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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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/X/ Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31,
2000 or
/ / Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934.
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SENTO CORPORATION
(Name of small business issuer in its charter)
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UTAH 000-06425 87-0284979
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
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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: $18,768,774
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 May 19, 2000, was approximately $30,229,782.
The number of shares of Common Stock outstanding as of May 19, 2000 was
8,314,851
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's definitive proxy statement relating to its Annual
Meeting of Shareholders scheduled for July 18, 2000 are incorporated by
reference in Part III of this report.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
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TABLE OF CONTENTS
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PART I............................................................................ 1
Item 1. Business.................................................... 1
Item 2. Description of Property..................................... 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II........................................................................... 10
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 10
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Results of Operations....................................... 11
Liquidity and Capital Resources............................. 13
Year 2000................................................... 14
Risks Related to Existing and Proposed Sento Operations..... 14
Item 7. Financial Statements........................................ 19
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 19
PART III.......................................................................... 20
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act......................................................... 20
Item 10. Executive Compensation...................................... 20
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 20
Item 12. Certain Relationships and Related Transactions.............. 20
Item 13. Exhibits and Reports on Form 8-K............................ 20
SIGNATURES........................................................................ 21
FINANCIAL STATEMENTS.............................................................. F-1
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THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-KSB THAT ARE NOT
PURELY HISTORICAL ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL FORWARD-LOOKING STATEMENTS
INVOLVE VARIOUS RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS CONTAINED IN
THIS REPORT INCLUDE STATEMENTS REGARDING THE COMPANY'S PLANS TO DEVELOP AND
DELIVER INTEGRATED INFORMATION TECHNOLOGY SERVICES, ACQUISITION PLANS, MARKET
OPPORTUNITIES AND ACCEPTANCE, EXPECTATIONS, GOALS, REVENUES, FINANCIAL
PERFORMANCE, STRATEGIES, MISSION AND INTENTIONS FOR THE FUTURE. SUCH
FORWARD-LOOKING STATEMENTS ARE INCLUDED UNDER ITEM 1. "BUSINESS," ITEM 2.
"PROPERTIES" AND ITEM 6. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." ALL FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS REPORT ARE MADE AS OF THE DATE HEREOF, BASED ON INFORMATION AVAILABLE TO
THE COMPANY AS OF SUCH DATE, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT. IT IS IMPORTANT TO NOTE THAT SUCH STATEMENTS MAY NOT
PROVE TO BE ACCURATE AND THAT THE COMPANY'S ACTUAL RESULTS AND FUTURE EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH STATEMENTS. AMONG THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S
EXPECTATIONS ARE THOSE DESCRIBED UNDER ITEM 6. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS---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.
PART I
ITEM 1. BUSINESS.
Sento provides information technology ("IT") outsourcing services, including
technical support services, help-desk functions, and technical training and
education. Through its state-of-the-art eCustomer Contact Center, 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.
BACKGROUND
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 1997 and 1998, Sento undertook a strategic transition to focus its
efforts on IT technical support and training. Sento constructed a new generation
customer support facility (the "eCustomer Contact Center"), which is now
operational and fully staffed with 437 agents as of May 19, 2000. Sento also
refocused its training activities away from "traveling" courses held in hotel
conference rooms to intensive multi-week IT certification courses held primarily
at Sento's corporate headquarters in American Fork, Utah. Sento also offers
custom corporate training and CBT. Sento sold certain operations, comprising
substantially all of its VAR business, in March and June 1999. In October 1999,
Sento announced its intention to undertake a series of transactions intended to
accelerate the development and commercialization of the integrated voice and
Internet customer care technology utilized in the eCustomer Contact Center. See
"--Recent Developments--EchoPass Transactions."
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 its IT service office located in
American Fork, Utah. Sento's current eCustomer Contact Centers are located in
its American Fork, Utah facility and its recently completed second facility in
Evanston, Wyoming.
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RECENT DEVELOPMENTS
ECHOPASS TRANSACTIONS. On November 17, 1999, Sento, as contributor, and
EchoPass Corporation, a newly-formed Utah corporation organized by certain
existing and former officers, directors and employees of Sento ("EchoPass"), as
contributee, entered into a Contribution Agreement, subsequently amended and
consummated as of March 1, 2000, pursuant to which, among other things, Sento
transferred to EchoPass substantially all of the technology owned and utilized
by Sento in the operation of its eCustomer Contract Center (the "Technology")
(the "EchoPass Transactions"). In addition, as part of the EchoPass
Transactions, EchoPass entered into Stock Purchase Agreements with a group of
financial and strategic investors, who contributed approximately $27.6 million
in exchange for shares of EchoPass Preferred Stock and a Master Software License
Agreement between Genesys Telecommunications Laboratories, Inc., a leading
developer of enterprise interaction management software ("Genesys"), as
licensor, and EchoPass, as licensee. Under the Contribution Agreement, Sento and
other parties to the EchoPass Transactions took the following actions:
(i) Sento transferred to EchoPass substantially all of the Technology in
exchange for 4,000,000 shares of EchoPass Series A Preferred Stock;
(ii) Sento and EchoPass entered into a Statement of Work, which grants
to Sento certain rights to utilize the Technology in developing its existing
and future eCustomer Contact Centers (the "Services Agreement");
(iii) Sento and EchoPass entered into a Facilities and Services
Agreement whereby Sento permits EchoPass to use certain office and research
and development space located at Sento's principal offices, and provides
accounting and administrative services to EchoPass;
(iv) EchoPass and Genesys entered into a Stock Purchase Agreement
providing for EchoPass to transfer 1,000,000 shares of the EchoPass
Series A Preferred to Genesys in exchange for $2,000,000 in cash and a
Master Software License Agreement providing for Genesys to grant to EchoPass
a license to use Genesys' Internet suite of enterprise interaction
management software in the development of EchoPass' business operations on
terms that are substantially more favorable than the pricing structure
currently available to Sento; and
(v) In addition to the above, Sento sold to EchoPass certain tangible
assets, consisting primarily of computer equipment, in exchange for
EchoPass' payment in cash of approximately $1,305,000.
On December 16, 1999, the shareholders of Sento approved the EchoPass
Transactions. Between December 1999 and March 2000, EchoPass engaged in
negotiations with prospective EchoPass investors. Effective March 1, 2000,
EchoPass entered into Series B Preferred Stock Purchase Agreements with New
Enterprise Associates and Cannan Partners, whereby these two venture capital
firms provided approximately $22.7 million to EchoPass in exchange for 8,040,000
shares of EchoPass Series B Preferred Stock. EchoPass also entered into
Series B Preferred Stock Purchase Agreements with other financial and strategic
investors. Sento owns 4,000,000 shares of the EchoPass Series A Preferred Stock,
representing approximately 26% of the outstanding shares of EchoPass on an
"as-converted" basis (approximately 20% of the shares of EchoPass on a fully
diluted basis, after giving effect to the exercise of outstanding and proposed
options to acquire shares of Echo Pass common stock).
WYOMING ECUSTOMER CONTACT CENTER. In May 2000, Sento opened a new,
state-of-the-art eCustomer Contact Center in Evanston, Wyoming. This expansion
began with 20 support representatives (currently estimated to expand to 50
representatives within four months of opening) engaging in customer interactions
over the Internet (email, Web text chat, Web callbacks and Internet calls) and
handling traditional voice-based calls. This expansion, if fully staffed, will
add an additional capacity of 300 seats
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for all shifts. Sento believes the expansion will increase Sento's ability to
respond to anticipated business growth from current Fortune 500 clients and new
client activity.
All customer inquiries and data are routed through the data and
communications center in American Fork, Utah to the Evanston facility over a
single network connection using convergent networking technology combining both
voice and data traffic. The facility utilizes voice over Internet protocol
("VoIP") technology and Sento's Web-enabled customer relationship management
software to create a blended media environment.
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:
- 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 in which 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.
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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 are split
into two strategic business segments: comprehensive product support and helpdesk
services available through Sento's eCustomer Contact Centers and customized and
general system and applications training available through Sento Training.
Sento's services help businesses provide and improve customer service by
providing immediate and accurate responses to their queries originating from the
telephone or Internet. Sento Training provides students with high-quality IT
training that has been designed to incorporate leading-edge delivery systems,
measurement tools and training practices in the latest general system,
application and certification curriculum.
INTERNAL GROWTH AND ACQUISITIONS. Sento intends to expand its operations by
opening or acquiring additional customer support facilities and training offices
in strategic locations throughout 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 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.
ATTRACT AND RETAIN HIGHLY SKILLED IT PROFESSIONALS. Sento's success will
depend 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 opportunity for
rapid advancement and expert personal training, as employees can move from one
career step to another while remaining within Sento. Sento employees work with
leading-edge technologies in a 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 integrating
technology (including the Technology transferred to EchoPass as discussed above)
into the eCustomer Contact Center from divergent companies in the IT and
computing industries. Sento is currently solely dependent on the Technology and
has entered into the Services Agreement, which permits Sento to use the
Technology in the operation of its eCustomer Contact Centers. As part of the
EchoPass Transactions, Sento and EchoPass executed agreements granting to Sento
the right to utilize the Technology on terms considered favorable by Sento at
the time of the EchoPass Transactions. 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. If those discussions
result in an agreement to adjust the pricing provisions of the Services
Agreement, the amount of the fees payable by Sento under the Services Agreement
could increase 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.
Sento's eCustomer Contact Centers go beyond a traditional telephone-centric
customer support facility, incorporating increased customer contact points
through nearly any media type, including voice and fax communication, as well as
electronic customer interactions over the Internet (e-mail, Web text chat,
Internet calls, Web collaboration, Web callback interactions and co-browsing)
with the same speed
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and efficiency as 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 believes its
eCustomer Contact Center will position 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 customer support, 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, Computer-Telephony Integration ("CTI") and Integrated Voice Response
("IVR") technologies, to provide immediate and accurate 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 service representative. 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 to accurately route the call
to the correct service representative. IVR systems are used in customer support
facilities as a replacement for reception operators and may also integrate
database access and fax responses.
HELPDESK. Helpdesk services are provided by vendor-certified professionals
acting on behalf of a customer. They 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 as a
helpdesk solution or as a supplement to the customer's on-site facility. In
addition, Sento has the capability to 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 customer support 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.
IT TRAINING. Sento provides instructor-led training in seminar (including
intensive multi-week IT Certificate courses), 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 in the Internet and networking technologies, some of which
include Microsoft Certified Systems Engineer ("MCSE"), Cisco Certified Network
Associate ("CCNA"), Cisco Certified Design Associate ("CCDA"), Certified Novell
Engineer ("CNE"), CompTIA A+, Network+, Certified Winframe Administrator
("CWA"), and Certified Internet Webmaster ("CIW"). Additional certifications
could include Cisco Certified Network Professional ("CCNP"), Cisco Certified
Internetwork Expert ("CCIE"), Certified
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Directory Engineer ("CDE"), Linux, Oracle, and others. 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
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 Australian Software Innovations, 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 acted as a
sales agent for BMC's Patrol product line. These software sales were
complemented by professional consultancy and integration, performance tuning
education, and customized configuration and development services.
As of March 1, 2000, Sento Australia ceased operations. Sento does not
expect to incur any additional expenses related to the cessation of operations
of Sento Australia.
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 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 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 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. (The terms of
repayment for this promissory note were amended on November 24, 1999 and
now provide for periodic payments through September 25, 2001. If Dewpoint
meets the terms of the new payment schedule, Sento will receive only
$100,000. If the new payment terms are not met, the original amount of the
note becomes due and payable.); and
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- 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. In January 2000, Sento accepted an early payment of $225,000 in
settlement of this promissory note.
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 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 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
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
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their large customers, as well as the following sample of national and worldwide
services companies, among others, who compete in one or both of the two market
segments in which Sento competes:
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COMPANY STOCK SYMBOL FY END REVENUES ($MIL) MARKET SEGMENT*
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Aris Corporation............................ ARSC Dec 118 T
Sykes Enterprises, Inc...................... SYKE Dec 575 TS
SmartForce.................................. CBTSY Dec 198 T
Learning Tree Int'l......................... LTRE Sep 189 T
Computer Learning........................... CLCX Jan 144 T
National Tech Team.......................... TEAM Dec 133 TS
Teletech Holdings........................... TTEC Dec 509 TS
TeleSpectrum................................ TLSP Dec 267 TS
Convergys Corporation....................... CVG Dec 1,763 TS
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*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 customer support 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
Three customers accounted for 67% of the revenues of the Company for the
year ended March 31, 2000. These three customers accounted for 31%, 24%, and
12%, respectively of the fiscal year'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 which is characterized by rapid technological
change. Historically, Sento has not incurred significant expenses for research
and development and does not expect to incur significant research and
development expenses in the future. In maintaining its competitive edge in
technology, Sento is dependent on the research and development efforts of
EchoPass or other alternative technology providers.
8
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EMPLOYEES
As of May 19, 2000, Sento had approximately 557 total employees, of which
approximately 478 were full-time employees and approximately 79 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. Sento's failure 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) 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; (2) OS/2-TM-, which is a trademark of
IBM; (3) Intel-Registered Trademark-, which is a registered trademark of Intel.
This Form 10-KSB also contains trademarks of other companies including Genesys,
which is a registered trademark of Genesys Telecommunications
Laboratories, Inc.
ITEM 2. DESCRIPTION OF PROPERTY.
Sento's headquarters and initial eCustomer Contact Center are located at 808
East Utah Valley Drive, American Fork, Utah. Sento leases approximately 40,000
square feet of space used for its administrative, technical support, and
training operations. The initial lease period will end in August 2005, with a
monthly base rent of $34,348 subject to adjustment during the renewal period.
Sento recently signed leases for approximately 33,000 square feet of space in
Evanston, Wyoming for the expansion of the Company's technical support
operations and approximately 15,000 square feet in a second American Fork
facility. The initial Wyoming lease period will end in June 2005, and the
monthly base rent is $9,625, subject to adjustment during the renewal periods.
The initial lease period for the second American Fork facility will end
June 2005, and the monthly base rent is $17,171, subject to a five percent
increase beginning July 2002.
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.
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.
9
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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, 2000.............................................. $7.438 $4.250
December 31, 1999........................................... $4.625 $2.125
September 30, 1999.......................................... $3.000 $1.844
June 30, 1999............................................... $2.063 $1.563
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
</TABLE>
The Company did not pay or declare dividends on the Common Stock during the
fiscal years ended March 31, 2000 and 1999. 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 May 19, 2000, the Company had 8,314,851 shares of Common Stock
outstanding, held by 417 shareholders of record, which does not include
shareholders whose shares are held in securities position listings.
In January 2000, the Company completed a private offering of 7% Subordinated
Convertible Debentures in the aggregate principal amount of $1,300,000. The
debentures are convertible for shares of Common Stock at the rate of 198 shares
of Common Stock per $1,000 debenture. In connection with the sale of the
debentures, the Company issued to the debenture purchasers warrants to purchase
130,000 shares of Common Stock at an exercise price of $6.25 per share. The
debentures were sold to 27 accredited investors with the assistance of Bathgate
McColley Capital Group LLC, a registered broker-dealer, who acted as a placement
agent in connection with the offering. In connection with the offering, the
Company paid to Bathgate McColley Capital Group LLC, placement agent fees in the
aggregate amount of $65,000 and issued to Bathgate McColley Capital Group LLC
and its affiliates warrants to purchase 35,000 shares of Common Stock at an
exercise price of $5.00 per share. The debenture offering was conducted without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to exemptions set forth in Section 4(2) of the Securities Act
and Regulation D promulgated thereunder. The Company's reliance on such
exemptions was based, in part, on the limited nature of the offering, the
absence of general solicitation activities in connection with the offering, the
sophistication of the purchasers (as represented by such purchasers in
subscription documents delivered to the Company) and the restricted nature of
the securities sold in the offering.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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 CBT methods.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
REVENUES. Revenues from continuing operations increased 138% or $10,882,000
from $7,887,000 for the fiscal year ended March 31, 1999 to $18,769,000 for the
fiscal year end March 31, 2000. These revenues were generated primarily from the
following two areas:
Technical services revenues increased 392%, or $11,136,000, from $2,843,000
for the fiscal year ended March 31, 1999 to $13,979,000 for the fiscal year
ended March 31, 2000. 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 Centers, which resulted in the
acquisition of new customers and increased revenues from existing customers. The
American Fork facility originally employed 30 agents in August of 1998 and is
now at capacity with 437 agents.
Rapid personnel growth and employee turnover in the eCustomer Contact Center
operations has an initial negative impact on the Company's earnings because of
the up-front training and hiring costs for new agents and the time lag before
the new agents generate revenue. During fiscal 2000 the Company substantially
completed the hiring and training of new employees by October of 1999. This
allowed the new agents to be trained in time to generate revenue during the
period November 1999 through March 31, 2000. As a result, the eCustomer Contact
Center operations were profitable during the final two quarters of fiscal 2000.
Revenue and personnel growth are expected to continue throughout fiscal 2001,
but are not expected to continue at the rate the Company experienced during
fiscal 2000. The Company has opened a second eCustomer Contact Center in
Evanston, Wyoming. Initially, this second eCustomer Contact Center will employ
up to 50 agents with a capacity for 300 agents. Revenues by quarter for this
segment from April 1, 1998 through March 31, 2000 were:
<TABLE>
<CAPTION>
THREE
THREE MONTHS THREE MONTHS MONTHS
THREE MONTHS ENDED ENDED ENDED
ENDED SEPTEMBER 31, DECEMBER 31, MARCH 30,
JUNE 30, 1998 1998 1998 1999
-------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues........................... $287,454 $294,468 $685,881 $1,575,429
======== ======== ======== ==========
Increase in revenue
from prior quarter............... $287,454 $ 7,014 $391,413 $ 889,548
======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE
THREE MONTHS THREE MONTHS MONTHS
THREE MONTHS ENDED ENDED ENDED
ENDED SEPTEMBER 30, DECEMBER 31, MARCH 30,
JUNE 30, 1999 1999 1999 2000
-------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues........................... $2,128,492 $2,318,631 $4,264,383 $5,267,371
========== ========== ========== ==========
Increase in revenue
from prior quarter............... $ 553,063 $ 190,139 $1,945,752 $1,002,988
========== ========== ========== ==========
</TABLE>
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Training revenues increased 20%, or $680,220, from $3,430,728 for the fiscal
year ended March 31, 1999 to $4,110,948 for the fiscal year ended March 31,
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. While the
multi-week classroom training courses, as a core component of the training
division, have shown positive growth, the remainder of the operations of this
division did not grow as expected, resulting in an operating loss for the
division during fiscal year ended March 31, 2000.
COST OF SALES. Cost of sales from continuing operations increased 140%, or
$8,168,000, from $5,849,000 for the fiscal year ended March 31, 1999 to
$14,017,000 for the year ended March 31, 2000. This increase was due primarily
to additional expenses necessary to generate increased revenue. Gross profit as
a percentage of revenues decreased by 0.5 percentage points, from 25.8% of
revenues during the year ended March 31, 1999 to 25.3% of revenues for the year
ended March 31, 2000. The decrease in gross margin was 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 up-front
training costs of new agents discussed above. Generally, the lower gross profit
margins were offset by lower selling and marketing expenses needed to generate
technical service revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 45%, or $3,729,000, from $8,252,000 for the
year ended March 31, 1999 to $4,523,000 for year the ended March 31, 2000. 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 year ended March 31, 1999.
AMORTIZATION OF INTANGIBLE ASSETS. The Company recorded $518,000 of
amortization expense relating to intangible assets during the year ended
March 31, 1999. The intangible assets that were being amortized are from
business acquisitions completed during the 1999 fiscal year and the latter
portion of the Company's 1998 fiscal year. In addition, the Company has divested
itself of some of these businesses 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. (See "Business--
Acquisitions and Divestitures")
IMPAIRMENT OF ASSETS. During the fiscal year ended March 31, 1999, the
Company recorded impairment of assets totaling $881,000. The impairment consists
of a write-down of goodwill and non-compete agreements totaling $426,000
relating to the Company's acquisition of Astron, Inc. ("Astron") in
January 1998 and the write-off of $455,000 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") during fiscal
1999, was the purchase of in-process research and development costs totaling
$92,000, which where expensed at the time of acquisition.
12
<PAGE>
OTHER INCOME (EXPENSE, NET). Other income (expense) includes the following
for the fiscal years ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Interest income......................................... $ 16,259 $ 96,738
Interest expense........................................ (102,992) (101,871)
Gain on sale of intangible assets....................... -- 875,000
Proceeds from assets impaired or written off in prior
periods............................................... 158,865 --
Gain (loss) on disposal of property and equipment....... (75,855) 112,496
Other................................................... 83,744 (184,447)
-------- --------
Other Income, Net....................................... $ 80,021 $797,916
======== ========
</TABLE>
It is not anticipated that other income will be significant in future
periods.
INTEREST INCOME AND INTEREST EXPENSE. Interest income decreased by $80,479,
or by 83%, from $96,738 during the year ended March 31, 1999 to $16,259 for the
year ended March 31, 2000. The decrease in interest income was due primarily to
the Company's decrease in cash during fiscal 2000. However, in the last quarter
of fiscal 2000 cash increased substantially because of the sale of the
convertible debentures and the completion of the financing of EchoPass. As a
result, the Company currently anticipates interest income will increase during
fiscal 2001.
Interest expense increased insignificantly during the fiscal year ended
March 31, 2000 compared to fiscal 1999 and is expected to increase slightly more
during fiscal 2001 to cover interest expense associated with the convertible
debentures sold by the Company in January 2000 and debt incurred the Company to
fund the development of the new Wyoming eCustomer Contact Center.
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, 2000 and
1999 of $76,000 and $12,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances increased 763%, or $2,106,000, from $275,893 at March 31, 1999
to $2,382,000 at March 31, 2000. Working capital increased to $3,661,000 at
March 31, 2000 from a $(1,538,000) deficit at March 31, 1999. The improved
liquidity was primarily due to proceeds received from the Company's private
placement of common stock in June of 1999, the sale of convertible debentures in
January of 2000, and the sale of assets to EchoPass in the EchoPass
Transactions. The private placement funds and EchoPass funding have sustained
the Company's growth during fiscal 2000, and it is expected that such funding is
adequate to fund the Company's anticipated growth for fiscal 2001.
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 $1,881,000. 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 Warrants are
exercisable at $2.50 per share.
This private equity financing also made it possible for the Company to
restructure its loan with a bank, which after renewal in April, 2000, provides
up to $3,000,000 of revolving credit financing and $500,000 of term loan
equipment financing. The amount available under the revolving bank line of
credit is based on Sento's outstanding accounts receivable. As of March 31,
2000, there were no borrowings outstanding under the bank line of credit. The
revolving line of credit matures in April of 2002 and is renewable upon the
mutual agreement of the Company and the bank.
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<PAGE>
The Company is funding its second eCustomer Contact Center in Evanston,
Wyoming principally through grants and low interest loans from the state of
Wyoming and the City of Evanston. These grants and low interest loans (totaling
up to $1.3 million) are incentives to Sento for providing jobs in Wyoming. A
portion of this funding will not require repayment if jobs are created by Sento
in Wyoming.
In addition to the financing Sento has obtained for the funding of the
Wyoming eCustomer Contact Center, Sento closed a $1.3 million private offering
of 7% Subordinated Convertible Debentures in January 2000 to fund future growth.
In conjunction with the financing, Sento issued warrants for the purchase of a
maximum of 130,000 shares of Common Stock, which are exercisable at $6.25 per
share.
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. In addition, the Company has
financed some of its 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
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.
YEAR 2000
Based on the information available as of the time of this filing, the
Company has not experienced any significant Year 2000 related system failures in
its internal operations. The Company's business operations are heavily dependent
on 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. As of the date of this
Report, the Company's key clients, service providers, strategic alliance
partners, vendors, suppliers and others have not reported any significant Year
2000 compliance problems, and the Company's financial results have not been
negatively impacted by Year 2000 failures of third parties. However, because the
Company's continued Year 2000 compliance, in calendar 2000, is in part dependent
on the continued Year 2000 compliance of third parties, there can be no
assurance that the Company's efforts alone have resolved all Year 2000 issues or
that key third parties will not experience Year 2000 compliance failures as
calendar year 2000 progresses.
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. These three customers
accounted for 31%, 24%, and 12%, respectively of fiscal 2000 year'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 any of its largest 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.
14
<PAGE>
RELIANCE ON ECHOPASS FOR OUTSOURCED SERVICES. Since completion of the
EchoPass Transactions, Sento no longer possess 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 the 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
opportunities. 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.
Although a Services Agreement between Sento and EchoPass grants 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. 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. 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.
FAILURE TO COMMERCIALIZE THE TECHNOLOGY. The Technology has not been tested
in applications outside of Sento's eCustomer Contact Center and EchoPass'
commercialization of the Technology is limited to two 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.
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 and could
negatively impact Sento's business and/or financial condition.
DILUTION OF SENTO'S OWNERSHIP. 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
15
<PAGE>
diluting Sento's ownership of the EchoPass capital stock and reducing Sento's
ability to influence the management and policies 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 not have the unrestricted right to develop new applications for the
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
16
<PAGE>
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 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 March 31, 2000, Sento had working
capital of $3,661,000 and a cash balance of $2,382,000. Sento's liquidity
position has improved significantly during fiscal 2000. 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
17
<PAGE>
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 and 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
May 19, 2000, Sento had 8,314,851 shares of Common Stock outstanding, of which
at least 7,395,399 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 rule
("Rule 144"). In addition, approximately 902,452 outstanding shares were, as of
May 19, 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 fiscal 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, 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 257 at June 11, 1999 to 557 at May 19, 2000. Sento
cannot provide any assurance that its new management team and other new
18
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS.
The financial statement information required by Item 7 is included on pages
F1--F-22.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information required to be provided in this Item has been previously
reported in the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended December 31, 1999 and in the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 1, 1999.
19
<PAGE>
PART III
ITEMS 9, 10, 11 AND 12.
These items are incorporated by reference to the Company's definitive proxy
statement relating to the Company's Annual Meeting of Shareholders scheduled for
July 18, 2000. The definitive proxy statement will be filed with the Commission
not later than 120 days after March 31, 2000, 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
NUMBER DESCRIPTION BY REFERENCE HEREWITH
------ ----------- ------------ --------
<C> <S> <C> <C>
3.1 Articles of Incorporation, as amended....................... (1)
3.2 Bylaws...................................................... (2)
10.1 Sento Corporation 1999 Omnibus Stock Incentive Plan......... (3)
10.2 Sento Corporation 1996 Employee Stock Purchase Plan (Amended (3)
and Restated).............................................
10.3 Form of Warrant............................................. (3)
10.4 Silicon Valley Bank Amended and Restated Loan and Security (3)
Agreement, dated as of April 28, 2000.....................
10.5 Form of 7% Convertible Subordinated Debentures.............. (3)
10.6 Lease Agreement, dated January 1, 2000, between the Company (3)
and K.E.B. Enterprises LP.................................
10.7 Lease Agreement, dated May 24, 2000, between the Company and (3)
Abinadi, Inc..............................................
21 Subsidiaries of the Registrant.............................. (3)
23.1 Consent of KPMG LLP......................................... (3)
23.2 Consent of Ernst & Young LLP................................ (3)
27 Financial Data Schedule..................................... (3)
</TABLE>
------------------------
(1) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended June 16, 1999.
(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) Filed herewith and attached to this Form 10-KSB following page 18 hereof.
(b) REPORTS ON FORM 8-K
On March 17, 2000 the Company filed a Report on Form 8-K reporting the
completion of the EchoPass Transactions discussed in Part I, Item 1.
"Business" of this report.
20
<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 16, 2000.
<TABLE>
<S> <C>
SENTO CORPORATION
By: /s/ DENNIS L. HERRICK
------------------------------------------------
Dennis L. Herrick
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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 16, 2000.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED
--------- ------------------------
<C> <S>
/s/ KIETH E. SORENSON
------------------------------------------- Chairman of the Board
Kieth E. Sorenson
/s/ DENNIS L. HERRICK
------------------------------------------- President, Chief Executive Officer and
Dennis L. Herrick Director (Principal executive officer)
/s/ GARY B. FILLER
------------------------------------------- Chief Financial Officer and Director
Gary B. Filler (Principal financial officer)
/s/ KIM A. COOPER
------------------------------------------- Director
Kim A. Cooper
/s/ LYNDON L. RICKS
------------------------------------------- Director
Lyndon L. Ricks
/s/ STANLEY J. CUTLER
------------------------------------------- Corporate Controller and Secretary
Stanley J. Cutler (Principal accounting officer)
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sento Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Sento Corporation
and subsidiaries as of March 31, 2000, and the related consolidated statements
of operations, stockholders' equity and comprehensive income and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Sento Corporation and subsidiaries for the year ended March 31, 1999, were
audited by other auditors whose report dated May 21, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sento Corporation
and subsidiaries at March 31, 2000, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
Ernst & Young, LLP
April 25, 2000, except for the first
and second paragraph of Note 7
as to which the date is April 28,
2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Sento Corporation:
We have audited the accompanying consolidated balance sheet of Sento Corporation
and subsidiaries as of March 31, 1999, and the related consolidated statements
of operations, stockholders' equity and comprehensive loss, and cash flows for
the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, 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 the
results of their operations and their cash flows for the year then ended.
KPMG LLP
Salt Lake City, Utah
May 21, 1999
F-2
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash...................................................... $2,382,321 $ 275,893
Accounts receivable, less allowance for doubtful accounts
of $131,000 in 2000 and $209,000 in 1999................ 3,201,921 3,075,460
Receivable from EchoPass Corporation...................... 220,438 --
Income taxes receivable................................... 3,277 375,148
Other current assets...................................... 212,930 391,882
----------
Total current assets........................................ 6,020,887 4,118,383
Property and equipment, net................................. 2,158,887 2,907,897
Investment in EchoPass Corporation.......................... 149,795 --
Other assets................................................ 67,231 274,891
---------- ----------
Total Assets................................................ $8,396,800 $7,301,171
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 752,976 $2,197,129
Accrued salaries and payroll taxes........................ 739,756 479,830
Accrued liabilities....................................... 538,664 1,068,949
Line of credit............................................ -- 1,000,000
Current portion of long-term debt and capital leases...... 80,492 191,741
Current portion of royalty obligations.................... -- 218,182
Deferred revenue.......................................... 247,540 500,321
---------- ----------
Total current liabilities................................... 2,359,428 5,656,152
Long-term debt and capital leases, excluding current
portion................................................. 140,677 103,192
Long-term royalty obligations, net of current portion..... -- 183,125
Convertible debt.......................................... 998,414 472,266
---------- ----------
Total long-term liabilities................................. 1,139,091 758,583
Commitments
Stockholders' equity:
Common stock, $.25 par value, 50,000,000 shares
authorized; issued and outstanding 8,313,398 in 2000 and
6,120,671 in 1999....................................... 2,078,351 1,580,607
Additional paid-in capital................................ 10,395,230 7,247,143
Deferred compensation..................................... (136,052) (204,814)
Accumulated deficit....................................... (7,439,248) (7,327,537)
Accumulated other comprehensive income--foreign currency
translation............................................. -- (22,400)
Treasury stock, 201,750 common shares, at cost............ -- (386,563)
---------- ----------
Total stockholders' equity.................................. 4,898,281 886,436
---------- ----------
Total Liabilities and Stockholders' Equity.................. $8,396,800 $7,301,171
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 31
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue..................................................... $18,768,774 $ 7,886,994
Cost of sales............................................... 14,017,316 5,848,628
----------- -----------
Gross profit.............................................. 4,751,458 2,038,366
Selling, general, and administrative expenses............... 4,523,236 8,252,184
Research and development expense............................ 242,225 177,009
Amortization of intangible assets........................... -- 517,873
Impairment of long-lived assets............................. -- 880,842
Write-off of in-process research and development costs...... -- 92,095
----------- -----------
Loss from operations...................................... (14,003) (7,881,637)
Equity loss on investment in EchoPass Corp.................. (194,172) --
Other income, net........................................... 80,021 797,916
----------- -----------
Loss before taxes......................................... (128,154) (7,083,721)
Income tax benefit.......................................... 67,832 502,468
----------- -----------
Loss from continuing operations........................... (60,322) (6,581,253)
Loss from discontinued operations......................... (51,389) (1,173,550)
----------- -----------
Net loss.................................................. $ (111,711) $(7,754,803)
=========== ===========
Net loss per share--basic and diluted
Continuing operations..................................... $ (0.01) $ (1.11)
Discontinued operations................................... -- (0.20)
----------- -----------
Net loss.................................................... $ (0.01) $ (1.31)
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
----------------------- PAID-IN DEFERRED (ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT)
---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1998................... 5,741,063 $1,435,268 $ 6,100,290 $ (338,357) $ 427,266
Conversion of bonds.......................... 313,554 78,388 441,879 -- --
Stock issued for bonuses..................... 12,208 3,052 29,323 -- --
Exercise of warrants......................... 73,894 18,474 240,154 -- --
Exercise of stock options.................... 14,882 3,720 14,736 -- --
Common stock issued for business
acquisition................................ 142,559 35,640 351,052 -- --
Employee stock purchases..................... 11,455 2,864 34,824 -- --
Common stock issued for royalty payments..... 12,806 3,201 34,885 -- --
Treasury shares received for sale of property
and businesses............................. (201,750) -- -- -- --
Amortization of deferred compensation........ -- -- -- 133,543 --
Comprehensive loss:
Net loss................................... -- -- -- -- (7,754,803)
Effect of change in foreign currency
translation.............................. -- -- -- --
Total comprehensive loss.....................
---------- ---------- ----------- ----------- -----------
Balances at March 31, 1999................... 6,120,671 1,580,607 7,247,143 (204,814) (7,327,537)
Cancellation of treasury shares.............. -- (50,438) (336,125) -- --
Conversion of bonds.......................... 401,264 100,316 431,951 -- --
Exercise of stock options.................... 211,638 52,910 444,832 -- --
Private placement of common stock............ 1,200,000 300,000 1,580,522 -- --
Cancellation of stock options................ -- -- (150,575) 150,575 --
Common stock issued for royalty payments..... 169,097 42,274 359,033 -- --
Warrant exercises............................ 173,749 43,437 395,310 -- --
Amortization of deferred compensation........ -- -- -- 46,034 --
Issuance of warrants with convertible
debentures................................. -- -- 226,609 -- --
Issuance of warrants for services............ -- -- 127,847 (127,847) --
Employee stock purchases..................... 36,979 9,245 65,406 -- --
Tax effect of disqualifying disposition...... -- -- 3,277 -- --
Comprehensive loss:
Net loss................................... -- -- -- -- (111,711)
Effect of change in foreign currency
translation.............................. -- -- -- -- --
Total comprehensive loss.....................
---------- ---------- ----------- ----------- -----------
Balances at March 31, 2000................... 8,313,398 $2,078,351 $10,395,230 $ (136,052) $(7,439,248)
========== ========== =========== =========== ===========
<CAPTION>
ACCUMULATED OTHER TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
INCOME/(LOSS) STOCK EQUITY
----------------- ---------- -------------
<S> <C> <C> <C>
Balances at March 31, 1998................... $(49,889) $ -- $7,574,578
Conversion of bonds.......................... -- -- 520,267
Stock issued for bonuses..................... -- -- 32,375
Exercise of warrants......................... -- -- 258,628
Exercise of stock options.................... -- -- 18,456
Common stock issued for business
acquisition................................ -- -- 386,692
Employee stock purchases..................... -- -- 37,688
Common stock issued for royalty payments..... -- -- 38,086
Treasury shares received for sale of property
and businesses............................. -- (386,563) (386,563)
Amortization of deferred compensation........ -- -- 133,543
Comprehensive loss:
Net loss................................... -- -- (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................... (22,400) (386,563) 886,436
Cancellation of treasury shares.............. -- 386,563 --
Conversion of bonds.......................... -- -- 532,267
Exercise of stock options.................... -- -- 497,742
Private placement of common stock............ -- -- 1,880,522
Cancellation of stock options................ -- -- --
Common stock issued for royalty payments..... -- -- 401,307
Warrant exercises............................ -- -- 438,747
Amortization of deferred compensation........ -- -- 46,034
Issuance of warrants with convertible
debentures................................. -- -- 226,609
Issuance of warrants for services............ -- -- --
Employee stock purchases..................... -- -- 74,651
Tax effect of disqualifying disposition...... -- -- 3,277
Comprehensive loss:
Net loss................................... -- -- (111,711)
Effect of change in foreign currency
translation.............................. 22,400 -- 22,400
Total comprehensive loss..................... (89,311)
-------- ---------- ----------
Balances at March 31, 2000................... $ -- $ -- $4,898,281
======== ========== ==========
</TABLE>
F-5
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 31
------------------------
2000 1999
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (111,711) $(7,754,803)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,011,794 1,414,964
Amortization of deferred compensation................... 46,034 133,543
Provision for losses on accounts receivable............. (77,410) 270,913
Equity loss on investment in EchoPass Corporation....... 194,172 --
Common stock issued in lieu of compensation............. -- 32,375
Loss on disposal of business............................ -- 337,402
Net (gain) loss on disposal of assets................... 119,430 (987,496)
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)
Gain on sale of subsidiary.............................. (15,370) --
Accretion on debenture for warrant...................... 9,901 --
Changes in operating assets and liabilities:
Accounts receivable................................... (339,043) 584,252
Other assets.......................................... (5,390) 1,998,529
Deferred income taxes................................. -- (52,999)
Accounts payable...................................... (1,332,754) (149,740)
Accrued liabilities and royalty obligations........... (206,086) 161,964
Income taxes receivable............................... 385,150 (53,036)
Deferred revenue...................................... 22,286 (543,177)
---------- -----------
Net cash used in operating activities............... (298,997) (3,362,744)
Cash flows from investing activities:
Acquisitions.............................................. -- (691,318)
Investment in EchoPass Corp............................... (343,967) --
Capital expenditures...................................... (1,634,519) (2,717,848)
Proceeds from sale of assets.............................. 1,143,672 192,722
Disposal of businesses, net of cash....................... 1,173 (161,184)
Proceeds from notes receivable............................ 225,000 28,000
---------- -----------
Net cash used in investing activities............... (608,641) (3,349,628)
Cash flows from financing activities:
Proceeds from issuance of stock........................... 1,880,522 314,772
Proceeds from issuance of long-term debt and line of
credit.................................................. 130,000 1,154,717
Principal payments of long-term debt and credit line...... (1,233,718) (314,192)
Principal payments on capital leases...................... (11,400) --
Proceeds from exercise of stock options................... 497,742 --
Proceeds from exercise of warrants........................ 438,747 --
Proceeds from Employee Stock Purchase Plan................ 74,651 --
Proceeds form issuance of convertible debentures.......... 1,215,122 --
---------- -----------
Net cash provided by financing activities........... 2,991,666 1,155,297
Effect of exchange rate changes............................. 22,400 25,954
---------- -----------
Net increase (decrease) in cash and cash equivalents........ 2,106,428 (5,531,121)
Cash and cash equivalents at beginning of period............ 275,893 5,807,014
---------- -----------
Cash and cash equivalents at end of period.................. $2,382,321 $ 275,893
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
SUPPLEMENT TO CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 31
---------------------
2000 1999
-------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid for:
Interest.................................................. $ 86,856 $ 62,849
Income taxes.............................................. -- 100,987
Supplemental disclosures of noncash investing and financing
activities
Common stock issued for payment of royalties................ $401,307 $ 38,086
Common stock issued for conversion of bonds................. 532,267 520,267
Assets acquired under capital lease......................... 92,617 --
Issuance of warrants with convertible debentures............ 226,609 --
Assets acquired and liabilities assumed through business
acquisitions:
Assets acquired:
Other assets, including intangibles..................... $ -- $1,551,210
Fixed assets............................................ -- 76,800
-------- ----------
Assets acquired....................................... -- 1,628,010
Less liabilities assumed:
Accrued liabilities..................................... -- (50,000)
Royalty obligations..................................... -- (500,000)
-------- ----------
Net assets acquired................................... -- 1,078,010
Less cash paid.............................................. -- (691,318)
-------- ----------
Net assets acquired with common stock................. $ -- $ 386,692
======== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Sento Corporation (Sento), formerly Sento Technical Innovations Corporation,
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 and
outsourced training.
Sento Technical Services Corporation offers a range of IT outsourcing
services consisting of "eCustomer Contact Center," "helpdesk," and technical
support services. 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 (VAR) 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.
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, during fiscal 2000, the Company conducted substantially all of
its foreign operations through Sento Australia Pty, Limited, based near Sydney,
Australia. As of March 1, 2000, Sento Australia ceased operations. Revenues from
foreign sales for the periods ended March 31, 2000 and 1999, were approximately
four percent and twelve percent of total sales, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the consolidated financial statements of
Sento and its wholly-owned subsidiaries (collectively, the Company). All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturites
of three months or less to be cash equivalents. The Company had no cash
equivalents as of March 31, 2000 and 1999.
REVENUE RECOGNITION
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. Deferred revenues at
March 31, 2000 consist of payments received in advance for customer training.
Deferred revenues at March 31, 1999 also include payments received on software
maintenance contracts, which were recorded as revenue over the period of the
contract (typically one year).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of fixed assets is
computed on the straight-line method over the estimated useful lives of
individual classes of assets. Leasehold improvements are depreciated over the
shorter of the remaining lease term or the useful life of the improvements. The
estimated useful lives of furniture and equipment is three to ten years.
F-8
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. In accordance with
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE, the Company capitalized approximately
$200,000 in 2000 associated with major enhancements to its technology.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and deferred tax liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and deferred tax liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and deferred tax liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION
The local foreign currency is the functional currency for the Company's
foreign subsidiaries. Assets and liabilities of foreign operations are
translated to U.S. dollars at the current exchange rates as of the applicable
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.
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, 2000 and 1999, as their effect is antidilutive. The weighted
average number of common shares outstanding during the years ended March 31,
2000 and 1999 were 7,565,810 and 5,901,959, 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 calculations as
the impact would have been antidilutive were 3,136,674 in 2000 and 3,216,872 in
1999.
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.
F-9
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
However, it also allows an entity to continue measuring compensation cost for
stock based compensation using the intrinsic-value method of accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB 25). The Company has elected to continue to apply the
provisions of APB 25 and provide pro forma footnote disclosures required by
SFAS 123.
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company provides unsecured credit
terms to its customers. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for possible losses which,
when realized, have been within the range of management's expectations. Three
customers accounted for 67% of revenues for the year ended March 31, 2000. These
three customers accounted for 31%, 24% and 12%, respectively of the fiscal
year's revenues.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues, and expenses and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items in the 1999 consolidated financial statements have been
reclassified to conform with the 2000 presentation.
FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, accounts payable, accrued
expenses, and debt approximate their estimated fair value.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs amounted to
$791,404 and $1,592,914 in 2000 and 1999, respectively.
COMPREHENSIVE LOSS
Comprehensive income (loss) consists of net income (loss) and effect of
change in foreign currency translation, which is presented in the consolidated
statements of stockholders' equity and comprehensive loss.
F-10
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER INCOME, NET
<TABLE>
<CAPTION>
MARCH 31
-------------------
2000 1999
-------- --------
<S> <C> <C>
Interest income......................................... $ 16,259 $ 96,738
Interest expense........................................ (102,992) (101,871)
Proceeds from assets impaired or written off in prior
periods............................................... 158,865 --
Gain on sale of intangible assets....................... -- 875,000
Gain (loss) on sale of property and equipment........... (75,855) 112,496
Other................................................... 83,744 (184,447)
-------- --------
Other income, net....................................... $ 80,021 $797,916
======== ========
</TABLE>
Approximately $300,000 of other income (net), previously reported for the
year ended March 31, 1999 has been reclassified to discontinued operations to
conform with the presentation of discontinued operations in accordance with
Generally Accepted Accounting Principles.
4. BUSINESS ACQUISITIONS AND ASSET DISPOSITIONS
In August 1998, Sento 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 due to
disagreements with the principals of ESI regarding certain representations and
obligations contained in the acquisition agreement. In August 1999, Sento and
ESI entered into a settlement and release agreement and issued 169,067 shares of
common stock as full consideration for unpaid royalties.
In October 1998, Sento acquired equipment and intellectual property from
Functional Software, Pty, Ltd. ("Functional") in exchange for $450,000 in cash
and approximately 130,000 shares of common stock. Subsequent to the acquisition,
Sento determined that the anticipated expenses of the acquired business would be
higher than anticipated at the time of acquisition. In March 1999, Sento entered
into an agreement with the successor-in-interest to Functional, whereby Sento
sold all of the equipment and intellectual property acquired from Functional in
exchange for the return of 100,000 shares of common stock.
F-11
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS AND ASSET DISPOSITIONS (CONTINUED)
During the year ended March 31, 1999, the Company sold the following:
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)
The dispositions, including the sale of property and intellectual property
of Functional, 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>
Of the net loss on disposition of businesses, a loss of $574,856 has been
included in other income and a gain of $197,454 has been included in
discontinued operations.
In June 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 statement of operations.
F-12
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS AND ASSET DISPOSITIONS (CONTINUED)
Revenue, operating costs and expenses, other income and expenses, and income
taxes of this business have been reclassified to discontinued operations for the
years ended March 31, 2000 and 1999. No allocation of general corporate overhead
has been made to discontinued operations relating to this business. Revenues
related to discontinued operations as of March 31, 2000 and 1999 are $994,229
and $13,338,236, respectively. The assets and liabilities related to
discontinued operations as of March 31, 1999 were approximately $240,000 and
$210,000, respectively.
As of March 1, 2000, Sento Australia ceased its operations. The Company does
not expect to incur any additional expense related to Sento Australia
operations.
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, approximately $200,000, that was
transferred to EchoPass. Sento's investment in EchoPass represents approximately
a 26% ownership interest. Therefore, Sento has recorded its pro-rata share of
EchoPass losses under the equity method of accounting.
5. NOTES RECEIVABLE
At March 31, 1999, the Company had a $250,000 note receivable ($175,000 net
of reserves). This note receivable was from the disposition of the Company's
West Coast sales office. In 2000, the Company received software totaling $8,933
and $225,000 in cash for payment of the note. The note is included in other long
term assets at March 31, 1999 in the accompanying financial statements.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of March 31:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Leasehold improvements............................. $ 270,967 $ 181,773
Furniture, fixtures, and equipment................. 3,080,295 3,686,951
----------- -----------
3,351,962 3,868,724
Less accumulated depreciation...................... (1,192,375) (960,827)
----------- -----------
$ 2,158,887 $ 2,907,897
=========== ===========
</TABLE>
F-13
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE TO BANK AND LONG-TERM DEBT
On April 28, 2000, the Company renegotiated the terms of its line-of-credit
agreement with a bank. The Company can draw up to $3,000,000 under the
agreement, subject to eligible receivable balances. The outstanding balance
accrues interest at prime plus 1.25% and is subject to certain restrictive
covenants. The Company also issued warrants to the bank, in connection with
obtaining the original line of credit in 1999, to purchase 60,000 shares of
common stock at $1.60 per share. The stock purchase warrant is currently
exercisable at $1.60 and expires March 2, 2004. The Company had no balances
outstanding against the credit line as of March 31, 2000.
On April 28, 2000, the Company obtained an additional $500,000 term loan
with a bank for purchases of property and equipment. The loan bears interest at
prime plus 1.50% and each draw will be amortized over 36 months with all unpaid
principal and interest due in October 2003. As of March 31, 2000 the Company had
not drawn down any funds from this loan. Under the loan agreement, funds may be
drawn through October 15, 2000.
The Company has opened a second eCustomer Contact Center located in
Evanston, Wyoming. The funding of this site is through a five-year 8.5% interest
loan from the Wyoming Industrial Development Corporation (up to $1,000,000) and
grants from the state of Wyoming and the City of Evanston (up to $300,000). A
portion of this funding (up to $300,000) will not require repayment if a
specefied number of jobs are created by Sento in Wyoming. None of the above
funding for the Evanston site had been drawn on as of March 31, 2000.
Long-term debt, including capital lease obligations, consist of the
following as of March 31:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
11% note payable in monthly installments of $4,871,
including interest, due August 2000, secured by
equipment................................................. $ 6,426 $ 87,569
9% note payable in monthly installments of $5,890, including
interest, due May 2000, secured by equipment 5,608 91,572
9%--12% notes payable in monthly installments totaling
$4,368, including interest, secured by equipment.......... -- 115,792
10.38% note payable in monthly installments totaling $3,217,
including interest, secured by equipment.................. 97,918 --
7.5% note payable in monthly installments totaling $601,
including interest, secured by equipment.................. 30,000 --
-------- --------
Total installment notes payable............................. $139,952 $294,933
-------- --------
Present value of net minimum capital lease payments......... 81,217 --
-------- --------
Total long-term debt........................................ 221,169 294,933
Less current portion........................................ 80,492 191,741
-------- --------
Long-term debt, excluding current portion................... $140,677 $103,192
======== ========
</TABLE>
F-14
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE TO BANK AND LONG-TERM DEBT (CONTINUED)
Capitalized leases are for equipment. Future minimum capital lease payments,
excluding taxes, insurance and other costs as of March 31, 2000 were:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2001........................................................ $36,577
2002........................................................ 36,577
2003........................................................ 16,891
-------
Total minimum capital lease payments........................ 90,045
Less amounts representing interest.......................... 8,828
Present value of net minimum capital lease payments......... $81,217
=======
</TABLE>
Aggregate maturities of installment notes payable are as follows: 2001,
$50,897; 2002, $39,039; 2003, $36,656; 2004, $6,430; and 2005, $6,930. 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 was in
compliance with all debt covenants at March 31, 2000.
8. CONVERTIBLE BONDS AND DEBENTURES
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
which expired in May 1999. The bonds were convertible into shares of Sento
common stock 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. Sento 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.
During the year ended March 31, 2000, $500,000 of principal ($472,266, book
value), and $60,000 of accrued interest, were converted into 401,264 shares of
common stock. During the year ended March 31, 1999, $500,000 of principal
($472,267, book value), and $48,000 of accrued interest, was converted into
313,554 shares of common stock.
In February 2000, the Company issued $1,300,000 of 7% convertible
subordinated debentures in $1,000 units consisting of one $990 debenture and
warrants to purchase 100 shares of common stock for $6.25 per share. The
interest rate on the debentures increases to 8% in February 2001 if the market
price of the Company's common stock is less than $7.50 per share. Each debenture
is convertible at the option of the holder for 198 shares of common stock at a
conversion price of $5.00 per share. Debentures which have not been converted or
earlier redeemed are due and payable in February 2003. The Company granted
certain rights to register the shares of common stock that are issuable upon the
conversion of the debentures. The Company also issued warrants to the placement
agent for 35,000 shares of common stock at a purchase price of $5.00 per share.
Of the total proceeds, $226,609 was allocated to value the warrants (including
the placement agent warrants) and offering costs of $84,878 have been charged
against the book value of the debentures and are being amortized over the life
of the debentures.
F-15
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
As of March 31, 2000 and 1999, the Company had federal and state net
operating loss carryforwards of approximately $3,396,000 and $4,762,000,
respectively. The net operating loss and credit carryforwards will expire at
various dates beginning in 2019 through 2020, if not utilized.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- -------- ---------
<S> <C> <C> <C>
Year ended March 31, 2000:
Federal.................................... $ (67,832) $ -- $ (67,832)
State...................................... -- -- --
--------- -------- ---------
$ (67,832) $ -- $ (67,832)
========= ======== =========
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)
========= ======== =========
</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>
YEAR ENDED MARCH 31
----------------------
2000 1999
-------- -----------
<S> <C> <C>
Computed "expected" tax (benefit) expense................... $(43,572) $(2,408,465)
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit............ 4,485 (35,813)
Nonconsolidated losses (income)........................... 125,191 (90,520)
Nondeductible goodwill.................................... -- 315,502
Nondeductible interest.................................... -- 17,554
Nondeductible acquisition costs........................... -- --
Change in valuation allowance............................. (500,000) 1,707,300
Gain on related party capitalization...................... 368,648 --
Other..................................................... (13,614) (8,026)
-------- -----------
Income tax (benefit) expense................................ $(67,832) $ (502,468)
======== ===========
</TABLE>
F-16
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $1,290,000 $1,776,000
Deferred compensation..................................... 67,000 88,000
Compensation accruals..................................... 81,000 0
Intangible assets......................................... 228,000 213,000
Accrued liabilities....................................... 244,000 180,000
Bad debts................................................. 11,000 78,000
Other, net................................................ 60,000 94,000
---------- ----------
Deferred tax assets......................................... 1,981,000 2,429,000
Deferred tax liabilities:
Property and equipment...................................... (149,000) (97,000)
---------- ----------
Net deferred tax assets..................................... 1,832,000 2,332,000
Valuation allowance......................................... (1,832,000) (2,332,000)
---------- ----------
Total....................................................... $ -- $ --
========== ==========
</TABLE>
The net valuation allowance decreased by $500,000 during the year ended
March 31, 2000.
10. LEASES
The Company has non-cancelable operating leases for office space and
equipment. The Company incurred rent expense of $488,991 and $659,176 for the
years ended March 31, 2000 and 1999, respectively. Future minimum rent payments
under existing non-cancelable operating leases are $686,547 in fiscal 2001,
$742,392 in fiscal 2002, $759,261 in fiscal 2003, $771,900 in fiscal 2004,
782,946 in fiscal 2005 and $836,223 thereafter.
11. 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 were made in
1999; no employer contributions were made during 2000.
F-17
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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 3,500,000
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 granted to employees have ten-year terms; stock options
granted to board members generally have a five-year term. 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, 2000, there
were 868,293 additional shares available for grant under the Plan.
The Company granted 900,000 options under the plan in connection with the
hiring of a new CEO in 1998; the 900,000 options are included in the tables
below. Of these options, 500,000 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 year ended March 31, 1999,
total compensation expense for these options was $48,000. In April 1999, these
options were cancelled and the remaining deferred compensation expense was
credited to paid in capital.
Stock option activity, relating to qualified and nonqualified options during
the periods indicated is as follows:
<TABLE>
<CAPTION>
PERIODS ENDED MARCH 31,
-------------------------------------------------------------
2000 1999
------------------------------ ----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
----------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Balance outstanding at beginning of
year.................................. 2,726,872 $3.74 2,013,601 $3.78
Granted................................. 1,974,500 2.92 1,012,250 3.33
Exercised............................... (211,638) 2.37 (14,882) 1.24
Forfeited............................... (2,211,811) 3.90 (284,097) 4.19
----------- ---------
Balance outstanding at end of year...... 2,277,923 3.00 2,726,872 3.74
=========== =========
Exercisable at end of year.............. 480,334 $2.27 699,845 $3.29
=========== =========
Weighted-average fair value of options
granted during the year............... $ 2.93 $ 1.36
</TABLE>
The following table summarizes information about stock options outstanding at
March 31, 2000:
<TABLE>
<CAPTION>
NUMBER
OUT-STANDING WEIGHTED-AVERAGE NUMBER EXERCISABLE
AT REMAINING WEIGHTED-AVERAGE AT WEIGHTED-AVERAGE
EXERCISE PRICE MARCH 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 2000 EXERCISE PRICE
-------------- -------------- ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$1.24 - 1.50 114,195 8.60 $ 1.47 114,195 $1.47
1.75 920,500 8.90 1.75 218,610 1.75
2.19 - 3.06 464,953 8.63 2.71 32,795 2.49
3.12 - 4.13 163,850 6.82 3.82 88,010 3.85
4.50 385,425 9.43 4.50 26,724 4.50
6.25 229,000 7.62 6.25 -- --
--------- -------
2,277,923 8.64 3.00 480,334 2.27
========= =======
</TABLE>
F-18
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMON STOCK (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions: 2000--expected dividend yield zero percent, risk-free interest rate
of 6.50 percent, expected life of 5 years, and expected stock-price volatility
of 86.89 percent; 1999--expected dividend yield zero percent, risk-free interest
rate of 5.35 percent, expected life of 5 years, and expected stock-price
volatility of 54.92 percent.
The Company applies APB 25 in accounting for options issued under the Plan.
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>
2000 1999
----------- -----------
<S> <C> <C> <C>
Net loss As reported.................. $ (111,710) $(7,754,803)
Pro forma.................... (586,887) (8,896,628)
Basic and diluted loss per As reported..................
share (0.01) (1.31)
Pro forma.................... (0.08) (1.51)
</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 WARRANTS EXERCISE PRICE EXPIRATION DATE
------------------ -------------- ---------------
<S> <C> <C>
50,000 $ 4.75 September 2001
45,000 4.13 February 2001
10,000 4.25 May 2003
60,000 1.60 March 2004
378,751 2.50 May 2002
50,000 2.50 May 2003
130,000 6.25 February 2003
35,000 5.00 February 2003
25,000 6.25 March 2001
25,000 8.00 March 2001
25,000 10.00 March 2001
25,000 13.00 March 2001
-------
858,751
=======
</TABLE>
F-19
<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMON STOCK (CONTINUED)
PRIVATE PLACEMENT
In July 1999 the Company completed a private placement of common stock and
warrants resulting in total consideration received of $1,920,000. 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 for a
three-year period at $2.50 per share. Offering costs relating to the private
placement totaled approximately $39,000.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted a stock purchase plan under which 200,000 shares of
common stock are reserved for future issuance to employees of the Company. The
purpose of the stock purchase plan is to provide a method whereby certain
employees of the Company may acquire a proprietary interest in the Company
through the purchase of shares of common stock. The stock purchase plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code. As of March 31, 2000, the Company had sold 73,112
shares to employees of the Company under this plan.
13. RESTRUCTURING CHANGES
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. All liabilities relating
to the restructuring plan were paid as of March 31, 1999.
14. ASSET IMPAIRMENT
The Company recorded impairment of assets totaling $454,546 in
December 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, ESI. 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.
15. SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company has historically operated in
three reportable business segments that have separate management teams. The
segments include Technical Services, Training Services, and VAR business
(Product Sales and Consulting). In July 1999, the Company discontinued its VAR
business segment.
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<PAGE>
SENTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT REPORTING (CONTINUED)
Accordingly, those operations have been presented as discontinued operations
in the accompanying financial statements.
TECHNICAL SERVICES: This segment offers a range of IT outsourcing services
consisting of "eCustomer Contact 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.
The "Other" column includes corporate related items and results of
insignificant operations. Segment reporting for March 31, 2000, is as follows:
<TABLE>
<CAPTION>
TECHNICAL TRAINING
SERVICES SERVICES OTHER TOTAL
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues..................................... $13,978,877 $4,110,948 $ 678,949 $18,768,774
Cost of sales................................ 11,290,509 2,437,772 289,035 14,017,316
Depreciation and amortization................ 812,266 69,187 130,341 1,011,794
Segment operating profit (loss).............. 613,724 (471,066) (156,661) (14,003)
Capital Expenditures......................... 1,515,923 58,000 60,596 1,634,519
Total assets................................. 4,429,689 337,347 3,629,764 8,396,800
</TABLE>
Segment reporting from March 31, 1999, is as follows:
<TABLE>
<CAPTION>
TECHNICAL TRAINING
SERVICES SERVICES OTHER TOTAL
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues..................................... $ 2,843,232 $3,430,728 $1,613,034 $7,886,994
Cost of sales................................ 3,157,336 2,124,518 566,774 5,848,628
Depreciation................................. 295,202 48,769 194,709 538,680
Amortization of intangible assets............ -- 317,612 200,261 517,873
Impairment of long-lived assets.............. -- 880,842 -- 880,842
Segment operating loss....................... (1,617,436) (4,400,373) (1,863,828) (7,881,637)
Total assets................................. 3,457,168 502,246 3,341,757 7,301,171
</TABLE>
The above segment reporting from March 31, 1999 has been restated to conform
with the presentation of discontinued operations.
16. 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.
During fiscal 2000, the Company sold fixed assets to EchoPass (see Note 4)
for approximately $1,228,000. No gain or loss was recognized on the sale.
Subsequent to the transfer of technology to EchoPass (see Note 4), Sento and
EchoPass entered into a services agreement wherein EchoPass licenses the
technology to Sento and provides other technical support functions to Sento.
During 2000, Sento incurred approximately $235,000 of expenses under this
services agreement.
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