The information in this prospectus is not complete and may be changed. The
selling shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
TRINITY LEARNING CORPORATION
[GRAPHIC OMITTED: TRINITY LOGO]
36,572,997 Shares Common Stock
This prospectus relates to the offer and sale of up to 36,572,999 shares of
common stock that may be sold from time to time by the persons listed under the
caption "Selling Security Holders," beginning on page 44. These shares include
8,800,000 shares that are issuable pursuant to the terms of a convertible
promissory note and 1,600,000 shares issuable upon the exercise of warrants,
both issued to Laurus Master Fund, Ltd. ("Laurus").
Quotations for our common stock are reported on the National Association of
Securities Dealers, Inc. OTC Bulletin Board under the symbol "TTYL." On December
14, 2004, the closing bid price for our common stock was $0.90 per share.
With the exception of proceeds from the exercise of warrants by Laurus and
any benefit accruing to us from the conversion of the promissory note held by
Laurus, we will not receive any of the proceeds from the sale of common stock by
the selling security holders. We will pay all expenses in connection with this
offering, and the selling security holders will only be responsible for paying
any sales or brokerage commissions or discounts with respect to sales of their
shares.
The selling security holders may sell shares in the over-the-counter market
or on any stock exchange on which our common stock may be listed at the time of
sale. They may also sell shares in block transactions or private transactions or
otherwise, through brokers or dealers. These sales will be made either at market
prices prevailing at the time of sale or at negotiated prices. Brokers or
dealers may act as agents for the selling stockholders or may purchase any of
the shares as principal. If brokers or dealers purchase shares as principal,
they may sell such shares at market prices prevailing at the time of sale or at
negotiated prices. In lieu of making sales through the use of this prospectus,
the selling stockholders may also make sales of the shares covered by this
prospectus pursuant to Rule 144 or Rule 144A under the Securities Act.
For a discussion of certain considerations associated with the purchase of
the common stock offered hereby, see "Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is January 14, 2005.
Unless the context otherwise requires, references in this prospectus to
"Trinity Learning," "the Company," "we," "us," "our" or "ours" refer to Trinity
Learning Corporation.
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
TABLE OF CONTENTS
Prospectus Summary.............................................................3
Risk Factors...................................................................5
Forward-Looking Statements....................................................10
Use of Proceeds...............................................................11
Dilution......................................................................11
Description of Business.......................................................11
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................23
Directors and Executive Officers..............................................34
Executive Compensation........................................................36
Security Ownership of Certain Beneficial Owners and Management................37
Certain Relationships and Related Transactions................................39
Legal Proceedings.............................................................41
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................41
Description of Securities.....................................................42
Market for Common Shares and Related Stockholder Matters......................43
Selling Security Holders......................................................44
Plan of Distribution..........................................................49
Experts and Counsel...........................................................50
Additional Information........................................................50
Index to Financial Statements.................................................51
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully, including "Risk Factors" and
our financial statements and the notes to those financial statements included
elsewhere in this prospectus.
Our Company
Trinity Learning Corporation, a publicly held Utah corporation, is a global
learning company specializing in technology-enabled training, education, and
certification services for major customers in multiple global industries. We are
achieving market presence in geographic markets worldwide by acquiring and
integrating companies providing innovative workplace learning solutions in
targeted regions and industry segments. During 2003 and 2004, we acquired
control of three companies located in the United States, Norway and Australia.
We also acquired operating interests in two companies located in South Africa.
Each of these companies serves unique segments of the global learning market.
Trinity Learning intends to increase market penetration and the breadth and
depth of its products and services through additional acquisitions, licensing,
strategic alliances, internal business development, and the expansion of sales
offices around the world.
Our company's executive offices are located at 1831 Second Street,
Berkeley, California, 94710. Our telephone number is (510) 540-9300.
Corporate Organization
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, it changed its 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. Immediately prior to the recapitalization, we had
13,419,774 shares of common stock outstanding. Following the recapitalization
and the cancellation of 108,226 shares of common stock beneficially owned by
members of management, there were 13,419,774 shares of common stock outstanding.
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.
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.
3
The Offering
The selling security holders will sell 36,572,997 shares of our common
stock. We currently have 31,465,143 shares of common stock issued and
outstanding, and a maximum aggregate of 10,400,000 shares of common stock are
issuable pursuant to the terms of the convertible note and warrants issued to
Laurus Master Fund Ltd. Assuming issuance of all of these shares of stock, we
will have the same number of shares of common stock issued and outstanding
following completion of this offering. We will not receive any proceeds from the
sales of common stock by the selling security holders.
Summary Selected Financial Data
The following selected financial information should be read in conjunction
with our consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this prospectus. The consolidated
statements of operations data for the fiscal year ended June 30, 2004 and the
transition period ended June 30, 2003, along with the consolidated balance sheet
data at June 30, 2004 and 2003, are derived from audited consolidated financial
statements included elsewhere in this prospectus. The consolidated statements of
operations data for the three months ended September 30, 2004 and September 30,
2003 and the consolidated balance sheet data at September 30, 2004 and September
30, 2004 are derived from unaudited consolidated financial statements included
in this prospectus.
Transition
Three Months Ended Year Ended Period Ended
September 30 June 30 June 30
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Consolidated Statements of Operations Data
------------------------------------------
Revenue $ 902,854 $ 253,993 $ 2,590,091 $ 167,790
Loss from Operations $ (1,001,064) $ (921,220) $ (5,075,960) $ (1,990,050)
Net Loss $ (1,861,586) $ (945,910) $ (11,462,063) $ (2,071,984)
Net Loss per Common Share Basic / Diluted $ (0.06) $ (0.06) $ (0.50) $ (0.26)
Consolidated Balance Sheet Data
-------------------------------
Total Assets $ 10,756,658 $ 5,688,025 $ 6,253,140 $ 1,342,344
Short-term Debt $ 3,175,119 $ 3,004,236 $ 2,880,070 $ 2,873,280
Long-term Debt $ 3,958,923 $ 3,437,456 $ 111,829 $ -
Stockholders' Equity $ 849,133 $ 1,250,569 $ 444,520 $ (1,530,936)
4
RISK FACTORS
Our future operating results are highly uncertain. Before deciding to
invest in our company or to maintain or increase your investment, you should
carefully consider the risks described below, in addition to the other
information contained in this prospectus. The risks and uncertainties described
below are not the only ones that we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also affect our
business and results of operations. If any of these risks actually occur, our
business, financial condition or results of operations could be seriously
harmed. In that event, the market price for our common stock could decline and
you may lose all or part of your investment.
Risks Related to Our Business and Industry
Additional capital is necessary to sustain and grow our business.
During the development stage of our operations, we expect that operating
revenues generated will be insufficient to cover expenses. 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.
If we fail to obtain additional financing and improve our results of
operations, we will be unable to meet our obligations as they become due,
raising 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 its obligations as they become due. That would raise substantial
doubt about our ability to continue as a going concern.
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 have experienced 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 our
financial condition or results of operations.
5
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 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. 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, 2003, BDO Spencer Steward
identified inadequate control over activities and reporting related to Trinity
Learning's equity investment in two South African companies. In light of these
findings, Trinity Learning is undertaking a review of its disclosure controls ad
procedures and staffing of its corporate accounting department.
We are effectively controlled by our officers and directors.
Our directors and executive officers beneficially own a significant
percentage of our 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.
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. The failure of this market to
develop, or a delay in the development of this market -- whether due to
technological, competitive or other reasons -- would severely limit the growth
of our business and adversely affect our financial performance.
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.
6
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 the 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 its 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 adequately
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 its
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 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
7
providers could affect our operations in the future and could limit the ability
of various of our subsidiaries to obtain authorization to operate in certain
jurisdictions. If we or various of our subsidiaries had to comply with, or were
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.
Material weaknesses in the design and operation of our internal controls
could negatively impact our business and operations.
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", including (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.
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. There can be no
assurances that Trinity Learning will successfully address and remedy these
material weaknesses in a timely manner, if at all. Failure to do so could have a
material negative impact on our business and operations
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 its 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.
8
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 international operations, this failure could have a
material adverse effect on our operating results and stock price.
Risks Related to the Offering
Because our common stock is traded on the OTC Bulletin Board, your ability
to sell your shares in the secondary trading market may be limited.
Our common stock currently is traded on the over-the-counter market on the
OTC Bulletin Board. The OTC Bulletin Board is an inter-dealer, over-the-counter
market that provides significantly less liquidity than the NASDAQ Stock Market
or national or regional exchanges. Securities traded on the OTC Bulletin Board
are usually thinly traded, highly volatile, have fewer market makers and are not
analysts. Consequently, the liquidity of our common stock is impaired, not only
in the number of shares that are bought and sold, but also through delays in the
timing of transactions, and lack of coverage by security analysts and the news
media. As a result, prices for shares of our common stock may be lower than
might otherwise prevail if our common stock was quoted on the NASDAQ Stock
Market or traded on a national securities exchange, like The New York Stock
Exchange or American Stock Exchange.
Because our common stock is a "penny stock," you may have difficulty
selling them in the secondary trading market.
Federal regulations under the Securities Exchange Act of 1934 regulate the
trading of so-called "penny stocks," which are generally defined as any security
not listed on a national securities exchange or NASDAQ, priced at less than
$5.00 per share and offered by an issuer with limited net tangible assets and
revenues. Since our common stock currently trades on the OTC Bulletin Board at
less than $5.00 per share, our common stock is a "penny stock" and may not be
traded unless a disclosure schedule explaining the penny stock market and the
risks associated therewith is delivered to a potential purchaser prior to any
trade.
In addition, because our common stock is not listed on NASDAQ or any
national securities exchange and currently trades at less than $5.00 per share,
trading in our common stock is subject to Rule 15g-9 under the Exchange Act.
Under this rule, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include:
o obtaining financial and investment information from the investor;
o obtaining a written suitability questionnaire and purchase agreement signed
by the investor; and
o providing the investor a written identification of the shares being offered
and the quantity of the shares.
If these penny stock rules are not followed by the broker-dealer, the investor
has no obligation to purchase the shares. The application of these comprehensive
rules will make it more difficult for broker-dealers to sell our common stock
and our stockholders, therefore, may have difficulty in selling their shares in
the secondary trading market.
We have not paid dividends to our stockholders in the past and we do not
anticipate paying dividends in the near future.
We have not declared or paid cash dividends on our common stock. We intend
to retain all future earnings, if any, to fund the operation of our business,
and therefore we do not anticipate paying dividends on our common stock in the
future.
There are a large number of shares of our common stock underlying our
outstanding warrants, options and convertible notes, all of which may be
available for future sale, which sale may depress the market prices of our
common stock.
9
The issuance of shares of common stock upon the exercise of our outstanding
options and warrants will result in dilution to the interests of our
shareholders, and may have an adverse effect on the trading price and market for
our common stock. As of November 30, 2004, we had options and warrants
outstanding which may be exercised to acquire 27,554,950 shares of our common
stock at various times. The future sale of these shares may adversely affect the
market price of our common stock. Shares issued upon exercise of our outstanding
warrants and options will also cause immediate and substantial dilution to our
existing shareholders. In addition, as long as these warrants and options remain
outstanding, our ability to obtain additional capital through the sale of our
securities might be adversely affected.
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 we have relied, we
may become subject to significant fines and penalties imposed by the SEC and
state securities agencies.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases,
forward-looking statements can be identified by terminology, for instance the
terms "may," "will," "should," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue," the negative of these terms or
other comparable terminology. In addition, these forward-looking statements
include, but are not limited to, statements regarding the following:
o anticipated operating results and sources of future revenue;
o growth;
o adequacy of our financial resources;
o development of new products and markets;
o obtaining and maintaining regulatory approval and changes in
regulations;
o competitive pressures;
o commercial acceptance of new products;
o changing economic conditions;
o expectations regarding competition from other companies; and
10
o our ability to manufacture and distribute our products.
Potential investors in our company are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Actual
results will differ and could differ materially from these forward-looking
statements. The factors that could cause actual results to differ materially
from those in the forward-looking statements include the following: (1) industry
conditions and competition, (2) the rate of market acceptance of our products,
(3) our ability to integrate acquired companies, (4) operational risks and
insurance, (5) risks associated with operating in foreign jurisdictions, (6)
product liabilities which may arise in the future which are not covered by
insurance or indemnity, (7) the impact of current and future laws and government
regulation, as well as repeal or modification of same, (8) the ability to retain
key personnel, (9) renegotiation, nullification or breach of contracts with
distributors, suppliers or other parties and (10) the relationship with our
suppliers. In light of these risks and uncertainties, there can be no assurance
that the matters referred to in the forward-looking statements contained in this
prospectus will in fact occur.
USE OF PROCEEDS
We will not receive any funds obtained by the selling security holders from
their re-offer and sale of the common stock covered by this prospectus. However,
we will receive the sale price of any common stock we sell to Laurus Master Fund
Ltd. upon exercise of their warrants. We expect to use the proceeds received
from the exercise of the warrants, if any, for general working capital purposes.
DILUTION
The shares offered for sale by the selling shareholders, assuming issuance
of the shares of common stock issuable pursuant to the terms of the convertible
note and warrants held by Laurus Master Fund Ltd., are or will already be
outstanding and, therefore, do not and will not contribute to dilution.
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;
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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. We continue to
evaluate potential acquisitions and to seek to develop strategic initiative
partnerships, such as our recently-announced EducacionAmericas, which will
develop learning products and services geared specifically to the Hispanic
market in North America.
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 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:
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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.
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
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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, 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.
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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 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.
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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 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.
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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.
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.
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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.
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
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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 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.
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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 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 (or $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:
20
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:
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.
21
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.
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.
22
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 approximately $1,000,000 million 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.
Properties and Facilities
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 each case from unaffiliated third parties.
These facilities are adequate for our needs at the present time and foreseeable
future
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
23
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 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
Three Months Ended September 30, 2004 Compared to September 30,2003
Our sales revenues for first quarter 2005 were $902,854, as compared to
$253,993 for the first quarter 2004. This increase in revenues is due to the
acquisitions in September 2003 of TouchVision and RMT and our acquisition of
VILPAS in March 2004. The three month period in 2003 comprises three months
revenue of CBL and one month each of RMT and TouchVision.
Costs of sales, which consist of labor and hardware costs, and other
incidental expenses, was $180,905 for the first quarter 2005 as compared to
$32,497 for the first quarter 2004, resulting in gross profit of $721,949 for
the first quarter 2005, as compared to $221,496 for the first quarter 2004.
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 March 2004.
24
Operating expenses for first quarter 2005 were $1,723,013 as compared to
$1,142,716 for the first quarter 2004. This increase was due primarily to a
significant increase in selling, general and administrative expenses which
increased $219,568 from $269,594 for the first quarter 2004. This increase is
largely due to the addition of the three new subsidiaries. Salaries and benefits
expense also increased $321,583 due to the addition of the new subsidiaries and
additional finance and management staff hired in Trinity corporate operations.
Other Expense of $885,398 was $860,708 greater than that for the first
quarter 2004. This increase is primarily due to losses in associated companies
accounted for on an equity basis of $648,501 and an increase in interest expense
of $206,415. Losses in associated companies comprise Riverbend ($225,255) and
IRCA ($423,246). Included in interest expense of $229,703 is $199,888
attributable to amortization of discounts on the Laurus and Oceanus notes of
$137,060 and $62,828, respectfully.
We reported net loss available for common stockholders of $1,861,586, or
$0.06 per share for the first quarter 2005, compared with a net loss of $945,910
or $0.06 per share for first quarter 2004.
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 September 30, 2004. The business results for
VILPAS are included for the period March 1, 2004 through September 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 July 1, 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.
(Pro forma)
---------------
Three Months
Ended
September 30,
2003
---------------
Revenue $ 1,193,198
===============
Gross Profit $ 919,957
===============
Operating Loss $ (706,227)
===============
Net Loss $ (726,300)
===============
On a pro forma basis, sales revenue of $902,854 for the three months ended
September 30, 2004 was $290,344 less than that for the three months ended
September 30, 2003. On a pro forma basis the decline in revenue is primarily
attributable to TouchVision where revenue declined $220,572 when compared to the
prior year. On a pro forma basis, gross profit had similar trends.
On a pro forma basis, operating loss of $1,001,064 for the first three
months ended September 30, 2004 was $294,837 greater than that for the three
months ended September 30, 2003. The increase is primarily a result of losses
sustained in TouchVision and increased operating costs in Trinity corporate
operations because of staff additions and increased legal fees.
On a pro forma basis, Other Expense of $885,398 for the three months ended
September 30, 2004 is $866,325 greater than that in the prior year primarily
because of the $647,506 increase in Equity Losses in Associated Companies and
amortization of the note discounts of $199,888 described above.
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
25
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 first quarter ended September 30, 2004:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
United States $ 384,579 $ (937,139) $ 34,334 $ - $ 125,814 $ 914,815 $ 2,183 $ 8,458,218 $ 257,261
Europe 362,464 (59,883) 11,625 - 205,287 564,073 - 1,761,516 514,298
Australia 155,811 (4,042) 2,003 - 60,168 376,517 31,319 536,924 77,574
South Africa - - - (648,501) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 902,854 $(1,001,064) $ 47,962 $ (648,501) $ 391,269 $ 1,855,405 $ 33,502 $10,756,658 $ 849,133
========== =========== =========== =========== =========== =========== =========== =========== ===========
As of and for the first quarter ended September 30, 2003:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
United States $ 109,993 $ (696,107) $ 5,852 $ - $ 132,484 $ - $ 8,654 $ 4,080,652 $ 1,485,167
Europe - - - - - - - - -
Australia 144,000 (225,113) 82,986 - 166,491 - 78,991 1,607,373 (234,598)
South Africa - - - (995) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 253,993 $ (921,220) $ 88,838 $ (995) $ 298,975 $ - $ 87,645 $ 5,688,025 $ 1,250,569
========== =========== =========== =========== =========== =========== =========== =========== ===========
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.
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
26
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.
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 expenses 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.
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.
27
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 ($671,038) 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 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.
28
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)
=========== =========== =========== =========== =========== =========== =========== =========== ===========
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 September 30, 2004 was $24,512,562 as
compared to $22,650,976 as of June 30, 2004.
At September 30, 2004, we had a cash balance of $846,860 compared to
$892,739 at June 30, 2004. Net cash used by operating activities during the
first quarter 2005 was $833,475, attributable primarily to our loss from
operations of $1,861,586. Net cash generated by financing activities was
$5,311,000 for the first quarter 2005 representing the net of borrowings and
repayments under short and long-term notes of $5,570,000 less fees associated
29
with debt issuance of $259,000. Of these funds, an aggregate of $70,000 was
advanced to our consolidated subsidiaries and $4,491,000 was deposited in a bank
in support of future acquisitions.
Accounts receivable increased from $243,164 at June 30, 2004 to $391,269 at
September 30, 2004. This increase is due to the timing of billings to and
collections from our customers.
Accounts payable increased from $814,651 at June 30, 2004 to $880,359 at
September 30, 2004. Accrued expenses decreased from $721,192 at June 30, 2004 to
$614,937 at September 30, 2004. These changes 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
computer equipment to accommodate our growth. Capital expenditures, excluding
purchases financed through capital lease, during the first quarter 2005 and
2004, were $0 and $10,635, respectively.
We continued to seek equity and debt financing in first quarter 2005 to
support our growth and to finance recent and proposed acquisitions. In this
regard, 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 in the principal amount of $5.5 million (the "Note") and
(ii) a five-year warrant to purchase up to 1,600,000 shares of our common stock
at a price of $0.81 per share. The Note is secured by all of our assets and the
assets of our U.S. subsidiary, TouchVision, Inc., and by a pledge of our stock
in TouchVision, Inc. Of the Note proceeds, $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; however,
funds may be released for operations at a rate of 25% of the dollar volume of
our stock for a twenty day period, and the outstanding principal balance of
$500,000 was repaid to Oceanus. The principal amount of the Note carries an
interest rate of prime plus two percent, subject to adjustment, and we must make
monthly principal payments of at least $22,059, 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,
provided that certain criteria are met regarding the trading price and volume of
our common stock. Any amount not converted to common stock is paid in cash to
Laurus at the rate of 102% of the monthly principal amount. Laurus has the
option to convert the entire principal amount of the Note, together with
interest thereon, into shares of our common stock, provided that such conversion
does not result in Laurus beneficially owning more than 4.99% of our outstanding
shares of common stock without first providing us with advance notice. We agreed
to register the shares of our common stock into which the Note and the warrant
are convertible, by September 30, 2004 and to cause such registration statement
to become effective by December 14, 2004. Failure to meet these deadlines
requires us to pay Laurus a penalty of 1.5% of the principal amount of the Note
($82,500) for each 30-day period during which such failure continues.
To meet our present and future liquidity requirements, we are continuing to
seek additional funding through private placements, and ongoing business
operations. To this end, we anticipate closing a $1.5 million private offering
of convertible debt in late December 2004 or early January 2005, the proceeds of
which will be added to our working capital.. 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
30
adequate to meet our liquidity requirements. Based upon our cash balance at
December 1, 2004 we will not be able to sustain operations for more than two
months 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 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 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.
31
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
32
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 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
33
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.
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.
DIRECTORS AND EXECUTIVE OFFICERS
Biographical Information
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
Edward P. Mooney 44 President and Director
Richard J. Marino 56 Chief Operating Officer
Christine R. Larson 50 Chief Financial Officer
William D. Jobe 65 Director
Richard G. Thau 57 Director
Arthur Ronald Kidson 61 Director
Martin Steynberg 42 Director
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
Corporation since January 2002 and has served as our 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.
34
Edward P. Mooney. Mr. Mooney has been a director of Trinity Learning
Corporation since January 2002 and has served as our 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
Corporation'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
us, Mr. Marino was most recently vice-president and publisher of Dowden Health
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 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 our 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
Corporation 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
Corporation 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
Corporation 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
Corporation 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.
35
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. 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.
36
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.
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.
37
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 10, 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 31,465,143 outstanding shares of
common stock as of November 30, 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 2,126,987 333,733 2,460,720 7.74%
Chief Executive Officer and (4) (4)(5)
Director
Edward P. Mooney 2,046,987 333,733 2,380,720 7.49%
President and Director (4) (4)(5)
William Jobe 200,000 100,668 300,668 *
6654 Bradbury Court
Fort Worth, TX 76132
Director
Arthur R. Kidson - 185,452 185,452 *
2 Epsom Road (6)
Stirling, East London
Republic of South Africa
Director
Martin Steynberg - 1,626,952 1,626,952 4.92%
P.O Box 10326 (3)
George
Republic of South Africa
Director
38
Number of Total Percent of Class
Name and Address of Number of Options & Beneficial Beneficially
Beneficial Owner Shares Owned Warrants (1) Ownership (2) Owned
------------------- ------------ ------------ ------------- ----------------
Richard Thau - 111,096 111,096 *
2468 Sharon Oaks Drive
Menlo Park, CA 94025
Director
Richard Marino - 127,025 127,025 *
Chief Operating Officer (5)
Christine R. Larson - 287,706 287,706 *
Chief Financial Officer (5)
Steven Hanson 2,080,000 3,000,000 5,080,000 14.74%
1319 NW 86th Street
Vancouver, WA 98665
5% Beneficial Owner
Theodore Swindells 3,840,970 1,275,000 5,115,970 15.63%
11400 Southeast 8th Street (4) (4)
Bellevue, WA 98004
5% Beneficial Owner
Luc Verelst 3,675,138 4,000,000 7,675,138 21.64%
Verbier, Switzerland 1936
5% Beneficial Owner
Granite Creek Partners, LLC 1,622,910 - 1,622,910 5.16%
1338 South Foothill Drive (4)
Salt Lake City, UT 84108
5% Beneficial Owner
All executive officers and directors 4,373,974 3,106,365 7,480,339 21.64%
of the Company as a group (8 persons) (3)(4) (3)(4)
* 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
December 10, 2004.
(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
November 30, 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.
39
(5) Includes that portion of options that have vested or will vest within 60
days from December 10, 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.
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 Mr. 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 as part of the total conversion of this financing to 4,520,069
shares of our common stock.
40
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 (or $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.
LEGAL PROCEEDINGS
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 13, 2004, we appointed Chisholm, Bierwolf & Nilson, LLC to
serve as our independent auditor for the fiscal year ended June 30, 2005. The
decision to change auditors was approved by our Audit Committee. Chisholm,
Bierwolf & Nilson, LLC and its predecessor entity, Bierwolf, Nilson &
Associates, had audited our financial statements for the transition period ended
June 30, 2003 and the year ended September 30, 2002.
On December 6, 2004, we notified BDO Spencer Steward ("BDO") of our
decision to dismiss BDO as our independent auditors. BDO audited the financial
statements for the years ended June 30, 2003 and 2004 for IRCA (Proprietary)
Limited ("IRCA"), a South African company, in which we, through our wholly owned
41
subsidiary, Danlas Limited, acquired 51% of the issued and outstanding shares in
the fiscal year ended June 30, 2004. We understand that BDO will continue to
serve as IRCA's independent auditor.
The decision to change auditors was approved by our Audit Committee. BDO
audited our financials statements for the fiscal year ended June 30, 2004. BDO's
auditor's report for the year ended June 30, 2004 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 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." Except
as so noted, BDO's report for this period did not contain an adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles.
In connection with the audit of the period ended June 30, 2004, there were
no disagreements or reportable events between us and BDO on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of BDO, would
have caused them to make a reference to the subject matter of the disagreements
or reportable events in connection with their reports. In the course of
performing its audit, BDO identified deficiencies that existed in the design or
operation of our internal controls that it considered to be "material
weaknesses." 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 filed amended quarterly reports for the first three
fiscal quarters of fiscal 2004 and is undertaking a review of its disclosure,
financial information, internal controls and procedures and organization and
staffing of its corporate accounting department.
Effective July 8, 2004, we engaged BDO as our principal independent
auditors with respect to our fiscal year ending June 30, 2004. The decision to
change auditors was approved by our board of directors. Prior to their
appointment, BDO 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 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 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 July 8, 2004, we also notified Chisholm, Bierwolf & Nilson, LLC, ("CBN")
of our decision to dismiss CBN as our independent auditors. 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.
42
On February 19, 2004, our independent auditors, BNA, informed us that on
February 10, 2004, that 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 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.
DESCRIPTION OF SECURITIES
We are authorized to issue 100,000,000 shares of common stock, no par
value, and 10,000,000 shares of undesignated preferred stock, no par value per
share. As of December 10, 2004, there were 31,465,143 shares of common stock
outstanding, which were held of record by 622 stockholders, and there were no
shares of preferred stock outstanding.
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Holders of common stock do not have
cumulative voting rights, and, therefore, holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors. Subject to preferences that may be applicable to any then-outstanding
preferred stock, holders of common stock are entitled to receive such dividends
as may be declared from time to time by our board of directors out of funds
legally available therefore. We have never declared or paid cash dividends on
our capital stock, expect to retain future earnings, if any, for use in the
operation and expansion of its business, and do not anticipate paying any cash
dividends in the foreseeable future.
In the event of liquidation, dissolution or winding up of our company,
holders of common stock are entitled to share ratably in all assets legally
available for distribution after payment of all debts and other liabilities and
subject to the prior rights of the holders of any preferred stock then
outstanding. Holders of common stock have no preemptive or other subscription or
conversion rights, and there are no redemption or sinking fund provisions
applicable to the common stock.
Our Amended and Restated Articles of Incorporation authorize 10,000,000
shares of undesignated preferred stock. Our board of directors will have the
authority, without any further vote or action by our stockholders, to issue from
time to time the preferred stock in one or more series and to fix the price,
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
a series or the designation of such series. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could decrease the amount of earnings and assets
available for distribution to holders of common stock or adversely affect the
rights and powers, including voting rights, of the holders of common stock, and
may have the effect of delaying, deferring or preventing a change in control of
our company without further action by the stockholders. We have no current plans
to issue any shares of preferred stock.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
At December 10, 2004, we had approximately 31,465,143 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 December 10, 2004.
43
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 for the
periods indicated. 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
July 1, 2004 to September 30, 2004 $ 1.65 $ 0.85
Dividend Policy
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 be Weighted Average Number of Securities
Issued upon Exercise of Exercise Price of Remaining Available for
Plan Name Outstanding Options Outstanding Options Future Issuance
--------- ------------------- ------------------- ---------------
Equity compensation plan 5,670,000 $0.43 1,784,590
approved by security holders
SELLING SECURITY HOLDERS
The following table details the name of each selling security holder, the
number of shares owned by the selling security holder, and the number of shares
that may be offered for resale under this prospectus.
44
Except in the case of Laurus Master Fund, Ltd. ("Laurus," see below),
because each selling security holder may offer all, some, or none of its shares,
and because there are currently no agreements, arrangements, or understandings
with respect to the sale of any of the shares, no definitive estimate as to the
number of shares that will be held by each selling security holder after the
offering can be provided. The following table has been prepared assuming that
all shares offered under this prospectus will be sold to parties unaffiliated
with the selling security holders. Except as indicated, none of the selling
security holders has had a significant relationship with us within the past
three years, other than as a result of the ownership of our shares or other
securities. Unless otherwise indicated, the selling security holders have sole
voting and investment power over their respective shares. The term "selling
security holder" or "selling security holders" includes the stockholders listed
below and their transferees, assignees, pledgees, donees or other successors.
Each selling stockholder reserves the right to accept or reject, in whole or in
part, any proposed sale of shares. Each selling stockholder also may offer and
sell less than the number of shares indicated. No selling stockholder is making
any representation that any shares covered by this prospectus will or will not
be offered for sale.
Most of the selling security holders acquired their shares in various
private placements that we have conducted over the course of the past two years.
Certain of our affiliates, identified below, acquired many of their shares
pursuant to various agreements with us (see "Certain Relationships and Related
Transactions"), and many of these shares were made subject to that certain
registration agreement (the "Registration Agreement") entered into in June 2003
between such parties and each of us, Standard Registrar and Transfer Company and
the National Association of Securities Dealers, Inc., which provided that such
shares would not be publicly sold unless and until such time as an effective
registration statement covering such securities is on file with the United
States Securities and Exchange Commission.
On August 31, 2004, we completed a private placement to Laurus of a
convertible term note ("Note") in the principal amount of $5.5 million and a
warrant ("Warrant") to purchase up to $1,600,000 shares of our common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The Note provides for monthly
payments of interest at the prime rate (as published in The Wall Street
Journal), plus 2%, which is subject to reduction if the market price of our
common stock exceeds certain designated thresholds. The Note also provides for
monthly amortization, commencing on November 1, 2004, of $22,058.82 per month,
with the balance payable on the maturity date.
The principal and unpaid interest on the Note are convertible into shares
of our common stock at a price of $0.72 per share, which price is subject to
anti-dilution adjustments, and Laurus has the option to receive shares of our
common stock in lieu of debt service payments at such price, subject to certain
adjustments. The Warrant entitles the holder thereof to purchase, at any time
through August 31, 2009, up to 1,600,000 shares of our common stock at a price
of $0.81 per share, subject to anti-dilution adjustments. The terms of both the
Note and the Warrant provide that Laurus may not exercise the Warrant or convert
the Note to the extent such exercise or conversion would result in Laurus
beneficially owning more than 4.99% of our outstanding common stock, without
first providing us with advance notice. The calculation below of the shares
beneficially owned by Laurus does not take into account this limitation on more
than 4.99% beneficially ownership.
Number of Shares Number of Percentage
Owned Prior to Number of Shares Shares Owned Owned After
Selling Security Holder Offering Offered After Offering Offering
------------------------------------------------------------------------------------------------------------------------
Adams, Laramie 29,413 29,413 0
Adams, Michael 29,413 29,413 0
Agnew, Devin (11) 1,548 1,548 0
Agnew, Bryce (11) 41,287 41,287 0
Anderson, John 30,000 30,000 0
Avis, Christine 2,500 2,500 0
Baker-Simms, Beverley 1,000 1,000 0
Bank Franck, Galland & Cie SA 41,851 41,851 0
Bautista, Alex (11) 1,548 1,548 0
45
Number of Shares Number of Percentage
Owned Prior to Number of Shares Shares Owned Owned After
Selling Security Holder Offering Offered After Offering Offering
------------------------------------------------------------------------------------------------------------------------
Bishop, Daniel (11) 1,032 1,032 0
Bishop, Carol F (Trust) (11) 2,580 2,580 0
Burrus, Yves 384,005 384,005 0
Carter, Elaine (11) 36,128 36,128 0
Chandler, Allen & Deanna 40,000 40,000 0
Chanobie Resources Limited 33,487 33,487 0
Ciardi, Francesco 125,000 125,000 0
Cole, Casey Egan (2) (16) 50,000 50,000 0
Cole, Kelli Ann (2) (16) 50,000 50,000 0
Cole, Ryan Delavan (2) (16) 50,000 50,000 0
Cole, Douglas & Cole, Corinne (1) (16) 336,017 336,017 0
Cole, Doug (1) (3) 1,100,000 1,100,000 0
Dam, JC 167,402 167,402 0
d'Amore, Melissa 5,000 5,000 0
d'Amore, Tancredi 5,000 5,000 0
Dawson, Roland Arthur 20,119 20,119 0
Debarge, Alexandra 5,000 5,000 0
Debarge, Iona 5,000 5,000 0
Debarge, Oliver 20,000 20,000 0
Debarge, Robina 5,000 5,000 0
Dent, David 40,215 40,215 0
Dileva, Rosario (16) 20,000 20,000 0
Doxford, Tim 2,000 2,000 0
European American Perinvest Group (5)(14) 644,199 644,199 0
Fisher, Brandi 40,000 40,000 0
Fitzsimmons, Michael 62,500 62,500 0
Garafas, George 1,000 1,000 0
Garelick, Steve (16) 5,000 5,000 0
Global Marketing Associates, Inc. (3) 600,000 600,000 0
Grace Investments Limited 169,832 169,832 0
Granite Creek Partners LLC (3) 1,622,910 1,622,910 0
Groefsema, Jakob 25,160 25,160 0
Gygax, Katie 2,000 2,000 0
Hancock Investments 83,909 83,909 0
Hanley, Louis Patrick 246,864 20,000 226,864 *
Hanson, Brooke L. 40,000 40,000 0
Hanson, Bryce 40,000 40,000 0
Hanson, Steven 2,000,000 2,000,000 0
Hayman, Ildi (10) 350,000 350,000 0
Hedblom, Dr Per 10,027 10,027 0
Hermitage Securities Ltd 300,000 300,000 0
Hofstad, Bernt 214,204 214,204 0
Hufstetler, Guy 40,000 40,000 0
Hufstetler, Rod 55,600 55,600 0
Hufstetler, Lois 80,000 80,000 0
Hugenot Memorial Church 12,500 12,500 0
Hulick, Robert & Susan 20,000 20,000 0
Hume, Gary 11,344 11,344 0
Hustler, Trudie 1,000 1,000 0
Hyacinth Resources, Inc. (16) 750,000 750,000 0
Isom, Terry 100,000 100,000 0
46
Number of Shares Number of Percentage
Owned Prior to Number of Shares Shares Owned Owned After
Selling Security Holder Offering Offered After Offering Offering
------------------------------------------------------------------------------------------------------------------------
Jennings, Malcolm 140,568 140,568 0
Jobe, William (3) (4) 200,000 200,000 0
Kaupthing Bank Sverig AB 50,000 50,000 0
King, James T 246,025 125,000 121,025 *
Klug, John 80,000 80,000 0
Knecht, Hanspeter 143,727 143,727 0
Laurus Master Fund, Ltd. 10,400,000 10,400,000 0
LB Swiss Private Bank Ltd. 63,542 63,542 0
Leopoldino, Helder 2,000 2,000 0
Lesner, Michael (11) 5,161 5,161 0
Lombard Odier Darier Hentsch & Cie 200,000 200,000 0
Loomis, Troy 200,000 200,000 0
Maclachlan, Neil T. 84,846 84,846 0
Mahar, Larry J (11) 558,920 558,920 0
Mak, Alexander 50,000 50,000 0
Malonga-Matouba, Mihambanou 40,223 40,223 0
Martin, Michael 100,000 100,000 0
McPherson, Barbara (10) 350,000 350,000 0
Merriman, D. Jonathan 62,500 62,500 0
Mooney, Vincenza Nancy (6) (16) 35,000 35,000 0
Mooney, Branden Patrick Trust (6) (16) 75,000 75,000 0
Mooney, Danielle Monique(6) (16) 75,000 75,000 0
Mooney, Edward & Theresa (6) (16) 256,017 256,017 0
Mooney, Edward (3) (6) 1,100,000 1,100,000 0
Moore, Paul 62,500 62,500 0
Morton, James 5,000 5,000 0
Mullen, Peter 100,000 100,000 0
Munson, Eric 116,290 50,000 66,290 *
Nye, Daniel (13) 50,000 50,000 0
Olson, Jeff & Debra 40,000 20,000 20,000 *
Oltramare, Nicolas 167,594 167,594 0
Park Place Columbia Ltd. 551,487 551,487 0
Parson, William (11) 1,548 1,548 0
Penn, Richard (11) 39,780 39,780 0
Perrette, Jean R 45,000 45,000 0
Perrette, Jean-Rene 201,140 201,140 0
Pictet & Cie 125,000 125,000 0
Pictet Private Equity Investors SA 100,000 100,000 0
Posner, Ronald (15) 100,000 100,000 0
Robbins, R.S. 30,000 30,000 0
Roche, Greg L (11) 558,920 558,920 0
Rodas, Gabriel (11) 1,548 1,548 0
Roue, Naz 1,000 1,000 0
Ryweck, Daniel 25,116 25,116 0
Sassi, Ismael 72,025 72,025 0
Savage, Mark 30,139 30,139 0
Schmidt, Robert 8,350 8,350 0
Senglaub, Joseph 30,000 30,000 0
Senglaub, Michael & Doris 100,000 50,000 50,000 *
Shauklas, Thomas 150,000 75,000 75,000 *
St. Vincent Catholic Church (16) 25,000 25,000 0
47
Number of Shares Number of Percentage
Owned Prior to Number of Shares Shares Owned Owned After
Selling Security Holder Offering Offered After Offering Offering
------------------------------------------------------------------------------------------------------------------------
Staring Company Ltd. 500,000 500,000 0
Steinmetz, John (19) 125,000 125,000 0
Stratford, Val 40,000 40,000 0
Swindells, Theodore H (3) (7) (17) 2,800,000 2,800,000 0
Tate, Joseph P. 250,000 250,000 0
Terra Nova Explorer's Fund 250,048 250,048 0
Thread Needle Street LLC (7) 500,000 500,000 0
TN Capital Equities, Ltd. (9) 40,721 40,721 0
Troncin, Gwen 5,000 5,000 0
Troncin, Gerard 30,000 30,000 0
Verelst, Luc (8) 3,675,138 3,675,138 0
Voelker, Fritz C 125,000 125,000 0
Wace, N.J. 60,000 60,000 0
Weldon, Elizabeth 25,000 25,000 0
Weldon, John (16) 100,000 100,000 0
Westland Utracht Effectenbank NV 359,496 359,496 0
Whiteman, Paul 5,000 5,000 0
Winkelman, P.H.M. 41,947 41,947 0
Wouters, Albert 170,087 170,087 0
Zackrisson, Mia 5,000 5,000 0
* Less than one percent (1%).
(1) Douglas Cole is our Chief Executive Officer and one of our directors.
(2) Casey, Kelli and Ryan Cole are children of Douglas Cole, our Chief
Executive Officer and one of our directors.
(3) Includes shares covered by the Registration Agreement.
(4) William Jobe is one of our directors.
(5) Of this amount, 400,000 shares are subject to the Registration Agreement.
(6) Edward Mooney is our President and one of our directors. Vincenza Nancy
Mooney is Edward Mooney's mother. Branden Mooney and Danielle Mooney are
children of Edward Mooney. The Edward and Teresa Trust is an affiliate of
Edward Mooney.
(7) Theodore Swindells and entities controlled by him beneficially own
approximately 15% of our securities. See "Security Ownership of Certain
Beneficial Owners and Management."
(8) Luc Verelst beneficially owns approximately 22% of our securities. See
"Security Ownership of Certain Beneficial Owners and Management."
(9) TN Capital Equities, Ltd. received these shares in payment of a finder's
fee in connection with our private placement that closed in October 2003.
(10) These shares were acquired from us in connection with the acquisition of
our interest in River Murray Training (Pty.) Ltd.. See "Description of our
Business - Our Business - River Murray Training (Pty.) Ltd. (RMT)."
(11) These shares were acquired from us in connection with our acquisition of
TouchVision, Inc. See "Description of our Business - Our Business -
TouchVision."
(12) (Intentionally deleted).
(13) Of these shares, 100,000 were issued by us in exchange for investment
advisory and/or consulting services rendered to our company. Of the total
number of shares, 50,000 are subject to the Registration Agreement..
(14) Of these shares, 250,000 were issued by us in payment of finder's fees in
connection with private placements.
(15) These shares were issued in payment of a finder's fee.
(16) These shares were transferred from Granite Creek Partners LLC (f/k/a Kings
Peak Advisors LLC) and are subject to the Registration Agreement.
(17) Of this amount, 986,017 shares were transferred from Granite Creek Partners
LLC and are subject to the Registration Agreement.
48
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, assignees, and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock they acquire on exercise of their warrants or options on any
stock exchange market or trading facility on which our shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. The
selling security holders may use any one or more of the following methods when
selling shares.
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o Privately negotiated transactions;
o Short sales;
o Broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
o A combination of any such methods of sale; and
o Any other method permitted pursuant to applicable law.
Rather than sell shares under this prospectus, the selling security holders
may sell shares under Rule 144 adopted under the Securities Act of 1933, after
at least one year elapses from the date the warrants or options are exercised
and the other requirements of the Rule are satisfied. The selling security
holders may also engage in short sales against the box, puts and calls, and
other transactions in our securities or derivatives of our securities and may
sell or deliver shares in connection with these trades.
The selling security holders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling security holder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares. Broker-dealers engaged by a selling security holder to sell its
shares may arrange for other broker-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the selling security
holders (or, if any broker-dealer acts as agent for the purchaser of shares,
from the purchaser) in amounts to be negotiated.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
49
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We have agreed to pay all fees and expenses incident to the registration of
the shares. We have agreed to indemnify the selling security holders against
certain losses, claims, damages, and liabilities, including liabilities under
the Securities Act of 1933. The selling security holders have also agreed to
indemnify us, and our directors, officers, agents, and representatives against
certain liabilities, including certain liabilities under the Securities Act of
1933. In the opinion of the Securities and Exchange Commission such
indemnification agreements are against public policy as expressed in the
Securities Act of 1933 and are, therefore, unenforceable. The selling security
holders and other persons participating in the distribution of the shares
offered hereby are subject to the applicable requirements of Regulation M
promulgated under the Securities Exchange Act of 1934 in connection with the
sale of the shares.
The selling security holders have agreed to the following volume
restrictions concerning resale of their shares following the effective date of
this registration statement ("Effective Date"): (a) a maximum of 33% of the
registered shares can be offered and sold during the 90-day period following the
Effective Date; (b) up to a further 33% of the registered shares can be offered
and sold during the period between 91 and 180 days following the Effective Date;
and (c) the remaining 34% of the registered shares can be offered and sold
during the period between 181 and 270 days following the Effective Date.
EXPERTS AND COUNSEL
The audited financial statements of Trinity Learning are included herein in
reliance on the report of BDO Spencer Steward, an independent regist3ered
accounting firm, and on the report of Bierwolf, Nilson & Associates and its
successor firm, Chisholm, Bierwolf & Nilson, LLC, such reports given on the
authority of such firms as experts in auditing and accounting. Both such reports
stated that because Trinity Learning had sustained losses and has negative
working capital, these conditions raise substantial doubt about its ability to
continue as a going concern.
Parsons Behle & Latimer, Salt Lake City, Utah, will pass on the validity of
our common stock being offered by this prospectus.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 with the SEC for the
common stock offered by the selling security holders under this prospectus. This
prospectus does not include all of the information contained in the registration
statement. You should refer to the registration statement and its exhibits for
additional information that is not contained in this prospectus. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, you should refer to the exhibits attached to this registration
statement for copies of the actual contract, agreement or document.
We file annual, quarterly and special reports and other information with
the Securities and Exchange Commission. You may read and copy any document we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. Our SEC filings are also available to
the public at the SEC's web site at http://www.sec.gov.
In addition, we maintain an Internet website at www.trinitylearning.com. We
do not intend that our website be a part of this prospectus.
50
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements for the Year Ended June 30, 2004 and the
Transition Period ended June 30, 2003
Report of Independent Registered Public Accounting Firm dated
November 22, 2004 F-1
Independent Auditor's Report dated October 18, 2003 F-2
Consolidated Balance Sheet as of June 30, 2004 and 2003 F-3
Consolidated Statements of Operations for the Year ended June 30,
2004 and the Transition Period ended June 30, 2003 F-4
Statement of Stockholders' Equity for the Period from October 1,
2002 to June 30, 2004 F-5
Consolidated Statements of Cash Flows for the Year Ended June 30,
2004 and the Transition Period ended June 30, 2003 F-6
Notes to Consolidated Financial Statements F-7
Unaudited Financial Statements as of September 30, 2004
Consolidated Balance Sheets September 30, 2004 and
September 30, 2003 F-30
Consolidated Statements of Operations and Comprehensive Income
Three Months Ended September 30, 2004 and 2003 F-31
Consolidated Statements of Cash Flows Three Months Ended
September 30, 2004 F-32
Notes to Consolidated Financial Statements F-33
51
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
F-1
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
F-2
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
F-3
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
F-4
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
F-5
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
F-6
Trinity Learning Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004
NOTE 1. ACCOUNTING POLICIES
Overview
Trinity Learning (sometimes referred to in these Notes as the "Company") 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
F-7
minority shareholder. Substantive 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.
F-8
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 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.
F-9
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 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.
F-10
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.
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
F-11
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 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
F-12
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.
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:
F-13
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 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
F-14
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 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
=============
F-15
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
===============
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
F-16
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.
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
=========== =========== ===========
F-17
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. 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:
F-18
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 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
F-19
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 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 Douglas Cole and Edward Mooney, who are
officers and directors of our company, and Theodore Swindells. At our August 19,
2003 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
F-20
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 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 1,20,000 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 (or $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.
F-21
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
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 $ -
============ ============
F-22
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 years ended
June 30, 2004 and the nine month transition period ended June 30, 2003,
respectively:
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:
F-23
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.
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:
F-24
June 30, 2004 June 30, 2003
------------- -------------
Net operating loss carryforward
Federal $ 2,169,700 $ 686,900
State 479,500 161,500
Foreign 569,500 118,500
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.
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 1,753,530 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 2,292,440 635,000
------------ ------------
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)
============ ============ ============ ============
F-25
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
========== =========== =========== =========== =========== =========== =========== =========== ===========
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 (i) issued convertible promissory notes in the aggregate
principal amount of $500,000 (the "Bridge Financing Notes") to certain
individuals and entities, and (ii) 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.
We completed the acquisition of all of the issued and outstanding shares of CBL
on October 2, 2002. 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.
F-26
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.
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 purchasing 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.
F-27
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 $0.04 for the exercise of options and warrants
resulting in gross proceeds to the Company of $34,375.
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.
F-28
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.
F-29
Trinity Learning Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, June 30,
2004 2004
(Unaudited) (Audited)
------------- -------------
Assets
------
Current Assets
Cash and Cash Equivalents $ 846,860 $ 892,739
Accounts Receivable 391,269 243,164
Prepaid Expense and Other Current Assets 231,356 229,802
------------- -------------
Total Current Assets 1,469,485 1,365,705
Equity Investment in and Advances to Associated Companies 1,617,680 1,922,935
Property & Equipment, net 33,502 37,160
Goodwill 1,855,405 1,849,526
Intangible Assets, net 390,333 434,958
Restricted Cash 4,992,522 500,000
Other Assets, net 397,731 142,856
------------- -------------
Total Assets $ 10,756,658 $ 6,253,140
============= =============
Liabilities, Minority Interest, Contingently Redeemable Equity and Stockholders' Equity
---------------------------------------------------------------------------------------
Liabilities
-----------
Accounts Payable $ 880,359 $ 814,651
Accounts Payable-Related Parties 86,321 77,988
Accrued Expenses 614,937 721,192
Interest Payable 5,865 21,124
Deferred Revenue 325,551 85,685
Notes Payable - Current 677,797 418,954
Notes Payable - Related Parties 584,289 740,476
------------- -------------
Current Liabilities 3,175,119 2,880,070
------------- -------------
Notes Payable - Long Term 530,906 71,829
Notes Payable - Long Term, Related Parties 221,408 40,000
------------- -------------
Long Term Liabilities 752,314 111,829
Equity Investment in and Advances to Associated Company 343,246 -
Warrant to Purchase Common Stock 2,863,363 -
------------- -------------
Total Liabilities 7,134,042 2,991,899
------------- -------------
Minority Interest 263,483 306,721
----------------- ------------- -------------
Contingently Redeemable Equity 2,510,000 2,510,000
------------------------------ ------------- -------------
Stockholders' Equity
--------------------
Preferred Stock, 10,000,000 Shares Authorized at No Par
Value, No Shares Issued and Outstanding in 2004 or 2003 - -
Common Stock, 100,000,000 Shares Authorized at No Par
Value, 31,040,143 shares Issued and Outstanding at
September 30 and June 30, 2004 25,331,567 23,092,957
Accumulated Deficit (24,512,562) (22,650,976)
Other Comprehensive Income 30,128 2,539
------------- -------------
Total Stockholders' Equity 849,133 444,520
------------- -------------
Total Liabilities, Minority Interest, Contingently
Redeemable Equity and Stockholders' Equity $ 10,756,658 $ 6,253,140
============= =============
The accompanying notes are an integral part of these financial statements
F-30
Trinity Learning Corporation and Subsidiaries
Consolidated Statement of Operations and Comprehensive Loss
Three Months Ended
September 30,
2004 2003
(Unaudited)
----------------------------
Revenue
Sales Revenue $ 902,854 $ 253,993
Cost of Sales (180,905) (32,497)
------------ ------------
Gross Profit 721,949 221,496
------------ ------------
Expenses
Salaries & Benefits 889,302 567,719
Professional Fees 296,587 216,565
Selling, General & Administrative 489,162 269,594
Depreciation & Amortization 47,962 88,838
------------ ------------
Total Expense 1,723,013 1,142,716
------------ ------------
Loss from Operations (1,001,064) (921,220)
------------ ------------
Other Expense
Interest, net 229,703 23,288
Debt Issuance 7,194 -
Equity Losses in Associated Companies 648,501 995
Foreign Currency Gain (Loss) - 407
------------ ------------
Total Other Expense 885,398 24,690
Minority Interest 24,876 -
----------------- ------------ ------------
Loss before Income Taxes (1,861,586) (945,910)
Income Taxes - -
------------ ------------
Net Loss $ (1,861,586) $ (945,910)
============ ============
Net Loss Per Common Share
Basic and Diluted $ (0.06) $ (0.06)
============ ============
Weighted Average Shares Outstanding 30,377,643 15,652,516
============ ============
A summary of the components of other comprehensive loss for the three months
ended September 30, 2004 and 2003 is as follows:
Three Months Ended
September 30,
2004 2003
(Unaudited)
----------------------------
Net Loss $ (1,861,586) $ (945,910)
Foreign Currency Translation Gain (Loss) 27,589 (2,961)
------------ ------------
Comprehensive Loss $ (1,833,997) $ (948,871)
============ ============
The accompanying notes are an integral part of these financial statements
F-31
Trinity Learning Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended September 30,
2004 2003
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (1,861,586) $ (945,910)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 47,962 88,838
Debt issuance 7,194 -
Non cash interest 205,753 -
Equity losses of associated companies 648,501 995
Employee stock based compensation 104,997 98,514
Minority interest (24,876) -
Changes in current assets and liabilities:
Accounts receivable (148,105) (14,434)
Prepaid expenses and other current assets (4,623) (34,238)
Accounts payable and accrued expenses (47,497) 19,517
Accounts payable - related parties 8,333 (7,822)
Deferred revenue 239,866 45,217
Interest payable (9,394) 21,590
------------ ------------
Net cash used by operating activities (833,475) (727,733)
------------ ------------
Cash flows from investing activities:
Payment for business acquisitions - (64,868)
Payment for business acquisitions - related party (4,815) (160,501)
Restricted cash (4,491,000) -
Advances to associated companies - (274,959)
Capital expenditures - (10,635)
------------ ------------
Net cash used by investing activities (4,495,815) (510,963)
------------ ------------
Cash flows from financing activities:
Repayments under short-term notes (500,000) -
Repayments under short-term notes - related party (50,000) (500,000)
Borrowings under short-term notes 6,120,000 -
Fees paid to issue debt (259,000) -
Payments for financing fees - (360,242)
Payments for financing fees - related party - (68,000)
Proceeds from sale of common stock - 3,004,500
------------ ------------
Net cash provided by financing activities 5,311,000 2,076,258
Effect of foreign exchange on cash (27,589) 2,961
------------ ------------
Net (decrease)increase in cash (45,879) 840,523
Cash at beginning of period 892,739 86,511
------------ ------------
Cash at end of period $ 846,860 $ 927,034
============ ============
Supplemental information:
Interest paid $ 19,795 $ 2,716
============ ============
Warrants Issued with Convertible Notes $ 2,863,363 $ -
============ ============
Beneficial Conversion Value of Note Payable $ 2,070,784 $ -
============ ============
Issuance of Common Stock for Business Acquisitions $ - $ 975,000
============ ============
Issuance of Conditionally Redeemable Equity $ - $ 1,000,000
============ ============
The accompanying notes are an integral part of these financial statements
F-32
Trinity Learning Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 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.
The accompanying unaudited interim consolidated financial statements and related
notes have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-QSB and Item 310 of Regulation S-B.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. These financial statements include the accounts
of Trinity and its consolidated subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
These unaudited interim consolidated financial statements should be read in
conjunction with the audited financial statements and related notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended June
30, 2004. The results of operations for the three months ended September 30,
2004, are not necessarily indicative of the operating results for the full year
and 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"). 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.
In the opinion of management, the accompanying unaudited interim consolidated
financial statements reflect all normal recurring adjustments that are necessary
for a fair presentation of the financial position, results of operations and
cash flows for the interim periods presented.
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.
F-33
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 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.
F-34
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. 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 September 2004, we incurred an
impairment charge of $80,000. At September 30, 2004, we had a negative value in
our investment in IRCA as losses and impairment charges have exceeded our
original investment. Losses will continue to be recorded in the statement of
operations up to the value of our $500,000 deposit as collateral for the IRCA
operating line of credit.
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 September
30 and June 30, 2004.
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.
Deferred Charges
The Company capitalizes costs associated with the issuance of debt instruments.
These costs are amortized on a method that approximates the interest method over
the term of the debt agreements. Amortization expenses for deferred charges were
$5,630 and $0 for the three months ended September 30, 2004 and 2003,
respectively.
Restricted Cash
Restricted cash within noncurrent assets consists primarily of $4,492,522 on
deposit in a restricted account as security for the $5.5 million convertible
term note with Laurus Master Fund, Ltd. In addition, $500,000 is on deposit with
F-35
Standard Bank and restricted for use as collateral for an operating line of
credit at IRCA. This provision is part of the Company's contractual arrangement
with IRCA. Should IRCA default on its line of credit with Standard Bank, these
funds may be seized by Standard Bank.
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 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 to be issued as described above 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 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. An allowance for doubtful loan
receivable in the amount of $80,000 was established at September 30, 2004 for
our loan to IRCA Australia.
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.
F-36
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 dilutive potential 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 three months ended September 30, 2004 and
2003, respectively.
If the company were to include all potential shares in the calculation, the
following items would be included:
o Stock options to purchase 5,670,000 shares of common stock at prices
ranging from $0.05 to $0.60 per share were outstanding at September
30, 2004; 3,182,000 options were outstanding at September 30, 2003 at
purchase prices varying from $0.05 to $0.50 per share.
o Warrants to purchase 21,884,950 shares of common stock at prices
ranging from $0.05 to $2.00 per share were outstanding September 30,
2004; warrants to purchase 5,677,000 shares of common stock at prices
ranging from $0.50 to $2.00 per share were outstanding at June 30,
2004
o At September 30, 2004 and 2003, we held 662,500 and 1,662,500 shares
in escrow, respectively.
o At September 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 common
stock for our investment in VILPAS, (iv) a convertible promissory note
totaling $70,000 convertible into an indeterminable amount of shares
of our common stock and (v) a convertible promissory note totaling
$5,500,000 convertible into an indeterminable amount of shares of our
common stock.
o At September 30, 2003, the following convertible notes were
outstanding: (i) $425,000 convertible note payable convertible into an
indeterminable number of shares of our common stock and (ii)
$1,000,000 convertible note payable convertible into 500,000 shares of
our common stock.
For the Three For the Three
Months Ended Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Numerator-Basic / Diluted
Net (loss) available for common stockholders $ (1,861,586) $ (945,910)
================== ==================
Denominator-Basic / Diluted
Weighted-average common stock outstanding 30,377,643 15,652,516
================== ==================
Basic / Diluted (loss) per share $ (0.06) $ (0.06)
================== ==================
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 $104,997 and
$98,514 was recognized for the three months ended September 30, 2004 and 2003,
respectively. The expense was calculated using the Black Scholes valuation model
with the following assumptions:
F-37
September 30, September 30,
2004 2003
------------- -------------
Five-Year Risk Free Interest Rate 3.33% 3.63%
Dividend Yield Nil Nil
Volatility 70% 70%
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.
Recently Issued Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46, ("FIN 46"),
Consolidation of Variable Interest Entities ("VIE"). Fin No. 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 No. 46 which, among other
revisions, resulted in the deferral of the effective date of applying the
provisions of FIN No. 46 to the first interim or annual period ending after
December 15, 2004 for qualifying VIE's. The Company believes it has no VIE's and
adoption of FIN 46, as revised, did not have a material impact on our
consolidated financial condition or results of operations for the quarters ended
September 30, 2004 and 2003.
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. Adoption of SFAS 150 did not have a
significant impact on the Company's financial statements for the quarters ended
September 30, 2004 and 2003.
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 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
F-38
newly created securities. Our required FSP 129-1 disclosures are included above
under "Earnings (Loss) Per 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 September 30, 2004, we had loaned TouchVision a total of $260,000 pursuant
to this agreement. This loan has been eliminated in consolidation at September
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 September 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 $85,417 ($4,815 of which was incurred in the
quarter ended September 30, 2004):
Cash acquired $ 102,357
Tangible assets acquired 269,213
Intangible assets acquired 350,281
Goodwill 914,815
-----------
Total assets acquired 1,636,666
Liabilities assumed 926,249
-----------
Net assets acquired $ 710,417
===========
The acquisition was accounted for using the purchase method of accounting.
Intangible assets are being 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.
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.
F-39
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 $15,425:
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 are being 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 $53,933 ($1,064 of which was
incurred during the quarter ended September 30, 2004):
Cash acquired $ 1,052,270
Tangible assets acquired 339,986
Intangible assets acquired 210,177
Goodwill 564,073
-----------
Total assets acquired 2,166,506
Liabilities assumed 1,017,937
Minority interest 294,636
-----------
Net assets acquired $ 853,933
===========
The acquisition was accounted for using the purchase method of accounting.
Intangible assets are being amortized over varying periods, as indicated by an
independent valuation, 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 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
F-40
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 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 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 September 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. was We advanced $300,000 at closing of the
acquisition and $700,000 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 (i) 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 ended June 30, 2004 and
management's estimate of future cash flows, the Company wrote down its remaining
investment in IRCA of approximately $884,962 to $0 in the fiscal year ended June
30, 2004.
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 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 three months ended
September 30, 2004 is as follows:
Balance as of June 30, 2004 $ 1,849,526
Goodwill acquired during the period 5,879
------------
Balance as of September 30, 2004 $ 1,855,405
============
SFAS 142 requires goodwill and other intangible assets to be tested for
impairment at least annually. 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
F-41
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 September 30,
2004.
The values assigned to other intangible assets are considered appropriate based
on independent valuations. The following table sets forth the Company's acquired
other intangible assets at September 30 and June 30, 2004, respectively, which
will continue to be amortized:
September 30, 2004 June 30, 2004
------------------------------------------------------ ------------------------------------------------------
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
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Trade names and $ 156,841 58 $ 33,942 $ 122,899 $ 156,841 58 $ 27,521 $ 129,320
trademarks
Backlog 40,600 36 15,944 24,656 40,600 36 4,511 36,089
Current and core
technology 152,317 9 51,992 100,325 152,317 9 41,027 111,290
Customer
relationships 175,100 55 32,647 142,453 175,100 55 28,515 146,585
Other intangibles 53,600 13 53,600 - 53,600 13 41,926 11,674
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 578,458 38 $ 188,125 $ 390,333 $ 578,458 38 $ 143,500 $ 434,958
============ ============ ============ ============ ============ ============ ============ ============
Five Year Amortization schedule:
Fiscal Year Amount
-------------- -------------
2005 $ 91,446
2006 126,475
2007 83,547
2008 60,302
2009 28,563
Thereafter -
------------
Total $ 390,333
============
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 accumulated deficit of $1,314,277 resulting
from the accumulated operating loss for CBL between October 2002 and December
2003 as well as other comprehensive income of $30,128 for the same period are
included in our consolidated accumulated deficit and accumulated other
comprehensive income at September 30, 2004. The net fair value of the assets and
liabilities divested, net of $1,000,000 convertible note payable, which was
cancelled, the intercompany receivable from CBL and the cancellation of
3,000,000 shares of our common stock which were cancelled were recorded as a
$461,063 net credit to our common stock.
Pro Forma Results
The operating results of CBL, TouchVision, RMT and VILPAS have been included in
the accompanying consolidated financial statements from the date of acquisition
forward and, for CBL, up to the date of divestiture. In December 2003, we
completed the sale of our interest in CBL to the former owners of CBL.
Accordingly, CBL business' results of operations were included from July 1, 2003
to September 30, 2003. The business results of operations of RMT and TouchVision
F-42
are included for the period September 1, 2003 through September 30, 2004. The
business results for VILPAS are included for the period July 1, 2004 through
September 30, 2004.
The following unaudited pro forma financial information for the three months
ended September 30, 2003 presents the combined results of operations of the
Company and TouchVision, RMT, and VILPAS assuming the acquisitions occurred July
1, 2003. 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 three months ended September 30, 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.
(Pro forma)
Three Months
Ended
September 30,
2003
---------------
Revenue $ 1,193,198
===============
Gross Profit $ 919,957
===============
Operating Loss $ (706,227)
===============
Net Loss $ (726,300)
===============
Net Loss per Common Share - Basic / Diluted $ (0.03)
===============
NOTE 3 - PROPERTY AND EQUIPMENT
Scheduled below are the assets, cost, and accumulated depreciation at September
30, 2004 and June 30, 2004, respectively and depreciation expense for the three
months ended September 30, 2004 and 2003, respectively.
Asset Cost Depreciation Expense Accumulated Depreciation
------------------------- ------------------------- -------------------------
9/30/2004 6/30/2004 9/30/2004 9/30/2003 9/30/2004 6/30/2004
----------- ----------- ----------- ----------- ----------- -----------
Furniture & Equipment $ 41,949 $ 53,733 $ 3,337 $ 4,862 $ 8,447 $ 16,573
=========== =========== =========== =========== =========== ===========
NOTE 4 - EQUITY INVESTMENTS IN AND ADVANCES TO ASSOCIATED COMPANIES
At September 30, 2004, the principal components of Equity Investments in and
Advances to Associated Companies were the following:
Ayrshire IRCA
----------- -----------
Equity investment as of July 1, 2004 $ 842,935 $ -
Advances 1,000,000 80,000
Provision for advances - (80,000)
Equity in losses of unconsolidated subsidiary (225,255) (343,246)
----------- -----------
Balance September 30, 2004 $ 1,617,680 $ (343,246)
=========== ===========
The financial positions of Ayrshire / Riverbend and IRCA at September 30, 2004
were:
F-43
Ayrshire IRCA
----------- -----------
Income statement information:
Revenue $ 411,772 $ 1,382,499
=========== ===========
Operating loss $ (76,452) $ (296,339)
=========== ===========
Net Loss $ (225,255) $ (343,246)
=========== ===========
Financial position information:
Current assets $ 899,473 $ 566,957
=========== ===========
Noncurrent assets $ 83,595 $ 1,147,321
=========== ===========
Current Liabilities $ 349,656 $ 896,042
=========== ===========
Long-term liabilities $ 1,543,736 $ 1,908,876
=========== ===========
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 as 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 September 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.
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 and $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 partial 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. Based on
management's evaluation of the collectibility of this loan receivable, we
provided an allowance for doubtful loan receivable for $80,000 during the three
months ended September 30, 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 the intangible assets are considered appropriate based on
independent valuations. The identifiable intangible assets are being amortized
over varying periods ranging from three to five years, as indicated by
independent valuations, and using the straight-line method.
The following table sets forth the Company's acquired intangible assets in
equity investments at September 30, 2004 which will continue to be amortized:
2004
---------------------------------------------------------
Gross Weighted Net
Carrying Average Life Accumulated Carrying
Amount in Months Amortization Amount
------------ ------------ ------------ ------------
Backlog $ 123,142 55 $ 28,012 $ 95,130
Current and core technology 28,101 36 10,094 18,007
Distributor relationships 122,579 60 26,478 96,101
Maintenance Contracts 67,345 60 16,283 51,062
In-Process R&D 20,833 0 20,833 -
Option value 325,000 indefinite - 325,000
------------ ------------ ------------
Total $ 687,000 $ 101,700 $ 585,300
============ ============ ============
F-44
Five Year Amortization schedule:
Fiscal Year Amount
--------------- ----------
2005 $ 56,395
2006 75,095
2007 63,828
2008 55,346
2009 9,636
Thereafter -
----------
Total $ 260,300
==========
NOTE 5 - COMMITMENTS
Total rental expense included in operations for operating leases for the three
months ended September 30, 2004 and 2003, respectively, amounted to $42,919 and
$27,332. The operating leases pertain to office 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 September 30, 2004:
Calendar Year Amount
-------------- ----------
2004 $ 111,260
2005 371,943
2006 333,591
2007 322,169
2008 134,237
Thereafter -
----------
Total $ 1,273,200
==========
As part of the Company's contractual arrangement with IRCA, we agreed to place
$500,000 on deposit with Standard Bank and restrict the funds for use as
collateral for an operating line of credit at IRCA. This deposit is classified
as restricted cash. Should IRCA default on its line of credit with Standard
Bank, these funds may be seized by Standard Bank.
NOTE 6 - OTHER ASSETS
Supplemental Balance Sheet Information as of September 30, 2004 (unaudited) and
June 30, 2004 (audited):
September 30 June 30,
2004 2004
(Unaudited) (Audited)
------------ ------------
Other assets:
Deferred debt issuance costs, net of accumulated
amortization of $7,194 and $0, respectively $ 251,806 $ -
Other assets 145,925 142,856
------------ ------------
Other assets, net $ 397,731 $ 142,856
============ ============
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 Mr. Theodore
Swindells, a significant stockholder of our company.
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,
F-45
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 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 European
American Securities, Inc. ("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 for services rendered in connection with our
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 with a fair market value of $375,000 were paid to EAS in
the Company's common stock. As of September 30, 2004, the balance owed to EAS
was $81,653. 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, as follows: $145,000 during the fiscal year ended September 30,
2001 and $780,000 during the transition period from October 1, 2002 to June 30,
2003. 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 balance of $425,000. During the period June 2004 to
October 2004, Mr. Swindells advanced us $155,000 for use as working capital. 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 (i) issued convertible promissory notes in the aggregate
principal amount of $500,000 (the "Bridge Financing Notes") to certain
individuals and entities, and (ii) 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.
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 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 $4,815 as
compensation for merger and acquisition services associated with our acquisition
of TouchVision.
F-46
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
$181,408 owing to Mr. Willums, of which $109,341 bears interest at 8% per annum
and $72,067 is non-interest bearing, has no fixed terms of repayment.
NOTE 8 - NOTES PAYABLE
On July 29, 2004, we issued a secured promissory note in the principal amount of
$500,000 to Oceanus Value Fund, L.P. ("Oceanus"). The note would have matured on
October 27, 2004, and bore interest at the rate of twelve percent (12%). 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. As such, a value attributable to the warrants using the Black Scholes
option valuation model of $188,842 was determined and recorded as a discount on
notes payable.
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 in the principal amount of $5.5 million and (ii) a five-year 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 principal payments of at least
$22,059, commencing November 1, 2004, toward the outstanding non-restricted
principal amount. Any remaining outstanding principal and interest are due in
full on August 31, 2007. The principal amount of the note and accrued interest
thereon are convertible into shares of our common stock at a price of $0.72 per
share, subject to anti-dilution adjustments. A value attributable to the
warrants using the Black Scholes option valuation model of $2,863,363 was
determined and recorded as a discount on notes payable. A value attributable to
the beneficial conversion feature using of the n toe using the Black Scholes
option valuation model of $2,070,784 was determined and recorded as a credit to
common stock and a discount on notes payable.
During the period from June 2004 through September 2004, Mr. Swindells advanced
us $120,000 for use as working capital. On August 10, 2004 we repaid $50,000 of
this amount.
As of September 30, 2004 and June 30, 2004, notes payable consisted of the
following:
September 30, June 30,
2004 2004
------------ ------------
Notes payable to third parties:
Convertible note payable, net of unamortized discount of $2,783,825
attributed to warrant and unamortized discount of $2,013,262 attributable
to beneficial conversion; interest at prime plus 2% payable monthly,
principal payments of $22,059 on the outstanding non-restricted
principal amount due the first of each month beginning November 1,
2004 until August 31, 2007 when any remaining principal and interest
are due. $ 702,913 $ -
Note payable to two credit unions; interest payable monthly, principal
due in full February 5, 2005, unsecured, interest at 12% per annum. 250,000 250,000
Third party creditors; unsecured, non-interest bearing and no fixed
terms of repayment. 10,810 10,810
Third party individuals; due September 1, 2006, unsecured, interest at
10% per annum, interest payable monthly, principal due in full at
maturity. 92,699 73,560
Bank note payable; due October 29, 2004, secured by Company vehicle,
interest at 9.5% per annum, monthly payments of interest and
principal. 10,736 12,103
F-47
Revolving bank lines of credit; unsecured, interest ranging from prime
plus 2.625% to prime plus 6.75%, monthly payment of principal and
interest. 131,590 133,128
Revolving third party line of credit; unsecured, interest at prime
plus 1.99%, monthly payments of interest and principal. 9,958 11,182
Notes payable to related parties:
Note payable to related party; principal and accumulated interest due
December 31, 2004, unsecured, interest at 6% per annum. 14,286 13,297
Convertible note payable to a related party, unsecured, interest,
non-interest bearing, no fixed terms of repayment. 70,000 50,000
Note payable to a related party; unsecured, interest at 8% per annum
on $109,341; non-interest bearing on $72,067. No fixed terms of
repayment. 181,408 177,179
Notes payable for acquisitions and equity investments:
Convertible note payable to a related party for VILPAS purchase; due
August 5, 2005, unsecured, non-interest bearing. 500,000 500,000
Convertible note payable to a related party for IRCA purchase; due
December 31, 2005, unsecured, non-interest bearing. 20,000 20,000
Convertible note payable to a related party for Riverbend purchase;
due December 31, 2006, unsecured, non-interest bearing. 20,000 20,000
------------ ------------
Total notes payable 2,014,400 1,271,259
Less: current maturities (1,262,086) (1,159,430)
------------ ------------
Long-term notes payable $ 752,314 $ 111,829
============ ============
Maturity schedule for notes payable:
Fiscal Year Amount
----------- -------------
2005 $ 605,259
2006 1,054,706
2007 357,405
2008 4,794,117
2009 -
-------------
Sub-total 6,811,487
Less: unamortized note discount (4,797,087)
-------------
Total $ 2,014,400
=============
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 three months ended
September 30, 2004 and 2003, respectively:
F-48
September 30, 2004 September 30, 2003
--------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------------ ------------ ------------
Outstanding at beginning of year 5,570,000 $ 0.42 2,447,000 $ 0.23
Granted 100,000 0.60 735,000 0.50
Exercised - - - -
Canceled - - - -
------------ ------------ ------------ ------------
Outstanding at September 30 5,670,000 $ 0.43 3,182,000 $ 0.29
============ ============ ============ ============
Exercisable at September 30 2,965,729 $ 0.40 1,303,125 $ 0.26
============ ============ ============ ============
Stock options outstanding and exercisable under 2002 Stock Plan as of September
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 3.02 372,260 $ 0.05
$0.25 800,000 0.25 3.20 560,685 0.25
$0.50 4,270,000 0.50 4.13 1,989,565 0.50
$0.60 100,000 0.60 4.27 43,219 0.60
---------------- ---------------- ----------------- ---------------
5,670,000 $ 0.43 2,965,729 $ 0.40
================ ================ ================= ===============
There are 1,784,590 options available for grant at September 30, 2004. The
weighted average grant date fair value of options granted as of September 30,
2004 is $0.43.
NOTE 10 - WARRANTS
Through September 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
Description Shares per Share Exercisable Through
----------- ------------- -------------- ----------------------
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
Warrant Issued to Oceanus Value Fund 125,000 $ 1.00 July 29, 2009
Warrant Issued to Laurus Funds 1,600,000 $ 0.81 August 30, 2009
------------- -------------
Total 21,884,950 $ 1.24
============= =============
(1) Bonus warrants are issuable upon exercise of the original warrant.
F-49
NOTE 11 - 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 first quarter ended September 30, 2004:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
United States $ 384,579 $ (937,139) $ 34,334 $ - $ 125,814 $ 914,815 $ 2,183 $ 8,458,218 $ 257,261
Europe 362,464 (59,883) 11,625 - 205,287 564,073 - 1,761,516 514,298
Australia 155,811 (4,042) 2,003 - 60,168 376,517 31,319 536,924 77,574
South Africa - - - (648,501) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 902,854 $(1,001,064) $ 47,962 $ (648,501) $ 391,269 $ 1,855,405 $ 33,502 $10,756,658 $ 849,133
========== =========== =========== =========== =========== =========== =========== =========== ===========
As of and for the first quarter ended September 30, 2003:
Investment
Depreciation Losses in Property
Operating & Associated Accounts & Total Net
Revenue Loss Amortization Companies Receivable Goodwill Equipment Assets Assets
---------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
United States $ 109,993 $ (696,107) $ 5,852 $ - $ 132,484 $ - $ 8,654 $ 4,080,652 $ 1,485,167
Europe - - - - - - - - -
Australia 144,000 (225,113) 82,986 - 166,491 - 78,991 1,607,373 (234,598)
South Africa - - - (995) - - - - -
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 253,993 $ (921,220) $ 88,838 $ (995) $ 298,975 $ - $ 87,645 $ 5,688,025 $ 1,250,569
========== =========== =========== =========== =========== =========== =========== =========== ===========
NOTE 12 - STOCKHOLDERS' EQUITY
On July 29, 2004, we issued a secured promissory note in the principal amount of
$500,000 to Oceanus Value Fund, L.P. ("Oceanus"). 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. A value
attributable to the warrants using the Black Scholes option valuation model of
$188,842 was determined and recorded as a discount on notes payable.
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 in the principal amount of $5.5 million and (ii) a five-year 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 principal payments of at least
$22,059, commencing November 1, 2004, toward the outstanding non-restricted
principal amount. The principal amount of the note and accrued interest thereon
are convertible into shares of our common stock at a price of $0.72 per share,
subject to anti-dilution adjustments. A value attributable to the warrants using
the Black Scholes model of $2,863,363 was determined and recorded as a liability
and a discount on notes payable. A value attributable to the beneficial
conversion feature of the note using the Black Scholes option valuation model of
$2,070,784 was determined and recorded as a credit to common stock and a
discount on notes payable
F-50
NOTE 13 - 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, and ongoing business operations.
To this end, we anticipate closing a $1.5 million private offering of
convertible debt in late December 2004 or early January 2005, the proceeds of
which will be added to our working capital. 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.
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
December 1, 2004 we will not be able to sustain operations for more than two
months without additional sources of financing.
F-51
TRINITY LEARNING CORPORATION
Re-Offer Prospectus
36,572,997 Shares Common Stock
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by us. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered to whom it is
unlawful to make such offer in any jurisdiction. Neither the delivery of this
prospectus nor any sale made shall, under any circumstances, create any
implication that information contained in this prospectus is correct as of any
time subsequent to the date of this prospectus or that there has been no change
in the affairs of Trinity Learning Corporation since such date.
TABLE OF CONTENTS
Prospectus Summary............................................................3
Risk Factors..................................................................5
Forward-Looking Statements....................................................10
Use of Proceeds...............................................................11
Dilution......................................................................11
Description of Business.......................................................11
Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................23
Directors and Executive Officers..............................................34
Executive Compensation........................................................36
Security Ownership of Certain Beneficial Owners and Management................37
Certain Relationships and Related Transactions................................39
Legal Proceedings.............................................................41
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..........................................................41
Description of Securities.....................................................42
Market for Common Shares and Related Stockholder Matters......................43
Selling Security Holders......................................................44
Plan of Distribution..........................................................49
Experts and Counsel...........................................................50
Additional Information........................................................50
Index to Financial Statements.................................................51