**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 June  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              ** |

 

**CommissionFile No. 000-23221**

 

**CENTIV, INC.**

(Exact name of Registrantas specified in its charter)

 

| **Delaware**                                                      |   | **58-2033795**                        |
|-------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization)  |   | (IRS Employer  Identification Number) |
|                                                              |   |                                  |
| **998 Forest Edge Drive,  Vernon Hills, Illinois  60061**    |
| **(Address of Principal Executive Offices, including  Zip Code)** |
|                                                              |   |                                  |
| **(847) 876-8300**                                                |
| (Registrant’s telephone  number, including area code)        |

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes: ý    No: o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act)  Yes: o     No: ý

 

The number of shares outstanding of the Registrant’scommon stock, par value $.001, as of August 8, 2003 the latest practicabledate, was 1,677,815 shares.

 

 

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**CENTIV, INC.**

**TABLE OFCONTENTS**

 
| **ITEM**    |
|-------------|
| **PART I**  | **FINANCIAL INFORMATION** |
|        |
| Item 1.     | Financial Statements: |
|        |   |
|        | Balance Sheets as of June 30, 2003 and  December 31, 2002 |
|        |   |
|        | Statements of Operations for  the three months and six months ended June 30, 2003 and 2002 |
|        |   |
|        | Statements of Cash Flows for  the six months ended June 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  |
|             |  |  |  |

 

**EXPLANATORY NOTE**

 

On June 16, 2003, after approval by the Company’s stockholders at itsregularly scheduled annual meeting, the Company instituted a one-for-threereverse stock split. The information and disclosures relating to the number ofshares of Common Stock and the related price per share have been adjusted toreflect the impact of the reverse stock split throughout this Form 10-Q.

 

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**PART I –FINANCIAL INFORMATION**

CENTIV, INC.

BALANCE SHEETS

 ($ in thousands)

 
|                                                                                                                                                                                                                |   | **June 30,  2003** |   | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                |   | **(unaudited)**    |   | **(audited)**           |   |
| **ASSETS**                                                                                                                                                                                                          |   |               |   |                    |   |
| Current assets:                                                                                                                                                                                                     |   |               |   |                    |   |
| Cash and cash equivalents                                                                                                                                                                                           |   | $                  | 1,944  |                    | $      | 1,304 |   |
| Accounts receivable, less allowance for doubtful accounts of $24 and  $19 at June 30, 2003 and December 31, 2002, respectively                                                                                 |   | 397                |   | 1,668                   |   |
| Inventories, net                                                                                                                                                                                                    |   | 29                 |   | 824                     |   |
| Prepaid expenses and other assets                                                                                                                                                                                   |   | 383                |   | 565                     |   |
| Income taxes receivable                                                                                                                                                                                             |   | 5                  |   | 21                      |   |
| Deferred income taxes – current                                                                                                                                                                                |   | 162                |   | 162                     |   |
| Total current assets                                                                                                                                                                                                |   | 2,920              |   | 4,544                   |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| Property and equipment, net                                                                                                                                                                                         |   | 1,451              |   | 1,707                   |   |
| Other assets                                                                                                                                                                                                        |   | 14                 |   | 137                     |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| Total assets                                                                                                                                                                                                        |   | $                  | 4,385  |                    | $      | 6,388 |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| **LIABILITIES**                                                                                                                                                                                                     |   |               |   |                    |   |
| Current liabilities:                                                                                                                                                                                                |   |               |   |                    |   |
| Accounts payable                                                                                                                                                                                                    |   | $                  | 274    |                    | $      | 2,888 |   |
| Accrued expenses                                                                                                                                                                                                    |   | 464                |   | 733                     |   |
| Contract obligation and deferred income                                                                                                                                                                             |   | 53                 |   | 140                     |   |
| Total current liabilities                                                                                                                                                                                           |   | 791                |   | 3,761                   |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| Deferred income taxes                                                                                                                                                                                               |   | 162                |   | 162                     |   |
| Other long-term liabilities                                                                                                                                                                                         |   | 47                 |   | —                  |   |
| Convertible Subordinated Debt                                                                                                                                                                                       |   | —             |   | 990                     |   |
| Total liabilities                                                                                                                                                                                                   |   | 1,000              |   | 4,913                   |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| Commitments and Contingencies                                                                                                                                                                                       |   | —             |   | —                  |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                                      |   |               |   |                    |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| Common Stock $.001 par value, 35,000,000 shares authorized; 1,944,310  shares issued and 1,675,315 shares outstanding at June 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 June 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 June 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 June 30, 2003 and December 31, 2002, respectively  (liquidation value of $7,700,000)                |   | 1                  |   | —                  |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| Due from stockholders                                                                                                                                                                                               |   | (270               | )      | (267                    | )      |
| Additional paid-in capital                                                                                                                                                                                          |   | 24,927             |   | 22,509                  |   |
| Accumulated deficit                                                                                                                                                                                                 |   | (20,519            | )      | (20,013                 | )      |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| Total stockholders’ equity                                                                                                                                                                                     |   | 3,385              |   | 1,475                   |   |
|                                                                                                                                                                                                                |   |               |   |                    |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                     |   | $                  | 4,385  |                    | $      | 6,388 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

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CENTIV,INC.

STATEMENTS OF OPERATIONS

($in thousands, except per share data)

 
|                                                                 |   | **Three  Months Ending June 30,** |   | **Six Months  Ending June 30,** |   |
|----------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                 |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                 |   | **(unaudited)**                   |   | **(unaudited)**                 |   | **(unaudited)** |   | **(unaudited)** |   |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Net sales                                                            |   | $                                 | 585    |                            | $      | 3,501 |   | $ | 5,367 |   | $ | 7,308 |   |
| Cost of goods sold                                                   |   | 247                               |   | 2,539                           |   | 3,659 |   | 5,388 |   |
| Gross profit                                                         |   | 338                               |   | 962                             |   | 1,708 |   | 1,920 |   |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Operating expenses:                                                  |   |                              |   |                            |   |   |   |   |   |
| Selling, general and administrative                                  |   | 643                               |   | 1,223                           |   | 1,915 |   | 2,426 |   |
| Depreciation                                                         |   | 144                               |   | 134                             |   | 286 |   | 267 |   |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Loss from operations                                                 |   | (449                              | )      | (395                            | )      | (493 | ) | (773 | ) |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Other Income                                                         |   | —                            |   | —                          |   | — |   | 283 |   |
| Interest income  (expense)                                      |   | 4                                 |   | 57                              |   | (12 | ) | 85 |   |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Loss from continuing operations                                      |   | (445                              | )      | (338                            | )      | (505 | ) | (405 | ) |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Income from discontinued operations (net of tax)                     |   | —                            |   | 0                               |   | — |   | 380 |   |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Net Loss                                                             |   | $                                 | (445   | )                               | $      | (338 | ) | $ | (505 | ) | $ | (25 | ) |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Effect of  beneficial conversion feature of preferred stock          |   | 0                                 |   | 0                               |   | 0 |   | (810 | ) |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Net loss attributable to common shareholders                         |   | $                                 | (445   | )                               | $      | (338 | ) | $ | (505 | ) | $ | (835 | ) |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Basic and Diluted Income/(Loss) applicable to common                 |   |                              |   |                            |   |   |   |   |   |
| Weighted average shares outstanding                                  |   | 1,670,718                         |   | 1,653,930                       |   | 1,535,474 |   | 1,653,083 |   |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Continuing operations per share before beneficial conversion feature |   | $                                 | (0.27  | )                               | $      | (0.20 | ) | $ | (0.33 | ) | $ | (0.25 | ) |
| Effect of Beneficial Conversion Feature                              |   | —                            |   | —                          |   | — |   | (0.49 | ) |
| Loss from continuing operations attributable to common shareholders  |   | (0.27                             | )      | (0.20                           | )      | (0.33 | ) | (0.74 | ) |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Discontinued operations per share                                    |   | $                                 | 0.00   |                            | $      | 0.00 |   | $ | 0.00 |   | $ | 0.23 |   |
|                                                                 |   |                              |   |                            |   |   |   |   |   |
| Net Loss per share                                                   |   | $                                 | (0.27  | )                               | $      | (0.20 | ) | $ | (0.33 | ) | $ | (0.51 | ) |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

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CENTIV, INC.

STATEMENTS OF CASH FLOWS

 

($ in thousands)

 
|                                                                         |   | **Six Months  Ending June 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                         |   | **2003**                        |       | **2002** |   |
|                                                                         |   | **(unaudited)**                 |       | **(unaudited)** |   |
| **Cash flows from operating  activities:**                                   |   |                            |       |   |   |
| Net Loss                                                                     |   | $                               | (505       | ) | $ | (25 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                            |       |   |   |
| Provision for  doubtful accounts receivable                                  |   | 11                              |       | 8 |   |
| Depreciation                                                                 |   | 286                             |       | 267 |   |
| Non-cash  interest on note payable (receivable)                              |   | (21                             | )          | (107 | ) |
| Non-cash  compensation for warrants and options                              |   | 6                               |       | 5 |   |
| Gain on sale of  CalGraph Business                                           |   | —                          |       | (488 | ) |
| Amortization of  Discount on Convertible Subordinated Debt                   |   | 10                              |       | — |   |
| Changes in net  assets and liabilities                                       |   |                            |       |   |   |
| Accounts  receivable                                                         |   | 1,260                           |       | 32 |   |
| Inventories                                                                  |   | 795                             |       | (60 | ) |
| Prepaid expenses  and other assets                                           |   | 172                             |       | (38 | ) |
| Accounts payable  and accrued expenses                                       |   | (2,867                          | )          | (2,460 | ) |
| Contract  obligations and deferred income                                    |   | (87                             | )          | (139 | ) |
| Other long-term  liabilities                                                 |   | 47                              |       | — |   |
| Income taxes                                                                 |   | 16                              |       | 573 |   |
| Net assets,  discontinued operations                                         |   | —                          |       | 123 |   |
| Total  adjustments                                                           |   | (372                            | )          | (2,284 | ) |
| **Net cash used in operating  activities**                                   |   | **(877**                        | **)**      | **(2,309** | **)** |
|                                                                         |   |                            |       |   |   |
| **Cash flows from investing  activities:**                                   |   |                            |       |   |   |
| Purchase of  property and equipment – continuing operations             |   | (29                             | )          | (193 | ) |
| Proceeds from  Sale of CalGraph Business                                     |   | 150                             |       | 1,100 |   |
| **Net cash provided by investing  activities**                               |   | **121**                         | ** ** | **907** | ** ** |
|                                                                         |   |                            |       |   |   |
| **Cash flows from financing  activities:**                                   |   |                            |       |   |   |
| Repayment of  credit facility                                                |   | —                          |       | (796 | ) |
| Repayment of  convertible subordinated debt facility                         |   | (500                            | )          | — |   |
| Net Proceeds  from private placement of securities                           |   | 1,910                           |       | 2,026 |   |
| Proceeds from  stock options exercised                                       |   | 2                               |       | 9 |   |
| (Repayment)/Proceeds,  net, from capital lease                               |   | (16                             | )          | 42 |   |
| **Net cash provided by financing  activities**                               |   | **1,396**                       | ** ** | **1,281** | ** ** |
|                                                                         |   |                            |       |   |   |
| **Increase (decrease) in cash and  cash equivalents**                        |   | **640**                         | ** ** | **(121** | **)** |
| Cash and cash  equivalents, beginning of year                                |   | 1,304                           |       | 228 |   |
| Cash and cash  equivalents, as of June 30                                    |   | $                               | 1,944      |   | $ | 107 |   |
|                                                                         |   |                            |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       |   |                            |       |   |   |
| Conversion of  convertible subordinated debt into preferred stock            |   | $                               | 500        |   | $ | — |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**NOTESTO FINANCIAL STATEMENTS**

 

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

 

The accompanying unaudited financial statements havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes.  Actual results could differ from thoseestimates.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included.  Operating results forthe three months and the six months ended June 30, 2003 are not necessarilyindicative of the results that may be expected for the full year endingDecember 31, 2003.  For furtherinformation, refer to the consolidated financial statements and the footnotesincluded in the Form 10-K for the year ended December 31, 2002.

 

**2.****              INVENTORIES**

 

Inventories, net of reserves, at June 30, 2003 andDecember 31, 2002 consist of the following ($ in thousands):

 

|            |   | **June 30,  2003** |   | **December  31,  2002** |   |
|-----------------|--------|--------------------|--------|-------------------------|--------|
| Gross Inventory |   | 96                 |   | 939                     |   |
| Reserves        |   | (67                | )      | (115                    | )      |
| Net Inventory   |   | 29                 |   | 824                     |   |

 

**3.****              NETLOSS PER COMMON SHARE**

 

Basic and diluted net income/(loss) per common shareare computed by dividing net income (loss) by the weighted average number ofcommon shares and common share equivalents outstanding during the period.  Since the Company has a net loss fromcontinuing operations, there were no common share equivalents that weredilutive during any of the periods presented. On June 16,2003 the Company instituted a one-for-three reverse stock split and theshares have been adjusted to reflect the reverse stock split.  The changes in outstanding shares during thethree months and six months ended June 30, 2003 and 2002 are shown below:

 
|                                        |   | **Three  Months Ending  June 30,** |   | **Six Months  Ending  June 30,** |   |
|---------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                        |   | **2003**                           |   | **2002**                         |   | **2003** |   | **2002** |   |
| **Common shares:**                          |   |                               |   |                             |   |   |   |   |   |
| Outstanding at  beginning of period         |   | 1,665,731                          |   | 1,652,227                        |   | 1,395,728 |   | 1,652,227 |   |
| Shares issued  (redeemed) during the period |   | 9,584                              |   | 6,667                            |   | 279,587 |   | 6,667 |   |
| Outstanding at  end of period               |   | 1,675,315                          |   | 1,658,894                        |   | 1,675,315 |   | 1,658,894 |   |
|                                        |   |                               |   |                             |   |   |   |   |   |
| Basic and  Diluted weighted average shares  |   | 1,670,718                          |   | 1,653,930                        |   | 1,535,474 |   | 1,653,083 |   |

 

Shares issued during the six months ended June 30,2003 reflect the conversion of 270,003 shares of Series A preferred stock intocommon shares as described in Note 12. In addition, the Company

 

4

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issued 8,334 shares to Piedmont Consulting, Inc. underthe terms of a Consulting Agreement dated May 8, 2003 and there were 1,250shares issued as a result of employees exercising stock options.

 

The weighted average common shares exclude securitiesthat would be anti-dilutive upon conversion. Accordingly, as of June 30, 2003,there are 2,566,671 common shares (770,000 preferred shares convertible at3.3333 common shares each); 333,336 warrants with an exercise price of $1.50that expire in March 2010; 270,003 warrants with an exercise price of $4.50 pershare that expire in March 2007; 28,335 warrants with an exercise price of$5.25 per share that expire in March 2008; 39,753 warrants with exercise pricesbetween $3.00 and $3.45 per share that expire between 2003 and 2007; and941,451 stock options that are excluded from the weighted average sharesoutstanding.

 

**4.****              INCOME TAXES**

 

There was no income tax provision/(benefit) for thethree months and six months ended June 30, 2003 and 2002 as anyprovision/(benefit) was offset by a corresponding reduction/(increase) in thevaluation allowance for deferred income taxes.

 

**5.****              CURRENT DEBT**

 

In June 2002, the Company entered into a Loan andSecurity Agreement (the “Agreement”), with Cole Taylor Bank, with an expirationdate of June 30, 2004, that provided for a revolving credit facility initiallyfor $750,000 with the possibility of increases up to $2.0 million. Theavailability under the credit facility could be increased to $2.0 million ifthe Company achieved certain earningstargets. Outstanding advances under the Agreement bear interest at primeplus 1.00%.   Pursuant to the terms ofthe Agreement, the Company had pledged accounts receivables, inventory andequipment as collateral.

 

The Company had no borrowings under the creditfacility as of December 31, 2002 and had no borrowings during the six monthsended June 30, 2003.  With the termination of the preferred supplierand support agreements with Anheuser-Busch, the credit facility with ColeTaylor Bank was terminated effective March 31, 2003.

 

**6.****              ESCROW SHARES**

 

The number of outstanding common shares does notinclude 76,090 shares held in escrow in connection with an acquisition by theCompany pursuant to a Pledge, Security and Escrow Agreement dated June 2,1997.  All of the interest in and titleto these 76,090 shares was transferred to Anita Ltd. and then subsequently transferredto the Company as part of a Settlement Agreement and Mutual Releases dated asof December 21, 2000.  These shares willultimately be released from the escrow to the Company and will be cancelled.  Therefore, the Company has, for accountingpurposes, treated these shares as cancelled effective as of December 21, 2000.

 

**7.****              PATENTAPPLICATION**

 

On March 20, 2002, the Company filed a patentapplication with the United States Patent and Trademark Office for a “Methodand System for Point of Purchase Sign Creation and Delivery.”  In addition, the Company filed aninternational patent application for the same invention to protect patentrights in foreign countries.  Although theapplications are still pending, a recent international preliminary examinationreport has indicated that the claimed invention is novel and has industrialapplicability.  The Company expects thatafter complete examination, it will be awarded patents that protect itsvaluable intellectual property. Centiv has developed this system that allows auser access to an information database for selecting sign templates, inputtingdata for the sign templates and selecting and ordering signage products forproduction of the sign templates having the data input.

 

5

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**8****                ****RESTRUCTURING CHARGES**

 

During 2002, as a result of the termination of thepreferred supplier and support agreement with Anheuser Busch, the Companyreduced headcount and other operating expenses.  Accordingly, $87,000 was charged to operations in 2002,consisting of $75,000 for severance costs for reductions in staff and $12,000relating to early lease termination cost.

 

During the three month period ending June 30, 2003,the remaining restructuring payments of $63,000 were made for employeeseparations.  The restructuring reservebalance was $0 as of June 30, 2003.

 

The following table provides a roll-forward of theliabilities incurred in connection with the business restructuring.

 
| **($ in thousands)**  |   | **December  31,  2002** |       | **Three  months  ended  March 31, 2003** |       | **Three  months  ended  June 30, 2003** |       | **June 30,  2003** |       |
|-----------------------|--------|-------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|--------------------|------------|
| **Type of Cost**      |   | **Balance**             |       | **Payments**                             |       | **Payments**                            |       | **Balance**        |       |
|                  |   |                    | ** ** |                                     | ** ** |                                    | ** ** |               | ** ** |
| Employee  Separations |   | $                       | 75         |                                     | $          | (12                                     | )          | $                  | (63        | ) | $ | 0 |   |
| Facility  Closings    |   | 12                      |       | (12                                      | )          | 0                                       |       | 0                  |       |
| **Total**             |   | $                       | 87         |                                     | $          | (24                                     | )          | $                  | (63        | ) | $ | 0 | ** ** |

** **

**9.****              SEGMENTDISCLOSURES**

 

Centiv offers web services for consumer brandcompanies to manage their in-store and on-premise point-of-purchase (POP)process.  The final product is high quality digitally producedsignage that is mass customized for the unique requirements of each retaillocation.

 

During 2001, the Company decided to focus on anddedicate its resources to its POP business. To further that goal, in December 2001, the Company sold the ChannelsBusiness and, effective January 31, 2002, sold Calgraph Technology Services,Inc.   The results of these businesseshave been reclassified to discontinued operations.  As a result of these divestitures, the Company currently operatesas a single business unit.

 

**10.****       DISCONTINUEDOPERATIONS**

 

**CalGraphTechnology Services Business**

 

Effective January 31, 2002, the Company sold theassets of the Calgraph Technology Services Business to Graphic Enterprises ofOhio, Inc.  Centiv receivedconsideration for the sale of the Calgraph assets in the amount of $1,050,000in cash plus a minimum royalty of $625,000 to be paid over a 25-month periodbeginning in May 2002.  GraphicEnterprises also assumed certain liabilities of Calgraph.  The Company realized a pre-tax gain on thesale of $586,000, which is the cash received plus the present value of theroyalty payments less the book value of the net assets and less transactionfees associated with the sale of the business. In addition, the Company wrote off the deferred tax asset of $98,000relating to the Calgraph Technology Services Business.  The pretax loss from operations for CalgraphTechnology Services Business in January 2002 was $108,000.

 

6

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**11.****       PRIVATEPLACEMENT OF SECURITIES**

 

**Series AConvertible Preferred Stock:**

 

On March 28, 2002 and April 15, 2002, the Companysold, in two separate closings, a private placement of Series A ConvertiblePreferred Stock (“Series A Preferred”), 191,000 and 25,000 units respectively, each unit consisting of one share ofSeries A Preferred and one warrant to purchase one additional share of Series APreferred. The purchase price for each unit was $10.00 per unit.  This sale of units was ratified by theCompany’s stockholders at the annual meeting of shareholders held on June 11,2002.  Because each share of Series APreferred was convertible, initially, into 3.33 shares of common stock, theeffective purchase price was $3.00 for each share of common stock purchased.The warrant that was included in each unit gives the holder the right, untilfive years after the issuance of the warrant, to purchase one share of Series APreferred at a purchase price of $15.00 per share or the equivalent of $4.50per share of common stock.

 

The Series A Preferred had aliquidation preference over common stock equal to the purchase price of theSeries A Preferred plus any accrued but unpaid dividends.  The Series A Preferred contained a dividendfeature, such that if not converted before March 31, 2003, dividends would haveaccrued at an annual rate equal to 8% of the purchase price of the Series APreferred.  In addition, if notpreviously converted into common stock, the Series A Preferred was subject toredemption at the option of the Company on the fourth anniversary of theissuance of the Series A Preferred at a redemption price equal to the purchaseprice plus any accrued but unpaid dividends. If the Company failed to redeem the Series A Preferred on that date, theholders of the convertible preferred stock would have become entitled to electa majority of the Company’s board of directors.  Notwithstanding the foregoing, directors elected by virtue of thevoting rights of the Series A Preferred would have had to recuse themselvesfrom any vote to redeem all or a portion of the Series A Preferred.

 

Proceeds to the Company from thesale of the Series A Preferred were $2,160,000, of which $1,910,000 wasreceived at the March 28, 2002 closing and the remaining $250,000 was receivedat the April 15, 2002 closing. Aggregate transaction costs of $135,000 representing legal, accountingand registration fees were incurred bringing the net proceeds to$2,025,000.  The net proceedswere used to pay off and cancel the Company’s then existing credit facilitywith Wachovia Bank, NA.

 

The Company recorded a beneficial conversion featureon the Series A Preferred andwarrants based on the fair value of the common stock of $3.00 per share as ofthe date of commitment. The warrants with an exercise price of $4.50 per share,  were valued at $810,000 using the Black-Scholes valuation methodusing assumptions described in Footnote 14 to Notes to Financial Statements.The beneficial conversion feature was calculated to be $810,000 at thecommitment date of March 28, 2002 and has been recorded as Additional Paid inCapital. As the preferred shares were convertible immediately, the entireamount of the beneficial conversion feature was accreted into the AccumulatedDeficit at March 31, 2002.

 

The Series A Preferred wasinitially convertible into 3.33 shares of common stock for each share of theSeries A Preferred.  This conversionratio, however, was subject to anti-dilution adjustment for stock splits,combinations and other similar changes and if the Company issued, except inlimited 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 automatically converted if (i) holders of 2/3 ofthe outstanding shares of such preferred stock agreed to convert, (ii) theCompany’s revenues exceeded $5 million for any two consecutive quarters, or(iii) the Company recognized $20 million in revenues for the 12-month periodending March 31, 2003.

 

The Company did, in fact,recognize $20 million in revenues for the 12-month period ending March 31, 2003and thus, all of the Series A Preferred issued and outstanding as of the closeof business on March 31, 2003 was converted into common stock and theassociated warrants were converted into warrants to purchase common stock.

 

On March 31, 2003, as part of the issuance of Series B Convertible Preferreddiscussed below, certain

 

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investors who also owned Series A Preferred converted 135,000 shares of Series A Preferred into270,000 shares of Series B Preferred. The associated warrants were cancelled for no value.  No Warrants were issued in connectionwith the shares of Series B Preferred issued in conversion for the Series APreferred.  The remaining 81,000 outstanding shares of Series A Preferred wereconverted on March 31, 2003 into 270,003 shares of common stock in accordancewith the terms of the Series A Preferred certificate of designations.Therefore, as of March 31, 2003, there were no shares of Series A Preferredoutstanding.

 

**Series BConvertible Preferred Stock:**

 

On March 31, 2003, the Company sold, in a privateplacement exempt from registration, 500,000units, each consisting of one share of Series B Convertible Preferred Stock(the “Series B Preferred”) and one warrant to purchase 0.667 shares, on a postreverse stock split basis, of Common Stock (the “Warrant”).  As part of the private placement, theholders of $500,000 of the outstanding Convertible Subordinated Debt convertedeach $5.00 of Subordinated Convertible Debt into one share of Series BPreferred and one warrant to purchase 0.667 shares, on a post reverse stocksplit basis, of Common Stock..  Theremaining $500,000 of Convertible Subordinated Debt was repaid in full fromproceeds of this offering.  In addition,the Company issued an additional 270,000 shares of Series B Preferred inconversion of 135,000 shares of its outstanding Series A Convertible PreferredStock (the “Series A Preferred”). No Warrants were issued in connectionwith the shares of Series B Preferred issued in exchange for the Series APreferred.  In addition, the priorwarrants to purchase Series A Preferred held by the Series A Preferredinvestors were cancelled with no value in connection with the conversion.  Theremaining 81,000 outstanding shares of Series A Preferred were converted onMarch 31, 2003 into 270,003 shares, on a post reverse stock split basis) ofCommon Stock in accordance with the terms of the Series A Preferred certificateof designations.

 

The purchase price for each unitwas $5.00 per unit (the “Purchase Price”). Because each share of Series B Preferred is convertible, initially, into3.33 shares of Common Stock on a post reverse stock split basis, the effectivepurchase price was $1.50 on a post reverse stock split basis for each share ofCommon Stock purchased.  The associatedWarrant gives the holder the right, until seven years after the issuance of theWarrant, to purchase 0.667 shares of Common Stock on a post reverse stock splitbasis at a purchase price of $1.50 per share on a post reverse stock splitbasis.

 

The Series B Preferred has aliquidation preference over Common Stock equal to two times the Purchase Priceplus any accrued and unpaid dividends. If not previously converted, the Series B Preferred will begin to accruedividends on April 1, 2004 at an annual rate equal to 8% of the Purchase Priceper year.  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 a redemptionprice equal to the Series B Preferred liquidation preference amount.  If the Company fails to redeem the Series BPreferred on that date, the holders of the Series B Preferred become entitledto elect a majority of the board of directors. Notwithstanding the foregoing, directors elected by virtue of the votingrights of the Series B Preferred would have to recuse themselves from any voteto redeem all or a portion of the Series B Preferred.

 

As stated, the Series BPreferred is initially convertible into 3.33 shares of Common Stock, on a postreverse stock split basis, for each share of the Series B Preferred.  This conversion ratio, however, is subjectto anti-dilution adjustment if the Company issues any capital stock (orsecurities exercisable for or convertible into capital stock) for a per shareprice less than the then current conversion price of $1.50 on a post reversestock split basis, except for issuances pursuant to the Company’s stock optionplan and certain other issuances to business partners.  The anti-dilution adjustment will be made ona full-ratchet basis.  Each share ofSeries B Preferred is entitled to 3.33 votes on a post reverse stock splitbasis and the Series B Preferred stockholders vote together with the CommonStock stockholders on all matters unless otherwise required by law.

 

The purchasers of the Series BPreferred may voluntarily convert the Series B Preferred into Common

 

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Stock at any time.  The Series B Preferred will be automaticallyconverted into Common Stock if (i) the Company meets either ConversionMilestone defined below, or (ii) holders of 2/3 of the outstanding shares ofthe Series B Preferred agree to convert. In either event, however, an automatic conversion will only occur if aregistration statement covering the resale of the shares issuable uponconversion is in effect at that time. “Conversion Milestone” shall meaneither (a) the Company’s pretax earnings from ongoing operations are equal toor greater than $6 million in the aggregate in any four consecutive fiscalquarters******asdetermined in accordance with United States Generally Accepted AccountingPrinciples (“GAAP”) as applied by the Company on the date when the Series BPreferred was first issued and the closing trading price of the Company’sCommon Stock is equal to or greater than $6.00 per share (as adjusted for anystock dividends, combinations or splits with respect to such shares after thefiling date hereof) for ten consecutive Trading Days (as defined below), or (b)the closing of a “firm commitment” underwritten public offering of Common Stockin which the public offering price per share of Common Stock is at least equalto three times the then-applicable conversion price for the Series B Preferredand which offering results in gross proceeds to the Company of not less than$15 million.  “Trading Day” shall mean abusiness day on which at least 50,000 shares of Common Stock are traded on theprincipal United States securities exchange or automated quotation system onwhich such security is listed or traded.

 

The Company agreed to file aregistration statement on Form S-3 to cover the resale of the shares of CommonStock issuable upon conversion of the Series B Preferred and the shares ofCommon Stock issuable upon exercise of the Warrants.  That registration statement was declared effective on July 16,2003.  The Company also agreed to useits best efforts to maintain the effectiveness of the registration statementuntil the earlier of (a) the later of (i) two years after all of the Warrantshave been redeemed or exercised, or (ii) two years after all of the Series BPreferred has been converted, or (b) six years from the closing date. Inaddition, 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.  TheCompany agreed to bear all expenses of each registration, including the costsof one special counsel to the purchasers of the Series B Preferred.

 

Pursuant to the terms of the private placement, theCompany may impose blackout periods with respect to the use of the registrationstatement in an aggregate amount of time not to exceed 25 business days in any12-month period if the Company’s board of directors determines in good faiththat (a) an amendment or supplement to a registration statement is required tocorrect a material misstatement or to include information the absence of whichwould render the registration statement materially misleading and (b) thefiling of such amendment or supplement would result in the disclosure ofinformation that the Company has a bona fide business purpose for preserving asconfidential. The Company may not issue more than four blackout periods in any12-month period.  The Company agreed tonotify the purchasers of the Series B Preferred of blackout periods but thepurchasers are not required to notify the Company of any sales if no blackoutis in effect.  The registration rightsare embodied in an investor rights agreement that contains customary terms andconditions, including cross-indemnities.

 

The Series B Preferred Stock financing included cashproceeds of $2,000,000 plus the conversion of $500,000 of the Company’s SeniorConvertible Subordinated Debt that was issued on September 28, 2002.  The remaining Senior ConvertibleSubordinated Debt of $500,000 was repaid out of the proceeds of this financingand as of March 31, 2003 the Company is debt free.  Aggregate transaction costs of$90,000 representing legal, accounting and registration fees were incurredbringing the net proceeds, after repaying the Subordinated Debt and transactioncosts, to $1,410,000.

 

There was no beneficialconversion feature on the Series B convertible preferred stock and warrantsbased on the fair value of the common stock of $1.02 per share as of the dateof commitment. The warrants with an exercise price of $1.50 per share, were valuedat $159,176 using the Black-Scholes

 

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valuation method usingassumptions described in Footnote 14 to Notes to Financial Statements.

 

**12.****       CONVERTIBLESUBORDINATED DEBT**

 

On September 30, 2002, the Company issued $1 millionof Senior Subordinated Convertible Notes to private investors.  These notes were convertible into equity, atthe lenders’ option upon the closing of, and at the same terms as, the nextequity financing in which the Company raises 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 an equityfinancing described above and pays interest at a rate of 10% per year.  In addition, the lenders received an aggregateof 16,667 warrants granted at the closing of the loan and were eligible toreceive an aggregate of an additional 6,667 warrants per month until such timeas the loan was fully repaid or converted into equity.

 

The warrant is exercisable at $5.25 per share and wascallable by the Company if the market price of the Company’s common stockcloses at or above $15.00 per share for 10 consecutive trading days.  The initial 16,667 warrants granted atclosing were valued at $11,858 using the Black-Scholes valuation assumptionsdescribed in Footnote 14 to Notes to Financial Statements, creating anunamortized discount on the Senior Subordinated Convertible Notes.  The unamortized discount was amortized tointerest expense over the term of the note.

 

On March 31, 2003, $500,000 of the Senior SubordinatedConvertible Debt was converted to Series B Preferred Stock and the remaining$500,000 was repaid out of the proceeds of the Series B Preferred Stockfinancing as described above.

 

The 8,334 warrants granted on the $500,000 of SeniorSubordinated Convertible Debt, which were converted into Series B PreferredStock, were cancelled effective March 31, 2003.  The remaining 8,334 warrants granted on the $500,000 of SeniorSubordinated Debt that was repaid are still active and outstanding.  In addition, the Company granted 20,000warrants on March 31, 2003 to the holders of the Senior Subordinated Debt thatwere repaid representing the warrants earned for the period October 1, 2002 throughMarch 31, 2003.  The additional 20,000warrants granted as of March 31, 2003 were valued at $2,700 using theBlack-Scholes valuation method.  Sincethe Company had accrued $14,400 for the warrants as of December 31, 2002, anadjustment to income of $11,700 was recorded for the three months ended March31, 2003.

 

**13.****       RELATEDPARTY TRANSACTIONS**

 

On December 1, 1999, the Company entered into a LoanAgreement with William M. Rychel pursuant to which the Company loaned Mr.Rychel a total of $1,775,000 to purchase from certain shareholders a total of268,995 shares of our common stock.  Theoriginal term of the loan was one year which the Company extended untilDecember 1, 2001 and, on December 1, 2001, the Company entered into anotheramendment with Mr. Rychel that extended the due date of the loan until December1, 2002.  In exchange for extending theloan, Mr. Rychel agreed to a non-compete and a confidentiality and assignmentof inventions agreement.  Under theSarbanes-Oxley Act of 2002, this loan could not be extended beyond its currentmaturity of December 1, 2002 or otherwise materially modified.  On November 25, 2002, the Companyrepurchased the 268,995 shares in exchange for the outstanding loan plusaccrued interest of $2,250,283.  Theshares repurchased have been put into Treasury Stock using the closing marketprice of the stock of $2.82 per share. The difference between the outstanding loan balance and the TreasuryStock resulted in a non-cash charge of $1,491,719.

 

Upon consummation of the Channels Businesstransaction, Centiv made loans to three former members of Centiv’s managementteam involved in the transaction.  Aloan in the amount of $200,000 was made to Scott Barker.  This loan is secured by 33,334 shares ofCentiv common stock owned by Mr. Barker

 

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and will bear interest at a rate of 25 basis pointsover the current rate on the Company’s senior debt facility, as adjusted fromtime to time.  The principal amount ofthis loan plus accrued interest shall be due and payable December 31,2003.  Upon the completion of theChannels Business transaction, the Company also made loans to Dave Boston andPat McLaughlin on the same terms and conditions in the amounts of $30,000 and$20,000, respectively.

 

John P. Larkin, the Company’s President and ChiefExecutive Officer was an investor in the Series B Preferred offering closed onMarch 31, 2003.  In connection with theinvestment, Mr. Larkin purchased 20,000 Units, each consisting of one share ofSeries B Convertible Preferred Stock and a warrant to purchase 0.667 shares ofcommon stock at an exercise price of $1.50 per share.  In connection with that transaction, Mr. Larkin waived hisconversion rights and granted to the Company’s Chief Financial Officer anirrevocable proxy to vote those shares (in accordance with the vote of themajority of the Company’s capital stock entitled to vote thereon excludingthese shares) until the Company’s stockholders ratified the issuance of theSeries B Preferred, which occurred at the Company’s annual meeting ofstockholders held on May 29, 2003.

 

**14.****       STOCK-BASEDCOMPENSATION**

 

Effective for fiscal 2003, the Company adopted thedisclosure requirements under SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure” as an amendment toSFAS No. 123.

 

Stock-based employee compensation, including stockoptions, for the three months and six months ended June 30, 2003 was accountedfor under the intrinsic value-based method as prescribed by APB OpinionNo. 25, “Accounting for Stock Issued to Employees.” Therefore, nocompensation expense was recognized for those stock options that had nointrinsic value on the date of grant.

 

If the Company were to recognize compensation expenseover the relevant service period under the fair-value method ofSFAS No. 123 with respect to stock options granted for the threemonths and six months ended June 30, 2003 and all prior years, the net losswould have increased (decreased), resulting in pro forma net earnings and EPSas presented below:

 

|                                                                                                                        |   | **Three  Months Ending  June 30,** |   | **Six Months  Ending  June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                                                                                        |   | **2003**                           |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                                                                                        |   |                               |   |                             |   |   |   |   |   |
| Net Loss – as reported                                                                                                 |   | $                                  | (446   | )                                | $      | (338 | ) | $ | (506 | ) | $ | (835 | ) |
|                                                                                                                        |   |                               |   |                             |   |   |   |   |   |
| Deduct:  stock-based compensation income (expense) determined under the fair value  based method for all awards, net of tax |   | 2                                  |   | 9                                |   | (26 | ) | 18 |   |
|                                                                                                                        |   |                               |   |                             |   |   |   |   |   |
| Net  Loss – pro forma                                                                                                  |   | $                                  | (444   | )                                | $      | (329 | ) | $ | (532 | ) | $ | (817 | ) |
|                                                                                                                        |   |                               |   |                             |   |   |   |   |   |
| **Earnings  (loss) per share:**                                                                                             |   |                               |   |                             |   |   |   |   |   |
| Basic  – as reported                                                                                                   |   | $                                  | (0.27  | )                                | $      | (0.20 | ) | $ | (0.33 | ) | $ | (0.51 | ) |
| Basic  – proforma                                                                                                      |   | (0.27                              | )      | (0.20                            | )      | (0.35 | ) | (0.49 | ) |
| Diluted  – as reported                                                                                                 |   | (0.27                              | )      | (0.20                            | )      | (0.33 | ) | (0.51 | ) |
| Diluted  – pro forma                                                                                                   |   | (0.27                              | )      | (0.20                            | )      | (0.35 | ) | (0.49 | ) |

 

The amount of the pro forma charge has been determinedusing the Black-Scholes model, aspermitted by FAS 123.  For purposes ofthe calculation, management used an average interest rate of 5.22% based on theU.S. Treasury Strip (zero-coupon) bonds, a projected volatility rate of 80%, adividend yield of 0% and an expected life of 5 years for the grants.

 

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

 

The Board of Directors hasestablished a Key Employee Incentive Pool (“KEIP”).  Under the KEIP, upon the consummation of a sale of all orsubstantially all of the assets of Centiv or the consummation of a mergerwherein the then current stockholders of Centiv do not own at least 50% of theoutstanding voting power of the surviving entity or upon a sale of all orsubstantially all of the outstanding capital stock of Centiv, the participatingemployees shall receive 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, greater than $75million the KEIP will be the greater of 10% or $11.25 million.

 

Since payments under the KEIP are contingent upon thesale of the Company as well as the amount to be realized upon sale and theparticipants must be employed at the time of the sale, there has been norecognition or accrual of the cost of this plan in the financialstatements.  The Company will recognizethe cost of the KEIP when the event becomes probable and the amount can bereasonably estimated.

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion should be read in conjunction with theinformation contained in the Consolidated Financial Statements, including therelated notes.

 

**Overview**

 

Weare a developer and provider of Web-enabled point-of-purchase (POP) solutionsfor consumer goods manufacturers and multi-location retailers.  Our Instant Impact solution allows marketingmanagers, brand managers and retailers to create, edit and schedule delivery ofcustomized POP signage, using field-editable sign templates created and/orapproved by manufacturers. Instant Impact POP signage is print quality anddigitally produced for the unique requirements of each retail location,allowing users to target specific consumer segments at the POP and accumulatequantitative data for analysis and feedback on the success of their in-store oron-premise marketing campaigns. Our products allow a user to access aninformation database for selecting sign templates approved or created bymanufacturers, input data for the sign templates and select signage productsfor production of the sign templates. OurInternet-based user interface is clear, flexible, user-friendly and changeableto allow control of the message at a corporate or local store level. InstantImpact signage can either be printed in a Centiv print center, or anindustry-standard print-formatted file can be delivered via the Internet to anyprint provider in the world.  We believethat our Instant Impact solution improves marketing results (due to improvedsignage utilization, customization and images), provides measurable marketingfeedback, reduces signage lead time, allows for distribution of brand identitywhile protecting the integrity of that identity and reduces the costsassociated with in-store and on-premises custom signage.

 

Theroots of Centiv’s introduction to the custom POP segment were formed in 1998when we partnered with Anheuser-Busch (A-B) to design, configure, deliver andimplement a proprietary A-B POP signage system in over 730 A-B wholesaledistributors in the United States and 16 foreign countries. This led to arelationship with Anheuser-Busch pursuant to which we installed a POP systemfor A-B allowing distributors to access that

 

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system to create custom signage using templatescreated by A-B.  In addition, as part ofour agreement, Centiv maintained rights to supply consumable print materials tothese distributors supported by an in-house call center service. As a result ofour exposure to the custom signage business, Centiv invested in the developmentof a web-based platform for the collaborative versioning of POP signage.  Beginning in 2001, Centiv began thecommercialization of Instant Impact.  Effective March 31, 2003, Centiv’s preferred supplier and technicalsupport agreement with A-B was not renewed. Our activities with A-B and its distributors terminated upon theexpiration of that agreement.

 

Withthe termination of the preferred supplier and support agreement effective March31, 2003, the sales to A-B and the wholesale distributor network will not occurin the future quarters of 2003.  We donot believe that sales from our Instant Impact product will be sufficient toreplace the sales lost from A-B and its wholesale distributor network during2003.  Total sales from A-B and itswholesale distributor network for the year ended December 31, 2002 were $24.9million.  Sales from A-B and its wholesaledistributor network during the three months ended June 30, 2003 and 2002 were$0 and $3.3 million, respectively and sales for the six months ended June 30,2003 and 2002 were  $4.1 million and$7.1 million, respectively.  In responseto this, we underwent a downsizing of our operations and have reduced ourheadcount and other operating expenses to a level that we believe will enableus to continue to operate our business. Although there can be no assurance that we will be able to offset thisloss of revenue sufficiently by cutting expenses or increasing revenue fromother sources, we believe the actions taken, along with capital raised in theoffering of our Series B Preferred Stock, will provide adequate financingthrough at least the next 12 months.

 

Although Centiv valuedits relationship with A-B, the contract did not include the Instant Impactweb-based process for POP design and delivery. The A-B relationship was part of the legacy business model as awholesaler of digital printing hardware and provider of consumable printingmaterials. The A-B relationship had never involved the use of Instant Impactä.  As a result, A-B’s decision in no wayreflects upon the relevancy and viability of this innovative service goingforward.  Despite the revenue impact oflosing our supply relationship with A-B, the net contribution impact was negligible.After a prudent assessment of our overhead costs and spending, we developed astrategy to defer or reduce ongoing expenses in order to minimize the financialimpact of this event.

 

Although no singlecustomer accounted for more than 10% of the sales for the years ended December31, 2002 and 2001, on a combined basis, distributors affiliated with A-B, inthe aggregate, accounted for approximately 97% and 99% of the sales,respectively.  For the three monthsended June 30, 2003 and 2002, distributors affiliated with A-B, in theaggregate, accounted for approximately 0% and 95% of the sales,respectively.   For the six months endedJune 30, 2003 and 2002, distributors affiliated with A-B, in the aggregate, accountedfor approximately 76% and 97% of our total sales, respectively.

 

**ThreeMonths Ended June 30, 2003 Compared With Three Months Ended June 30, 2002**

 

***Net Sales from continuing operations.***  Total sales from continuing operations of$585,000 for the three months ended June 30, 2003, decreased 83% or $2.9million, compared to $3,501,000****for the three months ending June 30,2002.  As previously mentioned, with the expiration of the Anheuser-Busch (A-B)preferred supplier and support agreement effective March 31, 2003, there wereno sales to A-B and the wholesale distributor network for the three monthsended June 30, 2003.  Sales to Anheuser-Busch(A-B) and its wholesale distributor networkwere $3.3 million for the three months ended June 30, 2002.

 

Sales of the Instant Impact product line were $585,000for the three months ended June 30, 2003, or an increase of 265% over the salesof $160,000 for the three months ended June 30, 2002.  The sales increase for the three monthsended June 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.  Sales of the Instant Impact product for the three months endedJune 30, 2003, showed a decline of $133,000 over the three months ended March31, 2003 as a result of certain customers POP budgets having been

 

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reduceddue to fiscal year-end cutbacks.  Weexpect that revenues will continue to grow as we continue to expand ourcustomer base and POP budgets are increased within our existing customers.

 

***Gross Profit from continuing operations.***  Gross profit from continuing operations of$338,000 for the three months ended June 30, 2003 decreased 65% or $624,000,compared to $962,000 for the three months ended June 30, 2002.  However, gross profit as a percentage ofsales increased 30.5 percentage points to 58.0% for the three months ended June30, 2003 compared to 27.5% for the three months ended June 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 63.1%compared to margins of 25.8% for the A-B sales for the three months ended June30, 2002.

 

The reason for the margin difference is that the A-B businessrelationship consisted of sales of lower margin digital printing hardware andconsumable printing materials, while the Instant Impact business consists of web-basedservices including web set-up fees, creative services as well as production ofcustomized point of purchase signage.

 

***SG&A Expenses from continuing operations.***  SG&A expenses from continuing operationsof $645,000 for the three months ended June 30, 2003 decreased $580,000 or 47%,compared to $1.2 million for the three months ended June 30, 2002.  As a result of the termination of the A-Bagreement, the costs associated with the A-B business have been eliminatedeffective March 31, 2003.  In addition,in the second quarter of 2003, SG&A expenses reflect a one-time favorableadjustments of $160,000 relating to: (1) a reversal of the 2002 bonus accrualof $120,000 as this amount will not be paid due to the establishment of thelong term Key Employee Incentive Plan (KEIP), and (2) a favorable workerscompensation insurance audit adjustment of $40,000.

 

***Depreciation Expense from continuingoperations.  ***Depreciationexpense from continuing operations increased $10,000, or 7%, to $144,000 forthe three months ended June 30, 2003, as compared to $134,000 for the threemonths ended June 30, 2002.  Theincrease in depreciation expense relates to additional computer and productionequipment purchased during the course of 2002 for the expansion of the print center.

 

***Interest Income (expense) from continuingoperations.  ***Interestincome of $4,000 for the three months ended June 30, 2003 decreased $53,000, or95%, compared to $57,000 for the three months ended June 30, 2002.  The decrease in interest income is theresult of the reduction in the outstanding loans due from stockholders (SeeFootnote 13 to Financial Statements).

 

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

 

***Net Loss from continuing operations.***  The Company had a net loss from continuingoperations of $445,000 for the three months ended June 30, 2003, compared tothe net loss of $338,000 for the three months ended June 30, 2002, an increasein the loss of 32%.  The increase in thenet loss is attributable to lower sales as a result of the termination of theA-B relationship as of March 31, 2003.

 

**SixMonths Ended June 30, 2003 Compared With Six Months Ended June 30, 2002**

 

***Net Sales from continuing operations.***  Total sales from continuing operations of$5.4 million for the six months ended June 30, 2003 decreased 27% or $1.9million, compared to $7.3 million for the six months ending June 30, 2002.  Aspreviously mentioned, with the termination of the A-B preferred supplier andsupport agreement, there were no sales to A-B and the wholesale distributornetwork after March 31, 2003 and

 

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therefore the sales to A-B of $4.1 million for the sixmonths ended June 30, 2003 decreased $3.0 million compared to sales to A-B of$7.1 million for the six months ended June 30, 2002.

 

Sales of the Instant Impact product line were $1.3million for the six months ended June 30, 2003, or an increase of 431% over thesales of $245,000 for the six months ended June 30, 2002.  The sales increase over prior year wasattributable primarily to expanded usage of the Instant Impact system fromexisting customers as well as revenue from new customers.

 

***Gross Profit from continuing operations.***  Gross profit from continuing operations of$1.7 million for the six months ended June 30, 2003, decreased 11% or $212,000,compared to $1.9 million for the six months ended June 30, 2002.  However, gross profit as a percentage ofsales increased 5.6 percentage points to 32% for the six months ended June 30,2003 compared to 26% for the six months ended June 30, 2002.

 

The gross profit percentage for the six months ended June 30, 2003 isreflective of a higher mix of Instant Impact sales compared to sales toA-B.  Instant Impact margins were 56.4%for the six months ended June 30, 2003 compared to margins of 48.6% for the sixmonths ended June 30, 2002.  Grossprofit percentage for the A-B sales were 24.0% for the six months ended June30, 2003 compared to margins of 25.5% for the six months ended June 30, 2002.

 

***SG&A Expenses from continuing operations.***SG&A expenses from continuing operations of $1.9 million for the six monthsended June 30, 2003, decreased $511,000 or 21%, compared to $2.4 million forthe six months ended June 30, 2002.  Asa result of the expiration of the A-B agreement, the costs associated with theA-B business have been eliminated effective March 31, 2003.  In addition, for the six months ended June30, 2003, SG&A expenses reflect a one-time favorable adjustments of$160,000 relating to: (1) a reversal of the 2002 bonus accrual of $120,000 asthis amount will not be paid due to the establishment of the long term KeyEmployee Incentive Plan (KEIP), and (2) a favorable workers compensationinsurance audit adjustment of $40,000.

 

***Depreciation Expense from continuingoperations.  ***Depreciationexpense from continuing operations increased $19,000, or 7%, to $286,000 forthe six months ended June 30, 2003, as compared to $267,000 for the six monthsended June 30, 2002.  The increase indepreciation expense relates to additional computer and production equipmentpurchased during the course of 2002 for the expansion of the print center.

 

***Other Income from continuingoperations.  ***There was no otherincome for the six months ended June 30, 2003 compared to $283,000 forthe six months ended June 30, 2002.  Theother income represents the settlement of outstanding liabilities associatedwith the termination of vendor contracts relating to the sale of the ChannelsBusiness.

 

***Interest Income (expense) from continuingoperations.  ***Interestexpense of $12,000 was recorded for the six months ended June 30, 2003,compared to interest income of $85,000 for the six months ended June 30,2002.  The interest expense in 2003reflects interest costs for the convertible subordinated debt of $1.0 millionthat was retired on March 31, 2003 (See Footnote 12 to Financial Statements).The interest income in 2002 represents interest on the stockholder’s notes (SeeFootnote 13 to Financial Statements).

 

***Income Taxes from continuing operations.***  The Company’s effective tax rate forcontinuing operations was 0% for the six months ended June 30, 2003 and 2002 asthe Company’s tax benefit was offset by a corresponding increase in thevaluation allowance for deferred income taxes.

 

***Net Loss from continuing operations.***  The Company had a net loss from continuingoperations of $505,000 for the six months ended June 30, 2003, compared to thenet loss of $405,000 for the six

 

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monthsended June 30, 2002, an increase in the net lose of 25%.  The increase in the net loss is attributableto lower sales as a result of the termination of the Anheuser Buschrelationship as of March 31, 2003.

 

**DiscontinuedOperations:**

 

The Company had net income from discontinued operations of $380,000 forthe six months ended June 30, 2002. (See Footnote 10 to Financial Statements for a description of thediscontinued operations).

 

**Effectof beneficial conversion feature of preferred stock:**

 

The Company recorded abeneficial conversion feature on the Series A Convertible Preferred Stock andwarrants that were issued in March 2002, based on the fair value of the commonstock of $3.00 per share as of the date of commitment. The warrants with anexercise price of $4.50 per share were valued at $810,000 using the Black-Scholesvaluation method. 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.

 

Therewas no beneficial conversion feature on the Series B Convertible PreferredStock and warrants that were issued in March 2003, based on the fair value ofthe common stock of $1.02 per share as of the date of commitment.

 

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

On June 30, 2003, the Company had $1.9 million in cash and positiveworking capital of $2.1 million compared to $1.3 million in cash and $783,000in working capital as of December 31, 2002. The improvement is a result of theSeries B Preferred Stock private offering that was completed on March 31, 2003(see Notes 11 and 12 to Consolidated Financial Statements).

 

The Company used $877,000 of cash from operations for the six monthsended June 30, 2003 compared to $2.3 million of cash used from operations forthe six months ended June 30, 2002. During the six months ended June 30, 2003, cash was used to pay accountspayable and accrued expenses of $2.8 million relating to vendor payments forthe A-B equipment upgrade that took place in Q4 2002.  Offsetting these payments was cash of $2.2 million through areduction in accounts receivable, inventories and prepaid expenses as a resultof the termination of the A-B agreement.

 

During the six months ended June 30, 2002, the Company used $2.3million of cash from operations.  Cashwas used to pay accounts payable and accrued expenses of $2.5 million primarilyfrom the payment of transaction costs as well as other payments relating tovendor settlements associated with the sale of the Channels Business.

 

For the six months ended June 30, 2003, the Company generated cash of$121,000 from investing activities.  TheCompany received cash of $150,000 from the sale of the CalGraph Business (seeNote 10 of the Notes to Consolidated Financial Statements), partially offset bycash used of $29,000 for the purchase of computer and productionequipment.  For the six months endedJune 30, 2002, the Company generated cash of $907,000 from investingactivities.  The Company received cashof $1,100,000 from

 

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the sale of the CalGraph Business (see Note 10 of the Notes toConsolidated Financial Statements), partially offset by cash used of $193,000for the purchase of software licenses, computer hardware and productionequipment. Approximately $89,000 of the $193,000 of purchases related toone-time expenditures for splitting the software licenses and computer hardwaredue to the divestitures of Channels and CalGraph business units.

 

For the six months ended June 30, 2003, the Company generated cash of$1,396,000 principally from financing activities in relation to the Series BPreferred Stock offering.  The Companyreceived net proceeds of $1,910,000 from the equity offering (see Note 11 ofthe Notes to Consolidated Financial Statements).  In addition, the Company repaid $500,000 of convertiblesubordinated debt (see Note 12 of the Notes to Consolidated FinancialStatements).  The remaining $500,000 ofsubordinated debt was converted in exchange for participation in the Series BPreferred Stock offering.

 

For the six months ended June 30, 2002, the Company generated cash of$1,281,000 from financing activities in relation to the Series A ConvertiblePreferred Stock offering.  The Companyreceived $1,776,000 from private equity offering (see Note 11 of the Notes toConsolidated Financial Statements).  Thenet proceeds were used to pay off and cancel the Company’s credit facility.

 

The Company believes that its available funds will be adequate tosatisfy its current and planned operations, including restructuring accruals,through at least the next 12 months.

 

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

In April 2002, the FASBissued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 46,Amendment of FASB Statement No. 13, and Technical Corrections”, SFAS No. 145addresses a variety of accounting practices. The provisions of this statement related to the rescission of StatementNo. 4 (Reporting Gains and Losses from Extinguishment of Debt) are effectivefor fiscal years beginning after May 15, 2002. The provisions of this statement related to Statement No. 13 (Accountingof Leases) are effective for transactions occurring after May 15, 2002.  All other provisions of this statement areeffective for financial 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.”

 

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

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.” This statement requires recognition of costs associated with exitor disposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. This new statement is effective for exit or disposal activities that areinitiated after December 31, 2002.  TheCompany does not expect that adoption of this statement will have a materialeffect on its results of operations or financial position.

 

In November 2002, theFASB issued Interpretation No. 45 (FIN No. 45), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.” This is an interpretation of FASB Statements No. 5, 57and 107 and the rescission of FASB Interpretation No. 34. FIN No. 45 elaborateson the disclosures to be made by a guarantor in its interim and annualfinancial statements about its obligations under certain guarantees that it hasissued.  It also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The initial recognition andinitial measurement provisions of FIN No. 45 are applicable on a

 

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prospective basis to guarantees issued or modified after December 31,2002, irrespective of the guarantor’s fiscal year-end.  The disclosure requirements in FIN No.45 areeffective for financial statements of interim or annual periods ending December15, 2002.  The Company does not expectthat adoption of this interpretation will have a material effect on its resultsof operations or financial position.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure.”  This statement amendsSFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition for a voluntary change to the fair value method of accountingfor stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFASNo. 123 to require more prominent disclosures in both the annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method on reported amounts.  The amendments to SFAS No. 123 in paragraphs2(a)-2(e) of this statement were effective for financial statements for fiscalyears ending after December 15, 2002 and were adopted by the Company in2002.  Adoption of these paragraphs didnot have a material effect on the Company’s results of operations or financialpositions.  The amendment to SFAS No.123 in paragraph 2(f) of this Statement and the amendment to Opinion 28 in paragraph3 are effective for financial reports containing condensed financial statementsfor interim periods beginning after December 15, 2002.  The Company does not expect that adoption ofthese portions of the statement will have a material effect on its results ofoperations or financial positions.

 

In January 2003, the FASBissued Interpretation No.46 (FIN No. 46), “Consolidation of Variable InterestEntities.”  This is an interpretation ofAccounting Research Bulletin No. 51, and revises the requirements forconsolidation by business enterprises of variable interest entities.  FIN No. 46 applies immediately to variableinterest entities created after January 31, 2003, and to variable interestentitles in which an enterprise obtains an interest after that date.  It applies in the first fiscal year orinterim period beginning after June 15, 2003 to variable interest entities inwhich an enterprise holds a variable interest that it acquired before February1, 2003.  FIN No. 46 applies to publicenterprises as of the beginning of the applicable interim or annual period, andit applies to nonpublic enterprises as of the end of the applicable annualperiod.  FIN No. 46 may be appliedprospectively with a cumulative-effect adjustment as of the date on which it isfirst applied or by restating previously issued financial statements for one ormore years with a cumulative-effect adjustment as of the beginning of the firstyear restated.  The Company is not partyto any 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 CertainFinancial Instruments with Characteristics of Both Liabilities and Equity”(“SFAS 150”), which improves the accounting for certain financial instrumentsthat, under previous guidance, issuers could account for as equity.  SFAS 150, which is effective for interimperiods beginning after June 15, 2003, requires that those instruments beclassified as liabilities in statements of financial position. The Company doesnot expect that adoption of this statement will have any material effect on itsresults of operations or financial position.

 

** **

**DISCLOSURE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

This report contains “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements appear in a number of places in this report and includeall statements 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 that such forward-looking statements are notguarantees of future performance and involve risks and uncertainties, and thatactual results may differ materially from those that are anticipated in theforward-looking statements as a result of the impact of competition andcompetitive

 

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pricing, business conditions and growth in the industry, general andeconomic conditions and other risks. Investors should review the more detailed description of these and otherpossible risks contained in the Company’s filings with the Securities andExchange Commission, including the Company’s Form 10-K for the year endedDecember 31, 2002.

 

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISKS**

 

Financial instruments that potentially subject the Company tosignificant concentrations of credit risk consist principally of trade accountsreceivable.  Credit risks with respectto trade receivables are limited due to the diversity of customers comprisingthe Company’s customer base.  TheCompany performs ongoing credit evaluations and charges uncollectible amountsto operations when they are determined to be uncollectible.

 

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

Centiv management, including the Chief ExecutiveOfficer and Chief Financial Officer, have conducted an evaluation of theeffectiveness of disclosure controls and procedures, pursuant to Exchange ActRule 13a-15(b), as of June 30, 2003. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective in ensuring that all material informationrequired to be filed in this quarterly report has been made known to them in atimely fashion 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 June 30, 2003 were identifiedthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

 

**PARTII       OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Not applicable

 

**ITEM2.  CHANGES IN SECURITIES AND USE OFPROCEEDS**

 

**Series AConvertible Preferred Stock:**

 

On March 28, 2002 and April 15, 2002, the Companysold, in two separate closings, a private placement of Series A ConvertiblePreferred Stock (“Series A Preferred”), 191,000 and 25,000 units respectively, each unit consisting of one share ofSeries A Preferred and one warrant to purchase one additional share of Series APreferred. The purchase price for each unit was $10.00 per unit.  This sale of units was ratified by theCompany’s stockholders at the annual meeting of shareholders held on June 11,2002.  Because each share of Series APreferred was convertible, initially, into 3.33 shares of common stock, theeffective purchase price was $3.00 for each share of common stock purchased.The warrant that was

 

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included in each unit gives theholder the right, until five years after the issuance of the warrant, topurchase one share of Series A Preferred at a purchase price of $15.00 pershare or the equivalent of $4.50 per share of common stock.

 

The Series A Preferred had aliquidation preference over commonstock equal to the purchase price of the Series A Preferred plus any accruedbut unpaid dividends.  The Series APreferred contained a dividend feature, such that if not converted before March31, 2003, dividends would have accrued at an annual rate equal to 8% of thepurchase price of the Series A Preferred. In addition, if not previously converted into common stock, the Series APreferred was subject to redemption at the option of the Company on the fourthanniversary of the issuance of the Series A Preferred at a redemption priceequal to the purchase price plus any accrued but unpaid dividends.  If the Company failed to redeem the Series APreferred on that date, the holders of the convertible preferred stock wouldhave become entitled to elect a majority of the Company’s board ofdirectors.  Notwithstanding theforegoing, directors elected by virtue of the voting rights of the Series A Preferredwould have had to recuse themselves from any vote to redeem all or a portion ofthe Series A Preferred.

 

Proceeds to the Company from thesale of the Series A Preferred were $2,160,000, of which $1,910,000 wasreceived at the March 28, 2002 closing and the remaining $250,000 was receivedat the April 15, 2002 closing. Aggregate transaction costs of $135,000 representing legal, accountingand registration fees were incurred bringing the net proceeds to$2,025,000.  The net proceedswere used to pay off and cancel the Company’s then existing credit facilitywith Wachovia Bank, NA.

 

The Company recorded a beneficial conversion featureon the Series A Preferred andwarrants based on the fair value of the common stock of $3.00 per share as ofthe date of commitment. The warrants with an exercise price of $4.50 per share,  were valued at $810,000 using the Black-Scholes valuation methodusing assumptions described in Footnote 14 to Notes to Financial Statements.The beneficial conversion feature was calculated to be $810,000 at the commitmentdate of March 28, 2002 and has been recorded as Additional Paid in Capital. Asthe preferred shares were convertible immediately, the entire amount of thebeneficial conversion feature was accreted into the Accumulated Deficit atMarch 31, 2002.

 

The Series A Preferred wasinitially convertible into 3.33 shares of common stock for each share of theSeries A Preferred.  This conversionratio, however, was subject to anti-dilution adjustment for stock splits,combinations and other similar changes and if the Company issued, except inlimited 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 automatically converted if (i) holders of 2/3 ofthe outstanding shares of such preferred stock agreed to convert, (ii) theCompany’s revenues exceeded $5 million for any two consecutive quarters, or(iii) the Company recognized $20 million in revenues for the 12-month periodending March 31, 2003.

 

The Company did, in fact,recognize $20 million in revenues for the 12-month period ending March 31, 2003and thus, all of the Series A Preferred issued and outstanding as of the closeof business on March 31, 2003 was converted into common stock and theassociated warrants were converted into warrants to purchase common stock.

 

On March 31, 2003, as part of the issuance of Series B Convertible Preferreddiscussed below, certain investors who also owned Series A Preferred converted 135,000 shares of Series A Preferred into 270,000shares of Series B Preferred.  Theassociated warrants were cancelled for no value.  No Warrants were issued in connection with the shares ofSeries B Preferred issued in conversion for the Series A Preferred.  Theremaining 81,000 outstanding shares of Series A Preferred were converted onMarch 31, 2003 into 270,003 shares of common stock in accordance with the termsof the Series A Preferred certificate of designations. Therefore, as of March31, 2003, there were no shares of Series A Preferred outstanding.

 

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**Series BConvertible Preferred Stock:**

 

On March 31, 2003, the Company sold, in a privateplacement exempt from registration, 500,000units, each consisting of one share of Series B Convertible Preferred Stock(the “Series B Preferred”) and one warrant to purchase 0.667 shares, on a postreverse stock split basis, of Common Stock (the “Warrant”).  As part of the private placement, theholders of $500,000 of the outstanding Convertible Subordinated Debt convertedeach $5.00 of Subordinated Convertible Debt into one share of Series BPreferred and one warrant to purchase 0.667 shares, on a post reverse stocksplit basis, of Common Stock..  Theremaining $500,000 of Convertible Subordinated Debt was repaid in full fromproceeds of this offering.  In addition,the Company issued an additional 270,000 shares of Series B Preferred inconversion of 135,000 shares of its outstanding Series A Convertible PreferredStock (the “Series A Preferred”). No Warrants were issued in connectionwith the shares of Series B Preferred issued in exchange for the Series APreferred.  In addition, the priorwarrants to purchase Series A Preferred held by the Series A Preferred investorswere cancelled with no value in connection with the conversion.  Theremaining 81,000 outstanding shares of Series A Preferred was converted onMarch 31, 2003 into 270,003 shares, on a post reverse stock split basis) ofCommon Stock in accordance with the terms of the Series A Preferred certificateof designations.

 

The purchase price for each unitwas $5.00 per unit (the “Purchase Price”). Because each share of Series B Preferred is convertible, initially, into3.33 shares of Common Stock on a post reverse stock split basis, the effectivepurchase price was $1.50 on a post reverse stock split basis for each share ofCommon Stock purchased.  The associatedWarrant gives the holder the right, until seven years after the issuance of theWarrant, to purchase 0.667 shares of Common Stock on a post reverse stock splitbasis at a purchase price of $1.50 per share on a post reverse stock splitbasis.

 

The Series B Preferred has aliquidation preference over Common Stock equal to two times the Purchase Priceplus any accrued and unpaid dividends. If not previously converted, the Series B Preferred will begin to accruedividends on April 1, 2004 at an annual rate equal to 8% of the Purchase Priceper year.  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 a redemptionprice equal to the Series B Preferred liquidation preference amount.  If the Company fails to redeem the Series BPreferred on that date, the holders of the Series B Preferred become entitledto elect a majority of the board of directors. Notwithstanding the foregoing, directors elected by virtue of the votingrights of the Series B Preferred would have to recuse themselves from any voteto redeem all or a portion of the Series B Preferred.

 

As stated, the Series BPreferred is initially convertible into 3.33 shares of Common Stock, on a postreverse stock split basis, for each share of the Series B Preferred.  This conversion ratio, however, is subjectto anti-dilution adjustment if the Company issues any capital stock (orsecurities exercisable for or convertible into capital stock) for a per shareprice less than the then current conversion price of $1.50 on a post reversestock split basis, except for issuances pursuant to the Company’s stock optionplan and certain other issuances to business partners.  The anti-dilution adjustment will be made ona full-ratchet basis.  Each share ofSeries B Preferred is entitled to 3.33 votes on a post reverse stock splitbasis and the Series B Preferred stockholders vote together with the CommonStock stockholders on all matters unless otherwise required by law.

 

The purchasers of the Series BPreferred may voluntarily convert the Series B Preferred into Common Stock atany time.  The Series B Preferred willbe automatically converted into Common Stock if (i) the Company meets eitherConversion Milestone defined below, or (ii) holders of 2/3 of the outstandingshares of the Series B Preferred agree to convert.  In either event, however, an automatic conversion will only occurif a registration statement covering the resale of the shares issuable uponconversion is in effect at that time. “Conversion Milestone” shall meaneither (a) the Company’s pretax earnings from ongoing operations are equal toor greater than $6 million in the aggregate in any four consecutive fiscalquarters******asdetermined in accordance with United States Generally Accepted AccountingPrinciples (“GAAP”) as applied by the Company on the date when the Series BPreferred was first issued and the

 

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closing trading price of the Company’s Common Stock isequal to or 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 abusiness day on which at least 50,000 shares of Common Stock are traded on theprincipal United States securities exchange or automated quotation system onwhich such security is listed or traded.

 

The Company agreedto file a registration statement on Form S-3 to cover the resale of the sharesof Common Stock issuable upon conversion of the Series B Preferred and theshares of Common Stock issuable upon exercise of the Warrants.  That registration statement was declaredeffective on July 16, 2003.  The Companyalso agreed to use its best efforts to maintain the effectiveness of theregistration statement until the earlier of (a) the later of (i) two yearsafter all of the Warrants have been redeemed or exercised, or (ii) two yearsafter all of the Series B Preferred has been converted, or (b) six years fromthe closing date. In addition, the Company granted the purchasers of the SeriesB Preferred piggy-back registration rights on any other registration statementfiled by the Company (other than on Forms S-8 or S-4).  The Company is not, however, obligated toregister or qualify the resale of the shares of Common Stock issuable uponconversion of the Series B Preferred and the shares of Common Stock issuableupon exercise of the Warrants under the laws of the various states, unlessspecifically requested by the purchasers of the Series B Preferred.  The Company agreed to bear all expenses ofeach registration, including the costs of one special counsel to the purchasersof the Series B Preferred.

 

Pursuant to the terms of the private placement, theCompany may impose blackout periods with respect to the use of the registrationstatement in an aggregate amount of time not to exceed 25 business days in any12-month period if the Company’s board of directors determines in good faiththat (a) an amendment or supplement to a registration statement is required tocorrect a material misstatement or to include information the absence of whichwould render the registration statement materially misleading and (b) thefiling of such amendment or supplement would result in the disclosure ofinformation that the Company has a bona fide business purpose for preserving asconfidential. The Company may not issue more than four blackout periods in any12-month period.  The Company agreed tonotify the purchasers of the Series B Preferred of blackout periods but thepurchasers are not required to notify the Company of any sales if no blackoutis in effect.  The registration rightsare embodied in an investor rights agreement that contains customary terms andconditions, including cross-indemnities.

 

The Series B Preferred Stock financing included cashproceeds of $2,000,000 plus the conversion of $500,000 of the Company’s SeniorConvertible Subordinated Debt that was issued on September 28, 2002.  The remaining Senior ConvertibleSubordinated Debt of $500,000 was repaid out of the proceeds of this financingand as of March 31, 2003 the Company is debt free.  Aggregate transaction costs of$90,000 representing legal, accounting and registration fees were incurredbringing the net proceeds, after repaying the Subordinated Debt and transactioncosts, to $1,410,000.

 

There was no beneficialconversion feature on the Series B convertible preferred stock and warrantsbased on the fair value of the common stock of $1.02 per share as of the dateof commitment. The warrants with an exercise price of $1.50 per share, werevalued at $159,176 using the Black-Scholes valuation method usingassumptions described in Footnote 14 to Notes to Financial Statements.

 

**Convertible Subordinated Debt:**

 

On September 30, 2002, the Company issued $1 millionof Senior Subordinated Convertible Notes to private investors.  These notes were convertible into equity, atthe lenders’ option upon the closing of, and at the same terms as, the nextequity financing in which the Company raises 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

 

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of an equity financing described above and paysinterest at a rate of 10% per year.  Inaddition, the lenders received an aggregate of 16,667 warrants granted at theclosing of the loan and were eligible, as described below, to receive anaggregate of an additional 6,667 warrants per month until such time as the loanwas fully repaid or converted into equity.

 

The warrants are exercisable at $5.25 per share and iscallable by the Company if the market price of the Company’s common stockcloses at or above $15.00 per share for 10 consecutive trading days.  The initial 16,667 warrants granted atclosing were valued at $11,858 using the Black-Scholes valuation assumptionsdescribed in Footnote 14 to Notes to Financial Statements, creating anunamortized discount on the Senior Subordinated Convertible Notes.  The unamortized discount was amortized tointerest expense over the term of the note.

 

On March 31, 2003, $500,000 of the Senior SubordinatedConvertible Debt was converted to Series B Preferred Stock and the remaining$500,000 was repaid out of the proceeds of the Series B Preferred Stockfinancing as described above.

 

The 8,332 warrants granted on the $500,000 of SeniorSubordinated Convertible Debt, which were converted into Series B PreferredStock, were cancelled effective March 31, 2003.  The remaining 8,335 warrants granted on the $500,000 of SeniorSubordinated Debt that was repaid are still active and outstanding.  In addition, the Company granted 20,000warrants on March 31, 2003 to the holders of the Senior Subordinated Debt thatwere repaid representing the warrants earned for the period October 1, 2002through March 31, 2003.  The additional20,000 warrants granted as of March 31, 2003 were valued at $2,700 using theBlack-Scholes valuation method.  Sincethe Company had accrued $14,400 for the warrants as of December 31, 2002, anadjustment to income of $11,700 was recorded for the three months ended March31, 2003.

 

**Stock Grant:**

 

The Company issued 8,334shares of common stock to Piedmont Consulting, Inc. (“Piedmont”) under theterms of a Consulting Agreement dated as of May 8, 2003.  The issuance of common stock was exempt fromregistration under the Securities Act by virtue of Section 4(2) thereof, nopublic sale having been involved.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

The Company’s 2003 Annual Meeting of Stockholders was held on May 29,2003.  The votes shown below are on apre-adjusted basis before the impact of the one for three reverse stock split.

 

**Proposal1 – Election of two Class I Directors with a three year term expiring in 2006to be elected by both the common shareholders and the preferred shareholdersvoting as a single class: **

 
| **Proposal 1 Results** |   | **For**    |   | **Against** |   | **Abstain** |   | **Broker  Non-votes** |   |
|------------------------|--------|------------|--------|-------------|--------|-------------|--------|-----------------------|--------|
| John P. Larkin         |   | 11,343,835 |   | 6,150       |   | 0           |   | 0                     |   |
| Len Finelli            |   | 11,288,835 |   | 61,150      |   | 0           |   | 0                     |   |

 

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The directors continuing their terms were:  Thomas M. Mason, Darrell Splithoff, Thomas B. Pennell and J.Smoke Wallin.

 

**Proposal2 – Approval of Amendment to 1997 Stock Option Plan to increase the number ofshares that we may issue under the plan from 1,500,000 to 2,000,000:**

 

| **Proposal 2 Results** |   | **For**   |   | **Against** |   | **Abstain** |   | **Broker  Non-votes** |   |
|------------------------|--------|-----------|--------|-------------|--------|-------------|--------|-----------------------|--------|
|                   |   |      |   |        |   |        |   |                  |   |
| Total All  Classes     |   | 9,457,976 |   | 176,775     |   | 253,700     |   | 1,461,534             |   |

 

 

**Proposal3 – Ratification of the issuance of (i) 500,000 units, each consisting of oneshare of Series B Convertible Preferred Stock and a warrant to purchase twoshares of Common Stock and (ii) an additional 270,000 shares of Series BConvertible Preferred Stock in conversion of 135,000 shares of Series AConvertible Preferred Stock (common shareholders only voted on this proposal):**

 

| **Proposal 3 Results**    |   | **For**   |   | **Against** |   | **Abstain** |   | **Broker  Non-votes** |   |
|---------------------------|--------|-----------|--------|-------------|--------|-------------|--------|-----------------------|--------|
|                      |   |      |   |        |   |        |   |                  |   |
| Common  Shareholders only |   | 2,774,851 |   | 8,600       |   | 5,000       |   | 1,461,534             |   |

 

 

**Proposal4 – Approval of an amendment to Centiv’s certificate of incorporation grantingdiscretionary authority to the board of directors to effect a reverse stocksplit of all of the outstanding shares of Common Stock, at a ratio betweenone-for-two (1-for-2) and one-for-five (1- for-5), if it determines such actionis in the best interests of our stockholders:**

 

 

| **Proposal 4 Results** |   | **For**    |   | **Against** |   | **Abstain** |   | **Broker  Non-votes** |   |
|------------------------|--------|------------|--------|-------------|--------|-------------|--------|-----------------------|--------|
|                   |   |       |   |        |   |        |   |                  |   |
| Common Shares          |   | 3,575,223  |   | 673,512     |   | 1,250       |   | 0                     |   |
|                   |   |       |   |        |   |        |   |                  |   |
| Preferred Shares       |   | 7,100,000  |   | 0           |   | 0           |   | 0                     |   |
|                   |   |       |   |        |   |        |   |                  |   |
| Total All Classes      |   | 10,675,223 |   | 673,512     |   | 1,250       |   | 0                     |   |

 

 

**Proposal5 – Approval of the selection of independent auditors, Grant Thornton:**

 

 

| **Proposal 5 Results** |   | **For**    |   | **Against** |   | **Abstain** |   | **Broker  Non-votes** |   |
|------------------------|--------|------------|--------|-------------|--------|-------------|--------|-----------------------|--------|
|                   |   |       |   |        |   |        |   |                  |   |
| Total All Classes      |   | 11,288,735 |   | 59,000      |   | 2,250       |   | 0                     |   |

 

 

**ITEM 5.  OTHER INFORMATION**

 

On June 30, 2003, NASDAQ SmallCap Market informed the Company that theCompany had regained compliance with the requirements for continued listing onthe NASDAQ SmallCap Market and

 

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NASDAQ had closed the hearing file. This followed a successful reverse stock split effected by the Companyon June 16, 2003, which resulted in a closing bid price above $1.00 for therequired ten consecutive trading days. Centiv’s closing bid price on June 30, 2003 was $2.13 per share.

 

**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

**Exhibits**

 

3.1 Certificate of Incorporation of Centiv, Inc. datedApril 11, 2002 and related Certificate of Designations, Preferences and Rightsfiled May 21, 2002 (Filed as Exhibit 3.1 to the Company’s Quarterly Report onForm 10-Q filed on August 12, 2002 and incorporated herein by reference).

 

3.2 Certificate of Designations, Preferences andRights filed March 31, 2003 (Filed as Exhibit 3.3 to the Company’s AnnualReport on Form 10-K filed on April 4, 2003 and incorporated herein byreference).

 

3.3 Bylaws of Centiv, Inc. (Filed as Exhibit 3.2 tothe Company’s Quarterly Report on Form 10-Q filed on August 12, 2002 andincorporated herein by reference).

 

4.1 Form of Securities Purchase Agreement dated March31, 2003 by and among Centiv, Inc. and the purchasers identified on Exhibit Athereto (Filed as Exhibit 4.4 to the Company’s Annual Report on form 10-K filedon April 4, 2003 and incorporated herein by reference).

 

4.2 Form of Amended and Restated Investors RightsAgreement dated March 31, 2003 by and among Centiv, Inc. and the investors whoare signatories thereto (Filed as Exhibit 4.5 to the Company’s Annual Report onform 10-K filed on April 4, 2003 and incorporated herein by reference).

 

4.3 Form of Warrant issued pursuant to SecuritiesPurchase Agreement dated March 31, 2003 by and among Centiv, Inc. and thepurchasers identified on Exhibit A thereto (Filed as Exhibit 4.6 to theCompany’s Annual Report on form 10-K filed on April 4, 2003 and incorporatedherein by reference).

 

4.4 Consulting Agreement dated as of May 8, 2003between the Company and Piedmont Consulting, Inc.

 

10.1 Loan Agreement dated June 12, 2002 between theCompany and Cole Taylor Bank (Filed as Exhibit 10.1 to the Company’s QuarterlyReport on Form 10-Q filed on August 12, 2002 and incorporated herein byreference).

 

10.2 Security Agreement dated June 12, 2002 betweenthe Company and Cole Taylor Bank (Filed as Exhibit 10.2 to the Company’sQuarterly Report on Form 10-Q filed on August 12, 2002 and incorporated hereinby reference).

 

10.3 Key Employee Incentive Pool Plan (filed asExhibit B to Registrant’s Proxy Statement filed with the Commission on May 6,2003 (file number 000-23221) and incorporated herein by reference).

 

11.1 Statements of Computation of Earnings Per Share(Filed as Exhibit 11.1 to the Company’s Annual Report on form 10-K filed onApril 4, 2003 and incorporated herein by reference).

 

31.1 Certificationby John P. Larkin pursuant to Rule 13a-14(a) and 15d-14(a), as Adopted Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

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31.2 Certificationby Thomas M. Mason pursuant to Rule 13a-14(a) and 15d-14(a), as AdoptedPursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

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

 

 

**Reportson Form 8-K**

 

The following reports on Form 8-K were filed during the three monthsended June 30, 2003:

 

Current Report on Form 8-K filed April 2, 2003, which includeddisclosure under Item 5 relating to the completion of the Company’s $2,500,000equity financing to a group of private investors.

 

Current Report on Form 8-K filed April 11, 2003, which includeddisclosure under Item 5 relating to the Company’s announcement of its earningsfor the fourth quarter of 2002 and the Company’s earnings for the twelve monthsended December 31, 2002.

 

Current Report on Form 8-K filed April 24, 2003, which includeddisclosure under Item 5 relating to the restructuring of the Company’s board ofdirectors to include new members with significant industry experience.

 

Current Report on Form 8-K filed April 30, 2003, which includeddisclosure under Item 9 relating to the Company’s announcement of its earningsfor the fiscal quarter ended March 31, 2003.

 

Current Report on Form 8-K filed May 13, 2003, which includeddisclosure under Item 9 relating to the Company’s conference call to announceits earnings for the fiscal quarter ended March 31, 2003.

 

Current Report on Form 8-K filed June 17, 2003, which includeddisclosure under Item 5 relating to the approval of a 1-for-3 reverse stocksplit by the Company’s board of directors pursuant to authority obtained fromthe Company’s stockholders at the Company’s annual meeting on May 29, 2003.

 

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**SIGNATURES**

 

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-Q TO BE SIGNED ON ITSBEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED THIS 8th DAY OF AUGUST,2003.

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

 

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