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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, 2000
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 06425
Utah SENTO CORPORATION 87-0284979
(State or other Exact Name of Small Business Issuer (I.R.S. Employer
Jurisdiction of as Specified in its Charter Identification No.)
Incorporation or
Organization)
808 EAST UTAH VALLEY DRIVE
American Fork, Utah 84003
(Address of Principal Executive Offices)
Issuer's 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:
Class Outstanding at
June 30, 2000
-------------------- --------------
Common capital stock 8,359,608
$.25 par value
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
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SENTO CORPORATION
Quarterly Report on Form 10-QSB
Quarter ended June 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION..................................................1
Item 1. Financial Statements...................................................1
Condensed Consolidated Balance Sheets..................................1
June 30, 2000 and March 31, 2000
Condensed Consolidated Statements of Operations........................2
Three Months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows........................3
Three Months ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements...................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................7
PART II. OTHER INFORMATION.....................................................13
Item 6. Exhibits and Reports on Form 8-K......................................13
SIGNATURES ....................................................................13
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 3,357,152 $ 2,382,321
Accounts receivable (net) 3,409,094 3,422,359
Other current assets 239,655 216,207
------------ ------------
Total current assets 7,005,901 6,020,887
Property and equipment (net) 2,296,590 2,158,887
Other assets 92,673 217,026
------------ ------------
Total Assets $ 9,395,164 $ 8,396,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 105,921 $ 80,492
Accounts payable 784,465 752,976
Accrued liabilities 1,713,432 1,278,420
Deferred revenue 149,344 247,540
------------ ------------
Total current liabilities 2,753,162 2,359,428
Long-term liabilities:
Convertible debt 1,020,920 998,414
Long-term debt, net of current portion 293,192 140,677
------------ ------------
Total long-term liabilities 1,314,112 1,139,091
Stockholders' equity:
Common stock 2,089,904 2,078,351
Additional paid-in capital 10,498,455 10,395,230
Deferred compensation (96,245) (136,052)
Accumulated deficit (7,164,224) (7,439,248)
------------ ------------
Total stockholders' equity 5,327,890 4,898,281
------------ ------------
Total liabilities and stockholders' equity $ 9,395,164 $ 8,396,800
============ ============
</TABLE>
1
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SENTO CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Revenue $ 6,053,052 $ 3,301,721
Cost of sales 4,740,166 2,341,010
----------- -----------
Gross profit 1,312,886 960,711
Costs and expenses:
Selling, general and administrative 875,854 1,165,501
Research and development -- 27,356
----------- -----------
Total costs and expenses 875,854 1,192,857
----------- -----------
Operating income (loss) 437,032 (232,146)
Equity loss on investment in EchoPass Corporation (149,795) --
Other expense (net) (12,213) (49,076)
----------- -----------
Income (loss) before taxes 275,024 (281,222)
Income tax benefit -- 66,279
----------- -----------
Income (loss) from continuing operations 275,024 (214,943)
Loss from discontinued operations, net of
income taxes -- (51,389)
----------- -----------
Net income (loss) $ 275,024 $ (266,332)
=========== ===========
Basic income (loss per) share:
Income (loss) from continuing operations $ 0.03 $ (0.03)
Loss from discontinued operations -- (0.01)
----------- -----------
Net income (loss) per common share $ 0.03 $ (0.04)
=========== ===========
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.03 $ (0.03)
Loss from discontinued operations -- (0.01)
----------- -----------
Net income (loss) per common share $ 0.03 $ (0.04)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding:
Basic 8,318,380 6,267,069
Diluted 9,647,883 6,267,069
</TABLE>
2
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SENTO CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 275,024 $ (266,332)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 283,346 292,407
Loss on disposal of assets -- 8,053
Equity loss in investment in EchoPass Corporation 149,795 --
Changes in operating assets and liabilities:
Accounts receivable 13,265 772,956
Prepaid taxes -- 325,130
Other assets (58,023) 24,102
Accounts payable 31,489 (348,315)
Accrued liabilities 435,012 (779,453)
Deferred revenue (98,196) (108,007)
----------- -----------
Net cash provided (used) by operating activities 1,031,712 (79,459)
Cash flows used in investing activities:
Purchase of property and equipment (349,603) (222,904)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock -- 1,659,997
Issuance of long-term debt 208,462 --
Principal payments of long-term debt (30,518) (54,432)
Net payments on credit line -- (1,000,000)
Proceeds from stock options and warrants exercised 114,778 4,395
----------- -----------
Net cash provided by financing activities 292,722 609,960
Effect of foreign exchange rates on cash -- (3,954)
----------- -----------
Net increase in cash 974,831 303,643
Cash at beginning of period 2,382,321 275,893
----------- -----------
Cash at end of period $ 3,357,152 $ 579,536
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 38,789 $ 22,195
</TABLE>
3
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SENTO CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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, 2000 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, 2000.
Certain balances in the financial statements for the three-month period
ended June 30, 1999 have been reclassified to conform to the current
presentation.
B. COMPREHENSIVE INCOME (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 income (loss) are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------ ------------------
<S> <C> <C>
Net income (loss) $275,024 $(266,332)
Foreign currency translation
adjustment -- (3,954)
-------- ---------
Comprehensive income (loss) $275,024 $(270,286)
======== =========
</TABLE>
C. COMMON STOCK
THREE MONTHS ENDED JUNE 30, 2000
During the three months ended June 30, 2000, options to purchase 46,210
shares of common stock were exercised.
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, each unit 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.
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D. INCOME/LOSS PER SHARE
Income/loss per share is computed in accordance with Financial Accounting
Standards Board Standard 128, "Earnings Per Share." Basic income/loss per
share is computed as net income or loss divided by the weighted average
number of shares of common stock outstanding for the period. Diluted income
per share reflects the potential dilution that could occur from shares of
common stock issuable through stock options, warrants and other convertible
securities. The effect of employee stock options to purchase 2,305,463
shares of common stock, warrants to purchase 858,751 shares of common stock
and 257,400 shares issuable pursuant to convertible debentures have been
included in the calculation of diluted common stock outstanding for the
three months ended June 30, 2000. Employee stock options to purchase
1,999,125 shares of common stock and warrants to purchase 1,087,500 shares
of common stock that were outstanding during the three months ended June
30, 1999 were not included in the computation of diluted loss per share
because to do so would be anti-dilutive.
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 275,024 $ (266,332)
Weighted average common shares outstanding 8,318,380 6,267,069
---------- -----------
Basic net income (loss) per share $ 0.03 $ (0.04)
========== ===========
DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 275,024 $ (266,332)
After-tax equivalent of interest expense on convertible debentures 37,274 --
---------- -----------
Income (loss) for purposes of computing diluted net income (loss) per
share 312,298 (266,332)
========== ===========
Weighted average common shares outstanding 8,318,380 6,267,069
Dilutive stock options and stock purchase warrants 1,072,103 --
Weighted average assumed conversion of convertible debentures 257,400 --
---------- -----------
Weighted average common and common equivalent shares outstanding for
purposes of computing diluted net income (loss) per share 9,647,883 6,267,069
========== ===========
Diluted net income (loss) per share $ 0.03 $ (0.04)
========== ===========
</TABLE>
E. DISCONTINUED OPERATIONS
The Company completed the sale of its VAR business and certain related
assets 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. As of June 30, 2000, the Company has received $26,651 under this
arrangement. 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. No allocation of general corporate overhead has
been made to discontinued operations relating to this business.
F. ECHOPASS CORPORATION
Pursuant to shareholder vote at a special shareholder meeting in December
1999, the Company consummated the sale of technology to EchoPass
Corporation (EchoPass) for 4,000,000 shares of EchoPass' Series A preferred
stock in March 2000. EchoPass was formed in fiscal 2000 and is a
development stage company. Sento has recorded its investment in EchoPass at
the historical carrying value of the underlying technology that was
transferred to EchoPass. As of March 31, 2000 Sento's investment
represented a 26% ownership interest in EchoPass. Therefore, Sento has
recorded its pro-rata share of EchoPass losses under the equity method of
accounting. As of June 30, 2000, the investment in EchoPass
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has been written down to a zero balance as the result of recording Sento's
pro-rata share of EchoPass losses.
G. 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 Centers."
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, 2000 and 1999 is shown in the
following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TECHNICAL TRAINING
JUNE 30, 2000 SERVICES SERVICES OTHER TOTAL
------------------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $4,856,045 $1,197,007 $ -- $6,053,052
Cost of sales 4,147,789 592,377 -- 4,740,166
Depreciation 173,543 29,115 9,242 211,900
Segment operating income
(loss) 304,727 150,164 (17,859) 437,032
Total assets as of June
30, 2000 4,977,809 650,057 3,767,298 9,395,164
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED TECHNICAL TRAINING
JUNE 30, 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>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GENERAL
Sento provides IT outsourcing services, including technical support services,
help-desk functions, and technical training and education. Through its
state-of-the-art eCustomer Contact Centers, Sento provides domestic and
international technical support services to leading computer hardware and
software companies. Sento also provides instructor-led technical training,
including distance learning through computer-based training ("CBT") methods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
REVENUES. Revenues from continuing operations increased 83% or $2,751,000 from
$3,302,000 for the three months ended June 30, 1999 to $6,053,000 for the three
months ended June 30, 2000. These revenues were generated primarily from the
following two areas:
Technical services revenues increased 128%, or $2,728,000, from $2,128,000 for
the three months ended June 30, 1999 to $4,856,000 for the three months ended
June 30, 2000. The significant increase in eCustomer Contact Centers revenues
was principally the result of the acquisition of new customers and increased
revenues from existing customers. There were 212 agents in one facility in
American Fork, Utah as of June 30, 1999; and there are now 507 agents in three
facilities. Revenues by quarter for this segment for the eight quarters ended
June 30, 2000 were as follows:
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
September 31, 1998 December 31, 1998 March 30, 1999 June 30, 1999
------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 294,468 $ 685,881 $1,575,429 $2,128,492
========= ========= ========== ==========
Increase in revenue
from prior quarter $ 7,014 $ 391,413 $ 889,548 $ 553,063
========= ========= ========== ==========
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
September 30, 1999 December 31, 1999 March 30, 2000 June 30, 2000
------------------ ----------------- -------------- -------------
Revenues $ 2,318,631 $ 4,264,383 $ 5,267,371 $ 4,856,045
=========== =========== =========== ===========
Increase (decrease)
in revenue from prior
quarter $ 190,139 $ 1,945,752 $ 1,002,988 $ (411,326)
=========== =========== =========== ===========
</TABLE>
Training revenues increased 34%, or $301,000, from $896,000 for the three months
ended June 30, 1999 to $1,197,000 for the three months ended June 30, 2000. 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. This increase in sales
volume, coupled with improved gross margin and a decrease in general and
administrative expenses resulted in a profit for this division for the three
months ended June 30, 2000 compared to a loss for the same period in 1999.
COST OF SALES. Cost of sales from continuing operations increased 102%, or
$2,399,000, from $2,341,000 for the three months ended June 30, 1999 to
$4,740,000 for the three months ended June 30, 2000. This increase was due in
part to additional expenses necessary to generate increased revenue. Gross
profit as a percentage of revenues decreased by 7.4 percentage points, from
29.1% of revenues during the three months ended June 30, 1999 to 21.7% of
revenues for the three months ended June 30, 2000. This decrease in gross profit
percentage was due, in large part, to certain inefficiencies that occurred in
the eCustomer Contact Center operations. Among the factors causing this decrease
in gross profit percentage were: increased overhead spending in anticipation of
additional business in the second and third quarters of Sento's fiscal year
2001; reorganization of leadership in the eCustomer Contact Centers; the
starting and ramping up of the Evanston, Wyoming eCustomer Contact Center;
turnover of staff from
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college students leaving for summer recess and Sento's hiring and training new
staff to replace departing staff; and increasing staffing for three new emerging
customers during the last month of the quarter. As Sento has previously
disclosed, adding new staff in the eCustomer Contact Center operations initially
impacts the Company's earnings because of the up-front training and hiring costs
of new agents and the time lag before they generate revenue. These extra
expenses and resulting lower gross margin may continue if Sento adds more staff.
In addition to the above mentioned increased operating expenses, Sento and
EchoPass have differences in opinion over the interpretation of certain aspects
of the agreement between Sento and EchoPass concerning pricing. As a result of
these differences of opinion, the companies are working under an interim
agreement through the end of September 2000. Both companies are working to
resolve these differences. However, if Sento is unable to resolve these
differences in a way that is consistent with its original understanding of the
agreement between the two companies, Sento will continue to experience lower
than expected gross margins. Additional charges from EchoPass reduced gross
margin for the eCustomer Contact Center division by approximately 2% for the
three months ended June 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 25%, or $290,000, from $1,166,000 for the
three months ended June 30, 1999 to $876,000 for the three months ended June 30,
2000. The decrease was due primarily to reduced marketing costs in the training
division, the cessation of operations of Sento Australia, and the continuing
efforts of management to control and reduce selling, general and administrative
expenses.
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
Condensed Consolidated Statement of Operations for the three months ended June
30, 1999 excludes the VAR business' revenues and expenses. Loss from these
discontinued operations was $51,389 for the three months ended June 30, 1999.
OTHER INCOME (EXPENSE). The Company accounts for its investment in EchoPass
under the equity method of accounting. During the three months ended June 30,
2000, the Company recognized its portion of EchoPass' losses up to its total
investment in EchoPass and will not recognize any further losses on this
investment. Should EchoPass become profitable in the future, the Company will
recognize its portion of the profits after its portion of unrecognized losses
have been offset by profits.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances increased 41%, or $975,000, from $2,382,000 at March 31, 2000 to
$3,357,000 at June 30, 2000. Working capital increased to $4,253,000 at June 30,
2000 from $3,661,000 at March 31, 2000. These increases in cash and working
capital originated mostly from positive cash flow from operations. In addition,
the Company has unused lines of credit in the amount of approximately $4
million.
Historically the Company's primary sources of liquidity have been cash received
from sales of assets and cash provided through private sales of equity and debt,
as well as borrowings under a bank line of credit, and for the three months
ended June 30, 2000 liquidity and cash were provided by positive cash flow from
operations. In addition, the Company has financed some of the equipment utilized
in its business through long-term leasing arrangements. The historic growth rate
of the technical services division has consumed substantial amounts of cash, and
the Company may be required to pursue additional funding opportunities to fund
future growth should such growth accelerate in excess of historical and planned
future growth. In the event the Company is not able to find such alternate
sources of funding, its ability to pursue its planned business strategy may be
limited. There can be no assurance that the Company will be able to obtain
necessary capital funding on terms favorable to the Company.
THE STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-QSB 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. "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
8
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SUCH STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE THOSE DESCRIBED UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS---RISKS RELATED TO EXISTING AND PROPOSED SENTO OPERATIONS." 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.
RISKS RELATED TO EXISTING AND PROPOSED SENTO OPERATIONS
In addition to other information in this Report, the following are important
factors that should be considered carefully in evaluating the Company and its
business.
DEPENDENCE ON KEY CUSTOMERS. Three customers accounted for 67% of the revenues
of the Company for the year ended March 31, 2000, and for the three months ended
June 30, 2000, two customers accounted for 58% of the revenues of the Company.
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 any of its principal existing technical support
customers would have, a material adverse effect on Sento's business, financial
condition and results of operations. In addition, Sento's future revenue growth
is dependent upon its ability to attract and retain new customers.
RELIANCE ON ECHOPASS FOR OUTSOURCED SERVICES. Since completion of the EchoPass
transactions in March 2000, Sento no longer possesses the technology and no
longer employs a number of former technical support employees who are presently
engaged in developing the technology and maintaining Sento's eCustomer Contact
Centers. Many of these technical support functions are now provided by EchoPass
employees on an outsourced basis pursuant to a services agreement. As a result,
Sento is dependent on EchoPass for many of the technical support functions
related to Sento's eCustomer Contact Centers. The outsourcing relationship could
result in decreased attention to Sento's needs, slower response times and the
lack of redundant support functions. If EchoPass fails in its business efforts,
Sento would be required to re-develop the technical services necessary to
support its operations. In addition, if EchoPass does not provide to Sento
high-quality technical support services at competitive prices, Sento may elect
or be forced to obtain replacement services from alternate sources. There can be
no assurance that Sento would be able to obtain such services at a reasonable
cost, if at all, or without a material interruption of its business.
CONFLICTS BETWEEN SENTO AND ECHOPASS. EchoPass owns the technology utilized in
Sento's eCustomer Contact Centers. Although a services agreement between Sento
and EchoPass grants to Sento the right to utilize substantially all of such
technology in the operation of its existing and future eCustomer Contact
Centers, EchoPass will likely have the opportunity to license such technology to
third parties, including existing and potential competitors of Sento.
Furthermore, since completing the EchoPass transactions, Sento and EchoPass have
identified differences in their interpretations of certain pricing provisions of
the services agreement and have undertaken discussions to reconcile those
interpretations. Those discussions may result in an agreement to adjust the
pricing provisions of the services agreement, to increase the amount of the fees
to be charged by EchoPass for services rendered to Sento, resulting in lower
gross margins and lower net income than previously anticipated by Sento. Such
repricing, if it occurs, may have a material adverse effect on Sento's results
of operations.
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 Sento's existing and proposed
products, services, proprietary technology and systems obsolete. To be
competitive, Sento 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 and services that
address the increasingly sophisticated and varied needs of its prospective
customers. If Sento 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 and could
negatively impact Sento's business and/or financial condition.
DILUTION OF SENTO'S OWNERSHIP. EchoPass' success in developing and licensing its
technology will depend to a significant extent on EchoPass' ability to obtain
financing required to develop, market and sell its 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 reducing
Sento's ability to influence the management and policies of EchoPass.
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The dilution of Sento's economic interests could result in Sento receiving less
financial benefit from EchoPass' use of its 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 EchoPass technology to competitors of Sento. In addition, Sento
will not have the unrestricted right to develop new applications for the
EchoPass technology without obtaining the consent of EchoPass. Without a
controlling interest in EchoPass, Sento will not be assured of obtaining
EchoPass' consent for such additional applications.
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 technical support, 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. Over the past several
years, a number of existing companies have enjoyed increasing success and rapid
internal growth. Several of these companies have been active in acquiring the
smaller regional training 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 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.
Sento cannot provide any assurance that better and more efficient services will
not be provided by new or existing IT service providers in competition with
Sento. The services provided by such competitors may be more effective or less
expensive than those provided by Sento. There can be no assurance that Sento
will improve, refine or enhance the services it provides.
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.
RISK OF EMERGENCY INTERRUPTION OF ECUSTOMER CONTACT CENTER OPERATIONS. Sento's
business depends to a large extent on computer and telecommunications equipment
and software systems (both equipment and systems maintained by Sento and
equipment and systems maintained by third parties, including EchoPass). Sento
cannot provide any assurance that natural disaster, human error, equipment
malfunction or inadequacy, or other events would not result in a prolonged
interruption in Sento's ability to provide support services to its 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. Property and business interruption insurance may not be
adequate to compensate Sento for all losses that it may incur.
CHANGING MARKET. The market for IT services is characterized by rapid
technological advances, new product introductions and enhancements, and changes
in customer requirements. Sento's future success will depend in large part on
its ability to service new products, platforms and rapidly changing technology.
These factors will require Sento 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
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products, systems tools, development environments and Internet/intranet
products. There can be no assurance that Sento will be able to provide such
services profitably. The failure by Sento to adapt to the changing IT service
industry would have an adverse impact on Sento's results of operations and
financial condition.
Sento's success will depend in part on EchoPass' 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 or EchoPass' 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. Sento's success will depend, in large
part, on its ability to attract, retain and train highly-qualified technical,
managerial and marketing personnel with IT expertise. Sento has not 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 will be able to
attract and maintain the 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 Sento.
LIQUIDITY AND CAPITAL RESOURCES. At June 30, 2000, Sento had working capital of
$4,253,000 and a cash balance of $3,357,000. Sento's liquidity position has
improved since June 30, 1999. However, future growth, particularly growth in
excess of planned growth, will depend on the Company's ability to obtain
financing. The historic growth rate of the technical services division has
consumed substantial amounts of cash, and the Company may be required to pursue
additional funding opportunities to fund future growth should it accelerate in
excess of historical and planned future growth. In the event the Company is not
able to find such alternate sources of funding, its ability to pursue its
planned business strategy may be limited. 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.
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 the business,
financial condition and results of operations of Sento.
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS. The value of individual
transactions can constitute a substantial percentage of Sento's quarterly
revenue, and particular transactions may generate a substantial portion of the
operating profits for a quarter. Because Sento'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 can cause significant
variations in operating results from quarter to quarter. In addition, Sento may
expend significant resources pursuing potential sales that will not be
consummated. Sento 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, Sento's quarterly revenues from its 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 the reasons identified above, management believes that period-to-period
comparisons of Sento's results of operations may not be meaningful and that no
one should rely upon them as an indication of future performance. Furthermore,
Sento cannot provide any assurance that it will be able to achieve or sustain
profitability on a quarterly basis.
COMMON STOCK ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Common Stock or the perception that such sales could occur, could have a
negative impact on the prevailing market prices for the Common Stock. As of June
30, 2000, Sento had 8,359,608 shares of Common Stock outstanding, of which at
least 7,521,756 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 or any successor
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rule ("Rule 144"). In addition, approximately 820,852 outstanding shares were,
as of June 30, 2000, "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.
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 Sento or its competitors, industry trends, general economic
conditions or other events or factors. Such fluctuations, as well as
fluctuations in the trading volume of the Common Stock, 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 Common Stock.
MANAGEMENT TRANSITION. Sento has, during the twelve months ended June 30, 2000,
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. In connection with the EchoPass
transactions, Sento accepted the resignations of Mr. Coombs as an employee,
officer and director of Sento and Mr. Barr as an employee and officer of Sento,
and both became full-time employees of EchoPass. As a result, Sento was required
to identify and retain qualified individuals to fill the vacancies created by
these departures. Mr. Dennis Herrick became Chief Executive Officer in March
2000. In addition, a majority of Sento's Board of Directors has been elected
since July 1998. Sento's headcount has grown from 279 at June 30, 1999 to 540 at
June 30, 2000. 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 could have a material adverse effect upon
Sento's operating results.
ANTI-TAKEOVER CONSIDERATIONS. Sento's Articles of Incorporation and Bylaws, 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. Sento's Articles of
Incorporation grant to the Board of Directors the authority, without further
action by Sento's shareholders, to fix the rights and preferences of, and issue
shares of preferred stock. These provisions may deter hostile takeovers or delay
or prevent changes in control of Sento or changes in Sento's management,
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 Common Stock when, as and if declared by
Sento's Board of Directors. No dividend has been declared or paid on the Common
Stock to date. At present Sento intends to retain any future earnings for use in
its business and therefore does not anticipate paying any dividends on the
Common Stock in the foreseeable future.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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/ DENNIS L. HERRICK
--------------------------------------
Dennis L. Herrick
President and Chief Executive Officer
By: /s/ STANLEY J. CUTLER
--------------------------------------
Stanley J. Cutler
Corporate Controller and Secretary
Dated August 8, 2000
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