**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

----

 

**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 March 31, 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 ofRegistrant as 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 checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes: ý   No: o

 

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

 

The number ofshares outstanding of the Registrant’s common stock, par value $.001, as of May9, 2003 the latest practicable date, was 4,997,035 shares.

 

 

----

 

**CENTIV, INC.**

##### **TABLEOF CONTENTS**

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

 

----

 

**PART I – FINANCIAL INFORMATION**

CENTIV, INC.

BALANCE SHEETS

($ in thousands)

 
|                                                                                                                                                                                                                  |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                  |   | **(unaudited)**     |   | **(audited)**           |   |
| **ASSETS**                                                                                                                                                                                                            |   |                |   |                    |   |
| Current assets:                                                                                                                                                                                                       |   |                |   |                    |   |
| Cash and cash equivalents                                                                                                                                                                                             |   | $                   | 2,683  |                    | $      | 1,304 |   |
| Accounts receivable, less allowance for doubtful  accounts of $24 and $19 at March 31, 2003 and December 31, 2002, respectively                                                                                       |   | 1,174               |   | 1,668                   |   |
| Inventories, net                                                                                                                                                                                                      |   | 194                 |   | 824                     |   |
| Prepaid expenses and other assets                                                                                                                                                                                     |   | 425                 |   | 565                     |   |
| Income taxes receivable                                                                                                                                                                                               |   | 8                   |   | 21                      |   |
| Deferred income taxes – current                                                                                                                                                                                  |   | 162                 |   | 162                     |   |
| Total current assets                                                                                                                                                                                                  |   | 4,646               |   | 4,544                   |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| Property and equipment, net                                                                                                                                                                                           |   | 1,578               |   | 1,707                   |   |
| Other assets                                                                                                                                                                                                          |   | 64                  |   | 137                     |   |
| Total assets                                                                                                                                                                                                          |   | $                   | 6,288  |                    | $      | 6,388 |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| **LIABILITIES**                                                                                                                                                                                                       |   |                |   |                    |   |
| Current liabilities:                                                                                                                                                                                                  |   |                |   |                    |   |
| Accounts payable                                                                                                                                                                                                      |   | $                   | 1,343  |                    | $      | 2,888 |   |
| Accrued expenses                                                                                                                                                                                                      |   | 945                 |   | 733                     |   |
| Contract obligation and deferred income                                                                                                                                                                               |   | 27                  |   | 140                     |   |
| Total current liabilities                                                                                                                                                                                             |   | 2,315               |   | 3,761                   |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| Deferred income taxes                                                                                                                                                                                                 |   | 162                 |   | 162                     |   |
| Convertible Subordinated Debt                                                                                                                                                                                         |   | —              |   | 990                     |   |
| Total liabilities                                                                                                                                                                                                     |   | 2,477               |   | 4,913                   |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| Commitments and Contingencies                                                                                                                                                                                         |   | —              |   | —                  |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                                                                         |   |                |   |                    |   |
| Common Stock $.001 par value, 35,000,000 shares  authorized; 5,804,018 shares issued and 4,997,035 shares outstanding at March  31, 2003, and 4,994,018 shares issued and 4,187,035 outstanding at December  31, 2002 |   | 5                   |   | 5                       |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| Treasury Stock, at cost, 806,983 shares at March 31,  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 March 31, 2003 and December 31, 2002,  respectively                                             |   | —              |   | —                  |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| Series B Preferred Stock, 1,000,000 shares designated;  770,000 shares and no shares issued and outstanding at March 31, 2003 and  December 31, 2002, respectively (liquidation value of $7,700,000)                  |   | 1                   |   | —                  |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| Due from stockholders                                                                                                                                                                                                 |   | (270                | )      | (267                    | )      |
| Additional paid-in capital                                                                                                                                                                                            |   | 24,907              |   | 22,509                  |   |
| Accumulated deficit                                                                                                                                                                                                   |   | (20,073             | )      | (20,013                 | )      |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| Total stockholders’ equity                                                                                                                                                                                       |   | 3,811               |   | 1,475                   |   |
|                                                                                                                                                                                                                  |   |                |   |                    |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                       |   | $                   | 6,288  |                    | $      | 6,388 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

----

 

CENTIV, INC.

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 

($ in thousands, except per share data)

 
|                                                                  |   | **Three  Months Ending March 31,** |   |
|-----------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                  |   | **2003**                                |   | **2002** |   |
|                                                                  |   | **(unaudited)**                         |   | **(unaudited)** |   |
|                                                                  |   |                                    |   |   |   |
| Net sales                                                             |   | $                                       | 4,782  |   | $ | 3,807 |   |
| Cost of goods sold                                                    |   | 3,412                                   |   | 2,849 |   |
| Gross profit                                                          |   | 1,370                                   |   | 958 |   |
|                                                                  |   |                                    |   |   |   |
| Operating expenses:                                                   |   |                                    |   |   |   |
| Selling, general and administrative                                   |   | 1,272                                   |   | 1,203 |   |
| Depreciation                                                          |   | 142                                     |   | 133 |   |
|                                                                  |   |                                    |   |   |   |
| Loss from operations                                                  |   | (44                                     | )      | (378 | ) |
|                                                                  |   |                                    |   |   |   |
| Other Income (expense)                                                |   | —                                  |   | 283 |   |
| Interest income   (expense)                                      |   | (16                                     | )      | 28 |   |
|                                                                  |   |                                    |   |   |   |
| Loss before income taxes from continuing operations                   |   | (60                                     | )      | (67 | ) |
|                                                                  |   |                                    |   |   |   |
| Benefit for income taxes from continuing operations                   |   | —                                  |   | — |   |
|                                                                  |   |                                    |   |   |   |
| Loss from continuing operations                                       |   | (60                                     | )      | (67 | ) |
|                                                                  |   |                                    |   |   |   |
| Income from discontinued operations (net of $98 tax in  2002)         |   | —                                  |   | 380 |   |
|                                                                  |   |                                    |   |   |   |
| Net Income (loss)                                                     |   | $                                       | (60    | ) | $ | 313 |   |
|                                                                  |   |                                    |   |   |   |
| Effect  of beneficial conversion feature of preferred stock           |   | —                                  |   | (810 | ) |
|                                                                  |   |                                    |   |   |   |
| Net loss attributable to common shareholders                          |   | $                                       | (60    | ) | $ | (497 | ) |
|                                                                  |   |                                    |   |   |   |
| Basic and Diluted Income/(Loss) applicable to common  shares          |   |                                    |   |   |   |
| Weighted average shares outstanding                                   |   | 4,196,035                               |   | 4,956,535 |   |
|                                                                  |   |                                    |   |   |   |
| Continuing operations per share before beneficial  conversion feature |   | $                                       | (0.01  | ) | $ | (0.02 | ) |
| Effect of Beneficial Conversion Feature                               |   | —                                  |   | (0.16 | ) |
| Loss from continuing operations attributable to common  shareholders  |   | (0.01                                   | )      | (0.18 | ) |
|                                                                  |   |                                    |   |   |   |
| Discontinued operations per share                                     |   | $                                       | — |   | $ | 0.08 |   |
|                                                                  |   |                                    |   |   |   |
| Net Loss per share                                                    |   | $                                       | (0.01  | ) | $ | (0.10 | ) |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

2

----

 

CENTIV, INC.

 

STATEMENTS OF CASH FLOWS

 

($ in thousands)

 
|                                                                         |   | **Three  Months Ending March 31,** |       |
|------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                         |   | **2003**                                |       | **2002 (*)** |   |
|                                                                         |   | **(unaudited)**                         |       | **(unaudited)** |   |
| **Cash  flows from operating activities:**                                   |   |                                    |       |   |   |
| Net  Income (loss)                                                           |   | $                                       | (60        | ) | $ | 313 |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                    |       |   |   |
| Provision  for doubtful accounts receivable                                  |   | 5                                       |       | 8 |   |
| Depreciation                                                                 |   | 142                                     |       | 133 |   |
| Interest  on note payable (receivable)                                       |   | (12                                     | )          | (52 | ) |
| Compensation  for warrants                                                   |   | (11                                     | )          | — |   |
| Gain  on sale of CalGraph Business                                           |   | —                                  |       | (488 | ) |
| Amortization  of Discount on Convertible Subordinated Debt                   |   | 10                                      |       | — |   |
| Changes  in net assets and liabilities                                       |   |                                    |       |   |   |
| Accounts  receivable                                                         |   | 489                                     |       | (441 | ) |
| Inventories                                                                  |   | 630                                     |       | (150 | ) |
| Prepaid  expenses and other assets                                           |   | 147                                     |       | 46 |   |
| Accounts  payable and accrued expenses                                       |   | (1,325                                  | )          | (1,317 | ) |
| Contract  obligations and deferred income                                    |   | (113                                    | )          | (127 | ) |
| Income  taxes                                                                |   | 13                                      |       | 573 |   |
| Net  assets, discontinued operations                                         |   | —                                  |       | 123 |   |
| Total  adjustments                                                           |   | (25                                     | )          | (1,692 | ) |
| **Net  cash used in operating activities**                                   |   | **(85**                                 | **)**      | **(1,379** | **)** |
|                                                                         |   |                                    |       |   |   |
| **Cash  flows from investing activities:**                                   |   |                                    |       |   |   |
| Purchase  of property and equipment – continuing operations             |   | (13                                     | )          | (164 | ) |
| Proceeds  from Sale of CalGraph Business                                     |   | 75                                      |       | 1,050 |   |
| **Net  cash provided by (used in) investing activities**                     |   | **62**                                  | ** ** | **886** | ** ** |
|                                                                         |   |                                    |       |   |   |
| **Cash  flows from financing activities:**                                   |   |                                    |       |   |   |
| Proceeds/(repayment),  net, from credit facility                             |   | —                                  |       | (796 | ) |
| Proceeds/(repayment),  net, from convertible subordinated debt facility      |   | (500                                    | )          | — |   |
| Net  Proceeds from private placement of securities                           |   | 1,910                                   |       | 1,776 |   |
| Proceeds/(repayment),  net, from capital lease                               |   | (8                                      | )          | 28 |   |
| **Net  cash provided by financing activities**                               |   | **1,402**                               | ** ** | **1,008** | ** ** |
|                                                                         |   |                                    |       |   |   |
| **Increase  (decrease) in cash and cash equivalents**                        |   | **1,379**                               | ** ** | **515** | ** ** |
| Cash  and cash equivalents, beginning of year                                |   | 1,304                                   |       | 228 |   |
| Cash  and cash equivalents, as of March 31                                   |   | $                                       | 2,683      |   | $ | 743 |   |
|                                                                         |   |                                    |       |   |   |
| **Supplemental disclosure of cash flow information:**                        |   |                                    |       |   |   |
| Conversion  of convertible subordinated debt into preferred stock            |   | $                                       | 500        |   | $ | — |   |

 

----

(*)  Prior year results have been reclassified toconform to the March 31, 2003 presentation.

 

The accompanying notesare an integral part of these financial statements.

 

3

----

 

**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 ended March 31, 2003 are not necessarily indicative of theresults that may be expected for the full year ending December 31, 2003.  For further information, refer to theconsolidated financial statements and the footnotes included in the Form 10-Kfor the year ended December 31, 2002.

 

**2.****                   INVENTORIES**

 

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

 

|             |   | **March 31,  2003** |   | **December  31,  2002** |   |
|------------------|--------|---------------------|--------|-------------------------|--------|
|             |   |                |   |                    |   |
| Gross  Inventory |   | 292                 |   | 939                     |   |
| Reserves         |   | (98                 | )      | (115                    | )      |
| Net  Inventory   |   | 194                 |   | 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. The changes in outstanding shares during the three months ended March31, 2003 and 2002 are shown below:

 
|                                        |   | **Three  Months Ending  March 31,** |   |
|---------------------------------------------|--------|-------------------------------------|--------|
|                                        |   | **2003**                            |   | **2002** |   |
| **Common  shares:**                         |   |                                |   |   |   |
| Outstanding  at beginning of period         |   | 4,187,035                           |   | 4,956,535 |   |
| Shares  issued (redeemed) during the period |   | 810,000                             |   | 0 |   |
| Outstanding  at end of period               |   | 4,997,035                           |   | 4,956,535 |   |
|                                        |   |                                |   |   |   |
| Basic  and Diluted weighted average shares  |   | 4,196,035                           |   | 4,956,535 |   |

 

Shares issued during the three months ended March 31,2003 reflect the conversion of Series A preferred stock into common shares asdescribed in Note 12.

 

The weighted average common shares exclude securitiesthat would be anti-dilutive upon conversion. Accordingly, as of March 31,2003, there are 7,700,000 common shares (770,000 preferred shares convertibleat 10 common shares each), 1,000,000 warrants with an exercise price of $0.50that expire 

 

4

----

 

in March 2010, 810,000 warrants with an exercise priceof $1.50 per share that expire in March 2007, and 85,000 warrants with anexercise price of $1.75 per share that expire in March 2008, 119,250 warrantswith exercise prices between $1.00 and $1.15 per share that expire between 2003and 2007, and 2,885,500 stock options that are excluded from the weightedaverage shares outstanding.

 

Earnings (loss) per share is computed as follows:

 
|                                                                    |   | **Three  Months  Ending March 31,** |   |
|-------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                    |   | **2003**                                 |   | **2002** |   |
| **Income  Available to common shareholders:**                           |   |                                     |   |   |   |
| Loss from continuing operations                                         |   | $                                        | (60    | ) | $ | (67 | ) |
|                                                                    |   |                                     |   |   |   |
| Effect  of Beneficial Conversion Feature of convertible preferred stock |   | 0                                        |   | (810 | ) |
|                                                                    |   |                                     |   |   |   |
| Loss  from continuing operations attributable to common shareholders    |   | $                                        | (60    | ) | $ | (877 | ) |
|                                                                    |   |                                     |   |   |   |
| Income  (Loss) from discontinued operations                             |   | 0                                        |   | 380 |   |
|                                                                    |   |                                     |   |   |   |
| Net  loss attributable to common shareholders                           |   | $                                        | (60    | ) | $ | (497 | ) |
|                                                                    |   |                                     |   |   |   |
| **Earnings  (loss) per share – Basic and Diluted:**                |   |                                     |   |   |   |
| Continuing  Operations                                                  |   | $                                        | (0.01  | ) | $ | (0.18 | ) |
| Discontinued  Operations                                                |   | 0.00                                     |   | 0.08 |   |
| Net  Loss                                                               |   | $                                        | (0.01  | ) | $ | (0.10 | ) |

 

**4.****                   INCOMETAXES**

 

There was no income tax provision/(benefit) for thethree months ended March 31, 2003 and 2002 as any provision/(benefit) wasoffset by a corresponding reduction/(increase) in the valuation allowance fordeferred income taxes.

 

**5.****                   CURRENTDEBT**

 

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 earnings beforeinterest, taxes, depreciation and amortization of at least $50,000 for three (3) consecutivemonths. 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 three monthsended March 31, 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.****                   ESCROWSHARES**

 

The number of outstanding commonshares does not include 228,266 shares held in escrow in connection with anacquisition by the Company pursuant to a Pledge, Security and Escrow Agreementdated June 2, 1997.  All of theinterest in and title to these 228,266 shares was transferred to Anita Ltd. andthen subsequently transferred to the Company as part of a Settlement Agreementand Mutual Releases dated as of December 21, 2000.  These shares will ultimately be 

 

5

----

 

released from the escrow to theCompany and will be cancelled. Therefore, the Company has, for accounting purposes, treated theseshares 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.  TheCompany expects that after examination, it will be awarded a patent to protectits valuable intellectual property. Centiv has developed this system whichallows a user access to an information database for selecting sign templates,inputting data for the sign templates and selecting and ordering signageproducts for production of the sign templates having the data input.

 

**8.****                   RESTRUCTURINGCHARGES**

 

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 has been charged to operations in 2002consisting of $75,000 for severance costs for reductions in staff and $12,000relating to early lease termination cost.

 

During the three months ending March 31, 2003,payments of $12,000 were made for employee separations of $12,000 and facilityclosings.  The restructuring reservebalance was $63,000 as of March 31, 2003 with the remaining payments to be madeduring the second quarter ending June 30, 2003.

 

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

 
| **($ in thousands)  Type of Cost** |   | **December 31,  2002  Balance** |   | **2003  Restructuring  Charges  Against the  Reserve** |   | **2003  Restructuring  Accrual** |   | **March 31,  2002  Balance** |   |
|------------------------------------|--------|--------------------------------------|--------|--------------------------------------------------------|--------|----------------------------------|--------|-----------------------------------|--------|
|                               |   |                                 |   |                                                   |   |                             |   |                              |   |
| Employee  Separations              |   | $                                    | 75     |                                                   | $      | (12                              | )      | $                                 | 0      |   | $ | 63 |   |
| Facility  Closings                 |   | 12                                   |   | (12                                                    | )      | 0                                |   | 0                                 |   |
| Total                              |   | $                                    | 87     |                                                   | $      | (24                              | )      | $                                 | 0      |   | $ | 63 |   |

 

**9.****                   SEGMENTDISCLOSURES**

 

Centiv offers webservices for consumer brand companies to manage their in-store and on-premisepoint-of-purchase (POP) process.  The final product is high qualitydigitally produced signage that is mass customized for the unique requirementsof each retail location.

 

During 2001, the Companydecided to focus on and dedicate its resources to its POP business.  To further that goal, in December 2001, theCompany sold the Channels Business and, effective January 31, 2002, soldCalgraph Technology Services, Inc.   Theresults of these businesses have been reclassified to discontinuedoperations.  As a result of thesedivestitures, the Company currently operates as a single business unit.

 

6

----

 

**10.****            RECLASSIFICATIONS**

 

Certain amounts in theMarch 31, 2002 financial statements have been reclassified to conform to theMarch 31, 2003 presentation.

 

**11.****           DISCONTINUEDOPERATIONS**

 

**CalGraph Technology Services Business**

 

Effective January 31,2002, the Company sold the assets of the Calgraph Technology Services Businessto Graphic Enterprises of Ohio, Inc. Centiv received consideration for the sale of the Calgraph assets in theamount of $1,050,000 in cash plus a minimum royalty of $625,000 to be paid overa 25 month period beginning in May 2002. Graphic Enterprises 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 $98,000 relatingto the Calgraph Technology Services Business. The pretax loss from operations for Calgraph Technology ServicesBusiness in January 2002 was $108,000.

 

**12.****            PRIVATEPLACEMENT OF SECURITIES**

 

**Series A Convertible Preferred Stock:**

 

On March 28, 2002 andApril 15, 2002, the Company sold, in two separate closings, a private placementof Series A Convertible Preferred Stock, 191,000 and 25,000 units respectively, each unit consisting of one share ofSeries A Convertible Preferred stock and one warrant to purchase one additionalshare of convertible preferred stock. The purchase price for each unit was$10.00 per unit.  This sale of units wasratified by the Company’s shareholders at the annual meeting of shareholdersheld on June 11, 2002.  Because eachshare of convertible preferred stock was convertible, initially, into tenshares of common stock, the effective purchase price was $1.00 for each shareof common stock purchased.  The warrantthat was included in each unit gives the holder the right, until five yearsafter the issuance of the warrant, to purchase one share of convertiblepreferred stock at a purchase price of $15.00 per share (the equivalent of$1.50 per share of common stock).

 

TheSeries A Convertible Preferred stock had a liquidation preference over commonstock equal to the purchase price of the convertible preferred stock plus anyaccrued but unpaid dividends.  The  Series A Convertible Preferred stock  began to accrue dividends on March 31, 2003at an annual rate equal to 8% of the purchase price of the convertiblepreferred stock.  In addition, if notpreviously converted into common stock, the Series A Convertible Preferredstock was subject to redemption at the option of the Company on the fourthanniversary of the issuance of the convertible preferred stock at a redemptionprice equal to the purchase price plus any accrued but unpaid dividends.  If the Company failed to redeem theconvertible preferred stock on that date, the holders of the convertiblepreferred stock become entitled to elect a majority of the board of directors.  Notwithstanding the foregoing, directorselected by virtue of the voting rights of the Series A Convertible Preferredstock would have had to recuse themselves from any vote to redeem all or aportion of the convertible preferred stock.

 

Proceedsto the Company from the sale of the Series A Convertible Preferred stock were$2,160,000, of which $1,910,000 was received at the March 28, 2002 closing andthe remaining $250,000 was received at the April 25, 2002 closing.  Aggregate transaction costs of $135,000representing legal, accounting and registration fees were incurred bringing thenet proceeds to $2,025,000.  Thenet proceeds were used to pay off and cancel the Company’s previous creditfacility with Wachovia Bank, NA.

 

The Company recorded abeneficial conversion feature on the convertible preferred stock and warrantsbased on the fair value of the common stock of $1.00 per share as of the dateof commitment. The warrants with an exercise price of $1.50 per share, werevalued at $810,000 using the Black-Scholes valuation method. The beneficialconversion feature was calculated to be $810,000 at the commitment 

 

7

----

 

date of March 28, 2002and has been recorded as Additional Paid in Capital. As the preferred shareswere convertible immediately, the entire amount of the beneficial conversionfeature was accreted into the Accumulated Deficit at March 31, 2002.

 

TheSeries A Convertible Preferred Stock was initially convertible into ten sharesof common stock for each share of the Series A Convertible Preferredstock.  This conversion ratio, however,was subject to anti-dilution adjustment for stock splits, combinations andother similar changes and if the Company issued, except in limitedcircumstances, any capital stock for a per share price less than the thencurrent conversion price.

 

TheSeries A Convertible Preferred Stock was, pursuant to its terms, to beautomatically converted if (i) holders of 2/3 of the outstanding shares of suchpreferred stock agreed to convert, (ii) the Company’s revenues exceeded $5million for any two consecutive quarters, or (iii) the Company recognized $20million in revenues for the 12-month period ending March 31, 2003.

 

TheCompany did, in fact, recognize $20 million in revenues for the 12-month periodending March 31, 2003 and thus, all of the Series A Convertible Preferred stockissued and outstanding as of the close of business on March 31, 2003 wasconverted into common stock and the associated warrants were converted intowarrants to purchase common stock.

 

On March 31, 2003, aspart of the issuance of Series BConvertible Preferred Stock, the investors who also owned Series A PreferredStock converted 135,000 shares of Series AConvertible Preferred Stock (the “Series A Preferred”) into 270,000 shares ofSeries B Preferred Stock.  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 ConvertiblePreferred.  The remaining 81,000 outstanding shares of Series A Convertible Preferredwere converted on March 31, 2003 into 810,000 shares of common stock inaccordance with the terms of the Series A Preferred certificate ofdesignations. Therefore, as of March 31, 2003, there were no shares of Series APreferred Stock outstanding.

 

**Series B Convertible Preferred Stock:**

 

On March 31, 2003, theCompany sold, in a private placement exempt from registration, 500,000 units, each consisting of one share of Series BConvertible Preferred Stock (the “Series B Preferred”) and one warrant topurchase two shares of Common Stock (the “Warrant”), which amounted to 20%warrant coverage.  As part of theprivate placement, the holders of $500,000 of the outstanding ConvertibleSubordinated Debt converted into Series B Preferred on the same terms as newinvestments.  The remaining $500,000 ofConvertible Subordinated Debt was repaid in full from proceeds of thisoffering.  In addition, the Companyissued an additional 270,000 shares of Series B Preferred in conversion of135,000 shares of its outstanding Series A Convertible Preferred Stock (the“Series A Preferred”). No Warrants were issued in connection with theshares of Series B Preferred issued in conversion of the Series A Preferred.  In addition, the warrants to purchase SeriesA Preferred held by the Series A Preferred investors were cancelled for novalue in connection with the conversion. The remaining 81,000 outstandingshares of Series A Preferred was converted on March 31, 2003 into 810,000shares of common stock in accordance with the terms of the Series A Preferredcertificate of designations.

 

Thepurchase price for each unit was $5.00 per unit (the “Purchase Price”).  Because each share of Series B Preferred isconvertible, initially, into ten shares of Common Stock, the effective purchaseprice was $0.50 for each share of Common Stock purchased.  The Warrant gives the holder the right,until seven years after the issuance of the Warrant, to purchase two shares ofCommon Stock at a purchase price of $0.50 per share.  Neither the Series B Preferred nor the Warrants have beenregistered under the Securities Act of 1933. Therefore, they may not be offered or sold in the United States absentregistration or an applicable exemption from registration requirements.

 

TheSeries B Preferred has a liquidation preference over Common Stock equal to twotimes the Purchase

 

8

----

 

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 entitled toelect 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.

 

Asstated, the Series B Preferred is initially convertible into 10 shares ofCommon Stock 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 $0.50 per share, exceptfor issuances pursuant to the Company’s stock option plan and certain otherissuances to business partners.  Theanti-dilution adjustment will be made on a full-ratchet basis.  The anti-dilution protection will not applyuntil the Company’s stockholders ratify the issuance of the Series B Preferred.

 

Thepurchasers of the Series B Preferred may voluntarily convert the Series BPreferred into Common Stock at any time. The Series B Preferred will be automatically converted into Common Stockif (i) the Company meets either Conversion Milestone defined below, or (ii)holders of 2/3 of the outstanding shares of the Series B Preferred agree toconvert.  In either event, however, anautomatic conversion will only occur if a registration statement covering theresale of the shares issuable upon conversion is in effect at that time. “ConversionMilestone” means either (a) the Company’s pretax earnings from ongoingoperations are equal to or greater than $6 million in the aggregate in any fourconsecutive fiscal quarters******as determined in accordance with United StatesGenerally Accepted Accounting Principles (“GAAP”) as applied by the Company onthe date when the Series B Preferred was first issued and the closing tradingprice of the Company’s Common Stock is equal to or greater than $2.00 per share(as adjusted for any stock dividends, combinations or splits with respect to suchshares after the filing date hereof) for ten consecutive Trading Days (asdefined below), or (b) the closing of a “firm commitment” underwritten publicoffering of Common Stock in which the public offering price per share of CommonStock is at least equal to 3 times the then-applicable conversion price for theSeries B Preferred and which offering results in gross proceeds to the Companyof not less than $15 million.  “TradingDay” means a business day on which at least 50,000 shares of Common Stock are tradedon the principal United States securities exchange or automated quotationsystem on which such security is listed or traded.

 

The Series B PreferredStock financing included cash proceeds of $2,000,000 plus the conversion of$500,000 of the Company’s Senior Convertible Subordinated Debt that was issuedon September 28, 2002.  The remainingSenior Convertible Subordinated Debt of $500,000 was repaid out of the proceedsof this financing and as of March 31, 2003 the Company was debt free. Aggregate transaction costs of $90,000representing legal, accounting and registration fees were incurred bringing thenet proceeds, after repaying the Subordinated Debt and transaction costs, to$1,410,000.

 

Therewas no beneficial conversion feature on the Series B convertible preferredstock and warrants based on the fair value of the common stock of $0.34 pershare as of the date of commitment. The warrants with an exercise price of$0.50 per share, were valued at $159,176 using the Black-Scholes valuationmethod.

 

**13.****            CONVERTIBLESUBORDINATED DEBT**

 

On September 30, 2002,the Company issued $1 million of Senior Subordinated Convertible Notes toprivate investors.  These notes wereconvertible into equity, at the lenders’ option upon the closing of, and at thesame terms as, the next equity financing in which the Company raises at least$1,000,000.  The loan had a term thatextended until the earlier of July 1, 2004 or two business days following theclosing of an equity financing described above and pays interest at a rate of10% per year.  In addition, the 

 

9

----

 

lenders received anaggregate of 50,000 warrants granted at the closing of the loan and wereeligible to receive an aggregate of an additional 20,000 warrants per monthuntil such time as the loan was fully repaid or converted into equity.

 

The warrant isexercisable at $1.75 per share and was callable by the Company if the marketprice of the Company’s common stock closes at or above $5.00 per share for 10consecutive trading days.  The initial50,000 warrants granted at closing were valued at $11,858 using theBlack-Scholes valuation method creating an unamortized discount on the SeniorSubordinated Convertible Notes.  Theunamortized discount was amortized to interest expense over the term of thenote.

 

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

 

The 25,000 warrantsgranted on the $500,000 of Senior Subordinated Convertible Debt, which wereconverted into Series B Preferred Stock, were cancelled effective March 31,2003.  The remaining 25,000 warrantsgranted on the $500,000 of Senior Subordinated Debt that was repaid are stillactive and outstanding.  In addition,the Company granted 60,000 warrants on March 31, 2003 to the holders of theSenior Subordinated Debt that were repaid representing the warrants earned forthe period October 1, 2002 through March 31, 2003.  The additional 60,000 warrants granted as of March 31, 2003 werevalued at $2,700 using the Black-Scholes valuation method.  Since the Company had accrued $14,400 forthe warrants as of December 31, 2002, an adjustment to income of $11,700 wasrecorded for the three months ended March 31, 2003.

 

**14.****            RELATEDPARTY TRANSACTIONS**

 

On December 1, 1999, theCompany entered into a Loan Agreement with William M. Rychel pursuant to whichthe Company loaned Mr. Rychel a total of $1,775,000 to purchase from certainshareholders a total of 806,983 shares of our common stock.  The original term of the loan was one yearwhich the Company extended until December 1, 2001 and, on December 1, 2001, theCompany entered into another amendment with Mr. Rychel that extended the duedate of the loan until December 1, 2002. In exchange for extending the loan, Mr. Rychel agreed to a non-competeand a confidentiality and assignment of inventions agreement.  Under the Sarbanes-Oxley Act of 2002, thisloan could not be extended beyond its current maturity of December 1, 2002 orotherwise materially modified.  OnNovember 25, 2002, the Company repurchased the 806,983 shares in exchange forthe outstanding loan plus accrued interest of $2,250,283.  The shares repurchased have been put intoTreasury Stock using the closing market price of the stock of $0.94 pershare.  The difference between theoutstanding loan balance and the Treasury Stock resulted in a non-cash chargeof $1,491,719.

 

Upon consummation of theChannels Business transaction, Centiv made loans to three former members ofCentiv’s management team involved in the transaction.  A loan in the amount of $200,000 was made to Scott Barker.  This loan is secured by 100,000 shares ofCentiv common stock owned by Mr. Barker and will bear interest at a rate of 25basis points over the current rate on the Company’s senior debt facility, asadjusted from time to time.  Theprincipal amount of this loan plus accrued interest shall be due and payableDecember 31, 2003.  Upon the completionof the Channels Business transaction, the Company also made loans to DaveBoston and Pat McLaughlin on the same terms and conditions in the amounts of$30,000 and $20,000, respectively.

 

John P. Larkin, theCompany’s President and Chief Executive Officer was an investor in the Series BConvertible Preferred Stock closed on March 31, 2003.  In connection with the investment, Mr. Larkin purchased 20,000Units, each consisting of one share of Series B Convertible Preferred Stock anda warrant to purchase two shares of common stock at an exercise price of $0.50per share.  In connection with thattransaction, Mr. Larkin agreed with the Company to waive his conversion rightsand to grant to the Company’s Chief Financial Officer an irrevocable proxy tovote those shares (in accordance with the

 

10

----

 

vote of the majority ofthe Company’s capital stock entitled to vote thereon excluding these shares)until the Company’s stockholders ratify the issuance of the Series BConvertible Preferred Stock.

 

**15.****            STOCK-BASEDCOMPENSATION**

 

Effective for fiscal2003, the Company adopted  thedisclosure requirements under SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure” as an amendment toSFAS No. 123.

 

Stock-based employeecompensation, including stock options, for the three months ended March 31,2003 was accounted for under the intrinsic value-based method as prescribed byAPB Opinion No. 25, “Accounting for Stock Issued to Employees.” Therefore,no compensation expense was recognized for those stock options that had nointrinsic value on the date of grant.

 

If the Company were torecognize compensation expense over the relevant service period under thefair-value method of SFAS No. 123 with respect to stock optionsgranted for the three months ended March 31, 2003 and all prior years, netearnings would have decreased, resulting in pro forma net earnings and EPS aspresented below: 

 
|                                                                                                                    |   | **Three  Months  Ending March 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                    |   | **2003**                                 |   | **2002** |   |
|                                                                                                                    |   |                                     |   |   |   |
| Net Loss – as reported                                                                                             |   | $                                        | (60    | ) | $ | (497 | ) |
|                                                                                                                    |   |                                     |   |   |   |
| Deduct:  stock-based compensation expense  determined under the fair value based method for all awards, net of tax |   | (17                                      | )      | 6 |   |
|                                                                                                                    |   |                                     |   |   |   |
| Net  Loss – pro forma                                                                                              |   | $                                        | (77    | ) | $ | (491 | ) |
|                                                                                                                    |   |                                     |   |   |   |
| **Earnings  (loss) per share:**                                                                                         |   |                                     |   |   |   |
| Basic  – as reported                                                                                               |   | $                                        | (0.01  | ) | $ | (0.10 | ) |
| Basic  – proforma                                                                                                  |   | (0.02                                    | )      | (0.10 | ) |
| Diluted  – as reported                                                                                             |   | (0.01                                    | )      | (0.10 | ) |
| Diluted  – pro forma                                                                                               |   | (0.02                                    | )      | (0.10 | ) |

 

11

----

 

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

 

The following discussionshould be read in conjunction with the information contained in theConsolidated Financial Statements, including the related 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 system to create custom signageusing templates created by A-B.  Inaddition, as part of our agreement, Centiv maintained rights to supplyconsumable print materials to these distributors supported by an in-house callcenter service. As a result of our exposure to the custom signage businessCentiv invested in the development of a web- based platform for thecollaborative versioning of POP signage. Beginning in 2001, Centiv began the commercialization of InstantImpact.   In December 2002, A-B notifiedCentiv that upon its expiration on March 31, 2003, Centiv would no longer bethe preferred supplier for various consumables of the system and our preferredsupplier technical support agreement would not be renewed.  Our activities with A-B and its distributorsterminated upon the expiration 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 and sales during the three months ended March 31, 2003 and 2002 were$4.1 million and $3.7 million, respectively. In response to this, we have undertaken a downsizing of our operationsand have reduced our headcount and other operating expenses to a level that webelieve will enable us to continue to operate our business.  Although there can be no assurance that wewill be able to offset this loss of revenue sufficiently by cutting expenses orincreasing revenue from other sources, we believe the actions taken, along withcapital raised with the sale of the Series B Preferred Stock, will provideadequate financing through at least the end of June 2004.

 

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

 

12

----

 

had never involved theuse 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 wasnegligible. After a prudent assessment of our overhead costs and spending, wedeveloped a strategy to defer or reduce ongoing expenses in order to minimizethe financial impact 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 withAnheuser-Busch, in the aggregate, accounted for approximately 97% and 99% ofthe sales.  For the three months endedMarch 31, 2003 and 2002, on a combined basis, distributors affiliated withAnheuser-Busch, in the aggregate, accounted for approximately 85% and 98% ofthe sales.

 

International sales wereinsignificant for the years ended December 31, 2002, 2001 and 2000.

 

Priorto focusing on the Centiv POP Business in 2001, Centiv operated three otherbusiness units in addition to the Centiv POP Business:

 

•***CalGraph Business***:Formerly a wholly owned subsidiary of the Company, CalGraph Technology Services,Inc. was a provider of on-site service and preventative maintenance servicesspecializing in wide-format printing devices. CalGraph’s U.S. and Canadian service operations included field servicetechnicians, customer support call center, component repair and refurbishmentfacilities and parts logistics.  TheCompany sold this business effective January 31, 2002 and it is reflected as *DiscontinuedOperations* in the Summary of Selected Financial Information andSelected Financial Information.

 

•***Channels Business***:Prior to divestiture by  the Company,the Channels Division specialized in the value-added wholesale distribution ofcomputer graphics technologies throughout North America. The Company sold thisbusiness effective December 31, 2001 and it is reflected as *DiscontinuedOperations* in the Summary of Selected Financial Information andSelected Financial Information.

 

•***Technology******SystemsBusiness***:  Priorto divestiture by the Company, the Technology Systems Division designed,assembled and sold  custom or“made-to-order” premium services or workstations and related technology tovalue added resellers, vertical market computer resellers, corporations,universities and government agencies. The Company sold the business effective October 31, 2000 and it isreflected as *Discontinued Operations* in the Summary of Selected FinancialInformation and Selected Financial Information.

 

**Three Months Ended March 31, 2003 Compared With Three MonthsEnded March 31, 2002**

 

***Net Sales from continuing operations.***  Total net sales from continuing operationsincreased 26% or $975,000 to $4,782,000 for the three months ended March 31,2003, compared to $3,807,000****for the three months ending March 31,2002.  Sales of the Instant Impact product line for the three months ended March31, 2003 were $717,000 or 8.4 times the sales of $85,000 for the three monthsended March 31, 2002.  The Q12003 sales for Instant Impact of $717,000 were greater than the sales of$638,000 for entire twelve months of 2002. In addition, the Q1 sales of Instant Impact increased $517,000 or 3.6times the Q4 2002 revenues of $200,000.  The sales increase in Q1 2003 was primarily attributable to expandedusage of the Instant Impact system from existing customers.  We expect that new customers to be implementedduring the second quarter that we expect will result in additional revenue.

 

Salesto Anheuser-Busch (A-B) and itswholesale distributor network were $4.1 million and $3.7 million for the threemonths ended March 31, 2003 and 2002, respectively.  As previously mentioned, with the termination of the preferredsupplier and support agreement effective March 31, 2003, the sales to A-B andthe wholesale distributor network will not occur in the future quarters of2003.

 

13

----

 

***Gross Profit from continuing operations.***  Gross profit from continuing operationsincreased 43% or $412,000 for the three months ended March 31, 2003 to$1,370,000 as compared to $958,000 for the three months ended March 31, 2002.  The gross profit as a percentage of salesincreased 3.4 percentage points to 28.6% for the three months ended March 31,2003 compared to 25.2% for the three months ended March 31, 2002.  The margin improvement is attributable tostronger sales mix of higher margin Instant Impact sales.  Instant Impact margins were 55% compared tomargins of 24% for the A-B sales for the three months ended March 31, 2003.

 

***SG&A Expenses from continuing operations.***  SG&A expenses from continuing operationsincreased $69,000 or 6% to $1.3 million for the three months ended March 31,2003 compared to $1.2 million for the three months ended March 31, 2002.  The increase in SG&A expenses over theprior year is from higher selling costs of $225,000 relating to additional A-Bsales. Excluding the selling costs for A-B, SG&A expenses for the threemonths ended March 31, 2003 were $861,000 or a decrease of $156,000 or 15%compared to prior year. As a result of the termination of the A-B agreement,the costs associated with the A-B business as been reduced effective March 31,2003.

 

***Depreciation Expense from continuing operations. ***Depreciation expensefrom continuing operations increased $9,000, or 7%, to $142,000 for the threemonths ended March 31, 2003, as compared to $133,000 for the three months endedMarch 31, 2002.  The increase indepreciation expense relates to additional computer and production equipmentpurchased during the course of 2002 for the expansion of the print center.  Depreciation expense for the 2003 total yearis not expected to be significantly higher than prior year’s level.

 

***Other Income from continuing operations. ***Other Income of$283,000 for the three months ended March 31, 2002 represents the settlement ofoutstanding liabilities associated with the termination of vendor contractsrelating to the sale of the Channels Business.

 

***Income Taxes from continuing operations.***  The Company’s effective tax rate forcontinuing operations was 0% for the three months ended March 31, 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 $60,000 for the three months ended March 31, 2003, a decrease inloss of $7,000 or 10%, as compared to the net loss of $67,000 for the threemonths ended March 31, 2002.  Excludingthe other income of $283,000 from prior year results, the net loss fromcontinuing operations of $60,000 compared to a net loss of $350,000 in 2002 isan improvement of $290,000 or 83% year over year.  The improvement in the net loss is attributable primarily to thehigher sales and margins from the growth in the Instant Impact product line.

 

**Discontinued Operations:**

 

The Company had netincome from discontinued operations of $380,000 for the three months endedMarch 31, 2002.  See Note 11 of theNotes to Consolidated Financial Statements for a description of thediscontinued operations.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

On March 31, 2003, theCompany had $2.7 million in cash and a positive working capital of $2.3 millioncompared to $1.3 million in cash and $0.8 million in working capital as ofDecember 31, 2002. The improvement is a result of the Series B preferred stockfinancing that was completed on March 31, 2003 (see Notes 12 and 13 toConsolidated Financial Statements).

 

14

----

 

The Company used $85,000of cash from operations for the three months ended March 31, 2003 compared to$1.4 million of cash used from operations for the three months ended March 31,2002.  During the three months endedMarch 31, 2003, cash was used to pay accounts payable and accrued expenses of$1.3 million relating to vendor payments for the Anheuser Busch equipmentupgrade that took place in Q4 2002. Offsetting these payments was cash of $1.3 million through a reductionin accounts receivable, inventories and prepaid expenses as a result of thetermination of the Anheuser Busch agreement.

 

During the three monthsended March 31, 2002, the Company used $1.3 million of cash fromoperations.  The cash used was a resultof the growth in accounts receivable of $441,000 due to higher sales andaccounts payable and accrued expenses used cash of $1.3 million.  The accounts payable/accrued expense cashusage was primarily from the payment of transaction costs as well as otherpayments relating to vendor settlements associated with the sale of theChannels Business.

 

For the three monthsended March 31, 2003, the Company generated cash of $62,000 from investingactivities.  The Company received cashof $75,000 from the sale of the CalGraph Business (see Note 11 of the Notes toConsolidated Financial Statements), partially offset by cash used of $13,000for the purchase of computer and production equipment.  For the three months ended March 31, 2002,the Company generated cash of $886,000 from investing activities.  The Company received cash of $1,050,000 fromthe sale of the CalGraph Business (see Note 11 of the Notes to Consolidated FinancialStatements), partially offset by cash used of $164,000 for the purchase ofsoftware licenses, computer hardware and production equipment. Approximately$89,000 of the $164,000 of purchases related to one-time expenditures forsplitting the software licenses and computer hardware due to the divestituresof Channels and CalGraph business units.

 

For the three months ended March 31, 2003, the Company generated cashof $1,402,000 from financing activities. The Company received net proceeds of $1,910,000 from a private equityoffering (see Note 12 of the Notes to Consolidated Financial Statements).  In addition, the Company repaid $500,000 ofconvertible subordinated debt (see Note 13 of the Notes to Consolidated FinancialStatements).

 

For the three months ended March 31, 2002, the Company generated cashof $1,008,000 from financing activities. The Company received $1,776,000 from private equity (see Note 12 of theNotes to Consolidated Financial Statements). The net proceeds were used to pay off and cancel the Company’s creditfacility with the bank.

 

The Company believes thatits available funds together will be adequate to satisfy its current andplanned operations, including restructuring accruals, for at least the next 12months

 

**RECENT ACCOUNTING 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 entitles “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 financialposition.  For those provisions that areeffective for fiscal years beginning after May 15, 2002, the Company doesnot 

 

15

----

 

expect that adoption ofthose provisions will have a material effect on its results of operations orfinancial 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. 5,57, and 107 and 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 prospectivebasis to guarantees issued or modified after December 31, 2002, irrespective ofthe guarantor’s fiscal year-end.  Thedisclosure requirements in FIN No.45 are effective for financial statements ofinterim or annual periods ending December 15, 2002.  The Company does not expect that adoption of this interpretationwill have a material effect on its results of 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 ofaccounting for stock-based employee compensation.  In addition, this statement amends the disclosure requirements ofSFAS No. 123 to require more prominent disclosures in both the annual andinterim financial statements about the method of accounting for stock-basedemployee compensation 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 inparagraph 3 are effective for financial reports containing condensed financialstatements for 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 and interpretationof Accounting 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 interest entitlesin 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 hold 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.

 

**DISCLOSURE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

This report contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  These statements appear in anumber of places in this report and include all statements that are nothistorical 

 

16

----

 

facts.  Some of the forward-looking statementsrelate to the intent, belief or expectations of the Company and its managementregarding the Company’s strategies and plans for operations and growth.  Other forward-looking statements relate totrends affecting the Company’s financial condition and results of operations,and the Company’s anticipated capital needs and expenditures.

 

Investors are cautionedthat such forward-looking statements are not guarantees of future performanceand involve risks and uncertainties, and that actual results may differmaterially from those that are anticipated in the forward-looking statements asa result of the impact of competition and competitive pricing, businessconditions and growth in the industry, general and economic conditions, andother risks.  Investors should reviewthe more detailed description of these and other possible risks contained inthe Company’s filings with the Securities and Exchange Commission, includingthe Company’s Form 10-K for the year ended December 31, 2002.

 

**ITEM3.  QUANTITATIVE****ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

 

Financial instrumentsthat potentially subject the Company to significant concentrations of creditrisk consist principally of trade accounts receivable.  Credit risks with respect to tradereceivables are limited due to the diversity of customers comprising theCompany’s customer base.  The Companyperforms ongoing credit evaluations and charges uncollectible amounts tooperations when they are determined to be uncollectible.

 

**ITEM4.  CONTROLS AND****PROCEDURES**

 

1.               Evaluationof disclosure controls and procedures.

 

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rule 13a-14 (c) under theExchange Act) as of a date (the “Evaluation Date”) within 90 days prior to thefiling date of this report.  Based uponthat evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of the Evaluation Date, our disclosure controls and procedureswere effective in timely alerting them to the material information relating tous (or our consolidate subsidiaries) required to be included in our periodicSEC filings.

 

2.               Changesin internal controls.

 

There were no significant changes made in our internalcontrols during the period covered by this report or, to our knowledge, inother factors that could significantly affect these controls subsequent to thedate of their evaluation.

 

**PARTII****     OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

Not applicable

 

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

 

**Series AConvertible Preferred Stock:**

 

17

----

 

OnMarch 28, 2002 and April 15, 2002, the Company sold, in two separate closings,a private placement of Series A Convertible Preferred Stock, 191,000 and 25,000 units respectively, each unitconsisting of one share of Series A Convertible Preferred stock and one warrantto purchase one additional share of convertible preferred stock. The purchaseprice for each unit was $10.00 per unit. This sale of units was ratified by the Company’s shareholders at theannual meeting of shareholders held on June 11, 2002.  Because each share of convertible preferred stock wasconvertible, initially, into ten shares of common stock, the effective purchaseprice was $1.00 for each share of common stock purchased.  The warrant that was included in each unitgives the holder the right, until five years after the issuance of the warrant,to purchase one share of convertible preferred stock at a purchase price of$15.00 per share (the equivalent of $1.50 per share of common stock).

 

The Series A Convertible Preferred stock had aliquidation preference over common stock equal to the purchase price of theconvertible preferred stock plus any accrued but unpaid dividends.  The Series A Convertible Preferredstock  began to accrue dividends onMarch 31, 2003 at an annual rate equal to 8% of the purchase price of theconvertible preferred stock.  Inaddition, if not previously converted into common stock, the Series A ConvertiblePreferred stock was subject to redemption at the option of the Company on thefourth anniversary of the issuance of the convertible preferred stock at aredemption price equal to the purchase price plus any accrued but unpaiddividends.  If the Company failed toredeem the convertible preferred stock on that date, the holders of theconvertible preferred stock become entitled to elect a majority of the board ofdirectors.  Notwithstanding theforegoing, directors elected by virtue of the voting rights of the Series AConvertible Preferred stock would have had to recuse themselves from any voteto redeem all or a portion of the convertible preferred stock.

 

Proceeds to the Company from the sale of the Series AConvertible Preferred stock were $2,160,000, of which $1,910,000 was receivedat the March 28, 2002 closing and the remaining $250,000 was received at theApril 25, 2002 closing.  Aggregatetransaction costs of $135,000 representing legal, accounting and registrationfees were incurred bringing the net proceeds to $2,025,000.  The net proceeds were used to pay offand cancel the Company’s previous credit facility with Wachovia Bank, NA.

 

TheCompany recorded a beneficial conversion feature on the convertible preferredstock and warrants based on the fair value of the common stock of $1.00 pershare as of the date of commitment. The warrants with an exercise price of$1.50 per share, were valued at $810,000 using the Black-Scholes valuationmethod. 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 Convertible Preferred Stock was initiallyconvertible into ten shares of common stock for each share of the Series AConvertible Preferred stock.  Thisconversion ratio, however, was subject to anti-dilution adjustment for stocksplits, combinations and other similar changes and if the Company issued,except in limited circumstances, any capital stock for a per share price lessthan the then current conversion price.

 

The Series A Convertible Preferred Stock was, pursuantto its terms, to be automatically converted if (i) holders of 2/3 of theoutstanding 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 inrevenues for the 12-month period ending March 31, 2003 and thus, all of theSeries A Convertible Preferred stock issued and outstanding as of the close ofbusiness on March 31, 2003 was converted into common stock and the associatedwarrants were converted into warrants to purchase common stock.

 

OnMarch 31, 2003, as part of the issuanceof Series B Convertible Preferred Stock, the investors who

 

18

----

 

alsoowned Series A Preferred Stock converted135,000 shares of Series A Convertible Preferred Stock (the “Series APreferred”) into 270,000 shares of Series B Preferred Stock.  The associated warrants were cancelled forno value.  No Warrants wereissued in connection with the shares of Series B Preferred issued in conversionfor the Series A Convertible Preferred. The remaining 81,000 outstandingshares of Series A Convertible Preferred were converted on March 31, 2003 into810,000 shares of common stock in accordance with the terms of the Series APreferred certificate of designations. Therefore, as of March 31, 2003, therewere no shares of Series A Preferred Stock outstanding.

 

**Series BConvertible Preferred Stock:**

 

On March 31, 2003, theCompany sold, in a private placement exempt from registration, 500,000 units, each consisting of one share of Series BConvertible Preferred Stock (the “Series B Preferred”) and one warrant topurchase two shares of Common Stock (the “Warrant”), which amounted to 20%warrant coverage.  As part of theprivate placement, the holders of $500,000 of the outstanding ConvertibleSubordinated Debt converted into Series B Preferred on the same terms as newinvestments.  The remaining $500,000 ofConvertible Subordinated Debt was repaid in full from proceeds of thisoffering.  In addition, the Companyissued an additional 270,000 shares of Series B Preferred in conversion of135,000 shares of its outstanding Series A Convertible Preferred Stock (the“Series A Preferred”). No Warrants were issued in connection with theshares of Series B Preferred issued in conversion of the Series APreferred.  In addition, the warrants topurchase Series A Preferred held by the Series A Preferred investors werecancelled for no value in connection with the conversion.  Theremaining 81,000 outstanding shares of Series A Preferred was converted onMarch 31, 2003 into 810,000 shares of common stock in accordance with the termsof the Series A Preferred certificate of designations.

 

Thepurchase price for each unit was $5.00 per unit (the “Purchase Price”).  Because each share of Series B Preferred isconvertible, initially, into ten shares of Common Stock, the effective purchaseprice was $0.50 for each share of Common Stock purchased.  The Warrant gives the holder the right,until seven years after the issuance of the Warrant, to purchase two shares ofCommon Stock at a purchase price of $0.50 per share.  Neither the Series B Preferred nor the Warrants have beenregistered under the Securities Act of 1933. Therefore, they may not be offered or sold in the United States absentregistration or an applicable exemption from registration requirements.

 

TheSeries B Preferred has a liquidation preference over Common Stock equal to twotimes the Purchase Price plus any accrued and unpaid dividends.  If not previously converted, the Series BPreferred will begin to accrue dividends on April 1, 2004 at an annual rateequal to 8% of the Purchase Price per year. In addition, if not previously converted into Common Stock, the Series BPreferred will be subject to redemption at the option of the Company on March31, 2007 at a redemption price equal to the Series B Preferred liquidationpreference amount.  If the Company failsto redeem the Series B Preferred on that date, the holders of the Series BPreferred become entitled to elect a majority of the board of directors.  Notwithstanding the foregoing, directorselected by virtue of the voting rights of the Series B Preferred would have torecuse themselves from any vote to redeem all or a portion of the Series BPreferred.

 

Asstated, the Series B Preferred is initially convertible into 10 shares ofCommon Stock 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 $0.50 per share, exceptfor issuances pursuant to the Company’s stock option plan and certain otherissuances to business partners.  Theanti-dilution adjustment will be made on a full-ratchet basis.  The anti-dilution protection will not applyuntil the Company’s stockholders ratify the issuance of the Series B Preferred.

 

Thepurchasers of the Series B Preferred may voluntarily convert the Series BPreferred into Common Stock at any time. The Series B Preferred will be automatically converted into Common Stockif (i) the Company meets either Conversion Milestone defined below, or (ii)holders of 2/3 of the outstanding

 

19

----

 

sharesof the 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” meanseither (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 $2.00 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 3 times 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” means a businessday on which at least 50,000 shares of Common Stock are traded on the principalUnited States securities exchange or automated quotation system on which suchsecurity is listed or traded.

 

The Series B PreferredStock financing included cash proceeds of $2,000,000 plus the conversion of$500,000 of the Company’s Senior Convertible Subordinated Debt that was issuedon September 28, 2002.  The remainingSenior Convertible Subordinated Debt of $500,000 was repaid out of the proceedsof this financing and as of March 31, 2003 the Company was debt free.  Aggregatetransaction costs of $90,000 representing legal, accounting and registrationfees were incurred bringing the net proceeds, after repaying the SubordinatedDebt and transaction costs, to $1,410,000.

 

Therewas no beneficial conversion feature on the Series B convertible preferredstock and warrants based on the fair value of the common stock of $0.34 pershare as of the date of commitment. The warrants with an exercise price of$0.50 per share, were valued at $159,176 using the Black-Scholes valuationmethod.

 

**Convertible Subordinated Debt:**

 

On September 30, 2002,the Company issued $1 million of Senior Subordinated Convertible Notes toprivate investors.  These notes wereconvertible into equity, at the lenders’ option upon the closing of, and at thesame terms as, the next equity financing in which the Company raises at least$1,000,000.  The loan had a term thatextended until the earlier of July 1, 2004 or two business days following theclosing of an equity financing described above and pays interest at a rate of10% per year.  In addition, the lendersreceived an aggregate of 50,000 warrants granted at the closing of the loan andwere eligible to receive an aggregate of an additional 20,000 warrants permonth until such time as the loan was fully repaid or converted into equity.

 

The warrant isexercisable at $1.75 per share and is callable by the Company if the marketprice of the Company’s common stock closes at or above $5.00 per share for 10consecutive trading days.  The initial50,000 warrants granted at closing were valued at $11,858 using theBlack-Scholes valuation method creating an unamortized discount on the SeniorSubordinated Convertible Notes.  Theunamortized discount will be amortized to interest expense over the term of thenote.

 

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

 

The 25,000warrants granted on the $500,000 of Senior Subordinated Convertible Debt, whichwere converted into Series B Preferred Stock, were cancelled effective March31, 2003.  The remaining 25,000 warrantsgranted on the $500,000 of Senior Subordinated Debt that was repaid are stillactive and outstanding.  In addition,the Company granted 60,000 warrants on March 31, 2003 to the holders ofthe Senior Subordinated Debt that were repaid representing the warrants earnedfor the period October 1, 2002 through March 31, 2003.  The additional 60,000 warrants granted as ofMarch 31, 2003 were 

 

20

----

 

valued at $2,700using the Black-Scholes valuation method. Since the Company had accrued $14,400 for the warrants as of December31, 2002, an adjustment to income of $11,700 was recorded for the three monthsended March 31, 2003.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable

 

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

 

Not applicable

 

**ITEM5.  OTHER INFORMATION**

 

On April 4, 2003, NASDAQSmallCap Market informed the Company that Nasdaq has accepted the Company’sevidence of compliance with the shareholders’ equity requirements necessary forcontinued listing on The Nasdaq SmallCap Market.  A previously scheduled oral hearing on the listing status wassubsequently cancelled by Nasdaq’s Hearings Department.

 

The Company does not currently comply withthe additional Nasdaq listing requirement of sustaining a closing bid price ofat least $1.00 per share for a minimum of ten consecutive trading days. Centivmust remedy this deficiency within a grace period set by Nasdaq, which expireson June 9, 2003. The Company plans to seek stockholder approval at the AnnualShareholder Meeting, scheduled for May 29, 2003, to amend its Certificate ofIncorporation to grant the Board authority to effect a reverse stock split, ifnecessary, to achieve compliance with this requirement.

 

**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).

 

21

----

 

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).

 

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).

 

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).

 

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

 

**Reports on Form 8-K**

 

The following reports onForm 8-K have been filed during the three months ended March 31, 2002:

 

Current Report on Form 8-Kfiled January 1, 2003, which included disclosure under Item 5 relating tothe resignation of William M. Rychel as Chief Executive Officer of the Companyand the appointment of John P. Larkin to that position.

 

Current Report on Form8-K filed January 10, 2003, which included disclosure under Item 5relating to the expiration of the Company’s Preferred Supplier Agreement withAnheuser-Busch.

 

Current Report on Form8-K filed March 3, 2003, which included disclosure under Item 5 relatingto receipt by the Company of a Staff Determination Letter from NASDAQ that theCompany did not meet the continued listing standards of the NASDAQ Small CapMarket.

 

22

----

 

**SIGNATURES**

 

PURSUANT TO THEREQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULYCAUSED THIS REPORT ON FORM 10-Q TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,THEREUNTO DULY AUTHORIZED THIS 12th DAY OF MAY, 2003.

 

CENTIV, INC.

 

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

 

23

----

 

**CERTIFICATIONS**

 

I, John P. Larkin,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Centiv, Inc;

 

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

 

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

 

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

 

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

 

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

 

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

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

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

 

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

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:    May  12, 2003 | /s/ John P. Larkin      |   |
|--------------------------------------------|-------------------------|--------|
|                                       | John P. Larkin          |
|                                       | Chief Executive Officer |

 

24

----

 

**CERTIFICATIONS**

 

I, Thomas M. Mason,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Centiv, Inc;

 

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

 

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

 

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

 

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

 

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

 

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

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

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

 

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

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:    May  12, 2003 | /s/ Thomas M. Mason     |   |
|--------------------------------------------|-------------------------|--------|
|                                       | Thomas M. Mason         |
|                                       | Chief Financial Officer |

 

25

----