SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
_X_ Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended March 31, 1997
or
___ Transition report under Section 13 or 15(d) of the Securities Act of 1934
for the transition period from ______________________ to
______________________
SENTO TECHNICAL
INNOVATIONS CORPORATION
______________________________________
(Name of Small Business Issuer in its
Charter)
UTAH 87-0284979
__________________ __________________
(State or Other (IRS Employer
Jurisdiction of Identification
Incorporation) No.)
311 NORTH STATE STREET
OREM, UTAH 84057
______________________________________
(Address of Principal Executive
Offices, including Zip Code)
Issuer's Telephone Number, including Area Code: (801) 226-3355
Securities registered under Section 12(g) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
________________________________________________ ________________________
Common Stock, $.25 par value . . . . . . . . . None
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the Issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes _X_ No ___
(2) 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 Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. _X_
Issuer's revenues for its most recent fiscal year: $17,609,586.
The aggregate market value of voting stock held by non-affiliates computed by
reference to the price at which the stock sold, or the average bid and asked
prices of such stock, as of June 16, 1997, was approximately $6,663,294.
Number of shares outstanding of each of Issuer's classes of common stock as of
the latest practicable date:
Outstanding at
Class June 16, 1996
_______________________________________________________ ______________
Common Stock, $.25 par value . . . . . . . . . . . . . 4,351,134
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's Annual Report to Shareholders for fiscal year ended
March 31, 1997 and Proxy Statement for Issuer's 1997 Annual Meeting of
Shareholders to be held on August 18, 1997 are incorporated by reference in
Parts II and III of this Annual Report on Form 10-KSB.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Through its four wholly owned subsidiaries, Spire Technologies, Inc.
("Spire Technologies"), Spire Systems Incorporated ("Spire Systems"), DewPoint
Distributed Solutions Incorporated ("DewPoint") and Centerpost Innovations Pty.
Ltd., the Company develops and implements system management and office
automation solutions for open and proprietary computing environments, acts as a
"service and value-added reseller" and distributor of software developed by
third parties, resells Digital Equipment Corporation ("Digital") network
computer systems and components on a value-added basis and manages value-added
reseller ("VAR") and distribution channels in the United States, Europe, and
Southeast Asia. The Company offers a wide range of desktop, workstation,
client/server and centralized computing software, systems and peripheral
equipment, as well as channel management and support services for both domestic
and international clientele in a wide variety of industries and computing
environments, including UNIX, Windows NT and Digital OpenVMS.
BACKGROUND
The Company was incorporated in the State of Utah in May 1969 for the
purpose of mineral exploration and development. From 1974 until April 1996, the
Company operated as Amacan Resources Corporation ("Amacan") and was almost
exclusively engaged as a participant with others in oil and gas exploration and
development. On April 18, 1996, the Company consummated a share exchange
transaction (together with related transactions, the "Share Exchange") by which
the Company acquired all the issued and outstanding capital stock of Spire
Technologies and Spire Systems in exchange for the issuance to the holders
thereof of a number of shares of common stock of the Company ("Common Stock")
equal to approximately 90% of the number of issued and outstanding shares of
Common Stock immediately after the consummation of the Share Exchange.
Effective May 1, 1996, the Company divested itself of all oil and gas interests.
The Company does not intend to participate in any oil and gas operations in the
future. See below "-- Oil and Gas Operations."
THE INDUSTRY
Technological advances in the computer industry continue to create
increasingly smaller, faster and less costly computing solutions. The result is
that, while some users continue to need and utilize mainframe technology, the
largest and fastest growing segment of the computing marketplace is mid-range,
mid-sized computing equipment for government, education and business users, and
smaller, consumer-oriented equipment, including personal computers.
With the proliferation of these new systems, particularly in the mid-range
market, there has been a proliferation of new computer operating systems
designed for these specialized machines. Like the well-recognized "operating
systems" or "platforms" for PCs (MS-DOS, Windows, and Windows 95 developed by
Microsoft Corporation ("Microsoft"), IBM's OS/2, and the operating systems
developed for Apple Computer Inc. ("Apple")), the mid-range market utilizes a
series of unique operating system platforms. These platforms include Digital's
VMS and Open VMS operating systems, a variety of UNIX operating systems which
have been separately developed by many different manufacturers, and Microsoft's
new Windows NT.
Computer application software products (such as wordprocessors,
spreadsheets, management tools, and other types of programs) are typically
designed for use on only one operating system. They generally cannot operate on
other platforms without making extensive and often costly modifications to the
original programming code. As a result of the complexity inherent in a market
which utilizes a wide variety of hardware and software systems, as well as the
changing needs of buyers of such products, the Spire Companies were formed to
serve the role of an "integrator" of solutions for the full range of mid-range
hardware and software users in government, education, and business environments.
The Company has reviewed the hardware and software being offered by current
manufacturers, compared the various competing products, and elected to represent
and sell those software and hardware systems which the Company considers to be
the finest products available on a stand-alone basis, but which are also capable
of being integrated with the other software and hardware product needs of its
customers. Accordingly, the Company is principally a sales and technical
support organization for third-party products which its employees have tested
and, if necessary, adapted for cross-operating system operation so that its
customers can obtain the benefits of products that function well together in an
often heterogeneous systems environment.
SALES AND DISTRIBUTION
The Company markets its products and services domestically through a direct
sales force of 40 representatives based in Utah and North Carolina, as well as
through a team of distributors and resellers operating in the U.S., Canada,
Europe and Southeast Asia managed by DewPoint. Arrangements with manufacturers,
resellers and authorized distributors are an increasingly important part of the
Company's focus on providing complete solutions to its customers and expanding
distribution of its products and services through indirect channels to domestic
and international customers.
PRODUCTS
OVERVIEW. Through Spire Technologies, the Company strives to fill the
computer needs of its customers by providing a combination of integrated
software packages from different manufacturers and technical support for such
products, including office automation, system management, performance, and
Internet security solutions. The Company is the licensing and support
organization for cross-platform compatible VMS and OpenVMS versions of
WordPerfect, WP Office, and Lotus 1-2-3. Spire Systems is an authorized VAR of
hardware and components manufactured by Digital, and provides its customers with
desktop integration and system hardware. The Company endeavors to meet the
specialized mid-range computing needs of government, education, and corporate
organizations worldwide by providing networking expertise in integrating multi-
vendor networks, network consulting with respect to connectivity, compatibility,
inter-operability and management of the end-user's local area network ("LAN"),
installation of the end-user's LAN, including interface hardware and software,
and timely and professional technical support.
SOFTWARE. Spire Technologies designs, develops, acquires from third
parties and distributes under license, or acts as a reseller for, various
software products for use on Digital computer operating systems, and computer
operating systems such as UNIX and Windows NT developed by other vendors. In
July 1996, Spire Technologies entered into an Exclusive License and Technical
Assistance Agreement with Australian Software Innovations (Services) Pty. Ltd.
("ASI"), pursuant to which the Company acquired the exclusive rights to use,
develop and sublicense SYSMON and other ASI software products in North and South
America.
OFFICE AUTOMATION. Under licenses from Corel, Lotus and Novell, the
Company has obtained the right to create derivative works of the source
code for WordPerfect, Lotus 1-2-3 and WP Office (a.k.a. Groupwise) with
ownership of such derivative works remaining in the licensors. The
Company's engineers have developed, and the Company now markets, these
software solutions for the OpenVMS operating platform. The Company also
markets these same office automation products (developed by third parties)
for UNIX, Digital UNIX, MS-DOS and Windows 95 operating platforms. Because
of the wide variety of computing platforms used today in many
organizations, management believes the ability of the Company to offer
powerful office tools which provide cross-platform compatibility and user
familiarity is important in assisting customers to create effective
corporate standards. The Company also offers other third-party office
automation products. The office automation products currently offered by
the Company include WordPerfect (Corel) for OpenVMS systems, Lotus 1-2-3
(Lotus) for OpenVMS, FAX Sr. (Omtool, Inc.)., an enterprise server which
sends and receives faxes directly from within WordPerfect, or almost any
other OpenVMS application, and WP Office (Novell, Inc.).
SYSTEM SECURITY. The Company offers a range of third-party UNIX and
OpenVMS operating system security products. These security software tools
are designed to protect an organization s computer network from
unauthorized external access, such as from the Internet, user monitoring,
auditing and logging, authorization and access control, message integrity
and confidentiality protocols, and automated system security analysis,
reporting and correction tools. System security products offered by the
Company include The BorderWare Firewall Server (Secure Computing
Corporation), promoted as a one-stop solution to a complete and secure
Internet gateway, WebTrack (Secure Computing Corporation), which controls
Internet usage based on duration of sessions or actual sites visited,
InterScan VirusWall (Trend Micro, Inc.), and KBLock (Raxco, Inc.), which
permits users to lock their unattended, logged-in terminals.
STORAGE MANAGEMENT. The Company offers third-party media management
and remote device access products including media libraries, backup and
restoration applications, and data recovery solutions, including remote
device access tools THRUway and THRUnet (Software Partners/32, Inc.),
TAPESYS (Software Partners/32, Inc.), a tape management system, RaxMaster
(Raxco, Inc.), a comprehensive OpenVMS performance solution, StorageCenter
(Software Partners/32, Inc.), which provides comprehensive system backup,
archiving and restore functions, PerfectFile (Raxco, Inc.), and UltraDisk
(Raxco, Inc.).
USER TRAINING AND SUPPORT. The third-party software solutions offered
by the Company for training and support allow customers to track user
problems and establish interactive links between the terminals of trainers
and users. From the trainer's keyboard, the trainer may intervene, create
log files of sessions and conduct local and remote product training for
groups of users. The Company offers the following user-training and
support products: CONTRL and ClydeSupport (Raxco, Inc.), PC-Duo (Vector
Networks Limited), and LANutil (Vector Networks Limited).
NETWORK MANAGEMENT AND PERFORMANCE. The third-party software offered
by the Company relative to system performance management allows customers
to monitor systems, databases, events and remote nodes to manage
performance tuning, capacity planning, saturation analysis, bench marking
and resource accounting from a central site. This performance management
is conducted in real-time interactive or background modes, across a wide
array of UNIX and database environments. The Company offers the following
management and performance products: (a) OpenAviator (ASI), a modular
system availability and analysis utility including CoPilot, AutoPilot,
Navigator, Data Collectors, Control Tower, and FlightLog, (b) POLYCENTER
Capacity Planner (Digital), a critical planning and evaluation tool, (c)
ENLIGHTEN (Enlighten Software), which provides distributed system
administration and centralized control for UNIX and Windows NT, (d)
PATHWORKS (Digital), which allows users to share applications, information,
and large system resources within OpenVMS, UNIX, Windows, MS-DOS and
MacIntosh environments, and (e) XJet and XConnect (XCd Corporation),
Ethernet print servers.
HARDWARE. Spire Systems is an authorized VAR for Digital, and provides its
customers with desktop integration, system and networking hardware, and Digital
Services solutions. Spire Systems is licensed to sell Digital's 64-bit reduced
instruction set computing (RISC) architecture known as "Alpha", which is
designed to support multiple operating systems. Through Spire Systems, the
Company offers Digital's line of Alpha-based products ranging from chips and
boards to high performance workstations and servers. Alpha supports three major
operating systems: Digital's 64-bit UNIX operating system, Digital's OpenVMS
operating system and Microsoft's Windows NT operating system. The Alpha-based
systems include high performance database servers and workstations. Spire
Systems also offers and sells Digital's VAX computer systems, components and
Intel-based personal computer systems, as well as peripherals manufactured by
Digital and other entities, including magnetic disk drives, tape drives, solid
state disk and in-film heads, video terminals, printers and network components.
TECHNICAL SERVICES AND SUPPORT. The Company provides technical consulting,
systems integration and product support services to help its customers plan,
implement and manage their information technology solutions. The Company's
services include maintenance and support services for Company software
solutions, as well as third-party products sold by the Company; information
systems consulting; technical and application design services; education and
training services; systems integration and project management services; network
design and support services; and outsourcing and resourcing management services.
COMPETITION
The information technology industry is highly competitive, international in
scope, and comprised of many companies. The methods of competition include, but
are not limited to, marketing, product performance, price, service, technology
and compliance with various industry standards. Present and potential
competition in the various markets served by the Company comes from firms of
various sizes and types, many of which are larger and have greater resources
than the Company. Firms not now in direct competition with the Company may
introduce competing products in the future. It is possible for companies to be
at various times competitors, customers and collaborators in different markets.
SUPPLIERS
The Company is solely dependent on Digital and authorized distributors of
Digital products for its supply of hardware. In addition, the Company obtains
software from numerous third-party vendors, many of which are the sole sources
for such software. The Company then incorporates the various hardware,
peripheral and software components into an integrated system for on-site
installation at each customer's location. If one of the Company's third-party
vendors of either hardware or software were to become unavailable to the
Company, management believes that the Company would be able to obtain competing
and alternate sources of supply of similar but not identical products.
Nonetheless, the failure of such suppliers to deliver such items on a timely
basis could adversely effect the operating results of the Company until
alternative sources of supply could be arranged. Also, if any of the license
agreements relating to the office automation products developed by the Company
were to be terminated, the operating results of the Company could also be
adversely affected.
SIGNIFICANT CUSTOMERS
Although the Company sells to many customers involved in certain industries
such as government and education which, if aggregated, would result in sales to
a particular industry of more than ten percent, no single customer represents
sales by the Company in the aggregate amount of ten percent or more of its
consolidated revenues. Accordingly, Company management believes that the loss
of any single customer would not have a material adverse effect on the Company
taken as a whole.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company does not own any patents nor has it filed any patent
applications relating to its products. The Company has a limited number of
copyrights and has obtained licenses to create derivative works relative to
copyrights owned by third parties. The ownership of such derivative works vests
in the licensor. The Company is also seeking tradename and trademark protection
for certain of its names and marks. Management does not believe that any
particular patent or group of patents, copyrights, trademarks, or tradenames is
of material importance to the business of the Company as a whole.
RESEARCH AND DEVELOPMENT
The Company competes in an industry which is characterized by rapid
technological change. Historically, neither the Company nor Spire Technologies
or Spire Systems (prior to the consummation of the Share Exchange) has incurred
significant expenses for research and development. Research and development
expenditures were approximately three percent of the Company's gross revenues
for the fiscal year ended March 31, 1997.
OIL AND GAS OPERATIONS
Prior to the consummation of the Share Exchange, the Company had operated
almost exclusively since 1974 as a participant with others in oil and gas
exploration and development. The Company's principal assets during this period
were working interests in producing oil and gas wells and options or rights to
participate in the drilling of additional wells. During this period, the
Company participated almost exclusively with an independent operator, Luff
Exploration Company ("Luff Exploration") of Denver, Colorado, in its exploration
activity. From 1974 to April 1996, the Company participated with Luff
Exploration in drilling a total of 122 wells, 31 of which were productive as of
April 1996. Of the 122 wells, 50 were exploratory wells and 72 were
developmental wells. During its participation with Luff Exploration, the
Company farmed out its interests for drilling by other companies, at their
expense, in a total of 28 additional wells, one of which was productive as of
April 1996. Effective May 1, 1996, the Company transferred to a group of
purchasers, including Kenneth D. Luff, President of Luff Exploration and a
former director of the Company, all of the Company's oil and gas interests in
exchange for the payment of $197,000. The Company does not intend to
participate in any oil or gas operations in the future.
EMPLOYEES
As of June 16, 1997, the Company had approximately 76 total employees,
approximately 64 of which were full-time employees. Competition for qualified
personnel in the computer industry is intense. The future success and growth of
the Company will depend in large measure upon its ability to attract and retain
qualified management and technical personnel. Failure of the Company to attract
and retain key management and technical personnel and qualified personnel
required to continue the Company's operations could have a material adverse
impact on the Company. None of the Company's employees is represented by a
labor organization with respect to their employment with the Company, the
Company has never had a work stoppage, and the Company considers its employee
relations satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The headquarters and research and development facilities of the Company are
located at 311 North State Street, Orem, Utah. The Company owns a 5,200 square
foot building, subject to encumbrances of $118,095 and $98,267 at March 31,
1997, which bear interest at rates of 8.25% and 8.70%, respectively. In
addition, the Company occupies 17,500 square feet of contiguous space under two
leases of one year and two years, respectively, both subject to options to
extend the terms thereof for an additional five lease periods of one year each.
The monthly base rents of these leases are $5,500 and $4,675, respectively,
subject to adjustment during the renewal periods. Company management believes
these contiguous facilities are suitable and adequate to meet the anticipated
needs of the Company for the current fiscal year. Management anticipates that
continued growth of the Company will necessitate acquisition of additional
office space in the future.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended March 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
section entitled "Price Range of Common Stock" in the Company's Annual Report to
Shareholders for the fiscal year ended March 31, 1997 (the "1997 Annual
Report").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information required by this Item is incorporated by reference to the
section entitled "Management's Discussion and Analysis or Plan of Operation" in
the 1997 Annual Report.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is incorporated by reference to the
financial statements of the Company included in the 1997 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's accountants on
accounting and financial disclosure.
On July 14, 1995, upon the recommendation and approval of the Board, Amacan
engaged Tanner + Co. as independent auditor to audit Amacan's financial
statements for the year ending April 30, 1995. Upon consummation of the Share
Exchange on April 18, 1996, and pursuant to the recommendation and approval of
the Board, the Company determined to retain the services of KPMG Peat Marwick
LLP ("KPMG"), who had served as the independent auditor of Spire Technologies
and Spire Systems since October 1995, to audit the financial statements of the
Company for the fiscal year ending April 30, 1996, and to dismiss Tanner + Co.
Tanner + Co.'s reports on Amacan's financial statements for the fiscal year
ended April 30, 1995 contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles. The Company had no disagreements with Tanner + Co. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved, would have caused Tanner + Co. to
make reference to the subject matter of the disagreement in connection with its
reports. In addition, during the two fiscal years and the interim period
preceding Tanner + Co.'s dismissal, the Company had no reportable events as
defined in Item 304(a)(1)(v) of Regulation S-B. No consultations occurred
between the Company and KPMG during the relevant fiscal year and any interim
period preceding the recent retention of KPMG regarding the application of
accounting principles, the type of audit opinion that might be rendered or other
information considered by the Company in reaching a decision as to an
accounting, auditing or financial reporting issue.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to the
sections entitled "Election of Directors - Nominees for Election as Directors,"
"Executive Officers" and "Executive Compensation - Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive proxy statement for
the annual meeting of the Company's shareholders to be held on August 18, 1997
(the "1997 Proxy Statement"). The 1997 Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after March 31, 1997,
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Election of Directors - Director Compensation" and "Executive
Compensation" in the 1997 Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section entitled "Principal Holders of Voting Securities" in the 1997 Proxy
Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation - Certain Relationships and Related
Transactions" in the 1997 Proxy Statement.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits.
Number Description Incorporated Filed
by Reference Herewith
_______ _________________________________________ ____________ ________
3.1 Articles of Incorporation. (1)
3.2 Articles of Amendment and Share Exchange. (2)
3.3 Bylaws (3)
10.1 Exclusive License and Technical (3)
Assistance Agreement dated as of July 1,
1996 by and between Australian Software
Innovations (Services) Pty. Ltd and the
Company
10.2 Option Agreement by and among the (4)
Company, Australian Software Innovations
(Services) Pty. Ltd, Kilat Holdings Pty.
Limited, and Eng Lee and Mary Lee, dated
September 10, 1996
10.3 Sento Technical Innovations Corporation (5)
Stock Incentive Plan
13 Annual Report to Shareholders for the (6)
Company's Fiscal Year 1997
21 Subsidiaries of the Registrant (6)
27 Financial Data Schedule. (6)
_________________________________
(1) Incorporated by reference to the exhibits to Registration Statement No. 2-
39659 on Form S-3 filed with the Securities and Exchange Commission in
March 1971.
(2) Incorporated by reference to Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 2, 1996, as amended by Form 8-K/A
filed with the Securities and Exchange Commission on July 29, 1996.
(3) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended April 30, 1996, filed with the Securities and Exchange
Commission on July 29, 1996, as amended by Form 10-KSB/A filed with the
Securities and Exchange Commission on August 1, 1996.
(4) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-1, filed with the Securities and Exchange Commission on November 1,
1996.
(5) Incorporated by reference to the Company's definitive proxy statement for
the annual meeting of the Company's shareholders to be held on August 18,
1997.
(6) Filed herewith and attached to this Form 10-KSB following page 8 hereof.
(b) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the last quarter of its
fiscal year 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on June 27, 1997.
SENTO TECHNICAL INNOVATIONS CORPORATION
By: /s/ Robert K. Bench
___________________________________________
Robert K. Bench, President, Chief Financial
Officer and Director
In accordance with the Securities Exchange Act of 1934, 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/ Gary B. Godfrey Chairman of the Board June 27, 1997
___________________________________ and Chief Executive
Gary B. Godfrey Officer (Principal
Executive Officer)
/s/ Robert K. Bench President, Chief June 27, 1997
___________________________________ Financial Officer and
Robert K. Bench Director (Principal
Financial and Accounting
Officer)
/s/ Eng H. Lee Vice President, Chief June 27, 1997
___________________________________ Technical Officer and
Eng H. Lee Director
/s/ Brian W. Braithwaite Secretary, Treasurer and June 27, 1997
___________________________________ Director
Brian W. Braithwaite
/s/ William A. Fressh Director June 27, 1997
___________________________________
William A. Fresh
/s/ Sherman H. Smith Director June 27, 1997
___________________________________
Sherman H. Smith
/s/ Kieth E. Sorensen Director June 27, 1997
___________________________________
Kieth E. Sorenson
<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS
1997* 1996 1995
- -------------------------------------------------------------------------------
Revenues $17,609,586 $13,873,401 $9,674,683
- -------------------------------------------------------------------------------
Net income $22,416 $339,555 $98,735
- -------------------------------------------------------------------------------
Earnings per share $.01 $.08 $.03
- -------------------------------------------------------------------------------
Cash $2,225,338 $1,552,806 $766,247
- -------------------------------------------------------------------------------
Working capital $2,139,580 $943,332 $183,268
- -------------------------------------------------------------------------------
Total assets $7,049,268 $4,544,825 $2,815,857
- -------------------------------------------------------------------------------
Long term debt $208,075 $215,691 $223,412
- -------------------------------------------------------------------------------
Stockholders equity $3,113,651 $1,480,907 $423,294
- -------------------------------------------------------------------------------
Shares outstanding 4,351,134 3,891,325 --
- -------------------------------------------------------------------------------
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TABLE OF CONTENTS
Financial Highlights 2
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Message to the Shareholders 4
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An Introduction to Sento 6
- ------------------------------------------------------
Highlights of Fiscal 1997 8
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Management's Discussion and Analysis
of Financial Condition and Results of Operation 12
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Independent Auditor's Report 17
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Consolidated Balance Sheets 18
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Consolidated Statements of Operations 19
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Consolidated Statements of Stockholder's Equity 20
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Consolidated Statements of Cash Flows 21
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Notes to the Consolidated Financial Statements 22
- ------------------------------------------------------
Market Information 29
- ------------------------------------------------------
Corporate Information 30
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3
<PAGE>
OUR SUCCESS CONTINUES TO BE DRIVEN BY OUR UNIQUE ENGINEERING, SALES,
MARKETING, AND DISTRIBUTION CAPABILITIES IN THE RAPIDLY EXPANDING WINDOWS NT,
UNIX, AND INTERNETWORKING COMPUTING ENVIRONMENTS.
MESSAGE TO THE SHAREHOLDERS
1997: BUILDING A FOUNDATION FOR GROWTH
TO OUR FELLOW SHAREHOLDERS:
The theme of our annual report, "1997: Building a Foundation for Growth",
reflects the significant investment we are making in developing new products,
broadening our sales and distribution channels, and expanding our technical
engineering resources worldwide. These investments have resulted in the
strong growth reported here and have positioned us for continued success and
worldwide expansion.
Sento enjoyed record growth again this year with revenues of $17,609,586
for the eleven month period ending March 31, 1997 compared with revenues of
$13,873,401 for the twelve months ended April 30, 1996. This represents 27%
topline growth. Our financial position at March 31, 1997 is the strongest in
the company's history, and has significantly increased shareholder value.
Cash per share was $ 0.51 at the year end, and net tangible book value was $
0.61 per share. It is also important to note that because we have changed our
fiscal year end from April 30 to March 31, the financial statements for
fiscal 1997 reflect only eleven months of operations.
Our success continues to be driven by our unique engineering, sales,
marketing, and distribution capabilities in the rapidly expanding Windows NT,
UNIX, and Internetworking computing environments. To maximize our sales
success in these high growth markets we have refocused our direct sales
organization this year into three areas: Applications, Internetworking &
Security, and Systems Management Solutions.
We have also added and trained specialized pre-sales engineers in each of
these areas to support increased effectiveness in large account and on-site
sales situations.
To obtain greater revenue leverage from Sento's software and system
engineering competencies, Sento Technical Services Group was recently formed
as a separate and distinct business unit. This technical services group
expands the information technology services and consulting solutions
available to our growing customer base in such areas as networking, systems
performance, integration, automation, and Windows NT migration.
We believe that increasing visibility and access to these services in
North America, Europe, and Southeast Asia will have a very favorable impact
on revenue growth and profitability as we move forward.
The following key accomplishments are representative
4
<PAGE>
of our progress this year:
- -Completion of an option agreement to acquire Australian Software Innovations
Pty Ltd (ASI). ASI has contributed both outstanding system performance
management technology and strategic access to the rapidly growing Southeast
Asia/Pacific Rim region.
- -Closing of the largest ever systems and services contract by Sento's wholly
owned systems integration and consulting company, Spire Systems, Inc.
- -Conclusion of major development projects delivering Corel WordPerfect 7 for
Digital's UNIX and OpenVMS operating systems, resulting in contracts with the
United Kingdom Court Service and an agreement with Digital Equipment
Corporation to bundle demonstration copies of the product with all UNIX
workstations shipped.
- -Expansion of Sento's worldwide presence as a distributor of leading third
party software products through the formation of DewPoint Distributed
Solutions, Inc., resulting in new alliances with companies such as Secure
Computing, ENLighten Software, INEX, and Corel Corporation.
- -Roll-out of the OpenAviator Performance Management product line in North
America and joint integration development with Digital's Polycenter Capacity
Planner, resulting in sales to American Airlines, Thiokol Corporation,
Lockheed-Martin, as well as other expanded sales and OEM opportunities.
- -Selection by Corel Corporation as exclusive provider of support, help desk,
and maintenance services on 15 different platforms for all Corel UNIX
products, resulting in expansion of service related revenue through marketing
and maintenance programs to a much larger installed customer base.
As you review other major accomplishments and areas of investment
highlighted on the following pages of this report we think you will recognize
indications of our growing reputation as industry leaders in providing
state-of-the-art products, consultation, training, and support solutions in
the rapidly growing information technology and computer networking markets.
As we continue 'building' Sento's leadership in these dynamic markets, we
remain committed to using the finest building blocks of integrity, hard work,
and dedication to customer satisfaction. We are confident that this
commitment--in combination with the outstanding talents and continued
dedication of our employees--will bring the rewards we all seek as
shareholders.
Thank you for your continued loyalty and support!
Sincerely,
/s/ Gary B. Godfrey
Gary B. Godfrey
Chairman & CEO
/s/ Robert K. Bench
Robert K. Bench
President & CFO
[PHOTO]
GARY B. GODFREY,
CHAIRMAN & CEO OF
SENTO TECHNICAL INNOVATIONS
[PHOTO]
ROBERT K. BENCH,
PRESIDENT & CFO OF
SENTO TECHNICAL INNOVATIONS
5
<PAGE>
AN INTRODUCTION TO SENTO
SPIRE TECHNOLOGIES, INC.
DIRECT SOFTWARE SALES
Spire Technologies, one of the leading providers of Windows NT, UNIX, and
OpenVMS software solutions and support services, was reorganized to more
effectively penetrate the server computing marketplaces. Their new sales and
pre-sales support teams are divided into the following three groups:
End-User Applications: Focuses on office automation, remote control,
electronic faxing, network management, and communications tools.
Internet and Security Applications: Provides internet and intranet
security, management, and electronic commerce tools, combined with
consultation, design, and turnkey solutions services.
Systems Management: Delivers system monitoring, performance enhancement,
data storage and retrieval, help desk tools, and automated software
management and distribution solutions.
These teams are supported by the Sento Technical Services Group which
provides consultation and configuration, front line support, installation and
implementation services, integration assistance, user training, and custom
product enhancement and development.
SPIRE SYSTEMS, INC.
SYSTEMS INTEGRATION
Spire Systems is an authorized value-added reseller of several leading
manufacturers, including Digital Equipment Corporation and Oracle
Corporation. Spire Systems provides superior system hardware, desktop
integration, configuration consultation, and Gold Key services.
In addition, Spire Systems designs, implements, and manages computing
solutions for every level of need--from recommending and integrating add-ons
and peripherals, to custom configuring enterprise solutions. They are also
trained and experienced with the wide range of products and services
available from manufacturers like Digital so they can provide the detailed
answers clients need.
Spire Systems also offers Windows NT migration configuration services;
integrates multi-vendor networks; provides network consultation with respect
to connectivity, compatibility, interoperability, and management; performs
LAN installation, including interface hardware and software; and timely,
professional technical support.
6
<PAGE>
DEWPOINT DISTRIBUTED SOLUTIONS, INC.
PRODUCT DISTRIBUTION
DewPoint Distributed Solutions provides distribution, reseller, and channel
management worldwide for leading software manufacturers such as Corel
Corporation, Trend Micro, Inc., Secure Computing Corporation, INEX
Corporation, and Datapac Australia, Pty Ltd.
With consultants, resellers, installation and training teams, and customer
support centers located in North and South America, Europe, and Australia/
Southeast Asia, DewPoint is able to provide third-party products and services
to Windows NT, UNIX, and Internet/Intranet resellers in virtually every
corner of the world.
As a value-added distributor, DewPoint offers superior products, technical
services, marketing support, and sales assistance to their channel partners
in order to provide key technology solutions, generate leads, and assist in
closing sales.
[PHOTO]
DOUG YATES
PRESIDENT OF DEWPOINT
DISTRIBUTED SOLUTIONS
AUSTRALIAN SOFTWARE INNOVATIONS, PTY LTD.
DEVELOPMENT AND ASIAN DISTRIBUTION
ASI, in conjunction with Sento, produces the OpenAviator suite of UNIX and
Windows NT-based management and performance monitoring utilities. This
software is complemented by professional consultancy and integration,
performance tuning education, and customized configuration and development
services.
ASI's Sydney development team, combined with Sento's development and
support center located in Orem, Utah, cater to and support joint development
efforts with organizations like Digital Equipment Corporation, and OEMs
throughout the world.
ASI is also the direct Asian distributor for Corel WordPerfect for OpenVMS
and UNIX, Lotus 1-2-3 for OpenVMS, virus detection software from Trend Micro,
and a number of other leading software products for end-user,
Internet/Intranet, and systems management markets.
[PHOTO]
ENG LEE
MANAGING DIRECTOR OF
AUSTRALIAN SOFTWARE
INNOVATIONS PTY LTD.
7
Page>
SIGNIFICANT EVENTS OF FISCAL YEAR 1997
THESE ARE JUST A FEW OF THE HIGHLIGHTS AND ACCOMPLISHMENTS OF THE PAST YEAR.
OUR COMPANY'S GROWTH HAS BEEN ACCOMPANIED BY AN EXCITING YEAR OF CHANGE AND
ACTIVITY FOR SENTO AND ITS SUBSIDIARIES. THESE KEY EVENTS OF 1997 HAVE
ALLOWED SENTO TO CREATE A STRONG FRAMEWORK ON WHICH TO BUILD OUR FUTURE.
MAY 1996
SENTO SIGNS EXCLUSIVE DISTRIBUTION AGREEMENT WITH AUSTRALIAN SOFTWARE
INNOVATIONS
Sento signed an exclusive distribution agreement with Australian Software
Innovations, Pty Ltd. (ASI) to distribute, license, and support ASI's system
monitoring and management tool, known in Australia as SYSMON. Owing to the
use of that name in North America, the product is marketed under the name
OpenAviator, and is sold as a modular suite of solutions. In addition, Sento
was established as the North American development and support center for
OpenAviator, providing local customization services and cooperative
development assistance to ASI's development team in Sydney. In return, ASI
provided on-site product and market development assistance with the year-long
loan of key ASI sales and marketing personnel.
JUNE 1996
$1.5 MILLION PRIVATE PLACEMENT
The Company successfully completed the
placement of one and a half million dollars of common stock and warrants.
These funds have provided the Company with the capital necessary to increase
the development and expansion of its line of products and services.
APRIL
6,500 PIECE LANUTIL DIRECT MAIL CAMPAIGN
JUNE
10,000 PIECE DIRECT MAIL FOR THE BORDERWARE FIREWALL SERVER
NETSEE CONFERENCE - SAN FRANCISCO
JOINT SPIRE/DIGITAL SEMINAR FOR OPEN AVIATOR AND CAPACITY PLANNER
<PAGE>
AUGUST 1996
GLOBAL SOFTWARE DISTRIBUTION COMPANY FORMED: DEWPOINT DISTRIBUTED SOLUTIONS
[Photo]
DewPoint Distributed Solutions was formed by the Company to assume
responsibility for worldwide software distribution and channel management for
a number of leading software manufacturers. DewPoint has established
distribution relationships with several key software manufacturers, developed
reseller channel partners throughout the world, and set up regional offices
in the US, England, and Australia.
SEPTEMBER 1996
SENTO SECURES OPTION TO ACQUIRE AUSTRALIAN SOFTWARE INNOVATIONS, PTY LTD.
The Company obtained an option to acquire ASI, the manufacturer of
OpenAviator, a leading systems performance management and monitoring tool for
the UNIX and Windows NT marketplace. OpenAviator has significant market
penetration in Asia and Europe, with growing customer acceptance now
occurring in the United States and Canada. In addition to ASI's technology
and development staff, this acquisition provides the Company with a strong
point of distribution for Sento's other product offerings, including
WordPerfect for the OpenVMS and UNIX platforms.
SEPTEMBER 1996
SPIRE SYSTEMS CLOSES LARGEST HARDWARE SALE IN COMPANY HISTORY: $1.4 MILLION
[Photo]
After months of negotiations, Spire Systems closed its largest sale to date:
US $1.4 million dollars in hardware, software, and services to Utah Higher
Education.
SEPTEMBER 1996
SENTO ANNOUNCES NEW RELEASE OF OPENAVIATOR
[Photo]
The Company completed localization of the OpenAviator system performance
management product and began market roll-out. This latest version provides a
number of enhancements, additions, and improvements,and allows customers to
purchase only those components currently needed, with the opportunity to buy
additional components as necessary.
AUGUST
PERFECTCACHE DIRECT MAIL INSERT IN FALL 1996 "TO THE POINT" NEWSLETTER
TO 9,000 CUSTOMERS
SEPTEMBER
EIGHT CITY INTERNET SECURITY SEMINAR ROADSHOW
<PAGE>
OCTOBER 1996
COREL WORDPERFECT 7 FOR DIGITAL UNIX RELEASED
[Photo]
The Company announced the successful first-time porting of Corel WordPerfect
7 to the Digital Equipment Corporation (Digital) UNIX computing platform.
This latest release is the first of several projects under way as a result of
the Company's strategic partnership with Corel Corporation (Corel). Corel
WordPerfect 7 for Digital UNIX is available in two formats: a character-based
version for users working on terminals, and a graphical version for customers
using GUI terminals and workstations. The first large sale of this new
product was consummated upon its release.
OCTOBER 1996
THREE DIRECT SALES GROUPS CREATED FOR SPIRE TECHNOLOGIES
[Photo]
Spire Technologies reorganized its sales team to more effectively penetrate
the server computing marketplaces. These teams are the End-User Applications
group, which focuses on office automation, network management, remote
support, electronic faxing, desktop publishing, and communications tools; the
Internet and Security Applications group, which provides security, management,
and electronic commerce tools combined with consultation, design, and turnkey
solutions services; and the Systems Management group, which provides system
monitoring, performance enhancement, data storage and retrieval, help desk,
and automated software distribution solutions.
NOVEMBER 1996
SENTO INCLUDED ON THE NASDAQ STOCK MARKET
Sento was accepted on the NASDAQ Small Cap Stock Market with its new symbol,
SNTO. Inclusion on the NASDAQ has provided additional market liquidity for
Sento's common stock.
NOVEMBER 1996
COMPLETION OF INTEGRATION OF OPENAVIATOR'S DATA COLLECTION INTERFACE WITH
DIGITAL'S POLYCENTER CAPACITY PLANNER TOOL
Sento and Digital completed the initial integration of Sento's OpenAviator
product with Digital's Capacity Planner product. This allows users of
Capacity Planner to collect information for modeling through OpenAviator's
system data collectors from more than eighteen different UNIX platforms. A
joint sales and marketing effort to promote and sell the greatly increased
capabilities of both Digital's Capacity Planner and OpenAviator was begun
simultaneously, to be launched upon the project's completion.
OCTOBER
OPENAVIATOR "ARE YOU FLYING YOUR SYSTEMS BLIND DIRECT MAIL CAMPAIGN -
10,000 PIECES
UNIX EXPO TRADE SHOW - NEW YORK CITY
NOVEMBER
DECUS '96 TRADE SHOW - ANAHEIM
FULL PAGE WORKPERFECT DISPLAY AD - UNIX REVIEW
RAXMASTER-DEMO CD DIRECT MAIL CAMPAIGN TO CURRENT CUSTOMER BASE
DECEMBER
CMG '96 TRADE SHOW - SAN DIEGO
35,000 PIECE WORDPERFECT FOR UNIX "PICK OF THE LITTER" DIRECT MAIL CAMPAIGN
OPENAVIATOR "ARE YOU FLYING YOUR SYSTEMS BLIND? SEQUENT USERS" DIRECT MAIL
CAMPAIGN - 11,000 PIECES
JANUARY
USENIX '97 TRADE SHOW - ANAHEIM
SURF '97 TRADE SHOW - SAN DIEGO
<PAGE>
DECEMBER 1996
FIRST LARGE SALE OF COREL WORDPERFECT FOR DIGITAL UNIX TO THE UK COURTS
The largest sale to date of Corel WordPerfect for Digital UNIX (character
version) since its release was completed with the UK Courts by Sento's Master
European Distributor of Corel WordPerfect, Avalan Technology.
DECEMBER 1996
FIRST SALE OF INTEGRATED OPENAVIATOR AND CAPACITY PLANNER TO AMERICAN AIRLINES
Following the completed integration of OpenAviator with Digital's Polycenter
Capacity Planner, Spire Technologies successfully consummated its first sale
of the combined products to American Airlines.
JANUARY 1997
NEW SENTO TECHNICAL SERVICES GROUP
[Photo]
Sento organized its Technical Services Group into a separate and distinct
business unit to expand the visibility of the information technologies
services and consulting solutions available to our growing customer base.
This new group provides customers with a wide range of design, implementation
and development services, including: Windows NT migration, systems
integration, product installation, system tuning, product training,
customized product enhancements and development services, and hands-on system
design and configuration services.
JANUARY 1997
SENTO EXPANDS SERVICES GROUP TO PROVIDE WORLDWIDE HELP DESK SUPPORT FOR COREL
Corel selected Sento's Technical Services Group to provide worldwide help
desk services and technical support for their Corel WordPerfect for UNIX and
CorelDRAW for UNIX customers. This arrangement has increased the Technical
Services Group's workload by 140%, creating the need to expand Services
personnel, while providing a significant new revenue opportunity to the
Company in the form of annual maintenance contracts, as well as customer
consulting, customized development, and support service contracts.
[Photo]
FEBRUARY
DEWPOINT RESELLER ADVERTISEMENT IN UNIX REVIEW MAGAZINE SENT TO 38,000
RESELLERS
DEWPOINT RESELLER NEWSLETTER SENT TO 550 RESELLERS
MARCH
UNIFORUM '97 TRADE SHOW - SAN FRANCISCO
INTERNET WORLD '97 TRADE SHOW - LOS ANGELES
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
OVERVIEW
Historically, Sento Technical Innovations Corporation and its wholly owned
subsidiaries have focused their sales and distribution efforts on two product
lines within the mid-range client/server computer market niche: providing
services as a VAR of Digital's network computer hardware systems and
components, and acting as a distributor/VAR for a variety of software
programs and applications developed by third parties. Recently, the Company
has entered into strategic licensing and product development arrangements
with IBM/Lotus, Corel/WordPerfect, Digital Equipment Corporation, and
Australian Software Innovations, through which the Company became the
licensed developer and sole distributor of various software products.
As part of its ongoing efforts to support customers' needs in the areas of
training, support, and system configuration, the Company offers its customers
an annual maintenance agreement. This allows customers access to the
technical resources and support personnel of the Company, including automatic
product updates, "bug fixes", and system configuration consulting. The demand
for technical computer systems consulting represents a growth opportunity for
the Company. The Company hired additional technical consultants in January
1996, and the Company has continued its efforts to concentrate on marketing
its consulting services to generate additional revenues.
Since November 1995, the Company has expanded its distribution model to
include software products that operate in the growing UNIX and Windows NT
operating systems environments. In addition to increased product line, the
Company also began marketing a family of products which provide solutions
relating to the Internet. These products include a third-party product known
in the industry as a "firewall," which is designed to protect an
organization's computer network from access by unauthorized users, and an
"anti-virus" product which is designed to protect the computer network from
virus intrusion originating from the Internet.
The combined revenues of the Company during fiscal year 1997 from these
various activities are broken down as follows:
- Open VMS software sales amounted to approximately 36% of revenues
- System configuration services and hardware sales amounted to approximately
50% of revenues
- Technical consulting and maintenance services amounted to approximately 14%
of revenues
With the addition of the new product lines, as described above, the
Company's management anticipates that revenues from the sale of UNIX platform
products, Internet security products, and technical consulting will grow
faster, as a percentage of revenues, than the historical product lines
offered by the Company.
12
<PAGE>
No single market sector represents a dominant portion of the Company's
revenue base during fiscal year 1997. Governmental and educational
institutions represent approximately 32% of revenues, and small to large
corporations represent the remaining 68% of revenues. No single customer
represents more than ten percent of the revenues of the Company.
The Company sells its products through a direct sales force of 35
representatives in the United States, and through a number of third-party
resellers in the Americas, Europe, Australia, and Southeast Asia. Domestic
sales represented 92% of total revenues in 1997, with international sales
representing the remaining 8%.
RESULTS OF OPERATIONS
The following table sets forth, for the three most recent fiscal years,
the amounts and percentage relationships to revenues of selected items of the
Company's consolidated financial data.
<TABLE>
<CAPTION>
1997 % OF % 1996 % OF % 1995 % OF
AMOUNT (1) REVENUE CHANGE AMOUNT REVENUE CHANGE AMOUNT REVENUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses and maintenance $8,855,887 50% 15% $7,694,695 55% 44% $5,356,572 55%
Hardware sales and services 8,753,699 50% 42% 6,178,706 45% 43% 4,318,111 45%
Total Revenues 17,609,586 100% 27% 13,873,401 100% 43% 9,674,683 100%
Cost of Sales:
Software licenses and maintenance 3,927,280 22% 27% 3,100,738 22% 8% 2,879,943 30%
Hardware sales and services 7,514,278 43% 40% 5,351,305 39% 43% 3,734,132 39%
Total Cost of Sales 11,441,558 65% 35% 8,452,043 61% 28% 6,614,075 69%
Gross Profit 6,168,028 35% 14% 5,421,358 39% 77% 3,060,608 31%
Operating Expenses:
Selling, General & Administration 5,711,061 32% 24% 4,605,402 33% 57% 2,927,081 30%
Research & Development 524,787 3% 96% 268,028 2% -- -- --
Operating Income (Loss) (67,820) -- (112)% 547,928 4% 310% 133,527 1%
Other Income (Expense) 106,375 -- 1015% (11,628) -- (199)% 11,696 --
Income Tax Expense 16,139 -- (92)% 196,745 1% 323% 46,488 --
Net Income 22,416 -- (93)% 339,555 3% 244% 98,735 1%
Cash and Cash Equivalents 2,225,338 43% 1,552,806 103% 766,247
Working Capital 2,139,580 127% 943,332 415% 183,268
Total Assets 7,049,268 55% 4,544,825 61% 2,815,857
Stockholders' Equity 3,113,651 110% 1,480,907 250% 423,294
</TABLE>
(1) Effective June 18, 1996, the Company changed its fiscal year from a
fiscal year end of April 30 to a fiscal year end of March 31. Information set
forth above for the Company's 1997 fiscal year reflects the Company's
operations during the eleven month period from May 1, 1996 through March 31,
1997. Because the information set forth above for the Company's 1996 and 1995
fiscal years reflects the Company's operations during the twelve month
periods ended April 30, 1996 and 1995, inter-year comparisons will be
affected accordingly.
13
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES
Revenues for the eleven months ended March 31, 1997 increased to $17,609,586
from $13,873,401 for the twelve months ended April 30, 1996, an increase of
27%. The increase in revenues reflects increases in both software product
sales and hardware product sales. New versions of existing software as well
as software for new operating platforms were released during the eleven
months ended March 31, 1997. Positive market acceptance of Digital's Alpha
operating platform hardware system also contributed to the increase in
hardware revenues.
GROSS PROFIT
Gross profit increased from $5,421,358, or 39% of revenues, for the twelve
months ended April 30, 1996, to $6,168,028, or 35% of revenues, for the
eleven months ended March 31, 1997. The strong sales of hardware products,
which generally carry a lower margin than software products, along with
increased start-up costs associated with expanding the Company's new UNIX
product lines, contributed to the increase in cost of sales, resulting in
lower gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased from $4,605,402, or
33% of revenues, for the twelve months ended April 30, 1996, as compared to
$5,711,061, or 32% of revenues, for the eleven months ended March 31, 1997.
RESEARCH AND DEVELOPMENT EXPENSES
Prior to fiscal 1996, research and development expenses were minimal as the
Company relied on its third-party manufacturers for substantially all product
development activities. For the eleven months ended March 31, 1997, research
and development expenses were $524,787, or three percent of revenues,
compared to $268,028, or two percent of revenues, for the twelve months ended
April 30, 1996. The increase was due principally to the Company's assumption
of the full development responsibilities for several newly licensed software
products.
OTHER INCOME (EXPENSE)
Other income consists of interest income, interest expense, and various other
items. Other income (expense) increased from an expense of $11,628, or less
than one percent of revenues, for the twelve months ended April 30, 1996, to
income of $106,375, or less than one percent of revenues, for the eleven
months ended March 31, 1997. Interest income increased during the eleven
months ended March 31, 1997 due to interest earned on the proceeds received
by the Company from the issuance of shares of Common Stock in the Private
Placement which closed in June 1996.
NET INCOME
Net income decreased from $339,555, or two percent of revenues, for the
twelve months ended April 30, 1996, to $22,416, or less than one percent of
revenues, for the eleven months ended March 31, 1997. The decrease was
primarily due to the increased research and development expenditures and
costs related to the Company's expansion into the UNIX and Windows NT
operating systems markets.
14
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES
Revenues increased to $13,873,401 for fiscal 1996 from $9,674,683 for
fiscal 1995. The increase in revenues resulted principally from increased
market penetration in both the software and hardware product lines.
Software sales increased by $2,338,123 from fiscal 1995 to fiscal 1996. The
increase was due primarily to the increased sales of WordPerfect for
OpenVMS and new sales of UNIX and Windows NT products. Hardware sales in
fiscal 1996 increased by $1,860,595 compared to fiscal 1995, largely as a
result of the release and customer acceptance of Digital's Alpha operating
platform hardware system during fiscal 1996. The Company's promotional
efforts to bundle the new AlphaServer and Alpha version of WordPerfect also
contributed to the increase in sales.
GROSS PROFIT
Gross profit increased from $3,060,608, or 31% of revenues, for fiscal
1995, to $5,421,358, to 39% of revenues, for fiscal 1996. The increase in
gross profit as a percentage of revenues was attributable primarily to
three major factors. First, the Company received the full license rights to
WordPerfect for OpenVMS and Lotus products. This decreased the royalty paid
to the owners and manufacturers of those products. Second, the new product
lines sold by the Company were more technical in nature, and therefore
carried a higher discount from the manufacturers. Third, the Company
enjoyed a higher growth in revenues than the corresponding growth required
for personnel; therefore, fixed costs related to cost of sales were spread
over a larger sales base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative expenses increased from $2,927,081, or
30% of revenues, for fiscal 1995 to $4,605,402, or 33% of revenues, for
fiscal 1996. The increase was due primarily to four factors: First, the
Company began expanding its international sales channel aggressively during
fiscal 1996. Second, a new UNIX sales division was created to focus on new
product lines. Third, activities relating to the Company's expanded
accounting, legal, and public reporting requirements increased expenses.
Fourth, activities relating to the Company's strategy of acquiring additional
products and other companies required greater expenditures.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist principally of programming costs
for new software and were not significant prior to 1996. During fiscal 1996,
the Company assumed total development responsibility for several newly
licensed products. During that year, the Company released a WordPerfect
upgrade, version 5.1+ for Open VMS/VAX, WordPerfect 5.1+ for Open VMS/Alpha,
and Lotus 1-2-3 for Open VMS/Alpha. Ongoing programming is necessary to keep
pace with software innovations in several segments of the Company's market
niche.
OTHER INCOME
Other income consisted primarily of interest income and interest expense.
Interest income has been earned on excess cash invested in interest bearing
instruments.
15
<PAGE>
NET INCOME
Net income increased from $98,735, or one percent of revenues, for fiscal
1995, to $339,555, or three percent of revenues, for fiscal 1996. The
increase in net income was primarily due to the robust sales of WordPerfect
for OpenVMS during fiscal year 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has satisfied its liquidity and capital resource
requirements through cash flow from operations and Private Placement funding.
Long-term bank borrowings have been kept to a minimum and used primarily for
the purchase of a building to house a portion of the Company's operations.
During fiscal 1997 and 1996, the Company used and generated cash from
operating activities in the amounts of ($874,429) and $362,131, respectively.
For the same years, net cash increased $672,532 and $786,559 respectively.
The Company's cash at the end of fiscal 1996 reflected the additional cash of
$608,408 obtained by the Company in the Share Exchange and its cash at the
end of fiscal 1997 reflected the addition of $1,561,168 obtained through the
issuance of common stock pursuant to the Private Placement which closed in
June 1996.
Working capital increased from $943,332 at April 30, 1996 to $2,139,580 at
March 31, 1997. The Company's current ratio increased from 1.33 at April 30,
1996 to 1.57 at March 31, 1997. This increase was due to cash received from
the Private Placement.
Effective June 1, 1996, the Company established two lines of credit with a
commercial bank, one for $1,000,000, secured by trade receivables, at a rate
equal to prime plus two percent, which expired June 1, 1997; the other for
$350,000, secured by equipment, at prime plus two percent, expiring May 1,
1999. As of March 31, 1997, neither of these lines of credit had been used.
The Company anticipates the renewal of the receivables credit line.
The Company continues to evaluate opportunities for the license or
acquisition of additional software products as well as the possible
acquisition of, or development of strategic alliances with, other companies
which may have products or distribution channels that are compatible with the
business objectives of the Company. The Company has obtained the Australian
Software Innovations Option (ASI Option), which is exercisable until
September 10, 1997; if the Company exercises the ASI Option or identifies and
proceeds with any other acquisition or alliance opportunity, additional
capital, in the form of debt or equity financing, may be required.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings PER SHARE (SFAS 128).
SFAS 128 establishes a different method of computing earnings per share than
is currently required under the provisions of Accounting Principles Board No.
15. Under SFAS 128, the Company will be required to present both basic
earnings per share and diluted earnings per share. While the Company has not
yet performed the calculation, basic earnings per share is expected to be
higher than the currently presented primary earnings per share as the effect
of diluted stock options will not be considered in computing basic earnings
per share. Adoption of SFAS 128 is required for financial statements for both
interim and annual periods ending after December 15, 1997. Accordingly, the
Company plans to adopt SFAS 128 in the quarter ended December 31, 1997. At
that time, the Company will restate all historical earnings per share data
presented to conform to the provisions of SFAS 128.
16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders of Sento Technical Innovations
Corporation:
We have audited the accompanying consolidated balance sheets of Sento
Technical Innovations Corporation and subsidiaries as of March 31, 1997 and
April 30, 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the eleven and twelve month periods
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of March 31, 1997 and April 30, 1996, and the results of their
operations and their cash flows for the eleven and twelve month periods then
ended in accordance with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
June 12, 1997
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,1997 APRIL 30, 1996
---------------------------------
<S> <C> <C>
Current assets:
Cash $ 2,225,338 $ 1,552,806
Accounts receivable, less allowance for
doubtful accounts of $223,210 in 1997
and $137,934 in 1996 3,140,425 2,176,642
Inventories 155,465 --
Other current assets (note 4) 241,644 7,806
Deferred tax asset (note 5) 98,917 42,723
- -----------------------------------------------------------------------------------
Total current assets 5,861,789 3,779,977
Fixed assets (note 3):
Land 36,021 36,021
Buildings 250,489 250,489
Furniture and equipment 772,321 526,005
Transportation equipment 11,516 11,516
Accumulated depreciation (359,268) (256,183)
- -----------------------------------------------------------------------------------
Net fixed assets 711,079 567,848
Interest in oil and gas properties (note 2) -- 197,000
Other assets (note 4) 476,400 --
- -----------------------------------------------------------------------------------
7,049,268 4,544,825
---------------------------------
---------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (note 3) $ 8,286 $ 7,721
Accounts payable 2,216,634 1,050,535
Accrued liabilities 260,274 488,660
Income taxes payable (note 5) 132,207 52,715
Deferred maintenance revenue 1,099,849 1,017,364
Other deferred revenue 4,959 219,650
---------------------------------------------------------------------------------
Total current liabilities 3,722,209 2,836,645
-------------------------------------------------------------------------------
Long-term liabilities:
Long-term debt, excluding current portion (note 3) 208,075 215,691
Deferred tax liability (note 5) 5,333 11,582
---------------------------------------------------------------------------------
Total long-term liabilities 213,408 227,273
-------------------------------------------------------------------------------
Commitments (notes 4 and 6)
Stockholders' equity (notes 2 and 8):
Common stock, $.25 par value. Authorized 8,000,000
shares; issued and outstanding 4,351,134 shares in
1997 and 3,891,325 shares in 1996 1,087,784 972,832
Additional paid-in capital 1,595,376 --
Deferred compensation (100,000) --
Retained earnings 530,491 508,075
---------------------------------------------------------------------------------
Total stockholders' equity 3,113,651 1,480,907
-------------------------------------------------------------------------------
$ 7,049,268 $ 4,544,825
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Eleven months ended Year ended
March 31, 1997 April 30, 1996
----------------------------------
<S> <C> <C>
Revenues:
Software licenses and maintenance $ 8,855,887 $ 7,694,695
Hardware sales and service 8,753,699 6,178,706
- --------------------------------------------------------------------------------------
Total revenues 17,609,586 13,873,401
----------------------------------------------------------------------------------
Cost of sales:
Software licenses and maintenance 3,927,280 3,100,738
Hardware sales and service 7,514,278 5,351,305
------------------------------------------------------------------------------------
Total cost of sales 11,441,558 8,452,043
----------------------------------------------------------------------------------
Gross profit 6,168,028 5,421,358
Selling, general, and administrative expenses 5,711,061 4,605,402
Research and development expense 524,787 268,028
- --------------------------------------------------------------------------------------
Income (loss) from operations (67,820) 547,928
Other income (expense):
Interest income 67,769 24,918
Interest expense (21,878) (31,831)
Other income (expense) 60,484 (4,715)
------------------------------------------------------------------------------------
Total other income (expense) 106,375 (11,628)
----------------------------------------------------------------------------------
Income before taxes 38,555 536,300
Income tax expense (note 5) 16,139 196,745
----------------------------------------------------------------------------------
Net income $ 22,416 $ 339,555
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Net income per share $ .01 $ 0.08
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ELEVEN MONTHS ENDED MARCH 31, 1997 AND YEAR ENDED APRIL 30, 1996
Common stock
------------------------ Additional
------------------------ paid-in Treasury Deferred
Shares Amount capital stock compensation
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at April 30, 1995 183,000 $ 2,000 7,410 (170,000) --
Issuance of treasury stock 4,386 -- 65,790 43,860 --
Business combination (note 2) 3,703,939 970,832 (73,200) 126,140 --
Net income -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Balances at April 30, 1996 3,891,325 972,832 -- -- --
Issuance of common stock (note 8) 446,048 111,512 1,449,656 -- --
Employee stock purchases 13,761 3,440 38,720 -- --
Deferred compensation related to
grant of stock warrants (note 8) -- -- 107,000 -- (107,000)
Amortization of deferred
compensation (note 8) -- -- -- -- 7,000
Net income -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 4,351,134 $ 1,087,784 1,595,376 -- (100,000)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total
Retained stockholders'
earnings equity
- ------------------------------------------------------------------------
<S> <C> <C>
Balances at April 30, 1995 583,884 423,294
Issuance of treasury stock -- 109,650
Business combination (note 2) (415,364) 608,408
Net income 339,555 339,555
- ------------------------------------------------------------------------
Balances at April 30, 1996 508,075 1,480,907
Issuance of common stock (note 8) -- 1,561,168
Employee stock purchases -- 42,160
Deferred compensation related to
grant of stock warrants (note 8) -- --
Amortization of deferred
compensation (note 8) -- 7,000
Net income 22,416 22,416
- ------------------------------------------------------------------------
Balances at March 31, 1997 530,491 3,113,651
- ------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Eleven months
ended Year ended
March 31, 1997 April 30, 1996
-------------- --------------
Cash flows from operating activities:
Net income $ 22,416 $ 339,555
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 176,685 53,699
Amortization of deferred compensation 7,000 --
Provision for losses on accounts receivable 85,276 --
Stock issued in lieu of compensation -- 109,650
Changes in operating assets and liabilities:
Accounts receivable (1,049,059) (632,225)
Inventories (155,465) 9,604
Other current assets (233,838) --
Other assets (550,000) --
Deferred income taxes (62,443) 3,127
Accounts payable 1,166,099 5,327
Accrued liabilities (228,386) (95,987)
Income taxes payable 79,492 18,561
Deferred maintenance revenue 82,485 331,170
Other deferred revenue (214,691) 219,650
-------------------------------------------------------------------
Net cash provided by (used in)
operating activities (874,429) 362,131
----------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (246,316) (153,336)
Proceeds from sale of oil and gas properties 197,000 --
Net cash acquired in business combination -- 484,781
--------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (49,316) 331,445
----------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of stock 1,603,328 --
Principal payments of long-term debt (7,051) (87,527)
Deposits for private placement subscription -- 180,510
--------------------------------------------------------------------------
Net cash provided by financing
activities 1,596,277 92,983
----------------------------------------------------------------
Net increase in cash 672,532 786,559
Cash at beginning of year 1,552,806 766,247
- -----------------------------------------------------------------------------
Cash at end of year $ 2,225,338 $1,552,806
- -----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 21,878 $ 21,016
Cash paid for income taxes -- 378,587
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND APRIL 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Sento Technical Innovations Corporation (Sento) is the parent of Spire
Technologies, Inc. (STI), Spire Systems Incorporated (SSI) (formerly Spire
Technologies Systems Division, Inc.), DewPoint Distributed Solutions
Incorporated (DewPoint), and Centerpost Innovations Pty Limited (Centerpost)
(collectively, the Company). STI, SSI, and DewPoint are resellers of computer
software and hardware, and also provide technical support for certain
software. The Company's customers consist of business and governmental
entities, geographically dispersed throughout the United States and abroad.
Revenues from foreign sales for the periods ended March 31, 1997 and April
30, 1996, were approximately eight and nine percent of total sales,
respectively, most of which were from Europe. As a reseller, the Company is
dependent on third-party suppliers, with over seventy percent of the
Company's revenues derived from products it obtains from three suppliers.
Basis of Presentation
The consolidated financial statements as of and for the periods ended
March 31, 1997 and April 30, 1996, include the consolidated financial
statements of Sento and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
During the first quarter of fiscal 1997, the Company changed its
year-end from April 30 to March 31. Accordingly, the accompanying 1997
consolidated balance sheet is as of March 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
are for the eleven months then ended. Comparable summary income statement
amounts for the eleven-month periods ending March 31, 1997 and 1996, are:
revenues, $17,609,586 and $12,709,678; gross profit, $6,186,028 and
$4,988,428; income tax expense, $16,139 and $256,745; net income $22,416 and
$348,996; and net income per share, $0.01 and $0.08.
Inventories
Inventories consist primarily of computer software disks and supplies
and third party supplier products which are stated at the lower of cost or
market. Cost is determined using the first-in, first-out (FIFO) method.
Fixed Assets
Fixed assets are stated at cost. Depreciation of fixed assets is
computed on the straight-line method over the estimated useful lives of
individual classes of assets. The estimated useful lives of the individual
classes of assets are as follows:
<TABLE>
<S> <C>
Buildings............................................ 40 years
Furniture and equipment.............................. 3-10 years
Transportation equipment............................. 5 years
</TABLE>
Revenue Recognition
Revenue from the sale of software licenses and hardware sales is
recognized at the time of delivery. Revenue from maintenance contracts and
customer service is recognized as the service is performed. Deferred
maintenance revenue consists of payments received on software maintenance
contracts and recorded as revenue over the period of the contract, which is
typically one year.
Research and Development
Research and development costs are expended as incurred.
Software Development Costs and Purchased Software
Statement of Financial Accounting Standards (SFAS) No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED,
provides for the capitalization of certain software development costs upon
the establishment of technological feasibility
22
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION AND SUBSIDIARIES
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which is defined by the Company as the completion of a working model of the
software. Internal software development costs incurred to date that are
eligible for capitalization have been immaterial.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and deferred tax liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and deferred tax liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is computed based on
the weighted average number of common shares and dilutive common stock
equivalents outstanding during the period. Stock options and warrants are
considered common stock equivalents. The number of shares used to compute net
income per common and common equivalent share were 4,251,240 and 3,992,768
shares for the periods ended March 31, 1997 and April 30, 1996, respectively.
Stock-Based Compensation
Effective May 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING
FOR STOCK BASED COMPENSATION (SFAS 123). SFAS 123 encourages entities to
adopt a fair value based method of accounting for stock options or similar
equity instruments. However, it also allows an entity to continue measuring
compensation cost for stock based compensation using the intrinsic-value
method of accounting prescribed by Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25). The Company has
elected to continue to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS 123.
Concentration of Credit Risk
In the normal course of business, the Company provides unsecured credit
terms to its customers. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for possible losses
which, when realized, have been within the range of management's
expectations. No one customer accounted for more than ten percent of total
revenues.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues, and expenses and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(2) BUSINESS COMBINATION AND ASSET DISPOSITION
On January 23, 1996, STI and SSI, which were both privately held by the
same group of owners, entered into an agreement and plan of reorganization
(Exchange Agreement) with Amacan Resources Corporation (Amacan) wherein STI
and SSI became wholly owned subsidiaries of Amacan. The Exchange Agreement
was approved by Amacan stockholders on April 18, 1996. Since 1974, Amacan, a
publicly-traded company, has been almost exclusively engaged as a participant
with others in oil and gas operations and development. Amacan's principal
assets were working interests in producing oil and gas wells and options or
rights to participate in the drilling of additional wells. As part of the
merger, Amacan was renamed Spire International Corp., which was subsequently
changed to Sento Technical Innovations Corporation.
Upon approval of the Exchange Agreement by the Amacan stockholders, (a)
the 389,102 shares of Amacan's common stock previously outstanding (as
adjusted for a reverse stock split) remained outstanding and (b) Amacan
issued an additional 3,502,223 shares of its com-
23
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION AND SUBSIDIARIES
(2) BUSINESS COMBINATION AND ASSET DISPOSITION (CONTINUED)
mon stock for all of the issued and outstanding shares of STI and SSI's
common stock. The business combination is treated for accounting purposes as
a "reverse merger" wherein STI and SSI are shown as the acquiring companies
because the former stockholders of STI and SSI have the significant majority
of the outstanding common stock after the combination, and management of STI
and SSI has become the management of the combined companies. The business
combination is accounted for using the purchase method of accounting with the
net assets of Amacan being recorded at their fair value at the date of
closing and the operating results of Amacan prior to the business combination
are not included with the historical operating results of STI and SSI.
The following pro forma financial information presents the combined
results of operations of STI, SSI, and Amacan as if the acquisition had
occurred as of May 1, 1995. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
STI, SSI, and Amacan constituted a single entity during such periods.
<TABLE>
Year ended April 30, 1996
-------------------------------------------------------
<S> <C>
Net sales................................. $ 14,020,329
Net income................................ 238,365
Net income per share...................... 0.06
</TABLE>
As described above, the Company acquired Amacan's interest in oil and
gas producing properties in the business combination. On May 1, 1996, these
properties were sold to an unrelated party. The properties were recorded at
fair market value as of acquisition date, as determined by the subsequent
sales price. Accordingly, no gain or loss was recorded on the disposal. The
operating loss for the oil and gas operations during the period from date of
acquisition (April 18, 1996) to April 30, 1996, was insignificant.
(3) NOTE PAYABLE TO BANK AND LONG-TERM DEBT
The Company has a $1,000,000 line of credit, at prime plus two percent,
secured by the Company's accounts receivable. No amounts were outstanding at
March 31, 1997 or April 30, 1996. The line expired June 1, 1997. The Company
anticipates that the line will be renewed. The Company also has a $350,000
line of credit at prime plus two percent, secured by equipment, expiring May
1, 1999.
Long-term debt at March 31, 1997 and April 30, 1996, consisted of the
following:
<TABLE>
1997 1996
-----------------------
<S> <C> <C>
8.25% first mortgage payable in monthly installments of $1,173, including
interest, with final payment of $107,417 due July 15, 1999, secured by the
Company's land and building with a book value of $250,167.............................. $118,095 $121,909
8.70% SBA loan payable in monthly installments of $1,078, including interest,
secured by the Company's land and building with a book value of $250,167............... 98,266 101,503
--------- -------
Total long-term debt..................................................................... 216,361 223,412
--------- -------
Less current portion..................................................................... 8,286 7,721
--------- -------
Long-term debt, excluding current portion................................................ $208,075 $215,691
--------- -------
--------- -------
Aggregate maturities of long-term debt are as follows: 1998, $8,286; 1999, $9,009; 2000, $114,094; 2001, $4,979; 2002,
$5,430; and thereafter $74,563.
</TABLE>
24
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION AND SUBSIDIARIES
(4) OTHER ASSETS
EXCLUSIVE LICENSE AGREEMENT
Effective July 1, 1996, the Company entered into an Exclusive License and
Technical Assistance Agreement (the ASI License Agreement) with Australian
Software Innovations (Services) Pty. Ltd. (ASI), a limited company organized
under the laws of the Commonwealth of Australia. ASI, which maintains its
principal office in Sydney, Australia, develops and markets performance
monitoring software and provides related technical consulting services to
customers located in Asia, Europe, the United Kingdom, and the United States.
Under the terms of the ASI License Agreement, the Company acquired an
exclusive license (the License) in North and South America during a five-year
term (which may be extended for up to three additional five-year periods) to
use, market, modify, manufacture, assemble, test, and modify ASI's SYSMON
software program. In consideration of the grant of the License, the Company
paid to ASI a non-refundable license fee in the amount of $550,000 and agreed
to pay royalties to ASI during the term of the ASI License Agreement, based
upon product and maintenance revenues generated by the Company for the use,
sale, license, and provision of technical support and maintenance services
attributable to the SYSMON software. In the event the Company fails to meet
certain performance criteria set forth in the ASI License Agreement, ASI may
terminate the exclusive nature of the ASI License throughout the remainder of
the ASI License term. The license fee, included in other assets in the
accompanying 1997 consolidated balance sheet, is being amortized over five
years with $73,600 of amortization expended during fiscal 1997. Royalties
paid to ASI totaled $123,502 during fiscal 1997.
OPTION AGREEMENT
On September 10, 1996, the Company entered into an ASI Option Agreement by
and among the Company, ASI, Kilat Holdings Pty. Limited (Kilat), a limited
company organized under the laws of Australia and the sole shareholder of ASI
and Eng Lee and Mary Lee, the sole shareholders of Kilat (the ASI
Shareholders). Under the terms of the ASI Option Agreement, ASI granted to
the Company an option (the ASI Option), exercisable at the Company's
discretion any time prior to September 10, 1997, to acquire all or any
portion of the tangible and intangible assets of ASI, as determined by the
Company.
As consideration for the grant of the ASI Option, the Company paid to ASI
an option purchase payment in the amount of $130,000. In the event the
Company elects to exercise the ASI Option for the purchase of all ASI assets,
the Company has agreed to pay to ASI the exercise price of $1,405,000,
consisting of cash in the amount of $1,055,000 and 87,500 shares of common
stock, subject to certain adjustments to the cash portion of the exercise
price to reflect the profit or loss of ASI for the period from April 30, 1996
through October 31, 1996. The Company has also agreed to assume certain
liabilities associated with the assets of ASI to be acquired by the Company.
The option purchase payment, included in other current assets in the
accompanying 1997 consolidated balance sheet, will either be included as part
of the purchase price upon exercise or expensed if not exercised by the end
of the option period.
(5) INCOME TAXES
<TABLE>
<CAPTION>
Income tax expense consists of:
Current Deferred Total
-----------------------------------------
<S> <C> <C> <C>
Eleven months ended March 31, 1997:
Federal $ 66,187 $ (54,438) $ 11,749
State 12,395 (8,005) 4,390
-------------------------------------------------------------------------------------------
$ 78,582 $ (62,443) $ 16,139
-----------------------------------------
Year ended April 30, 1996:
Federal $ 167,935 $ 3,127 $ 171,062
State 25,683 -- 25,683
-------------------------------------------------------------------------------------------
$ 193,618 $ 3,127 $ 196,745
-----------------------------------------
</TABLE>
25
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION AND SUBSIDIARIES
Actual income tax expense differs from the "expected" tax expense (computed by
applying the U.S. federal corporate income tax rate of 34 percent to income
before income taxes) as follows:
1997 1996
---- ----
Computed "expected" tax expense $ 13,108 $ 182,342
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit 2,897 16,950
Other 134 (2,547)
- --------------------------------------------------------------------------------
Income tax expense $ 16,139 $ 196,745
---------------------------------------------------------------------------
The tax effects of temporary differences that give rise to current deferred
tax assets and noncurrent deferred tax liabilities at March 31, 1997 and April
30, 1996, are presented below:
1997 1996
---- ----
Current deferred tax assets:
Other accrued expense $ 28,125 --
Deferred compensation -- 16,514
Allowance for doubtful accounts 70,792 42,723
-----------------------------------------------------------------------------
Total gross current deferred assets 98,917 59,237
Less valuation allowance -- 16,514
- -------------------------------------------------------------------------------
Net current deferred tax assets 98,917 42,723
-----------------------------------------------------------------------------
Noncurrent deferred tax assets:
Investment tax credit carry forwards 10,095 10,095
Net operating loss carry forward 60,624 73,903
-----------------------------------------------------------------------------
Total gross noncurrent deferred assets 70,719 83,998
Less valuation allowance 20,181 3,667
- -------------------------------------------------------------------------------
Net noncurrent deferred tax assets 50,538 80,331
Deferred tax liability -- tax depreciation in excess
of book depreciation 55,871 91,913
- -------------------------------------------------------------------------------
Net noncurrent deferred tax liability $ 5,333 $ 11,582
-----------------------------------------------------------------------------
The valuation allowance for deferred tax assets as of May 1, 1995, was
$-0-. The net change in the total valuation allowance for the periods ended
March 31, 1997 and April 30, 1996, was an increase of $-0- and $20,181,
respectively.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of March 31, 1997, will be allocated as an income
tax benefit to be reported in the consolidated statement of operations.
At March 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of $178,306 which expire from 2004 to 2011. The
Company also has investment tax credit carryforwards for federal income tax
purposes of $10,095 which expire from 1997 to 2001.
(6) LEASES
The Company has operating leases for office space and equipment. The
Company incurred rent expense of $115,276 and $80,426 for the periods ended
March 31, 1997 and April 30, 1996, respectively. Future minimum rent payments
under existing operating leases are $149,340 in fiscal 1998 and $15,540 in
fiscal 1999.
26
<PAGE>
(7) RETIREMENT PLAN
The Company has a qualified defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code. The plan covers all employees
who meet minimum age and service requirements, and allows participants to
defer a portion of their annual compensation on a pretax basis. In addition,
employer contributions are made at the discretion of the Board of Directors.
Participants are fully vested at all times in employee contributions.
Employer contributions vest over a six-year period. Employer contributions of
$11,438 and $12,376 were made for the periods ended March 31, 1997 and April
30, 1996, respectively.
(8) COMMON STOCK
STOCK OPTION PLAN
The Company has adopted a stock option plan (the Plan) pursuant to which
the Company's Board of Directors may grant stock options to officers and key
employees. The Plan authorizes grants of options to purchase up to 1,000,000
shares of authorized but unissued common stock. Stock options are granted
with an exercise price not less than the stock's fair market value at the
date of grant. All stock options have ten-year terms, vest at from
10 percent - 40 percent per year at the end of each of the first four years.
At March 31, 1997, there were 156,815 additional shares available for grant
under the Plan.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------------------------
1997 1996
------------------------------ -----------------------------
Number Weighted-average Number Weighted-average
of shares exercise price of shares exercise price
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Balance outstanding at beginning of year 516,685 $ 2.28 -- $ --
Granted 366,500 4.19 516,685 2.28
Forfeited (40,000) 2.28 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balance outstanding at end of year 843,185 3.19 516,685 2.28
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 115,502 1.35 41,830 1.24
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted during the year $ 1.22 $ 0.50
</TABLE>
The following table summarizes information about stock options outstanding at
March 31, 1997:
<TABLE>
<CAPTION>
Number Weighted-average Number
outstanding at remaining Weighted-average exercisable at Weighted-average
Exercise price March 31, 1997 contractual life exercise price March 31, 1997 exercise price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.24 278,685 8.6 $ 1.24 111,502$ 1.24
3.50 198,000 8.9 3.50 -- 3.50
4.00 227,000 9.8 4.00 -- 4.00
4.50 139,500 9.8 4.50 4,000 4.50
-------- -------
843,185 115,502
-------- -------
-------- -------
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 -expected dividend yield zero percent,
risk-free interest rate of 6.75 percent, expected life of 5 years, and
expected stock-price volatility of 62.9 percent; 1996 -expected dividend
yield zero percent, risk-free interest rate of 6.15 percent, expected
stock-price volatility of 62.9 percent, and expected life of five years.
27
<PAGE>
(8) COMMON STOCK (CONTINUED)
The Company applies APB 25 in accounting for its Plan and, accordingly,
no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net income would have been reduced to the pro
forma amounts indicated below:
1997 1996
-----------------------------
Net income As reported $ 22,416 339,555
Pro forma 5,597 323,478
Primary earnings per share As reported 0.01 0.08
Pro forma -- 0.08
Pro forma net income reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 may not be representative of the effects on reported net
income for future years.
STOCK WARRANTS
The Company has also granted warrants to outside consultants. On January
20, 1997, 70,000 warrants were granted with an exercise price of $3.75 per
share and on March 20, 1997, 30,000 warrants were granted with an exercise
price of $4.50 per share. Each warrant expires two years from date of grant.
Total compensation expense of $107,000 will be recognized over two years of
which $7,000 was recognized in 1997.
PRIVATE PLACEMENT
In June 1996, the Company completed a private offering of unregistered
shares of its common stock to certain accredited investors. The shares were
offered in units, at $7.00 per unit, with each unit consisting of two shares
of common stock plus one warrant to buy one share of common stock for $3.50
before April 30, 1998. In the offering, the Company sold 223,024 units
consisting of 446,048 shares of common stock and warrants to purchase 223,024
shares of common stock from which $1,561,168 of net cash proceeds were
received.
EMPLOYEE STOCK PURCHASE PLAN
A stock purchase plan was adopted by the Board of Directors of the
Company on April 18, 1996, and approved by the shareholders on September 10,
1996, under which 200,000 shares of common stock were reserved for possible
future issuance to employees of the Company and other individuals thereunder.
The purpose of the stock purchase plan is to provide a method whereby
employees of the Company and certain of its subsidiaries, except for
employees who own beneficially five percent or more of the voting stock of
the Company, may acquire a proprietary interest in the Company through the
purchase of shares of common stock. The stock purchase plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code. As of March 31, 1997, the Company had sold 13,761
shares to employees of the Company pursuant to the stock purchase plan.
(9) SUBSEQUENT EVENTS
In May 1997, the Company commenced a private offering to sell
unregistered shares of its common stock to certain accredited investors. The
shares were offered in 240,000 units, at $12.50 per unit, with each unit
consisting of three shares of common stock together with one warrant to buy
one share of common stock for $5.50 before May 31, 1999.
28
<PAGE>
MARKET INFORMATION
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed under the trading symbol "SNTO" on
the NASDAQ Small Cap Market maintained by the National Association of
Securities Dealers (the "NASD"). Prior to November 19, 1996, the Common Stock
was quoted on the over-the-counter bulletin board market maintained by the
NASD. The following table sets forth the range of bid prices for the Common
Stock in the over-the-counter market for the periods indicated prior to
November 19, 1996, as reported by the National Quotation Bureau, as well as
the range of closing trading prices for the Common Stock on the Small Cap
Market for the periods indicated thereafter. The over-the-counter market
quotations represent prices in the market between dealers in securities; they
do not include retail markup, markdown, or commissions, and do not
necessarily represent actual transactions. Prices shown for the quarter ended
April 30, 1996 and subsequent periods reflect the consummation of the
Company's share exchange in April 1996, including a one-for-seven reverse
split of the shares of Common Stock issued and outstanding at the effective
time of the share exchange.
<TABLE>
Bid Prices/Closing Prices
-----------------------------
-----------------------------
QUARTER ENDED HIGH LOW
- -----------------------------------------------------------
<S> <C> <C>
March 31, 1997 $ 5.00 $ 3.50
December 31, 1996 3.63 3.38
September 30, 1996 6.00 4.25
June 30, 1996 (two months) 6.00 1.3125
April 30, 1996 $ 6.00 $ 1.3125
January 31, 1996 .375 .03125
October 30, 1995 .125 .03125
July 31, 1995 .125 .05
</TABLE>
29
<PAGE>
CORPORATE INFORMATION
BOARD OF DIRECTORS
GARY B. GODFREY
Chairman and Chief Executive Officer
Sento Technical Innovations Corporation
ROBERT K. BENCH
President and Chief Financial Officer
Sento Technical Innovations Corporation
BRIAN W. BRAITHWAITE
Secretary/Treasurer
Sento Technical Innovations Corporation
WILLIAM A. FRESH (1)(2)
Private Investor
SHERMAN H. SMITH (1)(2)
C.P.A. and Partner
Schmitt, Griffiths, Smith & Co.
KIETH E. SORENSON
Managing Partner
Sorenson, Thomas & Co., a private investment company
ENG LEE
Managing Director
Australian Software Innovations, Pty., Ltd.
CORPORATE OFFICERS
GARY B. GODFREY
Chairman and Chief Executive Officer
ROBERT K. BENCH
President and Chief Financial Officer
BRIAN W. BRAITHWAITE
Secretary/Treasurer
SUBSIDIARY OFFICERS
F.J. ALLEN
President
Spire Systems, Inc.
GARY B. GODFREY
President
Spire Technologies, Inc.
ENG LEE
Managing Director
Australian Software Innovations, Pty Ltd.
DOUGLAS D. YATES
President
DewPoint Distributed Solutions, Inc.
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders will be held on Monday, August 18, 1997,
at 10:00 a.m. at the offices of Kimball, Parr, Waddoups, Brown & Gee, 185
South State Street, Salt Lake City, Utah 84147.
CORPORATE HEADQUARTERS
SENTO TECHNICAL INNOVATIONS CORPORATION
311 North State Street - Orem, Utah 84057
Tel (801)226-6222 - Fax (801) 224-2426
INTERNATIONAL OFFICES AND AFFILIATES
AUSTRALIA/SOUTHEAST ASIA
AUSTRALIAN SOFTWARE INNOVATIONS, PTY. LTD.
Level 3 - 51 Rawson Street - Epping, NSW 2121 Australia
UNITED KINGDOM/EUROPE
AVALAN TECHNOLOGY, LTD.
Willow Grange - Church Road - Watford, Herts WD1 3QA U.K.
CORPORATE INFORMATION
TRANSFER AGENT AND REGISTRAR
Atlas Stock Transfer
Murray, Utah
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Salt Lake City, Utah
COMMON STOCK
The company's stock is listed on the NASDAQ Stock Market under the symbol SNTO
CORPORATE COUNSEL
Kimball, Parr, Waddoups, Brown & Gee
Salt Lake City, Utah
INVESTOR RELATIONS
Coffin Communications Group
Sherman Oaks, California
INVESTOR INFORMATION
A copy of the Company's annual report, SEC Form 10-KSB, quarterly SEC Form
10-QSBs, and press releases are available upon written request to:
Investor Relations
Sento Technical Innovations Corporation
311 North State Street
Orem, Utah 84057
This information is also available on our web site: www.sento.com
(1) Compensation Committee
(2) Audit Committee
30
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
JURISDICTION OF
NAME INCORPORATION OR ORGANIZATION
____ _____________________________
Spire Technologies, Inc. Utah
Spire Systems Incorporated Utah
DewPoint Distributed Solutions Utah
Incorporated
Centerpost Innovations Pty. Ltd. New South Wales, Australia
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SENTO
TECHNICAL INNOVATIONS CORPORATION CONSOLIDATED BALANCE SHEET AND STATEMENT OF
OPERATIONS AS OF AND FOR THE ELEVEN MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-END> Mar-31-1997
<CASH> 2,225,338
<SECURITIES> 0
<RECEIVABLES> 3,363,635
<ALLOWANCES> (223,210)
<INVENTORY> 155,465
<CURRENT-ASSETS> 5,861,789
<PP&E> 1,070,347
<DEPRECIATION> (359,268)
<TOTAL-ASSETS> 7,049,268
<CURRENT-LIABILITIES> 3,722,209
<BONDS> 0
0
0
<COMMON> 1,087,784
<OTHER-SE> 2,025,867
<TOTAL-LIABILITY-AND-EQUITY> 7,049,268
<SALES> 17,609,586
<TOTAL-REVENUES> 17,609,586
<CGS> 11,441,558
<TOTAL-COSTS> 6,235,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,878
<INCOME-PRETAX> 38,555
<INCOME-TAX> 16,139
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,416
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
