<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
SENTO CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
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1
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November 17, 1999
[LOGO]
Dear Shareholder:
I am pleased to forward the enclosed Proxy Statement for the Special
Meeting of Shareholders (the "Special Meeting") of Sento Corporation, a Utah
corporation ("Sento"), to be held on December 16, 1999 at 10:00 a.m., local
time, at Sento's offices, 808 East Utah Valley Drive, American Fork, Utah 84003,
to consider and vote upon a proposal to approve, authorize, adopt and ratify a
Contribution Agreement (the "Contribution Agreement") by and between Sento and
EchoPass Corporation, a newly-formed Utah corporation ("EchoPass"), and approve
the related transactions contemplated by the Contribution Agreement
(collectively, the "EchoPass Transactions").
Pursuant to the Contribution Agreement, among other things, (i) Sento
will transfer to EchoPass substantially all of the technology currently owned
and utilized by Sento in the operation of its eCustomer Contact Center,
including related sales and marketing rights (collectively, the "Technology"),
in exchange for 4,000,000 shares of EchoPass Series A Convertible Preferred
Stock (the "EchoPass Preferred"), representing approximately 47% of the issued
and outstanding shares of EchoPass Common Stock (on a fully-diluted basis, after
giving effect to the conversion of the shares of EchoPass Preferred to be issued
in the EchoPass Transactions) immediately following the consummation of the
EchoPass Transactions; (ii) Sento and EchoPass will enter into a Services
Agreement, enabling Sento to utilize the Technology (at most favored customer
pricing) in developing its existing and future eCustomer Contact Centers; (iii)
Sento will transfer to EchoPass certain tangible assets, consisting primarily of
computer equipment, in exchange for EchoPass' delivery of a secured promissory
note in the original principal amount of approximately $1,100,000; (iv) EchoPass
will transfer 3,500,000 shares of EchoPass Preferred to Genesys
Telecommunication Laboratories, Inc., a leading developer of enterprise
interaction management software ("Genesys"), in exchange for $1,000,000 in cash
and a favorable license to use Genesys' internet suite of enterprise interaction
management software in the development of EchoPass' business operations; (v)
Sento and EchoPass will enter into a Facilities and Services Agreement pursuant
to which EchoPass will obtain the right to use certain office and research and
development space at Sento's principal offices and Sento will provide to
EchoPass accounting and other general and administrative services; and (vi)
certain existing employees of Sento, including Arthur F. Coombs, III, Sento's
President and Chief Executive Officer, will resign as employees of Sento and
will become employees of EchoPass.
Sento's Board of Directors (the "Board") has carefully reviewed and
considered the terms and conditions of the proposed EchoPass Transactions and
has received the preliminary opinion of Alliant Partners, its financial advisor,
that, as of September 28, 1999 and based on and subject to certain matters
stated therein, the contribution to be made by Sento to EchoPass in the EchoPass
Transactions is fair, from a financial point of view, to the Sento shareholders.
A copy of the preliminary Alliant Partners' opinion is attached to this Proxy
Statement as Appendix A. The Contribution Agreement provides that the
consummation of the EchoPass Transactions, if approved by the Sento shareholders
at the Special Meeting, is expressly conditioned upon Sento's receipt and
approval of a final opinion from Alliant Partners, acceptable to the Board and
substantially in the form of the draft opinion enclosed with the Proxy
Statement. Sento shareholders are advised to read the Alliant Partners opinion
in its entirety.
Based upon discussions with prospective investors, capital funding
sources and industry partners, the Board has determined that the terms and
conditions of the EchoPass Transactions are in the best interests of Sento and
its shareholders, in part because the Board believes the consummation of the
EchoPass Transactions will enable EchoPass to attract financing and strategic
alliance opportunities that are not presently available to Sento. Accordingly,
the Board has unanimously approved the terms of the EchoPass Transactions and
unanimously recommends that shareholders vote FOR the approval and the
consummation of the EchoPass Transactions. The Board believes that shareholder
approval of the EchoPass Transactions is not required; however, the Board has
determined that it is appropriate to submit the EchoPass Transactions to the
shareholders of Sento for their approval because of the interests of certain
members of the Board in the EchoPass Transactions (as described in the enclosed
Proxy Statement). Votes by shareholders of Sento who are also directors,
officers or shareholders of EchoPass will not be counted toward approval of the
EchoPass Transactions. YOUR VOTE ON THIS MATTER IS VERY IMPORTANT. Approval of
the EchoPass Transactions by the Sento shareholders is a condition to the
consummation of the EchoPass Transactions. We urge you to review carefully the
enclosed materials and to return your proxy card promptly.
The accompanying Proxy Statement provides a detailed description of the
EchoPass Transactions, certain business and financial information of Sento and
EchoPass and other important information. A copy of the Contribution Agreement
(including the related agreements and exhibits attached thereto) is attached to
the Proxy Statement as Appendix B. Copies of Sento's most recent Annual Report
on Form 10-KSB and Quarterly Reports on Form 10-QSB are also attached to the
Proxy Statement as Appendix C and Appendix D, respectively.
Whether or not you plan to attend the Special Meeting, please sign and
promptly return your proxy card in the enclosed postage paid envelope. If you
attend the meeting, you may vote in person if you wish, even though you have
previously returned your proxy.
Sincerely,
/s/ Kieth E. Sorenson
Kieth E. Sorenson
Chairman of the Board
<PAGE>
SENTO CORPORATION
808 EAST UTAH VALLEY DRIVE
AMERICAN FORK, UTAH 84003
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
-------------------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Special Meeting")
of Shareholders of Sento Corporation, a Utah corporation ("Sento"), will be held
on December 16, 1999, at 10:00 a.m., local time, at Sento's offices, 808 East
Utah Valley Drive, American Fork Utah 84003, for the following purposes:
1. To consider and vote upon a proposal to approve, authorize, adopt
and ratify a Contribution Agreement (the "Contribution Agreement") by and
between Sento and EchoPass Corporation, a newly-formed Utah corporation
("EchoPass"), and to consummate the related transactions contemplated by the
Contribution Agreement (collectively, the "EchoPass Transactions"). Pursuant to
the Contribution Agreement, among other things, (i) Sento will transfer to
EchoPass substantially all of the technology currently owned and utilized by
Sento in the operation of its eCustomer Contact Center, including related sales
and marketing rights (collectively, the "Technology"), in exchange for 4,000,000
shares of EchoPass Series A Convertible Preferred Stock (the "EchoPass
Preferred"), representing approximately 47% of the issued and outstanding shares
of EchoPass Common Stock (on a fully-diluted basis, after giving effect to the
conversion of the shares of EchoPass Preferred to be issued in the EchoPass
Transactions) immediately following the consummation of the EchoPass
Transactions; (ii) Sento and EchoPass will enter into a Services Agreement,
enabling Sento to utilize the Technology (at most favored customer pricing) in
developing its existing and future eCustomer Contact Centers; (iii) Sento will
transfer to EchoPass certain tangible assets, consisting primarily of computer
equipment, in exchange for EchoPass' delivery of a secured promissory note in
the original principal amount of approximately $1,100,000; (iv) EchoPass will
transfer 3,500,000 shares of EchoPass Preferred to Genesys Telecommunication
Laboratories, Inc., a leading developer of enterprise interaction management
software ("Genesys"), in exchange for $1,000,000 in cash and a favorable license
to use Genesys' internet suite of enterprise interaction management software in
the development of EchoPass' business operations; (v) Sento and EchoPass will
enter into a Facilities and Services Agreement pursuant to which EchoPass will
obtain the right to use certain office and research and development space at
Sento's principal offices and Sento will provide to EchoPass accounting and
other general and administrative services; and (vi) certain existing employees
of Sento, including Arthur F. Coombs, III, Sento's President and Chief Executive
Officer, will resign as employees of Sento and will become employees of
EchoPass.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The proposal to approve and consummate the EchoPass Transactions is
more fully described in the Proxy Statement accompanying this Notice.
Only shareholders of record of the common stock of Sento (the "Sento
Common Stock") at the close of business on November 15, 1999 are entitled to
notice of, and will be entitled to vote at, the Special Meeting or any
adjournment thereof. The Board of Directors of Sento (the "Board") believes that
shareholder approval is not required for the approval of the EchoPass
Transactions; however, the Board has determined that it is appropriate to submit
the terms of the EchoPass Transactions to the Sento shareholders for their
approval because of the interests of certain members of the Board in the
EchoPass Transactions (as described in the accompanying Proxy Statement).
Accordingly, Sento is seeking the affirmative vote of the holders of a majority
of the shares of Sento Common Stock represented at the Special Meeting for
approval of the terms of the EchoPass Transactions. Votes by shareholders of
Sento who are also directors, officers or shareholders of EchoPass will not be
counted toward approval of the EchoPass Transactions. Approval of the EchoPass
Transactions by the Sento shareholders is a condition to the consummation of the
EchoPass Transactions.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Kieth E. Sorenson
Kieth E. Sorenson
Chairman of the Board
American Fork, Utah
November 17, 1999
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TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, YOU ARE URGED
TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. ANY SHAREHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN
IF SUCH SHAREHOLDER HAS RETURNED A PROXY.
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<PAGE>
[LOGO]
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PROXY STATEMENT
--------------------
This Proxy Statement is being furnished to the shareholders of Sento
Corporation, a Utah corporation ("Sento"), in connection with the solicitation
of proxies by the Board of Directors of Sento (the "Board") for use at the
Special Meeting of Shareholders (the "Special Meeting") of Sento to be held at
10:00 a.m., local time, on December 16, 1999, at Sento's offices, 808 East Utah
Valley, American Fork, Utah 84303, and at any adjournments or postponements of
the Special Meeting.
At the Special Meeting, Sento shareholders will be asked to consider
and vote upon a proposal to approve, authorize, adopt and ratify a Contribution
Agreement (the "Contribution Agreement") by and between Sento and EchoPass
Corporation, a newly-formed Utah corporation ("EchoPass"), and approve the
related transactions contemplated by the Contribution Agreement (collectively,
the "EchoPass Transactions"). Pursuant to the Contribution Agreement, among
other things, (i) Sento will transfer to EchoPass substantially all of the
technology currently owned and utilized by Sento in the operation of its
eCustomer Contact Center, including related sales and marketing rights
(collectively, the "Technology"), in exchange for 4,000,000 shares of EchoPass
Series A Convertible Preferred Stock (the "EchoPass Preferred"), representing
approximately 47% of the issued and outstanding shares of EchoPass Common Stock
(on a fully-diluted basis, after giving effect to the conversion of the shares
of EchoPass Preferred to be issued in the EchoPass Transactions) immediately
following the consummation of the EchoPass Transactions; (ii) Sento and EchoPass
will enter into a Services Agreement, enabling Sento to utilize the Technology
(at most favored customer pricing) in developing its existing and future
eCustomer Contact Centers; (iii) Sento will transfer to EchoPass certain
tangible assets, consisting primarily of computer equipment, in exchange for
EchoPass' delivery of a secured promissory note in the original principal amount
of approximately $1,100,000; (iv) EchoPass will transfer 3,500,000 shares of
EchoPass Preferred to Genesys Telecommunication Laboratories, Inc., a leading
developer of enterprise interaction management software ("Genesys"), in exchange
for $1,000,000 in cash and a favorable license to use Genesys' internet suite of
enterprise interaction management software in the development of EchoPass'
business operations; (v) Sento and EchoPass will enter into a Facilities and
Services Agreement pursuant to which EchoPass will obtain the right to use
certain office and research and development space at Sento's principal offices
and Sento will provide to EchoPass accounting and other general and
administrative services; and (vi) certain existing employees of Sento, including
Arthur F. Coombs, III, Sento's President and Chief Executive Officer, will
resign as employees of Sento and will become employees of EchoPass.
On November 15, 1999, the high and low sales prices, of the common
stock, par value $0.25 per share, of Sento (the "Sento Common Stock") as
reported on the Nasdaq Stock Market (SmallCap Market) were $2.70 and $2.81,
respectively.
This Proxy Statement and accompanying form of Proxy are first being
mailed to shareholders of Sento on or about November 17, 1999.
--------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT. THE PROPOSED
TRANSACTIONS ARE COMPLEX. SHAREHOLDERS ARE STRONGLY URGED TO
READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT IN ITS
ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO
UNDER "RISK FACTORS".
--------------------
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER 17, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AVAILABLE INFORMATION................................................................................................iv
FORWARD-LOOKING STATEMENTS...........................................................................................iv
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.....................................................................v
SUMMARY...............................................................................................................1
The Companies...........................................................................................1
Sento...........................................................................................1
EchoPass........................................................................................1
The EchoPass Transactions...............................................................................1
Reasons for the EchoPass Transactions...................................................................2
Operations Following the EchoPass Transactions..........................................................3
Date, Time and Place of Meeting of Shareholders.........................................................3
Purposes of the Meeting.................................................................................3
RecordDate; Shares Entitled to Vote.....................................................................3
Vote Required...........................................................................................3
Quorum; Abstentions and Broker Non-Votes................................................................4
Interests of Certain Persons in the EchoPass Transactions...............................................4
Opinion of Alliant Partners.............................................................................4
Recommendation of the Board of Directors................................................................4
The Contribution Agreement..............................................................................4
Representations and Covenants...................................................................4
Conditions to the EchoPass Transactions.........................................................5
Closing.........................................................................................5
Termination or Amendment........................................................................5
Fees and Expenses...............................................................................5
Related Agreements......................................................................................5
Genesys Transactions....................................................................................6
Risk Factors............................................................................................6
Accounting Matters .....................................................................................6
Unaudited Pro Forma Financial Information...............................................................6
MARKET PRICE AND DIVIDEND INFORMATION--SENTO..........................................................................7
Market Price Data--Sento................................................................................7
Dividend Information--Sento.............................................................................7
Number of Shareholders--Sento...........................................................................7
MARKET PRICE AND DIVIDEND INFORMATION--ECHOPASS.......................................................................7
Market Price Data--EchoPass.............................................................................8
Dividend Information--EchoPass..........................................................................8
Number of Shareholders--EchoPass........................................................................8
RISK FACTORS..........................................................................................................9
THE SPECIAL MEETING..................................................................................................15
Date, Time and Place of Meeting........................................................................15
Record Date and Shares Entitled to Vote................................................................15
Voting of Proxies......................................................................................15
Vote Required..........................................................................................15
Quorum; Abstentions and Broker Non-Votes...............................................................15
</TABLE>
i
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<TABLE>
<S> <C>
Solicitation of Proxies and Expenses...................................................................16
Board Recommendation...................................................................................16
PRINCIPAL SHAREHOLDERS OF SENTO......................................................................................17
PRINCIPAL SHAREHOLDERS OF ECHOPASS...................................................................................18
THE ECHOPASS TRANSACTIONS............................................................................................19
General................................................................................................19
Background of the Transactions.........................................................................19
Reasons for the Transactions...........................................................................21
Operations Following the Transactions..................................................................21
Opinion ofAlliant Partners.............................................................................22
Interests of Certain Persons in the Transactions.......................................................25
Representations and Covenants..........................................................................26
Conditions to the Transactions.........................................................................26
Related Agreements.....................................................................................26
Services Agreement.............................................................................26
Promissory Note................................................................................26
Security Agreement.............................................................................26
Facilities and Services Agreement..............................................................27
Termination or Amendment...............................................................................27
Genesys Transactions...................................................................................27
Genesys License Agreement......................................................................27
Genesys Stock Purchase Agreements..............................................................27
Closing................................................................................................27
Accounting Matters.....................................................................................27
Unaudited Pro Forma Financial Information..............................................................27
Fees and Expenses......................................................................................27
Regulatory Requirements................................................................................28
Dissenter's Appraisal Rights...........................................................................28
BUSINESS OF SENTO....................................................................................................28
Background.............................................................................................28
Industry...............................................................................................29
Business Strategy......................................................................................29
Services...............................................................................................30
Acquisitions and Divestitures..........................................................................31
Competition............................................................................................32
Significant Customers..................................................................................33
Patents and Proprietary Technology.....................................................................33
Research and Development...............................................................................33
Employees..............................................................................................33
Proprietary Marks......................................................................................33
Facilities.............................................................................................33
MANAGEMENT OF SENTO..................................................................................................34
PROPOSED BUSINESS OF ECHOPASS........................................................................................36
Background.............................................................................................36
Industry...............................................................................................37
Business Strategy......................................................................................38
Competition............................................................................................39
Customers..............................................................................................39
Technology.............................................................................................40
Research and Development...............................................................................40
</TABLE>
ii
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<TABLE>
<S> <C>
Employees..............................................................................................41
Facilities.............................................................................................41
MANAGEMENT OF ECHOPASS...............................................................................................41
SHAREHOLDER PROPOSALS................................................................................................42
LEGAL MATTERS........................................................................................................42
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION...................................................................42
APPENDICES
A. Opinion of Alliant Partners
B. Contribution Agreement
C. Annual Report on Form 10-KSB for the Fiscal Year Ended March 31, 1999
D. Quarterly Reports on Form 10-QSB for the Quarterly Periods Ended June 30, 1999
and September 30, 1999
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
Sento is subject to the informational and reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information may be inspected and copied at the
offices of the Commission, Room 1024, Judiciary Plaza Building, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the regional offices of the
Commission at Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661, and at Seven World Trade Center, 13th Floor, New York, New
York 10049. Copies of such materials can also be obtained at prescribed rates
from the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza Building, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a web site that contains reports, proxy and information
statements and other materials that are filed through the Commission's
Electronic Data Gathering Analysis and Retrieval System. The web site can be
found at http://www.sec.gov.
In addition, Sento intends to furnish its shareholders with annual
reports which include financial statements that have been audited with a
report thereon by its independent accountants and quarterly reports
containing unaudited summary financial information for the first three
quarters of each fiscal year.
FORWARD-LOOKING STATEMENTS
Statements contained in this Proxy Statement that are not purely
historical are forward-looking statements and are being provided in reliance
upon the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. The words "expect," "estimate," "anticipate," "intend" and
similar expressions are intended to identify forward-looking statements. All
forward-looking statements are made as of the date hereof, and are based on
current management expectations and information available to Sento as of such
date. Sento assumes no obligation to update any forward-looking statement. It
is important to note that actual outcomes and actual results could differ
materially from those contemplated in such forward-looking statements.
Factors that could cause actual results to differ materially include various
risks and uncertainties, including those discussed under the heading "Risk
Factors" and elsewhere in this Proxy Statement.
NO PERSON HAS BEEN AUTHORIZED BY SENTO TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT. IN CONNECTION WITH THE
SOLICITATION OF PROXIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SENTO.
THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION FOR A PROXY IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION.
THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONTAINED
HEREIN SINCE THE DATE HEREOF.
iv
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by Sento with the Commission pursuant
to the Exchange Act (File No. 0-06425) are incorporated herein by reference
as of their respective dates:
(a) Annual Report on Form 10-KSB for the Fiscal Year ended
March 31, 1999 (the "Form 10-KSB").
(b) Quarterly Reports on Form 10-QSB for the Quarterly Periods
ended June 30, 1999 and September 30, 1999 (the "Forms
10-QSB").
(c) Description of Sento's Common Stock contained in a
Registration Statement on Form 10 dated July 24, 1972, as
modified and amended by Sento's Current Report on Form 8-K
filed on October 20, 1997.
In addition, Sento has elected to deliver to each shareholder of
record as of November 15, 1999, the record date for determination of
shareholders eligible to vote at the Special Meeting, copies of the Form
10-KSB and Forms 10-QSB. Copies of the Form 10-KSB and Forms 10-QSB are
attached to this Proxy Statement as Appendix C and Appendix D, respectively.
The Board encourages Sento shareholders to review and carefully consider the
information contained in the Form 10-KSB and the Forms 10-QSB as they
consider the proposal to approve the Contribution Agreement and the
consummation of the EchoPass Transactions.
Sento will provide without charge to each person to whom a Proxy
Statement is delivered, upon the written or oral request of such person, a
copy of any or all of the information incorporated by reference in this Proxy
Statement, other than exhibits to such information (unless such exhibits are
specifically incorporated by reference into the information that this
Prospectus incorporates). Requests for such copies should be directed to
Stanley J. Cutler, Corporate Secretary, Sento Corporation, 808 East Utah
Valley Drive, American Fork, Utah 84003, telephone (801) 492-2000.
v
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT, THE APPENDICES HERETO AND DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. THE SUMMARY DOES NOT CONTAIN A COMPLETE
DESCRIPTION OF THE TERMS OF THE ECHOPASS TRANSACTIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THIS PROXY STATEMENT AND THE
APPENDICES HERETO. SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND THE
APPENDICES IN THEIR ENTIRETY.
SOME OF THE STATEMENTS CONTAINED IN THIS PROXY STATEMENT, INCLUDING
INFORMATION "INCORPORATED BY REFERENCE," DISCUSS FUTURE EXPECTATIONS, CONTAIN
PROJECTIONS OF RESULTS OF OPERATION OR FINANCIAL CONDITION OR STATE OTHER
"FORWARD-LOOKING" INFORMATION. THOSE STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE STATEMENTS. THE FORWARD-LOOKING
INFORMATION IS BASED ON VARIOUS FACTORS AND WAS DERIVED USING NUMEROUS
ASSUMPTIONS. SOME OF THESE FACTORS ARE INCLUDED IN THE DISCUSSION OF "RISK
FACTORS" BELOW.
THE COMPANIES
SENTO. Sento provides a wide range of outsourcing solutions for
organizations of all sizes using Windows NT, UNIX, and Internet/Intranet-based
client-server computing environments. These services include:
- Information Technology ("IT") technical services, including
outsourced technical support and helpdesk functions; and
- IT training, including assessing and training in-house IT
staff both on-site and through distance learning, including
computer-based training ("CBT").
Unless otherwise indicated, "Sento" refers to Sento Corporation and
each of its operating divisions and subsidiaries. Sento was formed in 1986 as
Spire Technologies, Inc. to market high-end third party hardware and software
products as a value-added reseller ("VAR"). In 1997 and 1998, Sento undertook a
strategic transition to focus its efforts on IT training, consulting and
technical support. In 1998, it constructed a new generation call center facility
(referenced in this Proxy Statement as the "eCustomer Contact Center") which is
now operational and which management expects to be at capacity during November
1999 with over 400 agents. Sento sold certain operations, comprising its VAR
business, in March and June 1999. Sento's principal executive offices are
located at 808 East Utah Valley Drive, American Fork, Utah 84003. Its telephone
number is (801) 492-2000.
ECHOPASS. EchoPass is a newly-formed Utah corporation. As of the date
of this Proxy Statement, EchoPass has limited assets and has conducted no
business operations. If the proposal to approve the Contribution Agreement and
consummate the EchoPass Transactions is approved, EchoPass will acquire, develop
and operate the Technology. Immediately following the consummation of the
EchoPass Transactions, if consummated, Sento will own 4,000,000 shares of
EchoPass Preferred, representing approximately 47% of the issued and outstanding
shares of EchoPass Common Stock as of such date (on a fully-diluted basis, after
giving effect to the conversion of the shares of EchoPass Preferred to be issued
to Sento and Genesys in the EchoPass Transactions) and certain existing
directors, officers and employees of Sento will own 915,000 shares of EchoPass
Common Stock and exercisable options to acquire an additional 1,755,000 shares
of EchoPass Common Stock, representing an aggregate of approximately 26% of the
issued and outstanding shares of EchoPass Common Stock as of such date (on a
fully-diluted basis, after giving effect to the exercise of such options and the
conversion of the shares of EchoPass Preferred to be issued to Sento and Genesys
in the EchoPass Transactions). See "The EchoPass Transactions--Interests of
Certain Persons in the Transactions." EchoPass was formed as ECP.com, Inc. on
July 20, 1999 and subsequently changed its name to EchoPass Corporation.
EchoPass' principal executive offices are currently located at 808 East Utah
Valley Drive, American Fork, Utah 84003. EchoPass currently uses Sento's
telephone number, which is (801) 492-2000.
THE ECHOPASS TRANSACTIONS
Sento and EchoPass have entered into the Contribution Agreement dated
as of November 17, 1999, a copy of which is attached hereto as Appendix B. The
Contribution Agreement contemplates that the EchoPass Transactions will consist
of the following elements:
1
<PAGE>
(i) Sento will transfer to EchoPass substantially all of the
Technology in exchange for 4,000,000 shares of EchoPass Preferred,
representing approximately 47% of the issued and outstanding shares of
EchoPass Common Stock immediately following the consummation of the
EchoPass Transactions (on a fully-diluted basis after giving effect to
the conversion of the shares of EchoPass Preferred to be issued to
Sento and Genesys in the EchoPass Transactions);
(ii) Sento and EchoPass will enter into a Services Agreement,
enabling Sento to utilize the Technology (at most favored customer
pricing) in developing its existing and future eCustomer Contact
Centers (the "Services Agreement");
(iii) Sento will transfer to EchoPass certain tangible assets,
consisting primarily of computer equipment, in exchange for EchoPass'
delivery of a secured promissory note in the original principal amount
of approximately $1,100,000;
(iv) Sento and EchoPass will enter into a Facilities and
Services Agreement whereby Sento will permit EchoPass to use certain
office and research and development facilities located at Sento's
principal offices and provide accounting and other general and
administrative services to EchoPass (the "Facilities Agreement");
(v) EchoPass will transfer to Genesys 3,500,000 shares of
EchoPass Preferred in exchange for $1,000,000 in cash and a license to
use Genesys' internet suite of enterprise interaction management
software (the "Genesys Internet Suite") on terms that are substantially
more favorable than the pricing structure currently available to Sento.
(vi) Certain existing employees of Sento, including Arthur F.
Coombs, III, Sento's Chief Executive Officer, will resign as employees
of Sento and will become employees of EchoPass. See "The EchoPass
Transactions."
REASONS FOR THE ECHOPASS TRANSACTIONS
The Board of Directors of Sento (the "Board") believes that the
EchoPass Transactions are in the best interests of Sento and its shareholders.
The Board believes that the Technology represents the leading business
technology in the call center industry and can be leveraged for significant
growth in a new category of customer contact center solutions for small and
middle market companies and emerging and high-growth e-business and e-commerce
companies. The Board recognizes, however, that development of the proposed
business utilizing the Technology will require substantial additional investment
and that, to date, Sento has been unable to attract the investment capital
required to aggressively pursue development of the Technology. Moreover, the
Board believes that rapid development of the Technology will be critical to
establish and maintain a competitive edge over potential competitors who have
greater resources than Sento. Based upon discussions with prospective investors,
capital funding sources and industry partners, the Board believes the
consummation of the EchoPass Transactions will enable EchoPass to attract
financing and strategic alliance opportunities that are not presently available
to Sento. Because the Board believes that EchoPass will benefit from first-mover
advantages and will be able to develop and market the Technology more rapidly
than Sento (due, in part, to Sento's inability to fund the development of the
Technology), it believes that the consummation of the EchoPass Transactions will
offer Sento and its shareholders a greater opportunity to benefit from the
development of the Technology than the opportunities that are presently
available to Sento. Finally, the Board believes the consummation of the EchoPass
Transactions will create a significant incentive for the existing and proposed
management and employees of EchoPass to rapidly develop and market the
Technology and that, because the operations of EchoPass will initially be
focused primarily on developing and marketing the Technology, EchoPass will be
able to commercialize the Technology more rapidly than Sento. Accordingly, the
Board has concluded that the consummation of the EchoPass Transactions
represents the best opportunity to capitalize on the Technology and provide to
Sento's shareholders the benefits available therefrom. See "The EchoPass
Transactions--Reasons for the Transactions."
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OPERATIONS FOLLOWING THE ECHOPASS TRANSACTIONS
SENTO. Following the consummation of the EchoPass Transactions, if
approved at the Special Meeting, Sento will continue to conduct its existing
business of providing IT services consisting primarily of providing technical
support, helpdesk functions and assessing and training in-house IT personnel
through both on-site training and distance learning. Sento will no longer own
the Technology, but will be able to utilize the Technology pursuant to the
Services Agreement. The Board anticipates that several existing employees of
Sento, including Arthur F. Coombs, III, Sento's President and Chief Executive
Officer, will resign as employees of Sento and will become employees of EchoPass
upon the consummation of the EchoPass Transactions. Accordingly, the
consummation of the EchoPass Transactions will likely require Sento to identify
and hire new executive personnel to fill the vacancies resulting from these
resignations. See "The EchoPass Transactions--Operations Following the EchoPass
Transactions--Sento."
ECHOPASS. If the EchoPass Transactions are approved and consummated,
EchoPass will commence its proposed business operations of developing, marketing
and supporting customer service infrastructure solutions. EchoPass intends to
provide e-businesses with telephone and electronic customer interaction and
management capabilities through application hosting and customer communication
connectivity systems. Together, these services will be designed to provide
EchoPass customers with the capabilities to interact with customers over the
telephone and through electronic interactions media, including e-mail, Web text
chat, Web callbacks, Web call-throughs, co-browsing, faxes and voicemail.
EchoPass also intends to provide customer interaction management functionality
to help businesses manage customer data and history. EchoPass' services will
also be designed to enable businesses to benefit from the functionality of an
eCustomer Contact Center environment without installing, configuring,
maintaining or updating the applications and connectivity systems. EchoPass
anticipates that these services will provide high performance, scalability,
functionality and an Internet-enabled system that businesses need to deliver
leading customer service operations and effectively compete in today's highly
competitive and dynamic Internet environment. See "The EchoPass
Transactions--Operations Following the EchoPass Transactions--EchoPass."
DATE, TIME AND PLACE OF MEETING OF SHAREHOLDERS
The Special Meeting will be held on December 16, 1999, at 10:00 a.m.,
local time, at Sento's offices, 808 East Utah Valley Drive, American Fork, Utah
84003.
PURPOSES OF THE MEETING
At the Special Meeting, shareholders of record of Sento will be asked
to consider and vote upon a proposal to approve, authorize, adopt and ratify the
Contribution Agreement and to consummate the EchoPass Transactions.
RECORD DATE; SHARES ENTITLED TO VOTE
Holders of record of Sento Common Stock on November 15, 1999 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting. At
the close of business on the Record Date, there were outstanding and entitled to
vote 7,939,416 shares of Sento Common Stock, each of which will be entitled to
one vote on each matter to be acted upon; however, votes by Sento shareholders
who are also directors, officers, or shareholders of EchoPass will not be
counted toward approval of the EchoPass Transactions. See "The Special
Meeting--Vote Required."
VOTE REQUIRED
The Board believes that shareholder approval is not required for
approval of the EchoPass Transactions; however, the Board has determined that it
is appropriate to submit the terms of the EchoPass Transactions to the Sento
shareholders for their approval as a result of the interests of certain members
of the Board in the EchoPass Transactions (as described in this Proxy
Statement). Accordingly, Sento is seeking the affirmative vote of the holders of
a majority of the shares of Sento Common Stock represented at the Special
Meeting for approval of the terms of the EchoPass Transactions. Votes by
shareholders of Sento who are also directors, officers or shareholders of
EchoPass will not be counted toward approval of the EchoPass Transactions.
Approval of the terms of the EchoPass Transactions is a condition to the
consummation of the EchoPass Transactions. If the Sento shareholders do not
approve the EchoPass Transactions at the Special Meeting, Sento will not proceed
with the EchoPass Transactions.
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QUORUM; ABSTENTIONS AND BROKER NON-VOTES
A majority of the shares of Sento Common Stock issued and outstanding
as of the Record Date, represented in person or by properly executed proxy, is
required for a quorum at the Special Meeting. Abstentions and broker non-votes,
which are indications by a broker that it does not have discretionary authority
to vote on a particular matter, will be counted as "represented" for the purpose
of determining the presence or absence of a quorum. Under Utah corporate law and
the Articles of Incorporation and Bylaws of Sento, once a quorum is established,
shareholder approval with respect to a particular proposal is generally obtained
when the votes cast in favor of the proposal exceed the votes cast against such
proposal.
INTERESTS OF CERTAIN PERSONS IN THE ECHOPASS TRANSACTIONS
In considering the recommendation of the Board with respect to the
EchoPass Transactions, shareholders should be aware that certain members of the
Board have interests which may present them with conflicts of interest in
connection with the EchoPass Transactions. In particular, EchoPass was formed by
certain existing directors, officers and employees of Sento. Furthermore,
immediately following the consummation of the EchoPass Transactions, if
consummated, certain existing directors, officers and employees of Sento will
own 915,000 shares of EchoPass Common Stock and options to acquire an additional
1,755,000 shares of EchoPass Common Stock, representing an aggregate of
approximately 26% of the issued and outstanding shares of EchoPass Common Stock
as of such date (on a fully-diluted basis, after giving effect to the exercise
of such options and the conversion of the shares of EchoPass Preferred to be
issued to Sento and Genesys in the EchoPass Transactions). In addition, three of
Sento's existing directors also serve as directors of EchoPass. Shareholders
should also be aware that Genesys owns 162,502 shares of Sento Common Stock and
exercisable warrants to acquire an additional 81,251 shares of Sento Common
Stock, representing an aggregate of approximately 3% of the outstanding shares
of Sento Common Stock, and has indicated that it intends to vote such shares in
favor of the proposal to approve the EchoPass Transactions. See "The EchoPass
Transactions--Interests of Certain Persons in the Transactions." Votes by
shareholders of Sento who are also directors, officers or shareholders of
EchoPass will not be counted toward approval of the EchoPass Transactions. See
"The Special Meeting--Vote Required."
OPINION OF ALLIANT PARTNERS
Alliant Partners has delivered to the Board a preliminary copy of its
written opinion (the "Alliant Opinion"), that, as of September 28, 1999 and
based upon and subject to the factors and assumptions set forth in such written
opinion, the contribution to be made by Sento to EchoPass in the EchoPass
Transactions is fair, from a financial point of view, to the Sento shareholders.
The full text of the Alliant Opinion, which sets forth the assumptions made,
matters considered and limitations on the review undertaken by Alliant Partners,
is attached as Appendix A to this Proxy Statement. The Contribution Agreement
provides that the consummation of the EchoPass Transactions, if approved at the
Special Meeting, is expressly conditioned upon Sento's receipt and approval of a
final version of the Alliant Opinion that is substantially in the form of
opinion enclosed with this Proxy Statement. Sento shareholders are urged to read
the Alliant Opinion in its entirety. See "The EchoPass Transactions--Opinion of
Alliant Partners."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board has approved the EchoPass Transactions and has determined
that the EchoPass Transactions are in the best interests of Sento and its
shareholders. The Board recommends approval of the Contribution Agreement and
the EchoPass Transactions by the Sento shareholders. The primary factors
considered and relied upon by the Board in reaching its recommendation are
referred to in "The EchoPass Transactions--Reasons for the Transactions."
THE CONTRIBUTION AGREEMENT
REPRESENTATIONS AND COVENANTS. Pursuant to the Contribution Agreement,
Sento has agreed to contribute the Technology to EchoPass in exchange for
4,000,000 shares of EchoPass Preferred and to transfer to EchoPass certain
tangible assets consisting primarily of computer equipment (the "Assets") in
exchange for EchoPass' delivery of a secured promissory note in the original
principal amount of approximately $1,100,000. The Contribution Agreement
contains limited representations and warranties regarding Sento, the Technology
and the Assets, but provides no representations or warranties with regard to the
condition or value of the Technology or the Assets. Additionally, under
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the Contribution Agreement, Sento and EchoPass have agreed that EchoPass will
assume the liabilities relating to the Technology and the Assets from and
after the effective time of the Contribution Agreement, and that Sento and
EchoPass will indemnify one another with respect to certain losses relating
to the Contribution Agreement, the Technology and the Assets.
CONDITIONS TO THE ECHOPASS TRANSACTIONS. In addition to the
requirement that the requisite approval of the shareholders of Sento be
obtained, consummation of the EchoPass Transactions is subject to a number of
other conditions that, if not satisfied or waived, may cause the EchoPass
Transactions not to be consummated and the Contribution Agreement to be
terminated. Each party's obligation to consummate the EchoPass Transactions
is conditioned on, among other things, (i) receipt by Sento of the Alliant
Opinion substantially in the form of the preliminary opinion of Alliant
Partners attached as Appendix A to this Proxy Statement and in a form
acceptable to the Board and (ii) the simultaneous closing of the software
license and stock purchase transactions contemplated between EchoPass and
Genesys. See "The EchoPass Transactions -Other Related Agreements." Further,
if EchoPass does not raise $6,000,000 in equity funding (including the
$1,000,000 to be raised from the sale of 500,000 shares of EchoPass Preferred
to Genesys in the EchoPass Transactions) within 120 days of the closing of
the EchoPass Transactions, Sento may elect to rescind the Contribution
Agreement and the EchoPass Transactions. See "The EchoPass
Transactions--Conditions to the Transactions."
CLOSING. It is anticipated that, assuming all conditions are met, the
Transfer will occur and a closing will be held on or about December 16, 1999.
See "The EchoPass Transactions--Closing.
TERMINATION OR AMENDMENT. The Contribution Agreement may be terminated
or amended upon the written consent of both Sento and EchoPass.
FEES AND EXPENSES. Whether or not the EchoPass Transactions are
consummated, all costs and expenses incurred by Sento and EchoPass in connection
with the Contribution Agreement and the EchoPass Transactions will be paid by
Sento; however, in the event that the EchoPass Transactions are consummated,
EchoPass will reimburse Sento for all such costs and expenses to the extent such
costs and expenses exceed $50,000. See "The EchoPass Transactions - Fees and
Expenses."
RELATED AGREEMENTS
In connection with the EchoPass Transactions, Sento and EchoPass
propose to enter into related agreements, including (i) the Services Agreement,
pursuant to which EchoPass will provide to Sento services enabling Sento to
utilize the Technology (at most favored customer pricing) in developing its
existing and future eCustomer Contact Centers, covenant to provide IT consulting
services to enable Sento to operate and develop its existing and future
eCustomer Contact Centers and grant to Sento a preferential right to utilize
improvements to the Technology, (ii) a secured promissory note in the original
principal amount of approximately $1,100,000 made by EchoPass in favor of Sento
(the "Promissory Note") in consideration of Sento's proposed transfer of certain
tangible assets, consisting primarily of computer equipment, and (iii) the
Facilities Agreement, pursuant to which Sento will permit EchoPass to use
approximately 2,400 square feet of office and research and development space
located at Sento's American Fork, Utah headquarters and provide accounting and
other general and administrative services to EchoPass. See "The EchoPass
Transactions--Related Agreements."
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GENESYS TRANSACTIONS
As part of the EchoPass Transactions, EchoPass also proposes to enter
into a Master Software License Agreement (The "Genesys License Agreement") and a
Stock Purchase Agreement (the "Genesys Stock Purchase Agreement") with Genesys.
The Genesys License Agreement provides for the grant by Genesys of a
non-exclusive license to use the Genesys Internet Suite in the development of
EchoPass' business operations. In exchange for the right to use the Genesys
Internet Suite, EchoPass proposes to issue to Genesys 3,000,000 Shares of
EchoPass Preferred and pay quarterly maintenance fees. The Genesys Stock
Purchase Agreement provides for the sale by EchoPass of 500,000 shares of
EchoPass Preferred to Genesys in exchange for $1,000,000. The Genesys Stock
Purchase Agreement contains additional terms and conditions that are customary
for early-stage venture funding transactions and limitations on EchoPass' use of
the proceeds from the sale of EchoPass Preferred. See "The EchoPass Transactions
- - Genesys Transactions."
RISK FACTORS
In considering whether to vote for the approval and adoption of the
EchoPass Transactions, shareholders of Sento should carefully consider all of
the information contained in this Proxy Statement and, in particular, the
information set forth in the section entitled "Risk Factors."
ACCOUNTING MATTERS
Sento intends to account for the EchoPass Transactions, if consummated,
as an equity investment under generally accepted accounting principles. See "The
EchoPass Transactions--Accounting Matters."
UNAUDITED PRO FORMA FINANCIAL INFORMATION
In considering whether to vote for the proposal to approve, authorize,
adopt and ratify the Contribution Agreement and approve the EchoPass
Transactions, Sento shareholders should review and consider the unaudited pro
forma financial information giving effect to the EchoPass Transactions set forth
on pages P-1 through P-4 of this proxy statement.
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MARKET PRICE AND DIVIDEND INFORMATION--SENTO
MARKET PRICE DATA--SENTO
The Sento Common Stock is traded on the Nasdaq Stock Market (SmallCap
Market) under the symbol "SNTO." The following table sets forth the range of
high and low closing prices reported on the Nasdaq Stock Market for the Sento
Common Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Fiscal Year Ended March 31, 2000:
First Quarter.................................... $2.06 $1.56
Second Quarter................................... 3.00 1.88
Third Quarter (through November 15, 1999)........ 3.44 2.25
Fiscal Year Ended March 31, 1999:
First Quarter.................................... $5.13 $3.75
Second Quarter................................... 4.75 3.50
Third Quarter.................................... 4.00 2.25
Fourth Quarter................................... 2.63 1.38
Fiscal Year Ended March 31, 1998:
First Quarter.................................... $5.38 $3.88
Second Quarter................................... 5.50 4.25
Third Quarter.................................... 4.75 4.06
Fourth Quarter................................... 4.50 3.88
</TABLE>
DIVIDEND INFORMATION--SENTO
Sento has not declared or paid any dividends on the Sento Common Stock
and currently anticipates that it will retain all available funds to finance
future growth and business expansion. Any future determination to pay dividends
will be at the direction of the Board and will be dependent on results of
operations, contractual restrictions and other factors deemed relevant by the
Board.
NUMBER OF SHAREHOLDERS--SENTO
As of November 15, 1999, there were 421 shareholders of record who held
shares of Sento Common Stock (although Sento has been informed that there are in
excess of 1,000 beneficial owners), as shown on the records of Sento's transfer
agent for such shares.
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MARKET PRICE AND DIVIDEND INFORMATION--ECHOPASS
MARKET PRICE DATA--ECHOPASS
Neither the EchoPass Common Stock nor the EchoPass Preferred are listed
on any exchange or quoted by any dealers in securities. There is currently no
public market for the EchoPass Common Stock or the EchoPass Preferred, and Sento
does not expect that any public market will develop in the immediate future.
DIVIDEND INFORMATION--ECHOPASS
EchoPass has not declared or paid any dividends on the EchoPass Common
Stock or the EchoPass Preferred and Sento currently anticipates that EchoPass
will retain all available funds to finance future growth and business expansion.
The Articles of Incorporation of EchoPass, as amended, provide for the payment
of dividends to the holders of the EchoPass Preferred when, as and if determined
by the Board of Directors of EchoPass. Any future determination to pay dividends
will be at the discretion of EchoPass' Board of Directors and will be dependent
on results of operations, contractual restrictions and other factors determined
relevant by the Board of Directors of EchoPass.
NUMBER OF SHAREHOLDERS--ECHOPASS
As of November 15, 1999, there were 21 shareholders of record who own
an aggregate of 1,000,000 shares of EchoPass Common Stock. Currently, there are
no shares of EchoPass Preferred issued or outstanding.
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RISK FACTORS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROXY
STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS WILL DIFFER AND MAY DIFFER MATERIALLY. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED ELSEWHERE IN THIS PROXY STATEMENT AND IN THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING RISK FACTORS SHOULD BE
CONSIDERED BY HOLDERS OF SENTO COMMON STOCK IN EVALUATING WHETHER TO APPROVE THE
CONTRIBUTION AGREEMENT AND THE ECHOPASS TRANSACTIONS. MANY OF THE FACTORS
DISCUSSED BELOW MAY APPLY TO THE OPERATIONS OF BOTH SENTO AND ECHOPASS. THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE OTHER
INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT.
FAILURE TO OBTAIN FINANCING
EchoPass' ability to commercialize the Technology will depend to a
significant extent on the ability of EchoPass to obtain the financing necessary
to develop, market and sell the Technology. The proceeds of EchoPass' sale of
the shares of EchoPass Preferred to Genesys pursuant to the Genesys Stock
Purchase Agreement will be insufficient to fund the development and
commercialization of the Technology. Sento cannot provide any assurance that
EchoPass will be able to obtain additional debt or equity financing or that such
financing, if obtained, will be available on commercially reasonable terms. If
EchoPass is unable to obtain the financing required to develop, market and sell
the Technology, it will be unable to commercialize the Technology.
In addition, the Contribution Agreement provides that if EchoPass does
not raise $6,000,000 in equity funding (including the $1,000,000 proposed to be
raised from the sale of the shares of EchoPass Preferred to Genesys in the
EchoPass Transactions) within 120 days of the closing of the EchoPass
Transactions, Sento may elect to rescind the Contribution Agreement and the
EchoPass Transactions. If EchoPass fails to raise the necessary equity funding
and the EchoPass Transactions are rescinded, the development of the Technology
will suffer and Sento's operations and financial condition may be negatively
affected.
FAILURE TO COMMERCIALIZE THE TECHNOLOGY
The Technology is unproven in applications outside of Sento's eCustomer
Contact Center and Sento's commercialization of the Technology is limited to two
beta customer relationships. EchoPass' success in commercializing the Technology
will depend to a significant extent on EchoPass' ability to develop and
commercialize the Technology in settings and for applications in which the
Technology has not been tested. There can be no assurance that EchoPass will be
able to develop and/or commercialize the Technology for settings or applications
that will be commercially feasible or that it will be able to develop and/or
commercialize the Technology for use in applications other than Sento's existing
and future eCustomer Contact Centers.
DILUTION OF SENTO'S OWNERSHIP
If the EchoPass Transactions are completed, Sento will own the
equivalent of approximately 47% of the issued and outstanding shares of EchoPass
Common Stock on a fully-diluted basis, after giving effect to the conversion of
the shares of EchoPass Preferred to be issued to Sento and Genesys in the
EchoPass Transactions. EchoPass' success in developing and licensing the
Technology will depend to a significant extent on EchoPass' ability to obtain
financing required to develop, market and sell the Technology. As a result,
EchoPass will have an incentive to issue additional capital stock to sources of
such financing. The issuance of such additional capital stock would have the
effect of diluting Sento's ownership of the EchoPass capital stock and Sento's
ability to influence the management and policies of EchoPass. The Board of
Directors of EchoPass would be able to issue additional capital stock to the
extent of EchoPass' authorized but unissued shares of capital stock, which
currently represents approximately 83% of the total authorized capital stock of
EchoPass.
The dilution of Sento's economic interests could result in Sento
receiving less financial benefit from EchoPass' use of the Technology than Sento
could have obtained through commercializing the Technology itself. In addition,
Sento's lack of voting control over EchoPass could result in EchoPass taking
actions in conflict with or adverse to the interests of Sento. These actions
could include licensing the Technology to competitors of Sento. In addition,
Sento will
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not have the unrestricted right to develop new applications for the
Technology without consent from EchoPass. Without a controlling interest in
EchoPass, Sento will not be assured of obtaining EchoPass' consent for such
additional applications.
RELIANCE ON ECHOPASS FOR OUTSOURCED SERVICES
If the EchoPass Transactions are completed, Sento will no longer
possess the Technology and will no longer employ a number of existing technical
support employees who are presently engaged in developing the Technology and
maintaining Sento's eCustomer Contact Center. If the EchoPass Transactions are
completed, many of these technical support functions will be provided by
EchoPass employees on an outsourced basis pursuant to the Services Agreement. As
a result, Sento will be dependent on EchoPass for many of the technical support
functions related to Sento's eCustomer Contact Center. The outsourcing
relationship could result in decreased attention to Sento's needs, slower
response times and the lack of redundant support functions. In addition, if
EchoPass fails in its business efforts, Sento would be required to re-develop
the technical services necessary to support its opportunities.
CONFLICTS BETWEEN SENTO AND ECHOPASS
If the EchoPass Transactions are completed, EchoPass will own the
Technology. Although the Services Agreement will grant to Sento the right to
utilize the Technology in the operation of its existing and future eCustomer
Contact Centers, EchoPass will likely have the opportunity to license the
Technology to third parties, including existing and potential competitors of
Sento. Immediately following the EchoPass Transactions, Sento will likely
possess the ability to influence the management and policies of EchoPass and may
cause EchoPass to forego licensing opportunities with existing and potential
competitors of Sento in order to preserve Sento's ability to maintain its
existing and future eCustomer Contact Centers. As a result, Sento cannot make
assurances that EchoPass' proposal to license the Technology will result in any
greater benefit to Sento shareholders than the commercialization of the
Technology by Sento alone.
CONFLICTS WITH SENTO'S DIRECTORS, OFFICERS AND EMPLOYEES
EchoPass was founded by certain existing directors, officers and
employees of Sento. Furthermore, upon completion of the EchoPass Transactions,
certain existing directors, officers and employees of Sento will own 915,000
shares of EchoPass Common Stock and exercisable options to acquire an additional
1,755,000 shares of EchoPass Common Stock, representing an aggregate of
approximately 26% of the total issued and outstanding shares of EchoPass Common
Stock as of such date (on a fully-diluted basis, after giving effect to the
exercise of such options and the conversion of the shares of EchoPass Preferred
to be issued to Sento and Genesys in EchoPass Transactions). EchoPass may have
the opportunity to use, develop or commercialize the Technology in a manner that
may be in conflict with or adverse to the interests of Sento and its
shareholders. As a result of their financial interests, certain Sento directors,
officers and employees may have incentives to approve or facilitate such
opportunities, including voting their shares of EchoPass Common Stock in favor
of approval of exploiting such opportunities. Sento cannot provide any assurance
that certain directors, officers and/or employees of Sento will not have such
incentives or that they will not act upon such incentives.
COMPETITION IN THE E-BUSINESS CUSTOMER SERVICE MARKET
The e-business customer service market is new and intensely
competitive. There are no substantial barriers to entry, and established or new
entities may enter this market in the near future. Furthermore, established
enterprise software companies, including IBM, Hewlett-Packard Company, Microsoft
Corporation and similar companies, may leverage their existing relationships and
capabilities to offer e-business customer service applications. Any delays in
the general market acceptance of the e-business customer service applications
and EchoPass' proposed products and services would likely harm EchoPass'
competitive position. Delays would allow EchoPass' competitors additional time
to approve their service or product offerings, and also provide time for new
competitors to develop e-business customer service applications and solicit
prospective customers within EchoPass' target markets. Increased competition
could result in pricing pressures, reduced operating margins and loss of market
share.
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CHANGING NEEDS OF THE E-BUSINESS CUSTOMER SERVICE MARKET
The e-business customer service industry is characterized by rapid
technological change, changes in customer requirements and preferences and the
emergence of new industry standards and practices that could render EchoPass'
existing products, services, proprietary technology and systems obsolete. To be
competitive, EchoPass must continually improve the performance, features and
reliability of its products and services, including its existing e-business
customer service applications, and develop new products, services, functionality
and technology that address the increasingly sophisticated and varied needs of
its prospective customers. If EchoPass cannot adapt or respond in a
cost-effective and timely manner to changing industry standards, market
conditions or customer requirements, its business and operating results would
suffer.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, Sento had working capital of $110,358 and a cash
balance of $427,005. Sento's liquidity position deteriorated substantially
during the year ended March 31, 1999, primarily because Sento used $3,362,744 of
cash for employee training and operating activities during the year ended March
31, 1999 and $2,717,848 of cash for the purchase of furniture and equipment.
Sento's primary sources of liquidity have been cash received from sales
of assets and cash provided through private sales of equity as well as
borrowings under a bank line of credit. In addition, Sento has financed some of
its equipment utilized in its business through long-term leasing arrangements.
The current growth rate of the technical services division consumes a
substantial amount of cash monthly, and Sento continues to pursue additional
funding opportunities. In the event Sento 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 operations. There can be no assurance
that Sento will be able to obtain necessary capital funding on terms favorable
to Sento, if at all.
DEPENDENCE ON CUSTOMERS
No customer accounted for more than 10% of Sento'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, Sento
anticipates that technical support revenues will become the majority of its
revenues, and, therefore, it is anticipated that a small number of customers
will account for the majority of Sento's revenues. Consistent with industry
standards, Sento's contracts are generally cancelable by the customer on
short-term notice. Sento's loss of a significant amount of business with any of
its key customers could have, and the loss of a substantial amount of business
with either of its existing technical support customers would have, a material
adverse effect on Sento's business, financial condition and results of
operations.
MANAGEMENT TRANSITION
Sento has recently effected significant changes in its management team
and key employees. In particular, Arthur F. Coombs, III became Chief Executive
Officer in April 1999, Gary B. Filler joined Sento in March 1999 in a consulting
role as Executive Vice President and Acting Chief Financial Officer, and Keith
D. Barr joined Sento in April 1998 as Chief Information Officer. If the EchoPass
Transactions are consummated, Sento anticipates that Mr. Coombs will resign as
an employee, officer and director of Sento and will become a full-time employee
of EchoPass. As a result, Sento will be required to identify and retain one or
more qualified individuals to fill the vacancies created by Mr. Coombs'
departure. Sento has not identified any prospective candidates to fill such
vacancies. There can be no assurance that Sento will be able to successfully
identify and retain individuals who are capable of filling such vacancies. In
addition, a majority of the Board has been elected since July 1998. Sento's
headcount has grown from 162 at June 12, 1998 to 548 at October 31, 1999. Sento
cannot provide any assurance that its new management team and other new
personnel can successfully manage Sento's rapidly evolving business, and any
failure to do so would have a material adverse effect upon Sento's operating
results.
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<PAGE>
COMPETITION
The market for 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 Sento or EchoPass. Over the
past five years, a number of existing companies have enjoyed increasing success
and rapid internal growth. Several of these companies have been active in
acquiring 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 Andersen Consulting,
Computer Sciences Corp. ("CSC"), Electronic Data Systems ("EDS"), and IBM are
providing full "turnkey" solutions to their large customers.
Also, major computer hardware and software companies 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 Sento and
EchoPass.
Neither Sento nor EchoPass can provide any assurance that better and
more efficient services will not be provided by new or existing IT service
providers in competition with Sento and/or EchoPass. The services provided by
such competitors may be more effective or less expensive than those provided by
Sento or EchoPass. Although Sento and EchoPass intend to improve, refine and
enhance the services they provide, there can be no assurance that Sento or
EchoPass will be able 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 future success of Sento and EchoPass will depend in large part
on their ability to service new products, platforms and rapidly changing
technology. These factors will require Sento and EchoPass to provide adequately
trained personnel to address the increasingly sophisticated, complex and
evolving needs of their 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 Sento or EchoPass
will be able to provide such services profitably. The failure by Sento or
EchoPass to adapt to the changing IT service industry would have an adverse
impact on the results of operations and financial condition of Sento and/or
EchoPass.
The businesses of Sento and EchoPass will depend, in part, on their
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 or EchoPass will be
successful in adequately addressing these developments on a timely basis or
that, if these developments are addressed, Sento or EchoPass will be successful
in the marketplace. In addition, there can be no assurance that products or
technologies developed by others will not render the services of Sento and/or
EchoPass non-competitive or obsolete. Failure to address these developments
could have a material adverse effect on the business and financial condition of
Sento and/or EchoPass.
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<PAGE>
ATTRACTING, TRAINING AND RETAINING QUALITY EMPLOYEES
The IT services market suffers from a significant labor shortage. The
success of Sento and EchoPass will depend, in large part, on their abilities to
attract, retain and train highly qualified scientific, technical, managerial and
marketing personnel with IT expertise. Neither Sento nor EchoPass has entered
into employment agreements that require the services of any of its key technical
personnel to remain with Sento for any specified period of time. Competition for
such personnel is intense. There can be no assurance that Sento or EchoPass will
be able to attract and retain all personnel necessary for the development and
operation of their respective businesses nor that they will be able to train
their 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 Sento and EchoPass.
DEPENDENCE ON INDUSTRY TREND TO OUTSOURCE SERVICES
Sento's business depends in large part on the trend within the IT
industry to outsource certain services. Sento cannot provide any assurance that
this trend will continue or that, if the trend continues, it will continue at
the same rate of growth. The failure of this trend to continue could have a
material adverse effect on Sento's business, financial condition or results of
operations.
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
The value of individual transactions can constitute a substantial
percentage of the quarterly revenue of Sento and EchoPass, and particular
transactions may generate a substantial portion of the operating profits for a
quarter. Because the staffing and other operating expenses of Sento and EchoPass
are based on anticipated revenue levels, and a high percentage of their expenses
are fixed, delays in the receipt of orders or payments can cause significant
variations in operating results from quarter to quarter. In addition, Sento or
EchoPass may expend significant resources pursuing potential sales that will not
be consummated. Sento or EchoPass also may choose to reduce prices or to
increase spending in response to competition or to pursue new market
opportunities, which may adversely affect either's operating results.
In particular, Sento's revenues from its existing and proposed
eCustomer Contact Center operations are potentially volatile. Such revenues are
a function of the number of support requests received by Sento and the time
spent on such requests. Consequently, Sento's profitability may be adversely
affected if Sento 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 results of operations of Sento and EchoPass
may not be meaningful and that no one should rely upon them as an indication of
future performance. Furthermore, neither Sento nor EchoPass can provide any
assurance that either will be able to achieve and sustain profitability on a
quarterly basis.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Sento Common Stock has fluctuated widely in
response to variations in quarterly operating results, announcements by Sento or
its competitors, industry trends, general economic conditions or other events or
factors. Such fluctuations may continue in the future. Regardless of the general
outlook for Sento'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 Sento Common Stock.
RISK OF EMERGENCY INTERRUPTION OF CALL CENTER OPERATIONS
The businesses of Sento and EchoPass depend to a large extent on
computer and telecommunications equipment and software systems. Neither Sento
nor EchoPass can provide any assurance that natural disaster, human error,
equipment malfunction or inadequacy, or other events would not result in a
prolonged interruption in the ability of Sento or EchoPass to provide support
services to their clients. The temporary or permanent loss of computer or
telephone equipment or systems, through casualty, operating malfunction or
otherwise, could have a material adverse effect on Sento or EchoPass, as
applicable. Furthermore, the loss of EchoPass' computer or telephone equipment
or
13
<PAGE>
systems could result in service disruptions to EchoPass' customers, which
could give rise to significant claims against EchoPass. Property and business
interruption insurance may not be adequate to compensate Sento or EchoPass,
as applicable, for all losses that may be incurred.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Sento Common Stock or the perception
that such sales could occur, could have a negative impact on the prevailing
market prices for the Sento Common Stock. As of November 15, 1999, Sento had
7,939,416 shares of Sento Common Stock outstanding, of which approximately
6,085,297 shares were eligible as of such date under applicable securities laws
for immediate sale in the public market without restriction, except for any
shares purchased by any "affiliate" of Sento (as that term is defined under the
rules and regulations of the Securities Act) which will be subject to the resale
limitations of Rule 144 under the Securities Act ("Rule 144"), and approximately
1,784,963 outstanding shares were, as of November 15, 1999, "restricted
securities," as that term is defined under Rule 144, and may be eligible for
sale, subject to certain restrictions, in the open market pursuant to Rule 144.
ANTI-TAKEOVER CONSIDERATIONS
The Articles of Incorporation and Bylaws of Sento and EchoPass, the
Utah Revised Business Corporation Act and the Utah Control Shares Acquisition
Act each contain certain provisions that may have the effect of inhibiting a
non-negotiated merger or other business combination. The Articles of
Incorporation of Sento and EchoPass grant to the Board the authority, without
further action by Sento's shareholders, to fix the rights and preferences, and
issue shares of preferred stock. These provisions may deter hostile takeovers or
delay or prevent changes in control of or changes in the management of Sento and
EchoPass, including transactions in which shareholders might otherwise receive a
premium for their shares over the then-current market prices. In addition, these
provisions may limit the ability of shareholders to approve transactions that
they may deem to be in their best interests.
DIVIDENDS
Dividends are payable on the Sento and EchoPass Common Stock when, as
and if declared by the Boards of Directors of the respective companies. No
dividend has been declared or paid on the Sento Common Stock to date. At present
Sento and EchoPass intend to retain any future earnings for use in their
respective businesses and therefore do not anticipate paying any dividends on
the Sento or EchoPass Common Stock in the foreseeable future.
14
<PAGE>
THE SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The Special Meeting will be held on December 16, 1999, at 10:00 a.m.,
local time, at Sento's offices at 808 East Utah Valley, Drive, American Fork,
Utah 84003.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of Sento Common Stock at the close of business
on the Record Date, November 15, 1999, are entitled to notice of and to vote at
the Special Meeting. As of the close of business on the Record Date, there were
7,939,416 shares of Sento Common Stock outstanding and entitled to vote, held of
record by 421 shareholders. A majority, or 3,969,709, of these shares, present
in person or represented by proxy, will constitute a quorum for the transaction
of business. Each Sento shareholder is entitled to one vote for each share of
Sento Common Stock held as of the Record Date.
VOTING OF PROXIES
The proxy accompanying this Proxy Statement is solicited on behalf of
the Board for use at the Special Meeting. Shareholders are requested to
complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope or otherwise mail it to Sento. All proxies that are
properly executed and returned, and that are not revoked, will be voted at the
Special Meeting in accordance with the instructions indicated on the proxies or,
if no direction is indicated, to approve the Contribution Agreement and the
EchoPass Transactions. The Board does not presently intend to bring any business
before the Special Meeting other than the specific proposal referred to in this
Proxy Statement and specified in the notice of the Special Meeting. So far as is
known to the Board, no other matters are to be brought before the Special
Meeting. As to any business that may properly come before the Special Meeting;
however, it is intended that proxies, in the form enclosed, will be voted in
respect thereof in accordance with the judgment of the persons voting such
proxies. A Sento shareholder who has given a proxy may revoke it at any time
before it is exercised at the Sento Meeting by (i) delivering to the Secretary
of Sento a written notice, bearing a date later than the proxy, stating that the
proxy is revoked, (ii) signing and so delivering a proxy relating to the same
shares and bearing a later date prior to the vote at the Special Meeting, or
(iii) attending the Special Meeting and voting in person.
VOTE REQUIRED
Sento believes that shareholder approval is not required for the
EchoPass Transactions; however, the Board has determined that it is appropriate
to submit the EchoPass Transactions to the Sento shareholders for their approval
as a result of the interests of certain members of the Board in the EchoPass
Transactions (as described in the Proxy Statement). See "The EchoPass
Transactions--Interests of Certain Persons in the Transactions." Accordingly,
Sento is seeking the affirmative vote of the holders of a majority of the shares
of Sento Common Stock represented at the Special Meeting for approval of the
Contribution Agreement and the EchoPass Transactions. Votes by shareholders of
Sento who are also directors, officers or shareholders of EchoPass
(collectively, the "Interested Sento Shareholders") will be counted for purposes
of determining if a quorum is present at the Special Meeting, but will not be
counted toward approval of the EchoPass Transactions. As of the Record Date, the
executive officers and directors of Sento and their affiliates beneficially
owned (or possessed the right to acquire within 60 days of the Record Date)
510,543 shares of Sento Common Stock (approximately 6% of the shares of Sento
Common Stock then outstanding). Shareholders should also be aware that as of the
Record Date Genesys owned 162,502 shares of Sento Common Stock and exercisable
warrants to acquire an additional 81,251 shares of Sento Common Stock, but did
not own any shares of the capital stock of EchoPass. Accordingly, Genesys will
be permitted to vote its shares of Sento Common Stock at the Special Meeting.
See "The EchoPass Transactions--Interests of Certain Persons in the
Transactions."
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
A majority of the shares of the Sento Common Stock issued and
outstanding as of the Record Date, represented in person or by properly executed
proxy, is required for a quorum at the Special Meeting. Abstentions (including
shares held by Interested Sento Shareholders who are present at the Special
Meeting) and broker non-votes, which are indications by a broker that it does
not have discretionary authority to vote on a particular matter, will be counted
as
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<PAGE>
"represented" for the purpose of determining the presence or absence of a
quorum. Under Utah corporate law and the Articles of Incorporation and Bylaws
of Sento, once a quorum is established, shareholder approval with respect to
a particular proposal is generally obtained when the votes cast in favor of
the proposal exceed the votes cast against such proposal.
SOLICITATION OF PROXIES AND EXPENSES
Sento will bear the cost of solicitation of proxies in the enclosed
form from its shareholders. In addition to solicitation by mail, the directors,
officers and employees of Sento may solicit proxies from shareholders by
telephone, telegram, letter or in person. Following the original mailing of the
proxies and other soliciting materials, Sento will request brokers, custodians,
nominees and other record holders to forward copies of the proxy and other
soliciting materials to persons for whom they hold shares of Sento Common Stock
and to request authority for the exercise of proxies. In such cases, Sento, upon
the request of the record holders, will reimburse such holders for their
reasonable expenses.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF SENTO BELIEVES THAT THE CONTRIBUTION
AGREEMENT AND THE ECHOPASS TRANSACTIONS ARE FAIR TO AND IN THE BEST INTERESTS OF
SENTO AND ITS SHAREHOLDERS AND, THEREFORE, RECOMMENDS A VOTE FOR APPROVAL OF THE
CONTRIBUTION AGREEMENT AND THE ECHOPASS TRANSACTIONS.
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<PAGE>
PRINCIPAL SHAREHOLDERS OF SENTO
The following table sets forth information regarding the beneficial
ownership of Sento Common Stock as of November 15, 1999 by (i) each person who
is known by Sento to beneficially own more than 5% of Sento Common Stock, (ii)
each director of Sento and (iii) all directors and executive officers of Sento
as a group.
<TABLE>
<CAPTION>
Beneficial Ownership as of
November 15, 1999
--------------------------
Number of Percentage
Name and Address(1) Shares(2) of Total(3)
- -------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Gary B. Godfrey........................................................................ 816,027(4) 10%
149 North 835 East
Lindon, Utah 84042
Clemons F. Walker...................................................................... 513,200(5) 6%
748 Rising Star Drive
Henderson, Nevada 89014
Robert K. Bench........................................................................ 401,058 5%
626 East 1820 North
Orem, Utah 84057
Brian W. Braithwaite................................................................... 397,167 5%
808 East Utah Valley Drive
American Fork, Utah 84003
Gary B. Filler......................................................................... 157,625(6) 2%
Kieth E. Sorenson...................................................................... 105,000(7) 1%
Arthur F. Coombs, III.................................................................. 95,774(8) 1%
All directors and executive officers
as a group (5 persons).............................................................. 510,543(9) 6%
</TABLE>
- -----------------------
(1) Except as otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws, where
applicable.
(2) Includes shares subject to options and warrants that are exercisable
within sixty (60) days of November 15, 1999.
(3) The percentages set forth have been computed without taking into account
treasury shares held by Sento and are based on 7,939,416 shares
outstanding as of November 15, 1999 and, with respect to those persons
holding options and warrants that are exercisable within sixty (60) days
of November 15, 1999, the number of shares that are issuable at the end of
such period upon the exercise thereof.
(4) Shares are held by Gary B. Godfrey and Karie Godfrey, Trustees of the Gary
B. Godfrey Family Revocable Trust dated July 1, 1993.
(5) Includes 280,900 shares held in the name of the Walker Family Trust,
50,000 shares subject to presently exercisable warrants held by Mr. Walker
and 50,000 shares subject to presently exercisable warrants held in the
name of the Walker Family Trust.
(6) Includes 32,000 shares and 10,000 shares subject to presently exercisable
warrants held by G.T. Investments, of which Mr. Filler is the sole
shareholder, and 110,625 shares subject to presently exercisable options.
(7) Includes 105,000 shares subject to presently exercisable options.
(8) Includes 95,774 shares subject to presently exercisable options.
(9) Includes 449,543 shares subject to presently exercisable options and
20,000 shares subject to presently exercisable warrants.
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<PAGE>
PRINCIPAL SHAREHOLDERS OF ECHOPASS
The following table sets forth information regarding the beneficial
ownership of EchoPass Common Stock (on a fully-diluted basis, after giving
effect to the conversion of the EchoPass Preferred to be issued to Sento and
other parties in the EchoPass Transactions) as of November 15, 1999 and after
giving effect to the consummation of the EchoPass Transactions by (i) Sento,
(ii) Genesys, (iii) each person who beneficially owns more than 5% of the
EchoPass Common Stock as of November 15, 1999, (iv) each director of EchoPass
and (v) all directors and executive officers of EchoPass as a group.
<TABLE>
<CAPTION>
Beneficial Ownership as Beneficial Ownership After
Of Giving Effect to
November 15, 1999 EchoPass Transactions
-------------------------------- -------------------------------
Number of Percentage Number of Percentage
Name and Address(1) Shares(2) of Total(3) Shares(2) of Total(4)
- ------------------------------------------- -------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sento Corporation............................ 0 0% 4,000,000 47%
808 East Utah Valley Drive
American Fork, Utah 84003
Genesys Telecommunications Laboratories,
Inc............................. 0 0% 3,500,000 41%
1155 Market Street, 11th Floor
San Francisco, California 94103
Arthur F. Coombs, III....................... 275,000 28% 275,000 3%
808 East Utah Valley Drive
American Fork, Utah 84003
Keith D. Barr.................................. 275,000 28% 275,000 3%
808 East Utah Valley Drive
American Fork, Utah 84003
Gary B. Filler................................. 100,000 10% 100,000 1%
808 East Utah Valley Drive
American Fork, Utah 84003
Kieth E. Sorenson.......................... 100,000 10% 100,000 1%
808 East Utah Valley Drive
American Fork, Utah 84003
Richard DeGolia........................... 75,000 8% 75,000 *
1155 Market Street, 11th Floor
San Francisco, California 94103
Stanley J. Cutler.............................. 52,000 5% 52,000 *
808 East Utah Valley Drive
American Fork, Utah 84003
All directors and executive officers
as a group (5 persons).................. 877,000 88% 877,000 10%
</TABLE>
- -----------------------
* Less than one percent
(1) Except as otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares of stock shown
as beneficially owned by them, subject to community property laws, where
applicable.
(2) Number of shares indicated in this table does not reflect 1,910,000 shares
of EchoPass Common Stock subject to options granted to EchoPass officers,
directors, and employees. Such options are not presently exercisable;
however, upon the consummation of the EchoPass Transactions, the options
held by the following individuals will become exercisable with respect to
the following shares of EchoPass Common Stock: Arthur F. Coombs, III,
605,000 shares; Keith D. Barr, 575,000 shares; Gary B. Filler, 30,000
shares; Kieth E. Sorenson, 30,000 shares; Richard DeGolia, 155,000 shares;
Stanley J. Cutler, 198,000 shares; and all officers and directors as a
group, 1,593,000 shares.
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<PAGE>
(3) The percentages set forth as of November 15, 1999 are based on 1,000,000
shares of EchoPass Common Stock outstanding on November 15, 1999.
(4) The percentages set forth after giving effect to the EchoPass Transactions
are based on 1,000,000 shares of EchoPass Common Stock and 7,500,000
shares of EchoPass Preferred outstanding upon consummation of the EchoPass
Transactions (including the issuance of approximately 3,500,000 shares of
EchoPass Preferred to Genesys pursuant to the Genesys License Agreement
and the Genesys Stock Purchase Agreement) and the conversion of all such
7,500,000 shares of EchoPass Preferred.
THE ECHOPASS TRANSACTIONS
GENERAL
Sento and EchoPass have entered into the Contribution Agreement, a copy
of which is attached hereto as Appendix B, whereby Sento proposes to (i)
transfer to EchoPass substantially all of the Technology in exchange for
4,000,000 shares of EchoPass Preferred, representing approximately 47% of the
issued and outstanding shares of EchoPass Common Stock immediately following the
consummation of the EchoPass Transactions (on a fully-diluted basis, after
giving effect to the conversion of the shares of the EchoPass Preferred to be
issued to Sento and Genesys in the EchoPass Transactions); (ii) enter into the
Services Agreement, enabling Sento to utilize the Technology in developing its
existing and future eCustomer Contact Centers; (iii) transfer to EchoPass
certain tangible assets, consisting primarily of computer equipment, in exchange
for EchoPass' delivery of a secured promissory note in the original principal
amount of approximately $1,100,000; and (iv) permit EchoPass to use certain
office and research and development space located at Sento's principal offices,
and provide accounting and administrative services to EchoPass as contemplated
by the Facilities Agreement. In addition, EchoPass proposes to transfer
3,500,000 shares of EchoPass Preferred to Genesys in exchange for $1,000,000 in
cash and a favorable license to use the Genesys Internet Suite on terms that are
substantially more favorable than the pricing structure currently available to
Sento. If the EchoPass Transactions are consummated, Genesys will own 3,500,000
shares of EchoPass Preferred, representing approximately 41% of the issued and
outstanding shares of EchoPass Common Stock (on a fully-diluted basis, after
giving effect to the conversion of the EchoPass Preferred to be issued to Sento
and Genesys in the EchoPass Transactions). If the EchoPass Transactions are
approved, Sento also anticipates that certain existing employees of Sento,
including Arthur F. Coombs, III, Sento's Chief Executive Officer, will resign as
employees of Sento and will become employees of EchoPass.
The discussion in this Proxy Statement of the EchoPass Transactions and
the description of the principal terms of the Contribution Agreement and related
agreements are subject to and qualified in their entirety by reference to the
Contribution Agreement, a copy of which is attached to this Proxy Statement as
Appendix B and incorporated herein by reference, and the related agreements and
exhibits which are attached to and incorporated in the Contribution Agreement.
BACKGROUND OF THE TRANSACTIONS
In 1998, Sento's management began to strategically transition Sento
from its traditional VAR business to selling and marketing Sento's own
outsourced technical and training services. As of June 30, 1999, Sento completed
a series of sales of substantially all of its VAR business and assets, and
accelerated its efforts to concentrate and dedicate internal resources on its
outsourced technical and training services. See "Business of Sento--Background."
On March 1, 1998 and April 15, 1998, Arthur F. Coombs, III and Keith D.
Barr joined Sento as Executive Vice President of Sento and General Manager of
Sento Technical Services Corporation, a wholly-owned subsidiary of Sento ("Sento
Technical Services"), and Chief Information Officer of Sento, respectively. Both
Mr. Coombs and Mr. Barr came from Sykes Enterprises, Inc., a leading outsourcer
of technical services with revenues exceeding $550 million. Subsequent to
joining Sento, Messrs. Coombs and Barr began to develop a plan to build Sento's
technical services organization into a leading outsource provider of customer
support focused on incorporating leading technology.
During the fiscal year ended March 31, 1999, Sento continued its
efforts to develop an infrastructure based on leading technology to create the
next generation call center, which Sento has identified as the eCustomer Contact
Center. Sento management observed that the Internet was having a profound effect
in most IT markets, products, services and commerce and believed that the
Internet would also alter the process in which customers and businesses would
interact
19
<PAGE>
in pre- and post-sales customer support. Many traditional telephone call
centers had developed and invested in infrastructures and processes to
support traditional telephone calls, but did not possess the ability to
handle emerging electronic interactions media, including e-mail, Web text
chat, Web call backs, Web call-throughs, co-browsing, faxes and voicemail.
Sento began focusing its efforts on developing an environment that would be
capable of handling voice calls and electronic interactions incorporating
computer telephony integration ("CTI") technology, skills-based routing
systems, high resolution reporting and flexible customer interaction software
based on business rules.
In August 1998, an initial customer began outsourcing its customer
support to Sento's technical services organization utilizing the new
environment. Throughout the remainder of 1998 and early 1999, Sento continued
to invest in refinements to its environment. In June 1999, Sento completed
its initial effort to enable its customer service representatives to use
Sento's customer interaction software and communication tools to support
client customers over the Internet. These tools were accessible from any
computer using Microsoft's web-browsing utility Internet Explorer. In
addition, voice calls were packetized ("voice over IP" or "VoIP") and
delivered to customer service representatives over data networks,
relinquishing the need for telephones. Sento believes this development
represented the first production use of a convergent network combining voice
and data in a call center environment.
As Sento has pursued the development of the Technology, it has
recognized the necessity of obtaining additional investment capital in order
to finance the further development and commercialization of the Technology.
Contemporaneously with its efforts to develop the Technology, Sento
management contacted and met with a number of potential funding sources,
including capital funding sources with substantial experience in financing IT
businesses. Although many of these funding sources expressed significant
interest in the Technology, to date Sento has been unable to identify any
party willing to provide to Sento sufficient capital to enable Sento to
complete the development and commercialization of the Technology.
Based upon the conversations of Sento management with prospective
funding sources, Sento's limited financial resources and management's
assessment that Sento would be unable to raise sufficient investment capital
to fund the development and commercialization of the Technology on a timely
basis, management developed a concern that Sento would be unable to develop
and commercialize the Technology before larger IT companies, many of whom
have substantially greater financial resources than Sento, would develop
competing technologies and obtain a substantial market share. Accordingly, in
late May 1999 Sento management began to explore other methods of obtaining
the funding required to develop and commercialize the Technology. Through a
series of conversations with potential funding sources and strategic alliance
partners during June 1999, Sento management concluded that a new entity,
which had not experienced the financial difficulties that Sento had undergone
in the past several years and could focus its efforts solely on the
development of the Technology, might be able to attract sufficient funding to
enable the commercialization of the Technology within a reasonable period.
Over the next several weeks, Sento management continued to develop and refine
the terms of a proposed series of transactions, which are substantially the
EchoPass Transactions.
In July 1999, the Board reviewed Sento's efforts to develop and
commercialize the Technology, assessed Sento's financial condition and
concluded that Sento did not possess the financial resources, nor could it
reasonably expect to attract the financial resources, necessary to develop
and commercialize the Technology within a period that would enable Sento to
compete for meaningful market share. The Board also reviewed the terms and
conditions of Sento management's proposal for development of the Technology.
Following further discussions and refinement of the proposal, including
conversations with Alliant Partners, prospective capital funding sources and
strategic alliance partners, in mid-August 1999, the Board completed its
review of the proposed business transactions and concluded that completion of
the proposed transactions offered the greatest potential to develop and
commercialize the Technology within a reasonable time and that the proposed
series of transactions, if consummated, would be in the best interests of
Sento and its shareholders.
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REASONS FOR THE TRANSACTIONS
The Board believes that the EchoPass Transactions are in the best
interests of Sento and its shareholders. The Board believes that the
Technology represents the leading business technology in the call center
industry and can be leveraged for significant growth in a new category of
customer contact center solutions for small and middle market companies and
emerging and high-growth e-businesses and e-commerce companies. The Board
recognizes, however, that development of the proposed business utilizing the
Technology will require substantial additional investment and that, to date,
Sento has been unable to attract the investment capital required to
aggressively pursue commercialization of the Technology. Based upon
discussions with prospective investors, capital funding sources and industry
partners, the Board believes the consummation of the EchoPass Transactions
will enable EchoPass to attract financing and strategic alliance
opportunities that are not presently available to Sento. For example, the
Board believes that the willingness of Genesys to provide $1,000,000 in cash
and a favorable license to use the Genesys Internet Suite solely in exchange
for shares of EchoPass Preferred is a significant financing and strategic
alliance opportunity that is available to EchoPass, but would not be
available to Sento.
The Board has also concluded that the consummation of the EchoPass
Transactions will offer Sento and its shareholders a greater opportunity to
benefit from the development of the Technology than the opportunities that
are presently available to Sento. The Board believes the EchoPass
Transactions represent an opportunity to rapidly develop the Technology in an
effort to enter the market prior to the introduction of competing
technologies, products and services by competitors with greater resources
than Sento or EchoPass. The Board believes the consummation of the EchoPass
Transactions will enable EchoPass to benefit from "first-mover" advantages
and develop and market the Technology more rapidly than Sento. The Board
believes rapid development of the Technology may enable EchoPass to establish
the Technology as an industry standard for voice and electronic
interaction-enabled customer service solutions. In such an event, the Board
believes the value of the EchoPass Preferred to be received by Sento in the
EchoPass transactions will exceed the anticipated value of the Technology if
developed at the slower pace that Sento's current financial resources will
permit. More importantly, however, the Board believes that the rapid
establishment of the Technology as an industry standard will significantly
strengthen Sento's competitive position in the technical support arena, and
that the failure to develop and commercialize the Technology in advance of
competing products and services may influence existing and potential Sento
customers to conduct business with competitors whose products and services
are perceived as offering greater functionality than those incorporated in
Sento's eCustomer Contact Centers.
The Board also believes the consummation of the EchoPass
Transactions will create a significant incentive for the existing and
proposed management and employees of EchoPass to rapidly develop and market
the Technology and that, because the operations of EchoPass will initially be
focused primarily on developing and marketing the Technology, EchoPass will
be able to commercialize the potential benefits of the Technology more
rapidly than Sento. Accordingly, the Board has concluded that the
consummation of the EchoPass Transactions represents the best opportunity to
capitalize on the Technology and provide to Sento's shareholders the benefits
available therefrom.
OPERATIONS FOLLOWING THE TRANSACTIONS
SENTO. Following the consummation of the EchoPass Transactions, if
approved at the Special Meeting, Sento will continue to conduct its existing
business of providing IT services consisting primarily of providing technical
support and helpdesk functions and assessing and training in-house IT
personnel through both on-site training and distance learning. Sento will no
longer own the Technology, but will utilize the Technology pursuant to the
Services Agreement. The Board anticipates that several existing employees of
Sento, including Arthur F. Coombs, III, Sento's President and Chief Executive
Officer, will resign as employees of Sento and will become employees of
EchoPass upon the consummation of the EchoPass Transactions. Accordingly, the
consummation of the EchoPass Transactions will likely require Sento to
identify and hire new executive personnel to fill the vacancies resulting
from these resignations. Sento will continue to hold the shares of EchoPass
Preferred and will account for its ownership as an equity investment in
EchoPass. See "--Accounting Matters." Sento recognizes that the shares of
EchoPass Preferred to be issued to Sento in the EchoPass Transactions could
be distributed to Sento shareholders in a future transaction, subject to
applicable federal and state securities laws, but has no present intention to
do so.
ECHOPASS. If the EchoPass Transactions are approved and consummated,
EchoPass will commence its proposed business operations of developing, marketing
and supporting customer service infrastructure solutions. EchoPass intends to
provide e-businesses with telephone and electronic customer interaction and
management
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capabilities through application hosting and customer communication
connectivity systems. Together, these services will be designed to provide
EchoPass customers with the capabilities to interact with their customers
over the telephone and through electronic interactions media, including
email, Web text chat, Web callbacks, Web call-throughs, co-browsing, faxes
and voicemail. EchoPass also intends to provide customer interaction
management functionality to help businesses manage customer data and history.
EchoPass' services will also be designed to enable businesses to benefit from
the functionality of an eCustomer Contact Center environment without
installing, configuring, maintaining or updating the applications and
connectivity systems. EchoPass anticipates that these services will provide
high performance, scalability, functionality and an Internet-enabled system
that businesses need to deliver leading customer service operations and to
effectively compete in today's highly competitive and dynamic Internet
environment.
OPINION OF ALLIANT PARTNERS
Sento retained Alliant Partners to deliver the Alliant Opinion in
connection with the EchoPass Transactions, as more particularly described in the
Contribution Agreement. Alliant Partners was selected by the Board to provide
the Alliant Opinion based on Alliant Partners' qualifications, expertise and
reputation.
THE FULL TEXT OF THE PRELIMINARY VERSION OF THE ALLIANT OPINION DATED
SEPTEMBER 28, 1999, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF THE
REVIEW UNDERTAKEN BY ALLIANT PARTNERS IN RENDERING THE ALLIANT OPINION, IS
ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT. SHAREHOLDERS ARE URGED TO, AND
SHOULD, READ THE ALLIANT PARTNERS OPINION CAREFULLY AND IN ITS ENTIRETY.
Sento engaged Alliant Partners to render an opinion as to the fairness,
from a financial point of view, to the shareholders of Sento of the proposed
contribution of the Technology and the Assets by Sento to EchoPass in exchange
for 4,000,000 shares of EchoPass Preferred and the Promissory Note. The Alliant
Opinion addresses only the fairness of Sento's contribution of the Technology
and the Assets and does not express any views on any other terms of the EchoPass
Transactions. Specifically, the Alliant Opinion does not address Sento's
underlying business decision to effect the EchoPass Transactions.
On September 28, 1999, Alliant Partners rendered a preliminary version
of the Alliant Opinion to the Board that, as of such date, the consideration to
be received for the Technology and the Assets contributed by Sento to EchoPass
pursuant to the Contribution Agreement was fair to Sento's shareholders from a
financial point of view. No limitations were placed on Alliant Partners by the
Board with respect to the investigation made or the procedures followed in
preparing and rendering the Alliant Opinion.
In summary, Alliant Partners, in arriving at the Alliant Opinion, among
other things, reviewed and analyzed available financial statements, financial
projections and other information of Sento and EchoPass, respectively, and
discussed the transactions with Sento management and other associated parties.
Alliant Partners also analyzed the value of companies that are comparable to
Sento and performed such other analyses and considered such other factors as it
deemed appropriate. In arriving at the Alliant Opinion, Alliant Partners assumed
and relied upon, without independent verification, the accuracy and completeness
of the information provided to it for the purposes of the Alliant Opinion. The
Alliant Opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to it as of, September 28,
1999.
SUMMARY OF ANALYSES PERFORMED. As part of its investment banking
business, Alliant Partners is regularly engaged in the valuation of businesses
(including business units) and their securities in connection with mergers and
acquisitions, corporate restructurings, corporate partnerings, strategic
alliances and valuations for corporate or other purposes. Set forth below is a
brief summary of selected analyses presented by Alliant Partners to the Board on
September 28, 1999 in connection with its presentation on, and opinion of
Sento's contribution of the Technology and the Assets as of, such date.
Alliant Partners utilized several different methods it deemed
appropriate to develop separate value ranges for both (i) the assets to be
contributed by Sento to EchoPass; and (ii) the consideration to be received by
Sento in exchange. Details of the methodologies used by Alliant Partners for
each valuation method are discussed below.
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VALUATION OF CONTRIBUTED ASSETS. The assets to be contributed by Sento
to EchoPass consist of the Technology and the Assets. As detailed
below, Alliant Partners utilized three different valuation methods to
develop three separate indications of the value of the Technology.
Different weightings were assigned to the three methodologies, because
each method has a different relevance in determining value. Based on
these weightings, the resulting value of the Technology is $0.6 million
to $0.7 million. Alliant Partners did not perform a separate valuation
of the Assets; the value of the Assets is assumed to equal their book
value of $1,100,000 as of a current date. In sum, Alliant Partners
found the value of all assets contributed by Sento to be $1.7 million
to $1.8 million, which is below the valuation range of $7.8 million to
$9.3 million for the consideration to be received by Sento (as
discussed below).
- Cost Method. The cost method of valuation provides an
indication of the replacement value of the Technology. Using
Sento management projections, Alliant Partners estimated the
total costs incurred by Sento for all IT services from April
1, 1998 through August 31, 1999. Management also estimated
that approximately 80% of these total costs were related to
development of the Technology. Alliant Partners found the
resulting estimated cost of developing the Technology to be a
marginally useful indicator of the Technology's value.
- Market Method. Alliant Partners reviewed and compared selected
historical and projected financial information and ratios of
Sento to corresponding financial information and ratios of
publicly-traded guideline companies (the "Sento Guideline
Companies") that Alliant Partners deemed to be comparable in
many respects to Sento's recently restructured core business
(Sento's core business having been restructured from VAR to IT
training and services and technical support during the period
starting in 1997 and ending in June 1999). The value, based on
comparable companies, that was derived for Sento's core
business was subtracted from Sento's market value to obtain
the implied market value for the Technology. The Sento
Guideline Companies in the IT training, IT services and/or
technical support industries included: ARIS Corp., CBT Group,
Command Systems, Computer Learning Centers, Computer
Outsourcing Services, Learning Tree International, National
TechTeam, Sykes Enterprises and TeleTech Holdings. Although
the market method of valuation is relevant, the value of the
Technology derived from this method has a large range of
uncertainty due to the recent change in Sento's core business
model, which makes it difficult to determine the financial
performance of such core business on a preceding whole year's
basis. Accordingly, Alliant Partners applied the Sento
Guideline Companies' average multiple of revenue for the last
twelve months of 1.2 to an estimated annualized revenue for
Sento based on its revenue for the quarter ended June 30,
1999.
- DCF Analysis. Sento provided Alliant Partners with a
projection of cash flows for EchoPass as a unit of Sento for
all quarters through March 2001. This projection and a
terminal value for EchoPass were discounted to provide a net
present value for EchoPass as part of Sento. The discount
factor was developed using a build-up method, which adds the
risk-free interest rate on long-term government bonds, the
premium on common stock, the premium on small cap stocks and
investor-specific risk premiums for EchoPass as part of Sento.
This build-up method provided a discount factor of 30%. The
terminal value was developed by using the Gordon Growth Model,
assuming a growth rate of 15% and using the 30% discount rate.
Alliant Partners believes the discounted cash flow method
provides the most relevant indicator of value for the
Technology, since it represents the value to be foregone by
Sento in contributing the Technology to EchoPass.
VALUATION OF CONSIDERATION RECEIVED BY SENTO. The consideration to be
received by Sento includes 4,000,000 shares of EchoPass Preferred and
the Promissory Note for $1,100,000. In order to determine the value of
the consideration to be received by Sento for its ownership in EchoPass
following consummation of the EchoPass Transactions, Alliant Partners
utilized five different methods to develop five separate indications of
value for EchoPass. These five value indications provide values for
EchoPass BEFORE an investment in EchoPass by Genesys. It is anticipated
that Genesys will provide a total contribution to EchoPass of $7
million ($6 million for a software license and $1 million in cash for
3,500,000 of the EchoPass Preferred). As detailed below, to determine
the value of EchoPass, prior to the investment by Genesys ("pre-Genesys
investment" or "pre-money"), different weightings were assigned to the
five methodologies to reflect the relative value of information
provided by each method. Alliant Partners then determined a range of
value of $6.7 million to $8.2 million for Sento's ownership in EchoPass
(pre-Genesys investment) by applying Sento's expected effective
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pre-Genesys investment percentage ownership in EchoPass of 86%. This
was added to the $1,100,000 value ascribed to the Promissory Note. As
noted above, the resulting range of value from $7.8 million to $9.3
million for the total consideration to be received by Sento (including
the Promissory Note) is above the valuation range of $1.7 million to
$1.8 million for the assets to be contributed.
- Public Comparables. Alliant Partners reviewed and compared
selected historical and projected financial information and
ratios of EchoPass to corresponding financial information and
ratios of publicly-traded guideline companies that Alliant
Partners deemed to be comparable in many respects to EchoPass.
The companies were selected because they are application
service providers ("ASPs"); internet service providers
("ISPs"); e-commerce companies; and/or companies providing
web-hosted IT services or software. The guideline companies
used by Alliant Partners included: BrightStar Information
Technology, Critical Path, eGain Communications, Interliant,
Kana Communications, Siebel Systems and USinternetworking.
Since EchoPass and many of the comparable companies are
currently in a loss position and are essentially
"pre-revenue," financial ratios related to employee headcount
were used as a "proxy" for the stage of development and value
of EchoPass. Alliant Partners determined that the average
adjusted market capitalization multiple of employee headcount
for the guideline companies was $4.2 million. Alliant Partners
discounted this valuation multiple by an aggregate total of
80% to adjust for significant differences in size and
capabilities between the comparable companies and EchoPass at
its current stage. The adjusted multiple of 0.8 was then
applied to the projected number of EchoPass employees to be
employed immediately upon start of operations by EchoPass
(assumed to be 20 employees) to reach a value of EchoPass (on
a pre-Genesys investment or pre-money basis).
- Related Transactions (Merger &Acquisition Transactions and
Venture Capital Financings). Alliant Partners compared the
proposed EchoPass Transactions with selected transactions that
reflect the actual prices that venture capital or other firms
paid for equity investments in companies similar to EchoPass.
The companies were selected because they were ASPs; ISPs;
e-commerce companies; and/or companies providing web-hosted IT
services or software at the time of the selected transactions.
The related merger and acquisition transactions that were
analyzed included: the acquisition of KIVEX.com by Allegiance
Telecom; the acquisition of General Magic by At Home Corp.;
the acquisition of Altocom by Broadcom; the acquisition of
Meteor Communications by Campbell Scientific; the acquisition
of InTouch Systems by Comverse Technology; and the acquisition
of CyberDesic Communications by RMI.NET. The related venture
capital transactions that were analyzed included financings
of: ACME Software, LivePerson, webMethods, Bigstep.com,
Comergent, EC Direct, eGain, Remarq and BT Squared
Technologies. Again, since EchoPass is, and many of the
companies used in these two approaches were, in loss positions
and essentially "pre-revenue" at the time of acquisition or
venture capital financing, ratios related to employee
headcount were used as a "proxy" for the stage of development
and value of EchoPass. Alliant Partners' analyses indicated
that the selected merger and acquisition transactions had an
average acquisition price to employee headcount multiple of
$0.2 million, and the selected venture capital financings had
an average pre-money valuation to employee headcount multiple
of $0.26 million. These two related transactions methods are
considered to be excellent indicators of value for EchoPass on
a pre-Genesys investment or pre-money basis since they reflect
actual recent prices paid for equity in similar companies and
in many cases for companies at a similar stage of development
as EchoPass.
- DCF Analysis. Sento provided Alliant Partners with a
projection of cash flows for EchoPass as a stand-alone entity
through the year 2003. These projections and a terminal value
for EchoPass' projected cash flows after 2003 were discounted
to provide a net present value for EchoPass, on a pre-Genesys
investment basis. The discount factor was developed using a
build-up method, which adds the risk free interest rate on
long-term government bonds, the premium on common stock, the
premium on small cap stocks and investor specific risk
premiums for EchoPass as a stand-alone entity. This build-up
method provided a discount factor of 52%. The terminal value
was developed by using the Gordon Growth Model, assuming a
growth rate of 40% and using the 52% discount rate. This
method is quite sensitive to assumptions of growth rates and
discount rates.
- Genesys Equity Purchase. Alliant Partners determined the
pre-Genesys investment value of EchoPass based on (i) a
projected total of 8,500,000 shares of EchoPass Preferred
issued and outstanding (prior to
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the exercise of any stock options); (ii) the price per
share of $2.00 that Genesys is expected to pay for
1,000,000 shares of the EchoPass Preferred; and (iii) the
anticipated total Genesys contribution of $7 million.
ACCRETION/DILUTION FOR SENTO'S EPS. Alliant Partners analyzed the
impact of Sento's contribution of the Technology and the Assets on Sento's
earnings per share after the consummation of the EchoPass Transactions
(following consummation of the Genesys investment and assuming the issuance of
options to acquire 3,300,000 shares of EchoPass Common Stock). Based on the
proposed accounting treatment and the projected financial information provided
to Alliant Partners, Alliant Partners has concluded that the contribution of the
Technology and the Assets will have an accretive effect on Sento's earnings per
share.
INTERESTS OF ALLIANT PARTNERS. For acting as Sento's financial advisor
for the EchoPass Transactions, including delivery of the Fairness Opinion,
Alliant Partners received $50,000.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendation of the Board with respect to the
proposal to approve the Contribution Agreement and the EchoPass Transactions,
shareholders should be aware that certain members of the Board have interests
which may present them with conflicts of interest in connection with the
EchoPass Transactions. The Board was aware of those interests and considered
them, among other matters, in approving the Contribution Agreement and the
EchoPass Transactions. The Board's recognition of those interests was a factor
in its determination to call the Special Meeting and submit to Sento
shareholders the proposal to approve the Contribution Agreement and the EchoPass
Transactions.
Immediately following the consummation of the EchoPass Transactions, if
consummated, certain existing directors, officers and employees of Sento will
own 915,000 shares of EchoPass Common Stock and exercisable options to acquire
an additional 1,755,000 shares of EchoPass Common Stock, representing an
aggregate of approximately 26%, of the issued and outstanding shares of EchoPass
Common Stock as of such date (on a fully-diluted basis, after giving effect to
the exercise of such options and the conversion of the shares of EchoPass
Preferred to be issued to Sento and Genesys in the EchoPass Transactions). Votes
by shareholders of Sento who are also directors, officers or shareholders of
EchoPass will not be counted toward approval of the EchoPass Transactions. See
"The Special Meeting--Vote Required."
The Board also believes Sento's shareholders should recognize that
Arthur F. Coombs, III, President, Chief Executive Officer and a director of
Sento, Gary B. Filler, Acting Chief Financial Officer and a director of Sento,
and Kieth E. Sorensen, Chairman of the Board of Sento, are currently serving as
directors of EchoPass and Mr. Coombs currently serves as Chief Executive Officer
of EchoPass. Furthermore, the Board anticipates that if the EchoPass
Transactions are approved and consummated, Mr. Coombs will resign as President,
Chief Executive Officer and a director of Sento and will become a full-time
employee of EchoPass. By virtue of these relationships, Messrs. Coombs, Filler
and Sorenson have interests which present them with conflicts of interest in
approving and recommending the EchoPass Transactions.
In addition, the Board believes Sento shareholders should also be aware
that Genesys owns 162,502 shares of Sento Common Stock and exercisable warrants
to acquire an additional 81,251 shares of Sento Common Stock, representing an
aggregate of approximately 3% of the outstanding shares of Sento Common Stock,
and has indicated that it intends to vote such shares in favor of the proposal
to approve the EchoPass Transactions.
In addition to the foregoing interests of certain members of the Board,
Sento's Articles of Incorporation and Bylaws provide that it will indemnify its
directors and officers as permitted by the Utah Revised Business Corporation Act
(the "Act"). Under the Act, Sento may indemnify any person acting in his or her
capacity as a director or officer of Sento who is made a party to any suit or
proceeding if the person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to Sento's best interests. Sento may
indemnify the person in the case of a criminal proceeding if he or she had no
reasonable cause to believe his or her conduct was unlawful. Sento may not
indemnify any director or officer, however, where the claim or liability arose
out of that person's own negligence or willful misconduct, or if that person is
ultimately adjudged in the proceeding to be liable to Sento or liable on the
basis that he or she derived an improper personal benefit.
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REPRESENTATIONS AND COVENANTS
Pursuant to the Contribution Agreement, Sento has agreed to contribute
the Technology to EchoPass in exchange for 4,000,000 shares of EchoPass
Preferred and to transfer to EchoPass the Assets in exchange for EchoPass'
delivery of a secured promissory note in the original principal amount of
approximately $1,100,000. The Contribution Agreement contains limited
representations or warranties regarding the Assets and the Technology, but
provides no representations or warranties with regard to the condition or value
of the Technology or the Assets. Additionally, under the Contribution Agreement,
Sento and EchoPass have agreed that EchoPass will assume the liabilities
relating to the Technology and the Assets from and after the effective time of
the Contribution Agreement, and that Sento and EchoPass will indemnify one
another with respect to certain losses relating to the Contribution Agreement,
the Technology and the Assets.
CONDITIONS TO THE TRANSACTIONS
In addition to the requirement that the requisite approval of the
shareholders of Sento be obtained, consummation of the EchoPass Transactions is
subject to a number of other conditions that, if not satisfied or waived, may
cause the EchoPass Transactions not to be consummated and the Contribution
Agreement to be terminated. Each party's obligation to consummate the EchoPass
Transactions is conditioned on, among other things, (i) receipt by Sento of the
Alliant Opinion substantially in the form of the preliminary opinion of Alliant
Partners attached as Appendix A to this Proxy Statement and in a form acceptable
to the Board and (ii) the simultaneous closing of the transactions contemplated
by the Genesys License Agreement and the Genesys Stock Purchase Agreement.
Further, if EchoPass does not raise $6,000,000 in equity funding (including the
$1,000,000 to be raised from the sale of 500,000 shares of EchoPass Preferred
pursuant to the to Genesys Stock Purchase Agreement) within 120 days of the
closing of the EchoPass Transactions (the "Funding"), Sento may elect to rescind
the Contribution Agreement and the EchoPass Transactions. Even if the full
amount of the Funding is timely raised, Sento may nevertheless elect to rescind
the EchoPass Transactions if (i) the per share price of any shares of EchoPass
Common Stock sold in the Funding is less than $2.00 per share, or (ii) if
preferred stock is sold, such preferred stock is convertible for shares of
EchoPass Common Stock at a rate that is not less than one share of preferred
stock for each share of EchoPass Common Stock.
RELATED AGREEMENTS
SERVICES AGREEMENT. Pursuant to the Contribution Agreement, EchoPass
and Sento have agreed to enter into the Services Agreement, by which EchoPass
will provide to Sento the IT services necessary to enable Sento to operate and
develop its existing and future eCustomer Contact Centers. These services will
consist principally of hosted IT services providing integrated communications
solutions and customer management and IT consulting services. EchoPass will also
grant Sento a preferential right to utilize improvements to the Technology. The
Services Agreement will require Sento to pay transaction-based and hourly fees
for services rendered by EchoPass, but will provide that such fees will be at
rates that are no less favorable to Sento than the fees charged by EchoPass for
comparable services provided to other EchoPass customers. The Services Agreement
will require Sento and EchoPass to indemnify one another against certain
liabilities.
PROMISSORY NOTE. Pursuant to the Contribution Agreement, EchoPass has
agreed to execute the Promissory Note in the amount of approximately $1,100,000,
with interest at a rate of 10 1/2% annually, in favor of Sento. The Promissory
Note will be payable in full within 120 days of the closing of the EchoPass
Transactions. In addition, the Promissory Note also provides, among other terms,
that (i) EchoPass may prepay the principal amount of the Promissory Note in
whole or part without penalty; (ii) if EchoPass defaults on its obligations
under the Promissory Note, Sento may, among other remedies, declare the
principal and unpaid interest under the Promissory Note to be due and payable
immediately; and (iii) the full amount of the Promissory Note, together with
accrued interest, shall be accelerated and shall become payable within 15 days
of the completion of the Funding.
SECURITY AGREEMENT. Pursuant to the Contribution Agreement, EchoPass
has agreed to enter into a Security Agreement with Sento by which EchoPass will
grant Sento a first position security interest in the Technology and the Assets
as security for EchoPass' obligations under the Promissory Note. In the event of
EchoPass' default in the payment of amounts due under the Promissory Note or
failure to perform any other obligation under the Contribution Agreement or the
Promissory Note, Sento will possess the right to recover all of the Technology
and the Assets.
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FACILITIES AND SERVICES AGREEMENT. Pursuant to the Contribution
Agreement, EchoPass and Sento have agreed to enter into a Facilities and
Services Agreement, under which Sento will permit EchoPass to use approximately
2,400 square feet of office and research and development space located at
Sento's American Fork headquarters and provide accounting and other general and
administrative services to EchoPass.
TERMINATION OR AMENDMENT
The Contribution Agreement may be terminated or amended only with the
written consent of Sento and EchoPass or as a result of the failure of any
condition to the closing obligations of one or both of the parties.
GENESYS TRANSACTIONS
GENESYS LICENSE AGREEMENT. The Genesys License Agreement will provide
for EchoPass' use of the Genesys Internet Suite in the development of EchoPass'
business operations. The Genesys License Agreement, which will offer EchoPass
terms that are more favorable than the pricing structure currently available to
Sento, will enable EchoPass to deliver its services to up to 12,000 agent users
of its customers, with an option to acquire additional license rights for
additional blocks of 500 agent users. The up-front license fee required under
the Genesys License Agreement will be paid through the issuance of 3,000,000
shares of EchoPass Preferred. Quarterly maintenance fees required under the
Genesys License Agreement will be paid by EchoPass in cash as they are incurred.
GENESYS STOCK PURCHASE AGREEMENT. The Genesys Stock Purchase Agreement
will provide for the sale by EchoPass to Genesys of 500,000 shares of EchoPass
Preferred to Genesys in exchange for $1,000,000. The Genesys Stock Purchase
Agreement contains additional terms and conditions that are customary for early
stage venture funding transactions. The Genesys Stock Purchase Agreement will
also require that $900,000 of the proceeds of the sale of the EchoPass Preferred
be held in escrow until EchoPass raises at least $5,000,000 in additional equity
funding subsequent to the closing of the EchoPass Transactions.
CLOSING
It is anticipated that, assuming all conditions are met, the EchoPass
Transactions will occur and the closing will be held on or about December 16,
1999.
ACCOUNTING MATTERS
Sento intends to account for the EchoPass Transactions, if consummated,
as an equity investment under generally accepted accounting principles. Sento
intends to invite its independent public accountants for the current year and
Sento's most recently completed fiscal year to attend the Special Meeting. If in
attendance at the Special Meeting, representatives of the accountants will have
an opportunity to make a statement if they desire to do so and will be available
to respond to appropriate questions.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
In considering whether to vote for the proposal to approve, authorize,
adopt and ratify the Contribution Agreement and approve the EchoPass
Transactions, Sento shareholders should review and consider the unaudited pro
forma financial information giving effect to the EchoPass Transactions set forth
on pages P-1 through P-4 of this proxy statement.
FEES AND EXPENSES
All costs and expenses incurred in connection with the Contribution
Agreement and the EchoPass Transactions and the preparation and filing of this
Proxy Statement, including without limitation, fees of advisors and counsel to
Sento and EchoPass, will be paid by Sento. In the event that the EchoPass
Transactions are consummated, EchoPass will reimburse Sento for all such costs
and expenses to the extent such costs and expenses exceed $50,000. Sento
presently anticipates that the transaction costs and expenses associated with
the EchoPass Transactions, consisting primarily of the fee to be paid to Alliant
Partners for rendering its fairness opinion, legal fees, accounting fees,
printing expenses, filing fees and other miscellaneous expenses, will total
approximately $150,000.
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REGULATORY REQUIREMENTS
It is the understanding of Sento management that neither the
Contribution Agreement nor the EchoPass Transactions are subject to the review,
approval or other requirements of any regulatory agency.
DISSENTER'S APPRAISAL RIGHTS
The holders of Sento Common Stock will not have dissenter's appraisal
rights with respect to the EchoPass Transactions. The EchoPass Transactions do
not constitute a merger, consolidation or sale of all, or substantially all, of
the assets and property of Sento not in the ordinary course of business,
pursuant to which dissenter's appraisal rights are applicable under the Utah
Revised Business Corporation Act.
BUSINESS OF SENTO
Sento 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 helpdesk functions;
and
- assessing and training in-house IT staff both on-site and
through distance learning, including CBT methods.
Sento 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, Sento completed a share exchange with an existing public
company. In November 1996, the Common Stock was registered on the Nasdaq Stock
Market (Small Cap Market) (Symbol: SNTO). In 1998, Sento changed its name to
Sento Corporation.
In 1997 and 1998, Sento undertook a strategic transition to focus its
efforts on IT training and technical support. In 1998, Sento constructed its
eCustomer Contact Center which is now operational and is anticipated to be fully
staffed during the 2000 fiscal year. Sento sold certain operations, comprising
its VAR business, in March and June 1999. See "--Background."
BACKGROUND
Historically, Sento's operations consisted almost entirely of a VAR
business oriented to purchases of high-end third-party hardware and software
products. Sento generated revenues almost exclusively from sales and
distribution of third party hardware and software products. In 1997, Sento began
a strategic transition using its technical core competencies to offer IT
outsourcing services such as helpdesk, 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. Sento divested its VAR business in March
and June 1999. Sento has also refocused its training activities from classroom
style to corporate custom and distance learning/CBT. Sento's training services
are provided through its wholly-owned subsidiary Sento Training Corporation, a
Utah corporation ("Sento Training").
Sento's marketing efforts focus primarily on middle market to
enterprise level companies, 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 eCustomer Contact
Center is located in its 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., being referred to herein as "Sento Australia"), and Astron
Incorporated in Orem, Utah.
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INDUSTRY
The IT industry encompasses a broad spectrum of technology and services
used in the processing, distribution and management of information. This
spectrum includes:
- a user's desktop information system, consisting principally of
computer hardware, software and associated training;
- back office services, including existing and future IT systems
infrastructure; and
- 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 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 is rapidly
gaining favor among many organizations.
Sento 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. Sento believes it can pursue
its business strategy by implementing the following strategic initiatives:
DEVELOP AND MARKET LEADING-EDGE IT SOLUTIONS. Sento's services and
products are split into two strategic business segments: comprehensive product
support and helpdesk services available through Sento's existing and future
eCustomer Contact Centers and customized and general system and applications
training available through Sento Training. Sento's products and services help
businesses provide and improve Internet and telephone-based customer service.
Sento Training provides students with high-quality IT training that has been
designed to incorporate leading-edge delivery systems, measurement tools and
training practices.
INTERNAL GROWTH AND ACQUISITIONS. Sento intends to expand its
operations by opening or acquiring additional call centers and training offices
in strategic locations in the U.S. and foreign countries. Management believes
that if Sento successfully identifies and consummates acquisitions of additional
offices, it will enhance its ability to offer its multinational clients a
comprehensive package of integrated IT services. In addition to geographic
expansion, Sento will seek to identify and acquire companies that provide
complementary technical support and training services, and, as a result, extend
the breadth of its service offerings.
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<PAGE>
ATTRACT AND RETAIN HIGHLY SKILLED IT PROFESSIONALS. Sento's success
depends on its ability to attract, train, motivate and retain highly skilled IT
professionals. Management believes Sento's dual service approach (technical
support 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 helpdesk 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. Sento 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 Sento. Sento provides its
employees the chance to work with leading-edge technologies, in a stimulating,
flexible, entrepreneurial environment with ongoing technical training.
CAPITALIZE ON TECHNOLOGY. Sento has completed its construction of a new
generation technical support center in American Fork, Utah. Sento has integrated
technology into the support center from divergent companies on the cutting-edge
of the IT and computing industries. The support center goes beyond a traditional
telephone call center by using leading-edge technology to establish Sento's
eCustomer Contact Center. A customer interaction can be answered through
multiple media types, including voice and fax communication and electronic
customer interactions over the Internet (e-mail, Web text chat, Web
call-throughs, Web collaboration, Web call-back interactions and co-browsing)
with the same speed and efficiency as traditional telephone calls. The advent of
the Internet and the proliferation of electronic customer interactions are
changing the manner in which businesses communicate with their customers and
Sento's eCustomer Contact Center positions Sento to meet these emerging
opportunities.
SERVICES
Sento'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 two strategic categories:
technical support and training 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, local area networks ("LAN"), multi-user systems
and Computer-Telephony Integration ("CTI") and Integrated Voice Response ("IVR")
technologies, to provide timely technical support to its customers, enabling
those customers to focus increased attention on their core business operations.
CTI combines data with voice systems in order to enhance telephone services. For
example, automatic number identification ("ANI") allows a caller's records to be
retrieved from the database while the call is routed to the appropriate party.
IVR is an automated telephone answering system that responds with a voice menu
and allows the user to make choices and enter information via the user's
telephone keypad. IVR systems are used in call centers as a replacement for
human switchboard operators. IVR systems may also integrate database access and
fax responses.
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 (support related to
product installation, features and configuration) to end users and
manufacturers, combining hardware and network support with application
support for proprietary and off-the-shelf programs.
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<PAGE>
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.
INTERNATIONAL OPERATIONS. In July 1997, Sento acquired substantially
all of the assets of ASI, including the OpenAviator suite of UNIX-based
management and performance monitoring utilities. Shortly thereafter, Sento sold
the OpenAviator product suite to BMC Software, Inc. ("BMC") and agreed to
provide related product support services during a transition period which
expired on December 31, 1998. Sento contributed the remainder of the ASI assets
to Sento Australia, which acts as a sales agent 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.
ACQUISITIONS AND DIVESTITURES
As a result of Sento's transition to offering IT outsourcing services
rather than pursuing its historical VAR business, Sento has sold its VAR
business and related assets in a series of divestiture transactions completed
during the period between December 31, 1998 and June 30, 1999. These
transactions consisted principally of:
- the sale of Sento's remaining VAR business and related assets
to an unrelated party in June 1999 in exchange for an initial
cash payment of $50,000 and contingent payments based on
revenues generated from the divested business and assets,
which contingent payments will not exceed $350,000;
- the sale of all of the stock of Sento UK Limited (acquired in
October 1997 for 31,750 shares of Sento Common Stock) in
exchange for the return of 43,750 shares of Sento Common Stock
issued to the principal and certain employees of Sento UK
Limited and an agreement to pay Sento a royalty equal to two
percent of net revenues generated by Sento UK Limited during
the five-year period commencing April 1, 1999;
- 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 Sento 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;
- the sale of 67% of the stock of Dewpoint Distributed
Solutions, Inc. ("Dewpoint") (representing Sento'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 Sento and bearing
interest at the rate of six percent (6%) per annum; and
- 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 Sento 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.
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<PAGE>
In October 1998, Sento 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 Sento 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, Sento 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. Sento also
determined that the anticipated expenses of the acquired business would be
higher than anticipated at the time of acquisition. Sento has, as of March 31,
1999, entered into an agreement with the successor-in-interest to Functional
Software, whereby Sento sold all of the equipment and intellectual property
acquired from Functional Software in exchange for the return to Sento of 100,000
shares of Sento Common Stock.
In August 1998, 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, Sento began withholding royalty payments, based upon
Sento's working capital position and disagreements with the principals of ESI
regarding certain representations and obligations contained in the acquisition
agreement. In July 1999, Sento, Sento Training and ESI entered into a Settlement
and Release Agreement pursuant to which Sento agreed to issue to ESI 169,097
shares of Common Stock in full satisfaction of the obligations of Sento and
Sento Training to ESI. In addition, the parties released and discharged any
claims they had against each other, whether arising under the original
acquisition agreement or otherwise.
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.
Sento 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 Sento. Firms not now
in direct competition with Sento 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 Sento's strategy of delivering integrated IT solutions, if
successfully implemented, may constitute a competitive advantage.
As Sento has completed its transition to the delivery of outsourced IT
services, it has encountered a new range of competitors within each of the
technical support and training industry segments. Each of the two industry
segments exhibits unique characteristics and is rapidly growing and highly
competitive. In the IT technical support industry Sento also faces significant
and diverse competition from a broad spectrum of international, national,
regional and local enterprises. 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 competitors include major sole source IT services companies
such as Andersen 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 two market segments in which Sento competes:
<TABLE>
<CAPTION>
COMPANY STOCK SYMBOL FY END TTM REV ($MIL) MARKET SEGMENT*
- ------- ------------ ------ -------------- ---------------
<S> <C> <C> <C> <C>
Aris Corporation ARSC Dec 115 T
Sykes Enterprises, Inc. SYKE Dec 469 TS
CBT CBTSY Dec 162 T
Learning Tree Int'l LTRE Sep 187 T
Computer Learning CLCX Jan 145 T
National Tech Team TEAM Dec 117 TS
Teletech Holdings TTEC Dec 369 TS
Stream --- Dec 200 TS
</TABLE>
*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.
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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 Sento'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 Sento's
revenues, and, therefore, it is anticipated that a small number of customers
will account for the majority of Sento's revenues. Consistent with industry
standards, Sento'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 Sento.
PATENTS AND PROPRIETARY TECHNOLOGY
Sento does not own any patents nor does it have any patent applications
relating to its products. Sento 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.
Sento is also seeking tradename and trademark protection for certain of its
names and marks. Accordingly, Sento's management does not believe that any
particular patent or group of patents, copyrights, trademarks, or tradenames is
of material importance to the business of Sento as a whole.
RESEARCH AND DEVELOPMENT
Sento competes in an industry that is characterized by rapid
technological change. Historically, Sento has not incurred significant expenses
for research and development.
EMPLOYEES
As of October 31, 1999, Sento had approximately 548 total employees, of
which approximately 494 were full-time employees and approximately 54 were
part-time employees. Competition for qualified personnel in the IT industry is
intense. The future success and growth of Sento will depend in large measure
upon its ability to attract and retain qualified management and technical
personnel. There can be no assurance that Sento 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 Sento to attract and retain key
management and technical personnel and qualified personnel required to continue
Sento's operations could have a material adverse impact on Sento. None of
Sento's employees is represented by a labor organization with respect to his or
her employment with Sento. Sento has never had a work stoppage, and Sento
considers its employee relations satisfactory.
PROPRIETARY MARKS
Sento utilizes many third-party products represented by registered
or common law trademarks, including the following trademarks: (1)
DEC-Registered Trademark-, VMS-Registered Trademark-, OpenVMS-TM-,
VAX-Registered Trademark- and Alpha-TM- which are trademarks of Digital
Equipment Corporation; (2) Microsoft-Registered Trademark-, MS-DOS-Registered
Trademark-, DOS-TM-, Windows-Registered Trademark-, Windows NT-Registered
Trademark- and Windows 95-TM- which are trademarks of Microsoft Corporation;
(3) OS/2-TM- which is a trademark of International Business Machines
Corporation; and (4) Intel-Registered Trademark-which is a registered
trademark of Intel Corporation. This Proxy Statement also contains trademarks
of other companies.
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FACILITIES
The headquarters and existing call center of Sento are located at 808
East Utah Valley Drive, American Fork, Utah. Sento leases approximately 40,000
square feet of space used for its 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
Sento, if achieved, will necessitate acquisition of additional office space
during fiscal year 2000. Sento also leases a 4,100 square foot facility in
Sydney, Australia and a 2,600 square foot facility in Orem, Utah.
MANAGEMENT OF SENTO
The following table sets forth certain information with respect to the
executive officers and directors of Sento.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kieth E. Sorenson 50 Chairman of the Board
Arthur F. Coombs, III 38 President, Chief Executive Officer and Director
Gary B. Filler 58 Acting Chief Financial Officer and Director
Keith D. Barr 45 Chief Information Officer
Stanley J. Cutler 57 Corporate Controller and Corporate Secretary
Ronnie Johansen 38 Vice President of Operations
Kim A. Cooper 48 Director
Lyndon L. Ricks 43 Director
</TABLE>
KIETH E. SORENSON has served as Chairman of the Board of Sento since
December 1, 1997. Mr. Sorenson served as President and Chief Executive Officer
of Sento from December 1, 1997 to April 22, 1999. Prior to joining Sento, Mr.
Sorenson was the founder of Truevision, Inc. (formerly RasterOps), a
publicly-traded multi-media, graphics and video company. From 1993 to 1997, he
was a managing partner of Sorenson, Thomas & Co. and President, CEO and Chairman
of Truevision, Inc., of which he continued to serve as a director until January
1999. From 1979 to 1987, he was employed by Ramtek, Inc., a Silicon Valley
pioneer in computer graphics as Vice President of Engineering and Product
Marketing. He is also currently the owner of Avtronix, a private aviation
electronics manufacturing company, and a director of Sumeria, a developer of
CD-ROM titles.
ARTHUR F. COOMBS, III has served as President, Chief Executive Officer
and a director of Sento since April 22, 1999. From March 1998 until his
appointment to his current position, Mr. Coombs served as Executive Vice
President of Sento and General Manager of Sento Technical Services. Prior to
joining Sento, he served as Managing Director and Vice President over European
Business Development for Sykes Enterprises, Inc., a worldwide provider of
technical support services, for four years. He is an author of outsourcing and
IT technical support methodologies and is a recognized speaker at IT and call
center conferences. Mr. Coombs has worked for high-tech firms such as
Hewlett-Packard, VLSI Research, and Truevision, Inc.
GARY B. FILLER has served as a director of Sento since August 1998 and
as Acting Chief Financial Officer of Sento since March 1999. Prior to joining
Sento, he was Senior Vice President and Chief Financial Officer of Diamond
Multimedia Systems, Inc., a manufacturer of graphics boards and modems, from
January 1995 to September 1996. From June 1994 to January 1995, Mr. Filler was a
business consultant and private investor. From February 1994 until June 1994, he
served as Executive Vice President and Chief Financial Officer of ASK Group,
Inc., a computer systems company. Mr. Filler was Chairman of the Board of
Seagate Technology, Inc., a manufacturer and distributor of data storage,
retrieval and management products ("Seagate"), from September 1991 until October
1992, and was Vice Chairman of the Board of Seagate from October 1990 until
September 1991. Mr. Filler currently serves as Co-Chairman of the Board of
Seagate and as a director of Seagate Software, Inc., a subsidiary of Seagate.
KEITH D. BARR has served as the Chief Information Officer of Sento
since April 1998. He is responsible for the ongoing development of Sento's
information technology strategy and managing its new technical services center.
Prior to joining Sento, Mr. Barr worked for more than four years as the Director
of International IT for Sykes Enterprises, Inc., leading the technical
development from one call center of 35 employees to multiple call centers with
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5,000 employees worldwide. Prior to joining Sykes Enterprises, Inc., Mr. Barr
spent 20 years working for the U.S. Department of Defense and was the Chief of
Information Systems at the military's largest base located in Shreveport,
Louisiana.
STANLEY J. CUTLER has served as Sento's Corporate Controller since
November 1998 and as Corporate Secretary since July 1999. Previously he was
interim Vice President of Finance for Portola Packaging, a manufacturer of
closures for plastic containers with revenues of $200 million, from December
1997 to November 1998. Mr. Cutler served as Controller for Diamond Multimedia
Systems, Inc., a multimedia and computer graphics and modem company, from
January 1995 to November 1997. From July 1994 until December 1994, Mr. Cutler
served as the acting Director of Finance for Media Vision Technology, Inc., a
manufacturer of multimedia products. From February 1994 until July 1994, Mr.
Cutler served as Director of Finance for ASK Group, Inc., a computer systems
company. Mr. Cutler has many years of experience as controller and vice
president of finance for high-tech companies in Silicon Valley. Mr. Cutler is a
certified public accountant and began his career in accounting at Peat Marwick
Mitchell & Co. in San Francisco, California.
RONNIE JOHANSEN has served as the Vice President of Operations of Sento
since September 1999. Prior to his appointment as Vice President of Operations,
Mr. Johansen served as the Vice President of Sento Technical Services from July
1998 until September 1999. Prior to joining Sento, Mr. Johansen served as
Director of Customer Service for Novonyx, Inc., a joint venture formed by
Novell, Inc. and Netscape Inc., from July 1997 until May 1998 and as a Director
of EMEA Technical Services for Novell, Inc. in the Netherlands from November
1994 until July 1996. From August 1996 to July 1998, Mr. Johansen worked as an
independent consultant for several international business ventures. He was also
employed as Director of International Development for WordPerfect Corporation
from 1987 until 1994. Mr. Johansen received a B.A. degree in Russian Studies
from Brigham Young University.
KIM A. COOPER was appointed to serve as a director of Sento in August
1999. Mr. Cooper is currently the Chairman of the Board and Chief Executive
Officer of Digital Harbor International, Inc., a component software developer of
JAVA applications ("Digital Harbor"), positions he has held since founding
Digital Harbor in January 1996. Prior to founding Digital Harbor, Mr. Cooper
served for two years as Vice President of Worldwide Marketing and Business
Development for Novell, Inc., a provider of directory-enabled networking
software. Mr. Cooper also serves as a director of National TechTeam Inc. a
multinational provider of desktop management services to national and
multi-national governmental entities and service organizations and a number of
Fortune 500 companies.
LYNDON L. RICKS was appointed to serve as a director of Sento in
October 1999. Since 1992, Mr. Ricks has been an attorney in private practice
with the law firm of Kruse, Landa & Maycock, L.L.C., located in Salt Lake City,
Utah. Prior to undertaking his present position, Mr. Ricks was engaged in the
private practice of law with two firms located in Salt Lake City, Utah from 1982
until 1993. Mr. Ricks' legal practice is focused on securities compliance,
mergers and acquisitions, corporate matters and general business transactions.
Mr. Ricks served as chairman of the Securities Section of the Utah State Bar
from 1996 to 1997.
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PROPOSED BUSINESS OF ECHOPASS
BACKGROUND
In 1998, Sento's management began to strategically transition Sento
from its traditional VAR business to selling and marketing Sento's own
outsourced technical and training services. As of June 30, 1999, Sento completed
a series of sales of substantially all of its VAR business and assets, and
accelerated its efforts to concentrate and dedicate internal resources on its
outsourced technical and training services. See "Business of Sento--Background."
On March 1, 1998 and April 15, 1998, Arthur F. Coombs, III and Keith D. Barr
joined Sento as Executive Vice President of Sento and General Manager of Sento
Technical Services and Chief Information Officer of Sento, respectively. Both
Mr. Coombs and Mr. Barr came from Sykes Enterprises, Inc., a leading outsourcer
of technical services with revenues exceeding $550 million. Messrs. Coombs and
Barr outlined a plan to build Sento's technical services organization into a
leading outsource provider of customer support focused on incorporating leading
technology.
During the fiscal year ended March 31, 1999, Sento continued its
efforts to develop an infrastructure based on leading technology to create the
next generation call center, which Sento has identified as its eCustomer Contact
Center. Sento management observed that the Internet was having a profound effect
in most IT markets, products, services and commerce and believed that the
Internet would also alter the process by which customers and businesses would
interact in pre- and post-sales customer support. Many traditional telephone
call centers had developed and invested in infrastructures and processes to
support traditional telephone calls, but did not possess the ability to handle
merging electronic interactions media, including e-mail, Web text chat, Web call
backs, Web call-throughs, co-browsing, faxes and voicemail. Sento began focusing
its efforts on developing an environment that would be capable of handling voice
calls and electronic interactions incorporating computer telephony integration
("CTI") technology, skills-based routing systems, high resolution reporting and
flexible customer interaction software based on business rules.
In August, 1998, an initial customer began outsourcing its customer
support to Sento's technical services organization utilizing the new
environment. Throughout the remainder of 1998 and early 1999, Sento continued to
invest in refinements to its environment. In June, 1999, Sento completed its
initial effort to enable its customer service representatives to use Sento's
customer interaction software and communication tools to support client
customers over the Internet. The tools were accessible from any computer using
Microsoft's web-browsing utility Internet Explorer. In addition, voice calls
were packetized ("voice over IP" or "VoIP") and delivered to customer service
representatives over the data networks relinquishing the need for telephones.
Sento believes this development represented the first production use of a
convergent network combining voice and data in a call center environment.
Sento believes the ability to deliver communications and customer data
over a single network connection through a web-browsing utility will provide a
virtual environment that will enable customer service representatives to work
from home or remote offices. These representatives could be quickly deployed
without special or proprietary equipment or extensive capital outlays. Sento
believes EchoPass will be able to build upon Sento's infrastructure for the
technical service organization in order to support customer support operations
globally and position EchoPass for new business opportunities.
Today, electronic interactions between customers and Sento customer
service representatives account for approximately 40% of all customer
interactions. For this reason, Sento began branding its technical support
outsourcing organization as an eCustomer Contact Center rather than a call
center to emphasize the shift in electronic customer interactions. Sento
believes that the virtual capabilities of its eCustomer Contact Center
infrastructure can now be leveraged to enter new businesses, especially into the
emerging, high growth application service provider ("ASP") market. The ASP
market is characterized not by a shift in product functionality, but a shift in
product distribution. Businesses can now choose to purchase software as a
service based on a monthly transaction-based pricing model where a third party
hosts, configures, maintains and upgrades the applications. The business
accesses the applications through a web-browsing utility. Sento believes the
advantages for a company to choose a hosted solution are:
36
<PAGE>
- FASTER TIME TO DEPLOYMENT AND BENEFIT. Businesses would not
have to install and configure the application. The hosted
provider specializing in an application or solution could have
a client company up and running in a matter of weeks.
- REDUCED TECHNICAL AND OPERATIONAL RISKS. Businesses could
avoid certain technology obsolescence and associated
operational risks because the application or solution would be
a hosted service paid for on a usage basis, eliminating the
need for costly investments and infrastructure build out based
on proprietary or unproven technology.
- REDUCED RELIANCE ON INTERNAL IT RESOURCES. The hosted service
provider could configure, maintain and upgrade the application
or solution and the related supporting hardware. The business
could deploy internal IT resources towards core competencies
and strategic business tasks.
- LOWER COSTS. The ASP model would rely on usage-based pricing
and not on a traditional licensing and maintenance model
usually characterized by extensive up-front and ongoing annual
costs. The business could also reduce the need to purchase
supporting hardware and IT staffing resources for the
application.
- ACCESS TO THE LATEST TECHNOLOGY. Frequently, The rapid pace of
technological change moves faster than businesses can recover
their financial investment on past technology procurements.
Internal IT departments often lack the staffing resources,
expertise and capital resources to stay up-to-date with
technological change. The ASP model could provide businesses
with the latest technology without incurring large capital
outlays and IT staffing penalties.
Sento believes EchoPass will benefit by entering the ASP market with a
turnkey customer service solution incorporating both voice and electronic
interaction capabilities with advantages of a recurring revenue stream from a
transaction-based pricing model and the ability to leverage its return from the
development of the eCustomer Contact Center infrastructure. Market interest from
partners and prospects, first mover advantages and the general acceptance of the
ASP business model may assist EchoPass in its efforts to enter this emerging,
high growth market.
Forrester Research projects that the ASP market will grow from $150 million
this year to $6 billion by 2001. The projected growth is considerable and may be
explained by the fact that the ASP model offers a new distribution channel for
well-established markets. Sento believes its eCustomer Contact Center offers a
favorable solution for a hosted environment. Based upon a 1998 Datamonitor
study, 90% of domestic-based call centers are made up of less than 100 customer
service representatives, which also represents the fastest growing segment of
the call center industry. These types of operations generally do not have the
capital and staffing resources to build out their own eCustomer Contact Center
environment. As a result, Sento believes EchoPass' hosted service will offer a
compelling and cost-effective solution for these types of businesses.
INDUSTRY
With the advent of the Internet and the proliferation of electronic
interactions, Sento believes the manner in which businesses communicate with
their customers is undergoing a dramatic change: customers are beginning to
request that businesses be accessible and communicate online through e-mail,
fax, Web text chat, Web callbacks, Web call-throughs and voicemail as well as
traditional telephone calls. Given the emerging shift to online customer
interactions proven by the explosion of e-mail and the popularity of Web
technology such as Web call backs, many traditional telephone-centric customer
service solutions do not address the changes required by e-businesses and
e-commerce companies. Sento believes that in order for companies to compete
effectively in today's rapidly changing environment and with the deterioration
of product and pricing differentiation, businesses must offer the highest
quality customer experience to retain and attract new customers. Companies must
provide immediate, accurate and personalized customer experiences both over the
phone and through electronic interactions.
Sento believes that the growth of the Internet as an e-commerce vehicle
requires that a provider of IT services and products address the following:
37
<PAGE>
- THE IMPORTANCE OF CUSTOMER SERVICE IN E-BUSINESS. In a short
amount of time, the Internet has evolved from an information
source to a new platform for commerce. This growth has
increased competitive pressures in both e-commerce and
traditional commerce markets. Product and pricing
differentiation are diminishing and, in an effort to maintain
and gain market share, businesses are transitioning their
customer service operations into strategic assets and as key
differentiators. Businesses that do not extend a personalized,
useful customer service experience in the most convenient
communication channel may lose customers and prospective
customers to competitors that are a mouse click away. Gartner
Group estimates that by 2001, at least 25% of customer
interactions will be electronically based.
- THE NEED FOR A BLENDED MEDIA CUSTOMER SERVICE SOLUTION. As
e-mail continually becomes a popular medium for online
customers to interact with businesses, the complexity of
e-mail interactions continues to increase. Because online
customers requiring real-time customer service at a Web site
may not have a free line to make a telephone call, providing
real time interactions and quick responses from a business'
Web site may be the most convenient communications channel.
Businesses that provide only telephone-based customer service
or are not prepared to handle large volumes of electronic
interactions are ignoring a growing customer base.
International Data Corporation ("IDC") estimates that online
customers will grow from 28 million in 1998 to 128 million in
2002.
- THE TREND TOWARD HOSTED CUSTOMER SERVICE APPLICATIONS. As the
number of software applications grows, Sento anticipates that
their complexity will increase and IT staffing resources will
tighten. Many businesses are recognizing the benefits of
having a third party host their applications. Under this
arrangement, a business can benefit from the applications
functionality without installing, configuring, maintaining and
upgrading the application. Furthermore, capital expense
outlays are reduced from the result of transaction-based
pricing and without the need to obtain the hardware, staffing
resources and expertise to support the application. As
businesses increase their use of Web-enabled client-user
applications, the Internet and Internet protocol may become a
secure and reliable network. Furthermore, with the recent
emergence of global hosting providers, Sento believes the
appeal of the ASP model will continue to grow. Forrester
Research projects for the ASP market to grow from $150 million
in 1999 to $6 billion by 2001. The hosted service provider
model is intended to develop deeper penetration into small and
middle market companies that typically cannot afford these
applications and solutions.
BUSINESS STRATEGY
EchoPass' objective is to become a leading provider of eCustomer
Contact solutions with its hosted service. The key objective of EchoPass'
strategy will consist of:
- CREATE A MARKET LEADERSHIP POSITION AND BUILD BRAND
RECOGNITION. EchoPass' objective will be to create its
position as a leader in eCustomer Contact Center solutions
market by leveraging its application service provider business
model and establishing itself as the solution provider of
choice.
- INCREASE DISTRIBUTION CAPABILITIES AND PARTNERSHIPS. EchoPass
intends to create distribution capabilities by combining the
efforts of a direct sales force and partnerships with leading
e-business service and infrastructure providers. By
aggressively developing new alliances, EchoPass hopes to
leverage customer sales, marketing and deployment capabilities
to help establish its hosted service.
- CAPITALIZE ON FIRST MOVER ADVANTAGE. Sento believes EchoPass
will be the first enterprise to offer a complete, voice and
electronic interaction-enabled customer service solution in a
hosted environment. If EchoPass can develop and commercialize
the Technology, companies that are traditionally faced with
extensive capital expense outlays and extended time to
deployments will have a new choice designed to eliminate these
burdens and give businesses the benefits of the eCustomer
Contact Center environment quickly and cost-effectively.
38
<PAGE>
- ESTABLISH TECHNOLOGY LEADERSHIP WITH OPEN, SCALABLE WEB-BASED
ARCHITECTURE. EchoPass' objective will be to establish its
hosted service as a leading technology platform for eCustomer
Contact Center environments. In an effort to deliver the high
performance required in the complex and rapidly changing
business environment, EchoPass will attempt to develop a
solution that is highly scalable, rapidly deployable and
cost-efficient. Because EchoPass' Web-based architecture is
founded on industry standards and incorporates products
developed by leading manufacturers, Sento believes EchoPass
customers will be able to use EchoPass products and services
to reduce their technological and operational risks. EchoPass
intends to continue to develop and enhance its architecture to
efficiently handle the growing volume of electronic
interactions, while providing increased functionality for
e-businesses.
- LEVERAGE WEB-BASED HOSTED APPLICATION SERVICE. EchoPass'
hosted service is intended to be a Web-based hosted
application service for e-businesses that want to rapidly and
efficiently deploy an eCustomer Contact Center solution while
minimizing their up-front investment in hardware, software,
services and IT resources. Sento believes the ASP business
model will provide recurring revenue streams and
transaction-based pricing that discriminates against
traditional build-out solutions and creates a captive
customer-base for new products and services.
- FOCUS ON SMALL AND MIDDLE MARKET COMPANIES. EchoPass'
marketing programs will be targeted primarily at small and
middle market companies and emerging and high growth
e-businesses and e-commerce companies and will be focused on
educating the target market, generating new sales
opportunities and creating awareness of EchoPass' hosted
service. EchoPass' focus on the small to medium business will
require channel partners. EchoPass hopes to develop favorable
relationships with companies offering complimentary products,
including regional Bell operating companies or local area
telephone agencies, Internet service providers and other
managed network providers. Sento also hopes EchoPass will be
able to provide its products and services to larger
enterprises. Sento believes that EchoPass' development of
partner relationships will allow the use of an existing sales
force with an established relationship with the desired
customer
COMPETITION
The market for a complete, hosted customer service solution such as the
eCustomer Contact Center is new and Sento does not know of any other competitor
in this market. The level of competition in this evolving market is expected to
intensify in the future, as new competitors seek to deliver a complete, hosted
customer service solution.
Numerous companies have recently begun offering similar hosted
solutions that have limited functionality and address only certain components of
the customer service function. These companies are potential competitors and
include eGain Communications Corporation, Kana Communications, Inc., CosmoCom,
Synchrony Communications and LivePerson. Sento believes, however, that these
potential competitors currently offer hosted applications for either a customer
relationship management system without any communications solutions or only an
e-mail communications solution with a limited customer relationship management
function, exclusively addressing the e-mail component. Sento believes EchoPass
will be the first to offer a complete, hosted customer service solution. Sento
recognizes, however, that there are limited barriers to entry into the hosted
customer service environment and that many existing or potential competitors may
acquire or develop technologies and applications that will compete with
EchoPass' product and service offerings. These competitors may have
significantly greater financial resources and/or industry experience and
relationships than EchoPass. Upon consummation of the EchoPass Transactions,
EchoPass will be a relatively insignificant force in an extremely competitive
market.
CUSTOMERS
As of November 1, 1999, Sento had entered into agreements with two beta
customers, each of whom operates a customer service center of less than 50
seats, to test Sento's hosted service. Sento anticipates that these agreements
will be assigned to EchoPass upon the closing of the EchoPass Transactions.
Sento began internal testing of the service in a simulated environment
incorporating 20 customer service representatives in June 1999.
39
<PAGE>
EchoPass' target customer base will be small and middle market
companies and emerging and high growth e-businesses and e-commerce companies
requiring an eCustomer Contact Center environment, but who want to minimize
capital outlay and access the latest technology. Sento also hopes EchoPass will
be able to provide its products and services to selected larger enterprises.
Sento believes EchoPass' customers will purchase these products as services,
paying on a monthly basis as the services are delivered.
Upon the completion of the EchoPass Transactions, Sento will become
EchoPass' principal customer. The terms of the prospective relationship between
Sento and EchoPass are set forth in the Services Agreement. See "The EchoPass
Transactions - Related Agreements."
TECHNOLOGY
All of EchoPass' products and services will be built on a standards-based,
highly scalable framework designed to address the evolving business
communication needs of companies requiring voice and Internet-enabled customer
service solutions. Sento believes EchoPass' initial products and services, which
will incorporate the Technology and the Genesys Internet Suite, will offer a
broad range of feature functionality to support multimedia routing, queuing and
reporting. Sento's selection of the Genesys Internet Suite to provide the
enterprise interaction management features utilized in Sento's eCustomer Contact
Center was based on Sento's assessment that the Genesys Internet Suite would
provide leading technology that could be rapidly integrated with the Technology
to offer a complete, voice and electronic interaction-enabled customer service
solution in a hosted environment. Sento has utilized the Genesys Internet Suite
since August 1998, and believes the Genesys Internet Suite will provide certain
features and functionality necessary to enable EchoPass to develop its
anticipated products and services. Sento believes, however, that other leading
software providers have developed comparable products that could provide
replacement functionality if the Genesys Internet Suite fails to provide the
features required by EchoPass or is unavailable to EchoPass for any reason. The
evaluation and selection of an alternative software product would delay the
development of EchoPass' products and services and could require the payment of
royalties and other payments that are significantly higher than the fees payable
by EchoPass under the Genesys License Agreement.
EchoPass' solution will be designed to feature an advanced, scalable,
web-based architecture based on industry standards.
- Web-based: Web-enabled tools consist of
communication/interaction controls, customer interaction
management applications and administrative tools. These tools
will be designed to allow multiple aspects of customer
communication and information to be managed and controlled via
a PC using only a Web browser.
- Scalable: All components are considered best-of-breed with the
ability to scale to carrier class. The architecture will be
designed to allow specific components to also be replaced when
they reach technical adolescence with minimal effects and
minimal migration costs. Sound design standards and re-useable
code components will be designed to allow applications to be
adjusted rapidly and new features added with minimal effort.
- Flexible and Open: The modular design of the technical
environment is intended to allow adjustments to meet changing
business needs. Sento believes these designs will permit
significant changes in the business rules without coding or
redistribution to users and encourage rapid response to
business changes. Open interfaces and industry standard
components provide a wide array of connectivity options in
integrating new technology or in symphony with existing
systems.
Sento has designed and conducted rigorous internal testing of its
eCustomer Contact Center with the goal of providing Year 2000 Compliant systems.
"Year 2000 Compliant" means that EchoPass' services and related software and
hardware components will be capable of receiving, recording, storing,
processing, routing, transferring, presenting, and maintaining accurate dates
for all dates including and following January 1, 2000, including leap year
calculations, provided that all other products used by Sento's clients in
connections or combinations with the eCustomer Contact Center, including
hardware, software and firmware, properly exchange date data with the eCustomer
Contact Center.
40
<PAGE>
RESEARCH AND DEVELOPMENT
The market for EchoPass' proposed products and services is
characterized by rapid technological change, frequent new product and service
introductions, changes in customer requirements and emerging industry standards.
Sento believes that strong product development capabilities are essential to
EchoPass' strategy of building a competitive services offering. EchoPass'
product development team will consist of professionals with expertise in
software, telecommunications and computer hardware. Sento believes that this
combination of diverse technical and communications expertise will contribute to
the highly integrated functionality of EchoPass' product and service offerings
and thereby provide EchoPass with a competitive advantage. EchoPass' total
research and development staff will consist of eight employees.
EMPLOYEES
As of November 15, 1999, EchoPass had no employees. Sento presently
anticipates that if the EchoPass Transactions are consummated, EchoPass will
initially require the services of approximately 20 total employees. Sento
anticipates that many of these employees are currently employed by Sento and
will become EchoPass employees. In addition, EchoPass will need to hire
additional employees to pursue its business strategy. Competition for qualified
personnel in the IT industry is intense. The future success and growth of
EchoPass will depend in large measure upon its ability to attract and retain
qualified management and technical personnel. There can be no assurance that
EchoPass will be able to attract and maintain the personnel necessary for the
development and operation of its business. Failure to attract and retain key
management and technical personnel and qualified personnel required to develop
EchoPass' operations could have a material adverse impact on EchoPass.
FACILITIES
Upon the consummation of the EchoPass transactions, EchoPass will
continue to use the office and research and development facilities of Sento
located at 808 East Utah Valley Drive, American Fork, Utah. The terms and
conditions of EchoPass' arrangements with Sento with respect to such facilities
are set forth in the Facilities Agreement. See "The EchoPass Transactions--Other
Related Agreements." Sento currently estimates that the arrangement contemplated
by the Facilities Agreement will be sufficient to enable EchoPass to conduct its
business operations for approximately 120 days following the consummation of the
EchoPass Transactions. Upon the consummation of the EchoPass Transactions and
the completion of the Funding, EchoPass will likely move a significant portion
of its operations to new facilities. Neither EchoPass nor Sento has initiated
any efforts to identify future EchoPass facilities; however, both parties
believe EchoPass will be able to identify and lease suitable facilities at
commercially reasonable lease rates.
MANAGEMENT OF ECHOPASS
The following table sets forth certain information with respect to the
initial executive officers and directors of EchoPass.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Arthur F. Coombs, III 38 Chief Executive Officer and Director
Keith D. Barr 45 Vice President and Chief Technology Officer
Stanley J. Cutler 57 Corporate Controller and Treasurer
Richard DeGolia 49 Vice President of Business Development and Director
Gary B. Filler 58 Director
Kieth E. Sorenson 50 Director
</TABLE>
Biographical information for Messrs. Coombs, Barr, Cutler, Filler and
Sorenson is presented above under "BUSINESS OF SENTO - Management."
RICHARD DEGOLIA was appointed as Vice President of Business Development
and a director of EchoPass in September 1999. He has served as an executive
officer of Genesys since September 1996, most recently as Senior Vice
41
<PAGE>
President, Business Development and Strategic Planning, and Acting General
Counsel. From August 1985 to September 1996, Mr. DeGolia was an attorney with
Wilson, Sonsini, Goodrich & Rosati, PC, a law firm located in Silicon Valley.
Mr. DeGolia holds a B.A. in American Studies from the University of
California at Berkeley and a J.D. from Harvard University.
SHAREHOLDER PROPOSALS
As described in Sento's proxy statement relating to its 1999 Annual
Meeting of Shareholders, shareholder proposals for inclusion in the proxy
statement and form of proxy relating to Sento's 2000 Annual Meeting of
Shareholders must be received by Sento no later than May 26, 2000.
LEGAL MATTERS
Certain matters relating to the EchoPass Transactions will be passed
upon for Sento by Parr Waddoups Brown Gee & Loveless, Salt Lake City, Utah.
<TABLE>
<CAPTION>
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
<S> <C>
Unaudited Pro Forma Financial Statements - Basis of Presentation............................P-1
Unaudited Pro Forma Balance Sheet as of September 30,1999...................................P-2
Unaudited Pro Forma Statement of Operations for the year ended March 31,1999................P-3
Unaudited Pro Forma Statement of Operations for the six months ended September 30,1999......P-4
</TABLE>
42
<PAGE>
SENTO CORPORATION
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma financial statements give effect to the
acquisition of 47% of the issued and outstanding shares of EchoPass
Corporation on a fully diluted basis through the transfer of substantially
all of the technology currently owned and used by Sento in the operation of
its eCustomer Contact Center. Sento will account for the investment in
EchoPass Corporation under the equity method of accounting.
The unaudited pro forma balance sheet gives effect to the acquisition as if
it had occurred on September 30, 1999. The unaudited pro forma statement of
operations give effect to the acquisition as if it occurred on April 1, 1998.
Sento has preliminarily analyzed the savings that it expects to be realized
in salaries and certain benefits to certain existing employees of Sento,
including Arthur F. Coombs, III, Sento's Chief Executive Officer, who will
resign as employees of Sento and become employees of EchoPass Corporation as
well as other operating costs and expenses related to the technology team.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
Sento's financial position or results of operations would actually have been
if such transactions had in fact occurred on those dates and are not
necessarily representative of Sento's financial position or results of
operations of Sento for any future period. The unaudited pro forma financial
statements should be read in conjunction with the other information included
elsewhere in this Proxy Statement. See Risk Factors included elsewhere herein.
P-1
<PAGE>
SENTO CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1999
ASSETS
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 427,005 $ - $ 427,005
Accounts receivable 2,104,710 - 2,104,710
Note receivable - 1,100,000 (1) 1,100,000
Prepaid taxes 50,919 - 50,919
Other current assets 240,884 - 240,884
---------- ---------- ----------
Total current assets 2,823,518 1,100,000 3,923,518
PROPERTY AND EQUIPMENT 3,042,298 (1,100,000) (1) 1,942,298
OTHER ASSETS 295,066 (72,000) (2) 223,066
INVESTMENT IN ECHOPASS CORPORATION - 72,000 (2) 72,000
-
---------- ---------- ----------
Total assets $ 6,160,882 $ - $ 6,160,882
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 500,000 $ - $ 500,000
Current portion of long term debt 148,878 - 148,878
Accounts payable 915,478 - 915,478
Accrued liabilities 981,662 - 981,662
Deferred revenue 167,142 - 167,142
---------- ---------- ----------
Total current liabilities 2,713,160 - 2,713,160
LONG-TERM DEBT, NET OF CURRENT PORTION 45,880 - 45,880
STOCKHOLDERS' EQUITY 3,401,842 - 3,401,842
---------- ---------- ----------
Total liabilities and stockholders' equity $ 6,160,882 $ - $ 6,160,882
========== ========== ==========
</TABLE>
(1) Effect of selling approximately $1,100,000 (net book value) of property
and equipment to EchoPass Corp. in exchange for a note.
(2) Effect of transferring technology to EchoPass Corporation in exchange
for 4,000,000 shares of preferred stock in EchoPass Corp.
P-2
<PAGE>
SENTO CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended March 31, 1999
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PRO FORMA
(4) ADJUSTMENTS AS ADJUSTED
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE $ 7,886,994 $ - $ 7,886,994
COST OF REVENUE 5,770,381 (1,139,000) (1) 4,915,381
- 284,000 (2) -
----------- ----------- -----------
Gross profit 2,116,613 855,000 2,971,613
----------- ----------- -----------
COSTS AND EXPENSES:
Selling general and administrative 8,703,737 (258,000) (3) 8,445,737
Research and development 177,009 - 177,009
Amortization of intangible assets 523,098 - 523,098
Impairment of long-lived assets 880,842 - 880,842
Write-off of in-process research and development costs 92,095 - 92,095
----------- ----------- -----------
Total costs and expenses 10,376,781 (258,000) 10,118,781
----------- ----------- -----------
Operating loss (8,260,168) 1,113,000 (7,147,168)
----------- ----------- -----------
OTHER INCOME, NET 1,171,852 - 1,171,852
----------- ----------- -----------
Loss before taxes (7,088,316) 1,113,000 (5,975,316)
INCOME TAX BENEFIT 506,083 - 506,083
----------- ----------- -----------
Net income from continuing operations (6,582,233) 1,113,000 (5,469,233)
Loss from discontinued operations, net of income taxes (1,172,570) - (1,172,570)
----------- ----------- -----------
Net loss $ (7,754,803) $ 1,113,000 $ (6,641,803)
=========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations $ (1.12) $ 0.19 $ (0.93)
Loss from discontinued operations (0.20) - (0.20)
----------- ----------- -----------
Net loss per common share $ (1.31) $ 0.19 $ (1.13)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 5,901,959 5,901,959 5,901,959
Diluted 5,901,959 5,901,959 5,901,959
</TABLE>
(1) Transfer of costs for the technology team to EchoPass Corp. from Sento
Corporation as if EchoPass Corp. transactions had occurred April 1,
1998.
(2) Recognition of costs relating to the licensing of EchoPass Corp.
technology to Sento Corporation as if the EchoPass Corp. transactions
had occurred April 1, 1998.
(3) Transfer of the pro-rata share of selling general and administrative
costs that would have been billed to EchoPass Corp. under the
Facilities and Services Agreement as if the EchoPass Corp. transactions
had occurred April 1, 1998.
(4) Restated to reflect discontinued operations.
P-3
<PAGE>
SENTO CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 1999
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED
<S> <C> <C> <C>
REVENUE $ 6,872,075 $ (33,000) (1) $ 6,839,075
COST OF REVENUE 4,990,839 (805,500) (2) 4,630,339
- 445,000 (3) -
---------- ---------- ----------
Gross profit 1,881,236 327,500 2,208,736
---------- ---------- ----------
COSTS AND EXPENSES:
Selling general and administrative 2,288,605 (129,000) (4) 2,159,605
Research and development 117,314 (105,000) (5) 12,314
---------- ---------- ----------
Total costs and expenses 2,405,919 (234,000) 2,171,919
---------- ---------- ----------
Operating loss (524,683) 561,500 36,817
---------- ---------- ----------
OTHER INCOME
Pro-rata share of loss on investment in EchoPass Corp. - (72,000) (6) (72,000)
Other, net 65,646 - 65,646
---------- ---------- ----------
Other income (expense), net 65,646 (72,000) (6,354)
---------- ---------- ----------
Income (loss) before taxes (459,037) 489,500 30,463
INCOME TAX (EXPENSE) BENEFIT 135,403 (69,000) (7) 66,403
---------- ---------- ----------
Net income (loss) from continuing operations (323,634) 420,500 96,866
Loss from discontinued operations, net of income taxes (51,389) - (51,389)
---------- ---------- ----------
Net income (loss) $ (375,023) $ 420,500 $ 45,477
========== ==========
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations $ (0.05) $ 0.06 $ 0.01
Loss from discontinued operations (0.00) - (0.00)
---------- ---------- ----------
Net loss per common share $ (0.05) $ 0.06 $ 0.01
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 7,077,069 7,077,069 7,077,069
Diluted 7,077,069 7,275,307 7,275,307
</TABLE>
(1) Transfer of EchoPass revenue to EchoPass Corp. from Sento Corporation
as if the EchoPass Corp. transactions had occurred April 1, 1999.
(2) Transfer of costs for the technology team to EchoPass Corp. from Sento
Corporation as if EchoPass Corp. transactions had occurred April 1,
1999.
(3) Recognition of costs relating to the licensing of EchoPass Corp.
technology to Sento Corporation as if the EchoPass Corp. transactions
had occurred April 1, 1999.
(4) Transfer of the pro-rata share of selling general and administrative
costs that would have been billed to EchoPass Corp. under the
Facilities and Services Agreement as if the EchoPass Corp. transactions
had occurred April 1, 1999.
(5) Transfer to EchoPass Corp. of uncapitalized research and development
costs incurred during the six months ended September 30, 1999 relating
to the EchoPass technology as if the EchoPass Corp. transactions had
occurred April 1, 1999.
(6) Recognition of Sento Corporation's pro-rata share of EchoPass
Corporation's operating loss (limited to Sento's basis in EchoPass
Corp.) as if the EchoPass Corp. transactions had occurred April 1,
1999.
(7) Recognition of additional income taxes for the effect of the EchoPass
Corp. transactions as if they had occurred April 1, 1999.
P-4
<PAGE>
APPENDICES
A. Opinion of Alliant Partners
B. Contribution Agreement
C. Annual Report on Form 10-KSB for the Fiscal Year Ended March 31, 1999
D. Quarterly Reports on Form 10-QSB for the Quarterly Periods Ended June
30, 1999 and September 30, 1999
<PAGE>
APPENDIX A
<PAGE>
[LOGO]
September 28, 1999
Board of Directors
Sento Corporation
808 East Utah Valley Drive
American Fork, Utah 84003
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Sento Corporation ("Sento" or the
"Company") of the proposed contribution of assets by Sento (Technology and
Tangible Assets of the Sento Call Center) to EchoPass Corporation ("EchoPass")
in exchange for 4,000,000 Series "A" preferred shares of EchoPass and a
promissory note for approximately $1,100,000. The proposed contribution of
assets and associated Transaction events (the "Transaction") are more fully
detailed in the Contribution Agreement between Sento Corporation and EchoPass,
Inc. dated ________ 1999.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and
other information of the Company and EchoPass, respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning Sento and EchoPass
prepared by the management of the Company;
(iii) analyzed certain financial projections for both Sento and
EchoPass prepared by the management of the Company;
(iv) discussed the past and current operations, financial
condition, and the prospects of Sento and EchoPass with senior
executives of the Company, some of whom plan to become senior
executives of EchoPass;
(v) discussed with senior executives of the Company and
individuals knowledgeable about Sento in the financial
community regarding the past efforts in financing Sento and
the efforts to finance the portion of the business within
Sento which will constitute EchoPass, as well as projections
for financing EchoPass as a stand alone business;
(vi) discussed the proposed Transaction with a senior executive at
Genesys Telecommunications Laboratories ("Genesys"), a
proposed party to the series of Transactions contemplated by
the Contribution Agreement;
(vii) discussed the past and current operations, financial
condition, and the prospects of the business within Sento
which will constitute the business of EchoPass with senior
executives of the Company;
- -------------------------------------------------------------------------------
435 TASSO STREET, THIRD FLOOR, PALO ALTO, CA 94301, TELEPHONE: 650.325.1541,
TELEFAX: 650.325.0460
<PAGE>
Board of Directors Page 2
Sento Corporation September 28, 1999
(viii) discussed with the senior management of Sento the strategic
objectives of the Transaction and their estimates of the
synergies, cost savings and other benefits expected to result
from the Transaction as well as the expected costs and risks
associated with the proposed Transaction;
(ix) reviewed the reported prices and trading activity for the
Company's common stock;
(x) compared the financial performance of Sento (and the portion
of Sento that will constitute EchoPass) with that of certain
other comparable publicly-traded companies and the prices paid
for securities in those publicly traded companies;
(xi) reviewed the financial terms, to the extent publicly
available, of certain acquisition and merger Transactions of
companies comparable to Sento and EchoPass;
(xii) reviewed the financial terms, to the extent publicly
available, of certain venture capital equity investments in
companies comparable to EchoPass;
(xiii) discussed the proposed Transaction with senior managers of the
Company and their legal advisors;
(xiv) reviewed the Contribution Agreement and certain related
documents; and
(xv) performed such other analyses and considered such other
factors as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information provided to us for the purposes of
this opinion. With respect to the financial projections of Sento and EchoPass
and the estimates of the synergies, costs and benefits expected to result from
the Transaction, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgements of the
future financial performance of Sento and EchoPass. As Sento's management is
aware, we have had limited access to internal financial or other operating data
regarding Sento and EchoPass. Therefore the financial and other information
regarding the Company and EchoPass reviewed by Alliant Partners in connection
with the rendering of this opinion was limited to information provided by
Sento's management and to certain discussions with Sento's senior management
regarding the Company's financial condition and prospects, the strategic
objectives of the Transaction and management's estimates of the synergies, costs
and benefits expected to result from the Transaction. In addition, we have
assumed that the Transaction will be consummated in accordance with the terms
set forth in the Contribution Agreement, including, among other things, that the
Transaction will be accounted for as an equity investment in accordance with
U.S. General Accepted Accounting Principles. We have also assumed the
correctness of the representations by Sento's management that obtaining the
required financing for EchoPass as a part of Sento, with adequate timeliness, is
not a practical alternative. We have not made any independent valuation or
appraisal of the assets or liabilities of the Company, nor have we been
furnished with any such appraisals, and we have relied upon the representation
of the Company as to the book value of the tangible assets to be contributed and
to the value of the proposed software license contributed by Genesys for Series
"A" preferred shares in EchoPass. Our opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to us as of, the date hereof.
<PAGE>
Board of Directors Page 3
Sento Corporation September 28, 1999
Our opinion addresses only the fairness of the Transaction, from a financial
point of view to the shareholders of the Company, and we do not express any
views on any other terms of the Transaction. Specifically, our opinion does not
address the Company's underlying business decision to effect the Transaction
contemplated by the Contribution Agreement.
It is understood that this letter is for the information of the Board
of Directors of Sento, except that this opinion may be included in its entirety
in any filing made by the Company with the Securities and Exchange Commission
with respect to the Transaction.
Based upon and subject to the foregoing, and based upon such other
matters as we consider relevant, it is our opinion that, as of the date hereof
and pursuant to the Contribution Agreement, the asset contribution to be made by
Sento to EchoPass is fair, from a financial point of view, to the shareholders
of the Company.
Very truly yours,
By:/s/ Alliant Partners
---------------------
Alliant Partners
<PAGE>
APPENDIX B
<PAGE>
CONTRIBUTION AGREEMENT
Between
SENTO CORPORATION, a Utah corporation
and
ECHOPASS CORPORATION, a Utah corporation
November 17, 1999
<PAGE>
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (this "AGREEMENT") is made as of
November 17, 1999, between SENTO CORPORATION, a Utah corporation ("CONTRIBUTOR")
and ECHOPASS CORPORATION, a Utah corporation ("CONTRIBUTEE").
BACKGROUND
Contributor uses the Technology (as defined in SECTION
1A(i)(a) below).
Contributor uses the Tangible Assets (as defined in SECTION
1A(i)(b) below) in connection with the Technology.
Contributee has been organized for the purpose, among others,
of commercializing and developing additional applications for the Technology.
On the terms and subject to the conditions set forth in
this Agreement, Contributor desires to contribute to Contributee (i) the
Technology, in partial consideration for which Contributee will issue to
Contributor the Shares (as defined in SECTION 1B below) and enter into the
Services Agreement (as defined in SECTION 1D(i)(d) below) and (ii) the
Tangible Assets, in partial consideration for which Contributee will make the
Promissory Note (as defined in SECTION 1D(ii)(d) below) and execute the
Security Agreement (as defined in SECTION 1D(ii)(e) below).
Furthermore, as partial consideration for the obligations of
Contributor and Contributee under this Agreement, Contributor and Contributee
desire to enter into the Facilities Agreement (as defined in Section 1D(i)(c)
below) and execute the other documents and agreements contemplated hereby.
AGREEMENT
In consideration of the Background and the covenants and other
consideration set forth herein, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. CONTRIBUTION OF ASSETS IN EXCHANGE FOR THE SHARES.
1A. CONTRIBUTION OF ASSETS.
(i) On the terms and subject to the conditions contained in this
Agreement, at the Closing (as defined in SECTION 1D below), Contributor shall
contribute, convey, assign, transfer and deliver to Contributee all of
Contributor's right, title and interest in and to
(a) the technology used by Contributor in connection with
Contributor's eCustomer Contact Center, as more particularly described on
Schedule 1A(i)(a) attached hereto and made a part hereof (the "TECHNOLOGY"); and
(b) the tangible assets used by Contributor in connection with
its development and use of the Technology, as more particularly described on
Schedule 1A(i)(b) attached hereto and made a part hereof, together with such
additional tangible assets to be identified by the mutual agreement of
Contributor and Contributee prior to the Closing (the "TANGIBLE ASSETS" and
together with the Technology, the "ASSETS").
1
<PAGE>
(ii) CONTRIBUTEE HEREBY ACKNOWLEDGES THAT EXCEPT AS EXPRESSLY SET FORTH
IN SECTION 3A BELOW: (A) CONTRIBUTOR IS TRANSFERRING THE ASSETS IN "AS IS, WHERE
IS" CONDITION "WITH ALL FAULTS," WITHOUT ANY WARRANTIES, REPRESENTATIONS OR
GUARANTIES OF ANY KIND, ORAL OR WRITTEN, EXPRESS, OR IMPLIED, CONCERNING THE
ASSETS OR THIS AGREEMENT FROM OR ON BEHALF OF CONTRIBUTOR; AND (B) CONTRIBUTOR
HAS NOT MADE, DOES NOT AND WILL NOT MAKE ANY REPRESENTATIONS, OR WARRANTIES, OF
ANY KIND, ORAL OR WRITTEN, EXPRESS OR IMPLIED, CONCERNING THE ASSETS, INCLUDING,
WITHOUT LIMITATION (1) THE VALUE, MERCHANTABILITY, PROFITABILITY, SUITABILITY OR
FITNESS FOR A PARTICULAR USE OR PURPOSE, OF THE ASSETS, (2) THE CONDITION,
QUALITY, MANNER OF REPAIR, STATE OF REPAIR OR LACK OF REPAIR OF THE ASSETS, OR
(3) THE COMPLIANCE OF THE ASSETS WITH ANY APPLICABLE LAWS, RULES, STATUTES,
REGULATIONS, CODES OR ORDINANCES.
1B. ISSUANCE OF THE SERIES A PREFERRED. Subject to the conditions
specified in this Agreement, at the Closing, Contributee, in partial
consideration for the contribution of the Assets, shall issue to Contributor
4,000,000 shares (the "SHARES") of the Series A Convertible Preferred Stock, no
par value, of Contributee (the "SERIES A PREFERRED").
1C. ASSUMPTION OF LIABILITIES.
(i) Subject to the conditions specified in this Agreement, at the
Closing, Contributee, in partial consideration for the contribution of the
Assets, shall unconditionally assume and agree to pay, satisfy and discharge all
liabilities and obligations relating to or arising out of the Assets, including,
without limitation, any claims (whenever made) arising out of, relating to,
resulting from or caused by any transaction, status, event, condition,
occurrence or situation existing, arising or occurring in connection with the
ownership or operation of the Assets relating to any period commencing on or
after the Effective Time (as defined in SECTION 1D below), whether such
liabilities are absolute, known, unknown, fixed, contingent or otherwise (the
"ASSUMED LIABILITIES").
(ii) Notwithstanding the foregoing, Contributor hereby retains, and
Contributee does not assume and will have no liability with respect to, the
liabilities and obligations identified on SCHEDULE 1C(ii) (the "EXCLUDED
LIABILITIES").
1D. THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "CLOSING") shall take place at the place and time that is
mutually agreeable to Contributor and Contributee (the "EFFECTIVE TIME") but in
no event shall the Closing take place any later than 15 days following the
approval of this Agreement by the Disinterested Holders of the Sento Common
Stock (as defined below).
(i) At the Closing, subject to the conditions contained in this
Agreement, Contributor shall deliver, in satisfaction of its obligations
hereunder, the following to Contributee:
(a) an executed counterpart of the Assignment of Technology
and Assumption Agreement in the form set forth on EXHIBIT A, attached hereto and
made a part hereof (the "ASSIGNMENT OF TECHNOLOGY");
(b) an executed counterpart of the Bill of Sale and Assumption
Agreement in the form set forth on EXHIBIT B, attached hereto and made a part
hereof (the "BILL OF SALE");
(c) an executed counterpart of the Facilities and Services
Agreement in the form set forth on EXHIBIT C, attached hereto and made a part
hereof (the "FACILITIES AGREEMENT"); and
(d) an executed counterpart of the Services Agreement in the
form set forth on EXHIBIT D, attached hereto and made a part hereof (the
"SERVICES AGREEMENT").
2
<PAGE>
(ii) DELIVERIES BY CONTRIBUTEE. In partial consideration for the
contribution of the Assets, at the Closing, Contributee shall deliver the
following to Contributor:
(a) an executed certificate representing the Shares
issued in the name of Contributor;
(b) an executed counterpart of the Assignment of
Technology;
(c) an executed counterpart of the Bill of Sale;
(d) an executed Promissory Note substantially in the form set
forth on EXHIBIT E, attached hereto and made a part hereof (the "PROMISSORY
NOTE") and in an original principal amount ot be determined by the mutual
agreement of Contributor and Contributee prior to the Closing;
(e) an executed Security Agreement in the form set forth on
EXHIBIT F, attached hereto and made a part hereof (the "SECURITY AGREEMENT");
(f) an executed counterpart of the Facilities Agreement;
and
(g) an executed counterpart of the Services Agreement.
Section 2. CONDITIONS TO CLOSING.
2A. CONDITIONS TO CONTRIBUTOR'S OBLIGATION TO CLOSE. The obligation of
Contributor to transfer the Assets and deliver the documents set forth in
SECTION 1D(i) above at the Closing is subject to the satisfaction, as of the
Closing, of the following conditions:
(i) CLOSING DOCUMENTS. Contributee shall have delivered
all of the documents specified in SECTION 1D.(ii) above.
(ii) SHAREHOLDER APPROVAL. The Disinterested Holders of the common
stock, par value $0.25 per share, of Contributor (the "SENTO COMMON STOCK")
shall have approved (a) Contributor's execution and delivery of this Agreement
and performance of the transactions contemplated hereby and (b) the "EchoPass
Transactions" (as such term is defined in that certain definitive proxy
statement prepared by Contributor on Schedule 14A to the Securities Act of 1934,
as amended (the "PROXY STATEMENT") at the special meeting of such shareholders
identified in the Proxy Statement. The "Disinterested Holders of the Sento
Common Stock" shall mean all holders of Sento Common Stock other than the
shareholders, officers and directors of Contributee.
(iii) ALLIANT OPINION. Contributor shall have received a final executed
opinion of Alliant Partners stating that the contribution to be made by
Contributor to Contributee in the ECP.com Transactions is fair, from a financial
point of view to the Sento shareholders (the "ALLIANT OPINION"). The Alliant
Opinion shall be in substantially the form set forth on EXHIBIT G, attached
hereto and made a part hereof and shall be delivered in form and substance
acceptable to Contributor's Board of Directors.
(iv) SVB RELEASE. Contributor shall have obtained from Silicon Valley
Bank ("SVB") a release of SVB's security interest in and claim to the Tangible
Assets (the "SVB RELEASE").
(v) GENESYS TRANSACTIONS. Contributee shall have completed the
following transactions:
(a) Contributee shall have completed a transaction whereby
Contributee proposes to issue 3,000,000 shares of the Series A Preferred to
Genesys Telecommunications Laboratories, Inc., a California corporation
("GENESYS"), in exchange for the grant of a license by Genesys to Contributee
for the
3
<PAGE>
use of Genesys' internet suite of enterprise interaction management software
for up to 12,000 agent users of Contributee's customers with an option for
Contributee to obtain additional license rights for additional blocks of 500
of such agent users, which license shall be subject only to the payment of
quarterly maintenance fees by Contributee to Genesys, as, and if, such
maintenance fees are incurred; and
(b) Contributee shall have completed a transaction whereby
Contributee proposes to issue 500,000 shares of the Series A Preferred to
Genesys in exchange for $1,000,000 in cash or other immediately available funds;
such transactions to be consummated pursuant to a stock purchase agreement,
master software license agreement and other agreements and instruments, the
terms and conditions of which are yet to be determined, but which shall be
satisfactory to Contributor and Contributee, in their discretion (the "GENESYS
TRANSACTIONS").
(vi) WAIVER. Any condition specified in this SECTION 2A, other than
SECTION 2A(ii), may be waived if consented to by Contributor; provided, that no
such waiver shall be effective against Contributor unless it is set forth in a
writing executed by Contributor.
2B. CONDITIONS TO CONTRIBUTEE'S OBLIGATION TO CLOSE. The obligation of
Contributee to issue the Shares, assume the Assumed Liabilities and deliver the
documents set forth in SECTION 1D(ii) above is subject to the satisfaction as of
the Closing of the following conditions:
(i) CLOSING DOCUMENTS. Contributor shall have delivered all
of the documents specified in SECTION 1D(i) above.
(ii) SHAREHOLDER APPROVAL. The Disinterested Holders of the Sento
Common Stock shall have approved (a) Contributor's execution and delivery of
this Agreement and performance of the transactions contemplated hereby and (b)
the EchoPass Transactions at the special meeting of such shareholders identified
in the Proxy Statement.
(iii) ALLIANT OPINION. Contributor shall have received the Alliant
Opinion in substantially the form set forth on EXHIBIT G.
(iv) SVB RELEASE. Contributor shall have obtained the SVB Release.
(v) GENESYS TRANSACTIONS. Contributee shall have consummated the
Genesys Transactions.
(vi) WAIVER. Any condition specified in this SECTION 2B may be waived
if consented to by Contributee; provided that no such waiver shall be effective
against Contributee unless it is set forth in a writing executed by Contributee.
4
<PAGE>
Section 3. REPRESENTATIONS AND ADDITIONAL AGREEMENTS; COVENANTS AFTER THE
EFFECTIVE TIME.
3A. REPRESENTATIONS OF CONTRIBUTOR. Contributor hereby represents and
warrants to Contributee as follows:
(i) Contributor is a corporation duly incorporated, validly
existing, and having an active status under the laws of the State of Utah;
has the corporate power and authority to own its assets and to transact the
business in which it is now engaged or proposed to be engaged; and is duly
qualified as a foreign corporation and in good standing under the laws of
each other jurisdiction in which such qualification is required, if any.
(ii) Contributor owns or has the ability to use the Tangible Assets
and the Technology.
(iii) To Contributor's knowledge, the Technology does not infringe
any patent, copyright, trade secret or other intellectual property right of
any third party in the United States.
(iv) To Contributor's knowledge, there is no threatened action or
proceeding against or affecting the Contributor before any court,
governmental agency or arbitrator which may, in any one case or in the
aggregate, materially adversely affect the financial condition, operations,
properties, or business of Contributor or the ability of Contributor to
perform its obligation under this Agreement.
3B. REPRESENTATIONS OF CONTRIBUTEE. Contributee hereby represents and
warrants to Contributor that Contributee is a corporation duly incorporated,
validly existing, and having an active status under the laws of the State of
Utah; has the corporate power and authority to own its assets and to transact
the business in which it is now engaged or proposed to be engaged; and is duly
qualified as a foreign corporation and in good standing under the laws of each
other jurisdiction in which such qualification is required, if any.
3C. INDEMNIFICATION.
(i) INDEMNIFICATION BY CONTRIBUTOR. In addition to all rights and
remedies available to Contributee at law or in equity, Contributor agrees to
indemnify Contributee, its officers, directors, agents, representatives,
successors, permitted assigns and affiliates (collectively, the "CONTRIBUTEE
Parties") and hold each of them harmless against and pay on behalf of or
reimburse such Contributee Parties in respect of any loss (including, without
limitation, diminution in value and consequential damages), liability, demand,
claim, action, cause of action, cost, damage, deficiency, tax, penalty, fine or
expense, whether or not arising out of third party claims (including, without
limitation, interest, penalties, reasonable attorneys' fees and expenses and all
amounts paid in investigation, defense or settlement of any of the foregoing)
(collectively, "LOSSES") which any such Contributee Party may suffer, sustain or
become subject to, as a result of, in connection with, relating or incidental to
or by virtue of: (i) the breach of any representation, covenant or agreement of
Contributor contained in this Agreement or (ii) the assertion or recovery
against Contributee of any Excluded Liabilities.
(ii) INDEMNIFICATION BY CONTRIBUTEE. In addition to all rights and
remedies available to Contributor at law or in equity, Contributee agrees to
indemnify Contributor, its officers, directors, agents, representatives,
successors, permitted assigns and affiliates (collectively, the "CONTRIBUTOR
Parties") and hold each of them harmless against and pay on behalf of or
reimburse such Contributor Parties in respect of any Losses which any such
Contributor Party may suffer, sustain or become subject to, as a result of, in
connection with, relating or incidental to or by virtue of: (i) the breach of
any covenant or agreement of Contributee contained in this Agreement or (ii) the
assertion or recovery against Contributor of any Assumed Liabilities.
3D. NOTICE AND DEFENSE OF THIRD PARTY CLAIMS. If any proceeding shall
be brought or asserted under SECTIONS 3C(i) or 3C(ii) against an indemnified
party or any successor thereto (the "INDEMNIFIED
5
<PAGE>
Person") in respect of which indemnity may be sought under such Sections from
an indemnifying person or any successor thereto (the "INDEMNIFYING PERSON"),
the Indemnified Person shall undertake the defense, compromise or settlement
of such proceeding with counsel reasonably satisfactory to the Indemnified
Person, and the Indemnifying Person shall assume and pay all fees, costs and
expenses relating to or associated with the Indemnified Person's defense
thereof, including all fees and costs of counsel and the payment of all costs
and expenses in connection therewith. The Indemnified Person shall give
prompt written notice of such Proceeding to the Indemnifying Person;
provided, that any delay or failure to so notify the Indemnifying Person
shall relieve the Indemnifying Person of its obligations hereunder only to
the extent, if at all, that the Indemnifying Person is materially prejudiced
by reason of such delay or failure. Actual or threatened action by a
governmental authority or other person is not a condition or prerequisite to
the Indemnifying Person's obligations under SECTIONS 3C(i) or 3C(ii). In
connection with the Indemnified Person's defense of any such proceeding, the
Indemnifying Person shall, reasonably and in good faith, assist and cooperate
in the defense thereof. With respect to matters not involving proceedings
brought or asserted by third parties, within thirty (30) days after
notification from any Indemnified Person supported by reasonable
documentation setting forth the nature of the circumstances entitling such
Indemnified Person to indemnity hereunder, the Indemnifying Person, at no
cost or expense to such Indemnified Person, shall diligently commence
resolution of such matters in a manner reasonably acceptable to such
Indemnified Person and shall diligently and timely prosecute such resolution
to completion; provided, however, with respect to those valid claims that may
be satisfied by payment of a liquidated sum of money and which are not
disputed reasonably and in good faith by the Indemnified Person shall
promptly pay the amount so claimed.
3E. MUTUAL ASSISTANCE AND RECORDS. Contributee and Contributor agree
that they will mutually cooperate in the expeditious filing of all notices,
reports and other filings with any governmental authority required to be
submitted jointly by Contributee and Contributor in connection with the
execution and delivery of the Agreement and the consummation of the transactions
contemplated by the Agreement.
3F. RESCISSION OF AGREEMENT. In the event that Contributee fails to
obtain the Funding (as defined below) within 120 days of the Closing,
Contributor may elect to rescind the transactions effected at the Closing, in
which event (i) Contributee shall convey, transfer and assign to Contributor by
appropriate bills of sale and/or other instruments reasonably requested by
Contributor all of the Assets, (ii) Contributor shall deliver to Contributee the
Promissory Note, the Security Agreement and the certificate representing the
Shares for cancellation, (iii) both Contributor and Contributee shall enter into
appropriate termination agreements with respect to the Services Agreement and
the Facilities Agreement, (iv) at Contributor's request, Contributee shall
consent to and join in the filing of a declaratory action seeking an order
granting rescission of this Agreement and the related transactions, other than
the Genesys Transactions, and shall consent to the entry of a declaratory
judgment granting such relief, and (v) Contributee and Contributor shall take
all other actions to facilitate the rescission of this Agreement and the
transactions contemplated hereby, including, without limitation, the
reconveyance of all Assets to Contributor, but specifically excluding the
Genesys Transactions, all responsibility and liability for which, Contributee
hereby covenants and agrees shall be solely that of Contributee. The amount
required to be raised by Contributee in connection with the Funding shall be
reduced by the amount of cash received by Contributee in the Genesys
Transactions. The "FUNDING" shall mean equity funding of at least $6,000,000 (as
reduced by the cash amount raised in connection with the Genesys Transactions)
at a price per share of the capital stock of Contributee of no less than $2.00
and if such funding is obtained through the sale of preferred stock or other
convertible securities the conversion rate shall be no less than one share of
such convertible security per share of common stock of Contributee.
3G. PAYMENT OF COSTS AND EXPENSES; REIMBURSEMENT. The first $50,000 of
costs and expenses incurred in connection with this Agreement, the EchoPass
Transactions and the preparation and filing of the Proxy Statement, including
without limitation, fees of advisors and counsel to Contributor and Contributee,
shall be paid by Contributor, and all such costs and expenses in excess of
$50,000 shall be paid by Contributee. Subsequent to the Closing, Contributor
shall present to Contributee a summary of all costs and
6
<PAGE>
expenses incurred in connection with this Agreement, the EchoPass
Transactions and the preparation and filing of the Proxy Statement, and
Contributee shall promptly reimburse Contributor for the full amount of such
costs and expenses in excess of $50,000.
3H. FURTHER TRANSFERS. Each of Contributor and Contributee will, and
will cause each of their affiliates to, execute and deliver such further
instruments of conveyance and transfer and take such additional action as the
other party hereto may reasonably request to effect, consummate, confirm or
evidence the transfer of the Assets or the obligations of Contributee hereunder.
Section 4 MISCELLANEOUS.
4A. REMEDIES. Each party hereto shall have all rights and remedies set
forth in this Agreement and all rights and remedies which such party has been
granted at any time under any other agreement or contract with the other party
hereto and all of the rights which such party has under any law. Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law.
4B. CONSENT TO AMENDMENTS. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended only by the prior
written consent of Contributor and Contributee. No other course of dealing
between any of the parties hereto or any delay in exercising any rights
hereunder or under the Agreement shall operate as a waiver of any rights of any
party hereto.
4C. TERMINATION. This Agreement may be terminated only by the prior
written consent of Contributor and Contributee; provided, however, that in the
event of a failure of any of the conditions to either party's obligation to
close this Agreement the other party may terminate this Agreement if such other
party does not waive such failure in writing on or prior to the latest date on
which the Effective Time identified in SECTION 1D above is permitted to occur
pursuant to such SECTION 1D.
4D. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not.
4E. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
4F. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together shall constitute one
and the same Agreement.
4G. DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
4H. GOVERNING LAW. Except for matters governed by federal law, all
other issues and questions concerning the construction, validity, enforcement
and interpretation of this Agreement and the exhibits and schedules hereto shall
be governed by, and construed in accordance with, the laws of the State of Utah,
without giving effect to any choice of law or conflict of law rules or
provisions (whether of the State of Utah or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
Utah.
7
<PAGE>
4I. NOTICES. Except as expressly set forth to the contrary in this
Agreement, all notices, requests or consents provided for or permitted to be
given under this Agreement must be in writing and shall be deemed delivered: (i)
upon delivery if delivered in person; (ii) three (3) business days after deposit
in the United States mail, addressed to the recipient, postage paid, and
registered or certified with return receipt requested; (iii) upon transmission
if sent via telecopier, with a confirmation copy sent via overnight mail; or
(iv) one (1) business day after deposit with a national overnight courier. Such
notices, demands and other communications shall be sent to each party at the
address or telecopy number indicated below:
IF TO CONTRIBUTOR:
Sento Corporation
808 East Utah Valley Drive
American Fork, UT 84003
Attention: Linden Barney
Telecopy: (801) 492-2100
IF TO CONTRIBUTEE:
EchoPass Corporation
808 East Utah Valley Drive
American Fork, UT 84003
Attention: Stanley J. Cutler
Telecopy: (801) 492-2100
or to such other address or telecopy number or to the attention of such other
person as the recipient party has specified by prior written notice to the
sending party.
4J. NO STRICT CONSTRUCTION. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
SENTO CORPORATION
By: /s/ ARTHUR F. COOMBS, III
-------------------------------
Name: Arthur F. Coombs, III
Title: President and Chief Executive Officer
ECHOPASS CORPORATION
By: /s/ KEITH D. BARR
-------------------------------
Name: Keith D. Barr
Title: Vice President and Chief Technology Officer
9
<PAGE>
SCHEDULE 1A(i)(a)
TO
CONTRIBUTION AGREEMENT
----------------------------------------------------------------------
Technology
The "TECHNOLOGY" shall mean the internally-developed applications,
integration methods, maintenance and use processes, systems and components
currently owned and utilized by Contributor in the operation of its eCustomer
Contact Center, including, without limitation, all related sales and marketing
rights.
<PAGE>
SCHEDULE 1A(i)(b)
TO
CONTRIBUTION AGREEMENT
----------------------------------------------------------------------
Tangible Assets
[See schedule of assets attached hereto]
<PAGE>
TANGIBLE ASSETS
<TABLE>
<CAPTION>
ASSET
NO. DESCRIPTION
<S> <C>
103 Sun Sparcstation 5
109 VMAX Astra 600P scanner
117 Monitor
133 Yamaha CD writer
136 Link monitor
196 ADI monitor
211 Auto loader & SCSI drive
212 (2) fractional T-1s
215 Monitor-Princeton
238 ADI monitor
248 Monitor-Princeton 15",676"
252 Sager pentium laptop
254 Monitor-Princeton 15",640"
274 Compaq Deskpro
295 ADI Monitor
297 ADI Monitor 17",676"
305 Acer CPU
307 ADI monitor
316 Pentium 150 workstation
328 Pentium 200 workstation
329 Pentium 200 workstation
332 ADI monitor
339 ADI Monitor
340 ADI Monitor
346 ADI Monitor
362 Round table
374 4.3 GB narrow disk drive
375 3 Comlink switch
380 ADI Monitor
389 Jazz drive, cartridge,zip
392 ROOU,DKSUE,DKT202SD,RCOU
405 PKLU, TSTU, RS48S
407 Toshiba Satellite Pro
412 HP Vectra CPU
417 Pentium 120 workstation
461 Princeton Monitor
476 Bookcase
478 Credenza
479 Credenza
525 ADI Monitor
535 Desk
578 Nokia monitor
586 CTX monitor
588 Win terminal
643 CPU (Warf)
646 UPS
655 CPU
764 Compaq Deskpro EP
772 Compaq Deskpro EP
<PAGE>
774 Compaq Deskpro EP
784 Compaq Deskpro EP
874 ADI monitor
896 Exchange server V5.0
899 Monitor Maxtech 15",640"
900 Pentium 150 workstation
902 Monitor Maxtech 15",640"
903 Pentium 200 workstation
908 Monitor Maxtech 15",676"
912 Monitor Maxtech 15",676"
913 Monitor Maxtech 15",676"
922 2.1 GB SCSI wide disk
929 3.1 GB EIDE wide drive
930 Monitor
944 Compaq Deskpro EP
945 Compaq Deskpro EP
948 Compaq CPU
981 Compaq Deskpro
988 Compaq CPU
1018 ADI Monitor
1037 ADI Monitor
1038 ADI Monitor
1039 Compaq Deskpro 6300
1048 ADI Monitor
1066 ADI Monitor
1091 3 GB Ultra Wide disk drive
1092 Funai 16X IDE CD ROM
1129 Monitor Percomp 14",676"
1130 Monitor Percomp 14",676"
1131 Pentium 133 workstation
1201 Monitor Percomp 14",676"
1203 Gateway EV 700
1217 Gateway EV 700
1301 Pentium 133 workstation/CD burner
1302 Pentium dial-in server
1320 Gateway G6
1326 Gateway G6
1372 Gateway G6
1380 Gateway E-4200 computer
1388 Monitor Viewsonic 21 ",676"
1407 ADI Monitor
1410 ADI Monitor
1412 ADI Monitor
1426 Oak bookcase
1464 Compaq Computer
1493 ADI Monitor
1502 Compaq Desk Pro
1507 Compaq Desk Pro
1510 Compaq Desk Pro
<PAGE>
1525 Compaq Desk Pro
1527 Compaq Desk Pro
1552 Compaq Deskpro 6300
1583 Compaq Deskpro
1604 Compaq Deskpro
1610 Compaq
1612 Compaq Deskpro
1613 Compaq CPU
1614 Compaq Deskpro
1616 Compaq Deskpro
1626 Compaq Deskpro
1630 Compaq Deskpro
1631 Compaq
1633 Compaq Deskpro
1634 Speaker Wire-sound System
1635 Speakers (4)-sound system
1638 Adcom-power amp 2x80w
1639 Niles 4PR Speaker Select
1640 Yamaha 5 Disc CD Changer
1641 Yamaha 5 Disc CD Changer
1642 Yamaha 5 Disc CD Changer
1659 128MB SDRAM (2)
1662 128MB SDRAM (2)
1685 128 MB SIMM kit
1686 256MB buffered EDO DIMM
1701 CPU - ditto tape backup
1703 9.10GB SCSI3 wide (4)
1704 128MB SDRAM
1707 9.10GB SCSI3 wide (3)
1709 Smart-UPS 3000net 3000va
1711 ENET 10BT Hub 24 Port
1712 ENET 10BT Hub 24 Port
1714 Cisco 3600 6 port modem
1743 Monitor Everview 14",676"
1792 ADI monitor
1795 Compaq Proliant computer
1825 PBX Switch & CTI Service
1839 PBX Switch & CTI Service
1844 PBX & CTI install charges
1848 PCI three channel
1849 Matrox graphics
1858 Pentium 266 workstation
1859 Panasonic 17 Panasync"
1865 Zap video email unit
1867 Zap video email unit
1868 Zap video email unit
1869 Zap video email unit
1870 Zap video email unit
1871 Zap video email unit
<PAGE>
1872 Zap video email unit
1873 Zap video email unit
1874 Zap video email unit
1875 Zap video email unit
1876 SW100 user, port-chan lic
1887 3 Com link switch
1888 3 Com link switch
1889 3 Com link switch
1897 Monitor Maxtech 15",676"
1906 Intel MMX 200 workstation
1907 4port Rhetorex brd,24 chn
1912 Pentium 300 workstation
1913 Cisco 2501
1916 Intel MMX 200 workstation
1949 ISDN access installation
1950 Dual port DTI/PRI & card
1952 Monitor ADI 17",640"
1955 Analog mssg waiting card
1958 Intel MMX 233 workstation
1959 Compaq Deskpro
1961 300 TNs for Nortel Switch
1966 Monitor ADI 17",640"
1967 Monitor ADI
1976 CPU
1984 Pentium 400 Workstation
1996 Microscan 17 Monitor"
2015 Compaq Desktop EP
2034 Compaq Proliant 1600 server
2037 Compaq Proliant 3000 server
2038 Compaq Proliant 3000 server
2039 Compaq Proliant 3000 server
2045 Compaq Prosignia 200
2046 Compaq Prosignia 200
2047 Compaq Proliant 1600
2048 Compaq Prosignia 200
2049 Compaq Deskpro EP
2050 Compaq Deskpro EP
2054 Compaq Deskpro EP
2083 Compaq Deskpro EP
2092 Compaq Deskpro EP
2103 Monitor ADI 17",640"
2112 Monitor ADI 17",676"
2119 Monitor ADI 17",676"
2121 Monitor ADI 17",676"
2125 Monitor ADI 17",640"
2137 Monitor ADI 17",640"
2147 Monitor ADI 17",640"
2169 Monitor ADI 17",640"
2179 Change 9 T-1 lines from copper to fiber
<PAGE>
2188 Gateway E-3200-400 Computer
2224 Gateway E-3200-400 Computer
2270 Gateway E-3200 350 computer
2276 Gateway E-3200 350 computer
2281 Gateway E-3200 350 computer
2295 Gateway E-3200 350 computer
2311 Gateway EV700 monitor
2326 18.20 GB SCSI ultra wide hard drive
2327 512 MB buffered EDO DIMM memory
2328 Monitor 17 ADI"
2329 50 Genesys licenses
2330 IVR cards & ports
2331 3 Compaq 256 MB SDRAM DIMM
2332 Compaq Proliant processor kit & 3 256 MB SDRAM
2333 Compaq Proliant 3000, PII, 450 computer & redundant power supply
2334 Compaq Proliant 1600, PII, 450 computer & 4.03 GB SCSI & 128 MB SDRAM DIMM
2335 Metaframe 1.8-15 user & Winframe 1.8-10 user
2337 Toshiba Tecra 8000, PII, 300 laptop
2338 Toshiba Tecra 8000, PII, 300 laptop
2339 Conference TDS card
2340 Kentrox CSU/DSU D-serv standalone
2341 Smart UPS 3000
2342 (4) 9.10 GB SCSI ultra hard drive
2343 Compaq Proliant upgrade kit, board, 256 MB SDRAM DIMM
2346 EZT3 Mux w/DS1 & DS3 redundancy
2347 Compaq Proliant 1600 PIII 500 computer
2348 Compaq Proliant 1600 PIII 500 computer
2371 Gateway E3200 PIII 450
2374 Gateway E3200 PIII 450
2375 Gateway E3200 PIII 450
2376 Gateway E3200 PIII 450
2386 Gateway E3200 PIII 450
2400 Gateway E3200 PIII 450
2401 Gateway E3200 PIII 450
2402 Gateway E3200 PIII 450
2404 (2) Cisco WIC-1DSU-T1 card
2406 Cisco 1700 router
2407 Cisco 1700 router
2408 Line side T1 card
2409 Themescape Publisher software
2411 (150) Genesys license
2414 MS SQL server ver 7.0 license
2417 Compaq P300
2419 Compaq P300 Deskpro
2420 Compaq Prosignia 200
2421 Compaq Prosigna 200
2424 Toshiba Tecra 8000
2432 Compaq Smart Array 4200 SCSI Controller
2433 Brackets & legs in computer lab
<PAGE>
2434 (14) 128MB SDRAM for developers
2435 Backup internet suite, call concentrator, SNMP mgmt
2436 Smart UPS 3000
2437 (2) NT Server 4.0 & (2) SQL Server 7.0 licenses
2438 (2) lineside T1 cards
2439 (3)dual PRI cards,DTR card,Universal trunk card
2484 Gateway EV 700 monitor
2514 Nortel 81C switch upgrade from 61C
2515 Compaq expansion kits & controllers
2516 (6) Compaq 256MB SDRAM DIMM
2517 AS5300 memory module 32MB to 64MB
2519 Genesys software modifications
2520 (2) 804 ISDN BRI routers
2521 DN expansion materials & labor
2522 AL-1 lightening arrestor & antenna
2523 Compaq 1 GB memory kit EDO ram
2524 Compaq P2-450 processor option kit
2526 (2) Compaq 256 MB SDRAM DIMM
</TABLE>
<PAGE>
SCHEDULE 1C(ii)
TO
CONTRIBUTION AGREEMENT
-------------------------------------------------
Excluded Liabilities
The Excluded Liabilities shall mean:
1. Payment Obligations for any equipment listed on Exhibit A to the
Bill of Sale and ordered by Contributor prior to the Closing.
<PAGE>
EXHIBIT A
TO
CONTRIBUTION AGREEMENT
----------------------------------------------------------------------
Assignment of Technology and Assumption Agreement
[See document attached hereto]
<PAGE>
ASSIGNMENT OF TECHNOLOGY AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT OF TECHNOLOGY AND ASSUMPTION AGREEMENT (this
"ASSIGNMENT") is executed as of _____________, 1999 by SENTO CORPORATION, a
Utah corporation ("SELLER"), in favor of ECHOPASS CORPORATION, a Utah
corporation ("BUYER"), pursuant to that certain Contribution Agreement, dated
as of November 17, 1999, between Seller and Buyer (the "AGREEMENT").
Seller, for and in consideration of Ten and No/100 Dollars ($10.00),
the issuance of the Shares (as defined in the Agreement), the execution of
the Services Agreement (as defined in the Agreement), and other good and
valuable consideration in hand paid by Buyer, the receipt and sufficiency of
which are hereby acknowledged by Seller, assigns, transfers, sets over and
delivers to Buyer all of Seller's right, title and interest in and to the
Technology (as defined in the Agreement) to have and to hold the Technology
with any and all other rights and appurtenances thereto owned by Seller.
EXCEPT AS EXPRESSLY SET FORTH IN THE AGREEMENT, (A) SELLER ASSIGNS,
TRANSFERS, SETS OVER AND DELIVERS THE TECHNOLOGY HEREBY IN "AS IS, WHERE IS"
CONDITION "WITH ALL FAULTS," WITHOUT ANY WARRANTIES, REPRESENTATIONS OR
GUARANTIES OF ANY KIND, ORAL OR WRITTEN, EXPRESS, OR IMPLIED, CONCERNING THE
TECHNOLOGY, THE AGREEMENT OR THIS ASSIGNMENT FROM OR ON BEHALF OF SELLER; AND
(B) SELLER HAS NOT MADE, DOES NOT AND WILL NOT MAKE ANY REPRESENTATIONS, OR
WARRANTIES, OF ANY KIND, ORAL OR WRITTEN, EXPRESS OR IMPLIED, CONCERNING THE
TECHNOLOGY, INCLUDING, WITHOUT LIMITATION (1) THE VALUE, MERCHANTABILITY,
PROFITABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE, OF THE
TECHNOLOGY, (2) THE CONDITION, QUALITY, MANNER OF REPAIR, STATE OF REPAIR OR
LACK OF REPAIR OF THE TECHNOLOGY OR (3) THE COMPLIANCE OF THE TECHNOLOGY WITH
ANY APPLICABLE LAWS, RULES, STATUTES, REGULATIONS, CODES OR ORDINANCES.
Buyer accepts the transfer of the Technology and Buyer agrees to
assume and perform all the Assumed Liabilities (as defined in the Agreement)
relating to the Technology.
<PAGE>
IN WITNESS WHEREOF, the undersigned execute this Assignment as of
the date first written above.
"BUYER" "SELLER"
ECHOPASS CORPORATION, a Utah SENTO CORPORATION, a Utah corporation
corporation
By: By:
----------------------------- ----------------------------------
Name: Name:
--------------------------- --------------------------------
Title: Title:
-------------------------- -------------------------------
2
<PAGE>
EXHIBIT B
TO
CONTRIBUTION AGREEMENT
----------------------------------------------------------------------
Bill of Sale and Assumption Agreement
[See document attached hereto]
<PAGE>
BILL OF SALE AND ASSUMPTION AGREEMENT
THIS BILL OF SALE AND ASSUMPTION AGREEMENT (this "BILL OF SALE") is
executed as of _____________, 1999 by SENTO CORPORATION, a Utah corporation
("SELLER"), in favor of ECHOPASS CORPORATION, a Utah corporation ("Buyer"),
pursuant to that certain Contribution Agreement, dated as of November 17, 1999,
between Seller and Buyer (the "AGREEMENT").
Seller, for and in consideration of Ten and No/100 Dollars ($10.00),
that certain Promissory Note of even date herewith executed by Buyer to Seller
in the initial principal amount of _____________ Dollars ($____________), and
other good and valuable consideration in hand paid by Buyer, the receipt and
sufficiency of which are hereby acknowledged by Seller, assigns, transfers, sets
over and delivers to Buyer all of Seller's right, title and interest in and to
the Tangible Assets (as defined in the Agreement) to have and to hold the
Tangible Assets with any and all other rights and appurtenances thereto owned by
Seller.
EXCEPT AS EXPRESSLY SET FORTH IN THE AGREEMENT, (A) SELLER ASSIGNS,
TRANSFERS, SETS OVER AND DELIVERS THE TANGIBLE ASSETS HEREBY IN "AS IS, WHERE
IS" CONDITION "WITH ALL FAULTS," WITHOUT ANY WARRANTIES, REPRESENTATIONS OR
GUARANTIES OF ANY KIND, ORAL OR WRITTEN, EXPRESS, OR IMPLIED, CONCERNING THE
TANGIBLE ASSETS, THE AGREEMENT OR THIS BILL OF SALE FROM OR ON BEHALF OF SELLER;
AND (B) EXCEPT AS EXPRESSLY SET FORTH IN THE AGREEMENT, SELLER HAS NOT MADE,
DOES NOT AND WILL NOT MAKE ANY REPRESENTATIONS, OR WARRANTIES, OF ANY KIND, ORAL
OR WRITTEN, EXPRESS OR IMPLIED, CONCERNING THE TANGIBLE ASSETS, INCLUDING,
WITHOUT LIMITATION (1) THE VALUE, MERCHANTABILITY, PROFITABILITY, SUITABILITY OR
FITNESS FOR A PARTICULAR USE OR PURPOSE, OF THE TANGIBLE ASSETS, (2) THE
CONDITION, QUALITY, MANNER OF REPAIR, STATE OF REPAIR OR LACK OF REPAIR OF THE
TANGIBLE ASSETS OR (3) THE COMPLIANCE OF THE TANGIBLE ASSETS WITH ANY APPLICABLE
LAWS, RULES, STATUTES, REGULATIONS, CODES OR ORDINANCES.
Buyer accepts the transfer of the Tangible Assets and Buyer agrees to
assume and perform all the Assumed Liabilities (as defined in the Agreement)
relating to the Tangible Assets.
<PAGE>
IN WITNESS WHEREOF, the undersigned execute this Bill of Sale as of the
date first written above.
"BUYER" "SELLER"
ECHOPASS CORPORATION, a Utah SENTO CORPORATION, a Utah corporation
corporation
By: By:
---------------------------------- -----------------------------------
Name: Name:
-------------------------------- ---------------------------------
Title: Title:
------------------------------- --------------------------------
2
<PAGE>
EXHIBIT C
TO
CONTRIBUTION AGREEMENT
----------------------------------------------------------------------
Facilities and Services Agreement
[See document attached hereto]
<PAGE>
DRAFT
11/17/99
FACILITIES AND SERVICES AGREEMENT
THIS FACILITIES AND SERVICES AGREEMENT (this "AGREEMENT") is entered
into as of the ___ day of ________________________, 1999, by and between
SENTO CORPORATION, a Utah corporation ("SENTO") and ECHOPASS CORPORATION, a
Utah corporation ("ECHOPASS").
BACKGROUND
Pursuant to that certain building lease dated as of July 29, 1998
between Pracvest ("LANDLORD") and Sento (the "MASTER LEASE"), Sento leases
certain office and research and development space located in American Fork,
Utah, as more fully described in the Master Lease (the "OFFICE").
Pursuant to that certain Contribution Agreement, dated as of
November 17, 1999, between Sento, as contributor, and EchoPass, as
contributee (the "CONTRIBUTION AGREEMENT"), Sento desires to license to
EchoPass a portion of the Office and to permit EchoPass to use or benefit
from certain equipment, and accounting, administrative and similar services.
EchoPass desires to receive a license of a portion of the Office and to
utilize such equipment and services.
AGREEMENT
NOW, THEREFORE, in consideration of the Background, the covenants
and agreements hereinafter set forth and other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged by the parties, the parties hereto hereby agree as follows:
ARTICLE I - LICENSE AND SERVICES PROVIDED TO ECHOPASS
1.1 LICENSE OF THE OFFICE.
(a) LICENSE TO USE THE OFFICE. Subject to the terms and
conditions of this Agreement, Sento grants to EchoPass a license to use the
portion of the Office which consists of approximately 2,600 square feet (such
portion being the "LICENSED PREMISES"). EchoPass acknowledges that it has
been granted only a non-exclusive license to use and occupy the Licensed
Premises and that it has not been granted, nor will it claim, any real
property interest in the Office, all of which interests are hereby
disclaimed. Sento will deliver the Licensed Premises "as is," and "with all
faults," and EchoPass agrees that it will accept such premises in their
existing condition.
(b) SURRENDER OF LICENSED PREMISES. Immediately following
termination of this Agreement, EchoPass shall, at its expense (i) remove from
the Licensed Premises all of its personal property and that of its employees;
(ii) quit and deliver up the Licensed Premises to Sento peaceably and quietly
in as good order and condition the same were in on the Effective Date,
reasonable wear and tear excepted, and (iii) return any parking passes,
access cards, keys, and similar items granting access to, or related to the
occupancy of, the Licensed Premises. EchoPass shall repair any damages to the
Office resulting from the removal of EchoPass' personal property.
1.2 EQUIPMENT LICENSE. Sento grants to EchoPass, upon the terms and
conditions of this Agreement, a nonexclusive license to use all furniture and
equipment located in the Office which is necessary to the operation of the
business of EchoPass, other than computer hardware and software and related
equipment (the "EQUIPMENT").
<PAGE>
Sento will make available the Equipment to EchoPass in "as is" condition.
EchoPass agrees to use the Equipment in a careful manner and in compliance
with all applicable laws, ordinances and regulations affecting the use of
such equipment. Sento and its employees shall have access to the Equipment at
all reasonable times. EchoPass shall not itself remove the Equipment from the
Office, nor permit the Equipment to be removed from the Office, without the
prior written consent of Sento. EchoPass and Sento agree that each shall use
reasonable efforts to use the Equipment in such a manner as not to interfere
unreasonably with the needs of the other party's business. Title to the
Equipment shall remain with Sento at all times during the "Term" (as defined
below). EchoPass acknowledges that it has been granted only a license to use
the Equipment during the Term, and EchoPass expressly disclaims any ownership
interest in the Equipment. Immediately upon termination of this Agreement,
EchoPass shall deliver up the Equipment to Sento peaceably and quietly in as
good condition as the same was in on the date first written above, ordinary
wear and tear excepted.
1.3 ECHOPASS SERVICES.
(a) ACCOUNTING SERVICES. Sento shall provide to EchoPass,
upon the terms and conditions of this Agreement, accounting services (the
"ACCOUNTING SERVICES").
(b) HUMAN RESOURCE SERVICES. Sento shall provide to
EchoPass, upon the terms and conditions of this Agreement, services relating
to human resources support and management (the "HUMAN RESOURCE SERVICES").
(c) ADMINISTRATIVE SERVICES. Sento shall provide to
EchoPass, upon the terms and conditions of this Agreement, services relating
to general corporate and administrative services and executive administrative
support (the "ADMINISTRATIVE SERVICES" and, together with the Accounting
Services and the Human Resource Services, the "ECHOPASS SERVICES").
(d) SENTO EMPLOYEES. Each employee providing the EchoPass
Services shall remain subject to Sento's supervision and to all rules,
regulations, or limitations governing employees of Sento. Notwithstanding the
foregoing, EchoPass and Sento hereby agree that each shall use its best
efforts to utilize the time of the employees providing the EchoPass Services
in such a manner as to not interfere unreasonably with the operation of the
other party's business.
ARTICLE II - TERM; PAYMENTS
2.1 TERM. The term of this Agreement (the "TERM") shall commence on
_______________________ (the "EFFECTIVE DATE") and continue until terminated
by either party upon 60 days' written notice or as otherwise provided herein.
2.2 PAYMENT TERMS. In exchange for the license and services set
forth in ARTICLE II hereof, EchoPass shall make the following payments:
(a) PAYMENT FOR LICENSE OF LICENSED PREMISES. In exchange
for the license by Sento of the Licensed Premises, the provision of
utilities, Sento's shipping and receiving department and all expenses
incurred by Sento with respect to the Licensed Premises under the Master
Lease, EchoPass shall pay Sento a monthly license fee in the amount of $7,800
(the "LICENSE FEE"), subject to adjustment as set forth below in SECTION
2.2(g).
2
<PAGE>
(b) PAYMENT FOR ACCOUNTING SERVICES. In exchange for Sento
providing the Accounting Services, EchoPass shall pay Sento a monthly fee of
$12,000 (the "ACCOUNTING FEE"), subject to adjustment as set forth below in
SECTION 2.2(g).
(c) PAYMENT FOR ADMINISTRATIVE SERVICES. In exchange for
Sento providing the EchoPass Administrative Services, EchoPass shall pay
Sento a monthly fee of $8,500 (the "ADMINISTRATIVE SERVICES FEE"), subject to
adjustment as set forth below in SECTION 2.2(g).
(d) PAYMENT FOR HUMAN RESOURCE SERVICES. In exchange for
Sento providing the Human Resource Services, EchoPass shall pay Sento a
monthly fee (the "HUMAN RESOURCE SERVICES FEE") equal to EchoPass' pro-rata
share of the Human Resource Services. Calculations performed pursuant to this
SECTION 2.2(d) shall be performed consistent with Sento's past practices
regarding allocation of the costs of human resource services to subsidiaries
and divisions of Sento and licensees of Sento's office space.
(e) PAYMENT FOR OUTBOUND TELEPHONE CALLS. EchoPass shall
pay Sento the direct costs of all outbound telephone calls made on phone
lines allocated to EchoPass by Sento (the "OUTBOUND CALLS FEE"). Calculations
performed pursuant to this SECTION 2.2(e) shall be performed consistent with
Sento's past practices regarding allocation of the costs of outbound
telephone calls to subsidiaries and divisions of Sento and licensees of
Sento's office space.
(f) PAYMENT FOR MISCELLANEOUS COSTS. For all costs and
expenses incurred by Sento on behalf of EchoPass, including without
limitation, copy machine and basic telephone costs, other than in connection
with the EchoPass Services and other than the costs represented by the
Outbound Calls Fee, EchoPass shall pay Sento a monthly fee (the
"MISCELLANEOUS COSTS FEE" and together with the License Fee, the Accounting
Fee, the Administrative Services Fee, the Human Resource Services Fee and the
Outbound Calls Fee, the "FEE") equal to EchoPass' pro-rata share of such
other costs and expenses. Calculations performed pursuant to this SECTION
2.2(f) shall be performed consistent with Sento's past practices regarding
allocation of such other costs and expenses and costs and expenses similar
thereto to subsidiaries and divisions of Sento and licensees of Sento's
office space.
(g) FEE ADJUSTMENT. After the first day of every quarter
during the Term, Sento shall have the right to propose an increase in the
License Fee, the Accounting Fee and/or the Administrative Services Fee by
submitting to EchoPass, within fifteen (15) days after the first day of every
such quarter, a proposed adjusted License Fee, Accounting Fee and/or
Administrative Services Fee (the "FEE PROPOSAL"). EchoPass shall approve or
disapprove such Fee Proposal in a writing delivered to Sento within thirty
(30) days after the date such Fee Proposal was received by EchoPass. In the
event that EchoPass shall disapprove any Fee Proposal, or shall not deliver
any writing regarding such Fee Proposal to Sento within thirty (30) days
after the date such Fee Proposal was received by EchoPass, this Agreement
will immediately and automatically terminate, and EchoPass will immediately
vacate and surrender the Licensed Premises. Any Fee Proposal approved by
EchoPass shall take effect the first day of the month following the month in
which the Fee Proposal was approved.
The payments described in the foregoing SECTIONS 2.2(a), 2.2(b) and 2.2(c)
are due before the first day of each calendar month, subject to adjustment
for such month's fee as described above. The payments described in the
foregoing Sections 2.2(d), 2.2(e) and 2.2(f) are due within fourteen (14)
days after EchoPass' receipt of invoice therefor.
3
<PAGE>
ARTICLE III - GENERAL PROVISIONS
3.1 MASTER LEASE. This Agreement is subordinate to the Master Lease,
and Sento and EchoPass shall take or refrain from taking, as applicable, all
actions necessary to comply with the Master Lease. The Licensed Premises
shall be used by EchoPass exclusively for the offices of EchoPass and for no
other purposes without the prior written consent of Sento. EchoPass agrees
not to occupy or use, or permit any portion of the Licensed Premises to be
used, for any purpose which violates the Master Lease, is unlawful or
disreputable, or is deemed to be hazardous, or permit anything to be done in
or about the Office which would, directly or indirectly, in any way cause the
cancellation of insurance coverage on the Office or violate federal, state or
local law. Sento hereby agrees (without representation, warranty or recourse
of any nature whatsoever) that EchoPass shall receive all of the physical
services and utilities to be provided by Landlord for the Licensed Premises
under the Master Lease. EchoPass shall not directly make any demands on or
otherwise have any dealings with Landlord. If EchoPass desires to make any
demands on or otherwise communicate with Landlord, EchoPass shall inform
Sento of its demands or communications, and Sento shall, at its discretion,
make such demand or convey such information on EchoPass' behalf. In the event
the Master Lease is terminated for any reason (including without limitation
voluntary termination by Sento), EchoPass will immediately vacate and
surrender the Office, and this Agreement will immediately and automatically
terminate.
3.2 DEFAULT. In the event of a failure to comply with any term
hereof by either party, the other party shall provide written notice of the
noncompliance. In the event the noncomplying party does not cure such
noncompliance within 20 days of receiving such notice, the noncomplying party
shall be deemed to be in default, and the other party shall be free to pursue
any and all remedies provided herein or by law. Should EchoPass be deemed to
be in default under SECTION 2.2 of this Agreement, Sento shall, in addition
any and all remedies provided by law, have the following remedies:
(a) Sento shall have the right to be released from all
obligations in law and equity under this Agreement, and Sento may, at its
option, re-enter and take possession of the Office, including without
limitation, the Licensed Premises without legal process as in its first and
former estate, together with all improvements and additions made by EchoPass
thereon; or
(b) Sento may bring suit and recover judgment for any and
all delinquent Fee payments, or other amounts owing, under this Agreement,
including costs and attorneys fees and including interest at the rate of
fourteen percent (14%) per annum. The use of this remedy on one or more
occasions shall not prevent Sento, at its option, from resort to one of the
other remedies hereunder in the even of a subsequent default. In the event
that EchoPass fails to make any payment due hereunder at the time and in the
manner required, such payment shall bear interest at the rate of fourteen
percent (14%) per annum.
3.3 ASSIGNMENT. EchoPass shall not sublet or sublicense any portion
of the Licensed Premises or assign, mortgage, pledge or hypothecate this
Agreement or any interest herein, any portion of the Office, the Equipment or
the EchoPass Services without the written consent of Sento and the Landlord
(as applicable) having first been obtained. Any violation of the foregoing
sentence shall be a default of EchoPass hereunder. Any transfers or
assignment by operation of law shall be deemed to be an assignment within the
provisions of this SECTION 3.3, including, but not limited to, an assignment
for the benefit of creditors or as part of a merger or corporate
reorganization of EchoPass.
3.4 INDEMNIFICATION. Each of Sento and EchoPass hereby agrees to
indemnify and hold harmless the other in accordance with the terms of
Sections 3C and 3D of the Contribution Agreement, which terms are
4
<PAGE>
incorporated herein by reference except that the representations, warranties
and covenants for which indemnification obligations may arise under such
Sections of the Contribution Agreement shall be deemed, for purposes of this
Agreement only, to be the representations, warranties and covenants set forth
in this Agreement. Furthermore, for purposes of this Agreement there shall be
no indemnification obligations for any Excluded Liabilities (as defined in
the Contribution Agreement) or Assumed Liabilities (as defined in the
Contribution Agreement).
3.5 MISCELLANEOUS. All notices and other communications provided for
hereunder shall be provided in the same manner as provided in the
Contribution Agreement. If a legal action or other proceeding is brought by
any of the parties hereto for enforcement of this Agreement, the party that
prevails by enforcing this Agreement shall be entitled to recover reasonable
attorney's fees, costs and expenses incurred, in addition to any other relief
to which they may be entitled. This Agreement shall be governed by and
construed in accordance with the substantive laws of Utah, without regard for
its conflict of laws provisions. This Agreement shall be binding upon and
inure to the benefit of EchoPass and Sento and their successors and permitted
assigns. The captions in this Agreement are for convenience only and are not
part of this Agreement. This Agreement may be simultaneously executed in
several counterparts, each of which shall be an original and all of which
shall constitute one and the same instrument. Counterparts transmitted by
telecopier shall have the same validity and effect as those transmitted by
mail or in person. This Agreement, together with the Exhibits attached
hereto, sets forth the entire agreement between the Sento and the EchoPass
with respect to the subject matter hereof, superseding any prior agreements
among such parties, and no amendment or modification of this Agreement shall
be binding or valid unless set forth in writing and executed by the parties
hereto.
IN WITNESS WHEREOF, EchoPass and Sento have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.
"SENTO" "ECHOPASS"
SENTO CORPORATION, a Utah corporation ECHOPASS CORPORATION, a Utah corporation
By: ________________________________ By: ________________________________
Its: _______________________________ Its: _______________________________
5
<PAGE>
EXHIBIT D
TO
CONTRIBUTION AGREEMENT
----------------------------------------------------------------------
Services Agreement
[See document attached hereto]
<PAGE>
DRAFT: 11/17/99
SERVICES AGREEMENT
This Services Agreement (the "AGREEMENT") is entered into as of the
_____ day of __________________, 1999 (the "EFFECTIVE DATE"), by and between
ECHOPASS CORPORATION, a Utah corporation ("ECHOPASS"), and SENTO CORPORATION, a
Utah corporation ("SENTO").
BACKGROUND
WHEREAS, pursuant to a certain Assignment of Technology and Assumption
Agreement, dated as of even date herewith, by Sento in favor of EchoPass (the
"ASSIGNMENT"), and in connection with the closing of that certain Contribution
Agreement, dated as of November 17, 1999, between Sento, as contributor, and
EchoPass, as contributee (the "CONTRIBUTION AGREEMENT"), Sento has transferred
to EchoPass the Technology (as defined in the Contribution Agreement).
WHEREAS, Sento has used and desires to continue to derive benefit from
the Technology in connection with the operation of Sento's eCustomer Contact
Center.
WHEREAS, the execution of this Agreement is a condition to the
obligations of the parties to close the transactions contemplated by the
Contribution Agreement.
WHEREAS, in consideration of the execution of the Contribution
Agreement, Sento desires to receive from EchoPass, and EchoPass desires to
provide the Services (as defined below) to Sento, subject to the terms and
conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the Background above (which the
parties hereto acknowledge is accurate, true and correct), the mutual covenants
and conditions set forth herein and other good and valuable consideration, the
receipt and legal sufficiency of which are hereby acknowledged by the parties,
the parties hereto hereby agree as follows:
1. SERVICES. During the Term (as defined below), EchoPass agrees to
provide, and Sento agrees to pay for, all services offered by EchoPass or
provided by EchoPass to any of its customers to the extent that Sento elects to
receive such Services from EchoPass (the "SERVICES"), including, without
limitation the Sento Services (as defined in the "Statement of Work" described
in Section 2 below) that are set forth in the Statement of Work (as defined in
Section 2 below), subject to the terms and conditions set forth in this
Agreement.
2. STATEMENT OF WORK. Sento and EchoPass hereby acknowledge and agree to
the terms and conditions of that certain statement of work attached hereto as
EXHIBIT A (the "STATEMENT OF WORK"). Sento and EchoPass hereby acknowledge and
agree that they shall periodically amend the Statement of Work to reflect
developments in the business relationship between the parties and that, upon
their mutual execution of each amendment to the Statement of Work, the terms and
conditions of this Agreement shall be amended accordingly.
3. TERM. The term of this Agreement shall commence on the date of this
Agreement and, unless sooner terminated as provided in this Agreement, shall
continue until ___________, ________ (the "TERM").
<PAGE>
4. SERVICE COMMITMENT. During the Term, EchoPass shall provide to Sento
the level of Services reasonably requested by Sento in connection with Sento's
eCustomer Contact Center, including, without limitation, the level of the Sento
Services.
5. FEES. Sento shall not be obligated to pay to EchoPass any fees nor
reimburse EchoPass for any costs or expenses in connection with the installation
and configuration of the hardware and software required for the provision of the
Services to Sento by EchoPass, including, without limitation, the testing and
debugging of such installation and configuration and the correction of any
problems arising out of such installation and configuration. Following such
installation and configuration, Sento shall be required to pay an amount to
EchoPass for the Services as set forth in the Statement of Work, as amended;
PROVIDED, HOWEVER, that the amount charged to Sento for the Services shall not
exceed the lowest amount charged or offered to be charged by EchoPass to any
other party for comparable services and on other terms that are no less
favorable to Sento than those offered by EchoPass to any other party's customers
for such Services.
6. STAFFING LEVELS. EchoPass shall provide the appropriate staffing
levels (expressed in terms of the number and skills of employees) to effectively
provide the Services to Sento. EchoPass shall provide at least the minimum level
of staffing provided to any customer of EchoPass receiving the same type and
level of Services as Sento, unless a greater level of staffing is required to
effectively provide the Services to Sento.
7. MOST FAVORED CUSTOMER. It is the intent of both Sento and EchoPass
that the Services be provided to Sento on a "most-favored-customer" basis and
all terms in this Agreement (including without limitation, type and level of
Services provided, fees charged and staffing levels) shall be interpreted and
construed to effect such intent. Any term or condition that is offered by
EchoPass to or agreed upon by EchoPass with any customer of EchoPass shall be
irrevocably offered in writing to Sento by EchoPass within ten (10) days of the
offer of such term or condition to or agreement upon such term or condition with
such EchoPass customer, the terms and conditions of which offer, if accepted by
Sento in writing at any time after such offer, shall be deemed to amend the
terms and conditions of this Agreement and shall be reflected in the Statement
of Work. The effectiveness of such deemed amendment shall not be affected by the
failure to reflect such amendment in the Statement of Work.
8. TERMINATION UPON DEFAULT. In the event of any material default by a
party (the "DEFAULTING PARTY") of a material obligation under this Agreement,
the other party (the "NON-DEFAULTING PARTY") may give the Defaulting Party
written notice of the default and the election to terminate this Agreement
within 60 days after receipt of the notice if, within said time period, the
Defaulting Party fails to resolve the default by (i) curing the default, or (ii)
providing a written explanation satisfactory to the Non-Defaulting Party that a
default has not occurred, or (iii) entering into a mutually approved, written
agreement for the cure or other resolution of the default.
9. REMEDIES OTHER THAN TERMINATION UPON DEFAULT. Subject to the
provisions of SECTION 8 hereof, in the event of default, the Non-Defaulting
Party shall have all rights and remedies provided in law or equity, including
the right to obtain specific performance and damages (other than consequential
damages, which are expressly excluded); provided, however, that the
Non-Defaulting Party shall in any event be required to give notice of the
default and provide a 60-day opportunity to cure.
2
<PAGE>
10. BANKRUPTCY. All rights granted under or pursuant to this Agreement by
EchoPass to Sento are, and shall otherwise be deemed to be, for purposes of
Section 365(n) of the Title 11, United State Code (the "BANKRUPTCY CODE"), the
grant of rights to "intellectual property" as defined under Section 101(56) of
the Bankruptcy Code. The parties agree that Sento, as a recipient of such rights
under this Agreement, shall retain and may fully exercise all of its rights and
elections under the Bankruptcy Code. The parties further agree that, in the
event of the commencement of a bankruptcy proceeding by or against EchoPass
under the Bankruptcy Code, Sento shall be entitled to a complete duplicate of
(or complete access to, as appropriate) any such intellectual property and all
embodiments of such intellectual property, and same, if not already in its
possession, shall be promptly delivered to Sento (i) upon any such commencement
of a bankruptcy proceeding upon written request therefor by Sento, unless
EchoPass elects to continue to perform all of its obligations under this
Agreement, or (ii) if not delivered under (i) above, upon the rejection of this
Agreement by or on behalf of EchoPass upon written request therefor by Sento.
11. REPRESENTATIONS AND WARRANTIES.
11.1 ECHOPASS. EchoPass makes the following representations and
warranties to Sento, which representations and warranties shall
survive the execution and delivery of this Agreement:
11.1.1 Neither the execution and delivery of this Agreement, nor
the performance by EchoPass of its obligations provided for
herein, will violate any agreement, lien, instrument,
decree, order or judgment to which EchoPass or any of its
officers, directors or shareholders is a party or by which
it or they are bound.
11.1.2 EchoPass has the authority to enter into and perform this
Agreement. The representative of EchoPass signing this
Agreement is duly authorized to execute the same on behalf
of EchoPass and to consummate the transactions contemplated
hereby.
11.2 SENTO. Sento makes the following representations and warranties to
EchoPass, which representations and warranties shall survive the
execution and delivery of this Agreement:
11.2.1 Neither the execution and delivery of this
Agreement, nor the consummation of the transactions
provided for herein, will violate any agreement,
lien, instrument, decree, order or judgment to which
Sento is a party or by which it is bound.
11.2.2 Sento has the authority to enter into and perform
this Agreement. The representative of Sento signing
this Agreement is duly authorized to execute the
same on behalf of Sento and to consummate the
transactions contemplated hereby.
12. INDEMNIFICATION.
12.1 INDEMNIFICATION BY SENTO. Sento hereby agrees to indemnify, defend
and hold EchoPass and its officers, employees, agents and
affiliates harmless from and against all liabilities,
3
<PAGE>
claims, losses, damages, costs and expenses (including reasonable
attorney's fees) resulting from or arising in connection with any
breach by Sento of this Agreement, including, but not limited to,
the breach of any covenant, warranty or representation made by
Sento hereunder.
12.2 INDEMNIFICATION BY ECHOPASS. EchoPass hereby agrees to indemnify,
defend and hold Sento and its officers, employees, agents and
affiliates harmless from and against all liabilities, claims,
losses, damages, costs and expenses (including reasonable
attorney's fees) resulting from or arising in connection with any
of the following:
12.2.1 The failure of any of the following statements to be true,
correct and complete:
(a) EchoPass has all right, title and interest in and to
the intellectual property and other property rights
necessary for the performance by EchoPass of its
obligations under this Agreement, free and clear of
all liens, pledges, charges, security interests,
restrictions or encumbrances of any nature
whatsoever; and
(b) EchoPass is, and during the Term shall remain, in
compliance with applicable federal, state and local
governmental laws, regulations and ordinances
relating to its products, research and development
activities, including all such activities pertaining
to the Services, and EchoPass shall cause its
employees and agents to adhere thereto.
12.2.2 The breach by EchoPass of this Agreement, including, but
not limited to, the breach of any covenant, warranty or
representation made by EchoPass hereunder.
12.3 NOTICE AND DEFENSE OF THIRD PARTY CLAIMS. If any proceeding shall
be brought or asserted under SECTIONS 12.1 or 12.2 against an
indemnified party or any successor thereto (the "INDEMNIFIED
PERSON") in respect of which indemnity may be sought under such
Sections from an indemnifying person or any successor thereto (the
"INDEMNIFYING PERSON"), the Indemnified Person shall undertake the
defense, compromise or settlement of such proceeding with counsel
reasonably satisfactory to the Indemnified Person, and the
Indemnifying Person shall assume and pay all fees, costs and
expenses relating to or associated with the Indemnified Person's
defense thereof, including all fees and costs of counsel and the
payment of all costs and expenses in connection therewith. The
Indemnified Person shall give prompt written notice of such
Proceeding to the Indemnifying Person; provided, that any delay or
failure to so notify the Indemnifying Person shall relieve the
Indemnifying Person of its obligations hereunder only to the
extent, if at all, that the Indemnifying Person is materially
prejudiced by reason of such delay or failure. Actual or
threatened action by a governmental authority or other person is
not a condition or prerequisite to the Indemnifying Person's
obligations under SECTION 12.1 or 12.2. In connection with the
Indemnified Person's defense of any such proceeding, the
Indemnifying Person shall, reasonably and in good faith, assist
and cooperate in the defense thereof. With respect to matters not
involving proceedings brought or asserted by third parties, within
thirty (30) days after notification from any Indemnified Person
supported by reasonable documentation setting forth the nature of
the
4
<PAGE>
circumstances entitling any or all of such Indemnified Person
to indemnity hereunder, the Indemnifying Person, at no cost or
expense to such Indemnified Person, shall diligently commence
resolution of such matters in a manner reasonably acceptable to
such Indemnified Person and shall diligently and timely prosecute
such resolution to completion; provided, however, with respect to
those valid claims that may be satisfied by payment of a
liquidated sum of money and which are not disputed reasonably and
in good faith by the Indemnified Person shall promptly pay the
amount so claimed.
12.4 INFRINGEMENT ACTIONS. Each of EchoPass and Sento shall promptly
notify the other party in the event either learns of any instance
reasonably believed to constitute infringement of the Technology
or any charge of infringement arising out of use by Sento or any
affiliate of Sento of the Technology. In the event Sento elects to
prosecute a claim for infringement of any of the Technology, or if
a claim is made against Sento alleging infringement of a third
party's patent, design, utility model, intellectual property or
other rights as a result of use by Sento of any of the Technology,
EchoPass agrees to cooperate with Sento upon Sento's reasonable
request. In the event such a claim is made against Sento, EchoPass
shall indemnify, defend and hold Sento harmless against all costs
of the same, including without limitation all attorneys' and
witness fees and court costs incurred in connection therewith.
Sento shall retain sole control over the defense of any such
action and may retain counsel of its choice to conduct such
defense. If judgment is entered against Sento, or if Sento enters
into a settlement of any such claim or action, and if as a result
of such judgment or settlement Sento pays royalties, damages or
profits to the purported owner or owners of such infringed rights,
EchoPass shall indemnify and reimburse Sento on demand for any
amounts so paid.
13. MISCELLANEOUS.
13.1 NOTICES. All notices, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given
(i) when delivered personally, (ii) when sent by telecopier (with
receipt confirmed), provided that a copy is mailed within three
business days thereafter by registered or certified mail, return
receipt requested, (iii) when received by the addressee, if sent
by Express Mail, Federal Express or other express delivery service
(receipt requested), or (iv) three business days after being sent
by registered or certified mail, return receipt requested, in each
case to the other party at the following address and telecopier
numbers (or to such other address or telecopier number for a party
as shall be specified by like notice; provided that notices of a
change of address or telecopier number shall be effective only
upon receipt thereof):
if to Sento to:
Sento Corporation
808 East Utah Valley Drive
American Fork, Utah 84003
Attention: Linden Barney
Telecopier No.: (801) 492-2100
and
5
<PAGE>
if to EchoPass to:
EchoPass Corporation
808 East Utah Valley Drive
American Fork, Utah 84003
Attention: Stanley J. Cutler
Telecopier No.: (801) 492-2100
13.2 ASSIGNMENT. Subject to Sento's rights to sublicense hereunder, no
party shall assign or transfer any right, interest or part of this
Agreement without obtaining the prior written consent of the other
party hereto.
13.3 CREDITORS. None of the provisions of this Agreement shall be for
the benefit of or enforceable by any creditors of any party
hereto.
13.4 WAIVER. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this
Agreement or to exercise any right or remedy consequent upon a
breach thereof shall constitute a waiver of any such breach or of
any other covenant, agreement, term or condition. Either party
may, by notice delivered in the manner provided in this Agreement,
but shall be under no obligation to, waive any of its rights or
any conditions to its obligations hereunder, or any duty,
obligation or covenant of the other party. No waiver shall affect
or alter the remainder of this Agreement but each and every other
covenant, agreement, term and condition hereof shall continue in
full force and effect with respect to any other then existing or
subsequently occurring breach.
13.5 SEVERABILITY. Any provision hereof prohibited by or deemed
unlawful or unenforceable under any applicable law of any
jurisdiction shall, as to such jurisdiction, be ineffective
without affecting any other provision of this Agreement. To the
full extent, however, that the provisions of such applicable law
may be waived, they are hereby waived to the end that this
Agreement be deemed to be a valid and binding agreement
enforceable in accordance with its terms. In the event that any
term or provision of this Agreement shall be held invalid by a
competent court or government agency, the remainder of this
Agreement shall not be affected thereby and the parties hereto
shall continue to be bound by the remaining terms hereof. In such
event, the relevant term or provision (or should such term(s) or
provision(s) be such a crucial element of this Agreement, then the
entire Agreement) shall be renegotiated by the parties in a good
faith effort to achieve mutual agreement consistent with such
holding and shall continue to perform under this Agreement in a
manner consistent with its intent and objectives.
13.6 FORCE MAJEURE. Any cause or circumstance of whatever nature which
prevents or delays performance by a party of its obligations
hereunder, including without limitation, any riot, labor dispute,
strike or civil disturbance, or any governmental statute, rule,
regulation or other governmental action, which cause or
circumstance is not within the control of the party chargeable,
and which cannot by the exercise of reasonable diligence by such
party be prevented or overcome, shall extend the time for
performance thereof,
6
<PAGE>
provided such cause or circumstance was the proximate cause of
the failure to perform; provided, however, that such cause or
circumstance shall not excuse Sento from the timely payment of
any money when due hereunder.
13.7 FURTHER ACTION. The parties agree to execute and deliver all
documents, provide all information and take or forebear from all
such action as may be necessary or appropriate to achieve the
purposes of this Agreement.
13.8 APPLICABLE LAW AND JURISDICTION. This Agreement shall be governed
by and construed in accordance with the laws of the State of Utah
without reference to choice of law provisions. The parties hereby
subject themselves to the jurisdiction of the courts of the State
of Utah and agree that the exclusive venue and place of
jurisdiction for any lawsuit arising under or related to this
Agreement shall be the State of Utah.
13.9 LEGAL EXPENSE AND TRIAL BY JURY. In the event of any litigation
involving a dispute under this Agreement, each party shall be
responsible for its own costs and expenses in such litigation,
including attorneys' fees. As to any such litigation, the parties
each waive trial by jury.
13.10 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors, legal
representatives and assigns; provided that this provision shall
not be construed as permitting assignment, substitution,
delegation or other transfer of rights or obligations except
strictly in accordance with the other provisions of this
Agreement.
13.11 INTEGRATION. Other than the Contribution Agreement, this Agreement
constitutes the entire agreement between the parties pertaining to
the subject matter hereof, and supersedes all prior agreements and
understandings pertaining thereto. No covenant, representation or
condition not expressed in this Agreement shall affect or be
deemed to interpret, change or restrict the express provisions
hereof. The failure of any party to inspect this Agreement or the
documents referred to herein constitutes a waiver of any
objection, contention or claim that may be based upon such an
inspection.
13.12 RELATIONSHIP OF THE PARTIES. Neither Sento nor EchoPass nor any of
their employees, customers or agents shall be deemed to be the
representative, agent or employee of the other for any purpose
whatsoever, nor shall they or any of them have any right or
authority to assume or create an obligation of any kind or nature,
express or implied, on behalf of such other, nor to accept service
of any legal process addressed to or intended for such other.
EchoPass, Sento and their respective affiliates do not in any way
or for any purpose by this Agreement become a partner of any of
the others in the conduct of its business, or otherwise, or become
a joint venturer or a member of any enterprise with any of the
others.
13.13 COOPERATION. The parties agree promptly to cooperate in good faith
to carry out the provisions of this Agreement and the activities
contemplated thereby and shall also cooperate in good faith to
resolve any disputes or differences which may arise in connection
with the provisions hereof and the activities contemplated hereby.
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<PAGE>
13.14 TITLES AND CAPTIONS. The article and section titles or captions of
this Agreement are for convenience only and shall not be deemed
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.
13.15 PRONOUNS AND PLURALS. Whenever the context may require, any
pronoun used herein shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns
and verbs shall include the plural and vice versa. Each of the
foregoing genders and plurals is understood to refer to a
corporation, partnership or other legal entity when the context so
requires.
13.16 AUTHORIZATION. Each individual executing this Agreement does
thereby represent and warrant to each other person so signing (and
each other entity for which another person may be signing) that he
or she has been duly authorized to execute this Agreement.
13.17 COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed to be an original and
all of which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year first above written.
"SENTO"
SENTO CORPORATION
a Utah corporation
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
"ECHOPASS"
ECHOPASS CORPORATION
a Utah corporation
By:
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
8
<PAGE>
EXHIBIT A
TO
SERVICES AGREEMENT
STATE OF WORK
[See document attached hereto]
9
<PAGE>
EXHIBIT E
TO
CONTRIBUTION AGREEMENT
----------------------------------------------------------------------
Promissory Note
[See document attached hereto]
<PAGE>
DRAFT
11/17/99
PROMISSORY NOTE
$ , 1999
------------------- --------------------
FOR VALUE RECEIVED, the undersigned, ECHOPASS CORPORATION, a Utah
corporation with an office at 808 East Utah Valley Drive, American Fork, Utah
84003 ("MAKER"), hereby promises to pay to the order of SENTO CORPORATION, a
Utah corporation with principal offices at 808 East Utah Valley Drive,
American Fork, Utah 84003 ("PAYEE"), at such office of Payee, or such other
place as Payee may designate from time to time in writing, in lawful money of
the United States of America and in immediately available funds, the
principal amount of _____________________________ DOLLARS ($____________),
together with interest thereon from the date hereof as follows:
1. THE NOTE. This Promissory Note (the "NOTE") is being issued by
Maker pursuant to that certain Contribution Agreement dated as of November
17, 1999 by and between Maker and Payee (as amended, from time to time, the
"CONTRIBUTION AGREEMENT") and Payee's rights and Maker's obligations
hereunder are subject to the provisions of the Contribution Agreement.
References to the Contribution Agreement shall in no way impair the
negotiability hereof or the absolute and unconditional obligation of Maker to
pay both principal and interest hereon as provided herein. The principal
balance of the Note which is outstanding and unpaid from time to time is
referred to as the "PRINCIPAL AMOUNT."
2. INTEREST RATE. The Principal Amount shall bear interest from the
date hereof at an annual rate of ten and one-half percent (10.5%). Interest
shall be calculated on the basis of a 360-day year consisting of 12 months
each of 30 days.
3. PAYMENTS OF PRINCIPAL AND INTEREST. The Principal Amount and all
accrued and unpaid interest shall be payable in full on ______________, 2000
(the "MATURITY DATE"). Any payment of principal or interest made more than 5
days after it is due shall bear a late penalty of five percent (5%) of the
amount of the late payment. Interest shall not accrue on late penalties. All
payments shall be credited first to late penalties, second, to Payee's costs
and expenses as provided in SECTION 8 hereof, third, to accrued and unpaid
interest, and fourth, to the Principal Amount.
4. PREPAYMENTS. This Note may be prepaid in full or in part at any
time without the consent of Payee and without penalty or premium.
5. ACCELERATION UPON FUNDING. In the event that the Funding (as
defined in the Contribution Agreement) is completed, the entire principal and
interest of this Note shall become due and payable in full within fifteen
(15) days of the closing of the Funding (or the last portion thereof).
6. EVENTS OF DEFAULT. If one or more of the following events (each,
an "EVENT OF DEFAULT") shall have occurred and be continuing:
(a) if Maker shall fail to pay any principal on this Note when due,
or interest thereon and such default continues for a period of 10 days after
written notice thereof to Maker from Payee;
(b) there shall occur a material default or a defined Event of
Default under the Contribution Agreement, the Security Agreement dated as of
the date hereof by and between
<PAGE>
Maker and Payee (the "SECURITY AGREEMENT"), the Services Agreement dated as
of the date hereof by and between Maker and Payee or the Facilities and
Services Agreement dated as of the date hereof by and between Maker and
Payee, and such default or Event of Default is not cured within any
applicable grace period;
(c) if Maker is dissolved, whether voluntarily or involuntarily; or
(d) if the commencement of any bankruptcy or insolvency proceeding
involving Maker has not been stayed, dismissed, bonded or vacated within 60
days of Maker's receipt of notice thereof;
then, Payee may at any time (unless all defaults shall have been remedied) at
Payee's option, without notice to Maker or any other person, (i) declare the
entire principal and interest of the Note then remaining unpaid to be due and
payable immediately and shall thereafter earn interest, both before and after
judgment, at the rate of fourteen percent (14%) per annum, and/or (ii)
exercise any other right or remedy available at law, in equity, by contract
or otherwise. Any forbearance, failure or delay by Payee in exercising any
right or remedy under this Note or otherwise available to Payee shall not be
deemed to be a waiver of such right or remedy, nor shall any single or
partial exercise of any right or remedy preclude the further exercise of such
or another right or remedy.
7. OTHER PROVISIONS RELATING TO INTEREST AND CHARGES.
Notwithstanding any other provision contained in this Note or in any
agreement, document or instrument related to the transaction which this Note
is a part: (a) the rates of interest and charges and the payments provided
for herein and therein shall in no event exceed the rates and charges and the
payments which would result in interest being charged at a rate equaling the
maximum allowed by law; and (b) if, for any reason whatsoever, the holder
hereof ever receives as interest (or as a charge in the nature of interest)
in connection with the transaction of which this Note is a part an amount
which would result in interest being charged at a rate exceeding the maximum
allowed by law, such amount or portion thereof as would otherwise be
excessive interest shall automatically be applied toward reduction of the
unpaid principal balance then outstanding hereunder. Any such amount shall
not be applied toward payment of interest (or toward payment of a charge in
the nature of interest).
8. COSTS. In the event that (a) any payment under this Note is not
made at the time or in the manner required hereunder, (b) the holder hereof
incurs any costs of collection or other costs reasonably necessary for the
protection of the interest of Payee with respect to this Note, or (c) the
holder hereof exercises any right hereunder including without limitation its
right to accelerate the maturity of the obligations hereunder, Maker agrees
to pay any and all costs and expenses (regardless of the particular nature
thereof and whether incurred before or after the initiation of suit or before
or after judgment) which may be incurred by the holder hereof in connection
with the enforcement of any of its rights under this Note, including court
costs and attorneys' fees.
9. WAIVERS. Maker shall waive presentment by Payee for payment,
demand, notice of dishonor and nonpayment of this Note, and consent to any
and all extensions of time, renewals, waivers or modifications that may be
granted by Payee with respect to the payment or other provisions of this
Note, and to the release of any security or any part thereof, with or without
substitution.
2
<PAGE>
10. SECURITY AGREEMENT. This Note is secured by, and entitled to the
benefits of, the Security Agreement.
11. STATE LAW. This Note is delivered in the State of Utah and shall
be governed by and construed in accordance with the laws of the State of Utah
without reference to its choice of law rules.
12. SEVERABILITY. If for any reason one or more of the provisions of
this Note or their application to any person or circumstances shall be held
to be invalid, illegal or unenforceable in any respect or to any extent, such
provisions shall nevertheless remain valid, legal and enforceable in all such
other respects and to such extent as may be permissible. In addition, any
such invalidity, illegality or unenforceability shall not affect any other
provisions of this Note, but this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained therein.
13. SUCCESSORS AND ASSIGNS. This Note inures to the benefit of Payee
and binds Maker, and their respective successors and assigns.
14. CAPTIONS. The captions or headings of the paragraphs in this
Note are for convenience only and shall not control or affect the meaning or
construction of any of the terms or provisions of this Note.
15. WAIVER OF JURY TRIAL. AS AN IMPORTANT INDUCEMENT TO PAYEE TO
ENTER THIS AGREEMENT, MAKER WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION
ARISING UNDER OR IN ANY WAY RELATED TO THIS NOTE.
IN WITNESS WHEREOF, the undersigned has executed this Note on the
date first written above.
"MAKER"
ECHOPASS CORPORATION
a Utah corporation
By: __________________________________
Its: __________________________________
3
<PAGE>
EXHIBIT F
TO
CONTRIBUTION AGREEMENT
------------------------------
Security Agreement
[See document attached hereto]
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "AGREEMENT"), dated as of _______________,
1999, is made by ECHOPASS CORPORATION, a Utah corporation with principal
offices at 808 East Utah Valley Drive, American Fork, Utah 84003 ("GRANTOR"),
in favor of SENTO CORPORATION, a Utah corporation with principal offices at
808 East Utah Valley Drive, American Fork, Utah 84003 ("LENDER").
BACKGROUND
WHEREAS, pursuant to that certain Contribution Agreement between
Grantor and Lender and dated as of November 17, 1999 (the "CONTRIBUTION
AGREEMENT"), Lender has contributed the Tangible Assets (as defined in the
Contribution Agreement) (the "CONTRIBUTION") to Grantor in return for that
certain promissory note dated of even date herewith (the "NOTE") in the
original principal amount of _______________________ DOLLARS ($_________) and
Grantor has executed and delivered to Lender the Note.
WHEREAS, as an inducement to Lender to make the Contribution and as
a condition of Lender making the Contribution, Grantor has agreed to enter
into this Agreement for the purpose of securing its full and complete
performance under the Note.
WHEREAS, Grantor is willing to give and grant to Lender a security
interest in the Collateral (as defined below) as herein provided.
AGREEMENT
NOW, THEREFORE, in consideration of the Background and in order to
induce Lender to make the Contribution, Grantor hereby agrees with Lender, as
follows:
1. DEFINED TERMS. As used in this Agreement, the following terms
have the meanings specified below (such meanings being equally applicable to
both the singular and plural forms of the terms defined):
"LIEN" means any mortgage, deed of trust, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other),
security interest or preference, priority or other security agreement,
preferential arrangement or charge of any kind or nature whatsoever, whether
voluntary, involuntary or by operation of law.
"PROCEEDS" means "proceeds," as such term is defined in
Section 9-306(1) of the UCC and products.
"SECURED OBLIGATIONS" means all of Grantor's obligations under (i) the
Note, (ii) this Agreement, (iii) the Contribution Agreement, (iv) that
certain Services Agreement, dated of even date herewith, between Grantor and
Lender (the "SERVICES AGREEMENT") and/or (v) that certain Facilities and
Services Agreement, dated of even date herewith, between Grantor and Lender
(the "FACILITIES AGREEMENT"), as the Note, this Agreement, the Contribution
Agreement, the Services Agreement and the Facilities Agreement have been or
may in the future be amended, modified or supplemented, including, but not
limited to, the obligations to perform and observe all covenants and
conditions contained in the Note, this Agreement, the Contribution Agreement,
the Services
<PAGE>
Agreement and the Facilities Agreement, and to indemnify Lender for certain
liabilities herein provided.
"UCC" means the Uniform Commercial Code as the same may, from time
to time, be in effect in the State of Utah; PROVIDED, HOWEVER, in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of Lender's security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of Utah, the term "UCC" shall mean the Uniform Commercial Code
as in effect in such other jurisdiction for purposes of the provisions hereof
relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
2. GRANT OF SECURITY INTEREST. As collateral security for the full
and prompt payment when due (whether at stated maturity, by acceleration or
otherwise) of, and the performance of, all the Secured Obligations, Grantor
hereby assigns, conveys, mortgages, pledges, hypothecates and transfers to
Lender, and hereby grants to Lender a security interest in, all of Grantor's
right, title and interest in and to the items described on SCHEDULE I,
attached hereto and made a part hereof (the "COLLATERAL").
3. REPRESENTATION AND WARRANTIES. Grantor hereby represents and
warrants to Lender, which representations and warranties shall survive until
all the Secured Obligations are satisfied in full, as follows:
(a) Grantor is the sole owner of each item of the Collateral in
which a security interest is granted hereunder, having good title thereto,
free and clear of any and all Liens except for the security interest granted
to Lender pursuant to this Agreement.
(b) No effective security agreement, financing statement,
equivalent security or Lien instrument or continuation statement covering all
or any part of the Collateral is on file or of record in any public office,
except (i) such as may have been filed by Grantor in favor of Lender pursuant
to this Agreement, and (ii) those for which a valid release has been executed
and filed with the appropriate public office.
(c) Appropriate financing statements having been filed in the
jurisdictions listed on SCHEDULE II hereto, this Agreement is effective to
create a valid and continuing security interest in the Collateral prior to
all other Liens. All actions necessary or desirable to protect and perfect
such security interest in each item of the Collateral has been duly taken.
If, after the date hereof, additional filings are required to create a valid
and continuing security interest in the Collateral prior to all other Liens,
Grantor shall promptly notify Lender, submit an appropriate amendment to
SCHEDULE II hereto and file all such financing statements.
(d) No consent or approval of any person or entity, including,
without limitation, any debt or equity holder of Grantor, or of any public
authority, is necessary for the valid execution, delivery and performance of
this Agreement by Grantor, or any document or instrument executed in
connection herewith.
4. COVENANTS. Grantor covenants and agrees with Lender that from
and after the date of this Agreement and until the Secured Obligations are
fully satisfied:
(a) FURTHER DOCUMENTATION. At any time and from time to time, upon
the written request of Lender, and at the sole expense of Grantor, Grantor
will promptly and duly execute and deliver any and all such further instruments
and documents and take such further action as Lender
2
<PAGE>
may reasonably deem desirable to obtain the full benefits of this Agreement
and of the rights and powers herein granted. Grantor also hereby authorizes
Lender to file any such financing or continuation statement without the
signature of Grantor to the extent permitted by applicable law.
(b) MAINTENANCE OF RECORDS. Grantor will keep and maintain at its
own cost and expense satisfactory and complete records of the Collateral. For
Lender's further security, Grantor agrees that Lender shall have a special
property interest in all of Grantor's books and records pertaining to the
Collateral and, if an Event of Default shall have occurred and be continuing,
Grantor shall deliver and turn over any such books and records to Lender or
to its representatives at any time on demand of Lender.
(c) COMPLIANCE WITH LAWS, ETC. Grantor will comply, in all material
respects, with all federal, state and local laws, regulations and statutes
applicable to the Collateral or any part thereof or to the operation of
Grantor's business.
(d) PAYMENT OF OBLIGATIONS. Grantor shall pay all liabilities and
obligations of Grantor promptly when due in accordance with their terms, and
pay and discharge promptly when due all taxes, assessments, and governmental
charges or levies imposed upon it or upon its income or profits or in respect
of its properties before the same shall become delinquent or in default;
provided, however, that Grantor shall not be required to pay and discharge or
to cause to be paid and discharged any such tax, assessment, charge, levy, or
claim so long as the validity or amount thereof shall be contested in good
faith by appropriate proceedings and so long as such proceedings do not
result in a risk of loss to Lender of any Collateral. Grantor agrees to pay,
and to save Lender harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all excise, sales or other
similar taxes which may be payable or determined to be payable with respect
to any of the Collateral or in connection with any of the transactions
contemplated by this Agreement.
(e) LIMITATION ON LIENS ON COLLATERAL. Grantor will not create,
permit or suffer to exist, and will defend the Collateral against and take
such other action as is necessary to remove, any Lien on the Collateral, and
will defend the right, title and interest of Lender in and to any of
Grantor's rights to or under the Collateral and to the Proceeds thereof
against the claims and demands of all persons whomsoever.
(f) LIMITATIONS ON DISPOSITION. Grantor will not sell, lease,
transfer or otherwise dispose of any of the Collateral, or attempt or
contract to do so, except as expressly permitted under this Agreement.
(g) FURTHER IDENTIFICATION OF COLLATERAL. Grantor will, if so
requested by Lender, furnish to Lender, as often as Lender reasonably
requests, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as Lender
may reasonably request, all in reasonable detail.
(h) NOTICES. Grantor will advise Lender promptly, in reasonable
detail, (i) of any Lien or claim made or asserted against any of the
Collateral, and (ii) of the occurrence of any other event which would have a
material adverse effect on the aggregate value of the Collateral or in the
security interests created hereunder.
(i) RIGHT OF INSPECTION. Lender shall, at any reasonable time and
from time to time upon reasonable prior notice to Grantor (it being agreed
that Lender will use its best efforts to give at least 5 business days' prior
notice unless an Event of Default shall have occurred and be
3
<PAGE>
continuing, in which case no prior notice is necessary), have full and free
access to all the books and records and correspondence of Grantor, and Lender
or its representatives may examine the same, take extracts therefrom and make
photocopies thereof, and Grantor agrees to render to Lender, at Grantor's
cost and expense, such clerical and other assistance as may be reasonably
requested with regard thereto. Lender and its representatives shall at all
times also have the right to enter into and upon any premises belonging to,
or under the control of, Grantor where any of the Collateral is located for
the purpose of inspecting the same, observing its use or otherwise protecting
its interests therein, after giving any appropriate notice as required above.
(j) INSURANCE. Grantor shall maintain insurance at all times with
respect to the Collateral (including all risk-extended coverage) against the
risks of fire, theft and such other risks, including, without limitation,
liability, errors and omissions and business interruption, as Lender may
require, containing such terms, in such form and amounts, for such periods
and written by such companies as are acceptable to Lender in its reasonable
discretion. All such policies of insurance shall name Lender for the benefit
of the Lender as lender/loss payee and shall provide for not less than thirty
(30) days' prior written notice to Lender of intended cancellation or
reduction in coverage. Upon request of Lender, Grantor shall furnish Lender
with certificates or other evidence satisfactory to Lender of compliance with
the foregoing insurance provisions. Lender shall have the right (but shall be
under no obligation) to pay any of the premiums on such insurance and all
such payments made by Lender shall become part of the Secured Obligations and
be considered an advance at the highest rate of interest provided for in the
Note. Grantor expressly authorizes its insurance carriers to pay proceeds of
all insurance policies covering all or any part of the Collateral directly to
Lender. Grantor shall furnish Lender with receipt or other proofs of payment
of insurance on or before the due date.
5. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT.
(a) Grantor hereby irrevocably constitutes and appoints Lender and
any officer or agent thereof, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of Grantor and in the name of Grantor or in its own name,
from time to time in Lender's discretion, for the purpose of protecting
Lender's rights and interests as established by this Agreement and for the
purpose of performing any of Lender's rights upon the occurrence of an Event
of Default, to take any and all appropriate action and to execute and deliver
any and all documents and instruments which Lender may deem necessary or
desirable to accomplish the purposes of this Agreement. Grantor hereby
ratifies, to the extent permitted by law, all that any said attorney shall
lawfully do or cause to be done by virtue hereof. The power of attorney
granted pursuant to this SECTION 5, being coupled with an interest, shall be
irrevocable until the Secured Obligations are indefeasibly paid and satisfied
in full.
(b) The powers conferred on Lender hereunder are solely to protect
Lender's interests in the Collateral and shall not impose any duty upon it to
exercise any such powers. Lender shall be required to give an accounting only
for amounts that it actually receives as a result of the exercise of such
powers and neither it nor any of its officers, directors, employees or agents
shall be responsible to Grantor for any act or failure to act, except for its
own gross negligence or willful misconduct.
(c) Grantor also authorizes Lender, at any time and from time to
time after the occurrence and during the continuance of an Event of Default,
to execute without recourse and without representation or warranty of any
kind (except as to ability to convey title), in connection
4
<PAGE>
with the sale provided for in SECTION 8 hereof, any endorsements, assignments
or other instruments of conveyance or transfer with respect to the Collateral.
6. PERFORMANCE BY LENDER OF GRANTOR'S OBLIGATIONS. If Grantor
fails to perform or comply with any of its agreements contained herein and
Lender, as provided for by the terms of this Agreement, shall itself perform
or comply, or otherwise cause performance or compliance, with such agreement,
the reasonable expenses of Lender incurred in connection with such
performance or compliance shall be added to the outstanding principal amount
pursuant to the Note.
7. EVENTS OF DEFAULT. The occurrence of any one or more of the
following events or existence of any one or more of the following conditions
shall constitute an event of default ("EVENT OF DEFAULT") under this
Agreement:
(a) Grantor shall fail to pay any principal on the Note when due, or
interest thereon or shall fail to observe or perform any other term,
condition or covenant of this Agreement and such default continues for a
period of 10 days after written notice thereof to Grantor; or
(b) There shall occur a material default or a defined Event of
Default under the Note, this Agreement, the Contribution Agreement, the
Services Agreement, or the Facilities Agreement and such default or Event of
Default is not cured within any applicable cure period.
8. REMEDIES, RIGHTS AFTER EVENT OF DEFAULT.
(a) After the occurrence and during the continuance of an Event of
Default, Lender may exercise, in addition to all other rights and remedies
granted to it in this Agreement, all rights and remedies of a secured party
under the UCC. Lender shall apply the net proceeds of any such collection,
recovery, receipt, appropriation, realization or sale, as provided in
SECTION 8(d) hereof, Grantor remaining liable for any deficiency remaining
unpaid after such application. Lender shall be required to account for any
surplus, if any, to Grantor only after applying such net proceeds as set
forth in SECTION 8(d) and after the payment by Lender of any other amount
required by any provision of law, including Section 9-504(1)(c) of the UCC.
To the maximum extent permitted by applicable law, Grantor waives all claims,
damages, and demands against Lender arising out of the repossession,
retention or sale of the Collateral. Grantor agrees that Lender need not give
more than 10 days' notice of the time and place of any public sale or of the
time after which a private sale may take place and that such notice is
reasonable notification of such matters. Grantor shall remain liable for any
deficiency if the proceeds of any sale or disposition of the Collateral are
insufficient to pay all amounts to which Lender is entitled.
(b) Grantor also agrees to pay all costs of Lender, including,
without limitation, attorneys' fees and expenses, incurred in connection with
the enforcement of any of its rights and remedies hereunder.
(c) Grantor hereby waives presentment, demand, protest or any notice
(to the maximum extent permitted by applicable law) of any kind in connection
with this Agreement or any Collateral.
(d) The Proceeds of any sale, disposition or other realization upon
all or any part of the Collateral shall be distributed by Lender in the
following order of priorities:
5
<PAGE>
First, to the payment of the reasonable costs and expenses of such
sale, including, without limitation, all reasonable expenses of Lender and
its agents including the fees and expenses of its counsel, and all expenses,
liabilities and advances made or incurred by Lender in connection therewith
or pursuant to SECTION 6 hereof;
Next, to Lender, for the payment in full of the Secured Obligations
in accordance with the terms of the Note; and
Finally, after payment in full of all the Secured Obligations, to
Grantor, or its successors or assigns, or to whomsoever may be lawfully
entitled to receive the same, or as a court of competent jurisdiction may
direct.
9. LIMITATION ON LENDER'S DUTY IN RESPECT OF COLLATERAL. Lender
shall not have any duty as to any Collateral in its possession or control or
in the possession or control of any agent or nominee of Lender or any income
thereon or as to the preservation of rights against prior parties or any
other rights pertaining thereto, except that Lender shall use reasonable care
with respect to the Collateral in its possession or under its control. Upon
request of Grantor, Lender shall account for any moneys received by it in
respect of any foreclosure on or disposition of the Collateral.
10. NOTICES. All notices and other communications provided for
hereunder shall be made in accordance with the Section 4I of the Contribution
Agreement (except that references to Contributor and Contributee shall be
deemed to be references to Lender and Grantor, respectively).
11. AMENDMENTS, ETC. No amendment or waiver of any provision of
this Agreement nor consent to any departure by Grantor therefrom shall in any
event be effective unless the same shall be in writing and signed by Lender,
and then any such waiver or consent shall only be effective in the specific
instance and for the specific purpose for which given.
12. MISCELLANEOUS. No failure on the part of Lender to exercise,
and no delay in exercising any right hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or future exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative, may be exercised singly
or concurrently, and are not exclusive of any remedies provided by law, or
any other agreement or instrument executed by Grantor or Lender. This
Agreement and all obligations of Grantor hereunder shall be binding upon the
heirs, successors and assigns of Grantor, and shall, together with the rights
and remedies of Lender hereunder, inure to the benefit of Lender and its
respective successors and assigns. This Agreement shall be governed by, and
be construed and interpreted in accordance with, the law of the State of
Utah. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent
of such prohibition or invalidity and without invalidating the remaining
provisions of this Agreement. The section titles and headings contained in
this Agreement are and shall be without substantive meaning or content of any
kind whatsoever and are not a part of this Agreement. This Agreement,
together with the Note, the Contribution Agreement, the Services Agreement
and the Facilities Agreement Sublease constitutes, on and as of the date
hereof, the entire agreement of Grantor and Lender with respect to the
subject matter hereof, and all prior or contemporaneous understandings or
agreements, whether written or oral, between Lender and Grantor with respect
to such subject matter are hereby superseded in their entireties.
6
<PAGE>
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
7
<PAGE>
IN WITNESS WHEREOF, Grantor has executed and delivered this
Agreement as of the date first above written.
"GRANTOR"
ECHOPASS CORPORATION
a Utah corporation
By:
--------------------------------
Its:
-------------------------------
Accepted and acknowledged by:
"LENDER"
SENTO CORPORATION
a Utah corporation
By:
--------------------------------
Its:
-------------------------------
8
<PAGE>
SCHEDULE I
TO
SECURITY AGREEMENT
------------------------------
THE COLLATERAL
(a) The Technology;
(b) All rights of action on account of past, present and future
unauthorized use or infringement of all or any portion of the Technology;
(c) All customer lists, trade secrets, business records, license
rights, and agreements, whether Grantor is a licensor or licensee, license
fees, royalties, advertising materials, operating manuals, methods,
processes, know-how, sales literature, drawings, specifications,
descriptions, name plates, catalogs, supplier contracts, confidential
information, consulting agreements, engineering contracts, and all assets
associated with the Technology;
(d) All income, royalties, damages, and payments relating to the
Technology, now or hereafter due and/or payable, including, without
limitation, damages and payments for past or future infringement of any
rights conveyed hereunder;
(e) All foreign rights corresponding to the above described rights,
including, without limitation, those available by treaty and reciprocity;
(f) All trademarks, service marks, trade names, trademark
applications, trademark registrations, rights analogous to trademark and
service mark rights, and like protection, including without limitation,
renewals, divisions and extensions thereof, now existing or hereafter
arising, created or acquired by Grantor (the "TRADEMARKS");
(g) The entire goodwill of the business of Grantor connected with
and symbolized by the Trademarks and other intangibles of Grantor, including
without limitation the Technology;
(h) The Tangible Assets; and
(i) to the extent not otherwise included, all Proceeds, both cash
and noncash, of the foregoing items of Collateral.
9
<PAGE>
SCHEDULE II
TO
SECURITY AGREEMENT
------------------------------
JURISDICTIONS WHERE UCC-1 FINANCING STATEMENTS HAVE BEEN FILED
Utah Department of Commerce, Division of Corporations and Commercial Code
10
<PAGE>
EXHIBIT G
TO
CONTRIBUTION AGREEMENT
--------------------------------------------------------
Alliant Opinion
[See document attached hereto]
<PAGE>
[LETTERHEAD]
September 28, 1999
Board of Directors
Sento Corporation
808 East Utah Valley Drive
American Fork, Utah 84003
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Sento Corporation ("Sento" or the
"Company") of the proposed contribution of assets by Sento (Technology and
Tangible Assets of the Sento Call Center) to EchoPass Corporation ("EchoPass")
in exchange for 4,000,000 Series "A" preferred shares of EchoPass and a
promissory note for approximately $1,100,000. The proposed contribution of
assets and associated Transaction events (the "Transaction") are more fully
detailed in the Contribution Agreement between Sento Corporation and EchoPass,
Inc. dated ________ 1999.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and EchoPass, respectively;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning Sento and EchoPass prepared by the
management of the Company;
(iii) analyzed certain financial projections for both Sento and EchoPass
prepared by the management of the Company;
(iv) discussed the past and current operations, financial condition,
and the prospects of Sento and EchoPass with senior executives of
the Company, some of whom plan to become senior executives of
EchoPass;
(v) discussed with senior executives of the Company and individuals
knowledgeable about Sento in the financial community regarding the
past efforts in financing Sento and the efforts to finance the
portion of the business within Sento which will constitute
EchoPass, as well as projections for financing EchoPass as a stand
alone business;
(vi) discussed the proposed Transaction with a senior executive at
Genesys Telecommunications Laboratories ("Genesys"), a proposed
party to the series of Transactions contemplated by the
Contribution Agreement;
(vii) discussed the past and current operations, financial condition,
and the prospects of the business within Sento which will
constitute the business of EchoPass with senior executives of the
Company;
<PAGE>
Board of Directors Page 2
Sento Corporation September 28, 1999
(viii) discussed with the senior management of Sento the strategic
objectives of the Transaction and their estimates of the
synergies, cost savings and other benefits expected to result from
the Transaction as well as the expected costs and risks associated
with the proposed Transaction;
(ix) reviewed the reported prices and trading activity for the
Company's common stock;
(x) compared the financial performance of Sento (and the portion of
Sento that will constitute EchoPass) with that of certain other
comparable publicly-traded companies and the prices paid for
securities in those publicly traded companies;
(xi) reviewed the financial terms, to the extent publicly available, of
certain acquisition and merger Transactions of companies
comparable to Sento and EchoPass;
(xii) reviewed the financial terms, to the extent publicly available, of
certain venture capital equity investments in companies comparable
to EchoPass;
(xiii) discussed the proposed Transaction with senior managers of the
Company and their legal advisors;
(xiv) reviewed the Contribution Agreement and certain related documents;
and
(xv) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information provided to us for the purposes of
this opinion. With respect to the financial projections of Sento and EchoPass
and the estimates of the synergies, costs and benefits expected to result from
the Transaction, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgements of the
future financial performance of Sento and EchoPass. As Sento's management is
aware, we have had limited access to internal financial or other operating data
regarding Sento and EchoPass. Therefore the financial and other information
regarding the Company and EchoPass reviewed by Alliant Partners in connection
with the rendering of this opinion was limited to information provided by
Sento's management and to certain discussions with Sento's senior management
regarding the Company's financial condition and prospects, the strategic
objectives of the Transaction and management's estimates of the synergies, costs
and benefits expected to result from the Transaction. In addition, we have
assumed that the Transaction will be consummated in accordance with the terms
set forth in the Contribution Agreement, including, among other things, that the
Transaction will be accounted for as an equity investment in accordance with
U.S. General Accepted Accounting Principles. We have also assumed the
correctness of the representations by Sento's management that obtaining the
required financing for EchoPass as a part of Sento, with adequate timeliness, is
not a practical alternative. We have not made any independent valuation or
appraisal of the assets or liabilities of the Company, nor have we been
furnished with any such appraisals, and we have relied upon the representation
of the Company as to the book value of the tangible assets to be contributed and
to the value of the proposed software license contributed by Genesys for Series
"A" preferred shares in EchoPass. Our opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to us as of, the date hereof.
<PAGE>
Board of Directors Page 3
Sento Corporation September 28, 1999
Our opinion addresses only the fairness of the Transaction, from a financial
point of view to the shareholders of the Company, and we do not express any
views on any other terms of the Transaction. Specifically, our opinion does
not address the Company's underlying business decision to effect the
Transaction contemplated by the Contribution Agreement.
It is understood that this letter is for the information of the
Board of Directors of Sento, except that this opinion may be included in its
entirety in any filing made by the Company with the Securities and Exchange
Commission with respect to the Transaction.
Based upon and subject to the foregoing, and based upon such other
matters as we consider relevant, it is our opinion that, as of the date
hereof and pursuant to the Contribution Agreement, the asset contribution to
be made by Sento to EchoPass is fair, from a financial point of view, to the
shareholders of the Company.
Very truly yours,
/s/ Alliant Partners
Alliant Partners
<PAGE>
APPENDIX C
<PAGE>
- -------------------------------------------------------------------------------
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
---------------------------------------
(Name of small business issuer in its charter)
UTAH 000-06425 87-0284979
--------------------- ----------------------- -------------------
(State or other (Commission File No.) (IRS Employer
jurisdiction Identification No.)
of incorporation)
808 EAST UTAH VALLEY DRIVE
AMERICAN FORK, UTAH 84003
---------------------------------------
(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]
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
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
</TABLE>
i
<PAGE>
THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-KSB THAT ARE NOT
PURELY HISTORICAL ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ALL FORWARD-LOOKING STATEMENTS INVOLVE VARIOUS
RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT
INCLUDE STATEMENTS REGARDING THE COMPANY'S PLANS TO DEVELOP AND DELIVER
INTEGRATED INFORMATION TECHNOLOGY SERVICES, ACQUISITION PLANS, MARKET
OPPORTUNITIES AND ACCEPTANCE, EXPECTATIONS, GOALS, REVENUES, FINANCIAL
PERFORMANCE, STRATEGIES, MISSION AND INTENTIONS FOR THE FUTURE. SUCH
FORWARD-LOOKING STATEMENTS ARE INCLUDED UNDER ITEM 1. "BUSINESS," ITEM 2.
"PROPERTIES" AND ITEM 6. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." ALL FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS REPORT ARE MADE AS OF THE DATE HEREOF, BASED ON INFORMATION AVAILABLE TO
THE COMPANY AS OF SUCH DATE, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT. IT IS IMPORTANT TO NOTE THAT SUCH STATEMENTS MAY NOT
PROVE TO BE ACCURATE AND THAT THE COMPANY'S ACTUAL RESULTS AND FUTURE EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH STATEMENTS. AMONG THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S
EXPECTATIONS ARE THOSE DESCRIBED UNDER ITEM 6. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - 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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<PAGE>
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:
2
<PAGE>
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-
3
<PAGE>
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.
4
<PAGE>
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
5
<PAGE>
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.
6
<PAGE>
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.
7
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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.
8
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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.
<TABLE>
<CAPTION>
------------------------------
QUARTER ENDED HIGH LOW
---------- -----------------
<S> <C> <C>
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
</TABLE>
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
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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
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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>
SENTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<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
<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.
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.
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.
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>
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.
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.
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.
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.
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.
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.
11
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and 1998
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>
12
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and 1998
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.
13
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and 1998
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>
14
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and 1998
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.
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>
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.
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>
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.
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.
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>
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>
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 purchaseplan 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.
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>
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.
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.
26
<PAGE>
APPENDIX D
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended June 30, 1999
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 06425
SENTO CORPORATION
(Exact Name of Small Business Issuer as
Specified in its Charter)
808 East Utah Valley Drive
American Fork, Utah 84003
(Address of Principal Executive Offices)
UTAH 87-0284979
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Issuers telephone number, including area code: (801) 492-2000
Indicate by check mark 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 preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at
June 30, 1999
------------------------- -------------
<S> <C>
Common capital stock 7,767,312
$.25 par value per share
</TABLE>
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SENTO CORPORATION
Quarterly Report on Form 10-QSB
Quarter ended June 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of
Operations Three Months ended June 30, 4
1999 and 1998
Condensed Consolidated Statements of
Cash Flows Three Months ended June 30,
1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash $ 579,536 $ 275,893
Accounts receivable (net) 2,612,507 3,075,460
Income taxes receivable 50,018 375,148
Other current assets 77,236 391,882
----------- -----------
Total current assets 3,319,297 4,118,383
Property and equipment (net) 2,812,191 2,907,897
Other assets 346,733 274,891
----------- -----------
Total Assets $ 6,478,221 $ 7,301,171
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ - $ 1,000,000
Current portion of long-term debt 409,215 409,923
Accounts payable 1,848,814 2,197,129
Accrued liabilities 705,234 1,548,779
Deferred revenue 185,314 500,321
----------- -----------
Total current liabilities 3,148,577 5,656,152
----------- -----------
Long-term liabilities:
Convertible bonds - 472,266
Long-term debt, net of current portion 232,593 286,317
----------- -----------
Total long-term liabilities 232,593 758,583
----------- -----------
Stockholders' equity:
Common stock 1,992,268 1,580,607
Additional paid-in capital 9,153,963 7,247,143
Deferred compensation (42,394) (204,814)
Accumulated deficit (7,593,869) (7,327,537)
Accumulated other comprehensive loss - foreign (26,354) (22,400)
currency translation
Treasury stock (386,563) (386,563)
----------- -----------
Total stockholders' equity 3,097,051 886,436
----------- -----------
Total liabilities and stockholders' equity $ 6,478,221 $ 7,301,171
----------- -----------
----------- -----------
</TABLE>
3
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------------- ---------------------
<S> <C> <C>
Revenue $ 3,301,721 $ 1,486,365
Cost of sales 2,341,010 684,023
--------------------- ---------------------
Gross profit 960,711 802,342
--------------------- ---------------------
Costs and expenses:
Selling general and administrative 1,165,501 1,815,831
Amortization of intangible assets - 71,366
Research and development 27,356 62,314
--------------------- ---------------------
Total costs and expenses 1,192,857 1,949,511
--------------------- ---------------------
Operating loss (232,146) (1,147,169)
Other income (loss), net (49,076) 518,800
--------------------- ---------------------
Loss before taxes (281,222) (628,369)
Income tax benefit 66,279 -
--------------------- ---------------------
Net loss from continuing operations (214,943) (628,369)
Loss from discontinued operations, net of
income taxes (51,389) (269,622)
--------------------- ---------------------
Net loss $ (266,332) $ (897,991)
--------------------- ---------------------
--------------------- ---------------------
Basic and diluted earnings per share:
Loss from continuing operations (0.03) (0.11)
Loss from discontinued operations (0.01) (0.05)
--------------------- ---------------------
Net loss per common share $ (0.04) $ (0.16)
--------------------- ---------------------
--------------------- ---------------------
Weighted average number of common and
Common equivalent shares outstanding:
Basic 6,267,069 5,790,109
Diluted 6,267,069 5,790,109
</TABLE>
4
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
-------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(266,332) $ (897,991)
Adjustments to reconcile net loss to net
Cash used by operating activities:
Depreciation and amortization 280,557 213,436
Loss on disposal of assets 8,053 -
Amortization of deferred compensation 11,850 32,345
Changes in operating assets and liabilities:
Accounts receivable 772,956 1,046,407
Prepaid taxes 325,130 -
Other assets 24,102 183,942
Accounts payable (348,315) (1,029,790)
Accrued liabilities (779,453) (198,837)
Deferred revenue (108,007) (218,806)
---------- -----------
Net cash used in operating activities (79,459) (869,294)
---------- -----------
Cash flows used in investing activities:
Purchase of furniture and equipment (222,904) (102,605)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock 1,659,997 258,629
Issuance of long-term debt - 146,219
Net payments on line of credit (1,000,000) -
Proceeds from stock options exercised 4,395 -
Principal payments of long-term debt (54,432) (27,070)
Foreign currency translation (3,954) (3,067)
---------- -----------
Net cash provided by financing activities 606,006 374,711
---------- -----------
Net increase (decrease) in cash 303,643 (597,188)
Cash at beginning of period 275,893 5,807,014
---------- -----------
Cash at end of period $ 579,536 $ 5,209,826
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 22,195 $ 4,722
Income taxes - 250
</TABLE>
5
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
are stated in accordance with the instructions to Form 10-QSB and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the three months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the full
year. The unaudited condensed consolidated financial statements should
be read in conjunction with the condensed consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended March 31, 1999.
Certain balances in the financial statements for the three-month period
ended June 30, 1998 have been reclassified to conform to the current
presentation.
B. COMPREHENSIVE LOSS
The Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income," effective April 1, 1998.
SFAS 130 establishes standards for reporting and displaying
comprehensive loss and its components in financial statements. The
components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
-----------------------------------------------------------
<S> <C> <C>
Net loss $(266,332) $ (897,991)
Foreign currency translation
adjustment (3,954) (3,067)
--------- ----------
Comprehensive income loss $(270,286) $ (901,058)
--------- ----------
--------- ----------
</TABLE>
6
<PAGE>
C. COMMON STOCK
THREE MONTHS ENDED JUNE 30, 1999
During the three months ended June 30, 1999, all outstanding
convertible bonds including accrued interest were converted into
401,264 shares of the Company's common stock. The Company also
completed a private placement of common stock in June of 1999, whereby
600,000 units, consisting of two shares of common stock and a warrant
to purchase one share of common stock, were sold. The units were sold
at a price of $3.20 per unit for total proceeds of $1,880,522 (net of
$39,478 in offering costs). Of the total proceeds, cash from
subscriptions totaling $260,003 was received in July of 1999. The
warrants are exercisable for a three-year period at $2.50 per share.
In addition to the above transactions, options to purchase 45,377
shares of the Company's common stock were exercised during the three
months ended June 30, 1999.
THREE MONTHS ENDED JUNE 30, 1998
During the three months ended June 30, 1998, warrants to purchase
73,894 shares of the Company's common stock were exercised for proceeds
of $258,629.
D. LOSS PER SHARE
Loss per share is computed in accordance with Financial Accounting
Standards Board Standard No. 128, "Earnings Per Share". Basic loss per
share is computed as net loss divided by the weighted average number of
common shares outstanding for the period. Diluted loss per share
reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible
securities. The computation of diluted loss per share for the three
months ended June 30, 1999 excludes the assumed conversion of $500,000
in convertible bonds prior to the conversion to common stock on June
16, 1999 and June 20, 1999, because the impact of the conversion would
be anti-dilutive. The computation of diluted earnings per share for the
three months ended June 30, 1998 excludes the assumed conversion of
$1,000,000 in convertible bonds because the impact of the conversion
would be anti-dilutive. Employee stock options of 1,999,125 and
1,966,601, and warrants of 1,087,500 and 560,000 to purchase common
stock that were outstanding during the three months ended June 20, 1999
and 1998, respectively, were not included in the computation of diluted
loss per share because to do so would be anti-dilutive.
E. DISCONTINUED OPERATIONS
In June of 1999, the Company completed the sale of its VAR business and
certain related assets. The Orem VAR business was sold effective June
30, 1999. The Company received cash of $50,000 and future contingent
earn-out payments of up to $350,000 to be received over 36 months. The
Company recognized a gain on the sale before income taxes of
approximately $5,000 that has been included in the loss from
discontinued operations for the three months ended June 30, 1999.
The VAR business has been accounted for as discontinued operations, and
accordingly, the results of operations are segregated from continuing
operations in the accompanying statements of operations. Revenue,
operating costs and expenses, other income and expenses, and income
taxes of this business have been reclassified to discontinued
operations for the three months ended June 30, 1999 and 1998. No
allocation of general corporate overhead has been made to discontinued
operations relating to this business. The assets and liabilities
related to discontinued operations as of March 31, 1999 are
approximately $240,000 and $210,000, respectively.
F. SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company's two reportable
business segments have separate management teams. The segments
include Technical Services and Training Services.
TECHNICAL SERVICES: This segment offers a range of IT outsourcing
services consisting of "call center," "help desk," and technical
support services provided through the Company's "E-customer Contact
Center."
7
<PAGE>
TRAINING SERVICES: This segment 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.
The "Other" column includes corporate related items and results of
insignificant operations.
Summarized financial information concerning the Company's reportable
segments for the three months ended June 30, 1999 and 1998 is shown in
the following table:
<TABLE>
<CAPTION>
TECHNICAL TRAINING
1999 SERVICES SERVICES OTHER TOTAL
---------------------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 2,128,492 895,742 277,487 3,301,721
Cost of sales 1,744,338 488,708 107,964 2,341,010
Depreciation 226,061 6,900 40,767 273,728
Segment operating income
(loss) (121,126) (123,909) 12,889 (232,146)
Total assets as of June
30, 1999 3,503,745 601,456 2,373,020 6,478,221
</TABLE>
<TABLE>
<CAPTION>
TECHNICAL TRAINING
1998 SERVICES SERVICES OTHER TOTAL
---------------------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 287,454 776,103 422,808 1,486,365
Cost of sales 48,560 497,238 138,225 684,023
Depreciation 5,863 15,015 17,604 38,482
Amortization of intangible
assets - 57,386 13,980 71,366
Segment operating loss (47,514) (774,446) (325,209) (1,147,169)
Total assets as of June
30, 1998 2,253,973 1,449,938 10,232,352 13,936,263
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
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 and
technical support services.
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
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. ("Sento Australia")
based in Sydney, Australia.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998.
Revenues
Revenues increased 122%, or $1,815,356, from $1,486,365 for the three months
ended June 30, 1998 to $3,301,721 for the three months ended June 30, 1999.
These revenues were generated primarily from the following two areas:
Technical services revenues increased 640%, or $1,841,038, from $287,454 for
the three months ended June 30, 1998 to $2,128,492 for the three months ended
June 30, 1999. The Company began this operation during the quarter ended
March 31, 1998, and this significant increase reflects the Company's
strategic focus on providing IT services.
Training revenues increased 15%, or $119,639, from $776,103 for the three
months ended June 30, 1998 to $895,742 for the same period in 1999. This
increase represents the Company's transition from primarily providing
classroom-based training to providing custom corporate and other forms of IT
training.
Cost of Sales
Costs of sales consists primarily of salaries and employee benefits for the
Company's full and part-time employees, consultants, engineers, agents, and
instructors; travel expenses relating to consulting and training activities;
facilities costs; and depreciation on property and equipment used in
providing technical support services.
Cost of sales increased 242%, or $1,656,987, from $684,023 for the three
months ended June 30, 1998 to $2,341,010 for the same period in 1999. Gross
profit as a percentage of revenues decreased by 25%, from 54% of revenues
during the three months ended June 30, 1998 to 29% of revenues for the same
three-month period in 1999. The decline in gross margin is primarily the
result of a shift in the Company's revenue mix towards technical services,
which generate lower gross profit margins. Generally, the lower gross profit
margins are offset by lower sales and marketing expenses needed to generate
technical services.
Selling General and Administrative Expenses
Selling general and administrative expenses decreased 36%, or $650,330, from
$1,815,831 for the three months ended June 30, 1998 to $1,165,501 for same
three-month period in 1999. The decrease was due to management's focus on
cost reduction and a shift to less expensive marketing methods. Start-up
activities associated with the Company's training and technical services
divisions also contributed to higher general and administrative expenses
during the three-month period ended June 30, 1998.
The Company recorded $71,366 of amortization expense relating to intangible
assets during the three months ended June 30, 1998. The intangible assets
that were amortized in 1998 were subsequently disposed of or written off due
to impairment. Therefore, there is no amortization expense for the three
months ended June 30, 1999.
Other Income (Expense)
During the three months ended June 30, 1999, the Company recorded other
expense (net) of $49,076, as compared to other income (net) of $ 518,800, for
the three months ended June 30, 1998. The decrease of $ 567,876 was
9
<PAGE>
primarily due to the realization of income during the three months ended June
30, 1998 from the sale of assets. Management does not expect other income to
be significant in future periods.
Discontinued Operations
The Company sold all of its VAR business and related assets as of June 30,
1999. The loss from continuing operations reflected in the Statement of
Operations for the three months ended June 30, 1999 excludes the VAR
business' revenues and expenses. Loss from this discontinued operation was
$51,389 for the three months ended June 30, 1999 and $269,622 for the three
months ended June 30, 1998.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of $170,720, and cash
balances had increased 210% or $303,643 from $275,893 at March 31, 1999 to
$579,536 at June 30, 1999. The improved liquidity was primarily due to
proceeds received from the Company's private placement of common stock in
June of 1999.
On June 29, 1999, the Company completed a private placement of common stock
and warrants resulting in total consideration received (net of offering
costs) of $1,880,000. This private placement was 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 sold at a price of $3.20 per unit. The stock
purchase warrants are exercisable 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 a bank, which provides up to $2,000,000 of financing. The amount
available under the bank loan is based on Sento's outstanding accounts
receivable. As of June 30, 1999 there were no borrowings outstanding under
this bank line of credit.
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
borrowings 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 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 operations. There can be no assurance that the
Company will be able to obtain necessary capital funding on terms favorable
to the Company if at all.
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 IT Management and Sr. 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 regarding 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.
10
<PAGE>
- - 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 and security systems for the Company's 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.
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.
Recently issued Financial Accounting Standards
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.
Factors Affecting Future Results
This Form 10-QSB contains certain forward-looking statements (as defined in
Section 21E of the Securities Exchange Act of 1934, as amended) that involve
substantial risks and uncertainties. When used in this Form 10-QSB, the words
"anticipate" and "expect" and similar expressions as they relate to the
Company or its management is intended to identify such forward-looking
statements. The Company's actual results, performance or achievements will
differ, and could differ materially from the results, performance or
achievements expressed in, or implied by, these forward-looking statements.
Risks and uncertainties and other factors that could cause or contribute to
such differences include, but are not limited to, the Company's ability to
obtain capital funding necessary to pursue its business strategy;
difficulties in attracting and retaining highly skilled employees; the
Company's ability to manage rapid growth and expansion into new geographic
areas and service lines; the Company's ability to develop IT solutions that
keep pace with continuing changes in technology, evolving industry standards
and changing client preferences; and risks related to Year 2000 failures in
client's information systems. These and other risks, uncertainties and other
factors are more fully described in the Company's Annual Report on Form
10-KSB.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
a. 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. The Company believes that on June 9, 1999
Educational Systems Inc. ("ESI") filed suit against Sento
and Sento Training in the Fourth Judicial District court of
Utah County, State of Utah, requesting payment of amounts
allegedly payable under an acquisition agreement executed
by Sento, Sento Training and ESI, together with an
accounting and reconciliation of amounts payable under the
agreement and damages based on alleged misrepresentations
and interference with economic relations. The Company was
never served with papers filed by ESI. In July 1999, the
Company, Sento Training and ESI entered into a Settlement
and Release Agreement pursuant to which the Company agreed
to issue to ESI 169,097 shares of Common Stock in full
satisfaction of the obligations of the Company and Sento
Training to ESI. In addition, the parties released and
discharged any claims they had against each other, whether
arising under the original agreement or otherwise.
Item 2. Changes in Securities
a. Pursuant to a Convertible Bond and Warrant Purchase
Agreement dated as of July 8, 1997, between Canadian
Imperial Holdings, Inc. ("CIHI") and the Company, the
Company sold to CIHI a Convertible Bond with an "issue
price" of $1,000,000 and bearing interest at the rate of
six percent (the "Convertible Bond"). The Convertible
Bond, including interest on the principal thereof, was
convertible by CIHI into shares of the common stock in
accordance with the conversion rate set forth in the
Convertible Bond upon the earlier of (a) at any time after
October 6, 1997 in the discretion of CIHI or (b)
automatically on July 8, 1999.
On June 16, 1999 and June 22, 1999, CIHI elected to convert
$200,000 and $300,000, respectively, of principal value of
the Convertible Bond, together with accrued interest
thereon, into shares of common stock. In exchange for the
cancellation of the converted portion of the Convertible
Bond, and the Company issued to CIHI 401,264 shares of
common stock.
The sale of the convertible bonds and the issuance of the
shares of common stock upon the conversion thereof were
effected in reliance upon an exemption for sales of
securities not involving a public offering, as set forth in
Section 4(2) of the Securities Act of 1993, as amended (the
"Securities Act"). The Company's reliance upon such
exemption was based upon representations and warranties of
CIHI contained in transaction documents submitted to the
Company by CIHI.
On May 11, 1999 and on June 2, 1999, the Company issued
41,829 and 3,548 shares of Common Stock, respectively, upon
the exercise of options granted pursuant to the Company's
stock option plan.
On June 29, 1999, the Company completed a private placement
of its common stock whereby 600,000 units consisting of two
shares of the Company's common stock and one warrant to
purchase one share of the Company's common stock were sold.
The units were sold at a price of $3.20 per unit and the
stock purchase warrants are exercisable for a three-year
period at $2.50 per share. The private placement of the
units was effected in reliance upon an exemption for sales
of securities not involving a public offering, as set forth
in Section 4(2) of the Securities Act and Regulation D
promulgated thereunder. The Company's reliance on such
exemptions was based upon representations and warranties of
the purchasers contained in purchase documents delivered to
the Company by each purchaser.
Item 3. Defaults on Senior Securities
12
<PAGE>
a. None
Item 4. Submission of Matters to Vote of Security Holders
a. None
Item 5. Other Information
a. In connection with recent revisions to Rule 14a-8 and
related rules promulgated under the Securities Exchange Act
of 1934, as amended, the company has elected to provide the
following information regarding discretionary proxy voting
at the Company's 1999 annual meeting of shareholders (the
"1999 Meeting"). If a shareholder desiring to advance a
proposal for consideration at the Company's 1999 Meeting
fails to notify the company of the proposal at least 45 days
prior to the month and day of mailing the Company's proxy
statement relating to the 1999 annual meeting of shareholders,
then management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at
the 1999 Meeting, without any discussion of the matter in the
Company's proxy statement
Item 6. Exhibits and Reports on Form 8K
a. See Exhibit Index attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENTO CORPORATION
(Registrant)
August 13, 1999 By: /s/ ARTHUR F. COOMBS, III
-------------------------------------
Arthur F. Coombs, III
President and Chief Executive Officer
August 13, 1999 By: /s/ GARY B. FILLER
-------------------------------------
Gary B. Filler
Acting Executive Vice President and
Chief Financial Officer
13
<PAGE>
===============================================================================
UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended September 30, 1999
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 06425
SENTO CORPORATION
Exact Name of Small Business Issuer as
Specified in its Charter
UTAH 87-0284979
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
(Address of Principal Executive Offices)
808 East Utah Valley Drive
American Fork, Utah 84003
Issuers telephone number, including area code: (801) 492-2000
Indicate by check mark 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 preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at
September 30, 1999
-------------------- ------------------
<S> <C>
Common capital stock 7,939,416
$.25 par value
</TABLE>
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
===============================================================================
<PAGE>
SENTO CORPORATION
Quarterly Report on Form 10-QSB
Quarter ended September 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of
Operations Three Months and Six Months
ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of
Cash Flows Six Months ended September 30,
1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 4. Submission of Matters to Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPT. 30, 1999 MARCH 31, 1999
(UNAUDITED)
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 427,005 $ 275,893
Accounts receivable (net) 2,104,710 3,075,460
Income taxes receivable 50,919 375,148
Other current assets 240,884 391,882
----------- -----------
Total current assets 2,823,518 4,118,383
Property and equipment (net) 3,042,298 2,907,897
Other assets 295,066 274,891
----------- -----------
Total Assets $ 6,160,882 $ 7,301,171
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 500,000 $ 1,000,000
Current portion of long-term debt 148,878 409,923
Accounts payable 915,478 2,197,129
Accrued liabilities 981,662 1,548,779
Deferred revenue 167,142 500,321
----------- -----------
Total current liabilities 2,713,160 5,656,152
Long-term liabilities:
Convertible bonds - 472,266
Long-term debt, net of current portion 45,880 286,317
----------- -----------
Total long-term liabilities 45,880 758,583
Stockholders' equity:
Common stock 2,035,294 1,580,607
Additional paid-in capital 9,515,973 7,247,143
Deferred compensation (34,549) (204,814)
Accumulated deficit (7,702,560) (7,327,537)
Accumulated other comprehensive loss - foreign
currency translation (25,753) (22,400)
Treasury stock (386,563) (386,563)
----------- -----------
Total stockholders' equity 3,401,842 886,436
----------- -----------
Total liabilities and stockholders' equity $ 6,160,882 $ 7,301,171
=========== ===========
</TABLE>
3
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 3,570,354 $1,517,845 $ 6,872,075 $ 3,004,210
Cost of sales 2,649,829 1,214,739 4,990,839 1,898,762
----------- ---------- ----------- -----------
Gross profit 920,525 303,106 1,881,236 1,105,448
Costs and expenses:
Selling general and administrative 1,123,104 2,085,904 2,288,605 3,901,735
Amortization of intangible assets - 107,729 - 179,095
Research and development 89,958 34,274 117,314 96,588
----------- ---------- ----------- -----------
Total costs and expenses 1,213,062 2,227,907 2,405,919 4,177,418
----------- ---------- ----------- -----------
Operating loss (292,537) (1,924,801) (524,683) (3,071,970)
Other income (net) 114,722 361,609 65,646 880,409
----------- ---------- ----------- -----------
Loss before taxes (177,815) (1,563,192) (459,037) (2,191,561)
Income tax benefit 69,124 347,928 135,403 347,928
----------- ---------- ----------- -----------
Net loss from continuing operations (108,691) (1,215,264) (323,634) (1,843,633)
Loss from discontinued operations, net of
income taxes - (182,366) (51,389) (451,988)
----------- ---------- ----------- -----------
Net loss $ (108,691) $(1,397,630) $ (375,023) $(2,295,621)
=========== ========== =========== ===========
Basic and diluted loss per share:
Loss from continuing operations $ (0.01) $ (0.21) $ (0.05) $ (0.32)
Loss from discontinued operations (0.00) (0.03) (0.00) (0.08)
----------- ---------- ----------- -----------
Net loss per common share $ (0.01) $ (0.24) $ (0.05) $ (0.40)
=========== ========== =========== ===========
Weighted average number of
common and Common equivalent
shares outstanding:
Basic 7,861,083 5,737,233 7,077,069 5,716,783
Diluted 7,861,083 5,737,233 7,077,069 5,716,783
</TABLE>
4
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED SEPTEMBER 30
--------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (375,023) $(2,295,621)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 516,691 504,221
(Gain)loss on disposal of assets 5,718 (127,640)
Amortization of deferred compensation 19,690 64,690
Changes in operating assets and liabilities:
Accounts receivable 970,750 1,082,541
Prepaid taxes 324,229 -
Other assets (85,110) 784,959
Accounts payable (1,281,651) (246,169)
Accrued liabilities (470,242) 351,258
Deferred revenue (126,179) (936,272)
----------- -----------
Net cash used in operating activities (501,127) (818,033)
Cash flows used in investing activities:
Business disposals (acquisitions), net of cash 50,000 (100,000)
Purchase of furniture and equipment (682,877) (1,228,349)
----------- -----------
Net cash used in investing activities (632,877) (1,328,349)
Cash flows from financing activities:
Proceeds from issuance of stock 1,880,522 296,318
Issuance of long-term debt - 146,219
Net payments on line of credit (500,000) -
Proceeds from stock options exercised 8,122 -
Principal payments of long-term debt (100,175) (101,876)
----------- -----------
Net cash provided by financing activities 1,288,469 340,661
Effect of foreign exchange rates on cash (3,353) (11,922)
----------- -----------
Net increase (decrease) in cash 151,112 (1,817,643)
Cash at beginning of period 275,893 5,807,014
----------- -----------
Cash at end of period $ 427,005 $ 3,989,371
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 39,911 $ 2,542
Income taxes $ 3,678 $ 3,615
</TABLE>
5
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
are stated in accordance with the instructions to Form 10-QSB and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the three and six months ended September 30, 1999
are not necessarily indicative of the results that may be expected for
the full year. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended March 31, 1999.
Certain balances in the financial statements for the three-month and
six-month periods ended September 30, 1998 have been reclassified to
conform to the current presentation.
B. COMPREHENSIVE LOSS
The Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income," effective April 1, 1998.
SFAS 130 establishes standards for reporting and displaying
comprehensive loss and its components in financial statements. The
components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-----------------------------------------------------------
<S> <C> <C>
Net loss $(108,691) $(1,397,630)
Foreign currency translation
adjustment 601 (8,855)
--------- -----------
Comprehensive loss $(108,090) $(1,406,485)
========= ===========
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-----------------------------------------------------------
<S> <C> <C>
Net loss $(375,023) $(2,295,621)
Foreign currency translation
Adjustment (3,353) (11,922)
--------- -----------
Comprehensive loss $(378,376) $(2,307,543)
========= ===========
</TABLE>
6
<PAGE>
C. COMMON STOCK
SIX MONTHS ENDED SEPTEMBER 30, 1999
During the six months ended September 30, 1999, the following
transactions occurred which affected common stock:
All outstanding convertible bonds ($500,000 principal) including
accrued interest were converted into 401,264 shares of the Company's
common stock.
The Company also completed a private placement of common stock in June
of 1999, whereby 600,000 units, consisting of two shares of common
stock and a warrant to purchase one share of common stock, were sold.
The units were sold at a price of $3.20 per unit for total proceeds of
$1,880,522 (net of $39,478 in offering costs). The warrants are
exercisable for a three-year period at $2.50 per share.
On August 11, 1999, the Company issued 169,097 shares of common stock
pursuant to a settlement and release agreement (the "Agreement") with
Educational Systems, Inc ("ESI"). The Agreement called for the issuance
of common stock in full satisfaction of unpaid costs that had been
accrued by the Company under an acquisition agreement executed by
Sento, Sento Training and ESI in August of 1998.
Options to purchase 48,384 shares of common stock were exercised during
the six months ended September 30, 1999.
SIX MONTHS ENDED SEPTEMBER 30, 1998
During the six-month period ended September 30, 1998, the following
transactions occurred which affected common stock:
Warrants to purchase 73,894 shares of common stock were exercised for
proceeds of $258,629.
A total of 11,082 shares of common stock were issued in lieu of
employee bonuses.
A total of 11,453 shares of common stock were issued under the Employee
Stock Purchase Plan.
Convertible bonds ($100,000 principal) were converted to 33,393 shares
of common stock.
The Company sold a building to a former employee who was also a
director of the Company at the time of sale. The property was sold for
$192,722 in cash and 58,000 shares of common stock. The net gain on the
sale was $124,578.
D. LOSS PER SHARE
Loss per share is computed in accordance with Financial Accounting
Standards Board Standard No. 128, "Earnings Per Share". Basic loss per
share is computed as net loss divided by the weighted average number of
shares of common stock outstanding for the period. Diluted loss per
share reflects the potential dilution that could occur from shares of
common stock issuable through stock options, warrants and other
convertible securities. The computation of diluted loss per share for
the six months ended September 30, 1999 excludes the assumed conversion
of $500,000 in convertible bonds prior to the conversion to common
stock on June 16, 1999 and June 20, 1999, because the impact of the
conversion would be anti-dilutive. The computation of diluted earnings
per share for the six months ended September 30, 1998 excludes the
assumed conversion of $900,000 in convertible bonds because the impact
of the conversion would be anti-dilutive. Employee stock options of
1,774,787 and 2,128,601, and warrants of 767,500 and 560,000 to
purchase common stock that were outstanding during the six months ended
September 30, 1999 and 1998, respectively, were not included in the
computation of diluted loss per share because to do so would be
anti-dilutive.
E. DISCONTINUED OPERATIONS
In June of 1999, the Company completed the sale of its VAR business and
certain related assets. The VAR business was sold effective June 30,
1999. The Company received cash of $50,000 and future contingent
earn-out payments of up to $350,000 to be received over 36 months. The
Company recognized a gain on
7
<PAGE>
the sale before income taxes of approximately $5,000 that has been
included in the loss from discontinued operations for the six months
ended September 30, 1999.
The VAR business has been accounted for as discontinued operations, and
accordingly, the results of operations are segregated from continuing
operations in the accompanying statements of operations. Revenue,
operating costs and expenses, other income and expenses, and income
taxes of this business have been reclassified to discontinued
operations for the three and six months ended September 30, 1999 and
1998. No allocation of general corporate overhead has been made to
discontinued operations relating to this business. The assets and
liabilities related to discontinued operations as of March 31, 1999
were approximately $240,000 and $210,000, respectively.
F. SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company's two reportable
business segments have separate management teams. The segments consist
of Technical Services and Training Services.
TECHNICAL SERVICES: This segment offers a range of IT outsourcing
services consisting of "call center," "help desk," and technical
support services provided through the Company's "eCustomer Contact
Center."
TRAINING SERVICES: This segment 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.
The "Other" column includes corporate related items and results of
insignificant operations.
Summarized financial information concerning the Company's reportable
segments for the three months and six months ended September 30, 1999
and 1998 is shown in the following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TECHNICAL TRAINING
SEPTEMBER 30, 1999 SERVICES SERVICES OTHER TOTAL
---------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 2,318,631 $ 1,006,984 $ 244,739 $ 3,570,354
Cost of sales 2,069,611 503,116 77,102 2,649,829
Depreciation 186,300 10,762 45,901 242,963
Segment operating income
(loss) (301,420) 35,524 (26,641) (292,537)
Total assets as of
September 30, 1999 4,095,180 690,224 1,375,478 6,160,882
<CAPTION>
THREE MONTHS ENDED TECHNICAL TRAINING
SEPTEMBER 30, 1998 SERVICES SERVICES OTHER TOTAL
---------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 294,468 $ 781,668 $ 441,709 $ 1,517,845
Cost of sales 462,112 591,476 161,151 1,214,739
Depreciation 27,148 21,830 134,078 183,056
Amortization of intangible
assets - 93,749 13,980 107,729
Segment operating loss (555,963) (1,124,275) (244,563) (1,924,801)
Total assets as of
September 30, 1998 3,397,503 1,374,140 9,358,265 14,129,908
8
<PAGE>
<CAPTION>
SIX MONTHS ENDED TECHNICAL TRAINING
SEPTEMBER 30, 1999 SERVICES SERVICES OTHER TOTAL
---------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 4,447,123 $ 1,902,726 $ 522,226 $ 6,872,075
Cost of sales 3,813,949 991,824 185,066 4,990,839
Depreciation 412,361 17,662 86,668 516,691
Segment operating loss (422,546) (88,385) (13,752) (524,683)
Total assets as of
September 30, 1999 4,095,180 690,224 1,375,478 6,160,882
<CAPTION>
SIX MONTHS ENDED TECHNICAL TRAINING
SEPTEMBER 30, 1998 SERVICES SERVICES OTHER TOTAL
---------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 581,922 $ 1,557,771 $ 864,517 $ 3,004,210
Cost of sales 510,672 1,088,714 299,376 1,898,762
Depreciation 33,011 36,845 255,270 325,126
Amortization of intangible
assets - 151,135 27,960 179,095
Segment operating loss (603,477) (1,898,721) (569,772) (3,071,970)
Total assets as of
September 30, 1998 3,397,503 1,374,140 9,358,265 14,129,908
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
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 and technical
support services.
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
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. ("Sento Australia")
based in Sydney, Australia.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
Revenues
Revenues increased 135%, or $2,052,509 from $1,517,845 for the three months
ended September 30, 1998 to $3,570,354 for the three months ended September
30, 1999. These revenues were generated primarily from the following two
areas:
Technical services revenues increased 687%, or $2,024,163 from $294,468 for
the three months ended September 30, 1998 to $2,318,631 for the three months
ended September 30, 1999. The Company began its technical services operations
during the quarter ended March 31, 1998, and in August of 1998, moved to its
"state of the art" eCustomer Contact Center in American Fork, Utah. The
significant increase in revenues reflects the Company's strategic focus on
providing IT services through its eCustomer Contact Center. Agent headcount
has increased from 21 agents at June 30, 1998 to 316 at September 30, 1999.
Management expects to be at capacity at the American Fork location during
November 1999 with over 400 agents. Management believes the personnel growth
Sento is experiencing has had and, in the near term will continue to have, a
negative impact on its earnings because of upfront training and hiring costs
for new agents and the time lag before they generate revenue. Management
expects this personnel growth to continue into the near future, and this
division may not turn profitable in Sento's third quarter due to this
division's expanding customer base. The rate of personnel growth, as well as
other factors, will determine if the Company's technical services become
profitable. Management is currently unable to forecast when or if such
profitability will be achieved. Revenue by quarter for this segment through
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months Three Months Three Months
Ended Ended Ended Ended Ended Ended
JUN. 30, 1998 SEP. 30, 1998 DEC. 31, 1998 MAR. 31, 1999 JUN. 30, 1999 SEP. 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 287,454 $ 294,468 $ 685,881 $1,575,429 $2,128,492 $2,318,631
========== ========== ========== ========== ========== ==========
Increase in
revenue from
prior quarter N/A $ 7,014 $ 391,413 $ 889,548 $ 553,063 $ 190,139
========== ========== ========== ========== ==========
</TABLE>
Training revenues increased 29%, or $225,316 from $781,668 for the three
months ended September 30, 1998 to $1,006,984 for the same period in 1999.
This increase represents the Company's transition to intensive multi-week IT
certification courses and custom corporate training from shorter, less
intensive courses and other multi-media forms of IT training.
Cost of Sales
Costs of sales consists primarily of salaries and employee benefits for the
Company's full and part-time employees, consultants, engineers, agents, and
instructors; travel expenses relating to consulting and training activities;
facilities costs; and depreciation on property and equipment used in
providing technical support services.
10
<PAGE>
Cost of sales increased 118%, or $1,435,090, from $1,214,739 for the three
months ended September 30, 1998 to $2,649,829 for the same period in 1999.
Gross profit as a percentage of revenues increased by 6 percentage points,
from 20% of revenues during the three months ended September 30, 1998 to 26%
of revenues for the same three-month period in 1999. The increase in gross
margin, which is offset by upfront training costs of new agents discussed
above, is primarily the result of increased utilization of the Company's
facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 46%, or $962,800 from
$2,085,904 for the three months ended September 30, 1998 to $1,123,104 for
same three-month period in 1999. The decrease was due primarily to
management's focus on cost reduction, a shift to less expensive marketing
methods and a reduction in the level of expenditures associated with the
start-up of the eCustomer Contact Center and the training division during the
three-month period ended September 30, 1998.
The Company recorded $107,729 of amortization expense relating to intangible
assets during the three months ended September 30, 1998. The intangible
assets that were amortized in 1998 were subsequently disposed of or written
off due to impairment. Therefore, there is no amortization expense for the
three months ended September 30, 1999.
Other Income (Expense)
During the three months ended September 30, 1999, the Company recorded other
income (net) of $114,722, as compared to $361,609 for the three months ended
September 30, 1998. The decrease of $246,887 was primarily due to the
realization of income during the three months ended September 30, 1998 from
the sale of assets. Management does not expect other income to be significant
in future periods.
Discontinued Operations
The Company sold all of its VAR business and related assets as of June 30,
1999. Loss from these discontinued operations was $182,366 for the three
months ended September 30, 1998, and there was no loss to report for
discontinued operations for the three months ended September 30, 1999.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1998.
Revenues
Revenues increased 129%, or $3,867,865 from $3,004,210 for the six months
ended September 30, 1998 to $6,872,075 for the six months ended September 30,
1999. These revenues were generated primarily from the following two areas:
Technical services revenues increased 664%, or $3,865,201 from $581,922 for
the six months ended September 30, 1998 to $4,447,123 for the six months
ended September 30, 1999. The Company began its technical services operations
during the quarter ended March 31, 1998, and in August of 1998, moved to its
"state of the art" eCustomer Contact Center in American Fork, Utah. The
significant increase in revenues reflects the Company's strategic focus on
providing IT services through its eCustomer Contact Center. Agent headcount
has increased from 21 agents at June 30, 1998 to 316 at September 30, 1999.
Management expects to be at capacity at the American Fork location during
November 1999 with over 400 agents. Management believes the personnel growth
Sento is experiencing has had and, in the near term will continue to have, a
negative impact on its earnings because of upfront training and hiring costs
for new agents and the time lag before they generate revenue. Management
expects this personnel growth to continue into the near future, and this
division may not turn profitable in Sento's third quarter due to this
division's expanding customer base. The rate of personnel growth, as well as
other factors, will determine if the Company's technical services become
profitable. Management is currently unable to forecast when or if such
profitability will be achieved. Revenue by quarter for this segment through
September 30, 1999 is disclosed in management's discussion and analysis of
the three months ended September 30, 1999 and 1998.
Training revenues increased 22%, or $344,955 from $1,557,771 for the six
months ended September 30, 1998 to $1,902,726 for the same period in 1999.
This increase represents the Company's transition to intensive multi-week IT
certification courses and custom corporate training from shorter, less
intensive courses and other multi-media forms of IT training.
11
<PAGE>
Cost of Sales
Cost of sales consists primarily of salaries and employee benefits for the
Company's full and part-time employees, consultants, engineers, agents, and
instructors; travel expenses relating to consulting and training activities;
facilities costs; and depreciation on property and equipment used in
providing technical support services.
Cost of sales increased 163%, or $3,092,077 from $1,898,762 for the six
months ended September 30, 1998 to $4,990,839 for the same period in 1999.
Gross profit as a percentage of revenues decreased by 10 percentage points,
from 37% of revenues during the six months ended September 30, 1998 to 27% of
revenues for the same six-month period in 1999. The decrease in gross margin
is primarily the result of a shift in the Company's revenue mix caused by the
substantial increase in technical service revenues, which generate lower
gross margins, and the upfront training costs of new agents discussed above.
Generally, the lower gross profit margins are offset by lower sales and
marketing expenses needed to generate technical service revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 41%, or $1,613,130
from $3,901,735 for the six months ended September 30, 1998 to $2,288,605 for
same six-month period in 1999. The decrease was due primarily to management's
focus on cost reduction and a shift to less expensive marketing methods and a
reduction in the level of expenditures associated with the start-up of the
eCustomer Contact Center and the training division during the six-month
period ended September 30, 1998.
The Company recorded $179,095 of amortization expense relating to intangible
assets during the six months ended September 30, 1998. The intangible assets
that were amortized in 1998 were subsequently disposed of or written off due
to impairment. Therefore, there is no amortization expense for the six months
ended September 30, 1999.
Other Income (Expense)
During the six months ended September 30, 1999, the Company recorded other
income (net) of $65,646 as compared to $880,409 for the six months ended
September 30, 1998. The decrease of $814,763 was primarily due to the
realization of income during the six months ended September 30, 1998 from the
sale of assets. Management does not expect other income to be significant in
future periods.
Discontinued Operations
The Company sold all of its VAR business and related assets as of June 30,
1999. The loss from continuing operations reflected in the Statements of
Operations for the six months ended September 30, 1999 and September 30, 1998
excludes the VAR business' revenues and expenses. Loss from these
discontinued operations was $51,389 for the six months ended September 30,
1999 and $451,988 for the six months ended September 30, 1998.
Liquidity and Capital Resources
At September 30, 1999, the Company had working capital of $110,358 and cash
balances had increased 55% or $151,112 from $275,893 at March 31, 1999 to
$427,005 at September 30, 1999. The improved liquidity was primarily due to
proceeds received from the Company's private placement of common stock in
June of 1999.
On June 29, 1999, the Company completed a private placement of common stock
and warrants resulting in total consideration received (net of offering
costs) of $1,880,552. This private placement was 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 sold at a price of $3.20 per unit. The stock
purchase warrants are exercisable at $2.50 per share. With this new financing
and revenues from the Company's operations, management believes the Company
will be able to continue its existing operations and fund part of its
expected growth.
This new financing also made it possible for the Company to restructure its
loan with a bank, which provides up to $2,000,000 of financing. The amount
available under the bank loan is based on Sento's outstanding accounts
receivable. As of September 30, 1999 there was $500,000 of borrowings
outstanding under this bank line of credit. The loan matures in February of
2000 and is renewable upon the mutual agreement of the Company and the bank.
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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
borrowings 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 current growth rate of the technical services division
consumes a substantial amount of cash monthly, and the Company continues to
pursue additional funding opportunities. 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 operations.
There can be no assurance that the Company will be able to obtain necessary
capital funding on terms favorable to the Company, if at all.
Year 2000
Sento Corporation has organized a Year 2000 oversight committee that
conducted an analysis of the Company's internal compliance and implementing
necessary changes to ensure compliance. An overall five-phase plan was
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 IT Management and Sr. 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 regarding 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.
The Company has completed all of the above phases and is not aware of any
significant deficiencies in the Company's internal operations that have not
been resolved. 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 and security
systems for the Company's corporate office are newly purchased and Year 2000
certification verification has been received.
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 or other third parties including service providers
(particularly providers of telephone and other utility services), strategic
alliance partners, vendors or suppliers, 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.
Factors Affecting Future Results
This Form 10-QSB contains certain forward-looking statements (as defined in
Section 21E of the Securities Exchange Act of 1934, as amended) that involve
substantial risks and uncertainties. When used in this Form 10-QSB, the words
"anticipate" and "expect" and similar expressions as they relate to the
Company or its management is intended to identify such forward-looking
statements. The Company's actual results, performance or achievements will
differ, and could differ materially from the results, performance or
achievements expressed in, or implied by, these forward-looking statements.
Risks and uncertainties and other factors that could cause or contribute to
such differences include, but are not limited to, the Company's ability to
obtain capital funding necessary to pursue its business strategy;
difficulties in attracting and retaining highly skilled employees; the
Company's ability to manage rapid growth and expansion into new geographic
areas and service lines; the
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Company's ability to develop IT solutions that keep pace with continuing
changes in technology, evolving industry standards and changing client
preferences; and risks related to Year 2000 failures in client's information
systems. These and other risks, uncertainties and other factors are more
fully described in the Company's Annual Report on Form 10-KSB.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
a. Pursuant to a Convertible Bond and Warrant Purchase Agreement
dated as of July 8, 1997, between Canadian Imperial Holdings,
Inc. ("CIHI") and the Company, the Company sold to CIHI a
Convertible Bond with an "issue price" of $1,000,000 and
bearing interest at the rate of six percent (the "Convertible
Bond"). The Convertible Bond, including interest on the
principal thereof, was convertible by CIHI into shares of the
common stock in accordance with the conversion rate set forth
in the Convertible Bond upon the earlier of (a) at any time
after October 6, 1997 in the discretion of CIHI or (b)
automatically on July 8, 1999.
On June 16, 1999 and June 22, 1999, CIHI elected to convert
$200,000 and $300,000, respectively, of principal value of the
Convertible Bond, together with accrued interest thereon, into
shares of common stock. In exchange for the cancellation of
the converted portion of the Convertible Bond and the Company
issued to CIHI 401,264 shares of common stock. Upon the
completion of these conversions, the Convertible Bond has been
converted in its entirety.
The sale of the Convertible Bond and the issuance of the
shares of common stock upon the conversion thereof were
effected in reliance upon the exemption for sales of
securities not involving a public offering, as set forth in
Section 4(2) of the Securities Act of 1993, as amended (the
"Securities Act"). The Company's reliance upon such exemption
was based upon representations and warranties of CIHI
contained in transaction documents submitted to the Company by
CIHI.
On May 11, 1999, June 2, 1999 and September 30, 1999, the
Company issued 41,829, 3,548, and 3,007 shares of common
stock, respectively, upon the exercise of options granted
pursuant to the Company's stock option plan.
On June 29, 1999, the Company completed a private placement of
its common stock whereby 600,000 units consisting of two
shares of the common stock and one warrant to purchase one
share of common stock were sold. The units were sold at a
price of $3.20 per unit and the stock purchase warrants are
exercisable for a three-year period at $2.50 per share. The
private placement of the units was effected in reliance upon
the exemption for sales of securities not involving a public
offering, as set forth in Section 4(2) of the Securities Act
and Regulation D promulgated thereunder. The Company's
reliance on such exemptions was based upon representations and
warranties of the purchasers contained in purchase documents
delivered to the Company by each purchaser.
On August 11, 1999, the Company issued 169,097 shares of
common stock pursuant to a settlement and release agreement
(the "Settlement Agreement") with Educational Systems, Inc
(ESI). The Settlement Agreement called for the issuance of
common stock in full satisfaction of unpaid costs that had
been accrued by the Company under an acquisition agreement
executed by Sento, Sento Training and ESI in August of 1998.
The issuance of shares of common stock was undertaken in
reliance upon the exemption for sales of securities not
involving a public offering, as set forth in Section 4(2) of
the Securities Act. The Company's reliance on such exemption
was based upon representations and warranties of the
purchasers contained in the Settlement Agreement.
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Item 4. Submission of Matters to Vote of Security Holders
a. On September 23, 1999, the Company held its Annual Meeting of
Shareholders (the "Annual Meeting"). At the Annual Meeting,
two matters were submitted to the Company's shareholders for
consideration and approval. Those matters, together with the
voting results for each matter, are described in the following
paragraphs.
(a) Three directors of the Company were elected to serve
until the 2000 Annual Meeting of Shareholders of the
Company. The directors elected, together with votes
received are: Kieth E. Sorenson 5,412,727 votes;
Arthur F. Coombs, III 5,611,909 votes; and Gary B.
Filler 5,611,909 votes.
(b) The Company's shareholders approved the adoption of
the Sento Corporation 1999 Omnibus Stock Incentive
Plan (the "Plan"). The Plan replaces, in part, the
Sento Corporation Stock Incentive Plan, as amended
(the "Predecessor Plan"), and therefore, the Common
Stock previously authorized for the granting of stock
options under the Predecessor Plan remain outstanding
pursuant to the terms of the Predecessor Plan. The
Plan authorizes an aggregate of 3,500,000 shares of
Common Stock that may be subject to awards under the
Plan. Accordingly, only an additional 1,000,000
shares of Common Stock will be available for awards
under the Plan in excess of the number of shares that
were available under the Predecessor Plan. With
respect to this proposal, there were 2,853,077 votes
cast in favor of the proposal, 1,115,237 votes cast
against the proposal, and 32,590 votes abstained.
Item 6. Exhibits and Reports on Form 8K
a. Reg. SB item 27, Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENTO CORPORATION
(Registrant)
By: /s/ ARTHUR F. COOMBS III
------------------------------------------
Arthur F. Coombs, III
President and Chief Executive Officer
By: /s/ STANLEY J. CUTLER
------------------------------------------
Stanley J. Cutler
Corporate Controller and Secretary
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PROXY
SENTO CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Gary B. Filler and Stanley J. Cutler, and
each of them, as proxies, with full power of substitution, and hereby authorizes
them to represent and vote, as designated below, all shares of Common Stock of
Sento Corporation, a Utah corporation (the "Company"), held of record by the
undersigned on November 15, 1999 at a Special Meeting of Shareholders (the
"Special Meeting") to be held at 808 East Utah Valley Drive, American Fork, Utah
84003, on December 16, 1999, at 10:00 a.m., local time, or at any adjournment or
postponement thereof, upon the matters set forth below, all in accordance with
and as more fully described in the accompanying Notice of Special Meeting and
Proxy Statement, receipt of which is hereby acknowledged.
1. PROPOSAL TO APPROVE, AUTHORIZE, ADOPT AND RATIFY a Contribution Agreement by
and between the Company and EchoPass Corporation and to approve and
authorize the Company to consummate the transactions contemplated by such
Contribution Agreement.
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE PROPOSAL TO APPROVE, AUTHORIZE, ADOPT AND RATIFY THE
CONTRIBUTION AGREEMENT BY AND BETWEEN THE COMPANY AND ECHOPASS CORPORATION AND
TO APPROVE AND AUTHORIZE THE COMPANY TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED
BY SUCH CONTRIBUTION AGREEMENT.
Please complete, sign and date this proxy where indicated and return it
promptly in the accompanying envelope.
<TABLE>
<S> <C>
DATED: -------------------------------------------------, ----------------------------------------
1999 Signature
----------------------------------------
Signature if held jointly
(Please sign above exactly as the shares
are issued. When shares are held by
joint tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
partnership, please sign in partnership
name by authorized person.)
</TABLE>
