**United StatesSecurities 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 September 28, 2002** |
|                                         |
| **o**                                        | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**CommissionFile Number 06425**

 

| **Utah**                                                                       |   | **SENTO CORPORATION**                                            |   | **870-284979**                        |
|--------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other Jurisdiction of  Incorporation or Organization)                |   | Exact Name of Small Business Issuer as  Specified in its Charter |   | (I.R.S. Employer  Identification No.) |
|                                                                           |
| **808 East Utah Valley Drive**                                                 |
| American Fork, Utah 84003  (Address of Principal Executive Offices)            |
|                                                                           |
| Issuer’s telephone number, including area code:  **(801)  772-1100** |

 

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  October 31, 2002** |
|--------------------------------------|--------|--------------------------------------|
| Common capital stock  $.25 par value |   | 8,399,885                            |

 

Transitional Small BusinessDisclosure Format (check one):

 
| Yes   o |   | No   ý |
|------------------------|--------|----------------------------|

 

 

----

 

**SENTO CORPORATION**Quarterly Report on Form 10-QSBQuarter ended September 28, 2002

 

TABLE OF CONTENTS

 
| PART I   | FINANCIAL INFORMATION                                                                                                 |
|----------|-----------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                  |
| Item 1.  | Financial Statements                                                                                                  |
|     |                                                                                                                  |
|     | Condensed Consolidated  Balance SheetsSeptember 28. 2002 and March 30, 2002                                           |
|     |                                                                                                                  |
|     | Condensed  Consolidated Statements of OperationsThree and six months ended September  28, 2002 and September 29, 2001 |
|     |                                                                                                                  |
|     | Condensed  Consolidated Statements of Cash FlowsThree and six months ended September  28, 2002 and September 29, 2001 |
|     |                                                                                                                  |
|     | 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 4.  | Control and Procedures                                                                                                |
|     |                                                                                                                  |
| Item 6.  | Exhibits and  Reports on Form 8-K                                                                                     |
|     |                                                                                                                  |
|     | SIGNATURES                                                                                                            |
|     |                                                                                                                  |
|     | CERTIFICATIONS *                                                                                                      |

 

i

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PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

 

**SENTO CORPORATION****AND SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

 
|                                                       |   | **September  28, 2002** |      | **March 30, 2002** |   |
|------------------------------------------------------------|--------|-------------------------|-----------|--------------------|--------|
|                                                       |   | **(Unaudited)**         |      |               |   |
| **ASSETS**                                                 |   |                    |      |               |   |
| Current assets:                                            |   |                    |      |               |   |
| Cash                                                       |   | $                       | 1,218,827 |               | $      | 1,047,731 |   |
| Short-term investments                                     |   | 830,896                 |      | 928,522            |   |
| Accounts receivable (net)                                  |   | 1,633,421               |      | 3,514,487          |   |
| Other current assets                                       |   | 714,322                 |      | 790,752            |   |
| Total current assets                                       |   | 4,397,466               |      | 6,281,492          |   |
|                                                       |   |                    |      |               |   |
| Property and equipment (net)                               |   | 4,984,619               |      | 5,226,257          |   |
| Other assets                                               |   | 209,597                 |      | 124,293            |   |
| Total Assets                                               |   | $                       | 9,591,682 |               | $      | 11,632,042 |   |
|                                                       |   |                    |      |               |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**              |   |                    |      |               |   |
|                                                       |   |                    |      |               |   |
| Current liabilities:                                       |   |                    |      |               |   |
| Current portion of long-term  debt and capital leases      |   | $                       | 1,485,150 |               | $      | 1,117,838 |   |
| Accounts payable                                           |   | 1,185,150               |      | 1,230,108          |   |
| Accrued liabilities                                        |   | 903,964                 |      | 847,292            |   |
| Deferred revenue and other  current liabilities            |   | 52,465                  |      | 250,668            |   |
| Convertible debt                                           |   | 1,253,945               |      | 1,197,442          |   |
| Total current liabilities                                  |   | 4,880,674               |      | 4,643,348          |   |
|                                                       |   |                    |      |               |   |
| Long-term debt and capital  leases, net of current portion |   | 976,857                 |      | 1,504,839          |   |
|                                                       |   |                    |      |               |   |
| Stockholders’ equity:                                 |   |                    |      |               |   |
| Common stock                                               |   | 2,098,943               |      | 2,093,195          |   |
| Additional paid-in capital                                 |   | 10,344,118              |      | 10,322,732         |   |
| Accumulated other comprehensive  loss                      |   | (2,482                  | )         | (28,772            | )      |
| Accumulated deficit                                        |   | (8,706,428              | )         | (6,903,300         | )      |
| Total stockholders’ equity                            |   | 3,734,151               |      | 5,483,855          |   |
| Total Liabilities and  Stockholders’ Equity           |   | $                       | 9,591,682 |               | $      | 11,632,042 |   |

 

1

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**SENTO CORPORATIONAND SUBSIDIARIES**

 

**CondensedConsolidated Statements of Operations********(Unaudited)**

 
|                                                               |   | **Three Months Ended**  |       | **Six Months Ended**    |   |
|--------------------------------------------------------------------|--------|-------------------------|------------|-------------------------|--------|
|                                                               |   | **September 28,  2002** |       | **September 29,  2001** |   | **September 28,  2002** |   | **September 29,  2001** |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Revenue                                                            |   | $                       | 3,485,775  |                    | $      | 5,082,742 |   | $ | 7,708,509 |   | $ | 11,274,459 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Cost of sales                                                      |   | 3,755,097               |       | 4,563,077               |   | 8,065,517 |   | 10,155,362 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Gross profit (loss)                                                |   | (269,322                | )          | 519,665                 |   | (357,008 | ) | 1,119,097 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Selling, general and  administrative expenses                      |   | 615,134                 |       | 429,519                 |   | 1,203,122 |   | 872,582 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Operating income (loss)                                            |   | (884,456                | )          | 90,146                  |   | (1,560,130 | ) | 246,515 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Other expense, net                                                 |   | (142,972                | )          | (85,617                 | )      | (242,998 | ) | (151,187 | ) |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Income (loss) from continuing  operations                          |   | (1,027,428              | )          | 4,529                   |   | (1,803,128 | ) | 95,328 |   |
| Gain on disposal of  discontinued operations                       |   | —                  |       | 102,786                 |   | — |   | 102,786 |   |
| Net income (loss)                                                  |   | $                       | (1,027,428 | )                       | $      | 107,315 |   | $ | (1,803,128 | ) | $ | 198,114 |   |
| Basic income (loss) per share:                                     |   |                    |       |                    |   |   |   |   |   |
| Income (loss) from continuing  operations                          |   | $                       | (0.12      | )                       | $      | 0.00 |   | $ | (0.21 | ) | $ | 0.01 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Income from discontinued  operations                               |   | 0.00                    |       | 0.01                    |   | 0.00 |   | 0.01 |   |
| Net income (loss) per common  share                                |   | $                       | (0.12      | )                       | $      | 0.01 |   | $ | (0.21 | ) | $ | 0.02 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Diluted income (loss) per  share:                                  |   |                    |       |                    |   |   |   |   |   |
| Income (loss) from continuing  operations                          |   | $                       | (0.12      | )                       | $      | 0.00 |   | $ | (0.21 | ) | $ | 0.01 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Income from discontinued  operations                               |   | 0.00                    |       | 0.01                    |   | 0.00 |   | 0.01 |   |
| Net income (loss) per common  share                                |   | $                       | (0.12      | )                       | $      | 0.01 |   | $ | (0.21 | ) | $ | 0.02 |   |
|                                                               |   |                    |       |                    |   |   |   |   |   |
| Weighted average common and  common equivalent shares outstanding: |   |                    |       |                    |   |   |   |   |   |
| Basic                                                              |   | 8,395,766               |       | 8,359,529               |   | 8,395,640 |   | 8,415,266 |   |
| Diluted                                                            |   | 8,395,766               |       | 8,367,336               |   | 8,395,640 |   | 8,481,359 |   |

 

2

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**SENTO CORPORATIONAND SUBSIDIARIES**

 

**CondensedConsolidated Statements of Cash Flows********(Unaudited)**

 
|                                                                                      |   | **Six Months Ended**    |       |
|-------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                      |   | **September 28,  2002** |       | **September 29,  2001** |   |
| Cash flows from operating  activities:                                                    |   |                    |       |   |   |
| Net income (loss)                                                                         |   | $                       | (1,803,128 | ) | $ | 198,114 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |   |                    |       |   |   |
| Depreciation and amortization                                                             |   | 880,570                 |       | 901,551 |   |
| Gain on disposal of assets                                                                |   | (5,030                  | )          | (407 | ) |
| Revaluation of warrants issued  for services                                              |   | 7,131                   |       | — |   |
| Write-down of assets held for  sale                                                       |   | 58,668                  |       | — |   |
| Accretion on debenture for  warrant                                                       |   | 42,255                  |       | 36,877 |   |
| Realized loss on sale of  short-term investments                                          |   | 8,806                   |       | — |   |
| Changes in operating assets and  liabilities:                                             |   |                    |       |   |   |
| Accounts receivable                                                                       |   | 1,881,066               |       | 470,731 |   |
| Other assets                                                                              |   | (23,996                 | )          | (199,498 | ) |
| Accounts payable                                                                          |   | (44,958                 | )          | (242,054 | ) |
| Accrued liabilities                                                                       |   | 56,672                  |       | (827,218 | ) |
| Deferred revenue and other  current liabilities                                           |   | (198,203                | )          | (30,034 | ) |
| Net cash provided by operating  activities                                                |   | 859,853                 |       | 308,062 |   |
| Cash flows from investing  activities:                                                    |   |                    |       |   |   |
| Proceeds from sale of  short-term investments                                             |   | 132,090                 |       | — |   |
| Purchase of short-term  investments                                                       |   | (16,980                 | )          | — |   |
| Proceeds from sale of equipment                                                           |   | 9,440                   |       | 29,765 |   |
| Purchase of property and  equipment                                                       |   | (241,352                | )          | (2,271,029 | ) |
| Net cash used in investing  activities                                                    |   | (116,802                | )          | (2,241,264 | ) |
| Cash flows from financing  activities:                                                    |   |                    |       |   |   |
| Principal payments on long term  debt                                                     |   | (591,958                | )          | (437,246 | ) |
| Issuance of long-term debt                                                                |   | —                  |       | 886,777 |   |
| Purchase of treasury stock                                                                |   | —                  |       | (417,299 | ) |
| Proceeds from stock issued  through employee stock purchase plan                          |   | 20,003                  |       | — |   |
| Proceeds from stock options  exercised                                                    |   | —                  |       | 8,384 |   |
| Net cash provided by (used in)  financing activities                                      |   | (571,955                | )          | 40,616 |   |
| Net increase (decrease) in cash                                                           |   | 171,096                 |       | (1,892,586 | ) |
| Cash at beginning of period                                                               |   | 1,047,731               |       | 3,575,740 |   |
| Cash at end of period                                                                     |   | $                       | 1,218,827  |   | $ | 1,683,154 |   |
|                                                                                      |   |                    |       |   |   |
| Supplemental disclosures of cash flow  information                                        |   |                    |       |   |   |
| Cash paid for:                                                                            |   |                    |       |   |   |
| Interest                                                                                  |   | $                       | 134,528    |   | $ | 158,364 |   |

 

Non-cash investing andfinancing activities:

 

During the six months endedSeptember 28, 2002, equipment totaling $431,288 was purchased through a capitallease.

 

3

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**SENTO CORPORATION****AND SUBSIDIARIES**

 

**Notesto Condensed Consolidated Financial Statements********September 28, 2002(Unaudited)**

 

A.                                   BASISOF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statementsare stated in accordance with the instructions to Form 10-QSB and do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.

 

Operating results for the three and six months ended September 28, 2002are not necessarily indicative of the results that may be expected for the fullfiscal year.  The unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and footnotes thereto included in theCompany’s Annual Report on Form 10-KSB for the year ended March 30, 2002.

 

B.                                     SHORTTERM INVESTMENTS

 

The Company’s short-term investments are classified asavailable-for-sale securities and are recorded at market value.  As of September 28, 2002, the Company hadunrealized losses on these short-term investments of $2,482, recorded as othercomprehensive loss in stockholders’ equity. As of September 28, 2002, the Company’s short-term investments were heldin an adjustable income fund.

 

C.                                     EQUIPMENTFINANCING

 

During the six months ended September 28, 2002, the Company purchasedequipment through two capital leases. Each of these leases has a one-dollar purchase option.  The first lease for $160,538 calls formonthly payments of $4,174 over four years. The second lease for $270,750 calls for monthly payments of $10,022 overthree years.

 

D.                                    COMMONSTOCK

 

Six months ended September 28, 2002

 

A total of 22,993 shares of common stock were sold to employees underthe Company’s Employee Stock Purchase Plan during the six months endedSeptember 28, 2002.

 

Six months ended September 29, 2001

 

During the six months ended September 29, 2001, options to purchase4,791 shares of common stock were exercised.

 

There were 178,000 shares of common stock repurchased during thesix-month period ended September 29, 2001 at a total cost of $417,299 pursuantto a stock repurchase program approved by the Board of Directors in September2000.  The repurchase program authorizedthe repurchase of up to $1,000,000 of the Company’s common stock.  The repurchase was 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.

 

As of October 16, 2001, the Board of Directors unanimously called forthe cessation of the common stock buyback program, as it was determined theCompany’s resources would be better used on selling and marketing efforts.  During the repurchase program, the Companyrepurchased a cumulative total of 289,695 shares of the Company’s common stockfor $702,000.

 

4

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E.                                      INCOME(LOSS) PER SHARE

 

Income (loss) per share is computed in accordance with FinancialAccounting Standards Board Standard 128, “Earnings Per Share.”  Basic income (loss) per share is computed bydividing net income (loss) by the weighted average number of shares of commonstock outstanding for the period. Diluted income (loss) per share reflects the potential dilution thatcould occur from shares of common stock issuable through stock options,warrants and other convertible securities, if dilutive.  Options and warrants to purchase 4,707 and35,136 shares, respectively, of common stock have not been included in thecalculation of diluted common stock outstanding for the three and six monthsended September 28, 2002, because to do so would be anti-dilutive.  Shares issuable pursuant to convertibledebentures (257,400 shares) have not been included in the calculations ofdiluted common stock outstanding for the three and six months ended September28, 2002 and September 29, 2001 as to do so would be anti-dilutive.

 

The following tables set forth the computation of basic and dilutedincome (loss) per share for the three and six months ended September 28, 2002and September 29, 2001:

 
|                                                                                                  |   | **Three  Months Ended**  |       |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|
|                                                                                                  |   | **September  28,  2002** |       | **September  29,  2001** |   |
|                                                                                                  |   |                     |       |   |   |
| Net income (loss)                                                                                     |   | $                        | (1,027,428 | ) | $ | 107,315 |   |
| Denominator for basic income per share –  weighted average shares                                |   | 8,395,766                |       | 8,359,529 |   |
|                                                                                                  |   |                     |       |   |   |
| Dilutive common stock options and warrants                                                            |   | —                   |       | 7,807 |   |
| Denominator for diluted income per share –  weighted average common and common equivalent shares |   | 8,395,766                |       | 8,367,336 |   |
|                                                                                                  |   |                     |       |   |   |
| Basic income (loss) per share                                                                         |   | $                        | (0.12      | ) | $ | 0.01 |   |
|                                                                                                  |   |                     |       |   |   |
| Diluted income (loss) per share                                                                       |   | $                        | (0.12      | ) | $ | 0.01 |   |

 

 
|                                                                                                  |   | **Six Months  Ended**    | ** ** |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|
|                                                                                                  |   | **September  28,  2002** | ** ** | **September  29,  2001** | ** ** |
|                                                                                                  |   |                     |       |   |   |
| Net income (loss)                                                                                     |   | $                        | (1,803,128 | ) | $ | 198,114 |   |
| Denominator for basic income per share –  weighted average shares                                |   | 8,395,640                |       | 8,415,266 |   |
|                                                                                                  |   |                     |       |   |   |
| Dilutive common stock options and warrants                                                            |   | —                   |       | 66,093 |   |
| Denominator for diluted income per share –  weighted average common and common equivalent shares |   | 8,395,640                |       | 8,481,359 |   |
|                                                                                                  |   |                     |       |   |   |
| Basic income (loss) per share                                                                         |   | $                        | (0.21      | ) | $ | 0.02 |   |
|                                                                                                  |   |                     |       |   |   |
| Diluted income (loss) per share                                                                       |   | $                        | (0.21      | ) | $ | 0.02 |   |

 

5

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F.                                      LINEOF CREDIT AND LONG-TERM DEBT

 

The Company has a revolving line-of-credit agreement with a bank. Theline of credit (including the term loan agreements) subjects the Company tocertain restrictive covenants, including minimum liquidity and tangible networth.  The Company was in compliancewith its covenants at September 28, 2002. The Company can draw up to $2,000,000under the agreement, subject to eligible receivable balances and reduced by thenet balances of term loans outstanding with the bank (as of September 28, 2002,the Company had $962,000 of outstanding term loans with the bank, all of whichhas been reclassified as a current liability).

 

The Company has two significant current liabilities that come due(subject to renewal, extension renegotiation, or replacement) in the fourthquarter, i.e., the debentures in February 2003 and the line of credit(including term loans) in January 2003. The Company is seeking approval from its current debenture holders toextend the terms of repayment and is also seeking commercial financialinstitutions, investment banks and private investors to replace the currentdebentures and the line of credit on commercially reasonable terms, but suchpotentially may have dilutive effects on the current shareholders.  If the Company is successful in its effortsto refinance or replace its current debentures with other long-term financing,the holder of the line of credit may (but is not required to) renew its loanagreements.

 

6

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

 

**General**

 

Usingstate-of-the-art Portal Services and Customer Contact Solutions Centers, Sentoprovides domestic and international support services to Fortune 1000 companies,multinational companies, product manufacturers and software publishingcompanies.  By allowing companies tofocus on their core business, Sento helps its clients reduce headcount, eliminateunnecessary capital expenditures, and improve the experience for the customer.

 

**Critical Accounting Policies**

 

Sento’ssignificant accounting policies are described in Note 2 to Sento’s ConsolidatedFinancial Statements for the year ended March 30, 2002. Those financialstatements were prepared in accordance with accounting principles generallyaccepted in the United States and are included in Sento’s Form 10-KSB which hasbeen filed with the Securities and Exchange Commission.  Included within these policies are theCompany’s “critical accounting policies.” Critical accounting policies are those policies that are most importantto the preparation of the Company’s consolidated financial statements andrequire management’s subjective and complex judgments due to the need to makeestimates about the effect of matters that are inherently uncertain.  The Company’s critical accounting policiesrelate to revenue recognition, credit risk and stock-based compensation.  The application of these accounting policiesinvolves the exercise of judgment and the use of assumptions as to futureuncertainties and, as a result, actual results could differ materially fromthese estimates.

 

Thedevelopment and selection of these critical accounting policies have beendiscussed with the Audit Committee. Such policies are reviewed periodically during each year by the AuditCommittee.

 

*Revenue Recognition.*Revenue is generally recognized when persuasive evidence of an arrangementexists, delivery of services has occurred, the fee is fixed or determinable,and collection of the resulting receivable is reasonably assured.  Certain of the Company’s customer supportservices are delivered over a period of time. Revenue associated with these services is deferred until the customer supportis completed and Sento has no remaining obligation to provide further supportservices.

 

*Credit Risk.*In thenormal course of business, the Company provides unsecured credit terms to itscustomers.  Accordingly, the Companyperforms ongoing credit evaluations of its customers and maintains allowancesfor possible losses.  Except for thesignificant losses incurred during the fourth quarter of fiscal 2001, theCompany’s credit losses have generally been within management’sexpectations.  However, there can be noassurance that the Company’s future credit losses will be within management’sexpectations.  In addition, theCompany’s revenues and accounts receivable are concentrated in a relatively fewnumber of customers.  A significantchange in the liquidity or financial position of any one of these customers ora further deterioration in the economic environment, in general, could have anadverse impact on the collectability of the Company’s accounts receivable andthe Company’s future operating results.

 

*Stock – Based Compensation.*Statement of Financial Accounting Standards No. 123, *Accounting for Stock Based Compensation*(SFAS 123) encourages entities to adopt a fair value based method of accountingfor stock options or similar equity instruments.  However, it also allows an entity to continue measuringcompensation cost for stock based compensation using the intrinsic-value methodof accounting prescribed by Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (APB 25).  The Company has elected to continue to apply the provisions ofAPB 25 and provide pro forma disclosures required by SFAS 123 in the footnotesto the consolidated financial statements. Sento also issues equity-based incentive compensation to non-employeesfrom time to time.  Pursuant to EmergingIssues Task Force (EITF) 96-18, *Accounting for Equity Instruments that are Issued toOther than Employees for Acquiring or in Conjunction with Selling Goods orServices*, Sento accounts for these arrangements based on the fairvalue of the equity instrument issued. The fair value of such instruments is measured each quarter as therelated goods or services are provided. The resulting change in value of the instrument is either charged orcredited to income.

 

7

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**Results of Operations**

 

**Three Months Ended September 28, 2002Compared to Three Months Ended September 29, 2001**

 

*Revenues.*  Revenues decreased $1,597,000, or 31%, from$5,083,000 for the three months ended September 29, 2001 to $3,486,000 for thethree months ended September 28, 2002. The primary contributor to the reduction in revenue was the loss of theCompany’s largest revenue generating client, a major computer OEM, which askedSento toward the end of calendar 2001 for a reduction in rates of more than30%.  This client accounted for$1,921,000, or 38%, of revenues for the three months ended September 29, 2001and no revenue during the three months ended September 28, 2002.  Sento declined the client’s requested ratereduction, as did eight other outsource centers that are competitors of Sento,who also were supplying outsourced call center services to this client.  To accept the lower rate would have put theCompany into a loss position with this client, although the revenue would havecovered some fixed overhead costs.  Theloss of this large customer will likely continue to have a significant adverseimpact on Sento’s revenues and operating results if the business is notreplaced.

 

Currently, theCompany has excess capacity available to service additional call volume.  This capacity was built in anticipation ofhigher demand for the Company’s services. However, with the current economic condition, it is difficult to predictthe Company’s ability to fill this excess capacity with new business in thenear future or at all.

 

*Cost of Sales.*  Cost of sales decreased 18%, or $808,000,from $4,563,000 for the three months ended September 29, 2001 to $3,755,000 forthe three months ended September 28, 2002. This decrease in cost of sales was principally attributable to decreasedcustomer support call volume and a shift from traditional call center supportto Portal Services support, which has a lower cost.  Gross profit as a percentage of revenues decreased by eighteenpercentage points, from 10% of revenues during the three months ended September29, 2001 to a minus 8% of revenues for the three months ended September 28,2002.  The decrease in gross margin wasprimarily due to the Company’s excess capacity and the failure to generatesufficient revenue to cover the Company’s fixed costs.

 

The Companyanticipates low, though improving, call volume during the quarter endingDecember 31, 2002.  However, actual callvolumes will be subject to a number of factors beyond Sento’s control,including general economic and industry conditions.  An increase in call volumes, if achieved, would result in highercoverage of overhead and fixed costs, which would likely result in improved grossmargin percentages.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased by 43%, or $185,000, from $430,000 for the three months endedSeptember 29, 2001 to $615,000 for the three months ended September 28, 2002.  This increase was primarily due to increasedmarketing efforts.  Managementanticipates that selling, general and administrative expenses will increase infuture periods as a result of increased selling efforts to improve revenues.

 

**Six Months Ended September 28, 2002 Comparedto Six Months Ended September 29, 2001**

 

*Revenues.*  Revenues decreased $3,565,000, or 32%, from$11,274,000 for the six months ended September 29, 2001 to $7,709,000 for thesix months ended September 28, 2002. The primary contributor to the reduction in revenue was the loss of theCompany’s largest revenue generating client, a major computer OEM, which askedSento toward the end of calendar 2001 for a reduction in rates of more than30%.  This client accounted for$3,794,000, or 34%, of revenues for the six months ended September 29, 2001 andonly $141,000 or 2% of revenues during the six months ended September 28,2002.  Sento declined the client’srequested rate reduction, as did eight other outsource centers of competitorsof Sento, who also were supplying outsourced call center services to thisclient.  To accept the lower rate wouldhave put the Company into a loss position with this client, although therevenue would have covered some fixed overhead costs.  The loss of this large customer will likely continue to have asignificant adverse impact on Sento’s revenues and operating results if thebusiness is not replaced.

 

Currently, theCompany has excess capacity available to service additional call volume.  This capacity was built in anticipation ofhigher demand for the Company’s services. However, with the current economic recession, it is difficult to predictthe Company’s ability to fill this excess capacity with new business in thenear future or at all.

 

*Cost of Sales.*  Cost of sales decreased 21%, or $2,089,000,from $10,155,000 for the six months ended September 29, 2001 to $8,066,000 forthe six months ended September 28, 2002. This decrease in cost of sales was principally attributable to decreasedcustomer support call volume and a shift from traditional call center supportto Portal Services support, which has a lower cost.  Gross profit as a percentage of revenues decreased by fifteen

 

8

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percentage points, from 10% ofrevenues during the six months ended September 29, 2001 to a minus 5% ofrevenues for the six months ended September 28, 2002.  The decrease in gross margin was primarily due to the Company’sexcess capacity and the failure to generate sufficient revenue to cover theCompany’s fixed costs.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased by 38%, or $330,000, from $873,000 for the six months ended September29, 2001 to $1,203,000 for the six months ended September 28, 2002.  This increase was primarily due to increasedmarketing efforts.  Managementanticipates that selling, general and administrative expenses will increase infuture periods as a result of increased selling efforts to improve revenues.

 

**Liquidity and Capital Resources**

 

Cash andshort-term investment balances increased 4%, or $74,000, from $1,976,000 atMarch 30, 2002 to $2,050,000 at September 28, 2002. The primary reason for theslight increase in cash and short-term investments, despite the Company’s$1,803,000 net loss for the six months ended September 28, 2002, was thecollection of accounts receivable.** **Due,in part, to the accelerated collection of accounts receivable, as well as thedecline in revenues for the six months ended September 28, 2002, accountsreceivable declined 54%, or $1,881,000, from $3,514,000 at March 30, 2002 to$1,633,000 at September 28, 2002. Working capital decreased 129%, or$2,121,000, to a $(483,000) deficit at September 28, 2002 from $1,638,000 atMarch 30, 2002.

 

The Companyhas contractual obligations, including debt agreements and leases that willrequire the use of substantial amounts of cash.  The following table sets forth the Company’s contractualobligations as of September 28, 2002:

 

**Contractual Obligations:**

 
|                                           |   | **Payments Due by Period** |      |
|------------------------------------------------|--------|----------------------------|-----------|
|                                           |   | **Under 1 Year**           |      | **1-3 Years** |   | **4-5 Years** |   | **After 5 Years** |   | **Total** |   |
| Long Term Debt (principal only)(1)             |   | $                          | 1,230,000 |   | $ | 414,000 |   | $ | — |   | $ | — |   | $ | 1,644,000 |   |
| Convertible Debentures(2) (including interest) |   | 1,353,000                  |      | — |   | — |   | — |   | 1,353,000 |   |
| Capital Leases                                 |   | 339,000                    |      | 602,000 |   | 36,000 |   | — |   | 977,000 |   |
| Operating Leases                               |   | 915,000                    |      | 1,834,000 |   | 279,000 |   | — |   | 3,028,000 |   |
| Unconditional Purchase Obligations             |   | 100,000                    |      | — |   | — |   | — |   | 100,000 |   |
| Total Contractual Cash Obligations             |   | $                          | 3,937,000 |   | $ | 2,850,000 |   | $ | 315,000 |   | $ | — |   | $ | 7,102,000 |   |

 

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(1)               Asubstantial portion of the Company’s long-term debt carries a variable interestrate that is tied to the treasury rate. The remaining debt carries interest rates ranging from 6.7% to 10.9%.

(2)               Assumesdebentures, due in February 2003, will not be converted into shares of Sento’scommon stock.

 

In addition tothe above contractual obligations, the Company is contingently liable for anequipment lease that was assumed by Echopass Corporation.  The total amount of monthly payments dueunder this lease through September 2003 is $155,000.  The total amount of monthly payments due thereafter under thislease is $55,000.

 

At present, management believes the Company is able to meet its currentobligations for operations (excluding the current portion of its long-termobligations) as they come due; however, as discussed above, the Company hasexperienced a significant decrease in revenues, and, unless the Company issuccessful in its efforts to replace the lost revenues and to timely renegotiateor replace its debentures or line of credit, it may be unable to meet itsobligations under the line of credit and debentures as they become due.

 

The Companyhas a revolving line-of-credit agreement with a bank. The line of credit(including the term loan agreements) subjects the Company to certainrestrictive covenants, including minimum liquidity and tangible net worth.  The Company was in compliance with itscovenants at September 28, 2002. The Company can draw up to $2,000,000 underthe line of credit, subject to eligible receivable balances and reduced by thenet balances of term loans outstanding with the bank (as of September 28, 2002,the Company had $962,000 of outstanding term loans with the bank, all of whichhas been reclassified as a current liability).

 

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The Companyhas two significant current liabilities that come due (subject to renewal,extension renegotiation, or replacement) in the fourth quarter, i.e., thedebentures in February 2003 and the line of credit (including term loans) inJanuary 2003.  The Company is seekingapproval from its current debenture holders to extend the terms of repaymentand is also seeking commercial financial institutions, investment banks andprivate investors to replace the current debentures and the line of credit oncommercially reasonable terms, but such potentially may have dilutive effectson the current shareholders.  If theCompany is successful in its efforts to refinance or replace its current debentureswith other long-term financing, the holder of the line of credit may (but isnot required to) renew its loan agreements.

 

Historicallythe Company’s primary sources of liquidity have been cash received from salesof assets and cash provided through private sales of equity and debt, as wellas borrowings under a bank line of credit. During the two years ended March 30,2002 and the six months ended September 28, 2002, liquidity and cash were alsoprovided by positive cash flow from operations.  In addition, the Company has financed some of the equipmentutilized in its business through long-term leasing and loan arrangements.  However, leasing and other finance companieshave become much more restrictive in providing financing because of the economicdownturn, making it more difficult for the Company to obtain equipmentfinancing.  The growth of the Companyhas consumed substantial amounts of cash, and the Company may be required toobtain additional financing to sustain current operations and to retire orrefinance its subordinated debentures. In the event the Company is not able to find additional sources offunding and enter into financing transactions on reasonable terms, its abilityto sustain current operations (after the line of credit and debentures are due)will be limited, or it may be forced to reduce or suspend its operations.  There can be no assurance that the Companywill be able to obtain necessary capital funding on terms favorable to the Company,if at all.

 

*The statements contained in this Quarterly Report on Form 10-QSB thatare not purely historical are “forward-looking statements” within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21E ofthe Securities Exchange Act of 1934, as amended.  All forward-looking statements involve various risks anduncertainties.  Forward-lookingstatements contained in this Report include statements regarding the Company’splans to develop and deliver integrated information technology services, marketopportunities and acceptance, expectations, goals, revenues, financialperformance, strategies, mission and intentions for the future.  Such forward-looking statements are includedunder. “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and encompass Sento’s beliefs, expectations, hopes or intentionsregarding future events.  Words such as“expects,” “believes,” “anticipates,” “should,” and “likely” also identifyforward-looking statements. All forward-looking statements included in thisReport are made as of the date hereof, based on information available to theCompany as of such date, and the Company assumes no obligation to update anyforward-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 toother information in this Report, the following are important factors thatshould be considered 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.*  Four clients accounted for approximately 74%of the Company’s revenues for the six months ended September 28, 2002. Thesefour clients accounted for approximately 35%, 14%, 13%, and

 

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12%, respectively of revenuesfor the same period.  The Company’slargest client during fiscal 2002 terminated its relationship with Sento inApril 2002.  The loss of this client hashad a significant adverse impact on Sento’s operations and will likely have asignificant adverse impact on Sento’s revenues and net income during theremainder of fiscal 2003, if the business is not replaced.

 

Consistentwith industry standards, Sento’s contracts are generally cancelable by theclient on short-term notice.  Sento’sloss of a significant amount of business with any of its key clients couldhave, and the loss of a substantial amount of business with any of its largestexisting technical support clients would have, a material adverse effect onSento’s business, financial condition, and results of operations.  In addition, Sento’s future revenue growthis dependent upon its ability to attract and retain new clients.

 

*Liquidity and Capital Resources*.  At September 28, 2002, Sento had a workingcapital deficit of $(483,000) (representing a decline of 129% from March 30,2002).  Future growth, particularlygrowth in excess of planned growth, will depend on the Company’s ability toobtain financing.  The historic growthrate of Sento’s Customer Contact Solutions operations (most of which was in theUnited States) has consumed substantial amounts of cash and will continue torequire significant capital investment if the Company continues to grow as ithas in the past.  It should be notedthat there is very little capital spending required for growth using offshorepartners.  The Company may be requiredto pursue additional funding opportunities to sustain its current operations.  In the event the Company is not able to findadditional sources of funding and enter into financing transactions onreasonable terms, its ability to sustain current operations will be limited, orit may be forced to reduce or suspend its operations.  There can be no assurance that the Company will be able to obtainnecessary capital funding on terms favorable to the Company, if at all.

 

Furthermore,the terms of the Company’s line of credit and term loan agreements are subjectto certain restrictive covenants, including minimum liquidity and tangible networth.  As of September 28, 2002, theCompany was in compliance with all of its debt covenants. However, the loanagreements with the bank expire January 31, 2003, and the subordinatedconvertible debentures mature in February 2003.  If the Company is unable to refinance its convertiblesubordinated debentures the bank may not renew the Company’s revolving creditline.

 

*Credit Risk.*  In the normal course of business, theCompany provides unsecured credit terms to its customers.  Accordingly, the Company performs ongoingcredit evaluations of its customers and maintains allowances for possiblelosses.  Except for the significantlosses incurred during the fourth quarter of fiscal 2001, the Company’s creditlosses have generally been within management’s expectations.  However, there can be no assurance that theCompany’s future credit losses will be within management’s expectations.  In addition, the Company’s revenues andaccounts receivable are concentrated in a relatively few number ofcustomers.  A significant change in theliquidity or financial position of any one of these customers or a furtherdeterioration in the economic environment, in general, could have an adverseimpact on the collectability of the Company’s accounts receivable and theCompany’s future operating results.

 

*Risks of Growth Strategy*.  Sento’s business strategy is premised, inpart, upon expansion of its operations by opening customer contact facilities,or partnering or developing strategic alliances with other customer contactproviders in strategic locations throughout the U.S. and foreigncountries.  Substantial risks accompanySento’s growth plans.  For example,Sento’s growth plans are dependent upon its ability to attract and retain newclients.  Sento’s failure to attract andretain new clients, or the loss of existing clients, will not only prevent theimplementation of its business strategy, but may leave Sento with excesspersonnel and physical facilities, which would have a negative impact onSento’s results of operations and financial condition.

 

Sento’s growthplans are also subject to fluctuations in technology and industry standards,changes in customer requirements and preferences and general economicconditions, among other factors.  Manyof these factors are beyond Sento’s control. If Sento is incorrect in its assessment of the feasibility of its growthplans, or if circumstances change in a way that Sento did not foresee oranticipate, Sento may not be able to grow as planned or its growth strategy mayhave an adverse effect on its business operations and financial condition.

 

*Reliance on a Software Company for Chat andEmail applications*. Sento contracts with a software company to provide chat and email toolsused with Sento’s CRM software, reporting and management services.  If this software company 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.

 

*Changing Needs of the Customer ContactService Market*. The customer contact service industry is characterized by rapidtechnological change, changes in customer requirements and preferences, and theemergence

 

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of new industry standards andpractices that could render Sento’s existing and proposed products, services,technology and systems obsolete.  Toremain competitive, Sento must continually improve the performance, features,and reliability of its products and services, including its existing customercontact service applications, and develop new products and services thataddress the increasingly sophisticated and varied needs of its prospectivecustomers.  If Sento cannot adapt orrespond in a cost-effective and timely manner to changing industry standards,market conditions, or customer requirements, its business and operating resultswould suffer and could negatively impact Sento’s financial condition.

 

Sento’ssuccess may also depend in part on its ability to develop solutions that keeppace with continuing changes in information technology, evolving industrystandards, and changing client requirements. There can be no assurance that Sento will be successful in adequately addressingthese developments on a timely basis or that, if these developments areaddressed, 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’sfailure to address these developments could have a material adverse effect onits business and financial condition.

 

*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 majorcompanies provide their own in-house customer care support and customer training.

 

Sento cannotprovide any assurance that better and more efficient services will not beprovided by new or existing customer contact service providers in competitionwith Sento.  The services provided bysuch competitors may be more effective or less expensive than those provided bySento.  There can be no assurance thatSento will improve, refine or enhance the services it provides.

 

*Competition in Customer Contact ServicesMarket*.  Thecustomer contact services market is relatively 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, and similarcompanies, may leverage their existing relationships and capabilities to offercustomer service applications.  AlthoughSento was a relatively early entrant in the customer contact services market,any delays in market acceptance of customer contact service applications ingeneral, or Sento’s proposed products and services in particular, would likelyharm Sento’s competitive position. Delays would allow Sento’s competitors additional time to improve theirservice or product offerings, and also provide time for new competitors todevelop e-business customer service applications and solicit prospectiveclients within Sento’s target markets. Increased competition could result inpricing pressures, 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 maintained by Sento and equipment and systems maintainedby third parties).  Sento cannot provideany assurance that natural disaster, human error, equipment malfunction orinadequacy, or other events would not result in a prolonged interruption inSento’s ability to provide support services to its clients.  The temporary or permanent loss of computeror telephone equipment or systems, through casualty, operating malfunction orotherwise, could have a material adverse effect on Sento.  Property and business interruption insurancemay not be adequate to compensate Sento for all losses that it may incur.

 

*Attracting, Training, and Retaining QualityManagement and Employees*.  Sento’s success will depend, in large part, on its ability toattract, retain and train highly qualified technical, managerial and marketingpersonnel with the required expertise. Sento has not entered into employment agreements that require theservices of any of its key managerial or technical personnel to remain withSento for any specified period of time. There can be no assurance that Sento will be able to attract andmaintain the personnel necessary for the development and operation of itsbusiness or that it will be able to train its current employees on newdevelopments in technology. Specifically, the loss of any key personnel or an inability to attract,retain, train or motivate qualified personnel could have a material adverseeffect on Sento’s business, financial condition and results of operations.

 

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In addition, Sento’stotal employee count has fluctuated from approximately 585 as of March 31, 2000to approximately 953 as of December 31, 2000, and has decreased toapproximately 200 as of October 31, 2002. The support required for one of the Company’s largest clients isseasonal.  There is, therefore, anecessity for very rapid increases in employees and subsequent decreases in thenumber 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.

 

During the time period beginning July 2000 through September 2002, theCompany has partnered and continues to partner with offshore entities thatsupply Customer Contact Center services on a contract basis to theCompany.  Currently there areapproximately 170 agents in these offshore contracted Customer Contact Centers.  Managing the quality of services rendered toSento’s clients is further complicated by the remote location and language andcultural differences of agents supplying these services, and there can be noassurance that Sento can adequately manage these remote agents.  The lack of proper management of theseoffshore agents or the delivery of low-quality services by such agents couldhave a material adverse effect upon Sento’s operating results.

 

*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 Sento’sbusiness, financial condition, and results of operations.

 

*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 marketopportunities, which may adversely affect its operating results.

 

In particular,Sento’s quarterly revenues from its Customer Contact Solutions Centeroperations are potentially volatile. Such revenues are principally a function of the number of supportrequests received by Sento, and the time spent on such requests.** **Consequently, Sento’sprofitability may be adversely affected if Sento receives fewer supportrequests than anticipated or the time spent in resolving inquiries is greaterthan anticipated.

 

For thereasons identified above, management believes that period-to-period comparisonsof Sento’s results of operations may not be meaningful and that no one shouldrely upon them as an indication of future performance.  Furthermore, Sento cannot provide anyassurance that it will be able to achieve or sustain profitability on aquarterly basis.

 

*Volatility of Stock Price*.  The trading price of Sento’s common stockhas fluctuated widely in response to variations in quarterly operating results,announcements by Sento or its competitors, industry trends, general economicconditions or other events or factors. Such fluctuations, as well as fluctuations in the trading volume of thecommon stock, may continue in the future. Regardless of the general outlook for Sento’s business, the announcementof quarterly operating results below analyst and investor expectations couldhave a material and adverse effect on the market price of the common stock.

 

The Companyreceived a de-listing notice from Nasdaq on September 17, 2002, due to the bidfor Sento’s common stock being below $1.00, the minimum bid price for continuedlisting on the Nasdaq Small Cap Market. However, the Company was able to obtain a stay from de-listing uponrequesting a hearing before a Nasdaq Listing Qualification Panel that was heldon October 24, 2002.  The ListingQualification Panel has not released its decision; however, in an effort tomaintain Sento’s Nasdaq listing, Sento’s Board of Directors has adopted aproposal to be submitted to the Company’s shareholders at the annual meeting ofshareholders on November 14, 2002, which provides for an amendment to theCompany’s amended articles of incorporation to effect a one-for-four reversesplit of the outstanding shares of Sento common stock.  The intent of the proposed reverse stocksplit is to raise the per-share price of Sento’s common stock above the $1.00per share minimum required by Nasdaq for continued listing on the NasdaqSmallCap Market.  There can be noassurance that the amendment will be approved by the shareholders, or that, ifapproved, the minimum bid for the Company’s common stock will remain above$1.00 per share as required by Nasdaq.

 

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The Company values its listing on the Small Cap Market, and will seekto remain in compliance with the applicable listing qualification standards;however, the price of the common stock is determined by a number of factors,including general economic and market conditions, industry trends and publicperception, many of which are beyond the Company’s control. If the bid pricefor the common stock does not rise above $1.00 and remain above that level on aconsistent basis, the Company may lose its listing privileges on the NasdaqSmall Cap Market, and may be forced to find another forum for trading of itscommon 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.

 

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PART II.                                                 OTHER INFORMATION

 

Item 4.             Control andProcedures

 

Within the 90 days prior to the date of filing this Quarterly Report onForm 10-QSB, an evaluation was performed under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and the Senior Vice President of Finance, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rules 13a-14 and 15d-14).  Based upon the evaluation, the Company’s management, includingthe Chief Executive Officer and Senior Vice President of Finance, concludedthat, as of the date of that evaluation, the disclosure controls and procedureswere effective in timely alerting them to material information relating to theCompany required to be included in the Company’s periodic SEC filings.  Subsequent to the date of that evaluation,there have been no significant changes in the internal controls or in otherfactors that could significantly affect internal controls, nor were anycorrective actions required with regard to significant deficiencies andmaterial weaknesses.

 

Item 6.             Exhibits and Reports on Form 8-K

 

a)              Exhibitsattached to the 10-QSB are as follows:

 

Exhibit 99.1                                    Certificationof the Company’s Chief Executive Officer

Exhibit 99.2                                    Certificationof the Company’s Chief Financial Officer

 

b)             Reportson Form 8-K

Current reportdated September 26, 2002 filed for the purposes of disclosing to shareholdersand the financial markets certain business and financial information relatingto its business and operations.

 

 

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  (Principal executive officer) |
|                      |
|                      | By:                | /s/ STANLEY  J. CUTLER |   |
|                      |               | Stanley J.  Cutler |
|                      |               | Senior Vice  President of Finance and Secretary  (Principal financial and accounting officer) |
|                      |
| Dated  November 11, 2002. |

 

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CERTIFICATIONS *

 

I, Patrick F. O’Neal, certifythat:

 

1.                                       Ihave reviewed this quarterly report on Form 10-QSB of Sento Corporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)        all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)       any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  November 11, 2002 |                                   |
|--------------------------|----------------------------------------|
|                     |                                   |
|                     | /s/ PATRICK  F. O’ NEAL           |   |
|                     |                                   |
|                     | Patrick F.  O’Neal                |
|                     |                                   |
|                     | President  and Chief Executive Officer |

 

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I, Stanley J. Cutler, certifythat:

 

1.                                       Ihave reviewed this quarterly report on Form 10-QSB of Sento Corporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  November 11, 2002 |                                            |
|--------------------------|-------------------------------------------------|
|                     |                                            |
|                     | /s/ STANLEY  J. CUTLER                          |   |
|                     |                                            |
|                     | Stanley J.  Cutler                              |
|                     |                                            |
|                     | Senior Vice  President of Finance and Secretary |

 

17

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