U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2006
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Commission File No. 0-8924
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TWL Corporation
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(Name of small business issuer in its charter)
Utah 73-0981865
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4101 International Parkway
Carrollton, Texas 75007
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (972) 309-4000
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Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock, No Par Value
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [_]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year, $25,790,468
The aggregate market value of the voting and non-voting common equity
held by non-affiliates, computed by reference to the average bid and asked
price of such common equity as of October 6, 2006 was $862,660.
As of October 9, 2006, the issuer had 43,415,513 outstanding shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . .3
Item 2. Description of Property . . . . . . . . . . . . . . . . . 24
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 25
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 7. Financial Statements. . . . . . . . . . . . . . . . . . . 36
Item 8. Controls and Procedures . . . . . . . . . . . . . . . . . 80
Item 8A. Other Information . . . . . . . . . . . . . . . . . . . . 81
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a)
of the Exchange Act . . . . . . . . . . . . . . . . . . . 81
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . 84
Item 11. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . 87
Item 12. Certain Relationship and Related Transactions . . . . . . 91
Item 13. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . 92
Item 14. Principal Accountant Fees and Services. . . . . . . . . . 93
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATIONAL HISTORY
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 September 29, 2006, we
changed our name to TWL 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.
Throughout this report, we refer to TWL Corporation, together with its
subsidiaries, as "we," "us," "our company," "Trinity Learning," or the
"Company."
RECENT DEVELOPMENTS
PRIVATE FINANCING TRANSACTION IN MARCH OF 2006
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On March 31, 2006, we entered into a Securities Purchase Agreement
(the "Purchase Agreement") with certain accredited investor (the
"Investor") for the issuance of an aggregate of $4,500,000 in face amount
of 15% Senior Secured Convertible Debentures (the Debentures")
maturing March 31, 2010, and four year warrants (the "Warrants")
to purchase an aggregate of 7,200,000 shares of common stock of the
Company, exercisable into shares of the Company's common stock at $0.21
per share. The Debentures accrue interest at a rate of 15% per annum.
The Debentures are convertible into shares of the Company's common stock at
a price equal to $0.25 per share. The Company is obligated to pay
$187,500 as the monthly redemption amount of the Debentures on the first of
every month, beginning on March 31, 2008, which payment can be made in cash
or in common stock of the Company. The Company's obligation to repay
Debentures is secured by all of its assets, and the assets of its
wholly owned subsidiary, TWL Knowledge Group (the "Subsidiary"). In
addition, the Company's Subsidiary entered into a Subsidiary Guarantee with
the investors on March 31, 2006 pursuant to which the Subsidiary agreed to
guarantee the Company's repayment of the Debentures to the
investors.
The conversion price of the debentures and the exercise price of
the warrants may be adjusted in certain circumstances such as if we
pay a stock dividend, subdivide or combine outstanding shares of common
stock into a greater or lesser number of shares, or take such other actions
as would otherwise result in dilution of the investors' position.
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The investors have agreed to restrict their ability to convert
their debentures or exercise their warrants and receive shares of our
common stock such that the number of shares of common stock held by them in
the aggregate and their affiliates after such conversion of the
Debentures does not exceed 4.99% or exercise of the Warrants does not
exceed 9.99% of the then issued and outstanding shares of common
stock.
Pursuant to the requirements of the Registration Rights Agreement, dated
March 31, 2006, we are required to register, are registering and are
offering the shares of common stock issuable upon conversion of the
Debentures and the Warrants in this Registration Statement.
As of the date of this Annual Report, we do not know when we will receive,
if at all, the additional $4.0 million in financing from the Investor under
the Agreement.
PRIVATE FINANCING TRANSACTION IN AUGUST OF 2006
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On August 31, 2006 (the "Closing Date"), we entered into agreements
with Laurus Master Fund, Ltd., a Cayman Islands corporation ("Laurus"),
pursuant to which sold and issued to Laurus the Following securities:
- A secured three-year term note (the "Secured Note") with a principal
amount of $2,500,000 (the "Secured Note Amount"), which matures on August
31, 2009 (the "Maturity Date");
- A secured three-year revolving note with a principal amount of
$5,000,000 (the "Revolving Note"; the Revolving Note and the Secured Note
shall be collectively referred to as the "Notes"); and
- 1,500,000 shares (the "Shares") of preferred stock (the "Preferred
Stock"), of the Company, which is redeemable by the Company at a price of
$0.10 per share (the "Set Price") at any time until August 31, 2011,
and may be converted by Laurus at any time into common stock, no par value
per share (the "Common Stock"), of the Company at the Set Price.
Of the Secured Note, net proceeds of $2,173,000 were received by us on the
Closing Date, and were deposited in a restricted account with Col Taylor
Bank as security for the total loan amount and for use by us to make
acquisitions as approved by Laurus.
The Notes are secured by a blanket lien on all of the Company's assets, the
assets of the Company's subsidiaries and the cash held in the restricted
account at Cole Taylor Bank.
The principal amount of the Secured Note carries an interest rate of prime
plus three percent (the "Secured Note Rate"), subject to adjustment, and we
must make monthly amortizing payments of $42,500, commencing January 1,
2007 and with said monthly amortizing payments increasing to $62,500
commencing on January 1, 2008, toward the outstanding non-restricted
principal amount. Furthermore, the Secured Note Rate shall not at any
time be less than nine percent (9.0%). The Company may prepay the
Secured Note at any time as set forth in the Secured Note.
The principal amount of the Revolving Note carries an interest rate of
prime plus two percent (the "Revolving Note Rate"), subject to
adjustment, and we must make said monthly interest payments, payable
in arrears, commencing September 1, 2006. Furthermore, the Revolving Note
Rate shall not at any time be less than nine percent (9.0%). The
Company may prepay the May 2006 Revolving Note at any time without penalty.
In consideration of the foregoing, Laurus has agreed to a "lock-up
provision" period of no less than twelve (12) months from the Closing Date.
The Shares of Preferred Stock are convertible into shares of our common
stock at a price of $0.10 per share, subject to anti-dilution
adjustments. Laurus has contractually agreed to restrict its ability to
convert the Shares of Preferred Stock and receive shares of the Company's
Common Stock such that the number of shares of the Company common stock
held by it after such exercise does not exceed 4.99% of the Company's
then issued and outstanding shares of common stock.
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We also have granted Laurus a right of first refusal with respect to any
debt or equity financings, with such restriction being in effect for no
longer then 2 years after the Closing Date.
We are also obligated to file a registration statement registering the
resale of shares of the Common Stock issuable upon the conversion of the
Shares. We are not registering for resale in this Registration Statement
any Common Stock issuable upon the conversion of the Shares. If the
registration statement is not filed within 60 days of Closing Date, or
declared effective within 180 days of Closing Date, or if the
registration is suspended other than as permitted, in the registration
rights agreement between the Company and Laurus, the Company is obligated
to pay Laurus certain fees and the obligations may be deemed to be
in default.
AMENDMENT TO MARCH 2006 FINANCING
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On July 27, 2006, we entered into a Letter Agreement (the "Letter
Agreement #1") with Palisades Master Fund LP ("Palisades") pursuant to
which Palisades agreed to waive an Event of Default for the Company's
failure to timely file a registration statement with the SEC in
connection with the March 2006 financing with Palisades (the "March
2006 Financing"), and further agreed to subordinate its security
interest to the Company's loan in the amount of $7,000,000 to Laurus (the
"Subordination"). Furthermore, Palisades agreed to modify certain
provisions of the Registration Rights Agreement and Securities Purchase
Agreement, dated March 31, 2006. As consideration for the waiver, the
Company agreed to issue Palisades 1,000,000 shares of Preferred Stock
having a 7% coupon which is convertible into Common Stock at $0.10 per
share (the "Palisades Preferred Stock") and lower the conversion price for
the debentures dated March 31, 2006 issued to Palisades to $0.10. The
Palisades Preferred Stock shall pay the 7% coupon semi-annually.
Furthermore, at our sole option, we have the right to redeem the Palisades
Preferred Stock at $0.10 per share at any time on or before the 5th
anniversary of the Palisades Closing Date (as defined below).
We also agreed to file a registration statement registering the resale of
the shares issuable upon the conversion of the Palisades Preferred Stock
no later than 210 days after the Palisades Closing Date (as defined
below). We further agreed to issue an additional 82,800,000 warrants to
Palisades (the "Additional Warrants") as consideration for the waiver, such
that Palisades would have the right to substitute the Additional
Warrants for Preferred Stock of the Company under similar terms and
conditions as any Preferred Stock that would be issued to Laurus,
predicated upon the Company agreeing to a financing agreement with Laurus
on or before August 31, 2006.
On July 31, 2006 (the "Palisades Closing Date"), the Company entered into a
subsequent Letter Agreement with Palisades (the "Letter Agreement #2")
whereby Palisades and the Company agreed to modify the Letter Agreement
#1, such that Palisades would subordinate its security interest in all
of the assets of the Company and its subsidiaries to Laurus. As
consideration for the Waiver, the Subordination and Palisades' agreement
to surrender the 7,200,000 warrants issued in connection with the
March 2006 Financing and in lieu of the Company issuing the additional
82,800,000 warrants as agreed to pursuant Letter Agreement #1, the
Company agreed to issue to Palisades an additional 1,800,000 shares of
Preferred Stock with the terms as set forth above.
APPOINTMENT OF DENNIS J. CAGAN AND PATRICK R. QUINN
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On July 24, 2006 the Company's Board of Directors approved the
appointment of Dennis Cagan to serve as the permanent President and
Chief Executive Officer of the Company, and for such appointment to be
effective upon the closing of the Laurus Master Fund, Ltd. financing
transaction (the "Financing Transaction") which closed on August 31, 2006.
Mr. Cagan was previously serving as interim President and CEO of the
Company. In addition, the Company entered into a fulltime employment
agreement (the "Agreement") with Mr. Cagan, dated as September 1, 2006.
For more information on the terms of the Agreement, see section "Executive
Compensation."
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On September 1, 2006 the Board of Directors appointed Patrick Quinn, the
Company's Chief Financial Officer, to also serve as the Chief Operating
Officer of the Company, and for such appointment to be effective
upon the closing of the Financing Transaction.
APPOINTMENT OF DAVID B. BATSTONE
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On September 13, 2006, the Company's Board of Directors approved the
appointment of David B. Batstone as a director of the Company. For more
information on David B. Batstone, see section "Directors, Executive
Officers, Promoters and Control Persons; Compliance With Section 16(a) of
the Exchange Act."
SPECIAL SHAREHOLDER MEETING HELD ON SEPTEMBER 26, 2006
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On September 26, 2006, the Company held a Special Shareholders meeting, for
the Company's shareholders of record as of August 11, 2006 (the "Record
Date"), as was previously disclosed by the Company in its Proxy Statement
filed on Schedule 14(a) with the SEC on August 18, 2006. During the
meeting, the affirmative vote of the Company's shareholders holding the
majority of the Company's outstanding shares as of the Record Date approved
the following proposals:
1. Amending the Company's Articles of Incorporation to change the name
of the Company from Trinity Learning Corporation to TWL Corporation; and
2. Amending the Company's Articles of Incorporation to increase the
authorized number of common stock from 100,000,000 shares to 750,000,000
shares.
CHANGES TO THE ARTICLES OF INCORPORATION OF THE COMPANY
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On September 29, 2006, the Company filed Articles of Amendment ("Articles")
with the Secretary of State of the State of Utah, effective as of equal
date, to effect a name change of the Company from Trinity Learning
Corporation to TWL Corporation and to increase the authorized common stock
of the Company from 100,000,000 shares to 750,000,000 shares.
In addition the Company filed a Certificate of Amendment with the Secretary
of State of the State of Delaware, effective as of September 12, 2006, to
effect a name change of its subsidiary Trinity Workplace Learning
Corporation to TWL Knowledge Group.
GENERAL
We are a publicly held global learning company, with geographic locations
in the United States, Australia and Europe, that specializes in providing
technology-enabled learning and certification solutions for corporations,
organizations and individuals in multiple global industries. Historically,
we have focused our marketing on medium to large businesses and
organizations that wish to provide workplace training and certification to
their employees in a cost effective and efficient manner.
In addition to internal growth through business development and expansion
of sales and marketing in existing operations, we have pursued a strategy
of acquiring and integrating other operating companies with established
customer bases in strategic markets and industry segments. Today, target
acquisition candidates typically are expected to meet one or more of these
criteria:
- core operations in the United States
- prime customer relationships in North America
- international sales channels through agents, partners, or sales
offices
- content that can be leveraged by the Company's state-of-the-art
production and communication facility in Carrollton, Texas
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TWL KNOWLEDGE GROUP, INC.
In April, 2005, we completed the acquisition of the key operating assets of
the Primedia Workplace Learning division ("PWPL") of PRIMEDIA, Inc.,
including PWPL' s content libraries, trademarks, brands, intellectual
property, databases and physical assets. Also included was a 200,000 square
foot state-of-the-art workplace learning content production and delivery
facility which we lease in Carrollton, Texas, which is used to deliver
integrated learning solutions to professionals in the homeland security,
healthcare, industrial, fire and emergency, government, law enforcement and
private security markets. We operate the acquired assets as a wholly-owned
subsidiary under the name TWL Knowledge Group, Inc. ("TWLK").
The content library is used by over 7,000 clients to train, educate and
certify employees in the areas of state and federal regulatory compliance,
ongoing job certification, continuing education, risk mitigation and in-
service education. In addition to its traditional delivery capabilities
such as VHS, DVD, CD-ROM, Internet and print, the PWPL acquisition makes
the Company a provider of satellite-delivered learning content. The
satellite network consists of seven channels that are spread over three key
areas: healthcare, government and industrial. These satellite channels have
long-established and well-respected brand names in their respective
industries.
The division, subsequently renamed the TWL Knowledge Group, Inc. serves as
our primary content creation, marketing and delivery platform. With a
comprehensive video production and distribution platform, including
satellite uplinks and downlinks, plus live and archived Internet
broadcasting capabilities, we have the ability to reach customers and
learners around the world from one central facility. Currently not one
customer comprises more than 4% of our total revenues, and we have more
than 2,000 active customers.
TWLK has three key areas of focus:
- HEALTHCARE GROUP. The Healthcare Group ("HCG") focuses primarily
on serving hospitals and long-term care facilities within the
healthcare sector. HCG currently services more than 1,800
hospitals and long-term care institutions and reaches more than
1,800,000 healthcare professionals. HCG provides its training
primarily through our proprietary satellite delivered networks,
with more than 83% of its revenues subscription based with
contracts ranging from one to three years. HCG offers
accreditation for 17 categories of licensed healthcare
professionals, and has issued over 2,600,000 continuing education
certificates. HCG has partnership alliances with the Joint
Commission Resources and the VHA.
- GOVERNMENT SERVICES GROUP. The Government Services Group ("GSG")
focuses primarily on serving the emergency responder markets. GSG
currently services more than 2,700 agencies and trains more than
300,000 emergency responders in the fields of law enforcement,
fire, emergency medical services, and professional homeland
security. Approximately 90% of its revenue is subscription based
with contract lengths of generally one year in duration. GSG
currently offers more than 2,000 courses through a variety of
delivery channels to its thousands of federal, state and local
customers.
- INDUSTRIAL SERVICES GROUP. The Industrial Services Group ("ISG")
offers comprehensive training to the industrial sector and
services some of the largest companies in the United States,
including Global 1000 and Fortune 500 clients. Training in the
industrial segment is increasingly driven by customer mandates
for improved skills as well as for regulatory compliance.
Approximately 10-15% of its revenue is subscription based with
contracts ranging from one to three years. The remaining sales
are single-event transactions. ISG provides its library of more
than 2,000 training courses to its target market primarily
through VHS tapes and CD formats. ISG's commitment to online
offerings has positioned the group to transition from product
sales to a subscription model. ISG supplements all these channels
with associated print material.
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KEY BENEFITS OF THE COMBINED OPERATIONS
As a result of the PWPL acquisition, the combination of the Company and
TWLK provides a number of key benefits:
- Approximately 210 full-time workplace learning professionals,
including content development, instructional design, training
services, marketing, video production, satellite communications,
Internet and IT and administration. We have an expanded
accounting and finance group that should enhance our financial
controls, cash management, SEC reporting, and Sarbanes-Oxley
compliance.
- A content library of more than 21,000 training courses for the
healthcare, industrial and security government markets.
Delivery capabilities through a variety of channels, including
satellite, broadband, DVDs, CD-ROM, VHS, print and instructor-led
courses. We currently broadcast content via encrypted satellite
to more than 4,000 installed satellite dishes at customer sites.
This diverse and powerful delivery system should permit us to
cost effectively reach virtually any customer in the world in a
variety of secure channels.
- A state-of-the-art 200,000 square foot office and production
leased facility (approximately 20 minutes from Dallas-Fort
Worth), built and equipped at a cost estimated at over $30
million in 1996, including production studios, satellite uplinks
and downlinks. We now have an extensive information technology
infrastructure, including The Academy, which is a proprietary
database for tracking learners, courses and certifications. We
believe that because an individual's training and certification
information resides within The Academy and is not owned by the
employer, additional revenue could be generated as employees
change jobs and require re-certification. The building also
houses a replication and fulfillment center for in-house, on-
demand creation of VHS tapes, CDs and DVDs, which enables us to
leverage content development across all customer-driven delivery
media.
- A full-time customer service center that monitors and services
the TWLK client base, including providing professional services
and customized solutions. The support group also makes outbound
customer calls to generate sales leads as well as take incoming
customer calls.
THE GLOBAL LEARNING MARKET
According to EduVentures, Inc., the global education and training market is
estimated at approximately $2 trillion annually, with the United States
currently accounting for over 35% of the global market for education and
training services. Within the corporate training market, e-learning, fueled
by increased penetration of computers and workplace access to the Internet,
is playing an increased role in providing employees with training and
workplace learning. DC estimates that the worldwide e-learning services
market will exceed $23 billion by 2006 and Cortona Consulting estimates
that the global e-learning services market will reach $50 billion by 2010.
According to the Population Resource Center, world population exceeded 6
billion individuals in 2001 with a growth rate of 1.3% annually. Based upon
this growth rate, there will be approximately 1 billion new entrants to the
global workforce each decade until at least the middle of this century.
Furthermore, significant changes in the make-up of the world's population
are anticipated in the near future. It is estimated that in Europe, North
America and certain other industrialized nations, anticipated future labor
shortages are expected to be caused by an aging workforce and will need to
be met through immigration, which would drive demand for language and other
job training. Other labor shortages are expected to be met by full-time and
part-time re-entry by "retirees" into the workforce, a trend that is
already gaining momentum in the United States. These re-entry workers often
must be trained or retrained for new job skills, particularly in computer-
related skills. In addition to workplace learning, an aging population
points toward an expanded market for lifelong learning as longevity
increases and people are healthy and active longer into their 70s and 80s.
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Other demographic factors in the make-up of the world's work force are
expected to have a significant impact on the world learning market. In the
United States, according to Ameristat, between 1998 and 2008, over 40
million people are estimated to enter the US labor force, joining over 110
million workers already in the workforce. Furthermore, over 25% of new
workers are expected to be either Hispanic or Asian, thus increasing
diversity in the workplace. A more diverse workforce presents challenges to
employers with regard to language and communication skills, compliance with
laws and regulations regarding employment practices and training in basic
workplace skills.
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 holder as compared
to a high school diploma has nearly doubled since the late 1970s a
statistic that is even more pronounced for women workers. Around the world,
the value of a college degree, particularly from an accredited U.S. higher
education institution, remains one of the most valuable workplace assets.
Through distance and online education, there is a world market for college
degree programs and professional certifications. Wage differentials based
upon 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 upon 12 years of education.
Increased globalization 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. For developed
nations to compete with the outsourcing of labor to developing nations,
they must invest in educating and training their workforces. Many companies
already know the benefits of ongoing education and training for their
employees. The American Society for Training and Development ("ASTD")
performed a three-year study of employee education with 575 US-based
publicly-traded firms from various industries. ASTD 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
survey performed by Chief Learning Officer Magazine and Fairfield Research
Inc., a market research company, looked into the size of the enterprise-
learning market in the US. Companies with over $500 million in annual sales
spent an average of $3.7 million on learning and training and are estimated
to have collectively spent $11.9 billion on education in 2003.
Globalization also presents challenges to large-scale, multinational
employers in global industries that must address their human capital
requirements in a cost-effective manner due to dispersed workforces,
continual introduction of new technologies (including the introduction of
technology to job classifications staffed by entry-level or lower-skilled
workers), global competition, language and cultural barriers and other
demographic factors. Large employers also employ a wide range of personnel
with various educational attainment levels 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.
Just as globalization is expanding the world's workforce to new labor
markets and employers increasingly recognize the return on investment from
a better educated workforce, 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. Access to computers and the Internet 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 technology has also presented new
approaches for teaching and training employees. Over the past two decades,
educational research has shown that individuals learn in different ways and
that no one method of teaching or training is optimal across all types of
content or desired educational outcomes. Educational research has shown
that a blended learning approach is generally more successful for the
retention of new learning. Within the overall global learning market, there
are a variety of instructional methods that can be utilized to train
workers. These methods include:
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- Classroom instruction at a school, the employer's facility or at
an off-site facility
- Computer-based training and simulation
Distance education, utilizing printed materials or digital
materials
- Online or e-learning, either instructor-mediated or self-paced
- Hands-on training with machines or devices, either in the
workplace or at a remote facility
STRATEGY
Our goal is to become a leader in the global learning industry and to
create one of the first global brands that integrate products and services
for workplace learning, education and personal growth markets. Key aspects
of our strategy are:
- CROSS SELLING OF EXISTING CONTENT. We believe that there is
significant customer overlap among its HCG, GSC and ISG industry
verticals, With over 21,000 titles, we believe that there are
significant cross- and up-selling opportunities in the combined
Company and are refocusing our sales force to realize these
synergies.
- INCREASE PENETRATION IN KEY MARKETS. We intend to market
aggressively to expand our presence in key markets where
significant opportunities lie. For example, HCG currently serves
only 30% of the acute care market and less than 2% of the long-
term care market. GSG currently provides training to less than 6%
of the law enforcement market and only about 7% of the fire and
emergency markets. In addition, the homeland security market is
relatively new and provides substantial opportunity for growth.
- EXPAND INTO KEY INDUSTRY SEGMENTS. We are evaluating other
industry segments where we believe that our technology and
infrastructure will allow us to expand. Key among these is
language learning.
- CONTINUE FOCUS ON COST SAVINGS. We have implemented an extensive
cost savings initiative, which we expect to realize upon in the
next several quarters. This cost-savings initiative includes:
- Headcount reduction in non-core areas;
- Re-allocation of internal production staff to eliminate or
reduce freelancers; and
- Elimination of duplicate overhead, such as office space and
back office employees
- INCREASED CAPACITY UTILIZATION. TWLK's production facility has
additional unutilized capacity. We are in the process of
increasing capacity utilization by one or more of the following:
subleasing unused office space, finding additional third-party
clients for video production facilities and identifying clients
to share our satellite service capacity.
- INTEGRATION. TWLK now represents substantially all of our assets
and operations. We continue to operate our other subsidiaries in
the United States and in international markets, with the intent
of integrating operations, sales and marketing into TWLK. In
cases where integration is not feasible or cost effective, we
anticipate that we will either (a) continue to operate certain
subsidiaries as we have done in the past, (b) seek partnerships
and alliances and other strategic relationships, or (c) divest or
reduce our ownership in selective non-core assets and operations.
- INCREASE INVESTOR AWARENESS. We intend to apply for a NASDAQ
Small-Cap or AMEX listing as soon as it meets the listing
requirements.
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SUBSIDIARIES
We currently have three wholly owned operating subsidiaries: TWL Knowledge
Group, Inc., River Murray Training, and VILPAS. Subsequent to the end of
our fiscal year ended June 30, 2006 we divested our ownership in IRCA
(Proprietary) Limited, previously a 51% subsidiary, and 51% interest in the
operations of Riverbend.
TWL KNOWLEDGE GROUP
As of April 1, 2005, we entered into and closed an asset purchase agreement
(the "Asset Purchase Agreement") with PRIMEDIA Inc. and two PRIMEDIA
affiliates (collectively, "PRIMEDIA"), whereby PRIMEDIA sold to the Company
certain assets related to its PWPL division. The assets comprised those
relating to PWPL's HCG, GSC, ISG, Shared Services Group, and all other
assets of PWPL, including all of the assets of PRIMEDIA Digital Video
Holdings LLC, excluding only those assets primarily related to the
operations of PWPL's Financial Services Group and/or PWPL's Interactive
Medical Network business (such acquired assets referred to collectively
hereinafter as the "Business"). These assets are comprised of content
libraries, trademarks, brands, intellectual property, databases, and
physical assets. Included in the sale are certain video production and
distribution capabilities used to deliver integrated learning solutions to
professionals in the homeland security, healthcare, industrial, fire &
emergency, government, law enforcement and private security markets
currently served by PWPL.
In consideration for the Business, we assumed certain liabilities of
PRIMEDIA relating to the Business, in part consisting of (i) a lease for
the building in Carrollton, Texas where our current headquarters are
located, through February 2014 for total scheduled lease payments of
$20,051,302, and (ii) deferred revenue in the amount of $4,700,000 that we
assumed at purchase (the "Assumed Liabilities"), in an aggregate amount
estimated at the time of closing to be between $26 and $28 million.
The purchase price for the Business was subject to a working capital
adjustment whereby the purchase price for the assets would have either been
reduced or increased on a dollar-for-dollar basis to the extent that
certain elements of the working capital deficit of the Business as of April
1, 2005 were determined within 90 days of such date to be either,
respectively, less than or greater than $4,000,000. As of June 30, 2006, no
such working capital adjustments have been made.
In connection with the transactions contemplated by the Purchase Agreement,
SBI USA LCC, a California limited liability company ("SBI"), agreed to
guarantee the performance by the Company of certain leases comprising part
of the Assumed Liabilities. In consideration for such guarantee (the
"Guarantee"), we entered into an agreement with SBI dated April 1, 2005
(the "SBI Agreement") pursuant to which we agreed, among other things, to
issue to SBI an aggregate of 4,000,000 shares of the Company's common stock
(which stock will carry piggyback registration rights) (the "SBI Shares"),
to reimburse SBI for any expenses incurred by it in connection with the
granting of the Guarantee, to grant SBI the right to appoint an observer to
the Company's Board of Directors, plus expenses, and to indemnify SBI for
any liabilities that might accrue to it pursuant to the Guarantee.
Since closing of the Asset Purchase Agreement, we estimate that we have
been able to better utilize our resources and reduce expenses of the
Business from a combined basis by approximately $3.5 million on an
annualized basis through the following initiatives:
- Because Primedia refreshed and updated the content library prior
to the sale of PWPL, we believe that minimal investment, if any,
in content is needed over the next 12 months. Historically,
Primedia has spent approximately $1.1 million per quarter on
content development;
- As a result of our acquisition of PWPL from Primedia, corporate
overhead expenses of allocated from Primedia to PWPL should be
substantially eliminated;
- We have converted 29 temporary and/or contract employees to
permanent status and eliminated several current job functions for
an annual savings of approximately $1.3 million;
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- Because of the office space and administrative support that we
acquired as a result of its acquisition of the Business, we have
implemented annualized cost savings of approximately $300,000
through the elimination of duplicate overhead, such as office
space and certain financial staff in California;
- Other anticipated savings include:
- Annual savings of approximately $125,000 from reduced
maintenance costs related to the purchase of a new computer
system. No significant capital expenditures are planned
during the coming 12 months;
- 90,000 reduction of licensing fees paid for learning
management system;
- Bonus and legal fee accruals by PWPL, that are no longer
payable, of $212,000 and $100,000.
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. 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. Currently, this division is dormant and will likely be
liquidated.
RIVER MURRAY TRAINING
River Murray Training ("RMT"), our Australian subsidiary, provide
consultancy services for customers to establish a sustainable in-house
training system, resource development services to develop customized
learning support materials; and training services to 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.
RMT's primary sources of revenue are from the design and delivery of
consulting and training services in the Australian agribusiness industry.
VILPAS
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, a subsidiary of VILPAS, 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.
In aggregate, as of March 31, 2006, the Company derived the following
respective percentage of revenues by geographic region: United States
96.5%, Australia - 1.7% and Europe 1.8%.
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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:
- Smaller, specialized local training companies;
- Providers of online and e-learning products targeted at corporate
soft skills and technical training;
- Not-for-profit trade schools, vocational schools and
universities; and
- Learning services divisions of large, multinational computer,
software and management consulting firms.
We anticipate that market resistance may come from the internal trainers in
the organizations to whom our various operating subsidiaries sell training
and certification. Traditional trainers may see outsourcing as a threat to
their job security. We seek to overcome this by focusing our business
development strategy on senior management in operations, finance and human
resources. We will also reshape the value proposition for internal
training functions from tactical to strategic. We believe we can enhance
the role of internal training and human capital development departments by
providing a proven, integrated set of learning tools. In this way, we can
provide measurable results and increase both the actual effectiveness and
the perceived value of internal training departments.
Each of our operating subsidiaries faces local and regional competition for
customer contracts and for government and non-government funding of
education and training projects. In geographic areas where they hope to
expand, they may face competition from established providers of their
respective products and services.
We believe that our operating subsidiaries derive their competitive
advantage from one or more of the following:
- Proprietary content, software or technology;
- Strategic relationships and alliances, including exclusive
development and marketing relationships; and
- Management's industry and customer relationships.
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.
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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, 2006, we had approximately 210 full time employees
located in California, Texas, Mississippi, South Carolina, Tennessee,
Virginia, Australia, and Norway.
RISK FACTORS
You should carefully consider the following risks before making an
investment in our company. In addition, you should keep in mind that the
risks described below are not the only risks that we face. The risks
described below are the risks that we currently believe are material to our
business. However, additional risks not presently known to us, or risks
that we currently believe are not material, may also impair our business
operations. You should also refer to the other information set forth in
this Annual Report on Form 10-KSB, including the discussions set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Business," as well as our financial
statements and the related notes.
ADDITIONAL CAPITAL IS NECESSARY TO SUSTAIN AND GROW OUR BUSINESS.
For the foreseeable future, unless and until we attain profitable
operations, we will likely experience a net operating loss or minimal net
income. Thus, we will likely be dependent for the foreseeable future on
capital raised in equity and/or debt financing, and there can be no
assurance that we will be able to obtain such financing on favorable terms,
if at all.
WE HAVE INCURRED SIGNIFICANT LOSSES TO DATE AND EXPECT TO CONTINUE TO
INCUR LOSSES.
During the fiscal years ended June 30, 2006 and 2005 we incurred net losses
of approximately $21,779,617 and $15,614,043, respectively. As of June 30,
2006 we had an accumulated deficit of approximately $60,045,635. We expect
to continue to incur losses for at least the next 6 months. Continuing
losses will have an adverse impact on our cash flow and may impair our
ability to raise additional capital required to continue and expand our
operations.
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OUR AUDITORS HAVE ISSUED AN OPINION OF A SUBSTANTIAL DOUBT AS TO THE GOING
CONCERN OF THE COMPANY WHICH MAY MAKE IT MORE DIFFICULT FOR US TO RAISE
CAPITAL.
Our auditors have included a substantial going concern in their opinion
on our financial statements because of concerns about our ability to
continue as a going concern. These concerns arise from the fact that we
have not generated sufficient cash flows to meet our obligations and
sustain our operations. If we are unable to continue as a going concern,
you could lose your entire investment in us. Based on our current cash
balance and in light of the recent financing agreement entered into with
Laurus in August 2006, we will not be able to sustain operations beyond the
next 6 months without additional funding. Furthermore, other than the
Laurus financing, we currently have no arrangements in place or
contemplated to secure such additional funding.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING, WE MAY HAVE TO REDUCE OUR
BUSINESS OPERATIONS.
Although we have entered into securities purchase agreements providing
financing in an aggregate amount of $12.0 million, we will likely be
required to raise additional financing. We anticipate, based on
currently proposed plans and assumptions relating to our business, that
we will require approximately $4 million to satisfy our operations
and capital requirements for the next 12 months. Therefore, if our
marketing campaign is not successful in promoting sales of our products, we
will be required to seek additional financing. We will also require
additional financing to expand into other markets and further develop
our products and services. With the exception of the financing in an
aggregate amount of $12.0 million described in "Recent Developments"
section of Prospectus Summary, we have no current arrangements with respect
to any additional financing. Consequently, there can be no assurance
that any additional financing will be available when needed, on
commercially reasonable terms or at all. The inability to obtain
additional capital may reduce our ability to continue to conduct business
operations. Any additional equity financing may involve substantial
dilution to our then existing shareholders.
OUR BUSINESS STRATEGY IS BASED ON SUSTAINING AND GROWING OUR EXISTING
COMPANIES.
Our growth strategy includes integrating our recent acquisition and
building a world-wide learning technology company. Acquisitions involve
various inherent risks, such as:
- The potential loss of key personnel of an acquired business;
- The ability to integrate acquired businesses and to achieve
identified financial and operating synergies anticipated to
result from an acquisition; and
- Unanticipated changes in business and economic conditions
affecting an acquired business.
We expect to experience significant growth and expect such growth to
continue into the future. This growth is expected to place a significant
strain on our management, financial, operating and technical
resources. Failure to manage this growth effectively could have a
material adverse effect on the company's financial condition or results
of operations.
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
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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.
OUR BUSINESS MIGHT NEVER BECOME PROFITABLE.
We have never been profitable. As of June 30, 2006 we have a substantial
accumulated deficit in the amount of $60,045,635, and we expect our
cumulative net losses and cumulative negative cash flow to continue until
we can increase our revenues and/or reduce our costs. Long-term demand for
our service will depend upon, among other things, whether we obtain and
produce high quality programming consistent with consumers' tastes; the
willingness of consumers to pay for our products and services; the cost and
availability of our leased satellites; our marketing and pricing
strategy; and the marketing and pricing strategy of our competitors. If
we are unable ultimately to generate sufficient revenues to become
profitable and have positive cash flow, we could default on our
commitments and may have to discontinue operations or seek a purchaser
for our business or assets.
FAILURE OF OUR LEASED SATELLITES WOULD SIGNIFICANTLY DAMAGE OUR BUSINESS.
We lease one satellite for use in our TWLK business and currently derive
approximately 30% of our revenues from satellite customers. Satellites are
subject to a number of risks including: degradation and durability of solar
panels, quality of construction; random failure of satellite components,
which could result in significant damage to or loss of a satellite;
amount of fuel satellites consume; and damage or destruction by
electrostatic storms or collisions with other objects in space, which
occur only in rare cases. In the ordinary course of operation, satellites
experience failures of component parts and operational and performance
anomalies. These failures and anomalies are expected to continue in the
ordinary course, and it is impossible to predict if any of these future
events will have a material adverse effect on our operations. The
loss of our satellite transmission capabilities would have a significant
impact on our business. To date we have not experienced any of the above
referenced problems.
OUR NATIONAL BROADCAST STUDIO, TERRESTRIAL REPEATER NETWORK, SATELLITE
UPLINK FACILITY OR OTHER GROUND FACILITIES COULD BE DAMAGED BY NATURAL
CATASTROPHES OR TERRORIST ACTIVITIES.
Our national broadcast studios are located in our leased corporate offices
in Carrollton, Texas. An earthquake, tornado, flood, terrorist attack
or other catastrophic event could damage our national broadcast
studio, terrestrial repeater network or satellite uplink facility,
interrupt our service and harm our business. We do not have replacement
or redundant facilities that can be used to assume the functions of our
terrestrial repeater network, national broadcast studio or satellite
uplink facility in the event of a catastrophic event. Any damage to the
satellite that transmits to our terrestrial repeater network would likely
result in degradation of our service for some subscribers and could
result in complete loss of service in certain areas. Damage to our
national broadcast studio would restrict our programming production and
require us to obtain programming from third parties to continue our
service. Damage to our satellite uplink facility could result in a
complete loss of service until we could identify a suitable replacement
facility and transfer our operations to that site. To date we have not
experienced any of the above referenced problems.
WE ARE CONTROLLED BY CURRENT OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS.
Our directors, executive officers and principal stockholders and their
affiliates beneficially own approximately 17.41% of the outstanding shares
of our common stock. So long as our directors, executive officers and
principal stockholders and their affiliates control a majority of our fully
diluted equity, they will continue to have the ability to elect our
directors and determine the outcome of votes by our stockholders on
corporate matters, including mergers, sales of all or substantially all of
our assets, charter amendments and other matters requiring stockholder
approval. This controlling interest may have a negative impact on the
market price of our common stock by discouraging third-party investors.
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OUR GROWTH STRATEGY IS DEPENDENT ON A VARIETY OF REQUIREMENTS, ANY ONE OF
WHICH MAY NOT BE MET.
Our growth strategy and future profitability will be dependent on our
ability to recruit additional management, operational and sales
professionals and to enter into contracts with additional customers in
global markets. There can be no assurance that our business development,
sales, or marketing efforts will result in additional customer
contracts, or that such contracts will result in profitable
operations. Further, our growth strategy includes plans to achieve market
penetration in additional industry segments. In order to remain
competitive, we must (a) continually improve and expand our workplace
learning and other curricula, (b) continually improve and expand
technology and management-information systems, and (c) retain and/or
recruit qualified personnel including instructional designers,
computer software programmers, learning consultants, sales engineers, and
other operational, administrative and sales professionals. There can be
no assurance that we will be able to meet these requirements.
OUR BUSINESS WILL SUFFER IF TECHNOLOGY-ENABLED LEARNING PRODUCTS AND
SERVICES ARE NOT WIDELY ADOPTED.
Our technology-enabled solutions represent a new and emerging approach
for the workplace learning and education, and training market. Our
success will depend substantially upon the widespread adoption of e-
learning products for education and training. The early stage of
development of this market makes it difficult to predict customer demand
accurately. A delay in, or failure of, this market to develop, whether
due to technological, competitive or other reasons, would severely limit
the growth of our business and adversely affect our financial
performance.
WE FACE SIGNIFICANT COMPETITION FROM OTHER COMPANIES AND CHANGING
TECHNOLOGIES.
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 our
competitors have substantially greater financial, manufacturing, marketing
and technical resources, as well as having a larger market presence than
we do and represent significant long-term competition. In the event that
such a competitor is able to significantly improve the education
marketplace we may not be able to compete successfully in such markets. We
believe that competition will continue to increase, resulting in the market
pressure to develop and undertake similar or superior technological
advances. Such pressure could adversely affect our pricing, gross margins
and our ability to compete if we are not able to undergo similar
significant and rapid technological changes commensurate with such
competition. 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. However, there can be no assurance that our assessment
of the market place is correct, or that our products and services will be
accepted now or in the future.
Failure on our part to attract and retain sufficient skilled
personnel, particularly sales and marketing personnel and product
development personnel, may limit the rate at which we can grow, may
adversely affect our quality or availability of our products and may
result in less effective management of our business, any of which may
harm our business and financial performance. Qualified personnel are
in great demand throughout the learning and software development
industry. Moreover, newly hired employees generally take several months
to attain full productivity, and not all new hires satisfy performance
expectations.
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THE LENGTH OF THE SALES CYCLE FOR SERVICES MAY MAKE OUR OPERATING
RESULTS UNPREDICTABLE AND VOLATILE.
The period between initial contact with a potential customer and the
purchase of our products by that customer typically ranges from six to
eighteen months. Factors that contribute to the long sales cycle include
(a) the need to educate potential customers about the benefits of our
services; (b) competitive evaluations and bidding processes managed by
customers; (c) customers' internal budgeting and corporate approval
processes; and (d) the fact that large corporations often take
longer to make purchasing decisions due to the size of their
organizations.
OUR BUSINESS MAY SUFFER IF WE ARE NOT SUCCESSFUL IN DEVELOPING, MAINTAINING
AND DEFENDING PROPRIETARY ASPECTS OF TECHNOLOGY USED IN OUR PRODUCTS AND
SERVICES.
Our success and ability to compete are dependent, to a significant
degree, on our ability to develop and maintain the proprietary aspects
of our technology and operate without infringing the proprietary rights of
others. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend
against claims of infringement or invalidity. Any such litigation, even if
we prevailed, could be costly and divert resources and could have a
material adverse effect on our business, operating results and financial
condition. We can give no assurance that our means of protecting our
proprietary rights will be adequate, or that our competitors will
not independently develop similar technology. Any failure by us to
protect our intellectual property could have a material adverse effect
on our business, operating results and financial condition.
There can be no assurance that other parties will not claim that our
current or future products infringe their rights in the intellectual
property. We expect that developers of enterprise applications will
increasingly be subject to infringement claims as the number of products
and competitors in our industry segment grows and as the functionality of
products in different segments of the software industry increasingly
overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or
require us to enter into marginally acceptable terms. A successful
infringement claim against us and our failure or inability to license
the infringed rights or develop license technology with comparable
functionality, could have a material adverse effect on our business,
financial condition and operating results.
We integrate third-party software into some of our products. This third-
party software may not continue to be available on commercially
reasonable terms. We believe, however, there are alternative sources for
such technology. If we are unable to maintain licenses to the third-
party software included in our products, distribution of our
products could be delayed until equivalent software could be
developed or licensed and integrated into our products. This delay could
materially adversely affect our business, operating results and
financial condition.
LAWS AND REGULATIONS CAN AFFECT OUR OPERATIONS AND MAY LIMIT OUR
ABILITY TO OPERATE IN CERTAIN JURISDICTIONS.
Providers of educational programs to the public must comply with many
laws and regulations of federal, state and international governments. We
believe that we and our operating subsidiaries are in substantial
compliance with all laws and regulations applicable to our learning
business in the various jurisdictions in which we and our subsidiaries
operate. However, laws and regulations in the various jurisdictions in
which our subsidiaries operate that target educational providers could
affect our operations in the future and could limit the ability of our
subsidiaries to obtain authorization to operate in certain jurisdictions.
If we or various of our subsidiaries had to comply with, or was
found in violation of, a jurisdiction's current or future licensing
or regulatory requirements, we could be subject to civil or criminal
sanctions, including monetary penalties; we could also be barred from
providing educational services in that jurisdiction. In addition, laws
and regulatory decisions in many areas other than education could also
adversely affect our operations. Complying with current or future legal
requirements could have a material adverse effect on our operating results
and stock price.
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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:
- Difficulties in translating our courses into foreign
languages;
- International political and economic conditions;
- Changes in government regulation in various countries;
- Trade barriers;
- Difficulty in staffing foreign offices, and in training and
retaining foreign instructors;
- Adverse tax consequences; and
- Costs associated with expansion into new territories.
RISKS RELATED TO OUR BUSINESS IN AUSTRALIA AND EUROPE
We derive 1% of our revenues from our operations in Australia, and 1% of
our revenues from our operations in Europe. Accordingly, our results of
operations and prospects are subject, to some extent, to the economic,
political and legal developments in Australia and Europe.
While Australia's and Europe's economies have experienced growth in the
past several years, growth has been uneven, both geographically and among
various sectors of the economy. The Australian and European Union
government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the
overall economy of Australia and Europe, but may also have a negative
effect on us. Furthermore, trends, developments and enforcement of
conflicts between the United States and the European Union as monitored by
the World Trade Organization may have significant ramifications on our
operations in countries who are members of the European Union. For example,
our operating results and financial condition may be adversely affected by
the government's potential control over capital and technological
investments or changes in tax regulations. In the future, the Australian
and European government may play a significant role in regulating education
marketplace development by imposing various policies. It could also
exercise significant control over Australia's and Europe's economic growth
through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies.
FLUCTUATION OF THE AUSTRALIAN DOLLAR OR THE EURO MAY INDIRECTLY AFFECT OUR
FINANCIAL CONDITION BY AFFECTING THE VOLUME OF CROSS-BORDER MONEY FLOW.
The value of the Australian Dollar and the Euro fluctuates and is subject
to changes in political and economic conditions in Australia and Europe.
The conversion of the Australian Dollar or the Euro into foreign
currencies, including United States dollars, is further subject to rates as
set by the Australian National bank or its European Union equivalent, the
foreign exchange market rates and current exchange rates of a basket of
currencies on the world financial markets. As of October 3, 2006, the
exchange rate between the Australian Dollar and the United States dollar
was 1.34 Australian Dollars to every one United States dollar, and the
exchange rate between the Euro and the United States dollar was 0.78 Euros
to every one United States dollar. Accordingly, fluctuation of the
Australian Dollar or the Euro may indirectly affect our financial condition
by affecting the volume of cross-border money flow.
19 of 95
WE MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND
FINANCIAL CONTROLS IN AUSTRALIA AND EUROPE.
Australia and certain countries in the European Union where the Company
operates historically have adopted the Western style management and
financial reporting concepts and practices, as well as in modern banking,
computer and other control systems. However, if these conditions or
practices change, we may have difficulty in hiring, training and retaining
a sufficient number of qualified employees to work in Australia, Norway,
and/or Europe. As a result of this risk, we may experience difficulty in
establishing management, legal and financial controls, collecting financial
data and preparing financial statements, books of account and corporate
records and instituting business practices that meet newly adopted
standards. To date we have not experienced any of the above referenced
problems.
WE ARE AUTHORIZED TO ISSUE "BLANK CHECK" PREFERRED STOCK WHICH, IF ISSUED
WITHOUT STOCKHOLDERS APPROVAL, MAY ADVERSELY AFFECT THE RIGHTS OF HOLDERS
OF OUR COMMON STOCK.
Our certificate of incorporation authorizes the issuance of up to
10,000,000 shares of "blank check" preferred stock with such designations,
rights and preferences as may be determined from time to time by our Board
of Directors, of which we have currently designated and issued 4,300,000
shares. Accordingly, our Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which would adversely affect the voting
power or other rights of our stockholders. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control, which could
have the effect of discouraging bids for the Company and thereby prevent
stockholders from receiving the maximum value for their shares. We have no
present intention to issue any shares of its preferred stock in order to
discourage or delay a change of control. However, there can be no assurance
that preferred stock will not be issued at some time in the future.
THE AVAILABILITY OF A LARGE NUMBER OF AUTHORIZED BUT UNISSUED SHARES OF
COMMON STOCK MAY, UPON THEIR ISSUANCE, LEAD TO DILUTION OF EXISTING
STOCKHOLDERS.
We are authorized to issue 750,000,000 shares of common stock, of which as
of October 9, 2006, 43,415,513 shares were issued and outstanding. In
connection with the financing arrangement that we entered into in March and
August of 2006, we also have outstanding senior secured convertible
debentures that may be converted into up to 45,000,000 shares of common
stock at a fixed conversion price of $0.10, outstanding Series A
convertible preferred stock that may be converted into up to 43,000,000
shares of common stock and warrants to purchase up to 28,354,157 shares of
common stock. Assuming conversion and exercise of these instruments, we
will be left with more than 585,000,000 authorized shares of common stock
that remain unissued. These shares may be issued by our Board of Directors
without further stockholder approval. The issuance of large numbers of
shares, possibly at below market prices, is likely to result in substantial
dilution to the interests of other stockholders. In addition, issuances of
large numbers of shares may adversely affect the market price of our common
stock.
RISKS RELATING TO OUR CURRENT FINANCING AGREEMENTS:
---------------------------------------------------
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE
DEBENTURES DUE MARCH 31, 2010, WARRANTS THAT MAY BE AVAILABLE FOR FUTURE
SALE AND OUTSTANDING SERIES A CONVERTIBLE PREFERRED STOCK AND THE SALE OF
THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of October 9, 2006, we had 43,415,513 shares of common stock issued and
outstanding. In connection with the financing arrangements that we entered
into in March and August of 2006, we also have outstanding senior secured
convertible notes or that may be converted into up to 45,000,000 shares of
common stock at a fixed conversion price of $0.10, outstanding warrants to
purchase 28,354,157 shares of common stock, and outstanding Series A
convertible preferred stock that may be converted into up to 43,000,000
shares of common stock. Upon effectiveness of the registration statement of
which this prospectus forms a part, all including up to 45,000,000 shares
issuable upon conversion of the notes and upon exercise of our warrants,
may be sold without restriction. The sale of these shares may adversely
affect the market price of our common stock.
20 of 95
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED
CONVERTIBLE DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING
CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO
REPAY THE SECURED CONVERTIBLE DEBENTURES, IF REQUIRED, COULD RESULT IN
LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL
ASSETS.
On March 31, 2006, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $4,500,000 in principal amount of secured
convertible debentures. The secured convertible notes are due and
payable, with 15% interest, four years from the date of issuance,
unless sooner converted into shares of our common stock. In addition,
any event of default such as our failure to repay the principal or interest
when due, our failure to issue shares of common stock upon conversion by
the holder, or our failure to timely file a registration statement or
have such registration statement declared effective, could require the
early repayment of the secured convertible debentures, including a
default interest rate of 18% on the outstanding principal balance of the
debentures if the default is not cured with the specified grace period. At
the present moment, we do not anticipate that the full amount of the
secured convertible notes will be converted into shares of our
common stock, in accordance with the terms of the secured convertible
debentures, as the fixed conversion price of the convertible debentures is
$0.25 and exceeds our current market price as quoted on the OTC Bulletin
Board. However, if we are required to repay the secured convertible
debentures, we would be required to use our limited working capital and
raise additional funds. If we were unable to repay the debentures when
required, the debenture holders could commence legal action against us
and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
BEGINNING MARCH 31, 2008, WE MUST REPAY 1/24TH OF THE FACE AMOUNT OF OUR
DEBENTURES ON A MONTHLY BASIS, AND HAVING THE ABILITY TO MAKE THIS PAYMENT
IN CASH OR IN STOCK BASED UPON A 20% DISCOUNT FROM THE MARKET PRICE AT THE
TIME OF REPAYMENT, THE REPAYMENT IN SHARES OF THE PRINCIPAL AND INTEREST ON
THE DEBENTURES MAY RESULT IN SUBSTANTIAL DILUTION TO THE INTERESTS OF OUR
OTHER HOLDERS OF COMMON STOCK AND THE SALE OF THESE SHARES MAY DEPRESS THE
MARKET PRICE OF OUR COMMON STOCK AND CAUSE DILUTION TO OUR EXISTING
STOCKHOLDERS.
As of October 9, 2006, we had 43,415,513 shares of common stock issued and
outstanding. In connection with the financing arrangement that we entered
into with Palisades in March 2006 and pursuant to the Letter Agreement #1,
we also have outstanding secured convertible debentures that may be
converted into an estimated 45,000,000 shares of common stock at the fixed
conversion price of $0.10 per share. In addition, beginning March 31, 2008,
we must repay 1/24th of the face amount of our debentures on a monthly
basis, and we may have the ability to make this payment in cash or in stock
based upon a 20% discount from the market price at the time of repayment,
the repayment in shares of the principal and interest on the debentures may
result in substantial dilution to the interests of our other holders of
common stock and the sale of these shares may depress the market price of
our common stock and cause dilution to our existing stockholders. However,
our ability to repay the debentures and any interest on the debentures is
limited to the existence of an effective Registration Statement pursuant to
which Palisades would be permitted to utilize this Registration Statement
to resell all of the shares issuable pursuant to the financing documents
entered into with Palisades.
The variable repayment price feature of our convertible debentures could
require us to issue a substantially greater number of shares, which will
cause dilution to our existing stockholders. If we elect to repay the
debentures and interest in shares, the number of shares we will be required
to issue upon repayment of the debentures will increase if the market price
of our stock decreases.
Using the closing bid price of $0.09 of our common stock on October 3,
2006, assuming full repayment of the principal and interest of the
$4,500,000 in principal amount of convertible debentures in shares of our
common stock, and based upon a 20% discount from the market price at the
time of repayment of our debentures and 10% discount from the market price
at the time of the interest payment, we would be required to issue
62,500,000 shares of common stock for the repayment of debentures,
21 of 95
8,680,556 share for the repayment of interest, for an aggregate total of
71,180,556 or 163.95% of the 43,415,513 shares of common stock issued and
outstanding on October 9, 2006,. However, due to the floating repayment
rates, we do not know the exact number of shares that we could issue upon
repayment of the principal and interest on the debentures.
The following is an example of the amount of shares of our common stock
issuable upon repayment of 1/24th of the $4,500,000 principal amount of
convertible debentures or $187,500 on a monthly basis, plus accrued
interest at 15% per annum over four years, based on market prices assumed
to be 25%, 50% and 75% below the closing bid price on October 3, 2006 of
$0.09:
Repayment of Debentures
------------------------
-------------------------------------------------------------------------------------
PRICE WITH NUMBER
% BELOW MARKET PER SHARE 20% DISCOUNT OF SHARES PERCENTAGE*
-------------------------------------------------------------------------------------
25% $0.0675 $0.054 83,333,333 191.94%
-------------------------------------------------------------------------------------
50% $0.045 $0.036 125,000,000 287.92%
-------------------------------------------------------------------------------------
75% $0.0225 $0.018 250,000,000 575.83%
-------------------------------------------------------------------------------------
* Based upon 43,415,513 shares of common stock outstanding as of October 9,
2006. The convertible debentures contain provisions that limit the
stockownership of the holder of those debentures to 4.99%. Nevertheless,
the percentages set forth in the table reflect the percentage of shares
that may be issued to the holder in the aggregate.
As illustrated, the number of shares of common stock issuable in connection
with the conversion of the repayment of the debentures will increase if the
market price of our stock declines, which will cause dilution to our
existing stockholders.
THE LARGE NUMBER OF SHARES ISSUABLE UPON CONVERSION OF THE REAPAYMENT OF
THE CONVERTIBLE DEBENTURES MAY RESULT IN A CHANGE OF CONTROL.
As there is no limit on the number of shares that may be issued upon
conversion of the repayment amounts of the convertible debentures, these
issuances may result in the holder of the debentures controlling us. It may
be able to exert substantial influence over all matters submitted to a vote
of the shareholders, including the election and removal of directors,
amendments to our articles of incorporation and by-laws, and the approval
of a merger, consolidation or sale of all or substantially all of our
assets. In addition, this concentration of ownership could inhibit the
management of our business and affairs and have the effect of delaying,
deferring or preventing a change in control or impeding a merger,
consolidation, takeover or other business combination which our
shareholder, may view favorably.
THE LOWER THE STOCK PRICE, THE GREATER THE NUMBER OF SHARES COULD BE ISSUED
PURSUANT TO THE CONVERSION OF THE REPAYMENT AMOUNTS UNDER THE CONVERTIBLE
DEBENTURES.
The number of shares that could be issued upon conversion of the repayment
amounts scheduled under the convertible debentures is determined by the
market price of our common stock prevailing at the time of each conversion.
The lower the market price, the greater the number of shares issuable under
the agreement. Upon issuance of the shares, to the extent that holder of
those shares will and may attempt to sell the shares into the market, these
sales may further reduce the market price of our common stock. This in turn
will increase the number of shares issuable under the agreement. This may
lead to an escalation of lower market prices and ever greater numbers of
shares to be issued. A larger number of shares issuable at a discount to a
continuously declining stock price will expose our stockholders to greater
dilution and a reduction of the value of their investment.
22 of 95
THE ISSUANCE OF OUR STOCK UPON CONVERSION OF THE CONVERTIBLE DEBENTURES
COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE
FUTURE DECLINE OF OUR STOCK PRICE.
The convertible debentures have the potential to cause significant downward
pressure on the price of our common stock. This is particularly the case if
the shares issued upon conversion and placed into the market exceed the
market's ability to absorb the increased number of shares of stock. Such an
event could place further downward pressure on the price of our common
stock. The opportunity exists for short sellers and others to contribute to
the future decline of our stock price. If there are significant short sales
of our stock, the price decline that would result from this activity will
cause the share price to decline more so, which, in turn, may cause long
holders of the stock to sell their shares thereby contributing to sales of
stock in the market. If there is an imbalance on the sell side of the
market for the stock, our stock price will decline.
WE ARE OBLIGATED TO PAY LIQUIDATED DAMAGES AS A RESULT OF OUR FAILURE TO
HAVE THIS REGISTRATION STATEMENT DECLARED EFFECTIVE PRIOR TO JULY 31, 2006,
AND THE PAYMENT OF LIQUIDATED DAMAGES WILL EITHER RESULT IN DEPLETING OUR
WORKING CAPITAL OR ISSUANCE OF SHARES OF COMMON STOCK WHICH WOULD CAUSE
DILUTION TO OUR EXISTING SHAREHOLDERS.
Pursuant to the terms of our registration rights agreement entered into in
connection with our securities purchase agreement dated March 31, 2005, if
we do not have a registration statement registering the shares underlying
the senior secured convertible debentures and warrants declared effective
on or before July 31, 2006, we are obligated to pay liquidated damages in
the amount of 1.5% per month of the face amount of the issued and
outstanding senior secured convertible debentures outstanding, which equals
$67,500, until the registration statement is declared effective, subject to
an overall limit of up to 15 months of partial liquidated damages.
Palisades subsequently waived all liquidated damages and defaults related
to our failure to have the registration statement declared effective by
that date pursuant to the Letter Agreement entered into with Palisades
dated July 27, 2006, provided that the registration statement is declared
effective by September 27, 2006 (subject to a possible 30 day extension if
the Securities and Exchange Commission issues comments on the registration
statement). These liquidated damages must be paid in cash. If we have to
pay the liquidated damages, we would be required to use our limited working
capital and potentially raise additional funds.
RISKS RELATED TO OUR COMMON STOCK:
----------------------------------
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO DISPOSE OF YOUR STOCK.
Our common stock has been quoted on the OTC Bulletin Board under the symbol
"TWLP.OB" since October 13, 2006, prior to that point it was quoted on the
OTC Bulletin Board under the symbol "TTYL.OB". There is a limited trading
market for our common stock. For example, approximately more than one-third
of the trading days during November of 2005 saw no trading in our stock
at all. During that same period, the largest number of shares traded in one
day was 435,000. Accordingly, there can be no assurance as to the
liquidity of any markets that may develop for our common stock, the
ability of holders of our common stock to sell our common stock, or the
prices at which holders may be able to sell our common stock.
OUR HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE
FOR OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED
MARKET FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT
DIFFICULT FOR YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON
YOUR INVESTMENT.
The public market for our common stock has historically been very
volatile. Since the day out stock began being quoted on the Over-The-
Counter Bulletin Board on November 21, 2001 and through June 30, 2006,
the market price for our common stock has ranged from $2.10 to $0.10.
Any future market price for our shares may continue to be very volatile.
This price volatility may make it more difficult for you to sell shares
when you want at prices you find attractive. We do not know of any one
particular factor that has caused volatility in our stock price. However,
the stock market in general has experienced extreme price and volume
fluctuations that often are unrelated or disproportionate to the
23 of 95
operating performance of companies. Broad market factors and the
investing public's negative perception of our business may reduce
our stock price, regardless of our operating performance. Market
fluctuations and volatility, as well as general economic, market and
political conditions, could reduce our market price. As a result, this
may make it difficult or impossible for you to sell our common stock
for a positive return on your investment.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC
AND THE TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES
TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN
INVESTMENT IN OUR STOCK.
Our common stock is currently listed for trading on the OTC Bulletin Board
which is generally considered to be a less efficient market than
markets such as NASDAQ or other national exchanges, and which may cause
difficulty in conducting trades and difficulty in obtaining future
financing. Further, our securities are subject to the "penny stock
rules" adopted pursuant to Section 15 (g) of the Securities Exchange Act
of 1934, as amended, or Exchange Act. The penny stock rules apply to non-
NASDAQ companies whose common stock trades at less than $5.00 per share
or which have tangible net worth of less than $5,000,000 ($2,000,000 if
the company has been operating for three or more years). Such rules
require, among other things, that brokers who trade "penny stock" to
persons other than "established customers" complete certain
documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under
certain circumstances. Penny stocks sold in violation of the applicable
rules may entitle the buyer of the stock to rescind the sale and
receive a full refund from the broker.
Many brokers have decided not to trade "penny stock" because of the
requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is
limited. In the event that we remain subject to the "penny stock rules"
for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to
the "penny stock rules," investors will find it more difficult to dispose
of our securities. Further, for companies whose securities are traded in
the OTC Bulletin Board, it is more difficult: (i) to obtain accurate
quotations, (ii) to obtain coverage for significant news events because
major wire services, such as the Dow Jones News Service, generally
do not publish press releases about such companies, and (iii) to obtain
needed capital.
WE HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY
CASH DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO
THE VALUE OF OUR STOCK.
We have never paid cash dividends on our stock and do not anticipate paying
cash dividends on our stock in the foreseeable future. The payment of cash
dividends on our stock will depend on our earnings, financial condition and
other business and economic factors affecting us at such time as the board
of directors may consider relevant. If we do not pay cash dividends, our
stock may be less valuable because a return on your investment will only
occur if our stock price appreciates.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive
any proceeds from the sale of shares of common stock in this offering. We
will, however, receive proceeds from the exercise, if any, from warrants to
purchase 37,217,684 and options to purchase 10,628,000 shares of common
stock, respectively.
ITEM 2. DESCRIPTION OF PROPERTY
Our major facilities are located in Carrollton, Texas. Premises are located
on 14.79 acres of property and consist of a two story structure and parking
for approximately 650 vehicles. The building is approximately seven years
old and consists of 205,750 rentable square feet which we lease from an
unaffiliated third party on a ten year lease with nine years remaining. The
facility is used for production, warehouse and office space. The lease
payment is approximately $176,000 per month. The premises are suitable for
their intended uses.
24 of 95
ITEM 3. LEGAL PROCEEDINGS
The Company has agreed in connection with its purchase of the Primedia
Workplace Learning assets to assume the defense of certain litigation,
entitled ARGUS 1 SYSTEMS CORPORATION V. PRIMEDIA WORKPLACE LEARNING L.P.,
ET AL., No. 04-CV-138918, District Court of Fort Bend County, Texas (the
"Argus Claim"), regarding claims made by Argus 1 Systems Corporation
("Plaintiff") resulting from that certain Memorandum of Understanding,
dated May 22, 2003, ("MOU") by and between Plaintiff and PRIMEDIA Workplace
Learning LP, a Delaware limited partnership ("PWPL"). Plaintiff has alleged
various contracts and tort claims and seeks among other things license
fees, attorney fees and actual and punitive damages related to the sale of
proprietary content to the Department of Homeland Security. The Primedia
Workplace purchase agreement provides that the Company shall generally be
responsible for paying that portion of any Recovery (as defined therein)
relating to license fees, royalty fees, or other damages arising from any
sales other conduct after the purchase of the Workplace assets and be
responsible for the payment of all on-going license or royalty fees
relating to periods thereafter. In addition, some of the cost and
recoveries may be split on a 50/50 basis. The Company has not yet been
named as a party to the litigation, has not engaged legal counsel for the
matter, and has conducted no discovery. The Company is unable to estimate
the likelihood of an unfavorable outcome or the amount or range of any
potential loss its potential liability or legal exposure for the
litigation.
In addition, the Company is a defendant in a number of lawsuits brought by
its trade creditors. However, the Company believes that subsequent to its
successful funding, such litigations will not have a material adverse
effect on the Company. Also, the Company has the amounts in dispute
accrued for in accounts payable with an additional accrual of approximately
$200,000 for potential legal fees recorded in accrued expenses (see Note
6).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 26, 2006, the Company held a Special Shareholders meeting, for
the Company's shareholders of record as of August 11, 2006 (the "Record
Date"), as was previously disclosed by the Company in its Proxy Statement
filed on Schedule 14(a) with the SEC on August 18, 2006. During the
meeting, the affirmative vote of the Company's shareholders holding the
majority of the Company's outstanding shares as of the Record Date approved
the following proposals:
1. Amending the Company's Articles of Incorporation to change the
name of the Company from Trinity Learning Corporation to TWL
Corporation; and
2. Amending the Company's Articles of Incorporation to increase
the authorized number of common stock from 100,000,000 shares to
750,000,000 shares.
The following was the number of votes cast for, against or withheld, as
wells as the number of abstentions and broker non-votes as to each of the
matters below:
On the resolution to amend the Company's Articles of Incorporation to
change the name of the Company from Trinity Learning Corporation to TWL
Corporation,
For: 28,492,334 votes
Against: 106,152 votes
Abstain: 0 votes
Broker Non-Votes: 0 votes
On the resolution to amend the Company's Articles of Incorporation, as
amended, to increase the authorized number of common stock from
100,000,000 shares to 750,000,000 shares:
For: 26,700,061 votes
Against: 1,918,424 votes
Abstain: 0 votes
Broker Non-Votes: 0 votes
25 of 95
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
------------------
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
June 30, 2005.
The following table sets forth the high and low bid quotations, as
provided by the OTC Bulletin Board, for our common stock as reported by
NASDAQ. These prices are based on inter-dealer bid prices, without
markup, markdown, commissions or adjustments and may not represent
actual transactions.
Fiscal Year ending June 30, 2006: High Low
--------------------------------- ------------ ------------
April 1, 2006 to June 30, 2006 $ 0.20 $ 0.10
January 1, 2006 to March 31, 2006 $ 0.30 $ 0.14
October 1, 2005 to December 31, 2005 $ 0.31 $ 0.21
July 1, 2005 to September 30, 2005 $ 0.31 $ 0.20
Fiscal Year Ended June 30, 2005: High Low
--------------------------------- ------------ ------------
April 1, 2005 to June 30, 2005 $ 0.45 $ 0.22
January 1, 2005 to March 31, 2005 $ 1.05 $ 0.13
October 1, 2004 to December 31, 2004 $ 1.50 $ 0.70
July 1, 2004 to September 30, 2004 $ 1.65 $ 0.85
Fiscal Year Ended June 30, 2004: High Low
--------------------------------- ------------ ------------
April 1, 2004 to June 30, 2004 $ 1.50 $ 0.80
January 1, 2004 to March 31, 2004 $ 2.50 $ 1.50
October 1, 2003 to December 31, 2003 $ 1.59 $ 0.03
July 1, 2003 to September 30, 2003 $ N/A $ N/A
The shares quoted are subject to the provisions of Section 15(g) and
Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the Exchange
Act"), commonly referred to as the "penny stock" rule. Section 15(g) sets
forth certain requirements for transactions in penny stocks and Rule
15(g)9(d)(1) incorporates the definition of penny stock as that used in
Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. Rule 3a51-1 provides that any equity security is considered to
be a penny stock unless that security is: registered and traded on a
national securities exchange meeting specified criteria set by the
Commission; authorized for quotation on The NASDAQ Stock Market; issued
by a registered investment company; excluded from the definition on
the basis of price (at least $5.00 per share) or the registrant's net
tangible assets; or exempted from the definition by the Commission.
Trading in the shares is subject to additional sales practice
requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors, generally persons with
assets in excess of $1,000,000 or annual income exceeding $200,000, or
$300,000 together with their spouse.
26 of 95
For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of such securities
and must have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the delivery,
prior to the first transaction, of a risk disclosure document relating
to the penny stock market. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered
representative, and current quotations for the securities. Finally, the
monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in
penny stocks. Consequently, these rules may restrict the ability of broker
dealers to trade and/or maintain a market in the company's common stock and
may affect the ability of shareholders to sell their shares.
HOLDERS
-------
As of November 1, 2005, we had approximately 601 shareholders of
record.
DIVIDENDS
---------
We have not declared any dividends to date. We have no present
intention of paying any cash dividends on our common stock in the
foreseeable future, as we intend to use earnings, if any, to generate
growth. The payment by us of dividends, if any, in the future, rests within
the discretion of our Board of Directors and will depend, among other
things, upon our earnings, our capital requirements and our financial
condition, as well as other relevant factors. There are no material
restrictions in our certificate of incorporation or bylaws that restrict us
from declaring dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
-------------------------------------------------------------------
The following table shows information with respect to each equity
compensation plan under which the Company's common stock is authorized for
issuance as June 30, 2006.
-------------------- -------------------- -------------------- ---------------------
Number of
securities remaining
Number of securities available for future
to be issued upon Weighted average issuance under
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected
Plan category warrants and rights warrants and rights in column (a)
-------------------- -------------------- -------------------- ---------------------
Equity compensation
plans approved 14,467,000 $0.38 5,533,000
by security holders
-------------------- -------------------- -------------------- ---------------------
Equity compensation
plans not approved
by security holders None None None
-------------------- -------------------- -------------------- ---------------------
Total 14,467,000 $0.38 5,533,000
-------------------- -------------------- -------------------- ---------------------
RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
During the period February 2004 to November 2004, certain warrant
holders from our 2002 Bridge Financing exercised warrants at $0.05 per
share for 1,238,542 shares of our common stock.
On July 29, 2004, we issued a secured convertible promissory
note in the principal amount of $500,000 to Oceanus Value Fund, L.P.
("Oceanus"). 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.
27 of 95
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. The
principal amount of the Note and accrued interest thereon was convertible
into shares of our common stock at a price of $0.72 per share, subject to
anti-dilution adjustments.
On February 4, 2005, we issued an aggregate of 127,419 restricted
shares of our common stock to Laurus, upon conversion of $44,117.64 of
principal amount and accrued interest of $13,221.19 of the Note. The Note,
as amended, provided for a conversion rate of $0.45 for the first
$250,000 of principal converted.
On January 31, 2005, we issued 50,000 restricted shares of our
common stock to three affiliates of MCC Financial Services. The
shares were issued in consideration as partial payment for investor
relations services at a deemed price of $0.44 per share.
On March 2, 2006, we issued to Jack Rutherford a note in the
principal amount of $100,000 which is convertible into 625,000 shares of
common stock of the Company at $0.16 per share. In addition we issued
625,000 warrants exercisable at $0.20 per share and 250,000 warrants
exercisable at $0.15 per share to Mr. Rutherford in consideration for the
loan made.
On March 3, 2006, William T. Merrill purchased 156,250 shares of
Common Stock of the Company at $0.16 per share or $25,000. In
addition we issued 156,250 warrants exercisable at $0.20 per share to Mr.
Merrill in consideration of the purchase.
On March 3, 2006, David Spada purchased 156,250 shares of Common
Stock of the Company at $0.16 per share or $25,000. In addition we
issued 156,250 warrants exercisable at $0.20 per share to Mr. Spada in
consideration of the purchase.
On March 31, 2006, we issued to certain accredited investors an
aggregate of $4,500,000 in face amount of 15% Senior Secured Convertible
Debentures convertible at $0.25 per share and four year warrants to
purchase an aggregate of 7,200,000 shares of common stock of the Company
exercisable at $0.21 per share.
In July of 2006, we issued to certain accredited investors 1,800,000
shares of preferred stock convertible at $0.10 per share in exchange for
the 7,200,000 warrants previously issued to these accredited investors
exercisable at $0.21 per share. In addition, on August 31, 2006, we issued
to this accredited investor 1,000,000 shares of preferred stock convertible
at $0.10 per share in consideration of the investor agreeing to subordinate
its senior secured interest to Laurus Master Fund, Ltd., in all of the
assets of the Company and further agreed to modify their conversion price
from $0.25 to $0.10.
In August of 2006, the Company issued to Darrin M. Ocasio 1,800,000
shares of common Stock pursuant to the agreement entered into in March
2006, as a performance bonus stock award.
On August 31, 2006, we issued to Laurus Master Fund, Ltd., 1,500,000
shares of preferred stock convertible at $0.10 per share in consideration
of the sale of a secured three-year term note with a principal amount of
$2,500,000 and a secured three-year revolving note with a principal amount
of $5,000,000 to Laurus Master Fund, Ltd.
All of the above offerings and sales were deemed to be exempt under
rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933,
as amended. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors, business associates of TWL
Corporation or executive officers of TWL Corporation and transfer was
restricted by TWL Corporation in accordance with the requirements of the
Securities Act of 1933. In addition to representations by the above-
referenced persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their
investment, and that they understood the speculative nature of their
investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
28 of 95
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of the statements contained in this Form 10-KSB that are not
historical facts are "forward-looking statements" which can be identified
by the use of terminology such as "estimates," "projects," "plans,"
"believes," "expects," "anticipates," "intends," or the negative or other
variations, or by discussions of strategy that involve risks and
uncertainties. We urge you to be cautious of the forward-looking
statements, that such statements, which are contained in this Form 10-KSB,
reflect our current beliefs with respect to future events and involve known
and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances
can be given regarding the achievement of future results, as actual results
may differ materially as a result of the risks we face, and actual events
may differ from the assumptions underlying the statements that have been
made regarding anticipated events. Factors that may cause actual results,
our performance or achievements, or industry results, to differ materially
from those contemplated by such forward-looking statements include without
limitation:
1. Our ability to attract and retain management, and to integrate and
maintain technical information and management information systems;
2. Our ability to generate customer demand for our products;
3. The intensity of competition; and
4. General economic conditions.
SEASONALITY
The Company's operations are seasonal in nature. Operating results
have historically been stronger in the second half of the year with
generally strongest results generated in the fourth quarter of the year.
This seasonality causes, and will likely continue to cause, a variation in
the Company's quarterly operating results. Such variations have an effect
on the timing of the Company's cash flows and the reported quarterly
results.
All written and oral forward-looking statements made in connection
with this Form 10-KSB that are attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary
statements. Given the uncertainties that surround such statements, you are
cautioned not to place undue reliance on such forward-looking statements.
OVERVIEW
In the first quarter of fiscal year 2005, we announced that we had
modified our strategy to focus our management and financial resources on
new acquisition targets and operations in North America, with a secondary
focus on Western Europe. During the remainder of fiscal 2005 management
focused its efforts on identifying and analyzing various merger and
acquisition candidates in the United States. These efforts culminated with
the announcement on April 1, 2005 of an asset purchase agreement whereby we
acquired substantially all of the assets of Primedia Workplace Learning
from Primedia, Inc.
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, 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. Except as noted below 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.
On August 31, 2006, we entered into agreements with Laurus Master
Fund, Ltd., a Cayman Islands corporation ("Laurus"), pursuant to which we
sold debt and issued our preferred stock to Laurus in a private offering
pursuant to exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. The securities being sold and issued
to Laurus include the following:
29 of 95
1. A secured three-year term note (the "Secured Note") with a principal
amount of $2,500,000 (the "Secured Note Amount"), which matures on August
31, 2009 (the "Maturity Date");
2. A secured three-year revolving note with a principal amount of
$5,000,000 (the "Revolving Note"; the Revolving Note and the Secured Note
shall be collectively referred to as the "Notes");
3. 1,500,000 shares (the "Shares") of preferred stock (the "Preferred
Stock"), which is redeemable by us at a price of $0.10 per share (the "Set
Price") at any time until August 31, 2011, and may be converted by Laurus
at any time into our common stock, no par value per share (the "Common
Stock"), at the Set Price.
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.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2006 AS COMPARED TO THE FISCAL YEAR ENDED JUNE
30, 2005
Our sales revenues for the fiscal year ended June 30, 2006 were
$25,840,468 as compared to $11,176,974 for fiscal year ended June 30, 2005.
This significant increase in revenues is due primarily to twelve months of
operations for TWL Knowledge Group, Inc. $24,930,881 compared to three
months of operational results for fiscal year 2005 $8,168,297.
Costs of sales, which consist of labor and hardware costs, and other
incidental expenses, were $7,036,893 for the fiscal year 2006 as compared
to $2,910,244 for the fiscal year 2005, resulting in gross profit of
$18,803,575 for the fiscal year 2006 as compared to $8,266,730 for the
fiscal year 2005. These increases in both costs and gross profit were due
to and associated with increased revenues from the full year operations of
TWL Knowledge Group, Inc.
Operating expenses for fiscal year 2006 were $35,047,395 as compared
to $16,802,125 for fiscal year 2005. Salaries and benefits increased
$10,706,790 from $7,497,629 for fiscal year 2005 to $18,204,419 for fiscal
year 2006. Professional fees increased $1,719,795 from $1,495,874 for
fiscal year 2005 to $3,215,669 for fiscal year 2006. Selling, general and
administrative expense was $9,859,702 for fiscal 2006 as compared to
$4,837,038 for fiscal year 2005. Depreciation and amortization increased
$983,941 from $2,783,664 for fiscal year 2005 to $3,767,605 for fiscal year
2006. The increases are due largely to full year operations of TWL
Knowledge Group, Inc
Other expense of $5,535,797 for the year ended June 30, 2006 was
$1,599,766 less than the year ended June 30, 2005. Increased net interest
expense $3,591,976, loss due to conversion of debt $1,614,064 and financing
costs of $1,393,852 offset by the change in fair value of derivative
valuation of $739,588 and gain on forfeiture of warrants due to financing
of $280,328 accounted for most of the other expenses during fiscal year
2006. During the fiscal year 2005, other expenses were primarily made up
of net interest expense $2,445,410, equity losses and impairment of
investment in associated companies $4,192,460, debt conversion expenses
$231,579 and impairment of intangible assets $234,280.
We reported net loss available for common stockholders of $21,779,617
or $0.54 per share for the fiscal year 2006 as compared with $15,615,043 or
$0.49 per share for the fiscal year 2005.
30 of 95
The following unaudited pro forma financial information presents the
combined results of operations of the Company and twelve months of
operations of TouchVision, RMT, and VILPAS and three months of operations
of TWL Knowledge Group, Inc. The Company's investments in Riverbend and
IRCA are accounted for an equity basis. Accordingly, Riverbend's and
IRCA's business operating results are not included in the Company's
combined unaudited pro forma financial information for the twelve month
periods ended June 30, 2005 and 2004. In October 2005, The Company and
IRCA completed a Settlement Agreement whereby we mutually rescinded the
original acquisition agreement, resulting in no ownership positions for
IRCA in our company and vice versa (see "Subsequent Events IRCA
Settlement Agreement").
We operate as a single business segment and have one product offering
which is training and education; however, our consolidated subsidiaries are
organized geographically into reporting segments consisting of the United
States Division, the European Division, the Australia Division and the
South Africa Division. Our United States division comprises our corporate
operations and subsidiaries domiciled in the United States of America. The
European division comprises subsidiaries domiciled in Europe; the Australia
Division comprises subsidiaries domiciled in Australia. The South Africa
division comprises non-consolidated subsidiaries domiciled in South Africa
accounted for using the equity method of accounting and includes a two
person office owned by them in Australia.
As of and for the fiscal year ended June 30, 2006:
Investment
Depreciation Losses in
Operating & Associated
Revenue Loss Amortization Companies
------------ ------------- ------------ ------------
United States $ 25,013,792 $(15,326,838) $ 3,754,468 $ -
Europe 380,426 (854,962) 1,789 -
Australia 446,250 (62,020) 11,348 -
------------ ------------- ------------ ------------
Total $25,840,468 $(16,243,820) $ 3,767,605 $ -
============ ============= ============ ============
As of and for the fiscal year ended June 30, 2005:
Investment
Depreciation Losses in
Operating & Associated
Revenue Loss Amortization Companies
------------ ------------- ------------ ------------
United States $ 9,171,584 $ (8,139,211) $ 2,766,795 $ -
Europe 1,497,556 (204,031) 1,714 -
Australia 507,834 (102,415) 15,155 -
South Africa - (89,736) - -
------------ ------------- ------------ ------------
Total $ 11,176,974 $ (8,535,393) $ 2,783,664 $ -
============ ============= ============ ============
The following describes underlying trends in the businesses of each of
our three subsidiaries that operate as a single business segment and have
one product offering which is training and education.
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VILPAS. During 2005, the Norwegian government refined its mandates
with regard to functionally disabled workers, with funding modified to
target not only training of the handicapped but also at subsidizing direct
employment of handicapped and challenged individuals. FunkWeb, a majority
owned subsidiary of VILPAS, revised some of its programs and market
strategies to be able to participate in government programs aimed directly
at increasing employment among functionally disabled workers. Subsequent
to June 30, 2005 the Norwegian government modified its approach to
handicapped workers back, toward increased funding for these initiatives.
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. Management has commenced identifying potential business
partners and potential merger and acquisition targets in Norway and
Scandinavia with the goal of strengthening and expanding the longer-term
business operations of VILPAS and Funkweb. Such partnerships or
acquisitions could dilute the Company's ownership positions from current
levels.
RMT. During fiscal year 2005 there has been a continued 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, during 2005 a significant portion of RMT financial and
management resources were allocated for the purpose of developing new
products and services to expand its reach beyond the Australian viticulture
industry. The efforts have resulted in the development of FMRMT's
eLearning site ( www.r-m-t-online.com) which
offers a range of Certificate IV and Diploma qualifications using a
facilitated, online blend of learning. Training course and products
available through this new medium include: Training and Assessment courses
for careers in training, Frontline Management Training, Small Business
Management Training, Retail Management courses, HR Management courses, and
Viniculture/ Horticulture Management credentials. There is little or no
seasonality to RMT's business.
New investment for courseware increased during fiscal year 2005.
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 exploring distribution or licensing arrangements with outside
companies selling to the healthcare industry. Depending on sales channel
mix, some sales through outside agents may result in lower retained
revenues but, due to corresponding lower fixed costs, these sales may
nonetheless have a positive impact on the bottom line. Following the
acquisition of assets from Primedia, Inc. the Company commenced exploring
opportunities to achieve operating efficiencies through the integration of
certain financial, technical, and customer support aspects of the
TouchVision business into the operations of TWL Knowledge Group, Inc.
These efforts are continuing. Currently this division is dormant. It is
anticipated that it will be liquidated.
32 of 95
FISCAL YEAR ENDED JUNE 30, 2005 AS COMPARED TO THE FISCAL YEAR ENDED JUNE
30, 2004
VILPAS. During 2005, the Norwegian government refined its mandates
with regard to functionally disabled workers, with funding modified to
target not only training of the handicapped but also at subsidizing direct
employment of handicapped and challenged individuals. FunkWeb, a majority
owned subsidiary of VILPAS, revised some of its programs and market
strategies to be able to participate in government programs aimed directly
at increasing employment among functionally disabled workers. Subsequent to
June 30, 2005 the Norwegian government modified its approach to handicapped
workers back, toward increased funding for these initiatives. 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.
Management has commenced identifying potential business partners and
potential merger and acquisition targets in Norway and Scandinavia with the
goal of strengthening and expanding the longer-term business operations of
VILPAS and Funkweb. Such partnerships or acquisitions could dilute the
Company's ownership positions from current levels.
RMT. During fiscal year 2005 there has been a continued 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, during 2005 a significant portion of RMT financial and
management resources were allocated for the purpose of developing new
products and services to expand its reach beyond the Australian viticulture
industry. The efforts have resulted in the development of FMRMT's eLearning
site ( www.r-m-t-online.com) which offers a
range of Certificate IV and Diploma qualifications using a facilitated,
online blend of learning. Training course and products available through
this new medium include: Training and Assessment courses for careers in
training, Frontline Management Training, Small Business Management
Training, Retail Management courses, HR Management courses, and
Viniculture/ Horticulture Management credentials. There is little or no
seasonality to RMT's business.
New investment for courseware increased during fiscal year 2005.
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.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Our expenses are currently greater than our revenues. We have a
history of losses, and our accumulated deficit as of June 30, 2006 was
$60,045,635, as compared to $38,266,018 as of June 30, 2005.
At June 30, 2006, we had a cash balance of $181,339. Net cash used by
operating activities during the fiscal year 2006 was $4,699,033,
attributable primarily to our loss from continuing operations of
$21,779,617. Net cash provided by investing activities was $5,087,527.
Net cash used by financing activities was $952,728 for fiscal year 2006.
Accounts receivable decreased to $2,680,555 at June 30, 2006. This
decrease is due to increased collection efforts of the receivables owed to
TWL Knowledge Group, Inc.
Accounts payable increased to $6,830,088 at June 30, 2006. Accrued
expenses increased to $4,108,247 at June 30, 2006. These increases are
attributable to expenses incurred by our operating subsidiaries, including
TWL Knowledge Group, Inc., and our corporate office expenditures 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.
33 of 95
We continued to seek equity and debt financing in fiscal 2006 to
support our growth and to finance recent and proposed acquisitions.
On March 2, 2006, Jack Rutherford purchased 625,000 shares of Common
Stock of the Company at $0.16 per share or $100,000. In addition we issued
625,000 warrants exercisable at $0.20 per share to Mr. Rutherford in
consideration of the purchase. We further issued 250,000 warrants
exercisable at $0.15 per share to Mr. Rutherford in consideration for a
loan made in the amount of $100,000 by Mr. Rutherford to the Company on
March 1, 2006. The issuance of these securities was made in reliance on
Section 4(2) of the Securities Act as a transaction not involving any
public offering. No advertising or general solicitation was employed in
offering the securities, and the issuance of the securities was made to an
existing shareholder of our company.
On March 3, 2006, William T. Merrill purchased 156,250 shares of
Common Stock of the Company at $0.16 per share or $25,000. In addition we
issued 156,250 warrants exercisable at $0.20 per share to Mr. Merrill in
consideration of the purchase. The issuance of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering. No advertising or general solicitation was
employed in offering the securities, and the issuance of the securities was
made to an existing shareholder of our company.
On March 3, 2006, David Spada purchased 156,250 shares of Common Stock
of the Company at $0.16 per share or $25,000. In addition we issued 156,250
warrants exercisable at $0.20 per share to Mr. Spada in consideration of
the purchase. The issuance of these securities was made in reliance on
Section 4(2) of the Securities Act as a transaction not involving any
public offering. No advertising or general solicitation was employed in
offering the securities, and the issuance of the securities was made to an
existing shareholder of our company.
On March 31, 2006, the Company entered into a Securities Purchase
Agreement (the "Securities Agreement") with certain accredited investors
for the issuance of up to an aggregate of $8,500,000 in face amount of 15%
Senior Secured Convertible Debentures (the "Debentures") maturing March 31,
2010, and four year warrants (the "Warrants") to purchase an aggregate of
13,600,000 share of common stock of the Company. The Debentures accrue
interest at a rate of 15% per annum and we issued to Palisades Master Fund
LP a face amount of $4,500,000 in Debentures and warrants to purchase an
aggregate of 7,800,000 shares of common stock pursuant to the first closing
which occurred on March 31, 2006. The Company claims an exemption from the
registration requirements of the Act for the private placement of these
securities pursuant to Section 4(2) of the Act and/or Regulation D
promulgated thereunder since, among other things, the transaction did not
involve a public offering, the investors were accredited investors and/or
qualified institutional buyers, the investors had access to information
about the company and their investment, the investors took the securities
for investment and not resale, and the Company took appropriate measures to
restrict the transfer of the securities.
On August 31, 2006, TWL Corporation (the "Company") entered into
agreements with Laurus Master Fund, Ltd., a Cayman Islands corporation
("Laurus"), pursuant to which the Company sold debt and issued preferred
stock of the Company to Laurus in a private offering pursuant to exemption
from registration under Section 4(2) of the Securities Act of 1933, as
amended. The securities being sold and issued to Laurus include the
following:
1. A secured three-year term note (the "Secured Note") with a
principal amount of $2,500,000 (the "Secured Note Amount"), which
matures on August 31, 2009 (the "Maturity Date");
2. A secured three-year revolving note with a principal amount of
$5,000,000 (the "Revolving Note"; the Revolving Note and the
Secured Note shall be collectively referred to as the "Notes");
3. 1,500,000 shares (the "Shares") of preferred stock (the
"Preferred Stock"), of the Company, which is redeemable by the
Company at a price of $0.10 per share (the "Set Price") at any
time until August 31, 2011, and may be converted by Laurus at any
time into common stock, no par value per share (the "Common
Stock"), of the Company at the Set Price.
34 of 95
Of the Secured Notes, net proceeds of $2,173,000 were received by the
Company on the Closing Date. Any proceeds of the Revolving Note will be
deposited in a restricted account with Cole Taylor Bank as security for the
total loan amount and for use by us to make acquisitions as approved by
Laurus. We also agreed to pay, out of the Loan proceeds, the sum of
$270,000 to Laurus Capital Management, LLC, the manager of Laurus, the sum
of $60,000 to Laurus as reimbursement for Laurus' legal fees, due diligence
fees and expenses incurred in connection with the transaction, and $2,000
to Loeb & Loeb LLP as escrow agent fees.
DURING FISCAL YEAR 2005 OUR FINANCING ACTIVITIES WERE AS FOLLOWS:
On August 31, 2004, we entered into a series of agreements with Laurus
Master Fund, Ltd. ("Laurus") whereby we issued to Laurus (i) a secured
convertible term note ("Note") in the principal amount of $5.5 million and
(ii) a five-year warrant ("Warrant") to purchase up to 1,600,000 shares of
our common stock at a price of $0.81 per share. Of the Note proceeds, the
outstanding principal balance of $500,000 was repaid to Oceanus, $233,000
was used for operations, $4,491,000 was deposited in a restricted account
as security for the total loan amount and for use by us to make
acquisitions as approved by Laurus. Restricted funds may also be released
for operations at a rate of 25% of the dollar volume of our stock for a
twenty day period. The principal amount of the Note carries an interest
rate of prime plus two percent, subject to adjustment, and we must make
monthly payments of at least $22,000, commencing November 1, 2004, toward
the outstanding non-restricted principal amount. The principal amount of
the Note and accrued interest thereon is convertible into shares of our
common stock at a price of $0.72 per share, subject to anti-dilution
adjustments. We have granted Laurus a right of first refusal with respect
to any debt or equity financings and Laurus has the right to loan to us up
to an additional $2.2 million, within 270 days of closing, on the same
terms and conditions as contained in the Laurus agreements pertaining to
the Note and Warrant.
On July 13, 2005, the Company entered into a Credit Agreement (the
"Credit Agreement") with Instream Investment Partners, LLC, as
administrative agent, and certain lenders (the "Lenders"). Pursuant to the
terms of the Credit Agreement, the Lenders loaned to the Company
$3,500,000. The Company may borrow up to an additional $1,000,000 under the
Credit Agreement until January 13, 2006. The loan matures on January 13,
2007, with interest payable monthly at the rate of 12% per annum. The
obligations of the Company under the Credit Agreement are secured by a
security interest in substantially all existing and hereafter acquired
assets of the Company. TouchVision, Inc. and TWL Knowledge Group, Inc.,
subsidiaries of the Company, each have guaranteed the obligations of the
Company under the Credit Agreement, and have granted the Lenders a security
interest in substantially all of their respective existing and hereafter
acquired assets. The Company also granted to the Lenders warrants (the
"Warrants") to acquire up to an aggregate of 5.25% of the outstanding
common stock of the Company on a fully-diluted basis, and entered into a
Registration Rights Agreement with respect to the common stock issuable
upon exercise of the Warrants. Copies of the Credit Agreement, the form of
Warrant and the Registration Rights Agreement (collectively, the
"Agreements") were filed in a Report on Form 8K and are incorporated herein
by reference. A portion of the proceeds of the Credit Agreement was used
by the Company to repay all amounts outstanding under the Secured
Convertible Term Note and Securities Purchase Agreement (the "Laurus
Agreements") dated August 31, 2004 with Laurus Master Fund, Ltd.
("Laurus"). In connection therewith, Laurus converted a portion of the note
into 1,198,124 shares of common stock at a conversion price of $0.24 per
share.
35 of 95
In connection with the execution of the Credit Agreement, the Company
issued Warrants to the Lenders, which Warrants are exercisable for a period
of five years and permit the holders the right to acquire up to an
aggregate of 5.25% of the outstanding common stock of the Company on a
fully diluted basis at a price per share equal to $0.266, subject to
adjustment as provided in the Warrants. The Company believes that the
issuance of the Warrants is exempt from the registration requirements of
the Securities Act of 1933 pursuant to Section 4(2) thereof. A copy of the
form of Warrant is filed as Exhibit 99.2 hereto and is incorporated herein
by reference. As noted above, on July 13, 2005, in connection with the
payoff of amounts outstanding under the Laurus Agreements, Laurus converted
a portion of the note into 1,198,124 shares of common stock at a conversion
price of $0.24 per share. The Company believes that the issuance of common
stock upon conversion of the note is exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2)
thereof.
To meet our present and future liquidity requirements, we are
continuing to seek additional funding through private placements,
conversion of outstanding loans and payables into common stock, development
of the businesses of our newly-acquired subsidiaries, collections on
accounts receivable, and through additional acquisitions that have
sufficient cash flow to fund subsidiary operations. There can be no
assurance that we will be successful in obtaining more debt and/or equity
financing in the future or that our results of operations will materially
improve in either the short- or the long-term. If we fail to obtain such
financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt
about our ability to continue as a going concern.
Our financial statements are prepared using accounting principles
generally accepted in the United States of America generally applicable to
a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. Currently, we
do not have significant cash. To sustain operations our material assets
are pledged as security for the Instream credit facility. We do not have
an established source of revenues sufficient to cover our operating costs
that will 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, 2006, we
will not be able to sustain operations for more than 6 month(s) without
additional sources of financing.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition,
revenues, results of operations, liquidity or capital expenditures.
ITEM 7. FINANCIAL STATEMENTS
TWL CORPORATION
(formerly Trinity Learning Corporation)
Index of Financial Statements
June 30, 2006
Report of Independent Registered Public Accounting Firm 2006. . . .F-1
Financial Statements (audited):
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . .F-2
Consolidated Statement of Operations &
Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statement of Changes in
Stockholders' Equity . . . . . . . . . . . . . . . . . . F-4 to F-5
Consolidated Statement of Cash Flows. . . . . . . . . . . F-6 to F-7
Notes to Consolidated Financial Statements . . . . . . . F-8 to F-40
36 of 95
/Letterhead/
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee
TWL Corporation (formerly Trinity Learning Corporation)
Lafayette, California
We have audited the accompanying balance sheet of TWL Corporation (formerly
Trinity Learning Corporation) as of June 30, 2006, and the related
statements of operations, stockholders' equity and comprehensive loss and
cash flows for the years ended June 30, 2006 and 2005. 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 audits.
We conducted our audits in accordance with the standards of the PCAOB
(United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to have, nor were we engaged to perform, audits of its internal control
over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TWL Corporation
(formerly Trinity Learning Corporation) as of June 30, 2006, and the
results of their operations and their cash flows for the years ended June
30, 2006 and 2005, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company has a working capital deficit and has
suffered recurring operating losses, which raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 15. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
/S/ Chisholm, Bierwolf & Nilson, LLC
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
October 13, 2006
F-1
TWL Corporation
(formerly Trinity Learning Corporation)
Consolidated Balance Sheet
June 30,
2006
------------
Assets
Current Assets
Cash and Cash Equivalents $ 181,339
Accounts Receivable, net 2,680,555
Inventory 920,058
Prepaid Expenses and other Current Assets 19,858
------------
Total Current Assets 3,801,810
Property and Equipment, net 5,104,726
Program Inventory, net 2,142,145
Other Assets 180,753
------------
Total Assets $11,229,434
============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts Payable $ 6,830,088
Accrued Expenses 4,102,247
Accrued Expenses - Related Parties 218,881
Interest Payable 168,750
Deferred Revenue 3,509,173
Capital Lease - Current 1,199,294
Notes Payable - Current 587,496
Notes Payable - Related Parties 543,551
------------
Total Current Liabilities 17,159,480
------------
Long Term Liabilities
Obligations under Capital Leases 12,043,627
Convertible Notes Payable 4,500,000
Derivative Warrants Liabilities 373,936
------------
Total Long-term Liabilities 16,917,563
------------
Total Liabilities 34,077,043
------------
Contingently Redeemable Equity 800,000
------------
Commitments -
------------
Stockholders' Equity (Deficit)
Preferred Stock, 10,000,000 Shares Authorized
at No Par Value, No Shares Issued and Outstanding -
Common Stock, 750,000,000 Shares Authorized at
No Par Value, 41,615,513 Shares Issued and Outstanding 36,485,096
Accumulated Deficit (60,045,635)
Deferred Financial Advisor Fees (91,200)
Other Comprehensive Income (Loss) 4,130
------------
Total Stockholders' Equity (Deficit) (23,647,609)
------------
Total Liabilities and Stockholders' Equity (Deficit) $11,229,434
============
The accompanying notes are an integral part of these financial statements.
F-2
TWL Corporation
(formerly Trinity Learning Corporation)
Consolidated Statements of Operations and Comprehensive Loss
Fiscal Year Fiscal Year
Ended Ended
June 30, 2006 June 30, 2005
------------- -------------
Revenues, net
Subscription revenue $ 13,501,787 $ 5,452,468
One-time sales 8,005,726 3,512,907
Production revenue 1,396,951 1,449,946
Other revenue 2,936,004 761,653
------------- -------------
Total Revenues, net 25,840,468 11,176,974
------------- -------------
Cost of Sales (7,036,893) (2,910,244)
------------- -------------
Gross Profit 18,803,575 8,266,730
Expense
Salaries and Benefits 18,204,419 7,497,629
Professional Fees 3,215,669 1,495,874
Professional Fees Related Parties - 187,920
Selling, General & Administrative 9,859,702 4,837,038
Depreciation & Amortization 3,767,605 2,783,664
------------- -------------
Total Expenses 35,047,395 16,802,125
Loss from Operations (16,243,820) (8,535,395)
Other Income (Expense):
Interest, net (3,591,976) (2,445,410)
Equity Losses and Impairment of Investment
in Associated Companies - (4,192,460)
Financing Costs (1,393,852) -
Loss on Debt Refinancing (1,614,064) (231,579)
Impairment of Intangible Assets - (234,280)
Change in fair value of derivative warrant
liabilities 739,588 -
Gain on forfeiture of warrants due to debt
refinancing 280,328 -
Other Income (expense) 44,179 (31,834)
------------- -------------
Total Other Income and (Expense) (5,535,797) (7,135,563)
------------- -------------
Minority Interest - 59,215
------------- -------------
Loss from Continuing Operations Before Taxes (21,779,617) (15,611,743)
Income Tax Expense - 3,300
------------- -------------
Net Loss $(21,779,617) $(15,615,043)
============= =============
Net (Loss) per Common Share Basic and Dilutive $ (0.54) $ (0.49)
============= =============
Weighted Average Shares Outstanding 40,335,278 31,925,184
============= =============
The accompanying notes are an integral part of these financial statements.
A summary of the components of other comprehensive income (loss) for the fiscal
years ended June 30, 2006 and 2005:
Fiscal Year Fiscal Year
Ended Ended
June 30, 2006 June 30, 2005
------------- -------------
Net Loss $(21,779,617) $(15,615,043)
Foreign Currency Translation Gain (Loss) (6,688) 8,279
Comprehensive Loss (21,786,305) (15,606,764)
The accompanying notes are an integral part of these financial statements.
F-3
TWL Corporation
(formerly Trinity Learning Corporation)
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) and Comprehensive Income
For the Period July 1, 2004 through June 30, 2006
Preferred Stock Common Stock
Shares Amount Shares Amount
-------- -------- ------------ ------------
Balance at July 1, 2004 - $ - 31,040,143 $23,092,957
Exercise of Warrants at
$0.05 per share - - 300,000 15,000
Exercise of Warrants at
at $0.05 per share - - 62,500 3,125
Shares Issued for Services
at $0.90 per share - - 200,000 180,000
Exercise of Warrants at
at $0.05 per share - - 62,500 3,125
Shares Issued for Services
at $0.90 per share - - 217,000 195,840
Shares Issued for Services
at Market rate of $0.45
per share - - 50,000 22,500
Shares Issued for Services
at $9.45 per share - - 127,419 57,339
Shares Issued for Conversion
of Note and Interest Payable
at $0.73 per share - - 1,201,762 877,279
Shares Issued for Conversion
of Note and Interest Payable
at $0.73 per share - - 181,964 132,833
Shares Issued for Conversion
of Note and Interest Payable
at $0.73 per share - - 69,828 50,974
Employee Stock Based
Compensation - - - 752,063
Shares Issued for Services at
$0.25 per share - - 150,000 37,500
Shares Issued for Services at
Current Market Price of $0.16
per share - - 4,000,000 640,000
Shares Issued for Conversion
of Note and Interest Payable
at $0.73 per share - - 56,173 41,006
Value Attributed to Discount on
Convertible Note - - - 2,506,027
Value Attributed to Stock
Purchase Warrants - - - 3,393,224
Amortization of Deferred
Financial Advisory Fees - - - -
Foreign Currency Translation - - - -
Net Loss for the Year Ended
June 30, 2005 - - - -
-------- -------- ------------ ------------
Balance at June 30, 2005 - - 37,719,889 32,000,792
F-4
TWL Corporation
(formerly Trinity Learning Corporation)
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) and Comprehensive Income
For the Period July 1, 2004 through June 30, 2006
Preferred Stock Common Stock
Shares Amount Shares Amount
-------- -------- ------------ ------------
Shares Issued for Partial
Conversion of Note Payable at
$0.24 per share - - 1,198,124 287,550
Shares Issued for Conversion at
$0.45 per share - - 1,100,000 500,000
Employee Stock Based
Compensation - - 828,308
Amortization of Deferred
Financial Advisory Fees - - - -
Shares issued for services
at $0.25 per share - - 100,000 25,374
Shares Issued for Services
at $0.24 per share - - 560,000 134,400
Shares Issued for Cash at $0.16
per share - - 937,500 150,000
Value Attributed to Stock
Purchase Warrants - - - 348,672
Divestiture of Associated
Companies - - - 2,210,000
Foreign Currency Translation - - - -
Net Loss for the Year Ended
June 30, 2006 - - - -
-------- -------- ------------ ------------
Balance at June 30, 2006 - $ - 41,615,513 $36,485,096
======== ======== ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
TWL Corporation
(formerly Trinity Learning Corporation)
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) and Comprehensive Income
For the Period July 1, 2004 through June 30, 2006
Other Deferred
Comprehensive Financial
Accumulated Income Advisory
Deficit (Loss) Fees Total
------------- ------------- ------------- -------------
Balance at July 1, 2004 (22,650,976) 2,539 - 444,520
Exercise of Warrants at
$0.05 per share - - - 15,000
Exercise of Warrants at
$0.05 per share - - - 3,125
Shares Issued for Services
at $0.90 per share - - (180,000) -
Exercise of Warrants at
$0.05 per share - - - 3,125
Shares Issued for Services
at $0.90 per share - - (195,840) -
Shares Issued for Services
at Market rate of $0.45
per share - - - 22,500
Shares Issued for Services
at $9.45 per share - - - 57,339
Shares Issued for Conversion
of Note and Interest Payable
at $0.73 per share - - - 877,279
Shares Issued for Conversion
of Note and Interest Payable
at $0.73 per share - - - 132,833
Shares Issued for Conversion
of Note and Interest Payable
at $0.73 per share - - - 50,974
Employee Stock Based
Compensation - - - 752,063
Shares Issued for Services at
$0.25 per share - - - 37,500
Shares Issued for Services at
Current Market Price of $0.16
per share - - - 640,000
Shares Issued for Conversion
of Note and Interest Payable
at $0.73 per share - - - 41,006
Value Attributed to Discount on
Convertible Note - - - 2,506,027
Value Attributed to Stock
Purchase Warrants - - - 3,393,224
Amortization of Deferred
Financial Advisory Fees - - 232,920 232,920
Foreign Currency Translation - 8,279 - 8,279
Net Loss for the Year Ended
June 30, 2005 (15,615,042) - - (15,615,042)
------------- ------------- ------------- -------------
Balance at June 30, 2005 (38,266,018) 10,818 (142,920) (6,397,328)
F-4
TWL Corporation
(formerly Trinity Learning Corporation)
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) and Comprehensive Income
For the Period July 1, 2004 through June 30, 2006
Other Deferred
Comprehensive Financial
Accumulated Income Advisory
Deficit (Loss) Fees Total
------------- ------------- ------------- -------------
Shares Issued for Partial
Conversion of Note Payable at
$0.24 per share - - - 287,550
Shares Issued for Conversion at
$0.45 per share - - - 500,000
Employee Stock Based
Compensation - - - 828,308
Amortization of Deferred
Financial Advisory Fees - - 142,920 142,920
Shares issued for services
at $0.25 per share - - - 25,374
Shares Issued for Services
at $0.24 per share - - (91,200) 43,200
Shares Issued for Cash at $0.16
per share - - - 150,000
Value Attributed to Stock
Purchase Warrants - - - 348,672
Divestiture of Associated
Companies - - - 2,210,000
Foreign Currency Translation - (6,688) - (6,688)
Net Loss for the Year Ended
June 30, 2006 (21,779,617) - - (21,779,617)
------------- ------------- ------------- -------------
Balance at June 30, 2006 $(60,045,635) $ 4,130 $ (91,200) $(23,647,609)
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-5
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Consolidated Statements of Cash Flows
Fiscal Year Ended
June 30,
2006 2005
------------ ------------
Cash flows from operating activities:
Net loss $(21,779,617) $(15,615,042)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on disposal of assets - 31,834
Depreciation and amortization 3,767,605 3,016,587
Reserve for obsolete inventory 524,176 -
Gain on settlement of accounts payable (43,364) -
Amortization of discount on notes payable 1,495,564 -
Loss on conversion of notes payable 1,614,064 -
Amortization of convertible note payable
discounts related to warrants and
beneficial conversions 235,471 -
Impairment of Intangible Assets - 234,280
Non-cash interest expense - 2,100,229
Stock issued for services 68,574 757,339
Fair value of stock purchase warrants 348,672 -
Warrants issued for financing costs 1,393,852 -
Equity losses of associated companies - 4,192,461
Employee stock based compensation 828,308 752,063
Change in fair value of derivative warrant
liabilities (739,588) -
Gain on forfeiture of warrants due to debt
refinancing (280,328) -
Amortization of deferred financial advisory
fees 142,920 -
Debt conversion expenses - 231,579
Changes in current assets and liabilities,
net of businesses acquired and sold:
Accounts receivable 629,354 2,911,206
Prepaid expenses and other current assets 1,157,549 152,915
Accounts payable and accrued expenses 6,205,717 1,429,778
Accounts payable related party 218,881 (77,988)
Inventory 188,516 (383,427)
Deferred revenue (533,669) (937,631)
Interest payable 145,371 46,524
Minority interest (287,061) (19,660)
------------ ------------
Net cash used in operating activities (4,699,033) (1,176,953)
Cash flow from investing activities:
Overdraft acquired in acquisition - (386,362)
Proceeds from sale of assets - 11,901
Payments for program inventory - (463,238)
Restricted cash 5,091,670 (4,484,619)
Capital expenditures (4,143) (117,174)
------------ ------------
Net cash provided (used) by
investing activities 5,087,527 (5,439,492)
------------ ------------
F-6
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Consolidated Statements of Cash Flows
Fiscal Year Ended
June 30,
2006 2005
------------ ------------
Cash flow from financing activities:
Payment for capital leases (1,115,665) (266,542)
Payment for lines of credit - (253,846)
Proceeds from notes and convertible notes
payable 9,100,000 8,029,477
Proceeds from notes payable related parties 250,464 4,413
Payments on notes and convertible notes
payable (9,087,527) (869,176)
Payments on notes payable related parties (250,000) -
Payments for financing fees - (197,888)
Common stock issued for cash 150,000 -
Proceeds from exercise of warrants
and options - 21,250
------------ ------------
Net cash provided (used) by
financing activities (952,728) 6,467,688
------------ ------------
Effect of foreign exchange on cash (6,688) 8,279
------------ ------------
Net decrease in cash (570,922) (140,478)
Cash at beginning of period 752,261 892,739
------------ ------------
Cash at end of period $ 181,339 $ 752,261
============ ============
Supplemental information:
Interest paid $ 1,416,009 $ 64,541
Income taxes - 3,300
Issuance of common stock conversion
of bridge note - 1,102,092
Warrants issued with convertible notes 933,238 2,863,363
Warrants issued with credit financing 460,614 -
Beneficial conversion value of note payable - 2,070,784
Common stock issued for deferred financial
advisory fees 91,200 -
Common stock issued for conversion of notes
payable 787,550 -
The accompanying notes are an integral part of these financial statements
F-7
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES
OVERVIEW
TWL Corporation (the "Company"), formerly known as Trinity Learning
Corporation, 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.
On September 1, 2003, we completed the acquisition of 51% of the issued and
outstanding shares of Ayrshire that owns 95% of Riverbend, a South African
company that provides learning services to corporations and individuals in
South Africa. We also acquired the option to purchase the remaining 49% of
Ayrshire. In consideration for the Ayrshire shares, we issued a
convertible non-interest-bearing promissory note in the amount of $20,000,
which amount is convertible from time to time but no later than December
30, 2006 into a maximum of 2,000,000 shares of our common stock. The value
of shares issuable upon conversion (based upon a $0.50 per share value) in
excess of the note amount has been classified as contingently redeemable
equity. Of these shares, up to 400,000 may be withheld in satisfaction for
any breach of warranties by the former shareholders of Ayrshire. The
determination of purchase price was based on, among other things, annual
revenue for the two preceding years relative to comparable market based
values for publicly traded companies. The Ayrshire shares are subject to
escrow, and pledge agreements will be re-conveyed 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.
F-8
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
OVERVIEW (CONTINUED)
Effective April 1, 2005, the Company entered into and closed an asset
purchase agreement (the "Asset Purchase Agreement") with PRIMEDIA Inc. and
two PRIMEDIA affiliates (collectively,"PRIMEDIA"), whereby PRIMEDIA sold to
the Company certain assets related to its PRIMEDIA's Workplace Learning
division ("PWPL"). The assets comprised those relating to PWPL's Healthcare
Group, Government Services Group, Industrial Services Group, Shared
Services Group, and all other assets of PWPL, including all of the assets
of PRIMEDIA Digital Video Holdings LLC, excluding only those assets
primarily related to the operations of PWPL's Financial Services Group
and/or PWPL's Interactive Medical Network business (such acquired assets
referred to collectively hereinafter as the "Business"). These assets are
comprised of content libraries, trademarks, brands, intellectual property,
databases, and physical assets. Included in the sale are certain video
production and distribution capabilities used to deliver integrated
learning solutions to professionals in the homeland security, healthcare,
industrial, fire & emergency, government, law enforcement and private
security markets currently served by PWPL.
In October 2005, the parties entered into a Settlement Agreement with
provisions as follows: (a) Musca, TLC and Danlas agreed to cancel the
definitive agreement, and Danlas, IRCA and IRCA Investments agreed to
cancel the sale of shares agreement; (b) all rights and obligations of the
parties contained in the sale of shares and definitive agreements, which
have not been exercised and/or fulfilled, shall expire; (c) any transfer of
shares that may have been effected as envisaged in the sale of shares
agreement and the definitive agreement, is void ab initio, and the parties
agree to co-operate to the extent necessary to restore their positions as
shareholders as they were before the conclusion of the sale of shares
agreement, the definitive agreement and related agreements; (d) IRCA and
IRCA Investments abandon all claims which either of them may have against
Trinity International in terms of, arising from, or in connection with the
expansion contribution; (e) Trinity Learning cedes all of its rights
under terms of the interest free loan to Musca; (f) all options to purchase
stock of Trinity Learning granted or to have been granted to employees,
directors or officers of IRCA shall be rescinded; (g) IRCA, IRCA
Investments and Musca shall indemnify Trinity Learning and hold it harmless
against any loss which the Company may suffer as a result of any of the
managers of these entities and/or Titan Aviation exercising their
respective rights to acquire shares in the share capital of Trinity
Learning. Further, the parties agreed that they shall take the necessary
steps to release the bank guarantee, and to arrange for the repayment to
Trinity Learning of the amount of $250,000 deposited by TLC with Standard
Bank Limited (plus accrued interest). Such funds have been released and
transferred to Trinity Learning. Finally, the parties agreed that all
disputes which exist between them in terms of, arising from, or in
connection with the definitive agreement, the sale of shares agreement
and/or the relationship between the parties are fully and finally settled
with effect from the effective date, and all obligations which each of them
may owe to any other of them and all claims (arising out of contract and
statute), which each of them may have against any other of them
(irrespective of whether that claim would ordinarily arise in terms of the
laws of the RSA or any other jurisdiction), in terms of, arising from, or
in connection with the definitive agreement, the sale of shares agreement
and all agreement contained in appendices thereto and/or the relationship
between the parties generally from the commencement of such relationship
until and including the signature date shall have been settled.
Effective September 29, 2006, the Company filed Articles of Amendment (the
"Articles") with the Secretary of State of the State of Utah to effect a
name change of the Company from Trinity Learning Corporation to TWL
Corporation. The Articles were further amended to increase the authorized
common stock of the Company from 100,000,000 shares to 750,000,000 shares.
In addition, the Company filed a Certificate of Amendment with the
Secretary of State of the State of Delaware, effective as of September 12,
2006, to effect the name change of its subsidiary Trinity Workplace
Learning Corporation to TWL Knowledge Group, Inc.
F-9
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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
Our consolidated financial statements include the accounts of the Company
and our controlled subsidiaries. All significant inter-company
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.
- 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.
F-10
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION (CONTINUED)
- 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.
The operating results and cash flows from operations as a result of the
settlement agreement are included only for the months prior to divestiture
of IRCA in October 2005 (see Note 2 Divestiture 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 affect the purchase prior to
the Company having established a trading market for its stock.
REVENUE RECOGNITION
The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB")
No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB104"), which
provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. The SAB 104 outlines
the basic criteria that much be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. 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. Advance payments are recorded on the
Consolidated Balance Sheet as deferred revenue. 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.. Sale of books, DVD's and printed products are recognized as
revenue upon shipment, net of an allowance for returns. In compliance with
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs," distribution costs charged to customers are
recognized as revenue when the related product is shipped.
F-11
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
The Company's revenue can be classified into three main categories
Subscription Revenue, Single Event Revenue, and Production Revenue.
1. Subscription revenue is approximately 60% of the Company's total
revenue and is generated from contracts with customers who receive products
or services for a specified time period. Revenue is recognized evenly over
the term of the contract, unless pricing is tiered (must be stated in the
contract). Subscription products include satellite subscriptions, monthly
videotape subscriptions, monthly CD-ROM subscriptions, Internet
subscriptions, and Training-On-Demand subscriptions (tape library).
2. Single Event revenue is approximately 30% of total revenue and
involves the distribution of products (videotapes, CD-ROM's, etc.) to
customers. Revenue recognition is determined by delivery date, so only
revenue for products that have been delivered is recognized in the current
period.
3. Production Revenue is approximately 10% of total revenue and is
generated from live events or specialized production work performed for a
customer. The revenue is recognized upon completion of the live event or
production work, and subsequently invoiced (unless the customer requested
an invoice in advance).
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 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 2006 and June 2005,
we incurred an impairment charge of $0 and $2,083,806, respectively.
F-12
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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
allowance for bad debt will be based on a percentage of aged receivables.
Allowance for bad debt at June 30, 2006 was $595,885 of which $379,151 has
been reserved for all subsidiary outstanding receivable balances, with the
exception of TWL Knowledge Group, Inc.
PROGRAM INVENTORY AND OTHER INTANGIBLE ASSETS
Program inventory consists of capitalized costs incurred by TWL to develop
the programming for its various networks (Technical, Industrial, HSTN,
LETN, etc). The amounts capitalized primarily consist external costs
(e.g., producers, talent, crew) and internal production department costs.
Program inventory is amortized over the life of the program, assessed by
TWL based on the history of the network and how long the program is
expected to be aired, ranging from 2 to 5 years. The Company evaluates
asset impairment for reasonableness as part of the monthly variance
analysis review. Net amortization expense for the years ended June 30,
2006 and 2005 was $2,991,189 and $915,364, respectively.
At June 30, 2006, the Company did not have any intangible assets with
indefinite lives.
PROPERTY AND EQUIPMENT
Property and equipment, net are stated at cost less accumulated
depreciation and amortization. Depreciation of property and equipment,
including the amortization of leasehold improvements, is provided at rates
based on the estimated useful lives or lease terms, if shorter, using
primarily the straight-line method. Improvements are capitalized while
maintenance and repairs are expensed as incurred. Whenever significant
events or changes occur, such as those affecting general market conditions
or pertaining to a specific industry or an asset category, the Company
reviews the property and equipment for impairment. When such factors,
events or circumstances indicate that property and equipment should be
evaluated for possible impairment, the Company used an estimate of cash
flows (undisclosed and without interest charges) over the remaining lives
of the assets to measure recoverability. If the estimated cash flows are
less than the carrying value of the asset, the loss is measured as the
amount by which the carrying value of the asset exceeds fair value.
Depreciation expense for the period ended June 30, 2006 and 2005 is
$776,416 and $2,783,664 respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized under the straight-line method
over the terms of the related indebtedness, which approximates the
effective interest method. Deferred financing costs were $91,200 and
$142,920 for the years ended June 30, 2006 and 2005, respectively.
INVENTORY
The Company uses the weighted average FIFO method for inventory. The
Company's inventory consists of saleable videotapes, CD ROM's, and DVD's,
printed product (supporting materials for the videotapes and CD ROM's such
as manuals, training guides, program guides, etc.), and Calibre products
(high quality inventory such as gun bags, police batons, etc.). In
addition, inventory is divided into the three main divisions at the Company
Industrial, Government, and Healthcare.
F-13
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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 affect 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. As discussed in Note 2,
"Acquisitions and Divestitures," in October 2005 the Company divested
themselves from their operations in South Africa. As a result,
contingently redeemable equity of $2,210,000 related to this subsidiary was
cancelled and posted to the statement of stockholders' equity. The balance
of $800,000 remaining in the account is related to redeemable equity held
by the Company's subsidiary in Norway (VILPAS).
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. At June 30, 2005 the Company reassessed the
value of its investments in RMT, Vilpas and TouchVision and determined it
was appropriate to write down its investment in these entities to $0. For
more information see Note 5 of the Footnotes.
F-14
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's derivative financial instruments consist of embedded
derivatives related to the Instream note entered into in July 2005 and the
Palisades note entered into in March 2006, since the notes are not
conventional convertible debt. The accounting treatment of derivative
financial instruments requires that the Company record the derivatives and
related warrants at their fair values as of the inception date of the
agreement and at fair value as of each subsequent balance sheet date.
In addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the convertible debt,
the Company is required to classify all other non-employee stock options as
warrants and derivative liabilities and mark them to market at each
reporting date.
The Company had no beneficial conversion features during the year ended
June 30, 2006. Options and warrants were valued using the Black-Sholes
model. The following assumptions were used in valuing the derivative and
warrant liabilities as of June 30,
2006 2005
------------ ------------
Risk-free interest rate 3.85% 4.25%
Volatility 120% 126%
Expected dividend yield 0% 0%
Any change in fair value of these instruments will be recorded as non-
operating, non-cash income or expense at each reporting date. If the fair
value of the derivative is higher at the subsequent balance sheet date, we
will record a non-operating, non-cash charge. If the fair value of the
derivative is lower at the subsequent balance sheet date, we will record
non-operating, non-cash income. The derivative and warrant liabilities are
recorded as liabilities in the consolidated balance sheet.
CONVERTIBLE DEBT
The Company records its convertible debt net of the debt discount. From
time to time, the Company has debt with conversion options that provide for
a rate of conversion that is below market value. This feature is normally
characterized as a beneficial conversion feature ("BCF"), which is recorded
by the Company pursuant to EITF Issue No. 98-5 ("EITF 98-05"), "Accounting
for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," and EITF Issue No. 00-27,
"Application of EITF Issue No. 98-5 to Certain Convertible Instruments."
If a BCF exists, the Company records it as a debt discount. Debt discounts
are amortized to interest expense over the life of the debt on a straight-
line basis, which approximates the effective interest method. The
convertible debt held by the Company at June 30, 2006 did not contain
beneficial conversion features.
F-15
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
Note 1 - Accounting Policies (continued)
ISSUANCE OF SHARES FOR NON-CASH CONSIDERATION
The Company accounts for the issuance of equity instruments to acquire
goods and/or services based on the fair value of the goods and services or
the fair value of the equity instrument at the time of issuance, whichever
is more reliably determinable. The majority of equity instruments have
been valued at the market value of the shares on the date issued.
The Company's accounting policy for equity instruments issued to
consultants and vendors in exchange for goods and services follows the
provisions of EITF Issue No. 96-18, "Accounting for Equity Instruments That
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" and EITF Issue No. 00-18, "Accounting
Recognition for Certain Transactions Involving Equity Instruments Granted
to Other Than Employees." The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at
which a commitment for performance by the consultant or vendor is reached
or (ii) the date at which the consultant or vendor's performance is
complete. In the case of equity instruments issued to consultants, the
fair value of the equity instrument is recognized over the term of the
consulting agreement. In accordance with EITF Issue No. 00-18, an asset
acquired in exchange for the issuance of fully vested, nonforfeitable
equity instruments should not be presented or classified as an offset to
equity on the grantor's balance sheet once the equity instrument is granted
for accounting purposes.
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 of 10,628,000 and 37,217,684, respectively, were not
included in the computation of DEPS, because their inclusion would have
been anti-dilutive for the fiscal year ended June 30, 2006 and fiscal year
ended June 30, 2005.
Basic and diluted net loss per common share for the fiscal periods ended
June 30, 2006 and 2005 were calculated as follows:
For the For the
Year Ended Year Ended
June 30, 2006 June 30, 2005
-------------- --------------
Numerator-Basic / Diluted
Net loss available for common stockholders $ (21,779,617) $ (15,615,042)
============== ==============
Denominator-Basic / Diluted
Weighted-average common stock outstanding 40,335,278 31,925,184
============== ==============
Basic / Diluted loss per share $ (0.54) $ (0.49)
============== ==============
F-16
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
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 (REVISED 2004), "Accounting for Stock-Based
Compensation" (SFAS 123[R]). In accordance with SFAS 123[R], option
expense of $828,308 and $752,063 was recognized for the fiscal year ended
June 30, 2006 and 2005, respectively. The expense was calculated using the
Black Scholes valuation model with the following assumptions:
For the For the
Year Ended Year Ended
June 30, 2006 June 30, 2005
-------------- --------------
Five-Year Risk Free Interest Rate 3.85% 4.25%
Dividend Yield Nil Nil
Volatility 120% 126%
Average Expected Term (Years to Exercise) 5 5
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS NO. 151, INVENTORY COSTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This
statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing", to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). In
addition, this Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The adoption of SFAS No. 151 did not have an impact
on the Company's consolidated financial statements.
SFAS NO. 123(REVISED 2004), SHARE-BASED PAYMENT
In December 2004, the FASB issued No. 123, "Summary of Statement No. 123
(Revised 2004). This Statement is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation." This Statement supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and its related
implementation guidance. This Statement establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are
based on fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement does
not change the accounting guidance for share-based payment transactions
with parties other than employees provided in Statement 123 as originally
issued and EITF Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." The Company is currently evaluating the
provisions of SFAS 123(Revised 2004) and the impact that it will have on
its share-based employee compensation programs.
F-17
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
SFAS NO. 153, EXCHANGES OF NON-MONETARY ASSETS, AN AMENDMENT OF APB OPINION
NO. 29
In December 2004, the FASB issued SFAS No. 153, which amends ARB 29 to
eliminate the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of non-
monetary assets that do not have commercial substance. SFAS 153 is
effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. We do not anticipate that the adoption of
this standard will have a material impact on our financial statements.
SFAS NO. 154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF
APB OPINION NO. 20 AND FASB STATEMENT NO. 3"
In May 2005, the FASB issued SFAS 154 which replaces APB 20 and SFAS 3.
This statement provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method for
reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle.
This statement also provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable and for
reporting a change when retrospective application is impracticable. SFAS
154 is effective for accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005. The adoption of this
standard will not have a material impact on the Company's consolidated
financial statements.
SFAS NO. 155, "ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS"
In February 2006, the FASB issued SFAS NO. 155, "ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS", which amends SFAS No. 133, "Accounting for
Derivatives Instruments and Hedging Activities" and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". SFAS No. 155 amends SFAS No. 133 to narrow
the scope exception for interest-only and principal-only strips on debt
instruments to include only such strips representing rights to receive a
specified portion of the contractual interest or principle cash flows. SFAS
No. 155 also amends SFAS No. 140 to allow qualifying special-purpose
entities to hold a passive derivative financial instrument pertaining to
beneficial interests that itself is a derivative instrument. We do not
anticipate that the adoption of this standard will have a material impact
on our financial statements.
SFAS NO. 156, "ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS"
In March 2006, the FASB issued SFAS NO. 156, "ACCOUNTING FOR SERVICING OF
FINANCIAL ASSETS", which provides an approach to simplify efforts to obtain
hedge-like (offset) accounting. This Statement amends FASB Statement No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The
Statement (1) requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in certain
situations; (2) requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable;
(3) permits an entity to choose either the amortization method or the fair
value method for subsequent measurement for each class of separately
recognized servicing assets or servicing liabilities; (4) permits at
initial adoption a one-time reclassification of available-for-sale
securities to trading securities by an entity with recognized servicing
rights, provided the securities reclassified offset the entity's exposure
F-18
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
SFAS NO. 156, "ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS" (CONTINUED)
to changes in the fair value of the servicing assets or liabilities; and
(5) requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the balance sheet and
additional disclosures for all separately recognized servicing assets and
servicing liabilities. SFAS No. 156 is effective for all separately
recognized servicing assets and liabilities as of the beginning of an
entity's fiscal year that begins after September 15, 2006, with earlier
adoption permitted in certain circumstances. The Statement also describes
the manner in which it should be initially applied. The Company does not
believe that SFAS No. 156 will have a material impact on its consolidated
financial statements.
SFAS NO. 157, "FAIR VALUE MEASUREMENTS"
In September 2006, the FASB issued SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. This Statement applies to other accounting pronouncements
that require or permit fair value measurements. This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
Company does not anticipate any material impact on its consolidated
financial statements upon the adoption of this standard.
SFAS NO. 158, "EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER
POSTRETIREMENT PLANS"
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132-R." SFAS No. 158 requires an
entity to recognize in its statement of financial condition the funded
status of its defined benefit postretirement plans, measured as the
difference between the fair value of the plan assets, and the benefit
obligation. SFAS No. 158 also requires an entity to recognize changes in
the funded status of a defined benefit postretirement plan within
accumulated other comprehensive income, net of tax, to the extent such
changes are not recognized in earnings as components of periodic net
benefit cost. SFAS No. 158 is effective as of the end of the fiscal year
ending after December 15, 2006. The Company does not expect that the
adoption of SFAS No. 158 will have a material effect on the Company's
financial condition, results of operations, or cash flows.
EITF NO. 03-13, APPLYING THE CONDITIONS IN PARAGRAPH 42 OF SFAS NO. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, IN
DETERMINING WHETHER TO REPORT DISCONTINUED OPERATIONS
In November 2004, the EITF reached a consensus on EITF No. 01-13, "Applying
the Conditions In Paragraph 42 of SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets, in Determining Whether to
Report Discontinued Operations." In this consensus, the EITF provided
guidance on how an ongoing entity should evaluate whether the operations
and cash flow of a disposed component have been or will be eliminated form
the ongoing operations of the entity. The adoption of EITF 03-13 in 2004
did not have a material impact on the Company's consolidated financial
statements.
F-19
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
EITF NO. 05-02, THE MEANING OF CONVENTIONAL CONVERTIBLE DEBT INSTRUMENT IN
EITF ISSUE NO. 00-19, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK
In June 2005, the EITF reached a consensus on EITF No. 05-02, "The Meaning
of Conventional Convertible Debt Instrument in EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, A Company's Own Stock" that (1)the exception to the
requirements of paragraphs 12-33 of Issue 00-19 for "conventional
convertible debt instruments" should be retained; (2) that instruments that
provide the holder with an option to convert into a fixed number of shares
(or equivalent amount of cash at the discretion of the issuer) for which
the ability to exercise the option is based on the passage of time or a
contingent event should be considered "conventional" for purposes of
applying issue 00-19; and (3) that convertible preferred stock with a
mandatory redemption date may qualify for the exception included in
paragraph 4 of Issue 00-19 if the economic characteristics indicate that
the instrument is more akin to debt than equity. We do not expect the
adoption of EITF 05-02 to have a material impact on the Company's
consolidated financial statements.
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.
ACQUISITIONS
Effective April 1, 2005, the Company entered into and closed an asset
purchase agreement (the "Asset Purchase Agreement") with PRIMEDIA Inc. and
two PRIMEDIA affiliates (collectively,"PRIMEDIA"), whereby PRIMEDIA sold to
the Company certain assets related to its PRIMEDIA's Workplace Learning
division ("PWPL"). The assets comprised those relating to PWPL's Healthcare
Group, Government Services Group, Industrial Services Group, Shared
Services Group, and all other assets of PWPL, including all of the assets
of PRIMEDIA Digital Video Holdings LLC, excluding only those assets
primarily related to the operations of PWPL's Financial Services Group
and/or PWPL's Interactive Medical Network business (such acquired assets
referred to collectively hereinafter as the "Business"). These assets are
comprised of content libraries, trademarks, brands, intellectual property,
databases, and physical assets. Included in the sale are certain video
production and distribution capabilities used to deliver integrated
learning solutions to professionals in the homeland security, healthcare,
industrial, fire & emergency, government, law enforcement and private
security markets currently served by PWPL.
The following table summarizes the PWPL assets acquired and liabilities
assumed as of the closing date:
Tangible assets acquired $ 24,294,121
Intangible assets acquired 10,300,845
-------------
Total assets acquired 34,594,966
Liabilities assumed 24,652,191
-------------
Net assets acquired $ 9,942,775
=============
F-20
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 2 ACQUISITIONS AND DIVESTITURES (CONTINUED)
ACQUISITIONS (CONTINUED)
TOUCHVISION
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.
In August 2005 the Company decided to pursue strategic business
alternatives for its TouchVision subsidiary. These alternatives included a
sale, divestiture, joint venture, license of intellectual property or
closure of the business. Presently, the Company plans to dissolve the
business. Further the Company chose to write down its investment of
$1,218,148.
RIVER MURRAY TRAINING
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-21
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 2 ACQUISITIONS AND DIVESTITURES (CONTINUED)
ACQUISITIONS (CONTINUED)
RIVER MURRAY TRAINING (CONTINUED)
The following table summarizes the RMT assets acquired and liabilities
assumed as of the closing date in connection with $350,000 common stock
issued and acquisition related costs of $26,517:
Cash acquired $ 37,979
Tangible assets acquired 78,673
Intangible assets acquired 18,000
Goodwill 376,517
------------
Total assets acquired 511,169
Liabilities assumed 145,744
------------
Net assets acquired $ 365,425
============
The acquisition was accounted for using the purchase method of accounting.
Intangible assets will be amortized over varying periods, as indicated by
independent valuations, using the straight-line method. Allocation of the
excess of merger consideration over the net book value of assets acquired
between goodwill and intangible assets was determined by an independent,
third-party professional valuation firm. As the merger consideration was
paid entirely in shares of the Company's common stock, the goodwill
acquired may not be amortized for federal income tax purposes. The
goodwill arising from the acquisition is allocated to the Australian
geographic segment.
Due to the uncertainty of its international operations and lack of positive
cash flow, the Company has chosen to write down its investment to $0 in
River Murray Training as of June 30, 2005.
VILPAS
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 re-conveyed 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:
F-22
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 2 ACQUISITIONS AND DIVESTITURES (CONTINUED)
ACQUISITIONS (CONTINUED)
VILPAS (CONTINUED)
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.
Due to the uncertainty of its international operations and lack of positive
cash flow, the Company has chosen to write down its investment in Vilpas of
$815,000 to $0 as of June 30, 2005.
AYRSHIRE / RIVERBEND
On September 1, 2003, we completed the acquisition of 51% of the issued and
outstanding shares of Ayrshire that owns 95% of Riverbend, a South African
company that provides learning services to corporations and individuals in
South Africa. We also acquired the option to purchase the remaining 49% of
Ayrshire. In consideration for the Ayrshire shares, we issued a
convertible non-interest-bearing promissory note in the amount of $20,000,
which amount is convertible from time to time but no later than December
30, 2006 into a maximum of 2,000,000 shares of our common stock. The value
of shares issuable upon conversion (based upon a $0.50 per share value) in
excess of the note amount has been classified as contingently redeemable
equity. Of these shares, up to 400,000 may be withheld in satisfaction for
any breach of warranties by the former shareholders of Ayrshire. The
determination of purchase price was based on, among other things, annual
revenue for the two preceding years relative to comparable market based
values for publicly traded companies. The Ayrshire shares are subject to
escrow, and pledge agreements will be re-conveyed 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, 2005, no shares had been
issued in exchange for the convertible promissory note. During the year
ended June 30, 2006, the Company divested themselves of this entity (see
"Divestiture of IRCA").
F-22
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
Note 2 Acquisitions and Divestitures (continued)
ACQUISITIONS (CONTINUED)
AYRSHIRE / RIVERBEND (CONTINUED)
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. During the year ended June 30, 2006, the
Company divested themselves of this entity (see "Divestiture of IRCA").
DIVESTITURES
DIVESTITURE OF IRCA
In October 2005, the parties entered into a Settlement Agreement with
provisions as follows: (a) Musca, TLC and Danlas agreed to cancel the
definitive agreement, and Danlas, IRCA and IRCA Investments agreed to
cancel the sale of shares agreement; (b) all rights and obligations of the
parties contained in the sale of shares and definitive agreements, which
have not been exercised and/or fulfilled, shall expire; (c) any transfer of
shares that may have been effected as envisaged in the sale of shares
agreement and the definitive agreement, is void ab initio, and the parties
agree to co-operate to the extent necessary to restore their positions as
shareholders as they were before the conclusion of the sale of shares
agreement, the definitive agreement and related agreements; (d) IRCA and
IRCA Investments abandon all claims which either of them may have against
Trinity International in terms of, arising from, or in connection with the
expansion contribution; (e) Trinity Learning cedes all of its rights under
terms of the interest free loan to Musca; (f) all options to purchase stock
of Trinity Learning granted or to have been granted to employees, directors
or officers of IRCA shall be rescinded; (g) IRCA, IRCA Investments and
Musca shall indemnify Trinity Learning and hold it harmless against any
loss which the Company may suffer as a result of any of the managers of
these entities and/or Titan Aviation exercising their respective rights to
acquire shares in the share capital of Trinity Learning. Further, the
parties agreed that they shall take the necessary steps to release the bank
guarantee, and to arrange for the repayment to Trinity Learning of the
amount of $250,000 deposited by TLC with Standard Bank Limited (plus
accrued interest). Such funds have been released and transferred to
Trinity Learning. The operations of IRCA for the months through October
2005 resulted in expenses of approximately $618,000 which have been
included in general and administrative expenses in the Statement of
F-23
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
Note 2 Acquisitions and Divestitures (continued)
DIVESTITURES (CONTINUED)
DIVESTITURE OF IRCA (CONTINUED)
Operations for the fiscal year ended June 30, 2006. Finally, the parties
agreed that all disputes which exist between them in terms of, arising
from, or in connection with the definitive agreement, the sale of shares
agreement and/or the relationship between the parties are fully and finally
settled with effect from the effective date, and all obligations which each
of them may owe to any other of them and all claims (arising out of
contract and statute), which each of them may have against any other of
them (irrespective of whether that claim would ordinarily arise in terms of
the laws of the RSA or any other jurisdiction), in terms of, arising from,
or in connection with the definitive agreement, the sale of shares
agreement and all agreement contained in appendices thereto and/or the
relationship between the parties generally from the commencement of such
relationship until and including the signature date shall have been
settled. As a result of the divestiture, convertible redeemable equity of
$2,210,000, related to IRCA, was cancelled and posted to the Statement of
Stockholders' Equity.
PURCHASED INTANGIBLE ASSETS
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, 2005, which
indicated that 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 impairment test of the goodwill and other intangible
assets at June 30, 2005, we concluded that we did have impairment of
goodwill and intangibles in the amount of $234,280 resulting in full
impairment of intangibles at June 30, 2005.
At June 30, 2006 the Company has no intangible assets.
NOTE 3 INVENTORIES
Inventories consist of the following:
June 30, 2006
-------------
Books, CD's, video tapes, collateral materials $ 1,474,234
Inventory reserve (524,176)
-------------
Total Inventory $ 920,058
=============
F-24
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment, net, including those held under capital leases,
consisted of the following:
2006
------------
Cost
------------
Capital Leases:
Buildings and improvements $ 8,581,123
Less: Accumulated depreciation and amortization (3,516,654)
------------
Net Capital Lease 5,057,292
Fixed Assets:
Furniture and fixtures 128,610
Less: Accumulated depreciation and amortization (81,176)
------------
Net Fixed Assets 47,434
------------
Total Property and Equipment, net $ 5,104,726
============
NOTE 5 EQUITY INVESTMENTS IN AND ADVANCES TO ASSOCIATED COMPANIES
At June 30, 2005, 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 (1,842,935) (1,464,963) (3,307,898)
Equity losses of unconsolidated
subsidiaries (536,936) (1,793,086) (2,330,022)
------------ ------------ ------------
Balance June 30, 2005 $ 0 $ 0 $ 0
============ ============ ============
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 an impairment change in that
period. As of June 30, 2005, we recognized impairment loss for Ayrshire
of $1,842,935. This impairment was recognized due to Ayrshire's continued
operating losses, and future economic uncertainties in the markets Ayrshire
serves.
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
F-25
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 5 EQUITY INVESTMENTS IN AND ADVANCES TO ASSOCIATED COMPANIES
(CONTINUED)
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
2005 and 2004, we recognized an impairment loss for IRCA of $80,000 and
$884,963, respectively. We wrote down our investment in IRCA to $0 as a
result of current year operating performance. 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.
As a result of IRCA's continued unfavorable operating environment, we have
absorbed losses up to $500,000, the amount we have deposited as collateral
in support of IRCA's operating line of credit.
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.
During the year ended June 30, 2006, the Company divested themselves of
this entity (see "Divestiture of IRCA").
NOTE 6 ACCRUED EXPENSES
Accrued expenses consisted of the following:
June 30,
--------------------------
2006 2005
------------ ------------
Payroll, commissions and related employee benefits $ 1,121,476 $ 1,237,893
Rent and lease liabilities 518,346 -
Professional fees 1,403,599 112,000
Sales Tax 520,013 14,455
Royalties 569,319 147,413
Contingent legal fees 200,000 -
Other - 114,140
------------ ------------
$ 4,102,247 $ 1,625,901
============ ============
NOTE 7 COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Total rent expense under operating leases was $1,980,000 and $1,690,200 for
the years ended June 30, 2006 and 2005, respectively. Certain leases are
subject to escalation clauses and certain leases contain renewal options.
The leases related to the Company's operating facilities, the 36 MHz Ku-
bank transponder, and sever copier/printers. Minimum rental commitments
under non-cancelable operating leases are as follows:
F-26
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 7 COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMMITMENTS (CONTINUED)
Years ending June 30,
---------------------
2007 $ 1,980,000
2008 1,980,000
2009 117,097
2010 -
2011 -
Thereafter -
------------
$ 4,077,097
============
Future minimum lease payments under capital leases are as follows:
Years ending June 30,
---------------------
2007 $ 2,120,074
2008 2,120,074
2009 2,263,488
2010 2,335,194
2011 2,335,194
Thereafter 6,227,186
------------
$17,401,210
Less: Amount representing interest 4,158,289
Present value of net minimum lease payments 13,242,921
Less: Current portion 1,199,294
------------
Long-term obligation
(included in long-term debt) $12,043,627
============
The Company has agreed in connection with its purchase of the Primedia
Workplace Learning assets to assume the defense of certain litigation,
entitled ARGUS 1 SYSTEMS CORPORATION V. PRIMEDIA WORKPLACE LEARNING L.P.,
ET AL., No. 04-CV-138918, District Court of Fort Bend County, Texas (the
"Argus Claim"), regarding claims made by Argus 1 Systems Corporation
("Plaintiff") resulting from that certain Memorandum of Understanding,
dated May 22, 2003, ("MOU") by and between Plaintiff and PRIMEDIA Workplace
Learning LP, a Delaware limited partnership ("PWPL"). Plaintiff has alleged
various contracts and tort claims and seeks among other things license
fees, attorney fees and actual and punitive damages related to the sale of
proprietary content to the Department of Homeland Security. The Primedia
Workplace purchase agreement provides that the Company shall generally be
responsible for paying that portion of any Recovery (as defined therein)
relating to license fees, royalty fees, or other damages arising from any
sales other conduct after the purchase of the Workplace assets and be
responsible for the payment of all on-going license or royalty fees
relating to periods thereafter. In addition, some of the cost and
recoveries may be split on a 50/50 basis. The Company has not yet been
named as a party to the litigation, has not engaged legal counsel for the
matter, and has conducted no discovery. The Company is unable to estimate
the likelihood of an unfavorable outcome or the amount or range of any
potential loss its potential liability or legal exposure for the
litigation.
In addition, the Company is a defendant in a number of lawsuits brought by
its trade creditors. However, the Company believes that subsequent to its
successful funding, such litigations will not have a material adverse
effect on the Company. Also, the Company has the amounts in dispute
accrued for in accounts payable with an additional accrual of approximately
$200,000 for potential legal fees recorded in accrued expenses (see Note
6).
F-27
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 8 RELATED PARTY TRANSACTIONS
During the period June 2004 to October 2004, Mr. Swindells, a shareholder
of the Company, 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. On April
22, 2005 Mr. Swindells advanced $300,000 to us by way of short-term non-
interest bearing working capital loan. In October 2005 the Company repaid
$250,000 on this loan. In November 2005 Mr. Swindells advanced the Company
$250,000 in a short-term non-interest bearing loan. The total balance owed
to Mr. Swindells at June 30, 2006 is $300,000.
During September 2005 Vilpas converted its unsecured, non-interest bearing
note to equity. The $500,000 convertible note was converted into 1,100,000
shares of the Company's common stock in full satisfaction of the note.
From time to time, Jan Olaf Willlums, an officer of Vilpas, as well as
companies of which he is a director, have advanced funds to Vilpas. The
current balance of $186,448, of which $109,972 bears interest at 8% per
annum and $76,476 is non-interest bearing, has no fixed terms of repayment.
During the year ended June 30, 2006, Dennis Cagan, CEO/President and Doug
Cole, Executive Vice President paid for costs of the Company related to
travel. The Company has yet to reimburse Mr. Cagan or Mr. Cole for the
amounts advanced to the Company. The total amount of the payable to these
individuals is $218,881.
NOTE 9 CONVERTIBLE DEBT AND 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"). 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
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 reminder of the loan proceeds was used for
operating needs. The principal amount of the Term 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 Term 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 liability and a discount on notes payable. A value
attributable to the beneficial conversion feature of the Term 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.
On January 7, 2005, we closed an offering of Notes in the aggregate
principal amount of $1,552,500. The Notes mature in twelve months and
accrue interest at a rate of 9% per annum. The principal amount of the
Notes and accrued interest thereon are convertible into shares of our
common stock at any time prior to the due date of the Notes, we also issued
three-year warrants to purchase an aggregate of 2,126,712 shares of our
common stock at an exercise price of $1.50 per share.
F-28
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 9 CONVERTIBLE DEBT AND NOTES PAYABLE (CONTINUED)
On July 13, 2005, the Company entered into a Credit Agreement (the "Credit
Agreement") with Instream Investment Partners, LLC, as administrative
agent, and certain lenders (the "Lenders"). Pursuant to the terms of the
Credit Agreement, the Lenders loaned to the Company $3,500,000. The Company
may borrow up to an additional $1,000,000 under the Credit Agreement until
January 13, 2006. The loan matures on January 13, 2007, with interest
payable monthly at the rate of 12% per annum. The obligations of the
Company under the Credit Agreement are secured by a security interest in
substantially all existing and hereafter acquired assets of the Company.
TouchVision, Inc. and TWL Knowledge Group, Inc., subsidiaries of the
Company, each have guaranteed the obligations of the Company under the
Credit Agreement, and have granted the Lenders a security interest in
substantially all of their respective existing and hereafter acquired
assets. The Company also granted to the Lenders warrants (the "Warrants")
to acquire up to an aggregate of 5.25% of the outstanding common stock of
the Company on a fully-diluted basis, and entered into a Registration
Rights Agreement with respect to the common stock issuable upon exercise of
the Warrants. The warrants are exercisable for a period of five years at a
price per share equal to $0.266, subject to adjustment as provided in the
warrants.
The Credit Agreement includes certain features that are considered
derivative financial instruments, such as the related warrants that are
associated with a registration rights agreement which requires the exercise
of the warrants to be in unrestricted common stock of the Company. As
such, the Company is required to record the related warrants at their fair
values. The total of the Instream-related derivative warrant liabilities
at July 13, 2005 totaled $460,614.
At March 31, 2006 the value of the derivative warrant liabilities decreased
by $180,286 which has been reflected as a component of other income in the
accompanying consolidated statements of operations. On this date, the
Company entered into another financing agreement with Palisades Master Fund
LP ("Palisades"). As a result of the refinancing with Palisades the
Instream Credit Agreement balance of $2,551,169 was satisfied in full. The
warrants associated with the Instream Credit Agreement were forfeited by
Instream. As such, the derivative warrant liability has been removed from
the Company's financial statements, and a gain of forfeiture of warrants
has been recognized in the Company's statement of operations of $280,328 at
June 30, 2006 in accordance with EITF 96-19.
A portion of the proceeds of the Credit Agreement was used by the Company
to repay all amounts outstanding under the Secured Convertible Term Note
and Securities Purchase Agreement (the "Laurus Agreements") dated August
31, 2004 with Laurus Master Fund, Ltd. ("Laurus"). In connection therewith,
Laurus converted a portion of the note into 1,198,124 shares of common
stock at a conversion price of $0.24 per share, resulting in a credit of
$287,550 to common stock. The remaining discount on the Laurus note was
expensed as amortization in the amount of $1,495,564. The Laurus note
balance of $5,323,529 was satisfied by using the restricted cash noted
above and some of the proceeds from the Instream note. In accordance with
EITF Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange
of Debt Instruments," the exchange of the instruments were considered
substantial and thus the Company recognized a loss of $1,614,064 during the
year ended June 30, 2006.
As disclosed above, on March 31, 2006, the Company entered into a
Securities Purchase Agreement with certain accredited investors for the
issuance of up to an aggregate of $4,500,000 in face amount of 15% Senior
Secured Convertible Debentures (the "Debentures") maturing March 31, 2010,
and four year warrants (the "Warrants") to purchase an aggregate of
13,600,000 shares of common stock of the Company. The Debentures accrue
interest at a rate of 15% per annum and the Company issued a face amount of
$4,500,000 in Debentures and issued warrants to purchase an aggregate of
7,200,000 shares of common stock pursuant to the first closing which
occurred on March 31, 2006 at an exercise price equal to 120% of the
closing bid price of the Company's common stock on the day that is one day
prior to the initial closing date. The fair market value of the Company's
common stock on that date was $0.175. Therefore, the exercise price of the
warrants granted to Palisades is $0.21.
F-29
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 9 CONVERTIBLE DEBT AND NOTES PAYABLE (CONTINUED)
The Debentures are convertible into shares of the Company's common stock at
a price equal to $0.25 per share. The Company is obligated to pay 1/24th of
the face amount of the Debenture on the first of every month, starting
March 31, 2008, which payment can be made in cash or in common stock of the
Company. The Company's obligation to repay Debentures is secured by all of
its assets, and the assets of its wholly owned subsidiary, TWL Knowledge
Group, Inc. (the "Subsidiary"), pursuant to a certain Security Agreement
which the Company and the Subsidiary entered into with the investors on
March 31, 2006. In addition, the Company's Subsidiary entered into a
Subsidiary Guarantee with the investors on March 31, 2006 pursuant to which
the Subsidiary agreed to guarantee the Company's repayment of the
Debentures to the investors.
The guidance provided in EITF Issue No. 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," was applied to the Debentures. The results of this
application resulted in no beneficial conversion features being recognized.
However, the Debentures did include warrants that are considered derivative
financial instruments. The total of the Palisades-related derivative
warrant liabilities at March 31, 2006 totaled $933,238. This amount was
recorded as financing costs in the statement of operations and derivative
warrant liabilities in the long-term liabilities section of the balance
sheet.
During the year ended June 30, 2006, the value of the derivative warrant
liability decreased by $559,302 which is reflected as a component of other
income in the accompanying consolidated statements of operations. Accrued
interest on the Debentures at June 30, 2006 is $168,750.
As of June 30, 2006, convertible debt and notes payable consisted of the
following:
Notes payable to third parties: June 30, 2006
-------------------------------------------------------- --------------
Bank notes payable; secured by Company vehicle,
interest at 9.5% per annum, monthly payment of $574,
matures October 2006. $ 12,496
Senior secured convertible note payable to third party,
due March 31, 2010, interest at 15% per annum,
convertible at $0.25 per share, warrants are for four
years to purchase 7,200,000 shares of common stock at
$0.25 per share. 4,500,000
Convertible notes payable to third parties, interest at 9%
per annum, principal and interest due January 7, 2006,
past due, convertible at $0.45 per share, warrants are for
three years to purchase 2,126,712 shares of common stock at
$1.50 per share. 475,000
F-30
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 9 CONVERTIBLE DEBT AND NOTES PAYABLE (CONTINUED)
Notes payable to third parties: June 30, 2006
-------------------------------------------------------- --------------
Note payable to related party, due December 31, 2004,
past due, unsecured, interest at 6% per annum. 17,103
Notes payable to a related party; unsecured, interest
at 8% per annum on $94,777; non-interest bearing on
$76,447, payable on demand. 186,448
Convertible note payable to a related party, unsecured,
non-interest bearing, due December 31, 2006. 300,000
Note payable to a related party, unsecured, non-interest
bearing, due December 31, 2006. 100,000
Convertible note payable to a related party for IRCA purchase;
due December 31, 2005, past due, unsecured, non-interest
bearing convertible at $0.01 per share. 20,000
Convertible note payable to a related party for Riverbend
purchase; due December 31, 2006, unsecured, non-interest
bearing convertible at $0.01 per share. 20,000
Notes payable for capital lease obligations:
--------------------------------------------
Capital leases payable to third party, monthly payment of
$176,673 through November 2008 then increasing to $194,600
per month through maturity date, interest at 7.25%, secured
by building. 13,242,921
------------
Total notes payable 18,873,968
Less: current maturities (587,496)
Less: current maturities - notes related party (543,551)
Less: current maturities capital leases (1,199,294)
------------
Long-term notes payable $16,543,627
============
Maturity schedule for notes payable:
Fiscal Year Amount
---------------------------------------- ------------
2007 $ 2,330,341
2008 1,289,191
2009 1,532,309
2010 6,223,100
2011 1,852,261
Thereafter 5,646,766
------------
Total 18,873,968
============
F-31
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 10 - 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. On April 17, 2005, 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) 11,000,000 shares, plus (b) an annual 500,000 increase to be added in
fiscal years 2003 and 1,000,000 shares on the last day of each fiscal year
thereafter 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, 2006 and June 30, 2005, respectively:
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ----------- ------------ -----------
Outstanding at beginning of year 11,665,000 $ 0.33 5,570,000 $ 0.43
Granted 2,004,000 0.18 6,220,000 0.25
Canceled (3,041,000) 0.45 (125,000) 0.30
------------- ----------- ------------ -----------
Outstanding at end of year 10,628,000 $ 0.30 11,665,000 $ 0.33
============= =========== ============ ===========
Exercisable at year-end 6,614,393 $ 0.33 6,367,431 $ 0.36
============= =========== ============ ===========
Weighted Average Number of Weighted
Range of Number of Average Remaining Options Average
Exercise Options Exercise Contractual Vested Exercise
Price Outstanding Price Life (Years) (Exercisable) Price
------------- ------------ ------------ ------------ ------------ ------------
$ 0.05 450,000 $ 0.05 1.28 450,000 $ 0.05
$ 0.16 500,000 0.16 4.84 187,450 0.16
$ 0.19 1,475,000 0.19 4.61 912,500 0.19
$ 0.22 3,880,000 0.22 3.80 1,414,043 0.22
$ 0.25 500,000 0.25 1.42 500,000 0.25
$ 0.25 200,000 0.25 1.54 200,000 0.25
$ 0.27 125,000 0.27 3.89 66,838 0.27
$ 0.50 25,000 0.50 1.76 25,000 0.50
$ 0.50 1,010,000 0.50 2.18 958,790 0.50
$ 0.50 875,000 0.50 2.51 784,263 0.50
$ 0.50 250,000 0.50 2.59 213,660 0.50
$ 0.50 260,000 0.50 2.92 200,543 0.50
$ 0.50 978,000 0.50 3.58 630,373 0.50
$ 0.85 100,000 0.85 3.18 70,883 0.85
------------- ------------ ------------ ------------ ------------ ------------
10,628,000 $ 0.30 6,614,393 $ 0.33
============ ============ ============ ============
There are 1,386,000 options available for grant at June 30, 2006. The
weighted average grant date fair value of options granted as of June 30,
2006, and 2005 is $0.30 and $0.33, respectively.
F-32
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 11 WARRANTS
Through June 30, 2006, 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:
2006
-------------------------------------
Exercise
Price Exercisable
Description Shares Per Share Through
-------------------------------------------------------------------------------------
October 2002 Equity Private Placement 500,000 0.25 September 2007
October 2002 Equity Private Placement
Bonus Warrants (1) 250,000 1.00 September 2010
May 2003 Equity Private Placement 2,438,000 0.25 September 2007
May 2003 Equity Private Placement 7,708,600 0.25 October 2007
May 2003 Equity Private Placement
Bonus Warrants (1) 1,219,000 1.00 September 2010
May 2003 Equity Private Placement
Bonus Warrants (1) 3,854,300 1.00 October 2010
Warrants issued to Mr. Swindells on note
conversion 850,000 0.25 November 2007
Bonus warrants to Mr. Swindells (1) 425,000 1.00 November 2007
2004 Bridge Loan Warrant 1,549,000 0.25 May 2010
2004 Bridge Loan Warrant 1,146,000 0.25 February 2010
Warrants Issued to Financial Advisors 125,000 1.00 July 2009
Warrants Issued to Financial Advisors 1,600,000 0.81 August 2009
Warrants issued to Financial Advisors 20,000 0.25 July 2008
Warrants issued to Financial Advisors 190,050 0.25 October 2008
Warrants issued to Financial Advisors 10,000 0.25 October 2008
2005 Convertible Loan Warrants 1,476,027 0.25 January 2009
Warrants Issued to Financial Advisors 150,000 0.31 August 2008
Warrants Issued to Financial Advisors 376,818 0.31 July 2010
Warrants Issued to Financial Advisors 3,391,362 0.27 July 2010
Warrants Issued to Debt Private Placement 250,000 0.15 March 2008
Warrants Issued to Equity Private Placement 937,500 0.20 March 2008
Warrants Issued to debt holders that
converted debt during calendar 2005 1,476,027 0.25 January 2008
Warrants Issued to Creditors 75,000 0.30 March 2008
Warrants Issued to Debt Private Placement 7,200,000 0.25 March 2010
-------------------------------------------- ------------ ----------
Total Granted 37,217,684 0.39
Exercised -
------------
Total Outstanding 37,217,684
============
We recognized valuation expense of $1,393,852 for warrants granted in
relation to debt financing and 348,672 related to other services performed
on behalf of the Company for the fiscal year ended June 30, 2006. We
recognized valuation expense of $3,393,224 for the fiscal year ended June
30, 2005. The warrant expense was calculated using the Black Scholes
valuation model.
(1) Bonus warrants are issuable upon exercise of the original warrant.
F-33
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 12 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.
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 asset, and deferred tax asset valuation
allowance at June 30, 2006 is as follows:
June 30, 2006 June 30, 2005
------------- -------------
Net operating loss carryforward
Federal $ 8,060,697 $ 2,860,502
State 1,598,717 375,142
Foreign 1,044,419 685,500
Reserve for deferred revenues
Federal 1,134,831 1,336,500
State 267,048 314,500
Accrued compensation costs
Federal 78,372 46,000
State 18,440 10,800
Accrued amortization
Federal 105,440 52,400
State 24,780 12,300
Accumulated depreciation
Federal 44,900 268,100
State 104,700 63,100
------------- -------------
13,324,601 6,024,844
Less valuation allowance for
deferred tax assets (13,324,601) (6,024,844)
------------- -------------
Net Current Deferred Tax Assets $ 0 $ 0
============= =============
Inventory Reserve
Federal $ 178,220 $ -
State 41,934 -
Contingent Legal Fee Reserve
Federal 68,000 -
State 16,000 -
Bad Debt
Federal 111,806 -
State 26,307 -
The valuation allowance for deferred tax assets was increased by $7,299,757
during the year ended June 30, 2006.
At June 30, 2006, the Company has available net operating loss
carryforwards of approximately $23,707,932 for federal income tax purposes
that begin to expire in 2021. The federal carryforwards resulted from
losses generated in 2001 through 2005. The Company also has net operating
loss carryforwards available for state income tax purposes of $19,983,964
that begin to expire in 2021. The Company also has approximately
$2,748,470 of foreign net operating loss carryforwards. These loss
carryovers are limited per Section 382.
F-34
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 12 INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at statutory rates of income tax
benefits is as follows:
2006 2005
------------- -------------
Expense at Federal statutory rate 34% $(7,088,030) $(4,118,209)
State tax effects, net of Federal tax benefits (1,276,075) (711,313)
Nondeductible expenses 1,423,267 2,202,578
Foreign tax effects (358,919) (116,000)
Taxable temporary differences - -
Deductible temporary differences - -
Acquired net operating loss carryforward
from subsidiary - -
Deferred tax asset valuation allowance 7,299,757 2,742,844
------------- -------------
Income tax provision $ - $ -
============= =============
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, 2006 and 2005.
2006 2005
------------------------- --------------------------
Domestic Foreign Domestic Foreign
------------- ----------- ------------- -----------
Revenues $ 25,013,792 $ 826,676 $ 9,171,584 $2,005,390
Expenses 40,340,631 1,743,658 18,166,359 2,593,244
------------- ----------- ------------- -----------
Loss from Operations (15,326,839) (916,982) (8,994,775) (587,854)
Other Expenses (5,520,308) (15,488) (6,131,620) (3,942)
Minority Interest and Equity - - - 59,215
------------- ----------- ------------- -----------
Loss before Income Taxes $(20,847,147) $ (932,470) $(15,126,395) $ (532,581)
============= =========== ============= ===========
Note 13 Segment and Related Information
We operate as a single business segment and have one product offering which
is training and education; however, our consolidated subsidiaries are
organized geographically into reporting segments consisting of the United
States Division, the European Division, and the Australia 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.
F-35
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 13 SEGMENT AND RELATED INFORMATION (CONTINUED)
As of and for the fiscal year ended June 30, 2006:
Investment
Depreciation Losses in
Operating & Associated Accounts
Revenue Loss Amortization Companies Receivable
------------- ------------- ------------- ----------- ------------
United States $ 25,013,792 $(15,326,838) $ 3,754,468 $ - $ 2,425,180
Europe 380,426 (854,962) 1,789 - 206,811
Australia 446,250 (62,020) 11,348 - 48,654
South Africa - - - - -
------------- ------------- ------------- ----------- ------------
Total $ 25,840,468 $(16,243,820) $ 3,767,605 $ - $ 2,680,555
============= ============= ============= =========== ============
Property & Total Net
Goodwill Equipment Assets Assets
----------- ------------- ------------- --------------
United States $ - $ 5,064,927 $ 10,816,263 $ (22,637,558)
Europe - 17,659 283,682 (855,430)
Australia - 22,140 129,489 (154,621)
South Africa - - - -
----------- ------------- ------------- --------------
$ - $ 5,104,726 $ 11,229,434 $ (23,647,609)
=========== ============= ============= ==============
NOTE 14 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
whereby we issued to Laurus (i) a secured convertible tern 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 reminder of the loan proceeds was used for
operating needs. The principal amount of the Term 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 Term 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 liability and a discount on notes payable. A value
attributable to the beneficial conversion feature of the Term 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-36
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 14 STOCKHOLDERS' EQUITY (CONTINUED)
On January 7, 2005, we closed an offering of Notes in the aggregate
principal amount of $1,552,500. The Notes mature in twelve months and
accrue interest at a rate of 9% per annum. The principal amount of the
Notes and accrued interest thereon are convertible into shares of our
common stock at any time prior to the due date of the Notes, we also issued
three-year warrants to purchase an aggregate of 2,126,712 shares of our
common stock at an exercise price of $1.50 per share.
On July 13, 2005 the Company issued to Laurus Master Fund, Ltd. 1,198,124
share of common stock in connection with the payoff converting a portion of
a Secured Convertible Term Note and Securities Purchase Agreement at a
conversion price of $0.24 per share. Accordingly, $287,550 has been
credited to common stock.
On September 30, 2006 an affiliate of the Company converted its non-
recourse convertible note originally dated as of March 1, 2004 into
1,100,000 shares of common stock at a conversion price of $0.454545 per
share, resulting in a $500,000 credit to common stock.
In March 2006 the Company issued 25,000 three-year warrants to Johnson
Printing with an exercise price of $0.30 per share. Johnson Printing
provides printed materials and products to the Company.
In March 2006 the Company issued 50,000 three-year warrants to ElectroLab
Training with an exercise price of $0.30 per share. ElectroLab Training
provides proprietary products and training services to the Company.
On March 2, 2006, Jack Rutherford purchased 625,000 shares of Common Stock
of the Company at $0.16 per share or $100,000. In addition we issued
625,000 warrants exercisable at $0.20 per share to Mr. Rutherford in
consideration of the purchase. We further issued 250,000 warrants
exercisable at $0.15 per share to Mr. Rutherford in consideration for a
loan made in the amount of $100,000 by Mr. Rutherford to the Company on
March 1, 2006.
On March 3, 2006, William T. Merrill purchased 156,250 shares of Common
Stock of the Company at $0.16 per share or $25,000. In addition we issued
156,250 warrants exercisable at $0.20 per share to Mr. Merrill in
consideration of the purchase.
On March 3, 2006, David Spada purchased 156,250 shares of Common Stock of
the Company at $0.16 per share or $25,000. In addition we issued 156,250
warrants exercisable at $0.20 per share to Mr. Spada in consideration of
the purchase.
On February 1, 2006 the Company issued 480,000 shares of common stock for
services rendered, and to be rendered, on behalf of the Company. The value
of the services was valued at $0.24 per share. Per the agreement with DJI
Partners, 20,000 shares are recognized as expense each month. Accordingly,
380,000 shares have been recorded as deferred financial advisory fees and
valued at $91,200.
During the year ended June 30, 2006, the Company issued 80,000 and 100,000
shares of common stock for services rendered on behalf of the Company at a
price of $0.24 and $0.25 per share, respectively. Accordingly, an
aggregate of $38,975 has been recorded to the common stock account of the
Company.
NOTE 15 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 an
established source of revenues sufficient to cover our operating costs and
to allow us to continue as a going concern. We do currently possess a
financial institution source of financing although 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.
F-37
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 15 GOING CONCERN (CONTINUED)
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, and collections on accounts
receivable. 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 new revenue generating opportunities as well as
reduce redundant expenses, including our ability to maintain our existing
customer base and to expand our customer base into new geographic markets
and enhanced product offerings. The Company is investing a significant
amount of its available working capital into sales and marketing
activities. The Company has hired additional sales personnel and
contracted with a third party marketing organization to assist with
customer satisfaction surveys as well as a needs and usage survey. These
surveys will provide information that will allow the Company to tailor its
product offerings to coincide with customer desires. Further, with the
additional funding received (described in more detail in Footnote 16) the
Company is using a portion of the net proceeds to pay outstanding balances
due creditors. This will enable the Company to purchase additional
products and materials for resale. In addition, the Company has entered
into two sublease agreements for office space in its facilities at 4101
International Parkway, Carrollton Texas. Currently, the Company receives
approximately $64,000 per month related to the sublease agreements.
NOTE 16 SUBSEQUENT EVENTS
On July 27, 2006, we entered into a Letter Agreement (the "Letter
Agreement #1") with Palisades Master Fund LP ("Palisades") pursuant to
which Palisades agreed to waive an Event of Default for the Company's
failure to timely file a registration statement with the SEC in
connection with the March 2006 financing with Palisades (the "March
2006 Financing"), and further agreed to subordinate its security
interest to the Company's loan in the amount of $7,000,000 to Laurus (the
"Subordination"). Furthermore, Palisades agreed to modify certain
provisions of the Registration Rights Agreement and Securities Purchase
Agreement, dated March 31, 2006. As consideration for the waiver, the
Company agreed to issue Palisades 1,000,000 shares of Preferred Stock
having a 7% coupon which is convertible into Common Stock at $0.10 per
share (the "Palisades Preferred Stock") and lower the conversion price for
the debentures dated March 31, 2006 issued to Palisades to $0.10. The
Palisades Preferred Stock shall pay the 7% coupon semi-annually.
Furthermore, at our sole option, we have the right to redeem the Palisades
Preferred Stock at $0.10 per share at any time on or before the 5th
anniversary of the Palisades Closing Date (as defined below).
We also agreed to file a registration statement registering the resale of
the shares issuable upon the conversion of the Palisades Preferred Stock no
later than 210 days after the Palisades Closing Date (as defined below). We
further agreed to issue an additional 82,800,000 warrants to Palisades (the
"Additional Warrants") as consideration for the waiver, such that Palisades
would have the right to substitute the Additional Warrants for
Preferred Stock of the Company under similar terms and conditions
as any Preferred Stock that would be issued to Laurus, predicated upon the
Company agreeing to a financing agreement with Laurus on or before
August 31, 2006.
F-38
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 16 SUBSEQUENT EVENTS (CONTINUED)
On July 31, 2006 (the "Palisades Closing Date"), the Company entered into a
subsequent Letter Agreement with Palisades (the "Letter Agreement #2")
whereby Palisades and the Company agreed to modify the Letter Agreement
#1, such that Palisades would subordinate its security interest in all
of the assets of the Company and its subsidiaries to Laurus. As
consideration for the Waiver, the Subordination and Palisades' agreement
to surrender the 7,200,000 warrants issued in connection with the
March 2006 Financing and in lieu of the Company issuing the additional
82,800,000 warrants as agreed to pursuant Letter Agreement #1, the
Company agreed to issue to Palisades an additional 1,800,000 shares of
Preferred Stock with the terms as set forth above.
On August 31, 2006 (the "Closing Date"), the Company entered into
agreements with Laurus Master Fund, Ltd., a Cayman Islands corporation
("Laurus") and Palisades Equity Fund ("PEF"), pursuant to which the Company
sold debt and issued preferred stock of the Company to Laurus in a private
offering pursuant to exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. As a part of this financing, PEF
agreed to return all of its warrants issued under the March 31, 2006
Securities Purchase Agreement. In return, they were issued $1,800,000 of
convertible preferred stock. PEF was also issued $1,000,000 of convertible
preferred stock as part of this transaction. The securities being sold and
issued to Laurus include the following:
- A secured three-year term note (the "Secured Note") with a principal
amount of $2,500,000 (the "Secured Note Amount"), which matures on August
31, 2009 (the "Maturity Date");
- A secured three-year revolving note with a principal amount of $5,000,000
(the "Revolving Note"; the Revolving Note and the Secured Note shall be
collectively referred to as the "Notes"); and
- 1,500,000 shares (the "Shares") of preferred stock (the "Preferred
Stock"), of the Company, which is redeemable by the Company at a price of
$0.10 per share (the "Set Price") at any time until August 31, 2011, and
may be converted by Laurus at any time into common stock, no par value per
share (the "Common Stock"), of the Company at the Set Price.
Of the Secured Note, net proceeds of $2,173,000 were received by the
Company on the Closing Date. Any proceeds of the Revolving Note will be
deposited in a restricted account with Col Taylor Bank as security for the
total loan amount and for use by us to make acquisitions as approved by
Laurus. We also agreed to pay, out of the Loan proceeds, the sum of
$270,000 to Laurus Capital Management, LLC, the manager of Laurus, the sum
of $60,000 to Laurus as reimbursement for Laurus' legal fees, due diligence
fees and expenses incurred in connection with the transaction, and $2,000
to Loeb & Loeb LLP as escrow agent fees.
The Notes are secured by a blanket lien on all of the Company's assets, the
assets of the Company's subsidiaries and the cash held in the restricted
account at Col Taylor Bank. The Company pledged its ownership interests in
TWL Knowledge Group, Inc., its subsidiary, to Laurus in connection with the
aforementioned financing. In the event of a default, Laurus has the right
to accelerate payments under the Notes and, in addition to any other
remedies available to it, to foreclose upon the assets securing the Notes.
The principal amount of the Secured Note carries an interest rate of prime
plus three percent (the "Secured Note Rate"), subject to adjustment, and we
must make monthly amortizing payments of $42,500, commencing January 1,
2007 and with said monthly amortizing payments increasing to $62,500
commencing on January 1, 2008, toward the outstanding non-restricted
principal amount. Furthermore, the Secured Note Rate shall not at any time
be less than nine percent (9.0%). The Company may prepay the Secured Note
at any time by paying Laurus 105% of the Secured Note Amount if such
prepayment occurs prior to the first anniversary of the Closing Date, 103%
if such prepayment occurs on or after the first anniversary of the Closing
Date and prior to the second anniversary of the Closing Date, or 101% of
the Secured Note Amount outstanding at such time if such prepayment occurs
thereafter but prior to the Maturity Date, plus any accrued but unpaid
interest thereon.
F-39
TWL Corporation and Subsidiaries
(formerly Trinity Learning Corporation)
Notes to Consolidated Financial Statements
June 30, 2006
NOTE 16 SUBSEQUENT EVENTS (CONTINUED)
The principal amount of the Revolving Note carries an interest rate of
prime plus two percent (the "Revolving Note Rate"), subject to adjustment,
and we must make said monthly interest payments, payable in arrears,
commencing September 1, 2006. Furthermore, the Revolving Note Rate shall
not at any time be less than nine percent (9.0%). This monthly interest
payment amount will be increased proportionately if and when funds are
released from the restricted account. The Company may prepay the May 2006
Revolving Note at any time without penalty.
In consideration of the foregoing and so long as no Event of Default, as
defined in the Security Agreement entered into by and between the Company,
Laurus and TWL Knowledge Group, Inc., has occurred and is continuing,
Laurus agreed not to directly or indirectly, sell, offer, contract or grant
any option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the U.S. Securities Exchange Act of 1934, as amended,
or otherwise dispose of any Shares or publicly announce an intention to do
any of the foregoing, for a period of no less than twelve (12) months from
the Closing Date.
The Shares of Preferred Stock are convertible into shares of our common
stock at a price of $0.10 per share, subject to anti-dilution adjustments.
Laurus has contractually agreed to restrict its ability to convert the
Shares of Preferred Stock and receive shares of the Company's Common Stock
such that the number of shares of the Company common stock held by it after
such exercise does not exceed 4.99% of the Company's then issued and
outstanding shares of common stock. Such restriction shall automatically
become null and void following notice to the Company upon occurrence of an
event of default under the agreements with Laurus or upon 61days prior
notice to the Company.
We also have granted Laurus a right of first refusal with respect to any
debt or equity financings, with such restriction being in effect for no
longer then 2 years after the Closing Date.
The Company is obligated to file a registration statement registering the
resale of shares of the Company's Common Stock issuable upon the conversion
of the Shares. If the registration statement is not filed within 60 days of
Closing Date, or declared effective within 180 days of Closing Date, or if
the registration is suspended other than as permitted, in the registration
rights agreement between the Company and Laurus, the Company is obligated
to pay Laurus certain fees and the obligations may be deemed to be in
default.
On September 26, 2006, the Company held a Special Shareholders meeting, for
the Company's shareholders of record as of August 11, 2006 (the "Record
Date"), as was previously disclosed by the Company in its Proxy Statement
filed on Schedule 14(a) with the SEC on August 18, 2006. During the
meeting, the affirmative vote of the Company's shareholders holding the
majority of the Company's outstanding shares as of the Record Date approved
the following proposals:
1. Amending the Company's Articles of Incorporation to change the name of
the Company from Trinity Learning Corporation to TWL Corporation; and
2. Amending the Company's Articles of Incorporation to increase the
authorized number of common stock from 100,000,000 shares to
750,000,000 shares.
3. In addition, the Company filed a Certificate of Amendment with the
Secretary of State of the State of Delaware, effective as of September
12, 2006, to effect a name change of its subsidiary Trinity Workplace
Learning to TWL Knowledge Group, Inc.
F-40
ITEM 8. CONTROLS AND PROCEDURES
TWL Corporation ("TWL")maintains disclosure controls and procedures
that are designed to ensure that information required to be disclosed in
its reports pursuant to the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and
procedures.
In connection with the completion of its audit of, and the issuance of
its report on, TWL's consolidated financial statements for the year ended
June 30, 2005, Chisholm, Bierwolf & Nilson, LLC ("CBN") identified
deficiencies that existed in the design or operation of our internal
controls over financial reporting of our subsidiaries that it considered to
be "material weaknesses." The Public Company Accounting Oversight Board has
defined a material weakness as "a significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that
a material misstatement of the annual or interim financial statements will
not be prevented or detected." CBN 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 subsidiaries; and (ii) lack of sufficient
resources to identify and properly address technical SEC and reporting
issues.
The Company did not timely file its annual report on Form 10-KSB for
the fiscal year ended June 30, 2006. In addition, as noted above and as
previously disclosed, material weaknesses had been identified by CBN that
contributed to the Company's failure to timely file its annual report on
Form 10-KSB for the fiscal year ending June 30, 2005 or, with respect to
the audited and proforma financial statements relating to its acquisition
of the Primedia assets, its Current Report on Form 8-K. Accordingly, the
Company's chief executive officer and its chief financial officer concluded
that such controls and procedures were not effective as of June 30, 2006 or
2005, respectively.
In connection with its audit of, and the issuance of its report on our
consolidated financial statements for the year ended June 30, 2006, CBN,
Certified Public Accountants, of Bountiful, Utah, informed 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 subsidiaries and
(ii) lack of sufficient resources to identify and properly address
technical SEC and reporting issues.
As required by Rule 13a-15(b) of the Securities and Exchange
Commission, we carried out an evaluation under the supervision and with the
participation of our management, including our chief executive officer and
our chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of June 30, 2006.
Based on this evaluation, our chief executive officer and our chief
financial officer have concluded that the disclosure controls and
procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and
forms, were not effective as of June 30, 2006. Chisholm Bierwolf & Nilson
has not provided an attestation report on management's assessment of our
internal control over financial reporting.
There was no change in our internal control over financial reporting
that occurred during fourth fiscal quarter of the Company's fiscal year
ending June 30, 2006 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
80 of 95
In light of the material weaknesses identified by CBN, the Company
continues to review it's disclosure, financial information, internal
controls and procedures and organization and staffing of its corporate
accounting department. The Company retained an independent third party
accounting firm to assist with the review of disclosure requirements for
SEC reporting. In addition, the Company continues to retain outside legal
counsel to assist in, among other things, in its efforts to timely file or
submit our future reports under the Securities Exchange Act of 1934, as
amended. Management intends to continue focusing on strengthening the
Company's controls and procedures.
As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer of our disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Exchange Act). Based upon this evaluation, our chief executive officer and
chief financial officer concluded that for the fiscal year ended June 30,
2006, our disclosure controls and procedures are effective to ensure that
all information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is: (1) accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required
disclosure; and (2) recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. There was
no change in our internal controls or in other factors that could affect
these controls during our last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 8A. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of our
executive officers and directors.
Name Age Position
--------------------- ------- ------------------------------
Dennis J. Cagan 61 Chief Executive Officer,
President and Director
Patrick R. Quinn 46 Chief Financial Officer
and Chief Operating Officer
Douglas D. Cole 51 Executive Vice President and
Director
William D. Jobe 68 Director
Richard G. Thau 59 Director
Arthur Ronald Kidson 62 Director
Ron S. Posner 64 Director
David B. Batstone(1) 48 Director
*Rich Marino resigned and terminated his employment as President,
Chief Executive Officer and as an employee of the Company on May 3, 2006.
(1) David B. Batstone was appointed as a member of the Company's board
of Directors on September 13, 2006.
81 of 95
Certain biographical information pertaining to the above-named officers and
directors is set forth below:
DENNIS J. CAGAN
Mr. Cagan was appointed as our permanent Chief Executive Officer and
President on August 31, 2006. Mr. Cagan has also served as a director
since May 2005. He has been in the high technology industry as an active
entrepreneur for over 38 years, having founded over a dozen different
companies. He has been an investor and professional board member (over 40
boards) for over 25 years. Most recently as the founder, Chairman and CEO
of the Santa Barbara Technology Group, LLC, Mr. Cagan oversees all
activities including monitoring portfolio investments, consulting to early-
stage technology companies, and selecting new investments. Santa Barbara
Technology Group, LLC is a private investment and consulting firm engaged
primarily in working with, and investing in early-stage technology
companies in Santa Barbara. Mr. Cagan is currently on the Boards of
Directors of Acorn Technologies, Inc.; Pacific Palisades; BNI Holdings,
Goleta, CA. (formerly Bargain Network); InQ, Inc. (Chairman), Agoura Hills,
CA.; Nutricate Corp., Santa Barbara, CA.; Truston, Inc., Santa Barbara, CA.
(Chairman); and SaluDent International, Inc., Santa Barbara, CA.
(Chairman). His non-profit activities include: Executive Board, California
Coast Venture Forum; and Board of Directors, Santa Barbara County's United
Way.
DOUG COLE
Mr. Cole is Vice Chairman and Executive Vice President, has been a director
of the Company since 2002 and was our Chief Executive Officer until
February 1, 2006 when the company moved its corporate headquarters to
Texas. For the past 28 years, Mr. Cole has worked in the information
technology industry, with a focus on sales and marketing. He has
successfully completed numerous acquisitions, OEM agreements, International
Distribution and strategic partnerships for and among various companies
over his career, ranging from Hewlett Packard, Canon, Texas Instruments,
Sony and IBM. From 1998 to 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 1999 to 2000. 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. Mr. Cole is a graduate
of the University of California, Berkeley.
PATRICK R. QUINN
Mr. Quinn was appointed as the Company's Chief Financial Officer in May
2005, and subsequently appointed as the Company's Chief Operating Officer
on August 31, 2006. From March 2004 to May, 2005, Mr. Quinn was employed by
Primedia Workplace Learning ("PWPL") as the Chief Financial Officer. PWPL
was a wholly-owned subsidiary of Primedia Inc (NYSE PRM). From 2000 to
2003 Mr. Quinn was Chief Financial Officer for Fusion Laboratories, Inc.
From 1997 to 2000 Mr. Quinn was Chief Financial Officer of B.R. Blackmarr
&Associates, until its merger into BrightStar Information Technology Corp
(NASDAQ BTSR) where he was the Controller. From 1989 to 1997 Mr. Quinn was
Vice President/Chief Financial Officer for Affiliated Computer
Systems/Precept. Mr. Quinn has also been an adjunct professor of finance
in the MBA program at the University of Dallas, where he was rated in the
top 5% of the adjunct faculty.
WILLIAM D. JOBE
Mr. Jobe has been a director of the Company since 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.
82 of 95
RICHARD G. THAU
Mr. Thau has been a director of the Company since 2004. Mr. Thau is
currently self-employed and is actively engaged in
consultant/mentor/advisor activities. He is also an 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. Mr. Thau is Chairman of Availigent Systems
and holds advisory and/or board positions at Symphoniq Corp, LandSonar,
Inc., iBreva and Nomea. Mr. Thau is a graduate of the State University of
New York at Stony Brook.
ARTHUR RONALD KIDSON
Mr. Kidson has been a director of the Company since 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.
RON S. POSNER
Mr. Posner has been a director of the Company since May 2005. Mr. Posner
is Chairman of NetCatalyst, a high-technology mergers and acquisitions
firm, and a founding general partner of PS Capital LLC, an angel venture
capital firm. Mr. Posner has over 30 years experience in the technology
industry, having held CEO positions with a number of high technology
companies, including Peter Norton Computing, a PC utilities software
company. He has been an active investor and advisor to a number of
Internet companies including PrizeCentral.com (now called Flipside.com and
part of Vivendi-Universal Net Group), tunes.com (now part of Universal
Music Group), Spinner.com (now part of AOL Time Warner), STV.com (now
part of Sonic Foundry), Match.com (now part of TicketMaster City Search,
Inc.), and Novatel Wireless. Mr. Posner serves on the Boards of Directors
of eChinaCash and Puresight.
DAVID B. BATSTONE
Mr. Batstone was appointed as a member of our Board of Directors on
September 13, 2006. Prior to joining the Company's Board, David Batstone
has been a fully tenured Professor at the University of San Francisco from
fall of 1994 to the present date. He also has served as President of Right
Reality, a publishing and consulting firm since he founded the company in
September 2004. He currently serves as the Senior Editor of Worthwhile
magazine - a post he has held since the fall of 2004 - and Editor-at-Large
of Sojourners magazine a post he had held since the fall of 2001. In the
fall of 1998 David Batstone was part of the founding team that launched
Business 2.0 magazine, and served on the executive editorial team until he
departed in fall of 2000. In 2000 and 2001 David Batstone was a managing
partner in the investment banking firm, NetCatalyst. He received his B.A.
from Westmont College in Santa Barbara, CA in May, 1980; his M. Div. from
the Pacific School of Religion in Berkeley in May, 1984; his Ph.D. from the
Graduate Theological Union/University of California Berkeley in May 1989.
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.
83 of 95
AUDIT COMMITTEE
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
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who beneficially own more than
ten percent of a registered class of our equity securities to file with the
SEC initial reports of ownership and reports of change in ownership of
common stock and other equity securities of our Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, the following persons have failed to file, on a timely
basis, the identified reports required by Section 16(a) of the Exchange Act
as of June 30, 2006:
Known failures
Name and Number of Transactions not to file a
Relationship late reports timely reported required form
-------------------- ------------ ---------------- ---------------
Dennis J. Cagan 0 0 0
Patrick R. Quinn 1 1 0
Douglas D. Cole 2 1 0
William D. Jobe 1 1 0
Richard G. Thau 1 1 0
David B. Batstone -- -- 0
Ron S. Posner 1 1 0
Arthur Kidson 2 1 0
ITEM 10. EXECUTIVE COMPENSATION
The table below sets forth certain information regarding the annual and
long-term compensation for services by the named executive officers to us
in all capacities for the fiscal years ended June 30, 2005 and 2004, the
nine month transitional period ended June 30, 2003 and the fiscal year
ended September 30, 2002. These individuals received no other compensation
of any type, other than as set out below, during the fiscal years
indicated.
84 of 95
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- ----------------------
Long
Other Restr Term All
Name & Annual icted Incen- Other
Principal Compen Stock Stock tive Compen
Position Year Salary Bonus sation Awards Options Payout sation
-------------------------------------------------------------------------------------
Dennis Cagan 2006 $41,666 - - - 375,000 - -
Chief Executive
Officer, President
and Director (1)
Doug Cole
Executive Vice
President 2006 $198,359 - $6,000(4) - 250,000 - -
2005 $180,000 - $64,000 - 500,000 - -
Edward P. Mooney
President(3) 2006 $146,352 - - - - - -
2005 $180,000 - $12,000(5) - 500,000 - -
Rich Marino
Chief Operating
Officer (2) 2006 $231,550 $30,000 $4,500(6) - 250,000 - -
2005 $240,000 - $4,500 - - - -
Patrick R. Quinn
Chief Financial
Officer and 2006 $186,500 - $5,000(7) - 500,000 - -
Chief Operating 2005 $25,223 - - - 250,000 - -
Officer
(1) Mr. Cagan was appointed on May 9, 2006, as the Company's Chief
Executive Officer.
(2) Mr. Marino resigned as the Company's Chief Executive Officer on May 3,
2006.
(3) Mr. Mooney resigned as President of the company on January 9, 2006.
(4) Transportation and travel pursuant to employment agreement for Mr.
Cole.
(5) Transportation and travel pursuant to employment agreement for Mr.
Mooney.
(6) Transportation and travel pursuant to employment agreement for Mr.
Marino.
(7) Transportation and travel pursuant to employment agreement for Mr.
Quinn.
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. We do not pay
any fees for attendance at committee meetings.
EMPLOYMENT AGREEMENTS WITH THE MANAGEMENT
We entered into a full time employment agreement (the "Agreement")
with Dennis J. Cagan, our Chief Executive Officer, President and Director,
on September 1, 2006. The Agreement is effective for a term beginning on
the date of the Agreement and terminating on December 31, 2009 (the
"Employment Period"), unless earlier terminated as provided in the
Agreement. The Agreement may also be renewed by mutual written agreement
between Mr. Cagan and the Company. Mr. Cagan' base compensation under the
Agreement is $250,000 per year. Furthermore, Mr. Cagan shall be awarded
pursuant to the Agreement the amount of stock options equal to 3% of the
total number of fully diluted equity composed of the sum of (i) the number
of shares of common stock of the Company outstanding on the date of the
grant, (ii) the total amount of all granted options outstanding on the date
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of the grant (regardless of vesting), and (iii) the total amount of stock
options authorized to be granted by the Company under the 2002 Stock Option
Plan (including any increases authorized by the board of directors within
the fourth quarter of the 2006 calendar year) (the "Options"). The Options
shall vest as follows: 1/3 to vest on the date of the Agreement, and with
1/36 of the balance to vest each month over a 36 month period beginning on
the date of the Agreement; provided that upon a change of control (as
defined in the Agreement), 100% of all unvested options will vest, and
provided further that in the event that Mr. Cagan's employment is
terminated pursuant to Section 4(d)(i) of the Agreement, then he shall be
entitled to an acceleration of vesting of 1/2 of the remaining unvested
Options. Furthermore, Mr. Cagan is entitled to certain bonus compensation
based on certain Company benchmarks as set forth in Exhibit A annexed to
the Agreement.
The Company is required to promptly reimburse Mr. Cagan for all
business related out-of-pocket expenses reasonably incurred in performing
his responsibilities under the agreement. Mr. Cagan is entitled to a
certain amount of days of paid vacation, to be scheduled and taken in
accordance with the Company's standard vacation policies. In addition, Mr.
Cagan is entitled to sick leave and holidays at full pay in accordance with
the Company's policies established and in effect from time to time. The
Agreement also contains customary provisions for disability, death,
confidentiality, indemnification and non-competition. Both the Company and
Mr. Cagan have the right to voluntarily terminate the Agreement at any time
with or without cause. If the Company voluntarily terminates the
Agreement, the Company must pay Mr. Cagan a cash sum equal to his
monthly salary over a 12 month period; provided that, said
compensation will include all accrued vacation pay and bonuses, if any,
as Mr. Cagan would have been entitled to pursuant to the Agreement. If Mr.
Cagan resigns from his employment, he will be entitled to receive
compensation amount equal to his annual base salary of $250,000 plus any
accrued leave through the date of termination. All of Mr. Cagan's rights
to his annual base salary and benefits hereunder which accrue or become
payable after the date of such termination of the Employment Period shall
cease upon such termination. In addition, Mr. Cagan shall be eligible for
payment of any bonuses (earned prior to termination) as provided in the
Bonus Plan (as defined in the Agreement) and be entitled to exercise his
Options in accordance with Exhibit "B" annexed to the Agreement.
We entered into a three-year employment agreement with Patrick Quinn,
our Vice President of Finance, and Chief Financial Officer and Chief
Operating Officer on February 1, 2006. The agreement initially provided for
base salary of $187,000 per annum ("Annual Base Salary"). According to the
agreement, the annual base salary may be further adjusted from time to
time by the Board of Directors. The Board will review Mr. Quinn's salary at
least once during each calendar year, beginning with calendar year 2007.
Mr. Quinn is eligible to participate in all executive benefit plans and to
receive an annual bonus on such terms, at such time and in such amount as
determined by the Board of Directors. As part of the compensation package
given to Mr. Quinn, he will receive during the calendar year of 2006,
250,000 stock options which shall vest over a three-year period pursuant to
the Company's 2002 Stock Option Plan. Mr. Quinn's employment period will
continue until December 31, 2007 unless earlier terminated. If we
terminate the agreement without cause (as defined in the agreement), Mr.
Quinn is entitled to receive his annual base salary at the rate then
in effect and all benefits then afforded to senior executives for a six
month period after the date of termination, together with expenses
incurred as of the date of termination. In addition, the Company shall pay
Mr. Quinn the portion of the Annual Bonus attributable to any calendar year
of the Company (or portion thereof) accrued through the date of
termination. If Mr. Quinn terminates the agreement (as defined in the
agreement), Mr. Quinn is entitled to receive his Annual Base Salary plus
any accrued leave through the date of termination. All of Mr. Quinn's
rights to Annual Base Salary and benefits pursuant to the Employment
Agreement which accrue or become payable after the date of such
termination of the employment period shall cease upon such termination.
The agreement contains a non-competition covenant that survives for
a period of six months after termination of employment.
We entered into a three-year employment agreement with Douglas
Cole, our Executive Vice President on February 1, 2006. The agreement
initially provided for base salary of $180,000 per annum ("Annual Base
Salary"). According to the agreement, the annual base salary may be
further adjusted from time to time by the Board of Directors. The Board
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will review Mr. Cole's salary at least once during each calendar year,
beginning with calendar year 2007. Mr. Cole is eligible to participate
in all executive benefit plans and to receive an annual bonus on such
terms, at such time and in such amount as determined by the Board of
Directors. As part of the compensation package given to Mr. Cole, he
will receive during the calendar year of 2006, 250,000 stock options which
shall vest over a three-year period pursuant to the Company's 2002 Stock
Option Plan. Mr. Cole's employment period will continue until December
31, 2007 unless earlier terminated. If we terminate the agreement
without cause (as defined in the agreement), Mr. Cole is entitled to
receive his annual base salary at the rate then in effect and all
benefits then afforded to senior executives for a six month period after
the date of termination, together with expenses incurred as of the date
of termination. In addition, the Company shall pay Mr. Cole the portion
of the Annual Bonus attributable to any calendar year of the Company (or
portion thereof) accrued through the date of termination. If Mr. Cole
terminates the agreement (as defined in the agreement), Mr. Cole is
entitled to receive his Annual Base Salary plus any accrued leave through
the date of termination. All of Mr. Cole's rights to Annual Base
Salary and benefits pursuant to the Employment Agreement which accrue
or become payable after the date of such termination of the employment
period shall cease upon such termination. The agreement contains a non-
competition covenant that survives for a period of six months after
termination of employment.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of September 22,
2006 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
43,415,513 outstanding shares of common stock as of October 9, 2006.
Unless otherwise indicated, the address for each of the following is 4101
International Parkway Carrollton, Texas 75007.
Total Percent
Number of Beneficial of Class
Number of Options & Ownership Beneficially
Beneficial Owner Shares Owned Warrants (1) (2) Owned
---------------------------- ------------ -------------- ----------- ------------
Dennis J. Cagan
Chief Executive Officer
President and Director 0 6,874,300 (3) 6,874,300 5.37%
Patrick R. Quinn
Chief Financial Officer &
Chief Operating Officer 0 2,400,000 (9) 2,400,000 1.66%
Doug Cole
Executive Vice President
& Director 2,009,972 1,775,000 (4) 3,784,927 6.86%
William Jobe
6654 Bradbury Court
Fort Worth, TX 76132
Director 200,000 895,000 (5) 1,095,000 1.70%
Arthur R. Kidson
2 Epsom Road
Stirling, East London
Republic of South Africa
Director 0 720,000 (6) 720,000 *
Richard G. Thau
2468 Sharon Oaks Drive
Menlo Park, CA 94025
Director 0 1,055,000 (7) 1,055,000 1.40%
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Ron S. Posner
820 Stony Hill Road
Tiburon, CA 94920
Director 100,000 540,000 (8) 640,000 *
David B. Batstone
Director 0 440,000(10) 440,000 *
Steven Hanson
1319 NW 86th Street
Vancouver, WA 98665
5% Shareholder 2,000,000 3,000,000 5,000,000 10.77%
Theodore Swindells
11400 Southeast 8th Street
Bellevue, WA 98004
5% Shareholder 1,550,000 1,275,000 2,825,000 6.32%
Luc Verelst
Verbier, Switzerland 1936
5% Beneficial Owner 3,725,138 4,000,000 7,725,138 16.29%
---------------------------- ------------ -------------- ----------- ------------
All executive officers and
directors of the Company
as a group (8 persons) 2,309,972 6,353,519 8,663,491 17.41%
---------------------------- ------------ -------------- ----------- ------------
*Denotes less than one percent (1%).
** Unless otherwise stated, all stock options granted expire 5
years from the date of the respective stock option grant.
(1) Reflects warrants, options or other convertible securities that
will be exercisable, convertible or vested as the case may be within 60
days of June 30,2006.
(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 June 30, 2006 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 shareholder's name.
(3) Consists of (i) 25,000 stock options, which are fully vested,
granted on October 9, 2002 and which expire on October 9, 2007; (ii)
125,000 stock options granted on May 19, 2005, of which 71,896 would vest
by September 1, 2006; (iii) 250,000 stock options granted on May 9,
2006, of which 125,000 would vest by September 1, 2006; (iv) 125,000
stock options granted on February 8, 2006, fully vested; and (v) 6,349,300
stock options granted on September 26, 2004, of which 80,000 vested by
September 30, 2006. **
(4) Consists of (i) 250,000 stock options, fully vested, granted on
December 1, 2002 and which expire on October 9, 2007; (ii) 250,000 stock
options granted on December 31, 2003, of which 234,490 would vest by
September 1, 2006; (iii) 250,000 stock options granted on January 28,
2005, of which 164,023 would vest by September 1, 2006; (iv) 250,000
stock options granted on April 18, 2005, of which 148,850 would vest by
September 1, 2006; (v) 250,000 stock options granted on February 8, 2006,
of which 111,111 would vest by September 1, 2006; and (vi) 525,000 stock
options granted on September 26, 2004, of which 2,116,433 vested by
September 30, 2006. **
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(5) Consists of (i) 25,000 stock options, fully vested, granted on
October 9, 2002; (ii) 125,000 stock options granted on December 31, 2003,
of which 117,245 would vest by September 1, 2006; (iii) 25,000 stock
options granted on September 1, 2004, of which 19,283 would vest by
September 1, 2006; (iv) 125,000 stock options granted on January 28, 2005,
of which 82,011 would vest by September 1, 2006; (v) 125,000 stock options
granted on April 18, 2005, of which 74,425 would vest by September 1,
2006; (v) 150,000 stock options granted on February 8, 2006, which are
fully vested; and (vi) 320,000 stock options granted on September 26,
2004, of which 80,000 vested by September 30, 2006. **
(6) Consists of (i) 125,000 stock options granted on February 1, 2004, of
which 114,641 would vest by September 1, 2006; (ii) 25,000 stock options
granted on September 1, 2004, of which 19,283 would vest by September 1,
2006; (iii) 50,000 stock options granted on January 28, 2005, of
which 32,805 would vest by September 1, 2006; (iv) 50,000 stock options
granted on April 18, 2005, of which 29,770 would vest by September 1, 2006;
(v) 150,000 stock options granted on February 8, 2006, which are fully
vested; and (vi) 320,000 stock options granted on September 26, 2004, of
which 80,000 vested by September 30, 2006. **
(7) Consists of (i) 25,000 stock options, which are fully vested,
granted on October 9, 2002 and which expire on October 9, 2007; (ii)
125,000 stock options granted on February 1, 2004, of which 114,641 would
vest by September 1, 2006; (iii) 50,000 stock options granted on
September 1, 2004, of which 38,566 would vest by September 1, 2006; and
(iv) 125,000 stock options granted on January 28, 2005, of which 82,011
would vest by September 1, 2006; (v) 125,000 stock options granted on
April 18, 2005, of which 74,425 would vest by September 1, 2006; (vi)
175,000 stock options granted on February 8, 2006, which are fully vested;
and (vii) 430,000 stock options granted on September 26, 2004, of which
107,500 vested by September 30, 2006. **
(8) Consists of (i) 25,000 stock options, which are fully vested,
granted on April 1, 2003 and which expire on October 9, 2007; (ii)
125,000 stock options granted on April 18, 2005, of which 74,425 would
vest by September 1, 2006; (iii) 125,000 stock options granted on
February 8, 2006, fully vested; and (iv) 265,000 stock options granted on
September 26, 2006, of which 62,250 vested by September 30, 2006. **
(9) Consists of (i) 250,000 stock options, granted on April 18, 2005, of
which 148,850 would vest by September 1, 2006; (ii) 250,000 stock options
granted on February 8, 2006, fully vested; (iii) 250,000 stock options
granted on April 18, 2005, of which 62,500 would vest by September
1, 2006; and (iv) 1,650,000 stock options granted on September 26, 2006,
of which 412,500 vested by September 30, 2006. **
(10) Consists of (i) 50,000 stock options, granted on July 15, 2002 which
have entirely vested by September 30, 2006; (ii) 125,000 stock options
granted on September 13, 2006 which have entirely vested by September 30,
2006; and (iii) 265,000 stock options granted on September 26, 2006, of
which 62,250 vested by September 30, 2006. **
Options/SARs Grants During Last Fiscal Year
The following table sets forth the individual grants of stock options for
each of the below named executive officers for the fiscal year ended June
30, 2006. No stock options were exercised during the fiscal year ended
June 30, 2006.
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Individual Grants
-----------------
% of Total
Number of Total Options
Securities Granted to Exercise
Underlying Employees in Price Expiration
Name Options Fiscal Year per Share Date
--------------------- ----------- ------------- ------------- -------------
Dennis Cagan 250,000 16.66% $0.16 5/09/2011
250,000 16.66% $0.19 2/08/2011
--------------------- ----------- ------------- ------------- -------------
Doug Cole 250,000 16.66% $0.19 2/08/2011
--------------------- ----------- ------------- ------------- -------------
Patrick R. Quinn 250,000 16.66% $0.19 2/08/2011
250,000 16.66% $0.16 5/03/2011
--------------------- ----------- ------------- ------------- -------------
Rich Marino (1) 250,000 16.66% $0.19 2/08/2011
--------------------- ----------- ------------- ------------- -------------
(1) Rich Marino resigned as the Company's Chief Executive Officer on
May 3, 2006.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth the aggregate stock option exercises and
fiscal year-end option values for each of the above named executive
officers, as of June 30, 2006. This table reflects September 1, 2006, as
the vesting date of the options set forth below. No stock options were
exercised as of June 30, 2006.
Number of
Securities Exercise
Underlying Value of
Unexercisable Unexercisable
Shares Options as of Options
Acquired Value Sep. 1, 2006 at below date
on Realized Exercisable/ Exercisable/
Name Exercise ($) Unexercisable Unexercisable
----------------- --------- -------- ------------------- -------------------
($0.10 on 6/08/05)
Dennis Cagan 0 0 346,896 / 178,104 $34,690 / $17,810
Doug Cole 0 0 908,474 / 341,526 $90,847 / $34,153
Patrick R. Quinn 0 0 322,461 / 427,539 $32,246 / $42,754
Rich Marino (1) 0 0 234,295 / 515,705 $23,430 / $51,571
(1) Rich Marino resigned as the Company's Chief Executive Officer on
May 3, 2006.
THE 2002 STOCK PLAN
As of June 30, 2006, an aggregate of 14,467,000 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.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following related party transactions occurred from June 30, 2004 to
September 30, 2006:
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 were 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, which had a fair market value of $175,034 at time of the
conversion, as part of the total conversion of this financing to
4,520,069 shares of our common stock, which had a fair market value
of $4,746,072 at time of the conversion. 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.
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 2004, we paid Mr. Jobe an additional $4,815 in connection with
the TouchVision transaction. Ted Swindells, a holder of approximately
9.8% of the Company's Common Stock, lent the Company $300,000 in
April, 2005 pursuant to a non interest bearing unsecured demand
promissory note. The loan proceeds were used for working capital.
$250,000 of the loan was repaid in October, 2005.
Ted Swindells, a holder of approximately 9.8% of the Company's Common
Stock, lent the Company $300,000 in April, 2005 pursuant to a non interest
bearing unsecured demand promissory note. The loan proceeds were used for
working capital. $250,000 of the loan was repaid in October, 2005.
Management believes that all of the above transactions were on terms
at least as favorable as could have been obtained from unrelated third
parties.
91 of 95
ITEM 13. EXHIBITS
Exhibit
No. Description
------- ---------------------------------------------------------------
3(i).1 Articles of Restatement of the Articles of Incorporation of
Trinity Learning Corporation dated February 25, 2003. (4)
3(i).2 Articles of Amendments of the Company filed on September 29, 2006
with the Secretary of State of the State of Utah to (i) increase
the authorized common stock of the Company from 100,000,000
shares to 750,000,000 shares, and (ii) to change the name of the
Company to TWL Corporation. (2)
3(i).3 Articles of Restatement of the Articles of Incorporation of the
Company filed with the Secretary of State of the State of Utah on
August 31, 2006. (3)
3(ii) Bylaws of Trinity Companies, Inc. (1)
4.1 Statement of designation, powers, preferences and rights of the
Series A Preferred Stock. (3)
10.1 Asset Purchase Agreement dated April 1, 2005 among the Company,
PRIMEDIA Inc., its wholly-owned entity PRIMEDIA Digital Video
Holdings LLC, and PRIMEDIA Workplace Learning LP. (7)
10.2 Securities Purchase Agreement dated as of March 31, 2006 by
and among Trinity Learning Corporation and the investors. (8)
10.3 Form of 15% Senior Secured Convertible Debenture of Trinity
Learning Corporation. (8)
10.4 Form of Warrant issued to the investors in connection with the
Securities Purchase Agreement dated as of March 31, 2006. (8)
10.5 Registration Rights Agreement dated as of March 31, 2006 by
and among Trinity Learning Corporation and the investors. (8)
10.6 Security Agreement dated as of March 31, 2006 by and among
Trinity Learning Corporation, TWL Knowledge Group, Inc. and the
investors. (8)
10.7 Subsidiary Guarantee dated as of March 31, 2006 by Trinity
Workplace Learning Corporation. (8)
10.8 Voting Agreement dated as of March 31, 2006 entered into in
connection with the Securities Purchase Agreement dated as of
March 31, 2006.
10.9# Employment Agreement entered into by and between Dennis J.
Cagan and the Company dated September 1, 2006. (5)
10.10# Employment Agreement entered into by and between Patrick R.
Quinn and the Company dated February 1, 2006. (6)
10.11# Employment Agreement entered into by and between Douglas D.
Cole and the Company dated February 1, 2006. (6)
10.12 Security Agreement dated August 31, 2006 by and among the
Company, Laurus Master Fund, Ltd. and TWL Knowledge Group. (3)
10.13 IP Security Agreement dated August 31, 2006 by and between by
and Laurus Master Fund, Ltd. and TWL Knowledge Group. (3)
10.14 Secured Non-Convertible Term Note dated August 31, 2006
payable to Laurus Master Fund, Ltd. (3)
10.15 Secured Non-Convertible Revolving Note dated August 31, 2006
payable to Laurus Master Fund, Ltd. (3)
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10.16 Funds Escrow Agreement dated August 31, 2006 by and among TWL
Corporation, Laurus Master Fund, Ltd. and Loeb & Loeb LLP. (3)
10.17 Registration Rights Agreement dated August 31, 2006 by and
between TWL Corporation and Laurus Master Fund, Ltd. (3)
10.18 Stock Pledge Agreement dated August 31, 2006 by and among
Laurus Master Fund, Ltd., TWL Corporation and TWL Knowledge
Corporation. (3)
10.19 Subordination Agreement dated August 31, 2006 by and among
Laurus Master Fund, Ltd., Palisades Master Fund LP, TWL
Corporation and TWL Knowledge Group. (3)
10.20 Letter Agreement entered into by and between TWL Corporation
and Palisades Master Fund LP dated July 27, 2006. (3)
10.21 Letter Agreement entered into by and between TWL Corporation and
Palisades Master Fund LP dated July 31, 2006. (3)
10.22 Lock-up Letter Agreement by and between TWL Corporation and
Laurus Master Fund, Ltd. (3)
10.23 Voting agreement dated March 31, 2006.*
10.24 Escrow agreement dated March 31, 2006 entered into by and among
the Company, Palisades Master Fund, LP and Sichenzia Ross
Friedman Ference LLP.*
10.25 Lease Agreement dated July 21, 1997, between TIG Development
Property Account I, Inc. and Westcott Communications, Inc.*
16.1 Letter provided by Chisholm, Bierwolf & Nilson, LLC. (8)
21.1 List of Subsidiaries of TWL Corporation.*
31.1 Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification of Chief Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002*
* Exhibit filed herewith.
# Denotes a management contract or compensatory plan.
(1) Incorporated by reference from the quarterly report on Form 10-
QSB filed by the registrant on August 21, 2002.
(2) Incorporated by reference from the current report on Form 8-K
filed by the registrant on October 4, 2006.
(3) Incorporated by reference from the current report on Form 8-K
filed by the registrant on September 6, 2006.
(4) Incorporated by reference from the current report on Form 8-K
filed by the registrant on December 17, 2003.
(5) Incorporated by reference from the current report on Form 8-K
filed by the registrant on September 7, 2006.
(6) Incorporated by reference from the quarterly report on Form 10-
QSB filed by the registrant on May 23, 2006.
(7) Incorporated by reference from the current report on Form 8-K
filed by the registrant on April 7, 2005.
(8) Incorporated by reference from the current report on Form 8-K
filed by the registrant on April 4, 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT AND OTHER FEES
The Audit Committee has selected and retained Chisholm, Bierwolf & Nilson,
L.L.C. as our independent auditors for the fiscal year ended 30, 2006. This
is the second year that Chisholm, Bierwolf & Nilson, LLC has audited our
financial statements.
93 of 95
The following table presents fees for professional services rendered by our
auditors for the audit of our annual financial statements for the fiscal
years ended June 30, 2006 and June 30, 2005 and fees billed for other
services rendered by them during those periods:
Chisholm, Bierwolf, Nilson, LLC
----------------------------------
Fiscal 2006 Fiscal 2005
---------------- ----------------
Audit Fees (1) $ 130,465 $ 108,725
Audit-Related Fees (2) - -
Tax Tax Fees (3) - 13,250
All Other Fees (4) - -
---------------- ----------------
Total $ 130,465 $ 121,975
================ ================
(1) Audit Fees consist of an estimate of fees to be billed for the annual
audits and quarterly reviews.
(2) Audit-Related Fees consist of fees billed for various SEC filings and
accounting research.
(3) Tax Fees consist of fees billed for tax consultation and assistance in
the preparation of tax returns.
(4) All other fees.
All audited-related services, tax services and other services were pre-
approved by the Audit Committee, which concluded that the provision of
those services by Chisholm, Bierwolf & Nilson, L.L.C. was compatible with
the maintenance of that firm's independence in the conduct of its auditing
functions.
PRE-APPROVAL POLICY
The policy of the Audit Committee is to pre-approve all auditing and non-
auditing services of the independent auditors, subject to de minimus
exceptions for other than audit, review, or attest services that are
approved by the Audit Committee prior to completion of the audit.
Alternatively, the engagement of the independent auditors may be entered
into pursuant to pre-approved policies and procedures established by the
Committee, provided that the policies and procedures are detailed as to the
particular services and the Committee is informed of each service.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TWL CORPORATION
By: /S/ Dennis J. Cagan
---------------------------------------
Dennis J. Cagan
Chief Executive Officer
TWL CORPORATION
By: /S/ Patrick R. Quinn
---------------------------------------
Patrick R. Quinn
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
-------------------------- ------------------------- ------------------
/S/ Dennis J. Cagan Chief Executive Officer November 13, 2006
-------------------------- and President,
Dennis J. Cagan and Director
/S/ Douglas D. Cole Executive Vice President November 13, 2006
-------------------------- and Director
Douglas D. Cole
/S/ William D Jobe Director November 13, 2006
--------------------------
William D. Jobe
/S/ Richard G. Thau Director November 13, 2006
--------------------------
Richard G. Thau
/S/ Arthur Ronald Kidson Director November 13, 2006
--------------------------
Arthur Ronald Kidson
/S/ Ron S. Posner Director November 13, 2006
--------------------------
Ron S. Posner
/S/ David B. Batstone Director November 13, 2006
--------------------------
David B. Batstone
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