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SECURITIES AND EXCHANGE COMMISSION
  FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934  -OR- TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934  Commission file number 333-111378 CENTERGISTIC SOLUTIONS, INC.  CALIFORNIA
(State or other jurisdiction of incorporation or organization)
    
    95-2873122
(IRS Employer identification No.)
 2045 West Orangewood Avenue, Orange, California 92868-1944  (714) 935-9000
(Issuers telephone number) Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding twelve months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes x   No
o As of March 31, 2004, there were 9,169,048 shares of the issuers Common Stock outstanding. Traditional Small Business
Disclosure Format.
Yes o   No
x




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(CENTERGISTIC SOLUTIONS LOGO) CENTERGISTIC SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE PERIOD ENDED MARCH 31, 2004 TABLE OF CONTENTS PagePart I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets at March 31, 2004 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) For the Three and Nine Months Ended March 31, 2004
and 2003 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows For the Nine Months
Ended March 31, 2004 and 2003 (Unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    25Item 3. Controls and Procedures
    
    
    39Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 2. Change in Securities
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits and Reports on Form 8-K
    
    
    40SIGNATURES
    
    
    41EXHIBIT INDEX
    
    
    42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  -2-




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CENTERGISTIC SOLUTIONS, INC. 
 Condensed Consolidated Balance Sheet
 March 31,2004(Unaudited)ASSETSCurrentCash and cash equivalents
    
    $
    74,412Trade receivables, less allowance for doubtful accounts of $64,359
    
    
    1,011,849Inventories
    
    
    184,467Prepaid expenses
    
    
    148,222Miscellaneous receivables
    
    
    75,735Total current assets
    
    
    1,494,685Property, equipment, and leasehold
improvements,net of accumulated depreciation of $627,536
    
    
    189,677Capitalized software development costs,
net of accumulated amortization of $1,630,596
    
    
    222,555Other assetsDeferred offering costs
    
    
    362,246Other
    
    
    63,373Total other assets
    
    
    425,619$
    2,332,536
 3




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CENTERGISTIC SOLUTIONS, INC. Condensed Consolidated Balance Sheet (continued) March 31,2004(Unaudited)LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilitiesConvertible notes payable, including $70,000 to officers
and a related party, net of debt discount of $39,798
    
    $
    450,202Notes
payables - related parties
    
    
    53,408Accounts payable
    
    
    381,054Accrued expenses
    
    
    172,809Deferred income
    
    
    179,332Accrual for stock to be issued
    
    
    103,125Total liabilities, all current
    
    
    1,339,930Commitments and contingencies
(Notes 4 through 7)Stockholders equity (deficit)Common stock, 80,000,000 shares authorized;
9,169,048 shares issued and outstanding
    
    
    2,439,994Additional paid-in capital
    
    
    284,892Accumulated deficit
    
    
    (1,677,463
    )Unearned stock compensation
    
    
    (22,969
    )Common stock to be redeemed
    
    
    (28,433
    )996,021Less notes receivable
    
    
    (3,405
    )Total stockholders equity (deficit)
    
    
    992,616Total liabilities and stockholders equity (deficit)
    
    $
    2,332,546
 See accompanying notes to condensed consolidated financial statements. 4




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CENTERGISTIC SOLUTIONS, INC. 
 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Nine Months EndedMarch 31,
    
    Three Months Ended March 31,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Revenues:Software and service revenues
    
    $
    2,152,064
    
    
    $
    2,175,564
    
    
    $
    675,883
    
    
    $
    747,726Professional services
    
    
    115,040
    
    
    
    152,936
    
    
    
    20,640
    
    
    
    57,360Hardware sales
    
    
    678,968
    
    
    
    859,182
    
    
    
    135,375
    
    
    
    373,125Total revenues
    
    
    2,946,072
    
    
    
    3,187,682
    
    
    
    831,898
    
    
    
    1,178,211Cost of revenues:Software and service costs
    
    
    407,237
    
    
    
    393,216
    
    
    
    134,325
    
    
    
    221,145Professional services
    
    
    96,260
    
    
    
    119,444
    
    
    
    14,450
    
    
    
    49,925Hardware costs
    
    
    514,203
    
    
    
    575,907
    
    
    
    119,036
    
    
    
    202,738Total cost of revenues
    
    
    1,017,700
    
    
    
    1,088,567
    
    
    
    267,811
    
    
    
    473,808Gross profit
    
    
    1,928,372
    
    
    
    2,099,115
    
    
    
    564,087
    
    
    
    704,403Operating expenses:Selling and marketing
    
    
    598,549
    
    
    
    670,294
    
    
    
    179,882
    
    
    
    218,788Research and development
    
    
    323,528
    
    
    
    304,482
    
    
    
    102,071
    
    
    
    103,767General and administrative
    
    
    1,296,843
    
    
    
    1,303,061
    
    
    
    479,937
    
    
    
    458,416Total operating expenses
    
    
    2,218,920
    
    
    
    2,277,837
    
    
    
    761,890
    
    
    
    780,971Operating loss
    
    
    (290,548
    )
    
    
    (178,722
    )
    
    
    (197,803
    )
    
    
    (76,568
    )Other (expense) income
    
    
    (4,019
    )
    
    
    (73,164
    )
    
    
    90
    
    
    
    (40,963
    )Interest expense
    
    
    (162,271
    )
    
    
    (7,689
    )
    
    
    (33,111
    )
    
    
    (1,317
    )Loss before income taxes
    
    
    (456,838
    )
    
    
    (259,575
    )
    
    
    (230,824
    )
    
    
    (118,848
    )Income tax provision
    
    
    (3,200
    )
    
    
    (3,200
    )
    
    
    
    
    
    
    Net loss
    
    
    (460,038
    )
    
    
    (262,775
    )
    
    
    (230,824
    )
    
    
    (118,848
    )Other comprehensive income (loss), net
of tax
    
    
    3,834
    
    
    
    30,791
    
    
    
    
    
    
    
    12,625Comprehensive loss
    
    $
    (456,204
    )
    
    $
    (231,984
    )
    
    $
    (230,824
    )
    
    $
    (106,223
    )Basis and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )Weighted-average number of
common shares outstanding
    
    
    9,201,135
    
    
    
    9,273,416
    
    
    
    9,186,504
    
    
    
    9,273,416
 See accompanying notes to condensed consolidated financial statements. 5




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CENTERGISTIC SOLUTIONS, INC. 
 Condensed Consolidated Statements of Cash Flows Nine Months EndedMarch 31,2004
    
    2003(Unaudited)Cash flows from operating activitiesNet loss
    
    $
    (460,038
    )
    
    $
    (262,775
    )Adjustments to reconcile net loss to
net cash used by operating activities:Depreciation and amortization
    
    
    168,187
    
    
    
    167,000Provision for doubtful accounts
    
    
    28,374
    
    
    
    6,717Stock compensation
    
    
    88,198
    
    
    
    Non-cash interest expense
    
    
    55,719
    
    
    
    Loss on sale of securities
available for sale
    
    
    2,657
    
    
    
    44,081Loss on sale of land and building
held for sale
    
    
    
    
    
    
    32,457Increase (decrease) from changes
in assets and liabilities:Trade receivables
    
    
    (164,613
    )
    
    
    (15,160
    )Inventories
    
    
    (20,459
    )
    
    
    (36,964
    )Prepaid expenses
    
    
    (73,265
    )
    
    
    (75,830
    )Miscellaneous receivables
    
    
    (78
    )
    
    
    (8,241
    )Other assets
    
    
    (7,549
    )
    
    
    (25,212
    )Accounts payable
    
    
    191,644
    
    
    
    3,009Accrued expenses
    
    
    59,600
    
    
    
    87,672Deferred income
    
    
    33,466
    
    
    
    5,575Net cash used by operating activities
    
    
    (98,157
    )
    
    
    (77,671
    )Cash flows from investing activitiesProceeds from sale of securities
    
    
    4,798
    
    
    
    269,382Additions to capitalized software
development costs
    
    
    (11,065
    )
    
    
    Purchase of equipment
    
    
    (28,545
    )
    
    
    (49,182
    )Net proceeds from sale of land and
building held for sale
    
    
    
    
    
    
    148,396Net cash (used) provided
by investing activities
    
    
    (34,812
    )
    
    
    368,596
 See accompanying notes to condensed consolidated financial statements. 6




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CENTERGISTIC SOLUTIONS, INC. Condensed Consolidated Statements of Cash Flows (continued) March 31,2004
    
    2003(Unaudited)Cash flows from financing activitiesDeferred offering costs
    
    
    (210,797
    )
    
    
    (37,433
    )Principal payments on term loan and
notes payable
    
    
    (60,000
    )
    
    
    (380,381
    )Borrowings on short-term debt
    
    
    460,000
    
    
    
    70,000Certificate of deposit held as collateral
for note payable
    
    
    
    
    
    
    171,722Repurchase of common stock
    
    
    (15,787
    )
    
    
    (8,702
    )Payments received on note receivable
    
    
    1,953
    
    
    
    1,612Net cash provided (used) by
financing activities
    
    
    175,369
    
    
    
    (183,182
    )Net increase in cash and cash equivalents
    
    
    42,400
    
    
    
    107,743Cash and cash equivalents,beginning of period
    
    
    32,012
    
    
    
    102,842Cash and cash equivalents,end of period
    
    $
    74,412
    
    
    $
    210,585Supplemental Disclosures of Cash Flow
Information:Cash payments for:Interest
    
    $
    4,990
    
    
    $
    7,688Income tax payments
    
    $
    3,997
    
    
    $
    5,573
 See accompanying notes to condensed consolidated financial statements. 7




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CENTERGISTIC SOLUTIONS, INC. Condensed Consolidated Statements of Cash Flows (continued) Supplemental Disclosures of Non-Cash Investing and Financing Activities: During the nine months ended March 31, 2004, in conjunction with the private
debt offering discussed in Note 7, a vendor converted $30,000 of accounts
payable owed to a convertible promissory note. During the nine months ended March 31, 2004, the Company issued warrants to
purchase common stock as part of a private placement of debt. The estimated
fair value of the warrants was $12,533. In connection with the private
placement, the Company reclassified $53,616 of deferred offering costs to debt
discount as these costs were previously incurred for a pending financing
transaction. The cost of the debt discount is being accreted as non-cash
interest expense over the term of the notes payable. During the nine months ended March 31, 2004, the Company agreed to purchase its
common stock from a shareholder (Note 4). The Company issued a note payable
for $44,220 and recorded common stock to be redeemed as an offset to
stockholders equity (deficit). During that period, the Company paid down the
note payable and redeemed a total of $15,787 of common stock. See accompanying notes to condensed consolidated financial statements. 8




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CENTERGISTIC SOLUTIONS, INC. 
 Notes to Condensed Consolidated Financial Statements (Information with
Respect to the Three and Nine Months Ended

March 31, 2004 and 2003 is Unaudited)
  1.
    
    Organization and Nature of BusinessCentergistic Solutions, Inc. (the Company) was incorporated in the
State of California on March 10, 1972. On October 18, 1999, the Company
affected a name change to Centergistic Solutions, Inc.The Company provides integrated information distribution and reporting
systems, serving both general business and contact center environments.
The products provide critical information throughout the enterprise to
help companies improve performance and increase personnel productivity.Affinitec Corporation (Affinitec), a wholly owned subsidiary, develops
and distributes software that enables automatic call distribution
management system users to obtain sophisticated reporting and
communications tools to help manage their work force, forecast staffing
requirements, and schedule their agents. The operations of this entity
were merged into that of the parent company during fiscal 2001.Substantially all of the remaining operations are conducted by the
Companys Mexican subsidiary, Centergistic Solutions, S. DE R.L. DE D.V.
(formerly known as AAC de Latin America). The Mexican operations
distribute products of its parent, as well as other telecommunications
products from third parties.LYA, Inc., a wholly owned subsidiary, is a consulting business for call
centers and the telecommunications industry.2.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying unaudited condensed consolidated financial statements as
of March 31, 2004 and for the three and nine month periods ended March
31, 2004 and 2003 have been prepared in accordance with accounting
principles generally accepted in the United States of America for the
interim financial information and in accordance with the instructions per
Item 310(b) of Regulation SB. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included. Operating results for the nine month period ended March
31, 2004 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2004. These condensed consolidated
financial statements and notes thereto should be read with the
consolidated financial statements for the year ended June 30, 2003
included in the Companys Form SB-2 filed with the Securities and
Exchange Commission, which was declared effective on April 28, 2004. 9




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  2.
    
    Summary of Significant Accounting Policies (continued)Principles of ConsolidationThe accompanying consolidated financial statements as of March 31, 2004
and for the three and nine months ended March 31, 2004 and 2003 include
the accounts of the Company and its wholly owned subsidiaries, Affinitec
Corporation (Affinitec), Centergistic Solutions, S. DE R.L. DE D.V.
(Centergistic Solutions - Mexico) and LYA, Inc. (LYA). All
significant intercompany accounts and transactions have been eliminated.Managements Plans / LiquidityDuring the nine months ended March 31, 2004, the Company incurred a net
loss of $460,038 and an operating loss of $290,548, which includes
depreciation and amortization of $168,187, and, as of March 31, 2004, the
Company had working capital of $154,765. The Company demonstrated cost
reductions during the nine months ended March 31, 2004, as the operating
expenses decreased to $2,218,920 from $2,277,837 in the prior period.
This was achieved on an 8% decrease in revenue, of $241,610. The Company
has reduced headcount and general expense levels, and anticipates revenue
growth through an improved economy, targeted sales and marketing efforts,
the addition of strategically placed sales personnel, and expects the
cost reduction trend to continue this fiscal year and produce operating
profits throughout the next fiscal year.Additionally, as further discussed in Note 7, the Company has completed a
private offering of debt, raising gross proceeds of $490,000. The
Company used these proceeds to file a registration statement on Form
SB-2, which was declared effective in April 2004, to begin funding its
sales and marketing expansion programs and to fund current operating
expenses, as necessary. With this debt financing, management believes
the Company has sufficient cash and working capital to meet its needs
during the next fiscal year. The Company further contemplates an equity
round of $3,000,000 commencing in August 2004 and assuming the continuing
improvement in the public financial markets.Segment ReportingThe Company adopted Statement of Financial Accounting Standard (SFAS)
No. 131, Disclosures About Segment of an Enterprise and Related
Information, beginning July 2003. SFAS No. 131 establishes standards
for the way to report information about operating segments and related
disclosures about products and services, geographic areas, and major
customers in financial statements. The Company views its operations and
manages its business in three segments: Centergistic Solutions,
Centergistic Solutions - Mexico and LYA. 10




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  2.
    
    Summary of Significant Accounting Policies (continued)Segment Reporting (continued)The following represents the total assets by segment: March 31, 2004Centergistic Solutions
    
    $
    5,079,327Centergistic Solutions  Mexico
    
    
    597,3645,676,691Eliminations
    
    
    (3,344,155
    )Total consolidated assets
    
    $
    2,332,536
  The total assets for LYA are not significant and are included in those of
Centergistic Solutions.The following represents the revenues, gross profit and net income (loss)
by segment: Nine Months Ended
    
    Three Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Centergistic SolutionsRevenues
    
    $
    2,014,764
    
    
    $
    2,114,897
    
    
    $
    527,786
    
    
    $
    740,775Gross profit
    
    $
    1,500,561
    
    
    $
    1,538,990
    
    
    $
    408,698
    
    
    $
    498,653Net income (loss)
    
    $
    (460,401
    )
    
    $
    (365,715
    )
    
    $
    (239,620
    )
    
    $
    (164,222
    )Centergistic
Solutions - MexicoRevenues
    
    $
    816,268
    
    
    $
    919,849
    
    
    $
    283,472
    
    
    $
    380,076Gross profit
    
    $
    409,031
    
    
    $
    526,633
    
    
    $
    149,199
    
    
    $
    198,315Net income (loss)
    
    $
    (13,265
    )
    
    $
    84,166
    
    
    $
    4,423
    
    
    $
    42,754LYARevenues
    
    $
    115,040
    
    
    $
    152,936
    
    
    $
    20,640
    
    
    $
    57,360Gross profit
    
    $
    18,780
    
    
    $
    33,492
    
    
    $
    6,190
    
    
    $
    7,435Net income (loss)
    
    $
    13,628
    
    
    $
    18,774
    
    
    $
    4,373
    
    
    $
    2,620
 11




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  2.
    
    Summary of Significant Accounting Policies (continued)Net Loss Per ShareIn accordance with the provisions of SFAS No. 128, Earnings Per Share,
the Company is required to disclose basic and diluted earnings (loss) per
share. Basic earnings (loss) per share is computed by dividing net
income (loss), by the weighted average number of common shares
outstanding during each period. Diluted earnings (loss) per share is
similar to basic earnings (loss) per share, except that the weighted
average number of common shares outstanding is increased to reflect the
dilutive effect of potential common shares, such as those issuable upon
the exercise of stock or warrants, and the conversion of preferred stock,
as if they had been issued.On January 19, 2004, the Board of Directors approved an amendment to the
articles of incorporation including the number of authorized shares of
common stock to 80,000,000 and an 8:1 forward split of shares
outstanding. All share and per share amounts for the periods presented
in the financial statements have been retroactively adjusted for the
effects of this stock split.For all periods presented, there is no difference between basic and
diluted loss per common share, as the effects of stock options or
warrants and conversion of preferred stock are anti-dilutive, given the
net loss applicable to common shares for each period.ConcentrationsFinancial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade accounts receivable.The Company maintains its cash balances at financial institutions that
management believes possess high-credit quality, and related cash
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000 and the Securities Investor Protection Corporation up to
$500,000. At March 31, 2004, the Company did not have any amounts held
in the bank in excess of federally insured limits.Management believes that concentrations of credit, with respect to trade
receivables, are minimized by the Companys customer base. As of March
31, 2004, the Companys largest customer accounted for 21% of total trade
receivables, respectively. For each of the three months ended March 31,
2004 and 2003, the Companys largest customer accounted for 31% and 19%
of total Company net revenues, respectively. For each of the nine months
ended March 31, 2004 and 2003, the Companys largest customer accounted
for 27% and 32% of total Company net revenues, respectively. There were
no other customers that exceeded 10% of such amounts as of each
respective period-end. 12




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  2.
    
    Summary of Significant Accounting Policies (continued)Concentrations (continued)As of March 31, 2004, customers of the Companys Mexican subsidiary
accounted for 28% of total trade receivables, respectively. For each of
the three months ended March 31, 2004 and 2003 and for the sales to
customers of the Companys Mexican subsidiary account for 34% and 32%,
respectively, of total Company net revenues. For each of the nine months
ended March 31, 2004 and 2003 and for the sales to customers of the
Companys Mexican subsidiary account for 28% and 29%, respectively, of
total Company net revenues.Deferred Offering CostsThe Company has engaged the services of investment bankers to assist with
the potential funding of future operations through private investors. As
of March 31, 2004, the Company capitalized a net amount of $362,246 for
these services and such are included in the accompanying condensed
consolidated balance sheets as deferred offering costs. During the nine
months ended March 31, 2004, the Company completed a debt offering (Note
7). As part of this transaction, the Company reclassified $53,615 from
deferred offering costs to a contra-liability account. Such amount
represented that portion of the balance that related directly to the
costs of issuing the notes payable discussed in Note 7. The remaining
capitalized deferred offering costs relate to a pending equity
transaction. There can be no assurance that the Company will receive
funding from private investors. If the Company is able to receive
private funding, the deferred offering costs will be offset against the
proceeds received; otherwise, such will be expensed when the offering
efforts are terminated.Accounting for Stock-based CompensationThe Company has adopted SFAS No. 123, Accounting for Stock-based
Compensation, as amended by SFAS No. 148, Accounting for Stock-based
Compensation-Transition and Disclosure, which establishes financial
accounting and reporting standards for stock-based compensation. SFAS
No. 123 generally suggests, but does not require, stock-based employee
compensation transactions be accounted for based on the fair value of the
consideration received, or the fair value of the equity instruments
issued, whichever is more reliably measurable. Companies that do not
elect to change their accounting for stock-based employee compensation
are required to disclose the effect on net income as if the provisions of
SFAS No. 123 were followed. The Company has decided to retain the
provisions of APB Opinion No. 25, and related interpretations thereof,
for recognizing stock-based employee compensation expense, which includes
members of the board of directors. Non-employee stock compensation is
recorded at fair value in accordance with SFAS No. 123. 13




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  2.
    
    Summary of Significant Accounting Policies (continued)Accounting for Stock-based Compensation (continued)In accordance with APB Opinion No. 25, the Company has incurred
compensation cost aggregating $61,980 through March 31, 2004 for stock
option grants, of which $5,589 and $0 was recognized during the nine
month periods ended March 31, 2004 and 2003, respectively. Had
compensation cost for the stock-based compensation plan been determined
based on the fair value of awards (the method described in SFAS No. 123),
the reported net loss would have been as shown below: Nine Months
    
    Three MonthsEnded March 31,
    
    Ended March 31,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (460,038
    )
    
    $
    (262,775
    )
    
    $
    (230,824
    )
    
    $
    (118,848
    )Add: Stock compensation
expense recorded in
accordance with APB
Opinion No. 25
    
    
    5,589
    
    
    
    
    
    
    
    1,863
    
    
    
    Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all stock options, net of
related tax effects
    
    
    (46,469
    )
    
    
    (64,608
    )
    
    
    (15,973
    )
    
    
    (18,677
    )Pro forma net loss
    
    $
    (500,918
    )
    
    $
    (327,383
    )
    
    $
    (244,934
    )
    
    $
    (137,525
    )
  The fair value of each grant is estimated at the grant date using the
following assumptions: no stock price volatility; no dividends for all
years; risk-free interest rates of 2.00% and 3.99% for the three and
nine-month periods ended March 31, 2004 and 2003, respectively, and
expected lives of ten years for all grants.  Revenue Recognition  The Company typically provides bundled software and services through a
distributor network. Each component of a bundled solution is separately
identified based upon vendor specific objective evidence. The components
of revenue are recognized as follows: 14




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  2.
    
    Summary of Significant Accounting Policies (continued)Revenue Recognition (continued)  §
    
    Software license fees for site licenses and master
license agreements are recognized as revenue upon delivery of the
software, and when remaining obligations are not significant.
The Companys software licensing agreement provides the customer
with a 90-day warranty and return provision, including a limited
time to test the software. If the customer can prove that the
software is not functioning, the Company has the opportunity to
remedy the problem and, if not resolved, the customer may return
the software. The Company considers the need for a reserve for
warranty and returns on a quarterly basis; however, such
occurrences have historically not been significant.§
    
    Advance contract payments for software services,
consisting primarily of software maintenance and support, are
recorded as deferred income until the services are provided.
After the expiration of the software license warranty period, the
Company commences recognition of the contract payments ratably
over the term of the maintenance period. All subsequent software
maintenance and support is billed separately and recognized
ratably over the life of the maintenance period.§
    
    Revenues from software sold to distributors are
recognized upon delivery since title passes upon delivery. The
distributor is subject to a restocking fee of 10%-25% if an order
is returned; however, historically, such returns have been
insignificant. Special orders are non-cancelable.§
    
    Software and service revenues include services related
to maintenance, time and materials contracts, installation and
training. Such revenues are recognized as the services are
rendered.§
    
    Revenues from the sale of computer and display hardware
are recognized upon shipment, which is generally concurrent with
the passage of title.  Professional services revenues are derived from the services provided by
the Companys consulting business. Such revenues are recognized as the
services are rendered.3.
    
    Capitalized Software Development CostsResearch and development, which includes design, development, and testing
of new software, software maintenance, and enhancement costs, is expensed
as incurred until technological feasibility has been established for the
product. Technological feasibility is defined as a completion of detail
program design. Thereafter, certain costs, such as coding and testing,
are capitalized until the product is available for general release to
customers. 15




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  3.
    
    Capitalized Software Development Costs (continued)Software costs are amortized on a product-by-product basis using the
straight-line method over the remaining estimated economic life of the
software product, which is typically three to five years. Actual future
sales and remaining economic life of the product could differ
significantly from these estimates. Amortization of software costs for
the nine months ended March 31, 2004 and 2003 was $95,065 and $103,500,
respectively, and for the three months ended March 31, 2004 and 2003 was
$31,868 and $11,500, respectively, and is included general and
administrative expenses in the accompanying condensed consolidated
statements of operations and comprehensive income (loss).The following describes the components of capitalized software
development costs as of March 31, 2004 and the related estimated lives: Date TechnologicalFeasibility
    
    EstimatedEstablished
    
    LifeCenterStats
    
    December 2001
    
    5 yearsAgentView
    
    June 1999
    
    5 years
  The following summarizes the costs capitalized by product as of March 31, 2004: CenterStats
    
    $
    398,998AgentView
    
    
    307,476Fully amortized products
    
    
    1,146,6771,853,151Accumulated
amortization
    
    
    (1,630,596
    )$
    222,555
 16




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  4.
    
    Notes Payable  Related PartiesOn December 31, 2002, the Company entered into two notes payable to two
of its officers for an aggregate $24,975. Such notes bear interest at 6%
and the principal and interest are due and payable on demand. These
notes are secured by all of the assets of the Company. 17




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  4.
    
    Notes Payable  Related Parties (continued)In July 2003, the Company agreed to purchase 148,328 shares of Company
common stock from a former employee for $44,220 and issued a secured
promissory note payable in such amount. The note bears interest at 5%
per annum, and monthly payments in the amount of $2,750 are due and
payable on the note commencing after September 30, 2003. As each payment
is made, the Company cancels and retires 8,728 shares. Payment of the
note is secured by substantially all of the Companys assets. The
balance of the note at March 31, 2004 is $28,433.5.
    
    Commitments and ContingenciesConsulting AgreementAs of October 1, 2003, the Company entered into an Independent Consulting
Agreement (the Agreement) with a firm whereby the firm is to assist the
Company in the listing of its shares on a stock exchange, the sale of its
business or other debt or equity financings. Pursuant to the Agreement,
the Company is obligated to pay $1,000 per month for their services, as
well as a success fee of up to $37,500 in stock upon receipt by the
Company of up to $3,000,000 in aggregate financing under the terms of the
Agreement. Such Agreement expires on June 30, 2004.Off-Balance Sheet ArrangementThe Company provides indemnifications of varying scope and size to
certain customers against claims of intellectual property infringement
made by third parties arising from the use of the Companys products.
Management evaluates estimated losses for such indemnifications under
SFAS No. 5, Accounting for Contingencies, as interpreted by FASB
Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees. Management considers such factors as the
degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of the loss. As of June 30, 2003, the
Company has not encountered material costs as a result of such
obligations and has not accrued any liabilities related to such
indemnifications in the accompanying condensed consolidated financial
statements. 18




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  6.
    
    Stockholders EquityStock SplitOn January 19, 2004, the Board of Directors approved an amendment to the
articles of incorporation including the number of authorized shares of no
par common stock to 80,000,000 and an 8:1 forward split of shares
outstanding. All share and per share amounts for the periods presented
in the accompanying condensed consolidated financial statements have been
retroactively adjusted for the effects of this stock split.Stock Option PlansThe stockholders of the Company have approved the Centergistic Solutions,
Inc. Incentive Stock Option Plan (the Plan), which provides for the
issuance of up to 2,800,000 shares of its common stock. Options granted
under the Plan are not exercisable until two years after they are issued
and expire ten years after the date of issue. The options vest at a rate
of 25% per year over a four-year period. At March 31, 2004, 640,400 shares were available for grant under the terms of this Plan.In January 1998, the stockholders of the Company approved a nonqualified
stock option plan for the directors of the Company. The plan provides
for issuance of up to 800,000 shares of its common stock to directors.
Options are granted based on attendance at board meetings. At March 31,
2004, 547,200 shares were available for grant under the terms of this
plan. 19




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##### Table of Contents



CENTERGISTIC SOLUTIONS, INC. Notes to Condensed
Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  6.
    
    Stockholders Equity (continued)Stock Option Plans (continued)  A summary of the status of the plans, and changes during the nine months
ended March 31, 2004 is as follows: WeightedAverageExerciseFixed Options
    
    Shares
    
    PriceOutstanding at beginning of period
    
    
    2,006,000
    
    
    $
    0.56Granted
    
    
    406,400
    
    
    
    0.40Outstanding at end of period
    
    
    2,412,400
    
    
    $
    0.54Exercisable at end of period
    
    
    1,474,200
    
    
    $
    0.63Weighted average fair value of options granted during the period
    
    
    
    
    
    $
    0.40
 20




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  6.
    
    Stockholders Equity (continued)Stock Option Plans (continued)A summary of stock options outstanding at March 31, 2004 is as follows: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseFixed Options
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$0.30 to $0.47
    
    
    1,199,600
    
    
    
    7.53
    
    
    $
    0.38
    
    
    
    337,000
    
    
    $
    0.42$0.52 to $0.79
    
    
    1,212,800
    
    
    
    3.95
    
    
    
    0.69
    
    
    
    1,137,200
    
    
    
    0.692,412,400
    
    
    
    
    
    
    $
    0.54
    
    
    
    1,474,200
    
    
    $
    0.63
  Common Stock Purchase WarrantsIn conjunction with a subordinated debt financing with a related party in
1998, the Company issued warrants to purchase 480,000 shares of common
stock at $0.676 per share, which are exercisable at any time prior to
September 2005. All of these warrants were outstanding at March 31,
2004. 21




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##### Table of Contents



CENTERGISTIC SOLUTIONS, INC. Notes to Condensed Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  6.
    
    Stockholders Equity (continued)Common Stock Purchase Warrants (continued)  In connection with the agreement to sell the rights to the proceeds from
an outstanding lawsuit in fiscal year 2001, the Company issued warrants
(the Fiscal 2001 Warrants) to purchase 4,528,000 shares of common stock
at $0.4375 per share, which are exercisable at any time prior to
September 2005. Pursuant to the terms of the Fiscal 2001 Warrants,
should the Company issue a warrant or stock option to any person or
entity who is not an employee, director or consultant of the Company
providing for an exercise price of less than $0.654 per share, then the
exercise price of the Fiscal 2001 Warrants shall be reduced to 110% of
the lowest such exercise price (the Anti-dilution Provision). In
accordance with the provisions of SFAS No. 123, the value of the lawsuit
warrants was estimated to be $101,332. All of these warrants were
outstanding as of March 31, 2004. 22




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CENTERGISTIC SOLUTIONS, INC. Notes to Condensed Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  7.
    
    Private Placement of DebtSubsequent to June 30, 2003 and through September 30, 2003, the Company
entered into a total of 16 Note and Warrant Purchase Agreements (the
Agreements). Under the Agreements, the lenders agreed to loan the
Company an aggregate $490,000 ($30,000 of which was issued upon
conversion of accounts payable) in exchange for convertible subordinated
promissory notes (the Notes). The Notes, excluding all accrued
interest, are convertible into shares of common stock of the Company.
The principal amount of the Notes are convertible at any time, at the
option of the holder, at a price of $0.3975 per share. The Notes will
automatically convert upon the earlier of the following events: i) the
first anniversary date of the Notes or ii) 30 days from the effective
date of a registration statement filed by the Company under the
Securities Act of 1933, as amended, and the trading of the Companys
common stock on the OTC Bulletin Board. All unpaid principal and any
accrued but unpaid interest are due and payable on September 15, 2004.
Interest accrues at a rate of 6% per annum and is payable in arrears on
February 1, 2004, May 1, 2004 and August 1, 2004. The notes contain a
beneficial conversion feature, the value of which has been determined to
be $8,618. Such has been recorded as a component of the debt discount
and is being accreted as non-cash interest expense over the term of the
Notes.In consideration for entering into the Notes, the Company also issued
warrants (the Notes Warrants) entitling the note holder to purchase
 shares up to an aggregate of 74,016 shares of the Companys common stock
that will be received by the note holder upon conversion of the Notes
discussed above. The Notes Warrants are exercisable in whole, but not in
part, at any time from the date of issuance of the Notes Warrants and
ending on August 31, 2005 at a price of $0.3975 per share of common
stock. The Company estimated the value of these warrants at $8,618,
which is being accreted as non-cash interest expense over the term of the
Notes.Of the aggregate loan amount of $490,000, an aggregate $70,000 was loaned
by two officers and a relative of an officer with an aggregate of 10,576
warrants being issued to such individuals.In connection with the above-described transactions, the Company paid, as
a financial consulting fee, $20,750 in cash and issued warrants,
exercisable at a price of $0.466 per share to purchase 44,512 shares of
common stock. The Company estimated the value of the warrants at $3,915
which was recorded as a debt discount. The financial consulting fee and
warrants are being accreted as non-cash interest expense over the term of
the Notes. 23




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##### Table of Contents



CENTERGISTIC SOLUTIONS, INC. Notes to Condensed Consolidated Financial Statements (continued)(Information with Respect to the Three and Nine Months Ended
March 31, 2004 and 2003 is Unaudited)  7.
    
    Private Placement of Debt (continued)Upon issuance of the Notes, the Company reclassified $53,615 of related
costs from deferred offering costs to a contra-liability account. Such
is being accreted as non-cash interest expense over the term of the
Notes.Pursuant to the Anti-dilution Provision of the Fiscal 2001 Warrants
discussed in Note 6, such warrants were repriced to $0.4375 upon issuance
of the Notes Warrants. As such, the Fiscal 2001 Warrants were revalued
in accordance with SFAS No. 123, resulting in additional expense of
$82,609. Such amount was recorded as effective interest expense in the
accompanying consolidated statement of operations and comprehensive
income (loss) for the nine months ended March 31, 2004.On July 1, 2003, the Company also entered into two consulting agreements
with Hanover Capital Corp. (Hanover) pursuant to which the Company
agreed to pay to Hanover a monthly retainer of $5,000 for a period of 12
months, but cancelable by either party at any time with ten days written
notice prior to the end of each monthly period. The Company also agreed
to issue shares of common stock to Hanover as follows: (i) 200,000 shares
upon filing of the Companys proposed registration statement or Form
SB-2; (ii) 50,000 shares upon completion of a forward split of the
Companys common stock; and (iii) 100,000 shares upon approval of the
proposed Form SB-2.As of March 31, 2004, the Company accrued $103,125 as the estimated value
of the 250,000 shares of common stock to be issued under the
above-discussed Hanover agreements. 24




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A NOTE ABOUT FORWARD-LOOKING STATEMENTS The statements, other than statements of historical fact, included in
this report are forward-looking statements. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as
may, will, expect, intend, estimate, anticipate, plan, seek,
or believe. We believe that the expectations reflected in such
forward-looking statements are accurate. However, we cannot assure you that
such expectations will occur. Our actual future performance could differ
materially from such statements. These forward-looking statements are subject
to risks and uncertainties that could cause actual results and events to
differ materially. For a detailed discussion of these risks and
uncertainties please see the Factors That May Affect Future Results section
of this report. You should not unduly rely on these forward-looking
statements, which speak only as of the date of this report. Except as
required by law, we are not obligated to release publicly any revisions to
these forward-looking statements to reflect events or circumstances occurring
after the date of this report or to reflect the occurrence of unanticipated
events. General We are a provider of business performance and intelligence management
software that enables companies to translate data into critical and meaningful
metrics allowing for improved financial and operational performance. Our
software provides managers with customizable reporting and analysis tools.
These tools allow for real-time monitoring of and reporting against crucial
benchmarks in an organization. This enables constant monitoring of a companys
progress against financial and operational goals, and helps achieve optimal
operational performance. Business performance and intelligence management software uses historical
and real-time data and metrics to provide managers with visibility on the
business operations in real-time. We provide call/contact center managers with
powerful reporting and analytic tools allowing the constant monitoring of the
operational effectiveness and efficiency. While our current market focus is on
the call/contact center, we offer software to all operational areas of the
enterprise to gauge performance and profitable improvement. We also offer
consulting, training, technical support and programming services for our
customers and partners. Our company operates through its domestic headquarters, our Lynch Young &
Company Professional Services Group, and our wholly-owned Mexican subsidiary
located in Mexico City, Mexico. Our domestic operation sells AgentView,
CenterStats, the related hardware necessary to run these applications or
display statistics derived from these applications, training and educational
services, installation, custom programming and support services. Centergistic Solutions, Inc. was incorporated in Los Angeles, California
on March 13, 1972. Lynch Young Inc. (dba Lynch Young & Company) was
incorporated in California on October 16, 1980. Centergistic Solutions, Inc.
Latina America S. de R.L. de C.V., a limited liability partnership, was formed
in Mexico City, Mexico on May 19, 2000. This partnership was a successor to
Centergistic Solutions, Inc. Latina America S.A. de C.V., a Mexican corporation
originally formed July 1, 1993. Our Lynch Young & Company Professional Services Group operates as a
consulting firm selling consulting services to the call/contact center market.
Our Mexican subsidiary acts as a distribution company selling our AgentView and
CenterStats products along with other vendor sourced products to a variety of
distributors and end-users in Latin and South America. They also sell training
and educational services, installation and product support packages. In 2001, we completed development on our new product, CenterStats. During
fiscal year (FY) 2002 and 2003, we devoted what little internally generated
capital was available (approximately $100,000 in each of these fiscal years) to
actively promote, market, and sell CenterStats. The money was spent on a
salesperson focusing on selling CenterStats, and various marketing initiatives
intended to promote market awareness of CenterStats. However, due to limited
resources, we have never conducted a formal product launch and kickoff for
CenterStats. In addition, during FY 2002 and 2003, there has been a global
economic slowdown, and particularly, a decrease in corporate spending on
infrastructure and technology. These factors have had an adverse impact on our
ability to market and sell CenterStats, as well as the results of our
operations. We face several significant challenges common in our industry; continued
revenue growth; market segment risk; technological changes; and liquidity and
capital resources. We face challenges in growing our revenues because our CenterStats product
has not been installed in a large number of clients to date, and has not
achieved wide customer acceptance due to limited marketing and sales
activities. We are dependent upon the sale of CenterStats to substantially grow
our revenues. We have developed a sales and marketing plan to achieve this
revenue growth, but need capital to implement the plan. 25




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##### Table of Contents



We currently sell our products and services into the call/contact center
market. We generally sell in two different types of environments. In one
instance, our products are part of a bundled sale at the time of a new
call/contact center purchase and installation. We are dependent on our
distributors for a majority of these types of sales. In the other instance, we
sell to established call/contact centers that perceive a lack of data,
statistics, and metrics to effectively manage and monitor the performance of
their centers. We generate revenue in this arena through both direct end-user
sales and distribution channel sales. We face challenges that our distributors
could find new sources of this type product or even internally develop their
own product. We also face challenges that the call/contact center market
undergoes significant changes, restructuring, contraction, or evolution into
different technologies. We are subject to a rapidly changing technological environment. Our
ability to keep current with the demands of technology is critical to our
success. Each time the data flow of a particular application in the
call/contact center changes or new applications are created, we must be able to
retrieve that data. Our products must be changed also so that we may retrieve
that data. If we cannot continue to stay atop the technology curve, we will not
be able to compete effectively in this market space. To combat this challenge,
we have developed technology partnerships with many of the industry application
providers such as Avaya, Cisco, Concerto, Genesys, Microsoft, and Nortel to
name a few. These partnerships allow us the environment to test our products
and certify that our products work with a specific vendor application and to
get updates as their technology changes. Current Conditions In May 2003 we opened a development center in Delhi, India. We hired three
developers and currently have a staff of five. India was chosen as the site of
our center because of its available base of skilled and technological competent
developers and a lower cost structure. We plan to increase the staffing level
to ten upon a successful raise of capital. Primarily, these developers will
develop interfaces to enable our products to work with best of breed
call/contact center applications. Best-of-Breed (BOB) software can be defined
as the use of a specific software program or package for each specific
application or requirement. Many companies prefer, as policy, to incorporate a
Best-of-Breed software approach to make sure they are using the most highly
developed and tested solution for each application. The India development
center currently costs approximately $5,000 to $6,000 per month to maintain. We derive a substantial portion of our revenues from sales to customers in
Mexico, Latin America and South America. For the nine month periods ended
March 31, 2004 and 2003, these customers represented approximately 28% and 29%,
respectively, of our total net revenues. Our revenues in these countries are derived from our subsidiary,
Centergistic Solutions, Inc. Latin America S. R. L. de C.V., a limited
liability partnership. Its offices are located in Mexico City and houses 17
employees. This company acts primarily as a distributor, selling our AgentView
and CenterStats products along with others sourced from third party vendors
such as PC call accounting, voicemail products, data collection devices, and
LED display boards. This company sells its products primarily to companies such
as Avaya, Siemens and Alcatel. On September 30, 2003, we completed a private funding round of convertible
promissory notes. The gross proceeds generated from this raise was $490,000,
the net cash received was $460,000. The proceeds has been used to begin to
implement our sales and marketing plan for bringing CenterStats to the market
and to pay the fees and costs associated with the preparation and processing of
a registration statement filed with the SEC relating to a selling stockholder
offering. We allocated $100,000 towards the implementation of our sales and
marketing strategy. The remaining $360,000 was allocated as follows: $100,000
for accounting fees and related services, $100,000 for consulting and advisory
fees, $65,000 for principal payments of notes payable, $55,000 for legal fees,
$20,000 for printing expenses (including EDGARizing expenses) and $20,000 for
general working capital. We intend to raise up to an additional $3,000,000 in a
private offering. If this raise is successful, as to which there is no
assurance, those proceeds will be used to more fully implement our sales and
marketing strategy. We intend to begin the capital raise in August 2004. This
capital raise is critical to the implementation of our sales and marketing
strategy described in this prospectus. We must have capital to successfully implement our sales and marketing
strategy. We are not likely to see significant revenue growth without the sales
and marketing activities we intend to initiate with the proceeds of our
intended capital raise. Critical Accounting Policies The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and equity and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reported period. Actual results may differ from these
estimates under different assumptions or conditions. 26




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##### Table of Contents



Revenue Recognition Our revenue recognition policy is significant because revenue is a key
component of our results of operations. We derive our revenue primarily from
sales of our various products. As described below, significant management
judgments and estimates must be made and used in connection with revenue
recognized in any accounting period. If our management makes different
judgments or uses different estimates, material differences may result in the
amount and timing of our revenue for any period. We recognize revenue from the
sale of our products when:  
    
    we have persuasive evidence that an arrangement exists. For all sales,
we use a binding purchase order and sales order confirmation as
evidence of an arrangement. Sales through certain of our distributors
are evidenced by a master agreement governing the relationship,
together with binding purchase orders on a transaction by transaction
basis;
    
    the product is delivered to the customer under the terms of the
arrangement and title passes. Passage of title generally occurs when
the product is delivered to a common carrier, but in some cases occurs
when the customer receives the product;
    
    the revenue is fixed and determinable. At the time of the transaction,
we assess whether the fee associated with our revenue transactions is
fixed and determinable based on the payment terms associated with the
transaction. If a significant portion of a fee is due after our normal
payment terms, which are 30 to 75 days from invoice date, then we
account for the fee as not being fixed and determinable. In these
cases, we recognize revenue as the fees become due; and
    
    collection of the resulting receivable is reasonably assured. We
assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the
customer. We do not request collateral from our customers. If we
determine that collection of a fee is not reasonably assured, then we
defer the fee and recognize revenue at the time collection becomes
reasonably assured, which generally is upon receipt of cash. We derive revenues from licensing our software products, selling computer
and display hardware, and providing customer support, training, installation,
and consulting services. Software license fees for site licenses and master
license agreements are recognized as revenue upon delivery of the software, and
when remaining obligations are not significant. Sales to distributors are
recognized upon delivery as our distributors generally have customer orders in
hand before ordering from us. Should orders be cancelled, our distributors are
subject to restocking charges of 10%-25% except for custom orders which are
non-cancellable. Our software licensing agreement provides the customer with certain
warranty provisions, including a limited time to test the software. If the
customer can prove the software is not functioning, we have the opportunity to
remedy the problem, and if not resolved, the customer can return the software.
Historically, returns and warranty costs have not been significant. Advance contract payments for services, consisting primarily of software
customer support, are recorded as deferred income until after the expiration of
the software warranty period, at which time the revenue is recognized ratably
over the term of the maintenance period. All subsequent software support is
billed separately and recognized ratably over the life of the support period. Revenue from computer and display hardware is recognized upon shipment,
and consulting service revenue is recognized as services are rendered. Allowance for Doubtful Accounts Our management estimates the uncollectability of our accounts receivable
for losses that may result from the inability of our customers to make required
payments. Management specifically analyzes accounts receivable and historical
bad debts, customer concentrations, customer credit-worthiness, current
economic trends and changes in customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. If our customers financial
condition deteriorates such that it impairs their ability to make payments to
us, additional allowances may be required. As of March 31, 2004 and June 30,
2003, our accounts receivable balances were $1,012,000 and $876,000,
respectively, net of our estimated allowances for doubtful accounts of $64,000
and $36,000, respectively. The accounts receivable and estimated allowance for doubtful accounts
increased during the nine month period ended March 31, 2004. The Company has
achieved higher revenue volumes and larger average invoices due to increased
CenterStats sales. The payment cycle on these types of sales appears to have
stretched to 75-90 days from our typical experience of 45-60 days. We expect
this trend to continue as we increase sales of CenterStats. We have taken steps to address this trend by requiring staged payments on
these contracts when milestones are completed. We now typically require 25% of
the contract amount due upon signing, 50 to 65% upon delivery, and the
remaining balance due 30 days thereafter. We do not expect this trend to
significantly impact us as we believe revenues will continue to grow
sufficiently to enable us to generate enough cash flow to sustain operations. 27




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The accounts receivable turnover at March 31, 2004 has slowed down to 93
days. Revenues for the nine months ended March 31, 2004 were $2,946,000.
Revenues in the month of March 2004 were $420,000 representing 50% of the
revenues for the quarter. We billed $465,000 in the month of March 2004, which
includes revenue items, all applicable sales and value added taxes, and some
advance support contracts. This represents nearly 46% of the net accounts
receivable balance at March 31, 2004. This distorts the calculation of the
accounts receivable turnover, as March billings account for over 39 of the 93
turnover days calculated. Capitalized Software Development Costs We account for software development costs in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. SFAS No. 86
specifies that software development costs incurred internally should be
expensed as incurred until technological feasibility has been established. Once
technological feasibility has been established, all software development costs
should be capitalized until the product is available for general release to
customers. Technological feasibility is defined as a completion of detail
program design. Capitalization of software costs was minor during the nine
months ended March 31, 2004. Amortization of capitalized software costs
totaled $95,065 and $103,500 for the nine month periods ended March 31, 2004
and 2003, respectively. Long-Lived Assets During fiscal year 2003, we adopted SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets, which addresses significant
issues relating to the implementation of SFAS No. 121 and develops a single
accounting model, based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sale, whether such assets are or are not
deemed to be a business. SFAS No. 144 also modifies the accounting and
disclosure rules for discontinued operations. Implementation of such standard
has not had a material effect on the accompanying consolidated financial
statements. As of March 31, 2004, no such indicators of impairment were
identified by management. Stock-Based Compensation From time to time, we provide compensation in the form of shares of our
common stock as well as options or warrants to acquire shares of our common
stock. We derive the value of rights to acquire our common stock granted to
non-employees, such as options or warrants, from pricing models that consider
current market and contractual prices for our stock, as well as time value and
yield curve or volatility factors. Pricing models and their underlying
assumptions impact the amount and timing of unrealized gains and losses we
recognize, and use of different pricing models or assumptions could produce
different financial results. Options granted to employees are valued using the intrinsic value method
which bases compensation on the difference between the market value of the
underlying shares of common stock and the exercise price at the date of grant. Income Taxes We utilize the liability method of accounting for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income
taxes are recognized based on the differences between financial statement and
income tax bases of assets and liabilities using the enacted statutory rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized. The provision for income taxes represents
the tax payable for the period and the change during the period in deferred tax
assets and liabilities. Results of Operations for the Three Months Ended March 31, 2004 as Compared to
the Three Months Ended March 31, 2003 We believe there is some improvement in the economy in general and
corporate infrastructure technology spending in specific. We saw some order
growth for our AgentView product this past three months, and expect this trend
to continue as long as corporate infrastructure technology spending remains
consistent. Our biggest risks continue to be revenue growth, and the capital
raise necessary to implement our sales and marketing strategy. 28




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Revenues Three Month Period Ended March 31,(In thousands)2004
    
    %
    
    2003
    
    %Centergistic (U.S.)
    
    $
    528
    
    
    
    63.5
    
    
    $
    741
    
    
    
    62.9Mexico and Latin America
    
    $
    283
    
    
    
    34.0
    
    
    $
    380
    
    
    
    32.3Lynch Young & Company
    
    $
    21
    
    
    
    2.5
    
    
    $
    57
    
    
    
    4.8Total
    
    $
    832
    
    
    
    100.0
    
    
    $
    1,178
    
    
    
    100.0
 Centergistic Solutions is the U.S. based company selling products and
services to the call/contact center marketplace. Mexico and Latin America
represents revenue generated by Centergistic Solutions Latina America S. R. L.
de C.V., our wholly owned Mexican limited liability company subsidiary, sold to
Mexican, Latin and South American companies. Lynch Young & Associates, our
wholly owned subsidiary, represents our consulting and professional services
revenues. Total net revenues decreased by $346,000 or 29% for the three month period
ended March 31, 2004 (PE 2004) as compared to the three month period ended
March 31, 2003 (PE 2003). Revenues from U.S. based operations decreased by
$213,000 or 29% from the PE 2003. Revenues from Mexico and Latin America and
Lynch Young & Company also decreased as compared to the prior period. Revenues
from Mexico decreased by $97,000 or 26% and Lynch Young & Company decreased by
$36,000 or 63%. In the U.S. based operations, direct sales of AgentView increased $150,000
or 283% compared to PE 2003. The increase is due to several large customer
purchases during the past three months. We are starting to see sales activity
from customers requiring multiple data sources and a high number of agents.
This helps our revenue as one of our AgentView products is priced on a per
agent basis. We also charge additional amounts for multiple data sources. As
corporate infrastructure technology spending is increasing, we expect our
increasing revenue trend to continue also. We have approximately $175,000 in
backlog for orders that could not be fulfilled by quarter end and will be
recognized as revenue in the quarter ending June 30, 2004. CenterStats sales decreased by $10,000 or 20% compared to PE 2003. The
decrease is due a limited amount of sales attention to CenterStats this quarter
due to the significant AgentView sales activity. Distribution revenue in the U.S. dropped by $352,000 or 72% from PE 2003.
Revenue from our largest distributor, Dacon, fell by $220,000 or 46% from PE
2003. We believe we will recover this shortfall as we received two large
hardware orders accounting for $160,000 from Dacon in April. Sales to two of
our other distributors, Rockwell and BellSouth, decreased by $50,000 from PE
2003. Revenues from these distributors fell because of reorganization and
turnover in their respective companies, and us having to re-educate the product
management and sales organizations about our products and services. We expect
business from Rockwell to increase during the next nine months, but to see
continued weakness at BellSouth due to significant turnover in the sales
department and the sale of the Computer Telephony Group of Method IQ. Our
products are sold in this Computer Telephony Group. Installation and training revenues increased by $8,000 or 53% from PE 2003
due to the increased sales of AgentView and CenterStats. We also instituted a
price increase for these installations during the past year. The price increase
accounted for $2,000 of the increase, and the remainder was a volume related
increase. Mexico and Latin America revenues decreased by $97,000 or 26% as compared
to PE 2003. The Mexican economy remains relatively sluggish and according to
the American Business Chamber of Commerce (the Chamber) in Mexico, this trend
will continue through the remainder of our fiscal year. The Chamber projects
that the Mexican economy will begin to improve in the July-September 2004 time
frame. We expect to see our revenues remain flat through the remainder of our
fiscal year, with an improving trend as the economy improves. Lynch Young revenues decreased by $36,000 or 63% as compared to PE 2003.
The drop in revenue is related to the winding down of the Department of Water
and Power contract, from which the revenues from both period ends were
substantially derived. We expect completion of that contract by the conclusion
of our fiscal year. We expect to recognize $150,000 from this contract during
FY 2004. After the completion of the contract, we do not foresee a need to
operate Lynch Young as an independent consulting company any longer, and will
combine its operations with Centergistic Solutions, Inc. U.S. based operations.
This will cause an impairment of the remaining amount of goodwill in our
balance sheet of $23,600 associated with Lynch Young and such amount will be
written off at the conclusion of our fiscal year ending June 30, 2004 as the
contract concludes. We expect to see a decline in the Lynch Young revenues next
fiscal year, but this decline should be partially offset by consulting revenues
produced under the Centergistic Solutions, Inc. U.S. based operations. Cost of Revenues Cost of revenues decreased to $268,000 or 32% of revenues as compared to
$474,000 or 40% of revenues in PE 2003. Costs associated with hardware and
third party products sales decreased by nearly $170,000 and consulting expenses
related to the Lynch Young contract with Department of Water and Power
decreased $35,000. As a lesser portion of our revenue over this past three
months ended March 31, 2004 was derived from hardware sales, our costs related
to hardware sales decreased accordingly. We are at risk of hardware and third
party vendors passing on price increases that will affect our profitability. 29




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Operating Expenses Sales and Marketing Sales and marketing expenses decreased $39,000 or 18% as compared to PE
2003. We spent less on advertising ($11,000), and travel ($8,000) this period
end. We tried to find more economical methods to advertise this year instead of
trade publications as we did last year. We also tried to control travel
expenses by encouraging our salespeople to travel when necessary and combine
visits to several prospective customers on one trip. Commission expense was
lower by $20,000 due to the lower sales volume. We face the risk of not having
the necessary capital (estimated at a minimum of $1,000,000) to fully implement
our sales and marketing strategy next fiscal year. If we do not receive the
capital, we will scale back our implementation of the sales and marketing
strategy, and this will adversely affect our revenue and profitability in our
future fiscal periods. Our strategy will continue to slowly fund our sales and marketing programs
by investing any cash generated by operations. Absent any outside funding, we
will continue this process for the foreseeable future. However, we are planning
to raise capital through the financing contemplated to begin in August 2004,
and will use the funds to hire sales and marketing professionals, development
staff, and implement marketing programs for CenterStats. We plan to hire up to
10 sales professionals and up to 10 developers. If we are not successful in
raising the capital, we will reduce our planned hires to the level that can be
sustained from our existing operational cash flow. General and Administrative General and administrative expenses increased by $21,000 or 5% as compared
to PE 2003. The majority of the increase ($25,000) was due to increases in our
medical and liability insurance premiums. We do expect this trend to continue
in future periods. We also saw a decrease in the expenses ($15,000) associated with operating
our building that was sold in February 2003. We did not incur any costs
associated with the building in this current period. We anticipate general and administrative expenses to increase as we add
staff. As a result of obtaining public reporting company status in April 2004,
our professional fees in upcoming fiscal years are expected to greatly
increase. We anticipate general and administrative costs to increase by
$100,000 to $150,000 per year due to increased professional fees, director and
officer liability insurance, and increased employee benefit costs. Research and Development Research and development expenses increased by $2,000 or 2% over the same
period as last year primarily due to opening our development center in India in
May 2003. The costs for running this office averaged $4,000 a month for the PE
2004 as we ramped up to a staff of five. We expect the monthly cost to grow to
approximately $7,000 to $8,000 per month by the end of our fiscal year in June
2004. We plan to increase the staffing level to ten upon a successful raise of
additional capital. Primarily, these developers will develop interfaces to
enable our products to work with best of breed call/contact center
applications. The India development center currently costs approximately $5,000
to $6,000 per month to maintain. Other (Expense) Income The majority of the other expense recorded in the PE 2003 was attributable
to the sale of a building previously used in the Companys operations. The
loss on the sale of the building was $32,000. Interest Expense The interest expense during PE 2004 was related to interest on the
convertible debt, amortization of the debt issuance costs and beneficial
conversion feature, and repricing of certain existing warrants. This expense
will decrease as the warrant repricing was a one-time occurrence, certain debt
will be converted to common stock, and the debt issuance costs and beneficial
conversion feature will be fully amortized by August 2004. Net Income (Loss) Net loss increased to $231,000 as compared to $119,000 in PE 2003, a
$112,000 or 94% decline. The decline was primarily attributable to lower
revenue levels achieved in the quarter and additional interest expense. We anticipated generating an operating loss given that we planned to
invest any excess cash flow back into operations through sales and marketing
and development expenditures. 30




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Results of Operations for the Nine Months Ended March 31, 2004 as Compared to
the Nine Months Ended March 31, 2003 We believe there is some improvement in the economy in general and
corporate infrastructure technology spending in specific. We saw some order
growth for our AgentView and CenterStats products this past nine months, and
expect this trend to continue as long as corporate infrastructure technology
spending remains consistent. Our biggest risks continue to be revenue growth,
and the capital raise necessary to implement our sales and marketing strategy. Revenues Nine Month Period Ended March 31,(In thousands)2004
    
    %
    
    2003
    
    %Centergistic (U.S.)
    
    $
    2,015
    
    
    
    68.4
    
    
    $
    2,115
    
    
    
    66.3Mexico and Latin America
    
    $
    816
    
    
    
    27.7
    
    
    $
    920
    
    
    
    28.9Lynch Young & Company
    
    $
    115
    
    
    
    3.9
    
    
    $
    153
    
    
    
    4.8Total
    
    $
    2,946
    
    
    
    100.0
    
    
    $
    3,188
    
    
    
    100.0
 Total net revenues decreased by $242,000 or 8% for the nine month period
ended March 31, 2004 (PE 2004) as compared to the nine month period ended
March 31, 2003 (PE 2003). Revenues from U.S. based operations decreased by
$100,000 or 4% from the PE 2003. Revenues from Mexico and Latin America and
Lynch Young & Company also decreased as compared to the prior period.
Revenues from Mexico decreased by $104,000 or 11% and Lynch Young & Company
decreased by $38,000 or 25%. In the U.S. based operations, direct sales of AgentView increased $355,000
or 109% compared to PE 2003. The increase is due to several large customer
purchases during the past nine months. We are starting to see sales activity
from customers requiring multiple data sources and a high number of agents.
This helps our revenue as one of our AgentView products is priced on a per
agent basis. We also charge additional amounts for multiple data sources. As
corporate infrastructure technology spending is increasing, we expect our
increasing revenue trend to continue also. We have approximately $175,000 in
backlog orders that could not be fulfilled by quarter end and will be
recognized as revenue in the quarter ending June 30, 2004. CenterStats sales increased by $60,000 or 120% compared to PE 2003. The
increase is due to our continuing emphasis on introducing CenterStats into the
marketplace and obtaining customer awareness and acceptance. Distribution revenue in the U.S. dropped by $545,000 or 39% from PE 2003.
Revenue from our largest distributor, Dacon, fell by $200,000 or 20% from PE
2003. We believe we will recover this shortfall as we received two large
hardware orders aggregating $160,000 from Dacon in April. Sales to two of our
other distributors, Rockwell and BellSouth, decreased by $250,000 from PE 2003.
Revenues from these distributors fell because of reorganization and turnover in
their respective companies, and us having to re-educate the product management
and sales organizations about our products and services. We expect business
from Rockwell to increase during the next nine months, but to see continued
weakness at BellSouth due to significant turnover in the sales department and
the sale of the Computer Telephony Group of Method IQ. Our products are sold in
this Computer Telephony Group. Installation and training revenues increased by $33,000 or 63% from PE
2003 due to the increased sales of AgentView and CenterStats. We also
instituted a price increase for these installations during the past year. The
price increase accounted for $10,000 of the increase, and the remainder was a
volume related increase. Mexico and Latin America revenues decreased by $104,000 or 11% as compared
to PE 2003. The Mexican economy remains relatively sluggish and according to
the American Business Chamber of Commerce (the Chamber) in Mexico, this trend
will continue through the remainder of our fiscal year. The Chamber projects
that the Mexican economy will begin to improve in the July-September 2004 time
frame. We expect to see our revenues remain flat through the remainder of our
fiscal year, with an improving trend as the economy improves. Lynch Young revenues decreased by $38,000 or 25% as compared to PE 2003.
The drop in revenue is related to the winding down of the Department of Water
and Power contract, from which the revenues from both period ends were
substantially derived. We expect completion of that contract by the conclusion
of our fiscal year. We expect to recognize $150,000 from this contract during
FY 2004. After the completion of the contract, we do not foresee a need to
operate Lynch Young as an independent consulting company any longer, and will
combine its operations with Centergistic Solutions, Inc. U.S. based operations.
This will cause an impairment of the remaining amount of goodwill in our
balance sheet of $23,600 associated with Lynch Young and such amount will be
written off at 31




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##### Table of Contents



the conclusion of our fiscal year ending June 30, 2004 as the
contract concludes. We expect to see a decline in the Lynch Young revenues next
fiscal year, but this decline should be partially offset by consulting revenues
produced under the Centergistic Solutions, Inc. U.S. based operations. Cost of Revenues Cost of revenues decreased to $1,018,000 or 35% of revenues as compared to
$1,089,000 or 34% of revenues in PE 2003. Costs associated with hardware and
third party products sales decreased by nearly $60,000 and consulting expenses
related to the Lynch Young contract with Department of Water and Power
decreased $20,000. As a lesser portion of our revenue over this past nine
months ended March 31, 2004 was derived from hardware sales, our costs related
to hardware sales decreased accordingly. We are at risk of hardware and third
party vendors passing on price increases that will affect our profitability. Operating Expenses Sales and Marketing Sales and marketing expenses decreased $71,000 or almost 11% as compared
to PE 2003. We spent less on advertising ($30,000), and travel ($20,000) this
period end. We tried to find more economical methods to advertise this year
instead of trade publications as we did last year. We also tried to control
travel expenses by encouraging our salespeople to travel when necessary and
combine visits to several prospective customers on one trip. We face the risk
of not having the necessary capital (estimated at a minimum of $1,000,000) to
fully implement our sales and marketing strategy next fiscal year. If we do not
receive the capital, we will scale back our implementation of the sales and
marketing strategy, and this will adversely affect our revenue and
profitability in our future fiscal periods. Our strategy will continue to slowly fund our sales and marketing programs
by investing any cash generated by operations. Absent any outside funding, we
will continue this process for the foreseeable future. However, we are planning
to raise capital through the financing contemplated to begin in August 2004,
and will use the funds to hire sales and marketing professionals, development
staff, and implement marketing programs for CenterStats. We plan to hire up to
10 sales professionals and up to 10 developers. If we are not successful in
raising the capital, we will reduce our planned hires to the level that can be
sustained from our existing operational cash flow. General and Administrative General and administrative expenses decreased by $6,000 or nearly 1% as
compared to PE 2003. The majority of the decrease ($20,000) was due to
overcharging from our carrier of telephone expenses in the prior period, which
was reversed during the current period. We also saw reduced telephone charges
due to a re-negotiation of our contract that produced lower long distance
rates. We do not expect to see that significant drop continue in future
periods. We also saw a decrease in the expenses associated with operating our
building ($15,000) that was sold in February 2003. We did not incur any costs
associated with the building in this current fiscal period. Offsetting these decreases is an approximate $28,000 or 78% increase in
our allowance for doubtful accounts for PE 2004 and an increase in insurance
premiums of $10,000 or 9%. These increases are related to health and business
insurance premiums. We expect these premiums to continue to rise in the
foreseeable future. We anticipate general and administrative expenses to increase as we add
staff. As a result of obtaining public reporting company status, our
professional fees in upcoming fiscal years are expected to greatly increase. We
anticipate general and administrative costs to increase by $100,000 to $150,000
per year due to increased professional fees, director and officer liability
insurance, and increased employee benefit costs. Research and Development Research and development expenses increased by $19,000 or 6% over the same
period as last year primarily due to opening our development center in India in
May 2003. The costs for running this office averaged $4,000 a month for the PE
2004 as we ramped up to a staff of five. We expect the monthly cost to grow to
approximately $7,000 to $8,000 per month by the end of our fiscal year in June
2004. We plan to increase the staffing level to ten upon a successful raise of
additional capital. Primarily, these developers will develop interfaces to
enable our products to work with best of breed call/contact center
applications. The India development center currently costs approximately $5,000
to $6,000 per month to maintain. 32




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##### Table of Contents



Other (Expense) Income The Other Expense for the PE 2003 consisted primarily of a loss on the
sale of securities ($44,000) and a loss of the sale of a building ($32,000)
previously used in the Companys operations. Interest Expense The interest expense during PE 2004 was related to interest on the
convertible debt ($18,000), amortization of the debt issuance costs and
beneficial conversion feature ($56,000), and repricing of certain existing
warrants of $83,000. This expense will decrease as the warrant repricing was a
one-time occurrence, certain debt will be converted to common stock, and the
debt issuance costs and beneficial conversion feature will be fully amortized
by August 2004. Net Income (Loss) Net loss increased to $460,000 as compared to $263,000 in PE 2003, a
$197,000 or 75% decline. The decline was primarily attributable to the decline
in revenue and the increase in interest expense due to the repricing of the
warrants, amortization of the debt issuance costs and beneficial conversion
feature, and the increased expense from the officer loans and convertible debt. We anticipated generating an operating loss given that we planned to
invest any excess cash flow back into operations through sales and marketing
and development expenditures. Liquidity and Capital Resources Prior to fiscal year 2003, we were primarily financed through cash flow
from operations, sale of company assets, and to a lesser extent, limited bank
financing. During PE 2004, we received approximately $25,000 in loans from
officers and gross proceeds of $490,000 through a private offering of
convertible subordinated debt. We have allocated the proceeds from the
convertible debt to primarily fund the legal, accounting, and promotion fees
associated with our attempted capital raise, and to earmark $100,000 to fund
sales and marketing programs. Net cash used in operating activities was $98,000 and $78,000 in PE 2004
and 2003, respectively. The net cash used for operations in PE 2004 was
comprised primarily of depreciation and amortization of $168,000, stock
compensation of $88,000, non cash interest expense of $56,000, and a net
decrease in assets and liabilities of $51,000. Net cash used in investing activities was $35,000 in PE 2004 as compared
to generating $369,000 in PE 2003. The cash used in PE 2004 was due to purchase
of equipment of $29,000 and software development expenditures of $11,000. The
cash generated in PE 2003 was primarily due to the sale of securities of
$270,000 and the proceeds from the sale of the building of $148,000 offset by
purchases of equipment of $49,000. Net cash flows from financing activities generated $175,000 in PE 2004 as
compared to using $183,000 in PE 2003. We received gross proceeds of $490,000
from our private placement offering during PE 2004. These funds were offset by
using $211,000 for deferred offering costs. The cash used in PE 2003 was
primarily comprised of principal payments on debt of $380,000 offset by receipt
of a certificate of deposit of $171,000. We had working capital of $155,000 and $662,000 at March 31, 2004 and June
30, 2003, respectively. Working capital has declined due to funding our
planned capital raise and putting available working capital back into
operations. We will see the working capital increase in the next quarter as we
convert the convertible notes payable of $490,000 into equity as our SB-2
registration statement was made effective in April 2004. This will greatly
increase the working capital balance and we believe this will be at a
sufficient level to sustain us through the next fiscal year, but there are no
guarantees that this level will be sufficient. The cash on hand at March 31,
2004 is approximately $74,000. This level of cash is not sufficient for us to
implement our current operating plan. As noted in the Allowance for Doubtful
Accounts discussion above, accounts receivable balances have increased at March
31, 2004. We have concentrated on collection efforts in the current calendar
quarter and have received sufficient collections to provide the necessary cash
to sustain operations through the end of our current fiscal year. In March 2002, we received two loans from our officers and directors,
Ricardo Brutocao and David Cunningham. The total of these two loans are
$24,975. The loans are payable on demand and bear interest at 6%. As of March
31, 2004, the balance of these loans is $24,975. In July 2003, we agreed to purchase 148,328 shares of our common stock
from Al Wild, a former employee, for $44,220 and issued our secured promissory
note payable to Mr. Wild in such amount. Our note bears interest at the rate of
5% per annum, and monthly payments of principal and interest in the amount of
$2,700 are due and payable on the note commencing September 30, 2003. As each
monthly payment is made on our note, we may cancel and retire 8,728 of the
shares. Mr. Wild may cancel our note at any time and 33




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##### Table of Contents



elect to receive the
remainder of the shares we purchased from him that have not been cancelled and
retired by us in accordance with our agreement. Payment of our note to Mr. Wild
is secured by all of our assets. In September 2003, we were successful in raising gross proceeds of
$490,000 from the sale of convertible promissory notes. Of this total loan
amount, $10,000 was loaned by David Cunningham, an officer and director of
Centergistic, and $10,000 was loaned by MKB Associates, Inc., an affiliate of
Ricardo Brutocao, an officer and director of Centergistic. These proceeds were
allocated to increase sales and marketing activities and to pay the fees and
costs associated with the selling stockholder offering described elsewhere in
this report. As of March 31, 2004, including the results of operations for the nine
months then ended and the raising of gross proceeds of $490,000 in debt
financing, our working capital decreased to $228,000. We believe that we will
be able to convert this working capital into the cash necessary to continue
operations for the balance of fiscal year 2004. We intend to raise up to
an additional $3,000,000 in a private offering tentatively commencing on or
about August 1, 2004. We intend to begin the capital raise approximately 30
days after our stock commences trading on the OTC Bulletin Board. If this
raise is successful, as to which there is no assurance, we intend to use the
proceeds to add sales management and staff, conduct a marketing launch of
CenterStats, form strategic partnerships with consulting organizations such as
Accenture, EDS, IBM Global Services and Perot Systems, and heavily advertise
and promote our products and services during our next two fiscal years. As of
the date of this filing, we have not entered into any agreement or had any
material discussions with any such consulting organizations regarding the
formation of a strategic partnership. The minimum amount we need to finance
the plan for next year is $1,000,000, and to fully implement the plan over the
next two fiscal years, we will require $3,000,000. We face the risk that we will not be able to raise the necessary capital
to fully fund our sales and marketing plan. If we are not successful on our
$3,000,000 capital raise, we will have to scale back our plans. This will
impact our future revenue growth and profitability. If the capital raise is not successful, we will reduce our planned hires
to the level that can be sustained from our existing operational cash flow. We
will also scale back our product launch and marketing of CenterStats to the
level that they will be funded by operational cash flow. We have entered into consulting agreements with Hanover Capital and The
Bosphorous Group. These consultants were hired to act as financial advisors.
The Hanover Capital agreement runs from July 1, 2003 through June 30, 2004. In
addition to a $5,000 monthly payment, Hanover has received 250,000 shares of
company stock (with 100,000 left to be issued in the next fiscal quarter) for
achieving certain milestones. The Bosphorous Group agreement calls for monthly
compensation of $1,000, payment of monthly medical benefits, and payment of a
success fee upon completion of certain financing transactions. The term of the
agreement is from October 1, 2003 through June 30, 2004. We currently have not entered into any agreements nor are we currently in
discussions with any potential merger or acquisition candidate. However, we
intend to pursue an acquisition strategy upon successful completion of a
capital raise and the listing of our stock on the OTC Bulletin Board. As we
believe our current market space has a number of relatively small companies,
our strategy will be to increase market share, customer base, and technology by
acquiring these companies. We also believe that acquiring certain key
distributors, thereby securing our sales channels, makes sound business sense.
We may possibly seek to acquire one or more distributors in the future. FACTORS THAT MAY AFFECT FUTURE RESULTS We have experienced losses in the past, anticipate losses for the foreseeable
future and may never achieve profitability. We incurred a net loss of $460,000 during the nine months ended March 31, 2004,
and as of such date our accumulated deficit was $1,677,000. We expect that our
operating expenses will increase significantly as we continue to expand our
business. As a result, we will need to generate significantly more revenues
from sales of our new CenterStats product to achieve profitability. We have a
limited operating history with our new CenterStats product and we are not able
to estimate when, if ever, our revenues will increase sufficiently to cover
these expenses. We cannot assure you that our revenue will grow in the future
or that additional capital will be made available to us. If revenues grow
slower than we anticipate, or if operating expenses exceed our expectations or
cannot be reduced accordingly, or if we cannot obtain additional capital, our
business, operating results and financial condition will be materially and
adversely affected, which could cause our investors to lose all or part of
their investment in our common stock. We have not generated any significant revenues from the sale of our new
CenterStats product and if we are unable to increase sales, our business,
operating results and financial condition will be materially adversely
affected. We began marketing our CenterStats product in March 2002. Our marketing efforts
to date have been very limited because we lack 34




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sufficient capital to implement
our sales and marketing strategy. Revenues for the nine month periods ended
March 31, 2004 and 2003 were $2,946,000 and $3,188,000, respectively. Our future revenues will depend significantly on our ability to penetrate the
call/contact center [or business intelligence software] market space. We have
developed a sales and marketing strategy to achieve revenue growth, but we need
additional capital to implement it. If we are not successful in selling our
products in our targeted market due to insufficient additional capital or other
factors including competitive pressures or technological advances by others,
our business, operating results and financial condition will be materially and
adversely affected. We need additional capital to implement our current business strategy, which
may not be available to us, and if we raise additional capital, it may dilute
our investors ownership in us. We will require additional equity or other financing in order to implement
our sales, marketing and business strategy to grow revenues and reach
profitability. Obtaining additional financing will be subject to a number of
factors, including market conditions, our operating performance and investor
sentiment. These factors may make the timing, amount, terms and conditions of
additional financing unattractive to us. We cannot assure our investors that we
will be able to obtain any additional financing. If we are unable to obtain the
financing needed to achieve our business strategy, our ability to increase
revenues will be materially impaired and we may never reach profitability. Any additional capital raised through the sale of equity or convertible
debt securities may dilute our investors ownership percentage in us. In
addition, we may have to issue securities including debt securities, that may
have rights, preferences and privileges senior to our common stock. Our quarterly operating results, revenues and expenses may fluctuate
significantly which could have an adverse effect on the market price of our
common stock. Our operating results, revenues and expenses may fluctuate significantly
from quarter to quarter due to a variety of factors including:  
    
    the amount and timing of receipt of additional capital needed to implement our sales and marketing strategy,
    
    market acceptance of our CenterStats product,
    
    the timing, size and execution of orders and shipments,
    
    lengthy and unpredictable sales cycles,
    
    the timing of introduction and market acceptance of new products or product enhancements by us or our competitors,
    
    product and price competition,
    
    the relative proportions of revenues derived from license fees and services,
    
    changes in our operating expenses,
    
    our success in increasing our direct sales force,
    
    our success in maintaining relationships with our third-party distributors and adding new ones, and
    
    fluctuations in general economic conditions. We believe that period-to-period comparisons of our results of operations
are not a good indication of future performance. There can be no assurance that
future revenues and results of operations will not vary substantially. It is
also possible that in future quarters, our operating results will be below the
expectations of public market analysts and investors. In that event, the
trading price of our common stock may fall. The loss of Dacon PLC as a customer would materially adversely affect our
business, operating results and financial condition. We sell a substantial portion of our products to Dacon PLC, which is based
in the United Kingdom and has been a distributor of our products for the past
10 years. For the nine month periods ended March 31, 2004 and 2003, Dacon
accounted for 27% and 32%, respectively, of net revenues, and 21% of total
trade receivables as of March 31, 2004. The loss of Dacon PLC as a customer
would have a material adverse effect on our business, operating results and
financial condition. 35




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We face risks associated with operations in Mexico, Latin America and South
America which could adversely affect our business, operating results and
financial condition. We derive a substantial portion of our revenues from sales to customers in
Mexico, Latin America and South America. For the nine month periods ended
March 31, 2004 and 2003, these customers represented approximately 28% and 29%,
respectively, of our total net revenues. We face certain risks inherent in conducting business internationally, and
such specific risks in Mexico, Latin America and South America as languages and
cultural differences, legal and governmental regulatory requirements and
potential political and economic unrest. Any of these factors could seriously
harm our ability to generate future revenues from these customers, and,
consequently, our business, operating results and financial condition. We operate in a competitive business environment and if we cannot compete
effectively, we may face price reductions and decreased demand for our
products. The market for our products and services is intensely competitive and
subject to technological change. Competitors vary in size and in the scope and
breadth of the products and services they offer. We encounter competition from
a number of sources, all of which offer performance management reporting
systems to the call/contact center market. We expect additional competition
from other established and emerging companies as the market for performance
management reporting solutions and complementary products continues to develop
and expand. We encounter competition in the United States from a number of
sources, including Symon and Innova, all of which offer performance management
reporting systems to the call/contact center market. Some of our current, and
many of our potential competitors have longer operating histories, greater name
recognition, larger client bases and significantly greater financial,
engineering, technical, marketing and other resources than we do. As a result,
these companies may be able to respond more quickly to new or emerging
technologies and changes in customer demands or to devote greater resources to
the development, promotion and sale of their products than we can. In addition, current potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of our prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and acquire significant market share. We expect that the
call/contact center market will continue to attract new competitors and new
technologies, possibly involving alternative technologies that are more
sophisticated and cost-effective than our technology. New product introductions
by our competitors could cause a decline in sales, a reduction in the sales
price, or a loss of market acceptance of our existing products. There can be no
assurance that we will be able to compete successfully against current or
future competitors or that competitive pressures faced by us will not
materially adversely affect our business, financial condition and results of
operations. We rely in part, on third-party distributors to market and distribute our
products, and their failure to do so successfully could significantly harm our
ability to maintain and expand our customer base, which would adversely affect
our operating results and financial condition. Our sales and marketing strategy includes channels of third party
distributors. We have developed a number of these relationships and intend to
develop new ones. Our inability to attract new distributors or their inability
to penetrate their respective market segments or the loss of any of our
third-party distributors as a result of competitive products offered by other
companies, or products similar to ours that are developed internally by them or
otherwise, could harm our ability to maintain and expand our customer base. Our
ability to achieve revenue growth in the future will depend in part on our
success in developing and maintaining successful relationships with these
third-party distributors. If we are unable to develop or maintain our
relationships with these third-party distributors, our operating results and
financial condition will suffer. We must increase our direct sales force to sell our products, and if we are
unable to hire and train new sales personnel, our future growth will be
impaired. Our direct sales force currently consists of three persons. Our sales and
marketing strategy includes increasing the level of direct sales. Our ability
to achieve revenue growth in the future will depend on our ability to recruit,
train, and retain qualified direct sales personnel. If we are not able to
obtain additional capital, we will not be able to increase the size of our
direct sales force. Even if we are successful in obtaining additional capital,
there is no assurance that we will be successful in recruiting and retaining
qualified sales personnel. Our inability to increase the size and productivity
of our direct sales force could impair our growth and adversely affect our
operating results and financial condition. If we fail to keep pace with rapid technological changes in our industry, we
could lose existing customers and be unable to attract new business. Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render our 36




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existing products obsolete and unmarketable
in short periods of time. We expect new products and services, and enhancements
to existing products and services to continue to be developed and introduced by
others, which will compete with, and reduce the demand for, our products and
services. Our future success will depend, in part, on our ability to enhance
the performance features and reliability of our current products and introduce
new products that keep pace with technological developments and emerging
industry standards and to address the increasingly sophisticated needs of our
customers. We may have to raise additional capital to successfully improve the
features and reliability of our products and services. We may not be able to
obtain the capital or obtain it on terms acceptable to us. There can be no
assurance that we will be successful in developing, marketing and selling new
products or product enhancements that meet these changing demands, that we will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products or that our new
products and product enhancements will adequately meet the demands of the
marketplace and achieve market acceptance. We may lose sales, or sales may be delayed, due to the long sales cycle for our
products, which would reduce our revenues. Our customers generally involve many people in the decision to purchase
our products and consulting and other services. As a result, we may wait many
months before a sale can actually be completed. During this long sales cycle,
events may occur that affect the size or timing of the order or even cause it
to be canceled. For example, our competitors may introduce new products, or the
customers own budget and purchasing priorities may change. If these events
were to occur, sales of our products may be cancelled or delayed, which would
reduce our revenues. If we do not retain our senior management and other key employees, we may not
be able to successfully implement our business strategy. Our future success depends to a significant extent on the continued
services of our senior management, particularly, Ricardo Brutocao, Chief
Executive Officer, and David Cunningham, Chief Operating and Financial Officer,
and other key personnel, particularly, Rama Iyer, Vice President, Technology
and Product Management. The loss of the services of any of these persons could
have a material adverse effect on our business, results of operations and
financial condition. We have no employment agreements with Mr. Cunningham or
Mr. Iyer. We do not maintain key person life insurance for any of our
personnel at this time but may decide to in the future. Competition for
qualified personnel in our industry is intense and we compete for these
personnel with other companies that have greater financial and other resources
than we do. Our future success will depend in large part upon on our ability to
attract, retain and motivate highly qualified personnel, and there can be no
assurance that we will be able to do so. If we have any difficulty in hiring
needed qualified personnel, our business, financial condition and results of
operations could be materially adversely affected. Our success depends on growth in the telecommunications industry. While the Company as a whole is not dependent upon the telecommunications
industry, our AgentView legacy products are substantially positioned in the
sector. Our business would be adversely affected to the extent that the
telecommunications industry continues to contract through consolidation and
advances in technology, or does not achieve sustainable growth particularly
usage by companies who use multiple software applications. A number of factors
may inhibit the telecommunications industrys growth, including:  
    
    financial difficulties and recent bankruptcies of major providers such as Global Crossing and WorldCom;
    
    competitive concerns centered around large-scale price cutting;
    
    reluctance of industry companies to place purchase orders for capital expenditures; and
    
    lack of increasing customer demand for premium and high-speed services. If these conditions continue to occur in the future, the
telecommunications industry, as well as the purchase of our products by it,
could grow more slowly or decline. Our limited ability to protect our proprietary technology and other rights may
adversely affect our ability to compete. We rely on a combination of trademarks, copyrights, trade secret laws and
contractual provisions to protect our intellectual rights. We also have a
patent pending for an information management system. We cannot assure our
investors that our patent application will result in any patent being issued to
us or, if issued, that any patent claims will be of sufficient scope or
strength to provide any meaningful protection or any competitive advantage to
us. There can be no assurance that these protections will be adequate to
prevent our competitors from misappropriating our technology, or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology. To protect our trade secrets and
other proprietary information, we require employees, consultants and others to
enter into confidentiality agreements. We cannot assure our investors that
these agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. 37




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If we are found to infringe the proprietary rights of others, we could be
required to redesign our products, pay royalties or enter into license
agreements with third parties. Although we have never been the subject of a material intellectual
property dispute, there can be no assurance that a third party will not assert
that our technology violates its intellectual property rights in the future. As
the number of software products in our target market increases and the
functionality of these products further overlap, we believe that software
developers may become increasingly subject to infringement claims. Any claims,
whether with or without merit, could:  
    
    be expensive and time consuming to defend,
    
    cause us to cease making, licensing or using products that incorporate the challenged intellectual property,
    
    require us to redesign our products, if feasible,
    
    divert managements attention and resources, and
    
    require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies. There can be no assurance that third parties will not assert infringement
claims against us in the future with respect to our current or future products
or that any such assertion will not require us to enter into royalty
arrangements (if available) or litigation that could be costly to us. A large percentage of our stock is owned by relatively few people, including
officers and directors, and their interest may be different from and conflict
with the interest of our investors. As of March 31, 2004, our officers and directors beneficially owned a
total of 11,674,008 shares (including shares issuable upon exercise of options,
warrants or convertible securities beneficially owned by them that are
exercisable or convertible within 60 days after March 31, 2004), or
approximately 76% of our outstanding common stock. Investors in our common
stock may be subject to certain risks due to the concentrated ownership of our
common stock. For example, these stockholders, if acting together, would be
able to influence or control matters requiring approval by our stockholders,
including the election of directors and the approval of mergers, acquisitions
or other extraordinary transactions. They may also have interests that differ
from our investors and may vote in a way with which our investors disagree and
which may be adverse to our investors interests. The concentration of
ownership may have the effect of delaying, preventing or deterring a change of
control of our company, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of our company and
might ultimately affect the market price of our common stock. Future sales of shares of our common stock which are eligible for sale by our
stockholders may decrease the price of our common stock. We had 9,169,048 shares of common stock outstanding on March 31, 2004. All
of these shares are restricted securities under Rule 144 of the Securities
Act of 1933. An additional 8,761,960 shares underlying options, warrants and
convertible promissory notes outstanding on March 31, 2004 will be restricted
securities if and when they are issued. Restricted securities may be sold only
if they are registered under the Securities Act or if an exemption from the
registration requirements of the Securities Act is available. Generally,
stockholders may sell restricted securities without registration after holding
them for one year and subject to certain volume limitations. Actual sales, or
the prospect of sales by our present stockholders or by future holders of
restricted securities under Rule 144, or otherwise, may, in the future, have a
depressive effect on the market price of our common stock. A decline in the
price of shares of our common stock might impede our ability to raise capital
through the issuance of additional shares of our common stock or other equity
securities. There is no market for our common stock and we cannot assure our investors that
a market will develop or what the market price of our common stock will be. There is no public trading market for our common stock, and we cannot
assure our investors that one will develop or be sustained after this offering.
Trading, if any, in our common stock will be conducted in the over-the-counter
market on the OTC Electronic Bulletin Board. If a market does not develop or is
not sustained, it may be difficult for our investors to sell their shares of
common stock at an attractive price or at all. We cannot predict the prices at
which our common stock will trade. It is possible that in future quarters our
operating results may be below the expectations of public market analysts and
investors and, as a result of these and other factors, the price of our common
stock may decline. Our common stock will be deemed to be penny stock which may make it difficult
for investors to sell their shares. If a market ever develops for our common stock, our common stock will be
deemed to be penny stock as that term is defined in 38




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Rule 3a51-1 of the
Securities Exchange Act of 1934 (the Exchange Act). Penny Stocks are stocks:
(i) with a price of less than five dollars per share; (ii) that are not traded
on a recognized national exchange; (iii) whose prices are not quoted on the
NASDAQ automated quotation system (NASDAQ listed stocks must still meet
requirement (i) above); or (iv) in issuers with net tangible assets less than
$2,000,000 (if the issuer has been in continuous operation for at least three
years) or $5,000,000 (if in continuous operation for less than three years) or,
with average revenues of less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act and Rule 15g-2 of the Exchange Act
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investors account. Potential investors in
our common stock are urged to obtain and read such disclosures carefully before
purchasing any shares that are deemed to be penny stock. Moreover, Rule 15g-9 of the Exchange Act requires broker-dealers in penny
stocks to approve the account of any investor for transactions in such stocks
before selling any penny stock to that investor. This procedure requires the
broker-dealer to: (i) obtain from the investor information concerning his or
her financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transaction in penny
stocks are suitable for the investor and that the investor has significant
knowledge and experience to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from
such investor, confirming that it accurately reflects the investors financial
situation, investment experience and investment objects. Compliance with these
requirements may make it more difficult for investors in our common stock to
resell the shares to third parties or to otherwise dispose of them. No dividends anticipated to be paid. We have never paid any cash dividends on our common stock and we do not
anticipate paying cash dividends on our common stock in the future. The future
payment of dividends is directly dependent upon our future earnings, capital
requirements, financial requirements and other factors to be determined by our
Board of Directors. It is anticipated that future earnings, if any, which may
be generated from our operations will be used to finance our growth, and that
cash dividends will not be paid to our stockholders. We believe it is important to communicate our
expectations to our investors. However, there may be
events in the future that we are not able to predict
accurately or over which we have no control. The
risk factors listed above, as well as any cautionary
language in this report, provide examples of risks,
uncertainties and events that may cause our actual
results to differ materially from the expectations
we described in our forward-looking statements.
Before investing in our common stock, investors
should be aware that the occurrence of the events
described in these risk factors and elsewhere in
this report could have a material adverse effect on
our business, operating results, financial condition
and stock price. 
 ITEM 3. CONTROLS AND PROCEDURES As of the last day covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chief Operating Officer who is also the
Companys Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to Rule
13a-14 of the Securities Exchange Act of 1934 (the Exchange Act). Based upon
that evaluation, the Chief Operating Officer concluded that the Companys
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiary) required to be included in the Companys Exchange Act filings. There have been no significant changes in the Companys internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation. 39




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS None. 
 ITEM 2. CHANGES IN SECURITIES Pursuant to a consulting agreement, 100,000 shares were issued to
Hanover Capital Corporation upon the Companys completion of an 8 to 1
forward stock split in January 2004. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K See Exhibits listed in Exhibit Index. 40




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SIGNATURES In accordance with the requirements of the
exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned,
thereunto duly authorized. CENTERGISTIC SOLUTIONS, INC.Date: June 10, 2004
    /s/ Ricardo G. BrutocaoRicardo G. Brutocao,President Date: June 10, 2004
    /s/ David M. CunninghamDavid M. Cunningham,Chief Operating Officer, and Chief Financial Officer 41




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EXHIBIT INDEX No.
    
    Description31.1
    
    Certification of CEO  Rule 13a  14(a) or 15d  14(a)*31.2
    
    Certification of CFO  Rule 13a  14(a) or 15d  14(a)*32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002+
  *
    
    Filed herewith+
    
    Furnished herewith 42