines -- GAMCO Educational
Software, Teacher Support Software, and Educational Activities Software. This
strategy allows the Company to appeal to the different budgets and spending
patterns found in classrooms, schools, school districts and adult learning
centers.
The
passage and implementation of the No Child Left Behind Act (“NCLB”) in 2002
placed higher standards for accountability, research-based products,
instructional improvement and data-driven decision making upon all public
schools in the United States. As a result, the Company has focused on the
development, upgrading, selling and marketing of its Orchard Software for Your
State (“Orchard”) product line. The Company believes that Orchard is a
cost-effective solution for schools facing growing pressures to demonstrate
Adequate Yearly Progress and instructional improvement as mandated by
NCLB.
Starting
in school year 2005-2006, the NCLB Act requires that every public school must
conduct annual assessments in reading and math based upon each state’s academic
standards for every student in grades three through eight. Each school must meet
state-specific annual mandates for Adequate Yearly Progress or be classified as
a failing school. Failing schools face serious consequences up to loss of
accreditation and possible take over. NCLB requires 100% minimal proficiency in
reading and math for all public school students in grades three through eight by
school year 2013-2014 which places increasingly difficult demands upon schools
for instructional improvement and satisfactory progress towards 100% minimal
proficiency.
Orchard
integrates assessment based upon standards in 35 states with individualized
instruction from over 150 Skill Trees (i.e., software programs) in K-12 reading,
language, mathematics and science. Orchard’s assessment identifies specific
areas of academic weakness for each student within his/her state’s
grade-specific standards of learning. Orchard then prescribes an individualized
learning path for each student as students interact with a wide variety of
motivating instructional approaches that appeal to different learning styles.
Orchard’s management system tracks standards-based student progress for teachers
and administrators who are facing increasing pressure for data-driven decision
making as mandated by NCLB. Interim assessment tools can be used to measure
educational gains and to prepare students for their high-stakes state
test.
Over
6,000 schools and school districts use Orchard in computer labs, learning
centers and classrooms to supplement core instruction. Unlike many competitive
comprehensive solutions, Orchard’s solution is delivered as an unlimited
network/site license with no required recurring fees. Orchard’s scalable product
configurations allow schools with limited budgets to make a modest initial
investment by purchasing individual Skill Trees and then to grow their Orchard
solution with future purchases of larger curriculum bundles with multiple titles
and state-specific assessment.
The
Company employs approximately 20 people in its product development team who
develop new instructional content, upgrade product features, ensure
compatibility with new hardware and network operating systems and test for
quality assurance. The Company plans to release a new version of Orchard in 2005
- - Orchard Gold Star - with significantly improved options for interim formative
assessment and curriculum mapping, upgraded management and progress reports,
upgraded content and content sequencing, a new application that will allow
Orchard to aggregate student data at the school district level, and more
advanced technology including a Structured Query Language (“SQL”)
database
foundation that will improve performance and scalability within schools and
school districts.
Orchard
is sold through a network of resellers and direct field and inside sales
representatives who actively call on schools to sell comprehensive curriculum-
and technology-based learning solutions. A majority of the Company’s Orchard
business is repeat business from schools or school districts that build up their
Orchard implementation through repeat purchases. The Company believes that
Orchard has become a recognized competitor in the growing comprehensive
instructional software market as a result of its motivating and research-based
instructional content, its strong correlations to state objectives and tests,
and its cost-effective and scalable pricing structures. Orchard contributed 77%,
78% and 74% of the Company’s revenue for the years 2004, 2003 and 2002,
respectively.
In
addition to Orchard Software for Your State, the Company publishes four other
instructional software product lines:
GAMCO
Educational Software (“GAMCO”), the Company’s original product line, 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 catalog dealers, the Company’s inside sales force, its direct
catalogs and direct promotions. All GAMCO titles include management features
that track student progress and allow teachers to modify the instruction to meet
individual learning needs. Popular titles include Touchdown Math, Math Concepts,
Language Concepts and Phonics.
The
Teacher Support Software (“TSS”) product line, which was acquired in 2000, is
best known for its popular tools for teachers, including Worksheet Magic, and
its reading programs, including WordWorks. TSS products are now sold through all
of the Company’s sales channels as single-title solutions and as part of
comprehensive Orchard solutions. The Company has actively upgraded older TSS
products to be compatible with the computers and networks found in schools
today.
The
Company’s Educational Activities Software (“EAS”) line, which was acquired in
2001, has been a leading publisher of software for the middle school to adult
learner market for more than 20 years. Best known for its Diascriptive Reading
Series, EAS has traditionally sold its products to schools, community colleges,
adult learning centers and correctional facilities through a network of
independent representatives. EAS is the Company’s primary product offering for
the adult learning market and allows the Company to achieve incremental sales
growth in the market for instruction in basic skills for adults. In addition,
the Company sells selected EAS titles to its K-12 school customers and has
developed a comprehensive solution with universal management called Real
Achievement based upon EAS titles and appropriate titles from the Company’s
portfolio of other software products. The Company has committed development
resources to upgrading these products and to web-enable selected titles since
the older learner market appears to be increasingly responsive to software
delivered to students over the Internet.
Journey,
the comprehensive software product line acquired in 2001, has been upgraded to
make it more competitive with other structured comprehensive solutions.
The
Company also has generated sales of selected products which have been revised
for the home market and sold through a direct-to-the-home marketer of
educational software. This alliance allows the Company to achieve incremental
sales in the home market without incurring the costs of expensive retail
distribution.
Sources
and Availability of Raw Materials — Raw
materials are generally available and are purchased from a wide range of
suppliers. Shortages are not anticipated.
Copyrights
and Licenses — The
Company holds various copyrights and license rights, which are considered to be
material to its business. The licensing agreements under which the Company
licenses certain software provide for minimum sales and related royalty payments
by the Company over a specified number of years and are renewable
thereafter.
Seasonality
— The
Company typically experiences its highest levels of sales and accounts
receivable in the educational products business at the end of the school year
(the second quarter). However, seasonality does not have an overall material
adverse effect on the Company’s operations.
Working
Capital Items — The
Company does not purchase or maintain material inventories in advance of sales
of products, although certain materials are purchased in larger quantities in
order to obtain volume discounts. The Company does not routinely offer extended
terms for payment, but historically some public school districts and public
educational institutions have delayed making payment until appropriated funds
become available. Siboney Learning Group maintains an “on approval” policy under
which goods shipped subject to customer approval are not billed upon delivery
and can be returned within 45 days. Invoices are sent after 45 days if the goods
are not returned. Siboney Learning Group also maintains a general “satisfaction
guaranteed” policy under which GAMCO, TSS and EAS products may be returned
within 12 months, and Orchard products within 90 days from the date of purchase
if a customer is not satisfied. Returns approximated 2% of sales in 2004 and 3%
of sales in 2003 and 2002.
Dependence
on Limited Number of Customers — There
were no customers that represented more than 10% of the Company’s revenues in
2004 or 2003. In 2002, two customers each accounted for approximately 12% of the
Company’s revenues.
Backlog
— The
Company historically does not have a material backlog of orders.
Government
Business — Sales
of Siboney Learning Group’s computer software products are substantially
dependent upon expenditures of school districts and individual schools. Although
a substantial portion of Siboney Learning Group’s business is done with
governmental subdivisions, such business is not subject to
price renegotiation or termination at the election of the
government.
Environmental
Impact —
Present federal, state and local provisions regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment are not material to the Company.
Software
Development —
Software development costs are capitalized at the point the Company determines
that it is technologically feasible to produce the software title. Such costs
are amortized at the greater of the ratio that current gross revenue for a
product for the period involved bears to the total of current and anticipated
future gross revenues for the product or the straight-line method over an
estimated four-year useful life of the product.
Software
development costs of $583,602, $496,548 and $695,585 were capitalized in 2004,
2003 and 2002, respectively. Amortization expense charged against earnings
amounted to $601,237, $559,159 and $407,416 in 2004, 2003 and 2002,
respectively. Software development costs not capitalized are expensed in the
year incurred and totaled approximately $629,992, $656,300 and $299,000 in 2004,
2003 and 2002, respectively.
Amortization
of capitalized software costs begins when the product is released for sale to
customers. In progress software development costs capitalized for which
amortization had not begun amounted to $550,256, $438,725 and $554,715 at
December 31, 2004, 2003 and 2002, respectively.
Competition —
Siboney Learning Group operates in highly competitive markets, which are subject
to ongoing technological change and are expected to continue to require
relatively high research and development expenditures. A number of the Company’s
competitors are significantly larger and have substantially greater resources
than the Company. The Company competes on the basis of price and effectiveness
of software in achieving intended results. We believe the comprehensive learning
systems market is dominated by four major publishers: Pearson Digital Learning,
Plato Learning, Compass Learning and Riverdeep. Over the past several years, the
consolidation of educational software publishers has resulted in a reduction of
the number of new software titles designed for schools.
Personnel — As of
December 31, 2004, the Company had 63 full-time employees. The Company’s
employees are not represented by any union.
Website —The
Company’s website address is http://www.Siboney.com. The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K are all available, free of charge, through the
website as soon as practicable after the Company files the reports with the
SEC.
The
Company leases approximately 8,000 square feet of office space in
St. Louis, Missouri under a lease which expires December 31, 2007. Siboney
Learning Group also leases approximately 7,000 square feet of warehouse
facilities in St. Louis, Missouri under a lease which expires May 31, 2007.
The Lansing, Michigan research and development office leases approximately 4,090
square feet of office space under a lease which expires April 30, 2006. The
Skokie, Illinois curriculum and instructional design office leases 1,966 square
feet of office space under a lease which expires December 31, 2007.
The
Company also has certain natural resource interests through several
subsidiaries, which are not believed to be material assets of the Company,
individually or in the aggregate.
Siboney
Coal Company, Inc. (“Siboney Coal”), a subsidiary of the Company, owns the fee
and mineral interests in coal properties aggregating approximately 1,425 acres
in Johnson and Martin Counties, Kentucky. Previously these properties were
leased to a mining company; however, the Company and the lessee were unable to
agree on the continuing terms of the lease and the lease was terminated on May
14, 2003. There were no royalties received by the Company on these properties in
2004 or 2003.
During
the first quarter of 2004, the Company became aware that a new residential
subdivision being developed in Johnson County, Kentucky encroached on property
owned by Siboney Coal. In the second quarter of 2004, the Company negotiated a
settlement agreement with the developer and transferred approximately 82 acres
to the developers of the subdivision for $219,780, which was recognized as gain
on the sale of an asset.
Other
subsidiaries of the Company have royalty and working interests in oil and gas
leases and property rights. Revenues from such leases and interests are not
material. The present value of estimated future net oil and gas reserves of the
Company’s subsidiaries is presently not determinable, but is not believed to be
material.
Prior to
1958, the Company held oil exploration rights covering approximately four
million acres in Cuban territory, which were expropriated. The Company filed
claims against the Cuban government with the U.S. Foreign Claims Settlement
Commission which certified the Company’s loss as $2,454,000 plus 6% interest per
annum from November 1959. No funds have been appropriated to satisfy such
claims. Accordingly, the Company does not consider the collection of the claims
to be probable.
On June
25, 2004, Merit Audio Visual, Inc. d/b/a Merit Software (“Merit”) filed a
lawsuit in the Federal District Court for the Eastern District of Missouri
against Siboney Corporation, Siboney Learning Group, Inc., and Ernest R. Marx
(collectively “Siboney”), alleging copyright infringement and breach of contract
and seeking damages of $3,450,000, injunctive relief, attorney’s fees, and
costs. The lawsuit arose from a long-term relationship between the parties
established in 1996 with a licensing agreement which grants Siboney the right to
“create, market, sell, lease and distribute in the schools market” software
products which incorporate certain Merit software. The complaint alleged that
Siboney had sold software bundles incorporating certain Merit software under the
name “Orchard Home” outside of the “schools market,” allegedly breaching the
licensing agreement and infringing Merit’s alleged copyright in its software.
The complaint also alleged other miscellaneous breaches of the licensing
agreement, including failing to obtain Merit’s consent for certain changes to
Merit’s software, and disputing the amount of royalties due. Siboney filed a
counterclaim against Merit, seeking damages for breach of the licensing
agreement by Merit and a declaratory judgment of non-infringement of Merit’s
alleged copyright. On
December 16, 2004, Siboney settled the lawsuit with Merit. Under the settlement
agreement, none of the parties admitted liability for any of the claims and
agreed to terminate their software licensing agreement as of December 31, 2005.
Siboney agreed to continue to pay royalties due under the licensing agreement
through its termination plus additional payments of $100,000 for each of the
next
two years
and paid Merit $465,000 upon execution of the settlement agreement; and Merit
returned a portion of the royalty payments previously made by Siboney of
approximately $50,000. In accordance with the settlement agreement, all claims
were dismissed with prejudice on January 18, 2005.
| Item 4. |
Submission of Matters to a Vote of Security
Holders |
No
matters were submitted to the shareholders of the Company during the quarter
ended December 31, 2004.
PART
II
| Item 5. |
Market for Registrant’s Common Equity
and Related Stockholder
Matters |
Sales of
the Company’s common stock are reported on the Over-The-Counter “Bulletin Board”
maintained by NASDAQ.
| |
|
Stock
Price and Dividend Information |
The
following table sets forth the high and low bid prices per share of
common stock.
|
2004 |
|
2003 |
|
|
Quarter |
|
High |
|
Low |
|
Quarter |
|
High |
|
Low |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
$ |
.36 |
|
$ |
.19 |
|
|
First |
|
$ |
.26 |
|
$ |
.17 |
|
|
Second |
|
|
.48 |
|
|
.29 |
|
|
Second |
|
|
.29
|
|
|
.18 |
|
|
Third |
|
|
.46 |
|
|
.33 |
|
|
Third |
|
|
.37 |
|
|
.23 |
|
|
Fourth |
|
|
.49 |
|
|
.34 |
|
|
Fourth |
|
|
.38 |
|
|
.17 |
|
The
foregoing market quotations reflect interdealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual
transactions.
The
number of holders of record of the Company’s common stock as of March 22,
2005 was 9,005.
No cash
dividends were paid on the Company’s common stock in 2004 or 2003. Generally,
the payment of dividends is within the discretion of the Board of Directors who
will consider all relevant factors in making determinations regarding future
dividends, if any. The Company intends to continue its historical pattern of
utilizing cash generated by operations to support future growth.
| |
(d) |
Securities
Authorized For Issuance under Equity Compensation
Plans |
| |
|
See
Part III, Item 12 on pages 22 -
23. |
| |
(e) |
Recent
Sales of Unregistered
Securities |
The
Company granted an option dated October 14, 2004 to purchase 100,000 shares of
the Company’s common stock at a price of $0.50 per share in a private placement
of securities under Section 4(2) of the Securities Act of 1933 to a consultant
in exchange for retention of the consultant’s services. The consultant may
exercise the option by paying the purchase price for the shares on or before
October 14, 2005.
| |
(f) |
Issuer
Purchases of Equity
Securities |
|
Period |
(A)
Total
Number
Of
Shares
Purchased |
(B)
Average
Price
Paid
Per
Share |
(C)
Total
Number
Of
Shares
Purchased
As
Part
Of Publicly
Announced
Plans
Or
Programs(1) |
(D)
Maximum
Number
(Or
Approximate
Dollar
Value) Of
Shares
That May
Yet
Be
Purchased
Under
The Plans
Or
Programs |
|
|
|
|
|
|
Month
#1 (Oct. 1 - Oct. 31) |
55,000 |
|