**United States**

**Securities and Exchange Commission**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 

| ý | **Quarterly  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|--------|----------------------------------------------------------------------------------------------|

 

**For the Quarter Ended December 29, 2001**

 

| **o** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**Commission File Number 06425**

 

**SENTO CORPORATION**

(Exact Name of Small Business Issuer as Specified in its Charter)

 

| **Utah**                                                       |   | **87-0284979**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |                                 |
| **808 East Utah Valley Drive 3**                               |
| **American Fork, Utah 8400**                                   |
| (Address of Principal Executive Offices)                       |
|                                                           |   |                                 |
| **(801) 492-2000**                                             |
| Issuer’s telephone number, including area code            |

** **

Indicate by check mark whetherthe issuer (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  ý   No  o

 

State the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:

 

| **Class**                           |   | **Outstanding at January 31, 2001** |
|-------------------------------------|--------|-------------------------------------|
| Common capital stock $.25 par value |   | 8,372,773                           |

 

Transitional Small BusinessDisclosure Format (check one):

 

Yes  o   No  ý

 

 

**SENTO CORPORATION**

Quarterly Report on Form 10-QSB

Quarter ended December 29, 2001

 

TABLE OF CONTENTS

 
| PART I    | FINANCIAL INFORMATION                                                                                                     |
|-----------|---------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                      |
| Item 1.   | Financial Statements                                                                                                      |
|      |                                                                                                                      |
|      | Condensed  Consolidated Balance Sheets December 29, 2001 and March 31, 2001                                               |
|      |                                                                                                                      |
|      | Condensed Consolidated Income Statements Three months and nine months ended  December 29, 2001 and December 31, 2000 |
|      |                                                                                                                      |
|      | Condensed  Consolidated Statements of Cash  Flows Nine months ended December 29, 2001 and December 31, 2000               |
|      |                                                                                                                      |
|      | Notes  to Condensed Consolidated Financial Statements                                                                     |
|      |                                                                                                                      |
| Item  2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations.                              |
|      |                                                                                                                      |
| PART  II. | OTHER INFORMATION                                                                                                         |
|      |                                                                                                                      |
| Item 6.   | Exhibits and  Reports on Form 8-K                                                                                         |
|      |                                                                                                                      |
|      | SIGNATURES                                                                                                                |

 

i

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PART I   — FINANCIAL INFORMATION

Item 1.    FinancialStatements

 

**SENTO CORPORATION**

**AND SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

 

**ASSETS**

 
|                          |   | **December  29, 2001** |       | **March 31, 2001** |   |
|-------------------------------|--------|------------------------|------------|--------------------|--------|
|                          |   | **(Unaudited)**        |       |               |   |
| Current  assets:              |   |                   |       |               |   |
| Cash                          |   | $                      | 2,576,520  |               | $      | 3,575,740 |   |
| Accounts  receivable (net)    |   | 2,733,921              |       | 4,392,911          |   |
| Other  current assets         |   | 500,887                |       | 211,855            |   |
| Total  current assets         |   | 5,811,328              |       | 8,180,506          |   |
|                          |   |                   |       |               |   |
| Property  and equipment (net) |   | 5,776,267              |       | 3,887,782          |   |
| Other  assets                 |   | 166,618                |       | 73,795             |   |
| Total  Assets                 |   | $                      | 11,754,213 |               | $      | 12,142,083 |   |
|                               |        |                        |            |                    |        |  |  |  |

 

**LIABILITIES ANDSTOCKHOLDERS’ EQUITY**

 
| Current liabilities:                             |   |       |       |       |   |
|--------------------------------------------------|--------|------------|------------|------------|--------|
| Current  portion of long-term debt               |   | $          | 1,080,482  |       | $      | 714,371 |   |
| Accounts  payable                                |   | 911,194    |       | 1,417,148  |   |
| Accrued  liabilities                             |   | 1,250,969  |       | 1,477,541  |   |
| Accrued  loss from discontinued operations       |   | —     |       | 424,270    |   |
| Customer  deposits and other current liabilities |   | 186,188    |       | 219,758    |   |
| Total  current liabilities                       |   | 3,428,833  |       | 4,253,088  |   |
| Long-term  liabilities:                          |   |       |       |       |   |
| Convertible  debt                                |   | 1,170,542  |       | 1,092,824  |   |
| Long-term  debt, net of current portion          |   | 1,777,265  |       | 1,478,264  |   |
| Total  long-term liabilities                     |   | 2,947,807  |       | 2,571,088  |   |
| Stockholders’  equity:                      |   |       |       |       |   |
| Common  stock                                    |   | 2,137,744  |       | 2,131,072  |   |
| Additional  paid-in capital                      |   | 10,694,441 |       | 10,682,056 |   |
| Deferred  compensation                           |   | —     |       | (31,165    | )      |
| Treasury  stock                                  |   | (417,299   | )          | —     |   |
| Accumulated  deficit                             |   | (7,037,313 | )          | (7,464,056 | )      |
| Total  stockholders’ equity                 |   | 5,377,573  |       | 5,317,907  |   |
| Total  Liabilities and Stockholders’ Equity |   | $          | 11,754,213 |       | $      | 12,142,083 |   |

 

1

----

 

**SENTO CORPORATION**

**AND SUBSIDIARIES**

 

**CondensedConsolidated Income Statements**

**(Unaudited)**

 
|                                              |   | **Three Months Ended** |      | **Nine Months Ended** |   |
|---------------------------------------------------|--------|------------------------|-----------|-----------------------|--------|
|                                              |   | **December  29,** |      | **December 31,**      |   | **December 29,** |   | **December 31,** |   |
|                                              |   | **2001**               |      | **2000**              |   | **2001** |   | **2000** |   |
| Revenue                                           |   | $                      | 5,363,430 |                  | $      | 7,760,778 |   | $ | 16,637,889 |   | $ | 18,011,037 |   |
|                                              |   |                   |      |                  |   |   |   |   |   |
| Cost  of sales                                    |   | 4,511,099              |      | 6,952,255             |   | 14,666,461 |   | 15,774,339 |   |
|                                              |   |                   |      |                  |   |   |   |   |   |
| Gross  profit                                     |   | 852,331                |      | 808,523               |   | 1,971,428 |   | 2,236,698 |   |
|                                              |   |                   |      |                  |   |   |   |   |   |
| Selling,  general and administrative expenses     |   | 539,561                |      | 505,817               |   | 1,412,143 |   | 1,435,517 |   |
| Operating  income                                 |   | 312,770                |      | 302,706               |   | 559,285 |   | 801,181 |   |
|                                              |   |                   |      |                  |   |   |   |   |   |
| Equity  loss on investment in EchoPassCorporation |   | —                 |      | —                |   | — |   | (149,795 | ) |
| Other  expense, net                               |   | (84,141                | )         | (47,704               | )      | (235,328 | ) | (92,314 | ) |
| Income  from continuing operations                |   | 228,629                |      | 255,002               |   | 323,957 |   | 559,072 |   |
| Income  (loss) from discontinued operations       |   | —                 |      | (174,580              | )      | — |   | 25,486 |   |
| Gain  on disposal of discontinued operations      |   | —                 |      | —                |   | 102,786 |   | — |   |
| Net  income                                       |   | $                      | 228,629   |                  | $      | 80,422 |   | $ | 426,743 |   | $ | 584,558 |   |
| Basic  income per share:                          |   |                   |      |                  |   |   |   |   |   |
| Income  from continuing operations                |   | $                      | 0.03      |                  | $      | 0.03 |   | $ | 0.04 |   | $ | 0.07 |   |
| Income  (loss) from discontinued operations       |   | 0.00                   |      | (0.02                 | )      | 0.01 |   | 0.00 |   |
| Net  income per common share                      |   | $                      | 0.03      |                  | $      | 0.01 |   | $ | 0.05 |   | $ | 0.07 |   |
|                                              |   |                   |      |                  |   |   |   |   |   |
| Diluted  income per share:                        |   |                   |      |                  |   |   |   |   |   |
| Income  from continuing operations                |   | $                      | 0.03      |                  | $      | 0.03 |   | $ | 0.04 |   | $ | 0.06 |   |
| Income  (loss) from discontinued operations       |   | 0.00                   |      | (0.02                 | )      | 0.01 |   | 0.00 |   |
| Net  income per common share                      |   | $                      | 0.03      |                  | $      | 0.01 |   | $ | 0.05 |   | $ | 0.06 |   |
|                                              |   |                   |      |                  |   |   |   |   |   |
| Weighted  average common sharesoutstanding:       |   |                   |      |                  |   |   |   |   |   |
| Basic                                             |   | 8,372,773              |      | 8,576,898             |   | 8,401,102 |   | 8,464,882 |   |
| Diluted                                           |   | 8,381,213              |      | 8,940,893             |   | 8,447,977 |   | 9,133,847 |   |

 

2

----

 

**SENTO CORPORATION**

**AND SUBSIDIARIES**

 

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

 
|                                                                               |   | **Nine Months Ended**  |      |
|------------------------------------------------------------------------------------|--------|------------------------|-----------|
|                                                                               |   | **December  29,** |      | **December 31,** |   |
|                                                                               |   | **2001**               |      | **2000** |   |
| Cash  flows from operating activities:                                             |   |                   |      |   |   |
| Net  income                                                                        |   | $                      | 426,743   |   | $ | 584,558 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                   |      |   |   |
| Depreciation  and amortization                                                     |   | 1,428,866              |      | 857,546 |   |
| Gain  on disposal of assets                                                        |   | (407                   | )         | — |   |
| Equity  loss on investment in EchoPass Corporation                                 |   | —                 |      | 149,795 |   |
| Changes  in operating assets and liabilities:                                      |   |                   |      |   |   |
| Accounts  receivable                                                               |   | 1,658,990              |      | (1,639,096 | ) |
| Other  assets                                                                      |   | (362,399               | )         | (48,747 | ) |
| Accounts  payable                                                                  |   | (505,954               | )         | 1,104,415 |   |
| Accrued  liabilities                                                               |   | (636,807               | )         | 693,362 |   |
| Customer  deposits                                                                 |   | (36,592                | )         | (122,303 | ) |
| Net  cash provided by operating activities                                         |   | 1,972,440              |      | 1,579,530 |   |
| Cash  flows from investing activities:                                             |   |                   |      |   |   |
| Proceeds  from sale of equipment                                                   |   | 29,765                 |      | — |   |
| Purchase  of property and equipment                                                |   | (2,791,365             | )         | (2,483,166 | ) |
| Net  cash used in investing activities                                             |   | (2,761,600             | )         | (2,483,166 | ) |
| Cash  flows from financing activities:                                             |   |                   |      |   |   |
| Principal  payments of long term debt                                              |   | (711,571               | )         | (103,190 | ) |
| Issuance  of long-term debt                                                        |   | 886,777                |      | 1,416,561 |   |
| Purchase  of treasury stock                                                        |   | (417,299               | )         | (111,893 | ) |
| Proceeds  from stock issued through employee stock purchase plan                   |   | 23,649                 |      | 139,349 |   |
| Proceeds  from stock options exercised                                             |   | 8,384                  |      | 497,357 |   |
| Net  cash (used) provided by financing activities                                  |   | (210,060               | )         | 1,838,184 |   |
| Net  (decrease) increase in cash                                                   |   | (999,220               | )         | 934,548 |   |
| Cash  at beginning of period                                                       |   | 3,575,740              |      | 2 ,382,321 |   |
| Cash  at end of period                                                             |   | $                      | 2,576,520 |   | $ | 3,316,869 |   |
|                                                                               |   |                   |      |   |   |
| Supplemental disclosures of cash flow  information                                 |   |                   |      |   |   |
| Cash  paid for:                                                                    |   |                   |      |   |   |
| Interest                                                                           |   | $                      | 269,432   |   | $ | 107,295 |   |

 

Non-cashinvesting and financing activities:

 

Duringthe nine months ended December 29, 2001, the Company received a $50,000 notereceivable for the sale of equipment and $489,906 of equipment was purchasedthrough capital leases.

 

3

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**SENTO CORPORATION**

**AND SUBSIDIARIES**

 

**Notesto Condensed Consolidated Financial Statements**

**December 29, 2001**

**(Unaudited)**

 

A.            BASIS OF PRESENTATION

 

The accompanyingunaudited condensed consolidated financial statements are stated in accordancewith the instructions to Form 10-QSB and do not include all of the informationand footnotes required by generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.

 

Operatingresults for the three and nine months ended December 29, 2001 are not necessarilyindicative of the results that may be expected for the full fiscal year.  The unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and footnotes thereto included in the Company’sAnnual Report on Form 10-KSB for the year ended March 31, 2001.

 

B.            LONG TERM DEBT

 

In June 2001,the Company obtained a five-year term loan with Wyoming Industrial DevelopmentCorporation in the amount of $87,400. The note is for the purchase of furniture and equipment to be used inthe Company’s Customer Contact Solution Center located in Green River,Wyoming.  The note bears interest at8.5% and provides for interest only payments during the first six months of thenote.

 

In October2001, the Company purchased equipment under two capital leases.   Equipment costing $428,439 was purchasedunder a four-year lease with monthly payments of $10,873. Equipment costing$61,467 was purchased under a three-year lease with a monthly payment of$1,985.  Both leases have a one-dollarpurchase option at the end of the lease term.

 

In December2001, the Company entered into a master lease agreement whereby the Company canfinance up to $630,000 of future equipment purchases.  Each lease entered into under the master lease agreement will befor a period of 48 months with a one-dollar purchase option at the end of thelease.

 

C.            COMMON STOCK

 

Nine months ended December 29, 2001

During thenine months ended December 29, 2001, options to purchase 4,791 shares of commonstock were exercised and 21,897 shares of common stock were sold to employeesunder the Company’s Employee Stock Purchase Plan.

 

There were178,200 shares of common stock repurchased by the Company during the nine-monthperiod at a total cost of  $417,299pursuant to a stock repurchase program approved by the Board of Directors inSeptember 2000.  The repurchase programauthorizes the repurchase of up to $1,000,000 of the Company’s common stock.  The repurchase is conditioned upon theCompany’s having cash balances of at least $3,500,000 and $3,000,000 of unusedbank line of credit immediately prior to the purchase of stock.   Through December 29, 2001, the Company hasrepurchased a cumulative total of 289,695 shares of the Company’s common stockunder this program for $702,342.

 

As of October16, 2001, the Board of Directors unanimously called for the cessation of thecommon stock buyback program, as it was determined the Company’s resourceswould be better used on selling and marketing efforts.

 

4

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Nine months ended December 31, 2000

During thenine months ended December 31, 2000, options to purchase 244,482 shares ofcommon stock were exercised and 40,985 shares of common stock were sold toemployees under the Company’s Employee Stock Purchase Plan.

 

D.            INCOME PER SHARE

 

Income pershare is computed in accordance with Financial Accounting Standards BoardStandard 128, “Earnings Per Share.” Basic income per share is computed by dividing net income by theweighted average number of shares of common stock outstanding for theperiod.  Diluted income per sharereflects the potential dilution that could occur from shares of common stockissuable through stock options, warrants and other convertible securities, ifdilutive.  Shares issuable pursuant toconvertible debentures (257,400 shares) have not been included in thecalculations of diluted common stock outstanding for the three and nine monthsended December 29, 2001 and December 31, 2000, because to do so would beanti-dilutive.

 

The followingtables set forth the computation of basic and diluted earnings per share forthe three and nine months ended December 29, 2001 and December 31 2000:

 
|                                                                      |   | **Three Months Ended** |    |
|---------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                      |   | **December 29,**       |    | **December 31,** |   |
|                                                                      |   | **2001**               |    | **2000** |   |
| Income  from continuing operations                                        |   | $                      | 228,629 |   | $ | 255,002 |   |
|                                                                      |   |                   |    |   |   |
| Loss  from discontinued operations                                        |   | —                 |    | (174,580 | ) |
| Net  income                                                               |   | $                      | 228,629 |   | $ | 80,422 |   |
|                                                                      |   |                   |    |   |   |
| Denominator  for basic income per share — weighted  average shares   |   | 8,372,773              |    | 8,576,898 |   |
| Dilutive  common stock options and warrants                               |   | 8,440                  |    | 363,995 |   |
|                                                                      |   |                   |    |   |   |
| Denominator  for diluted income per share — weighted  average shares |   | 8,381,213              |    | 8,940,893 |   |
| Basic  income per share:                                                  |   |                   |    |   |   |
| Continuing  operations                                                    |   | $                      | 0.03    |   | $ | 0.03 |   |
| Discontinued  operations                                                  |   | 0.00                   |    | (0.02 | ) |
| Net  income                                                               |   | $                      | 0.03    |   | $ | 0.01 |   |
|                                                                      |   |                   |    |   |   |
| Diluted  income per share:                                                |   |                   |    |   |   |
| Continuing  operations                                                    |   | $                      | 0.03    |   | $ | 0.03 |   |
| Discontinued  operations                                                  |   | 0.00                   |    | (0.02 | ) |
| Net  income                                                               |   | $                      | 0.03    |   | $ | 0.01 |   |

 

5

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|                                                                                 |   | **Nine Months Ended** |    |
|--------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                 |   | **December 29,**      |    | **December 31,** |   |
|                                                                                 |   | **2001**              |    | **2000** |   |
| Income  from continuing operations                                                   |   | $                     | 323,957 |   | $ | 559,072 |   |
| Income  from discontinued operations and gain on disposal of discontinued operations |   | 102,786               |    | 25,486 |   |
| Net  income                                                                          |   | $                     | 426,743 |   | $ | 584,558 |   |
|                                                                                 |   |                  |    |   |   |
| Denominator  for basic income per share — weighted average shares               |   | 8,401,102             |    | 8,464,882 |   |
| Dilutive  common stock options and warrants                                          |   | 46,875                |    | 668,965 |   |
| Denominator  for diluted income per share — weighted average shares             |   | 8,447,977             |    | 9,133,847 |   |
| Basic  income per share:                                                             |   |                  |    |   |   |
| Continuing  operations                                                               |   | $                     | 0.04    |   | $ | 0.07 |   |
| Discontinuing  operations                                                            |   | 0.01                  |    | 0.00 |   |
| Net  income                                                                          |   | $                     | 0.05    |   | $ | 0.07 |   |
|                                                                                 |   |                  |    |   |   |
| Diluted  income per share:                                                           |   |                  |    |   |   |
| Continuing  operations                                                               |   | $                     | 0.04    |   | $ | 0.06 |   |
| Discontinuing  operations                                                            |   | 0.01                  |    | 0.00 |   |
| Net  income                                                                          |   | $                     | 0.05    |   | $ | 0.06 |   |

 

E.             DISCONTINUED OPERATIONS

 

On May 23,2001, the Company reached a decision to discontinue the operations of itsTraining Division, which had historically been presented as a separate businesssegment.  Revenues, operating costs andexpenses, other income and expenses, and income taxes of this business havebeen recorded against the accrued loss from discontinued operations for thenine months ended December 29, 2001 and reclassified as discontinued operationsfor the nine months ended December 31, 2000. In July of 2001, the Company sold substantially all of the assets heldfor sale from this business for $10,000 in cash and a $50,000 note receivable.  The anticipated loss from the disposal ofthe Training Division was expensed as of March 31, 2001.  During September of 2001, it became apparentthat the Company’s loss from the disposal would be less than the amount accruedat March 31, 2001.  Accordingly, a gainon disposal of discontinued operations of $103,000 has been recorded in theCompany’s income statement for the nine-month periods ended December 29, 2001to reflect the Company’s realized loss from the disposal of this segment.

 

F.             ECHOPASS CORPORATION

 

Pursuant to ashareholder vote at a special shareholder meeting in December 1999, the Companyconsummated the sale of certain technology to EchoPass Corporation (“EchoPass”)in exchange for 4,000,000 shares of EchoPass’ Series A Preferred Stock in March2000.  Sento recorded its investment inEchoPass at the historical carrying value of the underlying technology that wastransferred to EchoPass.  At that timeSento recorded its pro-rata share of EchoPass losses under the equity method ofaccounting.  As of June 30, 2000, theinvestment in EchoPass had been written down to a zero balance as the result ofrecording Sento’s pro-rata share of EchoPass losses.

 

On November 2,2001, EchoPass entered into a new financing arrangement with some of itsinvestors that substantially diluted Sento’s ownership to less than one-half ofone percent of EchoPass.  As a result,Sento no longer accounts for its investment in EchoPass under the equity methodof accounting.

 

6

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Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.

 

**General**

 

Sento Corporation provides thelatest in CRM (Customer Relations Management) service solutions for adiversified portfolio of organizations including leading domestic and internationalcomputer hardware and software companies. Through its state-of-the-art Customer Contact Solutions Centers, Sento’sservices include telephone, e-mail, Web text chat, Web callbacks, browsercollaboration, voicemail, and fax. These solutions are designed to direct incoming interactions to theright client company’s agent at the right time with skills-based routing andcustomer data screen pops, enabling immediate and accurate customer care.

 

**Results of Operations**

 

**Three Months EndedDecember 29, 2001 Compared to Three Months Ended December 31, 2000**

 

*Revenues.*  Revenues decreased $2,398,000 or 31%  from $7,761,000 for the three months endedDecember 31, 2000 to $5,363,000 for the three months ended December 29, 2001.  The decrease was primarily due to pricingpressure and lower call volumes from larger existing customers, which managementattributes to the slowing economy. Currently, the Company has excess capacity available to serviceadditional call volume.  This excesscapacity was built in anticipation of higher demand for the Company’sservices.  However, with the economicrecession and recent terrorist attacks, it is difficult to predict theCompany’s ability to fill this excess capacity with new business in the nearfuture or at all.  Revenues by quarterfor the fourteen quarters ended December 29, 2001 were as follows:

 

| **Three  Months Ended** |   | **Revenues** |      | **Increase  (decrease)**

**from prior  quarter** |   |
|-------------------------|--------|--------------|-----------|---------------------------------------------------|--------|
| September  30, 1998     |   | $            | 294,468   |                                              | $      | 7,014 |   |
| December 31,  1998      |   | $            | 685,881   |                                              | $      | 391,413 |   |
| March 31, 1999          |   | $            | 1,575,429 |                                              | $      | 889,548 |   |
| June 30, 1999           |   | $            | 2,128,492 |                                              | $      | 553,063 |   |
| September 30, 1999      |   | $            | 2,318,631 |                                              | $      | 190,139 |   |
| December 31, 1999       |   | $            | 4,264,383 |                                              | $      | 1,945,752 |   |
| March 31, 2000          |   | $            | 5,267,371 |                                              | $      | 1,002,988 |   |
| June 30, 2000           |   | $            | 4,856,045 |                                              | $      | (411,326 | ) |
| September 30, 2000      |   | $            | 5,394,214 |                                              | $      | 538,169 |   |
| December 31, 2000       |   | $            | 7,760,778 |                                              | $      | 2,366,564 |   |
| March 31, 2001          |   | $            | 8,092,588 |                                              | $      | 331,810 |   |
| June 30, 2001           |   | $            | 6,191,717 |                                              | $      | (1,900,871 | ) |
| September 29, 2001      |   | $            | 5,082,742 |                                              | $      | (1,108,975 | ) |
| December 29, 2001       |   | $            | 5,363,430 |                                              | $      | 280,688 |   |

 

The Company’s largest client(accounting for approximately 32% of revenues for the nine months endedDecember 29, 2001) has given Sento notice that it intends to terminate itsrelationship with Sento in late April 2002. Although the loss of this client is not expected to have any impact onthe quarter ending March 30, 2002, it will likely have a significant adverseimpact on Sento’s revenues and net income in quarters subsequent to March 30,2002, if the business is not replaced.

 

*Cost of Sales.*  Cost of sales decreased 35%, or $2,441,000,from $6,952,000 for the three months ended December 31, 2000 to $4,511,000 forthe three months ended December 29, 2001. However, gross profit as a percentage of revenues increased by 6percentage points, from 10% of revenues during the three months ended December31, 2000, to 16% of revenues for the three months ended December 29, 2001.  The main reasons for this gross marginimprovement are: (i) the increasing revenues from Sento’s Services Portalbusiness that has a higher gross margin

 

7

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than the traditional callcenter business, (ii) management’s decision during the December 2001 quarternot to increase staffing for additional holiday business from a major client,which would have resulted in the incurrence of significant training costsinvolved in bringing on new call center agents and the lack of time to recoverthose training costs before the immediate subsequent layoffs required after theholiday season, and (iii) management’s continued focus on keeping labor andother variable costs in line with the amount of revenue produced.  Had it not been for management’s efforts tocontrol variable costs and its implementation of the Services Portal, fixedcosts would have likely reduced margins given the decrease in revenue.

 

The Company anticipatesincreased call volumes from new clients in the March 2002 quarter; however,actual call volumes will be subject to a number of factors beyond Sento’scontrol, including the extent and duration of the current economicrecession.  An increase in call volume,if achieved, would result in higher absorption of overhead and fixed costs,which would likely result in improved gross margin percentages.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased by 7%, or $34,000, from $506,000 for the three months ended December31, 2000 to $540,000 for the three months ended December 29, 2001.  This increase was primarily due to increasedmarketing efforts.  Managementanticipates that selling, general and administrative expenses will increase infuture periods as a result of its efforts to increase revenues.

 

*Other Expense (net).*  During the three months ended December 29,2001, the Company recorded other expense (net) of $84,000, as compared to$48,000 during the three months ended December 31, 2000.  The net increase in expense of $36,000 wasprimarily due to increased interest expense incurred from additionalborrowings.

 

**Nine Months EndedDecember 29, 2001 Compared to Nine Months Ended December 31, 2000**

 

*Revenues.*  Revenues decreased 8%, or $1,373,000, from$18,011,000 for the nine months ended December 31, 2000 to $16,638,000 for thenine months ended December 29, 2001. The decrease was primarily due to pricing pressure and lower callvolumes from larger existing customers triggered by the slowingeconomy.  The Company has excesscapacity available to service additional call volumes.  However, with the economic recession andrecent terrorist attacks, it is difficult to predict the Company’s ability tofill this excess capacity with new business in the near future or at all.

 

*Cost of Sales.*  Cost of sales decreased 7%, or $1,108,000,from $15,774,000 for the nine months ended December 31, 2000 to $14,666,000 forthe nine months ended December 29, 2001. The decrease was due primarily to an overall decrease in callvolumes.  Gross profit as a percentageof revenues remained constant at 12 percentage points for the nine months endedDecember 29, 2001and December 31, 2000.

 

The main reasons for holdinggross profit percentages constant while revenues declined are: (i) theincreasing revenues from Sento’s Services Portal business that has a highergross margin than the traditional call center business, (ii) management’sdecision during the December 2001 quarter not to increase staffing foradditional holiday business from a major client, which would have resulted inthe incurrence of significant training costs involved in bringing on new callcenter agents and the lack of time to recover those training costs before theimmediate subsequent layoffs required after the holiday season, and (iii)management’s continued focus on keeping labor and other variable costs in linewith the amount of revenue produced. Had it not been for management’s efforts to control variable costs andits implementation of the Services Portal, fixed costs would have likelyreduced margins given the decrease in revenue.

 

The Company currently hasexcess capacity and anticipates increased call volume from new clients in theMarch 2002 quarter.  However, actualcall volumes will be subject to a number of factors beyond Sento’s control,including the extent and duration of the current economic recession.  An increase in call volume, if achieved,would result in higher absorption of overhead and fixed costs, which wouldlikely result in improved gross margin percentages.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesremained relatively constant at $1,412,000 for the nine months ended December29, 2001 when compared to $1,436,000 for the nine months ended December 31,2000.  Management anticipates thatselling, general and administrative expenses will increase in future periods asa result of its efforts to increase revenues.

 

*Equity*Loss*onInvestment in EchoPass Corporation.* The Company has historically accounted for its investment in EchoPassCorporation under the equity method of accounting.  Therefore, the Company has historically recorded its

 

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pro-rata share of EchoPass’losses.  As of June 30, 2000, theinvestment in EchoPass had been written down to zero.  On November 2, 2001, EchoPass entered into a new financing arrangementwith some of its investors that substantially diluted Sento’s ownership to less than one-half of onepercent of EchoPass.  As a result, Sentono longer accounts for its investment in EchoPass under the equity method ofaccounting.

 

*Other Expense (net).* During the nine months ended December29, 2001, the Company recorded other expense (net) of $235,000, as compared to$92,000 during the nine months ended December 31, 2000.  The net increase in expense of $143,000 wasprimarily due to increased interest expense incurred from additionalborrowings.

 

*Discontinued Operations*.As a result of management’s decision to discontinue the Company’s TrainingDivision, the anticipated loss on disposal of the training operations wasexpensed as of March 31, 2001.  In July2001, the Company sold substantially all of the assets of this business, and inSeptember 2001 it became apparent to management that the Company’s loss fromthe disposal would be less than the amount accrued at March 31, 2001.  Accordingly, a gain on disposal ofdiscontinued operations of $103,000 was recorded in the accompanying incomestatement for the nine months ended December 29, 2001 to adjust the Company’srealized loss from the disposal of this segment.  The revenues and expenses relating to the Training Division forthe three months ended December 31, 2000 have been reclassified to income fromdiscontinued operations.

 

**Liquidity and Capital Resources**

 

Although the Company had cashflow from operations of $1,972,000 during the nine months ended December 29,2001, cash balances decreased 28%, or $999,000, from $3,576,000 at March 31,2001 to $2,577,000 at December 29, 2001. Working capital decreased to $2,382,000 at December 29, 2001 from$3,927,000 at March 31, 2001.  Thisdecrease in cash was due in part to purchases of equipment with cash, asopposed to acquiring such equipment through long-term financing.  Sento is currently seeking financing ofapproximately $1,000,000 on this equipment, but there can be no assurance thatsuch financing will be completed, or that if completed, it will be completed onterms favorable to Sento.  The Companywas able to obtain long-term debt financing for $887,000 of equipment duringthe nine months ended December 29, 2001, and an additional financing of$490,000 of equipment was obtained through capital leases during the samenine-month period. As of December 29, 2001, the Company had an unused operatingline of credit in the amount of $3,000,000 and an unused lease line of creditof $630,000.

 

On September 13, 2000, theBoard of Directors approved the repurchase of up to $1,000,000 of the Company’scommon stock.  The repurchase programwas conditioned upon the Company’s having cash balances of at least $3,500,000plus an unused bank line of credit of $3,000,000 immediately prior to anybuyback of shares. As of December 29, 2001 the Company had repurchased a totalof 289,695 shares of common stock at a total cost of  $702,000 under this buyback program.  As of October 16, 2001, the Board of Directors unanimously calledfor the cessation of the repurchase program, as it was determined the Company’sresources would be better used on selling and marketing efforts.

 

Historically the Company’s primary sources ofliquidity have been cash received from sales of assets and cash providedthrough private sales of equity and debt, as well as borrowings under a bankline of credit. During the twenty-one months ended December 29, 2001, liquidity and cash were also provided bypositive cash flow from operations.  Inaddition, the Company has financed some of the equipment utilized in itsbusiness through long-term leasing arrangements.  However, leasing and other financing companies have become muchmore conservative in providing financing because of the economic recession,making it more difficult for the Company to obtain equipment financing.  The growth of the Company has consumedsubstantial amounts of cash, and the Company will be required to obtainadditional financing  to fund futuregrowth.  In the event the Company is notable to find additional sources of funding and enter into financingtransactions on reasonable terms, its ability to pursue its planned businessgrowth strategy may be limited.  Therecan be no assurance that the Company will be able to obtain necessary capitalfunding on terms favorable to the Company, if at all.

 

*The statements contained in this QuarterlyReport on Form 10-QSB that are not purely historical are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  All forward-looking statementsinvolve various risks and uncertainties. Forward-looking statements contained in this Report include statementsregarding the Company’s plans to develop and deliver integrated informationtechnology services, market opportunities and acceptance, expectations, goals,revenues, financial performance, strategies, mission and intentions for thefuture.  Such forward-looking statementsare included under. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and encompass Sento’s beliefs,expectations, hopes and intentions regarding future events.  Words such as “expects,” “believes,”“anticipates,” and “likely” also identify forward-looking statements.*

 

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*All forward-looking statements included inthis Report are made as of the date hereof, based on information available tothe Company as of such date, and the Company assumes no obligation to updateany forward-looking statement.  It isimportant to note that such statements may not prove to be accurate and thatthe Company’s actual results and future events could differ materially fromthose anticipated in such statements. Among the factors that could cause actual results to differ materiallyfrom the Company’s expectations are those described under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RisksRelated to Existing and Proposed Operations.” All subsequent written and oral forward-looking statements attributableto the Company or persons acting on its behalf are expressly qualified in theirentirety by this section and other factors included elsewhere in this Report.*

 

**Risks Related to Existing and ProposedOperations**

 

In addition to otherinformation in this Report, the following are important factors that should beconsidered carefully in evaluating the Company and its business.

 

*Volatile Economic Conditions Have Affectedand Will Likely**Continue to Affect Sento’s Operations and FinancialResults*.  Volatile economicconditions have adversely affected Sento’s operations and financialresults.  The slowing economy hasresulted in increased pricing pressures and lower call volumes from existingclients, and may have limited Sento’s ability to attract new clients.  These factors have contributed to a declinein Sento’s revenues and net income and have resulted in Sento’s excess capacityto service call volumes.  A substantialpercentage of Sento’s expenses is attributable to labor costs associated withstaffing Customer Contact Solutions Centers, which Sento may not be able toreduce on short notice in order to compensate for unexpected shortfalls in callvolumes.  Sento cannot forecast futurefluctuations in economic conditions, and its operations and financial resultsmay be materially and adversely affected by continued economic volatility.

 

*Dependence on Key Clients*.  Two clients accounted for approximately 62%of the Company’s revenues for the year ended March 31, 2001, and for the ninemonths ended December 29, 2001 three clients accounted for approximately 62% ofthe revenues of the Company.  Thelargest of these clients (accounting for approximately 32% of revenues for thenine months ended December 29, 2001) has given Sento notice that it intends toterminate its relationship with Sento in late April 2002.  Although the loss of this client is notexpected to have any impact on the quarter ending March 30, 2002, it willlikely have a significant adverse impact on Sento’s revenues and net income inquarters subsequent to March 30, 2002, if the business is not replaced.

 

Consistent with industrystandards, Sento’s contracts are generally cancelable by the client onshort-term notice.  Sento’s loss of asignificant amount of business with any of its key clients could have, and theloss of a substantial amount of business with any of its largest existingclients would have, a material adverse effect on Sento’s business, financialcondition, and results of operations. In addition, Sento’s future revenue growth is dependent upon its abilityto attract and retain new clients.

 

*Risks of Growth Strategy*.  Sento’s business strategy is premised, inpart, upon expansion of its operations by opening, acquiring or partnering withother customer support facilities. Substantial risks accompany Sento’s growthplans. For example, Sento’s growth plans are dependent upon its ability toattract and retain new clients. Sento’s failure to attract and retain newclients will not only prevent the implementation of its business strategy, butmay leave Sento with excess personnel and physical facilities, which would havea negative impact on Sento’s results of operations and financial condition.

 

Sento’s growth plans are alsosubject to fluctuations in technology and industry standards, changes incustomer requirements and preferences and general economic conditions, amongother factors.  Many of these factorsare beyond Sento’s control.  If Sento isincorrect in its assessment of the feasibility of its growth plans, or ifcircumstances change in a way that Sento did not foresee or anticipate, Sentomay not be able to grow as planned or its growth strategy may have an adverseeffect on its business operations and financial condition.

 

*Reliance on EchoPass for Outsourced Services*.  Sento contracts with EchoPass for some ofthe technical support functions related to Sento’s Customer Contact SolutionsCenters.  If EchoPass fails in itsbusiness efforts, Sento may be required to identify and retain one or morealternate third-party providers of such services and could experience servicedelays, interruptions or cancellations.

 

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*Changing Needs of the Customer Contact ServiceMarket*.  Thecustomer contact service industry is characterized by rapid technologicalchange, changes in customer requirements and preferences, and the emergence ofnew industry standards and practices that could render Sento’s existing andproposed products, services, technology and systems obsolete.  To remain competitive, Sento mustcontinually improve the performance, features, and reliability of its productsand services, including its existing customer contact service applications, anddevelop new products and services that address the increasingly sophisticatedand varied needs of its prospective customers. If Sento cannot adapt or respond in a cost-effective and timely mannerto changing industry standards, market conditions, or customer requirements,its business and operating results would suffer and could negatively impactSento’s business and/or financial condition.

 

Sento’s success may also dependin part on the ability of Sento and/or EchoPass to develop solutions that keeppace with the continuing changes in information technology, evolving industrystandards, and changing client requirements. There can be no assurance that Sento will be successful in adequatelyaddressing these developments on a timely basis or that, if these developmentsare addressed, Sento will be successful in the marketplace.  In addition, there can be no assurance thatproducts or technologies developed by others will not render Sento’s servicesnon-competitive or obsolete.  Sento’s orEchoPass’ failure to address these developments could have a material adverseeffect on Sento’s business and financial condition.

 

*Dilution of Sento’s Ownership in EchoPass*.  EchoPass’ success in developing andlicensing its technology will depend to a significant extent on EchoPass’ability to obtain financing required to develop, market and sell itstechnology.  As a result, EchoPass hasissued, and may continue to issue additional capital stock to sources of suchfinancing.  Since the completion of theEchoPass transactions, EchoPass has issued additional shares of capital stock,incurred debt, which may be converted or exchanged for shares of capital stock,and issued derivative securities, which can be exercised for shares of capitalstock.  The issuance of such additionalcapital stock has resulted in substantial dilution of Sento’s ownership of theEchoPass capital stock and has eliminated Sento’s ability to influence themanagement and policies of EchoPass. Furthermore, the substantial dilution of Sento’s ownership interest inEchoPass has significantly reduced the prospect that Sento will realize anyfinancial benefit from its ownership interest in EchoPass.

 

*Competition*.   The market for customer contact services ishighly fragmented and very competitive. The customer contact services industry, however, has begun to experiencea degree of consolidation and the existence of major customer contact centercompanies has resulted in an additional level of competition from serviceproviders that have greater name recognition, larger installed customer bases,and significantly greater financial, technical, and marketing resources thanSento.  Over the past several years, anumber of existing companies have enjoyed increasing success and rapid internalgrowth.  Several of these companies havebeen active in acquiring smaller regional customer contact services companiesand are becoming major competitors with a measurable share of this rapidlyexpanding market.

 

Also, many major companiesprovide their own in-house customer care support and customer training.  However, such companies are within thepotential customer base for customer contact service providers and have thecapability of outsourcing those services to Sento’s existing and prospectivecustomers.

 

Sento cannot provide any assurancethat better and more efficient services will not be provided by new or existingcustomer contact service providers in competition with Sento.  The services provided by such competitorsmay be more effective or less expensive than those provided by Sento.  There can be no assurance that Sento willimprove, refine or enhance the services it provides.

 

*Competition in Customer Contact ServicesMarket*.  Thecustomer contact services 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 softwarecompanies, including IBM, Hewlett-Packard Company, Microsoft Corporation, andsimilar companies, may leverage their existing relationships and capabilitiesto offer customer service applications. Any delays in the general market acceptance of the customer contactservice applications and Sento’s proposed products and services would likelyharm Sento’s competitive position.  Delayswould allow Sento’s competitors additional time to improve their service orproduct offerings, and also provide time for new competitors to develope-business customer service applications and solicit prospective customerswithin Sento’s target markets. Increased competition could result in pricingpressures, reduced operating margins and loss of market share.

 

*Risk of Emergency Interruption of CustomerContact Solutions Center Operations*.  Sento’s business depends to a large extenton computer and telecommunications equipment and software systems (bothequipment and systems

 

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maintained by Sento andequipment and systems maintained by third parties, including EchoPass).  Sento cannot provide any assurance thatnatural disaster, human error, equipment malfunction or inadequacy, or otherevents would not result in a prolonged interruption in Sento’s ability toprovide support services to its clients. The temporary or permanent loss of computer or telephone equipment orsystems, through casualty, operating malfunction or otherwise, could have amaterial adverse effect on Sento. Property and business interruption insurance may not be adequate tocompensate Sento for all losses that it may incur.

 

*Attracting, Training, and Retaining QualityManagement and Employees*.  The customer contact services market suffers from a significantlabor shortage.  Sento’s success willdepend, in large part, on its ability to attract, retain and train highly-qualifiedtechnical, managerial and marketing personnel with the required expertise.  Sento has not entered into employmentagreements that require the services of any of its key managerial or technicalpersonnel to remain with Sento for any specified period of time.  Competition for such personnel isintense.  There can be no assurance thatSento will be able to attract and maintain the personnel necessary for thedevelopment and operation of its business nor that it will be able to train itscurrent employees on new developments in technology.  Specifically, the loss of any key personnel or an inability toattract, retain, train and motivate qualified personnel could have a materialadverse effect on the business, financial condition and results of operationsof Sento.

 

In addition, Sento’s totalemployee count has fluctuated from approximately 585 as of March 31, 2000 toapproximately 953 as of December 31, 2000, and has decreased to approximately501 as of  December 31, 2001.  The support required for two of the Company’slargest clients is seasonal.  There is,therefore, a necessity for very rapid increases in employees and subsequentdecreases in the number of employees as the requirements for support change.  The Company cannot provide any assurancethat its current management team can successfully manage Sento’s rapidlyevolving business, and any failure to do so could have a material adverseeffect upon Sento’s operating results.

 

*Liquidity and Capital Resources*.  At December 29, 2001, Sento had workingcapital of $2,382,000 and a cash balance of $2,577,000.  Future growth, particularly growth in excessof planned growth, will depend on the Company’s ability to obtainfinancing.  The historic growth rate ofSento’s Customer Contact Solutions operations has consumed substantial amountsof cash and will continue to require significant capital investment.  The Company may be required to pursueadditional funding opportunities to fund future growth should it accelerate inexcess of historical and planned future growth.  In the event the Company is not able to find such alternatesources of funding, its ability to pursue its planned business strategy may belimited.  There can be no assurance thatthe Company will be able to obtain necessary capital funding on terms favorableto the Company, if at all.

 

*Dependence on Industry Trend to OutsourceServices*. Sento’s business depends in large part on the trend within the ITindustry to outsource certain services. Sento cannot provide any assurance thatthis trend will continue or that, if the trend continues, it will continue atthe same rate of growth.  The failure ofthis trend to continue could have a material adverse effect on the business,financial condition, and results of operations of Sento.

 

*Potential Significant Fluctuations inQuarterly Results*. The value of individual transactions can constitute a substantialpercentage of Sento’s quarterly revenue, and particular transactions maygenerate a substantial portion of the operating profits for a quarter.  Because Sento’s staffing and other operatingexpenses are based on anticipated revenue levels, and a high percentage of itsexpenses are fixed, delays in the receipt of orders can cause significantvariations in operating results from quarter to quarter.  In addition, Sento may expend significantresources pursuing potential sales that will not be consummated.  Sento also may choose to reduce prices or toincrease spending in response to competition or to pursue new market opportunities,which may adversely affect its operating results.

 

In particular, Sento’squarterly revenues from its Customer Contact Solutions Center operations arepotentially volatile.  Such revenues areprincipally a function of the number of support requests received by Sento, andthe time spent on such requests.** **Consequently,Sento’s profitability may be adversely affected if Sento receives fewer supportrequests than anticipated or the time spent in resolving inquiries is greaterthan anticipated.

 

For the reasons identifiedabove, management believes that period-to-period comparisons of Sento’s resultsof operations may not be meaningful and that no one should rely upon them as anindication of future performance. Furthermore, Sento cannot provide any assurance that it will be able toachieve or sustain profitability on a quarterly basis.

 

*Possible Volatility of Stock Price*.  The trading price of  Sento’s common stock has fluctuated widelyin response to variations in quarterly operating results, announcements bySento or its competitors, industry trends, general economic conditions or otherevents or factors.  Such fluctuations,as well as fluctuations in the trading volume of

 

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the common stock, may continuein the future.  Regardless of the generaloutlook for Sento’s business, the announcement of quarterly operating resultsbelow analyst and investor expectations could have a material and adverseeffect on the market price of the common stock.

 

*Anti-Takeover Considerations.*  Sento’s Articles of Incorporation andBylaws, the Utah Revised Business Corporation Act, and the Utah Control SharesAcquisition Act each contain certain provisions that may have the effect ofinhibiting a non-negotiated merger or other business combination.  Sento’s Articles of Incorporation grant tothe Board of Directors the authority, without further action by Sento’sshareholders, to fix the rights and preferences of, and issue shares ofpreferred stock.  These provisions maydeter hostile takeovers or delay or prevent changes in control of Sento orchanges in Sento’s management, including transactions in which shareholdersmight otherwise receive a premium for their shares over the then-current marketprices. In addition, these provisions may limit the ability of shareholders toapprove transactions that they may deem to be in their best interests.

 

*Dividends.*   Dividends are payable on Sento’s commonstock only when, as, and if declared by Sento’s Board of Directors.  At present Sento intends to retain anyfuture earnings for use in its business and therefore does not anticipatepaying any dividends on the common stock in the foreseeable future.

 

**PARTII.                OTHER INFORMATION**

 

Item 4.    Submission of Matters to Vote of SecurityHolders

 

On October 16,2001, the Company held its Annual Meeting of Shareholders (the “AnnualMeeting”).  At the Annual Meeting, twomatters were submitted to the Company’s shareholders for consideration andapproval.  Those matters, together withthe voting results for each matter, are described in the following paragraphs.

 

1.               Six directors of the Company wereelected to serve until the 2002 Annual Meeting of Shareholders of theCompany.  The directors elected,together with votes received are: Gary B. Filler 6,202,265 votes; Dennis L. Herrick6,199,757 votes; Kieth E. Sorenson 5,828,797 votes; Kim A. Cooper 6,214,822votes; Lyndon L. Ricks 6,226,465 votes; and Eric Olafson 6,226,322 votes.

 

2.               The Company’s shareholders approved aproposal to ratify the appointment of Ernst & Young LLP as independent auditorsof the Company for the fiscal year ending March 30, 2002.  With respect to this proposal, there were6,229,406 shares cast in favor of the proposal, 15,731 shares cast against theproposal, and 57,928 votes abstained.

 

Item 6.             Exhibitsand Reports on Form 8-K

 

a)              NoCurrent Reports on Form 8-K have been filed by the Company during the threemonths ended December 29, 2001.

 

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SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                      | SENTO  CORPORATION |
|---------------------------|--------------------|
|                      | (Registrant)       |
|                      |               |   |
|                      | By:                | /s/ PATRICK  F. O’ NEAL |
|                      |               | Patrick F.  O’ Neal |
|                      |               | President  and Chief Executive Officer |
|                      |               |   |
|                      | By:                | /s/ STANLEY  J. CUTLER |
|                      |               | Stanley J.  Cutler |
|                      |               | Vice  President of Finance and Secretary |
|                      |               |   |
| Dated  February 11, 2002. |               |   |

 

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