** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

| **(Mark One)** |
|----------------|
| **ý**     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|           |   |
|           | **For the quarterly period ended September 30,  2003** |
|           |   |
| **OR**         |
|           |   |
| **o**          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|           |   |
|           | **For the transition period from             to            ** |

 

**Commission File No. 000-23221**

 

**CENTIV, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                    |   | **58-2033795**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (IRS Employer  Identification Number) |

 

**998Forest Edge Drive, Vernon Hills, Illinois 60061**

**(Address of Principal ExecutiveOffices, including Zip Code)**

 

**(847) 876-8300**

(Registrant’s telephone number, including area code)

 

Indicate bycheck mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes:  ý    No:  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act) Yes:  o    No:  ý

 

The number ofshares outstanding of the Registrant’s common stock, par value $.001, as ofNovember 10, 2003 the latest practicable date, was 1,677,815 shares.

 

 

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**CENTIV, INC.**

##### **TABLE OF CONTENTS**

 
| **ITEM**    |                                                                                                  |
|-------------|-------------------------------------------------------------------------------------------------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                             |
|        |                                                                                                  |
| Item 1.     | Financial Statements                                                                                  |
|        |                                                                                                  |
|        | Balance Sheets as of September 30,  2003 and December 31, 2002                              |
|        |                                                                                                  |
|        | Statements of Operations for  the three months and nine months ended September 30, 2003 and 2002 |
|        | Statements of Cash Flows for the nine months ended September 30,  2003 and 2002                  |
|        | Notes to Financial Statements                                                                         |
|        |                                                                                                  |
| Item 2.     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations           |
|        |                                                                                                  |
| Item 3.     | Quantitative and Qualitative Disclosures  about Market Risks                                          |
|        |                                                                                                  |
| Item 4      | Controls and Procedures                                                                               |
|        |                                                                                                  |
| **PART II** | **OTHER INFORMATION**                                                                                 |
|        |                                                                                                  |
| Item 1.     | Legal Proceedings                                                                                     |
|        |                                                                                                  |
| Item 2.     | Changes in Securities and Use of Proceeds                                                             |
|        |                                                                                                  |
| Item 3.     | Defaults upon Senior Securities                                                                       |
|        |                                                                                                  |
| Item 4.     | Submission of Matters to a Vote of Security  Holders                                                  |
|        |                                                                                                  |
| Item 5.     | Other Information                                                                                     |
|        |                                                                                                  |
| Item 6.     | Exhibits and Reports on Form 8-K                                                                      |
|        |                                                                                                  |
| Signatures  |
|             |                                                                                                       |  |  |

 

**EXPLANATORYNOTE**

 

On June 16, 2003, after approval by the Company’sstockholders at its regularly scheduled annual meeting, the Company instituteda one-for-three reverse stock split. The information and disclosures relatingto the number of shares of Common Stock and the related price per share havebeen adjusted to reflect the impact of the reverse stock split throughoutthis Form 10-Q.

 

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**PART I – FINANCIAL INFORMATION**

CENTIV, INC.

BALANCE SHEETS

($ in thousands)

 
|                                                                                                                                                                                                                                                                                     |   | **September 30,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                                                                                                                                                                                                                                     |   | **(unaudited)**              |   | **(audited)**               |   |
| **ASSETS**                                                                                                                                                                                                                                                                               |   |                         |   |                        |   |
| Current assets:                                                                                                                                                                                                                                                                          |   |                         |   |                        |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                |   | $                            | 1,448  |                        | $      | 1,304 |   |
| Accounts receivable, less  allowance for doubtful accounts of $29 and $19 at September 30, 2003 and  December 31, 2002, respectively                                                                                                                                           |   | 361                          |   | 1,668                       |   |
| Inventories, net                                                                                                                                                                                                                                                                         |   | 18                           |   | 824                         |   |
| Prepaid expenses and other  assets                                                                                                                                                                                                                                                       |   | 306                          |   | 565                         |   |
| Income taxes receivable                                                                                                                                                                                                                                                                  |   | 5                            |   | 21                          |   |
| Deferred income taxes – current                                                                                                                                                                                                                                                     |   | 162                          |   | 162                         |   |
| Total current assets                                                                                                                                                                                                                                                                     |   | 2,300                        |   | 4,544                       |   |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Property and equipment, net                                                                                                                                                                                                                                                              |   | 1,316                        |   | 1,707                       |   |
| Other assets                                                                                                                                                                                                                                                                             |   | 14                           |   | 137                         |   |
| Total assets                                                                                                                                                                                                                                                                             |   | $                            | 3,630  |                        | $      | 6,388 |   |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| **LIABILITIES**                                                                                                                                                                                                                                                                          |   |                         |   |                        |   |
| Current liabilities:                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Accounts payable                                                                                                                                                                                                                                                                         |   | $                            | 108    |                        | $      | 2,888 |   |
| Accrued expenses                                                                                                                                                                                                                                                                         |   | 489                          |   | 733                         |   |
| Contract obligation and  deferred income                                                                                                                                                                                                                                                 |   | 100                          |   | 140                         |   |
| Total current liabilities                                                                                                                                                                                                                                                                |   | 697                          |   | 3,761                       |   |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Deferred income taxes                                                                                                                                                                                                                                                                    |   | 162                          |   | 162                         |   |
| Other long-term liabilities                                                                                                                                                                                                                                                              |   | 27                           |   | —                      |   |
| Convertible Subordinated Debt                                                                                                                                                                                                                                                            |   | —                       |   | 990                         |   |
| Total liabilities                                                                                                                                                                                                                                                                        |   | 886                          |   | 4,913                       |   |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Commitments and Contingencies                                                                                                                                                                                                                                                            |   | —                       |   | —                      |   |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                                                           |   |                         |   |                        |   |
| Common Stock $.001 par value,  35,000,000 shares authorized; 1,946,810 shares issued and 1,677,815 shares  outstanding at September 30, 2003, and 1,664,723 shares issued and  1,395,728 outstanding at December 31, 2002                                                      |   | 5                            |   | 5                           |   |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Treasury Stock, at cost,  268,995 shares at September 30, 2003 and December 31, 2002                                                                                                                                                                                           |   | (759                         | )      | (759                        | )      |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Preferred Stock, $.001 par  value, 5,000,000 shares authorized.Series A  Preferred Stock, 1,000,000 shares designated;  no shares and 216,000 shares issued and outstanding at  September 30, 2003 and December 31, 2002, respectively (liquidation  value of $2,160,000) |   | —                       |   | —                      |   |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Series B Preferred Stock, 1,000,000 shares  designated; 770,000 shares and no shares issued and outstanding at  September 30, 2003 and December 31, 2002, respectively (liquidation  value of $7,700,000)                                                                      |   | 1                            |   | —                      |   |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Due from stockholders                                                                                                                                                                                                                                                                    |   | (270                         | )      | (267                        | )      |
| Additional paid-in capital                                                                                                                                                                                                                                                               |   | 24,929                       |   | 22,509                      |   |
| Accumulated deficit                                                                                                                                                                                                                                                                      |   | (21,162                      | )      | (20,013                     | )      |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Total stockholders’ equity                                                                                                                                                                                                                                                          |   | 2,744                        |   | 1,475                       |   |
|                                                                                                                                                                                                                                                                                     |   |                         |   |                        |   |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                                                                         |   | $                            | 3,630  |                        | $      | 6,388 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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CENTIV, INC.

STATEMENTS OF OPERATIONS

($ in thousands, except per share data)

 
|                                                                  |   | **Three  Months Ending  September 30,** |   | **Nine  Months Ending  September 30,** |   |
|-----------------------------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                                                  |   | **2003**                                     |   | **2002**                                    |   | **2003** |   | **2002** |   |
|                                                                  |   | **(unaudited)**                              |   | **(unaudited)**                             |   | **(unaudited)** |   | **(unaudited)** |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Net sales                                                             |   | $                                            | 524    |                                        | $      | 4,769 |   | $ | 5,890 |   | $ | 12,077 |   |
| Cost of goods sold                                                    |   | 244                                          |   | 3,779                                       |   | 3,901 |   | 9,167 |   |
| Gross profit                                                          |   | 280                                          |   | 990                                         |   | 1,989 |   | 2,910 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Operating expenses:                                                   |   |                                         |   |                                        |   |   |   |   |   |
| Selling, general and  administrative                                  |   | 779                                          |   | 1,393                                       |   | 2,695 |   | 3,819 |   |
| Depreciation                                                          |   | 145                                          |   | 146                                         |   | 431 |   | 413 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Loss from operations                                                  |   | (644                                         | )      | (549                                        | )      | (1,137 | ) | (1,322 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Other income  (expense)                                          |   | (3                                           | )      | —                                      |   | (3 | ) | 283 |   |
| Interest income  (expense)                                       |   | 3                                            |   | 41                                          |   | (10 | ) | 126 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Loss from continuing operations                                       |   | (644                                         | )      | (508                                        | )      | (1,150 | ) | (913 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Income from discontinued  operations (net of tax)                     |   | —                                       |   | —                                      |   | — |   | 380 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Net Loss                                                              |   | $                                            | (644   | )                                           | $      | (508 | ) | $ | (1,150 | ) | $ | (533 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Effect of beneficial conversion feature of  preferred stock           |   | 0                                            |   | 0                                           |   | 0 |   | (810 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Net loss attributable to common  shareholders                         |   | $                                            | (644   | )                                           | $      | (508 | ) | $ | (1,150 | ) | $ | (1,343 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Basic and Diluted Income/(Loss)  applicable to common shares          |   |                                         |   |                                        |   |   |   |   |   |
| Weighted average shares  outstanding                                  |   | 1,677,435                                    |   | 1,660,805                                   |   | 1,583,314 |   | 1,655,686 |   |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Continuing operations per share  before beneficial conversion feature |   | $                                            | (0.38  | )                                           | $      | (0.31 | ) | $ | (0.73 | ) | $ | (0.55 | ) |
| Effect of Beneficial Conversion  Feature                              |   | —                                       |   | —                                      |   | — |   | (0.49 | ) |
| Loss from continuing operations  attributable to common shareholders  |   | (0.38                                        | )      | (0.31                                       | )      | (0.73 | ) | (1.04 | ) |
|                                                                  |   |                                         |   |                                        |   |   |   |   |   |
| Discontinued operations per  share                                    |   | $                                            | 0.00   |                                        | $      | 0.00 |   | $ | 0.00 |   | $ | 0.23 |   |
| Net Loss per share                                                    |   | $                                            | (0.38  | )                                           | $      | (0.31 | ) | $ | (0.73 | ) | $ | (0.81 | ) |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

2

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CENTIV, INC.

STATEMENTS OFCASH FLOWS

 

($ in thousands)

 
|                                                                         |   | **Nine  Months Ending September 30,** |       |
|------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                         |   | **2003**                                   |       | **2002** |   |
|                                                                         |   | **(unaudited)**                            |       | **(unaudited)** |   |
| **Cash flows from operating activities:**                                    |   |                                       |       |   |   |
| Net Loss                                                                     |   | $                                          | (1,150     | ) | $ | (533 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                       |       |   |   |
| Provision for doubtful accounts receivable                                   |   | 17                                         |       | (2 | ) |
| Provision / write-down of inventory                                          |   | —                                     |       | 31 |   |
| Depreciation                                                                 |   | 431                                        |       | 413 |   |
| Non-cash interest on note payable  (receivable)                              |   | (28                                        | )          | (154 | ) |
| Non-cash compensation for warrants and  options                              |   | 6                                          |       | 5 |   |
| Loss on disposal of fixed asset                                              |   | 3                                          |       | — |   |
| Gain on sale of CalGraph Business                                            |   | —                                     |       | (488 | ) |
| Amortization of Discount on Convertible  Subordinated Debt                   |   | 10                                         |       | — |   |
| Changes in net assets and liabilities                                        |   |                                       |       |   |   |
| Accounts receivable                                                          |   | 1,290                                      |       | (1,608 | ) |
| Inventories                                                                  |   | 806                                        |       | 150 |   |
| Prepaid expenses and other assets                                            |   | 182                                        |       | (39 | ) |
| Accounts payable and accrued expenses                                        |   | (3,000                                     | )          | (1,347 | ) |
| Contract obligations and deferred income                                     |   | (40                                        | )          | (150 | ) |
| Other long-term liabilities                                                  |   | 27                                         |       | — |   |
| Income taxes                                                                 |   | 16                                         |       | 573 |   |
| Net assets, discontinued operations                                          |   | —                                     |       | 123 |   |
| Total adjustments                                                            |   | (280                                       | )          | (2,493 | ) |
| **Net cash used in operating activities**                                    |   | **(1,430**                                 | **)**      | **(3,026** | **)** |
|                                                                         |   |                                       |       |   |   |
| **Cash flows from investing activities:**                                    |   |                                       |       |   |   |
| Purchase of property and equipment –  continuing operations             |   | (42                                        | )          | (246 | ) |
| Proceeds from Sale of CalGraph Business                                      |   | 225                                        |       | 1,175 |   |
| **Net cash provided by investing activities**                                |   | **183**                                    | ** ** | **929** | ** ** |
|                                                                         |   |                                       |       |   |   |
| **Cash flows from financing activities:**                                    |   |                                       |       |   |   |
| Repayment of credit facility                                                 |   | —                                     |       | (796 | ) |
| (Repayment)/Proceeds of convertible  subordinated debt facility              |   | (500                                       | )          | 1,000 |   |
| Net Proceeds from private placement of  securities                           |   | 1,910                                      |       | 2,026 |   |
| Proceeds from stock options exercised                                        |   | 6                                          |       | 17 |   |
| (Repayment)/Proceeds, net, from capital  lease                               |   | (25                                        | )          | 39 |   |
| **Net cash provided by financing activities**                                |   | **1,391**                                  | ** ** | **2,286** | ** ** |
|                                                                         |   |                                       |       |   |   |
| **Increase (decrease) in cash and cash equivalents**                         |   | **144**                                    | ** ** | **189** | ** ** |
| Cash and cash equivalents, beginning of  year                                |   | 1,304                                      |       | 228 |   |
| Cash and cash equivalents, as of  September 30                          |   | $                                          | 1,448      |   | $ | 417 |   |
|                                                                         |   |                                       |       |   |   |
| **Supplemental disclosure of cash flow information:**                        |   |                                       |       |   |   |
| Conversion of convertible subordinated debt  into preferred stock            |   | $                                          | 500        |   | $ | — |   |

 

The accompanying notes are anintegral part of these financial statements.

 

3

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**NOTES TO FINANCIAL STATEMENTS**

 

**1.****              BASISOF PRESENTATION**

 

Theaccompanying unaudited financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes.  Actual resultscould differ from those estimates.  Inthe opinion of management, all adjustments considered necessary for a fairpresentation have been included. Operating results for the three months and the nine months endedSeptember 30, 2003 are not necessarily indicative of the results that maybe expected for the full year ending December 31, 2003.  For further information, refer to theconsolidated financial statements and the footnotes included in the Form 10-Kfor the year ended December 31, 2002.

 

**2.****              SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

Thepreparation of financial statements, in conformity with accounting principlesgenerally accepted in the United States of America, requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period.  Managementbases its estimates on historical experience and other assumptions, which itbelieves are reasonable.  If actualamounts are ultimately different from these estimates, the revisions areincluded in the Company’s results of operations for the period in which theactual amounts become known.

 

Accountingpolicies are considered critical when they require management to makeassumptions about matters that are highly uncertain at the time the estimate ismade and when different estimates than management reasonably could have usedhave a material impact on the presentation of the Company’s financialcondition, changes in financial condition or results of operations.

 

Theconsolidated financial statements include the accounts of Centiv, Inc. and itswholly owned subsidiaries.  Significantintercompany transactions and account balances have been eliminated.

 

The Company’scritical accounting policies are described below:

 

**CASH AND CASHEQUIVALENTS**

 

The Companyconsiders all highly liquid investments with a remaining maturity of threemonths or less when purchased to be cash equivalents.

 

**REVENUE AND ACCOUNTSRECEIVABLES**

 

Sales arerecognized upon the shipment of products to the customer or when the servicehas been performed.

 

4

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The majorityof the Company’s accounts receivable are due from companies in the consumergoods manufacturing industry.  Credit isextended based on evaluation of a customers’ financial condition and,generally, collateral is not required. Accounts receivable are due within 30 to 45 days and are stated atamounts due from customers net of an allowance for doubtful accounts.

 

The Companydetermines its allowance by considering a number of factors, including thelength of time trade accounts receivable are past due, the Company’s previousloss history, the customer’s current ability to pay its obligation to theCompany, and the condition of the general economy and the industry as awhole.  The Company writes-off accountsreceivable when they become uncollectible, and payments subsequently receivedon such receivables are credited to the allowance for doubtful accounts.

 

**INVENTORIES**

 

The Companyestablishes inventory reserves for valuation, shrinkage, and excess andobsolete inventory.  Inventories arestated at the lower of cost or market. The Company accounts for the inventory on the first-in, first-out (FIFO)method of inventory costing.

 

The Companyrecords provisions for inventory shrinkage based upon historical experience toaccount for unmeasured usage or loss. Actual results differing from these estimates could significantly affectthe Company’s inventories and cost of goods sold.

 

The Companyrecords provisions for excess and obsolete inventories for the differencebetween the cost of inventory and its estimated realizable value based onassumptions about future product demand and market conditions.  Actual product demand or market conditionscould be different than projected by management.

 

**PROPERTY ANDEQUIPMENT**

 

Property andequipment are stated at cost.  Propertyand equipment are depreciated on a straight-line basis over their estimateduseful lives, which generally range from 3 to 7 years.  Amounts expended for maintenance and repairsare charged to expense as incurred. Upon disposition, both the related cost and accumulated depreciationaccounts are relieved and the related gain or loss is credited or charged tooperations.

 

**INCOME TAXES**

 

The provisionfor income taxes and corresponding balance sheet accounts are determined inaccordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”).  Under SFAS 109, deferred tax liabilities andassets are determined based on temporary differences between the bases ofcertain assets and liabilities for income tax and financial reportingpurposes.  The deferred tax assets andliabilities are classified according to the financial statement classificationof the assets and liabilities generating the differences.

 

The Companymaintains a valuation allowance with respect to deferred tax assets.  The Company establishes a valuationallowance based upon potential likelihood of realizing the deferred tax assetand taking into consideration the companies current financial position andresults of operations for the current and preceding years.  Future realization of the deferred taxbenefit depends on the

 

5

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existence ofsufficient taxable income within the carry-back or carry-forward period underthe tax law.

 

Changes incircumstances, such as the company generating taxable income, could cause achange in judgement about the realizability of the related deferred taxasset.  Any change in the valuationallowance will be included in income in the year of the change in estimate.

 

**STOCK INCENTIVE PLANS**

 

The Companymaintains a stock incentive plan.  SeeNote 15 for additional information regarding this plan and the effect of netincome and earnings per share if the Company had applied the fair valuerecognition provisions of Financial Accounting Standards Board (FASB) Statementof Financial Accounting Standards (SFAS) No. 123, “Accounting for stock-basedCompensation,” to stock-based compensation.   The Company accounts for this plan under the recognition and measurementprinciples of Accounting Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. No compensation cost is recognized for stock option grants.  All options granted under the Company’splans had an exercise price equal to the market value of the underlying commonstock on the date of the grant.

 

**FAIR VALUE OFFINANCIAL INSTRUMENTS**

 

The Company’sfinancial instruments include its debt obligations.  Management believes that these instruments bear interest at ratesthat approximate prevailing market rates for instruments with similarcharacteristics and, accordingly, that the carrying values for theseinstruments are reasonable estimates of fair value.

 

**SHIPPING AND HANDLINGFEES AND COSTS**

 

Shipping andhandling fees are billed to customers and are classified as revenue and theshipping and handling costs are classified as costs of goods sold as requiredper the Emerging Issues Task Force (“EITF”) released in Issue no. 00-10,“Accounting for Shipping and Handling Fees and Costs.”

 

**LONG LIVED ASSETS**

 

InAugust 2001, the FASB issued SFAS No. 144, “Accounting for the Impairmentof Long-Lived Assets.”  SFAS No. 144 iseffective for fiscal years beginning after December 15, 2001, andaddresses financial accounting and reporting for the impairment or disposal oflong-lived assets.

 

This statementsupersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets andfor Long-Lived Assets to Be Disposed Of,” and the accounting and reportingprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations-Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequent Occurring Events andTransactions,” for the disposal of a segment of a business.  The adoption of this standard did not have amaterial effect on the Company’s results of operations or financial position.

 

6

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**BASIS OF PRESENTATION**

 

Certain prioryear amounts have been reclassified to conform with the 2003 presentation.

 

**3.****              REALIZATION OF ASSETS**

 

Theaccompanying financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America, whichcontemplate continuation of the company as a going concern. As shown in theaccompanying unaudited financial statements, the Company sustained losses fromoperations in 2002, and such losses have continued through the quarter endedSeptember 30, 2003.

 

Recoverabilityof a substantial portion of the recorded asset amounts shown in theaccompanying balance sheet is dependent upon the continued operations of theCompany, which in turn is dependent upon the Company’s ability to obtain orgenerate additional working capital.

 

The financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts and classification of liabilities thatmight be necessary should the Company be unable to generate such additionalworking capital.

 

The Company iscurrently evaluating all potential strategic alternatives, including the saleof some or all of the business of the Company, potential partnerships and theavailability of additional capital to fund operations.  Depending on the results of theseevaluations, the Company might determine that certain of its long-lived assetswill require an impairment charge in a future period.

 

**4.****              INVENTORIES**

 

Inventories,net of reserves, at September 30, 2003 and December 31, 2002 consistof the following ($ in thousands):

 

|            |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-----------------|--------|------------------------------|--------|-----------------------------|--------|
| Gross Inventory |   | 85                           |   | 939                         |   |
| Reserves        |   | (67                          | )      | (115                        | )      |
| Net Inventory   |   | 18                           |   | 824                         |   |

 

**5.****              NETLOSS PER COMMON SHARE**

 

Basic anddiluted net income/(loss) per common share are computed by dividing netincome/(loss) by the weighted average number of common shares and common shareequivalents outstanding during the period. Since the Company has a net loss from continuing operations, there wereno common share equivalents that were dilutive during any of the periodspresented.  On June 16, 2003 theCompany instituted a one-for-three reverse stock split and the shares have beenadjusted to reflect the reverse stock split. The changes in outstanding shares during the three months and ninemonths ended September 30, 2003 and 2002 are shown below:

 

7

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|                                      |   | **Three  Months Ending  September 30,** |   | **Nine  Months Ending  September 30,** |   |
|-------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                      |   | **2003**                                     |   | **2002**                                    |   | **2003** |   | **2002** |   |
| **Common shares:**                        |   |                                         |   |                                        |   |   |   |   |   |
| Outstanding at beginning of period        |   | 1,675,315                                    |   | 1,658,894                                   |   | 1,395,728 |   | 1,652,227 |   |
|                                      |   |                                         |   |                                        |   |   |   |   |   |
| Shares issued during the period           |   | 2,500                                        |   | 5,835                                       |   | 282,087 |   | 12,502 |   |
| Outstanding at end of period              |   | 1,677,815                                    |   | 1,664,729                                   |   | 1,677,815 |   | 1,664,729 |   |
|                                      |   |                                         |   |                                        |   |   |   |   |   |
| Basic and Diluted weighted average shares |   | 1,677,435                                    |   | 1,660,805                                   |   | 1,583,314 |   | 1,655,686 |   |

 

Shares issuedduring the nine months ended September 30, 2003 reflect the conversion of270,003 shares of Series A preferred stock into common shares as described inNote 11.  In addition, the Companyissued 8,334 shares to Piedmont Consulting, Inc. under the terms of a ConsultingAgreement dated May 8, 2003 and there were 3,750 shares issued as a resultof employees exercising stock options.

 

The weightedaverage common shares exclude securities that would be anti-dilutive uponconversion. Accordingly, as of September 30, 2003, there were 2,566,671common shares (770,000 preferred shares convertible into 3.3333 common shareseach); 333,336 warrants with an exercise price of $1.50 that expire inMarch 2010; 270,003 warrants with an exercise price of $4.50 per sharethat expire in March 2007; 28,335 warrants with an exercise price of $5.25per share that expire between September 2007 and March 2008; 19,752warrants with an exercise price of $3.00 per share that expire between 2003 and2007; and 953,336 stock options with a weighted average exercise price of $2.47per share that are excluded from the weighted average shares outstanding.

 

**6.****              INCOMETAXES**

 

There was noincome tax provision/(benefit) for the three months and nine months endedSeptember 30, 2003 and 2002, as any provision/(benefit) was offset by acorresponding reduction/(increase) in the valuation allowance for deferredincome taxes.

 

**7.****              CURRENTDEBT**

 

InJune 2002, the Company entered into a Loan and Security Agreement (the“Agreement”), with Cole Taylor Bank, with an expiration date of June 30,2004, that provided for a revolving credit facility initially for $750,000 withthe possibility of increases up to $2.0 million. The availability under thecredit facility could be increased to $2.0 million if the Company achievedcertain earnings targets.Outstanding advances under the Agreement bear interest at prime plus1.00%.   Pursuant to the terms of theAgreement, the Company had pledged accounts receivable, inventory and equipmentas collateral.

 

The Companyhad no borrowings under the credit facility as of December 31, 2002 andhad no borrowings during the nine months ended September 30, 2003.  With thetermination of the preferred supplier and support agreements withAnheuser-Busch, the credit facility with Cole Taylor Bank was terminatedeffective March 31, 2003.

 

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**8.****              ESCROWSHARES**

 

The number ofoutstanding common shares does not include 76,090 shares held in escrow inconnection with an acquisition by the Company pursuant to a Pledge, Securityand Escrow Agreement dated June 2, 1997. All of the interest in and title to these 76,090 shares was transferredto Anita Ltd. and then subsequently transferred to the Company as part of aSettlement Agreement and Mutual Releases dated as of December 21,2000.  These shares will ultimately bereleased from the escrow to the Company and will be cancelled.  Therefore, the Company has, for accounting purposes,treated these shares as cancelled effective as of December 21, 2000.

 

**9.****              PATENTAPPLICATION**

 

OnMarch 20, 2002, the Company filed a patent application with the UnitedStates Patent and Trademark Office for a “Method and System for Point ofPurchase Sign Creation and Delivery.” In addition, the Company filed an international patent application forthe same invention to protect patent rights in foreign countries.  Although the applications are still pending,a recent international preliminary examination report has indicated that theclaimed invention is novel and has industrial applicability.  The Company expects that, after completeexamination, it will be awarded patents that protect its valuable intellectualproperty. Centiv has developed this system that allows a user access to aninformation database for selecting sign templates, inputting data for the signtemplates and selecting and ordering signage products for production of thesign templates having the data input.

 

**10.**       RESTRUCTURING CHARGES

 

During 2002,as a result of the termination of the preferred supplier and support agreementwith Anheuser Busch, the Company reduced its headcount and other operatingexpenses.  Accordingly, $87,000 inrestructuring charges was charged to operations in 2002, consisting of $75,000for severance costs for reductions in staff and $12,000 relating to early leasetermination cost.

 

During thethree-month period ending September 30, 2003, there were no restructuringpayments made.  The restructuringreserve balance was $0 as of September 30, 2003.

 

The followingtable provides a history of the liabilities incurred in connection with thebusiness restructuring.

 
| **($ in thousands)** |   | **December 31,  2002** |   | **Three  months  Ended  March 31, 2003** |   | **Three  months  Ended  June 30, 2003** |   | **Three  months  Ended  Sept. 30, 2003** |   | **September 30,  2003** |   |
|----------------------|--------|-----------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|------------------------------------------|--------|------------------------------|--------|
| **Type of Cost**     |   | **Balance**                 |   | **Payments**                                  |   | **Payments**                                 |   | **Payments**                             |   | **Balance**                  |   |
|                 |   |                        |   |                                          |   |                                         |   |                                     |   |                         |   |
| Employee Separations |   | $                           | 75     |                                          | $      | (12                                          | )      | $                                        | (63    | )                            | $      | — |   | $ | — |   |
| Facility Closings    |   | $                           | 12     |                                          | $      | (12                                          | )      | $                                        | — |                         | $      | — |   | $ | — |   |
| Total                |   | $                           | 87     |                                          | $      | (24                                          | )      | $                                        | (63    | )                            | $      | — |   | $ | — |   |

 

**11.****       SEGMENTDISCLOSURES**

 

Centiv offersweb services for consumer brand companies to manage their in-store andon-premise point-of-purchase (POP) process.  The final product ishigh quality digitally produced signage that is mass customized for the uniquerequirements of each retail location.

 

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During 2001,the Company decided to focus on and dedicate its resources to its POPbusiness.  To further that goal, inDecember 2001, the Company sold the Channels Business and, effectiveJanuary 31, 2002, sold Calgraph Technology Services, Inc.   The results of these businesses have beenreclassified as discontinued operations. As a result of these divestitures, the Company currently operates as asingle business unit.

 

**12.****       DISCONTINUEDOPERATIONS**

 

**CalGraph TechnologyServices Business**

 

EffectiveJanuary 31, 2002, the Company sold the assets of the Calgraph TechnologyServices Business to Graphic Enterprises of Ohio, Inc.  Centiv received consideration for the saleof the Calgraph assets in the amount of $1,050,000 in cash, plus a minimumroyalty of $625,000 to be paid over a 25-month period beginning inMay 2002.  Graphic Enterprises alsoassumed certain liabilities of Calgraph. The Company realized a pre-tax gain on the sale of $586,000, which wasthe cash received plus the present value of the royalty payments less the bookvalue of the net assets and less transaction fees associated with the sale ofthe business.  In addition, the Companywrote off the deferred tax asset of $98,000 relating to the Calgraph TechnologyServices Business.  The pretax loss fromoperations for Calgraph Technology Services Business in January 2002 was$108,000.

 

**13.****       PRIVATEPLACEMENT OF SECURITIES**

 

**Series A ConvertiblePreferred Stock:**

 

OnMarch 28, 2002 and April 15, 2002, the Company sold, in two separateclosings, a private placement of Series A Convertible Preferred Stock (“SeriesA Preferred”), 191,000 and 25,000 unitsrespectively, each unit consisting of one share of Series A Preferred and onewarrant to purchase one additional share of Series A Preferred. The purchaseprice for each unit was $10.00 per unit. This sale of units was ratified by the Company’s stockholders at theannual meeting of shareholders held on June 11, 2002.  Because each share of Series A Preferred wasconvertible, initially, into 3.33 shares of common stock, the effectivepurchase price was $3.00 for each share of common stock purchased. The warrantthat was included in each unit gave the holder the right, until five yearsafter the issuance of the warrant, to purchase one share of Series A Preferredat a purchase price of $15.00 per share or the equivalent of $4.50 per share ofcommon stock.

 

The Series A Preferred had a liquidation preference over common stockequal to the purchase price of the Series A Preferred plus any accrued butunpaid dividends.  The Series APreferred contained a dividend feature, such that, if not converted, beforeMarch 31, 2003, dividends would have accrued at an annual rate equal to 8%of the purchase price of the Series A Preferred.  In addition, if not previously converted into common stock, theSeries A Preferred was subject to redemption at the option of the Company onthe fourth anniversary of the issuance of the Series A Preferred at aredemption price equal to the purchase price plus any accrued but unpaiddividends.  If the Company failed toredeem the Series A Preferred on that date, the holders of the convertiblepreferred stock would have become entitled to elect a majority of the Company’sboard of directors.  Notwithstanding theforegoing, directors elected by virtue of the voting rights of the Series APreferred would have had to recuse themselves from any vote to redeem all or aportion of the Series A Preferred.

 

Proceeds to the Company from the sale of the Series A Preferred were$2,160,000, of which $1,910,000 was received at the March 28, 2002 closingand the remaining $250,000 was received at

 

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the April 15, 2002 closing. Aggregate transaction costs of $135,000 representing legal, accounting and registration fees were incurredbringing the net proceeds to $2,025,000. The net proceeds were used to pay off and cancel the Company’sthen existing credit facility with Wachovia Bank, NA.

 

The Companyrecorded a beneficial conversion feature on the Series A Preferred and warrants based on the fair value of thecommon stock of $3.00 per share as of the date of commitment. The warrants withan exercise price of $4.50 per share were valued at $810,000 using the Black-Scholesvaluation method, using the assumptions described in Footnote 14 to Notes toFinancial Statements. The beneficial conversion feature was calculated to be$810,000 at the commitment date of March 28, 2002 and has been recorded asAdditional Paid in Capital. As the preferred shares were convertibleimmediately, the entire amount of the beneficial conversion feature wasaccreted into the Accumulated Deficit at March 31, 2002.

 

The Series A Preferred was convertible initially into 3.33 shares ofcommon stock for each share of the Series A Preferred.  This conversion ratio, however, was subjectto anti-dilution adjustment for stock splits, combinations and other similarchanges and if the Company issued, except in limited circumstances, any capital stock for a per share price less than thethen-current conversion price.

 

The Series A Preferred was, pursuant to its terms, to be automaticallyconverted into common stock if (i) holders of 2/3 of the outstanding shares ofsuch preferred stock agreed to convert, (ii) the Company’s revenues exceeded $5million for any two consecutive quarters, or (iii) the Company recognized $20million in revenues for the 12-month period ending March 31, 2003.

 

The Company did, in fact, recognize $20 million in revenues for the 12-monthperiod ending March 31, 2003 and thus, all of the Series A Preferredissued and outstanding as of the close of business on March 31, 2003 was converted into commonstock and the associated warrants were converted into warrants to purchasecommon stock.

 

OnMarch 31, 2003, as part of the issuanceof Series B Convertible Preferred discussed below, certain investors who alsoowned Series A Preferred converted 135,000shares of Series A Preferred into 270,000 shares of Series B Preferred.  The associated warrants were cancelled forno value.  No Warrants wereissued in connection with the shares of Series B Preferred issued in conversionfor the Series A Preferred.  The remaining 81,000 outstanding shares of SeriesA Preferred were converted effective March 31, 2003 into 270,003 shares ofcommon stock in accordance with the terms of the Series A Preferred certificateof designations. Therefore, as of March 31, 2003, there were no shares ofSeries A Preferred issued and outstanding.

 

**SeriesB Convertible Preferred Stock:**

 

OnMarch 31, 2003, the Company sold, in a private placement exempt fromregistration, 500,000 units, eachconsisting of one share of Series B Convertible Preferred Stock (the “Series BPreferred”) and one warrant to purchase 0.667 shares, on a post reverse stocksplit basis, of common stock (the “Warrant”). As part of the private placement, the holders of $500,000 of theoutstanding Convertible Subordinated Debt converted each $5.00 of Subordinated ConvertibleDebt into one share of Series B Preferred and one warrant to purchase 0.667shares, on a post reverse stock split basis, of common stock..  The remaining $500,000 of ConvertibleSubordinated Debt was repaid in full from proceeds of the Series B Preferredoffering.  In addition, the Companyissued an additional 270,000 shares of Series B Preferred in conversion of135,000 shares of its outstanding Series A Preferred. No Warrants wereissued in connection with the shares of Series B Preferred issued in exchangefor the Series A Preferred.  Inaddition, the prior warrants to purchase Series A Preferred held by the SeriesA Preferred investors were cancelled with no value in connection with theconversion.  The remaining 81,000 outstanding shares of Series A Preferred wereconverted on

 

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March 31, 2003 into 270,003 shares, on a post reverse stock split basis) of common stock in accordance with theterms of the Series A Preferred certificate of designation.

 

The purchase price for each unit was $5.00 per unit (the “PurchasePrice”).  Because each share of Series BPreferred is convertible, initially, into 3.33 shares of common stock on a post reverse stock split basis, the effectivepurchase price was $1.50 for each share of common stock purchased.  The associated Warrant gives the holder theright, until seven years after the issuance of the Warrant, to purchase 0.667shares of common stock on a post reverse stock split basis at a purchase priceof $1.50 per share.

 

The Series B Preferred has a liquidation preference over common stockequal to two times the Purchase Price plus any accrued and unpaid dividends.  If not previously converted, the Series B Preferred will begin toaccrue dividends on April 1, 2004, at a rate equal to 8% per annum of thePurchase Price.  In addition, if notpreviously converted into common stock, the Series B Preferred will be subjectto redemption at the option of the Company on March 31, 2007 at aredemption price equal to the Series B Preferred liquidation preferenceamount.  If the Company fails to redeemthe Series B Preferred on that date, the holders of the Series B Preferredbecome entitled to elect a majority of the board of directors.  Notwithstanding the foregoing, directorselected by virtue of the voting rights of the Series B Preferred would have torecuse themselves from any vote to redeem all or a portion of the Series BPreferred.

 

As stated, the Series B Preferred is initially convertible into 3.33shares of common stock, on a post reverse stock split basis, for each share ofthe Series B Preferred.  This conversionratio, however, is subject to anti-dilution adjustment if the Company issuesany capital stock (or securities exercisable for or convertible into capitalstock) for a per share price less than the then-current conversion price,except for issuances pursuant to the Company’s stock option plan and certainother issuances to business partners. The anti-dilution adjustment will be made on a full-ratchet basis.  Each share of Series B Preferred is entitledto 3.33 votes on a post reverse stock split basis and the Series B Preferredstockholders vote together with the common stock stockholders on all mattersunless otherwise required by law.

 

The purchasers of the Series B Preferred may voluntarily convert theSeries B Preferred into common stock at any time.  The Series B Preferred will be automatically converted intocommon stock if (i) the Company meets either Conversion Milestone definedbelow, or (ii) holders of 2/3 of the outstanding shares of the Series BPreferred agree to convert.  In eitherevent, however, an automatic conversion will only occur if a registrationstatement covering the resale of the shares issuable upon conversion is ineffect at that time. “Conversion Milestone” shall mean either (a)the Company’s pretax earnings from ongoing operations are equal to or greaterthan $6 million in the aggregate in any four consecutive fiscal quarters******as determined inaccordance with United States Generally Accepted Accounting Principles (“GAAP”)as applied by the Company on the date when the Series B Preferred was firstissued and the closing trading price of the Company’s common stock is equal toor greater than $6.00 per share (as adjusted for any stock dividends,combinations or splits with respect to such shares after the filing datehereof) for ten consecutive Trading Days (as defined below), or (b) the closingof a “firm commitment” underwritten public offering of common stock in whichthe public offering price per share of common stock is at least equal to threetimes the then-applicable conversion price for the Series B Preferred and whichoffering results in gross proceeds to the Company of not less than $15million.  “Trading Day” shall mean a businessday on which at least 50,000 shares of common stock are traded on the principalUnited States securities exchange or automated quotation system on which suchsecurity is listed or traded.

 

The Company agreed to file a registration statement on Form S-3 tocover the resale of the shares of common stock issuable upon conversion of theSeries B Preferred and the shares of common stock

 

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issuable upon exercise of the Warrants.  That registration statement was declared effective onJuly 16, 2003.  The Company alsoagreed to use its best efforts to maintain the effectiveness of the registration statement until the earlier of (a)the later of (i) two years after allof the Warrants have been redeemed or exercised, or (ii) two years after all ofthe Series B Preferred has been converted, or (b) six years from the closingdate. In addition, the Company granted the purchasers of the Series B Preferredpiggy-back registration rights on any other registration statement filed by theCompany (other than on Forms S-8 or S-4). The Company is not, however, obligated to register or qualify the resaleof the shares of common stock issuable upon conversion of the Series BPreferred and the shares of common stock issuable upon exercise of the Warrantsunder the laws of the various states, unless specifically requested by thepurchasers of the Series B Preferred. The Company agreed to bear all expenses of each registration, includingthe costs of one special counsel to the purchasers of the Series B Preferred.

 

Pursuant tothe terms of the private placement, the Company may impose blackout periodswith respect to the use of the registration statement in an aggregate amount oftime not to exceed 25 business days in any 12-month period if the Company’sboard of directors determines in good faith that (a) an amendment or supplementto a registration statement is required to correct a material misstatement orto include information the absence of which would render the registrationstatement materially misleading and (b) the filing of such amendment orsupplement would result in the disclosure of information that the Company has abona fide business purpose for preserving as confidential. The Company may notinstitute more than four blackout periods in any 12-month period.  The Company agreed to notify the purchasersof the Series B Preferred of blackout periods but the purchasers are notrequired to notify the Company of sales if no blackout is in effect.  The registration rights are embodied in aninvestor rights agreement that contains customary terms and conditions,including cross-indemnities.

 

The Series BPreferred Stock financing resulted in cash proceeds of $2,000,000 plus theconversion of $500,000 of the Company’s Senior Convertible Subordinated Debtthat was issued on September 28, 2002. The remaining Senior Convertible Subordinated Debt of $500,000 wasrepaid out of the proceeds of this financing, and as of March 31, 2003,the Company was debt free and remained so as of September 30, 2003.  Aggregatetransaction costs of $90,000 representing legal, accounting and registrationfees were incurred bringing the net proceeds, after repaying the SubordinatedDebt and transaction costs, to $1,410,000.

 

There was no beneficial conversion feature on the Series B convertiblepreferred stock and warrants based on the fair value of the common stock of$1.02 per share as of the date of commitment. The warrants with an exerciseprice of $1.50 per share, were valued at $159,176 using the Black-Scholesvaluation method using the assumptions described in Footnote 14to Notes to Financial Statements.

 

**14.****       CONVERTIBLESUBORDINATED DEBT**

 

OnSeptember 30, 2002, in a private offering exempt from registration, theCompany issued $1 million of Senior Subordinated Convertible Notes to privateinvestors.  These notes were convertibleinto equity, at the lenders’ option, upon the closing of, and at the same termsas, the next equity financing in which the Company raised at least $1,000,000.  The loan had a term that extended until theearlier of July 1, 2004 or two business days following the closing of anequity financing described above and bore interest at a rate of 10% peryear.  In addition, the lenders receivedan aggregate of 16,667 warrants granted at the closing of the loan and wereeligible to receive an aggregate of an additional 6,667 warrants per monthuntil such time as the loan was fully repaid or converted into equity.

 

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The warrantwas exercisable at $5.25 per share and was callable by the Company if themarket price of the Company’s common stock closed at or above $15.00 per sharefor 10 consecutive trading days.  Theinitial 16,667 warrants granted at closing were valued at $11,858 using theBlack-Scholes valuation assumptions described in Footnote 14 to Notes toFinancial Statements, creating an unamortized discount on the SeniorSubordinated Convertible Notes.  Theunamortized discount was amortized to interest expense over the term of thenote.

 

OnMarch 31, 2003, $500,000 of the Senior Subordinated Convertible Debt wasconverted to Series B Preferred Stock and the remaining $500,000 was repaid outof the proceeds of the Series B Preferred Stock financing as described above.

 

The 8,334warrants granted on the $500,000 of Senior Subordinated Convertible Debt, whichwere converted into Series B Preferred Stock, were cancelled effectiveMarch 31, 2003.  The remaining8,334 warrants granted on the $500,000 of Senior Subordinated Debt that wasrepaid are still active and outstanding. In addition, the Company granted 20,000 warrants on March 31, 2003to the holders of the Senior Subordinated Debt that were repaid representingthe warrants earned for the period October 1, 2002 through March 31,2003.  The additional 20,000 warrantsgranted as of March 31, 2003 were valued at $2,700 using the Black-Scholesvaluation method.  Since the Company hadaccrued $14,400 for the warrants as of December 31, 2002, an adjustment toincome of $11,700 was recorded for the three months ended March 31, 2003.

 

**15.****       RELATEDPARTY TRANSACTIONS**

 

OnDecember 1, 1999, the Company entered into a Loan Agreement with WilliamM. Rychel, its former Chief Executive Officer, pursuant to which the Companyloaned Mr. Rychel a total of $1,775,000 to purchase from certain shareholders atotal of 268,995 shares of our common stock. The original term of the loan was one year, which the Company extendeduntil December 1, 2001, and on December 1, 2001, the Company enteredinto another amendment with Mr. Rychel that extended the due date of the loanuntil December 1, 2002.  Inexchange for extending the loan, Mr. Rychel agreed to a non-compete and aconfidentiality and assignment of inventions agreement.  Under the Sarbanes-Oxley Act of 2002, thisloan could not be extended beyond its maturity of December 1, 2002 orotherwise materially modified.  OnNovember 25, 2002, the Company repurchased the 268,995 shares in exchangefor the outstanding loan plus accrued interest of $2,250,283.  The shares repurchased have been put intoTreasury Stock using the closing market price of the stock of $2.82 pershare.  The difference between theoutstanding loan balance and the Treasury Stock resulted in a non-cash chargeof $1,491,719.

 

Uponconsummation of the Channels Business transaction, Centiv made loans to threeformer members of Centiv’s management team involved in the transaction.  A loan in the amount of $200,000 was made toScott Barker.  This loan is secured by33,334 shares of Centiv common stock owned by Mr. Barker and bears interest ata rate of 25 basis points over the rate, as adjusted from time to time, atwhich the Company is able to borrow senior debt.  The principal amount of this loan plus accrued interest shall bedue and payable December 31, 2003. Upon the completion of the Channels Business transaction, the Companyalso made loans to Dave Boston and Pat McLaughlin on the same terms andconditions as the loan to Mr. Barker in the amounts of $30,000 and $20,000,respectively.  These amounts, plusaccrued interest, are included in the shareholder equity section of thefinancial statements.

 

John P.Larkin, the Company’s current President and Chief Executive Officer was aninvestor in the Series B Preferred offering closed on March 31, 2003.  In connection with the offering, Mr. Larkinpurchased 20,000 units, each consisting of one share of Series B Preferred anda warrant to purchase

 

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0.667 sharesof common stock at an exercise price of $1.50 per share.  In connection with that transaction, Mr.Larkin waived his conversion rights and granted the Company’s Chief FinancialOfficer an irrevocable proxy to vote those shares (in accordance with the voteof the majority of the Company’s capital stock entitled to vote thereonexcluding these shares) until the Company’s stockholders ratified the issuanceof the Series B Preferred, which occurred at the Company’s annual meeting ofstockholders held on May 29, 2003.

 

**16.****       STOCK-BASEDCOMPENSATION**

 

Effective forfiscal 2003, the Company adopted the disclosure requirements underSFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure” as an amendment to SFAS No. 123.

 

Stock-basedemployee compensation, including stock options, for the three months and ninemonths ended September 30, 2003 was accounted for under the intrinsicvalue-based method as prescribed by APB Opinion No. 25, “Accounting forStock Issued to Employees.” Therefore, no compensation expense was recognizedfor those stock options that had no intrinsic value on the date of grant.

 

If the Companywere to recognize compensation expense over the relevant service period underthe fair-value method of SFAS No. 123 with respect to stock optionsgranted for the three months and nine months ended September 30, 2003 andall prior years, the net loss would have increased (decreased), resulting inpro forma net earnings and EPS as presented below:

 
|                                                                                                                        |   | **Three  Months Ending  September 30,** |   | **Nine  Months Ending  September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                                        |   | **2003**                                     |   | **2002**                                    |   | **2003** |   | **2002** |   |
|                                                                                                                        |   |                                         |   |                                        |   |   |   |   |   |
| Net Loss  – as reported                                                                                                |   | $                                            | (644   | )                                           | $      | (508 | ) | $ | (1,150 | ) | $ | (1,343 | ) |
| Deduct: stock-based compensation income  (expense) determined under the fair value based method for all awards, net of  tax |   | 35                                           |   | 9                                           |   | 9 |   | 27 |   |
|                                                                                                                        |   |                                         |   |                                        |   |   |   |   |   |
| Net Loss – pro forma                                                                                                   |   | $                                            | (609   | )                                           | $      | (499 | ) | $ | (1,141 | ) | $ | (1,316 | ) |
|                                                                                                                        |   |                                         |   |                                        |   |   |   |   |   |
| **Earnings (loss) per share:**                                                                                              |   |                                         |   |                                        |   |   |   |   |   |
| Basic – as reported                                                                                                    |   | $                                            | (0.38  | )                                           | $      | (0.31 | ) | $ | (0.73 | ) | $ | (0.81 | ) |
| Basic – pro forma                                                                                                      |   | (0.36                                        | )      | (0.30                                       | )      | (0.72 | ) | (0.79 | ) |
| Diluted – as reported                                                                                                  |   | (0.38                                        | )      | (0.31                                       | )      | (0.73 | ) | (0.81 | ) |
| Diluted – pro forma                                                                                                    |   | (0.36                                        | )      | (0.30                                       | )      | (0.72 | ) | (0.79 | ) |

 

The amount ofthe pro forma charge has been determined using the Black-Scholes model, as permitted by SFAS No. 123.  For purposes of the calculation, managementused an average interest rate of 5.04% based on the U.S. Treasury Strip(zero-coupon) bonds, a projected volatility rate of 80%, a dividend yield of 0%and an expected life of 5 years for the grants.

 

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**17.****       KEYEMPLOYEE INCENTIVE POOL (KEIP):**

 

The Board of Directors established a Key Employee Incentive Pool (the“KEIP”) on April 22, 2003.  Underthe KEIP, upon the consummation of a sale of all or substantiallyall of the assets of Centiv or the consummation of a merger wherein thethen-current stockholders of Centiv do not own at least 50% of the outstandingvoting power of the surviving entity or upon a sale of all or substantially allof the outstanding capital stock of Centiv, the participating employees shallreceive bonuses according to the following:

 

•                  If the totalconsideration received, including any assumption of debt, is less than $15million there will be no bonuses paid under the KEIP;

 

•                  If the totalconsideration received, including any assumption of debt, is greater than $15million and less than $75 million the KEIP will equal 15% of the totalconsideration; and

 

•                  If the totalconsideration received, including any assumption of debt, is greater than $75million the KEIP will be the greater of 10% or $11.25 million.

 

Since paymentsunder the KEIP are contingent upon the sale of the Company as well as theamount to be realized upon the sale and the participants must be employed atthe time of the sale, there has been no recognition or accrual of the cost ofthis plan in the Financial Statements. The Company will recognize the cost of the KEIP when the event becomesprobable and the amount can be reasonably estimated.

 

**ITEM2.****  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion shouldbe read in conjunction with the information contained in the ConsolidatedFinancial Statements, including the related notes.

 

### **Overview**

 

We are a developer and provider ofWeb-enabled point-of-purchase (POP) solutions for consumer goods manufacturersand multi-location retailers.  OurInstant Impact solution allows marketing managers, brand managers and retailersto create, edit and schedule delivery of customized POP signage, usingfield-editable sign templates created and/or approved by manufacturers. InstantImpact POP signage is print quality and digitally produced for the uniquerequirements of each retail location, allowing users to target specificconsumer segments at the POP and accumulate quantitative data for analysis andfeedback on the success of their in-store or on-premise marketing campaigns. Ourproducts allow a user to access an information database for selecting signtemplates approved or created by manufacturers, input data for the signtemplates and select signage products for production of the signtemplates. Our Internet-based userinterface is clear, flexible, user-friendly and changeable to allow control ofthe message at a corporate or local store level. Instant Impact signage caneither be printed in a Centiv print center, or an industry-standardprint-formatted file can be delivered via the Internet to any print provider inthe world.  We believe that our InstantImpact solution improves marketing results (due to improved signage utilization,customization and images), provides measurable marketing feedback, reducessignage lead time, allows for distribution of brand identity while protectingthe integrity of that identity and reduces the costs associated with in-storeand on-premises custom signage.

 

The roots of Centiv’s introduction to thecustom POP segment were formed in 1998 when we partnered with Anheuser-Busch(A-B) to design, configure, deliver and implement a proprietary A-B POP signagesystem in over 730 A-B wholesale distributors in the United States and 16 foreigncountries. This led to a relationship with A-B pursuant to which we installed aPOP system for A-B allowing distributors to

 

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access that system to create custom signageusing templates created by A-B.  Inaddition, as part of our agreement, Centiv maintained rights to supplyconsumable print materials to these distributors supported by an in-house callcenter service. As a result of our exposure to the custom signage business,Centiv invested in the development of a web-based platform for thecollaborative versioning of POP signage. Beginning in 2001, Centiv began the commercialization of InstantImpact.   Effective March 31, 2003,Centiv’s preferred supplier and technical support agreement with A-B was notrenewed.  Our activities with A-B andits distributors terminated upon the expiration of that agreement.

 

With the termination of the preferredsupplier and support agreement effective March 31, 2003, the sales to A-Band the wholesale distributor network will not occur in the future quarters of2003.    We do not believe that salesfrom our Instant Impact product will be sufficient to replace the sales lostfrom A-B and its wholesale distributor network during 2003.  Total sales from A-B and its wholesaledistributor network for the year ended December 31, 2002 were $24.9million.  Sales from A-B and itswholesale distributor network during the three months ended September 30,2003 and 2002 were $0 and $4.6 million, respectively and sales for the nine monthsended September 30, 2003 and 2002 were $4.1 million and $11.6 million, respectively.  In response to this, we underwent a downsizing of our operationsand have reduced our headcount and other operating expenses.

 

Although Centiv valued its relationship with A-B, the contract did notinclude the Instant Impact web-based process for POP design and delivery.  The A-B relationship was part of the legacybusiness model as a wholesaler of digital printing hardware and provider ofconsumable printing materials. The A-B relationship had never involved the useof Instant Impactä.  As a result, A-B’s decision in no wayreflects upon the relevancy and viability of this innovative service goingforward.

 

Although no single customer accounted for more than 10% of the salesfor the years ended December 31, 2002 and 2001, on a combined basis,distributors affiliated with A-B, in the aggregate, accounted for approximately97% and 99% of the sales, respectively. For the three months ended September 30, 2003, one customeraccounted for 39% of the sales and a second customer accounted for 35% of thesales.  For the three months endedSeptember 30, 2002, distributors affiliated with A-B, in the aggregate,accounted for 96% of the sales.   Forthe nine months ended September 30, 2003, distributors affiliated withA-B, in the aggregate, accounted for approximately 69% and one other customerof the Instant Impact product accounted for 12% of our total sales.  For the nine months ended September 30,2002, distributors affiliated with A-B, in the aggregate, accounted forapproximately 96% of our total sales.

 

**Three Months Ended September 30, 2003Compared With Three Months Ended September 30, 2002**

 

***Net Sales from continuing operations.***  Total sales from continuing operations of $524,000for the three months ended September 30, 2003, decreased 89% or $4.2million, compared to $4,769,000****for the three months endingSeptember 30, 2002.  As previously mentioned, with the expiration ofthe Anheuser-Busch (A-B) preferred supplier and support agreement effectiveMarch 31, 2003, there were no sales to A-B and the wholesale distributornetwork for the three months ended September 30, 2003.  Sales to A-B and its wholesale distributornetwork were $4.6 million for the three months ended September 30, 2002.

 

Salesof the Instant Impact product line were $524,000 for the three months endedSeptember 30, 2003, or an increase of 172% over the sales of $193,000 forthe three months ended September 30, 2002.  The sales increase for the three months endedSeptember 30, 2003 over the same period in the prior year was attributableprimarily to expanded usage of the Instant Impact system from existingcustomers as well as revenue from new customers.

 

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Sales of the InstantImpact product line for three months ended September 30, 2003, showed adecline of $60,000 over the three months ended June 30, 2003.  This decline is due, in part, to seasonalitywithin the existing customer base.  Inaddition, the sales cycle for new customers is taking longer than originallyprojected.  The sales cycle for theInstant Impact product involves a two-step process.  The first step is at the customer’s corporate office and thesecond step is having the sales representatives adopt the new process ofordering the POP materials utilizing the Instant Impact product.  Up to this point, we have experienced mixedresults in terms of the adoption rate for the sales force.

 

***GrossProfit from continuing operations.***  Gross profit from continuing operations of$280,000 for the three months ended September 30, 2003 decreased 72% or$710,000, compared to $990,000 for the three months ended September 30,2002.  However, gross profit as a percentageof sales increased 32.6% to 53.4% for the three months ended September 30,2003 compared to 20.8% for the three months ended September 30, 2002.  The gross profit percentage in the secondquarter of 2003 is reflective of the Instant Impact sales, while the prior yeargross profit margin contained a mix of Instant Impact sales and sales toA-B.  Instant Impact margins were 40.4%compared to margins of 19.9% for the A-B sales for the three months endedSeptember 30, 2002.

 

The reason for the margindifference is that the A-B business relationship consisted of sales of lowermargin digital printing hardware and consumable printing materials, while theInstant Impact business consists of web-based services including web set-upfees, creative services as well as production of customized point of purchasesignage.

 

***SG&A Expenses from continuingoperations.***  SG&A expenses from continuing operationsof $779,000 for the three months ended September 30, 2003 decreased$614,000 or 44%, compared to $1.4 million for the three months endedSeptember 30, 2002.  As a result ofthe termination of the A-B agreement, the Company restructured its operationsand eliminated the costs associated with the A-B business have been eliminatedeffective March 31, 2003.

** **

***DepreciationExpense from continuing operations.  ***Depreciationexpense from continuing operations was virtually flat year over year, showing aslight decrease of $1,000, or 1%, to $145,000 for the three months endedSeptember 30, 2003, as compared to $146,000 for the three months endedSeptember 30, 2002.

 

***OtherIncome/expense from continuing operations.  ***Other expense from continuing operationsfor the three months ended September 30, 2003 of $3,000 represents a losson the disposal of computer equipment.

 

***InterestIncome/expense from continuing operations.  ***Interest income of $3,000 for the threemonths ended September 30, 2003 decreased $38,000, or 93%, compared to$41,000 for the three months ended September 30, 2002.  The decrease in interest income is the resultof the reduction in the outstanding loans due from stockholders (See Footnote15 to Financial Statements).

 

***Income Taxes from continuing operations.***  The Company’s effective tax rate forcontinuing operations was 0% for the three months ended September 30, 2003and 2002 as the Company’s tax benefit was offset by a corresponding increase inthe valuation allowance for deferred income taxes.

 

***Net Loss from continuing operations.***  The Company had a net loss from continuingoperations of $644,000 for the three months ended September 30, 2003,compared to the net loss of $508,000 for the three months endedSeptember 30, 2002, an increase in the loss of $136,000 or 27%.  The increase in the net loss is attributableto lower sales as a result of the termination of the A-B relationship as ofMarch 31, 2003.

 

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**Nine Months Ended September 30, 2003Compared With Nine Months Ended September 30, 2002**

 

***Net Sales from continuing operations.***  Total sales from continuing operations of$5.9 million for the nine months ended September 30, 2003 decreased 51% or$6.2 million, compared to $12.1 million for the nine months endingSeptember 30, 2002.  As previously mentioned, with the termination ofthe A-B preferred supplier and support agreement, there were no sales to A-B andthe wholesale distributor network after March 31, 2003 and therefore thesales to A-B of $4.1 million for the nine months ended September 30, 2003decreased $7.5 million compared to sales to A-B of $11.6 million for the ninemonths ended September 30, 2002. The decrease in sales to A-B was partially offset by increased sales inthe Instant Impact product line.

 

Salesof the Instant Impact product line were $1.8 million for the nine months endedSeptember 30, 2003, or an increase of 316% over the sales of $438,000 forthe nine months ended September 30, 2002. The sales increase over prior year was attributable primarily toexpanded usage of the Instant Impact system from existing customers as well asincreased revenue from new customers.

 

***GrossProfit from continuing operations.***  Gross profit from continuing operations of$2.0 million for the nine months ended September 30, 2003, decreased 32%or $921,000, compared to $2.9 million for the nine months endedSeptember 30, 2002.  However, grossprofit as a percentage of sales increased 10% to 34% for the nine months endedSeptember 30, 2003 compared to 24% for the nine months endedSeptember 30, 2002.

 

The gross profit percentage forthe nine months ended September 30, 2003 is reflective of a higher mix ofInstant Impact sales compared to lower margin sales to A-B in 2002.  Instant Impact margins were 55.6% for thenine months ended September 30, 2003 compared to margins of 45.0% for thenine months ended September 30, 2002. Gross profit percentage for the A-B sales were 24.0% for the nine monthsended September 30, 2003 compared to margins of 23.3% for the nine monthsended September 30, 2002.

 

***SG&A Expenses from continuingoperations.*** SG&Aexpenses from continuing operations of $2.7 million for the nine months endedSeptember 30, 2003, decreased $1.1 million or 29%, compared to $3.8million for the nine months ended September 30, 2002.  As a result of the expiration of the A-Bagreement, the costs associated with the A-B business have been eliminatedeffective March 31, 2003.  Inaddition, for the nine months ended September 30, 2003, SG&A expensesreflect a one-time favorable adjustment of $160,000 relating to: (1) a reversalof the 2002 bonus accrual of $120,000 as this amount will not be paid due tothe establishment of the long term Key Employee Incentive Plan (KEIP), and (2)a favorable workers’ compensation insurance audit adjustment of $40,000.

** **

***DepreciationExpense from continuing operations.  ***Depreciationexpense from continuing operations increased $18,000, or 4%, to $431,000 forthe nine months ended September 30, 2003, as compared to $413,000 for thenine months ended September 30, 2002. The increase in depreciation expense relates to additional computer andproduction equipment purchased during the course of 2002 for the expansion ofthe print center.

 

***OtherIncome/expense from continuing operations.  ***Other expense from continuing operationsfor the nine months ended September 30, 2003 of $3,000 represents a losson the disposal of computer equipment. For the nine months endedSeptember 30, 2002 the other income of $283,000 represents the settlementof outstanding liabilities associated with the termination of vendor contractsrelating to the sale of the Channels Business.

 

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***InterestIncome/expense from continuing operations.  ***Interest expense of $10,000 was recordedfor the nine months ended September 30, 2003, compared to interest incomeof $126,000 for the nine months ended September 30, 2002.  The interest expense in 2003 reflectsinterest costs on $1.0 million of convertible subordinated debt that wasretired on March 31, 2003 (See Footnote 14 to Financial Statements). Theinterest income in 2002 represents interest on the stockholder’s notes (SeeFootnote 15 to Financial Statements).

 

***Income Taxes from continuing operations.***  The Company’s effective tax rate forcontinuing operations was 0% for the nine months ended September 30, 2003and 2002 as the Company’s tax benefit was offset by a corresponding increase inthe valuation allowance for deferred income taxes.

 

***Net Loss from continuing operations.***  The Company had a net loss from continuingoperations of $1.2 million for the nine months ended September 30, 2003,compared to the net loss of $913,000 for the nine months endedSeptember 30, 2002, an increase in the net loss of $237,000 or 26%.  The increase in the net loss is attributableto lower sales as a result of the termination of the A-B relationship as ofMarch 31, 2003.

 

**Discontinued Operations:**

 

The Company had net income fromdiscontinued operations of $380,000 for the nine months endedSeptember 30, 2002.  (See Footnote10 to Financial Statements for a description of the discontinued operations).

 

**Effect of beneficial conversion feature ofpreferred stock:**

 

The Company recorded a beneficial conversion feature on the Series AConvertible Preferred Stock and warrants that were issued in March 2002,based on the fair value of the common stock of $3.00 per share as of the dateof commitment. The warrants with an exercise price of $4.50 per share werevalued at $810,000 using the Black-Scholes valuation method. The beneficialconversion feature was calculated to be $810,000 at the commitment date ofMarch 28, 2002 and has been recorded as Additional Paid in Capital. As thepreferred shares were convertible immediately, the entire amount of thebeneficial conversion feature was accreted into the Accumulated Deficit atMarch 31, 2002.

 

There was no beneficial conversion feature onthe Series B Convertible Preferred Stock and warrants that were issued inMarch 2003, based on the fair value of the common stock of $1.02 per shareas of the date of commitment.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

On September 30, 2003, theCompany had $1.4 million in cash and positive working capital of $1.6 millioncompared to $1.3 million in cash and $783,000 in working capital as ofDecember 31, 2002. The improvement is a result of the Series B PreferredStock private offering that was completed on March 31, 2003 (see Notes 13and 14 to Consolidated Financial Statements).

 

The Company used $1.4 millionof cash from operations for the nine months ended September 30, 2003compared to $3.0 million of cash used from operations for the nine months endedSeptember 30, 2002.  During thenine months ended September 30, 2003, cash was used to pay accountspayable and accrued expenses of $3.0 million relating to vendor payments forthe A-B equipment upgrade that took place in Q4 2002.  Offsetting these payments was cash of $2.3 million through areduction in accounts receivable, inventories and prepaid expenses as a resultof the termination of the A-B agreement.

 

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During the nine months endedSeptember 30, 2002, the Company used $3.0 million of cash fromoperations.  Cash was used to payaccounts payable and to satisfy accrued expenses of $1.3 million, resultingprimarily from the payment of transaction costs and other payments associatedwith the sale of the Channels Business. In addition, cash was used to grow accounts receivable by $1.6 million,primarily as a result of the large-scale equipment upgrade for A-B.

 

For the nine months endedSeptember 30, 2003, the Company generated cash of $183,000 from investingactivities.  The Company received cashof $225,000 from the sale of the CalGraph Business (see Note 11 of the Notes toConsolidated Financial Statements), partially offset by cash used of $42,000for the purchase of computer and production equipment.  For the nine months ended September 30,2002, the Company generated cash of $929,000 from investing activities.  The Company received cash of $1,175,000 fromthe sale of the CalGraph Business (see Note 12 of the Notes to ConsolidatedFinancial Statements), partially offset by cash used of $246,000 for thepurchase of software licenses, computer hardware and production equipment.Approximately $89,000 of the $193,000 of purchases related to one-timeexpenditures for splitting the software licenses and computer hardware due tothe divestitures of Channels and CalGraph business units.

 

**For the nine months ended September 30, 2003, theCompany generated cash of $1,391,000 principally from financing activities inrelation to the Series B Preferred Stock offering.  The Company received net proceeds of $1,910,000 from the equityoffering (see Note 13 of the Notes to Consolidated Financial Statements).  In addition, the Company repaid $500,000 ofconvertible subordinated debt (see Note 14 of the Notes to ConsolidatedFinancial Statements).  The remaining$500,000 of subordinated debt was converted in exchange for participation inthe Series B Preferred Stock offering.**

** **

**For the nine months ended September 30, 2002, theCompany generated cash of $2,286,000 from financing activities.  The Company received net proceeds of$2,026,000 from a private equity offering (see Note 12 of the Notes toConsolidated Financial Statements).  Thenet proceeds were used to pay off and cancel the Company’s credit facility withthe bank. In addition, the Company received $1,000,000 from the issuance ofconvertible subordinated debt (see Note 14 of the Notes to ConsolidatedFinancial Statements).  During the ninemonths ended September 30, 2002, the Company used $796,000 to pay off andcancel the Company’s credit facility with Wachovia bank.**

** **

Based upon the current level ofrevenues and the cash position, the Company will need to raise additionalcapital during 2004 in order to fund current operations.  The Company is currently evaluating allpotential strategic alternatives, including the sale of some or all of thebusiness of the Company, potential partnerships and the availability ofadditional capital to sustain operations. Depending on the results of these evaluations, the Company mightdetermine that certain of its long-lived assets will require an impairmentcharge in a future period.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 46, Amendment of FASB Statement No. 13, and TechnicalCorrections”, SFAS No. 145 addresses a variety of accounting practices.  The provisions of this statement related tothe rescission of Statement No. 4 (Reporting Gains and Losses fromExtinguishment of Debt) are effective for fiscal years beginning afterMay 15, 2002.  The provisions ofthis statement related to Statement No. 13 (Accounting of Leases) are effectivefor transactions occurring after May 15, 2002.  All other provisions of this statement are effective forfinancial statements issued on or after May 15, 2002.  Statement No. 44 was entitled “According forIntangible Assets of Motor Carriers” and Statement No. 64 was entitled“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.”

 

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The Company adopted those provisions of SFAS No. 145 that wereeffective as of May 15, 2002. Adoption of those provisions did not have a material effect on theCompany’s results of operations or financial position.  For those provisions that are effective forfiscal years beginning after May 15, 2002, the Company does not expectthat adoption of those provisions will have a material effect on its results ofoperations or financial position.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This statement requiresrecognition of costs associated with exit or disposal activities when they areincurred rather than at the date of a commitment to an exit or disposal plan.  This new statement is effective for exit ordisposal activities that are initiated after December 31, 2002.  The Company does not expect that adoption ofthis statement will have a material effect on its results of operations or financialposition.

 

In January 2003, the FASB issued Interpretation No.46 (FIN No.46), “Consolidation of Variable Interest Entities.”  This is an interpretation of Accounting Research Bulletin No. 51,and revises the requirements for consolidation by business enterprises ofvariable interest entities.  FIN No. 46applies immediately to variable interest entities created afterJanuary 31, 2003, and to variable interest entitles in which an enterpriseobtains an interest after that date.  Itapplies in the first fiscal year or interim period beginning afterJune 15, 2003 to variable interest entities in which an enterprise holds avariable interest that it acquired before February 1, 2003.  FIN No. 46 applies to public enterprises asof the beginning of the applicable interim or annual period, and it applies tononpublic enterprises as of the end of the applicable annual period.  FIN No. 46 may be applied prospectively witha cumulative-effect adjustment as of the date on which it is first applied orby restating previously issued financial statements for one or more years witha cumulative-effect adjustment as of the beginning of the first yearrestated.  The Company is not party toany variable interest entity.  TheCompany does not expect that adoption of this interpretation will have amaterial effect on its results of operations or financial position.

 

In May 2003, the FASB issued SFAS No.150, “Accounting for Certain Financial Instruments with Characteristics of BothLiabilities and Equity” (SFAS 150), which improves the accounting for certainfinancial instruments that, under previous guidance, issuers could account foras equity.  SFAS 150, which is effectivefor interim periods beginning after June 15, 2003, requires that thoseinstruments be classified as liabilities in statements of financial position.The Company does not expect that adoption of this statement will have anymaterial effect on its results of operations or financial position.

 

### **DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

This report contains“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Thesestatements appear in a number of places in this report and include allstatements that are not historical facts. Some of the forward-looking statements relate to the intent, belief orexpectations of the Company and its management regarding the Company’sstrategies and plans for operations and growth.  Other forward-looking statements relate to trends affecting theCompany’s financial condition and results of operations, and the Company’santicipated capital needs and expenditures.

 

Investors are cautioned thatsuch forward-looking statements are not guarantees of future performance andinvolve risks and uncertainties, and that actual results may differ materiallyfrom those that are anticipated in the forward-looking statements as a resultof the impact of competition and competitive pricing, business conditions andgrowth in the industry, general and economic conditions and other risks.  Investors should review the more detaileddescription of these and other possible risks contained in the Company’sfilings with the Securities and Exchange Commission, including the Company’sForm 10-K for the year ended December 31, 2002.

 

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**ITEM3****.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

 

Financial instruments thatpotentially subject the Company to significant concentrations of credit riskconsist principally of trade accounts receivable.  Credit risks with respect to trade receivables are limited due tothe diversity of customers comprising the Company’s customer base.  The Company performs ongoing creditevaluations and charges uncollectible amounts to operations when they aredetermined to be uncollectible.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

As of September 30, 2003, Centivmanagement, including the Chief Executive Officer and Chief Financial Officer,have conducted an evaluation of the effectiveness of the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15(b), as ofSeptember 30, 2003. Based on that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company that is required to be included in Centiv’s periodicSEC filings and no changes are required at this time.

 

In connection with the evaluation by Centivmanagement, including the Chief Executive Officer and Chief Financial Officer,of our internal control over financial reporting, pursuant to Exchange Act Rule13a-15(d), no changes during the quarter ended September 30, 2003 wereidentified that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

**PART II    OTHERINFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

Not applicable

 

**ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

Not applicable

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable

 

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**ITEM5.  OTHER INFORMATION**

 

Not applicable

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

**Exhibits**

 

3.1Certificate of Incorporation of Centiv, Inc. dated April 11, 2002 andrelated Certificate of Designations, Preferences and Rights filed May 21,2002 (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filedon August 12, 2002 and incorporated herein by reference).

 

3.2Certificate of Amendment of Certificate of Incorporation of Centiv, Inc. datedJune 11, 2003.

 

3.3Certificate of Designations, Preferences and Rights filed March 31, 2003(Filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed onApril 4, 2003 and incorporated herein by reference).

 

3.4 Bylaws ofCentiv, Inc. (Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form10-Q filed on August 12, 2002 and incorporated herein by reference).

 

4.1 Form ofSecurities Purchase Agreement dated March 31, 2003 by and among Centiv,Inc. and the purchasers identified on Exhibit A thereto (Filed as Exhibit 4.4to the Company’s Annual Report on form 10-K filed on April 4, 2003 andincorporated herein by reference).

 

4.2 Form ofAmended and Restated Investors Rights Agreement dated March 31, 2003 byand among Centiv, Inc. and the investors who are signatories thereto (Filed asExhibit 4.5 to the Company’s Annual Report on form 10-K filed on April 4,2003 and incorporated herein by reference).

 

4.3 Form ofWarrant issued pursuant to Securities Purchase Agreement dated March 31,2003 by and among Centiv, Inc. and the purchasers identified on Exhibit Athereto (Filed as Exhibit 4.6 to the Company’s Annual Report on form 10-K filedon April 4, 2003 and incorporated herein by reference).

 

4.4 ConsultingAgreement dated as of May 8, 2003 between the Company and PiedmontConsulting, Inc. (Filed as Exhibit 4.4 to the Company’s Quarterly Report onForm 10-Q filed on August 11, 2003 and incorporated herein by reference).

 

10.1 LoanAgreement dated June 12, 2002 between the Company and Cole Taylor Bank(Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed onAugust 12, 2002 and incorporated herein by reference).

 

10.2 SecurityAgreement dated June 12, 2002 between the Company and Cole Taylor Bank(Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed onAugust 12, 2002 and incorporated herein by reference).

 

10.3 KeyEmployee Incentive Pool Plan (filed as Exhibit B to Registrant’s ProxyStatement filed with the Commission on May 6, 2003 (file number 000-23221)and incorporated herein by reference).

 

11.1Statements of Computation of Earnings Per Share (Filed as Exhibit 11.1 to theCompany’s Annual Report on form 10-K filed on April 4, 2003 andincorporated herein by reference).

 

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31.1 Certification by John P. Larkin pursuant to Rule13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2 Certification by Thomas M. Mason pursuant to Rule13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32 Certification Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

**Reports on Form 8-K**

 

The following reports on Form8-K were filed or furnished, as applicable, during the three months endedSeptember 30, 2003:

 

Current Report on Form 8-Kfiled July 2, 2003, which included disclosure under Item 5 relating to theCompany’s receipt of confirmation from NASDAQ that, as of June 30, 2003,the Company was in compliance with the continued listing standards of theNASDAQ Smallcap Market.

 

Current Report on Form 8-K furnishedAugust 13, 2003, which included disclosure under Item 12 relating to theCompany’s announcement of its earnings for the fiscal quarter endedJune 30, 2003.

 

Current Report on Form 8-Kfurnished August 15, 2003, which included disclosure under Item 12relating to the Company’s conference call to announce its earnings for thefiscal quarter ended June 30, 2003.

 

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**SIGNATURES**

 

PURSUANT TO THE REQUIREMENTS OFTHE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORTON FORM 10-Q TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULYAUTHORIZED THIS 11th DAY OF NOVEMBER, 2003.

 

CENTIV, INC.

 

 
| **SIGNATURE** |                 | **Title** |   |
|---------------|----------------------|-----------|--------|
|          |                 |      |   |   |
| By:           | /s/ John P.  Larkin  |      |   | Chief  Executive Officer,  President and Director (principal  executive officer) |   |
|          | John P.  Larkin      |      |
|          |                 |      |
|          |                 |      |   |   |
|          |                 |      |   |   |
| By:           | /s/ Thomas  M. Mason |      |   | Chief  Financial Officer  (principal financial and accounting  officer and duly authorized officer  of the Registrant) |   |
|          | Thomas M.  Mason     |      |
|          |                 |      |
|          |                 |      |

 

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