UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2007
or
[ ] Transition Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 001-32300
SMARTPROS LTD.
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(Name of Small Business Issuer in its Charter)
DELAWARE 13-4100476
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12 SKYLINE DRIVE, HAWTHORNE, NEW YORK 10532
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(Address of Principal Executive Office) (Zip Code)
(914) 345-2620
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Issuer's Telephone Number Including Area Code
Securities registered under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ------------------------
Common Stock, par value $.0001 per share American Stock Exchange
Warrants American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No |X|
Issuer's revenues for its most recent fiscal year: $15,204,506
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.): Approximately $22,232,067 as of March 19, 2008.
The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,021,422
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement, relating to the issuer's Annual Meeting
of Stockholders to be held on or about June 17, 2008, is incorporated by
reference in Part III to the extent described therein.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No |X|
SMARTPROS LTD.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1.......Description of Business...........................................................................2
Item 2.......Description of Property..........................................................................21
Item 3.......Legal Proceedings................................................................................22
Item 4.......Submission of Matters to a Vote of Security Holders..............................................22
PART II
Item 5.......Market for Common Equity and Related Stockholder Matters and Issuer Purchases Of
Equity Securities................................................................................22
Item 6.......Management's Discussion and Analysis of Financial Condition and Results of
Operation........................................................................................23
Item 7.......Financial Statements.............................................................................32
Item 8.......Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................................33
PART III
Item 9.......Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act................................................33
Item 10......Executive Compensation...........................................................................34
Item 11......Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters..............................................................................34
Item 12......Certain Relationships and Related Transactions, and Director Independence........................34
Item 13......Exhibits.........................................................................................34
Item 14......Principal Accountant Fees and Services...........................................................35
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-KSB are
"forward-looking statements" within the meaning of Section 21E of the Securities
and Exchange Act of 1934 regarding the plans and objectives of management for
future operations and market trends and expectations. Such statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties. Our
plans and objectives are based, in part, on assumptions involving the continued
expansion of our business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved.
The terms "we," "our," "us," or any derivative thereof, as used herein
shall mean SmartPros Ltd., a Delaware corporation, its subsidiaries and its
predecessors.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
We provide learning and training solutions for specific professional
markets, including accounting/finance, legal, engineering, securities and
insurance--all of which have mandatory continuing education requirements--as
well as information technologY professionals. We also provide corporate
governance, ethics and compliance training for the general corporate market. We
offer off-the-shelf courses and produce custom-designed programs with delivery
methods best suited to the specific needs of our clients. Our customers include
professional firms of all sizes and many of the Fortune 500 companies and a
large number of midsize and small companies.
Our learning solutions for professionals are designed to meet the
initial and/or the ongoing licensing and continuing professional education
requirements imposed by state licensing agencies and professional standards
organizations. Most of the courses in our accounting/finance library are
designed to meet the standards and adhere to the requirements of all state
boards of accountancy and those of various professional and certifying
organizations. In the engineering area, most of our courses have been approved
for continuing professional development credit by one or more organizations,
including the American Society of Civil Engineers, the National Society of
Professional Engineers, the American Council of Engineering Companies, the
American Society of Mechanical Engineers, and the Project Management Institute.
Our financial services library consists of courses designed to meet the
licensing or continuing education requirements for bankers and financial service
professionals, which includes insurance brokers, bankers and licensed security
industry professionals.
Our entire continuing legal education library is approved in 12 states
and the United Kingdom, and some or all of the continuing legal education
courses are approved in 29 states. Unlike the accounting and engineering
professions, where a national organization oversees the approval process for
continuing education courses, in the legal profession each state's bar,
judiciary or other organization controls the approval process.
In the general corporate market, our training solutions are designed to
meet corporate learning objectives applicable to specific skills and issues
regarding integrity and corporate culture. Our corporate ethics and compliance
training programs are designed to align corporate behavior with applicable laws
and regulations and generally accepted codes of conduct. For example, our
programs may deal with issues prompted by the Sarbanes-Oxley Act of 2002, the
U.S. Federal Sentencing Guidelines, and laws addressing workplace misconduct
such as harassment. Our e-marketing and e-commerce business sells ads on our Web
site and develops customized newsletters and marketing programs for our clients.
Our products are available in one or more of the following formats:
print, videotape and digital. Digital format can be delivered on CD-ROM, DVD or
over the Internet. The Internet is our fastest growing delivery channel,
attracting new and existing video-based subscribers. Our solutions are flexible,
cost-efficient and easy to use. They alleviate many of the inefficiencies
associated with traditional classroom training, such as travel costs, scheduling
difficulties and opportunity costs. In addition, we also offer our clients a
learning content management system, which provides the professionals and their
employers a platform to take continuing education over the Internet and the
ability to track their usage and performance.
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CORPORATE HISTORY
We were organized in April 1981 under the laws of Delaware as Center
for Video Education, Inc. In 1998 we changed our name to Creative Visual
Enterprises, Ltd. In January 2000 we changed our name to KeepSmart.com, Inc. and
in June 2001 we changed our name to SmartPros Ltd.
INDUSTRY BACKGROUND
The American Society for Training and Development, in its 2006 STATE OF
THE INDUSTRY report, estimated that in 2006 U.S. organizations spent $109
billion on employee learning and development. The accounting and finance market
includes certified public accountants, certified management accountants,
certified internal auditors and other accounting professionals, as well as
corporate accounting, finance and management professionals, most of whom have
mandatory continuing education requirements. According to the Bureau of Labor
Statistics, in 2006 there were over two million accountants and finance
professionals in the United States. Based on the fact that the American
Institute of Certified Public Accountants claims it has over 330,000 members
representing approximately 60% of all the certified public accountants in the
United States, we estimate there are currently more than 500,000 certified
public accountants and financial professionals that require continuing
professional education credit to maintain their professional accreditations and
hundreds of thousands of other financial management professionals that require
continuing professional education credit to maintain their certifications.
To maintain their licenses, accounting professionals must satisfy the
continuing professional educational requirements mandated by the State Boards of
Accountancy of the states in which they practice. Although states may differ in
terms of specific course requirements or the cycle of the licensing period,
every state and the District of Columbia and the U.S. Territories, other than
Wisconsin and the Virgin Islands, which do not have any continuing professional
education requirement, requires at least 40 hours of continuing professional
education credit annually to maintain an accounting license. In addition, in
terms of whether a particular course will qualify for CPE credit, 45 states, the
District of Columbia, and Puerto Rico automatically accept courses offered by
the National Registry of CPE Sponsors, also known as NASBA (National Association
of State Boards of Accountancy). Two states require registration with their
licensing agencies. The remaining states, other than Wisconsin, and U.S.
Territories, other than the Virgin Islands, have standards that mirror those of
NASBA and have no formal registration requirements.
According to the Bureau of Labor Statistics, in 2006 there were 1.5
million engineers in the United States and over 600,000 construction managers
and engineers. In addition, there are over 475,000 engineering technicians who
may need additional specialized training. All 50 states require engineers to
take and pass a certification exam to become a licensed professional engineer.
The basic entry-level exam, Fundamentals of Engineering, is given twice each
year, in April and October. According to the National Council of Examiners for
Engineering and Surveying (NCEES), in 2007 over 40,000 engineers sat for the
exam and 73% passed. In addition, engineers who pass the Fundamentals of
Engineering exam must then take a second exam to be licensed as a professional
engineer in a specific area such as civil engineering or mechanical engineering.
For example, the Professional Engineering exam, or PE, for civil engineering is
the highest-level exam for civil engineers. This exam is also given twice a
year, in April and October. According to NCEES, in 2007, 64% of the total
candidates taking the exam, which covers multiple disciplines, passed.
Many states require licensed professional engineers to complete a
minimum number of professional development hours to maintain their professional
licenses. Unlike the accounting and finance market, where there is a reasonable
amount of uniformity, in the engineering market each of the states requiring
professional development hours sets its own standards. The number of hours
required by the states varies from 16 per year to 30 every two years. In most
instances, the states rely on various professional organizations to certify
whether a particular course qualifies for professional development credit.
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Forty-one states require some form of continuing legal education with
requirements ranging between 10 hours per year to a total of 45 hours every
three years. All courses have to be approved by the respective bar associations
of each state. Unlike other professions, each state rather than a national
organization exercises control over the requirements and content approval of
continuing legal education courses, which makes the approval process more
difficult.
In addition to these professions, employees of financial service firms,
including banks, brokerage houses and insurance companies, have employees who
hold various licenses granted by the federal and/or state governments or
administrative agencies that require continuing education or need training to
prepare for their various professional licensing examinations.
Over the last few years, legislators, government and market regulators,
the investment community and the general public have become more aware of issues
involving corporate governance, ethics and compliance. This awareness resulted
in allegations of sexual harassment, accounting fraud and mismanagement,
excessive executive compensation, breach of fiduciary duties and insider trading
at some of the largest corporations, mutual funds and market specialists, and
the New York Stock Exchange. In some cases, corporate mismanagement and
misbehavior have resulted in substantial investor losses and fines, penalties or
damages. In response to some of these occurrences, Congress passed the
Sarbanes-Oxley Act of 2002, which imposes corporate governance standards on
publicly traded companies and authorizes the national exchanges and other
regulatory bodies to impose their own strict standards. As a result, public
companies, mutual funds, market specialists and corporations in general are more
accountable to their stockholders and regulatory overseers and the public. We
anticipate that corporate spending on compliance and ethics training programs
will increase.
While information technology professionals are generally not subject to
continuing education requirements, they need to keep abreast of the rapidly
changing environment in which they work. We believe our WatchIT product is a
medium to provide that education.
Although professional and corporate training has historically been
dominated by traditional classroom instruction, advances in communications
technology are changing the manner in which corporate training is developed,
delivered and tracked. In addition, competition demands that professionals spend
more of their time on revenue-generating matters. The increasing demands made on
professionals and corporate managers have led--and, we believe, will continue to
drive--the demand for continuing professional education and corporate training
solutions that are available in multiple, flexible and cost-effective formats.
OUR BUSINESS
Since becoming a public company in 2004, our business has expanded
significantly, primarily through acquisitions. In 2004, we served principally
two large vertical markets--accounting/finance and engineering professionals.
Today, we serve five professional markets and provide training solutions to a
wide range of corporate clients in varying industries. We do this through our
various divisions, all of which are devoted to providing educational services.
Our business is designed to satisfy the growing needs of:
o professionals and their employers to comply with initial and continuing
professional education requirements in a flexible cost-effective
manner;
o businesses to provide their employees and managers with training
programs addressing the needs of their respective industries, corporate
governance, ethics and compliance issues; and
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o professionals and businesses to be able to track and monitor their and
their employees' compliance with continuing education requirements and
to assess the effectiveness of their educational programs.
To address these needs, we have approximately 2,700 hours of programs
that currently are available in one or more formats including print, videotape,
CD-ROM or online--approximately 1,100 in accounting/finance, 600 in engineering,
600 hours in banking, securities and financial services, 200 hours in legal
training and 200 hours in information technology, not including custom-designed
courses. We develop customized courses based on specifications provided to us by
our clients in both financial and non-financial industries. Most of our courses
are designed to accommodate both group and self-study.
All of our courses in the accounting and finance professional libraries
are designed to meet the standards and adhere to the requirements of all state
boards of accountancy and those of the American Institute of Certified Public
Accountants (AICPA), Institute of Management Accountants (IMA), Institute of
Internal Auditors (IIA), the Association of Financial Professionals (AFP), and
the Association of Government Accountants (AGA). We are a registered sponsor of
continuing professional education with NASBA and in New York and Texas, the only
two states that have not adopted the NASBA standards. NASBA also confers the
status of Quality Assurance Service on organizations that offer self-study
courses that meet the requisite standards. We have met those standards and
received that status. As a result, our designated programs qualify for
continuing professional education credit in all 50 states for certified public
accountants, certified management accountants, certified internal auditors and
certified financial managers.
Our engineering products include courses that are designed to help
prepare engineers for the basic entry-level licensing exam and the civil
engineering professional engineer licensing exam, as well as courses that are
designed to meet the ongoing professional development requirements mandated by
various states. We generally jointly develop with or license these programs from
an independent third party. Most of our engineering courses are available in
print, CD-ROM and/or online.
Our Working Values, Ltd. subsidiary, consisting of two divisions that
often overlap, develops ethics and compliance training programs for corporations
and other organizations and provides continuing legal education. These programs
are designed to align workplace behavior with legal standards and prevailing
community expectations regarding corporate conduct. We also develop training
techniques and strategies focusing on modular development of resources that
track specific risk areas identified by the client. Our library of customizable
communication and learning tools and templates, in digital and print formats,
enables us to develop training and communication solutions and strategies
tailored to the individual corporate cultures of each client at competitive
price points. The result is an integrated program that more closely reflects the
culture of, and the specific issues facing, the client organization while still
maintaining the cost advantages of a generic solution.
Working Values' Cognistar division develops programs and provides
services to the legal and corporate compliance market. These solutions include
self-paced courses in a content-rich, engaging environment, that take full
advantage of the Internet, and, most importantly, can be provided at
significantly lower cost than other continuing education experiences. Cognistar
products include accredited continuing legal education programs and customized
corporate training programs.
Our information technology training division course library, WatchIT,
includes more than 250 courses providing relevant briefings to executives,
technologists and consultants with relevant up-to-date information in the
ever-changing technology landscape.
Our financial services division offers over 300 course titles covering
the insurance, banking and securities industries. These courses can be delivered
online, in a multimedia Web-based format, on video or
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through live training. Many of these courses have been approved for credit by
different organizations for continuing education in their respective fields.
We have relationships with a number of professional organizations and
societies that we believe are strategic either because we have co-marketing or
co-branding arrangements with them or because we jointly develop products with
them. While no single relationship is material to overall business, if all of
these relationships were to terminate simultaneously, our competitive position
in the marketplace would be adversely affected. The partners and the nature of
our relationship with them are as follows:
ASSOCIATION OF GOVERNMENT ACCOUNTANTS. AGA offers most of our
accounting/finance products to its members through a co-branded professional
education center, or PEC.
FINANCIAL EXECUTIVES INTERNATIONAL AND INSTITUTE OF MANAGEMENT
ACCOUNTANTS. FEI and IMA both market Financial Management Network. We are
responsible for producing the product with FEI and IMA, assisting in topic
selection and with providing speakers. We also are primarily responsible for
selling the product. We also sell our SmartPros Advantage line of products
through FEI and IMA.
INSTITUTE OF INTERNAL AUDITORS. IIA offers the online version of
Financial Management Network and SmartPros Advantage to its members through a
co-branded PEC.
STATE SOCIETIES OF CERTIFIED PUBLIC ACCOUNTANTS. A number of state
societies offer various products of ours through their own co-branded PEC.
CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS. CICA offers the online
version of Financial Management Network and SmartPros Advantage to its members
through a co-branded Professional Education Center.
AMERICAN SOCIETY OF CIVIL ENGINEERS AND BOSTON SOCIETY OF CIVIL
ENGINEERS. We jointly developed our PE Exam Review course with these
organizations. In addition, with the ASCE we jointly developed 37.5 hours of
technical civil engineering courses. ASCE markets our courses to its members.
NATIONAL SOCIETY OF PROFESSIONAL ENGINEERS. NSPE sells our courses
through a co-branded Web site and directly through their Web site.
AMERICAN COUNCIL OF ENGINEERING COMPANIES. ACEC sells our courses on
their Web site, on a co-branded Web site and via direct mail. They co-developed
some of our business and management courses.
AMERICAN SOCIETY OF MECHANICAL ENGINEERS. ASME sells our products.
ASSOCIATION OF OPERATIONS MANAGEMENT. APICS sells our supply chain,
inventory and production courses.
AMERICAN INTELLECTUAL PROPERTY LAWYERS ASSOCIATION. We convert AIPLA's
live seminars to online format. AIPLA markets our course catalog and their
members are entitled to a discount off the list price.
BUSINESS TRAINING LIBRARY. BTL sells our banking and information
technology course libraries to their customers on their own co-branded PEC.
OUR STRATEGY
Our objective is to become a leading provider of continuing
professional education and corporate training solutions in the United States. To
achieve this goal, we will pursue the following strategies:
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EXPAND LIBRARY OF CONTENT. We believe that our future success depends,
in part, on our ability to develop and acquire new content. The new content
could either expand or supplement our existing libraries or could constitute a
new library for one or more additional vertical markets. Toward this end, we
continuously develop new courses for our accounting, engineering, legal,
information technology, financial services and general corporate libraries.
EXPAND WITHIN EXISTING MARKETS AND INTO NEW MARKETS. We continue to
focus on expanding our presence and to introduce new products into the markets
we currently serve--particularly engineering, legal, financial services and
information technology, where we feel our market share is relatively small, and
corporate ethics and compliance training, where we believe the opportunity is
significant. In addition, we will investigate expanding into completely new
markets that we think are potentially lucrative, such as healthcare, safety and
personal development and certificate programs for professionals in various
disciplines.
MAKE STRATEGIC ACQUISITIONS. We believe that the most efficient way for
us to expand our libraries, increase our share of the markets we currently serve
and penetrate new markets is through strategic acquisitions as evidenced by the
seven acquisitions we made in years 2006 and 2007. We continue to seek strategic
opportunities.
KEEP PACE WITH TECHNOLOGY. We believe that our ability to deliver our
products in multiple formats is critical to our continued success. The broad
acceptance of the Internet for business communication will continue, making it
an increasingly important medium for distributing our products. At the same time
we recognize that new technologies may emerge that will complement our model for
flexible delivery of content. In 2007, we began work on developing a new
Learning Management System (LMS), which will have new features and
functionalities incorporating the newest technology and improve on LMSs acquired
through some of our recent acquisitions. As a result, we are now able to deliver
our content online to a greater number of Fortune 1000 and other companies. We
plan to continue to monitor the development and market acceptance of new
technologies and will make the necessary investment to adapt our products and
services to them.
EXPAND EXISTING ALLIANCES AND ENTER INTO NEW STRATEGIC ALLIANCES. We
believe that alliances with professional organizations and associations and
commercial content providers are important to our growth and competitive
position in the industry. We plan to try to broaden these existing relationships
and seek new ones.
OUR PRODUCTS AND SERVICES
The following are our products and services:
ACCOUNTING AND FINANCE
Our accounting and finance libraries contain over 1,100 credit hours of
content, of which 900 are generally available, and the balance is
custom-designed for specific clients. Except for SmartPros Advantage, discussed
below, which is only available online, our accounting and finance programs are
available in videotape, DVD and online. The videotape and DVD formats can be
used for either group study or self-study. The online format is for self-study
only and is usually available as text only, text with audio, or in a multimedia
format that includes text, audio and streaming video. All video courses come
with a hard copy of the program and are used primarily for group study. All
online courses include downloadable text materials, easy-to-follow course
outlines, interactive quizzes and the ability to track credits and print
completion certificates. Video and online self-study programs qualify for two
hours of continuing professional education credits in most states while video
group study qualifies for one hour of continuing professional education credit.
Our clients can purchase either a single program or a subscription to a series
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of programs. Prices depend on the length of the subscription, whether one, two
or three years, the number of users, and the number of libraries covered.
SMARTPROS ADVANTAGE (SPA). SPA is a skills-based learning library
containing over 280 courses, varying in length from one to eight credit hours.
We produce these programs in our own production facility. We pay the authors of
these programs a royalty. This library is marketed primarily to corporate
accounting and finance professionals as well as public accountants. The courses
are offered individually from $22.95 to $183.60 per course. The list price for a
one-year subscription purchased online is $409.
FINANCIAL MANAGEMENT NETWORK (FMN). FMN is a library of update programs
dealing with currently relevant topics. Each month, we create four new programs
(segments), or a total of 48 new segments equal to 48 group study credit hours
and 96 self-study credit hours each year. We also maintain an online archive
containing the most recent 72 programs representing 144 credit hours for our
subscribers. The segments are written and produced by our staff and generally
involve an independent industry professional as the interviewee. The material is
presented in a question and answer format. These programs are marketed primarily
to corporate accounting and finance professionals. The list price for a one-year
subscription to the group study video version starts at $5,495 and for the
online version is $409 per user.
CPA REPORT (CPAR). This library of programs covers topics in public
accounting and is distributed primarily to accountants in public practice. Each
month, except March, we add four new segments from among the following topical
areas: Individual Tax, Business Tax, Estate and Financial Planning, Specialized
Tax Topics, Auditing and Accounting and Financial Reporting. We also offer an
online archive containing the most recent 44 programs representing 88 credit
hours. The list price for a one-year subscription to CPAR starts at $1,759 and
$409 for the online version.
THE CPA REPORT GOVERNMENT AND NOT-FOR-PROFIT. This product is a library
of programs designed specifically for accounting professionals employed by
federal, state and local governmental agencies and not-for-profit organizations.
Each quarter we distribute four new programs: two for government accountants and
two for not-for-profit accountants. We also publish an online archive containing
16 of the most recent programs representing 32 credit hours. The list price for
a one-year subscription to the CPAR Government and Not-for-Profit edition is
$499 for the video and $205 for the online version.
In addition to the libraries described above, the contents of which are
available on a subscription basis, we also produce customized programs for our
clients. In some cases, the client will author the content and retain us to
videotape the program and convert it into a digital format that can be
distributed via the Internet or internally through the corporate intranet. In
other cases, we will write and produce the entire program for the client. We
then deliver this custom content either through our proprietary learning content
management system or that of the client. These customized products can be
designed to qualify for CPE credit.
ENGINEERING
Our engineering library includes the following:
PE EXAM REVIEW. Our interactive PE Exam Review course for civil
engineers was developed jointly with the American Society of Civil Engineers and
the Boston Society of Civil Engineers Section and is designed to prepare
engineers for their professional licensing exam. The PE Exam Review course, with
over 50 hours of material, is an interactive multimedia tool that simulates the
actual professional engineering exam using demonstration problems that are
comparable to the problems that are found on the actual exam. The course
includes seven complete, self-contained course modules that cover the following
subjects: Transportation; Sanitary and Environmental; Hydraulics and Hydrology;
Structures; Geotechnical; Surveying; and Economics. The list price for the
review course is $645.
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In October 2006, we purchased certain assets, including the course
content of MGI, a provider of self-study courses, to prepare for the PE exam.
The MGI coursework, which covers the same set of modules as our CD-ROM or online
version, is a paper-based, self-study format that provides for instructor
mentoring via e-mail, telephone or submission of mini-exams for grading. The
list price for the MGI review course is $390.
ONLINE PROFESSIONAL DEVELOPMENT HOURS. We have a library, consisting of
65 hours, of engineering and management courses that qualify for professional
development hours. For example, in the "General Engineering: Business
Management" area we have over a dozen courses on various topics relating to
managing a small professional practice. Over half of the content in this library
was developed with the ASCE. Other courses in this library were developed with
the ACEC. The list prices for these courses range from $30 to $445.
PROJECT MANAGEMENT FOR ENGINEERS. This course was co-developed with URS
Corporation, one of the largest engineering firms in the United States, and is
certified by the Project Management Institute (PMI) for professional development
unit credit for certified project managers and for professional development
hours credit for civil engineers. Developed by engineers specifically for
engineers, it was one of the first completely online interactive project
management courses. The online format is enriched with audio and interactive
graphics and allows the user to proceed at his or her own pace. The program is
divided into 11 critical sections with over 60 individual learning modules. It
provides over 35 hours of continuing professional development credit. The list
price for this course is $995 for 12-month access or $695 for six-month access.
FUNDAMENTALS OF ENGINEERING EXAM REVIEW. This is a preparatory course
for the basic entry-level licensing exam that all engineers are required to
take. It is a Flash-based, interactive review course that is being marketed
directly and through professional associations to engineers as well as to
engineering firms for their internal skill-building and competency testing
programs. It is available in CD-ROM and online. The list price for this course
is $299 for either the combination CD-ROM/online version or for the online
version. We also private label the course for our strategic partners so they can
market it to their members. The MGI self-study version of this course also
provides for instructor mentoring and has a list price of $390.
SUPPLY CHAIN AND CPIM CERTIFICATION. MGI provides to members of APICS a
series of five courses that can be taken as either stand-alone coursework or to
become Certified in Production and Inventory Management (CPIM). The courses are
designed to help the user develop knowledge and skills in the essential areas of
materials management and integrated resource management. Each APICS self-study
course requires approximately 25 to 30 hours to complete. The list price for
non-members for each course is $325.
CORPORATE GOVERNANCE, COMPLIANCE AND ETHICS
Working Values develops corporate governance, compliance and ethics
programs for major corporations and other business enterprises. Working Values
currently offers the following products and services:
Working Values develops custom-built training and compliance programs
for companies based on their specific needs through its Integrity Alignment
Process. The intent is usually to meet the best practices standards of the
Federal Sentencing Guidelines and other regulations. These products help create
a culture of compliance through assessment methodologies and deployment of live
and Web-based training and communication tools.
Working Values has developed assessment tools to assess employee
attitudes and awareness of critical integrity and antifraud risks and also an
assessment that provides an objective snapshot of the values that underlie
employee behavior, making it possible to translate qualitative data into
quantitative data.
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Working Values' "ethics training" is a curriculum of specific learning
experiences designed to meet specific integrity risks. Training can be designed
to meet the specific needs of various audiences; senior leaders, managers or all
employees.
Working Values has created ready-to-deploy tools to help an
organization customize its ethics program. These tools can be deployed as-is or
customized to meet an organization's needs. Working Values Integrity Toolkit
Learning Management System (LMS) offers enterprise distribution and
administration of education content and information.
LEGAL
Working Values' Cognistar division offers 187 online courses in
continuing legal education and business ethics. These courses are accredited for
over 215 hours of CLE credit in approximately 29 states. Not every course is
approved in each state. In addition, Cognistar develops customized courses for
its clients on a consulting basis.
FINANCIAL SERVICES
Through our financial services training division, we have added over
300 courses, totaling over 600 hours, in the banking, securities and insurance
areas. Course offerings include banking compliance, general banking, general
bank management, insurance, lending, retirement and estate planning, securities,
ethics, anti-money laundering, financial planning and industry-related sales and
service. Approximately 200 of these courses have been accredited by various
state departments of insurance for continuing education credit. Many other
courses have been approved by the American College for PACE credit, the
Certified Financial Planners (CFP) Board of Standards for CFP credit, and NASBA
for CPE credit. In addition, we have courses in our library to prepare various
insurance and financial services employees in taking their licensing exams.
These courses are offered in a number of different mediums including Web-based,
video, multimedia and workshop format.
INFORMATION TECHNOLOGY
Our SmartIT division includes more than 250 courses from our WatchIT
catalog. These courses are designed to update and inform technology
professionals about the latest initiatives in their field. Individual courses
may be purchased for $199; unlimited access to our course catalog is $1,199 per
year.
GENERAL CORPORATE
Through our Skye Multimedia subsidiary we provide general corporate
training to any number of industries including pharmaceutical manufacturers,
professional firms, brokerage and financial services. These programs are custom
produced to meet the client's specific needs, including product or sales
training, technical proficiency or other uses. These programs can be delivered
in a variety of formats including Web-based and give us the opportunity to cross
sell our other products and services to these companies. Skye, in conjunction
with another company, has recently introduced its iReflect Training Software
product. This is a training tool designed to improve personal interactive
skills.
OTHER
Most of our programs are generally produced in our production facility,
which also includes tape, CD-ROM and DVD duplication equipment. In addition, the
video production and duplication department generates its own revenue by leasing
the facility to third parties and by producing third-party programs.
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Our technology department is principally a service department. Its
primary function is to convert our courses to digital format for distribution on
CD-ROM, DVD and the Internet. This department also maintains our various Web
sites, our learning content management system, the SmartPros Professional
Education Center (PEC) for subscribers to our accounting/finance and engineering
products, and the Integrity Training Center for subscribers to our ethics and
compliance training programs. The SmartPros PEC is a turnkey system designed to
manage the educational subscriptions, student accounts, e-commerce and reporting
needs of our clients. Using the SmartPros PEC, our clients can review and assess
usage of our programs by their employees and their employees' performance and
the effectiveness of these programs. The SmartPros PEC is co-branded with the
client's logo and delivered using an application service provider hosted
infrastructure model that requires no client technology resources. For those
clients who have their own learning management system, we develop an interface
that allows them to access our system through their technology. These systems
are not generally marketed as stand-alone products. Rather, they are offered
together with our library of content and allow subscribers to track usage and
performance.
The technology department also generates fees through Web site
development and hosting, and consulting arrangements. For example, companies
that have internal education programs have engaged us to convert those programs
from workbook, instructor-led or videotaped-based courses to an e-learning
format. We also offer our customers a broad range of support services, including
technical support for our learning content management system. We believe that
providing a high level of customer service and technical support is necessary to
achieve a high level of customer satisfaction and sustained revenue growth.
PRODUCT DEVELOPMENT
Our product development team includes Jeffrey Jacobs, Jack Fingerhut,
Allen S. Greene and Denise Stefano in the accounting/finance area; Stephen Henn
in the legal market; Jay Gregory and Michael Fowler in financial services; and
James Fallon and James Graham in information technology. David Gebler, the
former President of Working Values, developed programs on corporate governance,
compliance and ethics for the general corporate market. Mr. Gebler is leaving
March 31, 2008, and will be replaced by Catherine Henry.
Mr. Jacobs, who is the head of product development for accounting
products and the producer of our FMN product, is an attorney and has been
developing continuing education programs for accounting and finance
professionals since 1987. Mr. Fingerhut, the Company's Co-Founder and President,
is a certified public accountant and oversees the development of our accounting
programs and new product development. Ms. Stefano is a certified public
accountant and a professor of accounting and is currently responsible for
updating existing and introducing new courses in our SPA catalog. Mr. Henn is an
attorney who was the former President of Cognistar and joined us when we
acquired Cognistar. He is responsible for the development of course content and
customized design in the legal area. Mr. Gregory was formerly responsible for
agent training at a large, national life insurance company and joined us as part
of the FinancialCampus acquisition. Mr. Fowler, who also joined us as part of
the FinancialCampus acquisition, was formerly the senior director of business
development at Thomson NETg. Mr. Fallon is producer of our WatchIT product and
has been developing programs for information technology professionals for over
10 years. Ms. Henry was formerly the senior director of compliance and ethics at
a large supermarket chain where she developed and maintained compliance policies
and metrics.
In addition, Seth Oberman, the President of Skye, develop and markets
customized courses and training programs for the pharmaceutical, financial
services and other industries that Skye services.
We are planning to devote more resources to developing programs. We
hire independent contractors to update, develop or assist in developing programs
for us. In those instances where we are relying on outside sources for content
or where we purchase existing content, our design and development team will
develop or oversee the development of an effective format that focuses on
performance objectives, instructional anti-practice strategies, interactivity
and assessments. This process includes creating and
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designing study guides and course material, scripts and, in some cases, visual
aids. The design and development team includes subject matter experts,
instructional designers, technical writers and developers, graphic designers,
content editors, and quality assurance reviewers. After final assembly and
integration of all course components, we test to ensure all functional
capabilities work as designed and deliver the desired learning experience and
result.
SALES AND MARKETING
Our sales and marketing strategy is designed to attract new customers
and build brand awareness. We market our products through our alliances with
professional organizations and associations, through our own inside
telemarketing sales force, our outside sales force, and through our Web sites.
We believe that this strategy allows us to focus our resources on the largest
sales opportunities while simultaneously leveraging our strategic relationships.
Our sales and marketing department includes a Senior Vice President of
Sales, a Vice President of Marketing, and a sales staff of 19 people. The sales
staff is divided between inside, or telesales, and field sales. The field sales
force focuses on larger accounts. In addition, our senior executives, as well as
the heads of various divisions, dedicate varying portions of their time and
efforts to sales and marketing activities. Our Chief Technology Officer spends a
portion of his time selling and marketing our technology services.
To supplement the efforts of our sales staff, we use comprehensive,
targeted marketing programs, including: direct mail to our customers and to
members of the professional organizations with which we partner; public
relations activities; advertising on our Web site and the Web sites of our
strategic partners; participating in trade shows; and ongoing customer
communication programs. We build brand awareness through our strategic
relationships with the leading professional associations and organizations and
the leading commercial content providers within the markets we serve. These
strategic relationships include co-branding initiatives on new and existing
products, joint advertising campaigns and e-commerce relationships.
TECHNOLOGY
Our proprietary learning content management system, the SmartPros
Professional Education Center, employs a logical and physical architecture that
facilitates rapid development, deployment and customization of Internet-based
solutions for organizational e-learning. Our core systems use a series of
scalable application Web servers, XML and MS-SQL data sources, and utilize
industry standard Web browser and Internet technologies for content delivery to
the users. To ensure limited downtime and product lines that are free of
bandwidth limitations as they grow, our redundant server system is located at a
secure Verizon co-location data center one mile from our Hawthorne, New York,
main office. Additionally, in the fourth quarter of 2007 we began to create a
redundant data center in Denver, Colorado, that will provide enhanced service to
West Coast and Asian-based customers and serve location-redundant, load-balanced
content. This co-location allows the freedom to completely control our server
infrastructure while providing us with 24/7 monitoring, support, redundant
Internet connectivity and full generator power backup.
The SmartPros PEC includes a scalable suite of applications and
features that can be streamed via the Internet or a corporate intranet. The
basic features of the system allow asynchronous streaming of video and audio
courses combined with media-timed synchronization of supplemental material,
online quizzes and final exams. Student interaction is enhanced through the use
of real-time questions to content experts with quick response. This full service
solution includes a complementary array of communication tools such as e-mail,
chat, message boards and learner tracking. The tracking of educational needs
both internal to the system and external education opportunities, such as
stand-up and leader-led training, are maintained using a student-managed course
tracking feature called "My Courses."
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Some key features of the SmartPros PEC include:
o SCALABILITY. Scalability is accomplished using a combination of
load-balancing hardware and software. Multiple, redundant servers are
deployed to handle peak periods when the largest numbers of concurrent
users are expected on the system.
o SCORM/AICC CONNECTIVITY LAYER. Where required, we use both Shareable
Content Object Reference Model (SCORM) and Aviation Industry CBT
Committee (AICC) Connectivity layers to ensure our content is
deliverable through a variety of enterprise e-learning systems other
than the PEC. Additionally, the core foundation is capable of
exchanging data with third-party legacy systems with minimal effort.
o STANDARD RELATIONAL DATABASE SERVER. We use standard relational
database servers. To enhance performance and ensure that users are
served efficiently, the core foundation executes database-stored
procedures to optimize intense database processing. The core foundation
currently supports Microsoft SQL Server databases.
o ASP-BASED APPLICATION SERVER. The business and application logic
resides on an ASP.NET-based application server. This architecture
allows us to deploy a site across multiple servers using Microsoft
Windows 2000 and 2003 servers.
o ELECTRONIC COMMERCE ENABLED. The core foundation includes interfaces to
external electronic payment services, enabling real-time electronic
commerce. This allows the instant purchase of both one-off and
subscription-based e-learning courseware.
o INTERNET MULTIMEDIA CONTENT DELIVERY. We deliver high quality, low
bandwidth video and audio via the Internet, intranets and extranets.
This multimedia content enhances and personalizes the learning
experience. We use Flash Media as the primary delivery mechanism for
this content.
o LOW BANDWIDTH/HIGH IMPACT ANIMATIONS. Using Macromedia's Flash
technology, we deliver both animated and spoken educational material
with minimal load on corporate networks.
COMPETITION
The market for continuing professional education and corporate learning
solutions is large, fragmented and highly competitive. We expect these
characteristics to persist for the foreseeable future based on the following
factors:
o The expected growth of this market, as demand for highly skilled
professionals increases;
o The increased scrutiny on corporate culture, ethics and compliance; and
o Relatively low barriers to entry.
Of the markets we currently serve, we believe that all of our
professional education markets have some barrier to entry plus a multitude of
regulatory compliance requirements. It would be extremely difficult to compete
in the accounting education market without NASBA sponsor designation. Obtaining
this designation requires an investment of time and a modest amount of capital.
Nevertheless, for companies with even modest resources in terms of talent and
capital, these barriers may not be significant. In the legal profession, the
approval process for continuing education courses varies by state, unlike
accounting. In the engineering market, each state sets its own standards, as
does each engineering specialty. In the corporate education market, the barriers
to entry are virtually non-existent. The financial service industry has various
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barriers to entry as employees requiring continuing education are subject to
federal and/or state regulations. In addition, customers expect courses covering
a broad range of topics related to regulatory concerns. The course library and
its delivery platform must meet very rigid controls in order to be pre-approved.
Information technology education has limited barriers to entry as there are no
regulatory requirements.
We believe that the principal competitive factors in our industry are
the following;
o Breadth, depth and relevancy of the course content;
o Performance support and other features of the training solution;
o Reputation of presenter;
o Adaptability, flexibility and scalability of the products offered;
o Liquidity and capital resources;
o Deployment options offered to customers;
o Customer service and support;
o Price;
o Industry and professional certifications;
o Brand identity; and
o Strategic relationships.
We believe that we compete favorably on most of these issues. While
price is always a competitive factor, we do not believe that we should compete
solely on that basis and, in fact, many of our competitors sell their products
for less than we sell ours. Particularly, in the accounting, legal, financial
services and information technology markets, we believe that our reputation and
the quality of our offerings--as well as our other competitive advantages,
including the breadth, depth and relevancy of our libraries, strategic
relationships, our learning content management system, our customer service and
support and the flexibility of our delivery options--allow us to price our
products accordingly. In the engineering and general corporate markets, where we
have not established our reputation to the same extent, we have less flexibility
when it comes to price. In the corporate compliance area, we believe that what
will ultimately differentiate us from our competitors will be our ability to
create programs that are designed to meet the specific corporate cultures of our
clients.
Our competitors vary in size and in the scope and breadth of the
products and services they offer. They include public companies such as
SkillSoft PLC and Saba Software, Inc., and private companies such as CPA2Biz,
Inc., Bisk Education, Inc., and MicroMash in the accounting market;
RedVector.com, Inc., AEC Direct and NetGen Learning Systems in the engineering
market; and LRN, The Legal Knowledge Company, Integrity Interactive Corporation,
MIDI, Inc. and PLI-Corpedia in the corporate compliance and ethics market. In
the financial services market our competitors include Kaplan Financial, RegEd,
WebCE, BVS, Sheshunoff, and various trade associations. In addition, we also
compete with universities, professional and other not-for-profit organizations
and associations, some of whom are also our strategic partners and/or clients.
Potential competitors include large diversified publishing companies, such as
The Washington Post Company, Thomson Financial and Pearson Education, other
education companies, including traditional providers of in-classroom instruction
and remote learning solutions, such as DeVry
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University, as well as professional service companies, such as accounting firms,
who are looking for alternative sources of revenue. Competition may also come
from technology and e-commerce solutions providers. Internet-based learning
solutions have become increasingly popular in recent years along with the
increased demand for flexible, cost-effective alternatives.
Some of our existing and potential competitors have greater resources,
financial capabilities, market penetration, and more extensive libraries that
have enabled or will enable them to establish a stronger competitive position
than we have. We sometimes compete directly with CPA2Biz. In addition, our
competitors include SkillSoft and Saba, who are both relatively large companies.
However, SkillSoft's primary focus is e-learning content and software products
for business and information technology professionals. Saba principally provides
software solutions that are used to manage people in large organizations,
although they do sell content as well. Since we currently do not market our
learning management system as a stand-alone product, we do not compete presently
with Saba in this area. However, many of our larger clients use the Saba system
or another system for their learning content management. In those cases, we will
interface with the learning management system and allow the client to access our
courseware while cross-posting student progress between ours and the client's
learning management system.
The largest solutions providers to the general corporate compliance
training market are Integrity Interactive and LRN. We rarely face either of
these companies in the marketplace since they both focus principally on Fortune
100 companies and have extensive off-the-shelf libraries. However, their
products tend to be more expensive than ours, and we believe that our ability to
adapt programs to address unique cultures of different organizations is greater
than theirs. Our more frequent competitors are PLI-Corpedia, a joint venture
between the Practising Law Institute (PLI) and Corpedia Education, two leaders
in the field of compliance education, and Midi, Inc. Both market off-the-shelf
and customized programs to mid- and large-cap public companies. PLI-Corpedia has
the advantage of access to PLI's vast library. Midi uses video-based modules and
tends to attract customers that like its particular training technique. We
believe that we have more diverse tools and can offer an integrated ethics and
compliance program that contains live, video and Web-based communication and
learning elements.
Our principal competitors in the area of providing continuing legal
education are the Practising Law Institute (PLI), West LegalEdCenter, ALI-ABA,
CLEonline, and various state bar associations.
Our principal competitors in the area of financial services compliance
training and continuing education for bankers include Bankers Edge, Bankers
Academy (The Edcomm Group) and banking associations such as BAI, Bankers
Training & Certification Center, and various banking trade organizations.
Our principal competitors in the area of engineering education are
RedVector.com, Inc., university-based extension programs, individual trainers
and professional organizations.
Our principal competitors in the area of information technology include
SkillSoft and Global Knowledge.
OUR COMPETITIVE ADVANTAGES
We believe that the following competitive advantages will help us
achieve this goal.
HISTORY AND REPUTATION. We have been providing learning solutions for
accounting and finance professionals for more than 26 years. We believe that in
the accounting/finance market we have the reputation of being a leading provider
of continuing professional education programs, as evidenced by our continued
growth in that market and a high renewal rate. We believe that our reputation in
the accounting/finance market will assist us as we expand our presence in the
engineering, legal, financial services, information technology, corporate ethics
and governance, and general corporate markets, and also into new markets.
15
We have been providing learning solutions for engineering professionals
since 1997. Our recently acquired legal and financial service divisions have
been in business for eight and 25 years, respectively, prior to our acquiring
these various companies.
PROFESSIONAL DESIGNATIONS AND STRATEGIC ALLIANCES. We believe that our
relationships with some of the largest and most respected professional
organizations and associations in the accounting and engineering professions:
o give us instant credibility in the marketplace;
o provide us with a distribution channel for our products;
o are a source for programs; and
o provide us with access to a faculty around which to build other
programs.
EXTENSIVE LIBRARY. Our content library consists of over 2,000 hours of
proprietary education content including skills-based and update programs. We
believe that our libraries are among the most extensive in the industry and help
attract new subscribers. In the market for continuing legal education, we offer
national courses; comparatively, those offered by the local bar associations
usually deal with issues particular to that state. We also believe that our
content and delivery technology is better than that of our competitors.
EXPERIENCED MANAGEMENT. Our management team is comprised of experienced
and successful accounting and legal professionals and sales and marketing and
administrative executives. This has enabled us to develop high quality programs,
enter into strategic relationships with the major professional organizations in
the markets we serve, attract well-known personalities around whom we develop
new programs, cut costs and make strategic acquisitions.
VALUE-ADDED SERVICES. In addition to our extensive library of
courseware, we also offer our customers a proprietary learning content
management system, an administrative tool that enables organizations to monitor
the use and efficacy of our programs.
LARGE AND DIVERSIFIED CUSTOMER BASE. We have over 3,000 customers. Our
customers include Fortune 500 companies, professional firms, small- and
medium-sized companies and individuals. In the aggregate, we estimate that our
corporate clients employ tens of thousands of accounting and finance
professionals, representing a substantial universe of potential users. In
addition, our corporate customers are a diversified group in terms of the
industries and markets in which they operate. For example, our customers are
some of the leading businesses in the following industries: accounting, banking
and finance, law, insurance, technology, telecommunications, retail, aerospace,
natural resources, construction and chemicals.
END-TO-END SERVICE. All of our accounting/finance, legal, information
technology and corporate training programs are produced, filmed, edited,
duplicated and converted in-house. Our engineering and financial services
programs are usually licensed from or developed in conjunction with an
independent third party but are filmed, edited, duplicated and/or converted into
digital format in-house. Finally, we have a fulfillment center from which we
ship our course materials, tapes as well as hard copies, to our customers. We
believe our vertically integrated operation results in a more efficient
production process and enhances the quality of our products.
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ONLINE RESOURCE AND CONTENT PROVIDER. We own and operate multiple Web
sites, including primary domains and subdomains at: www.smartpros.com,
http://education.smartpros.com, http://accounting.smartpros.com,
http://ir.smartpros.com, http://marketing.smartpros.com, www.workingvalues.com,
www.skyemm.com, www.cognistar.com, www.mgi.org, www.pelicense.org,
www.sageonlinelearning.com., www.financialcampus.com, www.watchit.com ,
www.financejobs.com, www.fmnonline.com, www.ireflectraining.com,
www.pro2net.com, www.accountingnet.com, and www.smartprosinteractive.com.
Our SmartPros Web site has over 20,000 pages of proprietary content and
links to professional organizations, associations and institutions, and is a
marketing and distribution channel for our products. We believe that this Web
site has become a destination for professionals based on the following data:
o As a result of maintaining the Web site, we have built a database with
over 500,000 profiled users.
o The Web site logs over 450,000 visits per month.
o Through our Web sites, we serve over one million ads and 200,000 opt-in
e-mails per month.
INTELLECTUAL PROPERTY
We own a variety of intellectual property, including trademarks, trade
names, copyrights, proprietary software, technical know-how and expertise,
designs, process techniques and inventions. We believe that the trademarks and
trade names we use to identify our products and services are material to our
business. We own all of the following trademarks, trade names and/or service
marks, which have either been federally registered or applications have been
filed with the United States Patent and Trademark Office seeking federal
registration: SMARTPROS, PRO2NET, KEEPSMART, WORKING VALUES, PROFESSIONAL
EDUCATION CENTER (PEC), FINANCIAL MANAGEMENT NETWORK (FMN), CPA REPORT (CPAR),
INTEGRITY TOOLKIT, INTEGRITY ALIGNMENT, COGNISTAR, SAGE, ACCOUNTINGNET, FINANCE
JOBS, WATCHIT, SMARTIT, HAWTHORNE CENTER FOR EXCELLENCE, iREFLECT and
FINANCIALCAMPUS. Despite our efforts to protect our proprietary rights,
unauthorized persons may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. Policing unauthorized use of our
products is extremely difficult and the means we use to protect our proprietary
rights may be inadequate. We believe that, ultimately, our success depends to a
larger extent on the innovative skills, know-how, technical competence and
abilities of our personnel.
All of our internally developed content is protected by copyright.
While this may offer some protection against unauthorized persons copying the
material, it does not prevent anyone from independently developing material on
the same topic or in the same format. Regarding content created, owned or
licensed by third parties, we enter into license agreements that permit us to
market, use and distribute that content. These licenses may be exclusive or
non-exclusive. We usually obtain a representation from the licensor that he or
she has the right to license the content to us, that the license granted to us
does not violate the terms of any other license, that the license granted does
not violate any applicable law, rule or regulation or the proprietary rights of
any third party, including, without limitation, patents, copyrights, trade
secrets, or any license or sublicense, covenant or contract with any third party
and that there is currently no actual or threatened suit by any such third party
based upon an alleged violation by such licensor of any such proprietary rights.
However, we do not make any independent investigation to verify if these
representations are accurate. If the representation is not true, we may be
enjoined from using that content further and may also be liable for damages to
the true owner of the content or the exclusive licensee.
In connection with our learning content management systems, our license
agreement restricts use of the system and prohibits users from copying or
sharing the system without our express written consent. Our learning content
management systems incorporate products and systems and technology that we
license and
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purchase from third parties. We cannot assure that we will be able to continue
to license or support this technology on terms that we consider reasonable, if
at all. If these licenses or maintenance agreements expire and we cannot renew
them, they are substantially modified or if they were terminated for any reason,
we would have to purchase, license or internally develop comparable products and
systems. Any one of these options may be expensive and/or time consuming, which
could have a material adverse effect on our business and financial performance.
We cannot prevent third parties from independently developing similar
or competing systems, software and content that do not infringe on our rights.
In addition, we cannot prevent third parties from asserting infringement claims
against us relating to these systems and software. These claims, even if they
are frivolous, could be expensive to defend and could divert management's
attention from our operations. If we are ultimately found to be liable to third
parties for infringing on their proprietary rights, we may be required to pay
damages, which may be significant, and to either pay royalties to the owner or
develop non-infringing technology, the cost of which may be significant.
GOVERNMENT REGULATION
Government regulation is important to our business. Every state sets
its own continuing professional education requirements, in terms of the number
of credits needed and the cycle in which those credits need to be earned, for
its licensed professionals. In addition, specific content will only qualify for
continuing professional education credit if it meets specific criteria, which
varies from state to state. In the accounting/finance area, most states have
adopted the NASBA standards to address the quality of course content. We are a
certified NASBA sponsor, meaning that the courses we offer to the general public
on a subscription basis qualify for continuing professional education credits in
those states that have either adopted the NASBA standards or their own standards
similar to NASBA's, the District of Columbia and Puerto Rico. In the engineering
area, there is less uniformity and each of our courses must be certified by the
particular professional organization that oversees that particular specialty.
The market for continuing legal education programs is regulated by the
state bar association, state courts or other organizations in each state. The
regulatory landscape is complex and varies from state to state.
The market for continuing education for the engineering professional is
regulated by each state. The National Council of Examiners for Engineering and
Surveying (NCEES) provides the guidelines and testing for engineers to obtain
their professional licenses in all 50 states and various United States
possessions.
In addition, various professionals in the insurance and security
industries have either federal and/or state licensing and continuing education
requirements.
EMPLOYEES
As of March 1, 2008, we had 99 employees of which 90 were full-time and
nine were part-time. We have 52 employees based in our executive offices in
Hawthorne, New York, and 13 employees based in our office in our Westborough,
Massachusetts office. Skye employs 12 people in their Bridgewater, New Jersey,
office. In addition, we have an aggregate of 22 employees that work out of their
homes in various states. We believe that our relationship with all of our
employees is generally good.
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CERTAIN RISK FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY
The following factors may affect our growth and profitability and
should be considered by any prospective purchaser of our securities:
THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE AND HAS
RELATIVELY LOW BARRIERS TO ENTRY. INCREASED COMPETITION COULD RESULT IN MARGIN
EROSION AS WELL AS LOSS OF MARKET SHARE AND BRAND RECOGNITION.
Our competitors include professional firms, public and privately held
companies, universities (traditional and online) and professional and
not-for-profit organizations and associations. Many of our existing and
potential competitors have greater financial resources, larger market share,
broader and more varied libraries, technology and delivery systems that are more
flexible or cost-effective, stronger alliances, and/or lower cost structures
than we do--which may enable them to establish a stronger competitive position
than we have, in part through greater marketing opportunities. If we fail to
address competitive developments quickly and effectively, we will not be able to
grow.
OUR GROWTH STRATEGY ASSUMES THAT WE WILL MAKE TARGETED STRATEGIC
ACQUISITIONS.
A key feature of our growth strategy is strategic acquisitions. We may
not be able to maintain our current rate of growth. If we fail to execute on
this strategy, our revenues may not increase and our ability to sustain
profitability will be impaired.
In 2007, we made three strategic acquisitions in the financial services
and information technology markets.
An acquisition strategy is inherently risky. Some of the risks we may
face in connection with acquisitions include:
o identifying appropriate targets in an efficient and timely fashion;
o negotiating terms that we believe are reasonable;
o failing to accurately assess the true cost of entering new markets or
marketing new products;
o integrating the operations, technologies, products, personnel and
customers of the acquired enterprise;
o maintaining our focus on our existing business;
o losing key employees; and
o reducing earnings because of disproportionately large depreciation and
amortization deductions relating to the acquired assets.
We may not be able to identify any appropriate targets or acquire them on
reasonable terms. Even if we make strategic acquisitions, we may not be able to
integrate these businesses into our existing operations in a cost-effective and
efficient manner.
IF WE FAIL TO KEEP UP WITH CHANGES AFFECTING THE MARKETS THAT WE SERVE,
WE WILL BECOME LESS COMPETITIVE, ADVERSELY AFFECTING OUR FINANCIAL PERFORMANCE.
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In order to remain competitive and serve our customers effectively, we
must respond on a timely and cost-efficient basis to changes in technology,
industry standards and procedures, and customer preferences. We need to
continuously develop new course material that addresses new developments, laws,
regulations, rules, standards, guidelines, releases and other pronouncements
that are periodically issued by legislatures, government agencies, courts,
professional associations and other regulatory bodies. In some cases these
changes may be significant and the cost to comply with these changes may be
substantial. We cannot assure that we will be able to adapt to any changes in
the future or that we will have the financial resources to keep up with changes
in the marketplace. Also, the cost of adapting our products and services may
have a material and adverse effect on our operating results.
OUR FUTURE GROWTH AND COMPETITIVENESS DEPENDS ON OUR ABILITY TO ADAPT
TO NEW TECHNOLOGIES AND CHANGES TO EXISTING TECHNOLOGIES AND NEW APPLICATIONS TO
MEET MARKET DEMAND.
One of our principal competitive advantages is our ability to deliver
content in multiple formats. This flexibility has enabled us to keep pace with
changes in technology and has contributed to our growth. For example, we
recently converted our entire course content to a Flash-based format because a
Windows-based format could not get through the firewall of many potential
clients. Keeping pace with technological developments can be difficult and
expensive, adversely impacting our operating results. However, our continued
growth depends on our ability to anticipate our customers' needs and
preferences, and to adapt to those needs and preferences. If we fail to do that,
the potential adverse impact could be significant to our business, operating
results and financial condition. We cannot assure that we will be able to keep
pace and adapt to changes in technology or customer preferences.
OUR FUTURE SUCCESS DEPENDS ON RETAINING OUR EXISTING KEY EMPLOYEES AND
HIRING AND ASSIMILATING NEW KEY EMPLOYEES. THE LOSS OF KEY EMPLOYEES OR THE
INABILITY TO ATTRACT NEW KEY EMPLOYEES COULD LIMIT OUR ABILITY TO EXECUTE OUR
GROWTH STRATEGY, RESULTING IN LOST SALES AND A SLOWER RATE OF GROWTH.
Our success depends in part on our ability to retain our key employees
including our Chief Executive Officer, Allen S. Greene, and our President, Jack
Fingerhut. Mr. Greene is an experienced senior corporate executive who has been
instrumental in cutting costs, raising capital and negotiating and consummating
seven acquisitions that have helped us refocus on our core competencies while at
the same time expand into new markets. Mr. Fingerhut is one of our founders and
is actively involved in sales and marketing and identifying acquisition targets.
Mr. Fingerhut also has overall responsibility for the accounting and banking
products and video production business. He has extensive contacts within--and
knowledge of--the accounting profession. Although we have employment agreements
with both of these executives, each executive can terminate his agreement at any
time. Also, we do not carry, nor do we anticipate obtaining, "key man" insurance
on either Mr. Greene or Mr. Fingerhut. It would be difficult for us to replace
either one of these individuals. In addition, as we grow we may need to hire
additional key personnel. We may not be able to identify and attract high
quality employees or successfully assimilate new employees into our existing
management structure. In addition, if any of our division heads were to leave,
it could affect our revenues adversely. For example, in early 2006 the head of
our video production division left and we have not yet been able to find a
permanent replacement for him. As a result revenues in that division have
declined significantly.
OUR SALES CYCLE CAN BE LONG AND UNPREDICTABLE, WHICH COULD DELAY OUR
GROWTH AND MAKE IT DIFFICULT FOR US TO PREDICT EARNINGS. THIS COULD LEAD TO
STOCK PRICE VOLATILITY.
Our sales cycle is unpredictable and can last as long as 24 months for
large, enterprise-wide or custom-designed programs. Most of our revenue is
derived from corporate customers. Identifying the decision maker in these
enterprises is often time consuming. Also, sales of online products, which we
believe are essential to our future growth and success, take longer than sales
of video or CD-ROM products. Other variables also complicate the purchasing
process, including the timing of disbursement of funds and the person-to-person
sales contact process. Sales may take much longer than anticipated, may fall
outside
20
the approved budget cycle and, therefore, may not occur due to the loss of
funding. This unpredictability has in the past caused, and may in the future
cause, our net revenue and financial results to vary significantly from quarter
to quarter.
OUR STRATEGIC RELATIONSHIPS ARE USUALLY SHORT-TERM, NONEXCLUSIVE
ARRANGEMENTS AND OUR STRATEGIC PARTNERS MAY PROVIDE THE SAME OR SIMILAR SERVICES
TO OUR COMPETITORS, DILUTING ANY COMPETITIVE ADVANTAGE WE GET FROM THESE
RELATIONSHIPS.
We rely on our strategic partners to provide us with access to content
and to sell our content. Our strategic partners may enter, and some have
entered, into identical or similar relationships with our competitors, which
could diminish the value of our products. Our relationships with our strategic
partners are primarily covered by annual agreements that are subject to renewal.
While we do not depend on any single strategic relationship for a significant
amount of revenue or to develop content, if a number of these organizations were
to terminate their relationships with us at the same time, our ability to
develop new content on a timely basis and our ability to distribute content
would be impaired. We may not be able to maintain our existing relationships or
enter into new strategic relationships.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY ADEQUATELY OR
COST EFFECTIVELY, WHICH MAY CAUSE US TO LOSE MARKET SHARE OR REDUCE OUR PRICES.
Our success depends in part on our brand identity and our ability to
protect and preserve our proprietary rights. We cannot assure that we will be
able to prevent third parties from using our intellectual property rights and
technology without our authorization. We do not own any patents on our
technology. Rather, to protect our intellectual property, we rely on trade
secrets, common law trademark rights, trademark registrations, copyright
notices, copyright registrations, as well as confidentiality and work for hire,
development, assignment and license agreements with our employees, consultants,
third party developers, licensees and customers. However, these measures afford
only limited protection and may be flawed or inadequate. Also, enforcing our
intellectual property rights could be costly and time consuming and could
distract management's attention from operating business matters.
IF WE WERE DEEMED AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY
ACT OF 1940, APPLICABLE RESTRICTIONS COULD MAKE IT IMPRACTICAL FOR US TO
CONTINUE OUR BUSINESS AS CONTEMPLATED AND COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS.
We are not an investment company under the Investment Company Act of
1940 and we intend to conduct our operations so that we will not be deemed an
investment company. However, if we were to be deemed an investment company,
restrictions imposed by the Investment Company Act of 1940, including
limitations on our capital structure and our ability to transact with
affiliates, could make it impractical for us to continue our business as
contemplated and would harm our business and the price of our common stock.
EFFECTS OF RECESSION ON BUSINESS.
Our customer base consists primarily of large corporations,
professional service and other firms, many of whose employees are required to
take continuing education on a periodic basis. However, in the event of a
recession, some of our clients could seek a cheaper provider of these courses
and could curtail the development of customized products.
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices, production facility, technology center and
fulfillment center are located on Route 9A in Hawthorne, New York, where we
lease 17,850 square feet. The lease expires February 28, 2010. We lease 1,800
square feet in Westborough, Massachusetts, where Working Values and Cognistar
are
21
based. The lease expires January 31, 2009. Finally, Skye Multimedia leases 2,320
square feet in Bridgewater, New Jersey, at which the lease expires in August
2008.
ITEM 3. LEGAL PROCEEDINGS
At the present time, we are not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(a) MARKET INFORMATION
Our common stock is currently traded on the American Stock Exchange
under the symbol "PED." We recently submitted an application for listing on the
NASDAQ Capital Market.
The following table sets forth, for the periods indicated, the high and
low sales information for our Common Stock. Such quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not necessarily
represent actual transactions.
PRICE RANGE OF COMMON STOCK
--------------------------------------------------------------------------------
SALES INFORMATION
--------------------------------------
HIGH LOW
--------------- ------------------
2007
----
First Quarter $6.00 $3.42
Second Quarter $7.00 $4.56
Third Quarter $9.27 $5.19
Fourth Quarter $6.43 $4.46
2006
----
First Quarter $3.55 $2.75
Second Quarter $3.35 $2.25
Third Quarter $3.20 $2.47
Fourth Quarter $4.21 $2.50
As of March 19, 2008, the closing sale price per share for our common
stock, as reported on the American Stock Exchange was $4.79.
(b) HOLDERS
As of March 3, 2008, the number of record holders of our common stock
was 129.
(c) DIVIDENDS
The holders of our common stock are entitled to receive such dividends
as may be declared by the Board of Directors. During the years ended 2006 and
2007, we did not pay any dividends. Payment of
22
future dividends will be within the discretion of our Board of Directors and
will depend on, among other factors, our retained earnings, capital requirements
and operating and financial condition.
RECENT SALES OF UNREGISTERED SECURITIES
None.
USE OF PROCEEDS
On October 19, 2004, our registration statement on Form SB-2,
commission file number 333-115454 (the "Registration Statement") registering the
offer and sale of units (each a "Unit" and collectively the "Units"), each Unit
consisting of three shares of our common stock, par value $.0001 per share, and
one and one-half common stock purchase warrants, was declared effective by the
U.S. Securities and Exchange Commission. The warrants included in the Units have
a term of five years and an exercise price of $7.125 per share. We sold all
600,000 Units covered by the Registration Statement. The gross proceeds to us
from the offering were $7,650,000. Paulson Investment Company, Inc., was the
representative of the underwriters of the offering. The net proceeds to us after
underwriting discounts and other expenses were approximately $6,000,000. As of
December 31, 2007, we used approximately $500,000 of the net proceeds to repay
certain long-term debt. Through December 31, 2007, we used $1.6 million of the
proceeds for acquisitions.
COMPANY PURCHASES OF ITS EQUITY SECURITIES
There were no company purchases of its equity securities in 2007.
On November 8, 2007, the Board of Directors approved an extension of
the stock buy back program under which $750,000 of company funds is allocated to
purchase shares of our common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED
ELSEWHERE IN THIS FORM 10-KSB. CERTAIN STATEMENTS IN THIS DISCUSSION AND
ELSEWHERE IN THIS REPORT CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934. SEE
"FORWARD-LOOKING STATEMENTS" FOLLOWING THE TABLE OF CONTENTS OF THIS 10-KSB.
BECAUSE THIS DISCUSSION INVOLVES RISK AND UNCERTAINTIES, OUR ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
We provide learning solutions for accounting/finance, legal, insurance,
banking, brokerage and engineering professionals, six large vertical markets
with mandatory continuing education requirements. In addition, we provide
training solutions for the pharmaceutical, banking, securities, insurance and
technology industries. We also provide information technology, corporate
governance, ethics and compliance training for the general corporate market. We
offer off-the-shelf courses and custom-designed programs with delivery methods
suited to the specific needs of our clients. Our customers include professional
firms of all sizes, many of the Fortune 500 companies and a large number of
midsize and small companies.
We measure our operations using both financial and other metrics. The
financial metrics include revenues, gross margins, operating expenses and income
from continuing operations. Other key metrics include (i) revenues by sales
source, (ii) online sales, (iii) cash flows and (iv) EBITDA.
23
Some of the most significant trends affecting our business are the
following:
o The increasing recognition by professionals and corporations that they
must continually improve their skills and those of their employees in
order to remain competitive;
o The plethora of new laws and regulations affecting the conduct of
business and the relationship between a corporation and its employees;
o The increased competition in today's economy for skilled employees and
the recognition that effective training can be used to recruit and
train employees; and
o The development and acceptance of the Internet as a delivery channel
for the types of products and services we offer.
In 2004 we successfully completed our initial public offering. The net
proceeds from the offering were approximately $6 million. To date, we have
expended approximately $2.1 million of those proceeds, $500,000 to repay debt
and the balance for acquisitions. We intend to use the remaining $3.9 million
net proceeds from the offering and our publicly traded common stock to execute
our growth strategy, which contemplates acquiring other companies (or their
assets) that provide learning solutions. We intend to focus on acquisitions that
will allow us to increase the breadth and depth of our current product
offerings, including the general corporate market for compliance, governance and
ethics. We will also consider acquisitions that will give us access to new
markets and products. We prefer acquisitions that are accretive, as opposed to
those that are dilutive, but ultimately the decision will be based on maximizing
shareholder value rather than short-term profits. The size of the acquisitions
will be determined, in part, by our size, the capital available to us and the
liquidity and price of our stock. We may use debt to enhance or augment our
ability to consummate larger transactions.
There are many risks involved with acquisitions, some of which are
discussed in Item 1 of Part 1 of this report above under the caption "Certain
Risk Factors That May Affect Our Growth and Profitability." These risks include
integrating the acquired business into our existing operations and corporate
structure, retaining key employees and minimizing disruptions to our existing
business. We cannot assure that we will be able to identify appropriate
acquisition opportunities or negotiate reasonable terms or that any acquired
business or assets will deliver the shareholder value that we anticipated at the
outset.
RECENT ACQUISITIONS
On March 1, 2007, we acquired substantially all of the assets and
assumed certain liabilities of The Selbst Group Inc. for approximately $93,000.
The Selbst Group, founded in 1974, is a specialized consulting firm providing
sales, sales management training, product training and marketing support for the
financial services industry. In conjunction with the acquisition we entered into
a two-year employment agreement with the President of Selbst, with an option to
extend the contract annually for three years. In addition, the seller may be
entitled to an incentive bonus if certain sales targets are reached.
On August 2, 2007, we acquired substantially all of the assets and
assumed certain liabilities of Bright Ideas Group d/b/a WatchIT (BIG). BIG
develops information technology education and training programs for business and
information technology professionals. The assets we acquired included
approximately 300 courses and customer contracts. We operate the WatchIT product
line under the Company's SmartIT business division. James Graham, BIG's Founder
and President, and other key employees of BIG, have become our employees.
The purchase price for the assets was $175,000 plus the assumption of
BIG's obligations under certain customer agreements. In addition, BIG is
entitled to an incentive payment of $200,000 if SmartIT's
24
revenues for the six month period beginning August 1, 2007, and ending January
31, 2008, exceed $1,000,000. If SmartIT's revenues for this period are between
$875,000 and $1,000,000, the incentive payment will be a prorated portion of the
$200,000. If revenues are less than $875,000, no incentive payment is due. None
of these contingent payments were earned.
Finally, BIG is also entitled to an earnout equal to three times BIG's
average annual earnings for the three year period ending July 31, 2010. Annual
earnings is income before taxes less all inter-company charges and an amount for
the use of capital the Company provides BIG. In no event may the earnout exceed
$3,000,000. Any payment under the earnout will be reduced by the sum of (i)
$115,000 and (ii) any incentive payments made with respect to the six-month
period ending January 31, 2008. The earnout amount may be paid at our discretion
either entirely in cash or 50% in cash and 50% in shares of our common stock
provided that at that time payment is due (i) our common stock is traded on the
New York Stock Exchange, the American Stock Exchange or the NASDAQ Capital
Market and (ii) we have filed all periodic reports we were required to file
under the Securities Act of 1934. Any payment in shares of common stock will be
valued based on the average closing price of the common stock for the 20
business days after July 31, 2010.
On August 21, 2007, we acquired substantially all of the assets and
assumed certain liabilities of FinancialCampus (FC) from SkillSoft Corporation.
FC produces and maintains a library of training courses designed for the
security, insurance and other financial services industries. FC also produces
customized training courses for its customers. This product line is included in
SmartPros Financial Services Training division. SkillSoft is entitled to an
additional annual earnout for three years equal to 10% of sales exceeding $2
million per annum. In no event shall the total cumulative earnout for the
three-year period exceed $750,000. The earnout is payable entirely in cash.
Should the Company sell the FC business prior to the end of the earnout period,
the seller will be entitled to $750,000 less any payments made against the
earnout. Certain key employees of FC have become employees of SmartPros.
The Selbst Group and FinancialCampus assets and liabilities were
incorporated into our Financial Services Training division, which also includes
our Sage course library.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements that have been
prepared according to accounting principles generally accepted in the United
States. In preparing these financial statements, we are required to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities. We evaluate these estimates on an ongoing basis. We base these
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. We consider the following accounting policies to be the most
important to the portrayal of our financial condition.
25
REVENUES
A large portion of our revenues is in the form of subscription fees for
one of our monthly accounting update programs or access to our library of
accounting, financial services training and legal courses. Other sources of
revenue include direct sales of programs or courses on a non-subscription basis,
fees for various services, including Web design, software development, tape
duplication, video production, video conversion, course design and development,
ongoing maintenance of a SmartPros Professional Education Center, and licensing
fees. Subscriptions are billed on an annual basis, payable in advance and
deferred at the time of billing. Sales made over the Internet are by credit card
only. Renewals are usually sent out 60 days before the subscription period ends.
Larger transactions are usually dealt with by contract, the financial terms of
which depend on the services being provided. Contracts for development and
production services typically provide for a significant upfront payment and a
series of payments based on deliverables specifically identified in the
contract.
Revenues from subscription services are recognized as earned; deferred
at the time of billing or payment and amortized into revenue on a monthly basis
over the term of the subscription. Engineering products are non-subscription
based and revenue is recognized upon shipment of the product or, in the case of
online sales, payment. Revenues from non-subscription services provided to
customers, such as Web site design, video production, consulting services and
custom projects are generally recognized on a proportional performance basis
where sufficient information relating to project status and other supporting
documentation is available. The contracts may have different billing
arrangements resulting in either unbilled or deferred revenue. We usually obtain
either a signed agreement or purchase orders from our non-subscription customers
outlining the terms and conditions of the sale or service to be provided.
Otherwise, these services are recognized as revenues after completion and
delivery to the customer. Duplication and related services are generally
recognized upon shipment or, if later, when our obligations are complete and
realization of receivable amounts is assured. Working Values and Skye recognize
revenue on a proportional performance basis.
IMPAIRMENT OF LONG-LIVED ASSETS
We review long-lived assets and certain intangible assets annually for
impairment whenever circumstances and situations change such that there is an
indication that the carrying amounts may not be recovered.
STOCK-BASED COMPENSATION
Effective January 1, 2006, we have adopted the recognition and
measurement requirements of SFAS No. 123R. As a result, compensation costs are
now recognized in the financial statements for stock options or grants awarded
to employees and directors. Options and warrants granted to non-employees are
recorded as an expense at the date of grant based on the then estimated fair
value of the security in question.
SEGMENT ACCOUNTING
We treat operating results as one segment, that of educational
services. Revenues from non-educational services such as video production are
not a material part of the Company's operating income.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2007, AND 2006
The following table compares our statement of operations data for the
years ended December 31, 2007, and December 31, 2006. The trends suggested by
this table may not be indicative of future operating
26
results, which will depend on various factors including the relative mix of
products sold (accounting/finance, engineering or corporate training) and the
method of sale (video or online).
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------------------
2007 2006
-------------------------------- -------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE CHANGE
-------------- ------------- --------------- ------------ ------------
Net revenues $ 15,204,506 100.0% $ 12,462,086 100.0% 22.0%
Cost of revenues 5,962,788 39.2% 5,176,525 41.5% 15.2%
------------ ----------- ------------- --------- ---------
Gross profit 9,241,718 60.8% 7,285,561 58.4% 26.8%
------------ ----------- ------------- --------- ---------
General and administrative 7,326,308 48.2% 5,820,403 46.7% 25.9%
Depreciation and amortization 749,272 4.9% 653,091 5.2% 14.7%
------------ ----------- ------------- --------- ---------
Total operating expenses 8,075,580 53.1% 6,473,494 51.9% 24.7%
------------ ----------- ------------- --------- ---------
Operating income 1,166,138 7.7% 812,067 6.5% 43.6%
------------ ----------- ------------- --------- ---------
Interest income 412,749 2.7% 330,843 2.6% 25.0%
Interest expense (1,044) 0% (4,299) 0% (75.7%)
------------ ----------- ------------- --------- ---------
Net interest income 411,435 2.7% 326,544 2.6% 26.0%
------------ ----------- ------------- --------- ---------
Income before benefit for income taxes 1,577,573 10.4% 1,138,611 9.1% 38.6%
Income tax benefit 590,792 3.9% 372,500 (3.0%) 58.9%
-------------------------------- -----------------------------------------------
Net income $ 2,168,365 14.3% $ 1,511,111 12.1% 43.5%
============ =========== ============= ========= =========
NET REVENUES
Net revenues for 2007 increased 22% compared to net revenues for 2006.
Online sales continue to be an important factor contributing to our overall
revenue growth. In 2007, net revenues from online sales of subscription-based
products and other sales accounted for approximately $5.2 million, or 34%, of
our net revenues. In 2006, online sales accounted for $3.2 million, or 24%, of
our net revenues. This is a result of recent acquisitions of financial services
products and a general conversion by many companies to online training.
Net revenues from sales of our accounting/finance products grew in
absolute terms but decreased as a percentage of net revenues due to the increase
in revenues resulting from our acquisitions. In 2007, net revenues from our
accounting/finance and related products were $9.3 million compared to $8.4
million in 2006. This increase was due in part to annual subscription price
increases and an increased level of sales. For 2007 net revenues from
accounting/finance products include subscription-based revenue of $8.2 million
and direct sales of course material on a non-subscription basis, net revenues
from custom work and advertising of $1.1 million. For 2006, subscription-based
revenue was $7.4 million and direct sales of course material on a
non-subscription basis, custom work and advertising was $1 million.
Net revenues from sales of our engineering products, which are not
subscription-based products, were $858,000 in 2007 compared to $703,000 in 2006.
This increase is primarily attributable to an increase in sales from our MGI
product line, which was $434,000 in 2007 as compared to $77,000 in 2006. MGI was
acquired in the fourth quarter of 2006. Sales from existing products decreased
from $626,000 in 2006 to $424,000 in 2007 as a result of a shift in the hiring
practices of many engineering firms away from civil engineers to other fields.
We are developing new products for other engineering disciplines to address this
trend
Net revenues from video production, duplication and consulting services
decreased in 2007 by $442,000 to $290,000 from $732,000 in 2006. Net revenues
from video duplication services decreased by $449,000 while net revenues from
consulting services increased by $7,000. Factors contributing to the decrease in
revenues from video duplication services include:
27
o In 2006, the former head of our video department resigned. He was
subsequently replaced and the person who replaced him was unable to
generate adequate sales. That person subsequently resigned as well. As
a result, the focus of our video division has shifted from working on
its own accounts to producing videos for other divisions.
o The general decline in the videotape industry reflecting the popularity
of digital formats such as CD-ROM and DVD resulting in a substantial
decrease in our tape duplication business.
o Inconsistency of consulting contracts.
o Sales are credited to the department from where they originate and not
to the department where the work is performed.
Net revenues from our Working Values subsidiary increased 64% from
$812,000 in 2006 to $1,331,000 in 2007. This increase was primarily due to sales
from the Cognistar legal division that was acquired in the fourth quarter of
2006. Net revenues from custom and ethics courses from Working Values were
relatively flat from 2006 to 2007 with sales of $729,000 and $738,000
respectively. The Cognistar division generated $593,000 in net revenues in 2007
as compared to $83,000 in 2006. Cognistar concentrates on delivering online
continuing legal education.
Skye generated $2.2 million of net revenues in 2007 as compared to $1.7
million in 2006. Skye was acquired in February 2006. Skye produces customized
training and educational material for the pharmaceutical industry, professional
firms, financial service companies and others.
Our financial services training division consists of our Sage course
library that was acquired in February 2006, Selbst, which we acquired in March
2007, and the FinancialCampus (FC) library of courses, which we acquired in
August 2007. Sage and FC sells online training courses for the banking,
insurance and securities industries. Selbst primarily provides live training to
those industries. Our financial services training division generated net
revenues of $1.2 million in 2007 as compared to only $72,000 in 2006. The
largest portion of the growth comes from the FC course sales.
Our technology training division, WatchIT, which was also acquired in
August 2007, generated net revenues of $92,000 in 2007.
COST OF REVENUES
Cost of revenues includes (i) production costs, such as the salaries,
benefits and other costs related to personnel, whether our employees or
independent contractors, who are used directly in connection with producing our
educational programs; (ii) royalties paid to third parties; (iii) the cost of
materials, such as videotape and packaging supplies; and (iv) shipping costs.
Compared to 2006, cost of revenues in 2007 increased by approximately $800,000.
The increase was primarily attributable to our recent acquisitions and increased
business from Skye which requires a substantial amount of outsourcing in order
to complete its projects. However, as a percentage of net revenues, cost of
revenues in 2007 decreased to 39.2% from 41.5%, resulting in a 4.1% increase in
our gross profit margin primarily as a result of increased Internet-based sales
that have a lower cost of delivery and higher margins than custom work.
There are many different types of expenses that are characterized as
production costs and they vary from period to period depending on many factors.
The expenses that showed the greatest variations from 2006 to 2007 and the
reasons for those variations were as follows:
o OUTSIDE LABOR AND DIRECT PRODUCTION COSTS. Outside labor includes the
cost of hiring actors and production personnel such as directors,
producers and cameramen and the outsourcing of non-video
28
technology. The cost of actors decreased by $66,000 offset by the
increased cost of video production and outside technology personnel of
$245,000. Both Skye and our consulting/technology departments employ a
number of consultants to write scripts, edit course material and
provide technology services. In 2006 we began outsourcing some of the
programming and content development functions that were previously done
by our employees to two firms in India. In order to control costs, we
are currently exploring areas such as China and the Philippines for
outsourcing our technology needs. Direct production costs, which are
costs related to producing videos other than labor costs--such as the
cost of renting equipment and locations, and the purchase of
materials--decreased by $83,000. These variations are related to the
type of video production and custom projects and do not reflect any
trends in our business.
o SALARIES. Overall payroll and related costs attributable to production
personnel increased by approximately $317,000. The increase was
primarily attributable to salaries and related costs from our recent
acquisitions of approximately $264,000, while our technology group's
salaries and related costs decreased by $215,000, and our video group's
salaries and related costs decreased by $98,000. Working Values
salaries and related costs increased by $256,000, primarily due to the
Cognistar acquisition. Skye's salaries increased approximately $110,000
in 2007 from 2006.
o ROYALTIES. Royalty expense increased in 2007 as compared to 2006 by
$42,000. Increased sales of our accounting products resulted in
substantially the entire increase. However, if volume increases or if
we enter into new agreements or modify existing agreements, the actual
royalty payments in 2008 under these agreements may be either higher or
lower than they were in 2007.
o OTHER COSTS. Travel and entertainment expenses increased by $50,000,
primarily related to the increase in Working Values and Skye projects.
Our shipping costs increased by $6,000 as a result of price increases
and increased volume.
As our business grows we may be required to hire additional production
personnel, increasing our cost of revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include corporate overhead such as
(i) compensation and benefits for administrative, sales and marketing and
finance personnel; (ii) rent; (iii) insurance; (iv) professional fees; (v)
travel and entertainment; and (vi) office expenses. General and administrative
expenses in 2007 were higher than they were in 2006 by $1,482,000, primarily due
to the acquisitions we made, resulting in increased rents, administrative
payrolls and other costs. Approximately $1,050,000 of the increase in general
and administrative expenses was attributable to increases in salaries and
related costs less the savings from outsourcing our customer service, as
outlined below. In addition, in conformity with SFAS No. 123R we are now
expensing the cost of issuing stock options. This expense in 2006 was $35,000
and $41,000 in 2007. Our professional fees increased in 2007 increased by
$65,000 primarily due to the cost of complying with the Sarbanes-Oxley Act of
2002. In 2007, we expended approximately $50,000 for such costs. In addition, in
2007 we began to outsource our customer service, a function that was formerly
done by employees. The cost was approximately $152,000, which was offset by a
savings of compensation expense. We anticipate that general and administrative
expenses will increase in 2008 as we fully absorb our recent acquisitions and
increased marketing expenses.
29
DEPRECIATION and AMORTIZATION
Depreciation and amortization expenses were $96,000 higher in 2007 than
they were in 2006. The increase is attributable to certain intangible assets
acquired in 2006 and 2007 and the purchase of additional computer hardware. We
are also amortizing the capitalized costs related to the Sarbanes-Oxley toolkit
product and related course content and development of new courses in our SPA
library. We expect our depreciation and amortization expenses on our current
assets to increase as we begin to amortize the costs related to these
acquisitions and the development of our new LMS and SPA courses.
OPERATING INCOME
For 2007 operation income was $1,166,000 compared to $812,000 in 2006,
an increase of 44%. As a percentage of net revenues, operating income in 2007
was 7.7% compared to 6.5% in 2006, an increase of 18.5%. Some of our recent
acquisitions of online subscription-based products have contributed to the
increase in operating income.
OTHER INCOME
Other income and expense items consist of interest paid on indebtedness
and interest earned on deposits. As of the end of 2007 we have repaid all of our
outstanding indebtedness. Net interest income increased by $85,000 due to
increased cash from operations and the general rise in interest rates during
2007. We anticipate a decrease in interest income as interest rates continue to
decrease in 2008.
INCOME TAX BENEFIT
We have begun to recognize the benefits of its net operating loss
carryforwards pursuant to SFAS No. 109. This has resulted in a $591,000 benefit
for the current year. We have taken an allowance for recognizing the full value
of the benefit because of the short-term history of profits.
NET INCOME
For 2007, we recorded net income of $2,168,000 compared to $1,511,000
for 2006. Our net profit margin for 2007 was 14.3% compared to 12.1%, an
increase of 18.2%. The increase in net income is primarily due to the increased
operating profit of $354,000, interest income of $85,000, and the income tax
benefits available through our net operating loss carryforwards.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
Historically, we have financed our working capital requirements through
internally generated funds, sales of equity and debt securities, and proceeds
from short-term bank borrowings. In October 2004 we consummated an initial
public offering of our common stock. The net proceeds to us from the offering
were approximately $6.0 million.
Our working capital as of December 31, 2007, was approximately $5.7
million compared to a $4.7 million working capital as of December 31, 2006. The
increase is attributable to positive cash flow from operations and earnings. Our
current ratio at December 31, 2007, is 1.87 to 1. The current ratio is derived
by dividing current assets by current liabilities and is a measure used by
lending sources to assess our ability to repay short-term liabilities. The
largest component of our current liabilities, $5.30 million at December 31,
2007, is deferred revenue, which is revenue collected or billed but not yet
earned under the principles of revenue recognition. Most of this revenue is in
the form of subscription fees and will be earned over the next 12 months. The
cost of fulfilling our monthly subscription obligation does not exceed this
revenue and is booked to expense as incurred. For some of our products, there
are no additional costs, other than shipping costs, required to complete this
obligation as the material is already in our library.
30
For the year ended December 31, 2007, net cash generated by operating
activities was approximately $3.54 million. We had a net increase in cash of
$2.68 million, primarily from operations and the exercise of stock options and
warrants, offset by cash expended for assets and business acquisitions. The
primary components of our operating cash flows are our net income adjusted for
non-cash expenses, such as depreciation and amortization, and the changes in
accounts receivable, accounts payable and deferred revenues.
Capital expenditures for the year ended December 31, 2007, were
approximately $793,000, of which $324,000 consisted of equipment purchases and
$92,000 in capitalizing the cost of producing various courses and $377,000 for
capitalizing the costs of developing the new LMS. Although we are constantly
upgrading our technology, we do not anticipate any significant increase in
capital expenditures relating to equipment purchases over the next 12 months.
For the year ended December 31, 2007, we had capital lease expenditures
of approximately $12,000. At year-end, we had no indebtedness.
In addition to the foregoing, as of December 31, 2007, we had
commitments under the lease for executive offices in Hawthorne, New York, the
Working Values and Cognistar executive offices in Westborough, Massachusetts,
and Skye's executive offices in Bridgewater, New Jersey, aggregating $831,000
through February 2010. The Cognistar lease expires in January 2009 and calls for
monthly rent of $3,089. The Skye lease was recently extended to August 2008 at a
monthly rental of $3,670.
The shareholders of Skye are also entitled to a contingent payment
based on certain levels of sales through December 31, 2008, less adjustments for
use of capital and other costs. The total additional payment cannot exceed
$1,200,000. The additional payment may be paid 50% in cash and 50% in our common
stock at our discretion. If the additional payment is made in stock, it will be
determined by the average price for the 20 business days subsequent to December
31, 2008.
In the future, we may issue additional debt or equity securities to
satisfy our cash needs. Any debt incurred or issued may be secured or unsecured,
at a fixed or variable interest rate and may contain other terms and conditions
that our Board of Directors deems prudent. Any sales of equity securities may be
at or below current market prices. We cannot assure that we will be successful
in generating sufficient capital to adequately fund our liquidity needs.
INTEREST RATE RISK
Interest rate risk represents the potential loss from adverse changes
in market interest rates. As we may hold U.S. Treasury securities or money
market funds, we may be exposed to interest rate risk arising from changes in
the level and volatility of interest rates and in the shape of the yield curve.
31
CREDIT RISK
Most of our cash is held in deposit accounts, U.S. Treasury and
non-Treasury money market funds. Our bank deposit accounts are insured by the
U.S. government but only up to a maximum of $100,000 at any one bank. Our money
market funds are held in a brokerage account that is insured by the Security
Industry Protection Corp (SIPC) up to $500,000 and various brokerage firms may
carry additional insurance from commercial insurance companies. Our cash
balances vary from time to time based on a variety of factors but in most cases
are significantly in excess of the insurable limit. As a result, we have
exposure on these accounts in the event these financial institutions become
insolvent.
In addition, we may have credit risk with respect to customers who
default on custom orders or who default on subscription payments.
SEASONALITY AND CYCLICALITY
Historically, the fourth quarter has been our strongest in terms of
revenue generation. This is due to the fact that most of our subscriptions
follow the calendar year and renewals are mailed out 60 days before the end of
the year. Also, for internal budgeting reasons, corporate clients tend to defer
their decisions to the end of the year.
In general, since most of our business relates to continuing
professional education and is non-discretionary, we do not believe that business
cycles have a material impact on our financial performance. Adverse business
conditions and developments, however, would negatively affect the performance of
Working Values and the ability of our video production and consulting
departments to generate revenues independently.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (FASB)
issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities." We believe that this pronouncement has a material impact on our
financial statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling
Interests in Consolidated Financial Statements." We believe that this
pronouncement will not have a material impact on our financial statements.
Also in December 2007, the FASB issue SFAS No. 141R, "Business
Combinations." SFAS No. 141R is effective for periods beginning after December
15, 2008, and may not be applied retroactively. We believe that this
pronouncement may affect the way we treat any contingent purchase price on
future acquisitions, as the pronouncement requires establishing an estimate of
that amount at the time of acquisition.
ITEM 7. FINANCIAL STATEMENTS
See the index to Financial Statements below, beginning on page F-1.
32
SMARTPROS LTD.
AND SUBSIDIARIES
CONTENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006 PAGES
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Income F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-17
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
SmartPros Ltd.
and Subsidiaries
Hawthorne, New York
We have audited the accompanying consolidated balance sheet of SmartPros Ltd.
and Subsidiaries as of December 31, 2007, and the related consolidated
statements of income, stockholders' equity and cash flows for the two years
ended December 31, 2007. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. 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 consolidated 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
SmartPros Ltd. and Subsidiaries as of December 31, 2007, and the results of
their operations and their cash flows for the two years ended December 31, 2007,
in conformity with accounting principles generally accepted in the United States
of America.
By: /s/ Holtz Rubenstein Reminick LLP
-------------------------------------------
Holtz Rubenstein Reminick LLP
Melville, New York
February 28, 2008
F-1
SMARTPROS LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
====================================================================================================================================
DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,072,338
Accounts receivable, net of allowance for
doubtful accounts of $39,842 1,964,483
Prepaid expenses and other current assets 237,097
------------
Total Current Assets 12,273,918
------------
Property and Equipment, net 630,857
Goodwill 145,684
Other Intangibles, net 3,296,538
Other Assets, including restricted cash of $150,000 154,673
Deferred Tax Asset 978,000
------------
5,205,752
------------
Total Assets $ 17,479,670
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 786,781
Accrued expenses 419,886
Other liabilities 40,040
Deferred revenue 5,318,382
------------
Total Current Liabilities 6,565,089
------------
Long-Term Liabilities:
Other liabilities-net of current portion 40,041
------------
Total Long-Term Liabilities 40,041
------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, authorized 1,000,000 shares,
0 shares issued and outstanding -
Common stock, $.0001 par value, authorized 30,000,000 shares,
5,304,698 issued and 4,993,967 outstanding 530
Common stock in treasury, at cost - 310,731 shares (922,625)
Additional paid-in-capital 16,925,314
Accumulated deficit (5,106,459)
------------
10,896,760
Deferred compensation (22,220)
------------
Total Stockholders' Equity 10,874,540
------------
Total Liabilities and Stockholders' Equity $ 17,479,670
============
--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-2
SMARTPROS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
===================================================================================================================================
YEARS ENDED DECEMBER 31, 2007 2006
-----------------------------------------------------------------------------------------------------------------------------------
Net Revenues $ 15,204,506 $ 12,462,086
Cost of Revenues 5,962,788 5,176,525
--------------------------------
Gross Profit 9,241,718 7,285,561
--------------------------------
Operating Expenses:
Selling, general and administrative 7,326,308 5,820,403
Depreciation and amortization 749,272 653,091
--------------------------------
8,075,580 6,473,494
--------------------------------
Operating Income 1,166,138 812,067
--------------------------------
Other Income (Expense):
Interest and dividend income 412,479 330,843
Interest expense (1,044) (4,299)
--------------------------------
411,435 326,544
--------------------------------
Net Income before Benefit for Income Taxes 1,577,573 1,138,611
Income Tax Benefit 590,792 372,500
--------------------------------
Net Income $ 2,168,365 $ 1,511,111
================================
Net Income Per Common Share:
Basic net income per common share $ 0.44 $ 0.30
================================
Diluted net income per common share $ 0.43 $ 0.30
================================
Weighted Average Number of Shares Outstanding:
Basic 4,924,098 4,994,090
================================
Diluted 5,022,911 5,008,164
================================
--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3
SMARTPROS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
====================================================================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock Additional
---------------------- --------------- Paid-in Accumulated Deferred
Shares Amount Shares Amount Capital Deficit Compensation
-------------- ------ ------ -------- --------------------------------------------
Balance at January 1, 2006 5,145,447 $514 - $ - $ 16,418,034 $ (8,785,935) $ (75,000)
Common Stock Issued by Exercise of Options 24,558 3 - - 52,797 - -
Purchase of Treasury Shares (201,000) - - - - - - -
Amortization of Deferred Compensation - - - - - - 42,000
Payment of Note Receivable from Shareholder - - - - - - -
Issuance of Shares from Restricted Stock Plan 16,500 2 - - 66,658 - (44,440)
Stock Option Expense - - - - 35,455 - -
Net Income - - - - - 1,511,111 -
------------ ---- - ---- -------------------------------------------
Balance at December 31, 2006 5,186,505 519 - - 16,572,944 (7,274,824) (77,440)
Common Stock Issued by Exercise of Options 24,401 2 - - 125,579 - -
Common Stock Issued by Exercise of
Underwriters' Warrants 87,765 8 - - 100,084 - -
Recapture of Short-Swing Profits - - - - 31,195 - -
Amortization of Deferred Compensation - - - - - - 55,220
Stock Option Expense - - - - 41,430 - -
Issuance of Shares from Restricted Stock Plan 6,027 1 - - 54,082 - -
Net Income - - - - - 2,168,365 -
------------ ---- ---- ---- -------------------------------------------
Balance at December 31, 2007 5,304,698 $530 - $ - $ 16,925,314 $ (5,106,459) $ (22,220)
============ ==== ==== ==== ===========================================
Receivable Total
from Treasury Stockholders'
Stockholder Stock Equity
--------------------------------------------
Balance at January 1, 2006 $ (200,000) $ (384,600) $ 6,973,013
Common Stock Issued by Exercise of Options - - 52,800
Purchase of Treasury Shares (201,000) - (538,025) (538,025)
Amortization of Deferred Compensation - - 42,000
Payment of Note Receivable from Shareholder 200,000 - 200,000
Issuance of Shares from Restricted Stock Plan - - 22,220
Stock Option Expense - - 35,455
Net Income - - 1,511,111
--------------------------------------------
Balance at December 31, 2006 - (922,625) 8,298,574
Common Stock Issued by Exercise of Options - - 125,581
Common Stock Issued by Exercise of
Underwriters' Warrants - - 100,092
Recapture of Short-Swing Profits - - 31,195
Amortization of Deferred Compensation - - 55,220
Stock Option Expense - - 41,430
Issuance of Shares from Restricted Stock Plan - - 54,083
Net Income - - 2,168,365
--------------------------------------------
Balance at December 31, 2007 $ - $ (922,625) $ 10,874,540
============================================
--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4
SMARTPROS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================================
YEARS ENDED DECEMBER 31, 2007 2006
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 2,168,365 $ 1,511,111
------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 749,272 653,091
Stock compensation expense 95,510 35,455
Deferred compensation 55,220 64,220
Deferred income tax benefit (600,000) (378,000)
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (3,544) (905,008)
Prepaid expenses and other current assets 40,296 783
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses 273,573 371,966
Deferred revenue 802,236 317,588
Other liabilities (40,056) (40,056)
------------------------------
Total adjustments 1,372,507 120,039
------------------------------
Net Cash Provided by Operating Activities 3,540,872 1,631,150
------------------------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (324,350) (91,413)
Capitalized course costs (92,341) (45,358)
Capitalized software development (376,536) -
Fixed assets acquired from acquisitions (77,201) -
Intangible assets acquired from acquisitions (210,512) -
Cash paid for business acquisitions (26,484) (1,282,906)
------------------------------
Net Cash (Used in) Investing Activities (1,107,424) (1,419,677)
------------------------------
Cash Flows from Financing Activities:
Purchase of treasury shares - (538,025)
Payments of note receivable from stockholder - 200,000
Net proceeds from exercise of stock options, warrants and other 256,868 52,799
Payments under capital lease obligations (11,767) (38,149)
------------------------------
Net Cash Provided by (Used in) Financing Activities 245,101 (323,375)
------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,678,549 (111,902)
Cash and Cash Equivalents, beginning of year 7,393,789 7,505,691
------------------------------
Cash and Cash Equivalents, end of year $ 10,072,338 $ 7,393,789
==============================
Supplemental Disclosure:
Cash paid for interest $ 1,044 $ 4,299
==============================
Cash paid for income taxes $ 9,208 $ 4,866
==============================
--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - SmartPros Ltd. ("SmartPros" or the "Company"), a
Delaware corporation, was organized in 1981 as Center for Video Education
Inc. for the purpose of producing educational videos primarily directed to
the accounting profession. SmartPros' primary products today are periodic
video and Internet subscription services directed to corporate accountants
and financial managers, accountants in public practice and CPA exam
candidates. In addition, the Company also produces a series of continuing
education courses directed to the engineering profession, as well as a
series of courses designed for candidates for the professional engineering
exam. Finally, through its wholly-owned subsidiary, Working Values Ltd.
("Working Values"), the Company produces ethics, governance, and compliance
programs for corporate clients and through its Cognistar division produces
on-line and customized training courses for the legal profession. Its other
wholly-owned subsidiary, Skye Multimedia Ltd. ("Skye") produces customized
training solutions for a number of industries including the pharmaceutical,
professional services and others. As a result of recent acquisitions, the
Company acquired a library of nationally certified online training solutions
for the banking, securities and insurance industries, as well as courses
designed for live training. The engineering division provides training
courses for the profession and preparation for professional licensing
examinations. SmartPros also produces custom videos and rents out its
studios. SmartPros is located in Hawthorne, New York, where it maintains its
corporate offices, new media lab, video production studios and tape
duplication facilities. While the Company's management monitors the revenue
streams of its various products and services, operations are managed and
financial performance is evaluated on a company-wide basis. Accordingly, all
of the Company's operations are considered by management to be aggregated in
one reportable segment, educational services.
BASIS OF PRESENTATION - The consolidated financial statements of SmartPros
include the accounts of SmartPros and its wholly-owned subsidiaries, Working
Values and Skye. All significant intercompany balances and transactions have
been eliminated.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION - The Company recognizes revenue from its subscription
services as earned. Subscriptions are generally billed on an annual basis,
deferred at the time of billing and amortized into revenue on a monthly
basis over the term of the subscription, generally one year. Engineering
products are non-subscription based and revenue is recognized upon shipment
or, in the case of online sales, upon receipt of payment. Revenues from
other non-subscription services, such as web site design, video production,
consulting services, and custom projects, are generally recognized on a
proportional performance basis where sufficient information relating to
project status and other supporting documentation is available. The
contracts may have different billing arrangements resulting in either
unbilled or deferred revenue. The Company obtains either signed agreements
or purchase orders from its non-subscription customers outlining the terms
and conditions of the products or services to be provided. Otherwise,
revenues are recognized after completion and/or delivery of services to the
customer. Duplication and related services are generally recognized upon
shipment or, if later, when the Company's obligations are complete and
realization of receivable amounts are assured.
SEGMENT ACCOUNTING - The Company has evaluated the requirements under SFAS
No. 141, "Financial Reporting for Segments of a Business Enterprise", and
believes that all of its operations are reportable under one segment, which
is educational services.
--------------------------------------------------------------------------------
F-6
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) refers to revenue,
expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income, but are excluded from net
income, as these amounts are recorded directly as an adjustment to
stockholders' equity. At December 31, 2007 and 2006, there were no such
adjustments required.
CASH AND CASH EQUIVALENTS - All highly liquid instruments with an original
maturity of three months or less are considered cash equivalents. From time
to time, the Company invests a portion of its excess cash in money market
accounts that are stated at cost and approximate market value.
INVESTMENTS - The Company has established a policy to invest proceeds from
its public offering in AAA-rated bonds with short-term maturities or money
market funds. The Company determines the appropriate classification of
securities at the time of purchase and reassesses the appropriateness of the
classification at each reporting date. At December 31, 2007, the Company had
no short-term investments. Unrealized gains and losses on available-for-sale
securities are recorded as a separate component of stockholders' equity.
Realized gains and losses on the sale of securities, as determined on a
specific identification basis, are included in the consolidated statements
of operations. For the years ended December 31, 2007 and 2006, the Company
had no unrealized gains or losses on available-for-sale securities.
CONCENTRATION OF CREDIT RISK - Financial instruments that subject the
Company to concentrations of credit risk consist primarily of cash and cash
equivalents, investments, and accounts receivable. From time to time, the
cash balances exceed the federal depository insurance coverage limit of
$100,000. The Company's cash balances are deposited with high credit quality
financial institutions. No single customer represents a significant
concentration of sales or receivables.
ACCOUNTS RECEIVABLE - Accounts receivable are recorded at original invoice
amount less an allowance that management believes will be adequate to absorb
estimated losses on existing accounts receivable. The allowance is
established through a provision for bad debts charged to expense. Accounts
receivable are charged against the allowance for doubtful accounts when
management believes that collectibility is unlikely. The allowance is an
amount that management believes will be adequate to absorb estimated losses
on existing accounts receivable, based on an evaluation of the
collectibility of accounts receivable and prior bad debt experience. This
evaluation also takes into consideration such factors as changes in the
nature and volume of the accounts receivable, overall accounts receivable
quality, review of specific problem accounts receivable, and current
economic conditions that may affect the customer's ability to pay. While
management uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary if there are
significant changes in economic conditions.
Accounts receivable are generally considered to be past due if any portion
of the receivable balance is outstanding for more than 90 days.
INVENTORIES - Inventories are valued at the lower of cost or market on a
first-in, first-out basis and consists primarily of videotape stock, both
unsold video and non-video courses and related materials. Inventories are
included in prepaid expense and other current assets.
SHIPPING AND HANDLING COSTS - The Company has included freight-out as a
component of cost of goods sold for the years ended December 31, 2007 and
2006.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and are
depreciated using the straight-line method over their estimated useful
lives, ranging from three to ten years. Leasehold improvements are amortized
over the lesser of their estimated useful lives or the life of the lease.
Expenditures for maintenance and repairs are charged to operations as
incurred and major expenditures for renewals and improvements are
capitalized and depreciated over their useful lives.
--------------------------------------------------------------------------------
F-7
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
LONG-LIVED ASSETS - The Company accounts for long-lived assets in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets and certain intangibles related to those
assets to be held and used, and for long-lived assets and certain
intangibles to be disposed of. SFAS No. 144 requires, among other things,
that the Company reviews its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that
the carrying amount of an asset may not be fully recoverable. If this review
indicates that the long-lived asset will not be recoverable, as determined
based on the estimated undiscounted cash flows of the Company over the
remaining amortization period, the carrying amount of the asset is reduced
by the estimated shortfall of cash flows. The Company believes that none of
the Company's long-lived assets were impaired.
GOODWILL - Goodwill results from prior business acquisitions and represents
the excess of the purchase price over the fair value of acquired tangible
assets and liabilities and identified intangible assets. Goodwill is
assessed at least annually for impairment and any such impairment will be
recognized in the period identified.
INTANGIBLE ASSETS - Certain intangible assets are being amortized on a
straight-line basis over their estimated useful lives, which vary between
five to nineteen years.
CAPITALIZED COURSE COSTS - Capitalized course costs include the direct cost
of internally developing proprietary educational products and materials that
have extended useful lives. Amortization of these capitalized course costs
commences when the courses are available for sale from the Company's
catalog. For the year ended December 31, 2007, the Company has expended
approximately $92,000 on such costs. The amortization period is five years,
except for the Sarbanes-Oxley courses that have a three-year amortization
period. Other course costs incurred in connection with any of the Company's
monthly subscription products or custom work is charged to expense as
incurred. As a result of recent acquisitions, the Company acquired an
additional $175,000 of course costs which are being amortized over a five
year period, as well. Included in other intangible assets at December 31,
2007, are capitalized course costs of $977,000, net of accumulated
amortization of $492,000.
CAPITALIZED SOFTWARE DEVELOPMENT - The Company has developed a new Learning
Management System ("LMS") and has capitalized those costs permissible under
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed". Total capitalized costs as of December 31,
2007 are $376,536. The Company will begin amortizing these costs upon
completion of the LMS over a five-year period.
DEFERRED REVENUE - Deferred revenue related to subscription services
represents the portion of unearned subscription revenue, which is amortized
on a monthly, straight-line basis, as earned. Deferred revenue related to
web site design and video production services represents that portion of
amounts billed by the Company, or cash collected by the Company, for which
services have not yet been provided or earned in accordance with the
Company's revenue recognition policy.
INCOME TAXES - Deferred tax assets and liabilities are recognized for
temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities. Deferred taxes are recognized
for the estimated taxes ultimately payable or recoverable based on enacted
tax laws. Changes in enacted tax rates and laws are reflected in the
financial statements in the periods they occur.
NET INCOME PER SHARE - Basic net income per share is computed by dividing
income available to common shareholders by the weighted-average number of
common shares outstanding. Diluted earnings per share reflect in periods, in
which they have a dilutive effect, the impact of common shares issuable upon
exercise of stock options and warrants and non-vested shares of common
stock. The reconciliation for the years ended December 31, 2007 and 2006 is
as follows:
--------------------------------------------------------------------------------
F-8
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
The reconciliation for the years ended December 31, 2007 and 2006 is as
follows:
YEARS ENDED DECEMBER 31, 2007 2006
------------------------------------------------------------------------------------------------------------
Weighted Average Number of Shares Outstanding 4,924,098 4,994,090
Effect of Dilutive Securities, common stock equivalents 98,813 14,074
---------------------------
Weighted Average Number of Shares Outstanding, used for
computing diluted earnings per share 5,022,911 5,008,164
===========================
STOCK-BASED COMPENSATION - Prior to January 1, 2006, the Company accounted
for share-based payments under the recognition and measurement provisions of
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and
related Interpretations, as permitted by Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION ("Statement
123"). Under that method, when options were granted with a strike price
equal to or greater than market price on date of issuance, there was no
impact on earnings either on the date of grant or thereafter, absent certain
modifications to the options. The Company adopted Financial Accounting
Standard No. 123 (R), SHARE-BASED PAYMENT ("Statement 123(R)"), on January
1, 2006, using the modified-prospective-transition method. Under the fair
value recognition provisions of this statement, stock based compensation
cost is measured at the grant date based on the fair value of the award and
is recognized as expense on a straight-line basis over the vesting period.
In addition, the Company adheres to the guidance set forth within Securities
and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107,
which provides the Staff's views regarding the interaction between SFAS No.
123(R) and certain SEC rules and regulations and provides interpretations
with respect to the valuation of share-based payments for public companies.
Determining the fair value of share-based awards at the grant date requires
assumptions and judgments about expected volatility and forfeiture rates,
among other factors. As of December 31, 2007, options and restricted shares
reserved for grants under the Plan were 761,506, provided that restricted
stock grants may not exceed 200,000 shares and 67,072 restricted shares have
been issued.
ADVERTISING - Advertising is expensed as incurred and was approximately
$62,000 and $55,000 for the years ended December 31, 2007 and 2006,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS - In February 2007, the FASB issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial Liabilities".
SFAS No. 159 permits an entity to choose, at specified election dates, to
measure eligible financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. An entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date.
Upfront costs and fees related to items for which the fair value option is
elected shall be recognized in earnings as incurred and not deferred. SFAS
No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS No. 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. At the
effective date, an entity may elect the fair value option for eligible items
that exist at that date. The entity shall report the effect of the first
remeasurement to fair value as a cumulative-effect adjustment to the opening
balance of retained earnings. The Company believes that this pronouncement
will not have a material effect on the consolidated financial statements.
--------------------------------------------------------------------------------
F-9
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations",
which changes how business acquisitions are accounted. SFAS No. 141R
requires the acquiring entity in a business combination to recognize all
(and only) the assets acquired and liabilities assumed in the transaction
and establishes the acquisition-date fair value as the measurement objective
for all assets acquired and liabilities assumed in a business combination.
Certain provisions of this standard will, among other things, impact the
determination of acquisition-date fair value of consideration paid in a
business combination (including contingent consideration); exclude
transaction costs from acquisition accounting; and change accounting
practices for acquired contingencies, acquisition-related restructuring
costs, in-process research and development, indemnification assets, and tax
benefits. SFAS No. 141R is effective for business combinations occurring
after December 15, 2008. The Company is currently evaluating the future
impacts and disclosures of this standard.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51", which
establishes new standards governing the accounting for and reporting of
noncontrolling interests ("NCIs") in partially owned consolidated
subsidiaries and the loss of control of subsidiaries. Certain provisions of
this standard indicate, among other things, that NCIs (previously referred
to as minority interests) be treated as a separate component of equity, not
as a liability; that increases and decreases in the parent's ownership
interest that leave control intact be treated as equity transactions, rather
than as step acquisitions or dilution gains or losses; and that losses of a
partially owned consolidated subsidiary be allocated to the NCI even when
such allocation might result in a deficit balance. This standard also
requires changes to certain presentation and disclosure requirements. SFAS
No. 160 is effective beginning January 1, 2009. The provisions of the
standard are to be applied to all NCIs prospectively, except for the
presentation and disclosure requirements, which are to be applied
retrospectively to all periods presented. The Company believes that this
pronouncement will not have a material effect on the consolidated financial
statements.
2. ACQUISITIONS
The Company made three acquisitions during 2007. In March 2007, it acquired
substantially all of the assets and assumed certain liabilities of The
Selbst Group Inc. for approximately $177,000. The Selbst Group provides
various training programs for the financial services industry.
In August 2007, the Company acquired substantially all of the assets and
assumed certain liabilities of Bright Ideas Group d/b/a WatchIT ("BIG"). BIG
develops information technology education and training programs for business
and information technology professionals. The purchase price for the assets
was $175,000 plus the assumption of BIG's obligations under certain customer
contracts. In addition, BIG was entitled to an incentive payment if a
certain revenue target for the six-month period beginning August 1, 2007,
and ending January 31, 2008, was met. No additional payments were due under
this provision.
Finally, BIG is also entitled to an "earn-out" equal to three times BIG's
average annual earnings for the three-year period ending July 31, 2010.
Average annual earnings is income before taxes, less all intercompany
charges and an amount for the use of capital the Company provides BIG. In no
event may the "earn-out" exceed $3,000,000. Any payment under the "earn-out"
will be reduced by the sum of (i) $115,000 and (ii) any incentive payments
made with respect to the six-month period ending January 31, 2008. The
"earn-out" amount may be paid at our discretion either entirely in cash or
50% in cash and 50% in shares of our common stock provided that at that time
payment is due (i) our common stock is traded on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ Capital Market and (ii)
we have filed all periodic reports we were required to file under the
Securities Act of 1934. Any payment in shares of common stock will be valued
based on the average closing price of the common stock for the 20 business
days after July 31, 2010.
--------------------------------------------------------------------------------
F-10
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
On August 21, 2007, the Company acquired substantially all of the assets and
assumed certain liabilities of Financial Campus ("FC") from SkillSoft
Corporation. The seller is entitled to an additional annual "earn-out" for
three years based on an amount equal to 10% of sales in excess of $2,000,000
per annum. In no event shall the total cumulative "earn-out" for the
three-year period exceed $750,000. The "earn-out" is payable in cash. Should
the Company sell the FC business prior to the end of the "earn-out" period,
the seller will be entitled to $750,000 less any payments made against the
"earn-out". Certain key employees of FC have become employees of SmartPros.
FC produces and maintains a library of training courses designed for the
security, insurance and other financial services industries. In addition, FC
produces customized training courses for its customers. This product line
will be included in SmartPros Financial Services Training division.
3. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------
Furniture, Fixtures and Equipment $3,733,044
Leasehold Improvements 189,709
----------
3,922,753
Less Accumulated Depreciation 3,291,896
----------
$ 630,857
==========
Depreciation expense for the years ended December 31, 2007 and 2006 were
approximately $214,000 and $179,000, respectively.
4. GOODWILL AND INTANGIBLE ASSETS
The components of intangible assets are as follows:
DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------
Accumulated Carrying
Cost Amortization Value
---------------------------------------------------
Engineering Courses $2,766,837 $1,976,271 $ 790,566
Rights to CPA Report ("CPAR") 1,700,000 1,445,022 254,978
Pro2 Net Courses ("P2N") 837,504 543,320 294,184
Sarbanes-Oxley Toolkit 248,804 222,127 26,677
Evergreen Client List 3,500 1,050 2,450
Working Values 94,700 49,500 45,200
Skye Multimedia Ltd. 204,000 46,200 157,800
MGI 54,000 9,375 44,625
Cognistar 380,164 59,151 321,013
Sage Courses 250,012 91,671 158,341
SPA Course Development 116,044 18,745 97,299
Engineering Course Development 12,000 - 12,000
Selbst Courses 139,099 15,570 123,529
Watch It Courses 197,930 12,413 185,517
Financial Campus 340,894 11,363 329,531
Capitalized Acquisition Costs 69,071 - 69,071
Capitalized Software Development 376,536 - 376,536
Purchased Domain Names 7,221 - 7,221
---------------------------------------------------
$7,798,316 $4,501,778 $3,296,538
===================================================
--------------------------------------------------------------------------------
F-11
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
The aggregate amortization expense for each of the years ended December 31,
2007 and 2006 was approximately $535,000 and $474,000, respectively.
Estimated amortization expense for the five years subsequent to December 31,
2007 is as follows:
YEARS ENDING DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
2008 $ 576,000
2009 478,000
2010 389,000
2011 285,000
2012 188,000
The following table presents the changes in the carrying amount of goodwill
and other intangibles during the year ended December 31, 2007:
Other
Goodwill Intangibles
--------------------------------------------------------------------------------------------------------------
Balance, January 1, 2006 $ 53,434 $ 2,158,593
Amortization Expense - (473,332)
Goodwill and Intangibles Acquired 77,250 965,871
--------------------------
Balance, December 31, 2006 130,684 2,651,132
Amortization Expense - (535,099)
Goodwill and Intangibles Acquired 15,000 1,180,505
--------------------------
Balance, December 31, 2007 $ 145,684 $ 3,296,538
==========================
5. INCOME TAXES
At December 31, 2007, the Company has a net deferred tax asset of
approximately $978,000, primarily resulting from the future tax benefit of
net operating loss carryforwards. The net valuation allowance decreased by
approximately $600,000 for the year ended December 31, 2007. Realization of
deferred tax assets depends on sufficient future taxable income during the
period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income. At December 31, 2007, the Company
has net operating loss carryforwards available to offset future taxable
income of approximately $4,500,000 which expire in 2023.
The components of income tax benefit for the years ended December 31 2007
and 2006 consist of the following:
2007 2006
-------------------------------------------------------------------------------------------------------------
Current:
Federal $ 9,208 $ 5,500
State - -
--------------------------
9,208 5,500
--------------------------
Deferred:
Federal 510,000 321,300
State (90,000) (56,700)
--------------------------
(600,000) (378,000)
--------------------------
Income Tax Benefit $ (590,792) $ (372,500)
==========================
--------------------------------------------------------------------------------
F-12
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
Deferred income tax expense results primarily from the reversal of temporary
timing differences between tax and financial statement income.
A reconciliation of income tax expense at the federal statutory rate to
income tax expense at the Company's effective rate is as follows:
YEARS ENDED DECEMBER 31, 2007 2006
-----------------------------------------------------------------------------------------------------------
U.S. Federal Statutory Income Tax Rate 34.0% 34.0%
Valuation Allowance (71.0)% (67.0)%
--------------------
Income Tax Benefit (37.0)% (33.0)%
====================
The temporary differences and carryforwards gave rise to the following
deferred tax asset at December 31, 2007:
Depreciation and Amortization $ 17,000
NOL Carryforward 1,530,000
Valuation Allowance (569,000)
-----------
$ 978,000
===========
6. CONVERTIBLE PREFERRED STOCK
In February 2002, the Company sold 2,000 shares of its Convertible Preferred
Stock to its former president. The entire purchase price for those shares,
$200,000, was evidenced by a promissory note from the purchaser. The entire
principal balance of the note and all accrued interest, calculated at 5.5%
per annum, was repaid in 2006.
7. STOCKHOLDERS' EQUITY
In January 2007, the Company's compensation committee granted certain
officers and key employees of the Company a total of 16,500 shares of
restricted common stock. The grant vests one-third immediately and one-third
each year, thereafter. The grants were part of a bonus paid for 2006 and
were considered issued as of December 31, 2006 and included in the total
outstanding shares as of that date. The stock is unregistered and subject to
certain forfeiture provisions if the employee leaves the Company prior to
January 29, 2009.
In conjunction with the Company's initial public offering, the underwriters
were issued 60,000 warrants ("Underwriter Warrants"), each warrant entitling
the holder thereof to purchase three shares of the Company's common stock
and warrants to purchase additional 1.5 shares at $7.15 per share. The
Underwriters Warrants are exercisable at a price of $15.30 per warrant.
During 2007, various holders of the Underwriter Warrants were issued 68,139
shares of common stock and warrants to purchase an additional 34,070 shares
for 51,883 Underwriter Warrants. In addition, 6,542 Underwriters' Warrants
were exercised for cash totaling $100,092, resulting in the issuance of
19,626 shares of common stock and warrants to purchase an additional 9,812
shares. As of December 31, 2007, there is a balance of 1,575 Underwriter
Warrants outstanding which expire on October 19, 2009.
In 2007, two employees and one consultant to the Company exercised their
vested stock options for the purchase of 24,401 shares of common stock at
prices ranging between $4.05 and $5.32.
The Company received a net of $31,195 after deducting legal expenses, as the
result of a penalty assessed against a more than ten percent shareholder for
violation of Rule 16b of the Securities and Exchange Act of 1934 for the
violation of short-swing profits rules.
--------------------------------------------------------------------------------
F-13
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
8. STOCK OPTION PLAN
The Company's 1999 Stock Option Plan (the "Plan"), as amended, provides for
the grant of incentive or non-qualified stock options and restricted stock
awards for the purchase of up to 882,319 shares of common stock to
employees, directors and consultants. Prior to the Company's initial public
offering, the Plan was administered by the Board of Directors. Since the
initial public offering, the Plan is being administered by the Compensation
Committee of the Board of Directors of the Company. The administrator of the
Plan determines the terms of options, including the exercise price,
expiration date, number of shares and vesting provisions.
The weighted average estimated fair value of stock options granted for the
year ended December 31, 2007 and 2006 was $2.06 and $1.26, respectively. The
fair value of options at the date of grant was estimated using the
Black-Scholes Option Pricing Model. During 2007, the Company took into
consideration guidance under SFAS No. 123(R) and SAB 107 when reviewing and
updating assumptions. The expected volatility is based upon historical
volatility of our stock and other contributing factors. The expected term is
based upon observation of actual time elapsed between date of grant and
exercise of options for all employees. Previously such assumptions were
determined based on historical data.
The assumptions made in calculating the fair values of options for the year
ended December 31, 2007 is as follows:
Contractual Term 10 years
Expected Volatility 35% - 45%
Expected Dividend Yield 0%
Risk-Free Interest Rate 4.1% - 4.63%
Expected Term 5.5 - 6.0 years
For the year ended December 31, 2007, share-based compensation expense
related to stock options was approximately $41,000. As of December 31, 2007,
the fair value of unamortized compensation cost related to unvested stock
option awards was approximately $178,000. Unamortized compensation cost as
of December 31, 2007 is expected to be recognized over a remaining
weighted-average vesting period of three years.
As of December 31, 2007, the total intrinsic value, which is the difference
between the exercise price and closing price of the Company's common stock
of options outstanding and exercisable was $495,000 and $364,000,
respectively.
In February 2008, the Company granted 34,025 options to various employees.
These options vest in three years and have an exercise price of $5.10.
--------------------------------------------------------------------------------
F-14
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
A summary of all stock option activity for the years ended December 31, 2006
and 2007 is as follows:
Number Weighted
of Average
Options Exercise Price
------------------------------------------------------------------------------------------------------------
Outstanding, January 1, 2006: 406,531 $ 4.67
Options granted 51,100 3.09
Options cancelled (47,466) 5.06
Options expired - -
Options exercised (24,558) 2.15
---------------------------
Outstanding, December 31, 2006: 385,607 4.57
Options granted 30,500 5.60
Options cancelled (4,909) 3.90
Options expired (517) 5.32
Options exercised (24,401) 5.15
---------------------------
Outstanding, December 31, 2007 386,280 4.62
---------------------------
Exercisable, December 31, 2007 317,483 $ 4.69
===========================
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Weighted Weighted
Average Weighted Average
Remaining Average Remaining
Number Contractual Exercise Number Contractual
Exercise Price Outstanding Life (Years) Price Exercisable Life (Years)
--------------------------------------------------------------------- ---------------------------------
$ 2.15 24,322 1.5 $ 2.15 24,322 1.5
2.42 25,850 4.1 2.42 25,850 4.1
2.75 26,000 8.8 2.75 8,666 8.8
3.00 2,100 8.2 3.00 1,050 8.2
3.05 9,000 8.2 3.05 4,500 8.2
3.44 15,000 7.8 3.44 11,250 7.8
4.00 10,000 7.3 4.00 7,500 7.3
4.05 6,667 8.8 4.05 - -
4.15 300 7.6 4.15 224 7.6
4.27 15,475 6.8 4.27 15,475 6.8
4.49 5,000 9.2 4.49 - -
5.32 218,674 2.2 5.32 213,504 2.2
5.50 1,500 9.2 5.50 500 9.2
5.78 15,000 9.8 5.78 - -
5.94 9,000 9.7 5.94 2,250 9.7
8.32 773 2.1 8.32 773 2.1
21.41 1,245 1.5 21.41 1,245 1.5
32.13 374 1.5 32.13 374 1.5
--------------------------------------------------------------------- ------------------------------
$ - 386,280 7.1 $ 4.57 317,483 5.4
===================================================================== ==============================
--------------------------------------------------------------------------------
F-15
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and production and warehouse facilities in
Hawthorne, New York, Westborough, Massachusetts and Bridgewater, New Jersey.
Future minimum lease payments are as follows:
YEARS ENDING DECEMBER 31,
----------------------------------------------------------------------------
2008 $ 414,000
2009 357,000
2010 60,000
------------
$ 831,000
============
A deferred rent credit of approximately $80,000 is included in other
liabilities provided for, at the inception of the Hawthorne, New York lease.
Rent expense is recorded on a straight-line basis over the lease term. Rent
expense for the years ended December 31, 2007 and 2006 was approximately
$445,000 and $408,000, respectively.
The Company arranged for a $150,000 letter of credit representing a security
deposit for the Hawthorne, New York lease. The Company has pledged a
$150,000 certificate of deposit to the bank issuing the letter of credit as
collateral for the letter of credit and the restricted cash account is
included in other assets.
EMPLOYMENT AGREEMENTS - The Company has employment agreements with its chief
executive officer, its president, its chief financial officer, its chief
technology officer and the presidents of Working Values and Skye Multimedia.
The employment agreement with the Company's chief executive officer was
renewed in February 2007, and is for a term of three years. The agreement
renews automatically for a new three-year term at the end of the first year
of each three-year term, unless either party gives notice of their intent
not to renew before the end of the first year, of each three-year term. The
chief financial officer's agreement was executed in June 2005 and expires
June 2008. The employment agreement with the president was renewed on
October 1, 2005 for a period of three years. The chief technology officer's
agreement was entered into on October 1, 2007 for a period of three years.
Each employment agreement provides for specified annual base salaries,
subject to increases at the discretion of the Company's Board of Directors.
Under certain agreements, if the Company terminates any executive's
employment without cause, or if an executive terminates his employment for
good reason, the executive is entitled to receive certain severance
benefits. The employment agreement with the president of Working Values
provides for performance and other bonuses, if the Company reaches certain
income levels. To date, no amounts have been paid or accrued in connection
with this provision. The Company has employment agreements with Stephen Henn
who joined the Company on account of the acquisition of Cognistar. He is
vice president of Working Values Ltd. His contract is for two years,
beginning November 1, 2006 and expiring on November 15, 2008, and has terms
similar to the other agreements. Skye's president's agreement is for three
years, beginning March 1, 2006 and expires January 31, 2009.
At December 31, 2007, the aggregate commitment under the four employment
agreements for the senior executives approximated $820,000.
LITIGATION - The Company is currently not a party in any litigation other
than that arising in the normal course of its business operations.
--------------------------------------------------------------------------------
F-16
SMARTPROS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of the following
classes of financial instruments were:
CURRENT ASSETS AND CURRENT LIABILITIES - The carrying values of cash,
investments securities available-for-sale, accounts receivables,
payables and certain other short-term financial instruments approximate
their fair value.
CAPITAL LEASE AND EQUIPMENT FINANCING OBLIGATIONS - The fair value of
the Company's capital lease and equipment financing obligations,
including the current portion, approximates fair value.
--------------------------------------------------------------------------------
F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A(T). CONTROLS AND PROCEDURES
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Management, with the
participation of our principal executive officer and the principal financial
officer, carried out an evaluation of the effectiveness of our "disclosure
controls and procedures" (as defined in the Securities Exchange Act of 1934 (the
"Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of the period
covered by this report (the "Evaluation Date"). Based upon that evaluation, our
principal executive officer and principal financial officer concluded that, as
of the Evaluation Date, our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act (i) is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms and
(ii) is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
Our management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within SmartPros have been detected.
b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in rule 13a-15(f) under the
Exchange Act). Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Our management has concluded that, as of December 31, 2007, our
internal control over financial reporting is effective based on these criteria.
This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this annual report.
c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
changes in our internal controls over financial reporting that occurred during
our fiscal fourth quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information relating to our directors and executive officers that is
responsive to Item 9 of Form 10-KSB will be included in our Proxy Statement in
connection with our 2007 annual meeting of stockholders, which information is
incorporated by reference herein.
33
CODE OF ETHICS
We have adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer and other persons performing similar
functions, as well as all of our other employees and directors. The Code of
Ethics is posted on our Web site at www.smartpros.com and is filed as Exhibit
14.1 to this report. Amendments to and waivers from the Code of Ethics will also
be posted on our Web site.
ITEM 10. EXECUTIVE COMPENSATION
Information relating to our directors and executive officers that is
responsive to Item 10 of Form 10-KSB will be included in our Proxy Statement in
connection with our 2007 annual meeting of stockholders, which information is
incorporated by reference herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information relating to our directors and executive officers that is
responsive to Item 11 of Form 10-KSB will be included in our Proxy Statement in
connection with our 2007 annual meeting of stockholders, which information is
incorporated by reference herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information relating to our directors and executive officers that is
responsive to Item 12 of Form 10-KSB will be included in our Proxy Statement in
connection with our 2007 annual meeting of stockholders, which information is
incorporated by reference herein.
ITEM 13. EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 Amended and Restated By-Laws, as amended (1)
4.1 Specimen stock certificate (1)
4.2 Form of warrant agreement including form of warrant (1)
4.3 Form of unit certificate (1)
4.4 Form of representative's warrant issued (1)
10.1 1999 Stock Option Plan, as amended (1)
10.2 Second Amended Employment Agreement between SmartPros Ltd. and
Jack Fingerhut (1)
10.3 Employment Agreement between SmartPros Ltd. and David M.
Gebler (1)
10.4 Employment Agreement between SmartPros Ltd. and Seth Oberman*
10.5 Employment Agreement, dated February 1, 2007, between Allen S.
Greene and SmartPros, Ltd. (3)
10.6.1 Lease for premises at 12 Skyline Drive, Hawthorne, New York
(1)
10.6.2 Lease for premises at 28 South Main Street Rear, Sharon,
Massachusetts (1)
10.6.3 Lease for premises at Westborough, Massachusetts (4)
34
10.6.4 Lease for premises at Bridgewater, New Jersey (4)
10.7 Letter Agreement between SmartPros Ltd. and Allen S. Greene
re: restricted stock (1)
10.8 Final form of Restricted Stock Agreement, dated as of January
29, 2007, executed by Allen S. Greene, Jack Fingerhut, Stanley
Wirtheim, Joseph Fish and David Gebler (3)
14.1 Code of Ethics (2)
21.1 Subsidiaries (4)
23.1 Consent of Holtz Rubenstein Reminick LLP*
31.1 Principal Executive Officer Certification pursuant to section
302 of the Sarbanes-Oxley Act of 2002*
31.2 Principal Financial Officer Certification pursuant to section
302 of the Sarbanes-Oxley Act of 2002*
32.1 Principal Executive Officer Certification pursuant to section
906 of the Sarbanes-Oxley Act of 2002*
32.2 Principal Financial Officer Certification pursuant to section
906 of the Sarbanes-Oxley Act of 2002*
-------
NOTES TO EXHIBITS
* Filed herewith
(1) Filed as an exhibit with the same number to Registration Statement on
Form SB-2 (No. 333-115454), effective as of October 19, 2004, and
incorporated herein by reference.
(2) Filed on March 14, 2005, as an exhibit with the same number to our
Current Report on Form 8-K and incorporated herein by reference.
(3) Filed on February 2, 2007, as an exhibit to our Current Report on Form
8-K and incorporated herein by reference.
(4) Filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2005, and incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information that is responsive to Item 14 of Form 10-KSB will be
included in our Proxy Statement in connection with our 2007 annual meeting of
stockholders, which information is incorporated by reference herein.
35
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SmartPros Ltd.
By: /s/ Allen S. Greene
-------------------------
Allen S. Greene
Chief Executive Officer
Date: March 24, 2008
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
indicated on March 24, 2008.
SIGNATURE TITLE
--------- -----
Principal Executive Officer
/s/ Allen S. Greene Chief Executive Officer
------------------------------
Allen S. Greene
Principal Financial Officer
/s/ Stanley P. Wirtheim Chief Financial Officer
------------------------------
Stanley P. Wirtheim
Directors
/s/ Allen S. Greene Chairman of the Board of Directors
------------------------------
Allen S. Greene
/s/ John J. Gorman Director
------------------------------
John J. Gorman
/s/ Jack Fingerhut Director
------------------------------
Jack Fingerhut
/s/ Leonard J. Stanley Director
------------------------------
Leonard J. Stanley
/s/ Martin H. Lager Director
------------------------------
Martin H. Lager
36