U.S. 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, 1998 or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Sento Technical
Innovations Corporation
----------------------------------------------
(Name of small business issuer in its charter)
Utah 000-06425 87-0284979
--------------- ----------- ----------
(State or other (Commission (IRS
jurisdiction File No.) Employer
of Identifica-
incorporation) tion No.)
311 North State Street
Orem, Utah 84059
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(Address of principal executive offices,
including zip code)
Issuer's telephone number, including area code: (801) 226-3355
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.25 par value
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
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. Yes [x] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained herein, and no disclosure will be contained,
to the best of the 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]
State Issuer's revenues for its most recent fiscal year: $20,639,845
The aggregate market value of the Common Stock held by non-affiliates of
the issuer, based upon the closing sale price of the Common Stock reported by
the NASDAQ SmallCap Market on June 12, 1998, was approximately $15,575,715.
The number of shares of Common Stock outstanding as of June 12, 1998 was
5,814,957.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's definitive proxy statement relating to its
Annual Meeting of Shareholders scheduled for August 11, 1998 are
incorporated by reference in Part III of this report.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [x]
_____________________________________________________________________________
<PAGE> TABLE OF CONTENTS
PART I ............................................................ 1
Item 1 Business ................................................... 1
Item 2. Description of Property .................................... 8
Item 3. Legal Proceedings .......................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ........ 8
PART II ................................. .......................... 9
Item 5. Market for Common Equity and Related Shareholder Matters .. 9
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 9
Item 7. Financial Statements ....................................... 14
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure ......... 14
PART III .......................................................... 15
Items 9, 10, 11 and 12 ............................................ 15
Item 13 Exhibits and Reports on Form 8-K ........................... 15
SIGNATURES ........................................................ 16
FINANCIAL STATEMENTS .............................................. F-1
<PAGE>
The statements contained in this Annual Report on Form 10-KSB that are
not purely historical are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All forward looking statements
involve various risks and uncertainties. Forward looking statements
contained in this Report include statements regarding the Company's plans to
develop and deliver integrated information technology services, acquisition
plans, market opportunities and acceptance, expectations, goals, revenues,
financial performance, strategies, mission and intentions for the future.
Such forward looking statements are included under Item 1. "Business," Item
2. "Properties" and Item 6. "Management's Discussion and Analysis of
Financial Condition and Results of Operations." All forward looking
statements included in this Report are made as of the date hereof, based on
information available to the Company as of such date, and the Company assumes
no obligation to update any forward looking statement. It is important to
note that such statements may not prove to be accurate and that the Company's
actual results and future events could differ materially from those
anticipated in such statements. Among the factors that could cause actual
results to differ materially from the Company's expectations are those
described under Item 6. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors Affecting Future Results."
All subsequent written and oral forward looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by this section and other factors included elsewhere in this Report.
PART I
Item 1. Business.
Overview
Sento Technical Innovations Corporation ("Sento" or the "Company")
provides integrated information technology ("IT") solutions for Windows NT,
UNIX, Open VMS, Internet/Intranet and networked computing environments.
Sento's core competencies include: systems design, integration and
implementation, business process reengineering, packaged software and
hardware acquisition and installation, networking and connectivity, Computer,
Telephone and Database Integration ("CTI") and Transmission Control
Protocol/Internet Protocol ("TCP/IP") level engineering, capacity planning
and systems monitoring. Through its wholly-owned subsidiaries, Sento
delivers outsourced IT solutions integrating training, consulting, technical
support and software.
Sento Training Corporation ("Sento Training") provides classroom
training courses, seminar training workshops, customized corporate training
programs and multi-media presentations, all of which are designed to teach
and reinforce skills required to make IT systems work effectively. Sento
Consulting Corporation ("Sento Consulting") delivers customized IT consulting
services intended to help Sento clients realize the benefits of advanced IT
solutions in the areas of network, systems and financial information
consulting. Sento Technical Services Corporation ("Sento Technical
Services") offers a range of IT outsourcing services consisting of "call
center," "helpdesk" and technical support services. DewPoint Distributed
Solutions Incorporated ("DewPoint") provides distribution, reseller, and
channel management for leading software manufacturers. Unless otherwise
indicated, references in this report to "Sento" or the "Company" include
Sento and its subsidiaries.
In addition, the Company conducts substantially all of its foreign
operations through Sento Australia Pty. Limited ("Sento Australia"), based
near Sydney, Australia, and Sento Limited ("Sento Ltd."), located near
London, England.
Historically, Sento operated as a Value Added Reseller ("VAR")
generating revenues from its sales and distribution of third party hardware
and software products. During the past year, the Company began a strategic
transition using its technical core competencies to offer IT outsourcing
services such as help desk, systems and network consulting and IT training.
The Company's management believes these new service offerings will contribute
greater operating margins than distributing third party products. Sento will
continue to sell software and hardware as part of its consulting and service
related activities.
Sento's marketing efforts focus on middle market companies ranging from
$50 million to $500 million in annual revenues as well as
divisions/departments of Fortune 500 companies. The Company sells and
delivers its services and products through a network of five sales and
service offices located in Orem, Utah, Boston, Massachusetts, Los Angeles,
California, London, England, and Sydney, Australia. These direct sales are
augmented by a distribution network of VARs and resellers throughout North
America.
During the year ended March 31, 1998, Sento expanded its product
offerings and geographic range through the acquisitions of Australian
Software Innovations Ltd. ("ASI") in Sydney, Australia, Software Innovations
Ltd. in London, England, CDG Technologies Inc. in Boston, Massachusetts, PC
Business Solutions, Inc. in Los Angeles, California, and Astron Incorporated
in Orem, Utah.
Industry
The IT industry encompasses a broad spectrum of technology and services
utilized in the processing, distribution and management of information. This
spectrum includes (i) a user's desktop information system, consisting
principally of computer hardware, software and associated training, (ii) back
office services, including existing and future IT systems infrastructure, and
(iii) organizational management of IT systems (including Internet and
Intranet) and requirements.
Within the IT industry, outsourcing services, which International Data
Corporation ("IDC") estimates represent approximately 50% of all outsourcing
revenues, constitute the fastest growing industry segment. According to IDC,
IT oursourcing service revenues are currently $82 billion annually and are
expected to grow to $185 billion by the end of 2001.
Sento believes most organizations face a rapidly changing, highly
competitive environment where improved utilization of IT products and
services can be a significant factor in improving products and services,
lowering costs and increasing customer satisfaction. Many top executives and
managers recognize the importance of information technology in their
organizations and the potential benefits of improved IT utilization. At the
same time, the rapid technological change and migration required to achieve
those benefits create tremendous pressure on organizations and their
management. As the pace of technological change accelerates, the
organization's ability to evaluate, integrate, deploy and leverage IT systems
is becoming a critical competitive issue. In particular, internal IT
departments are frequently challenged to utilize limited time and resources
(both financial and human) to stay abreast of rapid technological change
while maintaining the operations of existing IT systems.
The challenge of maintaining an organization's focus on core business
areas while attempting to monitor and benefit from rapid IT development has
prompted many organizations to seek professional IT training, consulting and
technical services from external providers. As a result, "outsourcing," or
the transfer of IT product and service responsibility from internal personnel
to external providers, is rapidly gaining favor among many organizations.
The principal factors motivating organizations to pursue outsourced IT
services are the desire to provide improved customer service, an effort to
focus internal organizational resources on the organization's core
competencies, the necessity of enhancing IT effectiveness and the benefit of
supplementing internal IT resources. Sento believes most organizations that
utilize information technology, whether in their core business or to
facilitate non-IT business operations, are currently outsourcing or will, in
the future, outsource some or all of their IT needs.
This Report contains registered and common law trademarks of various
customers, competitors and suppliers of the Company, including the following
registered trademarks: NovellR and UNIXR are trademarks of Novell, Inc.,
DECR, VMSR, OpenVMSR and AlphaR are trademarks of Digital Equipment
Corporation. MicrosoftR, WindowsR, and WindowsNTR are trademarks of
Microsoft Corporation. This Report also contains trademarks of other
companies.
Business Strategy
Sento's business strategy is to develop and provide integrated IT
solutions that enable its customers to effectively utilize leading-edge
technology to improve their business operations and results. The Company
believes it is positioned to pursue its business strategy through the
implementation of the following strategic initiatives:
Develop and Market Leading-Edge Integrated IT Solutions. Sento offers
its clients complete IT solutions utilizing the consulting, training,
technical support and software development and distribution competencies of
Sento Consulting, Sento Training, Sento Technical Services and DewPoint.
Through the various phases of customer IT needs, Sento provides capacity
planning, design and implementation, systems monitoring and tuning,
customized and general system and application training, followed up with
comprehensive product support and help desk services. Sento seeks to
identify the requirements and objectives of its customers, then deliver an
integrated package of leading edge technology and services that enables
customers to improve business processes and operating results.
Pursue and Integrate Strategic Acquisitions. The Company intends to
expand its operations by opening or acquiring additional consulting and
training offices in strategic locations in the U.S. and foreign countries.
Sento believes these acquisitions, if identified and consummated, will
enhance the Company's ability to offer its multinational clients a
comprehensive package of integrated IT services. In addition to geographic
expansion, the Company will seek to identify and acquire companies which
provide complementary consulting and training services, thereby extending the
breadth of Sento's service offerings. Sento's five acquisitions completed
during the year ended March 31, 1998 reflect the Company's efforts to pursue
such expansion. See " Recent Acquisitions." The acquisition of the
operations of ASI, which the Company now conducts through Sento Australia,
increased the Company's technical competence in the areas of systems
monitoring and tuning. PC Business Solutions, Inc. added both networking
consulting and financial systems implementation capabilities. Astron
Training Incorporated expanded the Company's service offerings to include
systems level training. The Company plans to continue to pursue additional
strategic acquisition in order to: (i) obtain expertise in new technologies;
(ii) enlarge its client base; (iii) gain access to qualified IT
professionals; and (iv) enter new geographic markets.
Attract and Retain Highly Skilled IT Professionals. The Company's
success depends on its ability to attract, train, motivate and retain highly
skilled IT professionals. The Company believes its three-pronged service
approach provides an excellent career path filled with significant
opportunities across the spectrum of IT experience, from entry level
positions through highly skilled IT consultants. The Company's help desk and
technical support centers will offer both entry level employees and seasoned
professionals the prospect of training to enhance their abilities while
serving customers in a broad range of IT areas. The Company's three
operating divisions offer complimentary career growth paths that enable
employees to diversify their experience and technical ability. The Company
also offers its professionals the prospect for rapid advancement and expert
personal training, as employees can move from one career step to another
while remaining within the same company. The Company affords employees the
chance to work with leading-edge technologies, to work in a stimulating,
flexible entrepreneurial environment and to obtain continuous technical
training.
Capitalize on Existing Resources and Relationships. Over the past ten
years the Company has assisted its customers in the design and implementation
of complex hardware and software solutions in heterogeneous operating systems
environments. Sento's consultants and help desk professionals have been at
the forefront of assisting clients to migrate from legacy (mainframe)
systems to the more versatile server and internet solutions offered by state-
of-the-art manufacturers and software vendors. The Company's need for its
consultants to have a knowledge base in both legacy operating systems and the
heterogeneous operating systems of the client/server environment has created
a large pool of experienced and well trained consultants. The Company's
active customer base includes over 7,000 customer sites around the world and
includes many major multinational corporations. Sento will use its large and
active customer base to expand sales of its new training, consulting and
technical support service offerings. The Company has completed its plans for
a state-of-the-art technical support center and will use that call center to
augment its present help desk business.
The Company has focused on helping its customers migrate to WindowsNT
and expects the continued expansion of NT as a preferred operating
environment for small to medium sized companies. Sento will use its trained
consultants to aggressively grow this migration business.
<PAGE>
Recent Acquisitions
During the fiscal year ended March 31, 1998, the Company acquired five
IT services businesses. Sento believes these acquisitions, summarized in the
following table, form the foundation for its pursuit of the business
strategies described above: See Item 7. Financial Statements for additional
information regarding these acquisitions.
Acquisition Purchase Primary
Acquired Business Date Price (1) Headquarters Services
----------------- ----------- --------- ------------- --------
CDG Technologies, July 1997 60,000 Framingham, IT Sales
Inc. shares Massachusetts
Australian Software July 1997 $2,329,093 Sydney, Software
Innovations Australia Develop-
(Services) Pty. Ltd. ment and
Systems
Consult-
ing
PC Business October 1997 250,000 Upland, Network
Solutions, Inc. shares California Consult-
ing
Software Innovations October 1997 31,750 Herts, IT Sales
Limited shares England
Astron Incorporated December 1997 144,000 Orem, IT
shares Utah Training
(1) Purchase prices for companies acquired in stock exchange transactions are
reflected in shares of Sento Common Stock; the purchase price for ASI, which
was paid in cash, is reflected in U.S. Dollars.
Services and Products
Sento's integrated IT solutions are designed to enable its customers to
effectively utilize leading-edge technology to improve their business
processes and operating results. Sento delivers IT services and products in
three broad categories: training, consulting and technical support services.
IT Training. Sento Training provides instructor-led training in
classroom, seminar, customized corporate and multimedia settings. Sento
Training's objective is to provide high-quality IT training designed to
incorporate leading delivery systems, measurement tools and training
practices. Sento Training currently offers training and related
certification services to IT professionals, including Microsoft Certified
Systems Engineer ("MCSE"), Certified Netware Engineer ("CNE"), Winframe,
Internet and networking technologies. Sento instructors combine their
presentation skills with technical information and years of practical, real-
world experience and examples. Instructors are certified in their area of
instruction, with many having multiple certifications (such as MCSE, MCP,
CNE, and/or CWA) to their credit. The characteristics and applications of
Sento Training's various training settings are summarized in the following
paragraphs:
Classroom. Classroom training is used in areas that demand a high
degree of "hands-on" learning. The technical nature of such courses
mandates the use of hardware and software to produce an effective
learning experience. Class sizes are kept relatively small (usually 20
to 30 students per class) in effort to facilitate a meaningful hands-on
experience for each student. These courses, referred to as "
ProCourses," are comprehensive, hands-on technical courses designed to
prepare students to pass all of the exams required to become a
Microsoft MCSE or MCSE+Internet, Novell CNE, or Citrix Winframe CWA.
These courses include comprehensive study guides, reference materials,
a CD filled with thousands of exam questions and tools, and one year of
personal testing support as students study and prepare to pass
certification exams. Sento believes that the demand for certified IT
personnel currently exceeds the supply of such personnel and that this
trend will continue for the next five to ten years.
Seminar. Seminar training offers a cost-effective learning program
through visual projection and printed instructional materials.
Students can follow step-by-step procedures intended to teach IT
concepts through the instructor's presentation. Seminar training
courses are designed to be fast-paced workshops that deliver a
substantial volume of information in one or two full days. Called
"PowerCourses," these one and two day classes for IT professionals
provide an in-depth look at a particular topic or system. Completion
of a PowerCourse provides practical technical expertise that
immediately translates into improved efficiency and success on the job.
These courses also provide thorough preparation for ProCourse
curricula, leading towards professional certification. Seminar training
is intended to deliver the tips, configurations, tweaks and solutions
required to address obstacles faced by IT professionals. Students are
also provided instruction in the use of IT solutions to maximize their
productivity. In contrast to the classroom approach described above,
seminar training is generally provided to a large number of students
(usually 100 to 500 students per seminar) in an open, lecture-type
format.
Customized Corporate. Sento Training provides on-site customized
corporate training anywhere in the world. Customized corporate
training programs, or "Custom Courses," are designed to re-skill,
update and cross-train a customer's IT professionals. In addition to
standard Sento Training courses, CustomCourse engineers and educators
develop and deliver hands-on training programs tailored specifically
for a company or group. Whether migrating to a tool or system, or
developing an internal product or process, instructors can prepare a
course designed to give employees the skills and information needed
for increased productivity and proficiency. On-site courses can be
tailored to a customer's software and hardware environment, system
development methodology and specific projects. These courses are
highly effective in teaching the required materials and in improving
student information retention. Custom Courses can be designed to
provide organizations with the tools and resources required to
successfully conduct in-house training on their own. These courses,
frequently referred to as "train-the-trainer" courses, include course
materials and instructor guides. Sento Training believes customized
corporate training delivers a number of benefits to customers,
including increased scheduling flexibility and employee satisfaction,
reduced down time, expanded breadth and depth of course materials and a
controlled environment. Courses address key IT areas, including
comprehensive technical introductions, hands-on skill-building courses
and advanced courses in specialized topics as requested by Sento
Training customers.
Multimedia. Multimedia training provides flexible, self-paced learning
programs that can be used whenever and wherever a customer desires.
Sento multimedia courses are designed to be highly effective, cost-
efficient training tools that reduce learning time while increasing
information retention. The two major forms of multimedia training
provided by Sento Training are computer-based training ("CBT") and
video training. Sento Training believes CBT is rapidly becoming an
established training medium in the IT industry. The principal types of
CBT training consist of communication via the Internet and multimedia
courses purchased as CD-ROMs or downloaded from a supplier's website.
Generally, CBT courses are less expensive than traditional classroom
training sessions, with a single CD-ROM product having the potential to
be used many times in multiple settings. Sento Training's CBT courses
are designed to unite proven instructional design with high-quality
visuals, sounds and case studies to provide a stimulating learning
experience. Video training is intended to deliver the excitement of
live training courses within a self-paced environment. Video training
offers both visual and audio instruction that targets the most
important areas of learning for each topic. Video courses are designed
to simplify software manual instructions and explain complicated
procedures and concepts.
IT Consulting. Sento Consulting provides IT consulting services
designed to help customers gain the benefits of advanced technologies
without adding to their in-house staff. Sento Consulting's personnel include
IT experts that are available to augment the internal IT capabilities of its
customers. Sento Consulting believes its customers benefit from a
partnership in developing a strategic plan for current and future IT needs.
IT consulting services may also include planning, design, evaluation,
transition, operations and development for on site and off site customer
projects. Sento Consulting's operations are focused in the areas of
networks, systems and financial applications. These three areas of
operation, which are synergistic in approach and promote cross-sales of
Company products and services, are described below:
Networks. Sento Consulting believes that a significant majority of its
customers, particularly small and mid size companies, rely upon
outsourced IT services in order to gain access to people and companies
with specific expertise in client server technology. Sento Consulting
seeks to provide this expertise through a broad range of network
services. Network consulting services are intended to provide
expertise on network consolidation, performance, support, systems
operations and implementation planning. Network design, migration and
installation services are provided for comprehensive logical and
physical planning of a customer's local area network ("LAN"), wide area
network ("WAN"), Internet and Intranet projects. Technical
documentation and maintenance services assist companies in reporting
the details of their project roll-outs. Network administration and
upgrade maintenance services help customers develop policies,
procedures and methodologies that address their needs for
enterprise wide software distribution, and WAN Internet and Intranet
services. These services also encourage maximum network control and
availability. Many customers require help with implementation and
maintenance of standards throughout their organization.
Systems. In a close relationship with the networking services
described above, Sento Consulting provides systems consulting services
addressing the technology of customer servers and other
mission critical computing needs. Systems consulting services include
complex IT areas, such as hardware, software and operating systems,
that companies must effectively utilize in order to achieve and
maintain a competitive advantage. Systems consulting also contemplates
a close working relationship between Sento Consulting and its customers
in the design and integration of advanced IT systems. A critical
component is the successful integration of multi vendor systems. Sento
Consulting believes its alliances and contracts with major vendors,
including IBM, Digital Equipment Corporation, and Compaq, encourage
flexibility and expand the range of strategic options for the
customer's business. In addition, Sento Consulting maintains expertise
in many complex software technologies, network technologies and
multi vendor environments.
Financial Applications. Sento Consulting believes that providing
organizations with expert planning, design, installation and
comprehensive setup are essential to its customers' successful
utilization of financial information systems. Sento Consulting
currently offers alliances with, and licensing and certification from,
Navision Software US, Inc., with general account expertise to service
customers with annual revenues between $5 million and $100 million.
Sento Consulting provides services designed to customize forms, reports
and user interfaces and to integrate products into the customers'
organization, which Sento Consulting believes are fundamental to the
successful implementation of IT financial products.
IT Technical Support. Sento Technical Services offers a broad range of
IT outsourcing services consisting principally of call center, helpdesk and
product support services. Sento Technical Services utilizes advanced
systems, including client-server-based database and reporting systems,
Internet, LAN and multi-user systems and Computer Telephone and Database
Integration ("CTI"), Integrated Voice Response ("IVR") and Integrated Fax
Retrieval ("IFR") technologies, to provide timely technical support to its
customers, enabling those customers to focus increased attention on their
core business operations.
Helpdesk. Helpdesk services are provided by vendor-certified
professionals acting on behalf of a customer to provide end users and
IT staffs with a knowledgeable resource to address questions and
problems involving applications, integrated desktop, network support or
customized areas of need. Helpdesk personnel provide flexible services
of a moderately technical nature that can be easily scaled to meet a
customer's changing technical support requirements. Utilizing Sento
Technical Services personnel, customers can develop a program that
meets their requirements, then implement the program rapidly as a
complete helpdesk solution or as a supplement to the customer's on-site
facility. In addition, Sento Technical Services can dispatch trained
engineers to customer or end-user locations when necessary to provide
on-site solutions.
Product Support. Product Support services are targeted towards
original equipment manufacturers ("OEMs"), software publishers,
hardware system manufacturers and other organizations requiring high-
quality technical services. These services, which are more technical
in nature than helpdesk or call center services, are designed to
provide customers with immediate and efficient access to "best-of-
class" product support. Sento Technical Services delivers
comprehensive first-level support to end users and manufacturers,
combining hardware and network support with application support for
proprietary and off-the-shelf programs.
International Operations In July 1997, Sento acquired substantially
all of the assets of ASI, including the OpenAviator suite of UNIX-based
management and performance monitoring utilities . Shortly thereafter, Sento
sold the OpenAviator product suite to BMC Software, Inc. ("BMC") and agreed
to provide related product support services during a transition period which
is presently scheduled to expire on December 31, 1998. Sento contributed the
remainder of the ASI assets to Sento Australia, which acts as a reseller for
BMC's Patrol product line. These software sales are complemented by
professional consultancy and integration, performance tuning education, and
customized configuration and development services.
Sento Australia's Sydney development team, combined with Sento's
development and support center located in Orem, Utah, cater to and support
joint development efforts with OEMs throughout the world. ASI is also the
direct Asian distributor for Corel WordPerfect for Open VMS and UNIX, Lotus
1-2-3 for Open VMS, virus detection software, and a number of other leading
software products for end-user, Internet/Intranet, and systems management
markets. The Company also markets its services and products in European
markets through Sento Ltd, a wholly-owned subsidiary of the Company formed in
connection with the Company's acquisition of Software Innovations Ltd. in
October 1997.
Competition
The IT industry is highly competitive, global in scope and comprised of
myriad enterprises and individuals. Methods of competition within the
industry include, but are not limited to, marketing, product performance,
price, service, technology and compliance with industry standards. Sento
anticipates that present and potential competition in the various markets
served by the Company will come from enterprises and individuals of various
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. Sento
believes that its efforts to implement its strategy of delivering integrated
IT solutions, if successfully implemented, may constitute a competitive
advantage.
As the Company has completed its transition to the delivery of
outsourced IT services, it has encountered a new range of competitors within
each of the training, consulting and technical services industry segments.
Each of the three industry segments exhibits unique characteristics and is
rapidly growing and highly competitive. Among other competitors, Sento
Training faces competition from large hardware and software vendors, as well
as many independent international, national, regional and local training
companies. Sento Consulting's principal competitors include software
vendors, consulting divisions of large international accounting and
consulting firms and independent international, national, regional and local
training companies. Sento Technical Services also faces significant and
diverse competition from a broad spectrum of international, national,
regional and local enterprises.
Supplier Relationships
Sento obtains hardware and software products from numerous third-party
vendors, many of which are the sole sources for such products. The Company
then integrates the various hardware and software components in the IT
services it provides. If any such third-party products were to become
unavailable to the Company, management believes that the Company would be
able to identify and acquire competing and alternate sources of supply for
similar but not identical products. Nonetheless, the failure of such
suppliers to deliver third-party items on a timely basis could adversely
effect the Company's operating results until alternative sources of supply
could be arranged. In addition, the Company has entered into license
agreements relating to certain office automation products. If any such
license agreement 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 sale 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 seeking trade name 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
trade names 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, the Company has not incurred significant
expenses for research and development.
Employees
As of June 12, 1998, the Company had approximately 160 total employees,
approximately 138 of which were full-time employees. Competition for
qualified personnel in the IT 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 of the Company are presently located at 311 North
State Street, Orem, Utah. The Company owns a 5,200 square foot building,
subject to encumbrances of $113,634 and $94,423 at March 31,1998, which bear
interest at rates of 8.25% and 8.70%, respectively. In addition, at the Orem
location the Company occupies 22,000 square feet of contiguous space under
two leases, both on a month-to-month lease arrangement. The Company also
leases facilities in Sydney, Australia (4,100 square feet); Herts, United
Kingdom (1,500 square feet).; Upland, California (7,297 square feet);
Framingham, Massachusetts (2,750 square feet); and Bountiful, Utah (1,400
square feet). The lease terms vary from monthly to four years.
On August 1, the Company anticipates that it will relocate its
corporate headquarters to a new corporate facility located at 808 East Utah
Valley Drive, American Fork, Utah 84003. These premises will consist of
40,000 square feet of office space and will house the Company's corporate,
administrative, finance and accounting, human resources, sales and marketing,
technical services, training, and systems departments. The Company is
presently in the final stages of negotiating the lease agreement for its new
headquarters. The Company is also in the process of negotiating the sale of
its existing Orem headquarters facilities and anticipates that it will
terminate its leases of the adjacent leased facilities.
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 fiscal year covered by this report.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.
The Company's Common Stock, par value $.25 ( the "Common Stock"), is
listed and traded under the 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 high and low closing 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 high and low closing sales prices for the Common Stock on the Nasdaq Small
Cap Market, as reported by the NASD 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.
Bid Prices/Sales Prices
Quarter Ended High Low
------------- ------ -------
March 31, 1998 .......... $4.50 $3.875
December 31, 1997 ........ 4.75 4.063
September 30, 1997 ........ 5.50 4.25
June 30, 1997 .......... 5.375 3.87
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
The Company did not pay or declare dividends on the Common Stock during
the periods ended March 31, 1998 and 1997. The Company currently anticipates
that it will retain all available funds to finance its future growth and
business expansion. The Company does not presently intend to pay cash
dividends in the foreseeable future.
As of June 12, 1998, the Company had 5,814,957 shares of Common Stock
outstanding, held by 428 shareholders of record, which does not include
shareholders whose shares are held in securities position listings.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Historically, Sento has acted as a distributor/value added reseller
(VAR) for a variety of software publishers and computer hardware
manufacturers. The focused market niche for these products is within the
mid-range client/server heterogeneous operating systems environment. As part
of its ongoing efforts to support and supply its customers with complete
information technology (IT) solutions the Company developed an expertise in a
number of systems operating environments and began a support/help desk
service for a number of its corporate customers. The Company has continued
to expand its technical resources by increasing support personnel and
expanding its marketing of consulting services to generate additional
revenues.
As the mid-range market began to mature, competition increased and
margins began to shrink. During the past year, the Company began to migrate
its business focus from that of a VAR to IT services including: helpdesk,
systems configuration, and other general consulting services which carry
higher margins and have greater market demand. The Company is now focused in
three major areas of supplying IT services: IT consulting, training and
technical support. The revenues of the Company during fiscal 1998 from these
three activities were as follows: Consulting, which includes systems and
network configuration, computer hardware and software sales, contributed
approximately 96% of revenues; training contributed approximately 4 percent
of revenues; and help desk support contributed approximately 15% of revenues
which is included in the Software licenses and maintenance revenue.
Sento management has concentrated its efforts to expand the areas of IT
training and technical support. These two markets are expected to comprise
an increasing share of the Company's revenues in future periods.
No single market sector represents a dominant portion of the Company's
revenue base. For the fiscal year ended March 31, 1998, Government and
educational institutions represented approximately 30% of revenues, and small
to large corporations represented the remaining 70%. No single customer
currently represents more than 10% of the Company revenues. Sento sells its
products and services through a direct sales force of 40 representatives in
the United States and through its subsidiaries in Australia and the United
Kingdom. Domestic sales represented approximately 91% of total revenues with
international sales representing the remaining approximately 9%.
Sento's revenues are derived from its consulting and training services
and sales and maintenance of its software products. Sento derives software
revenue from the sale of product lines within the mid-range client/server
market niche and UNIX platform, and from support contracts with clients who
purchase the software products. The core of software sales continues to be
the Company's proprietary products, as well as third-party products designed
to assist with office automation, help desk, and internet security.
Consulting revenue is derived primarily from professional fees billed to
clients. Training revenue is derived from fees charged to clients for
training provided at various sites throughout the country. In its open
enrollment classes, the Company seeks to fill each available seat in each
scheduled class. The Company continuously monitors this fill rate and may
cancel or reschedule classes that are underenrolled. Revenue for a training
class is recognized in the month in which the first day of the training event
falls.
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 for the 1998 fiscal year reflects the Company's operations during
the twelve months ended March 31, 1998. Information set forth for the 1997
fiscal year reflects the Company's operations during the eleven months ended
March 31, 1997. Information set forth for the 1996 fiscal year reflects the
Company's operations during the twelve months ended April 30, 1996.
<PAGE>
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>
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.
1998(1) 1997(3) 1996(4)
----------------------- ------------------ --------- -------------------
Percent- Percent-
Percent- age age
age Percent- of Percent- of
of age Revenues age Revenue
Amount Revenue Change Amount (2) Change Amount (2)
----------- --------- -------- ---------- -------- -------- ---------- --------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses and
maintenance . . . . . . $10,266,658 50% 16% $8,855,887 50% 15% $7,694,695 55%
Hardware sales and
services . . . . . . . 9,654,457 46% 10% 8,753,699 50% 42% 6,178,706 45%
Training . . . . . . . 718,730 4% 100% 0 - - 0 --
----------- ---------- ----------
Total Revenues . . . . 20,639,845 100% 17% 17,609,586 100% 27% 13,873,401 100%
----------- ---------- ----------
Cost of Sales(2):
Software licenses and
maintenance . . . . . . 5,982,365 58%(2) 52% 3,927,280 44%(2) 27% 3,100,738 40%(2)
Hardware sales and
services . . . . . . . 8,056,077 83%(2) 7% 7,514,278 86%(2) 40% 5,351,305 87%(2)
Training . . . . . . . 188,629 26%(2) N/A 0 - - 0 --
----------- ---------- ----------
Total Cost of Sales . . 14,227,071 69% 25% 11,441,558 65% 35% 8,452,043 61%
----------- ---------- ----------
Gross Profit 6,412,774 31% 5% $6,168,028 35% 14% $5,421,358 39%
----------- ---------- ----------
Operating
Expenses:
Selling, General &
Administration . . . . 9,401,037 46% 65% $5,711,061 32% 24% 4,605,402 33%
Research & Development 78,875 0% (85)% 524,787 3% 96% 268,028 2%
----------- ---------- ----------
Operating Income (Loss) (3,067,138) (15)% (4422)% (67,820) - (112)% 547,928 4%
----------- ---------- ----------
Other Income (Expense) 3,432,203 17% 3127% 106,375 - 1015% (11,628) -
Income before Taxes . . 365,065 2% 847% 38,555 -- 100% 536,300 --
Income Tax Expense . . 302,090 83%(5) 1772% 16,139 - (92)% 196,745 37%(5)
----------- ---------- ----------
Net Income . . . . . . 62,975 1% 181% 22,416 - (93)% 339,555 2%
=========== ========== ==========
Cash and Cash
Equivalents . . . . . . 5,807,014 161% 2,225,338 43% 1,552,806
Working Capital . . . . 5,668,917 165% 2,139,580 127% 943,332
Total Assets . . . . . 15,860,652 125% 7,049,268 55% 4,544,825
Stockholders' Equity . 7,574,578 143% 3,113,651 110% 1,480,907
</TABLE>
___________________
(1) Reflects the Company's operations for the twelve months ended March 31,
1998.
(2) Percentages shown for Cost of Sales figures reflect cost of sales as a
percentage of the corresponding revenue category only, not as a percentage
of total revenues.
(3) Reflects the Company's operations for the eleven months ended March 31,
1997.
(4) Reflects the Company's operations for the twelve months ended April 30,
1996.
(5) Income tax expense as a percentage of Income before Taxes.
<PAGE>
Fiscal 1998 Compared to Fiscal 1997
Revenues. Revenues for the twelve months ended March 31,
1998 increased to $20,639,845 from $17,609,586 for the eleven months ended
March 31, 1997, an increase of 17%. The increase in revenues reflects
increases in both software product sales (16%) and hardware product sales
(10%). The increase in software product sales resulted primarily from an
increase in software sales produced by several of the companies acquired by
Sento during the year, offset in part by a decrease in revenues from sales
of the Company's proprietary software products, as a result of the sale of
the Company's core software product (OpenAviator) to BMC in July 1997. The
increase in hardware sales and services resulted primarily from internally
generated growth and expansion of the Company's operations, now conducted
by Sento Consulting. In addition, revenues from IT training commenced in
the fourth quarter with the acquisition of Astron Incorporated,
contributing $718,730 in training revenues.
Gross Profit. Gross profit increased from $6,168,028, or
35% of revenues, for the eleven months ended March 31, 1997, to $6,412,774,
or 31% of revenues, for the twelve months ended March 31, 1998. The
decrease in gross margin percentages for each of the past two years is
reflective of the changing market conditions affecting VARs such as Sento.
The market for mid-range client-server-related hardware and software has
become increasingly competitive and the margins for these products have
continued to tighten and deteriorate for distributors and resellers
operating in this market niche. Management recognized this trend, and
began over the past year to implement initiatives to focus the Company's
business activities in its own products and services.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased from $5,711,061, or 32% of
revenues, for the eleven months ended March 31, 1997, to $9,401,037, or 46%
of revenues, for the twelve months ended March 31, 1998. In July 1997, the
Company sold the rights to its OpenAviator product line to BMC. Prior to
the sale of the OpenAviator product, approximately 50% of the Company's
sales and marketing efforts were focused on the sales of that product line.
Subsequent to the OpenAviator sale, the Company's sales and technical
support costs continued for several months, without the generation of sales
revenues, while those personnel were being transitioned to other
responsibilities. In addition, the Company acquired five companies during
the fiscal year and expanded its senior management team. Costs associated
with the assimilation of the acquisitions and the inefficiencies associated
with absorbing those operations also contributed to increased
administrative expenses during the twelve months ended March 31, 1998.
Research and Development Expenses. For the eleven months
ended March 31, 1997, research and development expenses were $524,787, or
three percent of revenues, compared to $78,875, or less than one-half
percent of revenues, for the twelve months ended March 31, 1998. Several
newly licensed software products which were completed in fiscal 1997 were
released into the marketplace in fiscal 1998, thereby concluding most of
the Company's development efforts and related costs.
Operating Loss. Loss from operations increased from $67,820
for the period ended March 31, 1997 to $3,067,138 for the year ended March
31, 1998. Much of this loss related to continued expenses and operating
costs associated with personnel restructuring following the sale of the
OpenAviator product to BMC. (Subsequent to that sale, the Company
maintained the sales, technical, and software development staff and began
to transition those personnel into other divisions with the Company). In
addition, costs associated with the Company's 1997 acquisitions along with
the costs of merging operations also contributed to higher operations
costs.
Other Income (Expense). Other income increased from
$106,375 for the eleven months ended March 31, 1997 to $3,432,203 for
the twelve months ended March 31, 1998. Other income for the twelve months
ended March 31, 1998 includes: (1) Proceeds of approximately $3,214,107
(net of direct expenses) resulting from the sale of the Company's
OpenAviator product line to BMC in July 1997 (See Note 2 to Financial
Statements set forth in Item 7. hereof); (2) interest income of $358,466,
compared to $67,769 for the eleven months ended March 31, 1997; and (3)
interest expense of $86,518, compared to $21,878 for the eleven months
ended March 31, 1997.
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 reflected
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, 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 a private placement transaction 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.
Liquidity and Capital Resources
During the twelve months ended March 31, 1998 and the eleven
months ended March 31, 1997, the Company used cash for operating activities
in the amounts of $2,723,903 and $874,429 respectively. For the same
years, net cash increased $3,581,676 and $672,532 respectively. The
Company's cash at the end of the twelve months ended March 31, 1998
reflected the additional cash of $5,600,000 obtained by the Company in the
sale of the OpenAviator product line and related support services to BMC,
cash of $1,000,000 from the issuance of a convertible bond to Canadian
Imperial Holdings, Inc. Bank, and cash of $2,937,380 obtained through the
issuance of 720,000 shares of Common Stock and warrants to purchase 240,000
additional shares of Common Stock pursuant to a private placement
transaction completed in August, 1997. Cash at the end of fiscal 1997
reflected the addition of $1,561,168 obtained through the issuance of
446,048 shares of Common Stock and warrants to purchase 223,024 additional
shares of Common Stock pursuant to a private placement transaction which
closed in June 1996.
Working capital increased from $2,139,580 at March 31, 1997
to $5,668,917 at March 31, 1998. The Company's current ratio increased
from 1.57 at March 31, 1997 to 1.87 at March 31, 1998. This increase was
due principally to cash received from the OpenAviator sale and the private
placement transaction in August 1997.
The Company continues to evaluate opportunities for 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 believes that the net proceeds of its two
private placements and the sale of the OpenAviator product line, together
with existing borrowing sources, will provide adequate cash to fund its
current operations and anticipated cash needs for the foreseeable future.
Year 2000
The Company has conducted preliminary diagnostic
examinations in an effort to assess the potential impact of Year 2000
issues on its operations. Based upon those preliminary examinations, the
Company does not believe the Year 2000 issue will have a significant impact
on the Company's internal operations or on solutions sold by the Company.
There can be no assurance, however, that the Company will not experience
interruptions of operations because of Year 2000 problems or become
involved in disputes with clients regarding Year 2000 problems involving
solutions developed or implemented by the Company or the interaction of
such solutions with other applications. Year 2000 problems could require
the Company to incur unanticipated expenses, and such expenses could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, the purchasing patterns of clients or
potential clients may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase services offered by the Company.
Factors Affecting Future Results
The statements contained in this Report on Form 10-KSB that
are not purely historical are "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All
forward looking statements involve various risks and uncertainties.
Forward looking statements contained in this Report include statements
regarding Sento's plans to develop and deliver integrated information
technology services, acquisition plans, market opportunities and
acceptance, expectations, goals, revenues, financial performance,
strategies, mission and intentions for the future. Such forward looking
statements are included under Item 1. "Business," Item 2. "Description of
Property" and Item 6. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." All forward looking statements
included in this Report are made as of the date hereof, based on
information available to Sento as of such date, and Sento assumes no
obligation to update any forward looking statement. It is important to
note that such statements may not prove to be accurate and that Sento's
actual results and future events could differ materially from those
anticipated in such statements.
There are a number of important factors that could cause
actual events or Sento's actual results to differ materially from the
Company's expectations. These factors include, without limitation, the
availability of qualified technical employees and Sento's ability to
attract and retain such employees, Sento's ability to execute its new
business strategy, Sento's ability to identify and integrate attractive
acquisition candidates, the highly competitive information technology
environment and Sento's response to competitive pressures, Sento's
efforts to respond to growth of its business, availability of capital to
fund Sento's growth strategy, economic fluctuations, and other
anticipated factors. All subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by this section and other
factors included elsewhere in this Report. Readers should also refer
to risk disclosures contained in the Company's filings with the
Securities and Exchange Commission.
Item 7. Financial Statements.
The financial statement information required by Item 7
is included on pages F-1--F-20 thereof.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None
<PAGE>
PART III
Items 9, 10, 11 and 12.
These items are incorporated by reference to the Company's
definitive proxy statement relating to the Company's Annual Meeting of
Shareholders scheduled for August 11, 1998. The definitive proxy statement
will be filed with the Commission not later than 120 days after March 31,
1998, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended.
Item 13. Exhibits and Reports on Form 8-K.
(a) EXHIBITS
Incorpora
ted
by Filed
Number Description Reference Herewith
------ ----------- --------- --------
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (2)
10.1 Exclusive License and Technical (2)
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 (3)
Company, Australian Software
Innovations (Services) Pty. Ltd, Kilat
Holdings Pty. Limited, and Eng Lee and
Mary Lee, dated September 10, 1996
10.3 ASI Asset Purchase Agreement dated as (4)
of July 9, 1997
10.4 ASI Intellectual Property Purchase (4)
Agreement dated as of July 9, 1997
10.5 Deed of Restraint of Trade dated as of (4)
July 9, 1997
10.6 Services Agreement dated as of July 9, (4)
1997
10.7 Consulting Agreement dated as of July (4)
9, 1997
10.8 Consulting Agreement dated as of July (4)
9, 1997
10.9 Asset Purchase and Services Agreement (4)
10.10 Sento Technical Innovations (5)
Corporation Stock Incentive Plan
10.11 PC Business Solutions Acquisition (6)
Agreement, dated as of October 1, 1997
10.12 Astron Incorporated Acquisition (7)
Agreement, dated as of November 19,
1997
10.13 Amendment No. 1 to Astron Incorporated (7)
Acquisition Agreement, dated as of
December 31, 1997
10.14 Employment Agreement with Kieth (8)
Sorenson
21 Subsidiaries of the Registrant (8)
23 Consent of KPMG Peat Marwick LLP (8)
27 Financial Data Schedule (8)
(1) Incorporated by reference to the exhibits to Registration
Statement No. 333-36251 on Form S-3 filed with the
Commission on September 24, 1997.
(2) Incorporated by reference to Annual Report on Form 10-KSB
for the fiscal year ended April 30, 1996, filed with the
Commission on July 29, 1996, as amended by Form 10-KSB/A
filed with the Commission on August 1, 1996.
(3) Incorporated by reference to exhibits to Amendment No. 1 to
Registration Statement on Form S-1, filed with the
Commission on November 1, 1996.
(4) Incorporated by reference to a Current Report on Form 8-K
filed with the Commission on July 28, 1997.
(5) Incorporated by reference to the Company's definitive proxy
statement for the annual meeting of the Company's
shareholders held on August 18, 1997.
(6) Incorporated by reference to a Current Report on Form 8-K
filed with the Commission on October 15, 1997
(7) Incorporated by reference to a Current Report on Form 8-K
filed with the Commission on January 15, 1997.
(8) Filed herewith and attached to this Form 10-KSB following
page F-20 hereof.
(b) REPORTS ON FORM 8-K
The Company filed its Current Report on Form 8-K on January
15, 1998 to disclose the purchase of Astron Incorporated and certain
matters related thereto.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on June 29, 1998.
SENTO TECHNICAL INNOVATIONS CORPORATION
By: /s/ KIETH E. SORENSON
Kieth E. Sorenson
Chairman of the Board, President
and Chief Executive Officer
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 indicated on June 29, 1998.
Signature Capacity in Which Signed
--------- ------------------------
Chairman of the Board, President
/s/ KIETH E. SORENSON and Chief Executive Officer
Kieth E. Sorenson (Principal executive officer)
/s/ ROBERT K. BENCH Chief Financial Officer (Principal
Robert K. Bench financial and accounting officer)
/s/ WILLIAM A. FRESH Director
William A. Fresh
/s/ GARY B. GODFREY Director
Gary B. Godfrey
/s/ SHERMAN H. SMITH Director
Sherman H. Smith
/s/ ENG H. LEE Director
Eng H. Lee
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' 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, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended March 31, 1998 and the eleven
months ended March 31, 1997. 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 did not audit the financial statements of Software Innovations Limited or
Sento Australia Pty Limited, wholly-owned subsidiaries, which financial
statements reflect total assets constituting 7.5 percent and total revenues
constituting 5.7 percent as of March 31, 1998 of the related consolidated
totals. Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
included for these companies, is based solely on the reports of the other
auditors.
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, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Sento Technical Innovations
Corporation and subsidiaries as of March 31, 1998 and 1997, and the results
of their operations and their cash flows for the year ended March 31, 1998
and the eleven months ended March 31, 1997, in conformity with generally
accepted accounting principles.
Salt Lake City, Utah
June 16, 1998
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 and 1997
Assets 1998 1997
------ ----------- ---------
Current assets:
Cash and cash equivalents $ 5,807,014 2,225,338
Accounts receivable, less allowance for doubtful
accounts of $397,842 in 1998 and $223,210 in
1997 4,076,715 3,140,425
Inventories 302,172 155,465
Prepaid taxes 322,112 -
Notes receivable, current portion (note 3) 39,500 -
Other current assets (note 2) 1,434,907 241,644
Deferred tax assets (note 7) 218,540 98,917
---------- ---------
Total current assets 12,200,960 5,861,789
Property and equipment (notes 4 and 5): 1,274,902 711,079
Intangible assets, less amortization of $214,584
in 1998 1,513,758 -
Notes receivable, less current portion (note 3) 98,500 -
Other assets (note 2) 772,532 476,400
---------- ---------
$ 15,860,652 7,049,268
========== =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt (note 5) $ 131,774 8,286
Accounts payable 2,720,562 2,216,634
Accrued liabilities 1,399,197 260,274
Income taxes payable (note 7) - 132,207
Deferred revenue 2,280,510 1,104,808
--------- ---------
Total current liabilities 6,532,043 3,722,209
--------- ---------
Long-term liabilities:
Deferred revenue 175,000 -
Convertible bonds (note 6) 944,533 -
Long-term debt, excluding current portion (note
5) 362,959 208,075
Deferred tax liabilities (note 7) 271,539 5,333
--------- --------
Total long-term liabilities 1,754,031 213,408
--------- --------
Commitments (note 8)
Stockholders' equity (notes 2 and 10):
Common stock, $.25 par value. Authorized
15,000,000 shares; issued and outstanding
5,741,063 shares in 1998 and 4,351,228 shares in
1997 1,435,268 1,087,808
Additional paid-in capital 5,950,290 1,595,352
Cumulative effect of foreign currency translation (49,889) -
Deferred compensation (338,357) (100,000)
Retained earnings 577,266 530,491
--------- ---------
Total stockholders' equity 7,574,578 3,113,651
---------- ---------
$ 15,860,652 7,049,268
========== =========
See accompanying notes to the consolidated financial statements.
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Eleven months
Year ended ended
March 31, April 30,
1998 1997
----------- -------------
Revenues:
Software licenses and maintenance $ 10,266,658 8,855,887
Hardware sales and service 9,654,457 8,753,699
Consulting and other services 718,730 -
---------- ----------
Total revenues 20,639,845 17,609,586
---------- ----------
Cost of sales:
Software licenses and maintenance 5,982,365 3,927,280
Hardware sales and service 8,056,077 7,514,278
Consulting and other services 188,629 -
---------- ----------
Total cost of sales 14,227,071 11,441,558
---------- ----------
Gross profit 6,412,774 6,168,028
Selling, general, and administrative 9,401,037 5,711,061
expenses
Research and development expense 78,875 524,787
---------- ---------
Loss from operations (3,067,138) (67,820)
Other income (expense):
Interest income 358,466 67,769
Interest expense (86,518) (21,878)
Other income, net (note 2) 3,160,255 60,484
--------- ---------
Total other income (expense) 3,432,203 106,375
--------- ---------
Income before taxes 365,065 38,555
Income tax expense (note 7) 302,090 16,139
--------- ---------
Net income $ 62,975 22,416
========= =========
Net income per share:
Basic $ .01 .01
Diluted .01 .00
See accompanying notes to the consolidated financial statements.
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year ended March 31, 1998 and eleven months ended March 31, 1997
<TABLE>
<CAPTION>
Cumu-
lative
effect of
Add- foreign Total
Common Stock itional currency Deferred Re- stock
--------------------- paid-in trans- compen- tained holder's
Shares Amount captial lation sation earnings equity
--------- --------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at April 30, 1996 3,891,325 $972,832 - - - 508,075 1,480,907
Issuance of common stock for cash
(note 10) 446,048 111,512 1,449,656 - - - 1,561,168
Employee stock purchases (note 10) 13,855 3,464 38,696 - - - 42,160
Deferred compensation related to
grant of stock warrants - - 107,000 - (107,000) - -
Amortization of deferred compensation - - - - 7,000 - 7,000
Net income - - - - - 22,416 22,416
--------- --------- --------- --------- --------- -------- ---------
Balances at March 31, 1997 4,351,228 1,087,808 1,595,352 - (100,000) 530,491 3,113,651
Issuance of common stock for cash
(note 10) 720,000 180,000 2,757,380 - - - 2,937,380
Issuance of common stock in lieu of
compensation 76,000 19,000 209,025 - - - 228,025
Issuance of warrants with
convertible bonds - - 55,465 - - - 55,465
Exercise of warrants 5,000 1,250 16,250 - - - 17,500
Exercise of stock options for common
shares and cash 92,262 23,066 (20,881) - - - 2,185
Common stock issued for business
combinations (note 2) 485,750 121,438 968,450 - - (16,200)1,073,688
Employee stock purchases (note 10) 10,823 2,706 35,113 - - - 37,819
Deferred compensation related to
grant of stock options and warrants
(note 10) - - 334,136 - (334,136) - -
Amortization of deferred compensation
(note 10) - - - - 95,779 - 95,779
Effect of change in foreign currency
translation - - - (49,889) - - (49,889)
Net income - - - - - 62,975 62,975
--------- --------- ---------- --------- -------- -------- ---------
Balances at March 31, 1998 5,741,063 $1,435,268 5,950,290 (49,889) (338,357) 577,266 7,574,578
========= ========= ========== ========= ========= ======== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Eleven
months
Year ended ended
March 31, March 31,
1998 1997
---------- ----------
Cash flows from operating activities:
Net income $ 62,975 22,416
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 385,292 176,685
Amortization of deferred compensation 95,779 7,000
Provision for losses on accounts receivable 174,632 85,276
Common stock issued in lieu of compensation 228,025 -
Net gain on disposition of assets (3,160,255) -
Changes in operating assets and liabilities:
Accounts receivable (342,166) (1,049,059)
Inventories (41,288) (155,465)
Other assets (291,950) (783,838)
Deferred income taxes 146,583 (62,443)
Accounts payable (249,741) 1,166,099
Accrued liabilities 423,398 (228,386)
Income taxes payable (339,603) 79,492
Deferred revenue 184,416 (132,206)
---------- ----------
Net cash used in operating activities (2,723,903) (874,429)
Cash flows from investing activities:
Expenditures for business acquisition (2,199,093) -
Capital expenditures (341,401) (246,316)
Proceeds from sale of assets 5,600,000 197,000
Issuance of notes receivable (110,000) -
--------- ----------
Net cash provided by (used in) investing 2,949,506 (49,316)
activities
Cash flows from financing activities:
Proceeds from issuance of stock 2,977,382 1,603,328
Proceeds from issuance of long-term debt 182,586 -
Principal payments of long-term debt (771,506) (7,051)
Foreign currency transactions (49,889) -
Proceeds from exercise of warrants 17,500 -
Proceeds from issuance of convertible bonds 1,000,000 -
--------- ----------
Net cash provided by financing activities 3,356,073 1,596,277
--------- ----------
Net increase in cash and cash equivalents 3,581,676 672,532
Cash and cash equivalents at beginning of 2,225,338 1,552,806
period --------- ---------
Cash and cash equivalents at end of period $5,807,014 2,225,338
========= =========
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Eleven
months
Year ended ended
March 31, March 31,
1998 1997
----------- ----------
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $ 86,518 21,878
Income taxes 646,745 -
Supplemental Disclosures of Non-cash Investing and
Financing Activities
Options exchanged for common stock $ 22,622 -
Deferred taxes related to assets acquired in 280,000 -
business combinations
Assets acquired and liabilities assumed through -
business acquisitions paid for with common stock:
Assets acquired:
Accounts receivable $ 466,505 -
Inventory 101,206 -
Notes receivable 28,000 -
Prepaid taxes 114,715 -
Other assets 1,496,085 -
Fixed assets 239,973 -
--------- -----
Assets acquired 2,446,484 -
Less liabilities assumed:
Long-term debt (309,040) -
Accounts payable (650,290) -
Accrued liabilities (343,012) -
Deferred revenue (70,454) -
--------- -----
Net assets acquired with common stock $1,073,688 -
========== ======
See accompanying notes to the consolidated financial statements.
<PAGE>
SENTO TECHNICAL INNOVATIONS CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
Description of Business
Sento Technical Innovations Corporation (Sento) provides integrated
information technology (IT) solutions for Windows NT, UNIX, Open VMS,
Internet/Intranet, and networked computing environments. Through its wholly-
owned subsidiaries, Sento delivers outsourced training, consulting, technical
support services, and software solutions.
Sento Training Corporation provides classroom training courses, seminar
training workshops, customized corporate training programs, and multi-media
presentations, all of which are designed to teach and reinforce skills
required to make IT systems work effectively. Sento Consulting Corporation
delivers customized IT consulting services intended to help Sento clients
realize the benefits of advanced IT solutions in the areas of network,
systems, and financial information consulting. Sento Technical Services
Corporation offers a range of IT outsourcing services consisting of "call
center," "helpdesk," and technical support services. DewPoint Distributed
Solutions Incoporation provides distribution, reseller, and channel
management for leading software manufacturers.
In addition, the Company conducts substantially all of its foreign operations
through Sento Australia Pty. Limited, based near Sydney, Australia and Sento
Limited, located near London, England. Revenues from foreign sales for the
periods ended March 31, 1998 and 1997, were approximately nine percent and
eight percent of total sales, respectively.
Historically, Sento operated as Value Added Reseller generating revenues from
its sales and distribution of third party hardware and software products. As
a reseller, the Company is dependent on third-party suppliers, with over
forty-five percent of the Company's revenues derived from products it obtains
from two suppliers. During the past year, the Company began a strategic
transition using its technical core competencies to offer IT outsourcing
services such as help desk, systems and network consulting, and IT training.
Basis of Presentation
The consolidated financial statements include the consolidated financial
statements of Sento and its wholly-owned subsidiaries (collectively, the
Company). 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturates
of three months or less to be cash equivalents. Cash equivalents at March
31, 1998 consist of a $300,000 certificate of deposit which is held as
collateral for a $300,000 letter of credit in favor of one of the Company's
vendors.
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.
Revenue Recognition
Revenue from the sale of software licenses and hardware sales is recognized
at the time of delivery. Revenues from maintenance contracts and customer
training and service are recognized as the service is performed. Deferred
revenues consist of payments received on software maintenance contracts and
recorded as revenue over the period of the contract, which is typically one
year.
Property and Equipment
Property and equipment 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:
Buildings 40 years
Furniture and equipment 3-10 years
Transportation equipment 5 years
Research and Development
Research and development costs are expensed as incurred.
Software Development Costs
Certain software development costs are capitalized once technological
feasibility is established, which is defined by the Company as the completion
of a working model of the software. To date, no costs have been capitalized
as the impact on the financial statements for all periods presented is not
material.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and deferred tax 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.
Foreign Currency Translation
The local foreign currency is the functional currency for the Company's
foreign subsidiaries. Assets and liabilities of foreign operations are
translated to U.S. dollars at the current exchange rates as of the applicable
balance sheet date. Revenues and expenses are translated at the average
exchange rates prevailing during the period. Adjustments resulting from
translation are reported as a separate component of stockholders' equity.
Certain transactions of the foreign subsidiaries are denominated in
currencies other than the functional currency, including transactions with
the parent company. Transaction gains and losses are included in other
income (expense) for the period in which the transaction occurs.
Intangible Assets
Intangible assets include goodwill and noncompete agreements. Goodwill is
amortized over five years and noncompete agreements are amortized over the
life of the agreements, generally two years. Amortization expense for 1998
was $214,584.
On an ongoing basis, management reviews the valuation of intangible assets to
determine possible impairment by comparing the carrying value to the
undiscounted estimated future cash flows of the related business.
Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
128). SFAS 128 became effective for financial statements with interim and
annual periods ending after December 15, 1997. Accordingly, the Company has
adopted SFAS 128. SFAS 128 establishes a different method of computing
earnings per common share than was previously required under the provisions
of Accounting Principles Board Opinion No. 15. SFAS 128 requires the
presentation of basic and diluted earnings per common share. Basic earnings
per common share is the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. Diluted
earnings per common share is the amount of earnings for the period available
to each share of common stock outstanding during the reporting period and to
each share that would have been outstanding assuming the issuance of common
shares for all dilutive potential common shares outstanding during the
period. Prior periods have been restated for presentation in accordance with
SFAS 128.
Net Income Per Common Share (continued)
A reconciliation between net income for calculation of basic net income per
common share and net income for calculation of diluted net income per common
share is as follows:
1998 1997
------ ------
Net income available to common stockholders $ 62,975 22,416
Interest expense, net of tax, related convertible
bonds 29,323 -
------ ------
Net income available to common stockholders after
assumed conversions $ 92,298 22,416
====== ======
A reconciliation between the basic and diluted weighted average number of
common shares for 1998 and 1997, is as follows:
1998 1997
------ ------
Basic weighted average number of common shares
outstanding during the year 5,017,203 4,256,686
Weighted average number of common stock options
and warrants outstanding during the year 238,517 224,814
Common shares issuable on conversion of
convertible bonds 209,689 -
--------- ---------
Diluted weighted average number of common shares
outstanding during the year 5,465,409 4,481,500
========= =========
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.
Reclassifications
Certain items in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation.
(2) Business Acquisitions and Asset Dispositions
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 reseller and developer of
computer software. ASI is a limited company organized under the laws of the
Commonwealth of Australia. 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 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 nonrefundable license
fee in the amount of $550,000 and agreed to pay royalties to ASI during the
term of the ASI License Agreement.
On September 10, 1996, the Company entered into an option agreement (ASI
Option) with ASI. Under the terms of the ASI Option, ASI granted the Company
a one year option to acquire all or any portion of the tangible and
intangible assets of ASI. As consideration for the ASI Option, the Company
paid ASI $130,000.
On July 9, 1997, the Company exercised its option under the ASI Option
Agreement. The Company paid a total of $2,329,093 including the $130,000
paid for the ASI Option. Upon exercise of the ASI option, the Company
acquired certain tangible and intangible assets, including, ASI's
intellectual properties, and assumed certain liabilities. The following
summarizes assets acquired and liabilities assumed with the ASI acquisition:
Accounts receivable $ 302,251
Inventory 4,214
Net property and equipment 206,609
Intangible assets 2,617,214
---------
3,130,288
Less liabilities assumed (931,195)
---------
Cash paid for ASI (exclusive of the $130,000 option) $ 2,199,093
=========
<PAGE>
(2) Business Acquisitions and Asset Dispositions (continued)
On July 10, 1997, the Company entered into an asset purchase and services
agreement (Purchase Agreement) with BMC Software, Inc. (BMC) pursuant to
which the Company sold substantially all of the intangible assets and license
rights it had acquired from ASI for $7,000,000. Of the $7,000,000 purchase
price, $1,400,000 was placed in escrow pending the Company's fulfillment of
certain representations and warranties. One-half of the escrowed amount will
be released in July 1998, with the remaining balance to be released in July
of 1999. The entire escrowed amounts receivable are included as other assets
in the accompanying financial statements. A portion of the gain equal to the
escrowed amount of $1,400,000 was recorded as deferred revenue at the time of
the sale and is being amortized using the straight-line method over a 24-
month period. As of March 31, 1998, $3,214,107 has been recognized as a gain
on the sale of assets and is included in other income in the accompanying
statement of operations and $875,000 is recorded as deferred revenue in the
accompanying balance sheet.
Effective July 1, 1997, the Company entered into an agreement with CDG
Technologies, Inc. (CDG), a reseller of computer software and a technical
services provider. The Company exchanged 60,000 shares of voting common
stock for all of the outstanding common stock of CDG. The purchase was
accounted for under the pooling method of accounting. The summary of assets
acquired and liabilities assumed is as follows:
Account receivable $ 130,483
Property and equipment 22,351
Other assets 8,241
Less liabilities assumed (161,075)
Accumulated deficit of CDG 16,200
---------
Value of common stock issued $ 16,200
=========
The Company's 1997 financial statements have not been restated to include the
operations of CDG due to immaterial of the restatement.
<PAGE>
(2) Business Acquisitions and Asset Dispositions (continued)
The Company also acquired three additional companies during 1998: P.C.
Business Solutions, Inc. (PCB), a reseller of computer software and a
technical services provider located in Upland, California; Software
Innovations Ltd. (SIL), a reseller of computer software and a technical
services provider located in Hertz, England; and Astron Incorporated
(Astron), a provider of education and training to the information technology
industry located in Orem, Utah. All three of the acquisitions were made
through the exchange of common stock and have been accounted for under the
purchase method of accounting. Accordingly, the results of operations of
these companies have been included in the Company's consolidated financial
statements since date of acquisition. A summary of assets acquired,
liabilities assumed, and consideration given for these acquisitions is as
follows:
PCB SIL Astron
-------- -------- --------
Accounts receivable $ 72,122 185,139 78,761
Inventory 89,206 - 12,000
Property and equipment 50,815 14,886 151,921
Goodwill 359,429 37,022 327,919
Noncompete agreements 359,429 37,022 327,919
Other assets 988 - 66,115
------- ------- -------
931,989 274,069 964,635
Less liabilities assumed (274,489) (196,281) (626,235)
------- ------- -------
$ 657,500 77,788 338,400
======= ======= =======
Consideration:
Shares of common stock issued 250,000 31,750 144,000
======= ======= =======
Value of common stock $ 657,500 77,788 338,400
======= ======= =======
The following unaudited pro forma summary presents consolidated results of
operations of the Company as if the entities acquired under the purchase
method had been acquired as of the beginnings of the periods presented:
1998 1997
------------ ----------
Total revenues $ 25,418,781 22,622,216
Net loss $ (591,513) (986,041)
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
(3) Notes Receivable
At March 31, 1998, the Company has notes receivable from two employees.
One has a balance of $28,000, is due in monthly installments of $1,000 and
accrues interest at nine percent. The note is secured by 50,000 shares of the
Company's common stock. The second note receivable has a balance of
$110,000 and accrues interest at a rate of nine percent. The Company will
recognize compensation expense and a related reduction of the note in equal
installments over a four-year period beginning in fiscal 1999 provided
continued employment of the note holder. All unpaid principal and interest
will become due at the time of voluntary termination.
(4) Property and Equipment
Property and equipment consist of the following as of March 31,:
1998 1997
---------- ----------
Land $ 36,021 36,021
Buildings and improvements 254,327 250,489
Leasehold improvements 94,010 -
Furniture fixtures and equipment 1,413,438 783,837
---------- ----------
1,797,796 1,070,347
Less accumulated depreciation (522,894) (359,268)
---------- ----------
$ 1,274,902 711,079
========== ==========
(5) Note Payable to Bank and Long-term Debt
Long-term debt at March 31, 1998 and 1997, consisted of the following:
1998 1997
---------- --------
10% note payable in monthly installments of $4,871,
including interest, due August 2000, secured by
equipment $ 146,218 -
9% note payable in monthly installments of $1,196,
including interest, due January 2002, secured by
equipment 59,546 -
9% - 12% notes payable in monthly installments totaling
$4,368, including interest, secured by equipment 80,912 -
<PAGE>
(5) Note Payable to Bank and Long-term Debt (continued)
1998 1997
--------- --------
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 $ 113,634 118,095
8.70% SBA loan payable in monthly installments of
$1,078, including interest, due February 2011, secured
by the Company's land and building 94,423 98,266
------- -------
Total long-term debt 494,733 216,361
Less current portion 131,774 8,286
------- -------
Long-term debt, excluding current portion $ 362,959 208,075
Aggregate maturities of long-term debt are as follows: 1999, $131,774; 2000,
$205,114; 2001, $48,402; 2002, $15,571; 2003, $24,498; and thereafter
$69,374.
(6) Convertible Bonds
In July 1997, the Company sold to Canadian Imperial Holdings, Inc.
$1,000,000 of 6 percent Series A Convertible Bonds with attached warrants to
purchase 42,500 shares of common stock from $4.00 to $5.50 per share. The
bonds are convertible into shares of Sento common stock beginning October 6,
1997, at a conversion price equal to the lesser of 85 percent of the average
closing bid price of the Sento common stock for the five trading days
preceding Canadian Imperial's notice of conversion or $5.22. In the event
the bonds have not been converted previously, the aggregate principal amount
of the bonds, together with accrued interest, will be converted into shares
of Sento common stock on July 7, 1999. The bonds are redeemable by Sento, at
its discretion, at any time after September 5, 1997, at a price equal to 115
percent of the unpaid principal amount of the bonds to be redeemed, plus
accrued interest. The warrants are exercisable until May 31, 1999. Sento
has also granted to Canadian Imperial certain rights to register shares of
Sento common stock issuable upon the conversion of the bonds. Of the total
proceeds, $55,465 has been allocated to the value of the warrants and is
recorded as an addition to paid-in capital.
<PAGE>
(7) Income Taxes
Income tax expense consists of:
Current Deferred Total
Year ended March 31, 1998:
Federal $ 316,720 (99,539) 217,181
State 118,786 (33,877) 84,909
------- --------- -------
$ 435,506 (133,416) 302,090
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
======= ======== =======
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:
1998 1997
--------- ---------
Computed "expected" tax expense $ 124,122 13,108
Increase (decrease) in income taxes resulting
from:
State income taxes, net of federal tax benefit 56,040 2,897
Foreign losses 48,074 -
Nondeductible goodwill 36,143 134
Nondeductible interest 15,300 -
Nondeductible acquisition costs 8,500 -
Other 23,911 -
--------- ---------
Income tax expense $ 302,090 16,139
========= =========
The tax effects of temporary differences that give rise to current
deferred tax assets and noncurrent deferred tax liabilities at March 31, 1998
and 1997, are presented below:
1998 1997
--------- ----------
Current deferred tax assets:
Other accrued expense $ 149,199 28,125
Allowance for doubtful accounts 69,341 70,792
--------- --------
Current deferred tax assets $ 218,540 98,917
Noncurrent deferred tax assets:
Investment tax credit carryforwards $ - 10,095
Net operating loss carryforward 19,451 60,624
--------- --------
Total gross noncurrent deferred assets 19,451 70,719
Less valuation allowance 19,451 20,181
--------- --------
Net noncurrent deferred tax assets - 50,538
--------- --------
Deferred tax liability - tax depreciation
in excess of book depreciation 13,558 55,871
Noncompete agreements 257,981 -
--------- --------
271,539 55,871
--------- --------
Net noncurrent deferred tax liabilities $ 271,539 5,333
========= ========
<PAGE>
(7) Income Taxes (continued)
The valuation allowance for deferred tax assets as of April 1, 1996 was $-0-.
The net change in the total valuation allowance for the periods ended
March 31, 1998 and 1997, was a decrease of $730 and an increase of $20,181,
respectively.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of March 31, 1998, will be allocated as an income tax
benefit to be reported in the consolidated statement of operations.
At March 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of $57,210 which expire in 2012.
(8) Leases
The Company has operating leases for office space and equipment. The
Company incurred rent expense of $241,245 and $115,276 for the periods ended
March 31, 1998 and 1997, respectively. Future minimum rent payments under
existing operating leases are $172,207 in fiscal 1999, $119,005 in fiscal
2000, $98,858 in fiscal 2001, and $38,250 in fiscal 2002.
(9) 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
$19,058 and $11,438 were made for the periods ended March 31, 1998 and 1997,
respectively.
(10) Common Stock
Stock Options
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 1,500,000
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. The number of shares
granted, vesting period and price per share is determined by the Board of
Directors. At March 31, 1998, there were 427,399 additional shares available
for grant under the Plan.
<PAGE>
(10) Common Stock (continued)
Stock option activity, relating to qualified options during the periods
indicated is as follows:
Period ended March 31,
-------------------------------------------------
1998 1997
------------------------ ------------------------
Weighted- Weighted-
average average
Number of exercise Number of exercise
shares price shares price
----------- ---------- ------------ ----------
Balance outstanding at
beginning of year 843,185 $ 3.05 516,685 $ 2.28
Granted 516,000 4.35 366,500 4.19
Exercised (127,262) 1.24 - -
Forfeited (159,322) 3.78 (40,000) 3.50
Balance outstanding at
end of year 1,072,601 3.78 843,185 3.05
Options exercisable at
end of year 134,361 2.96 115,502 1.35
Weighted-average fair
value of options granted
during the year $ 2.05 $ 2.39
The following table summarizes information about stock options outstanding at
March 31, 1998:
Number Weighted- Number
out- average Weighted- exercis- Weighted-
standing remaining average able at average
Exercise at March contrac- exercise March 31, exercise
price 31, 1998 tual life price 1998 price
- --------- ---------- ---------- ---------- ---------- -----------
$ 1.24 146,101 7.8 $ 1.24 52,136 $ 1.24
3.50 108,000 8.0 3.50 27,833 3.50
4.00-4.50 812,500 9.3 4.27 48,392 4.28
4.88 6,000 9.4 4.88 6,000 4.88
---------- ---------- ---------- ---------- -----------
1,072,601 8.9 3.78 134,311 2.96
========== ==========
In addition to options granted under the Plan, the Company also granted
900,000 options in connection with the hiring of a new CEO in the current
year. 500,000 of these options were issued at prices below fair market value
and a total of $240,000 in compensation expense related to these options will
be recognized ratably over one to four years. In 1998, total compensation
expense for these options was $41,425.
<PAGE>
(10) Common Stock (continued)
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; 1998 - expected dividend yield zero
percent, risk-free interest rate of 5.34 percent, expected stock-price
volatility of 45.14 percent, and expected life of five years.
The Company applies APB 25 in accounting for both its Plan and
nonqualified options. 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:
1998 1997
------------ -----------
Net income (loss) As reported $ 62,975 22,416
Pro forma (506,344) (110,965)
Basic earnings (loss) per share As reported 0.01 0.01
Pro forma (0.10) (0.03)
Diluted earings (loss) per share As reported 0.01 0.00
Pro forma (0.09) (0.03)
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
Outstanding warrants to purchase shares of the Company's common stock are
as follows:
Number of warrants Exercise price Expiration date
------------------ --------------- ---------------
223,024 $ 3.50 May 1998
70,000 3.75 January 1999
320,000 5.50 July 1999
279,330 3.58 July 1999
42,500 4.00 - 5.50 May 1999
70,000 4.50 - 4.75 March through September 1999
57,500 4.13 - 4.25 February through May 2001
----------
1,062,354
==========
<PAGE>
(10) Common Stock (continued)
Private Placement
In August of 1997, the Company completed a private offering of
unregistered shares of its common stock to certain accredited investors. The
shares were sold in units at $12.50 per unit, with each unit consisting of
three shares of common stock plus a warrant to purchase one share of common
stock for $5.50 before May 31, 1999. In the offering, the Company sold
240,000 units consisting of 720,000 shares of common stock and warrants to
purchase 240,000 shares of common stock from which $2,937,380 in net cash
proceeds were received.
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 a 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
The Company has adopted a stock purchase plan under which 200,000 shares
of common stock are reserved for future issuance to employees of the Company.
The purpose of the stock purchase plan is to provide a method whereby certain
employees 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, 1998, the Company had sold 24,678
shares to employees of the Company.
(11) Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No., 130, Reporting Comprehensive Income and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an enterprise and
Related Information. These statements, which are effective for periods
beginning after December 15, 1997 expand or modify disclosures and,
accordingly, will have no impact on the Company's reported financial
position, results of operation, or cash flows. The Company will adopt these
statements for the year ended March 31, 1999.
<PAGE>
Independent Auditors' Consent
The Board of Directors
Sento Technical Innovations Corporation
We consent to incorporation by reference in the registration statement No
333-12917 on Form 2-8 of Sento Technical Innovations Corporation of our
report dated June 16, 1998, relating to the consolidated balance sheets of
Sento Technical Innovations Corporation and subsidiaries as of March 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year ended March 31, 1998 and
the eleven months ended March 31, 1997, which report appears in the March
31, 1998 annual report on Form 10-K of Sento Technical Innovations Company.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Salt Lake City, Utah
June 29, 1998
<PAGE>
Sento Technical Innovations Corporation
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Sento Ltd. England
Sento Australia Pty. Ltd. Australia
Dewpoint Distributed Solutions, Inc. Utah
Sento Consulting Corporation Utah
Sento Technical Services Corporation Utah
Sento Training Corporation Utah
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into effective as
of the first day of December, 1997 by and between Sento Technical Innovations
Corporation, a Utah corporation (the "Company"), and Kieth E. Sorenson (the
"Executive").
WHEREAS, the Company desires to retain and employ the Executive, and the
Executive desires to accept such employment, on the terms and subject to the
conditions set forth in this Agreement.
Accordingly, the parties agree as follows:
1. Employment, Duties and Acceptance.
1.1 Employment by the Company. The Company hereby agrees to
employ the Executive as a full-time executive employee of the Company in the
position of Chief Executive Officer of the Company for the Term (as
hereinafter defined) to render such services and to perform such duties as
shall be required by the Bylaws of the Company (the "Bylaws") and as the
Board of Directors of the Company (the "Board of Directors") shall reasonably
request.
1.2 Acceptance of Employment by the Executive. The Executive
hereby accepts the employment described in the preceding paragraph and shall
render the services described therein. If appointed by the Board of
Directors, the Executive also shall serve during all or any part of the Term
as any other officer (so long as the Executive remains employed in the
position of Chief Executive Officer) and/or (so long as the Executive is
elected by the shareholders of the Company) as a director of the Company
without any compensation therefor other than as specified in this Agreement.
1.3 Chairman of the Board. In addition to the services described
above, during the period of the Executive's service as a director of the
Company, as elected by the Company's shareholders, the Board of Directors
may, from time to time, elect the Executive to serve in various capacities on
the Board of Directors, including as Chairman of the Board of Directors.
Upon any such election during the Term, the Executive agrees to serve in the
capacities designated by the Board of Directors from time to time.
1.4 Termination of Existing Contracts. The Executive hereby
agrees that all agreements, arrangements and contracts, whether written or
oral (including all existing agreements, arrangements and contracts relating
to remuneration of the Executive in exchange for his service as a director of
the Company), relating to the Executive's current employment or service on
behalf of or for the benefit of the Company, or any of its subsidiaries and
affiliates, shall be terminated as of the Commencement Date (as defined in
Section 2 below); provided, however, that (a) upon election by the Company's
shareholders, the Executive shall continue to serve as a director of the
Company, without additional compensation therefor, from time to time in
accordance with the Articles of Incorporation of the Company (the "Articles")
and the Bylaws and (b) the Executive shall continue to serve without salary
as an officer and/or director of any such subsidiary or affiliate if the
Executive was an officer and/or director of any such entity immediately prior
to the Commencement Date. The Executive covenants and agrees that he will
not enter into any agreement, arrangement or contract inconsistent with this
Agreement.
2. Term of Employment. The term of the Executive's employment under
this Agreement (the "Term") shall commence on the first day of December, 1997
(the "Commencement Date") and shall continue through and expire on the second
anniversary thereof, unless earlier terminated as herein provided. The Term
shall be automatically renewed for successive periods of one (1) year on each
anniversary of the Commencement Date, beginning with the second anniversary
thereof, unless earlier terminated as herein provided.
3. Compensation and Other Benefits.
3.1 Compensation. As compensation for services to be rendered by
the Executive pursuant to this Agreement:
3.1.1 The Company shall pay to the Executive, during the
Term, a salary equal to One Hundred Eighty Thousand Dollars ($180,000)
per annum (the "Annual Salary") in the form of (I) One Hundred Twenty
Thousand Dollars ($120,000) in cash and (ii) Fourteen Thousand (14,000)
shares (the "Shares") of the Company's common stock, $0.25 par value
(the "Common Stock"), such component of the Annual Salary consisting of
shares of the Common Stock to be issued in four equal installments, each
in the amount of Three Thousand Five Hundred (3,500) shares, upon the
first day of each calendar quarter during the Term. The Annual Salary
shall be subject to such increases as the Compensation Committee of the
Board of Directors may recommend and the Board of Directors may, in its
discretion, approve.
3.1.2 The Company shall pay to the Executive, within forty
five (45) days of the execution hereof, One Hundred Thousand and No/100
Dollars ($100,000) in cash (the "Signing Bonus"); provided, however,
that if the Executive resigns or is terminated for Cause (as defined
below) prior to the first anniversary of the Commencement Date, then the
Executive shall refund to the Company the full amount of the Signing
Bonus; and, further provided, that if the Executive resigns or is
terminated for Cause on or after the first anniversary of the
Commencement Date but prior to the second anniversary of the
Commencement Date, then the Executive shall refund to the Company the
full amount of the Signing Bonus less Eight Thousand Three Hundred
Thirty-Three and 33/100 Dollars ($8,333.33) for each full calendar month
after the first anniversary after the Commencement Date during which the
Executive remained in the employ of the Company.
3.1.3 The Company does hereby grant to the Executive,
subject to the provisions of Section 3.2 below, non-qualified options
representing the right to purchase shares of the Common Stock as
follows:
(a) Options to purchase One Hundred Thousand (100,000)
shares of Common Stock at an exercise price equal to Three and
50/100 Dollars ($3.50) per share, which shall vest and become
exercisable upon the first anniversary of the Commencement
Date (the "$3.50 Options");
(b) Options to purchase Four Hundred Thousand (400,000)
shares of Common Stock at an exercise price equal to Four and
50/100 Dollars ($4.50) per share, which shall vest and become
exercisable in accordance with Section 3.2 (the "$4.50
Options"); and
(c) Options to purchase Four Hundred Thousand (400,000)
shares of Common Stock at an exercise price equal to Five and
50/100 Dollars ($5.50) per share, which shall vest and become
exercisable in accordance with Section 3.2 (the "$5.50
Options" and, together with the $3.50 Options and the $4.50
Options, the "Options").
3.1.4 Commencing with the Company's fiscal year ending
March 31, 1999, the Company shall pay to the Executive, subject to the
terms and conditions of Section 3.3 hereof, an amount equal to the
Annual Bonus (as defined in Section 3.3 below) within forty-five days of
the end of each full fiscal year of the Company ending during the Term.
The Company shall not pay the Annual Bonus or any portion thereof with
respect to the Company's fiscal year ending March 31, 1998.
The Executive shall also be eligible, during the Term, to receive cash
bonuses and such other compensation, whether in the form of stock options,
stock appreciation rights, restricted stock awards or otherwise
(collectively, with, the Options and the Annual Bonus, the "Additional
Compensation"), as the Board of Directors (or Compensation Committee thereof)
may, at its discretion, approve. The Annual Salary and the Additional
Compensation shall be payable and issued, as the case may be, in accordance
with the applicable payroll option and/or other compensation policies and
plans of the Company as from time to time in effect, less such deductions as
shall be required to be withheld by applicable law and regulations. The
Executive shall bear all of his own tax liabilities arising out of or in
connection with the Annual Salary and the Additional Compensation.
3.2 The Options.
3.2.1 Term, Vesting and Exercise.
(a) All of the Options shall have a term of ten (10)
years and shall expire on the tenth anniversary of the Commencement Date,
unless earlier canceled pursuant to this Agreement.
(b) The Executive's right to exercise the $4.50 Options
and the $5.50 Options with respect to Eight Thousand Three Hundred Thirty-
Four (8,334) shares of the Common Stock, respectively, shall vest upon
execution of this Agreement. For each of the forty-six (46) months
immediately following the month of the Commencement Date, the Executive's
right to exercise the $4.50 Options and the $5.50 Options with respect to
Eight Thousand Three Hundred Thirty-Four (8,334) shares of the Common Stock,
respectively, shall vest on a monthly basis on the first day of each such
month. The Executive's right to exercise the $4.50 Options and the $5.50
Options with respect to the remaining Eight Thousand Three Hundred and Two
(8,302) shares of the Common Stock subject to the $4.50 Options and the $5.50
Options, respectively, shall vest on the first day of the forty-seventh
(47th) month following the month of the Commencement Date.
(c) Except as set forth in Section 6.3, the Executive
shall not have any right, title or interest in or to any Options with respect
to which the Executive's rights have not vested prior to the termination or
expiration of this Agreement.
3.2.3 Registration Rights. On the terms and subject to
the conditions set forth in Appendix I hereto, the provisions of which are
incorporated by reference, the Company agrees to register under the
Securities Act of 1933, as amended (the "Securities Act"), the Common Stock
issuable and/or transferable upon the exercise of the Options (the "Option
Shares").
3.2.4 Restrictions on Transfer. The Executive shall not
assign, sell, hypothecate, pledge, encumber or otherwise transfer any
interest in the Options without the express written consent of the Company.
The certificates, if any, evidencing the Options and the certificates
evidencing the Option Shares (with the exception of any Option Shares
registered under the Securities Act pursuant to this Section 3.2) shall be
stamped or otherwise imprinted with a legend substantially in the following
form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ARE "RESTRICTED SECURITIES" WITHIN THE
MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT
("RULE 144"). THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT
COMPLYING WITH RULE 144 IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR OTHER COMPLIANCE UNDER THE
SECURITIES ACT. THE SECURITIES ARE SUBJECT TO ADDITIONAL
RESTRICTIONS AS SET FORTH IN THAT CERTAIN EMPLOYMENT
AGREEMENT, DATED AS OF DECEMBER 1, 1997, BETWEEN SENTO
TECHNICAL INNOVATIONS CORPORATION, A UTAH CORPORATION AND
KIETH E. SORENSON.
3.3 The Annual Bonus.
3.3.1 The "Annual Bonus" for a given year (the "Bonus
Year") shall be equal to the result obtained by multiplying the Average
Percentage Increase (as defined below) by the amount of the Annual
Salary for the year. The "Average Percentage Increase" shall be equal
to the weighted average of (i) the quotient obtained by dividing (a) the
difference between the diluted earnings per share of the Company for the
Bonus Year (the "Bonus Year Earnings") and the diluted earnings per
share of the Company for the year immediately preceding the Bonus Year
(the "Preceding Year Earnings") by (b) the Preceding Year Earnings and
(ii) the quotient obtained by dividing (a) the difference between the
gross revenues of the Company for the Bonus Year (the "Bonus Year
Revenues") and the gross revenues of the Company for the year
immediately preceding the Bonus Year (the "Preceding Year Revenues") by
(b) the Preceding Year Revenues. For purposes of this Section 3.3 the
diluted earnings per share of the Company shall be determined according
to the Company's financial statements, in accordance with generally
accepted accounting principles. No portion of the Annual Bonus shall be
deemed to have been earned prior to the last day of the related Bonus
Year and prior to such last day the Executive shall not be entitled to
any such portion.
3.3.2 Solely for purposes of clarifying the intent of the
parties with respect to the calculation of the Annual Bonus, the
following hypothetical example illustrates the manner in which the
parties intend to calculate the amount of the Annual Bonus. The
following example is presented solely for purposes of illustration and
does not represent or estimate the expectation of the parties with
respect to the actual amounts to be included therein. Assuming that the
Annual Salary is $180,000, the Bonus Year Earnings and Bonus Year
Revenues are $.10 and $20,000,000, respectively, and the Preceding Year
Earnings and Preceding Year Revenues are $.05 and $15,000,000,
respectively, then the Average Percentage Increase would be equal to
66.7% (e.g. [(($.10-.$.05)/$.05) + (($20,000,000-
$15,000,000)/$15,000,000))]/2) and the Annual Bonus would be equal to
$120,000 (e.g. 67.5% * $180,000).
3.4 Participation in Employee Benefit Plans. The Executive shall
be permitted, during the Term, if and to the extent eligible, to participate
in any group life, hospitalization or disability insurance plan, health
program, pension plan, similar benefit plan or other so-called "fringe
benefits" of the Company, which may be available to all other executives of
the Company generally on the same terms as such other executives.
3.5 Reimbursement of Business Expenses. The Executive may incur
reasonable, ordinary and necessary business expenses in the course of his
performance of his obligations under this Agreement, including expenses for
travel, food, entertainment and premiums attributable to any insurance policy
maintained for the benefit of the Company and authorized by the Board of
Directors. The Company shall reimburse the Executive for all such business
expenses if (I) such expenses are incurred by the Executive in accordance
with the Company's business expense reimbursement policy, if any, as may be
established and modified by the Company from time to time and (ii) the
Executive provides to the Company a record of (a) the amount of the expense,
(b) the date, place and nature of the expense, c the business reason for the
expense and (d) all supporting documentation as may be required from time to
time by the relevant tax laws or regulations. The Company shall have no
obligation to reimburse the Executive for expenses that are not incurred and
substantiated as required pursuant to this Section 3.5.
4. Non-Competition.
4.1 Covenants Against Competition. The Executive acknowledges
that (I) the Company, which for purposes of this Article 4 includes Sento
Technical Innovations Corporation and all of its subsidiaries and affiliates,
including such subsidiaries and affiliates as may be formed, incorporated or
acquired during the Restricted Period (as defined in Section 4.1.1), is
engaged in the business of developing, configuring, marketing and
distributing computer hardware and software in the areas of system
management, office automation and value-added reselling and servicing of
third party software and providing related consulting, training and support
services (including telephone support services) (as such business is
conducted by the Company at any time during the Term, the "Business"); (ii)
he is one of a limited number of persons who has performed or will perform a
significant role in developing the Business; (iii) the Business is conducted
throughout the United States and in a number of countries outside of the
United States; (iv) his work for the Company has given him, and will continue
to give him, trade secrets of and confidential information concerning the
Company; (v) the agreements and covenants contained in this Article 4 are
essential to protect the Business and goodwill of the Company; (vi) he has
means to support himself and his dependents other than by engaging in the
Business and the provisions of this Article 4 will not impair such ability.
Accordingly, the Executive covenants and agrees as follows:
4.1.1 Non-Compete. During the Restricted Period, the
Executive shall not, within the Territory (as defined below), directly
or indirectly, (I) engage in the Business or any aspect of the Business
for the Executive's own account in competition with the Company; (ii)
enter the employ of, or render any services to, any person which
competes with the Company in the Business; or (iii) become interested in
any such person in any capacity, including as an individual, partner,
shareholder, officer, director, principal, member, manager, agent or
trustee; provided, however, the Executive may own, directly or
indirectly, securities of any person, whether or not such securities are
traded on a national securities exchange or over-the-counter market, so
long as the Executive does not own five percent (5%) or more of any
class of securities of such person. For purposes of this Agreement, the
term "Restricted Period" shall mean the Term (including any renewals
thereof), unless the Executive is terminated without Cause (as defined
below) or the Company elects not to renew this Agreement, in which event
the Restricted Period (as defined below) shall continue until the end of
the Severance Payment Period (as defined below). For purposes of this
Agreement, the term "Territory" shall mean and include (a) all of the
United States of America, whether or not the Company or any of its
subsidiaries or affiliates have conducted the Business (or any
development or expansion thereof (in all such states) and (b) all
foreign countries in which the Company or any of its subsidiaries or
affiliates has conducted the Business (or any development or expansion
thereof) on or before the termination of this Agreement.
4.1.2 Confidential Information; Personal Relationships.
During the Restricted Period and for a period of two (2) years
thereafter, the Executive shall keep secret and retain in strict
confidence, and shall not use for the benefit of himself or others, all
confidential matters of the Company, including, without limitation,
"know-how," trade secrets, customer lists, details of client or
consultant contracts, pricing policies, operational methods, marketing
plans or strategies, product development techniques or plans, business
acquisition plans, new personnel acquisition plans, methods of
production and distribution, technical processes, designs and design
projects, inventions and research projects of the Company learned by the
Executive heretofore or during the Restricted Period.
4.1.3 Property of the Company. All memoranda, notes,
lists, records and other documents or papers (and all copies thereof),
including such items stored in computer memories, on microfiche or by
any other means, made or compiled by or on behalf of the Executive, or
made available to the Executive relating to the Company, other than
purely personal matters, are and shall be the Company's property and
shall be delivered to the Company promptly upon the termination of the
Executive's employment (whether such termination is for Cause or
otherwise) or at any other time on request of the Company.
4.1.4 Employees of the Company. During the Restricted
Period and thereafter for as long as the Executive shall remain an
employee, officer or director of or consultant to the Company, the
Executive shall not, directly or indirectly, hire or solicit any
employee of the Company away from the Company or encourage any such
employee to leave such employment.
4.1.5 Consultants of the Company. During the Restricted
Period and thereafter for as long as the Executive shall remain an
employee, officer or director of or consultant to the Company, the
Executive shall not, directly or indirectly, hire or solicit any
consultant then under contract with the Company or encourage such
consultant to terminate such relationship.
4.1.6 Customers and Suppliers of the Company. During the
Restricted Period and thereafter for as long as the Executive shall
remain an employee, officer or director of or consultant to the Company,
the Executive shall not, directly or indirectly, solicit any customer or
supplier of the Company or encourage such customer or supplier to
terminate its relationship with the Company.
4.2 Rights and Remedies upon Breach. If the Executive breaches,
or threatens to commit a breach of, any of the provisions of Section 4.1 (the
"Restrictive Covenants"), the Company shall have the following rights and
remedies, each of which rights and remedies shall be independent of the
others and severally enforceable, and each of which is in addition to, and
not in lieu of, any other rights and remedies available to the Company under
law or in equity:
4.2.1 Specific Performance. The right and remedy to have
the Restrictive Covenants specifically enforced by any court of
competent jurisdiction, it being agreed that any breach or threatened
breach of the Restrictive Covenants would cause irreparable injury to
the Company and that money damages would not provide an adequate remedy
to the Company.
4.2.2 Accounting. The right and remedy to require the
Executive to account for and pay over to the Company all compensation,
profits, monies, accruals, increments or other benefits derived or
received by the Executive as the result of any transactions constituting
a breach of the Restrictive Covenants.
4.3 Severability of Covenants. The Executive acknowledges and
agrees that the Restrictive Covenants are reasonable and valid in
geographical and temporal scope and in all other respects. If any court
determines that any of the Restrictive Covenants, or any part thereof, is
invalid or unenforceable, the remainder of the Restrictive Covenants shall
not thereby be affected and shall be given full effect, without regard to the
invalid portions.
4.4 Blue-Penciling. If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographic scope of such provision, such court shall have the
power to reduce the duration or scope of such provision, as the case may be,
and, in its reduced form, such provision shall then be enforceable.
4.5 Enforceability in Jurisdictions. The Company and the
Executive intend to and hereby confer jurisdiction to enforce the Restrictive
Covenants upon the courts of any jurisdiction within the geographical scope
of the Restrictive Covenants. If the courts of any one or more of such
jurisdictions hold the Restrictive Covenants unenforceable by reason of the
breadth of such scope or otherwise, it is the intention of the Company and
the Executive that such determination not bar or in any way affect the
Company's right to the relief provided above in the courts of any other
jurisdiction within the geographical scope of the Restrictive Covenants, as
to breaches of such covenants in such other respective jurisdictions, such
covenants as they relate to each jurisdiction being, for this purpose,
severable into diverse and independent covenants.
5. Representations and Warranties. In order to induce the Company to
enter into this Agreement, the Executive hereby acknowledges, represents,
warrants and agrees that:
5.1 The Company has previously made available for inspection by
the Executive financial statements and other financial, corporate and
business information and records with respect to the Company.
5.2 The Executive may have to bear the economic risk of any
investment related to the Shares, the Option Shares and the Options (the
"Securities") for an indefinite period of time.
5.3 No representations, promises or agreements have been made
concerning the marketability or value of the Securities or (except as
expressly set forth in Section 3.2 and Appendix I) that any of the Securities
will be registered under the Securities Act or any state securities or blue
sky laws at any time in the future or will otherwise be qualified for sale
under the applicable securities laws.
5.4 No representations, warranties, promises or agreements have
been made to the Executive with respect to any of the following:
5.4.1 The approximate or exact length of time the
Executive will be required to remain an owner of the Securities;
5.4.2 The percentage of profit and/or the amount or type
of consideration (including dividends), profit or loss (including tax write-
offs and/or tax benefits) to be realized, if any, as a result of an
investment in the Securities; and/or
5.4.3 That the past performance or experience of the
Company will in any way indicate the results of future operations of the
Company, the results of the ownership of the Securities, or the likelihood of
achievement of the overall objectives of the Company.
5.5 The Executive is able to bear the substantial economic risks
of an investment in the Company, including but not limited to the possibility
of the complete loss of the Executive's investment in the Securities, the
lack of a public market, and the limited transferability of the Securities
which may make the liquidation of this investment impossible for the
indefinite future. The Executive has no need for liquidity in such
investment, and could afford a complete loss of such investment. The
Executive has reached the age of majority and has adequate means of providing
for the Executive's current needs and personal contingencies.
5.6 The Executive is an "accredited investor" as that term is
defined in Regulation D promulgated under the Securities Act of 1933, as
amended. The Executive is familiar with such Regulation D and the terms and
conditions thereof.
5.7 The Executive has such knowledge and experience in financial
and business matters that the Executive is capable of evaluating the merits
and risks of the investment in the Company and of protecting his own
interests.
5.8 The Securities will be acquired for the Executive's own
account for investment and not with a view toward resale or distribution
thereof, and the Executive does not now have any reason to anticipate any
change in the Executive's circumstances or other particular occasion or event
which would cause the Executive to sell any of the Securities or any interest
therein.
5.9 The Executive has received and reviewed all business,
corporate and financial documents and records concerning the Company that the
Executive wishes to receive and review.
5.10 The Executive has been given an opportunity to discuss the
history, business, corporate matters and prospects of the Company and the
management thereof with the officers and directors of the Company. The
Executive is fully informed with respect to the merits and risks associated
with the Securities and with the history, management business, prospects and
corporate matters of the Company.
5.11 Neither the Executive's execution and delivery of this
Agreement nor the performance of his obligations hereunder will (I) violate
any restriction of any government, governmental agency or court to which the
Executive is subject, (ii) conflict with, result in a breach of, constitute a
default under or require any notice under any agreement, arrangement or
contract to which Executive is a party or by which the Executive is bound or
(iii) be limited or restricted by any such agreement, arrangement or
contract.
5.12 All representations and warranties set forth above or in any
other written statement or document delivered by the Executive in connection
with the transactions contemplated hereby will be true and correct in all
respects on and as of the date of the sale of any of the Securities and the
exercise of any Options as if made on and as of such date and will survive
such sale and/or exercise.
5.13 The Executive understands the meaning and legal consequences
of the representations and warranties contained in this Agreement and agrees
to indemnify and hold harmless the Company and its directors, officers,
agents and representatives from and against any and all loss, damage or
liability due to or arising out of a breach of or the inaccuracy of any
representation or warranty of the Executive in this Agreement.
Notwithstanding any of the representations, warranties, acknowledgments or
arrangements made herein by the Executive, the Executive does not hereby or
in any manner waive any right granted to the Executive under federal or state
securities laws.
6. Termination.
6.1 Termination upon Death. If the Executive dies during the
Term, this Agreement shall terminate, except that the Executive's legal
representatives, successors, heirs or assigns shall be entitled to receive
the Annual Salary, the Additional Compensation and other accrued benefits, if
any, earned or vested up to the date of the Executive's death; provided,
however, if any Additional Compensation or other benefits are governed by the
provisions of any written employee benefit plan or policy of the Company, any
written agreement contemplated thereunder or any other separate written
agreement entered into between the Executive and the Company, the terms and
conditions of such plan, policy or agreement shall control in the event of
any discrepancy or conflict with the provisions of this Agreement regarding
such Additional Compensation or other benefit due to the Executive upon the
death, termination or disability of the Executive pursuant to Article 6
hereof.
6.2 Termination for Cause. The Company has the right, at any time
during the Term, subject to all of the provisions hereof, exercisable by
serving notice, effective in accordance with its terms, to terminate the
Executive's employment under this Agreement and discharge the Executive for
Cause. If such right is exercised, the Company's obligation to the Executive
shall be limited to the payment of any unpaid Annual Salary, Additional
Compensation (other than the Options) and other benefits, if any, accrued up
to the effective date (which shall not be retroactive) specified in the
Company's notice of termination. If the Company terminates the Executive for
Cause, all Options that have not been exercised by the Executive prior to the
effective date of the Company's notice of termination, whether or not such
options are vested or exercisable, shall be automatically canceled and shall
be of no further force or effect. As used in this Section 6.2, the term
"Cause" shall mean and include (I) a material breach by the Executive of the
terms of this Agreement, not cured within twenty (20) days after such breach,
(ii) the wrongful misappropriation of any money, assets or other property of
the Company or any subsidiary or affiliate of the Company, (iii) the
conviction of the Executive for any felony or a crime involving moral
turpitude, (iv) the Executive's chronic alcoholism or chronic drug addiction,
or (v) subject to the provisions of Section 6.5 below, the Executive's
unwillingness to carry out the material duties of his position as an officer
of the Company.
6.3 Termination for Reason Other than Cause. Notwithstanding any
other provision of this Agreement, the Board of Directors, in its discretion,
may elect to terminate this Agreement, and the Executive's employment
hereunder, at any time prior to the expiration of the Term. In the event the
Board of Directors elects to terminate this Agreement for any reason other
than for Cause or elects not to renew the Term pursuant to Section 2, the
Company shall pay to the Executive any unpaid Annual Salary, Additional
Compensation and other benefits, if any, accrued up to the effective date
(which shall not be retroactive) specified in the Company's notice of
termination plus an amount equal in value to the Severance Payment (described
in the following sentence). The "Severance Payment" shall be equal to (I) the
Annual Salary that would otherwise be payable through the end of the Term, in
the event such termination occurs prior to the first anniversary of the
Commencement Date (a "First Year Termination") or (ii) the Annual Salary that
would otherwise be payable during a one-year period, in the event such
termination occurs on or after the first anniversary of the Commencement
Date. The Severance Payment shall be payable by the Company in equal monthly
installments on the first day of (I) in the case of a First Year Termination,
each month that would otherwise occur during the remainder of the Term, or
(ii) in the case of any later termination of the Executive without Cause,
each of the twelve months immediately following such termination (all such
months during which an installment of the Severance Payment is due
constituting the "Severance Payment Period"). In addition to the foregoing,
in the event the Board of Directors elects to terminate this Agreement for
any reason other than Cause or elects not to renew the Term pursuant to
Section 2, the Executive's rights in the $3.50 Options shall vest immediately
and shall be exercisable for a period of thirty (30) days following such
effective date (after which thirty (30) day period the $3.50 Options shall
expire).
6.4 Change in Control. In the event that prior to the termination
of this Agreement a majority of the then outstanding shares of the Common
Stock or all or substantially all of the assets of the Company are acquired
by a person (whether an individual or an entity) not controlled by the
Company (including the current shareholders of the Company), (I) the Company
shall pay to the Executive an amount (in cash or shares of the Common Stock
or a combination thereof, as determined by the Board of Directors) equal to
the value of two (2) times the Annual Salary and (ii) each of the Options
shall vest and become exercisable in full on the day immediately preceding
the closing of such acquisition.
6.5 Suspension upon Disability. If during the Term the Executive
becomes physically or mentally disabled, whether totally or partially, as
evidenced by the written statement of a competent physician licensed to
practice medicine in the United States, so that the Executive is unable to
substantially perform his services hereunder for (I) a period of six
consecutive months, or (ii) for shorter periods aggregating six months during
any twelve-month period, the Company may at any time after the last day of
the six consecutive months of disability or the day on which the shorter
periods of disability equal an aggregate of six months, by written notice to
the Executive, suspend the Term of the Executive's employment hereunder and
discontinue payments of the Annual Salary, Additional Compensation (other
than the Options) and other benefits. In the event the Company suspends the
Term pursuant to the preceding sentence, all Options which are, as of the
date of the Company's notice to the Employee, vested and exercisable in
accordance with Section 3.2 above shall continue to be exercisable for a
period of one hundred eighty (180) days from the date of the Company's
notice, after which time all of the Options, whether or not such Options are
vested or exercisable, shall be automatically canceled and shall be of no
further force or effect. If at any time the Executive shall no longer be
disabled, as evidenced by the written statement of a competent physician
licensed to practice medicine in the United Sates, the Company may at its
election fully reinstate, and if such disability was for a period of not more
than twelve consecutive months the Company shall fully reinstate the
employment of the Executive pursuant to this Agreement and shall commence
payment of the Annual Salary and all of the terms of this Agreement shall
resume in full force for the balance of the Term. Nothing in this Section
6.5 shall be deemed to extend the Term.
7. Insurance. The Company may, from time to time, apply for and take
out, in its own name and at its own expense, naming itself or others as the
designated beneficiary (which it may change from time to time), policies for
health, accident, disability or other insurance upon the Executive in any
amount or amounts that it may deem necessary or appropriate to protect its
interest. The Executive agrees to aid the Company in procuring such
insurance by submitting to reasonable medical examinations and by filling
out, executing and delivering such applications and other instruments in
writing as may reasonably be required by an insurance company or companies to
which any application or applications for insurance may be made by or for the
Company.
8. Golden Parachute Excise Tax Gross-Up. In the event that, upon the
termination of this Agreement, the Severance Payment or other amount or
benefit payable to the Executive pursuant to the terms of this Agreement
constitute "excess parachute payments," as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and would be subject
to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"),
then the Company shall pay to the Executive an amount equal to the amount of
the Excise Tax payable by the Executive and attributable to the Severance
Payment and other amounts payable under the terms of this Agreement, as
determined by the mutual agreement of the Company and the Executive. If the
Company and the Executive are unable to determine the amount of the payment
required pursuant to this Section 8, the determination of the Executive's
Excise Tax liability shall be made in writing by the Company's independent
public accounting firm (the "Accountants"). In the event the actual amount
of the Excise Tax incurred by the Executive is determined by the Internal
Revenue Service to be greater or lesser than the amount determined by the
Company and the Executive or the Accountants, as applicable, the Company and
the Executive agree to promptly make such additional payments to the other
party as the Accountants reasonably determine are appropriate to ensure that
the net economic effect to the Executive under this Section 8, on an after
tax basis, is as if the Excise Tax did not apply to the Executive. For
purposes of making the calculations required by this Section 8, the
Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on interpretations of the Code for which there
is a "more likely than not correct" tax reporting position. The Company and
the Executive shall furnish to the Accountants such information and documents
as the Accountants may reasonably require in order to make a determination
under this Section 8. Each of the Company and the Executive shall pay one-
half of the costs and expenses of the Accountants attributable to performing
the duties required by this Section 8. The amounts payable by the Company to
the Executive pursuant to this Section 8 shall be paid in cash not later than
fifteen (15) days following the determination of the amount of such payments.
9. Other Provisions.
9.1 Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, five days after the date of deposit in the United
States mail, as follows:
(i) if to the Company, to:
Sento Technical Innovations Corporation
Attn: Robert K. Bench
311 North State Street
P.O. Box 1970
Orem, Utah 84059
(ii) if to the Executive, to him care of the Company at the
above address.
Any party may change its address for notice hereunder by notice to
the other parties hereto.
9.2 Entire Agreement. This Agreement contains the entire
agreement and understanding between the parties with respect to the subject
matter hereof and supersedes all prior agreements, written or oral, with
respect thereto; provided, however, that nothing herein shall in any way
limit the obligation, rights or liabilities of the parties under any existing
written stock option agreement separately entered into by the parties.
9.3 Waivers and Amendments. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder, nor any single or
partial exercise of any right, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, power
or privilege hereunder.
9.4 Governing Law; Venue. This Agreement shall be governed and
construed in accordance with the laws of the State of Utah applicable to
agreements made and to be performed entirely within such State. The parties
submit themselves to the jurisdiction of the Federal and state courts located
in Utah and agree to commence any lawsuit arising under or relating to this
Agreement in such courts.
9.5 Assignment. This Agreement, and any rights and obligations
hereunder, may not be assigned by any party hereto without the prior written
consent of the other party, except that the Company may assign this Agreement
to any of its subsidiaries or affiliates without the Executive's consent
provided such assignment does not diminish any of the Executive's duties,
positions, benefits, rights or obligations hereunder.
9.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.7 Headings; Interpretation. The headings in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement. The use of the word "including" in this
Agreement shall be construed to mean "including without limitation".
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
SENTO TECHNICAL INNOVATIONS CORPORATION
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
__________________________________________
Kieth E. Sorenson, an individual
APPENDIX I
REGISTRATION RIGHTS PROVISIONS
1. Certain Definitions. Capitalized terms used in this Appendix I
that are not otherwise defined herein shall have the respective meanings
assigned to them in that certain Employment Agreement, dated as of December
1, 1997 (the "Agreement"), to which this Appendix I is attached, if therein
defined. For the purposes of this Appendix I, the following terms shall have
the following meanings:
(a) "Registrable Securities" shall mean the Option Shares
transferrable upon exercise of the Options (when and if transferred in
accordance therewith).
(b) "1934 Act" shall mean the Securities Exchange Act of 1934, as
amended.
2. Registration Rights.
(a) Required Registration. At any time during the term of the
Options, the Executive may request the Company to register under the
Securities Act all or any portion of the shares of Registrable Securities
held by the Executive for sale in the manner and number specified in such
notice and the Company shall use its best efforts to cause to be registered
all of the Registrable Securities in the manner and number specified in such
notice; provided, however, that the exercise of such registration rights
shall be subject to the following limitations:
(I) the registration rights granted in this Section 2(a) may
be exercised on four (4) occasions (with expenses to be allocated
pursuant to Section 5 hereof) and on each such occasion with respect to
no fewer than 100,000 shares of Common Stock;
(ii) the Company shall have no obligation to register any of
the Registrable Securities unless the Registrable Securities are
eligible for registration on Form S-3; and
(iii) the Company shall have no obligation to take any
action to register or qualify any of the Registrable Securities in any
jurisdiction in which the Company would be required to execute a general
consent to service of process in effecting such registration or
qualification unless the Company is already subject to service in such
jurisdiction and except as may be required by the Securities Act.
(b) Incidental Registration. Whenever the Company proposes to
register any shares of the Common Stock under the Securities Act for a public
offering for cash (other than a registration relating to employee benefit
plans or to a transaction under Rule 145 of the Securities Act), the
Executive may request, within ten (10) days of his receipt of notice that the
Company is contemplating such offering, that the Company include in such
registration all or any portion of the Registrable Securities and the Company
shall use its best efforts to cause to be included in such registration all
of the Registrable Securities which the Executive requests to be registered.
The Executive agrees to sell such Registrable Securities in the same manner
and on the same terms and conditions as the other holders of Common Stock
which the Company proposes to register. The Executive's election to exercise
his registration rights in connection with any registration described in this
Section 2(b) shall be deemed an exercise of the Executive's rights pursuant
to Section 2(a)(I) and shall reduce accordingly the number of occasions under
which the Executive may exercise such rights.
(c) Shelf Registration. The Company may, in its discretion, or,
upon the request of the Executive, the Company shall, undertake any
registration contemplated by this Section 2 in accordance with the
requirements of Rule 415 promulgated under the Securities Act in order to
permit the offering of the Registrable Securities to be sold by the Executive
on a continuous basis in accordance with requirements of such Rule 415.
(d) Underwriting. In the event the Executive exercises the
registration rights set forth in Section 2(b) in connection with a registered
public offering involving an underwriting, the right of the Executive to
registration shall be conditioned upon the participation by the Executive in
such underwriting and the inclusion of the Registrable Securities of the
Executive in the underwriting to the extent provided herein. The Executive
shall (together with the Company and the other holders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting
by the Company. Notwithstanding any other provision of this subsection, if
the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, the managing
underwriter may limit the Registrable Securities to be included in such
registration. The Company shall so advise the Executive and the other
holders distributing their securities through such underwriting, and the
number of shares of Registrable Securities and other securities that may be
included in the registration and underwriting shall be allocated among the
Executive and other holders thereof in proportion, as nearly as practicable,
to the respective number of Registrable Securities or other securities
entitled to inclusion in such registration held by the Executive and other
selling Shareholders participating in such underwriting. If the Executive or
any other holder disapproves of the terms of any such underwriting, he may
elect to withdraw therefrom by written notice to the Company and the managing
underwriter.
3. Obligations of the Company. Whenever required under Section 2 of
this Appendix I to use its best efforts to effect the registration of any of
the Registrable Securities, the Company shall, as expeditiously as possible:
(a) Prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use
its best efforts to cause such registration statement to become and remain
effective;
(b) Prepare and file with the Securities and Exchange Commission
such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish to the Executive such number of copies of a
prospectus, including a preliminary prospectus and all amendments and
supplements thereto, in conformity with the requirements of the Securities
Act, and such other documents as the Executive may reasonably request in
order to facilitate the disposition of Registrable Securities owned by him;
and
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably appropriate, as
determined by the Company and its counsel, for the distribution of the
securities covered by the registration statement, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Appendix I
that the Executive shall furnish to the Company such information regarding
him, the Registrable Securities held by him and the intended method of
disposition thereof as the Company shall request and as shall be required in
connection with the action to be taken by the Company.
5. Expenses of Registration. All expenses incurred in connection with
the first two (2) registrations of the Registrable Securities pursuant to
Section 2 above (excluding underwriting commissions and discounts, all of
which shall be paid by the Executive), including, without limitation, all
registration and qualification fees, printing and accounting fees and
reasonable fees and disbursements of counsel for the Company and of counsel
to the Executive shall be borne by the Company. All expenses incurred in
connection with any other registration of the Registrable Securities
(including, without limitation, underwriting commissions and discounts,
registration and qualification fees, printing and accounting fees, fees and
disbursements of counsel to the Executive and reasonable fees and
disbursements of counsel for the Company) shall be borne by the Executive.
6. Delay of Registration. The Executive shall not have any right to
take any action to restrain, enjoin or otherwise delay any registration as
the result of any controversy which might arise with respect to the
interpretation or implementation of this Appendix I; but nothing in this
Section 6 shall be construed as limiting the Executive's right to damages for
breach of this Appendix I.
7. Indemnification. In the event any of the Registrable Securities
are included in a registration statement under this Appendix I:
(a) The Company will indemnify and hold harmless the Executive
against any losses, claims, damages or liabilities, joint or several, to
which he may become subject under the Securities Act, or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue or alleged untrue
statement of any material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or (ii) any violation of the
Securities Act, including any rule or regulation promulgated thereunder
applicable to the Company in connection with any such registration, or (iii)
the omission or alleged omission to state therein a material fact required to
be stated therein, or necessary to make the statements therein not
misleading; and will reimburse the Executive for any legal or other expenses
reasonably incurred by him in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 7 shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if
such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld) nor shall the Company be liable in any
such case for any such loss, claim, damage liability or action to the extent
that it arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in connection with such
registration statement, preliminary prospectus, final prospectus, or
amendments or supplements thereto, in reliance upon and in conformity with
any information furnished to the Company by the Executive or any of his
affiliates or counsel expressly for use in connection with such registration.
(b) The Executive will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed such registration
statement, each person, if any, who controls the Company within the meaning
of the Securities Act and any counsel or underwriter for the Company (within
the meaning of the Securities Act) against any losses, claims, damages or
liabilities to which the Company or any such director, officer, controlling
person, counsel or underwriter may become subject, under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon (i) any untrue or
alleged untrue statement of any material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) any violation of the
Securities Act, or (iii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements
thereto, in reliance upon and in conformity with any information furnished to
the Company by the Executive or any of his affiliates or counsel expressly
for use in connection with such registration; and the Executive will
reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, controlling person, counsel or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the liability of the Executive
under this Section 7 shall be limited to the amount of proceeds received by
the Executive from the sale of the Registrable Securities (or any of the
Options with respect thereto). It is agreed that the indemnity agreement
contained in this Section 7 shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Executive (which consent shall not be
unreasonably withheld).
(c) Promptly after receipt by a party indemnified under this
Section 7 of notice of commencement of any action for which indemnification
is required pursuant to this Section 7, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under
this Section 7, notify the indemnifying party in writing of the commencement
thereof and the indemnifying party shall have the right to participate in,
and to the extent the indemnifying party desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties. The failure of any indemnified
party to give notice required by this Section 7 shall not release the
indemnifying party from its obligations hereunder, unless such failure
results in prejudice to the indemnifying party; but the omission to so notify
the indemnifying party will not relieve him of any liability which he may
have to any indemnified party other than under this Section 7.
8. Transfer of Registration Rights. No portion of the registration
rights of the Executive under this Appendix I shall be transferred by the
Executive without prior written consent of the Company, which consent shall
not be unreasonably withheld.
9. Reporting Requirements. With a view toward making available the
benefits of certain rules and regulations of the Securities and Exchange
Commission that may at any time permit the sale of the Registrable Securities
with or without registration, from and after the effective date of the
Company's initial registration statement under the Securities Act, the
Company agrees to:
(a) Timely file and keep available such information, documents and
reports as may be required or prescribed by the Securities and Exchange
Commission under Section 13 or 15(d) (whichever is applicable) of the 1934
Act as well as any other information, reports and documents required of the
Company under the Securities Act or 1934 Act;
(b) Use its best efforts to qualify for the use of Form S-3 to
register the Registrable Securities in a secondary offering; and
(c) Furnish to the Executive or any of his transferees, forthwith
upon request, a written statement by the Company as to its compliance with
the reporting requirements of Rule 144, the Securities Act and the 1934 Act,
as well as a copy of the most recent annual or quarterly report of the
Company and such other reports and documents of the Company as the Executive
or any of his transferees may reasonably request in availing himself of any
rule or regulation of the Securities and Exchange Commission allowing the
Holder or any of his transferees to sell such securities with or without
registration.
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<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
