U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2004
Commission File No. 0-8924
Trinity Learning Corporation
(Exact name of small business issuer as specified in its charter)
Utah 73-0981865
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1831 Second Street, Berkeley, California 94710
(Address of principal executive offices)
(510) 540-9300
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, No Par
Value
Check whether the issuer (1) filed all reports required to be filed by
sections 13 or 15(d) of the Exchange Act during the past 9 months (or such
shorter period that the issuer 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 in this form, and no disclosure will be contained, to the
best of the 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. [ ]
The issuer's revenues for the fiscal year ended June 30, 2004: $2,590,091
The aggregate market value of the 19,844,438 shares of voting stock held by
non-affiliates of the Registrant, computed as the average of the closing bid and
asked prices as of October 26, 2004 was $19,844,438.
As of October 26, 2004, the Registrant had outstanding 31,402,643 shares of
common stock, no par value per share.
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PART I
Throughout this report, we refer to Trinity Learning Corporation, together with
its subsidiaries, as "we," "us," "our company," "Trinity Learning," or "the
Company."
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS MAY,
WILL, SHOULD, EXPECT, PLAN, INTEND, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT,
POTENTIAL OR CONTINUE, THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE
TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY
CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED BELOW. THESE FACTORS MAY
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING
STATEMENT.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER WE NOR ANY OTHER PERSON
ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE FORWARD-LOOKING
STATEMENTS. WE ARE UNDER NO DUTY TO UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS
AFTER THE DATE OF THIS ANNUAL REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL
RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
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TABLE OF CONTENTS
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PART I PAGE
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ITEM 1. DESCRIPTION OF BUSINESS 4
ITEM 2. DESCRIPTION OF PROPERTY 19
ITEM 3. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS 20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 21
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 22
ITEM 7. FINANCIAL STATEMENTS 31
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTATNTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 31
ITEM 8A. CONTROLS AND PROCEDURES 32
ITEM 8B. OTHER INFORMATION 33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTOL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 34
ITEM 10. EXECUTIVE COMPENSATION 36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 37
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 39
ITEM 13. EXHIBITS 41
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES 42
EXHIBIT INDEX 72
SIGNATURES 78
EXHIBITS
10.87 AGREEMENT DATED AUGUST 11, 2004 BETWEEN THE COMPANY
AND RESOURCE WORKS, INC.
10.88 AGREEMENT DATED OCTOBER 1, 2004 BETWEEN THE COMPANY
AND MCC FINANCIAL SERVICES ADVISORS, INC.
10.89 AGREEMENT DATED OCTOBER 12, 2004 BETWEEN THE COMPANY
AND HYACINTH RESOURCES, INC.
21.1 SUBSIDIARIES OF TRINTIY LEARNING CORPORATION
23.1 CONSENT OF INDEPENDENT REGISTRATION PUBLIC ACCOUNTING
31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER
32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER
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ITEM 1. DESCRIPTION OF BUSINESS
General
We are a publicly held global learning company that provides advanced
learning solutions for corporations, organizations and individuals. Our mission
is to become a leader in offering education, training and certification services
to major customers around the world. We are seeking to grow rapidly through
acquisitions, business development and strategic relationships.
We commenced our strategy in 2002 to acquire and integrate operating
companies with established customers in strategic markets that have developed
proprietary technology-enabled learning, training and certification systems and
services targeted at major customers in worldwide industries. Our initial target
market has been medium to large companies and organizations that provide
workplace training and certification to their employees in a cost effective and
efficient manner. We anticipate that growth will also be achieved through
strategic relationships, licensing and marketing of software and other
technologies, internal business development, and the expansion of sales offices
and other sales representation around the world.
In making acquisitions, we have targeted companies that we believe will
position us to:
o Provide workplace learning services to multiple organizational levels
of major employers;
o Leverage investments in content and delivery systems across multiple
industry segments;
o Cross-market learning services developed by our operating
subsidiaries;
o Design and implement long-term workplace human capital development
programs for large corporations, organizations and governments; and
o Provide meaningful learning experiences to end-users.
We adopted our strategy in 2002 based on competitive analysis, market
research and an analysis of our ability to acquire operating companies in key
market areas and segments with attractive valuations. We have executed this
strategy by identifying and completing a number of strategic acquisitions,
expanding our executive management team, entering into key strategic
relationships with financial advisors and investment banks, and developing and
implementing a development and growth stage financing strategy.
On February 22, 2004, we entered into an Agreement and Plan of Merger with
ProsoftTraining, a Nevada corporation, pursuant to which we would have merged
into a wholly owned subsidiary of ProsoftTraining. This Agreement and Plan of
Merger was mutually terminated on July 23, 2004. Following mutual termination of
our proposed merger with Prosoft, we have focused our efforts on obtaining
private equity and debt financing, identifying and negotiating additional
acquisition targets, primarily in North America and Western Europe, integrating
and leveraging acquired operating assets in the U.S., Australia, South Africa,
and Europe, and on developing our financial, shareholder and reporting
infrastructure to meet listing requirements for a larger stock exchange.
The Global Learning Market
According to EduVentures, Inc., a privately held education research
company, and Think Equity Partners, an investment bank focused on major growth
sectors of the economy, the global education and training market is estimated at
approximately US$2 trillion annually, with the United States currently
accounting for over 35% of the world market for training and education services.
Within the corporate training market, e-learning, fueled by increased
penetration of computers and workplace access to the Internet/Intranet, is
playing an increased role in providing employees with training and workplace
learning. IDC, a global market research and advisory firm, estimates that
worldwide e-learning market will exceed $23 billion by 2006. Cortona Consulting,
a strategic
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marketing and management assistance firm, estimates that the global e-learning
services market will reach $50 billion by 2010.
We believe that the global learning market will, over time, evolve globally
as it has in the United States and other developed countries, and will continue
to expand based on market factors including:
o Growth and dynamic changes in the world's population base and the
world's workforce;
o Continued globalization of the world's economies and expansion of
educational services in lesser developed countries;
o Increased access to Internet/Intranet and other communications
technologies around the world.
Changes in the size and make-up of the world's population
The Population Resource Center, a non-profit organization dedicated to
bringing the latest demographic data to policy makers, estimates that world
population exceeded 6 billion individuals in 2001, with a growth rate of 1.3%
annually. Based on this growth rate, there will be approximately 1 billion new
entrants to the global workforce each decade throughout the first half of this
century. Educating and training new workers is a task of global proportions.
Furthermore, significant changes in the make-up of the world's population are
anticipated in the near future:
o Future labor shortages in industrialized economies, caused by an aging
workforce, will be met through immigration and outsourcing; and
o Short-term labor shortages will be met by full-time and part-time
re-entry of "retirees" into the workforce, a trend that is already
gaining momentum in the United States.
Both groups will require training or retraining in new job skills - particularly
computer-related skills.
Other demographic factors in the make-up of the world's work force are
expected to have a significant impact on the workplace learning market. In the
United States, according to Ameristat, a partnership of the Population Reference
Bureau and the University of Michigan Social Science Data Analysis Network,
between 1998 and 2008 over 40 million people will enter the U.S. labor force,
joining over 110 million workers already in the workforce. Over 25% of new
workers are expected to be either Spanish or Chinese speaking, for whom English
skills are limited, knowledge of local laws and regulations regarding employment
practices is minimal, and for whom training in basic workplace skills will be
required.
During the same time, the average age of the workforce will increase to age
45 or older by the year 2025. In many cases, older workers will have changed
jobs or careers numerous times, with additional job or career changes likely
before reaching the age to receive retirement benefits. It is generally accepted
that young people entering the workforce today will need to continually adapt to
rapid changes in technology, employment opportunities and the skills needed to
succeed over their working lives.
As the global workplace continues to change rapidly, the economic value of
a college degree or professional certification continues to increase. In the
United States, the wage premium for a college degree as compared to a high
school diploma has nearly doubled since the late 1970s - a statistic that is
even more pronounced for women. Through distance and online education, there is
a worldwide market for college degree programs and professional certifications.
Wage differentials based on education can also be found in the workplace below
the degree level. For example, in Latin America, a worker with six years of
education typically earns 50% more than a worker with no formal education, and
the wage premium increases to 120% based on 12 years of education.
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Globalization and Technology
Increased globalization of the world's economies is also expected to have a
significant impact on the world learning market. As technology continues to
facilitate global communication and business, corporations will continue to seek
out new foreign markets for highly educated, lower cost workers, a process known
as "outsourcing" or white collar globalization. In order for developed nations
to compete with the outsourcing of labor to developing nations, they must invest
in educating and training their workforce. Many companies already know the
benefits of ongoing education and training for their employees.
A three year study of 575 publicly held companies by the American Society
for Training and Development ("ASTD"), an association of workplace learning and
performance professionals, found that companies who invested $680 per employee
more than the average company increased their total stockholder return by six
percent for the following year.
A US-based survey performed by Chief Learning Officer Magazine and
Fairfield Research Inc., a market research company, found that enterprise
companies (over $500 million in sales) annually spend an average of $3.7 million
on learning and training. These companies are estimated to have collectively
spent $11.9 billion on education in 2003. The annual spending per employee
averaged $912 with the greatest proportion of spending, nearly a third, devoted
to technical staff. Another major area of expenditure for training and workplace
learning was regulatory and health and safety compliance.
Globalization also presents challenges to large-scale, multinational
employers in global industries that must address their human capital
requirements in a cost-effective manner because of dispersed workforces,
continued introduction of new technologies, language and cultural barriers, and
other demographic factors. Large employers also employ a wide range of personnel
with various levels of education and differing needs for ongoing training,
workplace learning and professional development. In addition, compliance with
local, national and international regulations and standards is increasingly
critical for employers of all sizes.
Impact of Technology
Technology is revolutionizing access to learning, education and training
around the world through computer-based learning, high-speed network access,
distance learning, e-learning and online accredited education. Workplace access
to computers and the Internet/Intranet continues to increase dramatically, with
the highest rates of growth over the coming decade expected to be in less
developed nations. Worldwide, the "Internet population" is estimated at nearly 1
billion by The Computer Industry Almanac, and is expected to grow at a rate of
approximately 200 million new users per year.
The advent of computer and Internet/Intranet technology has also presented
new approaches for teaching and training employees. Individuals learn in
different ways, and no one method of teaching or training is optimal across all
types of content or desired educational outcome. Educational research has shown
that a "blended learning" approach is generally more successful for the
retention of new skills. Within the overall global learning market, there are a
variety of instructional methods that can be utilized to train workers:
o Traditional classroom instruction at a school, the employer's facility
or at an off-site facility;
o Computer-based training and workplace simulation;
o Distance education, using printed materials or digital materials;
o Online or e-learning, either instructor-mediated or self-paced; and
o Hands-on training with machines or devices, either in the workplace or
at a remote facility.
Recognizing that there is no single instructional method or technology that
works for every skill, every type of worker, or for all types of content, we
have and will continue to acquire operating companies that, together,
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represent a "blended learning" approach to workplace learning. Our operating
subsidiaries, collectively, are experienced in multiple delivery methods,
multiple content specialties, and have designed and implemented a variety of
workplace learning solutions.
Our Business
We serve the worldwide, workplace learning products and services market and
are executing a strategy to create the first true "blended learning" company on
a global scale. Trinity Learning's vision since inception has been to align our
acquisition and business development strategy with the large and growing demand
among Global 1000 corporations, organizations, and individuals throughout the
world to provide efficient access to learning opportunities made possible by
advances in technology, communications, and computing. Our acquisition strategy
is to target those companies that enable us to:
o Serve an expanding number of global industry segments from health care
to agriculture to manufacturing;
o Deliver to multiple organizational levels of major corporations from
blue collar to management to executives, focused on benefiting both
the organization and the employee or individual learner; and
o Use a blend of delivery methods including online learning, e-learning,
instructor-led training, simulations, multimedia, etc.
We currently have three wholly owned operating subsidiaries: TouchVision,
River Murray Training, VILPAS, and 51% interest in the operations of Riverbend
and IRCA.
TouchVision
As of September 1, 2003, we completed the acquisition of all of the issued
and outstanding shares of TouchVision, Inc., a California corporation
("TouchVision") that is in the business of providing technology-enabled
information and learning systems to healthcare providers, financial services
companies and other industry segments. In consideration for the TouchVision
shares, we issued an aggregate of 1,250,000 restricted shares of our common
stock, 312,500 shares of which are subject to the terms of an escrow agreement
as collateral for the indemnification obligations of the former TouchVision
shareholders. We also agreed to loan to TouchVision the sum of $20,000 per month
for the twelve-month period following closing, to be used for working capital,
having previously loaned TouchVision the sum of $50,000 in June 2003 by way of
bridge financing pending completion of the acquisition. As of June 30, 2004, we
had loaned TouchVision a total of $200,000 pursuant to this agreement. In
connection with the acquisition, TouchVision entered into substantially similar
employment agreements with each of Messrs. Gregory L. Roche and Larry J. Mahar,
the former principals of TouchVision, which have a term of two years and provide
for annual salaries of $120,000. William Jobe, one of our directors, was paid a
total of $59,500 during the period December 2003 to June 2004 as compensation
for merger and acquisition services associated with our acquisition of
TouchVision.
TouchVision specializes in web-based software products that are designed to
be deployed on external and internal websites, a network of self-service
stations, or stand-alone terminals. This hardware independence means the
software can be accessed with a wide variety of end-user devices: web browser
stations, wireless tablets and personal digital assistants (PDA's), kiosks, or
computers.
TouchVision has developed a number of products that are both generally
applicable and industry-specific. The VisMed(R) suite of applications is
specially branded for the healthcare industry. It bundles together many of the
applications listed below as well as e-mail and shopping capabilities.
TouchVision's current products consist of the following:
o CheckIn. CheckIn is the software solution for patient queuing,
admitting, and processing in hospitals, clinics, and other care
facilities. It is designed to replace the paper clipboard and health
information forms, and protects patient privacy in compliance with
HIPAA. It also tracks key performance metrics and offers real-time
reporting. At full implementation, CheckIn will perform
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automatic verification of insurance eligibility and collect the
patient's co-payment. This product is a part of the VisMed suite.
o Presenter. Digital signs are the computerized replacement of
billboards, message boards, schedule postings, and other static
information displays offering versatility, impact, and reach.
TouchVision Presenter is a tool for managing and displaying
information on digital signs from a desktop web browser. Without any
technical skills, personnel can manage welcoming information on a
plasma display, promotional messages on the attract loop of a kiosk
network, or schedule updates on LCD monitors outside meeting rooms.
o PathFinder. PathFinder is an interactive facility directory and way
finder system that can be viewed on a website or on self-service
terminals in a facility. The software is optimized for large
facilities such as hospitals, schools, institutions, and office
complexes that have a need to conveniently help visitors find a
destination. PathFinder users can search for a destination, view a map
showing how to reach the location, and receive other directional
instructions. This product is a part of the VisMed suite.
o Surveyor. Surveyor is flexible software that presents survey questions
to the user and collects their answers. Answers are then stored in a
database and emailed to the administrator. Surveyor is designed to
eliminate the cost, inconvenience, and inaccuracy of traditional paper
surveys. This product is a part of the VisMed suite.
o Educator. Educator provides a search engine for browsing and viewing
health education content that can be delivered directly to a patient -
in their room or education centers. This product is a part of the
VisMed suite.
o Finder. Finder is a flexible software system that allows the user to
search for information in a database. The selected information is
displayed on the screen with the ability to link to supplemental
information. Common uses of Finder include physician referrals
(DrFinder), staff directories (PeopleFinder), and building directories
(OfficeFinder).
o NurseStation. NurseStation is a productivity enhancement tool for
nurses, physicians, and healthcare providers. NurseStation informs a
care provider of whether the patient is currently in his or her room,
and tracks other important parameters such as treating physician,
specialist, nurse, and status. It replaces manual methods such as
marker boards at the nurse station and allows a care provider to
conveniently access this important information from anywhere in the
hospital using a handheld device or web station. This product is a
part of the VisMed suite.
o Concierge. Concierge, which is designed to require minimal technical
skills, allows a user to easily update application features, graphical
design, and information content. A library of content display
templates provides for rapid development of professional pages for
websites, web stations, and kiosks. Concierge's Announcer Module
provides a high-profile scrolling message window to display current
announcements and events. This product is a part of the VisMed suite.
o CareMail. CareMail provides personalized E-Cards for patients. E-Cards
can be created on the facility's website or at web stations inside the
facility. Cards are delivered directly to the patient at facilities
with in-room access, and are printed and delivered at other
facilities. This product is a part of the VisMed suite.
o HR Assist. HR Assist is designed to provide employees with convenient
and secure access to online HR services through use of online
resources for benefits enrollment, 401K management, and other human
resources administration tasks.
o BizBrowser. BizBrowser is an interactive business directory that can
be used for tourism advertising, community resources, and other
applications involving display of business
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information. Users can search by a variety of methods to quickly find
the business of interest. Numerous promotional or advertising
placement opportunities exist through banners, feature listings, and
display listings.
o Guardian. Guardian is a fault-protection agent for improving the
reliability and user experience of self-service terminals. It monitors
software applications and the Windows operating system to
automatically respond to faults that can occur as well as the printer
for paper and jamming issues, intercepts and replaces operating system
messages with user-friendly messages, and emails messages to the
system administrator.
TouchVision serves what Trinity Learning believes is a large and growing
market in the United States and around the world for products and services that
make information and content easily accessible, particularly where using a
personal computer is either cost-prohibitive, inaccessible or inappropriate.
Through its VisMed(R) brand, TouchVision delivers solutions that are tailored to
the unique needs of the healthcare sector; TouchVision believes that there are
similar opportunities for offerings that focus on other industry sectors and
geographic markets.
The addition of TouchVision provides other Trinity Learning companies with
the potential to incorporate new software and hardware technology and delivery
platforms into their core learning products. We anticipate that the TouchVision
suite of products will have broad application in technology-enabled workplace
learning where access to a desk-top computer is not available to many sectors of
the workforce. While continuing to develop its own unique customer
opportunities, TouchVision will work closely with our other operating companies
to co-develop workforce training applications and distribution platforms.
River Murray Training
As of September 1, 2003, we completed the acquisition of all of the issued
and outstanding shares of River Murray Training Pty Ltd ("RMT") an Australian
company that is in the business of providing workplace training programs for
various segments of the food production industry, including viticulture and
horticulture. In consideration for the shares of RMT, we issued 700,000
restricted shares of our common stock, 350,000 shares of which are subject to
the terms of an escrow agreement as collateral for the indemnification
obligations of the former RMT shareholders. We also loaned US$49,000 to RMT for
the purpose of repaying outstanding loans advanced to RMT by its former
shareholders.
RMT provides a "one stop shop" approach to meeting company's training needs
and has three separate business units to support this approach:
o Consultancy services to help establish a sustainable in-house training
system;
o Resource development services to develop customized learning support
materials; and
o Training services which provide a wide selection of fully accredited
training.
The basis of the RMT training model is partnering with companies to develop
training programs, which provides two key benefits for its customers: first,
training is made relevant to the workplace; second, active involvement of
customer personnel in training program development creates opportunities that
foster the creation of a learning environment. This in turn provides a medium
through which the customer can achieve continuous improvement.
In 1992, the Australian National Training Authority was established to
provide a national focus for vocational and educational training to ensure that
all workers met the same competency standards. In order to provide this level of
standardized content the Australian government designed the Australian Quality
Training Framework ("AQTF"), which is a set of nationally agreed-upon standards
that ensure the quality of vocational education and training services throughout
Australia.
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RMT was one of the early designers of content for the wine and viticulture
industry in Australia, designing content that met AQTF standards. As a
Registered Training Organization based in Australia's major wine production
region and one of its primary regions for agricultural products, RMT has
developed and maintains 350 training modules, with the majority in the wine
sector. Its major customers in this sector are large wine-producing companies
that receive Australian government funding for vocational training. Other
modules developed by RMT include training for retail services, small business
office administration and frontline management in the seafood and horticulture
industries as well as public services.
RMT's primary sources of revenue are from the design and delivery of
consulting and training services in the Australian agribusiness industry. RMT
believes that future growth will come from training for the public-sector,
agribusiness, and geographic expansion. We believe that RMT's operations can
benefit from our other subsidiaries that operate in markets outside Australia,
primarily by introducing enhanced online learning capabilities to leverage the
curriculum and staff of RMT to viticulture and agriculture regions throughout
Australia. RMT is also exploring the possibility of modifying training
curriculum available to it as an RTO for use in other global markets, including
content in areas such as operational management, which have applications across
multiple geographic markets and industries.
VILPAS
Effective March 1, 2004, we completed the acquisition of all of the issued
and outstanding shares of Virtual Learning Partners, AS (which subsequently
changed its name to Trinity Learning AS) ("VILPAS"), a learning services company
registered under the laws of Norway and headquartered in Oslo, Norway. VILPAS
owns 51% of FunkWeb AS ("FunkWeb"), a Norwegian learning services company that
is also headquartered in Oslo. FunkWeb Consulting AS, a consulting firm, is a
wholly owned subsidiary of FunkWeb.
In consideration for the shares of VILPAS, we issued a non-interest-bearing
promissory note in the principal amount of $500,000 convertible into 1,000,000
shares of our common stock and agreed to issue up to an additional 200,000
shares of our common stock in the event certain revenue and profit thresholds
are met during calendar 2004. As of June 30, 2004, no shares have been issued in
exchange for the convertible promissory notes. The shares of VILPAS were
delivered into escrow at closing and will be held in escrow as security for the
due performance of our obligations under the convertible promissory note. In the
event of a default by us under the Note, the escrow agent will return the VILPAS
shares to vendors upon delivery by them to the escrow agent of (i) the cancelled
note, (ii) any and all shares issued by us upon conversion of the note, and
(iii) any additional revenue-based shares that had been issued by us.
VILPAS is a learning services company headquartered in Oslo, Norway. For
the past five years, it has been engaged in developing e-learning and other
educational initiatives for corporations and organizations in Norway,
Scandinavia and Europe. FunkWeb, also headquartered in Oslo, is a leading
provider of workplace training and retraining for disabled persons. In
conjunction with national and local employment programs, FunkWeb has a
successful track record in providing disabled persons with skills,
certifications and job placement services primarily related to information
technologies, web-based systems, and computing. The minority partner in FunkWeb
is the Norwegian Federation of Functionally Disabled People, a non-government
organization (NGO) representing many of Norway's associations and programs for
the disabled.
FunkWeb provides classroom-based, instructor-led instruction and also
computer-based self-paced study to functionally-disabled individuals seeking to
develop new workplace skills and certifications. Many countries in Europe and
around the world have announced public initiatives to increase participation
rates in the labor force among disabled people. We believe that FunkWeb provides
a model, which may be replicated in other geographic countries.
Riverbend
On September 1, 2003, we completed the acquisition of 51% of the issued and
outstanding shares of Ayrshire Trading Limited ("Ayrshire") that owns 95% of
Riverbend Group Holdings (Proprietary) Limited ("Riverbend"). Riverbend, through
its various subsidiaries, is a provider of online university degrees and other
workplace learning services to corporations and individuals in South Africa.
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In consideration for the Ayrshire shares, we issued a convertible
non-interest-bearing promissory note in the amount of US$20,000, which amount is
convertible from time to time, but no later than December 30, 2006, into a
maximum of 2,000,000 restricted shares of our common stock. Of these shares, up
to 400,000 may be withheld in satisfaction for any breach of warranties by the
former shareholders of Ayrshire. As of June 30, 2004, no shares had been issued
in exchange for the convertible promissory note. The Ayrshire shares are subject
to escrow and pledge agreements and will be reconveyed to the former
shareholders in the event of a default by us of certain terms and conditions of
the acquisition agreements. As further consideration for the Ayrshire shares, we
agreed to make a non-interest-bearing loan of U.S. $1,000,000 to Ayrshire. An
option to acquire the remaining 49% of Ayrshire may be exercised in
consideration for the issuance of 1,500,000 additional shares of our common
stock, subject to certain adjustments.
Our 51% ownership in Ayrshire has been accounted for in the financial
statements included with this report using the equity method of accounting. The
equity method of accounting permits an investor to incorporate its pro rata
share of the investee's earnings into its earnings. However, rather than include
each component, e.g. sales, cost of sales, operating expenses, the investor only
includes its share of the investee's net income or loss as a separate line item
in its net income. The net income impact is identical whether the equity method
of accounting is used or full consolidation is employed. Under the equity method
of accounting, the balance sheet of the investee is not consolidated with the
balance sheet of the investor. Rather, the fair value of the consideration paid
is shown as an asset, "Investments in Associated Companies." The equity method
of accounting is used for investments in which the investor has significant
influence over the operations of the investee but lacks operating control.
Riverbend, founded in 1998, operates through its four subsidiaries.
Riverbend co-owns its largest subsidiary, eLearning Systems and its wholly owned
subsidiary, eDegree, with Jonnic Publications and Price Waterhouse Coopers.
eDegree authors and provides online degrees from some of South Africa's most
respected universities. Other Riverbend subsidiaries include Learning Advantage,
a customized learning solutions provider to corporations, Reusable Objects, a
leading-edge learning software developer, and Learning Strategies, an e-learning
consulting services provider. These Riverbend subsidiaries serve major corporate
customers in South Africa and are leaders in South Africa's initiative to
increase employment and competitiveness by expanding and improving adult basic
education and training. We anticipate that Riverbend's future revenue generation
will occur primarily through product development, business development and
geographic expansion.
eDegree's core business surrounds e-learning and online learning support.
The company partners with universities and corporations in order to maximize the
use of the Internet for instructional effectiveness. eDegree is currently
supplying and managing education and training to learners via several different
delivery formats. eDegree offers academic institutions and corporate partners
one or any of the following services:
o Instructional design and educational project management expertise;
o Curriculum development and courseware design;
o Interactive e-learning content conversion methodologies to meet
customized education and training needs;
o Delivering e-learning interventions;
o Management and administration of the delivery of e-learning courses;
o Object-oriented software expertise used in the development of
e-learning tools and interactive content; and
o Internal quality assurance capabilities.
eDegree has successfully created, designed, developed, and administered
courses on behalf of and in partnership with a number of leading South African
academic institutions. It is currently supplying and actively managing the
delivery of online education in collaboration with educational institutions to
more than 4,000 students worldwide. We anticipate that eDegree's future revenue
growth will be derived from broader distribution on behalf
11
of its existing programs and geographic growth through development of new
partnerships with educational institutions, corporations and government programs
worldwide.
Reusable Objects, another Riverbend subsidiary, designs and develops
software tools for the efficient authoring, development, management and
publishing of instructional software programs. In particular, the "Construct"
suite of tools includes a dynamic software utility for the creation of "learning
objects" that include one or more web pages, text documents, presentations, or
multimedia items that can be indexed, archived, and distributed to learners.
Reusable Objects' products allow its customers to create cost-effective
solutions designed in such a way that they can be deployed for a variety of
courses and programs customized to the needs of differing contexts, target
audiences, technical platforms and educational frameworks. Learner management,
presentation of multiple perspectives, and use of interesting and appropriate
graphics, and audio/video tools are central to Reusable Objects' solutions
strategy. Reusable Objects focuses heavily on encouraging skills development and
application instead of memorization and retention of factual information.
Trinity anticipates that Reusable Objects' revenue growth will be derived from
increased product development and product deployment to corporations and
universities both locally in South Africa and worldwide in conjunction with
growth in other Riverbend businesses.
Learning Strategies is a consulting organization that assists large
corporations, public entities and higher education institutions in understanding
the most suitable learning and knowledge management approach in the modern
technological environment. Learning Strategies' consultants provide consulting
in the areas of strategy, knowledge management, financial management, human
resource management, supply chain optimization, general process improvement and
assessment of management information needs. As part of their leadership and
industrial relations services, consultants facilitate team building, manage
conflict through mediation, provide training for effective workplace relations,
and develop and implement organizational transformation and restructuring.
Learning Strategies' customers are primarily corporations based in South Africa,
and we do not anticipate significant growth by Learning Strategies for the
foreseeable future.
Learning Advantage specializes in the supply and support of world-class,
e-learning applications. In marketing partnerships with leading companies such
as Docent, Saba, and others, Learning Advantage is supplying educational
software and managing e-learning solutions throughout South Africa. Learning
Advantage is licensed to distribute a wide range of e-learning support tools and
has extensive experience in the installation, configuration, end-user training
and support of its products. We anticipate that revenue growth will be derived
from the development of new product and geographic expansion.
IRCA
IRCA (Proprietary) Limited ("IRCA") is an international firm specializing
in corporate learning, certification, and risk mitigation in the areas of
safety, health environment, and quality assurance ("SHEQ"). The company is
headquartered in South Africa and operates international sales offices and
operations in South Africa, the United Kingdom, Australia, Malaysia and North
America.
We acquired our interest in IRCA in December 2003 when we completed the
acquisition of all of the issued and outstanding shares (the "Danlas Shares") of
Danlas Limited, a British Virgin Islands company ("Danlas") that owns 51% of
IRCA and holds an option to acquire the remaining 49%. In consideration for the
Danlas Shares, we (i) issued a convertible promissory note for $20,000 which is
convertible, under certain terms and conditions, into a maximum of 2,500,000
shares of common stock, (ii) issued two additional convertible promissory notes
of $10,000 each which become effective upon the conversion of the first
promissory note which, in the aggregate, are convertible into 2,000,000 shares
of common stock for the remaining 49% of IRCA, (iii) agreed to advance $500,000
in cash to establish an international sales force, (iii) agreed to provide
$500,000 on deposit with Standard Bank as collateral for an operating line of
credit and, (iv) agreed to issue up to an additional 1,000,000 shares of common
stock in the event certain profit thresholds are met. As of June 30, 2004, no
shares have been issued in exchange for the convertible promissory note and IRCA
had not achieved sufficient profit to receive additional shares for the twelve
months ended June 30, 2004. A commitment of 500,000 shares pursuant to this
agreement may be issuable if profit hurdles are achieved for the twelve months
ended June 30, 2005. The Danlas Shares were pledged and deposited in escrow at
closing as security for the due performance of Trinity's obligations under its
promissory notes. In the event of a default by us under the notes, the Danlas
Shares will be deemed sold back to the vendor at their par value. An event of
default under the Note includes, among other things, a voluntary or
12
involuntary bankruptcy proceeding involving us and the failure by us to list our
shares of common stock on a major stock exchange by December 30, 2005.
Our 51% ownership in IRCA has been accounted for in the financial
statements included with this report using the equity method of accounting. The
equity method of accounting permits an investor to incorporate its pro rata
share of the investee's earnings into its earnings. However, rather than include
each component, e.g. sales, cost of sales, operating expenses, the investor only
includes its share of the investee's net income or loss as a separate line item
in its net income. The net income impact is identical whether the equity method
of accounting is used or full consolidation is employed. Under the equity method
of accounting, the balance sheet of the investee is not consolidated with the
balance sheet of the investor. Rather, the fair value of the consideration paid
is shown as an asset, "Investments in Associated Companies." The equity method
of accounting is used for investments in which the investor has significant
influence over the operations of the investee but lacks operating control.
In connection with our acquisition of our interest in IRCA, we entered into
an agreement with Titan Aviation Ltd. ("Titan"), a private company held in a
trust, of which Mr. Martin Steynberg along with other business partners is a
beneficiary, pursuant to which we paid Titan on May 14, 2004 the sterling
equivalent of the sum of 4,000,000 South African Rand ($607,165) for various
services rendered to IRCA. We also agreed to appoint Mr. Martin Steynberg to our
Board of Directors until our next annual general meeting.
IRCA provides international risk assessment, consulting, and behavior-based
management and training services, with specific emphasis on integration of
services to clients in the field of Safety & Health, Environment and Quality
"(SHEQ"), as follows:
o Technical Services. IRCA provides a variety of services in the areas
of environmental impact assessment and management, process safety,
chemistry (process and analytical) and environmental engineering, thus
enabling it to comprehensively address the safety, health and
environmental risks of its clients through assessment, mitigation
design and design implementation.
o Consulting Services. IRCA advises and assists organizations in respect
of the SHEQ-related exposures. IRCA's professionals assess workplace
issues related to SHEQ, advise clients on learning programs and other
interventions that can reduce corporate financial risks, and assist in
the implementation and certification of programs. Guidance and
standards of operation are provided based on international best
practices, helping organizations to reduce the impact of identified
risks and to implement acceptable levels of control regarding residual
risks.
o Training. IRCA provides a variety of on-site training courses, some of
which are done in conjunction with BSI (British Standards Institution)
to ensure that the latest standards, practices and knowledge are
incorporated. IRCA is an accredited training provider and presents a
variety of SHEQ training courses. The courses incorporate
international standards and practices and are adapted to the
environment of the various countries in which IRCA operates. This
ensures that individual needs of executives, management, supervisors,
representatives and workers are satisfied. Courses presented range
from basic shop floor training aimed at the workforce, to highly
technical, specialist risk assessment techniques for functional
specialists. All training is presented in public course forums, as
well as in-house for organizations that require inclusion of their own
standards and logos. IRCA also offers web-based distance learning.
Competitive Business Conditions
The competitive market for corporate training and workplace learning is
fragmented by geography, curricula, and targeted segments of the workforce.
Although there are many companies that provide training, we believe that we
derive our competitive advantage because of our ability to provide a suite of
learning solutions on a worldwide basis at multiple levels of the workforce
ranging from industrial workers to executive management.
Generally, most of our competition comes from:
13
o Smaller, specialized local training companies;
o Providers of online and e-learning products targeted at corporate soft
skills and technical training;
o Not-for-profit trade schools, vocational schools and universities; and
o Learning services divisions of large, multinational computer, software
and management consulting firms.
We anticipate that market resistance may come from the internal trainers in
the organizations to whom our various operating subsidiaries sell training and
certification. Traditional trainers may see outsourcing as a threat to their job
security. We seek to overcome this by focusing our business development strategy
on senior management in operations, finance and human resources. We will also
reshape the value proposition for internal training functions from tactical to
strategic. We believe we can enhance the role of internal training and human
capital development departments by providing a proven, integrated set of
learning tools. In this way, we can provide measurable results and increase both
the actual effectiveness and the perceived value of internal training
departments.
Each of our operating subsidiaries faces local and regional competition for
customer contracts and for government and non-government funding of education
and training projects. In geographic areas where they hope to expand, they may
face competition from established providers of their respective products and
services.
We believe that our operating subsidiaries derive their competitive
advantage from one or more of the following:
o Proprietary content, software or technology;
o Strategic relationships and alliances, including exclusive development
and marketing relationships; and
o Management's industry and customer relationships.
We are in the process of expanding our sales efforts in each of our
operating subsidiaries. In December 2003 in conjunction with IRCA, we began the
development of an international sales force. At present, new sales are generally
derived through word-of-mouth and sales calls made by the managers of the
subsidiaries. We have on sales person who covers the eastern United States for
TouchVision. We are also in the process of developing distribution alliances
with other companies on behalf of TouchVision. RMT customizes and resells
content as a Registered Training Organization owned by the Australian
government.
Intellectual Property
Our success and ability to compete are dependent, to a significant degree,
on our ability to develop and maintain the proprietary aspects of our technology
and operate without infringing the proprietary rights of others. We regard
certain aspects of our products and documentation as proprietary and rely on a
combination of trademark, trade secret and copyright laws and licenses and
contractual restrictions to protect our proprietary rights. These legal
protections afford only limited protection. We seek to protect the source code
for our software, documentation and other written materials under trade secret
and copyright laws. We license software pursuant to license agreements that
restrict use of the software by customers. Finally, we seek to limit disclosure
of our intellectual property by requiring employees, consultants and customers
with access to our proprietary information to execute confidentiality agreements
and by restricting access to source codes. We believe, however, that in the
market for online-learning and other technology-enabled education, training and
certification services that require online business communications and
collaboration, factors such as the technological and creative skills of our
personnel and our ability to develop new products and enhancements to existing
products are more important than the various legal protections of our technology
to establishing and maintaining a technology leadership position.
14
Our products and services, in some cases, are derived from proprietary
content developed by our operating subsidiaries. In other cases, we or our
subsidiaries are licensed to market third-party content or software, or in some
cases to modify or customize third party content to meet the needs of our
clients. In certain cases, where we have made investments to develop or
co-develop certain products or services with third-parties, we and our operating
subsidiaries may be entitled to certain rights of ownership and copyright of
intellectual property to the extent they are delivered to customers in the
format developed by us.
Our products are generally licensed to end-users on a "right-to-use" basis
pursuant to a license that restricts the use of the products for the customer's
internal business purposes. We also rely on "click wrap" licenses, which include
a notice informing the end-user that, by downloading the product, the end-user
agrees to be bound by the license agreement displayed on the customer's computer
screen. Despite efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that is regarded as proprietary. Policing unauthorized use of products is
difficult and, while we are unable to determine the extent to which piracy of
our software exists, it can be expected to be a persistent problem. In addition,
the laws of many countries do not protect intellectual proprietary rights to as
great an extent as do the laws of the United States. Many of our subsidiaries
operate in countries other than the United States. We are in the process of
reviewing all intellectual property ownership and protection among all of our
recently-acquired operating subsidiaries.
Employees
As of September 30, 2004, we had 40 full time employees located in
California, Australia and Norway. In addition, our equity method investees have
275 employees in South Africa and Australia.
Corporate Background
We were incorporated on April 14, 1975 in Oklahoma under the name U.S.
Mineral & Royalty Corp. as an oil and gas exploration, development and operating
company. In 1989, we changed our name to Habersham Energy Company. Historically,
the company was engaged in the business of acquiring and producing oil and gas
properties, but did not have any business activity from 1995 to 2002. Subsequent
to our reorganization in 2002, we changed our corporate domicile to Utah,
amended our capital structure and changed our name to Trinity Companies Inc. In
March 2003, our name was changed to Trinity Learning Corporation.
On June 16, 2003, we completed a recapitalization of our common stock by
(i) effecting a reverse split of our outstanding common stock on the basis of
one share for each 250 shares owned, with each resulting fractional share being
rounded up to the nearest whole share, and (ii) subsequently effecting a forward
split by dividend to all stockholders of record, pro rata, on the basis of 250
shares for each one share owned. The record date for the reverse and forward
splits was June 4, 2003. As a result of the recapitalization, the number of
shares outstanding 13,419,774 remained unchanged. Between July and October 2003,
an additional 19,090 shares of common stock were issued to shareholders, and
shares owned by members of management were cancelled pursuant to this
recapitalization.
On August 6, 2003, our board of directors approved a change in our fiscal
year-end from September 30 to June 30 to align it with those of the companies we
had already acquired or were at that time in the process of acquiring.
We completed our first acquisition in October 2002 when we acquired
Competency Based Learning, Inc., a California corporation ("CBL-California"),
and two related Australian companies, Competency Based Learning, Pty. Ltd. and
ACN 082 126 501 Pty. Ltd., (collectively referred to as "CBL Australia"), in
consideration for the issuance of a total of 3,000,000 restricted shares of
common stock and $1,000,000 in convertible promissory notes and the assumption
of $222,151 in indebtedness. The transactions were effected through CBL Global
Corp. ("CBL"), our wholly-owned subsidiary. Effective December 22, 2003, we
conveyed our interests in CBL and its Australian and Californian subsidiaries
(the "CBL Companies") to the former owners of the CBL Companies. In conjunction
with the management buyout, we entered into a settlement agreement with respect
to litigation with CBL and the CBL Companies. Pursuant to this agreement, we
conveyed all of our interest in the CBL Companies back to the former owners in
exchange for (i) surrender and cancellation of all shares of our stock issued to
the former owners in connection with the acquisition of the CBL Companies, (ii)
the cancellation of our guaranty of
15
approximately $1,000,000 in convertible notes payable and other obligations
under the original transaction agreements, (iii) the waiver of certain other
closing conditions in the original transaction agreement, and (iv) the
assumption of certain financial obligations and accounts payable of CBL. The
parties also exchanged mutual releases of claims in connection with the original
transactions, and we dismissed litigation against the CBL Companies and their
former owners.
Risk Factors
You should carefully consider the following risks before making an
investment in our company. In addition, you should keep in mind that the risks
described below are not the only risks that we face. The risks described below
are the risks that we currently believe are material to our business. However,
additional risks not presently known to us, or risks that we currently believe
are not material, may also impair our business operations. You should also refer
to the other information set forth in this Annual Report on Form 10-KSB,
including the discussions set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Business," as
well as our financial statements and the related notes.
Additional capital is necessary to sustain and grow our business.
For the foreseeable future, unless and until we attain profitable
operations, we will likely experience a net operating loss or minimal net
income. Thus, we will likely be dependent for the foreseeable future on capital
raised in equity and/or debt financing, and there can be no assurance that we
will be able to obtain such financing on favorable terms, if at all.
Our business strategy is based on acquiring and consolidating additional
suitable operating companies at attractive valuations.
Our growth strategy includes integrating our recent acquisitions and
building a world-wide learning technology company. Acquisitions involve various
inherent risks, such as:
o The ability to assess accurately the value, strengths, weaknesses,
contingent and other liabilities and potential profitability of
acquisition candidates;
o The potential loss of key personnel of an acquired business;
o The ability to integrate acquired businesses and to achieve identified
financial and operating synergies anticipated to result from an
acquisition; and
o Unanticipated changes in business and economic conditions affecting an
acquired business.
We need to successfully integrate recently acquired and potential
additional operating companies.
As a result of recent acquisitions and, as part of our general business
strategy, we expect to experience significant growth and expect such growth to
continue into the future. This growth is expected to place a significant strain
on our management, financial, operating and technical resources. Failure to
manage this growth effectively could have a material adverse effect on the
company's financial condition or results of operations.
There can be no assurance that we will be able to effectively integrate the
acquired companies with our own operations. Expansion will place significant
demands on our marketing, sales, administrative, operational, financial and
management information systems, controls and procedures. Accordingly, our
performance and profitability will depend on the ability of our officers and key
employees to (i) manage our business and our subsidiaries as a cohesive
enterprise, (ii) manage expansion through the timely implementation and
maintenance of appropriate administrative, operational, financial and management
information systems, controls and procedures, (iii) add internal capacity,
facilities and third-party sourcing arrangements as and when needed, (iv)
maintain service quality controls, and (v) attract, train, retain, motivate and
manage effectively our employees. There can be no
16
assurance that we will integrate and manage successfully new systems, controls
and procedures for our business, or that our systems, controls, procedures,
facilities and personnel, even if successfully integrated, will be adequate to
support our projected future operations. Any failure to implement and maintain
such systems, controls and procedures, add internal capacity, facilities and
third-party sourcing arrangements or attract, train, retain, motivate and manage
effectively our employees could have a material adverse effect on our business,
financial condition and results of operations.
We are effectively controlled by our officers and directors.
Our directors and executive officers beneficially own a significant
percentage of the company's outstanding shares of common stock. As a result,
these people exert substantial influence over our affairs and may have the
ability to substantially influence all matters requiring approval by the
stockholders, including the election of directors.
We are subject to compliance with securities law, which exposes us to
potential liabilities, including potential rescission rights.
We have periodically offered and sold our common stock to investors
pursuant to certain exemptions from the registration requirements of the
Securities Act of 1933, as well as those of various state securities laws. The
basis for relying on such exemptions is factual; that is, the applicability of
such exemptions depends upon our conduct and that of those persons contacting
prospective investors and making the offering. We have not received a legal
opinion to the effect that any of our prior offerings were exempt from
registration under any federal or state law. Instead, we have relied upon the
operative facts as the basis for such exemptions, including information provided
by investors themselves.
If any prior offering did not qualify for such exemption, an investor would
have the right to rescind its purchase of the securities if it so desired. It is
possible that if an investor should seek rescission, such investor would
succeed. A similar situation prevails under state law in those states where the
securities may be offered without registration in reliance on the partial
preemption from the registration or qualification provisions of such state
statutes under the National Securities Markets Improvement Act of 1996. If
investors were successful in seeking rescission, we would face severe financial
demands that could adversely affect our business and operations. Additionally,
if we did not in fact qualify for the exemptions upon which it has relied, we
may become subject to significant fines and penalties imposed by the SEC and
state securities agencies.
Our growth strategy is dependent on a variety of requirements, any one of
which may not be met.
Our growth strategy and future profitability will be dependent on our
ability to recruit additional management, operational and sales professionals
and to enter into contracts with additional customers in global markets. There
can be no assurance that our business development, sales, or marketing efforts
will result in additional customer contracts, or that such contracts will result
in profitable operations. Further, our growth strategy includes plans to achieve
market penetration in additional industry segments. In order to remain
competitive, we must (a) continually improve and expand our workplace learning
and other curricula, (b) continually improve and expand technology and
management-information systems, and (c) retain and/or recruit qualified
personnel including instructional designers, computer software programmers,
learning consultants, sales engineers, and other operational, administrative and
sales professionals. There can be no assurance that we will be able to meet
these requirements.
Our business will suffer if technology-enabled learning products and
services are not widely adopted.
Our technology-enabled solutions represent a new and emerging approach for
the workplace learning and education, and training market. Our success will
depend substantially upon the widespread adoption of e-learning products for
education and training. The early stage of development of this market makes it
difficult to predict customer demand accurately. A delay in, or failure of, this
market to develop, whether due to technological, competitive or other reasons,
would severely limit the growth of our business and adversely affect our
financial performance.
17
We face significant competition from other companies.
The education marketplace is fragmented yet highly competitive and rapidly
evolving, and is expected to continue to undergo significant and rapid
technological change. Other companies may develop products and services and
technologies superior to our services, which may result in our services becoming
less competitive. Many of these companies have substantially greater financial,
manufacturing, marketing and technical resources than we do and represent
significant long-term competition. To the extent that these companies offer
comparable products and services at lower prices or at higher quality and more
cost effectively, our business could be adversely affected.
Our future growth depends on successful hiring and retention, particularly
with respect to sales, marketing and development personnel, and we may be unable
to hire and retain the experienced professionals we need to succeed.
Failure on our part to attract and retain sufficient skilled personnel,
particularly sales and marketing personnel and product development personnel,
may limit the rate at which we can grow, may adversely affect our quality or
availability of our products and may result in less effective management of our
business, any of which may harm our business and financial performance.
Qualified personnel are in great demand throughout the learning and software
development industry. Moreover, newly hired employees generally take several
months to attain full productivity, and not all new hires satisfy performance
expectations.
The length of the sales cycle for services may make our operating results
unpredictable and volatile.
The period between initial contact with a potential customer and the
purchase of our products by that customer typically ranges from six to eighteen
months. Factors that contribute to the long sales cycle include (a) the need to
educate potential customers about the benefits of our services; (b) competitive
evaluations and bidding processes managed by customers; (c) customers' internal
budgeting and corporate approval processes; and (d) the fact that large
corporations often take longer to make purchasing decisions due to the size of
their organizations.
Our business may suffer if we are not successful in developing, maintaining
and defending proprietary aspects of technology used in our products and
services.
Our success and ability to compete are dependent, to a significant degree,
on our ability to develop and maintain the proprietary aspects of our technology
and operate without infringing the proprietary rights of others. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity. Any
such litigation, even if we prevailed, could be costly and divert resources and
could have a material adverse effect on our business, operating results and
financial condition. We can give no assurance that our means of protecting our
proprietary rights will be adequate, or that our competitors will not
independently develop similar technology. Any failure by us to protect our
intellectual property could have a material adverse effect on our business,
operating results and financial condition.
There can be no assurance that other parties will not claim that our
current or future products infringe their rights in the intellectual property.
We expect that developers of enterprise applications will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and as the functionality of products in different
segments of the software industry increasingly overlaps. Any such claims, with
or without merit, could be time consuming to defend, result in costly
litigation, divert management's attention and resources, cause product shipment
delays or require us to enter into marginally acceptable terms. A successful
infringement claim against us and our failure or inability to license the
infringed rights or develop license technology with comparable functionality,
could have a material adverse effect on our business, financial condition and
operating results.
We integrate third-party software into some of our products. This
third-party software may not continue to be available on commercially reasonable
terms. We believe, however, there are alternative sources for such technology.
If we are unable to maintain licenses to the third-party software included in
our products, distribution of
18
our products could be delayed until equivalent software could be developed or
licensed and integrated into our products. This delay could materially adversely
affect our business, operating results and financial condition.
Laws and regulations can affect our operations and may limit our ability to
operate in certain jurisdictions.
Providers of educational programs to the public must comply with many laws
and regulations of federal, state and international governments. We believe that
we and our operating subsidiaries are in substantial compliance with all laws
and regulations applicable to our learning business in the various jurisdictions
in which we and our subsidiaries operate. However, laws and regulations in the
various jurisdictions in which our subsidiaries operate that target educational
providers could affect our operations in the future and could limit the ability
of our subsidiaries to obtain authorization to operate in certain jurisdictions.
If we or various of our subsidiaries had to comply with, or was found in
violation of, a jurisdiction's current or future licensing or regulatory
requirements, we could be subject to civil or criminal sanctions, including
monetary penalties; we could also be barred from providing educational services
in that jurisdiction. In addition, laws and regulatory decisions in many areas
other than education could also adversely affect our operations. Complying with
current or future legal requirements could have a material adverse effect on our
operating results and stock price.
Changes in exchange rates can unpredictably and adversely affect our
consolidated operating results.
Our consolidated financial statements are prepared in U.S. dollars, while
the operations of our foreign subsidiaries are conducted in their respective
local currencies. Consequently, changes in exchange rates can unpredictably and
adversely affect our consolidated operating results, and could result in
exchange losses. We do not hedge against the risks associated with fluctuations
in exchange rates. Although we may use hedging techniques in the future, we may
not be able to eliminate or reduce the effects of currency fluctuations. Thus,
exchange rate fluctuations could have a material adverse impact on our operating
results and stock price.
Our business is also subject to other risks associated with international
operations.
Our financial results may be adversely affected by other international
risks, such as:
o Difficulties in translating our courses into foreign languages;
o International political and economic conditions;
o Changes in government regulation in various countries;
o Trade barriers;
o Difficulty in staffing foreign offices, and in training and retaining
foreign instructors;
o Adverse tax consequences; and
o Costs associated with expansion into new territories.
We expect that international revenues will continue to be a significant
portion of our total revenues. If we fail to adequately anticipate and respond
to the risks associated with our international operations, this failure could
have a material adverse effect on our operating results and stock price.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate office in Berkeley, California is sub-leased from an
unaffiliated third party. The term of the lease commenced September 1, 2003 and
expired August 31, 2004, and is renewable on a month to month basis. Our various
operating subsidiaries also lease facilities in Australia, South Africa,
England, Norway and California, in
19
each case from unaffiliated third parties. These facilities are adequate for our
needs at the present time and foreseeable future
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At November 1, 2004, we had approximately 630 shareholders of record. Our
common stock has been quoted on the National Association of Securities Dealers
OTC Electronic Bulletin Board since December 23, 2003 under the symbol "TTYL."
Prior to this date, Trinity Learning's common stock was traded on the Pink
Sheets, a privately owned company headquartered in New York. Neither we nor any
of our affiliated purchasers, as that term is defined in Rule 10b-18 under the
Securities Exchange Act of 1934, repurchased any of our common stock during the
period April 1 through November 1, 2004.
The following table sets forth the high and low bid quotations, as provided
by the OTC Bulletin Board, for our common stock as reported by NASDAQ. These
prices are based on inter-dealer bid prices, without markup, markdown,
commissions or adjustments and may not represent actual transactions.
Market Price:
Fiscal Period: High Low
----- -----
December 23 to 31, 2003 $1.59 $1.59
January 1 to March 31, 2004 $2.50 $1.50
April 1 to June 30, 2004 $1.50 $0.80
We have never declared or paid dividends on our common stock in the past,
and we do not intend to pay such dividends in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of operations,
capital requirements and other factors our board of directors deems relevant.
Neither we nor any of our affiliated purchasers, as that term is defined in
Rule 10b-18 under the Securities Exchange Act of 1934, repurchased any of our
common stock during the period April 1 through October 1, 2004.
The 2002 Stock Plan
An aggregate of 7,454,590 shares of our common stock are currently
authorized for issuance pursuant to our 2002 Stock Plan. This plan was approved
on December 2, 2002, at a special meeting of our shareholders. The Plan allowed
for a maximum aggregate number of shares that may be optioned and sold under the
plan of (a) 3,000,000 shares, plus (b) an annual 500,000 increase to be added on
the last day of each fiscal year beginning in 2003 unless a lesser amount is
determined by the board of directors. The plan became effective with its
adoption and remains in effect for ten years unless terminated earlier. On
December 30, 2003, the board of directors amended the 2002 Stock Plan to allow
for a maximum aggregate number of shares that may be optioned and sold under the
plan of (a) 6,000,000 shares, plus (b) an annual 1,000,000 increase to be added
on the last day of each fiscal year beginning in 2004 unless a lesser amount is
determined by the board of directors. Options granted under the plan vest 25% on
the day of the grant and the remaining 75% vests monthly over the next 36
months.
The following table sets forth certain information regarding securities
authorized for issuance under the 2002 Stock Plan at September 30, 2004:
Equity Compensation Plan Information
------------------------------------
Number of Securities to Weighted Average Number of Securities
be Issued upon Exercise Exercise Price of Remaining Available for
Plan Name of Outstanding Options Outstanding Options Future Issuance
--------- ---------------------- ------------------- ---------------
Equity compensation plan 5,570,000 $0.43 1,884,590
approved by security holders
21
Recent Sales of Unregistered Securities
During the period February 2004 to November 2004, certain warrant holders
from the 2002 Bridge Financing exercised warrants at $0.05 per share for
1,238,542 shares of our common stock. Included in this amount are 126,042 shares
issued to Granite Creek Partners ("GCP"), formerly known as Kings Peak Advisory,
LLC. See "Item 12-Certain Relationships and Related Transactions." The issuance
of these securities was made in reliance on Section 4(2) of the Securities Act
as a transaction not involving any public offering. No advertising or general
solicitation was employed in offering the securities, the offerings and sales
were made to a limited number of persons, and we restricted transfer of the
securities in accordance with the requirements of the Securities Act.
On May 28, 2004, we closed the offering of senior convertible bridge notes
that we commenced in January 2004. A total of $2,695,000 was raised in the
offering, to be used for (i) corporate administration, (ii) the expansion of
subsidiary operations, and (iii) expenses and commitments made for acquisitions
in 2003. As of May 28, 2004, the entire aggregate principal amount of the notes,
plus accrued interest thereon, had been converted into a total of 4,520,069
shares of our common stock. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a limited
number of persons, and we restricted transfer of the securities in accordance
with the requirements of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This management's discussion and analysis of financial condition and
results of operations and other portions of this report contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by this forward-looking information.
This management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and the
related notes included elsewhere in this report.
Overview
On August 6, 2003, our board of directors approved a change in our fiscal
year-end from September 30 to June 30 in order to align us with those of the
companies we had already acquired or were at that time in the process of
acquiring. Accordingly, we filed a transition report on Form 10-KSB for the
period from October 1, 2002 to June 30, 2003 (the "transition period") and the
audited financial statements contained herein cover this period and the fiscal
year ended June 30, 2004.
We substantially reorganized our business and changed our strategic
business plan during the fiscal year ended September 30, 2002. This
reorganization continued into the subsequent transition period. As part of this
reorganization, we incurred significant costs associated with hiring new
management, acquiring new office facilities and engaging professional advisors
to assist us in the process of developing and executing new business
opportunities. We also sought and obtained debt and equity financing which
permitted us to complete our various corporate acquisitions in the transition
period and in fiscal 2004.
Our financial statements are prepared using accounting principles generally
accepted in the United States of America generally applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. Currently, we do not have
significant cash or other material assets, nor do we have an established source
of revenues sufficient to cover our operating costs and to allow us to continue
as a going concern. We do not currently possess a financial institution source
of financing and we cannot be certain that our existing sources of cash will be
adequate to meet our liquidity requirements.
To meet our present and future liquidity requirements, we will continue to
seek additional funding through private placements, conversion of outstanding
loans and payables into common stock, development of the business of our
newly-acquired subsidiaries, collections on accounts receivable, and through
additional acquisitions that have sufficient cash flow to fund subsidiary
operations. There can be no assurance that we will be successful in obtaining
more debt and/or equity financing in the future or that our results of
operations will materially improve in either the short- or the long-term. If we
fail to obtain such financing and improve our results of operations, we will be
unable
22
to meet our obligations as they become due. That would raise substantial doubt
about our ability to continue as a going concern.
Accounting for Riverbend and IRCA
In September and December 2003, we completed the acquisition, respectively,
of our interest in Riverbend and IRCA. Our interim financial statements as
originally filed for the periods ending September 30 and December 31, 2003 and
March 31, 2004 reflected the consolidation of those entities with our company.
Our investments in Riverbend and IRCA have been re-classified in our year-end
audited financial statements as equity investments and, accordingly, the
financial results of these companies have not been consolidated with our
financial statements. We have file amended quarterly reports for the periods
ended September 30 and December 31, 2003 and March 31, 2004 that reflect this
change in accounting treatment.
Results of Operations
Fiscal Year Ended June 30, 2004 as Compared to the Nine Month Transition Period
Ended June 30, 2003
Our sales revenues for fiscal year 2004 were $2,590,091 as compared to
$167,790 for the nine month transition period ended June 30, 2003. This
significant increase in revenues is due to the acquisitions, in September 2003
of TouchVision and RMT, and in March 2004, of VILPAS. The period in 2003
comprises nine months revenue of CBL which was our sole operating subsidiary in
that period. The fiscal year 2004 includes ten months of revenue from
TouchVision ($1,113,463) and RMT ($639,678), and four months of revenue from
VILPAS ($669,160). Revenues of CBL ($167,790), which was sold by us effective
December 22, 2003, were included through such date.
Costs of sales, which consist of labor and hardware costs, and other
incidental expenses, were $475,076 for the fiscal year 2004 as compared to $0
for the nine month transition period ended June 30, 2003, resulting in gross
profit of $2,115,015 for the fiscal year 2004, as compared to $167,790 for the
nine month transition period ended June 30, 2003. There was no cost of sales in
the prior period because our sole subsidiary at that time, CBL, licensed
pre-existing content. These increases in both costs and gross profit were due to
and associated with increased revenues resulting from the acquisitions completed
by us in September 2003 and in March 2004.
Operating expenses for fiscal year 2004 were $7,190,975 as compared to
$2,157,840 for the nine month transition period ended June 30, 2003. This
increase was due primarily to a significant increase in salaries and benefits,
which increased $2,593,375 from $1,043,123 for the nine month transition period
ended June 30, 2003 to $3,636,498 for the fiscal year 2004. The increase is
largely due to the acquisition of the new subsidiaries ($1,246,233), development
of an international sales force ($311,729) and the addition of finance,
administrative and executive staff ($661,308) in support of the new operating
strategy as well as an additional three months of activity in fiscal 2004.
Additionally, employee stock based compensation of $526,491 was $449,717 greater
than the expense for the nine month transition period ended June 30, 2003. The
increase is due to new stock option issuances, primarily to employees of our new
subsidiaries, as well as to new employees in our corporate administration group,
and also because we used a volatility factor of 70% in 2004 as compared to 0% in
2003 in using the Black Scholes option valuation model to evaluate the costs
associated with our stock option plan.
Other significant increases in operating expense resulted from increases in
selling, general and administrative expense, professional fees, and depreciation
and amortization expense. Selling, general and administrative expense of
$1,886,514 for fiscal year 2004 increased $1,385,130 from $501,384 for the nine
month transition period ended June 30, 2003. Selling, general and administrative
costs attributable to the new subsidiaries and the development of an
international sales force totaled $1,288,338. Professional fees increased
$950,786, of which $126,634 is attributable to the acquisitions, $142,888 is
attributable to increased legal fees, $328,050 is attributable to increased
financial advisory fees and $297,349 is attributable to increased accounting and
audit fees. Depreciation and amortization expense increased from $175,497 for
the nine month transition period June 30, 2003 to $279,360 for fiscal year 2004.
The increase of $103,863 comprises $87,584 attributable to amortization of
intangible assets and $16,279 attributable to depreciation expense, both
resulting from the acquisitions of TouchVision, RMT and VILPAS.
23
Other Expense of $6,378,643 for the year ended June 30, 2004 was $6,296,709
greater than that for the nine month transition period ended June 30, 2003. This
increase is primarily due to losses in associated companies accounted for on an
equity basis of $2,714,985, and debt conversion expense of $3,449,332. Losses in
associated companies arise from Riverbend, ($536,936) and IRCA ($2,178,049). The
loss in IRCA includes a $884,963 charge for impairment. Debt conversion expense
comprises non-cash expense associated with the conversion of the 2004 Bridge
Loan at $0.60 per share when the fair market value of shares trading publicly
was $1.05 to $1.25 per share. The IRCA impairment expense of $884,963 is equal
to the write down to $0 of our initial investment in IRCA, net of current year
operating losses and amortization of identifiable intangible assets. We wrote
down our investment in IRCA to $0 as a result of current year operating
performance and anticipated operating losses in IRCA for the foreseeable future.
These losses are, in part, a result of the weakening of the US dollar in
relation to the South African Rand and the resulting down turn in mining
operations in South Africa, IRCA's primary customer base. In future periods, we
will continue to absorb losses up to the amount of the $500,000 we have
deposited as collateral in support of IRCA's operating line of credit. The
weakening U.S dollar also negatively impacted the translated results for each of
the foreign subsidiaries.
We reported net loss available for common stockholders of $11,462,063, or
$0.50 per share for the fiscal year 2004, compared with a net loss of $2,071,984
or $0.26 per share for the nine month transition period last year.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and TouchVision, RMT, and VILPAS
assuming the acquisitions occurred October 1, 2002. In December 2003, we
completed the sale of our interest in CBL to the former owners of CBL.
Accordingly, CBL's business operating results are not included in the Company's
combined unaudited pro forma financial information for the twelve and nine month
periods ended June 30, 2004, and 2003. The unaudited pro forma financial
information is not intended to represent or be indicative of the consolidated
results of the operations of the Company that would have been reported had these
acquisitions been completed as of the dates presented, nor should it be taken as
a representation of the future consolidated results of operations of the
Company.
(Unaudited)
-----------
Fiscal Year Transition
Ended June 30, Period Ended
2004 June 30, 2003
-------------- --------------
Revenue $ 3,115,500 $ 2,550,448
============== ==============
Gross Profit $ 2,363,177 $ 2,010,843
============== ==============
Operating Loss $ (5,203,706) $ (1,266,640)
============== ==============
Net Loss $ (12,924,746) $ (1,239,493)
============== ==============
Net Loss per Common Share - Basic / Diluted $ (0.57) $ (0.54)
============== ==============
On a pro forma basis, sales revenue of $3,115,500 for the year ended June
30, 2004 was $565,052 greater than that for the nine month transition period
ended June 30, 2003. Sales revenue in VILPAS and in TouchVision increased
$210,816 and $512,217, respectively, primarily as a result of the additional
three months in the year ended June 30, 2004. On a pro forma basis, revenue in
RMT declined $157,982 because over the past year there has been a general
reduction in Australian government subsidies for corporate training. On a pro
forma basis, gross profit showed similar trends.
On a pro forma basis, operating expense of $7,566,883 for the year ended
June 30, 2004 was $4,289,400 greater than that for the nine month transition
period ended June 30, 2003. In VILPAS and in TouchVision, increases are
primarily a result of the additional three months in the year ended June 30,
2004. In RMT, operating expense declined by $138,723 as a result of reduced use
of temporary training staff and other training costs consistent with the
decrease in sales revenue. The most significant increases resulted from
increases in corporate headquarters expense, largely due to the addition of
finance, administrative and executive staff ($661,308) in support of the new
operating strategy, employee stock compensation expense of $526,491, which was
$449,717 greater than the nine month transition period ended June 30, 2003, as
well as the additional three months of expense in the current period. Other
significant increases in operating expense resulted from increases in selling,
general and administrative expense and professional fees. Selling, general and
administrative costs include $953,141 for the
24
development of an international sales force in 2004. In 2004, professional fees
include an increase of $886,469 incurred by the Company's corporate operations,
$142,888 of which is attributable to increased legal fees, $328,050 is
attributable to increased financial advisory fees and $297,349 is attributable
to increased accounting and audit fees.
We operate as a single business segment; however, our consolidated
subsidiaries are organized geographically into reporting segments consisting of
the United States Division, the European Division, the Australia Division and
the South Africa Division. Our United States division comprises our corporate
operations and subsidiaries domiciled in the United States of America. The
European division comprises subsidiaries domiciled in Europe; the Australia
Division comprises subsidiaries domiciled in Australia. The South Africa
division comprises non-consolidated subsidiaries domiciled in South Africa
accounted for using the equity method of accounting and includes a two person
office owned by them in Australia.
As of and for the fiscal year ended June 30, 2004:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
United
States $ 1,113,463 $(4,680,565) $ 221,883 $ - $ 140,560 $ 910,000 $ 3,517 $ 3,997,388 $ 320,538
Europe 669,160 (19,866) 19,616 - 45,116 563,009 - 1,701,409 117,253
Australia 807,468 (375,529) 37,861 - 57,488 376,517 33,643 554,343 6,729
South
Africa - - - (2,714,985) - - - - -
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 2,590,091 $(5,075,960) $ 279,360 $(2,714,985) $ 243,164 $ 1,849,526 $ 37,160 $ 6,253,140 $ 444,520
=========== =========== =========== =========== =========== =========== =========== =========== ===========
As of and for the nine month transition period ended June 30, 2003:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
United
States $ - $(1,114,213) $ - $ - $ - $ - $ - $ 232,177 $ (584,224)
Europe - - - - - - - - -
Australia 167,790 (875,836) 175,497 - 42,719 - 45,561 1,110,168 (946,712)
South
Africa - - - - - - - - -
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 167,790 $(1,990,050) $ 175,497 $ - $ 42,719 $ - $ 45,561 $ 1,342,344 $(1,530,936)
=========== =========== =========== =========== =========== =========== =========== =========== ===========
The following describes underlying trends in the businesses of each of our three
operating subsidiaries.
VILPAS. The Norwegian government is currently refining its mandates with
regard to functionally disabled workers, with funding now targeted at not only
training of the handicapped but also at subsidizing direct employment of
handicapped and challenged individuals. FunkWeb, a majority owned subsidiary of
VILPAS, is in the process of revising some of its programs and market strategies
to be able to participate in government programs aimed directly at increasing
employment among functionally disabled workers. There is little or no
seasonality to the business of VILPAS. The majority of operating costs are fixed
costs, with some variable costs incurred related to cost of instructors, which
costs may vary depending upon enrollment.
RMT. Over the past year there has been a general reduction in Australian
government subsidies for corporate training. As a result, RMT and other
Registered Training Organizations must rely on competitive advantages to retain
clients and to attract new customers. Accordingly, RMT is in the process of
developing new products and services to expand its reach beyond the Australian
viticulture industry. There is little or no seasonality to RMT's business. New
investment for courseware may increase in the coming fiscal year as RMT develops
new courses to market in Australia and in markets outside Australia. Variable
costs for RMT primarily include one-time and ongoing expenses for outsourced
course development and, at times, instructors. Presently, RMT sells its products
and services in Australia in local currency (Australian Dollars) and there is
little or no effect from currency exchange. In the future, if RMT is successful
in selling in markets outside of Australia, foreign exchange factors may impact
the ability of RMT to market and compete in a profitable manner.
25
TouchVision. TouchVision has begun to expand its business into developing
new software and consulting services for the hospital and healthcare market,
while continuing to supply industry sectors it has focused on in the past. We
believe investments in technology infrastructure by hospitals and healthcare
providers will be stable in the coming fiscal years. There is little or no
seasonality to the business of TouchVision. In addition to sales through its
existing sales force, TouchVision is in the process of establishing distribution
arrangements with outside companies selling to the healthcare industry.
Depending on sales channel mix, some sales through outside agents may result in
lower retained revenues but, due to corresponding lower fixed costs, these sales
may nonetheless have a positive impact on the bottom line.
Transition Period Ended June 30, 2003 Compared to the Fiscal Year Ended
September 30, 2002
Our revenues for the nine-month transitional period ended June 30, 2003
were $167,790, as compared to $0 for the fiscal year ended September 30, 2002.
These revenues were generated by our sole operating subsidiary, CBL. Net loss
for the nine-month transitional period ended June 30, 2003 was $(2,071,984) as
compared to $(565,931) for the fiscal year ended September 30, 2002.
Our operating expense increased from $552,774 for the year ended September
30, 2002 to $2,157,840 for the nine-month transitional period ended June 30,
2003. This increase was due primarily to a significant increase in salaries and
benefits, which increased $960,123 from $83,000 for the year ended September 30,
2002 to $1,043,123 for the period ended June 30, 2003. Of this amount, $603,551
was paid for salaries and related tax, medical and other benefits for the
thirteen employees of CBL. During the period, we also hired our president, our
chief financial officer and our chief learning officer and incurred the salary
expense associated with these positions. Other significant increases in our
operating expenses were related to travel and entertainment expenses, which
increased $121,725, from $60,868 for the year ended September 30, 2002 to
$182,593 for the transition period ended June 30, 2003. Professional fees
increased from $363,770 to $437,836 and include financial advisory and legal
expenses associated with our recent financing and acquisition activities. Also
included in operating expense is $167,747 amortization expense resulting from
the $1,118,312 capitalization of intellectual property acquired with CBL and
related amortization of this asset. Net interest expense of $77,352 increased
substantially from $13,957 for the year ended September 30, 2002. This increase
is primarily attributable to interest paid on various loans incurred immediately
prior to and during the period.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have a history of
losses, and our accumulated deficit as of June 30, 2004 was $22,650,976, as
compared to $11,188,913 as of June 30, 2003.
At June 30, 2004, we had a cash balance of $892,739 compared to $86,511 at
June 30, 2003. Net cash used by operating activities during the fiscal year 2004
was $3,672,724, attributable primarily to our loss from operations of
$5,075,960. Net cash generated by financing activities was $6,498,391 for the
fiscal year 2004 representing the net of borrowings and repayments under
short-term notes of $2,495,000, $4,973,300 in proceeds from issuance of common
stock, $36,646 from the proceeds of exercising warrants and options, less
financing fees of $1,006,555. Of funds received, $1,000,000 was advanced to
Riverbend, $500,000 was deposited in a bank in support of an operating letter of
credit for IRCA, $1,520,591 was paid for acquisition related legal and financial
advisor fees and $1,000,329 was paid for other financial advisory fees.
Accounts receivable increased from $42,719 at June 30, 2003 to $243,164 at
June 30, 2004. This increase is due to the addition of the receivables owed to
the three subsidiaries we acquired during fiscal year 2004.
Accounts payable increased from $324,004 at June 30, 2003 to $814,651 at
June 30, 2004. Accrued expenses increased from $270,270 at June 30, 2003 to
$721,192 at June 30, 2004. These increases are attributable to expenses incurred
by the three subsidiaries we acquired during fiscal year 2004 and our continuing
corporate expansion during the year.
As a professional services organization we are not capital intensive.
Capital expenditures historically have been for computer-aided instruction,
accounting and project management information systems, and general-purpose
26
computer equipment to accommodate our growth. Capital expenditures during the
fiscal year 2004 and the nine month transition period ended June 30, 2003, were
$21,220 and $34,274, respectively.
We continue to seek equity and debt financing in fiscal 2004 to support our
growth and to finance recent and proposed acquisitions:
In February 2004, we entered into term credit agreements with Hong Kong
League Central Credit Union and with HIT Credit Union for a total of $250,000.
The obligation matures February 2005. Interest on these notes is payable monthly
at 12% per annum. Interest on these notes was prepaid on September 1, 2004.
On May 28, 2004, we closed the offering of senior convertible bridge notes
that we commenced in January 2004. A total of $2,695,000 was raised in the
offering, to be used for (i) corporate administration, (ii) the expansion of
subsidiary operations, and (iii) expenses and commitments made for acquisitions
in 2003. As of May 28, 2004, the entire aggregate principal amount of the notes,
plus accrued interest thereon, was converted into a total of 4,520,069 shares of
our common stock.
On July 29, 2004, we issued a secured convertible promissory note in the
principal amount of $500,000 to Oceanus Value Fund, L.P. ("Oceanus"). On
September 1, 2004, we repaid the principal owing on the promissory note plus
accrued proceeds from the Laurus transaction described below.
On August 31, 2004, we entered into a series of agreements with Laurus
Master Fund, Ltd. ("Laurus") whereby we issued to Laurus (i) a secured
convertible term note ("Note") in the principal amount of $5.5 million and (ii)
a five-year warrant ("Warrant") to purchase up to 1,600,000 shares of our common
stock at a price of $0.81 per share. Of the Note proceeds, the outstanding
principal balance of $500,000 was repaid to Oceanus, $233,000 was used for
operations, $4,491,000 was deposited in a restricted account as security for the
total loan amount and for use by us to make acquisitions as approved by Laurus.
Restricted funds may also be released for operations at a rate of 25% of the
dollar volume of our stock for a twenty day period. The principal amount of the
Note carries an interest rate of prime plus two percent, subject to adjustment,
and we must make monthly payments of at least $22,000, commencing November 1,
2004, toward the outstanding non-restricted principal amount. The principal
amount of the Note and accrued interest thereon is convertible into shares of
our common stock at a price of $0.72 per share, subject to anti-dilution
adjustments. We have granted Laurus a right of first refusal with respect to any
debt or equity financings and Laurus has the right to loan to us up to an
additional $2.2 million, within 270 days of closing, on the same terms and
conditions as contained in the Laurus agreements pertaining to the Note and
Warrant.
To meet our present and future liquidity requirements, we are continuing to
seek additional funding through private placements, conversion of outstanding
loans and payables into common stock, development of the businesses of our
newly-acquired subsidiaries, collections on accounts receivable, and through
additional acquisitions that have sufficient cash flow to fund subsidiary
operations. There can be no assurance that we will be successful in obtaining
more debt and/or equity financing in the future or that our results of
operations will materially improve in either the short- or the long-term. If we
fail to obtain such financing and improve our results of operations, we will be
unable to meet our obligations as they become due. That would raise substantial
doubt about our ability to continue as a going concern.
Our financial statements are prepared using accounting principles generally
accepted in the United States of America generally applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. Currently, we do not have
significant cash or other material assets, nor do we have an established source
of revenues sufficient to cover our operating costs and to allow us to continue
as a going concern. We do not currently possess a financial institution source
of financing and we cannot be certain that our existing sources of cash will be
adequate to meet our liquidity requirements. Based upon our cash balance at June
30, 2004, we will not be able to sustain operations for more than one month
without additional sources of financing.
Related Party Transactions
Our corporate reorganization during the fiscal year ended September 30,
2002 was effected primarily by two of our officers and directors, Messrs.
Douglas Cole and Edward Mooney. During that fiscal year and the
27
transition period subsequent thereto, we entered into several transactions with
these individuals and with entities controlled by them, as well as entities
controlled by Theodore Swindells, a significant stockholder of our company.
As of August 8, 2002, we formalized a Debt Conversion Agreement with Global
Marketing Associates, Inc. ("GMA"), holder of a convertible promissory note (the
"GMA Note") in the principal amount of $166,963, pursuant to which the principal
amount of the note, along with accrued interest thereon, was made convertible,
under certain conditions, into 3,200,000 shares of our common stock. The GMA
Note was originally issued in November 2000 to the attorneys of our predecessor
company and was subsequently acquired by Pacific Management Services, Inc., who
assigned the note to GMA. GMA subsequently assigned the right to acquire
2,600,000 of the 3,200,000 shares of common stock to several persons, including
Messrs. Cole, Mooney, and Swindells and European American Securities, Inc.
("EAS"), a private entity of which Mr. Swindells is a principal. Pursuant to the
assignment, Messrs. Cole and Mooney each acquired the right to acquire 600,000
shares of the common stock, EAS acquired the right to acquire 400,000 shares,
and Mr. Swindells acquired the right to acquire 1,000,000 shares. As of January
2003, all 3,200,000 shares of our common stock had been issued pursuant to the
terms of the GMA Note. Fifty percent of such shares are subject to a two-year
lock-up provision that restricts transfer of such shares without prior written
consent of our board of directors.
As of July 15, 2002, we entered into a two-year Advisory Agreement with
Granite Creek Partners, LLC ("GCP"), formerly King's Peak Advisors, LLC. The
agreement is automatically renewable for an additional 12-month period. Under
the terms of the Advisory Agreement, GCP agreed to provide us with general
corporate, financial, business development and investment advisory services on a
non-exclusive basis. These services include assisting with the identification of
placement agents, underwriters, lenders and other sources of financing, as well
as additional qualified independent directors and members of management. GCP is
a private company whose principals are Messrs. Cole, Mooney and Swindells. At
our August 19, 2003 board of directors' meeting, our board of directors voted to
suspend the Advisory Agreement from August 15, 2003 until January 2004, and this
agreement remains suspended. Through December 31, 2003, GCP had earned a total
of $315,000 under the Advisory Agreement, $110,000 of which was converted into
4,400,000 shares of our common stock in March 2003. The remaining balance of
$205,000 was paid in full to GCP as of June 30, 2004.
As of July 31, 2002, we entered into an Advisory Agreement with EAS, a
private entity of which Mr. Swindells is a principal, pursuant to which EAS
agreed to provide financial advisory and investment banking services to us in
connection with various equity and/or debt transactions. In exchange for such
services, we agreed to pay EAS a retainer fee of $5,000 per month and a
commission ranging from 5% to 7% based on the type of transaction consummated,
such fees being payable, at EAS' option, in cash or our common stock. On October
2, 2003, we renewed the agreement with EAS on terms similar to those contained
in the first agreement. On January 1, 2004, we amended the October 2003
agreement in connection with our January 2004 senior convertible bridge note
offering, which closed on May 28, 2004, for which we paid EAS a fee of 10%.
Through June 30, 2004, EAS had earned a total of $1,065,104 pursuant to our
arrangement with them, of which $345,450 was earned in connection with private
equity and/or debt transactions and $719,654 was earned for advisory services in
connection with certain acquisitions. As of June 30, 2004, the balance owed to
EAS was $66,653. On May 27, 2004, European American Perinvest Group, a
subsidiary of EAS, invested $100,000 in our 2004 senior convertible bridge note
offering. On May 28, 2004, this investment was converted to 166,699 restricted
shares of our common stock as part of the total conversion of this financing to
4,520,069 shares of our common stock.
During the period August 2001 to June 30, 2002, Mr. Swindells advanced a
total of $925,000 to us by way of short-term non-interest bearing working
capital loans. We repaid $500,000 of the total amount owing in September 2003
and issued an aggregate of 850,000 shares of our common stock to Mr. Swindells
in November 2003 in payment of the remaining balance of $425,000. During the
period June 2004 to October 2004, Mr. Swindells advanced us $155,000. On August
10, 2004 we repaid $50,000 of this amount. On October 14, 2004, Mr. Swindells
exercised warrants to purchase 300,000 shares of our common stock at $0.05 per
share.
28
In October 2002, we issued convertible promissory notes in the aggregate
principal amount of $500,000 (the "Bridge Financing Notes") to certain
individuals and entities, and in connection with the issuance of the Bridge
Financing Notes, issued warrants to the holders of the notes to purchase
additional shares of common stock. Of the total principal amount of the Bridge
Financing Notes, $55,000 was advanced by GCP and $120,000 by Mr. Swindells. On
May 19, 2003, the aggregate principal amount of the Bridge Financing Notes and
accrued interest thereon of $34,745 was converted into 1,336,867 shares of
common stock at a price of $0.40 per share. The warrants issued in connection
with the Bridge Financing Notes are exercisable for a period of one year at a
price of $0.05 per share, and contain a net issuance provision whereby the
holders may elect a cashless exercise of such warrants based on the fair market
value of the common stock at the time of conversion. On March 26, 2004, GSP
exercised its warrants in a cashless exercise for which it received a total of
126,042 shares of common stock.
Effective October 1, 2002, we issued an aggregate of 1,200,000 restricted
shares of our common stock at a price of $0.025 per share to our three
directors, Messrs. Cole, Mooney and Jobe, in consideration for past services
valued at $30,000.
In connection with our acquisition of our interest in IRCA, we entered into
an agreement with Titan Aviation Ltd. ("Titan"), a private company held in a
trust of which Mr. Martin Steynberg and other business partners are the
beneficiaries. Pursuant to this agreement, we paid Titan on May 14, 2004 the
sterling equivalent of the sum of 4,000,000 South African Rand ($607,165) in
consideration for various services rendered to IRCA. Mr. Steynberg, who is a
stockholder in IRCA Investments (Proprietary) Limited, which owns 25.1% of IRCA,
became a director of our company on January 1, 2004 pursuant to the terms of the
IRCA acquisition.
William Jobe, one of our directors, was paid a total of $59,500 during the
period December 2003 to May 2004 as compensation for merger and acquisition
services associated with our acquisition of TouchVision. In August we paid Mr.
Jobe an additional $4,815 in connection with the TouchVision transaction.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and form the basis
for the following discussion and analysis on critical accounting policies and
estimates. The preparation of these financial statements required us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. These estimates and assumptions are evaluated on a regular basis.
Actual results may differ from these estimates under different assumptions or
conditions. A summary of our significant accounting policies is set out in Note
1 to our audited consolidated financial statements. Significant estimates
include revenue recognition policy, valuation and allocation of the purchase
consideration of the assets and liabilities and assets acquired in business
combinations and equity investments in associated companies, our determination
of fair value of common stock issued in business combinations and equity
investments in associated companies, and the annual valuation and review for
impairment of assets acquired and of long-lived assets. Material accounting
policies that we believe are the most critical to investors' understanding of
our financial results and condition, and require complex management judgment,
are discussed below.
1. Consolidation Policy. Our consolidated financial statements include
the accounts of the Company and our wholly-owned subsidiaries. All
significant intercompany transactions are eliminated in consolidation.
Our 51% ownership in Ayrshire and in IRCA have been accounted for in
the financial statements included with this report using the equity
method of accounting. The equity method of accounting requires an
investor to incorporate its pro rata share of the investee's earnings
into its earnings. However, rather than include each component, e.g.
sales, cost of sales, operating expenses, the investor only includes
its share of the investee's net income or loss as a separate line item
in its statement of operations. The net income impact is identical
whether the equity method of accounting is used or full consolidation
is employed. Under the equity method of accounting, the balance sheet
of the investee is not consolidated with the balance sheet of the
investor. Rather, the fair value of the consideration paid is recorded
as an asset, "Equity Investment in Associated
29
Company." The equity method of accounting is used for investments in
which the investor has significant influence over the operations of
the investee but lacks operating control.
2. Valuation of Common Stock Issued in Business Combinations. The
acquisition value assigned to the RMT transaction and to the
TouchVision transaction was determined using $0.50 per common share
for the shares issued in each of those transactions. The acquisition
value assigned to the VILPAS transaction was determined using $0.80
per common share for the shares to be issued on the conversion of the
underlying convertible promissory note. At the time of the RMT and
TouchVision transactions, a trading market for the Company's common
stock had not been established and the Company was in the process of
raising capital at $0.50 per share. The Company's stock began trading
on the OTC Bulleting Board in late December 2003; however, total
monthly volume for shares traded averaged less than 10,000 shares per
month from January 2004 to June 2004 at prices ranging from $0.80 per
share to $2.10 per share. The number of shares to be issued, 1,000,000
shares of restricted stock, is relatively large compared to actual
trading volume and the shares to be issued are not registered. A price
of $0.80 per share was considered the best estimate of the fair value
of the shares to be issued.
3. Valuation of Common Stock to be Issued in Acquisition of Interest in
Associated Companies. The acquisition values assigned to the Riverbend
transaction and to the IRCA transaction was determined using $0.50 per
common share for the shares to be issued on conversion of the
underlying convertible promissory notes for each of those
transactions. At the time of the Riverbend transaction, a trading
market for the Company's common stock had not been established and the
Company was in the process of raising capital at $0.50 per share.
Similarly, the Company had just completed its financing efforts when
the IRCA transaction was consummated and the Company's shares had not
yet been listed for quotation on the OTC Bulletin Board. As such, a
value of $0.50 per share was considered the best estimate of the fair
value of the shares to be issued at that time.
4. Revenue Recognition. We earn our revenues primarily from
service-related contracts, including operations and maintenance
services and a variety of technical assistance services. Revenue is
generally recognized on a straight-line basis, unless evidence
suggests that the revenue is earned or obligations are fulfilled in a
different pattern over the contractual term of the arrangement, or the
expected period, during which those specified services will be
performed, whichever is longer. Four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services rendered; (3) the fee is
fixed and determinable; and (4) collectibility is reasonably assured.
The Company determines whether criteria (3) and (4) are met based on
judgments regarding the nature of the fee charged for services
rendered and products delivered, and the collectibility of those fees.
5. Allocation of Purchase Consideration in Business Acquisitions. The
excess of the consideration paid for subsidiaries over the fair value
of acquired tangible assets less the fair value of acquired
liabilities is assigned to intangible assets and goodwill. The Company
obtains an independent third party valuation to ascertain the amount
to allocate to identifiable intangible assets and the useful lives of
those assets. The Company amortizes identifiable intangible assets
over their useful life unless that life is determined to be
indefinite. The useful life of an intangible asset that is being
amortized is evaluated each reporting period as to whether events and
circumstances warrant a revision to the remaining period of
amortization. Goodwill is not amortized and is tested for impairment
on an annual basis. The implied fair value of goodwill is determined
by allocating fair value to all assets and liabilities acquired; the
excess of the price paid over the amounts assigned to assets and
liabilities acquired is the implied fair value of goodwill.
6. Allocation of Purchase Consideration for Equity Investments in
Associated Companies. The excess of the consideration paid for equity
investments in associated companies over our pro rata share of the
investee's net assets is allocated to intangibles and goodwill similar
to a purchase business combination. The Company obtains an independent
third party valuation to ascertain the amount to allocate to
identifiable intangible assets and the useful lives of those assets.
The Company amortizes identifiable intangible assets over their useful
life unless that life is determined to be indefinite. In each of the
Riverbend and the IRCA transactions, the Company received an option,
exercisable under certain conditions, to acquire the additional 49% of
each of those companies. Using the Black Scholes option valuation
model, a value was
30
assigned to each of the intangible assets associated with those
options. The remaining useful life of an intangible asset that is
being amortized is evaluated each reporting period as to whether
events and circumstances warrant a revision to the remaining period of
amortization. The value of the Equity Investments in Associated
Companies is tested for impairment on an annual basis. At June 30,
2004, based on actual performance and forecasts for future
performance, the value of the IRCA investment after application of
current year losses and amortization of intangible assets was written
down to $0 and impairment expense of $884,963 was recorded in the
statement of operations.
7. Fair Value of Common Stock. Contingently redeemable equity represents
the value of shares of our common stock issuable upon the conversion
of notes payable in excess of the face value of these notes issued in
the acquisition of VILPAS, and the acquisition of equity interest in
each of the Riverbend and IRCA transactions. The stock arrangements
are dependent on the satisfaction of certain conditions by us, most
notably the listing of our common stock on a major stock exchange in
the United States of America, for which there are financial
requirements for listing. The valuation and allocation process relies
on significant assumptions made by management, in particular, the
value of the shares issued to effect the purchase prior to the Company
having established an active trading market for its stock.
ITEM 7. FINANCIAL STATEMENTS
See Item 13(a) for an index to the financial statements attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 8, 2004, we notified Chisholm, Bierwolf & Nilson, LLC, ("CBN") of
our decision to dismiss CBN as our independent auditors and engaged BDO Spencer
Steward to serve as our independent auditor for the fiscal year ended June 30,
2004. The decision to change auditors was approved by our board of directors.
CBN's predecessor firm, Bierwolf, Nilson & Associates ("BNA"), audited our
financial statements for the fiscal year ended September 30, 2002 and the
transition period ended June 30, 2003. BNA's auditor's report for the transition
period ended June 30, 2003 contained a separate paragraph stating, "The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 13 to the
consolidated financial statements, the Company's significant operating losses
raise substantial doubt about our ability to continue as a going concern. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty." BNA's auditor's report for the
fiscal year ended September 30, 2002 contained a separate paragraph stating,
"The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company's significant operating losses raise
substantial doubt about our ability to continue as a going concern. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty." Except as so noted, BNA's reports for each of
these two periods did not contain an adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles.
In connection with audits of the transition period ended June 30, 2003 and
the fiscal year ended September 30, 2002, and any subsequent interim period
preceding the date hereof, there were no disagreements or reportable events
between us and CBN or its predecessor entity BNA on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to the satisfaction of CBN or BNA, would have
caused them to make a reference to the subject matter of the disagreements or
reportable events in connection with their reports.
Effective July 8, 2004, we engaged BDO Spencer Steward as our principal
independent auditors with
31
respect to our fiscal year ending June 30, 2004. Prior to their appointment, BDO
Spencer Steward had previously audited IRCA for the fiscal year ended June 30,
2003. During the fiscal year ended September 30, 2002, the transition period
ended June 30, 2003 and through the date of their engagement, we did not consult
BDO Spencer Steward with respect to (i) the application of accounting principles
to a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, and neither a
written report was provided to us nor was oral advice provided that BDO Spencer
Steward concluded was an important factor considered by us in reaching a
decision as to the accounting, auditing or reporting issue, or (ii) any matter
that was the subject of a disagreement or event identified in response to
paragraph (a)(1)(iv) of Item 304 of Regulation S-B.
On February 19, 2004, our independent auditors, BNA, informed us that on
February 10, 2004, it had merged its operations into CBN and was therefore
effectively resigning as our auditors. BNA had audited our financial statements
for the fiscal year ended September 30, 2002 and the transition period ended
June 30, 2003 and its reports for each of these two periods did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles. There were no
disagreements between us and BNA on any matter regarding accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
during the past two fiscal years or any subsequent interim period preceding the
date of the merger that resulted in the effective resignation of Bierwolf,
Nilson & Associates as our auditors. Our board of directors confirmed that we
would continue our engagement with CBN and approved the change in auditors
resulting from the merger of BNA into CBN.
ITEM 8A. CONTROLS AND PROCEDURES
Trinity Learning maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in its reports
pursuant to the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
In connection with the completion of its audit of, and the issuance of its
report on, Trinity Learning's consolidated financial statements for the year
ended June 30, 2004, BDO Spencer Steward ("BDO") identified deficiencies that
existed in the design or operation of our internal controls over financial
reporting that it considered to be "material weaknesses." The Public Company
Accounting Oversight Board has defined a material weakness as "a significant
deficiency or combination of significant deficiencies that results in more than
a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected." BDO advised the Audit
Committee of Trinity Learning's Board of Directors of the following material
weaknesses in our financial reporting: (i) inadequate control over activities
and reporting relating to Trinity Learning's investments in its South African
subsidiaries; and (ii) lack of sufficient resources to identify and properly
address technical SEC and reporting issues.
As such, Trinity Learning reviewed its earlier determination to consolidate
the financial statements of its two partially-owned subsidiaries, IRCA
(Proprietary) Limited ("IRCA") and Riverbend Group Holdings (Proprietary)
Limited ("Riverbend"), both acquired during fiscal 2004. This consolidation had
been reflected in Trinity Learning's interim financial statements included in
its three previously-filed quarterly reports for fiscal 2004. After this review
and following discussions with BDO, our board of directors concluded on October
12, 2004, with respect to Trinity Learning's interest in IRCA and Riverbend,
that the equity method of accounting is the appropriate accounting treatment in
accordance with accounting principles generally accepted in the United States of
America. As such, Trinity Learning filed amended quarterly reports for the first
three fiscal quarters of fiscal 2004 to reflect this change. Trinity Learning
also corrected the manner in which it reported the results of its bridge loan
financing in its March 31, 2004 quarterly report on Form 10-QSB and amended this
report to reflect this change.
32
In light of the material weaknesses identified by BDO, Trinity Learning is
undertaking a review of its disclosure, financial information, internal controls
and procedures and organization and staffing of its corporate accounting
department. It is anticipated that this review will result in, among other
things, the hiring of additional finance and accounting resources, including
independent consultants who will document, test and develop current and expanded
internal controls and procedures and provide support to our existing finance and
accounting staff. Trinity Learning's management, audit committee, and directors
will continue to work with our auditors and other outside advisors to ensure
that our controls and procedures are adequate and effective.
Except as stated above, there have been no other changes in our internal
controls over financial reporting during our most recent fiscal year that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
ITEM 8B. OTHER INFORMATION
None
33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names, ages and titles of our executive
officers and directors:
Name Age Position
---- --- --------
Douglas D. Cole 49 Chief Executive Officer and Director,
indefinite term
Edward P. Mooney 44 President and Director, indefinite term
Richard J. Marino 55 Chief Operating Officer
Christine R. Larson 51 Chief Financial Officer
William D. Jobe 66 Director, indefinite term
Richard G. Thau 57 Director, indefinite term
Arthur R. Kidson 61 Director, indefinite term
Martin Steynberg 42 Director, indefinite term
Certain biographical information pertaining to the above-named officers and
directors is set forth below.
Douglas D. Cole. Mr. Cole has been a director of Trinity Learning since
January 2002 and has served as Trinity Learning's chief executive officer since
August 2002. For the past 25 years, Mr. Cole has worked in the information
technology industry, with a focus on sales and marketing. He has successfully
completed numerous acquisitions and strategic partnerships for and among various
companies. He served as a director of USA Broadband, Inc., a publicly-traded
company specializing in delivery of digital video and television programming,
from October 2001 to October 2003, and served as interim president of its
operating subsidiary, Cable Concepts, Inc., from November 2001 to April 2002.
From August 1998 to June 2000, Mr. Cole served as a director of RateXchange
Corporation and as a director of two of its subsidiaries, RateXchange I, Inc.
and PolarCap, Inc. He served as Chairman, Chief Executive Officer, President and
Principal Accounting Officer of RateXchange from April 1999 to February 2000. He
served as the Chief Executive Officer of PolarCap, Inc. from its inception until
August 1998. Mr. Cole was the founder and Chief Executive Officer of Great Bear
Technology from its inception in 1992 until its merger with Graphic Zone Inc. in
1992.
Edward P. Mooney. Mr. Mooney has been a director of Trinity Learning since
January 2002 and has served as Trinity Learning's President since October 1,
2002. Mr. Mooney has 20 years' experience in corporate development, corporate
finance, and financial research and analysis. He served as a director and
officer of USA Broadband, Inc., a publicly-traded company, from April 2001 to
October 2003, and he also served as interim Chief Executive Officer until
September 2002 and provided consulting services to USA Broadband until May 2003.
Prior thereto, Mr. Mooney was self-employed as a corporate consultant. Mr.
Mooney served as a director for RateXchange Corporation from November 1998 to
April 2000 and as Executive Vice President from April 1999 to April 2000. Mr.
Mooney also served as a director of WorldPort Communications, Inc. from
September 1996 to May 1998 and as President from September 1996 to April 1997.
During 2002, Mr. Mooney served as a director of Category 5 Technologies, Inc. a
publicly traded company. He also served as a director of InterAmericas
Communications Corporation, HQ Office International and HQ Office Supplies
Warehouse.
Richard J. Marino. Mr. Marino was appointed as Trinity Learning's Chief
Operating Officer in May 2004. Mr. Marino has over 20 years of senior executive
management experience in global operations, product development and sales for
major publishing and media companies. Prior to joining Trinity Learning, Mr.
Marino was most recently vice-president and publisher of Dowden Heath Media.
Prior thereto, from 2001 until August 2003, Mr. Marino was managing partner of
the Management Group, LLC, a business services organization. During 2001, Mr.
Marino was also chief executive officer of Standard Media International,
publisher of The Industry
34
Standard Magazine. From 1999 to 2001, Mr. Marino was chief operating officer of
CNET Networks, Inc., which operated one of the world's largest websites offering
a variety of products and services.
Christine R. Larson. Ms. Larson has over 20 years' experience as a business
and financial professional. She has served as Trinity Learning's chief financial
officer since January 2003. Prior to that time, she worked as an independent
financial and marketing consultant to start-up software, hardware and Internet
service companies. In 1999, she worked for KPMG Consulting, Inc. She was
previously employed from 1985 to 1998 by Bank of America Corporation, most
recently as a senior vice president in their interactive services division.
While working at Bank of America Corporation, she served as chief financial
officer of their leasing subsidiary, BA Leasing and Capital Corporation and of
their venture capital subsidiary, BA Ventures Inc. She is a certified public
accountant licensed in the state of California.
William D. Jobe. Mr. Jobe has been a director of Trinity Learning since
January 2002. He has been a private venture capitalist and a computer,
communications and software industry advisor since 1991. Prior to that time, he
worked in executive management for a number of firms in the computer, software
and telecommunications industries including MIPS Technology Development, where
he served as President, and Data General, where he was Vice President of North
American Sales. Mr. Jobe has served as a director for a number of privately held
and publicly held high technology companies including Qualix Group, Inc.,
Fulltime Software, Inc., Multimedia Access Corporation where he served as
chairman of the board and director, Viewcast.com, GreatBear Technology Company,
Tanisys Technology, Inc. and Interand Group.
Richard G. Thau. Mr. Thau has been a director of Trinity Learning since
January 2004. Mr. Thau is a self-employed consultant/mentor/advisor and investor
in early stage information technology companies and serves as an
executive-in-residence at InterWest Partners. From 1990 to 1999, Mr. Thau served
as Director, Chairman of the Board and CEO of FullTime Software (formerly Qualix
Group), a provider of software for network based computing. He also is the
former CEO of Micro-MRP.
Arthur Ronald Kidson. Mr. Kidson has been a director of Trinity Learning
since January 2004 and is a chartered accountant in South Africa. Mr. Kidson was
appointed a director pursuant to the terms of the agreement by which Trinity
Learning acquired its interest in RiverBend Group Holdings (Proprietary)
Limited. From 1998 to 2000, Mr. Kidson served as the Executive Director of Price
Waterhouse Coopers Chartered Accountants in South Africa. Prior to that, Mr.
Kidson served as Chairman of Coopers & Lybrand Chartered Accountants in South
Africa.
Martin Steynberg. Mr. Steynberg has been a director of Trinity Learning
since January 2004. He was appointed to the board pursuant to the terms of the
agreement by which Trinity Learning acquired its interest in IRCA (Proprietary)
Limited. Mr. Steynberg has served as the Chief Executive Officer of Titan
Aviation Ltd., a Guernsey corporation, since 1999. Prior to that, Mr. Steynberg
was the managing director of Hubschrauber Transport GMBH in Austria from 1997 to
1999. From 1995 to 1997, Mr. Steynberg was a partner with Barnard and Co.
Chartered Accountants (SAICA) in South Africa.
Board Committees
The Company has an Audit Committee established in accordance with Section
3(a) (58) (A) of the Securities Exchange Act of 1934, which consists of Richard
Thau, William Jobe and Arthur Kidson. Richard Thau is the interim Chairperson of
the committee. This committee, among other things, reviews the annual audit with
the Company's independent accountants. In addition, the audit committee has the
sole authority and responsibility to select, evaluate, and, where appropriate,
replace the independent auditors or nominate the independent auditors for
shareholder approval. The Company's Board of Directors has determined that the
Company has at least one audit committee financial expert on its Audit
Committee. Mr. Richard Thau, the audit committee financial expert, is
independent as that term is used in Item 7(d) (3) (iv) of Schedule 14A under the
Securities Act of 1934.
Section 16(a) Beneficial Ownership Reporting Compliance
Our directors and executive officers and persons who hold more than 10% of
our outstanding common stock are subject to the reporting requirements of
Section 16(a) of the Exchange Act ("Section 16(a)"), which require them to file
reports with respect to their ownership of common stock and their transactions
in common stock.
35
Based solely upon review of Forms 3 and 4 and amendments thereto furnished to us
during our most recent fiscal year, and Forms 5 and amendments thereto furnished
to us, or any written representations made to us that no Form 5 was required, we
believe that all reporting requirements under Section 16(a) were met in a timely
manner by the persons who were executive officers, directors or greater than 10%
stockholders of Trinity Learning Corporation during the year ended June 30,
2004, except for the following: a Form 3 for Douglas D. Cole that was due to be
filed on or before January 30, 2002 was filed on December 18, 2003; a Form 3 for
Edward P. Mooney that was due to be filed on or before February 8, 2002 was
filed on December 2, 2003; a Form 3 for Christine R. Larson that was due to be
filed on or before January 23, 2003 was filed on December 2, 2003; and a Form 3
for William D. Jobe that was due to be filed on or before February 8, 2002 was
filed on December 2, 2003. Forms 4 were due to be filed in respect of certain
transactions involving these persons at various dates in 2002 and 2003; the
information pertaining to these transactions was included in the information
provided in their respective Forms 3. Forms 3 were due to be filed in January
2004 for Messrs. Thau, Kidson and Steynberg, who were appointed to our board of
directors in January 2004, and in May for Mr. Marino, who was at that time
appointed as our chief operating officer. A Form 3 has also not been filed by
Luc Verelst, who beneficially owns more than 10% of our outstanding common
stock. We anticipate Forms 3 for these individuals will be filed in the very
near future.
Code of Ethics
We have adopted a code of ethics that applies to all employees of our
company, including employees of our subsidiaries, as well as each member of our
board of directors. The code of ethics is available on our website at
www.trinitylearning.com.
ITEM 10. EXECUTIVE COMPENSATION
The table below sets forth certain information regarding the annual and
long-term compensation for services to us in all capacities for the fiscal year
ended June 30, 2004, the nine month transitional period ended June 30, 2003 and
the fiscal years ended September 30, 2002 and 2001 of Messrs. Douglas Cole and
Edward Mooney and Ms. Christine Larson. These individuals received no other
compensation of any type, other than as set out below, during the fiscal years
indicated.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Long Term
Other Annual Restricted Stock Incentive All Other
Name and Principal Position Year Salary Bonus Compensation Stock Awards Options Payouts Compensation
--------------------------- ---- ------ ----- ------------ ------------ ------- ------- ------------
Douglas D. Cole 2004 $180,000 - $12,000 - 250,000 - -
Chief Executive Officer 2003 $135,000 $25,000 $9,000 - 250,000 - -
2002 $75,000 - $5,000 - - - $12,500
Edward P. Mooney 2004 $180,000 - $12,000 - 250,000 - -
President 2003 $135,000 $25,000 $9,000 - 250,000 - -
2002 - - - - - - $12,500
Christine R. Larson
Chief Financial Officer 2004 $165,000 - $9,000 250,000 - -
2003 $45,800 - - 200,000 - -
2002 - - - - - - -
The following table sets forth the individual stock option grants made
during the fiscal year ended June 30, 2004 to each of the above named executive
officers.
36
Stock Option Grants in Last Fiscal Year
Individual Grants
-------------------
% of Total Options
Number of Securities Granted to Employees Exercise Price
Name Underlying Options in Fiscal Year per Share Expiration Date
---- ------------------ -------------- --------- ---------------
Douglas D. Cole 250,000 5.9% $0.50 December 31, 2008
Edward P. Mooney 250,000 5.9% $0.50 December 31, 2008
Christine R. Larson 250,000 5.9% $0.50 December 31, 2008
The following table sets forth the aggregate stock option exercises and
fiscal year-end option values for each of the above named executive officers for
the fiscal year ended June 30, 2004.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth the aggregate stock option exercises and
fiscal year-end option values for each of the above named executive officers. No
stock options were exercised during the year ended June 30, 2004.
Number of Securities Exercise Value of
Shares Underlying Unexercised Unexercised Options
acquired on Options at FY-End at FY-End
Name Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------------- ------------------------- -------------------------
Douglas D. Cole - - 254,965 / 245,035 $87,157/$100,343
Edward P. Mooney - - 254,965 / 245,035 $87,157/$100,343
Christine R. Larson - - 216,815 / 233,185 $77,619/$97,380
Compensation of Directors
Non-employee members of our board of directors have been granted options
from time to time to purchase shares of our common stock, but are not otherwise
compensated in their capacity as directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of October 26, 2004
regarding current beneficial ownership of our common stock by (i) each person
known by us to own more than 5% of the outstanding shares of our common stock,
(ii) each of our executive officers and directors, and (iii) all of our
executive officers and directors as a group. Except as noted, each person has
sole voting and sole investment or dispositive power with respect to the shares
shown. The information presented is based on 31,402,643 outstanding shares of
common stock as of October 26, 2004. Unless otherwise indicated, the address for
each of the following is 1831 Second Street, Berkeley, California 94710.
Number of Total Percent of Class
Name and Address of Number of Options & Beneficial Beneficially
Beneficial Owner Shares Owned Warrants (1) Ownership (2) Owned
---------------- ------------ ------------ ------------- -----
Douglas D. Cole 2,126,987 315,925 2,442,912 7.70%
Chief Executive Officer and Director (4) (4)(5)
Edward P. Mooney 2,046,987 315,925 2,362,912 7.45%
President and Director (4) (4)(5)
37
Number of Total Percent of Class
Name and Address of Number of Options & Beneficial Beneficially
Beneficial Owner Shares Owned Warrants (1) Ownership (2) Owned
---------------- ------------ ------------ ------------- -----
William Jobe 200,000 94,435 294,435 *
6654 Bradbury Court
Fort Worth, TX 76132
Director
Arthur R. Kidson - 180,109 180,109 *
2 Epsom Road (6)
Stirling, East London
Republic of South Africa
Director
Martin Steynberg - 1,609,332 1,609,332 4.87%
P.O Box 10326 (3)
George
Republic of South Africa
Director
Richard Thau - 103,973 103,973 *
2468 Sharon Oaks Drive
Menlo Park, CA 94025
Director
Richard Marino - 118,031 118,031 *
Chief Operating Officer (5)
Christine R. Larson - 271,678 271,678 *
Chief Financial Officer (5)
Steven Hanson 2,080,000 3,000,000 5,080,000 14.77%
1319 NW 86th Street
Vancouver, WA 98665
5% Beneficial Owner
Theodore Swindells 3,509,093 1,275,000 4,784,093 14.51%
11400 Southeast 8th Street (4) (4)
Bellevue, WA 98004
5% Beneficial Owner
Luc Verelst 3,675,138 4,000,000 7,675,138 21.68%
Verbier, Switzerland 1936
5% Beneficial Owner
Granite Creek Partners, LLC 1,622,910 - 1,622,910 5.17%
1338 South Foothill Drive (4)
Salt Lake City, UT 84108
5% Beneficial Owner
All executive officers and 4,373,974 3,009,408 7,383,382 21.46%
directors of the Company as a (3)(4) (3)(4)
group (8 persons)
* Denotes less than one percent (1%).
(1) Reflects warrants, options or other convertible securities that will
be exercisable, convertible or vested as the case may be within 60
days of October 26, 2004.
38
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person
that are currently exercisable or become exercisable within 60 days
following October 26, 2004 are deemed outstanding. These shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. Unless otherwise indicated
in the footnotes to this table, the persons and entities named in the
table have sole voting and sole investment power with respect to the
shares set forth opposite such stockholder's name.
(3) Includes shares issuable upon certain performance criteria for equity
method investee, IRCA Pty. Ltd. Mr. Steynberg owns 31% of Musca
Holding Limited, a British Virgin Islands Company, and he disclaims
beneficial ownership of the shares owned by Musca and/or which are
issuable to Musca. A proportionate ownership of these shares is
included in the calculation of beneficiary ownership for Mr.
Steynberg.
(4) Includes shares owned by Granite Creek Partners, LLC, a Utah limited
liability corporation ("GCP") (formerly known as Kings Peak Advisors,
LLC). Mr. Cole, Mr. Mooney and Mr. Swindells each own a 33-1/3%
interest in GCP, and each disclaims beneficial ownership of the shares
in the Company that are issuable to GCP. Proportionate ownership of
these shares is included in the calculation of beneficiary ownership
for Mr. Cole, Mr. Mooney and Mr. Swindells.
(5) Includes that portion of options that have vested or will vest within
60 days from October 26, 2004 under the 2002 Stock Plan.
(6) Mr. Kidson owns 3% of Great Owl Limited, a British Virgin Company and
a shareholder in one of our investees. He disclaims beneficial
ownership of the shares owned by Great Owl and/or which are issuable
to Great Owl. A proportionate ownership of these shares is included in
the calculation of beneficiary ownership for Mr. Kidson.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our corporate reorganization during the fiscal year ended September 30,
2002 was effected primarily by two of our officers and directors, Messrs.
Douglas Cole and Edward Mooney. During that fiscal year and the transition
period subsequent thereto, we entered into several transactions with these
individuals and with entities controlled by them, as well as entities controlled
by Theodore Swindells, a significant stockholder of our company.
As of August 8, 2002, we formalized a Debt Conversion Agreement with Global
Marketing Associates, Inc. ("GMA"), holder of a convertible promissory note (the
"GMA Note") in the principal amount of $166,963, pursuant to which the principal
amount of the note, along with accrued interest thereon, was made convertible,
under certain conditions, into 3,200,000 shares of our common stock. The GMA
Note was originally issued in November 2000 to the attorneys of our predecessor
company and was subsequently acquired by Pacific Management Services, Inc., who
assigned the note to GMA. GMA subsequently assigned the right to acquire
2,600,000 of the 3,200,000 shares of common stock to several persons, including
Messrs. Cole, Mooney, and Swindells and European American Securities, Inc.
("EAS"), a private entity of which Mr. Swindells is a principal. Pursuant to the
assignment, Messrs. Cole and Mooney each acquired the right to acquire 600,000
shares of the common stock into which the GMA Note was convertible, EAS acquired
the right to acquire 400,000 shares, and Mr. Swindells acquired the right to
acquire 1,000,000 shares. As of January 2003, all 3,200,000 shares of our common
stock had been issued pursuant to the terms of the GMA Note. Fifty percent of
such shares are subject to a two-year lock-up provision that restricts transfer
of such shares without prior written consent of our board of directors.
As of July 15, 2002, we entered in a two-year Advisory Agreement with
Granite Creek Partners, LLC ("GCP"), formerly King's Peak Advisors, LLC,
automatically renewable for an additional 12-month period. Under the terms of
the Advisory Agreement, GCP agreed to provide us with general corporate,
financial, business development and investment advisory services on a
non-exclusive basis. These services include assisting with the identification of
placement agents, underwriters, lenders and other sources of financing, as well
as additional qualified independent directors and members of management. GCP is
a private company whose principals are Messrs. Cole, Mooney and Swindells. At
our August 19, 2003 board of directors' meeting, our board of directors voted to
suspend the Advisory Agreement from August 15, 2003 until January 2004, and this
agreement remains suspended. Through December 31, 2003, GCP had earned a total
of $315,000 under the Advisory Agreement, $110,000 of which was converted into
4,400,000 shares of our common stock in March 2003. The remaining balance of
$205,000 was paid in full to GCP as of June 30, 2004.
39
As of July 31, 2002, we entered into an Advisory Agreement with EAS, a
private entity of which Mr. Swindells is a principal, pursuant to which EAS
agreed to provide financial advisory and investment banking services to us in
connection with various equity and/or debt transactions. In exchange for such
services, we agreed to pay EAS a retainer fee of $5,000 per month and a
commission ranging from 5% to 7% based on the type of transaction consummated,
such fees being payable, at EAS' option, in cash or our common stock. On October
2, 2003, we renewed the agreement with EAS on terms similar to those contained
in the first agreement. On January 1, 2004, we amended the October 2003
agreement in connection with our January 2004 senior convertible bridge note
offering, which closed on May 28, 2004, for which we paid EAS a fee of 10%.
Through June 30, 2004, EAS had earned a total of $1,065,104 pursuant to our
arrangement with them, of which $345,450 was earned in connection with private
equity and/or debt transactions and $719,654 was earned for advisory services in
connection with certain acquisitions. In January 2004, 250,000 shares of our
common stock with a fair market value of $375,000 was paid to EAS in the
Company's common stock. As of June 30, 2004, the balance owed to EAS was
$66,653. On May 27, 2004, European American Perinvest Group, a subsidiary of
EAS, invested $100,000 in our 2004 senior convertible bridge note offering. On
May 28, 2004, this investment was converted to 166,699 restricted shares of our
common stock as part of the total conversion of this financing to 4,520,069
shares of our common stock.
During the period August 2001 to June 30, 2002, Mr. Swindells advanced a
total of $925,000 to us by way of short-term non-interest bearing working
capital loans. We repaid $500,000 of the total amount owing in September 2003
and issued an aggregate of 850,000 shares of our common stock to Mr. Swindells
in November 2003 in payment of the remaining balance of $425,000. During the
period June 2004 to October 2004, Mr. Swindells advanced us $155,000. On August
10, 2004 we repaid $50,000 of this amount and on November 2, 2004 we paid the
remaining balance of $105,000. On October 14, 2004, Mr. Swindells exercised
warrants to purchase 300,000 shares of our common stock at $0.05 per share.
In October 2002, we issued convertible promissory notes in the aggregate
principal amount of $500,000 (the "Bridge Financing Notes") to certain
individuals and entities, and in connection with the issuance of the Bridge
Financing Notes, issued warrants to the holders of the notes to purchase
additional shares of common stock. Of the total principal amount of the Bridge
Financing Notes, $55,000 was advanced by GCP and $120,000 by Mr. Swindells. On
May 19, 2003, the aggregate principal amount of the Bridge Financing Notes and
accrued interest thereon of $34,745 was converted into 1,336,867 shares of
common stock at a price of $0.40 per share. The warrants issued in connection
with the Bridge Financing Notes are exercisable for a period of one year at a
price of $0.05 per share, and contain a net issuance provision whereby the
holders may elect a cashless exercise of such warrants based on the fair market
value of the common stock at the time of conversion. On March 26, 2004, GCP
exercised its warrants in a cashless exercise for which it received a total of
126,042 shares of common stock.
Effective October 1, 2002, we issued an aggregate of 1,200,000 restricted
shares of our common stock at a price of $0.025 per share to our three
directors, Messrs. Cole, Mooney and Jobe, in consideration for past services
valued at $30,000.
In connection with our acquisition of our interest in IRCA, we entered into
an agreement with Titan Aviation Ltd. ("Titan"), a private company held in a
trust of which Mr. Martin Steynberg and other business partners are the
beneficiaries. Pursuant to this agreement, we paid Titan on May 14, 2004 the
sterling equivalent of the sum of 4,000,000 South African Rand ($607,165) in
consideration for various services rendered to IRCA. Mr. Steynberg, who is a
stockholder in IRCA Investments (Proprietary) Limited, which owns 25.1% of IRCA,
became a director of our company on January 1, 2004 pursuant to the terms of the
IRCA acquisition.
William Jobe, one of our directors, was paid a total of $59,500 during the
period December 2003 to May 2004 as compensation for merger and acquisition
services associated with our acquisition of TouchVision. In August we paid Mr.
Jobe an additional $4,815 in connection with the TouchVision transaction.
40
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of Trinity Learning Corporation and
related notes thereto and auditor's report thereon, are filed as part of this
Annual Report on Form 10-KSB:
Page
----
43 Report of Independent Registered Public Accounting Firm
44 Independent Auditor's Report dated October 18, 2003 issued by
Bierwolf, Nilson & Associates
45 Consolidated Balance Sheets as of June 30, 2004 and 2003
46 Consolidated Statements of Operations and Comprehensive Loss for
the year ended June 30, 2004 and the nine month transition
period ended June 30, 2003
47 Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the year ended June 30, 2004 and the nine month
transition period ended June 30, 2003
48 Consolidated Statements of Cash Flows for the year ended June
30, 2004 and the nine month transition period ended June 30,
2003
49 Notes to Consolidated Financial Statements
2. Exhibits
The exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby incorporated
by reference into, this Annual Report on Form 10-KSB.
(b) Reports on Form 8-K Filed During the Last Quarter of the Fiscal Year
Ended June 30, 2004.
On June 1, 2004, we filed a current report on Form 8-K to announce the
appointment of Richard Marino as our Chief Operating Officer.
41
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee has selected and retained BDO Spencer Steward as our
independent auditors for the fiscal year ended June 30, 2004. This is the first
year that BDO Spencer Steward has audited our financial statements.
The following table presents fees for professional services rendered by our
auditors for the audit of our annual financial statements for the fiscal year
ended June 30, 2004 and the nine-month transition period ended June 30, 2003 and
fees billed for other services rendered by our auditors during those periods:
BDO Spencer Steward
-------------------------
Transition
Fiscal 2004 Period 2003
----------- -----------
Audit Fees (1) $ 190,000 $ -
Audit-Related Fees (2) - -
Tax Fees (3) 50,530 -
All Other Fees (4) - -
----------- -----------
Total $ 240,530 $ -
=========== ===========
Bierwolf, Nilson & Associates
-----------------------------
Transition
Fiscal 2004 Period 2003
----------- -----------
Audit Fees (1) $ 15,000 $ 65,000
Audit-Related Fees (2) 97,433 17,042
Tax Fees (3) - 1,250
All Other Fees (4) - -
----------- -----------
Total $ 112,433 $ 83,292
=========== ===========
(1) Audit fees consist of an estimate of fees to be billed for the annual
audits and quarterly reviews.
(2) Audit-Related Fees consist of fees billed for various SEC filings,
audits of target companies and accounting research.
(3) Tax fees consist of fees billed for tax consultation and assistance in
the preparation of tax returns.
(4) All Other Fees.
All audited-related services, tax services and other services were pre-approved
by the Audit Committee, which concluded that the provision of those services by
BDO Spencer Steward was compatible with the maintenance of that firm's
independence in the conduct of its auditing functions.
42
Report of Independent Registered Public Accounting Firm
Board of Directors and Corporation
Trinity Learning Company
Berkeley, California
We have audited the accompanying consolidated balance sheet of Trinity Learning
Corporation as of June 30, 2004 and the related consolidated statements of
operations and comprehensive loss, stockholders' equity (deficit) and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trinity Learning
Corporation at June 30, 2004, and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has suffered losses from operations and has
negative working capital. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 14. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Spencer Steward
-----------------------
Pretoria, South Africa
November 22, 2004
43
BIERWOLF, NILSON & ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
1453 SOUTH MAJOR STREET SALT LAKE CITY, UTAH 84115
A Partnership of Telephone (801) 363-1175 Nephi J. Bierwolf, CPA
Professional Corporations Fax (801) 363-0615 Troy F. Nilson, CPA
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Trinity Learning Corporation
We have audited the accompanying consolidated balance sheet of Trinity Learning
Corporation, (a Utah corporation) as of June 30, 2003 and September 30, 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the transition period October 1, 2002 to June 30, 2003 and the
fiscal year ended September 30, 2002. These consolidated financial statements
are the responsibility of the management of Trinity Learning Corporation. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trinity Learning Corporation as
of June 30, 2003 and September 30, 2002, and the consolidated results of their
operations and its cash flows for the transition period October 1, 2002 to June
30, 2003 and the fiscal year ended September 30, 2002, in conformity with
generally accepted accounting principles, in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the consolidated financial statements, the Company's significant operating
losses raise substantial doubt about its ability to continue as a going concern.
These consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Bierwolf, Nilson & Associates
---------------------------------
Salt Lake City, Utah
October 18, 2003
44
Trinity Learning Corporation and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 2004 June 30, 2003
-------------- --------------
Assets
------
Current Assets
Cash and Cash Equivalents $ 892,739 $ 86,511
Accounts Receivable 243,164 42,719
Prepaid Expenses and Other Current Assets 229,802 97,985
-------------- --------------
Total Current Assets 1,365,705 227,215
Equity Investments in and Advances to Associated Companies 1,922,935 -
Property & Equipment, net 37,160 45,561
Goodwill 1,849,526 -
Intangible Assets, net 434,958 950,565
Restricted Cash 500,000 -
Other Assets 142,856 119,003
-------------- --------------
Total Assets $ 6,253,140 $ 1,342,344
============== ==============
Liabilities, Minority Interest, Contingently Redeemable Equity and Stockholders' Equity (Deficit)
-------------------------------------------------------------------------------------------------
Liabilities
-----------
Accounts Payable $ 814,651 $ 324,004
Accounts Payable - Related Parties 77,988 67,868
Accrued Expenses 721,192 270,270
Interest Payable 21,124 63,987
Deferred Revenue 85,685 -
Notes Payable - Current 418,954 -
Notes Payable - Related Parties 740,476 2,147,151
-------------- --------------
Current Liabilities 2,880,070 2,873,280
-------------- --------------
Notes Payable - Long Term 71,829 -
Notes Payable - Related Parties 40,000 -
-------------- --------------
Long-term Liabilities 111,829 -
-------------- --------------
Total Liabilities 2,991,899 2,873,280
-------------- --------------
Minority Interest 306,721 -
----------------- -------------- --------------
Contingently Redeemable Equity 2,510,000 -
------------------------------ -------------- --------------
Stockholders' Equity (Deficit)
------------------------------
Preferred Stock, 10,000,000 Shares Authorized at No Par
Value, No Shares Issued and Outstanding - -
Common Stock, 100,000,000 Shares Authorized at No Par
Value; 31,040,143 and 14,956,641 shares Issued and
Outstanding in 2004 and 2003, Respectively 23,092,957 9,693,447
Accumulated Deficit (22,650,976) (11,188,913)
Subscription Receivable - (35,000)
Other Comprehensive Gain (Loss) 2,539 (470)
-------------- --------------
Total Stockholders' Equity (Deficit) 444,520 (1,530,936)
-------------- --------------
Total Liabilities, Minority Interest, Contingently Redeemable
Equity and Stockholders' Equity (Deficit) $ 6,253,140 $ 1,342,344
============== ==============
The accompanying notes are an integral part of these financial statements
45
Trinity Learning Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
Transition Period
Fiscal Year October 1, 2002
Ended to
June 30, 2004 June 30, 2003
--------------- ---------------
Revenue
-------
Sales Revenue $ 2,590,091 $ 167,790
Cost of Sales (475,076) -
--------------- ---------------
Gross Profit 2,115,015 167,790
--------------- ---------------
Expense
-------
Salaries & Benefits 3,636,498 1,043,123
Professional Fees 1,163,603 212,817
Professional Fees - Related Parties 225,000 225,019
Selling, General & Administrative 1,886,514 501,384
Depreciation & Amortization 279,360 175,497
--------------- ---------------
Total Expense 7,190,975 2,157,840
--------------- ---------------
Loss from Operations (5,075,960) (1,990,050)
--------------- ---------------
Other Income (Expense)
----------------------
Interest, net (209,863) (77,352)
Equity Losses and Impairment of Investment in Associated
Companies (2,714,985) -
Debt Conversion (3,449,332) -
Foreign Currency Gain (Loss) (4,463) (4,582)
--------------- ---------------
Total Other Income (Expense) (6,378,643) (81,934)
Minority Interest (7,460) -
----------------- --------------- ---------------
Loss Before Income Taxes (11,462,063) (2,071,984)
Income Taxes - -
--------------- ---------------
Net Loss $ (11,462,063) $ (2,071,984)
=============== ===============
Net Loss Per Common Share - Basic and Diluted $ (0.50) $ (0.26)
=============== ===============
Weighted Average Shares Outstanding 22,827,313 8,050,147
=============== ===============
A summary of the components of other comprehensive loss for the fiscal year
ended June 30, 2004 and the transition period ended June 30, 2003 follows:
Fiscal Year Transition Period
Ended Ended
June 30, 2004 June 30, 2003
--------------- ---------------
Net Loss $ (11,462,063) $ (2,071,984)
Foreign Currency Translation Gain (Loss) 3,009 (470)
--------------- ---------------
Comprehensive Loss $ (11,459,054) $ (2,072,454)
=============== ===============
The accompanying notes are an integral part of these financial statements
46
Trinity Learning Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Other
Shares of Accumulated Subscription Comprehensive
Common Stock Common Stock Deficit Receivable Gain (Loss) Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at October 1, 2002 49,774 $ 8,380,775 $ (9,116,929) $ (35,000) $ - $ (771,154)
Shares Issued for CBL Global Corp.
Acquisition 3,000,000 75,000 - - - 75,000
Stock Issued for Services at $0.025 per Share 6,670,000 166,750 - - - 166,750
Shares Issued for Conversion on Note Payable
at $0.052 per Share 3,200,000 166,963 - - - 166,963
Shares Issued for Conversion of Note and
Interest Payable at $0.40 per Share 1,336,867 534,745 - - - 534,745
Shares of Beneficial Owners Cancelled in
Recapitalization at $0.50 per Share (108,226) (54,113) - - - (54,113)
Shares Issued in Recapitalization at $0.50
per Share (1) 108,226 54,113 - - - 54,113
Shares Issued for Cash at $0.50 per Share (1) 700,000 350,000 350,000
Cost of Share Issuance (1) - (57,560) - - - (57,560)
Foreign Currency Translation - - - - (470) (470)
Employee Stock Based Compensation - 76,774 - - - 76,774
Net Loss for the Transition Period Ended
June 30, 2003 - - (2,071,984) - - (2,071,984)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2003 14,956,641 9,693,447 (11,188,913) (35,000) (470) (1,530,936)
Shares Issued for TouchVision and RMT
Acquisitions at $0.50 per Share 1,950,000 975,000 - - - 975,000
Shares Issued for Cash at $0.50 per Share (2) 9,946,600 4,973,300 - - - 4,973,300
Shares Issued for Conversion of Note Payable
to a Related Party at $0.50 per Share (2) 850,000 425,000 - - - 425,000
Shares Rescinded in CBL Divestiture (3,000,000) 461,063 461,063
Cancellation of Subscription Receivable - - - 35,000 - 35,000
Shares Issued for Conversion of Note and
Interest Payable at Weighted Average Price
of $1.11 per Share (2) 4,520,069 5,034,044 - - - 5,025,852
Value Attributed to Stock Purchase Warrants - 1,245,580 - - - 1,253,772
Exercise of Warrants and Stock Options 858,952 36,646 - - - 36,646
Shares Issued for Services 957,881 728,941 - - - 728,941
Employee Stock Based Compensation - 526,491 - - - 526,491
Foreign Currency Translation - - - - 3,009 3,009
Cost of Share Issuance (2) - (1,006,555) - - - (1,006,555)
Net Loss Year Ended June 30, 2004 - - (11,462,063) - - (11,462,063)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2004 31,040,143 $ 23,092,957 $(22,650,976) $ - $ 2,539 $ 444,520
============ ============ ============ ============ ============ ============
(1) Share issuance costs apply to these transactions for the nine month
transition period ended June 30, 2003.
(2) Share issuance costs apply to these transactions for the fiscal year ended
June 30, 2004.
The accompanying notes are an integral part of these financial statements
47
Trinity Learning Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Fiscal Year Transition Period
Ended Ended
June 30, 2004 June 30, 2003
--------------- ---------------
Cash flows from operating activities:
Net loss $ (11,462,063) $ (2,071,984)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 279,360 175,497
Stock issued for services 728,941 166,750
Equity losses and impairment of investment in associated companies 2,714,985 -
Non-cash effect from write off of fixed assets - 6,071
Employee stock based compensation 526,491 76,774
Non-cash interest expense 135,286 9,744
Debt conversion expense 3,449,332 -
Changes in current assets and liabilities, net of businesses acquired
and sold:
Accounts receivable 61,237 (42,719)
Prepaid expenses and other current assets 143,879 (188,662)
Accounts payable 125,704 168,329
Accounts payable - related party 10,120 (5,832)
Accrued expenses 125,424 187,270
Deferred revenue (459,609) -
Interest payable (63,896) 38,987
Minority interest 12,085 -
--------------- ---------------
Net cash used by operating activities (3,672,724) (1,479,775)
--------------- ---------------
Cash flows from investing activities:
Payment for business acquisitions/divestiture, net of cash acquired (421,228) 184,729
Restricted cash (500,000) -
Advances to associated companies (1,080,000) (25,000)
Capital expenditures (21,220) (34,274)
--------------- ---------------
Net cash (used) provided by investing activities (2,022,448) 125,455
--------------- ---------------
Cash flows from financing activities:
Borrowings under short-term notes 2,945,000 -
Borrowings under short-term notes - related party 50,000 780,000
Repayments under short term notes - related party (500,000) -
Payments for financing fees (691,540) (16,310)
Payments for financing fees - related party (315,015) (41,250)
Proceeds from exercise of warrants and options 36,646 -
Proceeds from sale of common stock 4,973,300 350,000
--------------- ---------------
Net cash provided by financing activities 6,498,391 1,072,440
Effect of foreign exchange on cash 3,009 (397)
--------------- ---------------
Net increase (decrease) in cash 806,228 (282,277)
Cash at beginning of period 86,511 368,788
--------------- ---------------
Cash at end of period $ 892,739 $ 86,511
=============== ===============
Supplemental information:
Interest paid $ 37,052 $ -
=============== ===============
Issuance of common stock for business acquisitions $ 975,000 $ 75,000
=============== ===============
Issuance of common stock for conversion of debt - related party $ 425,000 $ -
=============== ===============
Issuance of common stock - conversion of bridge note $ 5,025,852 $ -
=============== ===============
Warrants issued with convertible notes $ 1,253,772 $ -
=============== ===============
Issuance of contingently redeemable equity $ 2,510,000 $ -
=============== ===============
Cancellation of common stock and convertible notes payable pursuant
to the sale of CBL $ 461,063 $ -
=============== ===============
Cancellation of subscriptions receivable $ 35,000 $ -
=============== ===============
The accompanying notes are an integral part of these financial statements
48
Trinity Learning Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004
NOTE 1. ACCOUNTING POLICIES
Overview
Trinity Learning is creating a global learning company by acquiring operating
subsidiaries that specialize in educational and training content, delivery, and
services for particular industries or that target a particular segment of the
workforce. Trinity Learning believes that there are product and service
synergies between and among our various subsidiaries that position us to create
a global learning company that can provide integrated learning services to
corporations, organizations, educational institutions, and individual learners,
using a variety of delivery technologies, platforms and methods to meet the
growing need for global learning solutions. Trinity Learning believes that it
will be one of the first companies to be able to serve major multinational
employers at multiple levels of their organizations and assist these customers
to meet the challenges of a major turnover in the world's workforce over the
coming decade. Factors such as demographics, technology, and globalization will
require enterprises, organizations and governments around the world to invest in
human capital to remain competitive.
On August 6, 2003, our board of directors approved a change in our fiscal
year-end from September 30 to June 30 to align with those of the companies we
had already acquired or were at that time in the process of acquiring. Future
operating results may not be comparable to historical operating results due to
our September 1, 2003 acquisitions of TouchVision, Inc. ("TouchVision"); River
Murray Training Pty Ltd ("RMT"); and 51% of the issued and outstanding shares of
Ayrshire Trading Limited ("Ayrshire"), as well as our December 1, 2003
acquisition of Danlas Limited ("Danlas") and March 1, 2004 acquisition of
Trinity Learning AS ("VILPAS"), formerly known as Virtual Learning Partners, AS.
Ayrshire owns 95% of the issued and outstanding shares of Riverbend Group
Holdings (Pty.) Ltd. ("Riverbend"). These companies are collectively referred to
as Riverbend. Danlas owns 51% of IRCA (Proprietary) Limited ("IRCA"). These
companies are collectively referred to as IRCA.
Use of Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires it to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the balance sheet dates and the reported amounts of revenues
and costs during the reporting periods. Actual results could differ from those
estimates. On an ongoing basis, the Company reviews its estimates based on
information that is currently available. Changes in facts and circumstances may
cause the Company to revise its estimates. Significant estimates include revenue
recognition policy, valuation and allocation of the purchase consideration of
the assets and liabilities and assets acquired in business combinations and
equity investments in associated companies, our determination of fair value of
common stock issued in business combinations and equity investments in
associated companies, and the annual valuation and review for impairment of
assets acquired and of long-lived assets.
Principles of Consolidation and Basis of Presentation
On August 6, 2003, our board of directors approved a change in our fiscal
year-end from September 30 to June 30 to align with those of the companies we
had already acquired or were at that time in the process of acquiring. Our
consolidated financial statements include the accounts of the Company and our
controlled subsidiaries. All significant intercompany transactions are
eliminated in consolidation.
Our 51% ownership in IRCA and our 51% ownership in Ayrshire, which owns 95% of
Riverbend, have been accounted for in the financial statements included with
this report using the equity method of accounting. Emerging Issues Task Force
Issue 96-16, "Investor's Accounting for an Investee When the Investor Has a
Majority Voting Interest but the Minority Shareholders Have Certain Approval or
Voting or Veto Rights" (EITF 96-16) provides guidance as to the distinction
between protective rights of the minority shareholder which do not overcome the
presumption of consolidation and substantive participating rights of the
minority shareholder. Substantive
49
participating rights that allow the minority shareholder to participate in
establishing operating and capital decisions in the ordinary course of business,
overcome the presumption that the investor should consolidate the investee.
o In the Riverbend transaction, Section 20.2.11.3 of the Definitive
Agreement ("the Agreement") between Trinity, the majority owner in
Ayrshire, and Great Owl Limited ("Great Owl"), the minority owner in
Ayrshire, prevents Ayrshire and its subsidiaries from approving,
canceling or effecting "material changes to the annual budget or any
modification thereof" or "incur (ring) unbudgeted capital expenditure
of US$150,000 per item or US$500,000 per annum." Also, pursuant to
Section 18.3 of the Agreement, Trinity and Great Owl are "each
entitled to appoint an equal number of directors to the board of
directors" of Ayrshire. These substantive participating rights of the
minority shareholder preclude consolidation of this investment and
will remain in effect until Trinity owns 100% of Ayrshire.
o In the IRCA transaction, Section 20.1.19.3 of the Sale of Shares
Agreement ("SOS Agreement") between Danlas Limited, a wholly owned
subsidiary of Trinity, and IRCA Investments (Pty.) Ltd. ("IRCA
Investments"), the minority shareholder in IRCA, prevents IRCA and its
subsidiaries from approving, canceling or effecting "material changes
to the annual budget or any modification thereof, or to its strategic
plans or marketing strategy or incur(ring) unbudgeted capital
expenditure in excess of R200,000 (two hundred thousand Rand) per item
or R800,000 (eight hundred thousand Rand) in total per annum." Also,
pursuant to Section 19 of the SOS Agreement, Danlas and IRCA
Investments are "each entitled to appoint equal number of directors to
the board of directors" of IRCA. These substantive participating
rights of the minority shareholder will remain in effect until Danlas
owns 60% of IRCA.
Purchase Accounting
The Company accounts for its investments in its subsidiaries using the purchase
method of accounting. Intangible assets are recognized apart from goodwill if
they are contractual in nature or separately identifiable. Acquisitions are
measured on the fair value of consideration exchanged and, if the consideration
given is not cash, measurement is based on the fair value of the consideration
given or the fair value of the assets acquired, whichever is more reliably
measurable. The excess of cost of an acquired entity over the net amounts
assigned to identifiable acquired assets and liabilities assumed is recognized
as goodwill. The valuation and allocation process relies on significant
assumptions made by management, in particular, the value of the shares issued to
effect the purchase prior to the Company having established a trading market for
its stock.
Revenue Recognition
We earn our revenues primarily from service-related contracts, including
operations and maintenance services and a variety of technical assistance
services. Revenue is generally recognized on a straight-line basis, unless
evidence suggests that the revenue is earned or obligations are fulfilled in a
different pattern over the contractual term of the arrangement or the expected
period, during which those specified services will be performed, whichever is
longer. Four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. The Company determines whether criteria (3) and (4) are
met based on judgments regarding the nature of the fee charged for services
rendered and products delivered and the collectibility of those fees. The
Company also earns revenue from the sale of hardware containing software, and
accounts for this revenue in accordance with SOP 97-2, Software Revenue
Recognition in accordance with EITF 03-5. To date, such revenues have not been
significant.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit
risk, consist principally of trade receivables. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of clients
that comprise our customer base and their dispersion across different business
and geographic areas. We estimate and maintain an allowance for potentially
uncollectible accounts and such estimates have historically been within
management's expectations. Our cash balances, restricted cash and short-term
investments are maintained in accounts held by major banks and financial
institutions located primarily in the United States, Norway, South Africa and
Australia.
50
No single customer accounts for revenues or receivables greater than 10% of
Company totals.
Cash and Cash Equivalents
We consider all highly liquid instruments with original maturities of three
months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value due to the short-term maturity of these
instruments. The carrying value of notes payable approximates fair value because
negotiated terms and conditions are consistent with current market rates.
Determination of the fair value of notes payable to related parties cannot be
estimated because of the favorable conditions given to the Company by these
parties not otherwise available from third parties. It is not practicable to
estimate the fair value of notes payable issued for acquisitions and equity
investments because they were issued at a substantial conversion premium and
contain no stated payment terms. The carrying value of equity investments and
advances to associated companies approximates fair value. We evaluate such
assets on a regular basis by looking at cash flows, market conditions and
current and anticipated future performance. In June 2004, we incurred an
impairment charge of $884,963.
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal
trade terms. Management regularly evaluates the need for an allowance for
uncollectible accounts by taking into consideration factors such as the type of
client; governmental agencies or private sector; trends in actual and forecasted
credit quality of the client, including delinquency and late payment history;
and current economic conditions that may affect a client's ability to pay.
Management has determined that there is no need for an allowance as of June 30,
2004 and 2003.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method using estimated lives ranging from three to five years for
property and equipment. Leasehold improvements are amortized over the length of
the lease or estimated useful life, whichever is less. Property and equipment is
periodically reviewed for impairment. When such loss is identified, it is
recorded as a loss in that period.
Fair Value of Common Stock
Contingently redeemable equity represents the value of shares of our common
stock issuable upon the conversion of notes payable in excess of the face value
of these notes issued in the acquisition of VILPAS and the acquisition of equity
interest in each of the Riverbend and IRCA transactions. The stock arrangements
are dependent on the satisfaction of certain conditions by us, most notably the
listing of our common stock an a major stock exchange in the United States of
America, for whom there are financial requirements for listing. The valuation
and allocation process relies on significant assumptions made by management, in
particular, the value of the shares issued to effect the purchase prior to the
Company having established a trading market for its stock. When it becomes
probable that redemption will occur, the Company will record changes in fair
value in the Statement of Operations.
Allocation of Purchase Consideration in Business Combinations
The Company accounts for its investments in its subsidiaries using the purchase
method of accounting. The excess of the consideration paid for subsidiaries over
the fair value of acquired tangible assets less the fair value of acquired
liabilities is assigned to intangible assets and goodwill. The Company obtains
an independent third party valuation to ascertain the amount to allocate to
identifiable intangible assets, and the useful lives of those assets. The
Company amortizes identifiable intangible assets over their useful life unless
that life is determined to be indefinite. The useful life of an intangible asset
that is being amortized is evaluated each reporting period as to
51
whether events and circumstances warrant a revision to the remaining period of
amortization. Goodwill is not amortized and is tested for impairment on an
annual basis. The implied fair value of goodwill is determined by allocating
fair value to all assets and liabilities acquired; the excess of the price paid
over the amounts assigned to assets and liabilities acquired is the implied fair
value of goodwill.
Allocation of Purchase Consideration for Equity Investments in Associated
Companies
The excess of the consideration paid for equity investments in associated
companies over our pro rata share of the investee's net assets is allocated to
intangibles and goodwill similar to a purchase business combination. The Company
obtains an independent third party valuation to ascertain the amount to allocate
to identifiable intangible assets and the useful lives of those assets. The
Company amortizes identifiable intangible assets over their useful life unless
that life is determined to be indefinite. In each of the Riverbend and the IRCA
transactions, the Company received an option, exercisable under certain
conditions, to acquire the additional 49% of each of those companies. Using the
Black Scholes option valuation model, a value was assigned to each of the
intangible assets associated with those options. The useful life of an
intangible asset that is being amortized is evaluated each reporting period as
to whether events and circumstances warrant a revision to the remaining period
of amortization. The value of the Equity Investments in Associated Companies is
tested for impairment on an annual basis. At June 30, 2004, based on actual
performance and forecasts for future performance, the value of the IRCA
investment after application of current year losses and amortization of
intangible assets, was written down to $0 and impairment expense of $884,963 was
recorded in the statement of operations.
Software Development Costs
Software development costs related to software that the company licenses to
customers are charged to expense as incurred until technological feasibility is
attained. Technological feasibility is attained when the Company's software has
completed system testing and has been determined viable for its intended use.
The time between the attainment of technological feasibility and completion of
software development has been short with immaterial amounts of development costs
incurred during this period. Accordingly, software costs have not been
capitalized other than product development costs acquired through technology
business combinations and technology purchases.
Earnings (Loss) per Share
Basic earnings (loss) per common share is computed by dividing net income (loss)
available for common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per common share
("DEPS") is computed giving effect to all potential dilutive shares including
shares held in escrow, common stock issuable upon the conversion of notes
payable or the exercise of stock options and warrants. DEPS is computed by
dividing net income (loss) available for common stockholders by the
weighted-average common shares and dilutive potential common shares that were
outstanding during the period. Shares from release of escrow shares, the
conversion of notes payable or the exercise of options and warrants for common
shares were not included in the computation of DEPS, because their inclusion
would have been antidilutive for the fiscal year ended June 30, 2004 and the
nine month transition period ended June 30, 2003.
If the Company were to include all potential shares in the calculation, the
following items would be included:
o Stock options to purchase 5,570,000 shares of common stock at prices
ranging from $0.05 to $0.50 per share were outstanding at June 30,
2004; 2,447,000 options were outstanding at June 30, 2003 at purchase
prices varying from $0.05 to $0.50 per share.
o Warrants to purchase 20,584,950 shares of common stock at prices
ranging from $0.05 to $2.00 per share were outstanding at June 30,
2004; 750,000 at prices ranging from $1.00 to $2.00 per share were
outstanding at June 30, 2003.
o At June 30, 2004 and 2003, we held 662,500 and 1,000,000 shares in
escrow, respectively.
o At June 30, 2004, we had the following convertible notes outstanding:
(i) a convertible non-interest-bearing promissory note in the amount
of $20,000 was convertible into 2,000,000 shares of our common stock
for our investment in Ayrshire, (ii) a convertible
non-interest-bearing promissory note in the amount of $20,000 was
convertible into 2,500,000 shares of our common stock for our
investment in Danlas / IRCA, (iii) a convertible promissory note in
the amount of $500,000 convertible into 1,000,000 shares of our
52
common stock for our investment in VILPAS and (iv) a convertible
promissory totaling $50,000 convertible into an indeterminable amount
of shares of our common stock.
o At June 30, 2003, the following convertible notes were outstanding:
(i) $925,000 convertible notes payable convertible into an
indeterminable number of shares of our common stock and (ii)
$1,000,000 convertible notes payable convertible into 500,000 shares
of our common stock.
Basic and diluted net loss per common share for the fiscal periods ended June
30, 2004 and 2003 were calculated as follows:
Transition Period
October 1, 2002
For the Year Ended to
June 30, 2004 June 30, 2003
---------------- ----------------
Numerator-Basic / Diluted
Net loss available for common stockholders $ (11,462,063) $ (2,071,984)
================ ================
Denominator-Basic / Diluted
Weighted-average common stock outstanding 22,827,313 8,050,147
================ ================
Basic / Diluted loss per share $ (0.50) $ (0.26)
================ ================
Stock-Based Compensation
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 148 ("SFAS 148"), "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends FASB
Statement 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent disclosure in both annual and interim financial statements of the
method of accounting for employee stock option grants and the effect of the
method used on reported results.
The Company has adopted the fair value based method of accounting for
stock-based employee compensation in accordance with Statement of Financial
Accounting Standards Number 123, "Accounting for Stock-Based Compensation" (SFAS
123). In accordance with SFAS 123, option expense of $526,491 and $76,774 was
recognized for the fiscal year ended June 30, 2004 and nine month transition
period ended June 30, 2003, respectively. The expense was calculated using the
Black Scholes valuation model with the following assumptions:
June 30, 2004 June 30, 2003
------------- -------------
Five-Year Risk Free Interest Rate 3.13% 3.01%
Dividend Yield Nil Nil
Volatility 70% 0%
Average Expected Term (Years to Exercise) 5 5
Goodwill and Other Intangibles Resulting from Business Acquisitions
The Company adopted Statement of Financial Accounting Standard No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets," at the beginning of fiscal 2003.
As required, the Company identified its reporting units and the amounts of other
intangible assets, and other assets and liabilities allocated to those reporting
units. This Statement addresses the accounting and reporting of goodwill and
other intangible assets subsequent to their acquisition. SFAS No.142 provides
that (i) goodwill and indefinite-lived intangible assets will no longer be
amortized, (ii) impairment will be measured using various valuation techniques
based on discounted cash flows, (iii) goodwill will be tested for impairment at
least annually at the reporting unit level, (iv) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually, and (v)
intangible assets with finite lives will be amortized over their useful lives.
The Company does not have any intangible assets with indefinite lives.
53
Recently Issued Accounting Standards
In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146
("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 replaces Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)"
in its entirety and addresses significant issues relating to recognition,
measurement and reporting costs associated with an exit or disposal activity,
including restructuring activities. Under EITF Issue No. 94-3, a liability is
recognized, measured and reported as of the date of an entity's commitment to an
exit plan. Pursuant to SFAS 146, a liability is recorded on the date on which
the obligation is incurred and should be initially measured at fair value. SFAS
146 is effective for exit or disposal activities initiated after December 31,
2002. The Company adopted SFAS 146 on July 1, 2003. The adoption had no
significant impact on the Company's financial statements.
EITF Consensus Issue No.00-21 ("EITF 00-21"), "Revenue Arrangements with
Multiple Deliverables" was first discussed at the July 2000 EITF meeting and was
issued in February 2002. Certain revisions to the scope of the language were
made and finalized in May 2003. EITF 00-21 addresses the accounting for multiple
element revenue arrangements, which involve more than one deliverable or unit of
accounting in circumstances, where the delivery of those units takes place in
different accounting periods. EITF 00-21 requires disclosures of the accounting
policy for revenue recognition of multiple element revenue arrangements and the
nature and description of such arrangements. The accounting and reporting
requirements are effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company has adopted EITF 00-21. The
adoption had no significant impact on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires certain guarantees to be
measured at fair value upon issuance and recorded as a liability. In addition,
FIN 45 expands current disclosure requirements regarding guarantees issued by
entity, including tabular presentation of the changes affecting an entity's
aggregate product warranty liability. Certain provisions of FIN 45 were
effective December 15, 2002; others were effective December 31, 2002. The
adoption of FIN 45 had no impact on Trinity Learning's consolidated financial
condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, ("FIN 46"),
Consolidation of Variable Interest Entities ("VIE"). FIN 46 requires that if a
company holds a controlling interest in a VIE, the assets, liabilities and
results of the VIE's activities should be consolidated in the entity's financial
statements. In December 2003, the FASB revised FIN 46 which, among other
revisions, resulted in the deferral of the effective date of applying the
provisions of FIN 46 to the first interim or annual period ending after December
15, 2004 for qualifying VIE's. The Company is currently evaluating the impact,
if any, that implementation of FIN 46 will have on the Company's consolidated
financial condition or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
("SFAS 150"), "Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity." SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. As permitted, the Company
adopted SFAS 150 on September 1, 2003 and adoption of SFAS 150 did not have a
significant impact on the Company's financial statements.
On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC
or the Staff) issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue
Recognition," which supersedes SAB 101, "Revenue Recognition" in Financial
Statements. SAB 104's primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the
SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the "FAQ") issued with SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. Selected portions of the FAQ have been incorporated into
SAB 104. While the wording of SAB 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. SAB 104 applies
54
to our service related contracts. We do not have material multiple element
arrangements and thus SAB 104 does not impact our financial statements nor is
adoption of SAB 104 considered a change in accounting principle.
On April 9, 2004, FASB issued FASB Staff Position No. FAS 129-1, "Disclosure of
Information about Capital Structure, Relating to Contingently Convertible
Securities" ("FSP 129-1"). FSP 129-1 clarifies that the disclosure requirements
of Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" applies to all contingently convertible
securities and to their potentially dilutive effects on earnings per share
("EPS"), including those for which the criteria for conversion have not been
satisfied, and thus are not included in the computation of diluted EPS. The
guidance in FSP 129-1 is effective immediately and applies to all existing and
newly created securities. Our required FSP 129-1 disclosures are included above
under "Income Per Common Share." Our contingently redeemable equity is
convertible to shares of our common stock; however, the conversion would be
anti-dilutive.
Reclassifications
Certain reclassifications have been made to the 2003 consolidated financial
statements and notes to conform to the 2004 presentation with no effect on
consolidated net loss, or accumulated deficit.
NOTE 2 - ACQUISITIONS AND DIVESTITURES
We commenced a strategy in 2002 to acquire operating companies in strategic
markets that have developed proprietary technology-enabled learning, training
and certification services targeted at major customers in worldwide industries.
Our mission is to become a leading global learning solution corporation through
acquisition, business development and strategic relationships.
On September 1, 2003, we completed the acquisition of all of the issued and
outstanding shares of TouchVision, a California corporation that is in the
business of providing technology-enabled information and learning systems to
healthcare providers, financial services companies and other industry segments.
In consideration for the TouchVision shares, we issued an aggregate of 1,250,000
restricted shares of our common stock, of which 312,500 shares are subject to
the terms of an escrow agreement as collateral for the indemnification
obligations of the former TouchVision shareholders. The determination of
purchase price was based on, among other things, annual revenue for the two
preceding years relative to comparable market based values for publicly traded
companies. We also agreed to loan to TouchVision the sum of $20,000 per month
for the twelve-month period following closing, to be used for working capital.
As of June 30, 2004, we had loaned TouchVision a total of $200,000 pursuant to
this agreement. This loan has been eliminated in consolidation at June 30, 2004.
We had previously loaned TouchVision the sum of $50,000 in June and July, 2003
by way of bridge financing pending completion of the acquisition. This loan has
also been eliminated in consolidation at June 30, 2004.
The following table summarizes the TouchVision assets acquired and liabilities
assumed as of the closing date in connection with $625,000 common stock issued
and acquisition related costs of $80,602:
Cash acquired $ 102,357
Tangible assets acquired 269,213
Intangible assets acquired 350,281
Goodwill 910,000
------------
Total assets acquired 1,631,851
Liabilities assumed 926,249
------------
Net assets acquired $ 705,602
============
The acquisition was accounted for using the purchase method of accounting.
Intangible assets will be amortized over varying periods, as indicated by
independent valuations, using the straight-line method. Allocation of the excess
of merger consideration over the net book value of assets acquired between
goodwill and intangible assets was determined by an independent, third-party
professional valuation firm. As the merger consideration was paid entirely in
shares of the Company's common stock, the goodwill acquired may not be amortized
for federal income tax purposes. The goodwill arising from the acquisition is
allocated to the United States geographic segment.
55
On September 1, 2003, we completed the acquisition of all of the issued and
outstanding shares of RMT, an Australian company that is in the business of
providing workplace training programs for various segments of the food
production industry, including viticulture and horticulture. In consideration
for the shares of RMT we issued 700,000 restricted shares of our common stock,
of which 350,000 shares are subject to the terms of an escrow agreement as
collateral for the indemnification obligations of the former RMT shareholders.
The determination of purchase price was based on, among other things, annual
revenue for the two preceding years relative to comparable market based values
for publicly traded companies.
The following table summarizes the RMT assets acquired and liabilities assumed
as of the closing date in connection with $350,000 common stock issued and
acquisition related costs of $26,517:
Cash acquired $ 37,979
Tangible assets acquired 78,673
Intangible assets acquired 18,000
Goodwill 376,517
-----------
Total assets acquired 511,169
Liabilities assumed 145,744
-----------
Net assets acquired $ 365,425
===========
The acquisition was accounted for using the purchase method of accounting.
Intangible assets will be amortized over varying periods, as indicated by
independent valuations, using the straight-line method. Allocation of the excess
of merger consideration over the net book value of assets acquired between
goodwill and intangible assets was determined by an independent, third-party
professional valuation firm. As the merger consideration was paid entirely in
shares of the Company's common stock, the goodwill acquired may not be amortized
for federal income tax purposes. The goodwill arising from the acquisition is
allocated to the Australian geographic segment.
On March 1, 2004, we completed the acquisition of all the issued and outstanding
shares of VILPAS (f/k/a Virtual Learning Partners AS). In consideration for the
VILPAS shares we issued a convertible non-interest-bearing promissory note in
the principal amount of $500,000, which note is convertible from time to time
but no later than August 5, 2005 into a maximum of 1,000,000 shares of our
common stock. The value of shares issuable upon conversion (based upon a $0.80
per share value) in excess of the note amount has been classified as
contingently redeemable equity. Of these shares, up to 20% may be withheld in
satisfaction for any breach of warranties by the former shareholders of VILPAS.
The determination of purchase price was based on, among other things, annual
revenue for the two preceding years relative to comparable market based values
for publicly traded companies. The VILPAS shares are subject to escrow and
pledge agreements and will be reconveyed to the former shareholders in the event
of a default by us of certain terms and conditions of the acquisition
agreements, including, among other things, a voluntary or involuntary bankruptcy
proceeding involving us or the failure by us to list our shares of common stock
on a major stock exchange by February 5, 2005, subject to a six-month extension
in the event a listing application is in process on such date.
The following table summarizes the VILPAS assets acquired and liabilities
assumed as of the closing date in connection with the $500,000 convertible note
payable issued, the $300,000 recorded as conditionally redeemable equity in our
balance sheet and acquisition related costs of $52,869:
Cash acquired $ 1,052,270
Tangible assets acquired 339,986
Intangible assets acquired 210,177
Goodwill 563,009
-----------
Total assets acquired 2,165,442
Liabilities assumed 1,017,937
Minority interest 294,636
-----------
Net assets acquired $ 852,869
===========
The acquisition was accounted for using the purchase method of accounting.
Intangible assets will be amortized over varying periods, as indicated by an
independent valuation, using the straight-line method. Allocation of the
56
excess of merger consideration over the net book value of assets acquired
between goodwill and intangible assets was determined by an independent,
third-party professional valuation firm. As the merger consideration was paid
entirely with a promissory note with no payment terms and convertible into
shares of the Company's common stock, the goodwill acquired may not be amortized
for federal income tax purposes. The goodwill arising from the acquisition is
allocated to the European geographic segment.
On September 1, 2003, we completed the acquisition of 51% of the issued and
outstanding shares of Ayrshire that owns 95% of Riverbend, a South African
company that provides learning services to corporations and individuals in South
Africa. We also acquired the option to purchase the remaining 49% of Ayrshire.
In consideration for the Ayrshire shares, we issued a convertible
non-interest-bearing promissory note in the amount of $20,000, which amount is
convertible from time to time but no later than December 30, 2006 into a maximum
of 2,000,000 shares of our common stock. The value of shares issuable upon
conversion (based upon a $0.50 per share value) in excess of the note amount has
been classified as contingently redeemable equity. Of these shares, up to
400,000 may be withheld in satisfaction for any breach of warranties by the
former shareholders of Ayrshire. The determination of purchase price was based
on, among other things, annual revenue for the two preceding years relative to
comparable market based values for publicly traded companies. The Ayrshire
shares are subject to escrow, and pledge agreements will be reconveyed to the
former shareholders in the event of a default by us of certain terms and
conditions of the acquisition agreements, including, among other things, a
voluntary or involuntary bankruptcy proceeding involving us or the failure by us
to list our shares of common stock on a major stock exchange by December 30,
2006. The results of operations for Ayrshire, using the equity method, have been
included in the Company's financial statements since the date of acquisition. As
of June 30, 2004, no shares had been issued in exchange for the convertible
promissory note.
In connection with this acquisition, we agreed to make a non-interest-bearing
loan of $1,000,000 to Ayrshire, $300,000 of which was advanced at closing of the
acquisition. The remaining $700,000 was advanced on November 3, 2003. The loan
to Ayrshire has been accounted for as a note receivable. We may exercise an
option to acquire the remaining 49% of Ayrshire in consideration for the
issuance of 1,500,000 shares of our common stock, subject to certain
adjustments. The Company has allocated $325,000 of the consideration paid to
this intangible asset.
On December 1, 2003, we completed the acquisition of all the issued and
outstanding shares of Danlas, a British Virgin Islands Company that owns 51% of
IRCA (Proprietary) Limited ("IRCA"), a South African company specializing in
corporate learning, certification and risk mitigation in the area of safety,
health environment and quality assurance ("SHEQ"). IRCA operates in South
Africa, England and the United States through various operating subsidiaries.
Danlas also holds options to acquire the remaining 49% of IRCA. In consideration
for the Danlas shares, the Company issued a convertible promissory note in the
aggregate principal amount of $20,000 convertible under certain conditions into
a maximum of 2,500,000 shares of the Company's common stock, (ii) agreed to
advance $500,000 in cash to Danlas to establish an international sales force,
(iii) provided $500,000 as collateral for an operating line of credit and, (iv)
provided certain future profit thresholds are met, agreed to issue up to an
additional 1,000,000 shares of the Company's common stock. The value of shares
issuable upon conversion (based upon a $0.50 per share value) in excess of the
note amount has been classified as contingently redeemable equity. The
determination of purchase price was based on, among other things, annual revenue
for the two preceding years relative to comparable market based values for
publicly traded companies. The results of operations for IRCA, using the equity
method, have been included in the Company's financial statements since the date
of acquisition. The $500,000 deposited as collateral in support of a bank line
of credit is classified as restricted cash in the Company's balance sheet. In
consideration of the operating results for the year and management's estimate of
future cash flows, the Company wrote down its remaining investment in IRCA of
approximately $884,963 to $0. We wrote down our investment in IRCA as a result
of current year operating performance and anticipated operating losses in IRCA
for the foreseeable future. These losses are, in part, a result of the weakening
of the US dollar in relation to the South African Rand and the resulting
downturn in mining operations in South Africa.
As part of the Danlas transaction, we issued two convertible notes of $10,000
each, with which to purchase the remaining 49% of IRCA. However, the notes are
only effective should Danlas be able to exercise two options for the remaining
49% of IRCA. The options are exercisable for the period December 1, 2003 to
December 31, 2005 commencing the day upon which the average closing price per
share of the Company's common stock for a period
57
of ten days equals or exceeds $2.00. The purchase consideration for the
remaining 49% is 2,000,000 shares of our common stock. The Company has allocated
$75,000 of the consideration paid to this option.
Purchased Intangible Assets
Changes in the net carrying amount of goodwill for the fiscal year ended June
30, 2004 and nine month transition period ended June 30, 2003 are as follows:
Balance as of October 1, 2002 $ -
Goodwill acquired during the period -
-------------
Balance as of June 30, 2003 -
Goodwill acquired during the period 1,849,526
Goodwill divested during the period -
-------------
Balance as of June 30, 2004 $ 1,849,526
=============
SFAS 142 requires goodwill and other intangible assets to be tested for
impairment at least annually. Accordingly, we have completed our annual review
of the recoverability of goodwill as of June 30, 2004, which indicated that no
impairment of goodwill had been experienced. We believe the following method we
use in testing impairment of goodwill provides us with a reasonable basis in
determining whether an impairment charge should be taken.
We regularly evaluate whether events and circumstances have occurred which
indicate a possible impairment of goodwill and other intangible assets. In
evaluating whether there is an impairment of goodwill and other intangible
assets, we evaluate the performance of each subsidiary relative to its
performance in prior periods, its budget and its upcoming three year forecast.
We also evaluate the revenue achieved per share of our common stock issued as
part of the purchase consideration in relation to market capitalization of
publicly traded training companies for current and prior periods. Based on our
review of the goodwill and other intangible assets, we concluded that we did not
have any impairment of goodwill at June 30, 2004.
The values assigned to other intangible assets are considered appropriate based
on independent valuations. The other intangible assets are being amortized over
varying periods, as indicated by independent valuations, using the straight-line
method. The following table sets forth the Company's acquired other intangible
assets at June 30, 2004 and June 30, 2003, which will continue to be amortized:
2004 2003
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Gross Average Net Gross Average Net
Carrying Life in Accumulated Carrying Carrying Life in Accumulated Carrying
Amount Months Amortization Amount Amount Months Amortization Amount
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Tradenames and
trademarks $ 156,841 58 $ 27,521 $ 129,320 $ - - $ - $ -
Backlog 40,600 36 4,511 36,089
Current and core
technology 152,317 9 41,027 111,290 - - - -
Customer
relationships 175,100 55 28,515 146,585 - - - -
Other intangibles 53,600 13 41,926 11,674 1,118,312 5 167,747 950,565
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 578,458 38 $ 143,500 $ 434,958 1,118,312 5 $ 167,747 $ 950,565
============ ============ ============ ============ ============ ============ ============ ============
Five Year Amortization schedule:
Fiscal Year Amount
--------------- ---------------
2005 $ 136,073
2006 126,475
2007 83,547
2008 60,302
2009 28,561
Thereafter -
---------------
Total $ 434,958
===============
58
Divestitures
In December 2003, we sold our interest in CBL Global Corporation and its
Australian subsidiaries (collectively "CBL") to Messrs. Scammell and Kennedy,
the former owners of CBL. In conjunction with the management buyout, we entered
into a Settlement Agreement with respect to our litigation with CBL. Pursuant to
the terms of the agreement, we conveyed all of our interest in CBL back to the
former owners in exchange for surrender and cancellation of 3,000,000 shares of
Company stock issued to them in connection with acquisition of CBL and the
cancellation of $1,000,000 in convertible notes payable to them. Also as a
result of the divestiture, $222,151 owed by CBL to Messrs. Kennedy and Scammell
is no longer an obligation of the Company. Through CBL's strategic alliance with
IRCA, Trinity will continue to market CBL-related workplace learning content and
products in Africa.
As a result of the divestiture, the results of operations for CBL through the
date of divestiture, December 21, 2003, of $368,036 have been included in the
results of operation presented with this report. The accumulated deficit of
$1,314,277 resulting from the accumulated operating loss for CBL between October
2002 and December 2003, as well as comprehensive income of $20,073 for the same
period, are included with our consolidated accumulated deficit and accumulated
other comprehensive income at June 30, 2004. The net fair value of the assets
and liabilities divested, net of a $1,000,000 convertible note payable which was
cancelled, the intercompany receivable from CBL and the cancellation of
3,000,000 shares of shares of our common stock, was recorded as a $461,063 net
credit to our common stock. No gain or loss was recognized in the Consolidated
Statement of Operations as a result of the divestiture.
Pro Forma Results (Unaudited)
The operating results of CBL, TouchVision, and RMT have been included in the
accompanying consolidated financial statements from the date of acquisition
forward and, for CBL, up to the date of divestiture. Accordingly, CBL business'
results of operations were included from October 1, 2002 to December 22, 2003.
The business results of operations of RMT and TouchVision are included for the
period September 1, 2003 through June 30, 2004. The business results for VILPAS
are included for the period March 1, 2004 through June 30, 2004.
The following unaudited pro forma financial information presents the combined
results of operations of the Company and TouchVision, RMT, and VILPAS assuming
the acquisitions occurred October 1, 2002. In December 2003, we completed the
sale of our interest in CBL to the former owners of CBL. Accordingly, CBL's
business operating results are not included in the Company's combined unaudited
pro forma financial information for the twelve and nine month periods ended June
30, 2004, and 2003. The unaudited pro forma financial information is not
intended to represent or be indicative of the consolidated results of the
operations of the Company that would have been reported had these acquisitions
been completed as of the dates presented, nor should it be taken as a
representation of the future consolidated results of operations of the Company.
(Unaudited)
-----------
Fiscal Year Transition
Ended June 30, Period Ended
2004 June 30, 2003
------------- -------------
Revenue $ 3,115,500 $ 2,550,448
============= =============
Gross Profit $ 2,363,177 $ 2,010,843
============= =============
Operating Loss $ (5,203,706) $ (1,266,640)
============= =============
Net Loss $ (12,924,746) $ (1,239,493)
============= =============
Net Loss per Common Share - Basic / Diluted $ (0.57) $ (0.54)
============= =============
NOTE 3 - PROPERTY AND EQUIPMENT
Scheduled below are the assets, cost, and accumulated depreciation at June 30,
2004 and June 30, 2003, respectively, and depreciation expense for the fiscal
year ended June 30, 2004 and the nine month transition period ended June 30,
2003, respectively.
59
Assets Cost Depreciation Expense Accumulated Depreciation
--------------------- --------------------- ------------------------
6/30/2004 6/30/2003 6/30/2004 6/30/2003 6/30/2004 6/30/2003
--------- --------- --------- --------- --------- ---------
Furniture & Equipment $ 53,733 $ 53,385 $ 24,029 $ 7,750 $ 16,573 $ 7,824
========= ========= ========= ========= ========= =========
NOTE 4 - EQUITY INVESTMENTS IN AND ADVANCES TO ASSOCIATED COMPANIES
At June 30, 2004, the principal components of Equity Investments in and Advances
to Associated Companies were the following:
Ayrshire IRCA Total
----------- ----------- -----------
Equity investment $ 1,379,871 $ 2,178,049 $ 3,557,920
Cash Advances 1,000,000 80,000 1,080,000
Impairment in equity investment - (884,963) (884,963)
Equity losses of unconsolidated subsidiaries (536,936) (1,293,086) (1,830,022)
----------- ----------- -----------
Balance June 30, 2004 $ 1,842,935 $ 80,000 $ 1,922,935
=========== =========== ===========
The financial positions of Ayrshire / Riverbend and IRCA at June 30, 2004 were:
Ayrshire IRCA
------------ ------------
Income statement information:
Revenue $ 1,514,749 $ 4,880,349
============ ============
Operating loss $ (243,622) $ (738,981)
============ ============
Net Loss $ (475,264) $ (1,201,097)
============ ============
Financial position information:
Current assets $ 1,046,148 $ 1,751,147
============ ============
Noncurrent assets $ 108,287 $ 1,650,473
============ ============
Current Liabilities $ 418,078 $ 1,755,416
============ ============
Long-term liabilities $ 1,433,998 $ 2,274,962
============ ============
In 2004, equity in losses of associated companies was $1,622,023. The Company
also recognized an $884,963 impairment charge, as its annual evaluation of its
equity investments indicated that the IRCA investment had no value at June 30,
2004. This loss in value is due to IRCA's continued operating losses, and future
economic uncertainties in the markets IRCA serves.
The consideration paid for our investment in Ayrshire was $1,379,871. This
amount comprises legal and financial advisory fees of $379,871 plus 2,000,000
shares of our common stock valued at $0.50 per share. The net asset value of
Ayrshire at acquisition date was $1,806,886 and our pro rata share of their net
assets was $875,463. Equity Investments in Associated Companies are periodically
reviewed for impairment. The difference between our investment and our pro rata
share of Ayrshire's net assets has been allocated to goodwill and to intangible
assets. Equity Investments in Associated Companies are periodically reviewed for
impairment. When such impairment is identified, it is recorded as a loss in that
period. As of June 30, 2004, no such impairment was incurred.
The consideration paid for our investment in IRCA was $2,178,049. This amount
comprises legal, financial advisory and consultancy fees of $928,049, including
the payment to Mr. Steynberg of $607,165, plus 2,500,000 shares of our common
stock valued at $0.50 per share. The net asset value of IRCA at acquisition date
was $2,704,870 and our pro rata share of their net assets was $1,379,484. The
difference between our investment and our pro rata share of IRCA's net assets
has been allocated to goodwill and to intangible assets. Equity Investments in
Associated Companies are periodically reviewed for impairment. When such
impairment is identified, it is recorded as a loss in that period. As of June
30, 2004, we recognized an impairment loss for IRCA of $884,963.
60
We wrote down our investment in IRCA to $0 as a result of current year operating
performance and anticipated operating losses in IRCA for the foreseeable future.
These losses are, in part, a result of the weakening of the US dollar in
relation to the South African Rand and the resulting down turn in mining
operations in South Africa. In future periods, we will continue to absorb losses
up to the amount of the $500,000 we have deposited as collateral in support of
IRCA's operating line of credit. We believe that the advance of $80,000 is
collectible from IRCA Australia.
In connection with our September 1, 2003 purchase of 51% of Ayrshire, we agreed
to make a non-interest-bearing loan of $1,000,000 to Ayrshire, $300,000 of which
was advanced at closing of the acquisition. The remaining $700,000 was advanced
on November 3, 2003. The note is due December 30, 2006 provided that, if by
December 2005 an option to purchase the additional 49% of Ayrshire has not been
exercised, the loan shall be repayable in five equal annual installments, the
first installment being payable on December 31, 2007 and the remaining
installments payable in yearly intervals thereafter. As further consideration
for our December 1, 2003 purchase of 51% of IRCA, we agreed to make a
non-interest-bearing loan of $80,000 to IRCA Australia, which was advanced
during fiscal 2004.
The other amortizable intangible assets are being amortized over varying
periods, as indicated by independent valuations, using the straight-line method.
The values assigned to these intangible assets are considered appropriate based
on independent valuations. The technology-based intangible assets are being
amortized over varying periods ranging from three to five years, as indicated by
independent valuations, using the straight-line method. The following table sets
forth the Company's acquired intangible assets in equity investments at June 30,
2004 which will continue to be amortized:
2004
-----------------------------------------------------
Gross Weighted
Carrying Average Life Accumulated Net Carrying
Amount in Months Amortization Amount
----------- ------------ ----------- -----------
Backlog $ 123,142 55 $ 22,922 $ 100,220
Current and core
technology 28,101 36 7,752 20,349
Distributor
relationships 122,579 60 20,349 102,230
Maintenance Contracts 67,345 60 11,144 56,201
In-Process R&D 20,833 0 20,833 -
Option value 325,000 indefinite - 325,000
----------- ----------- -----------
Total $ 687,000 $ 83,000 $ 604,000
=========== =========== ===========
Five Year Amortization schedule:
Fiscal Year Amount
---------------- -------------
2005 $ 75,095
2006 75,095
2007 63,828
2008 55,346
2009 9,636
Thereafter -
-------------
Total $ 279,000
=============
NOTE 5 - COMMITMENTS
Total rental expense included in operations for operating leases for the fiscal
year and nine month transition period ended June 30, 2004 and 2003, amounted to
$161,758 and $44,524, respectively. The operating leases are for office
61
space used by the Company for its operations. Certain lease rentals contain
renewal options, and provide for payment of property taxes and operating
expenses. These operating lease agreements expire at varying dates through 2008.
Total minimum lease commitments as of June 30, 2004:
Calendar Year Amount
------------------ --------------
2004 $ 224,307
2005 371,943
2006 333,591
2007 322,169
2008 134,237
Thereafter -
--------------
Total $ 1,386,247
==============
As part of the Company's contractual arrangement with IRCA, it agreed to provide
$500,000 on deposit with Standard Bank and restricted for use as collateral for
an operating line of credit at IRCA. Should IRCA default on its line of credit
with Standard Bank, these funds may be seized by Standard Bank.
NOTE 6 - LEGAL PROCEEDINGS
On September 12, 2003, we filed a Complaint (Case No. 2:03CV00798DAK), in the
United States District Court for the District of Utah, Central Division, against
CBL Global (f/k/a CBL Acquisition Corporation), and Robert Stephen Scammell, the
sole shareholder of CBL-California; alleging, among other things, that Scammell
and CBL-California provided us with misstated financial statements prior to our
merger in October 2002 with CBL-California and CBL Global. On September 18,
2003, we filed a First Amended Complaint and Jury Demand, which added as
defendants CBL Global and Brian Kennedy, the sole shareholder of CBL-Australia.
The First Amended Complaint alleged causes of action for violations of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, for violations of Section 20(a) of the Securities Exchange Act of
1934, for declaratory relief and breach of contract, for common law fraud, and
for negligent misrepresentation.
The First Amended Complaint alleged, among other things, that the defendants
were advised by CBL-California's accountant on September 18, 2002 that
CBL-California's financial statements were misstated, and alleged that new
restated financial statements were issued on September 19, 2002. The First
Amended Complaint alleged, however, that the restated financial statements were
not provided to us prior to the October 1, 2002 closing of the merger.
In December, 2003, pursuant to a settlement agreement we reconveyed our
interests in CBL Global and its Australian subsidiaries (collectively "CBL") to
Messrs. Scammell and Kennedy, the former owners of CBL. Pursuant to the terms of
the settlement agreement each party released any and all claims against each
other, we conveyed all of our interest in CBL back to the former owners in
exchange for surrender and cancellation of 3,000,000 shares of Company stock
issued to them in connection with acquisition of CBL and the cancellation of
$1,000,000 in convertible notes payable to them. Also, as a result of the
divestiture, $222,151 owed by CBL Global to Messrs. Kennedy and Scammell is no
longer an obligation of the Company. Through CBL's strategic alliance with IRCA,
Trinity will continue to market CBL-related workplace learning content and
products in Africa.
NOTE 7 - RELATED PARTY TRANSACTIONS
Our corporate reorganization during the fiscal year ended September 30, 2002 was
effected primarily by two of our officers and directors, Messrs. Douglas Cole
and Edward Mooney. During that fiscal year and the transition period subsequent
thereto, we entered into several transactions with these individuals and with
entities controlled by them, as well as entities controlled by Theodore
Swindells, a significant stockholder of our company.
As of August 8, 2002, we formalized a Debt Conversion Agreement with Global
Marketing Associates, Inc. ("GMA"), holder of a convertible promissory note (the
"GMA Note") in the principal amount of $166,963, pursuant to which the principal
amount of the note, along with accrued interest thereon, was made convertible,
under certain conditions, into 3,200,000 shares of our common stock. The GMA
Note was originally issued in November 2000 to
62
the attorneys of our predecessor company and was subsequently acquired by
Pacific Management Services, Inc., who assigned the note to GMA. GMA
subsequently assigned the right to acquire 2,600,000 of the 3,200,000 shares of
common stock to several persons, including Messrs. Cole, Mooney, and Swindells
and European American Securities, Inc. ("EAS"), a private entity of which Mr.
Swindells is a principal. Pursuant to the assignment, Messrs. Cole and Mooney
each acquired the right to acquire 600,000 shares of the common stock, EAS
acquired the right to acquire 400,000 shares, and Mr. Swindells acquired the
right to acquire 1,000,000 shares. As of January 2003, all 3,200,000 shares of
our common stock had been issued pursuant to the terms of the GMA Note. Fifty
percent of such shares are subject to a two-year lock-up provision that
restricts transfer of such shares without prior written consent of our board of
directors.
As of July 15, 2002, we entered into a two-year Advisory Agreement with Granite
Creek Partners, LLC ("GCP"), formerly King's Peak Advisors, LLC. The Agreement
is automatically renewable for an additional 12-month period. Under the terms of
the Advisory Agreement, GCP agreed to provide us with general corporate,
financial, business development and investment advisory services on a
non-exclusive basis. These services include assisting with the identification of
placement agents, underwriters, lenders and other sources of financing, as well
as additional qualified independent directors and members of management. GCP is
a private company whose principals are Messrs. Cole, Mooney and Swindells. At
our August 19, 2003 board of directors' meeting, our board of directors voted to
suspend the Advisory Agreement from August 15, 2003 until January 2004, and this
agreement remains suspended. Through December 31, 2003, GCP had earned a total
of $315,000 under the Advisory Agreement, $110,000 of which was converted into
4,400,000 shares of our common stock in March 2003. The remaining balance of
$205,000 was paid in full to GCP as of June 30, 2004.
As of July 31, 2002, we entered into an Advisory Agreement with EAS, a private
entity of which Mr. Swindells is a principal, pursuant to which EAS agreed to
provide financial advisory and investment banking services to us in connection
with various equity and/or debt transactions. In exchange for such services, we
agreed to pay EAS a retainer fee of $5,000 per month and a commission ranging
from 5% to 7% based on the type of transaction consummated, such fees being
payable, at EAS' option, in cash or our common stock. On October 2, 2003, we
renewed the agreement with EAS on terms similar to those contained in the first
agreement. On January 1, 2004, we amended the October 2003 agreement in
connection with our January 2004 senior convertible bridge note offering, which
closed on May 28, 2004, for which we paid EAS a fee of 10%. Through June 30,
2004, EAS had earned a total of $1,065,104 pursuant to our arrangement with
them, of which $345,450 was earned in connection with private equity and/or debt
transactions and $719,654 was earned for advisory services in connection with
certain acquisitions. In January 2004, 250,000 shares of our common stock with a
fair market value of $375,000, was paid to EAS in the Company's common stock. As
of June 30, 2004, the balance owed to EAS was $66,653. On May 27, 2004, European
American Perinvest Group, a subsidiary of EAS, invested $100,000 in our 2004
senior convertible bridge note offering. On May 28, 2004, this investment was
converted to 166,699 restricted shares of our common stock.
During the period August 2001 to June 30, 2002, Mr. Swindells advanced a total
of $925,000 to us by way of short-term non-interest bearing convertible working
capital loans. We repaid $500,000 of the total amount owing in September 2003
and issued an aggregate of 850,000 shares of our common stock to Mr. Swindells
in November 2003 in payment of the remaining balance of $425,000. During the
period June 2004 to October 2004, Mr. Swindells advanced us $155,000. On August
10, 2004 we repaid $50,000 of this amount and on November 2, 2004 we paid the
remaining balance of $105,000. On October 14, 2004, Mr. Swindells exercised
warrants to purchase 300,000 shares of our common stock at $0.05 per share.
In October 2002, we issued convertible promissory notes in the aggregate
principal amount of $500,000 (the "Bridge Financing Notes") to certain
individuals and entities, and in connection with the issuance of the Bridge
Financing Notes, issued warrants to the holders of the notes to purchase
additional shares of common stock. Of the total principal amount of the Bridge
Financing Notes, $55,000 was advanced by GCP and $120,000 by Mr. Swindells. On
May 19, 2003, the aggregate principal amount of the Bridge Financing Notes and
accrued interest thereon of $34,745 was converted into 1,336,867 shares of
common stock at a price of $0.40 per share. The warrants issued in connection
with the Bridge Financing Notes are exercisable for a period of one year at a
price of $0.05 per share, and contain a net issuance provision whereby the
holders may elect a cashless exercise of such
63
warrants based on the fair market value of the common stock at the time of
conversion. On March 26, 2004, GCP exercised its warrants in a cashless exercise
for which it received a total of 126,042 shares of common stock.
Effective October 1, 2002, we issued an aggregate of 1,200,000 restricted shares
of our common stock at a price of $0.025 per share to our three directors,
Messrs. Cole, Mooney and Jobe, in consideration for past services valued at
$30,000.
In connection with our acquisition of our interest in IRCA, we entered into an
agreement with Titan Aviation Ltd. ("Titan"), a private company held in a trust
of which Mr. Martin Steynberg and other business partners are the beneficiaries.
Pursuant to this agreement, we paid Titan on May 14, 2004 the sterling
equivalent of the sum of 4,000,000 South African Rand ($607,165) in
consideration for various services rendered to IRCA. Mr. Steynberg, who is a
stockholder in IRCA Investments (Proprietary) Limited, which owns 25.1% of IRCA,
became a director of our company on January 1, 2004 pursuant to the terms of the
IRCA acquisition.
William Jobe, one of our directors, was paid a total of $59,500 during the
period December 2003 to May 2004 and in September 2004 he was paid an additional
$4,815 as compensation for merger and acquisition services associated with our
acquisition of TouchVision.
From time to time, Jan-Olaf Willums, an officer of VILPAS, as well as companies
of which he is a director, have advanced funds to VILPAS. The current balance of
$177,179, of which $105,112 bears interest at 8% per annum and $72,067 is
non-interest bearing, has no fixed terms of repayment.
NOTE 8 - NOTES PAYABLE
As of June 30, 2004 and June 30, 2003, notes payable consisted of the following:
June 30, 2004 June 30, 2003
------------- -------------
Notes payable to third parties:
Notes payable to two credit unions; interest only payable
monthly, principal due in full February 5, 2005,
unsecured, interest at 12% per annum. $ 250,000 $ -
Third party creditors; unsecured, non-interest bearing and
no fixed terms of repayment. 10,810 -
Third party individuals; due September 1, 2006, unsecured,
interest at 10% per annum, interest only payable monthly,
principal due in full at maturity. 73,560 -
Bank note payable; due October 29, 2004, secured by
Company vehicle, interest at 9.5% per annum, monthly
payments of principal and interest. 12,103 -
Revolving bank lines of credit; unsecured, interest
ranging from prime plus 2.625% to prime plus 6.75%,
monthly payments of principal and interest. 133,128 -
Revolving third party line of credit; unsecured, interest
at prime plus 1.99%, monthly payments of principal and
interest. 11,182 -
Notes payable to related parties:
Note payable to related party; due December 31, 2004,
unsecured, interest at 6% per annum. 13,297 -
Convertible note payable to a related party, unsecured,
non-interest bearing, no fixed terms of repayment. 50,000 925,000
64
June 30, 2004 June 30, 2003
------------- -------------
Note payable to a related party; unsecured, interest at 8%
per annum on $105,112; non-interest bearing on $72,067, no
fixed terms of repayment. 177,179 -
Notes payable to the former owners of CBL, unsecured,
interest at 7% per annum, due September 1, 2003, cancelled
pursuant to the settlement agreement discussed in Note 6. - 222,151
Notes payable issued for acquisitions and equity
investments:
Convertible notes payable to the former owners of CBL,
secured by assets of the subsidiary, interest at 7% per
annum, due September 1, 2004, cancelled pursuant to the
settlement agreement discussed in Note 6. - 1,000,000
Convertible note payable to a related party for VILPAS
purchase; due August 5, 2005, unsecured, non-interest
bearing. 500,000 -
Convertible note payable to a related party for IRCA
purchase; due December 31, 2005, unsecured, non-interest
bearing. 20,000 -
Convertible note payable to a related party for Riverbend
purchase; due December 31, 2006, unsecured, non-interest
bearing. 20,000 -
------------ ------------
Total notes payable 1,271,259 2,147,151
Less: current maturities (1,159,430) (2,147,151)
------------ ------------
Long-term notes payable $ 111,829 $ -
============ ============
Maturity schedule for notes payable:
Fiscal Year Amount
------------------ ---------------
2005 $ 1,159,430
2006 20,000
2007 91,829
2008 -
2009 -
Thereafter -
---------------
Total $ 1,271,259
===============
NOTE 9 - STOCK OPTION PLAN
On December 2, 2002, at a special meeting of our shareholders, the 2002 Stock
Plan was approved. The Plan allowed for a maximum aggregate number of shares
that may be optioned and sold under the plan of (a) 3,000,000 shares, plus (b)
an annual 500,000 increase to be added on the last day of each fiscal year
beginning in 2003 unless a lesser amount is determined by the board of
directors. The plan became effective with its adoption and remains in effect for
ten years unless terminated earlier. On December 30, 2003, the board of
directors amended the 2002 Stock Plan to allow for a maximum aggregate number of
shares that may be optioned and sold under the plan of (a) 6,000,000 shares,
plus (b) an annual 1,000,000 increase to be added on the last day of each fiscal
year beginning in 2004 unless a lesser amount is determined by the board of
directors. Options granted under the plan vest 25% on the day of the grant and
the remaining 75% vests monthly over the next 36 months.
The following schedule summarizes the activity during the fiscal year ended June
30, 2004 and the nine month transition period end June 30, 2003, respectively:
65
2004 2003
---------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------------ ------------ ------------
Outstanding at beginning of year 2,447,000 $ 0.23 - $ -
Granted 4,245,000 0.50 2,447,000 0.23
Exercised (45,410) 0.05 - -
Canceled (1,076,590) 0.29 - -
------------ ------------ ------------ ------------
Outstanding at end of year 5,570,000 $ 0.43 2,447,000 $ 0.23
============ ============ ============ ============
Exercisable at year-end 2,571,524 $ 0.39 963,625 $ 0.22
============ ============ ============ ============
Stock options outstanding and exercisable under 2002 Stock Plan as of June 30,
2004 are as follows:
Weighted Average Remaining Number of Options Weighted
Range of Number of Options Average Contractual Life Vested Average
Exercise Price Outstanding Exercise Price (Years) (Exercisable) Exercise Price
-------------- ---------------- ---------------- ------------------- ----------------- ---------------
$0.05 500,000 $ 0.05 3.27 340,753 $ 0.05
$0.25 800,000 0.25 3.45 510,274 0.25
$0.50 4,270,000 0.50 4.39 1,720,497 0.50
---------------- ---------------- ----------------- ---------------
5,570,000 $ 0.43 2,571,524 $ 0.39
================ ================ ================= ===============
There are 1,884,590 options available for grant at June 30, 2004. The weighted
average grant date fair value of options granted as of June 30, 2004 is $0.43.
NOTE 10 - WARRANTS
Through June 30, 2004, the Company had issued warrants for purchase of its
common stock to investors and service providers in connection with its financing
transactions. The principal terms of the warrants are summarized below:
Number of Exercise Price Exercisable
Description Shares per Share Through
----------- ------------- ------------- -------------
2002 Bridge Loan 425,000 $ 0.05 August 2004
October 2002 Equity Private Placement 500,000 $ 1.00 May 2006
October 2002 Equity Private
Placement Bonus Warrants (1) 250,000 $ 2.00 n/a
May 2003 Equity Private Placement 2,438,000 $ 1.00 August 2006
May 2003 Equity Private Placement 7,708,600 $ 1.00 October 2006
May 2003 Bonus Warrants (1) 5,073,300 $ 2.00 n/a
Warrants Issued to Financial Advisors 200,050 $ 0.60 October 2006
Warrants Issued to Investment Bank 20,000 $ 0.50 July 2008
Warrants Issued to Mr. Swindells on
note conversion 850,000 $ 1.00 November 2006
Bonus Warrants to Mr. Swindells (1) 425,000 $ 2.00 n/a
2004 Bridge Loan Warrant 2,695,000 $ 1.00 February and May 2009
------------- -------------
Total 20,584,950 $ 1.23
============= =============
* Value not assigned.
(1) Bonus warrants are issuable upon exercise of the original warrant.
66
NOTE 11 - INCOME TAXES
The Company accounts for corporate income taxes in accordance with Statement of
Accounting Standards Number 109 ("SFAS No. 109") "Accounting for Income Taxes."
SFAS No. 109 requires an asset and liability approach for financial accounting
and reporting for income tax purposes. This approach results in the recognition
of deferred tax assets (future tax benefits) and liabilities for the expected
future tax consequences of temporary timing differences between book and
carrying amounts and the tax basis of assets and liabilities. Future tax
benefits are subject to a valuation allowance to the extent of the likelihood
that the deferred tax assets may not be realized.
The Company has no federal, state or foreign jurisdiction, current or deferred
income tax expense for the years ended June 30, 2004 and 2003.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's total
deferred tax assets, and deferred tax asset valuation allowances at June 30,
2004 and 2003 are as follows:
June 30, 2004 June 30, 2003
------------- -------------
Net operating loss carryforward
Federal $ 2,169,700 $ 686,900
State 479,500 161,500
Foreign 560,500 118,500
Reserve for deferred revenues
Federal 12,600 -
State 2,900 -
Accrued compensation costs
Federal 46,000 18,360
State 10,800 4,300
------------- -------------
3,282,000 989,560
Less valuation allowance for deferred tax assets (3,282,000) (989,560)
------------- -------------
Net Current Deferred Tax Assets $ - $ -
============= =============
The valuation allowance for deferred tax assets was increased by $2,292,440
during the year ended June 30, 2004 and increased by $635,000 during the year
ended June 30, 2003.
At June 30, 2004, the Company has available net operating loss carryforwards of
approximately $6,881,500 for federal income tax purposes that begin to expire in
2021. The federal carryforwards resulted from losses generated in 2001 through
2004. The Company also has net operating loss carryforwards available for state
income tax purposes of $5,454,100 that begin to expire in 2021. The Company also
has approximately $1,475,000 of foreign net operating loss carryforwards. These
loss carryovers are limited per Section 382.
67
The reconciliation of income tax computed at statutory rates of income tax
benefits is as follows:
2004 2003
------------ ------------
Expense at Federal statutory rate - 34% $ (2,611,436) $ (467,900)
State tax effects, net of Federal tax benefits (664,032) (110,100)
Nondeductible expenses 1,733,530 84,145
Foreign tax effects (330,000) (118,500)
Taxable temporary differences 184 -
Deductible temporary differences (9,686) (22,660)
Acquired net operating loss carryforward from subsidiary (411,000) -
Deferred tax asset valuation allowance 2,292,440 635,015
------------ ------------
Income tax provision $ - $ -
============ ============
In connection with acquiring of TouchVision and VILPAS, the Company has recorded
a deferred tax benefit of $411,000 for net operating loss carryforwards that
will be offset against goodwill recorded pursuant to the above mentioned
acquisition when the tax benefit is realized.
No goodwill is expected to be deductible for tax purposes in any geographical
segment.
The components of income (loss) before taxes for domestic and foreign operations
are as follows for the year ended June 30, 2004 and 2003.
2004 2003
---------------------------- ----------------------------
Domestic Foreign Domestic Foreign
------------ ------------ ------------ ------------
Revenues $ 1,113,464 $ 1,476,628 $ - $ 167,790
Expenses 5,097,996 2,568,056 1,596,823 561,017
------------ ------------ ------------ ------------
Loss from Operations (3,984,532) (1,091,428) (1,596,823) (393,227)
Other Expenses (6,377,645) (999) (79,965) (1,969)
Minority Interest & Equity - (7,459) - -
------------ ------------ ------------ ------------
Loss before Income Taxes $(10,362,177) $ (1,099,886) $ (1,676,788) $ (395,196)
============ ============ ============ ============
NOTE 12 - SEGMENT AND RELATED INFORMATION
We operate as a single business segment; however, our consolidated subsidiaries
are organized geographically into reporting segments consisting of the United
States Division, the European Division, the Australia Division and the South
Africa Division. Our United States division comprises our corporate operations
and subsidiaries domiciled in the United States of America. The European
division comprises subsidiaries domiciled in Europe; the Australia Division
comprises subsidiaries domiciled in Australia. The South Africa division
comprises non-consolidated subsidiaries domiciled in South Africa accounted for
using the equity method of accounting including a two person office owned by
them in Australia.
As of and for the fiscal year ended June 30, 2004:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
United States $1,113,463 $(4,680,565) $ 221,883 $ - $ 140,560 $ 910,000 $ 3,517 $ 3,997,388 $ 320,538
Europe 669,160 (19,866) 19,616 - 45,116 563,009 - 1,701,409 117,253
Australia 807,468 (375,529) 37,861 - 57,488 376,517 33,643 554,343 6,729
South Africa - - - (2,714,985) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $2,590,091 $(5,075,960) $ 279,360 $(2,714,985) $ 243,164 $ 1,849,526 $ 37,160 $ 6,253,140 $ 444,520
========== =========== =========== =========== =========== =========== =========== =========== ===========
68
As of and for the nine month transition period ended June 30, 2003:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
United States $ - $(1,114,213) $ - $ - $ - $ - $ - $ 232,177 $ (584,224)
Europe - - - - - - - - -
Australia 167,790 (875,836) 175,497 - 42,719 - 45,561 1,110,168 (946,712)
South Africa - - - - - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 167,790 $(1,990,050) $ 175,497 $ - $ 42,719 $ - $ 45,561 $ 1,342,344 $(1,530,936)
========== =========== =========== =========== =========== =========== =========== =========== ===========
NOTE 13 - STOCKHOLDERS' EQUITY
In October 2002, we issued convertible promissory notes in the aggregate
principal amount of $500,000 (the "Bridge Financing Notes") to certain
individuals and entities, and in connection with the issuance of the Bridge
Financing Notes, issued warrants to the holders of the notes to purchase
additional shares of common stock. Of the total principal amount of the Bridge
Financing Notes, $55,000 was advanced by GCP and $120,000 by Mr. Swindells. On
May 19, 2003, the aggregate principal amount of the Bridge Financing Notes and
accrued interest thereon of $34,745 was converted into 1,336,867 shares of
common stock at a price of $0.40 per share. The warrants issued in connection
with the Bridge Financing Notes are exercisable for a period of one year at a
price of $0.05 per share, and contain a net issuance provision whereby the
holders may elect a cashless exercise of such warrants based on the fair market
value of the common stock at the time of conversion. On March 26, 2004, GCP
exercised its warrants in a cashless exercise for which it received a total of
126,042 shares of common stock.
On October 1, 2002, we authorized a Stock Purchase Agreement in order to retain
qualified directors and officers. The Stock Purchase Agreement allowed various
directors to purchase an aggregate of 1,200,000 shares of our common stock at a
price of $0.025 per share. A total of $30,000 was paid to these directors via
issuance of 1,200,000 shares of the Company's common stock.
On October 1, 2002, we completed the acquisition of all the issued and
outstanding shares of CBL. In consideration for the CBL shares we issued
3,000,000 shares of common stock and an aggregate of $1,000,000 in promissory
notes convertible into 500,000 shares of our common stock. A total of 1,000,000
shares of those issued are subject to the terms of an escrow agreement as
collateral for the indemnification obligations of the former CBL shareholders.
On October 2, 2002, we issued 1,070,000 shares of common stock in settlement of
outstanding amounts due for services rendered to the Company. These shares were
issued at $0.025 per share totaling $26,750.
During the period November 15, 2002 to January 21, 2003, we issued 3,200,000
shares in exchange for $166,963, respectively of unsecured notes payable.
On March 20, 2003, we issued 4,400,000 shares of common stock in settlement of
$110,000 of amounts due to Granite Creek Partners ("GCP") formerly Kings Peak
Advisors, LLC.
On June 16, 2003, we completed a recapitalization of our common stock by (i)
effecting a reverse split of our outstanding common stock on the basis of one
share for each 250 shares owned, with each resulting fractional share being
rounded up to the nearest whole share, and (ii) subsequently effecting a forward
split by dividend to all stockholders of record, pro rata, on the basis of 250
shares for each one share owned. The record date for the reverse and forward
splits was June 4, 2003. As a result of the recapitalization, the number of
shares outstanding 13,419,774 remained unchanged. Between July and October 2003,
an additional 19,090 shares of common stock were issued to shareholders, and
shares owned by members of management were cancelled pursuant to this
recapitalization.
Between January and April 2003, we sold by way of a private placement an
aggregate of 250,000 units at a price of $1.00 per unit, for aggregate
consideration of $250,000. Each unit entitles the holder to two shares of our
common stock and two three year warrants, each to purchase an additional share
of common stock for $1.00 per share. If all warrants are fully exercised by the
holder of such warrants, a bonus warrant will be issued entitling the holder to
purchase one additional share of common stock for $2.00.
We completed the acquisition of all of the issued and outstanding shares of
TouchVision. In consideration for the TouchVision shares, we issued an aggregate
of 1,250,000 restricted shares of our common stock, of which 312,500 shares are
subject to the terms of an escrow agreement as collateral for the
indemnification obligations of the former TouchVision shareholders.
69
We completed the acquisition of all of the issued and outstanding shares of RMT.
In consideration for the shares of RMT we issued 700,000 restricted shares of
our common stock, of which 350,000 shares are subject to the terms of an escrow
agreement as collateral for the indemnification obligations of the former RMT
shareholders.
During the period June 1, 2003 to October 31, 2003, we sold by way of a private
placement an aggregate of 5,073,300 units at a price of $1.00 per unit, for
aggregate consideration of $5,073,300. Each unit comprised two shares of our
common stock and two warrants, each exercisable for one additional share of our
common stock. In addition, each unit carried the right to acquire an additional
warrant to purchase, under certain conditions, up to one additional share of
common stock. In connection with the private placement, we paid $448,105 in
commissions and issued to various financial advisors, 567,160 additional shares
of our common stock and five-year warrants to purchase 207,050 shares of our
common stock.
In December 2003, we completed the divestiture of our interests in CBL Global
and CBL to the former owners of CBL. In conjunction with the management buyout,
we entered into a Settlement Agreement with respect to our litigation with CBL
as described in our 10KSB filed with the U.S. Securities and Exchange
Commission. We acquired CBL from its former owners in October 2002. Pursuant to
the terms of the agreement, we have conveyed all our interest in CBL back to the
former owners in exchange for surrender and cancellation of all shares of
Trinity stock issued to them in connection with the acquisition of CBL and the
cancellation of approximately $1,000,000 in convertible notes payable to them.
From time to time, since inception of our current operating strategy, Mr.
Swindells has provided short-term working capital loans on a non-interest
bearing basis. The principal may be converted into such other debt or equity
securities financings that we may issue in private offerings while the loan is
outstanding. In September 2003, we repaid $500,000 on the $925,000 note balance
then outstanding. In November 2003, the remaining balance of $425,000 was
converted into 850,000 shares of common stock and issued to Mr. Swindells.
During the period June 2004 to July 2004 Mr. Swindells advanced us $120,000. On
August 10, 2004 we repaid $50,000 of this amount.
During the period February 2004 to November 2004, certain warrant holders from
the 2002 Bridge Financing exercised warrants at $0.05 per share for 1,238,542
shares of our common stock. Included in this amount are 126,042 shares issued to
Granite Creek Partners ("GCP"), formerly known as Kings Peak Advisory, LLC.
In January 2004, the Company commenced an offering of up to $3,000,000 Senior
Convertible Bridge Notes (the "Notes"). The Notes were convertible at 80% of the
"Next Equity Financing" offering price. In addition, for each $1.00 invested,
the investor received a five year warrant to purchase a share of the Company's
common stock at $1.00 per share. Using the Black Scholes option valuation model
a value of $1,245,580 was attributed to the warrants and recorded as a discount
on notes payable. On March 25, 2004, the Company's board of directors voted to
allow conversion of the notes and accrued interest if converted prior to April
5, 2004 at a conversion price of $0.60 per share. As a result, certain investors
elected to convert $836,000 in principal of the total amount then outstanding of
$1,146,000 plus accrued interest of $5,108 as of March 25, 2004. The difference
of $1,312,378 between the fair market value of the shares issued calculated
using $1.25 per share and the carrying value of the debt plus accrued interest
of the debt retired was recorded as debt conversion expense. At its May 12, 2004
meeting, the board voted to allow the remaining investors to convert principal
and interest at $0.60 per share. As a result, on May 28, 2004 investors
converted the remaining principal then outstanding of $1,859,000 plus accrued
interest of $11,922 to common stock. The difference of $2,136,954 between the
fair market value of the shares then outstanding calculated using $1.05 per
share and the carrying value of the debt plus accrued interest of the debt
retired was recorded as debt conversion expense. As a result of these
transactions 4,520,069 shares of our common stock were issued and a net credit
to common stock of $5,034,044 was recorded. Financing fees incurred in
connection with the sale of the notes are approximately $241,200
Finally, 100,000 and 40,721 shares of the Company's common stock were issued to
Mr. Ron Posner and TN Capital Equities, Inc. for finders' fees for the Riverbend
and IRCA acquisitions and for fundraising, respectively. During the year ended
June 30, 2004 858,952 shares of the Company's common stock were issued at a
weighted average price per share of $0.04 for the exercise of options and
warrants resulting in gross proceeds to the Company of $34,375.
70
NOTE 14 - GOING CONCERN
Our financial statements are prepared using accounting principles generally
accepted in the United States of America generally applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. Currently, we do not have
significant cash or other material assets, nor do we have an established source
of revenues sufficient to cover our operating costs and to allow us to continue
as a going concern. We do not currently possess a financial institution source
of financing and we cannot be certain that our existing sources of cash will be
adequate to meet our liquidity requirements. These conditions raise substantial
doubt about our ability to continue as a going concern
To meet our present and future liquidity requirements, we will continue to seek
additional funding through private placements, conversion of outstanding loans
and payables into common stock, development of the business of our
newly-acquired subsidiaries, collections on accounts receivable, and through
additional acquisitions that have sufficient cash flow to fund subsidiary
operations. There can be no assurance that we will be successful in obtaining
more debt and/or equity financing in the future or that our results of
operations will materially improve in either the short- or the long-term. If we
fail to obtain such financing and improve our results of operations, we will be
unable to meet our obligations as they become due.
On July 29, 2004, we issued a secured convertible promissory note in the
principal amount of $500,000 to Oceanus Value Fund, L.P. ("Oceanus"). The note
matures on October 27, 2004, and bears interest at the rate of twelve percent
(12%). The holder of the note has the option to participate in a subsequent
financing during the term of the note, and in lieu of all or part of any cash
payment that would otherwise be made to us in connection with such financing,
the holder may elect to contribute $1.00 of debt forgiveness under the note for
each $1.00 of such participation. In connection with the issuance of the note,
we also issued to Oceanus a five-year warrant to purchase up to 125,000 shares
of our common stock at a price of $1.00 per share. We also entered into a
registration rights agreement with Oceanus covering the shares issuable upon any
conversion of the note and the shares underlying the warrant. On September 1,
2004, we repaid the principal owing on the promissory note.
On August 31, 2004, we entered into a series of agreements with Laurus Master
Fund, Ltd. ("Laurus") whereby we issued to Laurus (i) a secured convertible term
note ("Note") in the principal amount of $5.5 million and (ii) a five-year
warrant ("Warrant") to purchase up to 1,600,000 shares of our common stock at a
price of $0.81 per share. Of the Note proceeds, $4,491,000 was deposited in a
restricted account as security for the total loan amount and for use by us to
make acquisitions as approved by Laurus; the outstanding principal balance of
$500,000 was repaid to Oceanus and the remainder of the loan proceeds was used
for operating needs. The principal amount of the Note carries an interest rate
of prime plus two percent, subject to adjustment, and we must make monthly
payments of at least $22,000, commencing November 1, 2004, toward the
outstanding non-restricted principal amount. The principal amount of the Note
and accrued interest thereon is convertible into shares of our common stock at a
price of $0.72 per share, subject to anti-dilution adjustments. We have granted
Laurus a right of first refusal with respect to any debt or equity financings,
and Laurus has the right to loan to us up to an additional $2.2 million, within
270 days of closing on the same terms and conditions as contained in the Laurus
agreements pertaining to the Note and Warrant.
Trinity's future capital requirements will depend on our ability to successfully
implement these initiatives and other factors, including our ability to maintain
our existing customer base and to expand our customer base into new geographic
markets, and overall financial market conditions in the United States and other
countries where we will seek prospective investors.
Our financial statements are prepared using accounting principles generally
accepted in the United States of America generally applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. Currently, we do not have
significant cash or other material assets, nor do we have an established source
of revenues sufficient to cover our operating costs and to allow us to continue
as a going concern. We do not currently possess a financial institution source
of financing and we cannot be certain that our existing sources of cash will be
adequate to meet our liquidity requirements. Based upon our cash balance at June
30, 2004, we will not be able to sustain operations for more than one month
without additional sources of financing.
71
EXHIBIT INDEX
EXHIBITS
2.1 Articles of Restatement of the Articles of Incorporation of Trinity
Learning Corporation dated February 25, 2003 (4)
2.2 Bylaws of Trinity Companies, Inc. (1)
10.1 Financial Advisory Agreement and Indemnification Letter entered into
as of July 31, 2002 between Trinity Companies, Inc. and European
American Securities, Inc. (1)
10.2 Debt Conversion Agreement dated as of August 8, 2002 between Trinity
Companies, Inc. and Global Marketing Associates, Inc. (1)
10.3 Form of Executive Employment Agreement. (1)
10.4 Advisory Agreement dated as of July 15, 2002 between Trinity
Companies, Inc. and Kings Peak Advisors, LLC. (1)
10.5 Agreement and Plan of Reorganization dated as of October 1, 2002,
among the Company, Competency Based Learning, Inc. and CBL Acquisition
Corp. (2)
10.6 Securities Purchase Agreement dated as of October 1, 2002 between CBL
Acquisition Corp. and Brian Kennedy, relating to shares of Competency
Based Learning, Pty. Ltd ACN 084 763 780. (2)
10.7 Securities Purchase Agreement dated as of October 1, 2002 by and among
CBL Acquisition Corp. and Brian Kennedy and Robert Stephen Scammell,
relating to shares of ACN 082 126 501 Pty. Ltd. (2)
10.8 Escrow Agreement dated as of October 1, 2002 by and among the Company,
CBL Acquisition Corp., Robert Stephen Scammell, Brian Patrick Kennedy
and Heritage Bank of Commerce. (2)
10.9 Convertible Promissory Note in the principal amount of $485,000 dated
October 1, 2002 issued by CBL Acquisition Corp. to Robert Stephen
Scammell. (2)
10.10 Convertible Promissory Note in the principal amount of $515,000 dated
October 1, 2002 issued by CBL Acquisition Corp. to Brian Kennedy. (2)
10.11 Promissory Note in the principal amount of US$198,079.12 dated October
1, 2002 issued by CBL Acquisition Corp. to Robert Stephen Scammell.
(2)
10.12 Promissory Note in the principal amount of AUD$36,100.80 dated October
1, 2002 issued by CBL Acquisition Corp. to Brian Kennedy. (2)
10.13 Employment Agreement dated as of September 1, 2002 between CBL
Acquisition Corp. and Robert Stephen Scammell. (2)
10.14 Employment Agreement dated as of September 1, 2002 between CBL
Acquisition Corp. and Brian Kennedy. (2)
10.15 Security Agreement dated as of October 1, 2002 by and between CBL
Acquisition Corp., Robert Stephen Scammell and Trinity Companies, Inc.
(2)
10.16 Form of Deed of Charge executed as of October 1, 2002 by Competency
Based Learning Pty Ltd. (2)
72
10.17 Form of Guarantee and Indemnity executed as of October 1, 2002 by
Competency Based Learning Pty Ltd. (2)
10.18 Form of Guarantee and Indemnity executed as of October 1, 2002 by ACN
082 126 501 Pty. Ltd. (2)
10.19 Form of Stock Purchase Agreement entered into as of October 1, 2002
between Trinity Companies, Inc., and each of its directors. (2)
10.20 Note and Warrant Purchase Agreement dated as of August 20, 2002
between Trinity Companies and various purchasers. (2)
10.21 Form of Convertible Promissory Note issued pursuant to the Note and
Warrant Purchase Agreement dated as of August 20, 2002. (2)
10.22 Form of Warrant issued pursuant to the Note and Warrant Purchase
Agreement dated as of August 20, 2002. (2)
10.23 Commercial Tenancy Agreement between Wedgetail Systems PTY LTD ACN
003356429 and Competency Based Learning PTY LTD CAN 084 763780 dated
December 12, 2000. (3)
10.24 Deed of Variation of Lease dated 1 July 2002 between Wedgetail Systems
PTY LTD ACN 003356429 and Competency Based Learning PTY LTD ACN 084
763780. (3)
10.25 Registration Agreement dated June 2003 between Trinity Learning
Corporation and certain of its shareholders. (5)
10.26 Securities Purchase Agreement date September 1, 2003 by and among
Trinity Learning Corporation and the shareholders of TouchVision, Inc.
(6)
10.27 Escrow Agreement dated September 1, 2003 by and among Trinity Learning
Corporation, Gregory L. Roche, Larry J. Mahar and Heritage Bank of
Commerce. (6)
10.28 Promissory Note dated September 1, 2003 from TouchVision, Inc. to
Trinity Learning Corporation. (6)
10.29 Employment Agreement dated September 1, 2003 between TouchVision, Inc.
and Gregory L. Roche. (6)
10.30 Employment Agreement dated September 1, 2003 between TouchVision, Inc.
and Larry J. Mahar. (6)
10.31 Securities Purchase Agreement date August 12, 2003 by and among
Trinity Learning Corporation and Barbara McPherson and Ildi Hayman.
(6)
10.32 Escrow Agreement dated August 12, 2003 by and among Trinity Learning
Corporation, Barbara McPherson, Ildi Hayman and Heritage Bank of
Commerce. (6)
10.33 Acquisition Agreement dated September 1, 2003 between Great Owl
Limited, a British Virgin Islands company, and Trinity Learning
Corporation. (6)
10.34 Escrow Agreement dated September 1, 2003 by and among Great Owl
Limited, a British Virgin Islands company, Trinity Learning
Corporation, and Reed Smith of London as escrow agent. (6)
10.35 Deed of Pledge dated September 1, 2003 by Trinity Learning Corporation
to Great Owl Limited, a British Virgin Islands company. (6)
10.36 Warranties of Seller under the Acquisition Agreement dated September
1, 2003 between Great Owl Limited, a British Virgin Islands company,
and Trinity Learning Corporation. (6)
73
10.37 Warranties of Purchaser under the Acquisition Agreement dated
September 1, 2003 between Great Owl Limited, a British Virgin Islands
company, and Trinity Learning Corporation. (6)
10.38 Convertible Promissory Note dated September 1, 2003, issued by Trinity
Learning Corporation to Great Owl Limited, a British Virgin Islands
company. (6)
10.39 Acquisition Agreement dated December 1, 2003 between Musca Holding
Limited, Trinity Learning Corporation and Danlas Limited. (7)
10.40 Escrow Agreement dated December 1, 2003 by and among Musca Holding
Limited, Trinity Learning Corporation, and Reed Smith of London as
escrow agent. (7)
10.41 Deed of Pledge dated December 1, 2003 by Trinity Learning Corporation,
a Utah corporation, to Musca Holding Limited, a British Virgin Islands
company. (7)
10.42 Warranties of Seller under the Acquisition Agreement dated December 1,
2003 between Musca Holding Limited, a British Virgin Islands company,
and Trinity Learning Corporation. (7)
10.43 Warranties of Purchaser under the Acquisition Agreement dated December
1, 2003 between Musca Holding Limited, a British Virgin Islands
company, and Trinity Learning Corporation. (7)
10.44 Convertible Promissory Note in the principal amount of $20,000.00
dated December 1, 2003, issued by Trinity Learning Corporation, a Utah
corporation, to Musca Holding Limited, a British Virgin Islands
company. (7)
10.45 Convertible Promissory Note in the principal amount of $10,000.00
dated December 1, 2003, issued by Trinity Learning Corporation, a Utah
corporation, to Musca Holding Limited, a British Virgin Islands
company. (7)
10.46 Convertible Promissory Note in the principal amount of $10,000.00
dated December 1, 2003, issued by Trinity Learning Corporation, a Utah
corporation, to Musca Holding Limited, a British Virgin Islands
company. (7)
10.47 Settlement and Release Agreement made as of December 17, 2003, by and
among Trinity Learning Corporation, CBL Global Corp., Competency Based
Learning, Inc., Competency Based Learning Pty. Ltd. ACN 084 763 780,
ACN 082 126 501 Pty Ltd, Stephen Scammell, and Brian Kennedy. (8)
10.48 Finder's Fee Agreement dated August 9, 2003 between Trinity Learning
Corporation and London Court Ltd. (9)
10.49 Placement Agent Agreement dated May 30, 2003 between the Company and
ACAP Financial, Inc. (9)
10.50 Financial Advisory Agreement dated May 29, 2003 between the Company
and Merriman Curhan Ford & Co. (9)
10.51 Finder's Fee Agreement dated April 11, 2003 between the Company and TN
Capital Equities, Ltd. (9)
10.52 Agreement dated December 17, 2003 between Trinity Learning Corporation
and Titan Aviation Ltd. (9)
10.53 Acquisition Agreement dated March 1, 2004 by and among Trinity
Learning Corporation and the Shareholders. (10)
10.54 Escrow Agreement dated March 1, 2004 by and among Trinity Learning
Corporation, the Shareholders, Jan-Olaf Willums as Shareholder
Representative and Heritage Bank of Commerce as escrow agent. (10)
74
10.55 Convertible Promissory Note in the principal amount of $500,000.00
dated March 1, 2004, issued by Trinity Learning Corporation to Inspire
AS. (10)
10.56 Amended Agreement dated March 1, 2004 between Trinity Learning
Corporation and Titan Aviation Ltd. (11)
10.57 Sublease Agreement dated July 22, 2003 between Trinity Learning
Corporation and Vargus Marketing Group, Inc. (11)
10.58 Amended Agreement dated January 1, 2004 between the Company and
European American Securities (12)
10.59 Agreement dated July 14, 2002 between the Company and Lynne Longmire.
(12)
10.60 Agreement dated December 12, 2002 between the Company and
Acquimmo-Salenko M&A. (12)
10.61 Agreement dated January 23, 2004 between the Company and Bathgate
Capital Partners, LLC. (12)
10.62 Agreement dated February 3, 2004 between the Company and Doherty &
Co., LLC. (12)
10.63 Agreement dated February 19, 2004 between the Company and Nordic
Enterprise BV. (12)
10.64 Agreement dated March 1, 2004 between the Company and VanCamp
Advisors, LLC. (12)
10.65 Agreement dated March 22, 2004 between the Company and Newforth
Partners, LLC. (12)
10.66 Agreement dated March 23, 2004 between the Company and GVC Financial
Services, LLC. (12)
10.67 Agreement and Plan of Merger dated February 22, 2004 between
ProsoftTraining and the Company. (16)
10.68 Termination Agreement between the Company and ProsoftTraining dated
July 22, 2004. (16)
10.69 Amended and Restated 2002 Stock Plan. (13) #
10.70 Securities Purchase Agreement dated July 29, 2004 between the Company
and Oceanus Value Fund, L.P. (16)
10.71 Senior Secured Promissory Note dated July 29, 2004 issued by the
Company to Oceanus Value Fund, L.P. (16)
10.72 Security Agreement dated July 29, 2004 between the Company and Oceanus
Value Fund, L.P. (16)
10.73 Registration Rights Agreement dated July 29, 2004 between the Company
and Oceanus Value Fund, L.P. (16)
10.74 Warrant dated July 29, 2004 to Oceanus Value Fund, L.P. (16)
10.75 Financial Advisory Agreement dated July 19, 2004 between the Company
and Merriman Curhan Ford & Co. (16)
10.76 Agreement dated July 8, 2004 between the Company and TN Capital
Equities, Ltd. (16)
10.77 Agreement dated July 23, 2004 between the Company and Bridgewater
Capital Corporation. (16)
10.78 Securities Purchase Agreement dated August 31, 2004 between Trinity
Learning Corporation and Laurus Master Fund, Ltd. (17)
75
10.79 Restricted Account Agreement dated August 31, 2004 between North Fork
Bank, Trinity Learning Corporation and Laurus Master Fund, Ltd. (17)
10.80 Restricted Account Letter Agreement dated August 31, 2004 between
Laurus Master Fund, Ltd. and Trinity Learning Corporation. (17)
10.81 Secured Convertible Term Note dated August 31, 2004 issued by Trinity
Learning Corporation to Laurus Master Fund, Ltd. (17)
10.82 Common Stock Purchase Warrant dated August 31, 2004 issued by Trinity
Learning Corporation to Laurus Master Fund, Ltd. (17)
10.83 Registration Rights Agreement dated August 31, 2004 between Trinity
Learning Corporation and Laurus Master Fund , Ltd. (17)
10.84 Stock Pledge Agreement dated August 31, 2004 among Laurus Master Fund,
Ltd., Trinity Learning Corporation and TouchVision, Inc. (17)
10.85 Master Security Agreement dated August 31, 2004 among Laurus Master
Fund, Ltd., Trinity Learning Corporation and TouchVision, Inc. (17)
10.86 Subsidiary Guarantee dated August 31, 2004 among Laurus Master Fund,
Ltd., Trinity Learning Corporation and TouchVision, Inc. (17)
10.87 Agreement dated August 11, 2004 between the Company and Resource
Works, Inc.*
10.88 Agreement dated October 1, 2004 between the Company and MCC Financial
Services Advisors, Inc.*
10.89 Agreement dated October 12, 2004 between the Company and Hyacinth
Resources, Inc.*
16.1 Letter provided by Bierwolf, Nilson & Associates. (14)
16.2 Letter provided by Chisholm, Bierwolf & Nilson, LLC. (15)
21.1 Subsidiaries of Trinity Learning Corporation. *
23.1 Consent of Independent Public Accountant *
31.1 Certification of Chief Executive Officer. *
31.2 Certification of Chief Financial Officer. *
32.1 Certification of Chief Executive Officer. *
32.2 Certification of Chief Financial Officer, *
* Filed herewith.
# Denotes a management contract or compensatory plan.
(1) Incorporated by reference from the quarterly report on Form 10-QSB
filed by the registrant on August 21, 2002.
(2) Incorporated by reference from the current report on Form 8-K filed by
the registrant on October 16, 2002.
76
(3) Incorporated by reference from the annual report on Form 10-KSB filed
by the registrant on January 10, 2003.
(4) Incorporated by reference from the quarterly report on Form 10-QSB
filed by the registrant on May 20, 2003.
(5) Incorporated by reference from the current report on Form 8-K filed by
the registrant on June 19, 2003.
(6) Incorporated by reference from a current report on Form 8-K filed by
the registrant on September 16, 2003.
(7) Incorporated by reference from a current report on Form 8-K filed by
the registrant on December 17, 2003.
(8) Incorporated by reference from a current report on Form 8-K filed by
the registrant on January 6, 2004.
(9) Incorporated by reference from the quarterly report on Form 10-QSB
filed by the registrant on February 23, 2004.
(10) Incorporated by reference from a current report on Form 8-K filed by
the registrant on March 2, 2004.
(11) Incorporated by reference from the quarterly report on Form 10-QSB
filed by the registrant on May 17, 2004.
(12) Incorporated by reference from the quarterly report on Form 10-QSB/A
filed by the registrant on June 14, 2004.
(13) Incorporated by reference from the Registration Statement on Form S-8
filed by the registrant on February 6, 2004.
(14) Incorporated by reference from the current report on Form 8-K filed by
the registrant on February 24, 2004.
(15) Incorporated by reference from the current report on Form 8-K/A filed
by the registrant on July 26, 2004.
(16) Incorporated by reference from the Registration Statement on Form SB-2
filed by the registrant on August 13, 2004.
(17) Incorporated by reference from the current report on Form 8-K filed by
the registrant on September 7, 2004.
(18) Incorporated by reference from the current report on Form 8-K filed by
the registrant on October 18, 2004.
77
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRINITY LEARNING CORPORATION
December 2, 2004 By: /S/ DOUGLAS D. COLE
-------------------
Douglas D. Cole
Chief Executive Officer
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 and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Douglas D. Cole Chief Executive Office December 2, 2004
-------------------------- (Principal Executive Officer)
Douglas Cole and Director
/s/ Edward Patrick Mooney President and Director December 2, 2004
--------------------------
Edward Patrick Mooney
/s/ Christine R. Larson Chief Financial Officer December 2, 2004
--------------------------
Christine R. Larson
/s/ Cynthia Jorgensen Corporate Controller December 2, 2004
--------------------------
Cynthia Jorgensen
/s/ William D. Jobe Director December 2, 2004
--------------------------
William D. Jobe
/s/ Richard G. Thau Director December 2, 2004
--------------------------
Richard G. Thau
/s/ Arthur Ronald Kidson Director December 2, 2004
--------------------------
Arthur Ronald Kidson
/s/ Martin Steynberg Director December 2, 2004
--------------------------
Martin Steynberg
Supplemental Information to Be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act By Registrants Which Have Not registered
Securities Pursuant to Section 12 of the Act
No annual report to stockholders or proxy materials were disseminated to
the stockholders of Trinity Learning Corporation during the fiscal year ended
June 30, 2004.
78