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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, 1999 or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
SENTO CORPORATION
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(Name of small business issuer in its charter)
UTAH 000-06425 87-0284979
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(State or other (Commission File No.) (IRS Employer
jurisdiction Identification No.)
of incorporation)
808 EAST UTAH VALLEY DRIVE
AMERICAN FORK, UTAH 84003
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(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (801) 492-2000
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. [ ]
State Issuer's revenues for its most recent fiscal year: $21,225,230
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 11, 1999, was approximately $8,342,687.
The number of shares of Common Stock outstanding as of June 11, 1999 was
7,078,546.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's definitive proxy statement relating to its Annual
Meeting of Shareholders scheduled for September 23, 1999 are incorporated by
reference in Part III of this report.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Business...........................................................1
Item 2. Description of Property............................................7
Item 3. Legal Proceedings..................................................7
Item 4. Submission of Matters to a Vote of Security Holders................8
PART II........................................................................9
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters....................................9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................9
Results of Operations.............................................10
Liquidity and Capital Resources...................................12
Year 2000.........................................................13
Certain Factors That May Affect Future Performance............................14
Item 7. FINANCIAL STATEMENTS..............................................17
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................17
PART III......................................................................18
Items 9, 10, 11 and 12........................................................18
Item 13. Exhibits and Reports on Form 8-K..................................18
SIGNATURES....................................................................19
FINANCIAL STATEMENTS.........................................................F-1
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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 - CERTAIN FACTORS THAT
MAY AFFECT FUTURE PERFORMANCE." 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 Corporation ("Sento" or the "Company") provides IT services to
organizations of all sizes that use or develop applications for Windows NT, UNIX
and Internet/Intranet-based client-server computing environments. Such services
consist primarily of the following:
- - providing outsourced technical support and help-desk functions;
- - consulting in computer telephony integration (`CTI") technology; and
- - assessing and training in-house IT staff both on-site and through distance
learning, including computer based training methods ("CBT").
The Company was formed in 1986 as Spire Technologies, Inc. and
marketed high-end third party hardware and software products as a value added
reseller ("VAR"). In 1996, the Company completed a share exchange with an
existing public company. In November 1996, the Company's Common Stock, $.25 par
value (the "Common Stock") was registered on the Nasdaq Stock Market (Small Cap
Market) (Symbol: SNTO). In 1998, the Company changed its name to Sento
Corporation.
In 1997 and 1998, the Company undertook a strategic transition to
focus its efforts on IT training, consulting and technical support. In 1998 the
Company constructed a call center facility which facility is now operational and
is anticipated to be fully staffed (300 personnel) during the 2000 fiscal year.
The Company sold certain operations, comprising part of its VAR business, in
March 1999 and may sell other parts of this business as discussed elsewhere
herein.
BACKGROUND
Historically, Sento operations consisted almost entirely of a VAR
business oriented to purchasers of high-end third-party hardware and software
products. The Company generated revenues almost exclusively from sales and
distribution of third-party hardware and software products. In 1997, 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 ("outsourcing" refers to the transfer of IT product and service
responsibility from internal personnel to external providers). Management
believes these new service offerings will contribute greater operating margins
than distributing third-party products. The Company divested some of its VAR
business in March 1999 and anticipates that it may divest itself of
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the remainder of its VAR business during the 2000 fiscal year. The Company has
also refocused its training activities from classroom style to corporate custom
and distance learning/CBT.
The Company'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. Sento sells and delivers its
services through two IT service offices located in American Fork, Utah, and
Sydney, Australia. Sento's call center is located in the American Fork, Utah
facility.
During the year ended March 31, 1998, Sento expanded its service
offerings and geographic range through the acquisitions of Australian Software
Innovations Pty. Ltd. ("ASI") in Sydney, Australia (now known as Sento Australia
Pty. Ltd.), and Astron Incorporated in Orem, Utah.
THE INDUSTRY
The IT industry encompasses a broad spectrum of technology and
services used 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.
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,
increasing customer satisfaction and building competitive advantages. 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 use limited time and resources (both financial and human) to stay
abreast of rapid technological change while maintaining the operations of
existing IT systems without incurring significant technological or operational
risks.
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. Growing product complexity, shorter
product life cycles and an increasing number of products and multi-vendor
computer and network configurations have increased the demand for technical
support services. At the same time, software publishers, hardware manufacturers,
online service providers and other organizations are finding it increasingly
difficult and expensive to service all their needs in-house. Technical support
is especially challenging to undertake as a non-core function because of the
need for ongoing capital investment in specialized equipment, the technical
workforce management challenge and the inherent need for scale. 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 Company believes that 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 use 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.
BUSINESS STRATEGY
Sento's business strategy is to develop and provide integrated IT
solutions that enable its customers to effectively use leading-edge technology
to improve their business operations and results. The Company believes it can
pursue its business strategy by implementing the following strategic
initiatives:
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DEVELOP AND MARKET LEADING-EDGE INTEGRATED IT SOLUTIONS. The Company
offers its clients broad IT solutions utilizing its consulting, training and
technical support skills and experience. Through the various phases of customer
IT needs, the Company provides:
- - capacity planning, design and implementation;
- - systems monitoring and tuning;
- - customized and general system and application training; and
- - ongoing comprehensive product support and help desk services.
The Company seeks to identify the IT 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.
INTERNAL GROWTH AND ACQUISITIONS. Sento intends to expand its
operations by opening or acquiring additional call centers and consulting and
training offices in strategic locations in the U.S. and foreign countries.
Management believes that if the Company successfully identifies and consummates
acquisitions of additional offices, then it will enhance its 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 that provide complementary consulting and training services, and, as a
result, extend the breadth of its service offerings.
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. Management believes that the Company's three-pronged
service approach (technical support, consulting and training) provides an
excellent career path filled with significant opportunities across the spectrum
of IT experience, from entry level positions through highly skilled IT
consultants. Sento'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 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 Company. Sento provides its employees the chance to
work with leading-edge technologies in a stimulating, flexible, entrepreneurial
environment with continuous technical training.
CAPITALIZE ON EXISTING RESOURCES AND RELATIONSHIPS. Over the past ten
years Sento 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 2,500 customer sites around the world and includes many major
multinational corporations. The Company will use its large and active customer
base to expand sales of new training, consulting and technical support service
offerings. The Company has completed its construction of a state-of-the-art
technical support center in American Fork, Utah and will use that call center to
augment its present help desk business.
SERVICES
The Company's integrated IT solutions are designed to enable its
customers to effectively use leading-edge technology to improve their business
processes and operating results. Sento delivers IT services in three broad
categories: training, consulting and technical support services.
IT TECHNICAL SUPPORT. Sento offers a broad range of IT outsourcing
services consisting principally of call center, helpdesk and product support
services. Sento uses advanced systems, including client-server-based database
and reporting systems, Internet, LAN and multi-user systems and
Computer-
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Telephony 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 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 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 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.
IT TRAINING. Sento provides instructor-led training in seminar,
customized corporate and multimedia settings. Sento's objective is to provide
high-quality IT training designed to incorporate leading delivery systems,
measurement tools and training practices. Sento currently offers training and
related certification services to IT professionals, including Microsoft
Certified Systems Engineer ("MCSE"), Certified NetWare Engineer ("CNE"),
Certified Winframe Administrator ("CWA"), 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. In addition, Sento offers
training for QuickBooks customers. These courses provide tips, configurations,
tweaks and solutions required to address obstacles faced by business and
accounting professionals. Students are provided instruction in the use of
solutions to maximize their productivity. Sento provides its training and
applications through various settings including seminar, customized corporate
and multimedia including video and computer based training via Internet and
CD-ROM.
VAR BUSINESS. Sento sells, designs, installs and integrates computer
solutions comprised of hardware, software and technical services. These products
and services include: mail and messaging solutions, systems design, Windows NT
migration services, network design and implementation, data and systems
management, Internet connectivity and security, remote network connections and
virtual private networks ("VPN"), software solutions such as office automation
and imaging to performance enhancement tools. Sento is a Channel Partner with
Compaq Computer Corporation and an authorized reseller for companies including
CISCO and Microsoft. In March 1999, the Company sold certain assets and
operations, comprising a portion of its VAR business. The Company anticipates
that it will divest itself of the remainder of its VAR business during the 2000
fiscal year.
INTERNATIONAL OPERATIONS. In July 1997, the Company acquired
substantially all of the assets of Australian Software Innovations (Services)
Pty. Ltd. ("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 expired on December
31, 1998. Sento contributed the remainder of the ASI assets to Sento Australia,
Pty. Ltd., a wholly-owned subsidiary of the Company ("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.
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ACQUISITIONS AND DIVESTITURES
In October 1998, the Company acquired equipment and intellectual
property from Functional Software, Pty., Ltd. ("Functional Software") in
exchange for $450,000 in cash and approximately 130,000 shares of Common Stock.
Functional Software is the developer of COSMOS, a system management framework
technology for UNIX and Windows NT computer systems. Subsequent to the
acquisition, the Company determined that the level of revenues reasonably
anticipated to be generated from the operation of the Functional Software assets
would be substantially lower than anticipated at the time of the acquisition.
The Company also determined that the anticipated expenses of the acquired
business would be higher than anticipated at the time of acquisition. The
Company has, as of March 31, 1999, entered into an agreement with the
successor-in-interest to Functional Software, whereby the Company sold all of
the equipment and intellectual property acquired from Functional Software in
exchange for the return to the Company of 100,000 shares of Common Stock.
In August 1998, Sento Training Corporation ("Sento Training") acquired
the marketing rights to certain IT training courses from Educational Systems,
Inc. ("ESI") for $100,000 cash and an agreement to pay future royalties of not
less than $500,000 and not more than $1,400,000 (in cash and shares of Common
Stock) over a 33-month period. Effective April 1, 1999, the Company began
withholding royalty payments, based upon the Company's working capital position
and disagreements with the principals of ESI regarding certain representations
and obligations contained in the acquisition agreement. The Company believes
that on June 9, 1999 ESI filed suit against Sento Training in the Fourth
Judicial District Court of Utah County, State of Utah, requesting payment of
amounts allegedly payable under the ESI acquisition agreement, an accounting and
reconciliation of amounts payable under the agreement and damages based on
alleged misrepresentations and interference with economic relations. As of the
date of this Report, the Company has not been served with papers filed by ESI.
During the year ended March 31, 1999, the Company also sold certain
assets acquired in a series of transactions during the year ended March 31,
1998. These transactions consisted of (a) the sale of all of the stock of Sento
UK Limited (acquired in October 1997 for 31,750 shares of Common Stock) in
exchange for the return of 43,750 shares of Common Stock issued to the principal
and certain employees of Sento UK Limited and an agreement to pay the Company a
royalty equal to two percent of net revenues generated by Sento UK Limited
during the five-year period commencing April 1, 1999; (b) the sale of all of the
assets of Sento's east coast division (acquired in July 1997 from CDG
Technologies, Inc. for 60,000 shares of Common Stock) in exchange for the
payment of cash in an amount equal to $135,000 (paid over a three-year period)
and a royalty based upon net revenues of the divested operations over the
three-year period, provided that the entire purchase price will be reduced to
$100,000 if paid in full prior to January 1, 2001; (c) the sale of 67% of the
stock of Dewpoint Distributed Solutions, Inc. ("Dewpoint") (representing the
Company's entire ownership of the stock of Dewpoint) in exchange for cash in the
amount of $5,000 and the delivery of promissory notes in the original principal
amount of $333,336, secured by a pledge of all of the Dewpoint shares
transferred by the Company and bearing interest at the rate of six percent (6%)
per annum; and (d) the sale of all of the assets of Sento's west coast division
(acquired in October 1997 from PC Business Solutions, Inc. for 250,000 shares of
Common Stock) in exchange for a promissory note in the original principal amount
of $250,000, secured by a pledge of 100,000 shares of Common Stock and bearing
interest at the rate of seven and one-half percent (7.5%) per annum.
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,
product differentiation, service, technology and compliance with industry
standards. The Company anticipates that present and potential competition in the
various markets it serves will come from enterprises and individuals of various
types, many of which are larger and have greater resources than those of 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. Management
believes that its efforts to implement the Company's
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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. In the IT training industry, among other
competitors, Sento faces competition from large hardware and software vendors,
as well as many independent international, national, regional and local training
companies. Sento's principal competitors in IT consulting include software
vendors, consulting divisions of large international accounting and consulting
firms and independent international, national, regional and local training
companies. In the IT technical support industry, Sento also faces significant
and diverse competition from a broad spectrum of international, national,
regional and local enterprises.
Sento's competitors include major sole source IT services companies
such as Anderson Consulting, Computer Sciences Corp., Electronic Data Systems,
and IBM which provide full "turnkey" solutions to their large customers, as well
as the following national and worldwide services companies, among others, who
compete in one or more of the three market segments in which Sento competes:
<TABLE>
<CAPTION>
COMPANY SYMBOL FY END TTM REV ($MIL) MARKET SEGMENT*
- ------- ------ ------ -------------- --------------
<S> <C> <C> <C> <C>
Keane Consulting KEA Dec 1,076 C, T, TS
Aris Corporation ARSC Dec 115 C, T
Sykes International SYKE Dec 469 C, TS
CBT CBTSY Dec 162 T
Learning Tree Intnl LTRE Sep 187 T
A Consulting Team TACX Dec 49 C, T
Integrated Systems INTS Feb 74 C
Computer Learning CLCX Jan 145 T
National Tech Team TEAM Dec 117 TS
Teletech Holdings TTEC Dec 369 TS
Whittman-Hart, Inc. WHIT Dec 308 C
Stream DNY Dec 200 TS
</TABLE>
* C - Consulting, T - Training, TS, Technical Support
Sento's ability to compete in its market segments will be driven by
its niche approach, state-of-the-art call center technology, its core
competencies in leading-edge technologies, and by servicing higher-end IT
segments such as networks, TCP/IP, CTI, and systems rather than simpler products
like desktop applications and games.
Given the extensive market opportunity in the networking, Internet,
and CTI systems operating environments, management believes that Sento's
strategy of providing the "best of breed" services in the technically high end
market niche will provide it with competitive positioning to achieve high growth
and capture market share while reaching profitability objectives.
SIGNIFICANT CUSTOMERS
No customer accounted for more than 10% of the Company's revenues for
the fiscal year ended March 31, 1999. However, two customers accounted for
approximately 83% of technical support revenues, and it is anticipated that less
than five customers will account for more than 80% of the technical support
revenues in the next fiscal year and perhaps longer. In addition, it is
anticipated that technical support revenues will become the majority of the
Company's revenues, and, therefore, it is anticipated that a small number of
customers will account for the majority of the Company's revenues. Consistent
with industry standards, the Company's contracts are generally cancelable by the
customer on short-term notice. The loss of, or the failure to retain a
significant amount of business with any key customer, could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
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PATENTS AND PROPRIETARY TECHNOLOGY
The Company does not own any patents nor does it have any patent
applications relating to its products. The Company has a limited number of
copyrights and has obtained licenses to create derivative works relative to
copyrights owned by third parties. The ownership of such derivative works vests
in the licensor. The Company is also seeking tradename and trademark protection
for certain of its names and marks. Accordingly, Company management does not
believe that any particular patent or group of patents, copyrights, trademarks,
or tradenames is of material importance to the business of the Company as a
whole.
RESEARCH AND DEVELOPMENT
The Company competes in an industry which is characterized by rapid
technological change. Historically, the Company has not incurred significant
expenses for research and development.
EMPLOYEES
As of June 11, 1999, the Company had approximately 257 total
employees, approximately 225 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. There can be no assurance
that the Company will be able to attract and maintain all personnel necessary
for the development and operation of its business nor that it will be able to
train its current employees on new developments in technology. 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.
PROPRIETARY MARKS
The Company utilizes many third-party products represented by
registered or common law trademarks, including the following trademarks.
DEC-Registered Trademark-,VMS-Registered Trademark-, OpenVMS-TM-,
VAX-Registered Trademark- and Alpha-TM- are trademarks of Digital.
Microsoft-Registered Trademark-, MS-DOS-Registered Trademark-, DOS-TM-,
Windows-Registered Trademark-, Windows NT-Registered Trademark- and Windows
95-TM- are trademarks of Microsoft. OS/2-TM- is a trademark of IBM.
Intel-Registered Trademark- is a registered trademark of Intel Corporation.
This Form 10-KSB also contains trademarks of other companies.
ITEM 2. DESCRIPTION OF PROPERTY.
The headquarters and existing call center of the Company are located
at 808 East Utah Valley Drive, American Fork, Utah. The Company leases
approximately 40,000 square feet of space used for the Company's administrative,
call center, technical support and training operations. The monthly base rent is
$33,400, subject to adjustment during the renewal periods. Management
anticipates that continued growth of the Company, if achieved, will necessitate
acquisition of additional office space during fiscal year 2000. The Company also
leases a 4,100 square foot facility in Sydney, Australia and a 2,600 square foot
facility in Orem, Utah.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of this Report, the Company is not a party to any legal
proceedings that are required to be reported under this Item. See Item 1.
Business--Acquisitions and Divestitures.
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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.
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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"). The
following table sets forth the range of high and low closing prices for the
Common Stock in the over-the-counter market for the periods indicated, as
reported by the NASD. 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.
------------------------------
QUARTER ENDED HIGH LOW
---------- -----------------
March 31, 1999 ................ $2.625 $1.375
December 31, 1998 ............. $4.000 $2.250
September 30, 1998 ............ $4.750 $3.500
June 30, 1998 ................. $5.125 $3.750
March 31, 1998 ................ $4.500 $3.875
December 31, 1997 ............. $4.750 $4.063
September 30, 1997 ............ $5.500 $4.250
June 30, 1997 ................. $5.375 $3.875
The Company did not pay or declare dividends on the Common Stock during the
periods ended March 31, 1999 and 1998. 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 11, 1999, the Company had 7,078,546 shares of Common Stock
outstanding, held by 440 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
Sento Corporation ("Sento" or the "Company") 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 hardware and software solutions.
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 customers realize the benefits of advanced IT solutions
in the areas of network, systems and financial information. Sento Technical
Services Corporation ("Sento Technical Services") offers a range of IT
outsourcing services consisting of "call center", "helpdesk", and technical
support services. The Company conducts substantially all of its foreign
operations through Sento Australia Pty. Ltd. based in Sydney, Australia and
Sento Limited, located near London, England. DewPoint Distributed Solutions
Corporation, a majority owned (67%) subsidiary (divested March 31, 1999),
provided distribution, reseller, and channel
9
<PAGE>
management for leading software and hardware manufacturers. As discussed
elsewhere in the Form 10-KSB, the Company has divested itself of some of these
businesses.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Revenues increased 3% or $585,385 from $20,639,845 for the
fiscal year ended March 31, 1998 to $21,225,230 for the fiscal year ended March
31, 1999. These revenues were generated from the following three areas:
Revenues from the Company's VAR business decreased 26% or $5,148,773
from $19,924,058 for fiscal year ended March 31, 1998 to $14,775,285 for the
fiscal year ended March 31, 1999. This decrease is representative of the
Company's strategic transition from reselling third party products to marketing
the Company's own product line of IT outsourced services. In addition, two of
the Company's major suppliers experienced significant market share
deterioration. The Company expects that revenues from product sales and
maintenance will represent a smaller percentage of the Company's revenues in the
future as the Company continues to focus on its other sources of revenue. The
Company divested some of this business in March 1999 and anticipates that it
will divest itself of the remainder of this business during the 2000 fiscal
year.
Training revenues of $3,430,728 for the fiscal year ended March 31,
1999 were generated through Sento Training. The Company's training revenues for
the fiscal year ended March 31, 1998 of $715,787, were all generated in the
fourth quarter, which is when the Company entered into the training business
with the acquisition of Astron Incorporated ("Astron").
Technical Services revenues of $3,019,217 were generated through Sento
Technical Services, which was created in April of 1998. The Company had no
comparative technical services revenues for the year ended March 31, 1998. This
revenue reflects the Company's strategic focus on providing IT services.
COST OF SALES. Cost of sales consists primarily of salaries and
employee benefits for the Company's full and part-time consultants, engineers,
agents, and instructors; travel expenses relating to consulting and training
activities; the costs to third party manufacturers for software and hardware
products; facilities costs; and depreciation on property and equipment incurred
in the production of revenues.
Cost of sales increased 8% or $1,159,944 from $14,227,071 for the
fiscal year ended March 31, 1998 to $15,387,015 for the same period in 1999.
Gross profit as a percentage of revenues decreased by 3%, from 31% of revenues
during the fiscal year ended March 31, 1998 to 28% of revenue for the same
period in 1999. There have been general decreases in the margins allowed from
manufacturers to resellers in both hardware and software products. In August
1998, the Company completed and moved into a new technical support call center.
Excess capacity in the Company's new call center also contributed to lower
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses increased 42% or $3,853,081 from $9,186,053 for the
fiscal year ended March 31, 1998 to $13,039,134 for the same period in 1999.
During the first nine months of fiscal 1999 the Company spent substantial
amounts on selling and marketing expenses in an effort to increase training
revenues that resulted in no increase in revenues and a substantial loss to
Sento Training. During the fourth quarter of fiscal 1999, the Company
significantly changed its focus from providing classroom training to providing
custom corporate IT training, video, and training in several vertical niche
markets. This change of focus has resulted in increased revenues, lower selling
and marketing spending, and a visible improvement in operating results for the
training division. Management intends to continue this approach and believes
Sento Training's financial results will continue to improve with this strategy
in place. Start-up activities associated with
10
<PAGE>
Sento Technical Services and Sento Training also contributed to the large
increase in general and administrative expenses during fiscal 1999.
RESEARCH AND DEVELOPMENT EXPENSES. The increase in research and
development expenses of $98,134 or 124% from $78,875 during the year ended March
31, 1998 to $177,009 for the year ended March 31, 1999 was mainly due to
software development activities by the Company's Australian operations.
AMORTIZATION OF INTANGIBLE ASSETS. The Company recorded $791,456 of
amortization expense relating to intangible assets during the fiscal year ended
March 31, 1999. The intangible assets being amortized are from business
acquisitions completed during the 1999 fiscal year and the latter portion of the
Company's fiscal year ended March 31, 1998. Therefore, amortization of
intangible assets, in the amount of $214,984 was much lower in fiscal 1998
because of the short time these assets were held during that year. In addition,
as discussed elsewhere in this Form 10-KSB, the Company has divested itself of
some of these business and has experienced an asset impairment on the remaining
business, which has resulted in no remaining intangible assets as of March 31,
1999. In future years, there will be no amortization of intangible assets
relating to the above mentioned acquisitions.
RESTRUCTURING CHARGES. The Company took measures to improve
productivity in its VAR business during the three months ended December 31, 1998
when it implemented a restructuring plan that included the closing of the
Company's network consulting operations in Southern California. The Company
recorded a restructuring charge of $229,829, including the write-off of $202,179
of unamortized goodwill and non-compete agreements relating to the Company's
network consulting operations.
IMPAIRMENT OF ASSETS. During the fiscal year ended March 31, 1999, the
Company recorded impairment of assets totaling $880,842. The impairment consists
of a write-down of goodwill and non-compete agreements totaling $426,296
relating to the Company's acquisition of Astron, Inc. in January 1998 and the
write-off of $454,546 of unamortized intangible marketing rights for classroom
based training related to the acquisition of Educational Systems Inc. The
decision to write down these assets was based on continued losses in the
classroom-based training department of the Company's training division, which
was acquired through the acquisition of Astron. In addition, the Company expects
to incur continued losses in classroom-based training and, therefore, is
focusing its continued efforts on seminar-based training and customized
corporate training.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. Included as
part of the acquisition of Functional Software Pty, Inc. ("Functional"), was the
purchase of in-process research and development costs totaling $92,095, which
where expensed at the time of acquisition.
OTHER INCOME, NET. Other income includes the following for the years
ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest income $ 111,601 $ 358,466
Interest expense (101,871) (86,518)
Loss on disposal of businesses (337,402) -
Gain on sale of intangible assets 875,000 3,214,107
Gain (loss) on disposal of property and equipment 112,496 (53,852)
Settlement with vendor 141,000 -
Other 314,055 -
------------ -----------
Other Income, Net $1,114,879 $3,432,203
============ ===========
</TABLE>
It is not anticipated that other income will be significant in future periods.
INTEREST INCOME. Interest income decreased by $246,865, or by 69%,
from $358,466 during the year ended March 31, 1998 to $111,601 during the same
period in 1999. The decrease in interest income is due primarily to the
significant decrease in the Company's cash balances.
11
<PAGE>
INTEREST EXPENSE. Interest expense decreased by $134,647, or 57%, from
$236,518 during the year ended March 31, 1998 to $101,871 during the same period
in 1999. This decrease was due primarily to a charge to interest expense in 1998
for a 15% discount offered on $1,000,000 of convertible bonds issued in 1998.
The total charge to interest expense for the above mentioned discount was
$150,000 in 1998.
LOSS ON DISPOSAL OF BUSINESSES. During the last quarter of fiscal
1999, the Company sold its VMS software sales and support business; all of the
stock of Sento UK; all of the assets of Sento's east coast operations; its
ownership in Dewpoint Distributed Solutions, Inc. ("Dewpoint"); all of the
assets of Sento's west coast operations; and intellectual property and equipment
acquired in October of 1998 from Functional. See Item 1. Business--Acquisitions
and Divestitures. The net loss from the disposal of these businesses totaled
$337,402.
GAIN ON SALE OF INTANGIBLE ASSETS. During the year ended March 31,
1998, the Company sold intangible assets to BMC Software, Inc. (BMC). The total
gain from the sale to BMC was $4,089,107, of which $3,214,107 was recognized in
fiscal 1998 and the remaining $875,000 was recognized in fiscal 1999 as
contractual representations and warranties were completed.
GAIN (LOSS) ON DISPOSAL OF PROPERTY AND EQUIPMENT. Included in the
gain on disposal of property and equipment during the year ended March 31, 1999
is a gain totaling $124,578 from the sale of a building. The Company also
recognized losses from the disposal of equipment during the years ended March
31, 1999 and 1998 of $12,082 and $53,852 respectively.
OTHER. Other includes royalty and investment income totaling $188,000,
collected by the Company in 1999 from the sale of investments in a prior period
and other miscellaneous items. No gain on the sale of these investments was
originally recognized at the time of sale due to the uncertainty of future
realization. Management does not expect other income to be significant in future
periods.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had a $1,537,769 deficit in working
capital and cash balances had decreased 95%, or $5,531,121, from $5,807,014 at
March 31, 1998 to $275,893 at March 31, 1999. The deterioration in liquidity was
primarily due to $3,462,744 of net cash used by operating activities and
$2,717,848 of cash used for capital expenditures during the year ended March 31,
1999.
The Company's primary sources of liquidity have been cash received
from sales of assets and cash provided through private sales of equity as well
as being generated by its operations. In addition, the Company has financed some
of its equipment utilized in its business through long-term debt and has
obtained an operating line of credit from a bank. The Company's expansion and
continuing operating losses will require the Company to find additional sources
of funding in future periods. In the event the Company is not able to find such
alternate sources of funding, its ability to pursue its planned business
strategy will be limited and it may be forced to reduce or suspend its
operations. There can be no assurance that the Company will be able to obtain
necessary capital funding on terms favorable to the Company, or at all.
On June 9, 1999, the Company completed the initial closing of a
private placement of common stock and warrants resulting in total consideration
received to that date of approximately $1,600,000. The offering period of the
private placement will continue through July 2, 1999, during which time Sento
will seek to raise an additional amount to bring the private placement to its
maximum amount of $1,920,000. This maximum amount of the private placement is in
the form of 600,000 units consisting of two shares of common stock and a warrant
to purchase one share of common stock. The units were and are being sold at a
price of $3.20 per unit. The stock purchase warrants are exercisable for a
three-year period at $2.50 per share. With this new financing, management
believes the Company will be able to continue its operations and fund part of
its expected growth.
This new financing also made it possible for the Company to
restructure its loan with its bank, which will provide up to $2,000,000 of bank
financing including the $1,000,000 outstanding with the bank
12
<PAGE>
at March 31, 1999. The amount available under the bank loan is based on Sento's
outstanding accounts receivable. The new financing also makes it possible for
the Company to proceed with its plans to enter into agreements regarding sales
and leaseback of equipment, which could provide up to an additional $1,500,000
in cash.
As discussed above, management has implemented plans to raise debt and
equity capital sufficient for continued operations. In the opinion of
management, the continued implementation of these plans will permit the Company
to meet its operating requirements, at least through the next fiscal year.
However, the Company is subject to many uncertainties over which management has
limited control, any one of which could adversely affect the Company's operating
cash flows and thus create cash flow problems for the Company.
YEAR 2000
Sento Corporation has organized a Year 2000 oversight committee that is
conducting an analysis of the Company's internal compliance and implementing
necessary changes to ensure compliance. An overall five-phase plan has been
implemented to coordinate the efforts of all offices worldwide.
The five-phase plan is outlined below:
- - Discovery: Creation of Year 2000 Project Plan, Organization of Oversight
Committee consisting of site coordinators for each of the Sento sites,
members of the Company's IT management and senior management, and project
manager. Communication with Board of Directors.
- - Risk Assessment: Identify and document critical path items for all
departments throughout Sento worldwide. Assess risk on each item. Determine
current Year 2000 Compliance Status for each at risk item.
- - Equipment and Products: Inventory of internal systems and software and
embedded logic equipment. Contacting all suppliers and manufacturers of
equipment and products for Year 2000 status on products as well as their
internal company Year 2000 readiness.
- - Testing: Conduct internal testing on all mission critical systems to assure
no disruption of service or date-logic concerns.
- - Reporting and Contingency Plans: Reporting of results of above phases and
proposed contingency plans for all high-risk items.
To date, the Company has completed the Discovery, Risk Assessment, Equipment and
Products, and Testing phases. The Company is currently accumulating information
for the Reporting and Contingency Plan phase. The Company's mission critical
systems primarily consist of newly purchased computers with Intel processors
running Microsoft NT/Windows software. The Company's primary mission critical
applications have been purchased with documented Year 2000 compliance. The
telephone system and security system for the corporate office are newly
purchased and Year 2000 certification verification is underway.
While the costs to address the Company's Year 2000 issues cannot readily be
determined until the above five phases have been completed, the nature of the
systems and software that are implemented in the Company's critical path
processes are such that the Company does not anticipate the costs associated
with any corrective procedures will be material. The preceding statements
regarding the Company's anticipated costs are forward-looking. Actual results
could differ materially from those identified in the forward-looking statements.
Factors affecting these results include the timing and cost of completing the
Company's year 2000 assessment, the costs of any required remedial measures, the
costs of failing to anticipate year 2000 issues that arise and the existence of
any liability to third parties for failure by the Company to have adequately
addressed its year 2000 issues.
13
<PAGE>
In the near term, Year 2000 compliance is creating significant demand for IT
products and services such as those provided by the Company. The passage of the
Year 2000 may have a material adverse effect on the demand for these services.
In addition, while the Company is not aware of any existing potential claims,
the occurrence of Year 2000 related system failures in the information systems
of clients of the Company could have a material adverse effect on the Company's
business, financial condition and results of operation, whether or not the
Company bears any responsibility, legal or otherwise, for the occurrence of
those problems.
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
In addition to other information in this Form 10-KSB, the following
are important factors that should be considered carefully in evaluating the
Company and its business.
Liquidity and Capital Resources
At March 31, 1999, the Company had a $1,537,769 deficit in working
capital and cash balances had decreased 95% or $5,531,121, from $5,807,014 at
March 31, 1998 to $275,893 at March 31, 1999. The deterioration in liquidity was
due primarily to $3,462,744 of net cash used by employee training and operating
activities during the year ended March 31, 1999 and $2,717,848 of cash used to
purchase furniture and equipment.
The Company's primary sources of liquidity have been cash received
from sales of assets and cash provided through private sales of equity, as well
as borrowing under a bank line of credit. In addition, the Company has financed
some of its equipment utilized in its business through long-term leasing
arrangements. The Company's expansion and continuing operating losses require
the Company to find additional sources of funding. In the event the Company is
not able to find such alternate sources of funding, its ability to pursue its
planned business strategy will be limited, and it may be forced to reduce or
suspend its operations. There can be no assurance that the Company will be able
to obtain necessary capital to fund its operations and purchase needed equipment
to expand its operations on terms favorable to the Company, or at all.
Dependence on Customers
No customer accounted for more than 10% of revenues for the fiscal
year ended March 31, 1999. However, two customers accounted for approximately
83% of technical support revenues, and it is anticipated that less than five
customers will account for more than 80% of the technical support revenues in
the next fiscal year and perhaps longer. In addition, it is anticipated that
technical support revenues will become the majority of the Company's revenues,
and, therefore, it is anticipated that a small number of customers will account
for the majority of the Company's revenues. Consistent with industry standards,
the Company's contracts are generally cancelable by the customer on short-term
notice. The loss of, or the failure to retain a significant amount of business
with any key customer could have, and the cancellation or termination of the
Company's contracts with either of its existing technical support customers
would have, a material adverse effect on the business, financial condition and
results of operations of the Company.
Competition
The market for providing IT services is highly fragmented and very
competitive. The IT services industry is comparatively young with many small
regional service companies supplying some training and consulting, or systems
integration services coupled with hardware and software sales. There are many
small IT training companies specializing in various vertical market niches.
The IT services industry, however, has begun to experience a degree of
consolidation and the entry of major IT companies, which has resulted in an
additional level of competition from service providers that have greater name
recognition, larger installed customer bases, and significantly greater
financial, technical and marketing resources than the Company. Over the past
five years, a number of existing companies have enjoyed increasing success and
rapid internal growth. Several of these companies
14
<PAGE>
have been active in acquiring the smaller regional training and consulting
companies and are becoming major competitors with a measurable share of this
rapidly expanding market. In addition, major sole source IT services companies
such as Anderson Consulting, Computer Sciences Corp. ("CSC"), Electronic Data
Systems ("EDS"), and IBM provide full "turnkey" solutions to their large
customers.
Also, major computer hardware and software companies generally provide
their own technical support, consulting, and customer training. Therefore, such
companies are not within the potential customer base for IT service providers
and have the capability of providing services that compete with those provided
by the Company.
There can be no assurance that better and more efficient services will
not be provided by new or existing IT service providers in competition with the
Company or that existing service providers will not develop. The services
provided by such competitors may be more effective or less expensive than those
provided by the Company. Although the Company continues to improve, refine and
enhance the services it provides, there can be no assurance that the Company
will be able in the future to do so.
Changing Market
The market for IT services is characterized by rapid technological
advances, new product introductions and enhancements, and changes in customer
requirements. The Company's future success will depend in large part on its
ability to service new products, platforms and rapidly changing technology.
These factors will require the Company to provide adequately trained personnel
to address the increasingly sophisticated, complex and evolving needs of its
customers.
The complex nature of support services has resulted in the demand for
technical support services to expand beyond the telephone and now includes
e-mail, faxes and the Internet. Services include resolution of problems relating
to the configuration and set-up, installation and interoperability of different
products, and the level of support requests ranges from simple error messages to
complex network configurations. These services cover a broad set of
technologies, including operating environments, applications, databases,
communication and network products, systems tools, development environments and
Internet/intranet products. There can be no assurance that the Company will be
able to provide such services profitably. The failure by the Company to adapt to
the changing IT service industry would have an adverse impact on the Company's
result of operations and financial condition.
Sento's success will depend in part on its ability to develop
solutions that keep pace with the continuing changes in information technology,
evolving industry standards and changing client requirements. There can be no
assurance that Sento will be successful in adequately addressing these
developments on a timely basis or that, if these developments are addressed,
Sento will be successful in the marketplace. In addition, there can be no
assurance that products or technologies developed by others will not render
Sento's services non-competitive or obsolete. Sento's failure to address these
developments could have a material adverse effect on Sento's business and
financial condition.
Attracting, Training and Retaining Quality Employees
The IT services market suffers from a significant labor shortage. The
success of the Company depends, in large part, on its ability to attract, retain
and train highly-qualified scientific, technical, managerial and marketing
personnel with IT expertise. The Company has not entered into employment
agreements that require the services of any of its key technical personnel to
remain with the Company for any specified period of time. Competition for such
personnel is intense. There can be no assurance that the Company will be able to
attract and maintain all personnel necessary for the development and operation
of its business nor that it will be able to train its current employees on new
developments in technology. The loss of the services of key personnel or an
inability to attract, retain, train and motivate qualified personnel could have
a material adverse effect on the business, financial condition and results of
operations of the Company.
15
<PAGE>
Dependence on Industry Trend to Outsource Services
The Company's business depends in large part on the trend within the
IT industry to outsource certain services. There can be no assurance that this
trend will continue or if the trend continues that it will proceed at the same
rate of growth. The failure of this trend to continue could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
New Management
The Company has recently effected significant changes in its
management team and key employees. In particular, the Company's chief executive
officer, Arthur Coombs, Gary B. Filler, in a consulting role as its Executive
Vice President and Chief Financial Officer, and Keith Barr, Chief Information
Officer, joined the Company in February 1998, March 1999 and April, 1998,
respectively. A majority of the Company's Board of Directors were elected since
July 1998. The Company's headcount has grown from 162 at June 12, 1998 to 257 at
June 11, 1999. There can be no assurance that the Company's new management team
and other new personnel can successfully manage the Company's rapidly evolving
business, and failure to do so would have a material adverse effect upon the
Company's operating results.
Potential Significant Fluctuations in Quarterly Results
The value of individual transactions can constitute a substantial
percentage of the Company's quarterly revenue, and particular transactions may
generate a substantial portion of the operating profits for a quarter. Because
the Company's staffing and other operating expenses are based on anticipated
revenue levels, and a high percentage of its expenses are fixed, delays in the
receipt of orders or payments can cause significant variations in operating
results from quarter to quarter. In addition, the Company may expend significant
resources pursuing potential sales that will not be consummated. The Company
also may choose to reduce prices or to increase spending in response to
competition or to pursue new market opportunities, which may adversely affect
its operating results.
In particular, the Company's revenues from call center operations are
potentially volatile. Such revenues are a function of the number of support
requests received by the Company and the time spent on such requests.
Consequently, the Company's profitability may be adversely affected if the
Company receives fewer support requests than anticipated or the time spent in
resolving inquiries is greater than anticipated.
For all of the reasons identified above, management believes that
period-to-period comparisons of the Company's results of operations may not be
meaningful and should not be relied upon as an indication of future performance.
Furthermore, there can be no assurance that the Company will be able to achieve
and sustain profitability on a quarterly basis.
Possible Volatility of Stock Price
The trading price of the Common Stock has fluctuated widely in
response to variations in quarterly operating results, announcements by the
Company or its competitors, industry trends, general economic conditions or
other events or factors. Such fluctuations may continue in the future. Among
other factors, as described in the preceding paragraph, it is possible that in
some future quarters the Company's operating results will be below the
expectations of public market analysts and investors. Regardless of the general
outlook for the Company's business, the announcement of quarterly operating
results below analyst and investor expectations could have a material and
adverse effect on the market price of the Common Stock.
Risk of Emergency Interruption of Call Center Operations
16
<PAGE>
The Company's business is highly dependent on its computer and
telecommunications equipment and software systems. There can be no assurance,
that natural disaster, human error, equipment malfunction or inadequacy, or
other events would not result in a prolonged interruption in the Company's
ability to provide support services to its clients. The temporary or permanent
loss of the Company's computer or telephone equipment or systems, through
casualty, operating malfunction or otherwise, could have a material adverse
effect on the Company. The Company's property and business interruption
insurance may not be adequate to compensate the Company for all losses that it
may incur.
Collection of Accounts
The Company's business of providing IT services involves certain
account collection risks. These remedies may be time-consuming and there can be
no assurance that the Company would be successful in its efforts or that the
Company would be able to recover its costs of collection. With respect to
software sales, a customer who has ordered and received software from the
Company may fail to pay timely for the software, thus creating a collection
problem for the Company. In the event a purchaser of services or software
defaults on its payment obligation, the Company's sole remedy would be the
pursuit of legal remedies.
ITEM 7. FINANCIAL STATEMENTS.
The financial statement information required by Item 7 is included on pages
F-1--F-20.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
17
<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 September 23, 1999. The definitive proxy statement will be filed
with the Commission not later than 120 days after March 31, 1999, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
Incorporated Filed
Description by Reference Herewith
Number
- -------------- ---------------------------------------------------------------------- ------------ --------
<S> <C> <C> <C>
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (2)
10.1 Sento Technical Innovations Corporation Stock Incentive Plan (3)
10.2 Astron Incorporated Acquisition Agreement, dated as of November 19, (4)
1997
10.3 Amendment No. 1 to Astron Incorporated Acquisition Agreement, dated as (4)
of December 31, 1997
10.4 Educational Systems, Inc. Asset Purchase Agreement, dated as of (1)
June 24, 1998.
10.5 Silicon Valley Bank Amended and Restated Loan and Security Agreement, (1)
dated as of June 23, 1999.
21 Subsidiaries of the Registrant (1)
23 Consent of KPMG LLP (1)
27 Financial Data Schedule (1)
- --------------
</TABLE>
(1) Filed herewith and attached to this Form 10-KSB following page 19
hereof.
(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 the Company's definitive proxy statement
for the annual meeting of the Company's shareholders held on August
18, 1997.
(4) Incorporated by reference to a Current Report on Form 8-K filed with the
Commission on January 15, 1997.
(b) REPORTS ON FORM 8-K
None
18
<PAGE>
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 25, 1999.
SENTO CORPORATION
By: /s/ ARTHUR F. COOMBS, III
--------------------------------
Arthur F. Coombs, III
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 25, 1999
SIGNATURE CAPACITY IN WHICH SIGNED
- --------------------------------- ------------------------------------------
/s/ KIETH E. SORENSON Chairman of the Board
- -------------------------------
Kieth E. Sorenson
/s/ ARTHUR F. COOMBS, III President, Chief Executive Officer and
- ------------------------------- Director (Principal executive officer)
Arthur F. Coombs, III
/s/ GARY B. FILLER Chief Financial Officer and Director
- ------------------------------- (Principal financial and accounting
Gary B. Filler officer)
/s/ ROBERT K. BENCH Director
- -------------------------------
Robert K. Bench
/s/ WALTER W. BREGMAN Director
- -------------------------------
Walter W. Bregman
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Sento Corporation:
We have audited the accompanying consolidated balance sheets of Sento
Corporation and subsidiaries as of March 31, 1999 and 1998 (as restated), and
the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We 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 Corporation and
subsidiaries as of March 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended.
KPMG LLP
Salt Lake City, Utah
May 21, 1999, except as to
the first paragraph of note 6
which is as of June 8, 1999,
and the second paragraph
of note 16 which is as
of June 9, 1999
F-1
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1999 and 1998
<TABLE>
<CAPTION>
1998
1999 (NOTE 7)
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 275,893 5,807,014
Accounts receivable, less allowance for doubtful
accounts of $208,678 in 1999 and $397,842 in 1998 3,075,460 4,076,715
Inventories 10,010 302,172
Income taxes receivable 375,148 322,112
Notes receivable, current portion (note 4) -- 39,500
Other current assets (note 3) 381,872 1,434,907
Deferred tax assets (note 8) -- 218,540
------------ ----------
Total current assets 4,118,383 12,200,960
Property and equipment (notes 5 and 6) 2,907,897 1,274,902
Intangible assets, less amortization of $214,584 in 1998 (notes 3 and 13) -- 1,513,758
Notes receivable, less current portion (note 4) 175,000 98,500
Other assets (note 3) 99,891 772,532
------------ ----------
$ 7,301,171 15,860,652
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (note 6) $ 1,000,000 --
Current portion of long-term debt (note 6) 191,741 131,774
Current portion of royalty obligations (note 3) 218,182 --
Accounts payable 2,197,129 2,720,562
Accrued salaries 479,830 311,013
Accrued liabilities 1,068,949 1,088,184
Deferred revenue 500,321 2,280,510
------------ ----------
Total current liabilities 5,656,152 6,532,043
------------ ----------
Long-term liabilities:
Deferred revenue -- 175,000
Convertible bonds (note 7) 472,266 944,533
Long-term debt, excluding current portion (note 6) 103,192 362,959
Long-term royalty obligations, net of current portion (note 3) 183,125 --
Deferred tax liabilities (note 8) -- 271,539
------------ ----------
Total long-term liabilities 758,583 1,754,031
Commitments (notes 9, 16, and 18)
Stockholders' equity (notes 3, 7, and 11):
Common stock, $.25 par value. Authorized 50,000,000 shares;
issued and outstanding 6,120,671 shares in 1999 and 5,741,063 shares in 1998 1,580,607 1,435,268
Additional paid-in capital 7,247,143 6,100,290
Deferred compensation (204,814) (338,357)
Retained earnings (accumulated deficit) (7,327,537) 427,266
Accumulated other comprehensive income - foreign currency translation (22,400) (49,889)
Treasury stock, 201,750 common shares, at cost (386,563) --
------------ ----------
Total stockholders' equity 886,436 7,574,578
------------ ----------
$ 7,301,171 15,860,652
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1998
1999 (NOTE 7)
------------ ----------
<S> <C> <C>
Revenues $ 21,225,230 20,639,845
Cost of sales 15,387,015 14,227,071
------------ ----------
Gross profit 5,838,215 6,412,774
Selling, general, and administrative expenses 13,039,134 9,186,053
Research and development expense 177,009 78,875
Amortization of intangible assets 791,456 214,984
Restructuring charges (note 12) 229,829 --
Impairment of long-lived assets (note 13) 880,842 --
Write-off of in-process research and development costs (note 3) 92,095 --
------------ ----------
Loss from operations (9,372,150) (3,067,138)
Other income, net (note 2) 1,114,879 3,282,203
------------ ----------
Income (loss) before taxes (8,257,271) 215,065
Income tax benefit (expense) (note 8) 502,468 (302,090)
------------ ----------
Net loss $ (7,754,803) (87,025)
------------ ----------
------------ ----------
Net loss per share - basic and diluted $ (1.31) (0.02)
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
ACCUMU-
RETAINED LATED
ADDI- EARNINGS OTHER TOTAL
COMMON STOCK TIONAL DEFERRED (ACCUMU- COMPRE- STOCK-
------------------- PAID-IN COMPEN- LATED HENSIVE TREASURY HOLDERS'
SHARES AMOUNT CAPITAL SATION DEFICIT) INCOME/LOSS STOCK EQUITY
--------- ---------- --------- -------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 11) 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 (note 7) -- -- 205,465 -- -- -- -- 205,465
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 3) 485,750 121,438 968,450 -- (16,200) -- -- 1,073,688
Employee stock purchases
(note 11) 10,823 2,706 35,113 -- -- -- -- 37,819
Deferred compensation related
to grant of stock options
and warrants (note 11) -- -- 334,136 (334,136) -- -- -- --
Amortization of deferred
compensation (note 11) -- -- -- 95,779 -- -- -- 95,779
Comprehensive loss:
Net loss (note 7) -- -- -- -- (87,025) -- -- (87,025)
Effect of change in
foreign currency translation -- -- -- -- -- (49,889) -- (49,889)
----------
Total comprehensive loss (136,914)
--------- ---------- --------- -------- ---------- ----------- -------- ----------
Balances at March 31, 1998 5,741,063 1,435,268 6,100,290 (338,357) 427,266 (49,889) -- 7,574,578
Conversion of bonds 313,554 78,388 441,879 -- -- -- -- 520,267
Stock issued for bonuses 12,208 3,052 29,323 -- -- -- -- 32,375
Exercise of warrants 73,894 18,474 240,154 -- -- -- -- 258,628
Exercise of stock options 14,882 3,720 14,736 -- -- -- -- 18,456
Common stock issued for
business acquisition 142,559 35,640 351,052 -- -- -- -- 386,692
Employee stock purchases
(note 11) 11,455 2,864 34,824 -- -- -- -- 37,688
Common stock issued for
royalty payments 12,806 3,201 34,885 -- -- -- -- 38,086
Treasury shares received for
sale of property and
businesses (201,750) -- -- -- -- -- (386,563) (386,563)
Amortization of deferred
compensation (note 11) -- -- -- 133,543 -- -- -- 133,543
Comprehensive loss:
Net loss -- -- -- -- (7,754,803) -- -- (7,754,803)
Effect of change in
foreign currency translation -- -- -- -- -- 27,489 -- 27,489
----------
Total comprehensive loss (7,727,314)
--------- ---------- --------- -------- ---------- ----------- -------- ----------
Balances at March 31, 1999 6,120,671 $1,580,607 7,247,143 (204,814) (7,327,537) (22,400) (386,563) 886,436
--------- ---------- --------- -------- ---------- ----------- -------- ----------
--------- ---------- --------- -------- ---------- ----------- -------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1998
1999 (NOTE 7)
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,754,803) (87,025)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,414,964 600,276
Amortization of deferred compensation 133,543 95,779
Provision for losses on accounts receivable 270,913 174,632
Common stock issued in lieu of compensation 32,375 228,025
Loss on disposal of business 337,402 --
Net gain on disposition of assets (987,496) (3,160,255)
Write-off of in-process research and development costs 92,095 --
Asset impairment and restructuring charges 1,110,671 --
Notes receivable charged to compensation 110,000 --
Minority interest (68,201) --
Interest on warrants with convertible bonds -- 150,000
Changes in operating assets and liabilities:
Accounts receivable 584,252 (342,166)
Inventories 200,880 (41,288)
Other assets 1,797,649 (506,934)
Deferred income taxes (52,999) 146,583
Accounts payable (149,740) (249,741)
Accrued liabilities and royalty obligations 161,964 423,398
Income taxes receivable (53,036) (339,603)
Deferred revenue (543,177) 184,416
----------- ----------
Net cash used in operating activities (3,362,744) (2,723,903)
----------- ----------
Cash flows provided by (used in) investing activities:
Expenditures for business acquisition (691,318) (2,199,093)
Capital expenditures (2,717,848) (341,401)
Proceeds from sale of assets 192,722 5,600,000
Disposal of business, net of cash (161,184) --
Issuance of notes receivable -- (110,000)
Proceeds from notes receivable 28,000 --
----------- ----------
Net cash provided by (used in) investing activities (3,349,628) 2,949,506
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock 314,772 2,994,882
Proceeds from issuance of long-term debt and line of credit 1,154,717 182,586
Principal payments of long-term debt (314,192) (771,506)
Proceeds from issuance of convertible bonds -- 1,000,000
----------- ----------
Net cash provided by financing activities 1,155,297 3,405,962
----------- ----------
Effective of exchange rate changes 25,954 (49,889)
Net increase (decrease) in cash and cash equivalents (5,531,121) 3,581,676
Cash and cash equivalents at beginning of period 5,807,014 2,225,338
----------- ----------
Cash and cash equivalents at end of period $ 275,893 5,807,014
----------- ----------
----------- ----------
</TABLE>
(Continued)
F-5
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1998
1999 (NOTE 7)
----------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 62,849 86,518
Income taxes 100,987 646,745
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Options exchanged for common stock $ -- 22,622
Deferred taxes related to assets acquired in business combinations -- 280,000
Common stock issued for payment of royalties 38,086 --
Common stock issued for conversion of bonds 520,267 --
Assets acquired and liabilities assumed through
business acquisitions:
Assets acquired:
Accounts receivable $ -- 466,505
Inventory -- 101,206
Notes receivable -- 28,000
Prepaid taxes -- 114,715
Other assets, including intangibles 1,551,210 1,496,085
Fixed assets 76,800 239,973
----------- ----------
Assets acquired 1,628,010 2,446,484
Less liabilities assumed:
Long-term debt -- (309,040)
Accounts payable -- (650,290)
Accrued liabilities (50,000) (343,012)
Royalty obligations (500,000) --
Deferred revenue -- (70,454)
----------- ----------
Net assets acquired 1,078,010 1,073,688
Less cash paid (691,318) --
----------- ----------
Net assets acquired with common stock $ 386,692 1,073,688
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Sento Corporation (Sento), formerly Sento Technical Innovations,
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
technical support services, consulting, and outsourced training.
Sento Technical Services Corporation offers a range of IT outsourcing
services consisting of "call center," "helpdesk," and technical
support services. 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 Training Corporation
provides 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.
Historically, Sento operated as a Value Added Reseller generating
revenues from its sales and distribution of third party hardware and
software products. As a reseller, the Company was dependent on
third-party suppliers, with over forty-five percent of the Company's
revenues in 1998 derived from products it obtains from two suppliers.
During the past two years, the Company began a strategic transition
using its technical core competencies to offer IT outsourcing services
and IT training.
In addition, the Company conducts substantially all of its foreign
operations through Sento Australia Pty. Limited, based near Sydney,
Australia. Revenues from foreign sales for the periods ended March 31,
1999 and 1998, were approximately twelve percent and nine percent of
total sales, respectively.
(b) BASIS OF PRESENTATION
The financial statements include the consolidated financial statements
of Sento and its wholly-owned subsidiaries (collectively, the
Company). All intercompany balances and transactions have been
eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturites 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. The Company had no cash
equivalents as of March 31, 1999.
(d) 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.
F-7
<PAGE>
(e) REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 97-2, SOFTWARE
REVENUE RECOGNITION, which supersedes SOP 91-1, SOFTWARE REVENUE
RECOGNITION. Effective March 31, 1998, the Company adopted the
provisions of SOP 97-2. Revenue was recognized in accordance with SOP
97-2 in fiscal year 1999, and SOP 91-1 in prior years.
Revenue is generally recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collection of the resulting receivable is reasonably
assured. Revenue from the sale of software licenses and hardware sales
is generally recognized upon delivery. Revenues from maintenance
contracts are recognized over the term of the contract, 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.
(f) 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
(g) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Software
development costs incurred between achieving technological feasibly
and release of the product have been insignificant and therefore
expensed as incurred.
(h) 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.
F-8
<PAGE>
(i) 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 consolidated 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 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.
(j) INTANGIBLE ASSETS
Intangible assets as of March 31, 1998, 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.
The Company assesses whether its goodwill and other intangible assets
are impaired based on a periodic evaluation of undiscounted projected
cash flows through the remaining amortization period. If an impairment
exists, the amount of such impairment is calculated and recorded based
on the estimated fair value of the asset.
(k) NET LOSS PER COMMON SHARE
Basic loss per share is computed in accordance with Financial
Accounting Standards Board Standards No. 128, EARNINGS PER SHARE.
Basic net loss per share is computed as net loss divided by the
weighted average number of common shares outstanding for the period.
Diluted net loss per share reflects the potential dilution that could
occur from common shares issueable through stock options, warrants,
and other convertible securities, if dilutive. Common stock equivalent
shares are excluded from the computation of net loss per share for the
years ended March 31, 1999 and 1998, as their effect is antidilutive.
Net loss is the same for both basic net loss per share and diluted net
loss per share.
The weighted average number of common shares outstanding during the
years ended March 31, 1999 and 1998 were 5,901,959 and 5,017,203,
respectively, for both the basic and diluted calculations. The number
of outstanding options and warrants that could potentially be dilutive
in future years which were excluded from the calculations as there
impact would have been antidilutive were 3,216,872 in 1999 and
3,075,955 in 1998.
F-9
<PAGE>
(l) STOCK-BASED COMPENSATION
The Company has 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.
(m) 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.
(n) 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.
(o) RECLASSIFICATIONS
Certain items in the 1998 consolidated financial statements have been
reclassified to conform with the 1999 presentation.
(p) FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, notes receivable, accounts
payable, accrued expenses, and debt approximate their estimated fair
value.
(q) ADVERTISING
Advertising costs are expensed as incurred. Advertising cost amounted
to $1,592,914 and $537,780 in 1999 and 1998, respectively.
F-10
<PAGE>
(r) COMPREHENSIVE LOSS
On March 31, 1999, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income (loss) consists of
net income (loss) and effect of change in foreign currency
translation, which is presented in the consolidated statements of
stockholder's equity and comprehensive loss. The statement requires
only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of
operations. Prior year consolidated financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
(2) OTHER INCOME, NET
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Interest income $ 111,601 358,466
Interest expense (101,871) (236,518)
Loss on disposal of businesses (note 3) (337,402) -
Gain loss on sale of intangible assets (note 3) 875,000 3,214,107
Gain (loss) on sale of property and equipment 112,496 (53,852)
Settlement with vendor 141,000 -
Other 314,055 -
---------- ---------
Other income, net $1,114,879 3,282,203
---------- ---------
---------- ---------
</TABLE>
(3) 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.
F-11
<PAGE>
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:
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
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. The escrowed amounts
receivable are included as other assets at March 31, 1998 in the
accompanying consolidated balance sheet. A portion of the gain was recorded
as deferred revenue at the time of the sale and was recognized as the
representations and warranties were completed. As of March 31, 1998,
$875,000 was recorded as deferred revenue in the accompanying consolidated
balance sheet and was recognized as other income in fiscal 1999.
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:
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
F-12
<PAGE>
The Company also acquired three additional companies during fiscal year
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:
<TABLE>
<CAPTION>
PCB SI ASTRON
--------- -------- --------
<S> <C> <C> <C>
Accounts receivable $ 72,122 185,139 78,761
Inventory 89,206 - 12,000
Property and equipment 50,815 14,886 151,921
Goodwill and other intangibles 718,858 74,044 655,838
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
--------- -------- --------
--------- -------- --------
</TABLE>
The following unaudited pro forma summary presents consolidated results of
operations of the Company for the year ended March 31, 1998 as if the
entities acquired under the purchase method had been acquired as of the
beginning of 1998:
<TABLE>
<S> <C>
Total revenues $25,418,781
Net loss $ (741,513)
Loss per share $ (.15)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for all of 1998. 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.
F-13
<PAGE>
In August 1998, the Company acquired all marketing rights to certain
classroom based IT training courses from Educational Systems, Inc. (ESI)
for $100,000 cash and between $500,000 and $1,400,000 in future royalties
to be paid out over a 33-month period. The purchase agreement also provides
for additional payments over the 33-month period contingent on future sales
of certain classroom based IT training courses. The intellectual property
and marketing rights were being amortized on a straight-line basis over 33
months (note 13). The acquisition has been accounted for by the purchase
method and, accordingly, the results of operations of ESI have been
included in the Company's consolidated financial statements from August
1998. Effective April 1, 1999, the Company began withholding royalty
payments, based upon the Company's working capital position and
disagreements with the principals of ESI regarding certain representations
and obligations contained in the acquisition agreement.
Assuming the acquisition of ESI had occurred at April 1, 1997, the
Company's results of operations would not have been materially different
for either 1999 or 1998, than currently presented in the accompanying
consolidated statements of operations.
In October 1998, the Company acquired equipment and intellectual property
from Functional Software Pty., Ltd. (Functional) for $450,000 in cash and
129,656 restricted shares of the Company's common stock. Functional is
located in Australia and is a software developer. The transaction was
accounted for under the purchase method of accounting. Results of
operations have been included in the Company's consolidated financial
statements since the date of acquisition.
The following is a summary of the acquisition:
<TABLE>
<S> <C>
Consideration:
Cash $492,440
Common stock 386,692
Acquisition costs incurred 98,878
--------
Total consideration 978,010
Assets acquired and liabilities assumed:
Equipment 76,800
Intellectual property 571,421
Accrued liabilities (50,000)
--------
Total assets acquired and liabilities assumed 598,221
Purchase price in excess of fair value 379,789
In-process research and development costs (92,095)
--------
Goodwill $287,694
--------
</TABLE>
F-14
<PAGE>
During the year ended March 31, 1999, the Company sold the following
businesses:
West coast sales office (originally acquired as part of the PC
Business Solutions acquisition) East coast sales office (originally
acquired as part of the GDG acquisition) Sento Limited (located in
England and originally acquired as Software Innovations Ltd.) Dewpoint
Distributed Solutions (Dewpoint) (located in Orem, Utah) VMS software
sales and support operations (Based in American Fork, Utah)
In addition, the Company sold equipment and intellectual property of
Functional.
The dispositions were accounted for as follows:
<TABLE>
<S> <C>
Assets sold:
Cash $ 161,184
Accounts receivable 146,090
Inventory 91,282
Property and equipment, net 283,918
Other assets 5,467
Intangible assets, net 1,020,957
Accumulated foreign currency translation 1,535
Minority interest 68,201
----------
1,778,634
Less liabilities assumed:
Long-term debt (40,325)
Accounts payable (373,693)
Accrued liabilities (62,639)
Deferred revenue (537,012)
----------
Net assets sold 764,965
Consideration received:
Treasury stock (212,563)
Accounts receivable (40,000)
Notes receivable, net of reserves (175,000)
----------
Loss on disposition of businesses $ 377,402
----------
----------
</TABLE>
(4) NOTES RECEIVABLE
At March 31, 1999, the Company had a note receivable, net of reserves, of
$175,000. This note receivable was from the disposition of the west coast
sales office. The note is noninterest bearing and is due June 1, 2004.
F-15
<PAGE>
At March 31, 1998, the Company had notes receivable. The first note was due
from an employee and had a balance of $28,000, which was paid during fiscal
1999. The second note receivable had a balance of $110,000, was due from an
officer and director of the Company and was taken as compensation by the
officer in fiscal 1999.
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Land $ - 36,021
Building and improvements - 254,327
Leasehold improvements 181,773 94,010
Furniture, fixtures, and equipment 3,686,951 1,413,438
---------- ---------
3,868,724 1,797,796
Less accumulated depreciation (960,827) (522,894)
---------- ---------
$2,907,897 1,274,902
---------- ---------
---------- ---------
</TABLE>
(6) NOTE PAYABLE TO BANK AND LONG-TERM DEBT
On June 8, 1999, the Company renegotiated the terms of its line-of-credit
agreement with a bank. The Company can draw up to $2,000,000 under the
agreement, subject to eligible receivable balances. The outstanding balance
accrues interest at prime plus two percent and is subject to certain
restrictive covenants. The Company also issued warrants to purchase 60,000
shares of common stock at $1.60 per share to the bank in connection with
the line of credit. The stock purchase warrant is currently exercisable at
$1.60 and expires March 2, 2004. As of March 31, 1999, the Company has
$1,000,000 outstanding against the credit line.
Long-term debt at March 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
10% note payable in monthly installments of $4,871, including
interest, due August 2000, secured by equipment $ 87,569 146,218
8% note payable in monthly installments of $5,890, including
interest, due May 2000, secured by equipment 91,572 -
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 115,792 80,912
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
8.25% first mortgage payable in monthly installments of $1,173,
including interest, with final payment of $107,417 due July 15,
1999, secured by the Company's land and building $ - 113,634
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
---------- ---------
Total long-term debt 294,933 494,733
Less current portion 191,741 131,774
---------- ---------
Long-term debt, excluding current portion $103,192 362,959
---------- ---------
---------- ---------
</TABLE>
Aggregate maturities of long-term debt are as follows: 2000, $191,741;
2001, $82,885; and 2002, $20,307. The Company's debt covenants require,
among other things, the maintenance of a minimum net worth, debt to net
worth ratio and income. The Company did not comply with these financial
covenants at March 31, 1999. The Company received waivers and amendments
with respect to these covenants from all pertinent parties for March 31,
1999.
(7) CONVERTIBLE BONDS
In July 1997, the Company sold to Canadian Imperial Holdings, Inc.
(Canadian Imperial) $1,000,000 of six 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
was allocated to the value of the warrants and is recorded as an addition
to paid-in capital.
The conversion price of the bonds is considered a beneficial conversion
feature which increases the effective interest rate of the bond and is
reflected as a charge to interest expense. The interest expense is
recognized from the date the bond is issued to the date it first becomes
convertible. The interest expense related to the beneficial conversion
feature is $150,000. Because the amount was not previously recognized, the
1998 consolidated financial statements have been restated to show the
$150,000 as a contribution of capital and increased interest expense. This
restatement caused earnings per share of $0.01, as previously reported, to
decrease to a net loss per share of $0.02.
F-17
<PAGE>
During the year ended March 31, 1999, $500,000 of principal ($472,267, book
value), and $48,000 of accrued interest, were converted to common shares.
(8) INCOME TAXES
Income tax (expense) benefit consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- -------- --------
<S> <C> <C> <C>
Year ended March 31, 1999:
Federal $(399,469) (48,736) (448,205)
State (50,000) (4,263) (54,263)
--------- -------- --------
$(449,469) (52,999) (502,468)
--------- -------- --------
--------- -------- --------
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
--------- -------- --------
--------- -------- --------
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
----------- -------
<S> <C> <C>
Computed "expected" tax (benefit) expense $(2,807,472) 73,122
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit (35,813) 56,040
Nonconsolidated losses (income) (90,520) 48,074
Nondeductible goodwill 315,502 26,143
Nondeductible interest 17,554 15,300
Nondeductible acquisition costs - 8,500
Change in valuation allowance 2,106,307 (730)
Other (8,026) 75,641
----------- -------
Income tax (benefit) expense $ (502,468) 302,090
----------- -------
----------- -------
</TABLE>
F-18
<PAGE>
The tax effects of temporary differences that give rise to current deferred
tax assets and noncurrent deferred tax liabilities at March 31, 1999 and
1998, are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- -------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 179,848 69,341
Deferred compensation 88,148 -
Allowance for doubtful accounts 77,837 149,199
Intangible assets 212,890 -
Net operating loss carryforward 1,776,402 -
Other 94,013 19,451
----------- -------
Total 2,429,138 237,991
Valuation allowance (2,332,082) (19,451)
----------- -------
Net assets $ 97,056 218,540
----------- -------
Deferred tax liabilities:
Property and equipment $ 97,056 13,558
Intangible assets - 257,981
----------- -------
Total liabilities $ 97,056 271,539
----------- -------
----------- -------
</TABLE>
The valuation allowance for deferred tax assets as of March 31, 1997 was
$20,181. The net change in the total valuation allowance for the periods
ended March 31, 1999 and 1998, was an increase of $2,312,631 and a decrease
of $730, respectively.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of March 31, 1999, will be allocated as an
income tax benefit to be reported in the consolidated statement of
operations.
At March 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of $4,762,473 which expire in 2019.
(9) LEASES
The Company has operating leases for office space and equipment. The
Company incurred rent expense of $659,176 and $241,245 for the years ended
March 31, 1999 and 1998, respectively. Future minimum rent payments under
existing operating leases are $687,320 in fiscal 2000, $684,638 in fiscal
2001, $661,882 in fiscal 2002, $623,449 in fiscal 2003, and $1,116,942
thereafter.
F-19
<PAGE>
(10) 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 $29,856 and $19,058 were made for the periods ended March
31, 1999 and 1998, respectively.
(11) 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
2,500,000 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. Stock options vest over three or four years. At March
31, 1999, there were 1,155,982 additional shares available for grant under
the Plan.
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 1998, the
900,000 options are included in the tables below. 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 was to be recognized ratably
over one to four years. For the years ended March 31, 1999 and 1998, total
compensation expense for these options was $48,000 and $41,425,
respectively. In April of 1999, these options were cancelled.
In fiscal 1999, the Company granted an additional 625,000 options outside
of the Plan to key members of management and employees, all of which were
issued at or above fair market value and included in the tables below. In
April 1999, 215,000 of the options issued outside of the Plan in 1999 were
cancelled and 750,000 new options under the Plan were issued at fair value
market value.
F-20
<PAGE>
Stock option activity, relating to qualified and nonqualified options
during the periods indicated is as follows:
<TABLE>
<CAPTION>
PERIODS ENDED MARCH 31,
--------------------------------------------------
1999 1998
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance outstanding at
beginning of year 2,013,601 $3.78 883,185 $3.05
Granted 1,012,250 3.33 1,417,000 4.35
Exercised (14,882) 1.24 (127,262) 1.24
Forfeited (284,097) 4.19 (159,322) 3.78
--------- ---------
Balance outstanding at end of year 2,726,872 3.74 2,013,601 3.78
Exercisable at end of year 699,845 $3.29 134,311 $2.96
--------- ---------
--------- ---------
Weighted-average fair value of options
granted during the year $1.36 $2.05
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1999:
<TABLE>
<CAPTION>
NUMBER
OUT- WEIGHTED- NUMBER
STANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
EXERCISE MARCH 31, CONTRACTUAL EXERCISE MARCH 31, EXERCISE
PRICE 1999 LIFE PRICE 1999 PRICE
-------- --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.24 124,122 6.8 $1.24 99,828 $1.24
1.53 100,000 10.0 1.53 100,000 1.53
2.50 144,250 9.8 2.48 - -
3.50 96,000 7.1 3.50 48,000 3.50
3.87 743,000 8.0 3.74 - -
4.00 157,000 8.2 4.00 45,600 4.00
4.50 1,362,500 8.0 4.38 406,417 4.30
--------- -----------
2,726,872 8.1 3.74 699,845 3.29
--------- -----------
--------- -----------
</TABLE>
F-21
<PAGE>
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: 1998 - expected dividend yield zero percent, risk-free
interest rate of 5.34 percent, expected life of 5 years, and expected
stock-price volatility of 45.14 percent; 1999 - expected dividend yield
zero percent, risk-free interest rate of 5.35 percent, expected stock-price
volatility of 54.92 percent, and expected life of 5 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 123, the Company's
net loss would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C> <C>
Net loss As reported $(7,754,803) (87,025)
Pro forma (8,896,628) (656,344)
Basic and diluted loss per share As reported (1.31) (0.02)
Pro forma (1.51) (0.13)
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS 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:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
WARRANTS PRICE DATE
--------- ----------- -------------------------
<S> <C> <C>
320,000 $5.50 July 1999
42,500 4.00 - 5.50 May 1999
50,000 4.75 September 1999
57,500 4.13 -4.25 February through May 2001
20,000 1.56 March 2004
---------
490,000
---------
---------
</TABLE>
F-22
<PAGE>
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 July 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. Also the placement agent received warrants to purchase
80,000 shares of common stock at $5.50 per share which expire in July 1999.
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, 1999, the Company
had sold 36,133 shares to employees of the Company.
(12) RESTRUCTURING CHARGES
In an effort to improve productivity, the Company implemented a
restructuring plan that included the closing of the Company's network
consulting operations in Southern California. The Company recorded
restructuring charges of $229,829 in December 1998 as a result of closing
the above mentioned operations. Restructuring charges include severance
costs of terminated employees, future minimum rent obligations for the
vacated facilities and the write-off of the unamortized balance of
intangible assets of $202,179.
(13) ASSET IMPAIRMENT
The Company recorded impairment of assets totaling $454,546 in December 31,
1998 and $426,296 as of March 31, 1999. The impairment represents the
write-down of unamortized marketing rights, goodwill, and noncompete
agreements purchased with its acquisition of Astron, Inc., and its
exclusive marketing, representative, Educational Systems, Inc. The write
down was based on incurred losses and projected negative cash flow from
operations relating to classroom based training. During the first nine
months of fiscal 1999 the Company spent substantial amounts on selling and
marketing expenses in an effort to increase training revenues, however,
such expenditures resulted in no significant increase in revenues and a
substantial loss in the training division. During the fourth quarter of
fiscal 1999, the Company significantly changed its strategic focus from
providing classroom training to providing custom corporate IT training,
video, and training in several vertical niche markets.
F-23
<PAGE>
(14) SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company's three reportable business
segments have separate management teams. The segments include Technical
Services, Training Services, Product Sales and Consulting (VAR Business).
TECHNICAL SERVICES: This segment offers a range of IT outsourcing services
consisting of "call center," "help desk," and technical support services.
TRAINING SERVICES: This segment provides seminar training workshops,
customized corporate training programs and multi-media presentations, all
of which are designated to teach and reinforce skills required to make IT
systems work effectively.
VAR BUSINESS (PRODUCT SALES AND CONSULTING): This segment sells computer
hardware and software as well as offering customized IT consulting services
in the areas of network, systems and financial information.
The "Other" column includes corporate related items and results of
insignificant operations.
<TABLE>
<CAPTION>
TECHNICAL TRAINING VAR
SERVICES SERVICES BUSINESS OTHER TOTAL
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 3,019,217 3,430,728 14,775,285 - 21,225,230
Cost of sales 3,157,336 2,124,519 10,105,160 - 15,387,015
Depreciation 295,202 48,769 145,678 133,859 623,508
Amortization of intangible
assets - 317,612 318,741 155,103 791,456
Restructuring charges - - 229,829 - 229,829
Impairment of long-lived
assets - 880,842 - - 880,842
Write-off of in-process
research and development
- - 92,095 - 92,095
Segment operating loss
(1,507,290) (4,517,333) (1,827,883) (1,519,644) (9,372,150)
Total assets 3,457,168 502,246 2,161,143 1,180,614 7,301,171
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
TECHNICAL TRAINING VAR
SERVICES SERVICES BUSINESS OTHER TOTAL
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998
Revenues $ - 715,787 19,924,058 - 20,639,845
Cost of sales - 241,755 13,985,316 - 14,227,071
Depreciation - 11,950 332,934 40,408 385,292
Amortization of intangible
assets - 57,385 136,599 21,000 214,984
Segment operating loss
- (297,808) (1,416,585) (1,352,745) (3,067,138)
Total assets - 713,441 7,569,272 7,577,939 15,860,652
</TABLE>
Significant foreign sales in 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
United Kingdom $ 402,511 984,782
Australia 780,277 1,613,034
---------- ---------
$1,182,788 2,597,816
---------- ---------
---------- ---------
</TABLE>
(15) RELATED PARTY TRANSACTIONS
During fiscal 1999, the Company sold land and a building to a former
employee who was also a director of the Company at the time of the sale.
The property was sold for $192,722 in cash and 58,000 shares of the
Company's common stock. The net gain recognized on the sale was $124,578.
(16) LIQUIDITY AND SUBSEQUENT EVENT
During the year ended March 31, 1999, the Company incurred a net loss of
$7,754,803 and used cash in operating activities of $3,362,744. Management
has implemented plans to raise debt and equity capital sufficient for
continued operations. In the opinion of management, the continued
implementation of these plans will permit the Company to meet its operating
requirements, at least through the next fiscal year; however, the Company
is subject to many uncertainties over which management has limited control,
any one of which could adversely affect the Company's operating cash flows
and thus create cash flow problems for the Company.
On June 9, 1999 the Company completed the initial closing of a private
placement of common stock and warrants resulting in total consideration
received to that date of approximately $1,600,000. The offering period of
the private placement will continue through July 2, 1999, during which time
Sento will seek to raise an additional amount which will bring the private
placement to its maximum amount of $1,920,000. This maximum amount of the
private placement is in the form of 600,000 units consisting of two shares
of common stock and a warrant to purchase one share of common stock. The
units were and are being sold at a price of $3.20 per unit. The stock
purchase warrants are exercisable for a three year period at $2.50 per
share.
F-25
<PAGE>
(17) PROSPECTIVE ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 identifies the
characteristics of internal-use software and provides examples to assist in
determining when computer software is for internal use. SOP 98-1 is
effective for financial statements for fiscal years beginning after
December 15, 1998. Management does not expect that adoption of SOP 98-1
will have a material impact on the Company's consolidated financial
position, results of operations, or liquidity.
(18) COMMITMENTS AND CONTINGENCIES
The Company is involved with potential claims which have arisen in the
normal course of business. While the ultimate results of these matters
cannot be predicted with certainty, management does not expect them to have
a material adverse effect on the financial position or results of
operations of the Company.
F-26
<PAGE>
ARTICLES OF AMENDMENT AND RESTATEMENT
OF THE
ARTICLES OF INCORPORATION
OF
SENTO TECHNICAL INNOVATIONS CORPORATION
(HEREAFTER SENTO CORPORATION)
Pursuant to the provisions of the Utah Revised Business Corporation
Act, the undersigned corporation (the "Corporation") hereby adopts the following
Articles of Amendment and Restatement of its Articles of Incorporation with the
intent that this amendment constitutes a restatement of such Articles of
Incorporation and supersedes the existing Articles of Incorporation as
previously amended:
I.
The name of the corporation is Sento Technical Innovations
Corporation.
II.
The following Amended and Restated Articles of Incorporation were
adopted by the shareholders of the corporation at a meeting of shareholders held
on August 11, 1998 in the manner prescribed by the Utah Revised Business
Corporation Act:
The Articles of Incorporation of the corporation, as previously
amended, are hereby amended and restated in their entirety as follows:
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
SENTO CORPORATION
ARTICLE I - NAME
The name of the corporation is Sento Corporation.
ARTICLE II - PURPOSES AND POWERS
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the Utah Revised Business
Corporation Act. The corporation shall have all of the rights, powers and
privileges now or hereafter conferred upon corporations organized under the Utah
Revised Business Corporation Act. The corporation may do everything necessary,
suitable or proper for the accomplishment of any of its corporate purposes.
ARTICLE III - SHARES
The total number of shares of capital stock which the corporation
shall have authority to issue is fifty five million (55,000,000) of which five
million (5,000,000) shall be shares of preferred stock, no par value
(hereinafter called the "Preferred Stock"), and fifty million (50,000,000) shall
be shares of common stock, $.25 par value (hereinafter called the "Common
Stock").
The designation, powers, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, of each class of stock, and the express grant of authority
to the board of directors to amend these Articles of Incorporation to fix the
designation, powers, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, of each
share of the Preferred Stock which are not fixed by these Articles of
Incorporation, are as follows:
A. PREFERRED STOCK
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1. NUMBER; SERIES. The Preferred Stock may be issued in one or more
series, from time to time, with each such series to have such designation,
powers, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, as shall be
stated and expressed in an amendment to these Articles of Incorporation
providing for the issue of such series. The board of directors of the
corporation is hereby expressly vested with authority to amend the Articles of
Incorporation, without shareholder action or approval, to: (a) create one or
more series of the Preferred Stock, fix the number of shares of each such series
(within the total number of authorized shares of the Preferred Stock available
for designation as a part of such series), and designate and determine, in whole
or part, the preferences, limitations, and relative rights of each series of the
Preferred Stock; (b) alter or revoke the preferences, limitations and relative
rights granted to or imposed upon any wholly unissued series of the Preferred
Stock; or (c) increase or decrease the number of shares constituting any series
of the Preferred Stock (the number of shares of which was originally fixed by
the board of directors) either before or after the issuance of shares of the
series, provided that the number may not be decreased below the number of shares
of such series then outstanding, or increased above the total number of
authorized shares of the Preferred Stock available for designation as a part of
such series. Without limiting the foregoing, the authority of the board of
directors with respect to each such series shall include, but not be limited to,
the determination or fixing of the following:
(i) The distinctive designation and number of shares comprising
such series, which number may (except where otherwise provided by the board of
directors in creating such series) be increased or decreased (but not below the
number of shares then outstanding) from time to time by like action of the board
of directors;
(ii) The dividend rate of such series, the conditions and times upon
which such dividends shall be payable, the relation which such dividends shall
bear to the dividends payable on any other class or classes of stock or series
thereof, or on the other series of the same class, and whether dividends shall
be cumulative or noncumulative;
(iii) The conditions upon which the shares of such series shall be
subject to redemption by the corporation and the times, prices and other terms
and provisions upon which the shares of the series may be redeemed;
(iv) Whether or not the shares of the series shall be subject to the
operation of retirement or sinking fund provisions to be applied to the purchase
or redemption of such shares and, if such retirement or sinking fund be
established, the annual amount thereof and the terms and provisions relative to
the operation thereof;
(v) Whether or not the shares of the series shall be convertible
into or exchangeable for shares of any other class or classes, with or without
par value, or of any other series of the same class and, if provision is made
for conversion or exchange, the times, prices, rates, adjustments and other
terms and conditions of such conversion or exchange;
(vi) Whether or not the shares of the series shall have voting
rights, in addition to the voting rights provided by law, and, if so, subject to
the limitations hereinafter set forth, the terms of such voting rights;
(vii) The rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution or upon distribution of assets
of the corporation;
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(viii) Any other powers, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, of the shares of such series, as the board of directors
may deem advisable.
2. DIVIDENDS. The holders of the shares of the Preferred Stock of each
series shall be entitled to receive, when and as declared by the board of
directors, out of the funds legally available for the payment of dividends,
dividends at the rate fixed by the board of directors for such series for the
current period and, if cumulative, for all prior periods for which such
dividends are cumulative.
Whenever, at any time, dividends on the then outstanding Preferred Stock as
may be required with respect to any series outstanding shall have been paid or
declared and set apart for payment on the then outstanding Preferred Stock, and
after complying with respect to any retirement or sinking fund or funds for all
applicable series of the Preferred Stock, the board of directors may, subject to
the provisions of the resolution or resolutions creating the series of the
Preferred Stock, declare and pay dividends on the Common Stock as provided in
paragraph B.1. of this Article III, and the holders of shares of the Preferred
Stock shall not be entitled to share therein, except as otherwise provided in
the amendment creating any series.
3. LIQUIDATION; DISSOLUTION. The holders of the Preferred Stock of each
series shall be entitled upon liquidation or dissolution of the corporation to
such preferences as are provided in the amendment creating such series of the
Preferred Stock, and no more, before any distribution of the assets of the
corporation shall be made to the holders of shares of the Common Stock. Whenever
the holders of shares of the Preferred Stock shall have been paid the full
amounts to which they shall be entitled, the holders of shares of the Common
Stock shall be entitled to share in all assets of the corporation remaining as
provided in paragraph B.2. of this Article III. If, upon such liquidation,
dissolution or winding up, the assets of the corporation distributable as
aforesaid among the holders of the Preferred Stock of all series shall be
insufficient to permit full payment to them of said preferential amounts, then
such assets shall be distributed ratably among such holders in proportion to the
respective total amounts which they shall be entitled to receive as provided in
this paragraph A.3.
4. VOTING. Except as otherwise provided by an amendment to the Articles
of Incorporation creating any series of the Preferred Stock or by the general
corporation law of Utah, the Common Stock issued and outstanding shall have and
possess the exclusive power to vote for the election of directors and for all
other purposes as provided in paragraph B.3. of this Article III.
5. PREEMPTIVE RIGHTS. Except as otherwise provided by an amendment to the
Articles of Incorporation providing for the issuance of any series of the
Preferred Stock, no holder of shares of the Preferred Stock shall, as such
holder, be entitled as of right to subscribe for, purchase or receive any part
of any new or additional issue of stock of any class, whether now or hereafter
authorized, or of bonds, debentures or other securities convertible into or
exchangeable for stock, but all such additional shares of stock of any class, or
bonds, debentures or other securities convertible into or exchangeable for
stock, may be issued and disposed of by the board of directors on such terms and
for such consideration, so far as may be permitted by law, and to such persons,
as the board of directors in its absolute discretion may deem advisable.
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B. COMMON STOCK
1. DIVIDENDS. Subject to the rights of the holders of the Preferred
Stock, and subject to any other provisions of the Articles of Incorporation,
holders of the Common Stock shall be entitled to receive such dividends and
other distributions in cash, stock or property of the corporation as may be
declared thereon by the board of directors from time to time out of assets or
funds of the corporation legally available therefor.
2. LIQUIDATION; DISSOLUTION. In the event of any liquidation, dissolution
or winding up of the affairs of the corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the corporation and after payment or provision for payment to the
holders of each series of the Preferred Stock of all amounts required in
accordance with paragraph A.3. of this Article III, the remaining assets and
funds of the corporation shall be divided among and paid to the holders of the
Common Stock.
3. VOTING.
(a) At every meeting of the shareholders of the corporation, every
holder of the Common Stock shall be entitled to one vote in person or by proxy
for each share of such Common Stock standing in his name on the stock transfer
records of the corporation.
(b) No shareholder shall have the right to cumulate votes in the
election of directors.
4. PREEMPTIVE RIGHTS. No holder of shares of the Common Stock of the
corporation shall, as such holder, be entitled as of right to subscribe for,
purchase or receive any part of any new or additional issue of stock of any
class, whether now or hereafter authorized, or of bonds, debentures or other
securities convertible into or exchangeable for stock, but all such additional
shares of stock of any class, or bonds, debentures or other securities
convertible into or exchangeable for stock, may be issued and disposed of by the
board of directors on such terms and for such consideration, so far as may be
permitted by law, and to such persons, as the board of directors in its absolute
discretion may deem advisable.
ARTICLE IV - DIRECTORS
The number of directors of the corporation shall be as determined by
resolution of the board of directors, but shall not be less than three (3) nor
more than nine (9).
The personal liability of any director to the corporation or to its
shareholders for monetary damages for any action taken or any failure to take
any action, as a director, is hereby eliminated to the fullest extent permitted
by Utah laws. In the event the applicable Utah law or this Article IV is
repealed or amended to decrease or limit in any manner the protection or rights
available to directors hereunder, such repeal or amendment shall not be
retroactively applied in determining the personal liability of a director
pursuant to this Article IV prior to the enactment of such amendment.
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ARTICLE V - REGISTERED OFFICE AND AGENT
The street address of the corporation's registered office and the name and
signature of the corporation's registered agent at that office are:
311 North State Street, P.O. Box 1970
Orem, Utah 84059
-------------------------------------
Robert K. Bench
ARTICLE VI - INDEMNIFICATION OF OFFICERS AND DIRECTORS
The corporation shall indemnify any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise to the fullest extent permitted by the Utah Revised Business
Corporation Act, as the same may hereafter be amended, or as otherwise permitted
by law.
ARTICLE VI - EFFECT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
These amended and restated Articles of Incorporation supersede the original
Articles of Incorporation of the corporation and all amendments and revisions
thereto and restatements thereof.
END OF TEXT OF AMENDMENT AND RESTATEMENT
(Remainder of this page intentionally left blank)
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III.
The number of shares of the capital stock of the corporation outstanding as
of the date the foregoing amendment and restatement was approved by the
shareholders of the corporation was _____________ shares of Common Stock, par
value $.25 per share, and the number of shares entitled to vote thereon was
_________________. No other class of shares was issued and outstanding.
IV.
The number of shares of Common Stock voted for the foregoing amendment and
restatement was _______________ shares; the number of shares of Common Stock
voted against such amendment and restatement was _______________ shares; and the
number of shares of Common Stock abstaining from voting was ________________.
DATED this 11th day of August, 1998.
Sento Corporation,
a Utah corporation
By:
---------------------------------
Kieth E. Sorenson,
President and Chief Executive Officer
ATTEST:
- ---------------------------------
Robert K. Bench, Secretary
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered
into this 24th day of June, 1998, by and between EDUCATIONAL SYSTEMS, INC., a
Utah corporation whose address for purposes of this Agreement is 3507 North
University Aye, #250, Provo, Utah 84604 (the "Seller"), SENTO TRAINING
CORPORATION, a Utah corporation whose address for purposes of this Agreement
is 311 North State Street Orem, Utah 84057 (the "Buyer"), RICHARD S. SMITH,
an individual, and KERRY 0. ARNOLD, an individual, (collectively, the
"Principals"), whose common address for purposes of this Agreement is 3507
North University Aye, #250, Provo, Utah 84604.
RECITALS
WHEREAS, Seller is engaged in the business of marketing, selling and
promoting training courses for users, designers and engineers of computer
networks (the "Courses"), including, without limitation, Courses designed to
assist students to pass any core or elective tests necessary to receive the
Microsoft Certified Systems Engineer ("MCSE") or Certified Novell Engineer
("CNE") designations (the "Business").
WHEREAS, Buyer desires to purchase, and Seller desires to soil,
substantially all of the assets used in conducting the Business, upon the
terms and conditions set forth in this Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the covenants, conditions and
agreements set forth herein, and for other good and valuable consideration,
the receipt, adequacy and legal sufficiency of which are hereby acknowledged,
Buyer, Seller and the Principals hereby agree as follows:
I. PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE. Except as set forth in Section 12 below, at
the Closing (as defined below) Seller shall sell, assign, transfer, convey
and deliver to Buyer, free and clear of all claims, encumbrances and
liabilities, all of the assets, tangible and intangible, real and personal,
used by Seller in connection with the operation of the Business (all of which
are referred to collectively herein as the "Assets") including, but not by
way of limitation:
(a) all rights to market, sell or promote the MCSE and CNE Courses
on behalf of Astron, Inc. as provided for in that certain
agreement dated June 4, 1997 between Seller and Astron, Inc.
(b) all intellectual property used in connection with the
operation of the Business;
(c) all supplier lists, promotional materials, literature, books
and records related to the Business; and
(d) all other intangible rights associated with the Business,
including, without limitation, all goodwill, approvals,
authorizations, contract rights, escrow accounts, agreements,
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instruments, documents of title, general intangibles, options
and all other permits, approvals and certificates used,
obtained or held in connection with the Business.
1.2 EXCLUDED ASSETS. Notwithstanding the sale, transfer and
conveyance described in Section 1.1 above, the parties agree that Assets
shall not include and Buyer shall not, pursuant to this Agreement, acquire
any interest in (a) the name "Educational Systems, Inc." or any rights to use
such name or (b) any of the assets included in paragraphs 5.2 and 5.3 herein,
including the physical assets identified on EXHIBIT A attached hereto and
incorporated herein by this reference (the "EXCLUDED ASSETS").
1.3 NO ASSUMPTION OF LIABILITIES. Buyer shall not assume any of
the liabilities, obligations, duties or encumbrances of Seller generally or
in connection with Seller's operation of the Business; in particular, but
without limitation, Buyer shall not assume any liabilities, obligations,
duties or encumbrances under the Jamestown Lease. Seller agrees and covenants
that it shall remain liable for and shall satisfy in a timely manner all
liabilities, obligations, duties and agreements of Seller relating to or
arising in connection with the Business or the Assets based on events that
occur on or prior to the Closing Date.
II. PURCHASE PRICE: MANNER OF PAYMENT
2.1 PAYMENT OF PURCHASE PRICE. Subject to the terms and
conditions set forth in This Agreement, as consideration for Seller's
execution of this Agreement and performance of its obligations hereunder,
including, without [imitations, the sale of the Assets, Buyer agrees to pay
to Seller, in cash and shares of the Common Stock (the "Sento Common Stock")
of Sento Technical Innovations Corporation ("Sento") the purchase price
determined in accordance with the provisions of this Article II (the
"Purchase Price"). The actual amount of the Purchase Price shall be equal to
the greater of (a) Six Hundred Thousand Dollars ($600,000) or (b) an amount
equal to Ten Percent (10%) of the gross sales price actually received by
Buyer from the sale and delivery of live, in-person, instructor-led MCSE and
CNE Courses conducted in the United States (including all replacement or
successor Courses thereto), resulting from Buyer financed marketing efforts
and delivered after August 1, 1998 and continuing with respect to all Courses
for which Buyer initiates marketing activities on or prior to March 31, 2001,
and pursuant to which Courses are scheduled on or prior to June 30, 2001,
regardless of the timing of payment for such Courses (such period to be
referred hereinafter as the "PAYMENT PERIOD" net of any refunds, rebates,
discounts, axes and costs of collection (including attorneys' fees), up to a
maximum of One Million Five Hundred Thousand Dollars ($1,500,000).
2.2 INITIAL INSTALLMENT. Subsequent to Closing, Buyer shall pay
to Seller an initial installment of the Purchase Price in the amount of One
Hundred Thousand Dollars ($100,000). To facilitate Buyer's payment of such
initial installment, (a) at the Closing, Seller shall deliver to Buyer a
schedule of creditors, to be attached to this Agreement as Exhibit "C",
identifying each creditor and setting forth the amount of and basis for each
payment to be made by Seller and (b) subsequent to the Closing, Seller shall,
in good faith, proceed to pay such creditors. Seller agrees that for the
first 60 days after Closing, the funds provided in this section shall be used
solely for the purpose of payment to Seller's creditors. Any balance
remaining thereafter may be disbursed at the discretion of Seller.
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2.3 INSTALLMENT PAYMENTS. In addition to Buyer's payment of
amounts required by Section 2.2 above, Buyer shall pay to Seller the
remainder of the Purchase Price in monthly and quarterly installments, the
timing and amounts of which shall be determined as follows.
(a) Buyer shall pay to Seller 33 equal cash payments in the amount
of $7,576 on the first day of each month, beginning August 1,
1998 (the Monthly Payment) and continuing to and including
April 1, 2001.
(b) Within thirty (30) days of the conclusion of each calendar
quarter during the Payment Period, Buyer shall deliver to
Seller, in cash and shares of Sento Common Stock a
reconciliation payment (the "Quarterly Payment") in an amount
equal to the difference between (i) the actual Purchase Price
payable by Buyer pursuant to Section 2.1 above with respect to
MCSE and CNE Course sales during the applicable quarter and
(ii) the aggregate amount of all Monthly Payments paid by
Buyer to Seller with respect to the applicable quarter. The
Quarterly Payment shall be paid in cash and shares of Sento
Common Stock in accordance with the following procedure:
First, Buyer shall cause Sento Technical Innovations
Corporation ("Sento") to issue to Seller shares of Sento
Common Stock having a value (determined pursuant to Section
2.4 below) equal to the amount of the Quarterly Payment, but
not in excess of the aggregate amount of all Monthly Payments
paid by Buyer with respect to the applicable quarter; Second,
if the amount of the Quarterly Payment exceeds the aggregate
amount of all Monthly Payments wfth respect to the applicable
quarter, the balance of the Quarterly Payment will be paid In
two equal portions, one portion of which will be paid in cash
and the other portion of which will be paid in shares of Sento
Common Stock having a value (determined pursuant t~ Section
2.4 below) equal to the cash portion.
(c) Buyer's obligation to deliver any shares of Sento Common Stock
pursuant to this Agreement shall be contingent upon Seller's
delivery at the Closing of the subscription agreement
described in Section 4.2(d) below, together with all other
certificates, documents and agreements required to conform
such issuance to the requirements of all applicable state and
federal securities laws, as determined by Sento. If, in
Sento's discretion, such documentation does not warrant the
issuance of stock, then such payments will be made in cash.
2.4 VALUE OF COMMON STOCK. For purposes of determining the
value of the shares of Sento Common Stock to be delivered to Seller pursuant
to Section 2.3 above, the value of each share of Sento Common Stock shall be
equal to the lesser of (a) the closing sale price for a share of Sento Common
Stock, as reported by the Nasdaq Stock Market, on the last trading day of the
applicable calendar quarter and (b) the following amounts, as applicable,
during the Payment Period (i) for quarterly periods occurring between the
Closing Date and March 31, 1999, Five Dollars ($5.00) per share; (ii) for
quarterly periods occurring between April I, 1999 and March 31, 2000, Seven
and 50/100 Dollars ($7.50) per share; and (iii) and for quarterly periods
occurring between April 1, 2000 and March 31, 2001, Ten Dollars ($10.00) per
share.
2.5 PRORATIONS. Subject to the other provisions of this
Agreement, including, without limitation, Section 1.3 above, the parties
agree to prorate as of the Closing Date any taxes, utilities, insurance
premiums and other charges relating to the Assets.
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III. PRE-CLOSING RIGHTS AND OBLIGATIONS
3.1 OPPORTUNITY TO INVESTIGATE. Prior to the Closing Date,
Seller shall afford Buyer and its accountants, attorneys and other authorized
representatives free and full access during regular business hours to the
books, records, personnel and properties of Seller and the Business in order
that Buyer may have a full opportunity to make such investigation as it may
desire of the Business and all properties and affairs of Seller as they
relate to the Business.
3.2 CONDUCT OF BUSINESS. Prior to the Closing Date, Seller
shall conduct the Business only in the ordinary and usual course of business
consistent with past practices. No change shall be made in the policies and
practices of the Business without the prior written consent of Buyer in each
instance. Seller shall pay when due all amounts and obligations relating to
or arising in connection with the Business including, without limitation, all
lease payments, insurance premiums, taxes and accounts payable.
3.3 PROTECTION OF ASSETS. Prior to the Closing Date, Seller
shall take all actions reasonably necessary to protect its title to, and the
condition of, the Assets. Seller shall maintain in full force and effect all
existing insurance policies with respect to the Business and the Assets,
except to the extent that such insurance policies may be replaced with
policies providing equivalent or superior coverage and protection at the same
or lower rates with Buyer's prior written consent
3.4 CONFIDENTIALITY. Buyer and Seller shall maintain the
confidentiality of any non-public information of the other party exchanged
during the pendency of this Agreement. Neither party will make public
disclosure of the proposed transaction without the prior consent of the other
party, except as necessary for Sento to comply with its reporting obligations
as a public company.
IV. CLOSING
4.1 DATE AND PLACE OF CLOSING. The closing of the sale of the
Assets (the "Closing") shall be held at such time and location as Buyer and
Seller shall mutually agree on June 24, 1998, with effect on July 1, 1998 (the
"Closing Date"). At the Closing, title to all of the Assets, as outlined in
section one above, shall pass to Buyer.
4.2 SELLER'S CLOSING DELIVERIES. At the Closing, Seller shall:
(a) deliver to Buyer possession of the Assets, such that Buyer
shall be entitled to til enjoyment of the Assets;
(b) deliver to Buyer a schedule of creditors of the Business as
contemplated by Section 2.2 above;
(c) execute and deliver to Sento a subscription agreement relating
to the shares of Sento Common Stock to be transferred pursuant
to Section 2.3(b) above, in form and substance acceptable to
Sento in its discretion; and
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(d) deliver to Buyer all other documents, agreements,
certificates, books and records relating to the Assets as
Buyer shall reasonably request.
4.3 BUYER'S CLOSING DELIVERIES. Subject to the terms,
conditions and provisions hereof, including, without limitation, Seller's
performance of each of its obligations set forth in Section 4.2 above, upon
the completion of the Closing. Buyer shall, at the times and in the amounts
set forth in Article U above, pay the Purchase Price, less any offset for
claims arising pursuant to Section 7.4 below.
V. POST-CLOSING RIGHTS AND OBLIGATIONS
5.1 TRANSITION PERIOD. During the period between the Closing
Date and August 1, 1998 (the "Transition Period"), Seller will continue
marketing Courses to be held prior to August 1, 1998, and will provide Buyer
oversight of marketing activities to verify that marketing of the Courses
continues at levels acceptable to Buyer. MCSE and CNE Course revenues (net of
any refunds, rebates, discounts, taxes and costs of collection) actually
received by Buyer or Seller as a result of Seller's marketing efforts
initiated prior to August 1, 1998 will be divided equally between Buyer and
Seller. Buyer will pay to Seller Ten Percent (10%) of all MCSE and CNB Course
revenues (net of any refunds, rebates, discounts, taxes and costs of
collection) actually received by Buyer as a result of Buyer's marketing
efforts initiated during the Transition Period for courses held after August
1, 1998, as defined in section 2.1 above. The parties shall apportion
expenses such as "cold calls," telephones, reception. etc., during, or prior
to, the Transition Period based on which party is responsible for initiating
the particular marketing efforts; i.e., costs expended by Seller to aid Buyer
in the marketing efforts for which it is responsible shall be refunded to
Seller. Further, during the Transition Period, the panics shall work together
to settle any outstanding accounts or other issues relative to Courses held
prior to August 1, 1998.
5.2 PHYSICAL ASSETS. Seller will retain ownership of Seller's
tangible assets located at the Jamestown Property, including Seller's
furniture, office equipment, telephone system and computer network.
Subsequent to the Closing, Seller shall permit Buyer to occupy the Jamestown
Property and use all such related assets during the remaining term of the
Jamestown Lease, after which Buyer shall vacate possession of the Jamestown
Property and return to Seller all assets of Seller located thereat. From
Closing through December 31, 1998, Buyer shall reimburse Seller, on a monthly
basis, an amount equal to the actual lease payment and utility expenses
incurred by Seller with respect to the Jamestown Property. Seller shall
maintain adequate insurance coverage of the Jamestown Property and shall
cause all insurance policies relating to the Jamestown Property to name Buyer
as an additional insured party.
5.3 CONTACT DATABASE. Seller shall retain ownership and use of
Seller's "Contact Database" but Seller shall allow Buyer the use of the
Contact Database to further its marketing efforts for the Courses during the
term of this Agreement and beyond. Seller will not use or allow the Contact
Database to be used for Competitive Business Purposes as described in 5.4(b)
below.
5.4 SELLER'S BUSINESS ACTIVITIES.
(a) Seller and each of the Principals acknowledges that (i) they
constitute a limited number of persons who have performed a
significant role in developing the Business: (ii) the Business
is conducted throughout the United States; (iii) their work in
connection with the development of the Business has given
them, and will continue to give them, trade secrets of and
confidential information concerning the Assets, the Business,
the Courses
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and Buyer, (iv) the agreements and covenants contained in this
Section 5.4 are essential to protect the Assets and the
Business and the goodwill associated therewith; and (v) they
possess the means to support themselves and their dependents
other than by engaging in any Competitive Business (as defined
below) and the provisions of this Section 5.4 will not impair
such ability.
(b) Seller and each of the Principals covenants and agrees that
during the Payment Period he or it will not to engage in any
Competitive Business (as defined below) anywhere in the United
States. As used herein, the term "Competitive Business" means
the business of marketing, promoting, soiling, offering,
teaching and developing live, instructor-led Courses related
in any manner to MCSE or CNE training or certification.
(c) Seller and each of the Principals acknowledge and agree that
the covenants in this Section 5.4 are reasonable and valid in
geographical and temporal scope and in all other respects. If
any court determines that any of the covenants in this Section
5.4, or any part thereof, is invalid or unenforceable, the
remainder of such covenants shall not thereby be affected and
shall be given full effect, without regard to the invalid
portions. Without limiting the generality of the foregoing,
if, court determines that the geographic scope of the
covenants in this Section 5.4 is unreasonable, then such scope
shall be reduced to the geographic area where Buyer (including
its affiliates) are engaged in the Business or such other
geographic area as the court shall determine to be reasonable
in light of the factors acknowledged by Seller and the
Principals in Section 5.4(a) above.
(d) Buyer and Seller agree that during the Payment Period Seller
may continue to market and promote training courses that do
not constitute a "Competitive Business" and may continue to
use the name "Educational Systems, Inc."
5.5 ASTRON AGREEMENT. The parties agree that, upon the
execution of this Agreement, that the certain Agreement, dared as of June 4,
1997, by and between Astron Incorporated and Seller (the "Astron Agreement"),
together with any subsequent agreements or addenda related in any manner
thereto, shall be terminated with effect from August 1, 1998, but its
previsions shall apply to courses marketed by Seller prior to August 1, 1998.
VI. REPRESENTATIONS AND WARRANTIES
6.1 REPRESENTATIONS AND WARRANTIES OF SELLER AND THE
PRINCIPALS. For the purpose of inducing Buyer to enter into this Agreement
and with the knowledge that Buyer will rely upon the following
representations and warranties. Seller and each of the Principals represents
and warrants to Buyer as follows:
(a) AUTHORITY. Seller and the Principals possess all requisite
power and authority to enter into this Agreement and to
perform all of their respective obligations under this
Agreement. Seller is not a party to, subject to, or bound
by, and no part of the Assets are subject to any mortgage,
deed of trust, loan agreement security agreement, lien, or
other agreement or instrument of any kind, or any judgment,
order, writ, injunction or decree of any court or
governmental body, that will prohibit, prevent, or affect
(i) the carrying
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out of the transactions contemplated by this Agreement, or
the performance by Seller of any of its obligations
hereunder; or (ii) the use by Buyer of any part of the
Assets.
(b) COMPLIANCE WITH LAW. The operations of Seller with respect
to the Business and the Assets have not violated, do not
currently violate, and will not, as of the Closing Date,
violate any federal, state, or local laws. Seller possesses
all licenses, permits, certificates, orders, approvals and
authority from federal, state or local governmental
agencies which are necessary to conduct and continue to
conduct the Business as presently constituted; and no
suspension or cancellation of any such licenses, permits,
certificates, orders, approvals or authority is threatened.
(c) LITIGATION. There is no litigation. action, proceeding or
investigation pending or threatened before any court,
administrative agency or other governmental body or arbiter
by, against, affecting or involving Seller which involves
or affects the Business or any part of the Assets which
would (i) affect in any way the ability of Seller to catty
out the transactions contemplated by this Agreement or (ii)
affect or threaten in any manner whatsoever Buyers
ownership, use or possession of the Assets after the
Closing Date.
(d) ASSETS AND TITLE. Seller holds good and marketable title to
all of the Assets. Neither Seller nor any Principal or any
other person has sold, assigned, granted or transferred to
any person, firm or entity any interest in the Assets, the
Business, or any part thereof. Seller is authorized and
possesses the right to sell, assign, transfer and convey
the Assets to Buyer and to permit Buyer to occupy the
Jamestown Property during the remaining term of the
Jamestown Lease; and Seller's sole and undivided interest
in and to the Assets is assignable and transferable. Upon
the consummation of the transactions described in this
Agreement, Buyer will acquire good and marketable title to
all of the Assets, free and clear of any lien, claim,
encumbrance, pledge or security interest of any nature
whatsoever.
6.2 REPRESENTATIONS AND WARRANTIES OF BUYER. For the purpose of
inducing Seller to enter into this Agreement and with the knowledge that Seller
and the Principals will rely upon the following representations and warranties,
Buyer represents and warrants to Seller and each of the Principals as follows:
(a) AUTHORITY. Buyer possess all requisite power and authority to
enter into this Agreement and to perform all of its respective
obligations under this Agreement and Buyer and Sento warrants
that Buyer is authorized to enter into this Agreement and that
payments in cash and stock will be paid as provided for
herein. Sento further warrants that its wholly-owned
subsidiary, Astron, Inc., consents to the transfer of Seller's
rights to Buyer hereunder.
(b) COMPLIANCE WITH LAW. The operations of Buyer with respect to
the purchase of the Business and the Assets will not violate,
as of the Closing Date, any federal, state, or local laws.
(c) LITIGATION. There is no litigation, action, proceeding or
investigation pending Or threatened before any court,
administrative agency or other governmental body or arbiter
7
<PAGE>
by. against affecting or involving Buyer which would in any
way impair its ability to complete all terms and conditions of
this Agreement.
6.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding
any investigation made at any time by or on behalf of any of the parties, all
of the covenants, representations, warranties, indemnifications, agreements
and undertakings set forth in this Agreement, and in the separate instruments
delivered hereunder, shall survive the Closing.
VII. ADDITIONAL OBLIGATIONS
7.1 FURTHER ASSURANCES. From time to time after the Closing,
each party to this Agreement at the request of the other party and without
further consideration, shall execute and deliver or use its best efforts to
cause to be executed and delivered such other consents, releases, assumptions
and other instruments as the requesting party may reasonably deem necessary
or desirable (a) to vest, perfect, or confirm, on record or otherwise, in the
requesting party the title to any assets, properties, or rights acquired or
to be acquired by the requesting party by reason of, or as a result of, the
transactions provided for in this Agreement or (b) to put the requesting
party in possession of any of such assets, property, or rights. In the case
of any assets, properties, or rights, if any, which cannot be transferred
effectively without the consent of a third party or governmental agency,
Seller and the Principals shall, in good FAITH, cooperate in obtaining such
consent promptly; and if any such consent shall not be obtainable, Seller and
the Principals shall use best efforts to provide Buyer with the benefits
thereof in some other manner.
7.2 TAXES ARID EXPENSES. All sales, use and transfer taxes
payable with respect to the sate and transfer of the Assets shall be paid by
Seller. Buyer, Seller and the Principals shall pay their own fees and
expenses incurred in the preparation and execution OF, and performance
pursuant to, this Agreement.
7.3 EMPLOYEES. Seller, Buyer and the Principals acknowledge and
agree that Buyer shall have no obligation to employ after the Closing Date
any current employee of the Business, and that Buyer shall retain all
discretion with respect to its employment of any current employee of the
Business who are principally employed or involved in the marketing of MCSE or
CNE Courses in connection wit the purchase of the Assets and the operation of
the Business after the Closing Date. In connection therewith:
(a) Seller shall pay all obligations and retain all liability for
amounts owing to employees of the Business which are incurred
during any period prior to the Closing Date or attributable
thereto, except as provided for in section 5.1 above.
(b) Seller shall provide promptly to all employees employed in the
Business all tax and employment forms and information required
to be provided to such employees by Seller under applicable
law. To the extent Buyer has control of any of this
information, either due to its use of Seller's computers and
equipment or due to Buyer employing the employees of the
Business with accounting or tax knowledge. Buyer agrees to
cooperate in providing the necessary information to Seller.
Buyer also agrees to cooperate in
8
<PAGE>
providing any other information Seller may need for its own
accounting or tax purposes where the information or knowledge
is held by the computers, equipment or employees Buyer has
hired from the Business.
(c) Seller represents that as of the date of this Agreement all
employees of the Business are, and covenants that as of the
Closing Date all employees of the Business shall be, employees
at will.
7.4 INDEMNIFICATION. Seller shall indemnify and hold harmless
Buyer from and against any and all liabilities, claims, obligations, demands,
damages, costs, fees and expenses incurred by Buyer as a result of, arising
out of, or otherwise in respect of (i) the ownership of the Assets or the
operation of the Business on or prior to the Closing Date; (ii) any
inaccuracy in, or breach of, any representation. warranty, covenant or
agreement of Seller set forth in this Agreement; (iii) the application or any
violation of, or failure to comply with, any bulk sales statute; and (iv) any
and all actions, suits, proceedings, claims, liabilities, demands,
assessments and judgments incident to any of the foregoing or such
indemnification. It is the intention of the panics that this indemnity does
not require payment as a condition precedent to recovery by Buyer against
Seller under this indemnity and that, in the event a valid claim against
Seller may be legally asserted against Buyer, then, pursuant to this Section
7.4, Buyer may withhold and offset the reasonable amount of any such claim
against amounts otherwise payable by Buyer to Seller pursuant to this
Agreement. The provisions of this Section 7.4 shall not limit or preclude in
any manner the right of Buyer to seek and obtain indemnification from Seller
pursuant to any other agreement or applicable law.
7.5 ASSIGNABILITY. Buyer agrees to promptly notify Seller of
any assignment of this Agreement or any of its rights hereunder. Buyer
acknowledges that no assignment will have any adverse impact on Seller or the
contractual rights and obligations entered into in this Agreement.
7.6 ACCOUNTING AND RECORDS. Buyer agrees, in accordance with
the payment of Purchase Price described in paragraph 2.1 above, that Seller
shall, upon reasonable notice, be allowed access to Buyer's or its assignees
accounting and records in order to verify the calculations used to determine
the Purchase Price payment.
VIII. GENERAL PROVISIONS
8.1 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah, without reference
to choice of law rules.
8.2 WAIVER AND MODIFICATION. This Agreement may not be amended,
superseded or canceled, and none of the terms and conditions hereof may be
waived except by a written instrument executed by each party hereto: or, in
the case of a waiver, by the party waiving compliance.
8.3 ENTIRE AGREEMENT. This Agreement, together with the
exhibits attached hereto, contains the entire agreement between the parties
(including any affiliates of the parties) with respect to the subject matter
hereof and supersedes all prior understandings and agreements between Buyer,
Seller and the Principals, including, without limitation, the Astron
Agreement., as delineated in paragraph 5.5 above.
9
<PAGE>
8.4 CAPTIONS. The respective captions of the sections and
paragraphs of this Agreement are inserted for convenience only and shall not
be deemed to modify or otherwise affect this Agreement
8.5 ATTORNEYS FEES. If any legal action or other proceeding is
brought for enforcement of this Agreement because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions
of this Agreement, the successful or prevailing party shall be entitled to
recover reasonable attorneys fees and costs incurred, in addition to any
other relief to which it may be entitled.
8.6 NOTICES. All notices and other communications required
hereunder shall be in writing and shall be deemed given and effective when
delivered personally or by overnight courier or deposited in the United
States Mail, registered or certified mail (return receipt requested), postage
prepaid, to the parties at the addresses set forth in the introductory
paragraph above (or at such other address as shall be specified by like
notice, provided that notices of a change of address shall be effective only
upon receipt thereof).
IN WITNESS WHEREOF, this Agreement was executed by the parties as of
the day and year first written above.
"SELLER"
EDUCATIONAL SYSTEMS, INC.,
a Utah corporation
By: /s/ Kerry G. Arnold
--------------------------------
Its: President
"PRINCIPALS"
/s/ Richard S Smith
-----------------------------------
Richard S. Smith
/s/ Kerry G Arnold
-----------------------------------
Kerry G. Arnold
10
<PAGE>
"BUYER"
SENTO TRAINING CORPORATION,
a Utah corporation
By: /s/ John Wendel
--------------------------------
Its: EVP
SENTO TECHNICAL INNOVATIONS
CORPORATION, a Utah Corporation
By:
Its:
11
<PAGE>
Exhibit A
EXCLUDED ASSETS
<TABLE>
<S> <C>
Desks 7
Credenza 1
File Cabinets 4
Conference Chairs 10
Desk Chairs 15
Cubicles 10
Tables 4
Computers 13
Printers 3
Fax Machines 2
Copy Machine 1
Win Telephone System 1
Telephones 14
White Boards 5
Storage Cabinet-S 1
Shelving Units 3
Refrigerator 1
Microwave 1
Toaster 1
Clocks 2
Pictures 5
Other Miscellaneous Office Equipment
</TABLE>
<PAGE>
EXHIBIT "B"
TO
ASSET PURCHASE AGREEMENT DATED JUNE 24, 1998
PAYMENT SCHEDULE
Section 1:
MCSE and CNE Course revenues resulting from Seller's marketing
efforts initiated prior to August 1, 1998 Period will be divided as follows:
A. 50% to Buyer.
B. 50% to Seller.
Section 2:
MCSE and CNE Course revenues resulting from Buyer's marketing efforts
initiated during the Transition Period, with respect to courses held after
August 1, 1998, will be divided as follows:
A. 90% to Buyer.
B. 10% to Seller.
13
<PAGE>
Exhibit C
ESI Accounts Payable
<TABLE>
<S> <C>
Maasai, Inc $ 26,926.63
Rubin Response 21,343.59
Accumail Services, Inc 15,841.42
American Name Services 15,546.61 (18,119.21)*
American Mail Well 9,050.41
TelAmerica 6,313.85
Sylvan Prornetric 4,950.00
SOS Staffing Services 2,612.95
Darwin Fisher 1,135.00
Tom Scribner 900.96
Federal Express 767.95
System Technology, Inc 478.19
Multi Media Marketing 399.00
Viking 349.52
Jamestown Square 198.20
Lock Box 156.80
Pitney Bowes 145.11
Mount Olympus Water 138.86
Laser Supply of Utah, Inc 104.13
Access Computer Products 52.06
Bidnet 27.12
Personnel Concepts Limited 9.95
-----------
Total $107,498.37
</TABLE>
The above represents amounts owing to third party vendors for which services
have been received. The amounts and total will vary as payments are made and
new services received in the day-to-day course of business. The above does
not include Sento/ESI reconciliations and accounts which are still open.
* The difference represents an item for which we are not responsible.
<PAGE>
STOCK ISSUANCE AGREEMENT
THIS STOCK ISSUANCE AGREEMENT (the "Agreement") is made and entered
into this 24th day of June, 1998 by and among EDUCATIONAL SYSTEMS, INC., a
Utah corporation (ES!), SENTO TECHNICAL INNOVATIONS CORPORATION, a Utah
corporation ("Sento"), and RICHARDS. SMITH, an individual, and KERRY (3. ARNOLD,
an individual (collectively, the "Principals").
RECITALS:
WHEREAS, pursuant to the terms of an Asset Purchase Agreement,
dated June __, 1998, by and between ES!, Sento Training Corporation, a Utah
corporation which is a wholly-owned subsidiary of Sento ("Sento Training"),
and the Principals (the "Purchase Agreement"), Sento Training has agreed to
purchase from ES!, and ES! has agreed to sell to Sento Training,
substantially all of the assets of ES!; and
WHEREAS, in partial consideration for ESI's performance of its
obligations under the Purchase Agreement, Sento has agreed to issue and
deliver to EM certain shares (the "Shares") of the Sento Common Stock, $25
par value (the "Common Stock"), at the times and in the manner set forth in
the Purchase Agreement, including, without limitation, the provisions of
Section 2.3 (b) of the Purchase Agreement; and
WHEREAS, the obligation of Sento to issue and deliver the Shares to
ESI is expressly contingent upon ESI's delivery of all representations,
warranties and documents requested by Sento in order to accomplish such
issuance and delivery; and
WHEREAS, subject to the terms and conditions of the Purchase
Agreement, this Agreement sets forth certain terms and conditions upon which
Sento is willing to issue and deliver the Shares to ESI.
AGREEMENT:
NOW, THEREFORE, upon these premises and in consideration of the
mutual obligations set forth herein and in the Purchase Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. ISSUANCE OF SHARES. Upon the terms and subject to the conditions
set forth in the Purchase Agreement, Sento shall, at the times and in the
manner set forth in the Purchase Agreement, issue and deliver to ES! a
presently indeterminate number of newly issued shares of Common Stock, the
number of which shall be calculated in the manner set forth in the Purchase
Agreement.
2. ACKNOWLEDGEMENTS. As an inducement to Sento to enter into this
Agreement and to issue and deliver the Shares acid with the knowledge that
Sento and Sento Training will rely upon each of the following acknowledgments
and agreements, ESI and each of the Principals hereby acknowledges and agrees
that:
2.1 Sento has previously made available for inspection by ESI and
the Principals financial statements and other financial,
corporate and business information and records with respect
to Sento.
2.2 The Shares have not been registered under the Securities Act
of 1933, as amended (the "Securities Act"), or any state
securities or 'blue sky' laws, and al-c being issued to ES!
pursuant to
1
<PAGE>
exemptions from the registration requirements of the
Securities Act and applicable state securities and blue sky
laws, and:
(i) the Shares may not be resold, pledged,
transferred. hypothecated or otherwise disposed of unless the
Shares are subsequently registered under the Securities Act and
relevant state securities and blue sky laws or unless Sento
receives an opinion of ESI's counsel In a form acceptable to Sento
and its legal counsel that with respect to the Shares registration
is not required under the Securities Actor under the securities or
blue sky laws of any state;
(ii) a notation will be made upon the appropriate
records of Sento andante certificate or certificates representing
the Shares so that transfers of the Shares will not be effected
without compliance with such restrictions on transferability and
resale and reflecting the terms and conditions of this Agreement
and the Purchase Agreement;
(iii) the Securities and Exchange Commission (the
"Commission") has taken the position that persons who offer or
sell restricted securities such as the Shares are on notice that,
in view of the broad remedial purposes of the Securities Act and
of public policy which supports registration, they will have a
substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales and, in
connection with resales, the Commission has stated that the
"change in circumstances" concept which previously applied in
determining whether such resales were exempt from registration,
will no longer be considered on that issue;
(iv) ESI may have to bear the economic risk of any
investment related to the Shares for an indefinite period of time;
and
(v) no representation, promise or agreement has
been made concerning the marketability or value of the Shares or
that any of the Shares will be registered under the Securities
Actor any state securities or blue sky laws at any time in the
future or will otherwise be qualified for sale under applicable
securities laws.
2.3 Any investment in the Common Stock is highly speculative
and subject to substantial risks, including, without limitation, the risks
identified in Sento's filings with the Commission, which filings Sento has
encouraged ESI and the Principals to review in detail and ESI and the
Principals have had a reasonable opportunity to review.
2.4 No representation, warranty, promise or agreement has been
made to ESI with respect to any of the following:
(i) the approximate or exact length of time ESI will be
required to remain as owner of the Shares;
(ii) the percentage of profit and/or the amount or type of
consideration (including dividends), profit or loss (including tax
benefits) to be realized, if any, as a result of ESI's ownership of the
Shares; and/or
(iii) that the past performance or experience of Sento will
in anyway indicate the results of fixture operations of Sento, the
results of the ownership of the Shares, or the likelihood of
achievement of the overall objectives of Sento.
2
<PAGE>
3. REPRESENTATIONS AND WARRANTIES. To induce Sento to enter
into this Agreement, to induce Sento Training to enter into the Purchase
Agreement, and with the knowledge that each of Sento and Sento Training will
relay upon each of the following representations and warranties, ES! and each
of the Principals hereby represents and warrants that:
3.1 ESI is able to bear the substantial economic risks of an
investment in the Common Stock, including, but not limited to, the
possibility of the complete loss of the ESI's investment in the Shares, the
lack of a public market, and the limited transferability of the Shares which
may make the liquidation of this investment impossible for the indefinite
ffiture. ES! has no need for liquidity in such investment, and could afford a
complete loss of such investment.
3.2 ESI and the Principals have such knowledge and experience
in financial and business matters that ESI and the Principals are capable of
evaluating the merits and risks of the investment in the Common Stock and of
protecting their own interests.
3.3 The Shares will be acquired for ESI's own account for
investment and not wit a view toward resale or distribution thereof, and ESI
does not now have any reason to anticipate any change in ESI's circumstances
or other particular occasion or event which would cause ESI to sell any of
the Shares or any interest therein.
3.4 ESI and the Principals have received and reviewed all
business, corporate and financial documents and records concerning Sento that
ESI and the Principals desire to receive and review.
3.5 ESI and the Principals have been given an opportunity to
discuss the history, business, corporate matters and prospects of Sento and
the management thereof with the officers and directors of Sento. ESI and the
Principals are fully informed with respect to the merits and risks associated
with the Shares and with the history, management business, prospects and
corporate matters of Sento.
3.6 All representations and warranties set forth above or in
any other written statement or document delivered by ESI or the Principals in
connection with the transactions contemplated hereby are true and correct in
all respects as of the date hereof and will be true and correct in all
respects on and as of the date of each issuance and delivery of the Shares as
contemplated by the Purchase Agreement as if made on and as of such date and
will survive each issuance and delivery of the Shares.
3.7 ESI and the Principals understand the meaning and legal
consequences of the representations and warranties contained in this
Agreement and agree, jointly and severally, to indemnify and hold harmless
Sento and Sento Training and their respective directors, officers and agents
from and against any and all losses, damages and liabilities due to or
arising out of a breach of or the inaccuracy of any representation or
warranty of ES! of the Principals in this Agreement. Notwithstanding any of
the representations, warranties, acknowledgments or agreements made herein by
ES! or the Principals, ES! and the Principals do not hereby or in any other
manner waive any right granted to ES! or the Principals under federal or
state securities laws.
4. CAPTIONS. The captions used herein are for convenience
only and shall not be deemed a part of this Agreement and in no way define,
limit, augment, extend or describe the scope, content or intent of any part
or parts of this Agreement.
3
<PAGE>
5. GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by the substantive laws of, the State of Utah,
without reference to principles governing choice or conflicts of laws.
6. ASSIGNMENTS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective legal
representatives, successors, agents, heirs and assigns. Neither this
Agreement nor any obligations hereunder shall be assigned by ESI.
7. ENTIRE AGREEMENT. This Agreement, together with the
Purchase Agreement and any exhibits and schedules attached hereto or thereto,
constitute the entire agreement between the parties hereto with respect to
the subject matter contained herein, and there are no covenants, terms or
conditions, express or implied, other than as set forth or referred to
herein. This Agreement and the Purchase Agreement supersede all prior
agreements between the parties hereto relating to all or part of the subject
matter herein. No representations, oral or written, modifying or
contradicting the terms of this Agreement have been made by any party except
as contained herein. This Agreement may not be amended, modified or canceled
except by written agreement of the parties signed by the party against whom
enforcement is sought.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first set forth above.
"ESI"
EDUCATIONAL SYSTEMS, INC.
a Utah corporation
By: /s/ Kerry G. Arnold
--------------------------------
Its: President
"SENTO"
SENTO TECHNICAL INNOVATIONS CORPORATION,
a Utah corporation
By: /s/ Robert K Bench
--------------------------------
Its: Vice President/CFO
"PRINCIPLES"
/s/ Richard S. Smith
-----------------------------------
Richard S. Smith, an individual
/s/ Kerry G. Arnold
-----------------------------------
Kerry G. Arnold, an individual
5
<PAGE>
Execution Copy
RESTRICTED STOCK TRANSFER AGREEMENT
THIS RESTRICTED STOCK TRANSFER AGREEMENT (the "Agreement") is made
and entered into this 18th day of November, 1998 by and among SENTO
CORPORATION, a Utah corporation ("Sento"), and JANAE ARNOLD, an individual,
and HEIDI M. SMITH, an individual (collectively, the "Principals").
RECITALS:
WHEREAS, pursuant to the terms of an Asset Purchase Agreement, dated
June 24, 1998, by and between Educational Systems. Inc., a Utah corporation
("ESI"), Sento Training Corporation, a Utah corporation which is a
wholly-owned subsidiary of Sento ("Sento Training"), among other parties (the
"Purchase Agreement"), Sento Training purchased from ESI, and ESI sold to
Sento Training, substantially all of the assets of ESI; and
WHEREAS, in partial consideration for ESI's performance of its
obligations under the Purchase Agreement, Sento issued and delivered to ESI
certain shares of Sento Common Stock, $.25 par value (the "Common Stock"),
and agreed to issue to ESI certain additional shares of Common Stock at the
times and in the manner set forth in the Purchase Agreement, including,
without limitation, the provisions of Section 2.3(b) of the Purchase
Agreement; and
WHEREAS, ESI and the Principals have requested that Sento give its
consent to a proposed transfer by EM to the Principals of all of the shares
of Common Stock acquired or proposed to be acquired by ESI pursuant to the
terms of the Purchase Agreement (collectively, the "Shares"); and
WHEREAS, subject to the terms and conditions of the Purchase
Agreement, this Agreement sets forth certain terms and conditions upon which
Sento is willing to consent to the proposed transfer of the Shares from ESI
to the Principals.
AGREEMENT:
NOW, THEREFORE, upon these premises and in consideration of the
mutual obligations set forth herein and in the Purchase Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. CONSENT TO TRANSFER OF SHARES. Upon the terms and subject
to the conditions set forth in the Purchase Agreement and this Agreement,
Sento hereby consents to the proposed transfer of the Shares from ESI to the
Principals.
1
<PAGE>
Execution Copy
2. ACKNOWLEDGMENTS. As an inducement to Sento to enter into
this Agreement and to consent to the transfer of the Shares from ESI to the
Principals and, with the knowledge that Sento will rely upon each of the
following acknowledgments and agreements, each of the Principals hereby
acknowledges and agrees that:
2.1 Sento has previously made available for inspection by the
Principals financial statements and other financial, corporate and business
information and records with respect to Sento.
2.2 The Shares have not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), or any state securities or
"blue sky" laws, and have been and will be issued to ESI pursuant to
exemptions from the registration requirements of the Securities Act and
applicable state securities and blue sky laws, and:
(i) the Shares may not be resold, pledged, transferred,
hypothecated or otherwise disposed of unless the Shares are
subsequently registered under the Securities Act and relevant state
securities and blue sky laws or unless Sento receives an opinion of
counsel to the Principals in a form acceptable to Sento and its legal
counsel that with respect to the Shares registration is not required
under the Securities Act or under the securities or blue sky laws of
any state;
(ii) a notation will be made upon the appropriate records
of Sento and on the certificate or certificates representing the Shares
so that transfers of the Shares will not be effected without compliance
with such restrictions on transferability and resale and reflecting the
terms and conditions of this Agreement and the Purchase Agreement;
(iii) the Securities and Exchange Commission (the
"Commission") has taken the position that persons who offer or sell
restricted securities such as the Shares are on notice that, in view of
the broad remedial purposes of the Securities Act and of public policy
which supports registration, they will have a substantial burden of
proof in establishing that an exemption from registration is available
for such offers or sales and, in connection with resales, the
Commission has stated that the "change in circumstances" concept, which
previously applied in determining whether such resales were exempt from
registration, will no longer be considered on that issue;
(iv) the Principals may have to bear the economic risk of
any investment related to the Shares for an indefinite period of time;
and
(v) no representation, promise or agreement has been made
concerning the marketability or value of the Shares or that any of the
Shares 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 applicable securities laws.
2.3 Any investment in the Common Stock is highly speculative
and subject to substantial risks, including, without limitation, the risks
identified in Sento's filings with the Commission, which filings Sento has
encouraged the Principals to review in detail and the Principals have had a
reasonable opportunity to review.
2
<PAGE>
Execution Copy
2.4 No representation, warranty, promise or agreement has been
made to the Principals with respect to any of the following:
(i) the approximate or exact length of time the
Principals will be required to remain as owners of the Shares;
(ii) the percentage of profit and/or the amount or type of
consideration (including dividends), profit or loss (including tax
benefits) to be realized, if any, as a result of the ownership of the
Shares by the Principals; and/or
(iii) that the past performance or experience of Sento will
in any way indicate the results of future operations of Sento, the
results of the ownership of the Shares, or the likelihood of
achievement of the overall objectives of Sento.
3. REPRESENTATIONS AND WARRANTIES. To induce Sento to enter
into this Agreement and with the knowledge that Sento will relay upon each of
the following representations and warranties, each of the Principals hereby
represents and warrants that:
3.1 each of the Principals is able to bear the substantial
economic risks of an investment in the Shares, including, but not limited to,
the possibility of the complete loss of the investment of the Principals in
the Shares, the lack of a public market, and the limited transferability of
the Shares which may make the liquidation of this investment impossible for
the indefinite future. The Principals have no need for liquidity in such
investment, and could afford a complete loss of such investment.
3.2 The Principals have such knowledge and experience in
financial and business matters that the Principals are capable of evaluating
the merits and risks of the investment in the Common Stock and of protecting
their own interests.
3.3 The Shares will be acquired for the Principals' own account
for investment and not with a view toward resale or distribution thereof, and
the Principals do not now have any reason to anticipate any change in their
circumstances or other particular occasion or event which would cause the
Principals to sell any of the Shares or any interest therein.
3.4 The Principals have received and reviewed all business,
corporate and financial documents and records concerning Sento that the
Principals desire to receive and review.
3.5 The Principals have been given an opportunity to discuss
the history, business, corporate matters and prospects of Sento and the
management thereof with the officers and directors of Sento. The Principals
are fully informed with respect to the merits and risks associated with the
Shares and with the history, management, business, prospects and corporate
matters of Sento.
3.6 All representations and warranties set forth above or in
any other written statement or document delivered by ESI or the Principals in
connection with the transactions contemplated hereby or by the Purchase
Agreement are true and correct in all respects as of the date hereof and will
be true and correct in all respects on and as of the date of each issuance
and delivery of the Shares as contemplated by
3
<PAGE>
Execution Copy
the Purchase Agreement as if made on and as of such date and will survive
each issuance and delivery of the Shares.
3.7 The Principals understand the meaning and legal
consequences of the representations and warranties contained in this
Agreement and agree, jointly and severally, to indemnify and hold harmless
Sento and Sento Training and their respective directors, officers and agents
from and against any and all losses, damages and liabilities due to or
arising out of a breach of or the inaccuracy of any representation or
warranty of the Principals in this Agreement. Notwithstanding any of the
representations, warranties, acknowledgments or agreements made herein by the
Principals, the Principals do not hereby or in any other manner waive any
right granted to the Principals under federal or state securities laws.
4. CAPTIONS. The captions used herein are for convenience only
and shall not be deemed a part of this Agreement and in no way define, limit,
augment, extend or describe the scope, content or intent of any pan or parts
of this Agreement.
5. GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by the substantive laws of, the State of Utah,
without reference to principles governing choice or conflicts of laws.
6. ASSIGNMENTS. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective legal
representatives, successors, agents, heirs and assigns. Neither this
Agreement nor any obligations hereunder shall be assigned by the Principals.
7. ENTIRE AGREEMENT. This Agreement, together with the
Purchase Agreement (including any exhibits and schedules attached thereto)
and any other documents or instrument executed in connection therewith
including, without limitation, a Stock Issuance Agreement dated June 24,
1998, constitute the entire agreement between the parties hereto with respect
to the subject matter contained herein, and there are no covenants, terms or
conditions, express or implied, other than as set forth or referred to
herein. This Agreement, the Purchase Agreement and the Stock Issuance
Agreement described above supersede all prior agreements between the parties
hereto relating to all or part of the subject mailer herein. No
representations, oral or written, modifying or contradicting the tem~s of
this Agreement have been made by any party except as contained herein. This
Agreement may not be amended, modified or canceled except by written
agreement of the parties signed by the party against whom enforcement is
sought.
4
<PAGE>
Execution Copy
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the date first set forth above.
"SENTO"
SENTO TECHNICAL INNOVATIONS CORPORATION,
a Utah corporation
By: /s/ Robert K. Bench
--------------------------------
Its: Vice President/CFO
"PRINCIPALS"
/s/ Heidi M. Smith
-----------------------------------
Heidi M. Smith, an individual
/s/ Janae Arnold
-----------------------------------
Jane Arnold, an individual
<PAGE>
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Item ----
- ----
<S> <C> <C>
1 ACCOUNTING AND OTHER TERMS. . . . . . . . . . . . . . . . . . . . . . 1
2 LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Credit Extensions. . . . . . . . . . . . . . . . . . . . . . . . 1
2.1.1 Revolving Advances.. . . . . . . . . . . . . . . . . . 1
2.1.2 Letters of Credit. . . . . . . . . . . . . . . . . . . 2
2.2 Overadvances . . . . . . . . . . . . . . . . . . . . . 2
2.3 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3 CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.1 Conditions Precedent to Initial Credit Extension . . . . . . . . 2
3.2 Conditions Precedent to all Credit Extensions. . . . . . . . . . 3
4 CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . 3
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . 3
5 REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . 3
5.1 Due Organization and Authorization . . . . . . . . . . . . . . . 3
5.2 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.3 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.4 No Material Adverse Change in Financial Statements . . . . . . . 4
5.5 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.6 Regulatory Compliance. . . . . . . . . . . . . . . . . . . . . . 4
5.7 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.8 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 4
6 AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . 4
6.1 Government Compliance. . . . . . . . . . . . . . . . . . . . . . 4
6.2 Financial Statements, Reports, Certificates. . . . . . . . . . . 4
6.3 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.4 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.5 Primary Accounts . . . . . . . . . . . . . . . . . . . . . . . . 5
6.6 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . . 5
6.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 6
7 NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.2 Changes in Business, Ownership, Management or Business
Locations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.3 Mergers or Acquisitions. . . . . . . . . . . . . . . . . . . . . 6
7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.5 Encumbrance. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.6 INVESTMENTS; DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . 6
<PAGE>
7.7 Transactions with Affiliates . . . . . . . . . . . . . . . . . . 6
7.8 Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . . . 6
7.9 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
8 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.1 Payment Default. . . . . . . . . . . . . . . . . . . . . . . . . 7
8.2 Covenant Default . . . . . . . . . . . . . . . . . . . . . . . . 7
8.3 Material Adverse Change. . . . . . . . . . . . . . . . . . . . . 7
8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . 7
8.7 Judgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.8 Misrepresentations . . . . . . . . . . . . . . . . . . . . . . . 7
9 BANK'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . 8
9.1 Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . 8
9.2 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . 8
9.3 Accounts Collection. . . . . . . . . . . . . . . . . . . . . . . 8
9.4 Bank Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 8
9.5 Bank's Liability for Collateral. . . . . . . . . . . . . . . . . 9
9.6 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . 9
9.7 Demand Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . 9
10 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER. . . . . . . . . . . . . . 9
12 GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 9
12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 9
12.2 Indemnification. . . . . . . . . . . . . . . . . . . . . . . .10
12.3 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . .10
12.4 Severability of Provision. . . . . . . . . . . . . . . . . . .10
12.5 Amendments in Writing, Integration . . . . . . . . . . . . . .10
12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . .10
12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . .10
12.8 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . .10
12.9 Attorneys' Fees, Costs and Expenses. . . . . . . . . . . . . .10
12.10 Borrower Waivers . . . . . . . . . . . . . . . . . . . . . . .10
12.11 Joint and Several Liability. . . . . . . . . . . . . . . . . .11
13 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
13.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . .11
EXHIBIT A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
EXHIBIT B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
EXHIBIT C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
<PAGE>
EXHIBIT D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
DISBURSEMENT REQUEST AND AUTHORIZATION . . . . . . . . . . . . . . . . . .22
CORPORATE RESOLUTIONS TO BORROW. . . . . . . . . . . . . . . . . . . . . .23
CORPORATE RESOLUTIONS TO BORROW. . . . . . . . . . . . . . . . . . . . . .25
CORPORATE RESOLUTIONS TO BORROW. . . . . . . . . . . . . . . . . . . . . .27
CORPORATE RESOLUTIONS TO BORROW. . . . . . . . . . . . . . . . . . . . . .29
</TABLE>
<PAGE>
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") dated June 23,
1999, between SILICON VALLEY BANK ("Bank") and SENTO CORPORATION, SENTO
TRAINING CORPORATION, SENTO CONSULTING CORPORATION, and SENTO TECHNICAL
SERVICES CORPORATION (collectively and jointly and severally "Borrower"),
amends and restates the Loan and Security Agreement between the parties dated
February 12, 1999, as amended by amendment to loan and security agreement
dated March 2, 1999, and provides the terms on which Bank will lend to
Borrower and Borrower will repay Bank. The parties agree as follows:
1. ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed
following GAAP Calculations and determinations must be made following GAAP.
The term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation" in this or any Loan Document. Capitalized terms in this
Agreement shall have the meanings set forth in Section 13. This Agreement
shall be construed to impart upon Bank a duty to act reasonably at all times.
2. LOAN AND TERMS OF PAYMENT
(1) CREDIT EXTENSIONS. Borrower will pay Bank the unpaid principal
amount of all Credit Extensions and interest on the unpaid principal amount
of the Credit Extensions.
1. REVOLVING ADVANCES.
(1) Bank will make Advances not exceeding (i) the lesser of
the Committed Revolving Line and the Borrowing Base minus (ii) the amount of
all outstanding Letters of Credit (including drawn but unreimbursed Letters
of Credit). Amounts borrowed under this Section may be repaid and reborrowed
during the term of this Agreement.
(2) Interest Rate. Advances accrue interest on the
outstanding principal balance at a per annum rate 2.00 percentage points
above the Prime Rate. After an Event of Default, Obligations accrue interest
at 5 percent above the rate effective immediately before the Event of
Default. The interest rate increases or decreases when the Prime Rate
changes. Interest is computed on a 360 day year for the actual number of days
elapsed.
(3) To Obtain an Advance, Borrower must notify Bank by
facsimile or telephone by 3:00 p.m. Pacific time on the Business Day the
Advance is to be made. Borrower must promptly confirm any telephone
notification by delivering to Bank the Payment/Advance Form attached as
Exhibit B. Bank will credit Advances to Borrower's deposit account. Bank
may make Advances under this Agreement based on instructions from a
Responsible Officer or his or her designee or without instructions if the
Advances are necessary to meet Obligations which have become due. Bank may
rely on any telephone notice given by a person whom Bank believes is a
Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to that reliance.
(4) The Committed Revolving Line terminates on the Revolving
Maturity Date, when all Advances are immediately payable.
2. LETTERS OF CREDIT. Bank will issue or have issued Letters of
Credit for Borrower's account not exceeding (i) the lesser of the Committed
Revolving Line or the Borrowing Base minus (ii) the outstanding principal
balance of the Advances, but the face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve) may not exceed $2,000,000. Each Letter of Credit will expire no
later than one hundred eighty (180) days after the Revolving Maturity Date
provided Borrower's Letter of Credit reimbursement obligation is secured by
cash on terms acceptable to Bank at any time after the Revolving Maturity
Date if the term of this Agreement is not extended by Bank.
(2) OVERADVANCES. If Borrower's Obligations under Section 2.1.1 and
2.1.2 exceed the lesser of either (i) the Committed Revolving Line or (ii) the
Borrowing Base, Borrower must immediately pay in cash to Bank the excess.
Page 1 - LOAN AND SECURITY AGREEMENT
<PAGE>
(3) PAYMENTS.
(1) Payments. Interest is payable in arrears on the first of
each month. Bank may debit any of Borrower's deposit accounts including
Account Number 3300099141 for principal and interest payments or any amounts
Borrower owes Bank. Bank will notify Borrower when it debits Borrower's
accounts. These debits are not a set-off. Payments received after 12:00 noon
Pacific time are considered received at the opening of business on the next
Business Day. When a payment is due on a day that is not a Business Day, the
payment is due the next Business Day and additional fees or interest accrue.
(4) FEES. Borrower will pay to Bank:
(1) Facility Fee. A fully earned, non-refundable
facility fee of $2,000 due on the Closing Date; and
(2) Bank Expenses. All Bank Expenses (including
reasonable attorneys' fees and expenses incurred through and after the
Closing Date when due.
2.5 LOCK-BOX ACCOUNT. Borrower shall immediately direct all account
debtors of borrower to make payments to a lock-box account at Bank controlled
by Bank as designated by Bank ("Lock-Box Account"). On a daily basis Bank
shall deposit all proceeds received in the Lock-Box Account into Borrower's
general checking account with Bank. Borrower shall hold any proceeds
received by Borrower from collection of accounts in trust for Bank without
commingling the same with other funds of Borrower and shall turn the same
over to Bank immediately upon receipt in the identical form received. All
credits to Borrower's general checking account shall be conditional upon
final payment to Bank at its own office in cash or solvent credits of the
items giving rise to them and if any item is not so paid, the amount of any
credit given for it shall be charged to any deposit account of Borrower with
Bank or treated as an Advance under this Agreement, whether or not the item
is returned. Borrower shall at the request of Bank notify the account
debtors of the security interest of Bank in any account and Bank may itself
at any time so notify account debtors. Upon the occurrence of an Event of
Default Bank may credit such proceeds deposited to the Lock-Box Account
against the Indebtedness of Borrower upon receipt but to allow time for
clearance of items, interest shall be calculated thereon for the number of
days as computed by the Bank at the interest rate for loans as set forth in
Section 2.1.1(b) of this Agreement; provided, however, that if the balance of
the Indebtedness is zero, Bank shall credit such proceeds to Borrower's
general checking account.
3. CONDITIONS OF LOANS
(1) CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. Bank's
obligation to make the initial Credit Extension is subject to the condition
precedent that it receive the agreements, documents and fees it requires.
(2) CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's
obligations to make each Credit Extension, including the initial Credit
Extension, is subject to the following:
(1) timely receipt of any Payment/Advance Form; and
(2) the representations and warranties in Section 5 must
be materially true on the date of the Payment/Advance Form and on the
effective date of each Credit Extension and no Event of Default may have
occurred and be continuing, or result from the Credit Extension. Each Credit
Extension is Borrower's representation and warranty on that date that the
representations and warranties in Section 5 remain true.
(3) the execution by Sento Corporation of the Amendment
to Warrant to Purchase Stock in the form of Exhibit E., incorporated herein
by this reference.
Page 2
<PAGE>
4. CREATION OF SECURITY INTEREST
(1) GRANT OF SECURITY INTEREST. Borrower grants Bank a continuing
security interest in all presently existing and later acquired Collateral to
secure all Obligations and performance of each of Borrower's duties under the
Loan Documents. Except for Permitted Liens, any security interest will be a
first priority security interest in the Collateral. Bank may place a "hold"
on any deposit account pledged as Collateral. If the Agreement is terminated,
Bank's lien and security interest in the Collateral will continue until
Borrower fully satisfies its Obligations.
Borrower does not grant Bank a security interest in, or lien on
any intellectual property, including with limitation patents, copyright
rights, copyright applications, copyright registrations and like protections
in each work of authorship and derivative work, whether published or
unpublished, now owned or later acquired; any patents, trademarks, service
marks and applications therefor; any trade secret rights, including any
rights to unpatented inventions, know-how, operating manuals, license rights
and agreements and confidential information, now owned or hereafter acquired;
or any claims for damages by way of any past, present and future infringement
of any of the foregoing.
Notwithstanding the foregoing, the security interest granted
herein shall not extend to and the term "Collateral" shall not include any
property, rights or licenses to the extent the granting of a security
interest therein (i) would be contrary to applicable law or (ii) is
prohibited by or would constitute a default under any agreement or document
(but excluding any agreement or document concerning the borrowing of money or
granting of a security interest) governing such property, rights or licenses
(but only to the extent such prohibition is enforceable under applicable law).
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
(1) DUE ORGANIZATION AND AUTHORIZATION. Borrower and each Subsidiary
is duly existing and in good standing in its state of formation and qualified
and licensed to do business in, and in good standing in, any state in which
the conduct of its business or its ownership of property requires that it be
qualified, except where the failure to so qualify could not reasonably be
expected to cause a Material Adverse Change.
The execution, delivery and performance of the Loan Documents have
been duly authorized, and do not conflict with Borrower's formations
documents, nor constitute an event of default under any material agreement by
which Borrower is bound. Borrower is not in default under any agreement to
which or by which it is bound in which the default could cause a Material
Adverse Change.
(2) COLLATERAL. Borrower has good title to the Collateral, free of
Liens except Permitted Liens. The Eligible Accounts are bona fide, existing
obligations, and the service or property has been performed or delivered to
the account debtor or its agent for immediate shipment to and unconditional
acceptance by the account debtor. Borrower has no notice of any actual or
imminent Insolvency Proceeding of any account debtor whose accounts are an
Eligible Account in any Borrowing Base Certificate. All Inventory is in all
material respects of good and marketable quality, free from material defects.
(3) LITIGATION. Except as shown in the Schedule attached hereto as
Schedule 1, there are no actions or proceedings pending or, to Borrower's
knowledge, threatened by or against Borrower or any Subsidiary in which an
adverse decision could cause a Material Adverse Change.
(4) NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements for Borrower and any Subsidiary delivered
to Bank fairly present in all material respects Borrower's consolidated
financial condition and Borrower's consolidated results of operations. There
has not been any material deterioration in Borrower's consolidated financial
condition since the date of the most recent financial statements submitted to
Bank.
(5) SOLVENCY. The fair salable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities;
the Borrower is not left with unreasonably small capital after the transactions
in this Agreement; and Borrower is able to pay its debts (including trade
debts) as they mature.
Page 3
<PAGE>
(6) REGULATORY COMPLIANCE. Borrower is not an "investment company"
or a company "controlled" by an "investment company" under the Investment
Company Act. Borrower is not engaged as one of its important activities in
extending credit for margin stock (under Regulations G, T and U of the
Federal Reserve Board of Governors). Borrower has complied with the Federal
Fair Labor Standards Act. Borrower has not violated any laws, ordinances or
rules, the violation of which could cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower
or any Subsidiary or, to the best of Borrower's knowledge, by previous
Persons, in disposing, producing, storing, treating, or transporting any
hazardous substance other than legally. To the best of Borrower's knowledge,
Borrower and each Subsidiary has timely filed all required tax returns and
paid, or made adequate provision to pay, all taxes. Borrower and each
Subsidiary have obtained all consents, approvals and authorizations of, made
all declarations or filings with, and given all notices to, all government
authorities that are necessary to continue its business as currently
conducted, except where the failure to do so could not reasonably be expected
to cause a Material Adverse Change.
(7) SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities except for Permitted Investments.
(8) FULL DISCLOSURE. No representation, warranty or other statement
of Borrower in any certificate or written statement given to Bank, taken
together with all such certificates and written statements given to Bank,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained in the certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower will do all of the following:
(1) GOVERNMENT COMPLIANCE. Borrower will maintain its and all
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could reasonably be expected to have a material adverse
effect on Borrower's business or operations. Borrower will comply, and have
each Subsidiary comply, with all laws, ordinances and regulations to which it
is subject, noncompliance with which could (i) reasonably be expected to have
a material adverse effect on Borrower's business or operations, or (ii) cause
a Material Adverse Change.
(2) FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(1) Borrower will deliver to Bank: (i) as soon as
available, but no later than 30 days after the last day of each month, a
company prepared consolidated balance sheet and income statement covering
Borrowers' consolidated operations during the period, together with the
balance sheet and income statements of Borrower's international Subsidiaries,
eliminations, and a consolidation of all Borrower's and Subsidiaries, in a
form acceptable to Bank and certified by a Responsible Officer; (ii) within
5 days of filing, copies of all statements, reports and notices made available
to Borrower's security holders or to any holders of Subordinated Debt and all
reports on Form 10-K and 10-Q with the Securities and Exchange Commission;
(iii) a prompt report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower
or any Subsidiary of $100,000 or more; and (iv) budgets, sales projections,
operating plans or other financial information Bank reasonably requests.
(2) Borrower will deliver to Bank Within 7 days of each
Friday, a Borrowing Base Certificate signed by a Responsible Officer in the
form of Exhibit C, with aged listings of accounts receivable and accounts
payable.
(3) Within 30 days after the last day of each month,
Borrower will deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in the form of Exhibit D.
(4) Bank has the right to audit Borrower's Accounts at
Borrower's expense, but the audits will be conducted no more often than once
every 6 months unless an Event of Default has occurred and is continuing.
Page 4
<PAGE>
(3) TAXES. Borrower will make, and cause each Subsidiary to make,
timely payment of all material federal, state, and local taxes or assessments
and will deliver to Bank, on demand, appropriate certificates attesting to
the payment.
(4) INSURANCE. Borrower will keep its business and the Collateral
insured for risks and in amounts, as Bank requests. Insurance policies will
be in a form, with companies, and in amounts that are satisfactory to Bank
and comparable to other similar businesses in the same geographic area. All
property policies will have a lender's loss payable endorsement showing Bank
as an additional loss payee and all liability policies will show the Bank as
an additional insured and provide that the insurer must give Bank at least
20 days notice before canceling its policy. At Bank's request, Borrower will
deliver certified copies of policies and evidence of all premium payments.
Proceeds payable under any policy in excess of $25,000 (or in any amount
after occurrence of an Event of Default) will, at Bank's option, be payable
to Bank on account of the Obligations.
(5) PRIMARY ACCOUNTS. Borrower will maintain its primary depository
and operating accounts with Bank.
(6) FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each month:
(1) QUICK RATIO. A ratio of Quick Assets to Current
Liabilities minus Deferred Revenue of at least 0.65 to 1.0 for the month-ends
from June 30, 1999 through and including November 30, 1999; and 0.75 for each
month-end thereafter.
(2) DEBT/NET WORTH RATIO. A ratio of Total Liabilities
less Subordinated Debt less Deferred Revenue to Tangible Net Worth of not
more than 3.00 to 1.00 commencing June 30, 1999.
(3) TANGIBLE NET WORTH. A Tangible Net Worth of at least
$2,000,000 as of June 30, 1999; $1,900,000 as of July 31, 1999; and
$1,800,000 for each month-end thereafter.
(4) MAXIMUM NET LOSSES. Incur net losses of no more than
$250,000 for the quarter ending June 30, 1999; $150,000 for the quarter
ending September 30, 1999; and $0.00 for the quarter ending December 31, 1999
and thereafter.
(7) FURTHER ASSURANCES. Borrower will execute any further instruments
and take further action as Bank requests to perfect or continue Bank's security
interest in the Collateral or to effect the purposes of this Agreement.
70 NEGATIVE COVENANTS
Borrower will not do any of the following without the prior written
consent of the Bank:
(1) DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose
of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than a Transfer: (i) of
Inventory in the ordinary course of business: (ii) of non-exclusive licenses
and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business; (iii) otherwise permitted
under this Section 7; (iv) in an aggregate amount not exceeding $100,000 in
aggregate amount in any fiscal year; or (v) of worn-out or obsolete Equipment.
(2) CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business other
than the businesses currently engaged in by Borrower or have a material
change in its ownership OF GREATER THAN 50% or management. Borrower will
not, without at least 30 days prior written notice to Bank, relocate its
principal executive office or add any new offices or business locations.
(3) MERGERS OR ACQUISITIONS. (i) Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with any other Person other than
Borrower or a wholly owned subsidiary thereof, or (ii) acquire, or permit any
of its Subsidiaries to acquire, all or substantially all of the capital stock
or property of another Person, provided
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Borrower or its Subsidiaries may make acquisitions to the extent (a) Borrower
is not in default under this Agreement, (b) such acquisition does not cause a
breach or violation of any financial covenants under this Agreement, and
(c) Borrower has given Bank at least thirty (30) days' prior written notice.
(4) INDEBTEDNESS. Create, incur, assume, or be liable for any
Indebtedness, or permit any Subsidiary to do so, other than Permitted
Indebtedness.
(5) ENCUMBRANCE. Create, incur, or allow any Lien on any of its
property, or assign or convey any right to receive income, including the sale
of any Accounts, or permit any of its Subsidiaries to do so, except for
Permitted Liens, or permit Bank's first priority security interest in the
Collateral to be materially impaired.
(6) INVESTMENTS; DISTRIBUTIONS. (i) Make any Investment in any
Person, other than Permitted Investments, or permit any of its Subsidiaries
to do so; or (ii) pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock, except for (a) repurchases of
stock from former employees or consultants of Borrower in accordance with the
terms of repurchase agreements between Borrower and such employee or
consultant, (b) distributions payable solely in Borrower's capital stock, and
(iii) Borrower may convert any of its convertible securities into other
securities pursuant to the terms of such convertible securities or otherwise
in exchange therefor.
(7) TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter or
permit any material transaction with any Affiliate, except transactions that
are in the ordinary course of Borrower's business, on terms less favorable to
Borrower than would be obtained in an arm's length transaction with a
non-affiliated Person.
(8) SUBORDINATED DEBT. Make or permit any payment on any Subordinated
Debt, except under the terms of the Subordinated Debt, or amend any provision
in any document relating to the Subordinated Debt, without Bank's prior written
consent.
(9) COMPLIANCE. Become an "investment company" or a company
controlled by an "investment company," under the Investment Company Act of
1940 or undertake as one of its important activities extending credit to
purchase or carry margin stock, or use the proceeds of any Advance for that
purpose; fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur;
fail to comply with the Federal Fair Labor Standards Act or violate any other
law or regulation, if the violation could reasonably be expected to (i) have
a material adverse effect on Borrower's business or operations, or (ii) cause
a Material Adverse Change, or permit any of its Subsidiaries to do so.
80 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
(1) PAYMENT DEFAULT. Borrower fails to pay any (i) principal amount
of any Advances when due and payable, (ii) interest due on any Advances
within five (5) days of the due date thereof, or (iii) any portion of any
other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by
Borrower of an invoice for such other Obligations;
(2) COVENANT DEFAULT. Borrower does not perform any obligation in
Section 6 or violates any covenant in Article 7 or does not perform or
observe any other material term, condition or covenant in this Agreement, any
Loan Documents, or in any agreement between Borrower and Bank and as to any
default under a term, condition or covenant that can be cured, has not cured
the default within 30 days after it occurs, or if the default cannot be cured
within 30 days or cannot be cured after Borrower's attempts in the 30 day
period, and the default may be cured within a reasonable time, then Borrower
has an additional time, (of not more than 30 days) to attempt to cure the
default. During the additional period the failure to cure the default is not
an Event of Default (but no Credit Extensions will be made during the cure
period);
(3) MATERIAL ADVERSE CHANGE. (i) There occurs a material impairment
in the perfection or priority of Bank's security interest in the Collateral
or in the value of such Collateral which is not covered by adequate
insurance; or (ii) Bank determines, based upon information available to it
and in its reasonable judgment, that Borrower will fail to comply with one or
more of the financial covenants in Section 6 during the next succeeding
financial reporting period;
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(4) ATTACHMENT. (i) Any material portion of Borrower's assets is
attached, seized, levied on, or comes into possession of a trustee or
receiver and the attachment, seizure or levy is not removed in 30 days;
(ii) Borrower is enjoined, restrained, or prevented by court order from
conducting a material part of its business; (iii) a judgment or other claim
becomes a Lien on a material portion of Borrower's assets; or (iv) a notice
of lien, levy, or assessment is filed against any of Borrower's assets by any
government agency and not paid within 30 days after Borrower receives notice.
These are not Events of Default if stayed or if a bond is posted pending
contest by Borrower (but no Credit Extensions will be made during the cure
period);
(5) INSOLVENCY. (i) Borrower becomes insolvent; (ii) Borrower begins
an Insolvency Proceeding; or (iii) an Insolvency Proceeding is begun against
Borrower and not dismissed or stayed within 60 days (but no Credit Extensions
will be made before any Insolvency Proceeding is dismissed);
(6) OTHER AGREEMENTS. There is a default in any agreement between
Borrower and a third party that gives the third party the right to accelerate
any Indebtedness exceeding $100,000 or that could cause a Material Adverse
Change;
(7) JUDGMENTS. A money judgment(s) in the aggregate of at least
$50,000 is rendered against Borrower and is unsatisfied and unstayed for
30 days (but no Credit Extensions will be made before the judgment is stayed or
satisfied);
(8) MISREPRESENTATIONS. If Borrower or any Person acting for Borrower
makes any material misrepresentation or material misstatement now or later in
any warranty or representation in this Agreement or in any communication
delivered to Bank or to induce Bank to enter this Agreement or any Loan
Document.
90 BANK'S RIGHTS AND REMEDIES
(1) RIGHTS AND REMEDIES. When an Event of Default occurs and is
continuing Bank may, without notice or demand, do any or all of the following:
(1) Declare all Obligations immediately due and payable
(but if an Event of Default described in Section 8.5 occurs all Obligations
are immediately due and payable without any action by Bank);
(2) Stop advancing money or extending credit for Borrower's
benefit under this Agreement or under any other agreement between Borrower and
Bank;
(3) Settle or adjust disputes and claims directly with
account debtors for amounts, on terms and in any order that Bank considers
advisable;
(4) Make any payments and do any acts it considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower will assemble the Collateral if Bank requests and make it available
as Bank designates. Bank may enter premises where the Collateral is located,
take and maintain possession of any part of the Collateral, and pay,
purchase, contest, or compromise any Lien which appears to be prior or
superior to its security interest and pay all expenses incurred. Borrower
grants Bank a license to enter and occupy any of its premises, without
charge, to exercise any of Bank's rights or remedies;
(5) Apply to the Obligations any (i) balances and
deposits of Borrower it holds, or (ii) any amount held by Bank owing to or
for the credit or the account of Borrower;
(6) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell the Collateral.
(7) Dispose of the Collateral according to the Code.
(2) POWER OF ATTORNEY. When an Event of Default occurs and continues,
Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse
Borrower's name on any checks or other forms of payment or security;
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(ii) sign Borrower's name on any invoice or bill of lading for any Account or
drafts against account debtors, (iii) make, settle, and adjust all claims
under Borrower's insurance policies; (iv) settle and adjust disputes and
claims about the Accounts directly with account debtors, for amounts and on
terms Bank determines reasonable; and (v) transfer the Collateral into the
name of Bank or a third party as the Code permits. Bank may exercise the
power of attorney to sign Borrower's name on any documents necessary to
perfect or continue the perfection of any security interest regardless of
whether an Event of Default has occurred. Bank's appointment as Borrower's
attorney in fact, and all of Bank's rights and powers, coupled with an
interest, are irrevocable until all Obligations have been fully repaid and
performed and Bank's obligation to provide Credit Extensions terminates.
(3) ACCOUNTS COLLECTION. When an Event of Default occurs and
continues, Bank may notify any Person owing Borrower money of Bank's security
interest in the funds and verify the amount of the Account. Borrower must
collect all payments in trust for Bank and, if requested by Bank, immediately
deliver the payments to Bank in the form received from the account debtor,
with proper endorsements for deposit.
(4) BANK EXPENSES. If Borrower fails to pay any amount or furnish
any required proof of payment to third persons Bank may make all or part of
the payment or obtain insurance policies required in Section 6.5, and take
any action under the policies Bank reasonably deems prudent. Any amounts
paid by Bank are Bank Expenses and due and payable within 10 days of written
notice thereof to Borrower, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to
make similar payments in the future or Bank's waiver of any Event of Default.
(5) BANK'S LIABILITY FOR COLLATERAL. If Bank complies with reasonable
banking practices it is not liable or responsible for: (a) the safekeeping of
the Collateral; (b) any loss or damage to the Collateral; (c) any diminution
in the value of the Collateral; or (d) any act or default of any carrier,
warehouseman, bailee, or other person. Borrower bears all risk of loss,
damage or destruction of the Collateral.
(6) REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement and the Loan Documents are cumulative. Bank has all rights and
remedies provided under the Code, by law, or in equity. Bank's exercise of
one right or remedy is not an election, and Bank's waiver of any Event of
Default is not a continuing waiver. Bank's delay is not a waiver, election,
or acquiescence. No waiver is effective unless signed by Bank and then is
only effective for the specific instance and purpose for which it was given.
(7) DEMAND WAIVER. Borrower waives demand, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment
at maturity, release, compromise, settlement, extension, or renewal of
accounts, documents, instruments, chattel paper, and guaranties held by Bank
on which Borrower is liable.
100 NOTICES
All notices or demands by any party to this Agreement or any other
related agreement must be in writing and be personally delivered or sent by
an overnight delivery service, by certified mail, postage prepaid, return
receipt requested, or by telefacsimile at the addresses below:
Borrower: Sento Corporation
808 East Utah Valley Drive
American Fork, Utah
Attn: Stan Cutler
FAX: (801) 492-2100
Bank: Silicon Valley Bank
11000 SW Stratus, Suite 170
Beaverton, OR 97008
Attn: Bruce Helberg
FAX: (503) 526-0818
A party may change its notice address by giving the other party written
notice.
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110 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive
jurisdiction of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN
DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH
OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH
PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER
WITH ITS COUNSEL.
120 GENERAL PROVISIONS
(1) SUCCESSORS AND ASSIGNS. This Agreement binds and is for the
benefit of the successors and permitted assigns of each party. Borrower may
not assign this Agreement or any rights or Obligations under it without
Bank's prior written consent which may be granted or withheld in Bank's
discretion. Bank has the right, without the consent of or notice to
Borrower, to sell, transfer, negotiate, or grant participation in all or any
part of, or any interest in, Bank's obligations, rights and benefits under
this Agreement, the Loan Documents or any related agreement.
(2) INDEMNIFICATION. Borrower will indemnify, defend and hold harmless
Bank and its officers, employees and agents against: (a) all obligations,
demands, claims, and liabilities asserted by any other party in connection
with the transactions contemplated by the Loan Documents; and (b) all losses
or Bank Expenses incurred, or paid by Bank from, following, or consequential
to transactions between Bank and Borrower (including reasonable attorneys'
fees and expenses), except for losses caused by Bank's gross negligence or
willful misconduct.
(3) TIME OF ESSENCE. Time is of the essence for the performance of
all Obligations in this Agreement.
(4) SEVERABILITY OF PROVISION. Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.
(5) AMENDMENTS IN WRITING, INTEGRATION. All amendments to this
Agreement must be in writing. This Agreement and the Loan Documents
represent the entire agreement about this subject matter, and supersedes
prior or contemporaneous negotiations or agreements. All prior or
contemporaneous agreements, understandings, representations, warranties, and
negotiations between the parties about the subject matter of this Agreement
and the Loan Documents merge into this Agreement and the Loan Documents.
(6) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, are an original, and all taken together,
are one Agreement.
(7) SURVIVAL. All covenants, representations and warranties made in
this Agreement continue in full force while any Obligations remain
outstanding. The obligations of Borrower in Section 12.2 to indemnify Bank
will survive until all statutes of limitations for actions that may be
brought against Bank have run.
(8) CONFIDENTIALITY. In handling any confidential information, Bank
will exercise the same degree of care that it exercises for its own
proprietary information, but disclosure of information may be made: (i) to
Bank's subsidiaries or affiliates in connection with their business with
Borrower; (ii) to prospective transferees or purchasers of any interest in
the Loans; (iii) as required by law, regulation, subpoena, or other order,
(iv) as required in connection with Bank's examination or audit; and (v) as
Bank considers appropriate exercising remedies under this Agreement.
Confidential information does not include information that either: (a) is in
the public domain or in Bank's possession when disclosed to Bank, or becomes
part of the public domain after disclosure to Bank; or (b) is disclosed to
Bank by a third party, if Bank does not know that the third party is
prohibited from disclosing the information.
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(9) ATTORNEYS' FEES, COSTS AND EXPENSES.
In any action or proceeding between Borrower and Bank arising
out of the Loan Documents, the prevailing party will be entitled to recover
its reasonable attorneys' fees and other costs and expenses incurred, in
addition to any other relief to which it may be entitled.
(10) BORROWER WAIVERS.
Borrower hereby waives (a) any right to require Bank to:
(i) proceed against any other Borrower or any other person; (ii) proceed
against or exhaust any security; (iii) pursue any other remedy; and (b) Any
setoff, defense or counterclaim against Bank: (i) any defense from the
absence, impairment or loss of any right of reimbursement or subrogation or
any other rights against another Borrower. Until Borrower's obligations to
Bank have been paid, no Borrower shall have a right of subrogation or
reimbursement or subrogation or other rights against another Borrower; (ii) any
right to enforce any remedy that Bank has against any other Borrower; (iii) any
rights to participate in any security held by Bank; (iv) any demands for
performance, notices of nonperformance or of new or additional indebtedness.
Each Borrower is responsible for being and keeping itself informed of each
Borrower's financial condition. Bank has no duty to provide information to
Borrower.
Bank may exercise or not exercise any right or remedy it has against each
Borrower or any security it holds (including the right to foreclose by
judicial or nonjudicial sale) without affecting any other Borrower's
liability.
(11) JOINT AND SEVERAL LIABILITY. Each Borrower is jointly and
severally liable to Bank for all Obligations.
(12) SET-OFF. In addition to all liens upon, and rights of setoff
against, the monies, securities or other property of Borrower given to Bank
by law, Bank shall have a lien upon and a right of setoff against, and
Borrower hereby grants to Bank a security interest in, all monies, securities
and other property of Borrower now and hereafter in the possession of or on
deposit with Bank, whether held in a general or special account or deposit,
or for safekeeping or otherwise; every such lien and right of setoff may be
exercised without notice or demand upon Borrower's default in the payment of
the indebtedness of Borrower to Bank arising under or in connection with the
Note, this Agreement, any security document or instrument given in connection
therewith, or upon the occurrence of any Event of Default under this Agreement
or any other document or instrument executed and delivered in connection
herewith. No lien or right of setoff shall be deemed to have been waived by
any act or conduct on the part of the Bank, by any neglect to exercise such
right of setoff or to enforce such lien, or by any delay in so doing.
130 DEFINITIONS
(1) DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract
rights, and other obligations owed Borrower in connection with its sale or
lease of goods (including licensing software and other technology) or
provision of services, all credit insurance, guaranties, other security and
all merchandise returned or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing.
"ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is
under common control with the Person, and each of that Person's senior
executive officers, directors, partners and, for any Person that is a limited
liability company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs
or expenses (including reasonable attorneys' fees and expenses) for
preparing, negotiating, administering, defending and enforcing the Loan
Documents (including appeals or Insolvency Proceedings).
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"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs
or any Equipment containing the information.
"BORROWING BASE" is (i) 75% of Eligible Accounts.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on EXHIBIT A.
"COMMITTED REVOLVING LINE" is a Credit Extension of up to $2,000,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an
obligation directly or indirectly guaranteed, endorsed, co-made, discounted
or sold with recourse by that Person, or for which that Person is directly or
indirectly liable; (ii) any obligations for undrawn letters of credit for the
account of that Person; and (iii) all obligations from any interest rate,
currency or commodity swap agreement, interest rate cap or collar agreement,
or other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
but "Contingent Obligation" does not include endorsements in the ordinary
course of business. The amount of a Contingent Obligation is the stated or
determined amount of the primary obligation for which the Contingent
Obligation is made or, if not determinable, the maximum reasonably
anticipated liability for it determined by the Person in good faith; but the
amount may not exceed the maximum of the obligations under the guarantee or
other support arrangement.
"CREDIT EXTENSION" is each Advance, Letter of Credit or any other
extension of credit by Bank for Borrower's benefit.
"DEFERRED REVENUE" is all amounts received in advance of performance
under contracts and not yet recognized as revenue.
"ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section 5.2
including Eligible Foreign Accounts; BUT Bank may change eligibility standards
as necessary in its reasonable judgment, by giving Borrower 30 days prior
written notice. Unless Bank agrees otherwise in writing, Eligible Accounts
will not include:
(1) Accounts that the account debtor has not paid within
90 days of invoice date;
(2) Accounts for an account debtor, 50% or more of whose
Accounts have not been paid within 90 days of invoice date;
(3) Credit balances over 90 days from invoice date;
(4) Accounts for an account debtor, including Affiliates,
whose total obligations to Borrower exceed 25% of all Accounts for the
amounts that exceed that percentage, unless Bank approves in writing;
(5) Accounts for which the account debtor does not have its
principal place of business in the United States ("Foreign Accounts"),
except Eligible Foreign Accounts;
(6) Accounts for which the account debtor is a federal
government entity or any department, agency, or instrumentality,
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(7) Accounts for which Borrower owes the account debtor,
but only up to the amount owed (sometimes called "contra" accounts,
accounts payable, customer deposits or credit accounts);
(8) Accounts for demonstration or promotional Equipment,
or in which goods are consigned, sales guaranteed, sale or return, sale
on approval, bill and hold, or other terms if account debtor's payment
may be conditional;
(9) Accounts for which the account debtor is Borrower's
Affiliate, officer, employee, or agent,
(10) Accounts in which the account debtor disputes liability
or makes any claim and Bank believes there may be a basis for dispute
(but only up to the disputed or claimed amount), or if the Account Debtor
is subject to an Insolvency Proceeding, or becomes insolvent, or goes out
of business;
(11) Accounts for which Bank reasonably determines collection
to be doubtful; and
(12) Accounts consisting of progress payments billed on a
percentage completion basis, except Accounts due to Sento Consulting
Corporation consisting of progress payments billed on a percentage completion
basis but only to the extent they are clearly marked on all Borrowing Base
Certificates and Accounts Receivable agings, and not to exceed 15% of all
Accounts.
"ELIGIBLE FOREIGN ACCOUNTS" are Accounts for which the account debtor
does not have its principal place of business in the United States but are:
(1) covered by credit insurance satisfactory to Bank, less any deductible; or
(2) supported by letter(s) of credit acceptable to Bank; (3) Foreign Accounts
not to exceed 20% of all Accounts, including Accounts from foreign subsidiaries
of Gateway Corporation which alone shall not to exceed 15% of all Accounts, or
(4) that Bank approves in writing.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations
for surety bonds and letters of credit, (b) obligations evidenced by notes,
bonds, debentures or similar instruments, (c) capital lease obligations and
(d) Contingent Obligations.
"INSOLVENCY PROCEEDING" is any proceeding by or against any Person
under the United States Bankruptcy Code, or any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, compositions,
extensions generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person other than a Subsidiary,
or a Person who will become a Subsidiary upon completion of the investment,
or any loan, advance or capital contribution to any Person other than a
Subsidiary, or a Person who will become a Subsidiary upon completion of the
investment.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or
future agreement between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"MATURITY DATE" is the Revolving Maturity Date.
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"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
including interest accruing after Insolvency Proceedings begin and debts,
liabilities, or obligations of Borrower assigned to Bank.
"PERMITTED INDEBTEDNESS" is:
(1) Borrower's indebtedness to Bank under this Agreement
or the Loan Documents;
(2) Indebtedness existing on the Closing Date and shown
on attached Schedule 2;
(3) Subordinated Debt;
(4) Indebtedness to trade creditors and with respect to
surety bonds and similar arrangements incurred in the ordinary course of
business;
(5) Indebtedness secured by Permitted Liens;
(6) Other Indebtedness for purchase money obligations or
leases not otherwise permitted by Section 7.4 and not to exceed $100,000.00
in the aggregate outstanding at any one time; and
(7) Extensions, refinancing, modifications, amendments
and restatements of any items of Permitted Indebtedness (a) through (f), above,
provided that the principal amount therefore is not increased or the terms
thereof are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
"PERMITTED INVESTMENTS" are:
(1) Investments shown on Schedule 3, attached hereto and
existing on the Closing Date;
(2) (1) marketable direct obligations issued or
unconditionally guaranteed by the United States or its agency or any State
maturing within 1 year from its acquisition, (ii) commercial paper maturing
no more than 1 year after its creation and having the highest rating from
either Standard & Poor's Corporation or Moody's Investors Service, Inc., and
(iii) Bank's certificates of deposit issued maturing no more than 1 year
after issue; and
(3) Investments in Borrower's foreign Subsidiaries so long
as Borrower is not in default hereunder and to the extent such investment
will not cause Borrower to violate any covenant or other provision of this
Agreement.
(4) Investments (not including debt obligations) received
in connection with the bankruptcy or reorganization of customers or suppliers
and in settlement of delinquent obligations of, and other disputes with,
customers or suppliers arising in the ordinary course of business;
(5) Investments pursuant to or arising under currency
agreement or interest rate agreements entered into in the ordinary course of
business;
(6) Investments consisting of prepaid royalties and other
credit extensions to customers and suppliers who are not Affiliates, in the
ordinary course of business;
(7) Investments constituting acquisitions permitted under
Section 7.3;
(8) Deposit accounts of Borrower in which Bank has a Lien
prior to any other Lien;
(9) Deposit accounts of any Subsidiaries maintained in
the ordinary course of business;
(10) Investments accepted in connection with transfer
permitted by Section 7.1;
Page 13
<PAGE>
(11) Other Investments aggregating not in excess of
$100,000.00.
"PERMITTED LIENS" are:
(1) Liens existing on the Closing Date and shown on
Schedule 4 attached hereto, or arising under this Agreement or other Loan
Documents;
(2) Liens for taxes, fees, assessments or other
government charges or levies, either not delinquent or being contested in
good faith and for which Borrower maintains adequate reserves on its Books,
IF they have no priority over any of Bank's security interests;
(3) Purchase money Liens (i) on Equipment acquired or
held by Borrower or its Subsidiaries incurred for financing the acquisition
of the Equipment, or (ii) existing on Equipment when acquired, IF the Lien is
confined to the property and improvements and the proceeds of the Equipment;
(4) Leases or subleases and licenses or sublicenses
granted in the ordinary course of Borrower's business and any interest or
title of a lessor, licensor or under any lease or license;
(5) Leases or subleases and licenses or sublicenses
granted in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as
a whole, and any interest or title of a lessor, licensor or under any lease
or license;
(6) Liens arising from judgments, decrees or attachments
in circumstances not constituting an Event of Default under Section 8.7;
(7) Easements, reservations, rights of way, restrictions,
minor defects or irregularities in title and similar charges or encumbrances
affecting real property not constituting a Material Adverse Effect;
(8) Liens that are not prior to the Lien of Bank which
constitute rights of setoff of a customary nature or banker's lien with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangements entered into with banks in the
ordinary course of business;
(9) Earned-out and royalty obligations existing on the
date hereof or entered into in connection with an acquisition permitted by
Section 7.3;
(10) Liens on assets (including the proceeds thereof and
accessions thereto) that existed at the time such assets were acquired by
Borrower or any Subsidiary (including Liens on assets of any corporation that
existed at the time it became or becomes a Subsidiary); provided such Liens
are not granted in contemplation of or in connection with the acquisition of
such asset by Borrower or a Subsidiary;
(11) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payments of customs duties in connection
with the importation of goods;
(12) Liens or deposits to secure indemnity, performance or
other similar bonds in the ordinary course of business; and
(13) Liens arising by operation of law such as mechanics',
materialman's, carriers', warehousemen's liens incurred in the ordinary
course of business;
(14) Liens arising in connection with any Permitted
Indebtedness; and
(15) Liens incurred in the extension, renewal or refinancing
of the indebtedness secured by Liens described in (a) through (d) and (n),
but any extension, renewal or replacement Lien must be limited to the
property encumbered by the existing Lien and the principal amount of the
indebtedness may not increase.
Page 14
<PAGE>
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if
it is not Bank's lowest rate.
"QUICK ASSETS" is, on any date, the Borrower's consolidated,
unrestricted cash, cash equivalents, net billed accounts receivable and
investments with maturities of less than 12 months determined according to
GAAP.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is February 12, 2000.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is any Person or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Borrower or one or more Affiliates or
Subsidiaries of the Borrower.
"TANGIBLE NET WORTH" is, on any date, (a) the consolidated total assets
of Borrower and its Subsidiaries plus the total amount of the CIBC debenture,
MINUS, (b) any amounts attributable to (i) goodwill, (ii) intangible items
such as unamortized debt discount and expense, Patents, trade and service
marks and names, Copyrights and research and development expenses except
prepaid expenses, and including as intangible items inter-company receivables
from Foreign Subsidiaries and any investments by Borrower in foreign
Subsidiaries, (iii) reserves not already deducted from assets, AND (iv) Total
Liabilities plus (c) Subordinated Debt.
"TOTAL LIABILITIES" is on any day, obligations that are classified
under GAAP as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid,
but excluding all other Subordinated Debt.
Page 15
<PAGE>
BORROWER:
SENTO CORPORATION SENTO TRAINING CORPORATION
By: By:
----------------------------- --------------------------------
Title: Title:
-------------------------- -----------------------------
SENTO CONSULTING CORPORATION SENTO TECHNICAL SERVICES CORPORATION
By: By:
----------------------------- --------------------------------
Title: Title:
-------------------------- -----------------------------
BANK:
SILICON VALLEY BANK
By:
-----------------------------
Title:
--------------------------
Page 16
<PAGE>
EXHIBIT A
THE COLLATERAL CONSISTS OF ALL RIGHT, TITLE AND INTEREST OF BORROWER
IN AND TO THE FOLLOWING:
All goods and Equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, claims, literature, reports, catalogs, income
tax refunds, payments of insurance and rights to payment of any kind;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as
well as all merchandise returned to or reclaimed by Borrower and Borrower's
Books relating to any of the foregoing;
All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, letters of credit, certificates of
deposit, instruments and chattel paper now owned or hereafter acquired and
Borrower's Books relating to the foregoing; and
Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
BORROWER DOES NOT GRANT BANK A SECURITY INTEREST IN, OR LIEN ON ANY
INTELLECTUAL PROPERTY, INCLUDING WITH LIMITATION PATENTS, COPYRIGHT RIGHTS,
COPYRIGHT APPLICATIONS, COPYRIGHT REGISTRATIONS AND LIKE PROTECTIONS IN EACH
WORK OF AUTHORSHIP AND DERIVATIVE WORK, WHETHER PUBLISHED OR UNPUBLISHED, NOW
OWNED OR LATER ACQUIRED; ANY PATENTS, TRADEMARKS, SERVICE MARKS AND
APPLICATIONS THEREFOR; ANY TRADE SECRET RIGHTS, INCLUDING ANY RIGHTS TO
UNPATENTED INVENTIONS, KNOW-HOW, OPERATING MANUALS, LICENSE RIGHTS AND
AGREEMENTS AND CONFIDENTIAL INFORMATION, NOW OWNED OR HEREAFTER ACQUIRED; OR
ANY CLAIMS FOR DAMAGES BY WAY OF ANY PAST, PRESENT AND FUTURE INFRINGEMENT OF
ANY OF THE FOREGOING.
Page 17
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM:
-------------------
The undersigned authorized officer of Sento Corporation certifies that
under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance
for the period ending _______________ with all required covenants except as
noted below and (ii) all representations and warranties in the Agreement are
true and correct in all material respects on this date. Attached are the
required documents supporting the certification. The Officer certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) consistently applied from one period to the next except as explained
in an accompanying letter or footnotes. The Officer acknowledges that no
borrowings may be requested at any time or date of determination that
Borrower is not in compliance with any of the terms of the Agreement, and
that compliance is determined not just at the date this certificate is
delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C>
Monthly financial statements [MONTHLY] within 30 days Yes No
10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No
A/R & A/P Agings Weekly within 7 days of each Friday Yes No
A/R Audit Initial and Semi-Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Monthly Basis (unless noted):
Minimum Quick Ratio ________ ____:1.0 Yes No
Minimum Tangible Net Worth ________ $_______ Yes No
Maximum Debt/Tangible Net Worth 3.00:1.0 ____:1.0 Yes No
</TABLE>
------------------------------
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
------------------------------
Received by:
-----------------
AUTHORIZED SIGNER
Sincerely,
Date:
------------------------
- ------------------------- Verified:
SIGNATURE --------------------
AUTHORIZED SIGNER
- ------------------------- Date:
TITLE ------------------------
Compliance Status: Yes No
- ------------------------- ------------------------------
DATE
18 - AMENDMENT TO WARRANT TO PURCHASE STOCK
<PAGE>
AMENDMENT TO WARRANT TO PURCHASE STOCK
THIS AMENDMENT TO WARRANT TO PURCHASE STOCK, made and entered into
as of the 23 day of June, 1999, by and between SILICON VALLEY BANK (hereinafter
referred to as "Bank"), and SENTO CORPORATION, ("Company").
RECITALS:
The parties entered into a warrant to purchase stock dated as of
March 2, 1999, ("Warrant"), and the parties now desire to amend the Warrant
as hereinafter provided. All capitalized terms used herein shall have the
meanings assigned to them in the Warrant.
19 - AMENDMENT TO WARRANT TO PURCHASE STOCK
<PAGE>
NOW, THEREFORE, the parties mutually agree as follows:
1. The Warrant is hereby amended to provide:
(a) The Initial Exercise Price, also referred to as the Warrant
Price, is hereby changed to $1.60.
(b) The number of shares of the common stock of the Company
subject to the Warrant is hereby increased to 60,000, and all references to
the Shares in the Warrant shall be deemed to be a reference to 60,000 shares
of the Company's common stock.
2. Except as herein amended, each and all of the terms and provisions
of the Warrant shall be and remain in full force and effect during the term
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
to the Agreement as of the date written above.
[Intentionally Blank]
20 - AMENDMENT TO WARRANT TO PURCHASE STOCK
<PAGE>
Borrower hereby acknowledges receipt of a copy of this Amendment.
COMPANY:
SENTO CORPORATION
By: By:
------------------------------- --------------------------------
Title: Title:
---------------------------- -----------------------------
Chair of Board, President or CFO, Secretary or
Vice President Assistant Secretary
SILICON VALLEY BANK
By:
-------------------------------
Title:
----------------------------
21 - AMENDMENT TO WARRANT TO PURCHASE STOCK
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a listing of all significant subsidiaries of Sento Corporation
as of March 31, 1999. All subsidiaries conduct business either under the name of
Sento Corporation or their respective legal names.
SUBSIDIARY STATE OR JURISDICTION OF INCORPORATION
Sento Consulting Corporation Utah
Sento Technical Services Corporation Utah
Sento Training Corporation Utah
Sento Australia Pty. Limited Australia
<PAGE>
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Board of Directors
Sento Corporation:
We consent to incorporation by reference in the Registration Statement
No. 333-12917 on Form S-8 and Registration Statement No. 333-36251 on Form S-3
of Sento Corporation of our report dated May 21, 1999, except as to the first
paragraph of note 6 which is as of June 8, 1999, and the second paragraph of
note 16 which is as of June 9, 1999, relating to the consolidated balance
sheets of Sento Corporation and subsidiaries as of March 31, 1999 and 1998
(as restated), and the related consolidated statements of operations,
stockholders' equity and comprehensive loss, and cash flows for the years
then ended, which report appears in the March 31, 1999 Annual Report on
Form 10-KSB of Sento Corporation.
KPMG LLP
Salt Lake City, Utah
June 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 275,893 5,807,014
<SECURITIES> 0 0
<RECEIVABLES> 3,284,138 4,474,557
<ALLOWANCES> 208,678 397,842
<INVENTORY> 10,010 302,172
<CURRENT-ASSETS> 4,118,383 12,200,960
<PP&E> 3,868,724 1,797,796
<DEPRECIATION> 960,827 522,894
<TOTAL-ASSETS> 7,301,171 15,860,652
<CURRENT-LIABILITIES> 5,656,152 6,532,043
<BONDS> 767,199 1,439,266
0 0
0 0
<COMMON> 1,580,607 1,435,268
<OTHER-SE> (694,171) 6,139,310
<TOTAL-LIABILITY-AND-EQUITY> 7,301,171 15,860,652
<SALES> 14,775,285 19,924,058
<TOTAL-REVENUES> 21,225,230 20,639,845
<CGS> 15,387,015 14,227,071
<TOTAL-COSTS> 15,387,015 14,227,071
<OTHER-EXPENSES> 15,210,365 9,479,912
<LOSS-PROVISION> 69,724 69,724
<INTEREST-EXPENSE> 101,871 236,518
<INCOME-PRETAX> (8,257,271) 215,065
<INCOME-TAX> (502,468) 302,090
<INCOME-CONTINUING> (7,754,803) (87,025)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,754,803) (87,025)
<EPS-BASIC> (1.31) (.02)
<EPS-DILUTED> (1.31) (.02)
</TABLE>
