##### **SECURITIES AND EXCHANGE COMMISSION**

###### **WASHINGTON,DC 20549**

 

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**FORM 10-K**

| **(Mark One)**                     |
|------------------------------------|
| **ý**                         |   | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                               |   |   |
|                               |   |   |
|                               |   | **For the calendar year  ended December 31, 2003** |
|                               |   |   |
| **OR**                             |
|                               |   |   |
| **o**                              |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                               |   |   |
|                               |   |   |
|                               |   | **For the transition period from             to            ** |
|                               |   |   |
| **Commission  File No. 000-23221** |

 

**CENTIV,INC.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

**P.O. Box 113, Palos Verdes Estates, CA 90274**

**(Addressof Principal Executive Offices, including Zip Code)**

 

**(949)717-0626**

(Registrant’s telephonenumber, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

**None**

Securities Registered Pursuant to Section 12(g) of the Act:

 

**CommonStock, $.001 par value**

 

(Title of Class)

 

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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Company’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).  Yes      No  ý.

 

As of March 31, 2004 (thelast business day of the most recently completed first calendar quarter), theaggregate market value of voting and non-voting stock held by non-affiliates ofthe Company was approximately $11,736,960 (based upon the last reported salesprice of the Common Stock as reported by the OTC Pink Sheets).  Shares of Common Stock held by eachexecutive officer, director, and shareholders with beneficial ownership ofgreater than 10% of the outstanding Common Stock of the Company and persons orentities known to the Company to be affiliates of the foregoing have beenexcluded in that such persons may be deemed to be affiliates.  This assumption regarding affiliate statusis not necessarily a conclusive determination for other purposes.

 

The number of shares ofCommon Stock outstanding (excluding treasury shares of 268,995) as of April 19,2004 was 29,639,568.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

 

 

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**CENTIV,INC.**

##### **TABLEOF CONTENTS**

 
| **ITEM**                                                                                                         |   |
|------------------------------------------------------------------------------------------------------------------|--------|
| **PART I**                                                                                                       |   |
| 1. Business                                                                                                      |   |
|                                                                                                             |   |
| 2.  Properties                                                                                                   |   |
|                                                                                                             |   |
| 3. Legal  Proceedings                                                                                            |   |
|                                                                                                             |   |
| 4. Submission of Matters to a Vote of  Security Holders                                                          |   |
|                                                                                                             |   |
| **PART II**                                                                                                      |   |
| 5. Market for the Company’s Common  Equity, Related Stockholder Matters, and Purchases of Equity Securities |   |
|                                                                                                             |   |
| 6. Selected Financial  Data                                                                                      |   |
|                                                                                                             |   |
| 7.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                  |   |
|                                                                                                             |   |
|                                                                                                             |   |
| 7A. Quantitative and Qualitative Disclosures  About Market Risk                                                  |   |
|                                                                                                             |   |
|                                                                                                             |   |
| 8. Financial Statements and Supplementary Data                                                                   |   |
|                                                                                                             |   |
| 9. Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure                         |   |
|                                                                                                             |   |
| 9A. Controls and Procedures                                                                                      |   |
|                                                                                                             |   |
| **PART III**                                                                                                     |   |
| 10. Directors and Executive Officers of the  Company                                                             |   |
|                                                                                                             |   |
| 11. Executive Compensation                                                                                       |   |
|                                                                                                             |   |
| 12. Security Ownership of Certain Beneficial  Owners and Management                                              |   |
|                                                                                                             |   |
| 13. Certain Relationships and Related  Transactions                                                              |   |
|                                                                                                             |   |
| 14. Principal Accountant Fees and Services                                                                       |   |
|                                                                                                             |   |
| **PART IV**                                                                                                      |   |
| 15. Exhibits, Financial Statement Schedules,  and Reports on Form 8-K                                            |   |
|                                                                                                             |   |
| Signatures                                                                                                       |   |

 

**EXPLANATORY NOTE**

 

On June 16, 2003, after approval by the Company’s stockholders at itsregularly scheduled annual meeting, the Company instituted a one-for-threereverse stock split.  The informationand disclosures relating to the number of shares of Common Stock and therelated price per share have been adjusted to reflect the impact of the reversestock split throughout this Annual Report on Form 10-K.

 

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**ITEM 1.  BUSINESS.**

 

#### ***Overview/History***

 

The following narrativedescribes the business transacted and intended to be transacted by Centiv, Inc.(“Centiv” or the “Company”) and its subsidiaries Beijing Multimedia Limited(“Beijing Multimedia”), Centiv Services, Inc. (“Centiv Services”), and otherentities, as disclosed.  The financialstatements included in Item 8 of this Annual Report on Form 10-K report thefinancial position of the Company as of December 31, 2003, and 2002, and theresults of operations and changes in financial position for the three yearsended December 31, 2003, 2002, and 2001. Subsequent to December 31, 2003, Centiv concluded the acquisition ofBeijing Multimedia which holds significant assets and payment obligations,changed its management team, changed is capital structure, increased the size ofits amended and restated stock plan, transferred its on-goingpoint-of-purchases signage operations to Centiv Services, and adopted a holdingcompany structure to seek additional capital and to pursue businessopportunities related to multimedia, publishing and advertising.  The financial statements also includedisclosures concerning the significant events, agreements, or transactions thatoccurred or were effected subsequent to December 31, 2003.  During the next twelve months, the value ofCentiv and its subsidiaries will be greatly influenced by the performance ofthe newly acquired assets, capital formation activities, the completion offunding obligations, and the decisions of the new management team.  Moreover, the Company’s securities may tradewith potentially significant volatility as the securities markets evaluate anddigest information about the business, both historically and to be transactedby Centiv and its subsidiaries in the future.

 

On January 29, 2004,Centiv announced that it had entered into a Stock Purchase Agreement with EagleTreasure Limited (“Eagle Treasure”) under which the Company acquired all of theissued capital stock of Beijing Multimedia, a wholly owned subsidiary of EagleTreasure.  The acquisition of BeijingMultimedia under the Stock Purchase Agreement was approved and ratified by theBoard of Directors of the Company on January 16, 2004.  On February 4, 2004, Centiv issued20,250,000 unregistered shares of its $.001 par value common stock in the nameof Eagle Treasure, a company incorporated in the British Virgin Islands, inexchange for the entire 202,500 shares of the issued and paid up share capitalof Beijing Multimedia.  In addition,Centiv assumed certain pre-existing obligations of Beijing Multimedia to issuecertain fee shares and stock options.

 

Prior to the acquisitionof Beijing Multimedia by the Company, under a Transfer Agreement dated December16, 2003, Beijing Multimedia acquired a percentage interest in the long-termnet operating profits of the joint advertising activities of CITIC Cultural& Sports Industry Co. Ltd. (“CITIC Cultural”) through the payment of $50.0million in net operating profits cash calls (“NOP Cash Calls”) to CITICCultural which was due on or before March 31, 2004.  The payment of the $50.0 million in NOP Cash Calls was not madewhen due.  As a result, the NOP CashCalls amount was increased from $50.0 million to $55.0 million, the paymentdate for the NOP Cash Calls was extended to a series of dates through May 31,2004, and the Transfer Agreement was amended by a Supplemental Agreement, andan Addendum Agreement.  Under the termsof the Supplemental Agreement to the Transfer Agreement, dated April 9, 2004,the Company agreed to be jointly and severally liable with Beijing Multimediafor the payment of the $55.0 million of NOP Cash Calls required to be paid toCITIC Cultural.

 

CITIC Cultural is acompany organized under the laws of the People’s Republic of China specializingin cultural and media businesses, and its principal businesses include: filmproduction and distribution, television drama and program production anddistribution, subway and railway advertising, magazine and newspaperpublication, and sports and entertainment businesses.

 

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CITIC Group is one ofthe largest conglomerates in Asia, with total asset value of approximatelyUS$70 billion at the close of calendar 2003. CITIC Cultural is an affiliate of CITIC Group.

 

In connection with theBeijing Multimedia acquisition, Centiv intends to conduct its operations solelythrough wholly owned or majority owned operating subsidiaries.  Therefore, as of the date of this AnnualReport on Form 10-K, Centiv operates as a parent company with the followingwholly owned subsidiaries:

 

1.         CentivServices, a Nevada corporation, a developerand provider of web-enabled POP solutions for consumer goods manufacturers andmulti-location retailers.

2.         BeijingMultimedia, a British Virgin Islands corporation, which owns the rights to  a percentage of the net operating profitsinterest in the joint advertising activities of CITIC Cultural.

 

**Centiv Services**

 

Centiv Services receivedall of the on-going POP signage operations of the Company in a wholly ownedsubsidiary transfer transaction subsequent to December 31, 2004. CentivServices is a developer and provider of web-enabled POP solutions for consumergoods manufacturers and multi-location retailers.  Its Instant Impact solution allows marketing managers, brandmanagers and retailers to create, edit and schedule delivery of customized POPsignage, using field-editable sign templates created and/or approved bymanufacturers.  Instant Impact POPsignage is print quality and digitally produced for the unique requirements ofeach retail location, allowing users to target specific consumer segments atthe POP and accumulate quantitative data for analysis and feedback on thesuccess of their in-store or on-premise marketing campaigns.  Its products allow a user access to aninformation database for selecting sign templates approved or created bymanufacturers, input data for the sign templates and select signage productsfor production of the sign templates. Centiv Services’ Internet-based user interface is clear, flexible,user-friendly, and changeable to allow control of the message at a corporate orlocal store level.  Instant Impactsignage can either be printed in a Centiv Services print center, or anindustry-standard print-formatted file can be delivered via the Internet to anyprint provider in the world.  Managementof Centiv Services believes that its Instant Impact solution improves marketingresults (due to improved signage utilization, customization and images),provides measurable marketing feedback, reduces signage lead time, allows fordistribution of brand identity while protecting the integrity of that identityand reduces the costs associated with in-store and on-premises custom signage.

 

Priorto focusing on the Centiv POP Business in 2001, Centiv (prior to the transferof the on-going operations of the Company to Centiv Services in 2004) operatedthree other business units in addition to the Centiv POP Business:

 

•***CalGraph Business***:Formerly a wholly owned subsidiary of the Company, CalGraph TechnologyServices, Inc. was a provider of on-site service and preventative maintenanceservices specializing in wide-format printing devices.  CalGraph’s U.S. and Canadian serviceoperations included field service technicians, customer support call center, componentrepair and refurbishment facilities, and parts logistics.  The Company

 

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soldthis business effective January 31, 2002 and it is reflected as *DiscontinuedOperations* in the Summary of Selected Financial Information andSelected Financial Information.

 

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

 

•***Technology******SystemsBusiness***:  Priorto divestiture by the Company, the Technology Systems Division designed,assembled and sold custom or “made-to-order” premium services or workstationsand related technology to value added resellers, vertical market computerresellers, corporations, universities and government agencies.  The Company sold the business effectiveOctober 31, 2000.

 

### **Strategy of Centiv Services**

 

Centiv Services’ strategyis to offer web services for consumer brand companies to manage its in-storeand on-premise point-of-purchase (POP) process.  These services allow a user access to an information database forselecting sign templates approved or created by manufacturers, input data forthe sign templates and select signage products for production. The final product is print quality digitally produced signage that is masscustomized for the unique requirements of each retail location.  UsingInternet technology as the access medium, Centiv Services offers thesecustomers on-demand, mass customized digitally produced POP signs, andadvertising materials for use in in-store or on-premise marketing.  The management of Centiv Services believesits products result in faster, more effective POP campaigns and allow customersto enhance their brand image while maintaining control over the use andintegrity of that brand image.

 

**History of Centiv’s Divisions andProducts**

 

By 2001, the Companybegan to focus on and dedicate its resources to the Centiv POP Business.  The Company sold its Channels Businesseffective December 31, 2001, and also sold its CalGraph Business effectiveJanuary 31, 2002.

 

TheCompany is a Delaware corporation, originally formed in Georgia in 1997 andreincorporated in Delaware in 2002.

 

**General**

 

For many years, retailersand manufacturers who sell their products through retail channels have utilizedPOP signage to promote products and services to consumers.  Typically, that signage has been producedusing manual methods (chalkboards, markers, etc.) by in-store personnel, orprinted at a central corporate location using standard lithography printing methodsand distributed to retail stores.

 

Recent advances inweb-based technology and digital printing hardware have created a new marketfor customized POP signage using display graphics printers, software, andmedia.  These technologies will allowretailers and wholesalers to quickly and easily create, print and displayretail signs that are more responsive to their needs in full color withphoto-realistic quality.

 

During 1998, as part of its key strategicobjectives, the Company was engaged by Anheuser-Busch to design, implement, andsupport a customized POP sign-making system, which allows

 

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Anheuser-Busch distributors to make POP signsquickly and without the use of highly trained, dedicated personnel.  The Company provided product research anddevelopment, training, installation, and technical support for the beveragemanufacturers’ distributors.  TheCompany also provided outsource fulfillment of inks and media used in thesign-making process.  As of March 31,2003, this activity was eliminated as Anheuser-Busch (“A-B”) did not renew thepreferred supplier technical support agreement.  While Centiv valued its relationship with A-B, the contract didnot include the Instant Impact web-based process for POP design anddelivery.  The A-B relationship was partof the legacy business model as a wholesaler of digital printing hardware andprovider of consumable printing materials. The A-B relationship had never involved the use of Instant Impactä.

 

### **Products and Markets**

 

Beginning in 2003, theCompany’s business model was exclusively focused on the web-based solutionInstant Impactä which uses anonline, Internet-based interface that allows customers to create and ordercustomized digital promotions using a standard Web browser and manufacturercreated or approved templates. Customers have the option of having their signs printed at a centralprint facility owned and operated by Centiv, or they may print locally atvarious print devices connected to their local computer.  The Company’s Internet-based solutionprovides a closed-loop information feedback that allows corporate customers touse this information to measure the effectiveness of their retail campaigns andpromotions at the regional or national level.

 

The Company’s Internet-based on-demand POP approachoffers traditional retailer marketers an entirely new way to individuallycustomize various forms of signage used in the retail environment.  Its solution allows clients to increasetheir brand awareness, closely control and monitor their brand image anddigital assets and project a consistent message nationally while allowing localcustomization.

 

Its solution also helps customers gain market shareand increase sales.  Additionally, thistechnology provides quicker turnarounds that enable clients and merchants topreview signage on-line and either print at their location or have themdelivered within two business days. This system allows clients to launch new promotions rapidly and betterreact to changing consumer trends.

 

Currently, the management of Centiv Services intendsto pursue cross-marketing and co-marketing agreements with companies that serveretail and manufacturing sector as well as potential opportunities to licensethe Company’s Internet technology and print center services.

 

### **Backlog**

 

The Company does not havesignificant backlog as it is able to integrate and deliver products generallywithin a few days of order receipt and long-term contracts to supply productshave not been entered into with customers (the Company assembles and sellsproducts on the basis of individual purchase orders as and when received).  The backlog at the beginning of a calendarquarter may not represent a significant percentage of the products to be soldin that quarter.  Therefore, managementdoes not consider order backlog a significant indicator of the Company’s futurerevenues.

 

### **Competition**

 

The process of obtainingcustom POP signage is highly fragmented and inefficient.  The market is served by traditionalprinters, fulfillment organizations, or print management service

 

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companies.  There are several large public companies,which provide a wide variety of in-store marketing solutions, but none of thesecompanies have chosen to enter the POP sector as defined by Centiv and as aresult do not compete directly with Centiv’s solution.  These companies include Catalina MarketingCorp. (NYSE: POS), Insignia Systems, Inc. (NASDAQ: ISIG) and ValassisCommunications, Inc. (NYSE: VCI).  Thereare also numerous independent and franchised signage providers and traditionalcommercial printers, including Fastsigns International, Inc. and Kinko’s, Inc.

 

The competition isfurther fragmented by specialized value added resellers of these variousservices.  There are direct competitors offering certain customary products andservices and there are potential competitors currently focusing on othersegments of the POP market. Specifically, in the turnkey field deployed POP print systems, theprincipal competition potentially comes from highly specialized Value AddedResellers.

 

### **Intellectual Property**

 

**OnMarch 21, 2001, the Company filed a patent application with the United StatesPatent and Trademark Office for a “Method and System for Point of Purchase SignCreation and Delivery.”  In addition,the Company filed an international patent application for the same invention toprotect patent rights in foreign countries. Although the applications are still pending, a recent internationalpreliminary examination report has indicated that the claimed invention isnovel and has industrial applicability. The Company expects that, after complete examination, it will be awardedpatents that protect its valuable intellectual property.  Centiv has developed this system that allowsa user access to an information database for selecting sign templates,inputting data for the sign templates and selecting and ordering signageproducts for production of the sign templates having the data input.**

 

The Company seeks toprotect its trade secrets and proprietary know-how, in part, by confidentialityagreements with employees, consultants, advisors, and others.  There can be no assurance that suchemployees, consultants, advisors or others will maintain the confidentiality ofsuch trade secrets or proprietary information, or that the trade secrets orproprietary know-how of the Company will not otherwise become known or beindependently developed by competitors in such a manner that the Company willhave no practical recourse.

 

### **Product Research and Market Development**

 

The market for theCompany’s products is characterized by rapid technological change and evolvingindustry standards, and it is highly competitive with respect to timely productinnovations.  The introduction of productsembodying new technology and the emergence of new industry standards can renderexisting products obsolete and unmarketable. The Company believes that its future success will depend upon itsability to develop, manufacture, and market new products and enhancements to existingproducts on a cost-effective and timely basis.

 

If the Company is unablefor technological or other reasons to develop products in a timely manner inresponse to changes in the industry, or if products or product enhancementsthat the Company develops do not achieve market acceptance, the Company’sbusiness will be materially and adversely affected.

 

### **Employees**

 

At December 31, 2003, theCompany had 23 full-time employees. Centiv’s employees are not represented by a labor union and managementbelieves that relations with its employees are satisfactory.

 

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**ITEM2.  PROPERTIES.**

 

The table below setsforth certain information with respect to leased properties:

 

**LeaseTerms:**

 
| **Location**            |   | **Approximate  Square  Footage** |   | **Expiration  Date** |   | **Monthly  Rent** |   |
|-------------------------|--------|----------------------------------|--------|----------------------|--------|-------------------|--------|
|                    |   |                             |   |                 |   |              |   |
| 998 Forest Edge  Drive  |   |                             |   |                 |   |              |   |
| Vernon Hills,  Illinois |   | 20,000                           |   | Month-to-month       |   | $                 | 6,000  |   |
|                         |        |                                  |        |                      |        |                   |        |  |

 

**ITEM3.  LEGALPROCEEDINGS.**

 

The Company is involvedin certain claims arising in the normal course of business.  In the opinion of management of the Company,although the outcomes of the claims are uncertain, in the aggregate, they arenot likely to have a material adverse effect on the Company.

 

# **ITEM 4.  SUBM**ISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS. 

##### ** **

None.

 

 

[The remainder ofthis page intentionally left blank.]

 

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##### **PART II**

 

**ITEM5.  MARK****ET PRICEOF AND DIVIDENDS ON THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDERMATTERS.**

 

**Public Market for Common Stock**

 

On February 3, 2004, the NASDAQ StockMarket implemented a trading halt on Centiv’s common stock.  Centiv took steps to voluntarily delist itsshares from the NASDAQ Small Cap Market, to be effective at the close oftrading on Friday, February 6, 2004.  Inany event, under Market Place Rule 4330(f) applicable to listed companies,Centiv’s acquisition of Beijing Multimedia was viewed by NASDAQ as a ReverseMerger triggering the need to reapply for listing on the NASDAQ.  By delisting, Centiv is not required tocomply with NASDAQ’s corporate governance requirements, however it has andcontinues to comply with the requirements of its charter and the corporate lawsof Delaware.

 

The Company’s commonstock was quoted on the NASDAQ Small Cap Market under the symbol “CNTV” untilFebruary 3, 2004.  Effective on February9, 2004, the Company’s stock is quoted on the OTC pink sheets under the symbol“CNTV.PK.”  The Company is in the processof applying to the OTC:BB exchange as well as other exchanges.

 

The following table setsforth, for the periods indicated, the high and low closing prices per share ofthe common stock as reported on the NASDAQ Small Cap Market.  As of February 26, 2004, the closing priceof the Company’s common stock on the OTC pink sheet market was $1.30.

 
| **2002**     |   | **High** |   | **Low** |   |
|--------------|--------|----------|--------|---------|--------|
|         |   |     |   |    |   |
| 1st  Quarter |   | $        | 3.90   |    | $      | 1.80 |   |
| 2nd  Quarter |   | 4.86     |   | 2.25    |   |
| 3rd  Quarter |   | 3.75     |   | 2.55    |   |
| 4th  Quarter |   | 3.60     |   | 0.60    |   |
|              |        |          |        |         |        |  |  |

 
| **2003**     |   | **High** |   | **Low** |   |
|--------------|--------|----------|--------|---------|--------|
|         |   |     |   |    |   |
| 1st  Quarter |   | $        | 1.53   |    | $      | 0.57 |   |
| 2nd  Quarter |   | 2.37     |   | 1.20    |   |
| 3rd  Quarter |   | 2.09     |   | 1.00    |   |
| 4th  Quarter |   | 1.17     |   | 0.47    |   |
|              |        |          |        |         |        |  |  |

 

# **Holders**

 

As of February 27, 2004,there were approximately 31 holders of record and 734 beneficial holders of thecommon stock.

 

# **Dividends**

 

The Company has appliedand intends to continue to apply any retained and current earnings toward thedevelopment of its business and to finance the growth of the Company.  Consequently, the Company currently does notanticipate paying cash dividends on common stock in the foreseeable future.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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### **Recent Issuances of Unregistered Securities**

 

Acquisitionof Beijing Multimedia:

 

On January 29, 2004,Centiv announced that it had entered into a Stock Purchase Agreement with EagleTreasure under which it acquired all of the issued capital stock of its whollyowned subsidiary, Beijing Multimedia. Beijing Multimedia owns the rights to acquire a part of the net operatingprofits interest in the joint advertising activities of CITIC Cultural.

 

On February 4, 2004,Centiv issued 20,250,000 unregistered shares of its $.001 par value commonstock in the name of Eagle Treasure, a company incorporated in the BritishVirgin Islands, in exchange for the entire 202,500 shares of the issued andpaid up share capital of Beijing Multimedia. Further, the Company assumed certain pre-existing obligations of BeijingMultimedia to issue certain fees shares and stock options.  Beijing Multimedia will continue as a whollyowned subsidiary of Centiv.

 

Series B ConvertiblePreferred Stock: 

 

On March 31, 2003, theCompany sold, in a private placement exempt from registration, 500,000 units, each consisting of one share of Series BConvertible Preferred Stock (the “Series B Preferred”) and one warrant topurchase 0.667 shares, on a post reverse stock split basis, of common stock(the “Warrant”).  As part of the privateplacement, the holders of $500,000 of the outstanding Convertible SubordinatedDebt converted each $5.00 of Subordinated Convertible Debt into one share ofSeries B Preferred and one warrant to purchase 0.667 shares, on a post reversestock split basis, of common stock.

 

Theremaining $500,000 of Convertible Subordinated Debt was repaid in full fromproceeds of the Series B Preferred offering. In addition, the Company issued an additional 270,000 shares of Series BPreferred in conversion of 135,000 shares of its outstanding Series A Preferred.  No Warrants were issued in connectionwith the shares of Series B Preferred issued in exchange for the Series APreferred.  In addition, the priorwarrants to purchase Series A Preferred held by the Series A Preferredinvestors were cancelled with no value in connection with the conversion.  Theremaining 81,000 outstanding shares of Series A Preferred were converted onMarch 31, 2003 into 270,003 shares, on a post reverse stock split basis) ofcommon stock in accordance with the terms of the Series A Preferred certificateof designation.

 

Thepurchase price for each unit was $5.00 per unit (the “Purchase Price”).  Because each share of Series B Preferred isconvertible, initially, into 3.33 shares of common stock on a post-reversestock split basis, the effective purchase price was $1.50 for each share ofcommon stock purchased.  The associatedWarrant gives the holder the right, until seven years after the issuance of theWarrant, to purchase 0.667 shares of common stock on a post reverse stock splitbasis at a purchase price of $1.50 per share.

 

TheSeries B Preferred has a liquidation preference over common stock equal to twotimes the Purchase Price plus any accrued and unpaid dividends.  If not previously converted, the Series BPreferred will begin to accrue dividends on April 1, 2004, at a rate equal to8% per annum of the Purchase Price.  Inaddition, if not previously converted into common stock, the Series B Preferredwill be subject to redemption at the option of the Company on March 31, 2007 ata redemption price equal to the Series B Preferred liquidation preferenceamount.  If the Company

 

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failsto redeem the Series B Preferred on that date, the holders of the Series BPreferred become entitled to elect a majority of the Board of Directors.  Notwithstanding the foregoing, directorselected by virtue of the voting rights of the Series B Preferred would have torecuse themselves from any vote to redeem all or a portion of the Series B Preferred.

 

Asstated, the Series B Preferred is initially convertible into 3.33 shares ofcommon stock, on a post reverse stock split basis, for each share of the SeriesB Preferred.  This conversion ratio,however, is subject to anti-dilution adjustment if the Company issues anycapital stock (or securities exercisable for or convertible into capital stock)for a per share price less than the then-current conversion price, except forissuances pursuant to the Company’s stock option plan and certain otherissuances to business partners.  Theanti-dilution adjustment will be made on a full-ratchet basis.  Each share of Series B Preferred is entitledto 3.33 votes on a post reverse stock split basis and the Series B Preferredstockholders vote together with the common stock stockholders on all mattersunless otherwise required by law.

 

The purchasers of the Series B Preferred may voluntarily convert theSeries B Preferred into common stock at any time.  The Series B Preferred will be automatically converted intocommon stock if (i) the Company meets either Conversion Milestone definedbelow, or (ii) holders of 2/3 of the outstanding shares of the Series BPreferred agree to convert.  In eitherevent, however, an automatic conversion will only occur if a registrationstatement covering the resale of the shares issuable upon conversion is ineffect at that time.  “ConversionMilestone” shall mean either (a) the Company’s pretax earnings from ongoingoperations are equal to or greater than $6 million in the aggregate in any fourconsecutive calendar quarters as determined in accordance with United StatesGenerally Accepted Accounting Principles (“GAAP”) as applied by the Company onthe date when the Series B Preferred was first issued and the closing tradingprice of the Company’s common stock is equal to or greater than $6.00 per share(as adjusted for any stock dividends, combinations or splits with respect tosuch shares after the filing date hereof) for ten consecutive Trading Days (asdefined below), or (b) the closing of a “firm commitment” underwritten publicoffering of common stock in which the public offering price per share of commonstock is at least equal to three times the then-applicable conversion price forthe Series B Preferred and which offering results in gross proceeds to theCompany of not less than $15 million. “Trading Day” shall mean a business day on which at least 50,000 sharesof common stock are traded on the principal United States securities exchangeor automated quotation system on which such security is listed or traded.

 

TheCompany agreed to file a registration statement on Form S-3 to cover the resaleof the shares of common stock issuable upon conversion of the Series BPreferred and the shares of common stock issuable upon exercise of theWarrants.  That registration statementwas declared effective on July 16, 2003. The Company also agreed to use its best efforts to maintain theeffectiveness of the registration statement until the earlier of (a) the laterof (i) two years after all of the Warrants have been redeemed or exercised, or(ii) two years after all of the Series B Preferred has been converted, or (b)six years from the closing date.  Inaddition, the Company granted the purchasers of the Series B Preferredpiggyback registration rights on any other registration statement filed by theCompany (other than on Forms S-8 or S-4). The Company is not, however, obligated to register or qualify the resaleof the shares of common stock issuable upon conversion of the Series B Preferredand the shares of common stock issuable upon exercise of the Warrants under thelaws of the various states, unless specifically requested by the purchasers ofthe Series B Preferred.  The

 

Companyagreed to bear all expenses of each registration, including the costs of onespecial counsel to the purchasers of the Series B Preferred.

 

Pursuant to the terms ofthe private placement, the Company may impose blackout periods with respect tothe use of the registration statement in an aggregate amount of time not toexceed 25 business days in any 12-month period if the Company’s Board ofDirectors

 

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determines in good faiththat (a) an amendment or supplement to a registration statement is required tocorrect a material misstatement or to include information the absence of whichwould render the registration statement materially misleading and (b) thefiling of such amendment or supplement would result in the disclosure ofinformation that the Company has a bona fide business purpose for preserving asconfidential. The Company may not institute more than four blackout periods inany 12-month period.  The Company agreedto notify the purchasers of the Series B Preferred of blackout periods but thepurchasers are not required to notify the Company of sales if no blackout is ineffect.  The registration rights areembodied in an investor rights agreement that contains customary terms andconditions, including cross-indemnities.

 

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

 

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

 

By March 3, 2004, alloutstanding shares of the Series B Preferred Stock (770,000 shares) had beenconverted into common stock of the Company (2,566,668 common shares).

 

Senior SubordinatedConvertible Debt:

 

On September 30, 2002, ina private offering exempt from registration, the Company issued $1.0 million ofSenior Subordinated Convertible Notes to private investors.  These notes were convertible into equity, atthe lenders’ option, upon the closing of, and at the same terms as, the nextequity financing in which the Company raised at least $1,000,000.  The loan had a term that extended until theearlier of July 1, 2004 or two business days following the closing of an equityfinancing described above and bore interest at a rate of 10% per year.  In addition, the lenders received anaggregate of 16,667 warrants granted at the closing of the loan and wereeligible to receive an aggregate of an additional 6,667 warrants per monthuntil such time as the loan was fully repaid or converted into equity.

 

The warrant wasexercisable at $5.25 per share and was callable by the Company if the marketprice of the Company’s common stock closed at or above $15.00 per share for 10consecutive trading days.  The initial16,667 warrants granted at closing were valued at $11,858 using theBlack-Scholes valuation assumptions described in Footnote 14 to Notes toFinancial Statements, creating an unamortized discount on the SeniorSubordinated Convertible Notes.  Theunamortized discount was amortized to interest expense over the term of thenote.

 

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

 

The 8,334 warrantsgranted on the $500,000 of Senior Subordinated Convertible Debt, which wereconverted into Series B Preferred Stock, were cancelled effective March 31,2003.  The remaining 8,334 warrantsgranted on the $500,000 of Senior Subordinated Debt that was repaid are stillactive and outstanding.  In addition,the Company granted 20,000 warrants on March 31, 2003 to the holders of theSenior Subordinated Debt that were repaid representing the warrants

 

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earned for the periodOctober 1, 2002 through March 31, 2003. The additional 20,000 warrants granted as of March 31, 2003 were valuedat $2,700 using the Black-Scholes valuation method.  Since the Company had accrued $14,400 for the warrants as ofDecember 31, 2002, an adjustment to income of $11,700 was recorded for thethree months ended March 31, 2003.

 

Other Warrants Issued:

 

On July 3, 2001, theCompany issued warrants to purchase of up to 20,000 shares of common stock toPiedmont Consulting, Inc. (“Piedmont”) under the terms of a ConsultingAgreement.  The warrants were exercisableat $3.45 per share, but expired on July 3, 2003.

 

On October 12, 2001, theCompany issued warrants to purchase up to 4,000 shares of common stock toSelling Dynamics, L.L.C. in partial payment for consulting services.  The warrants were exercisable at $3.00 pershare, but the warrant expired on October 12, 2003.

 

On November 11, 2002, theCompany issued warrants to purchase up to 15,750 shares of common stock toSatterfield & Associates in partial payment for recruiting services inconnection with the hiring of John Larkin, Centiv Service Inc.’spresident.  The warrants are exercisableat $3.00 per share and expire in 5 years. Using the Black-Scholes valuation method, the warrants were valued at$7,607 and recorded as interest expense.

 

In each case, thewarrants issued were exempt from registration under the Securities Act of 1933,as amended, by virtue of Section 4(2) thereof, no public sale having beeninvolved.

 

Securities Authorized forIssuance Under Equity Compensation Plan:

 

As of December 31, 2003,the Company maintained a 1997 Stock Option Plan covering 666,667 shares of theCompany’s Class A Common Stock (the “Plan”), that may be granted to employees,officers, directors, and certain consultants or advisors to the Company (SeeNote 10 to Consolidated Financial Statements). This compensation plan has been approved by the Company’s stockholders.

 

Pursuant to the offermade to John Larkin as President and Chief Operation Officer of Centiv, 474,374options were granted on October 28, 2002 outside of the Stock Option Plan.  The initial vesting period of the optionsincluded 85,000 shares vesting immediately and the remaining vest over asix-year period.  There are provisionsto accelerate the vesting period if certain revenue targets are achieved in2003 and 2004.  This compensation planwas not previously approved by the Company’s stockholders, as it was part of anemployment offer to hire.

 

On January 7, 2004, theCompany granted 171,000 stock options (not reflected in table below) and acceleratedthe exercisability of all outstanding options and to increase the period ofexercisability to 12 months following termination of employment with theCompany.

 

Below is a tablesummarizing the securities authorized for issuance under equity compensationplans as of December 31, 2003:
| **Plan Category**              |   | **Securities  to be  Issued upon  Exercising of  Options** |   | **Weighted  Average Exercise  Price of  Outstanding  Options** |   | **Securities  Available for  Future Equity  Compensation** |     |
|--------------------------------|--------|------------------------------------------------------------|--------|----------------------------------------------------------------|--------|------------------------------------------------------------|----------|
| Previously  Approved Plans     |   | 479,002                                                    |   | $                                                              | 1.95   |                                                       | 171,413, |   |
| Not Previously  Approved Plans |   | 474,334                                                    |   | $                                                              | 3.00   |                                                       | 0        |   |
| Total                          |   | 953,336                                                    |   | $                                                              | 2.47   |                                                       | 171,413  |   |

 

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Subsequent to December31, 2003, Centiv amended and restated its 1997 Stock Option Plan to reserve10,000,000 new shares of its common stock and renamed the Plan the 2004Non-Qualified Stock Compensation Plan (the “Plan”).  Shortly thereafter, the 10,000,000 new shares were included in aRegistration Statement on Form S-8 filed with the Securities and ExchangeCommission.  On February 11, 2004, theCompany issued 4,800,000 shares of common stock under the Plan to officers,directors, and professional advisors.

 

**ITEM6.  SELECTED FINANCIAL DATA.**

 

### **SELECTED FINANCIAL AND OPERATING DATA**

 

The financial informationpresented below represents selected historical data for the Company.  The following selected financial andoperating data presented by the Company should be read in conjunction with thehistorical consolidated financial statements of the Company and the relatednotes thereto and “Management’s Discussion and Analysis of Results ofOperations and Financial Condition.” The financial results of the Calgraph Business, Channels Business, andTechnology Systems Business have been reflected as discontinued operations andthe prior year financial statements have been restated to conform to theDecember 31, 2003 presentation.

 
|                                                        |   | **Years  Ended December 31,  (In thousands, except per share data)** |   |
|-------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                        |   | **2003**                                                             |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Statement of  Operations Data:                              |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net Sales                                                   |   | $                                                                    | 6,266  |   | $ | 25,508 |   | $ | 12,432 |   | $ | 15,242 |   | $ | 16,922 |   |
| Cost of goods  sold                                         |   | 4,073                                                                |   | 20,962 |   | 9,982 |   | 12,749 |   | 12,271 |   |
| Gross profit                                                |   | 2,193                                                                |   | 4,546 |   | 2,450 |   | 2,493 |   | 4,651 |   |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Operating  expenses:                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Selling, general  and Administrative                        |   | 3,538                                                                |   | 5,390 |   | 4,309 |   | 3,872 |   | 2,255 |   |
| Depreciation                                                |   | 576                                                                  |   | 570 |   | 313 |   | 100 |   | 88 |   |
| Restructuring  charges                                      |   | —                                                               |   | 87 |   | — |   | — |   | 445 |   |
| Operating income  (loss)                                    |   | (1,921                                                               | )      | (1,501 | ) | (2,172 | ) | (1,479 | ) | 1,863 |   |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Loss on  repurchase of stock (Note 13)                      |   | —                                                               |   | 1,492 |   | — |   | — |   | — |   |
| Other (expense)                                             |   | (502                                                                 | )      |   |   |   |   |   |   |   |   |
| Interest expense  (income)                                  |   | (8                                                                   | )      | (104 | ) | 872 |   | 375 |   | 157 |   |
| Income (loss)  before taxes                                 |   | (2,431                                                               | )      | (2,889 | ) | (3,044 | ) | (1,854 | ) | 1,706 |   |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Provision  (benefit) for income taxes                       |   | —                                                               |   | 49 |   | 787 |   | (609 | ) | 731 |   |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Income/(Loss)  from continuing operations                   |   | (2,431                                                               | )      | (2,938 | ) | (3,831 | ) | (1,245 | ) | 975 |   |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Gain/(loss) from  discontinued operations, net of tax       |   | —                                                               |   | 380 |   | (3,068 | ) | (1,089 | ) | (8,093 | ) |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net income  (loss)                                          |   | $                                                                    | (2,431 | ) | $ | (2,558 | ) | $ | (6,899 | ) | $ | (2,334 | ) | $ | (7,118 | ) |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Effect of  beneficial conversion feature of preferred stock |   | —                                                               |   | (810 | ) | — |   | — |   | — |   |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net loss  attributable to common stockholders               |   | $                                                                    | (2,431 | ) | $ | (3,368 | ) | $ | (6,899 | ) | $ | (2,334 | ) | $ | (7,118 | ) |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Basic and  diluted weighted average shares outstanding      |   | 1,607,134                                                            |   | 1,631,433 |   | 1,658,704 |   | 2,043,506 |   | 2,053,888 |   |
|                                                        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Basic and  diluted loss applicable to common shares:        |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Continuing  operations                                      |   | $                                                                    | (1.51  | ) | $ | (2.29 | ) | $ | (2.31 | ) | $ | (0.61 | ) | $ | 0.47 |   |
| Discontinued  operations                                    |   | —                                                               |   | 0.23 |   | (1.85 | ) | (0.53 | ) | (3.94 | ) |
| Net income  (loss)                                          |   | $                                                                    | (1.51  | ) | $ | (2.06 | ) | $ | (4.16 | ) | $ | (1.14 | ) | $ | (3.47 | ) |

 

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|                                 |   | **As of  December 31,  (In thousands)** |   |
|--------------------------------------|--------|-----------------------------------------|--------|
|                                 |   | **2003**                                |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Balance Sheet  Data:                 |   |                                    |   |   |   |   |   |   |   |   |   |
| Working capital  (deficit)           |   | $                                       | 536    |   | $ | 783 |   | $ | (2,201 | ) | $ | 2,461 |   | $ | 9,289 |   |
| Net assets,  discontinued operations |   | 0                                       |   | 0 |   | 906 |   | 16,031 |   | 14,665 |   |
| Total assets                         |   | 2,565                                   |   | 6,388 |   | 9,144 |   | 35,270 |   | 37,340 |   |
|                                 |   |                                    |   |   |   |   |   |   |   |   |   |
| Total debt                           |   | 0                                       |   | 990 |   | 795 |   | 12,847 |   | 4,264 |   |
| Shockholders’  equity:          |   |                                    |   |   |   |   |   |   |   |   |   |
| Due from  stockholders               |   | (270                                    | )      | (267 | ) | (2,366 | ) | (1,941 | ) | (1,780 | ) |
| Paid-in capital                      |   | 24,176                                  |   | 21,755 |   | 19,623 |   | 19,526 |   | 22,563 |   |
| Accumulated  deficit                 |   | (22,443                                 | )      | (20,013 | ) | (16,645 | ) | (9,746 | ) | (7,412 | ) |
| Total  stockholders’ equity     |   | $                                       | 1,463  |   | $ | 1,475 |   | $ | 612 |   | $ | 7,839 |   | $ | 13,371 |   |
|                                      |        |                                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ITEM 7.  MANAGEMENT’S DI****SCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.**

 

The following discussionshould be read in conjunction with the information contained in the financialstatements, including the related notes thereto.  In particular, it should be emphasized that subsequent toDecember 31, 2003, the Company reported the acquisition of significant assetsand payment obligations, changed its management team, changed its capitalstructure, increased the size of its amended and restated non-qualified stock compensationplan, transferred its on-going POP operations to Centiv Services, and adopted aholding company structure to seek additional capital and to pursue businessopportunities related to multimedia, publishing and advertising.  The Overview that follows discusses thebusiness transacted by Centiv in the calendar years ended December 31, 2003,2002, and 2001.

 

### **Overview**

 

The Company is a developer and provider of web-enabled POP solutionsfor consumer goods manufacturers and multi-location retailers.  Its Instant Impact solution allows marketingmanagers, brand managers and retailers to create, edit and schedule delivery ofcustomized POP signage, using field-editable sign templates created and/orapproved by manufacturers.  InstantImpact POP signage is print quality and digitally produced for the uniquerequirements of each retail location, allowing users to target specificconsumer segments at the POP and accumulate quantitative data for analysis andfeedback on the success of their in-store or on-premise marketingcampaigns.  The Company’s products allowa user access to an information database for selecting sign templates approvedor created by manufacturers, input data for the sign templates and selectsignage products for

 

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production of the signtemplates.  The Internet-based user interface is clear, flexible, user-friendly, andchangeable to allow control of the message at a corporate or local storelevel.  Instant Impact signage caneither be printed in a Centiv print center, or an industry-standardprint-formatted file can be delivered via the Internet to any print provider inthe world.  Management of the Companybelieves that its Instant Impact solution improves marketing results (due toimproved signage utilization, customization and images), provides measurablemarketing feedback, reduces signage lead time, allows for distribution of brandidentity while protecting the integrity of that identity and reduces the costsassociated with in-store and on-premises custom signage.

 

Theroots of Centiv’s introduction to the custom POP segment were formed in 1998when it partnered with Anheuser-Busch (“A-B”) to design, configure, deliver andimplement a proprietary A-B POP signage system in over 730 A-B wholesaledistributors in the United States and 16 foreign countries.  This led to a relationship with A-B pursuantto which the Company installed a POP system for A-B allowing distributors toaccess that system to create custom signage using templates created byA-B.  In addition, as part of theCompany’s agreement, Centiv maintained rights to supply consumable printmaterials to these distributors supported by an in-house call center service.  As a result of its exposure to the customsignage business, Centiv invested in the development of a web-based platformfor the collaborative versioning of POP signage.  Beginning in 2001, Centiv began the commercialization of InstantImpact.  In December 2002, A-B notifiedCentiv that upon its expiration on March 31, 2003, Centiv would no longer bethe preferred supplier for various consumables of the system, and the Company’spreferred supplier technical support agreement would not be renewed.  The Company’s activities with A-B and itsdistributors terminated upon the expiration of the agreement on March 31, 2003.

 

Although Centiv valued its relationship withA-B, the contract did not include the Instant Impact web-based process for POPdesign and delivery.  The A-Brelationship was part of the legacy business model as a wholesaler of digitalprinting hardware and provider of consumable printing materials.  The A-B relationship had never involved theuse of Instant Impactä.  As aresult, A-B’s decision in no way reflects upon the relevancy and viability ofthis innovative service going forward. Despite the revenue impact of losing the Company’s supply relationshipwith A-B, the net contribution impact was negligible.  After a prudent assessment of overhead costs and spending, theCompany determined how to defer or reduce ongoing expenses in order to minimizethe financial impact of this event.

 

Withthe termination of the preferred supplier and support agreement effective March31, 2003, the sales to A-B and the wholesale distributor network did not occurin the remaining quarters of 2003. Sales from its Instant Impact product were not sufficient to replace thesales lost from A-B and its wholesale distributor network during 2003.  Total sales from A-B and its wholesaledistributor network for the years ended December 31, 2003 and 2002 were $4.1million and $24.9 million, respectively. In response to this, Centiv underwent a downsizing of its operations andhas reduced its headcount and other operating expenses.

 

Although no singlecustomer accounted for more than 10% of the sales for the years ended December31, 2002 and 2001, on a combined basis, distributors affiliated with A-B, inthe aggregate, accounted for approximately 97% and 99% of the sales,respectively.  For the year endedDecember 31, 2003, distributors affiliated with A-B, in the aggregate,accounted for approximately 58% of the Company’s total sales and two othercustomers of Instant Impact each accounted for more than 10% of total sales andcombined accounted for 25% of sales.

 

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

 

•***CalGraph Business***:Formerly a wholly owned subsidiary of the Company, CalGraph TechnologyServices, Inc. was a provider of on-site service and preventative maintenanceservices specializing in wide-format printing devices.  CalGraph’s U.S. and Canadian service

 

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operationsincluded field service technicians, customer support call center, componentrepair and refurbishment facilities, and parts logistics.  The Company sold this business effectiveJanuary 31, 2002 and it is reflected as *Discontinued Operations* in the Summary ofSelected Financial Information and Selected Financial Information.

 

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

 

•***Technology******SystemsBusiness***:  Priorto divestiture by the Company, the Technology Systems Division designed,assembled and sold custom or “made-to-order” premium services or workstationsand related technology to value added resellers, vertical market computerresellers, corporations, universities and government agencies. The Company soldthe business effective October 31, 2000.

 

**Resultsof Operations**

 

Net sales reflect thesale of the Company’s products, net of allowances for returns and otheradjustments.** **Sales are generatedfrom the sale of products, supplies, and services primarily in the UnitedStates.  The web-based Instant Impactproduct has the following revenue components: One-time set-up fees, template design and product configuration fees,user training fees, and print services fees. Revenue is recognized when the service has been performed or in the caseof the printing when the product has been shipped.

 

Cost of goods soldconsists primarily of product costs, freight charges, direct costs, andassociated overhead with providing services performed by the Company for itscustomers.

 

A large portion of theCompany’s operating expense is relatively fixed.  Since the Company does not obtain long-term purchase orders orcommitments from its customers, it must anticipate the future volume of ordersbased upon historical purchasing practices. Cancellations, reductions, or delays in orders by a customer or group ofcustomers could have a material adverse effect on the Company’s business,financial condition and results of operations.

 

Selling, general andadministrative (SG&A) expenses include costs for sales representatives,marketing and advertising of the Company’s products, training, warehouse costs,information technology, corporate and administrative functions, employeebenefits, and facility costs.

 

Depreciation expensereflects the cost of associated with expensing property and equipment purchasesover the useful life of the asset. Property and equipment are depreciated on a straight-line basis overtheir estimated useful lives, which generally range from 3 to 7 years.

 

Interest expense (income)includes costs and expenses associated with working capital indebtedness andinterest on the Convertible Subordinated Debt, offset by interest incomeassociated with loans to shareholders.

 

In previous years, theCompany operated four business units: Channels, Centiv POP, CalGraph and Technology Systems.  As discussed above, the Technology SystemsBusiness was sold as of October 31, 2000, the Channels Business was sold as ofDecember 31, 2001 and the CalGraph Business was sold effective January 31,2002.  The Company now has a singlebusiness segment, Centiv.  The financialresults of the Channels, CalGraph and Technology Systems Businesses have beenreflected as discontinued operations as these business units have beendivested.  The prior years financialstatements have been restated to conform to the December 31, 2003presentations.

 

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# **Critical Accounting Policies**

 

The preparation offinancial statements, in conformity with accounting principles generallyaccepted in the United States of America, requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period.  Management bases itsestimates on historical experience and other assumptions, which it believes arereasonable.  If actual amounts areultimately different from these estimates, the revisions are included in theCompany’s results of operations for the period in which the actual amountsbecome known.

 

Accounting policies areconsidered critical when they require management to make assumptions aboutmatters that are highly uncertain at the time the estimate is made and whendifferent estimates than management reasonably could have used have a materialimpact on the presentation of the Company’s financial condition, changes infinancial condition or results of operations.

 

The Company’s criticalaccounting policies are described below:

 

**RevenueRecognition and Accounts Receivable:**

 

The Company recognizesrevenue upon the shipment of its products to the customer provided that theCompany has received a signed purchase order, the price is fixed, title hastransferred, product returns are reasonably estimable, collection of resultingreceivable is reasonably assured, there are no customer acceptance requirementsand there are no remaining significant obligations.

 

The Company establishesreserves for customer accounts receivable balances that are potentiallyuncollectible.  The methods used toestimate the required allowance are based on several factors including the ageof the receivables, the historical ratio of actual write-offs to sales, andprojected write-offs.  These analysestake into consideration economic conditions that may have an impact on aspecific industry, group of customers, or a specific customer.  The reserves could be materially differentif economic conditions change or actual results deviate from historical trends.

 

**InventoryReserves:**

 

The Company establishesinventory reserves for valuation, shrinkage, and excess and obsoleteinventory.  Inventories are stated atthe lower of cost or market.  TheCompany accounts for the inventory on the first-in, first-out (FIFO) method ofinventory costing.

 

The Company recordsprovisions for inventory shrinkage based upon historical experience to accountfor unmeasured usage or loss.  Actualresults differing from these estimates could significantly affect the Company’sinventories and cost of goods sold.

 

The Company recordsprovisions for excess and obsolete inventories for the difference between thecost of inventory and its estimated realizable value based on assumptions aboutfuture product demand and market conditions. Actual product demand or market conditions could be different thanprojected by management.

 

**ValuationAllowance of Deferred Tax Assets:**

 

The Company maintains avaluation allowance with respect to deferred tax assets.  The Company establishes a valuationallowance based upon potential likelihood of realizing the deferred tax assetand taking into consideration the companies current financial position andresults of operations for the current and preceding years.  Future realization of the deferred taxbenefit depends on the existence of sufficient taxable income within thecarry-back or carry-forward period under the tax law.

 

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Changes in circumstances,such as the company generating taxable income, could cause a change in judgmentabout the realizability of the related deferred tax asset.  Any change in the valuation allowance willbe included in income in the year of the change in estimate.

 

**Other:**

 

Other significantaccounting policies, not involving the same level of measurement uncertaintiesas those discussed above, are nevertheless important to an understanding of thefinancial statements.  Policies relatingto revenue recognition, fair value of financial instruments, depreciation, long-livedassets, income taxes and warranties require judgments on complex matters thatare often subject to multiple external sources of authoritative guidance suchas the Financial Accounting Standards Board, Securities and ExchangeCommission, etc.  Although no specificconclusions reached by these authorities appear likely to cause a materialchange in the Company’s accounting policies, outcomes cannot be predicted withconfidence.  Also, see Note 2 to theCompany’s financial statements, which provide a summary of the Company’ssignificant accounting policies.

 

**Year Ended December 31, 2003 Compared With Year EndedDecember 31, 2002.**

 

***Net Sales from continuing operations.***  Total sales from continuing operations of$6.2 million for the year ended December 31, 2003 decreased 75% or $19.2million, compared to $25.5 million for the year ended December 31, 2002.  Aspreviously mentioned, with the termination of the A-B preferred supplier andsupport agreement, there were no sales to A-B and the wholesale distributornetwork after March 31, 2003 and therefore the sales to A-B of $4.1 million forthe year ended December 31, 2003 decreased $20.8 million compared to sales toA-B of $24.9 million for the year ended December 31, 2002.  The decrease in sales to A-B was partiallyoffset by increased sales in the Instant Impact product line.

 

Sales of the Instant Impact product line were $2.2million for the year ended December 31, 2003, or an increase of 245% over thesales of $638,000 for the year ended December 31, 2002.  The sales increase over prior year wasattributable primarily to expanded usage of the Instant Impact system fromexisting customers as well as increased revenue from new customers.

 

***Gross Profit from continuing operations.***  Gross profit from continuing operations of$2.2 million for the year ended December 31, 2003, decreased 52% or $2.3million compared to $4.5 million for the year ended December 31, 2002.  However, gross profit as a percentage ofsales increased 17% to 35% for the year ended December 31, 2003 compared to 18%for the year ended December 31, 2002.

 

The gross profitpercentage for the year ended December 31, 2003 is reflective of a higher mixof Instant Impact sales compared to lower margin sales to A-B in 2002.  Instant Impact margins were 55% for the yearended December 31, 2003 compared to margins of 33% for the year ended December31, 2002.  Gross profit percentage forthe A-B sales were 24.0% for the year ended December 31, 2003 compared to marginsof 17% for the year ended December 31, 2002.

** **

***SG&A Expenses from continuing operations.***  SG&A expenses fromcontinuing operations of $3.5 million for the year ended December 31, 2003,decreased $1.9 million or 34%, compared to $5.4 million for the year endedDecember 31, 2002.  As a result of theexpiration of the A-B agreement, the costs associated with the A-B businesshave been eliminated effective March 31, 2003. In addition, for the year ended December 31, 2003, SG&A expensesreflect a one-time favorable adjustment of $160,000 relating to: (1) a reversalof the 2002 bonus accrual of $120,000 as this amount will not be paid due tothe establishment of the long term Key Employee Incentive Plan (KEIP), and (2)a favorable workers’ compensation insurance audit adjustment of $40,000.  In addition, the SG&A expenses included$260,000 for 2002 relating to legal expenses

 

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**associatedwith the termination of the Encad supply agreement, defense of the Centivtrademark, and costs associated with reincorporation of the Company fromGeorgia to Delaware.  Centiv purchasedinks from Encad that were used in the Anheuser Busch system.  Encad’s termination of the agreementcoincided with the announcement that another supplier was selected for thelarge equipment upgrade.**

 

***Depreciation Expense from continuing operations. ***Depreciation expensefrom continuing operations increased $6,000, or 1%, to $576,000 for the yearended December 31, 2003, as compared to $570,000 for the year ended December31, 2002.  The increase in depreciationexpense relates to additional computer and production equipment purchasedduring the course of 2002 for the expansion of the print center.

 

***Restructuring Charges. ***As a result of the termination of the preferredsupplier and support agreement with Anheuser Busch, the Company reducedheadcount and other operating expenses. Accordingly, $87,000 was charged to operations in 2002 consisting of$75,000 for severance costs for reductions in staff and $12,000 relating toearly lease termination cost.  Thisamount was paid in 2003 and no further restructuring charge was incurred in2003.

 

***Loss on Repurchase of Stock. ***During November 2002, the Companyrepurchased 268,995 shares of common stock in exchange for an outstanding loanplus accrued interest of $2.3 million from the prior Chief ExecutiveOfficer.  The shares repurchased havebeen put into the Company’s treasury stock using the closing market price ofthe stock of $2.82 per share.  Thedifference between the outstanding loan balance and the Treasury Stock resultedin a non-cash charge of $1.5 million.

 

***Other Income/expense from continuing operations. ***Other expense fromcontinuing operations for the year ended December 31, 2003 of $502,000represents the termination cost of the 998 Forest Edge Drive, Vernon Hills,Illinois facility of $348,000 and the write-off of fixed assets of $154,000that are no longer useful.

 

***Interest Income/expense from continuing operations. ***Net interest income of$8,000 for the year ended December 31, 2003 consisted of interest income of$25,000, primarily from the interest on shareholder notes (See Footnote 15 toFinancial Statements), partially offset by interest expense of $33,000,primarily from the interest on the convertible subordinated debt that wasretired on March 31, 2003 (See Footnote 14 to Financial Statements).

 

The interest income forthe year ended December 31, 2002 of $104,000 primarily represents interest onthe stockholder’s notes (See Footnote 15 to Financial Statements).

 

***Provision (benefit) for income taxes from continuingoperations.***  TheCompany’s effective tax rate for continuing operations was 0% for the year endedDecember 31, 2003 as the Company’s tax benefit was offset by a correspondingincrease in the valuation allowance for deferred income taxes.  The Company maintains a valuation allowancewith respect to deferred tax assets as a result of the uncertainty of ultimaterealization.  At December 31, 2003, theCompany had net pre-tax operating loss carry-forwards of approximately $10.2million expiring in various years through 2022.  The difference between the Company’s effective and statutory taxrates was primarily due to the valuation reserve for the deferred tax asset andstate taxes, net of the federal benefit.

 

For the year endedDecember 31, 2002, the Company’s effective tax rate from continuing operationswas a tax provision of 1.7% reflecting the remaining write-off of deferred taxassets.

 

***Net Loss from continuing operations.***  The Company had a net loss from continuingoperations of $2.4 million for the year ended December 31, 2003, compared tothe net loss of $2.9 million for the year ended December 31, 2002, a decreaseof in the net loss of $507,000 or 17%. The decrease in the net loss is attributable to no loss on therepurchase of stock, partially offset by lower sales as a result of thetermination of the A-B relationship as of March 31, 2003.

 

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***Discontinued Operations.***  The income from discontinued operations forthe year ended December 31, 2002 of $380,000 is comprised of an after-tax gainon the sale of the net assets of Calgraph Technology Services, Inc. of $488,000and a loss from operations of $108,000.

 

***Net Loss.***  Net loss improved by $127,000 to a net loss of $2.4 million forthe year ended December 31, 2003 compared to a net loss of $2.6 million for theyear ended December 31, 2002.  Thereduction in the net loss is attributable to the expense associated with therepurchase of the treasury stock in 2002, partially offset by lower sales as aresult of the termination of the A-B relationship as of March 31, 2003.

 

***Beneficial Conversion Feature of Preferred Stock.*** The Company recorded a beneficial conversion feature on the SeriesA Convertible Preferred Stock and warrants that were issued in March 2002,based on the fair value of the common stock of $3.00 per share as of the dateof commitment.  The warrants with anexercise price of $4.50 per share were valued at $810,000 using theBlack-Scholes valuation method.  Thebeneficial conversion feature was calculated to be $810,000 at the commitmentdate of March 28, 2002 and has been recorded as Additional Paid inCapital.  As the preferred shares wereconvertible immediately, the entire amount of the beneficial conversion featurewas accreted into the Accumulated Deficit at March 31, 2002.

 

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

 

***Basic and Diluted Income (Loss) Applicable to Common Shares.***  Loss applicable to common shares for theyear ended December 31, 2003 of $1.51 per share compares to $2.29 per share for2002.  The loss for the year endedDecember 31, 2002 included a loss of $0.50 per share relating to the beneficialconversion feature of the preferred stock (see Note 9 of the Notes toConsolidated Financial Statements).

 

For the year endedDecember 31, 2002, the net income applicable to common shares from discontinuedoperations was $0.23 per share.  Therewere no discontinued operations for the year ended December 31, 2003.

 

**Year Ended December 31, 2002 Compared With Year EndedDecember 31, 2001.**

 

***Net Sales from continuing operations.***  Net sales increased $13.1 million, or 105%,to $25.5 million for the year ended December 31, 2002 compared to $12.4 millionfor the year ended December 31, 2001. The increase is attributable primarily to $11 million of revenuerelating to the large-scale equipment upgrade for A-B and theirdistributors.  The equipment is used toproduce locally customized Point of Purchase (POP) signage.  The sales of consumables used to produce thesignage increased 14% or $1.4 million over prior year primarily due toincreased demand.  The remaining growthin revenue was attributable to the new Instant Impact product with sales inexcess of $0.6 million.  Sales to A-Band its distributors terminated upon the expiration of the Company’s preferredsupplier technical support agreement on March 31, 2003.

 

***Gross Profit from continuing operations.***  Gross profit from continuing operationsincreased 86% or $2.1 million for the year ended December 31, 2002 to $4.5million as compared to $2.4 million for the year ended December 31, 2001.  Lower gross margins on the Anheuser-Buschequipment upgrade reduced the overall gross profit percentage by 1.9 percentagepoints to 17.8% for the year ended December 31, 2002 compared to 19.7% for theyear ended December 31, 2001.  Grossmargins on the remaining business averaged 25.0%, which is an improvement of5.3% points over prior year.  Excludingthe equipment upgrade, the margin improvement was attributable to the web basedsales as well as the technical support call center now being handled directlyby Centiv instead of being outsourced to another entity.

 

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***SG&AExpenses from continuing operations****.*  SG&A expenses from continuing operationsincreased $1.1 million or 25% to $5.4 million for the year ended December 31, 2002compared to $4.3 million for the year ended December 31, 2001. The increase in SG&A expenses over the prior year is primarily fromadministrative costs that due to the divestitures of the other businesses arenow being absorbed entirely by Centiv. In addition, the SG&A expenses included $260,000 for 2002 relatingto legal expenses associated with the termination of the Encad supplyagreement, defense of the Centiv trademark, and costs associated withreincorporation of the Company from Georgia to Delaware.  Centiv purchased inks from Encad that wereused in the Anheuser Busch system. Encad’s termination of the agreement coincided with the announcementthat another supplier was selected for the large equipment upgrade.

 

***Depreciation Expense from continuing operations.***  Depreciation expense increased $257,000 to$570,000 for the year ended December 31, 2002, as compared to $313,000 for theyear ended December 31, 2001.  Theincrease in depreciation expense relates to the Company’s implementation of anew enterprise wide software package as well as the cost of the new onlineInstant Impact POP system.

 

***Restructuring Charges. ***As a result of the termination of the preferredsupplier and support agreement with Anheuser Busch, the Company has reducedheadcount and other operating expenses. Accordingly, $87,000 has been charged to operations in 2002 consistingof $75,000 for severance costs for reductions in staff and $12,000 relating toearly lease termination cost.

 

***Loss on Repurchase of Stock. ***The Company repurchased 268,995 shares ofcommon stock in exchange for an outstanding loan plus accrued interest of $2.3million from the prior Chief Executive Officer.  The shares repurchased have been put into the Company’s treasurystock using the closing market price of the stock of $2.82 per share.  The difference between the outstanding loanbalance and the Treasury Stock resulted in a non-cash charge of $1.5 million.

 

***Interest Income (Expense).***  Net interest income (expense) fromcontinuing operations improved $976,000 from interest expense of $872,000 in2001 to interest income of $104,000 in 2002. The improvement in interest income is due to the lower borrowings in2002 compared to 2001.  In addition, theinterest income is a result of the interest on the outstanding loans toshareholders.

 

***Benefit for Income Taxes.***  The Company’s effective tax rate from continuingoperations was a tax provision of 1.7% for the year ended December 31, 2002 ascompared to tax provision of 25.6% for the year ended December 31, 2001.  The Company recorded a valuation reserveagainst the deferred income tax asset of $2.1 million for the year endedDecember 31, 2001.  The Companymaintains a valuation allowance with respect to deferred tax assets as a resultof the uncertainty of ultimate realization. At December 31, 2002, the Company had net operating loss carry-forwardsof approximately $8.8 million expiring in various years through 2022.  The difference between the Company’seffective and statutory tax rates was primarily due to the valuation reservefor the deferred tax asset and state taxes, net of the federal benefit.

 

***Loss from Continuing Operations.***  The loss from continuing operationsdecreased $0.9 million to a loss of $2.9 million for the year ended December31, 2002 compared to a loss of $3.8 million for the year ended December 31,2001.  The decrease in the net loss isattributable primarily to the improvement in gross profit as well as areduction in interest expense.

 

***Discontinued Operations.***  The Company had net income from discontinuedoperations of $380,000 for the year ended December 31, 2002 compared to a lossof $3.1 million for the year ended December 31, 2001.  See Note 15 of the Notes to Consolidated Financial Statements fora description and breakdown of the discontinued operations.

 

The income fromdiscontinued operations for the year ended December 31, 2002 of $380,000 iscomprised of an after-tax gain on the sale of the net assets of CalgraphTechnology Services, Inc. of $488,000 and a loss from operations of $108,000.

 

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The loss fromdiscontinued operations for the year ended December 31, 2001 of $3.1 million iscomprised of a loss from operations of the Channels Business of $0.7 millionand a loss on the sale of the Channels Business of $2.4 million.  The loss on the sale of the ChannelsBusiness included the write off of goodwill of $1.9 million and the write offof the deferred tax asset of $184,000 for the year ended December 31,2001.  Below is a breakdown of thediscontinued operations for the years ending December 31, 2001:

 
|                                             |   | **Year  ending December 31, 2001** |   |
|--------------------------------------------------|--------|------------------------------------|--------|
| **(In Thousands)**                               |   | **Channels**                       |   | **CalGraph** |   | **Total** |   |
| Net  sales                                       |   | $                                  | 48,403 |   | $ | 8,074 |   | $ | 56,477 |   |
| Gain  (loss) from operations before income taxes |   | (722                               | )      | 9 |   | (713 | ) |
| Gain  (loss) on sale of Business                 |   | (2,175                             | )      | — |   | (2,175 | ) |
| Provision  (Benefit) from income taxes           |   | 184                                |   | (4 | ) | 180 |   |
| Gain  (loss) from discontinued operations        |   | $                                  | (3,081 | ) | $ | 13 |   | $ | (3,068 | ) |

 

***Net Loss.***  Net loss decreased $4.3 million to a net loss of $2.6 million forthe year ended December 31, 2002 compared to a net loss of $6.9 million for theyear ended December 31, 2001.  Thereduction in the net loss is attributable to the higher sales / gross profitand lower interest expense, partially offset by the $1.5 million of otherexpense associated with the repurchase of the treasury stock.

 

***Beneficial Conversion Feature of Preferred Stock.*** The Company recorded a beneficial conversion feature on theconvertible preferred stock and warrants based on the fair value of the commonstock of $3.00 per share as of the date of commitment.  The warrants with an exercise price of $4.50per share, were valued at $810,000 using the Black-Scholes valuationmethod.  The beneficial conversionfeature was calculated to be $810,000 at the commitment date of March 28, 2002and has been recorded as Additional Paid in Capital.  Since the preferred shares are convertible immediately, theentire amount of the beneficial conversion feature has been accreted into theAccumulated Deficit at March 31, 2002.

 

***Basic and Diluted Income (Loss) Applicable to Common Shares.***  Loss applicable to common shares for theyear ended December 31, 2002 of $2.29 per share is similar to the $2.31 lossper share in 2001.  The loss for theyear ended December 31, 2002 included a loss of $0.50 per share relating to thebeneficial conversion feature of the preferred stock (see Note 9).  The net income (loss) applicable to commonshares from discontinued operations improved $2.08 per share from a loss of$1.85 per share for the year ended December 31, 2001 to income of $0.23 for theyear ended December 31, 2002.

 

### **Liquidity and Capital Resources**

 

Since inception, theCompany has financed its operations through a combination of cash flows fromoperations, bank borrowings, equity capital, and the net proceeds from theCompany’s initial public offering in November 1997.

 

On March 31, 2003, theCompany sold, in a private placement exempt from registration, 500,000 units, each consisting of one share of Series BConvertible Preferred Stock (the “Series B Preferred”) and one warrant topurchase 0.667 shares, on a post reverse stock split basis of common stock (the“Warrant”), which amounted to 20% warrant coverage.  As part of the private placement, the holders of $500,000 of theoutstanding Convertible Subordinated Debt converted into Series B Preferred onthe same terms.  The remaining $500,000was repaid in full from proceeds of this offering.  In addition, the Company issued an additional 270,000 shares ofSeries B Preferred in

 

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conversionof 135,000 of its outstanding Series A Convertible Preferred Stock (the “SeriesA Preferred”).  No Warrants wereissued in connection with the shares of Series B Preferred issued in exchangefor the Series A Preferred.  Inaddition, the warrants to purchase Series A Preferred held by the Series APreferred investors were cancelled with no value in connection with theconversion.  The remaining 81,000 outstanding shares of the Series A Preferred wasconverted on March 31, 2003 into shares of common stock in accordance with theterms of the Series A Preferred certificate of designations.

 

Thepurchase price for each unit was $5.00 per unit (the “Purchase Price”).

 

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

 

Thenet proceeds to the Company from the sale of the Series B Preferred Stock wereused for working capital and to finance the operations of the Company.  With the termination of the preferredsupplier and support agreements with Anheuser-Busch, the credit facilities withCole Taylor Bank were terminated effective March 31, 2003.

 

On December 31, 2003, theCompany had $877,000 in cash and working capital of $536,000 compared to $1.3million in cash and working capital of $783,000 on December 31, 2002.

 

Based upon the currentlevel of revenues and the cash position, the Company will need to raiseadditional capital during the year 2004 in order to fund currentoperations.  The Company is currentlyevaluating all potential strategic alternatives, including the sale of some orall of the business of the Company, potential partnerships and the availabilityof additional capital to sustain operations. Subsequent to December 31, 2003, Centiv took significant actions toaddress its liquidity concerns.  Theseactions are discussed elsewhere in the narrative and in the Notes to FinancialStatements.

 

**Cashflow for 2003:**

 

For the year endedDecember 31, 2003, the Company used $2.1 million in cash from operatingactivities.  The cash was used to payaccounts payable and accrued expenses of $2.7 million relating to vendorpayments for the A-B equipment upgrade that took place in Q4 2002.  Partially offsetting these payments was cashgenerated of $2.4 million through a reduction in accounts receivable,inventories and prepaid expenses as a result of the termination of the A-Bagreement.  The Company had non-cashitems affecting the operating cash flows for the year ended December 31, 2003of $696,000 consisting primarily of $576,000 of depreciation expenses and$154,000 loss on the write-off of fixed assets that the Company no longer used.

 

For the year endedDecember 31, 2003, the Company generated cash of $258,000 from investingactivities.  The Company received cashof $300,000 from the sale of the CalGraph Business, partially offset by cashused of $42,000 for the purchase of computer and production equipment.

 

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**Forthe year ended December 31, 2003, the Company generated cash of $1,381,000principally from financing activities in relation to the Series B PreferredStock offering.  The Company receivednet proceeds of $1,910,000 from the equity offering (see Note 9 of the Notes toConsolidated Financial Statements).  Inaddition, the Company repaid $500,000 of convertible subordinated debt (seeNote 16 of the Notes to Consolidated Financial Statements).  The remaining $500,000 of subordinated debtwas converted in exchange for participation in the Series B Preferred Stockoffering.**

 

**Cashflow for 2002:**

 

For the year endedDecember 31, 2002, the Company used $2.0 million in cash from operatingactivities.  The cash used was primarilya result of working capital requirements. Specifically, accounts receivable increased $697,000 due to theshipments of the A-B equipment upgrade in the fourth quarter and the payment ofaccounts payable/accrued expenses of $1.2 million.  The accounts payable/accrued expense cash usage was primarilyfrom the payment of transaction costs as well as other payments relating tovendor settlements associated with the sale of the Channels Business.  The Company had non-cash items affecting theoperating cash flows for the year ended December 31, 2002 of $1.8 millionconsisting primarily of $1.5 million for the loss on the repurchase of treasurystock and $570,000 of depreciation expenses, partially offset by $488,000 forthe gain on sale of the Calgraph Business.

 

For the year endedDecember 31, 2002, the Company generated $919,000 of cash from investingactivities.  The Company used $331,000of cash for the purchase of property and equipment.  Approximately $89,000 of the $331,000 of purchases related to one-timeexpenditures for splitting the software licenses and computer hardware due tothe divestitures of Channels and CalGraph business units.  The remainder of the capital expenditureswas primarily for computer and production equipment

 

For the year endedDecember 31, 2002, the Company generated cash from financing activities of $2.2million.  The Company received netproceeds of $2.0 million from the issuance of Series A Preferred Stock in aprivate equity offering (see Note 9 of the Notes to Consolidated FinancialStatements).  The net proceeds were usedto pay-off the bank credit facility of $795,000.  In addition, the Company received $1,000,000 from the issuance ofconvertible subordinated debt (see Note 16 of the Notes to ConsolidatedFinancial Statements).

 

In September 2002, theCompany entered into a supplemental credit facility with Cole Taylor Bank.  The supplemental credit facility provided upto $5.2 million in purchase order financing. This facility was used to finance the inventory requirements for thelarge-scale equipment upgrade for Anheuser Busch and its wholesalers.  The Company had borrowings of $5.2 millionunder this financing and had repaid all of the borrowings.  The Company had no borrowings under thisfacility as of December 31, 2002.  Inlight of the expiration of the Anheuser-Busch preferred supplier and technicalsupport agreement, this facility was terminated by Cole Taylor Bank effectiveMarch 31, 2003.

 

**Cashflow for 2001:**

 

For the year endedDecember 31, 2001, the Company generated $7.8 million in cash from operatingactivities.  Working capital changesfrom continuing operations generated $3.4 million of cash and net assets ofdiscontinued operations generated $7.2 million of cash.  Accounts receivable from continuing operationsgenerated cash of $4.7 million due to increased sales in the fourth quarter of2000 that were collected in the first quarter of 2001.  The increase of prepaid expenses and otherassets related to an income tax receivable of $0.5 million for the year endedDecember 31, 2001.  Net assets fromdiscontinued operations generated $7.2 million of cash for the year endedDecember 31, 2001 due to a reduction in accounts receivable and inventory.  The Company had non-cash items affecting theoperating cash flows for the year ended December 31, 2001 of $4.0 millionconsisting primarily of $2.1 million for the loss on the sale of the ChannelsBusiness and a $2.1 million valuation reserve for the Company’s net loss carryforward.

 

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For the year endedDecember 31, 2001, the Company generated $4.5 million of cash from investingactivities.  The Company used $1.5million of cash for the purchase of property and equipment.  Of the $1.5 million of capital equipment purchases,$0.8 million was for a new state of the art accounting and warehousing packagethat was implemented during the second quarter of 2001 and $0.6 million was forthe development and implementation of the Instant Impact web-enabled orderentry and fulfillment software package. Cash of $5.9 million was generated from the sale of the ChannelsBusiness on December 31, 2001.

 

For the year endedDecember 31, 2001, the Company used cash from financing activities of $12.5million.  The Company’s credit facilitywas reduced by $10.3 million to $795,000 as of December 31, 2001 from a balanceof $11.1 million as of December 31, 2000. Of the $10.3 million pay down of the credit facility, $4.4 million wasrepaid through the Company’s operating activities through improved workingcapital management and $5.9 million was repaid from the proceeds from the saleof the Channels Business on December 31, 2001. The Company also paid off a $1.8 million note issued to certain dissentingshareholders in connection with the settlement of a dissenters’ claim that wasrecorded for the year ended December 31, 2000. The Company no longer has any outstanding liabilities concerning thesettlement.

 

In connection with thesale of the Channels Business, the Company made loans to three former membersof the management team involved in the transaction.  The total amount of the loans is $250,000 and beared an interestrate of 25 basis points over the Company’s current borrowing rate on the creditfacility.  The principal amount of thisloan plus accrued interest was due and payable on

December 28, 2003.  The Company also recorded interest income of$175,000 on a loan to another shareholder. The loan plus accrued interest was repaid during the January and Februaryof 2004.

 

**Impact of Inflation**

 

Management believes thatinflation has not had a material impact on the Company’s business, its netsales and revenues or its income (loss) from continuing operations.

 

### **Disclosure RegardingForward-Looking Statements**

 

**Safe Harbor For Forward-Looking Statements**

 

**AnnualReport**

 

This Annual Report andstatements by the Company or its representatives make contain forward-lookingstatements that involve risks and uncertainties.  These statements may be found in “Business,” “Management’s Discussionand Analysis of Financial Condition and Results of Operations” and elsewhere inthe Annual Report.  The Company developsforward-looking statements by combining currently available information withits beliefs and assumptions.  Thesestatements often contain words like “believe,” “expect,” “anticipate,”“intend,” “contemplate,” “seek,” “plan,” “estimate” or similarexpressions.  Forward-looking statementsdo not guarantee future performance. Recognize these statements for what they are and do not rely upon themas facts.

 

Forward-lookingstatements involve risks, uncertainties and assumptions, including, but notlimited to, those discussed below under the caption “Factors That May AffectFuture Results” and elsewhere in this Annual Report.  The Company makes these statements under the protection affordedit by Section 21E of the Securities Exchange Act of 1934, as amended.  Because the Company cannot predict all ofthe risks and uncertainties that may affect it, or control the ones the Companydoes predict, these risks and uncertainties can cause its results to differmaterially from the results the Company expresses in its forward-lookingstatements.

 

**Factors That May Affect FutureResults**

 

The reader of this AnnualReport on Form 10-K should carefully consider the risks and uncertaintiesdescribed below and other information in this Annual Report.  These are not the only risks and

 

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uncertainties that theCompany faces.  Additional risks anduncertainties that are not currently known or that management currentlybelieves are immaterial may also harm the Centiv’s business operations.  If any of these risks or uncertaintiesoccurs, it could have a material adverse effect on the Company’s business.

 

**Risks Related to The Company**

 

**Centiv is a dramatically different company.**

 

The financial statementsincluded in Item 8 of this Annual Report on Form 10-K report the financialposition of the Company as of December 31, 2003, and 2002, and the results ofoperations and changes in financial position for the three years ended December31, 2003, 2002, and 2001.  Subsequent toDecember 31, 2003, Centiv concluded the acquisition of Beijing Multimedia whichholds significant assets and payment obligations, changed its management team,changed is capital structure, increased the size of its amended and restatednon-qualified stock compensation plan, transferred its on-going POP signageoperations to Centiv Services, and adopted a holding company structure to seekadditional capital and to pursue business opportunities related to multimedia,publishing and advertising.  Thefinancial statements and notes thereto also include disclosures concerning thesignificant events, agreements, or transactions that occurred or were effectedsubsequent to December 31, 2003.  Duringthe next twelve months, the value of Centiv and its subsidiaries will begreatly influenced by the performance of the newly acquired assets, capitalformation activities, the completion of funding obligations, and the decisionsof the new management team.  Moreover,the Company’s securities may trade with potentially significant volatility asthe securities markets evaluate and digest information about the business, bothhistorically and to be transacted by Centiv and its subsidiaries in the future.

 

**The Company has incurred consolidated operating losses thatexceed twenty million dollars.**

 

**A**sof December 31, 2003, Centiv reported an accumulated deficit of $22,444,000.

 

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**The Companycannot predict its future results because of the Significant Changes Occurringafter December 31, 2003.**

 

Giventhe operating history, it will be difficult to predict future results.  The reader should consider the followinguncertainties that may be encountered as an early stage company in a new andrapidly evolving market.

 

•                                          market acceptance of the Centiv products orservices;

•                                          consumer demand for, and acceptance of Centiv’sproducts, services and follow-on products; and

•                                          Centiv’s unproven and evolving business model.

 

**The Centiv POPBusiness has not generated significant revenues to date and incurred losses incalendar years 2003, 2002, and 2001.**

 

TheCentiv POP Business was commenced in 1998, has a limited operating history, andincurred losses for the years 2000-2003, although it did make an operatingprofit in 1998 and 1999.  Management ofthe Company expects losses to continue into calendar year 2004.  The Centiv POP Business will need to achievegreater revenues to achieve profitability. There can be no assurance that the Company will be successful inincreasing revenues of the Centiv POP Business, or generating acceptablemargins, or, if it does, that operation of the Centiv POP Business will be aprofitable business enterprise.  If theCompany is unable to achieve significantly greater recurring revenue from itsCentiv POP Business, losses will likely continue indefinitely.  The Company will likely have to seekadditional outside sources of capital. There can be no assurance that it will be able to obtain such capital onfavorable terms and conditions or at all. If this occurs, the market price of the Company’s common stock couldsuffer.

 

**The quarterly and annual sales and financial results havevaried significantly in the past, and the Company expects to experiencefluctuations in the future, which means that period-to-period comparisons arenot necessarily meaningful or indicative of future performance.**

 

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Sales and operatingresults have varied, and may continue to vary, significantly from year to yearand from quarter to quarter as a result of a variety of factors, including theintroduction of new products by competitors, pricing pressures, the timing ofthe completion or the cancellation of projects, the evolving and unpredictablenature of the markets in which computer products are sold and economicconditions generally or in certain geographic areas in which customers dobusiness.  Furthermore, the Company maybe unable to control spending in a timely manner to compensate for anyunexpected revenue shortfall. Accordingly, it cannot provide assurance that sales and net income, ifany, in any particular quarter will not be lower than sales and net income, ifany, in a preceding or comparable quarter or quarters.  In addition, sales and net income, if any,in any particular quarter are not likely to be indicative of the results ofoperations for any other quarter or for the full year.  The trading prices of the Company’ssecurities may fluctuate significantly in response to variations in ourquarterly or annual results of operations.

 

**The Company maynot be able to sustain or accelerate growth, or sustain or accelerate recurringrevenue from Centiv’s products or services.**

 

Therecan be no assurance that demand for Centiv’s products or services will increaseor be sustained, or that its current or future products will have marketacceptance in that product category. Acquisition costs per customer are currently very high due to thesignificant costs associated with sales, product development andmarketing.  To the extent the Companydoes not achieve growth and this cost per customer is not reduced, it will bedifficult for the Company to generate meaningful revenue at acceptable marginsor achieve profitability.  To the extentthat the Centiv Business model is not successful, because market acceptancedeclines, or other competing technologies evolve in connection with theevolving Internet market or for any other reason, the Company might have futureunexpected declines in revenue.  Inorder to achieve and maintain profitability, its POP program needs to achievenational program status.  In order toobtain participating manufacturers and retailers at the rate desired, thisservice program must achieve increases in sales.  In achieving these results, the Company will be competing for themarketing expenditures or branded product manufacturers who use various formsof point-of-purchase marketing methods. Management of the Company cannot provide assurance that its POP programwill achieve or maintain the marketplace acceptance or profitability necessaryto compete successfully with traditional marketing methods.

 

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**The Company’s business depends on its intellectual propertyrights, and if it fails to protect them, its competitive position will suffer.**

 

Although the Company hasmade applications, it has no current patents, and its success partially dependson its ability to preserve trade secrets and to operate without infringing onthe proprietary rights of third parties. Management of the Company seeks to protect its trade secrets andproprietary know-how, in part, by confidentiality agreements with employees,consultants, advisors, and others.  Itcannot guarantee that these individuals will maintain the confidentiality ofits trade secrets and proprietary know-how, or that its competitors will notlearn of or independently develop its trade secrets or proprietary know-how ina manner that leaves the Company with no practical recourse.

 

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**If the Company loses the services of its key personnel, itmay be unable to replace them, and its business could be negatively affected.**

 

The Company’s success dependsin large part on the continued service of its management and other keypersonnel and its ability to continue to attract, motivate and retain highlyqualified employees.  In particular, theservices of John Larkin, our President and Chief Executive Officer, and ThomasMason, our Vice President, Finance and Chief Financial Officer are integral tothe execution of its business strategy. If one or more of our key employees leaves Centiv, it will have to finda replacement with the combination of skills and attributes necessary toexecute the Company’s strategy.  Becausecompetition from other technology companies for skilled employees is intense,and the process of finding qualified individuals can be lengthy and expensive,management of the Company believes that the loss of the services of keypersonnel could negatively affect the business, financial condition, andresults of operations.

 

**Many of the Company’s customers operate in a highly regulatedindustry.**

 

Substantially all of theCompany’s net sales in 2003 came from customers engaged in the alcoholicbeverages industry.  If the regulationof this industry were to limit advertisement in any material way, the Company’srelationship with these customers could suffer.

 

**Risks Related to the Company’s Industry**

 

**Weak economic conditions in the market may negatively impactsales of computer graphics products and services.**

 

From time to time, themarket for the Company’s products and services experiences weak economicconditions.  To the extent that generaleconomic conditions affect the demand for products and services in this market,it could have an adverse effect on Centiv’s ability to sell its products andservices.

 

**Risks Related to the Company’sCapital Stock**

 

**The public market for the Company’s common stock may bevolatile.**

 

The market price of theCompany’s common stock has been and is likely to continue to be volatile andsignificantly affected by various factors, including:

 

•                  uncertainty about the new assetsacquired, and new management team;

 

•                  general market conditions and marketconditions affecting computer technology stocks in particular;

 

•                  actual or anticipated fluctuations inthe Company’s quarterly or annual operating results;

 

•                  announcements relating to contracts,investments, acquisitions, divestitures;

 

•                  discontinued operations, layoffs orcorporate actions;

 

•                  industry conditions or trends; and

 

•                  limited public float, market makingactivity, and research coverage.

 

The stock markets haveexperienced significant price and volume fluctuations that have affected themarket prices of many company stocks. These fluctuations have often been unrelated or disproportionate to

 

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operatingperformance.  These broad market orsector fluctuations may adversely affect the market price of our commonstock.  General economic, political andmarket conditions such as recessions and interest rate fluctuations may alsohave an adverse effect on the market price of the Company’s common stock.  In addition, the market price of theCompany’s common stock has also been and is likely to continue to be affectedby expectations of analysts and investors.

 

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**The Company’s ability to issue additional preferred stock mayadversely affect the rights of common stockholders and may make takeovers moredifficult, possibly preventing stockholders from obtaining optimal share price.**

 

The Company’s Certificateof Incorporation authorizes the issuance of shares of “blank check” preferredstock, which would have the designations, rights and preferences as may bedetermined from time to time by the Board of Directors.  Accordingly, the Board of Directors isempowered, without shareholder approval (but subject to applicable governmentregulatory restrictions), to issue additional preferred stock with dividend,liquidation, conversion, voting or other rights that could adversely affect thevoting power or other rights of the holders of the common stock.  In the event of an issuance, the preferredstock could be used, under certain circumstances, as a method of discouraging,delaying or preventing a change in control of Centiv.

 

**ITEM 7A****.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISKS.**

 

The Company was subjectto risk due to changes in interest rates in connection with its Loan andSecurity Agreement.  The Loan andSecurity Agreement provided for up to $750,000 at interest rates of prime rateplus 1.0% per annum.  The Company haspaid off and cancelled this credit facility. Financial instruments that potentially subject the Company tosignificant concentrations of credit risk consist principally of trade accountsreceivable.  Credit risks with respectto trade receivables are limited due to the diversity of customers comprisingthe Company’s customer base.  TheCompany performs ongoing credit evaluations and charges uncollectible amountsto operations when they are determined to be uncollectible.

 

**ITEM 8****.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

 

See the ConsolidatedFinancial Statements beginning on page F-1. Condensed quarterly financial information on the Company is included inNote 21 of Notes to Financial Statements.

 

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**ITEM 9****.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

On February 5, 2004,pursuant to the approval of the Board of Directors, Centiv resolved to changethe accounting firm of Grant Thornton, LLP as its independent auditors.

 

The independentaccountants’ reports of Grant Thornton, LLP on the consolidated financialstatements of the Registrant for each of the calendar years ended December 31,2001 and December 31, 2002, contain no adverse opinion or disclaimer of opinionand neither of those reports was qualified or modified as to uncertainty, auditscope or accounting principles.

 

During the Company’s lasttwo calendar years ended December 31, 2001 and December 31, 2002, and in thesubsequent interim periods through February 4, 2004, there were no disagreementswith Grant Thornton, LLP, except as discussed in the following paragraph, onany matter of accounting principles or practices, financial statementdisclosure, or auditing scope or procedure, which disagreements, if notresolved to the satisfaction of Grant Thornton, LLP, would have caused it tomake reference to the subject matter of the disagreements in connection withits reports on the financial statements for such periods.

 

Specifically, inconnection with the December 31, 2001 financial statements, Grant Thornton, LLPrecommended that a valuation reserve be established for the deferred tax assetrelating to the Company’s net operation loss carry-forward as a result of theCompany’s recent operating losses.  Uponinitial discussion with Grant Thornton, LLP, management was of the opinion thatthere was flexibility over the time-period in which the valuation reserve couldbe recognized and established.  Uponfurther discussion and review, management and Grant Thornton, LLP, agreed thatthe valuation reserve for the deferred tax assets should be established andtherefore this initial disagreement was resolved to the satisfaction of GrantThornton, LLP.  The proposed change ofauditors was a commercial decision of the Board of Directors.

 

Grant Thornton, LLPfurnished a letter addressed to the Securities and Exchange Commission statingthat it agrees with the above statements. A copy of that letter is filed as Exhibit 16 to this Current Report onForm 8-K filed on February 11, 2004.

 

On February 5, 2004, Centivengaged the accounting firm of Davis Accounting Group, P.C., located in CedarCity, Utah, as its new independent accountants.  Prior to that date, the Company did not consult with DavisAccounting Group, P.C. regarding any accounting matters.

 

During Centiv’s two mostrecent calendar years and any subsequent interim period prior to the engagementof Davis Accounting Group, P.C., neither the company nor anyone on theCompany’s behalf consulted with Davis Accounting Group, P.C. regarding either(i) the application of accounting principles to a specified transaction, eithercontemplated or proposed, or the type of audit opinion that might be renderedon Centiv’s financial statements or (ii) any matter that was either the subjectof a “disagreement” or a “reportable event.”

 

ITEM 9A.  CONTROLS AND PROCEDURES.

 

(a) Evaluation ofDisclosure Controls and Procedures

 

The Company’s ChiefExecutive Officer and Chief Financial Officer as of December 31, 2003, havereviewed and evaluated the effectiveness of the Company’s disclosure controlsand procedures (as defined in the Securities Exchange Act of 1934 Rules13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of thisAnnual Report on Form 10-K (the “Evaluation Date”).  Based on their review and evaluation, the previous ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theEvaluation Date, the Company’s disclosure controls and procedures were adequateand effective to ensure that material information relating to the Company andits consolidated subsidiaries would be made known to them by others withinthose entities in a timely manner, particularly during the period in which thisAnnual Report on Form 10-K was being prepared, and that no changes are requiredat this time.

 

(b) Changes in InternalControls

 

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There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s disclosure controls and proceduressubsequent to the Evaluation Date, nor were there any significant deficienciesor material weaknesses in such internal controls requiring correctiveactions.  As a result, no correctiveactions were required or undertaken.

 

**PART III**.

 

**ITEM 10**.  DIRECTORS AND EXECUTIVE OFFICERS OF THECOMPANY.

 

The following personsserved as directors of the Company during calendar 2003.  However, immediately prior and subsequent toDecember 31, 2003, all of the following persons submitted their resignations.

 

***John P. Larkin,***46, Director.  Prior to joining Centiv, Mr. Larkin co-founded Spectra MarketingSystems, Inc., a consumer marketing database services firm, which he built to$100 million in sales between 1988 and 1997. Before founding Spectra, Mr. Larkin was Vice President - ProductManagement at Information Resources, Inc. He began his career with various positions at Procter & Gamble andThe Minute Maid Company and also served as Director of Sales Planning and Operationsat The Treesweet Company.  He holds aBS/BA from the University of Kentucky. Mr. Larkin became a director in December 2002.  Mr. Larkin resigned as a director on January 14, 2004.  Subsequent to December 31, 2003, Mr. Larkinbecame a director of Centiv Services, a wholly owned subsidiary of the Company.

 

***Len Finelli****,* 50, Director.  Mr. Finelli is the Chief FinancialOfficer/Executive VP Business Strategy, Nielsen Retail EntertainmentInformation, a division of VNU Media Measurement & Information(www.vnu.com). * *Mr. Finelli has beenwith VNU since 1987, and has held a number of key financial and managerialpositions during his tenure.  He hasserved in his current capacity since 2001. After initially being employed as Controller, Mr. Finelli was promotedin 1990 to CFO of VNU Business Information Services (later re-named to VNUMarketing Information Services Inc.). Mr. Finelli is also a director and minority owner of Spot Quotation andData, a New York based media research firm. Mr. Finelli became a director in April 2003.  Mr. Finelli resigned as a director on January 14, 2004.  Subsequent to December 31, 2003, Mr. Finellibecame a director of Centiv Services, a wholly owned subsidiary of the Company.

 

***Daryl Splithoff****,*  53,Director.  Mr. Splithoff has been withthe Wm. Wrigley Jr. Company since September 1, 2000 where he is currentlySenior Vice President – Supply Chain and Corporate Development.  Before joining the Wrigley Company, Mr.Splithoff was, from March 1998 to September 1999, the President & CEO ofEdwards Fine Foods (EFF), a frozen dessert company headquartered inAtlanta.  He joined EFF after ten yearswith the Keebler Company, where he was Senior Vice President of Sales andDistribution and served as a member of Keebler’s Executive ManagementCommittee.  Mr. Splithoff resigned as adirector on December 7, 2003.

 

***Thomas M. Mason***, 47,****Director.  Mr. Mason joined Centiv in March 2000as Vice President of Finance and Chief Financial Officer and became a directorin February 2001.  From July 1997 untiljoining Centiv, Mr. Mason served as Chief Financial Officer of The SegerdahlCorporation, a commercial printer. Prior to that, from February through July 1997, he served as Senior VicePresident and Chief Financial Officer of Telular Corporation.  For the preceding 13 years, Mr. Mason heldvarious finance and general management positions with Bell & HowellCompany.  Mr. Mason also worked atAmerican Hospital Supply Corporation for five years and began his career withKPMG/Peat Marwick as a CPA.  Mr. Masonbecame a director of Centiv in February 2001. Mr. Mason resigned as a director on January 14, 2004.  Subsequent to December 31, 2003, Mr.Mason became a director of Centiv Services, a wholly owned subsidiary of theCompany.

 

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***J. Smoke Wallin***, 36, Director.  Since 1999, Mr. Wallin has been the founderand ****Chairman & CEO of eSkyeSolutions****(www.eskyesolutions.com), a leading software solutionsprovider to the beverage, Consumer Packaged Goods (CPG) and distributionindustries.  Mr. Wallin began his careerin 1988 with National Wine and Spirits, Inc. (www.nwscorp.com), the nation’ssixth largest beverage alcohol distributor, and he became Executive VicePresident and a Director of National Wine and Spirits, Inc. in 1993.  He is also currently Chairman of the Wine& Spirits Wholesalers of America (www.wswa.org).  Mr. Wallin serves numerous philanthropic organizations includingBoy Scouts of America, Junior Achievement, and Vanderbilt University.  Mr. Wallin was appointed to the Board ofDirectors of Centiv in April 2003 to fill the vacancy created by Mr.Carnevale’s resignation.  Mr. Wallinresigned as a director on December 9, 2003.

 

***Thomas Pennell,***38, Director. Mr. Pennell has since 1996 been the Managing Partner of PennellVenture Partners (www.pennell.com), a technology focused venture capital fundbased in New York.  Prior toestablishing PVP, Mr. Pennell held positions in venture capital and smallbusiness finance with Chase Manhattan Bank in 1996, Endeavor Capital Managementfrom 1992 to 1995, and Access Capital prior to that time.  On March31, 2003, the holders of the Series B Convertible Preferred Stock designatedMr. Pennell as their preferred director pursuant to the terms of the Company’sRestated Articles of Incorporation and the related Series B PreferredCertificate of Designations, Preferences and Rights, and the Board appointedMr. Pennell a director effective April 22, 2003.  Mr. Pennell resigned as a director on December 22, 2003.

 

**Executive Officers**

 

The following personsserved as the executive officers of Centiv, Inc. during 2003.  However, subsequent to December 31, 2003,all of the following persons submitted their resignations.  The following summary is based oninformation furnished by them.

 

***John P. Larkin,***46, President, Chief Executive Officer andChief Operating Officer.  Prior tojoining Centiv, Mr. Larkin co-founded Spectra Marketing Systems, Inc., aconsumer marketing database services firm, which he built to $100 million in salesbetween 1988 and 1997.  Before foundingSpectra, Mr. Larkin was Vice President – Product Management at InformationResources, Inc. (NASDAQ: IRIC).  Hebegan his career with various positions at Procter & Gamble and The MinuteMaid Company and also served as Director of Sales Planning and Operations atThe Treesweet Company.  He holds a BS/BAfrom the University of Kentucky.

 

***James M. Kearney***, 48, joined Centiv asVice President, Chief Information Officer in July 2000.  Prior to joiningCentiv, Mr. Kearney served as Director of Applications Development for BeloitCorporation, a global manufacturer of paper making machinery.  Mr. Kearney’s experience also includesserving as Director, Information Services with The Chicago Faucet Company, aplumbing products manufacturer, from July 1993 through May 1997 and Director,Information Services with Cobra Corporation, a distributor of consumerelectronics products from November 1991 through July 1993.

 

***John R. Bauer,***48,joined Centiv as Vice President, Chief Marketing Officer in April 2002.  Prior to joining Centiv, Mr. Bauerexperience includes 25 years in sales and marketing for major packaged goodscompanies, including 13 years with The Pillsbury Company.  He later served in executive roles atTropicana Products, Inc., Lykes Bros. Inc., and World’s Finest Chocolate.  Most recently, Mr. Bauer was a Partner withMosaic InfoForce, a joint venture between Information Resources, Inc. andMosaic, Inc. Mr. Bauer earned a BA at Duke University and an MBA from the Universityof St. Thomas in St. Paul, MN.

 

***Thomas M. Mason***, 47,****joined Centiv in March 2000 as VicePresident of Finance and Chief Financial Officer.  From July 1997 until joining Centiv, Mr. Mason served as ChiefFinancial

 

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Officerof The Segerdahl Corporation, a commercial printer.  Prior to that, from February through July 1997, he served asSenior Vice President and Chief Financial Officer of Telular Corporation.  For the preceding 13 years, Mr. Mason heldvarious finance and general management positions with Bell & HowellCompany.  Mr. Mason also worked atAmerican Hospital Supply Corporation for five years and began his career withKPMG/Peat Marwick as a CPA.

 

***Kevin Costello***, 50, joined Centiv as Executive Vice Presidentof Business Development in July 2003. Prior to joining Centiv, Mr. Costello’s experience included over 25years in sales and marketing for marketing services and packaged goodscompanies, including 11 years with Spectra Marketing Systems, Inc. where he wasExecutive Vice President of New Business. Prior to his career with Spectra, he held various sales and marketingpositions at Borden’s and Jeno’s, Inc. Mr. Costello holds a B.A. in Marketing from St. Mary’s University inWinona, MN.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section16(a) of the Securities Exchange Act of 1934 requires that Centiv’s executiveofficers, directors, and 10% stockholders file reports of securities ownershipand changes in ownership with the Securities and Exchange Commission.  Officers, directors, and 10% owners also arerequired to furnish us with copies of all Section 16(a) forms they file.  Based solely on review of the copies ofthese reports provided to us and written representations that no other reportswere required, the management of the Company believes that all filingrequirements were met during calendar 2003.

 

**ITEM 11**.  EXECUTIVE COMPENSATION.

 

Thisfollowing table summarizes the before-tax compensation for the Chief ExecutiveOfficer and the next four most highly compensated executive officers of Centivthrough the year ended December 31, 2003. However, subsequent to December 31, 2003, all of the following personssubmitted their resignations.

 

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**Summary Compensation**

 
|                                                                                                                               |   |     |   |                     |   |        |   | **Long-Term  Compensation**         |   |                            |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|--------------------------|--------|-------------|--------|-------------------------------------|--------|---------------------------------|--------|
|                                                                                                                               |   |     |   | **Annual  Compensation** |   | **Awards**  |   |                                |   |
| **Name and  Principal Position**                                                                                                   |   | **Year** |   | **Salary**               |   | **Bonus**   |   | **Securities  Underlying  Options** |   | **All Other  Compensation (1)** |   |
| John P. Larkin                                                                                                                     |   | 2003     |   | $175,000                 |   | $0          |   | —                              |   | $648                            |   |
| President and Chief  Executive Officer  (since December 31, 2002)  President and Chief Operating Officer  (since October 28, 2002) |   | 2002     |   | 25,000                   |   | $0          |   | 474,334                             |   | —                          |   |
|                                                                                                                               |   |     |   |                     |   |        |   |                                |   |                            |   |
| Thomas M. Mason                                                                                                                    |   | 2003     |   | $130,000                 |   | $0          |   | 33,334                              |   | $740                            |   |
| Chief Financial Officer                                                                                                            |   | 2002     |   | 160,000                  |   | $0 (2       | )      |  25,000                        |   |  820                       |   |
| (since March 2000)                                                                                                                 |   | 2001     |   | 160,000                  |   | 58,333      |   | 13,334                              |   |  820                       |   |
|                                                                                                                               |   |     |   |                     |   |        |   |                                |   |                            |   |
| Kevin Costello                                                                                                                     |   | 2003     |   | $78,571                  |   | —      |   | 41,667                              |   | $262                            |   |
| Executive Vice  President, Sales  (since July 2003)                                                                                |   |     |   |                     |   |        |   |                                |   |                            |   |
|                                                                                                                               |   |     |   |                     |   |        |   |                                |   |                            |   |
| James M. Kearney                                                                                                                   |   | 2003     |   | $100,000                 |   | $0          |   | 21,667                              |   | $489                            |   |
| Chief Information  Officer                                                                                                         |   | 2002     |   | 120,729                  |   | $0 (2       | )      |  5,000                         |   | 542                             |   |
| (since July 2000)                                                                                                                  |   | 2001     |   | 115,000                  |   | 16,150      |   | 5,000                               |   | 542                             |   |
|                                                                                                                               |   |     |   |                     |   |        |   |                                |   |                            |   |
| John R. Bauer                                                                                                                      |   | 2003     |   | $125,000                 |   | $0          |   | 21,667                              |   | $648                            |   |
| Vice President of  Marketing  (since April, 2002)                                                                                  |   | 2002     |   | $127,997                 |   |  $0 (2 | )      |  25,000                        |   |  $538                      |   |

 

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(1)                Representspayments made by Centiv on a long-term disability policy.

(2)                The followingbonuses were accrued as of December 31, 2002, Mr. Mason: $58,580; Mr. Kearney:$14,625; and Mr. Bauer: $32,951. However, these officers agreed to forgive the payment of these bonusesin connection with the establishment of the Company’s Key Employee IncentivePlan and therefore the bonus accrual was reversed during the second quarterended June 30, 2003.

 

**Option Grants in 2003**

 

This table givesinformation relating to option grants during 2003 to the executive officerslisted in the Summary Compensation Table. Unless otherwise noted, the options were granted under the Company’sAmended and Restated 1997 Stock Option Plan. Unless otherwise noted, the options vest in four equal annualinstallments beginning on the first anniversary of the grant date.

 

The potential realizablevalue is calculated based on the term of the option at its time of grant, whichis 10 years.  The calculation assumesthat the fair market value on the date of grant appreciates at the indicatedrate compounded annually for the entire term of the option and that the optionis exercised at the exercise price and the stock is sold on the last day of itsterm at the appreciated price.  Stockprice appreciation of 5% and 10% is assumed pursuant to the rules of theSecurities and Exchange Commission.  Theactual price appreciation may be substantially greater or lower than thatassumed under these rules.  The Companycannot assure provide assurance that the actual stock price will appreciateover the 10-year option term at the assumed levels or at any other definedlevel.  The closing price of the CommonStock on March 15, 2004 was $0.81 per share.

 

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|             |   | **Individual  Grants**                       |   |                                                           |   |                           |   |
|------------------|--------|----------------------------------------------|--------|----------------------------------------------------------------|--------|--------------------------------|--------|
|             |   | **Securities  Underlying  Options  Granted** |   | **Percent of  Total  Options  Granted to  Employees  in 2003** |   | **Exercise  Price Per  Share** |   | **Expiration  Date** |   | **Potential  Realizable  Value at Assumed  Annual Rates of Stock  Price Appreciation for  Option Term** |   |
| **Name**         |   |                                         |   |                                                           |   | **5%**                         |   | **10%** |   |
| John P. Larkin   |   | —                                       |   | —                                                         |   | —                         |   | — |   | — |   | — |   |
| Thomas M. Mason  |   | 33,334                                       |   | 14.1                                                           |   | 0.66                           |   | 3/26/13 |   | 13,836 |   | 35,063 |   |
| Kevin Costello   |   | 41,667                                       |   | 17.6                                                           |   | 1.80                           |   | 7/14/13 |   | 47,167 |   | 119,532 |   |
| James M. Kearney |   | 21,667                                       |   | 9.2                                                            |   | 0.66                           |   | 3/26/13 |   | 8,993 |   | 22,791 |   |
| John R. Bauer    |   | 21,667                                       |   | 9.2                                                            |   | 0.66                           |   | 3/26/13 |   | 8,993 |   | 22,791 |   |

 

**Option Exercises in 2003 and2003 Year-End Option Values**

 

None of the executiveofficers listed in the Summary Compensation Table exercised stock optionsduring 2002.  The value of unexercisedin-the-money options at year-end 2003 is determined using the differencebetween the option exercise price and $0.82 (the closing price of Centiv CommonStock on the last trading day of the calendar year, December 31, 2003)multiplied by the number of shares underlying the option.  An option is in-the-money if the marketvalue of the Common Stock subject to the option is greater than the exerciseprice.

 
|            |   | **Securities  Underlying  Unexercised Options at  Year End 2003** |   | **Value of  Unexercised  In-the-Money Options at Year  End 2003** |   |
|-----------------|--------|-------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
| **Name**        |   | **Exercisable**                                                   |   | **Unexercisable**                                                 |   | **Exercisable** |   | **Unexercisable** |   |
| John P. Larkin  |   | 45,000                                                            |   | 429,334                                                           |   | 0 |   | 0 |   |
| Thomas M. Mason |   | 32,917                                                            |   | 58,751                                                            |   | 0 |   | 5,333 |   |
| Kevin Costello  |   | 10,417                                                            |   | 31,250                                                            |   | 0 |   | 0 |   |
| James Kearney   |   | 6,251                                                             |   | 28,750                                                            |   | 0 |   | 3,467 |   |
| John R. Bauer   |   | 12,500                                                            |   | 34,167                                                            |   | 0 |   | 3,467 |   |

 

###### **Key Employee Incentive Pool**

 

OnMarch 27, 2003, the compensation committee of the Board of Directors and thefull Board of Directors, including the independent directors unanimouslyapproved the establishment of a Key Employee Incentive Pool (“KEIP”).  Under the KEIP, upon the consummationof a sale of all or substantially all of the assets of Centiv or theconsummation of a merger wherein the then current stockholders of Centiv do notown at least 50% of the outstanding voting power of the surviving entity orupon a sale of all or substantially all of the outstanding capital stock ofCentiv, the participating employees shall receive bonuses (payable in theconsideration of the sale) according to the following:

 

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

 

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

 

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

 

 

Allparticipants and allocation to those participants under the KEIP will besubject to approval of the compensation committee of the Board of Directors.

 

Subsequent to December31, 2003, the KEIP was terminated.

 

 

**ITEM 12**.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT.

 

The following table showshow much of each class of the Company’s stock was beneficially owned asof March 31, 2004 by:

 

•                  Executive Officers;

 

•                  each Current Director;

 

•                  each stockholder known by us to ownbeneficially at least 5% of our Common Stock; and

 

•                  all directors and executive officersas a group.

 

Beneficial ownership is a technical term broadlydefined by the Securities and Exchange Commission to mean more than ownershipin the usual sense.  In general,beneficial ownership includes any shares a director or executive officer canvote or transfer, shares subject to stock options and warrants that are

 

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exercisable currently or become exercisable within 60 days and sharessubject to convertible securities that are convertible currently or within 60days.  These shares are considered to beoutstanding for the purpose of calculating the percentage of ownership of thestockholder holding these options, warrants or convertible securities, but arenot considered to be outstanding for the purpose of calculating the percentageownership of any other person.  Exceptas otherwise noted, the stockholders named in this table have sole voting anddispositive power for all shares shown as beneficially owned by them.

 

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| **(1)  Title of class**       |   | **(2)  Name and address of  beneficial owner**                                                                                                        |   | **(3)  Amount and  nature of  beneficial  ownership** |   | **(4)  Percent of class** |   |
|-------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|---------------------------|--------|
| $.001 par value  common stock |   | Eagle Treasure Limited  c/o East Asia Corporate Services (BVI)  Limited  East Asia Chambers  P.O. Box 901  Road Town, Tortola  British Virgin Islands |   | 20,250,000 shares  Direct                             |   | 68                        | %      |
|                          |   |                                                                                                                                                  |   |                                                  |   |                      |   |
| $.001 par value  common stock |   | Mak Wai Keung Shawn (a)  Chief Executive Officer, President and Director                                                                              |   | 400,000  Direct                                       |   | <1                     | %      |
|                          |   |                                                                                                                                                  |   |                                                  |   |                      |   |
| $.001 par value  common stock |   | Lau Kwok Hung (a)  Chief Financial Officer and Director                                                                                               |   | 100,000 Direct                                        |   | <1                     | %      |
|                          |   |                                                                                                                                                  |   |                                                  |   |                      |   |
| $.001 par value  common stock |   | Patrick Ma (a)  Director                                                                                                                              |   | 0                                                     |   | <1                     | %      |
|                          |   |                                                                                                                                                  |   |                                                  |   |                      |   |
| $.001 par value  common stock |   | Hu Bing (a)  Director                                                                                                                                 |   | 400,000 Direct                                        |   | <1                     | %      |
|                          |   |                                                                                                                                                  |   |                                                  |   |                      |   |
| $.001 par value  common stock |   | Tsai Wai Fong Candy (a)  Secretary                                                                                                                    |   | 100,000 Direct                                        |   | <1                     | %      |
|                          |   |                                                                                                                                                  |   |                                                  |   |                      |   |
| $.001 par value  common stock |   | All Executive Officers and Directors as a Group                                                                                                       |   | 1,000,000                                             |   | 3                         | %      |

 

----

(a)                                  Themailing address for all Executive Officers and Directors is Centiv, Inc., P.O.Box 113, Palos Verdes Estates, CA 90274.

 

**ITEM 13**.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.

 

**Transactions with Mr. Rychel**

 

Centivloaned Mr. Rychel a total of $1,775,000 to purchase from certain shareholders atotal of 806,983 shares of the Company’s Common Stock, 685,816 of which wereshares of Class B Common Stock.  Alloutstanding shares of the Company’s Class B Common Stock were converted intoCommon Stock of the Company on a one-for-one basis on January 21, 2000.  The loan was due on December 1, 2001 and wasrenewed until December 1, 2002.  InNovember 2002, the Company repurchased the 806,983 shares in exchange for theoutstanding loan plus accrued interest of $2,250,283.

 

**Transactions with Talkot Capital, LLC and Mr. Larkin**

 

On March 31, 2003, theCompany sold, in a private placement exempt from registration, 500,000 units, each consisting of one share of Series BConvertible Preferred Stock (the “Series B Preferred”) and one warrant topurchase two shares of Common Stock (the “Warrant”), which amounted to 20%warrant coverage.  Talkot CrossoverFund, a fund managed by Talkot Capital, LLC, of which Mr. Carnevale, theCompany’s former Chairman, was the Director of Private Equity Investing untilDecember 2002 and Thomas B. Akin, both of whom are significant Centiv

 

42

----

 

stockholders,were investors in the offering. Additionally, John P. Larkin, the Company’s President and ChiefExecutive Officer was also an investor in the offering.  Talkot Crossover Fund and Mr. Akin eachacquired 205,000 shares of Series B Convertible Preferred Stock and warrants topurchase 210,000 shares of the Company’s Common Stock at an exercise price of$0.50 per share.  Mr. Larkin acquired20,000 shares of Series B Convertible Preferred Stock and warrants to purchase40,000 shares of Common Stock at an exercise price of $0.50 per share.

 

**ITEM14**.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The Board of Directors of the Company appointed GrantThornton LLP as independent auditors effective November 13, 2000.  Grant Thornton LLP performed audit servicesin connection with the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002, review services in connection with the Company’s QuarterlyReports on Form 10-Q for the first three calendar quarters of the year 2003,and other services pertaining to registration statement filings, tax returnpreparation, consulting and related services. As provided above, by early January 2004, the entire Board of Directorsof the Company had resigned and was replaced with new board members.  On February 5, 2004, the new Board ofDirectors appointed the firm of Davis Accounting Group P.C. as independentauditors of the Company, thereby replacing the firm of Grant Thornton LLP.

 

**Audit and Review Fees**

 

GrantThornton LLP billed the Company approximately $73,137 for professional servicesin connection with the reviews of the financial statements included in theQuarterly Reports on Form 10-Q for the first three calendar quarters of 2003.

 

DavisAccounting Group P.C. billed the Company approximately $24,734 for professionalservices in connection with the audit of the financial statements included inthe Annual Report on Form 10-K for the year ended December 31, 2003.

 

**FinancialInformation Systems Design and Implementation Fees**

 

In the calendar year 2003,there were no fees billed by or paid to either Grant Thornton LLP or DavisAccounting Group P.C. for professional services in connection with operating orsupervising the operation of the Company’s information system or managing itslocal area network.  In addition, therewere no fees for professional services in connection with designing orimplementing a hardware or software system that aggregates source dataunderlying the financial statements or generates information that issignificant to the Company’s financial statements taken as a whole.

 

**AllOther Fees**

 

In the calendar year2003, the Company paid additional fees to Grant Thornton LLP of approximately$83,841 for services provided by them in connection with registration statementfilings, tax return preparation and consulting and related services.

 

The audit committee ofthe Board of Directors has considered whether the non-audit services of GrantThornton LLP during the calendar year 2003 were compatible with maintainingGrant Thornton LLP’s independence.  Suchdetermination was not necessary by the Board of Directors for Davis AccountingGroup P.C. as all fees billed by that firm were for audit services.

 

43

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##### **PART IV**

 

**ITEM 15****.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K.**

 

44

----

 

(a)(1) Financial Statements

 

Report of Independent Auditors – 2003

 

Report of Independent Auditors – 2002 and 2001

 

Balance Sheets

 

Statements of Operations

 

Statements of Changes in Stockholders’ Equity

 

Statements of Cash Flows

 

Notes to Financial Statements

 

(a) (2) FinancialStatement Schedule for the Years Ended December 31, 2003, 2002 and 2001.

 

Schedule II - Valuation and Qualifying Accounts onpage F-34.

 

All other financialstatement schedules are omitted because the information is not required, or isotherwise included in the Consolidated Financial Statements or the notesthereto included in this Annual Report on Form 10-K.

 

Condensed quarterly financialinformation on the Company is included in Note 21 of Notes to the FinancialStatements.

 

(a) (3) Exhibits.

 

The following exhibitsare filed with or incorporated by reference into this Annual Report on Form10-K.

 
| **EXHIBIT  NO.** |   | **DESCRIPTION OF EXHIBIT**                                                                                                                                                                                                                                                                                           |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                 |
| 3.1              |   | Certificate of  Incorporation of Centiv, Inc., a Delaware corporation. Incorporated by  reference from Exhibit 3.1 to the Company's Form 10-Q for June 30, 2002 filed  August 8, 2002. SEC File 0-23221. Accession Number 1177651-2-26.                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                 |
| 3.2              |   | Certificate of  Amendment of Certificate of Incorporation of Centiv, Inc., a Delaware  corporation. Incorporated by reference from Exhibit 3.2 to the Company's Form  10-Q for September 30, 2003 filed November 13, 2003. SEC File 0-23221.  Accession Number 1104659-3-26087.                                      |
|             |   |                                                                                                                                                                                                                                                                                                                 |
| 3.3              |   | Bylaws of Centiv, Inc.,  a Delaware corporation.  Incorporated  by reference from Exhibit 3.2 to the Company's Form 10-Q for June 30, 2002  filed August 8, 2002. SEC File 0-23221. Accession Number 1177651-2-26.                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                 |
| 4.1              |   | Certificate of the  Rights, Designations and Preferences of the Series B Convertible Preferred  Stock of Centiv, Inc., a Delaware corporation. Incorporated by reference from  Exhibit 3.3 to the Company's Form 10-K for December 31, 2002 filed April 4,  2003. SEC File 0-23221. Accession Number 1104659-3-6037. |

 

45

----

 
| 4.2    |   | Form of Warrant to  Purchase Common Stock. Incorporated by reference from Exhibit 4.6 to the  Company's Form 10-K for December 31, 2002 filed April 4, 2003. SEC File  0-23221. Accession Number 1104659-3-6037.                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                               |
| 4.3    |   | Form of Amended and  Restated Investors Rights Agreement dated March 31, 2003. Incorporated by  reference from Exhibit 4.5 to the Company's Form 10-K for December 31, 2002  filed April 4, 2003. SEC File 0-23221. Accession Number 1104659-3-6037.                                               |
|   |   |                                                                                                                                                                                                                                                                                               |
| 10.1   |   | Stock Purchase  Agreement used to acquire Beijing Multimedia Limited. Incorporated by  reference from Exhibit 10.1 the Company's Current Report on Form 8-K for  February 2, 2004 filed February 6, 2004. SEC File 0-23221. Accession Number  1104659-4-2823                                       |
|   |   |                                                                                                                                                                                                                                                                                               |
| 10.2   |   | Transfer Agreement by  and between CITIC Cultural Sports Industry Co. Ltd. and Beijing Multimedia  Limited. Incorporated by reference from Exhibit 10.2 the Company's Current  Report on Form 8-K for February 2, 2004 filed February 6, 2004. SEC File  0-23221. Accession Number 1104659-4-2823. |
|   |   |                                                                                                                                                                                                                                                                                               |
| 10.3   |   | Assignment and  Assumption Agreement by and between Centiv, Inc. and Beijing Multimedia  Limited. Incorporated by reference from Exhibit 10.3 the Company's Current  Report on Form 8-K for February 2, 2004 filed February 6, 2004. SEC File  0-23221. Accession Number 1104659-4-2823.           |
|   |   |                                                                                                                                                                                                                                                                                               |
| 10.4   |   | Contribution Agreement  Between Centiv, Inc. and Centiv Services, Inc. Incorporated by reference from  Exhibit 10.4 the Company's Current Report on Form 8-K for February 2, 2004  filed February 6, 2004. SEC File 0-23221. Accession Number 1104659-4-2823.                                      |
|   |   |                                                                                                                                                                                                                                                                                               |
| 10.5   |   | 2004 Non-Qualified  Stock Compensation Plan. Incorporated by reference from Exhibit 10.5 the  Company's Current Report on Form 8-K for February 2, 2004 filed February 6,  2004. SEC 0-23221. Accession Number 1104659-4-2823.                                                                     |
|   |   |                                                                                                                                                                                                                                                                                               |
| 11.1   |   | Statement re:  computation of per share earnings.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                               |
| 21.1   |   | Subsidiaries.                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                               |
| 23.1   |   | Consent of Davis  Accounting Group P.C.                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                               |
| 23.2   |   | Consent of Grant Thornton  LLP.                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification  of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification  of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification  of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                           |

 

(b) Reports Filed on Form8-K

 

The following reports onForm 8-K have been filed during the three months ended December 31, 2003:

 

Current Report on Form8-K furnished November 12, 2003, which included disclosure under Item 12relating to the Company’s announcement of its earnings for the calendar quarterended September 30, 2003.

 

*   Indicates compensatory planor arrangement.

46

----

 

**SIGNATURES**

 

PURSUANT TO THEREQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THEREGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THEUNDERSIGNED, THEREUNTO DULY AUTHORIZED THIS 28th DAY OF APRIL, 2004.

 
|   |   | Centiv, Inc. |
|--------|--------|--------------|
|   |   | (Registrant) |
|   |   |         |
|   |   | By:          |    /s/ | Mak Wai Keung Shawn |   |
|   |   |         | Mak Wai Keung Shawn |
|   |   |         | President and Chief  Executive Officer |

 

PURSUANT TO THEREQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEENSIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THECAPACITIES AND ON THE DATES INDICATED.

 
| **SIGNATURE** |                 | **Title** |                                                    | **Date**       |   |
|---------------|----------------------|-----------|---------------------------------------------------------|----------------|--------|
|          |                 |      |
| /s/           | Mak Wai Keung Shawn  |      | Chief Executive  Officer,                               | April 28, 2004 |
|          | Mak  Wai Keung Shawn |      | President and Director  (principal  executive officer)  |           |
|          |                 |      |
|          |                 |      |
| /s/           | Lau Kwok Hung        |      | Chief Financial Officer  and                            | April28, 2004  |
|          | Lau  Kwok Hung       |      | Director (principal  financial  and accounting officer) |           |
|          |                 |      |
|          |                 |      |
| /s/           | Patrick Ma           |      | Director                                                | April 28, 2004 |
|          | Patrick Ma           |      |                                                    |           |
|          |                 |      |
|          |                 |      |
| /s/           | Hu Bing              |      | Director                                                | April 28, 2004 |
|          | Hu Bing              |      |                                                    |           |
|               |                      |           |                                                         |                |        |  |  |

 

47

----

 

**CENTIV,INC.**

** **

**INDEXTO FINANCIAL STATEMENTS**

 

**FinancialStatements of Centiv, Inc.**

 

 
| Report  of Independent Auditors - 2003 - Davis Accounting Group P.C. |
|----------------------------------------------------------------------|
|                                                                 |
| Report  of Independent Auditors - 2002 and 2001 - Grant Thornton LLP |
|                                                                 |
| Balance  Sheets                                                      |
|                                                                 |
| Statements  of Operations                                            |
|                                                                 |
| Statements  of Changes in Stockholders’ Equity                  |
|                                                                 |
| Statements  of Cash Flows                                            |
|                                                                 |
| Notes  to Financial Statements                                       |

 

F-1

----

 

**REPORT OFINDEPENDENT AUDITORS** - 2003

 

Tothe Board of Directors and Stockholders of Centiv, Inc.

 

Wehave audited the accompanying balance sheet of Centiv, Inc. (a Delawarecorporation) as of December 31, 2003, and the related statements of operations,changes in stockholders’ equity and cash flows for the year then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.  Thefinancial statements of Centiv, Inc. as of December 31, 2002, and for the yearsended December 31, 2002, and 2001 and Schedule II for the same periods wereaudited by other auditors whose report dated January 31, 2003, expressed anunqualified opinion on those financial statements.

 

Weconducted our audit in accordance with standards of the Public CompanyAccounting Oversight Board (United States of America).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Centiv, Inc. as of December 31,2003, and the results of its operations and its cash flows for the year thenended, in conformity with accounting principles generally accepted in theUnited States of America.

 

Wehave also audited Schedule II for the year ended December 31, 2003.  In our opinion, this schedule, whenconsidered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 
| /s/  Davis Accounting Group P.C.      |   |   |
|---------------------------------------|--------|--------|
|                                  |
| Cedar  City, Utah                     |
| April  5, 2004, except for Note 17    |
| for  which the date is April 28, 2004 |

 

F-2

----

 

**REPORTOF INDEPENDENT AUDITORS – 2002 AND 2001**

 

 

Tothe Board of Directors and Stockholders of Centiv, Inc.

 

Wehave audited the accompanying balance sheet of Centiv, Inc. as of December 31,2002, and the related statements of operations, changes in stockholders’ equityand cash flows for the years ended December 31, 2002, and 2001.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Centiv, Inc. as of December 31,2002, and the results of its operations and its cash flows for the years endedDecember 31, 2002, and 2001, in conformity with accounting principles generallyaccepted in the United States of America.

 

Wehave also audited Schedule II for the years ended December 31, 2002 and2001.  In our opinion, this schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

 
| /s/  Grant Thornton, LLP              |   |
|---------------------------------------|--------|
|                                  |
| Chicago,  Illinois                    |
| January  31, 2003, except for Note 9  |
| for  which the date is March 31, 2003 |

 

F-3

----

 

**CENTIV,INC.**

**BALANCE SHEETS**

**($ In thousands)**

 
|                                                                                                                                                                                                                                                         |   | **December 31,** |   | **December 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                                                                                                                                                         |   | **2003**         |   | **2002**         |   |
| **ASSETS**                                                                                                                                                                                                                                                   |   |             |   |             |   |
| Current assets:                                                                                                                                                                                                                                              |   |             |   |             |   |
| Cash and cash equivalents                                                                                                                                                                                                                                    |   | $                | 877    |             | $      | 1,304 |   |
| Accounts receivable, less  allowance for doubtful accounts of $25 and $19 at December 31, 2003 and 2002,  respectively                                                                                                                                       |   | 246              |   | 1,668            |   |
| Inventories, net                                                                                                                                                                                                                                             |   | 36               |   | 824              |   |
| Prepaid expenses and other  assets                                                                                                                                                                                                                           |   | 296              |   | 565              |   |
| Income taxes receivable                                                                                                                                                                                                                                      |   | 1                |   | 21               |   |
| Deferred income taxes - current                                                                                                                                                                                                                              |   | 91               |   | 162              |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Total current assets                                                                                                                                                                                                                                         |   | 1,547            |   | 4,544            |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Property and equipment, net                                                                                                                                                                                                                                  |   | 1,018            |   | 1,707            |   |
| Other assets                                                                                                                                                                                                                                                 |   | —           |   | 137              |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Total assets                                                                                                                                                                                                                                                 |   | $                | 2,565  |             | $      | 6,388 |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| **LIABILITIES**                                                                                                                                                                                                                                              |   |             |   |             |   |
| Current liabilities:                                                                                                                                                                                                                                         |   |             |   |             |   |
| Current debt                                                                                                                                                                                                                                                 |   | $                | — |             | $      | — |   |
| Accounts payable                                                                                                                                                                                                                                             |   | 488              |   | 2,888            |   |
| Accrued expenses                                                                                                                                                                                                                                             |   | 394              |   | 733              |   |
| Contract obligation and  deferred income                                                                                                                                                                                                                     |   | 129              |   | 140              |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Total current liabilities                                                                                                                                                                                                                                    |   | 1,011            |   | 3,761            |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Deferred income taxes                                                                                                                                                                                                                                        |   | 91               |   | 162              |   |
| Convertible Subordinated Debt                                                                                                                                                                                                                                |   | —           |   | 990              |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Total liabilities                                                                                                                                                                                                                                            |   | 1,102            |   | 4,913            |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Commitments and Contingencies                                                                                                                                                                                                                                |   |             |   |             |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                |   |             |   |             |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Common Stock $.001 par value,  35,000,000 shares authorized; 1,946,810 shares issued and 1,677,815 shares  outstanding at December 31, 2003, and 1,664,723 shares issued and 1,395,728  shares outstanding at December 31, 2002                              |   | 6                |   | 5                |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Treasury Stock, at cost,  268,995 shares at December 31, 2003 and 2002                                                                                                                                                                                       |   | (759             | )      | (759             | )      |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Preferred Stock, $.001 par  value, 5,000,000 shares authorized; 770,000 and 216,000 shares issued and  outstanding at December 31, 2003 and 2002, respectively (liquidation value of  $7,700,000 and $2,160,000 at December 31, 2003 and 2002, respectively) |   | 1                |   | —           |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Due from stockholders                                                                                                                                                                                                                                        |   | (270             | )      | (267             | )      |
| Additional paid-in capital                                                                                                                                                                                                                                   |   | 24,929           |   | 22,509           |   |
| Accumulated deficit                                                                                                                                                                                                                                          |   | (22,444          | )      | (20,013          | )      |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Total stockholders’ equity                                                                                                                                                                                                                              |   | 1,463            |   | 1,475            |   |
|                                                                                                                                                                                                                                                         |   |             |   |             |   |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                                             |   | $                | 2,565  |             | $      | 6,388 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-4

----

** **

**CENTIV, INC.**

**STATEMENTS OFOPERATIONS**

**($ In thousands, except per share data)**

** **
|                                                                                      |   | **YEARS ENDED DECEMBER 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                      |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                                      |   |                         |   |   |   |   |   |
| Net sales                                                                                 |   | $                            | 6,266  |   | $ | 25,508 |   | $ | 12,432 |   |
| Cost of goods sold                                                                        |   | 4,073                        |   | 20,962 |   | 9,982 |   |
| Gross profit                                                                              |   | 2,193                        |   | 4,546 |   | 2,450 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| Operating expenses:                                                                       |   |                         |   |   |   |   |   |
| Selling, general and  administrative                                                      |   | 3,538                        |   | 5,390 |   | 4,309 |   |
| Depreciation                                                                              |   | 576                          |   | 570 |   | 313 |   |
| Restructuring Charges                                                                     |   | 0                            |   | 87 |   | 0 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| Loss from operations                                                                      |   | (1,921                       | )      | (1,501 | ) | (2,172 | ) |
|                                                                                      |   |                         |   |   |   |   |   |
| Loss on Repurchase of Stock  (Note 13)                                                    |   | 0                            |   | (1,492 | ) | — |   |
| Other (expense)                                                                           |   | (502                         | )      |   |   |   |   |
| Interest income (expense)                                                                 |   | (8                           | )      | 104 |   | (872 | ) |
|                                                                                      |   |                         |   |   |   |   |   |
| Loss before income tax  provision (benefit)                                               |   | (2,431                       | )      | (2,889 | ) | (3,044 | ) |
|                                                                                      |   |                         |   |   |   |   |   |
| Provision (benefit) for income  taxes from continuing operations                          |   | 0                            |   | 49 |   | 787 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| Income / (loss) from continuing  operations                                               |   | (2,431                       | )      | (2,938 | ) | (3,831 | ) |
|                                                                                      |   |                         |   |   |   |   |   |
| Loss from discontinued  operations (net of tax provision of $98 in 2002 and $180 in 2001) |   | 0                            |   | 380 |   | (3,068 | ) |
|                                                                                      |   |                         |   |   |   |   |   |
| Net loss                                                                                  |   | $                            | (2,431 | ) | $ | (2,558 | ) | $ | (6,899 | ) |
|                                                                                      |   |                         |   |   |   |   |   |
| Effect of beneficial conversion  feature of preferred stock (Note 9)                      |   | 0                            |   | (810 | ) | — |   |
|                                                                                      |   |                         |   |   |   |   |   |
| Net loss attributable to common  stockholders                                             |   | $                            | (2,431 | ) | $ | (3,368 | ) | $ | (6,899 | ) |
|                                                                                      |   |                         |   |   |   |   |   |
| Basic and diluted weighted  average shares outstanding                                    |   | 1,607,134                    |   | 1,631,433 |   | 1,658,704 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| Basic and Diluted Income/(Loss)  applicable to common shares                              |   |                         |   |   |   |   |   |
| Continuing operations                                                                     |   | $                            | (1.51  | ) | $ | (2.29 | ) | $ | (2.31 | ) |
| Discontinued operations                                                                   |   | $                            | 0      |   | $ | 0.23 |   | $ | (1.85 | ) |
| Net loss                                                                                  |   | $                            | (1.51  | ) | $ | (2.06 | ) | $ | (4.16 | ) |

 

The accompanying notes are anintegral part of these financial statements.

 

F-5

----

 

**CENTIV,INC.**

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

 
|                                                            |   | **Number  Of Shares** |       | **Class A  Common** |   | **Number  Of Shares** |        | **Treasury** |   | **Number of  Preferred** |       | **Class B  Common** |       | **Number of  Preferred** |   |                 |        | **Due from  Stock-** |   | **Additional  Paid-in** |       | **Retained  Earnings** |       |      |   |
|-----------------------------------------------------------------|--------|-----------------------|------------|---------------------|--------|-----------------------|-------------|--------------|--------|--------------------------|------------|---------------------|------------|--------------------------|--------|----------------------|-------------|----------------------|--------|-------------------------|------------|------------------------|------------|-----------|--------|
| **($In  000’s)**                                           |   | **Class A**           |       | **Stock**           |   | **Treasury**          |        | **Stock**    |   | **Series A  Shares**     |       | **Stock**           |       | **Series B  Shares**     |   | **Preferred  Stock** |        | **holders**          |   | **Capital**             |       | **(Deficit)**          |       | **Total** |   |
|                                                            |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       |                   |       |      |   |
| **Balances at 12/31/00**                                        |   | **1,687,382**         | ** ** | **$**               | **5**  | ** **            | **0**       | ** **   | **$**  | **0**                    | ** ** | **0**               | ** ** | **$**                    | **0**  | ** **           | **0**       | ** **           | **$**  | **0**                   | ** ** | **$**                  | **(1,941** | **)**     | **$**  | **19,521** | ** ** | **$** | **(9,746** | **)** | **$** | **7,839** | ** ** |
| Loan to stockholders                                            |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        | (250                 | )      |                    |       |                   |       | (250      | )      |
| Interest on loan to Stockholder                                 |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        | (175                 | )      |                    |       |                   |       | (175      | )      |
| Stock options/ warrants issued for services                     |   | 10,000                |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   | 97                      |       |                   |       | 97        |   |
| Escrow shares cancellation                                      |   | (45,155               | )          |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       |                   |       |      |   |
| Net loss                                                        |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       | (6,899                 | )          | (6,899    | )      |
| **Balances at 12/31/01**                                        |   | **1,652,227**         | ** ** | **$**               | **5**  | ** **            | **0**       | ** **   | **$**  | **0**                    | ** ** | **0**               | ** ** | **$**                    | **0**  | ** **           | **0**       | ** **           | **$**  | **0**                   | ** ** | **$**                  | **(2,366** | **)**     | **$**  | **19,618** | ** ** | **$** | **(16,645** | **)** | **$** | **612** | ** ** |
|                                                            |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       |                   |       |      |   |
| Repurchase Shares                                               |   | (268,995              | )          | 268,995             |   | (759                  | )           |         |   |                     |       |                |       |                     |   |                 |        | 2,251                |   |                    |       |                   |       | 1,492     |   |
| Interest on loan to stockholders                                |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        | (152                 | )      |                    |       |                   |       | (152      | )      |
| Stock options exercised                                         |   | 12,496                |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   | 18                      |       |                   |       | 18        |   |
| Issuance of Series A Preferred Stock                            |   | 216,000               |       |                |   |                  |        |         |   |                     |       |                |       |                     |   | 0                    |        |                 |   | 2,025                   |       |                   |       | 2,025     |   |
| Stock Options and Warrants issued for services                  |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       | 12                     |       | 12        |   |
| Beneficial Conversion Feature on Preferred Stock                |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   | 810                     |       | (810                   | )          |      |   |
| Warrants on Convertible Sub Debt                                |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   | 26                      |       |                   |       | 26        |   |
| Net Loss                                                        |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       | (2,558                 | )          | (2,558    | )      |
| **Balances at 12/31/02**                                        |   | **1,395,728**         | ** ** | **$**               | **5**  | ** **            | **268,995** | ** **   | **$**  | **(759**                 | **)**      | **216,000**         | ** ** | **$**                    | **0**  | ** **           | **0**       | ** **           | **$**  | **0**                   | ** ** | **$**                  | **(267**   | **)**     | **$**  | **22,509** | ** ** | **$** | **(20,013** | **)** | **$** | **1,475** | ** ** |
| Interest on loan to stockholders                                |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       | (3                     | )          | (3        | )      |
| Stock options exercised                                         |   | 3,750                 |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       | 6                      |       | 6         |   |
| Conversion of Series A and issuance of Series B Preferred Stock |   | 270,003               |       | 1                   |   |                  |        |         |   | (216,000                 | )          |                |       | 770,000                  |   | 1                    |        |                 |   | 2,408                   |       |                   |       | 2,410     |   |
| Stock Options and Warrants issued for services                  |   | 8,334                 |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   | 17                      |       |                   |       | 17        |   |
| Warrants on Convertible Sub Debt                                |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   | (11                     | )          |                   |       | (11       | )      |
| Net Loss                                                        |   |                  |       |                |   |                  |        |         |   |                     |       |                |       |                     |   |                 |        |                 |   |                    |       | (2,431                 | )          | (2,431    | )      |
| **Balances at 12/31/03**                                        |   | **1,677,815**         | ** ** | **$**               | **6**  | ** **            | **268,995** | ** **   | **$**  | **(759**                 | **)**      | **0**               | ** ** | **$**                    | **0**  | ** **           | **770,000** | ** **           | **$**  | **1**                   | ** ** | **$**                  | **(270**   | **)**     | **$**  | **24,929** | ** ** | **$** | **(22,444** | **)** | **$** | **1,463** | ** ** |

 

The accompanying notes are an integral partof these financial statements.

 

F-6

----

 

**CENTIV, INC.**

**STATEMENTS OF CASH FLOWS**

**($ In thousands)**

** **
|                                                                                       |   | **YEARS  ENDED DECEMBER 31,** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                       |   | **2003**                      |   | **2002** |   | **2001** |   |
| **Cash flows from operating activities:**                                                  |   |                          |   |   |   |   |   |
| Net loss                                                                                   |   | $                             | (2,431 | ) | $ | (2,558 | ) | $ | (6,899 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                          |   |   |   |   |   |
| Provision for doubtful accounts receivable                                                 |   | 10                            |   | (2 | ) | 33 |   |
| Provision /write-down of inventory                                                         |   | (35                           | )      | 77 |   | 134 |   |
| Depreciation                                                                               |   | 576                           |   | 570 |   | 313 |   |
| Non-cash loss on note from shareholder                                                     |   | —                        |   | 1,492 |   | — |   |
| Non-cash interest on note payable  (receivable)                                            |   | (25                           | )      | (34 | ) | 65 |   |
| Non-cash compensation for warrants and  stock options                                      |   | 6                             |   | 26 |   | 97 |   |
| Amortization of Discount on Convertible  Subordinated Debt                                 |   | 10                            |   | 2 |   | — |   |
| (Gain)   Loss on sale of Businesses                                                   |   | —                        |   | (488 | ) | 2,092 |   |
| Loss on disposal of assets                                                                 |   | 154                           |   | 125 |   | — |   |
| Deferred taxes                                                                             |   | —                        |   | 49 |   | 1,300 |   |
| Changes in net assets and liabilities                                                      |   |                          |   |   |   |   |   |
| Accounts receivable                                                                        |   | 1,412                         |   | (697 | ) | 4,716 |   |
| Inventories                                                                                |   | 823                           |   | 77 |   | (113 | ) |
| Prepaid expenses and other assets                                                          |   | 150                           |   | (57 | ) | (793 | ) |
| Accounts payable and accrued expenses                                                      |   | (2,705                        | )      | (1,248 | ) | (44 | ) |
| Deferred income and contract obligation                                                    |   | (11                           | )      | (68 | ) | 51 |   |
| Income taxes                                                                               |   | —                        |   | 596 |   | (382 | ) |
| Net assets, discontinued operations                                                        |   | —                        |   | 123 |   | 7,232 |   |
| Total adjustments                                                                          |   | 365                           |   | 543, |   | 14,701 |   |
| **Net cash (used in) provided by operating activities**                                    |   | (2,066                        | )      | (2,015 | ) | 7,802 |   |
|                                                                                       |   |                          |   |   |   |   |   |
| **Cash flows from investing activities:**                                                  |   |                          |   |   |   |   |   |
| Purchase of property and equipment –  continuing operations                           |   | (42                           | )      | (331 | ) | (1,323 | ) |
| Purchase of property and equipment –  discontinued operations                         |   | —                        |   | — |   | (132 | ) |
| Proceeds from sale of Businesses                                                           |   | 300                           |   | 1,250 |   | 5,931 |   |
| Net cash provided by investing  activities                                                 |   | 258                           |   | 919 |   | 4,476 |   |
|                                                                                       |   |                          |   |   |   |   |   |
| **Cash flows from financing activities:**                                                  |   |                          |   |   |   |   |   |
| Proceeds, net, from credit facility                                                        |   | —                        |   | (795 | ) | (10,347 | ) |
| Net proceeds from private placement of  Preferred Stock                                    |   | 1,910                         |   | 2,025 |   | — |   |
| (Repayment)/Proceeds of convertible  subordinated debt facility                            |   | (500                          | )      | 1,000 |   | — |   |
| (Repayments)/Proceeds, net, from capital  lease financings                                 |   | (32                           | )      | 76 |   | — |   |
| Proceeds from exercise of stock options                                                    |   | 6                             |   | 18 |   | — |   |
| Dissenters’ settlement payments                                                       |   | —                        |   | — |   | (1,769 | ) |
| Loan to stockholder                                                                        |   | (3                            | )      | (152 | ) | (425 | ) |
| **Net cash provided by (used in) financing activities**                                    |   | 1,381                         |   | 2,172 |   | (12,541 | ) |
|                                                                                       |   |                          |   |   |   |   |   |
| **Increase (decrease) in cash and cash equivalents**                                       |   | (427                          | )      | 1,076 |   | (263 | ) |
| Cash and cash equivalents, beginning of  year                                              |   | 1,304                         |   | 228 |   | 491 |   |
| Cash and cash equivalents, end of year                                                     |   | $                             | 877    |   | $ | 1,304 |   | $ | 228 |   |
|                                                                                       |   |                          |   |   |   |   |   |
| **Supplemental disclosure of cash flow information:**                                      |   |                          |   |   |   |   |   |
|                                                                                       |   |                          |   |   |   |   |   |
| Cash paid during the year for interest                                                     |   | $                             | 34     |   | $ | 116 |   | $ | 1,046 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-7

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**CENTIV, INC.**

**NOTES TO FINANCIAL STATEMENTS**

 

**1.****     ORGANIZATION, BASIS OFPRESENTATION, AND NATURE OF OPERATIONS**

 

**ORGANIZATION**

 

Subsequent to December 31, 2003, Centiv, Inc.(the “Centiv” or the “Company”) reported the acquisition of significant assetsand payment obligations, changed its management team, changed its capitalstructure, increased the size of its amended and restated non-qualified stockcompensation plan, transferred its on-going point-of-purchase operations toCentiv Services, Inc., a wholly owned subsidiary (“Centiv Services”), andadopted a holding company structure to seek additional capital and to pursuebusiness opportunities related to multimedia, publishing and advertising.  The Overview that follows discusses thebusiness transacted by Centiv for the years ended December 31, 2003, 2002, and2001.  See Note 17 for a discussion ofsubsequent events.

 

The Company is a developer and provider ofweb-enabled point-of-purchase (“POP”) solutions for consumer goodsmanufacturers and multi-location retailers. The Company’s Instant Impact solution allows marketing managers, brandmanagers and retailers to create, edit and schedule delivery of customized POPsignage, using field-editable sign templates created and/or approved bymanufacturers.  Instant Impact POPsignage is print quality and digitally produced for the unique requirements ofeach retail location, allowing users to target specific consumer segments atthe point-of-purchase and accumulate quantitative data for analysis andfeedback on the success of their in-store or on-premise marketingcampaigns.  Centiv’sproducts allow users access to aninformation database for selecting sign templates approved or created bymanufacturers, input data for the sign templates and select signage productsfor production of the sign templates. Its Internet-based user interface isclear, flexible, user-friendly, and changeable to allow control of the messageat a corporate or local store level.  Instant Impact signage can either be printed in a Centiv printcenter, or an industry-standard print-formatted file can be delivered via theInternet to any print provider in the world.

 

The roots of Instant Impact were formed in1998 when the Company partnered with Anheuser-Busch (“Anheuser-Busch or “A-B”)to design, configure, deliver and implement POP signage systems in over 730 A-Bwholesale distributor locations in the United States and 16 foreigncountries.  This led to a relationshipwith Anheuser-Busch pursuant to which the Company has installed a POP systemfor A-B allowing distributors to access that system to create custom signageusing templates created by A-B.  Centivsupplied technical support call service and various supplies for that system.  In December 2002, Anheuser-Busch notifiedCentiv that subsequent to March 31, 2003, the Company would no longer be thepreferred supplier for various consumables of the system, and the preferredsupplier technical support agreement would not be renewed.

 

Prior to focusing on the Centiv POP Businessin 2001, Centiv operated three other business units in addition to the CentivPOP Business:

 

•***CalGraph Business***: Formerly a wholly owned subsidiary ofthe Company, CalGraph Technology Services, Inc. was a provider of on-siteservice and preventative maintenance services specializing in wide-formatprinting devices.  CalGraph’s U.S. andCanadian service operations included field service technicians, customersupport call center, component repair and refurbishment facilities, and partslogistics.  The Company sold thisbusiness effective January 31, 2002 and it is reflected as *Discontinued Operations.*

 

•***Channels Business:*** Prior to divestiture by the Company,the Channels Division specialized in the value-added wholesale distribution ofcomputer graphics technologies throughout North America.  The Company sold this business effectiveDecember 31, 2001 and it is reflected as *Discontinued Operations.*

 

F-8

----

 

•***Technology******Systems Business***:  Prior to divestiture by the Company, theTechnology Systems Division designed, assembled and sold custom or“made-to-order” premium services or workstations and related technology tovalue added resellers, vertical market computer resellers, corporations,universities and government agencies.

 

 

**BASIS OF PRESENTATION**

 

The financial statements are prepared on the basis of accountingprinciples generally accepted in the United States of America.  The accompanying consolidated financial statementsinclude the accounts of Centiv, Inc. and its wholly owned subsidiaries, asapplicable.  Significant intercompanytransactions and account balances have been eliminated in consolidation.  The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities at December 31, 2003 and 2002, and reported amounts of revenues andexpenses for each of the three years in the periods ended December 31, 2003,2002 and 2001.  Significant estimatesprimarily include those made for the allowance for doubtful accounts, reservesfor obsolete and slow-moving inventory and valuation allowance for deferred taxassets.  Actual results could differfrom those estimates made by management.

 

**NATUREOF OPERATIONS**

 

Centiv offers web services for consumer brand companies to manage theirin-store and on-premise POP process.  The final product is highquality digitally produced signage that is mass customized for the uniquerequirements of each retail location. The POP materials are eitherproduced at our digital print center or printed remotely at third partyprinters.  Revenue consists of webservices, design services, POP materials, supplies, and equipment.

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The Company’s significant accounting policies are described below:

 

F-9

----

 

**CASHAND CASH EQUIVALENTS**

 

The Company considers all highly liquid investments with orginalmaturies of 90 days or less to be cash equivalents.  Cash equivalents are recorded at cost, which approximates fairvalue.

 

**REVENUERECOGNITION AND ACCOUNTS RECEIVABLE**

 

Sales are recognized upon the shipment of products to the customer orwhen the service has been performed.

 

The majority of the Company’s accounts receivable are due fromcompanies in the consumer goods manufacturing industry.  Credit is extended based on evaluation of acustomers’ financial condition and, generally, collateral is not required.  Accounts receivable are due

within 30 to 45 days and are stated at amounts due from customers netof an allowance for doubtful accounts.

 

The Company determines its allowance by considering a number offactors, including the length of time trade accounts receivable are past due,the Company’s previous loss history, the customer’s current ability to pay itsobligation to the Company, and the condition of the general economy and theindustry as a whole.  The Company writes-offaccounts receivable when they become uncollectible, and payments subsequentlyreceived on such receivables are credited to the allowance for doubtfulaccounts.

 

**INVENTORIES**

 

The Company establishes inventory reserves for valuation, shrinkage,and excess and obsolete inventory. Inventories are stated at the lower of cost or market.  The Company accounts for the inventory onthe first-in, first-out (FIFO) method of inventory costing.

 

The Company records provisions for inventory shrinkage based upon historicalexperience to account for unmeasured usage or loss.  Actual results differing from these estimates could significantlyaffect the Company’s inventories and cost of goods sold.

 

The Company records provisions for excess and obsolete inventories for thedifference between the cost of inventory and its estimated realizable valuebased on assumptions about future product demand and market conditions.  Actual product demand or market conditionscould be different than projected by management.

 

**PROPERTYAND EQUIPMENT**

 

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

 

F-10

----

 

**INCOMETAXES**

 

The provision for income taxes and corresponding balance sheet accountsare determined in accordance with SFAS No. 109, “Accounting for Income Taxes”(“SFAS 109”).  Under SFAS 109, deferredtax liabilities and assets are determined based on temporary differencesbetween the bases of certain assets and liabilities for income tax andfinancial reporting purposes.  Thedeferred tax assets and liabilities are classified according to the financialstatement classification of the assets and liabilities generating thedifferences.

 

The Company maintains a valuation allowance with respect to deferredtax assets.  The Company establishes avaluation allowance based upon potential likelihood of realizing the deferredtax asset and taking into consideration the companies current financialposition and results of operations for the current and preceding years.  Future realization of the deferred taxbenefit depends on the existence of sufficient taxable income within thecarry-back or carry-forward period under the tax law.

 

Changes in circumstances, such as the company generating taxableincome, could cause a change in judgment about the realizability of the relateddeferred tax asset.  Any change in thevaluation allowance will be included in income in the year of the change inestimate.

 

**STOCKINCENTIVE PLANS**

 

The Company maintains a stock incentive plan.  See Note 15 for additional information regarding this plan andthe effect of net income and earnings per share if the Company had applied thefair value recognition provisions of Financial Accounting Standards Board(“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, *Accounting for stock-based Compensation*,to stock-based compensation.  TheCompany accounts for this plan under the recognition and measurement principlesof Accounting Board Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations.  No compensation cost is recognized for stockoption grants.  All options grantedunder the Company’s plans had an exercise price equal to the market value ofthe underlying common stock on the date of the grant.

 

The following table illustrates the effect ofnet income and earnings per share if the Company had applied the fair valuerecognition provisions of Financial Accounting Standards Board (FASB) Statementof Financial Accounting Standards (SFAS) No. 123, *Accounting for stock-based Compensation*, to stock-basedcompensation.  The following table alsoprovides the amount of Stock-Based compensation cost included in net income asreported.

 
| **($In thousands)**                                                                                               |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                                              |   |     |   |     |   |     |   |
| Net loss – as reported                                                                                       |   | $        | (2,431 | )        | $      | (3,368   | )      | $ | (6,888 | ) |
| Deduct: stock-based compensation expense  determined under the fair value based method for all awards, net of tax |   | 44       |   | 22       |   | (182     | )      |
| Net loss – pro forma                                                                                         |   | $        | (2,387 | )        | $      | (3,346   | )      | $ | (7,070 | ) |
| Earnings per share:                                                                                               |   |     |   |     |   |     |   |
| Basic – as reported                                                                                          |   | $        | (1.51  | )        | $      | (2.06    | )      | $ | (4.16 | ) |
| Basic – pro-forma                                                                                            |   | $        | (1.49  | )        | $      | (2.05    | )      | $ | (4.26 | ) |
| Diluted – as reported                                                                                        |   | $        | (1.51  | )        | $      | (2.06    | )      | $ | (4.16 | ) |
| Diluted – pro forma                                                                                          |   | $        | (1.49  | )        | $      | (2.05    | )      | $ | (4.26 | ) |

 

F-11

----

 

**FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

The Company’s financial instruments include its debt obligations.  Management believes that these instrumentsbear interest at rates that approximate prevailing market rates for instrumentswith similar characteristics and, accordingly, that the carrying values forthese instruments are reasonable estimates of fair value.

 

**SHIPPINGAND HANDLING FEES AND COSTS**

 

Shipping and handling fees are billed to customers and are classifiedas revenue and the shipping and handling costs are classified as costs of goodssold as required per the Emerging Issues Task Force (“EITF”) released in Issueno. 00-10, *Accounting for Shipping andHandling Fees and Costs*.

 

**LONGLIVED ASSETS**

 

In August 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment of Long-Lived Assets*.  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001, and addresses financial accounting andreporting for the impairment or disposal of long-lived assets.

 

This statement supersedes SFAS No. 121, *Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of*, and the accounting and reportingprovisions of Accounting Principles Board Opinion No. 30, *Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequent Occurring Events and Transactions*, for the disposal of asegment of a business.  The adoption ofthis standard did not have a material effect on the Company’s results ofoperations or financial position.

 

**CASH CONCENTRATION**

 

As of December 31, 2003, the Company had approximately $847,000deposited in a bank which exceed the Federal Deposit Insurance Corporationlimit of $100,000.

** **

**3.  INVENTORIES**

 

Inventories, net of reserves, at December 31, 2002and 2001 consist of the following ($ in thousands): 

 
|            |   | **2003** |   | **2002** |   |
|-----------------|--------|----------|--------|----------|--------|
| Gross Inventory |   | $        | 68     |     | $      | 939 |   |
| Reserves        |   | (32      | )      | (115     | )      |
| Net Inventory   |   | $        | 36     |     | $      | 824 |   |

 

F-12

----

 

**4.  PROPERTY AND EQUIPMENT, NET**

 

Propertyand equipment, net of accumulated depreciation, at December 31, 2003 and 2002,consists of the following:

 
| **($In thousands)**              |   | **2003** |   | **2002** |   |
|----------------------------------|--------|----------|--------|----------|--------|
|                             |   |     |   |     |   |
| Furniture and fixtures           |   | $        | 114    |     | $      | 192 |   |
| Machinery and computer equipment |   | 368      |   | 623      |   |
| Computer software                |   | 1,694    |   | 1,690    |   |
| Leasehold improvements           |   | —   |   | 25       |   |
|                             |   | 2,176    |   | 2,530    |   |
| Less: accumulated depreciation   |   | (1,158   | )      | (823     | )      |
|                             |   |     |   |     |   |
| Property and equipment, net      |   | $        | 1,018  |     | $      | 1,707 |   |

 

 

**5.  CURRENT DEBT**

 

**In June 2002, the Company entered into a Loan and SecurityAgreement (the “Agreement”), with Cole Taylor Bank, which expires on June 30,2004, that provides for a revolving credit facility initially for $750,000 withthe possibility of increases up to $2.0 million.  The availability under the credit facility will be increased to$2.0 million if the Company achieves earningsbefore**

**interest, taxes, depreciation, andamortization of at least $50,000for three (3) consecutive months**.  The Company did not achieve thesemilestones; therefore, the availability under the credit facility was$750,000.  Outstanding advances underthe Agreement bear interest at prime plus 1.00%.  Pursuant to the terms of the Agreement, the Company has pledgedaccounts receivables, inventory, and equipment as collateral.  The Company had borrowings of $629,000 underthis credit facility during 2002 and has repaid all of the borrowings.  The Company had no borrowings under thiscredit facility as of December 31, 2002 and had no borrowings during the twelvemonths ended December 31, 2003.

** **

**In September 2002, the Company entered into a supplementalcredit facility with Cole Taylor Bank. The supplemental credit facility provided up to $5.2 million in purchaseorder financing.  This facility was usedto finance the inventory requirements for the large-scale equipment upgradewith Anheuser Busch and its wholesalers. The maturity date for this financing is February 15, 2003 and bearsinterest at prime plus 1.00%.  The Company had borrowings of $5.2 millionunder this financing and had repaid all of the borrowings.**  As of December 31,2002, the Company had no borrowings outstanding under this facility and had noborrowings during the twelve months ended December 31, 2003.

** **

With the termination of the preferredsupplier and support agreements with Anheuser-Busch, the credit facilities withCole Taylor Bank were terminated effective March 31, 2003.

** **

**6.  INCOME TAXES**

 

The provision (benefit) for income taxes for theyears ended December 31, 2003, 2002 and 2001 is as follows:

 
| **($In thousands)**           |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                          |   |     |   |     |   |     |   |
| **Current**                   |   |     |   |     |   |     |   |
| Federal                       |   | $        | 0      |     | $      | 0        |   | $ | 0 |   |
| State                         |   | 0        |   | 0        |   | 0        |   |
| **Subtotal Current**          |   | $        | 0      |     | $      | 0        |   | $ | 0 |   |
|                          |   |     |   |     |   |     |   |
| **Deferred**                  |   |     |   |     |   |     |   |
| Federal                       |   | $        | (823   | )        | $      | (307     | )      | $ | (953 | ) |
| State                         |   | (116     | )      | (42      | )      | (135     | )      |
| Change in valuation allowance |   | 939      |   | 496      |   | 2,055    |   |
| **Subtotal Deferred**         |   | $        | 0      |     | $      | 147      |   | $ | 967 |   |
|                          |   |     |   |     |   |     |   |
| **Total Provision/(Benefit)** |   | $        | 0      |     | $      | 147      |   | $ | 967 |   |

 

F-13

----

 

A reconciliation of federal statutory and effectiveincome tax rates is as follows:

 
|                                       |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory U.S. federal income tax rate     |   | (34.0%   | )      | (34.0%   | )      | (34.0%   | )      |
| Effect of:                                 |   |     |   |     |   |     |   |
| State income taxes, net of federal benefit |   | (5.3     | )      | (2.5     | )      | (3.0     | )      |
| Nondeductible stock repurchase write-off   |   | —   |   | —   |   | 12.2     |   |
| Nondeductible goodwill amortization        |   | —   |   | 21.0     |   | —   |   |
| Nondeductible meals and entertainment      |   | 0.1      |   | 0.3      |   | 0.3      |   |
| Nondeductible foreign loss                 |   | —   |   | —   |   | 0.1      |   |
| Return to accrual reconciliation           |   | —   |   | (0.3     | )      | 1.8      |   |
| Sale of Channels business                  |   | —   |   | —   |   | 3.1      |   |
| Valuation reserve for NOL carry forward    |   | 42.9     |   | 20.5     |   | 34.7     |   |
|                                       |   |     |   |     |   |     |   |
| Other, net                                 |   | (3.7     | )      | 1.1      |   | 1.1      |   |
|                                       |   |     |   |     |   |     |   |
| Effective income tax rate                  |   | 0        | %      | 6.1      | %      | 16.3     | %      |

 

An analysis of the deferred income tax assets and liabilities atDecember 31, 2003 and 2002 is

as follows:

 
| **($In thousands)**                                     |   | **2003** |   | **2002** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|
| Current deferred income tax assets:                     |   |     |   |     |   |
| Accounts receivable                                     |   | $        | 10     |     | $      | 8 |   |
|                                                    |   |     |   |     |   |
| Inventory                                               |   | 12       |   | 45       |   |
| Accruals                                                |   | 47       |   | 105      |   |
| 263A Capitalization                                     |   | 2        |   | 4        |   |
| Total current deferred income tax assets                |   | $        | 91     |     | $      | 162 |   |
|                                                    |   |     |   |     |   |
| Noncurrent deferred income tax assets:                  |   |     |   |     |   |
| Net operating loss carryforward                         |   | 3,959    |   | 2,840    |   |
| Valuation allowance on net operating loss  carryforward |   | (3,959   | )      | (2,840   | )      |
| Total non-current deferred income tax asset             |   | $        | 0      |     | $      | 0 |   |
|                                                    |   |     |   |     |   |
| Noncurrent deferred income tax liabilities,  net        |   |     |   |     |   |
| Depreciation                                            |   | (223     | )      | (191     | )      |
| Other                                                   |   | 132      |   | 29       |   |
| Total noncurrent deferred income tax  liabilities       |   | (91      | )      | (162     | )      |
|                                                    |   |     |   |     |   |
| Noncurrent deferred income tax asset  (liability), net  |   | $        | (91    | )        | $      | (162 | ) |
|                                                    |   |     |   |     |   |
| Net Deferred income tax asset (liability)               |   | $        | 0      |     | $      | 0 |   |

 

F-14

----

 

The Company maintains a valuation allowance with respect to deferredtax assets as a result of the uncertainty of ultimate realization.  At December 31, 2003, the Company had netoperating loss carry-forwards of approximately $10.2 million, expiring invarious years through 2022.

 

**7.  COMMITMENTS AND CONTINGENCIES**

 

**OPERATINGLEASES**

 

The Company office space is lease was terminatedas of December 31, 2003 and is on a month-to-month lease paying $6,000 permonth.  The Company paid $348,000 inearly January 2004 to terminate the lease for office space.  The Company also has various operatingleases for office equipment that expire through 2007.  As of December 31, 2003, minimum rentals due under these leaseswere as follows (in thousands):

 

 

| 2004   |   | $      | 37     |   |
|--------|--------|--------|--------|--------|
| 2005   |   | 35     |   |
| 2006   |   | 28     |   |
| 2007   |   | 16     |   |
| 2008   |   | — |   |
|   |   | $      | 116    |   |

 

Rent expense for the years ended December 31, 2003, 2002 and 2001 wasapproximately $206,000, $269,000 and $218,000,****respectively.

 

**CAPITAL LEASES**

 

The Company leases office and production equipment under variouscapital leases that expire through 2007. The outstanding balance under the capital leases was $40,000 as ofDecember 31,

2003 and was reflected as an accrued liability.  The payments including interest due underthese leases were as follows (in thousands):

 

| 2004                                        |   | $      | 28     |   |
|---------------------------------------------|--------|--------|--------|--------|
| 2005                                        |   | 7      |   |
| 2006                                        |   | 7      |   |
| 2007                                        |   | 1      |   |
| 2008                                        |   | 0      |   |
| Total Lease payments                        |   | 43     |   |
|                                        |   |   |   |
| Less:   Amounts representing interest  |   | (3     | )      |
|                                        |   |   |   |
| Present Value of net minimum lease payments |   | $      | 40     |   |

 

The equipment has a net carrying cost of $41,000 and $85,000 as ofDecember 31, 2003 and 2002, respectively.

 

**8.  LITIGATION**

 

The Company is involved in certain claimsarising in the normal course of business. In the opinion of management of the Company, although the outcomes ofthe claims are uncertain, in the aggregate, they are not likely to have amaterial adverse effect on the Company.

 

F-15

----

 

**9.  CAPITAL STRUCTURE**

 

On November 11, 1997, in connection with theinitial public offering of the Company’s securities, 2,100,000 units wereissued.  Each unit consisted of oneshare of Class A Common Stock and one Redeemable Warrant.  The Class A Common Stock and RedeemableWarrant were transferable separately immediately upon issuance.  These warrants expired on November 10, 2002.

 

**CLASS A COMMON STOCK**

 

On June 14, 1998, the Company authorized31,666,667 shares of Class A Common Stock, $.001 par value.  Holders of Class A Common Stock have theright to cast one vote for each share held of record on all matters submittedto a vote of holders of Class A Common Stock.

 

**REDEEMABLE WARRANTS**

 

As part of the Company’s initial publicoffering, the investor received a Redeemable Warrant that entitled theregistered holder to purchase one share of Class A Common Stock at an exerciseprice of $25.20 per share (adjusted for 1 for 3 reverse split effective June16, 2003) at any time until the fifth anniversary of the date of issue, whichwas November 10, 2002.  Beginning on thefirst

anniversary of the date of issue, theRedeemable Warrants were redeemable by the Company on 30 days written noticeand at a redemption price of $.05 per Redeemable Warrant if the closing priceof the Class A Common Stock for any 30 consecutive trading days ending within15 days of the notice of redemption averages in excess of $35.25 per share(adjusted for 1 for 3 reverse split effective June 16, 2003).  All Redeemable Warrants must be redeemed ifany are redeemed.  The Company hasreserved from its authorized but unissued shares a sufficient number of sharesof Class A Common Stock for issuance upon the exercise of the RedeemableWarrants.  The Redeemable Warrants didnot contain any voting or other rights of a stockholder of the Company.  These redeemable warrants expired on November10, 2002.

 

**CLASSB COMMON STOCK**

 

On January 21, 2000, the Company eliminated its dual class of stock andall outstanding shares of Class B Common Stock were converted into Class ACommon Stock on a one-for-one basis.  On

May 1, 1997, the Company increased the outstanding shares from 100 to3,424 by declaring a 34.24-for-1 stock split of the Company’s common stock (parvalue of $1.00).  On June 2, 1997, theCompany declared a 400-for-1 stock split of the Company’s common stock pursuantto which all of the Company’s outstanding common stock was exchanged for4,000,000 shares of Class B Common Stock with a par value of $.001.** **During October 1997, the Companyeffected an .83333325-for-1 reverse stock split pursuant to which theoutstanding shares of Class B Common Stock were exchanged for 3,333,333 sharesof Class B Common Stock.  Each share ofClass B Common Stock was entitled to five votes on all matters on whichstockholders may vote, including the election of directors.  Each share of Class B Common Stock wasautomatically converted into one share of Class A Common Stock upon (i) itssale, gift of transfer, except in the case of a transfer to a trust for whichthe original holder acts as sole trustee or to any other holder of Class BCommon Stock, (ii) the death of the original holder thereof, including in thecase of the original holder having transferred the Class B Common Stock to atrust for which the original holder served as trustee during his or herlifetime, or (iii) the conversion of an aggregate of 75% of the authorizedshares of Class B Common Stock.

 

**ESCROW SHARES**

 

In connection with the Company’s initial public offering of itssecurities, the holders of the Company’s Class B Common Stock agreed to placean aggregate of 166,667 shares into escrow. As part of the settlement of a claim brought by former dissentingshareholders in connection with

 

F-16

----

 

the conversion of the Class A Common Stock, 57,067 escrow shares havebeen forfeited.  In March 2001, theremaining 109,600 shares in escrow expired and were cancelled.  In addition, there were 25,863 sharescancelled relating to the shares held in escrow for the 1998 acquisitions.  These shares were cancelled as a result ofnot achieving certain profit targets.

 

**PREFERREDSTOCK**

 

The Company has authorized 5,000,000 shares of preferred stock.  The Board of Directors has the authority toissue the preferred stock in one or more series and to fix the number of sharesand the relative rights, conversion rights, voting rights and terms of redemptionand liquidation preferences.

 

**SeriesA Convertible Preferred Stock:**

 

On March 28, 2002 and April 15, 2002, the Company sold, in two separateclosings, a private placement of Series A Convertible Preferred Stock (“SeriesA Preferred”), 191,000 and 25,000 unitsrespectively, each unit consisting of one share of Series A Preferred and onewarrant to purchase one additional share of Series A Preferred.  The purchase price for each unit was $10.00per unit.  This sale of units wasratified by the Company’s stockholders at the annual meeting of shareholdersheld on June 11, 2002.  Because eachshare of Series A Preferred was convertible, initially, into 3.33 shares ofcommon stock, the effective purchase price was $3.00 for each share of commonstock purchased.  The warrant that wasincluded in each unit gave the holder the right, until five years after theissuance of the warrant, to purchase one share of Series A Preferred at apurchase price of $15.00 per share or the

equivalent of $4.50 per share of commonstock.

 

The Series A Preferred had a liquidationpreference over common stock equal to the purchase price of the Series APreferred plus any accrued but unpaid dividends.  The Series A Preferred contained a dividend feature, such that,if not converted, before March 31, 2003, dividends would have accrued at anannual rate equal to 8% of the purchase price of the Series A Preferred.  In addition, if not previously convertedinto common stock, the Series A Preferred was subject to redemption at theoption of the Company on the fourth anniversary of the issuance of the Series APreferred at a redemption price equal to the purchase price plus any accruedbut unpaid dividends.  If the Companyfailed to redeem the Series A Preferred on that date, the holders of theconvertible preferred stock would have become entitled to elect a majority ofthe Company’s board of directors. Notwithstanding the foregoing, directors elected by virtue of the votingrights of the Series A Preferred would have had to recuse themselves from anyvote to redeem all or a portion of the Series A

 

F-17

----

 

Preferred.

 

Proceeds to the Company from the sale of theSeries A Preferred were $2,160,000, of which $1,910,000 was received at theMarch 28, 2002 closing and the remaining $250,000 was received at the April 15,2002 closing.  Aggregate transactioncosts of $135,000 representing legal, accounting and registration fees wereincurred bringing the net proceeds to $2,025,000.  The net proceeds were used to pay off and cancelthe Company’s then existing credit facility with Wachovia Bank, NA.

 

The Company recorded a beneficial conversion feature on the Series A Preferred and

warrants based on the fair value of the common stock of $3.00 per shareas of the date of commitment.  Thewarrants with an exercise price of $4.50 per share were valued at $810,000using the Black-Scholes valuation method, using the assumptions described inFootnote 14 to Notes to Financial Statements. The beneficial conversion feature was calculated to be $810,000 at thecommitment date of March 28, 2002 and has been recorded as Additional Paid inCapital.  As the preferred shares wereconvertible immediately, the entire amount of the beneficial conversion featurewas accreted into the Accumulated Deficit at March 31, 2002.

 

The Series A Preferred was convertibleinitially into 3.33 shares of common stock for each share of the Series APreferred.  This conversion ratio,however, was subject to anti-dilution adjustment for stock splits, combinationsand other similar changes and if the Company issued, except in limitedcircumstances, any capital stock for a per share price less than thethen-current conversion price.

 

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

 

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

 

On March 31, 2003, as part of the issuanceof Series B Convertible Preferred discussed below, certain investors who alsoowned Series A Preferred converted 135,000shares of Series A Preferred into 270,000 shares of Series B Preferred.  The associated warrants were cancelled forno value.  No Warrants wereissued in connection with the shares of Series B Preferred issued in conversionfor the Series A Preferred.  The remaining 81,000 outstanding shares of SeriesA Preferred were converted effective March 31, 2003 into 270,003 shares ofcommon stock in accordance with the terms of the Series A Preferred certificateof designations.  Therefore, as of March31, 2003, there were no shares of Series A Preferred issued and outstanding.

 

**SeriesB Convertible Preferred Stock:**

 

On March 31, 2003, the Company sold, in a private placement exempt fromregistration, 500,000 units, eachconsisting of one share of Series B Convertible Preferred Stock (the “Series BPreferred”) and one warrant to purchase 0.667 shares, on a post reverse stocksplit

 

F-18

----

 

basis, of common stock (the “Warrant”).  As part of the private placement, the holdersof $500,000 of the outstanding Convertible Subordinated Debt converted each$5.00 of Subordinated Convertible Debt into one share of Series B Preferred andone warrant to purchase 0.667 shares, on a post reverse stock split basis, ofcommon stock.  The remaining $500,000 ofConvertible Subordinated Debt was repaid in full from proceeds of the Series BPreferred offering.  In addition, theCompany issued an additional 270,000 shares of Series B Preferred in conversionof 135,000 shares of its outstanding Series A Preferred.  No Warrants were issued inconnection with the shares of Series B Preferred issued in exchange for theSeries A Preferred.  In addition, theprior warrants to purchase Series A Preferred held by the Series A Preferredinvestors were cancelled with no value in connection with the conversion.  Theremaining 81,000 outstanding shares of Series A Preferred were converted onMarch 31, 2003 into 270,003 shares, on a post reverse stock split basis) ofcommon stock in accordance with the terms of the Series A Preferred certificateof designation.

 

The purchase price for each unit was $5.00per unit (the “Purchase Price”). Because each share of Series B Preferred is convertible, initially, into3.33 shares of common stock on a post reverse stock split basis, the effectivepurchase price was $1.50 for each share of common stock purchased.  The associated Warrant gives the holder theright, until seven years after the issuance of the Warrant, to purchase 0.667shares of common stock on a post reverse stock split basis at a purchase priceof $1.50 per share.

 

The Series B Preferred has a liquidationpreference over common stock equal to two times the Purchase Price plus anyaccrued and unpaid dividends.  If notpreviously converted, the Series B Preferred will begin to accrue dividends onApril 1, 2004, at a rate equal to 8% per annum of the Purchase Price.  In addition, if not previously convertedinto common stock, the Series B Preferred will be subject to redemption at theoption of the Company on March 31, 2007 at a redemption price equal to theSeries B Preferred liquidation preference amount.  If the Company fails to redeem the Series B Preferred on thatdate, the holders of the Series B Preferred become entitled to elect a majorityof the board of directors. Notwithstanding the foregoing, directors elected by virtue of the votingrights of the Series B Preferred would have to recuse themselves from any voteto redeem all or a portion of the Series B Preferred.

 

As stated, the Series B Preferred isinitially convertible into 3.33 shares of common stock, on a post reverse stocksplit basis, for each share of the Series B Preferred.  This conversion ratio, however, is subjectto anti-dilution adjustment if the Company issues any capital stock (or securitiesexercisable for or convertible into capital stock) for a per share price lessthan the then-current conversion price, except for issuances pursuant to theCompany’s stock option plan and certain other issuances to business partners.  The anti-dilution adjustment will be made ona full-ratchet basis.  Each share ofSeries B Preferred is entitled to 3.33 votes on a post reverse stock splitbasis and the Series B Preferred stockholders vote together with the commonstock stockholders on all matters unless otherwise required by law.

 

The purchasers of the Series B Preferred mayvoluntarily convert the Series B Preferred into common stock at any time.  The Series B Preferred will be automaticallyconverted into common stock if (i) the Company meets either ConversionMilestone defined below, or (ii) holders of 2/3 of the outstanding shares ofthe Series B Preferred agree to convert. In either event, however, an automatic conversion will only occur if aregistration statement covering the resale of the shares issuable uponconversion is in effect at that time.  “ConversionMilestone” shall mean either (a) the Company’s pretax earnings from ongoingoperations are equal to or greater than $6 million in the aggregate in any fourconsecutive fiscal quarters**as

 

F-19

----

 

determined in accordance with United States Generally AcceptedAccounting Principles (“GAAP”) as applied by the Company on the date when theSeries B Preferred was first issued and the closing trading price of theCompany’s common stock is equal to or greater than $6.00 per share (as adjustedfor any stock dividends, combinations or splits with respect to such sharesafter the filing date hereof) for ten consecutive Trading Days (as definedbelow), or (b) the closing of a “firm commitment” underwritten public offeringof common stock in which the public offering price per share of common stock isat least equal to three times the then-applicable conversion price for theSeries B Preferred and which offering results in gross proceeds to the Companyof not less than $15 million.  “TradingDay” shall mean a business day on which at least 50,000 shares of common stockare traded on the principal United States securities exchange or automatedquotation system on which such security is listed or traded.

 

The Company agreed to file a registrationstatement on Form S-3 to cover the resale of the shares of common stockissuable upon conversion of the Series B Preferred and the shares of commonstock issuable upon exercise of the Warrants. That registration statement was declared effective on July 16,2003.  The Company also agreed to useits best efforts to maintain the effectiveness of the registration statementuntil the earlier of (a) the later of (i) two years after all of the Warrantshave been redeemed or exercised, or (ii) two years after all of the Series BPreferred has been converted, or (b) six years from the closing date.  In addition, the Company granted the purchasersof the Series B Preferred piggyback registration rights on any otherregistration statement filed by the Company (other than on Forms S-8 orS-4).  The Company is not, however,obligated to register or qualify the resale of the shares of common stockissuable upon conversion of the Series B Preferred and the shares of commonstock issuable upon exercise of the Warrants under the laws of the variousstates, unless specifically requested by the purchasers of the Series BPreferred.  The Company agreed to bearall expenses of each registration, including the costs of one special counselto the purchasers of the Series B Preferred.

 

Pursuant to the terms of the private placement, the Company may imposeblackout periods with respect to the use of the registration statement in anaggregate amount of time not to exceed 25 business days in any 12-month periodif the Company’s board of directors determines in good faith that (a) anamendment or supplement to a registration statement is required to correct amaterial misstatement or to include information the absence of which wouldrender the registration statement materially misleading and (b) the filing ofsuch amendment or supplement would result in the disclosure of information thatthe Company has a bona fide business purpose for preserving as confidential.The Company may not institute more than four blackout periods in any 12-monthperiod.  The Company agreed to notifythe purchasers of the Series B Preferred of blackout periods but the purchasersare not required to notify the Company of sales if no blackout is ineffect.  The registration rights areembodied in an investor rights agreement that contains customary terms andconditions, including cross-indemnities.

 

The Series B Preferred Stock financing resulted in cash proceeds of$2,000,000 plus the conversion of $500,000 of the Company’s Senior ConvertibleSubordinated Debt that was issued on September 28, 2002.  The remaining Senior ConvertibleSubordinated Debt of $500,000 was repaid out of the proceeds of this financing,and as of March 31, 2003, the Company was debt free and remained so as ofDecember 31, 2003.  Aggregate transaction costs of $90,000representing legal, accounting and registration fees were incurred bringing thenet proceeds, after repaying the Subordinated Debt and transaction costs, to$1,410,000.

 

F-20

----

 

There was no beneficial conversion feature onthe Series B Preferred and warrants based on the fair value of the common stockof $1.02 per share as of the date of commitment.  The warrants with an exercise price of $1.50 per share, werevalued at $159,176 using the Black-Scholes valuation method usingthe assumptions described in Footnote 14 to Notes to Financial Statements. SeeNote 17 for subsequent events pertaining to the Series B Preferred.

 

**10. STOCK OPTION PLAN**

 

The Company’s Board of Directors and stockholders approved the 1997Stock Option Plan (the “Plan”) covering 666,667 shares of the Company’s Class ACommon Stock that may be granted to employees, officers, directors, and certainconsultants or advisers to the Company. Options granted under the Plan may be either (i) options intended toqualify as incentive stock options

under Section 422 of the Internal Revenue Code or (ii) non-qualifiedstock options.  Incentive optionsgranted under the Plan are exercisable for a period of up to ten years from thedate of grant at an exercise price that is not less than the fair market valueof the stock on the date of grant, except that the term of an incentive optiongranted under the Plan to a stockholder owning more than 10% of the outstandingvoting power may not exceed five years and its exercise price

 

may not be less than 110% of the fair market value of the stock on thedate of grant.  In addition, to theextent that the aggregate fair market value, as of the date of grant, of thestock for which incentive options become exercisable for the first time by anoptionee during the calendar year exceeds $100,000, the portion of such optionthat is in excess of the $100,000 limitation will be treated as a non-qualifiedoption.  The Company’s Board ofDirectors administers the Plan, which expires in August 2007.  The Company has 171,413 stock options availablefor future grant at December 31, 2003.

 

On January 7, 2004, the Company granted 171,000 stock options andaccelerated the exercisability of all outstanding options and to increase theperiod of exercisability to 12 months following termination of employment withthe Company.

 

A summary of stock options as of December 31, 2003, 2002 and 2001 andactivity during the period ending those dates is as follows:

 
|                                 |   | **2003**                        |   | **2002**                        |   | **2001**                        |   |
|--------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                                 |   | **Weighted  Average  Exercise** |   | **Weighted  Average  Exercise** |   | **Weighted  Average  Exercise** |   |
|                                 |   | **Options**                     |   | **Price ($)**                   |   | **Options**                     |   | **Price ($)** |   | **Options** |   | **Price ($)** |   |
| Options at beginning of period       |   | 842,838                         |   | 3.07                            |   | 311,884                         |   | 4.04 |   | 198,965 |   | 6.35 |   |
| Granted                              |   | 236,670                         |   | 0.98                            |   | 669,382                         |   | 2.91 |   | 170,178 |   | 1.87 |   |
| Exercised                            |   | (3,750                          | )      | 1.41                            |   | (12,502                         | )      | 1.41 |   | 0 |   | — |   |
| Forfeited                            |   | (122,422                        | )      | 5.00                            |   | (125,926                        | )      | 4.61 |   | (57,259 | ) | 5.57 |   |
| Outstanding at the end of period     |   | 953,336                         |   | 2.47                            |   | 842,838                         |   | 3.07 |   | 311,884 |   | 4.04 |   |
| Options exercisable at end of period |   | 233,828                         |   | 2.97                            |   | 201,092                         |   | 3.73 |   | 144,526 |   | 5.26 |   |

 

Weighted average fair value of optionsgranted during the period are:

 

F-21

----

 
|                                |   | **2003**                        |   | **2002**                   |   | **2001**                        |   |
|-------------------------------------|--------|---------------------------------|--------|----------------------------|--------|---------------------------------|--------|
|                                |   | **Weighted  Average  Exercise** |   | **Weighted  Fair  Market** |   | **Weighted  Average  Exercise** |   | **Weighted  Fair  Market** |   | **Weighted  Average  Exercise** |   | **Weighted  Fair  Market** |   |
|                                |   | **Price ($)**                   |   | **Value ($)**              |   | **Price ($)**                   |   | **Value ($)** |   | **Price ($)** |   | **Value ($****)** |   |
| Option granted during the year      |   |                            |   |                       |   |                            |   |   |   |   |   |   |   |
| Option price > fair market value |   | —                          |   | —                     |   | 0.89                            |   | 0.85 |   | 0.52 |   | 0.47 |   |
| Option price = fair market value    |   | 0.98                            |   | 0.98                       |   | 0.97                            |   | 0.97 |   | 0.65 |   | 0.65 |   |
| Option price < fair market value |   | —                          |   | —                     |   | —                          |   | — |   | — |   | — |   |

 

The sale of the Channels Business (See Note 15) involved five membersof management whose stock options vested immediately upon the consummation ofthe Channels Business transaction with the vesting period extended to one yearor December 28, 2002.  The Companyrecorded an expense of $60,528 relating to the accelerated vesting andextension of the vesting period of the stock options for the five members ofmanagement.

 

Pursuant to the offer made to John Larkin as President and ChiefOperation Officer of Centiv, 474,334 options were granted on October 28, 2002outside of the Stock Option Plan.  Thevesting

period was initially over a six-year period.  Effective January 7, 2004, all the vesting periods on all theoptions were accelerated.

 

The Company applies APB Opinion No. 25 (“APB25”) and related Interpretations in accounting for the Plan.  The Financial Accounting Standards Boardissued Statement No. 123, *Accounting forStock-Based Compensation* (“SFAS 123”) changing the methods forrecognition of cost on plans similar to those of the Company.  Adoption of the accounting provisions of FAS123 is optional; however, pro forma disclosures as if the Company adopted thecost recognition requirements under FAS 123 are required.  The following table illustrates the effect ofnet income and earnings per share if the Company had applied the fair valuerecognition provisions of Financial Accounting Standards Board (FASB) Statementof Financial Accounting Standards (SFAS) No. 123, *Accounting for stock-based Compensation*, to stock-basedcompensation.  The following table alsoprovides the amount of Stock-Based compensation cost included in net income asreported.

 

Had compensation cost for the Plan beendetermined on a fair value basis in accordance with the provisions of SFAS 123,the Company’s net loss for the three years ended December 31, 2003, 2002 and2001 would have been as follows:

 
| **($In thousands)**                                                                                               |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                                              |   |     |   |     |   |     |   |
| Net loss – as reported                                                                                       |   | $        | (2,431 | )        | $      | (3,368   | )      | $ | (6,888 | ) |
| Deduct: stock-based compensation expense  determined under the fair value based method for all awards, net of tax |   | 44       |   | 22       |   | (182     | )      |
| Net loss – pro forma                                                                                         |   | $        | (2,387 | )        | $      | (3,346   | )      | $ | (7,070 | ) |
| Earnings per share:                                                                                               |   |     |   |     |   |     |   |
| Basic – as reported                                                                                          |   | $        | (1.51  | )        | $      | (2.06    | )      | $ | (4.16 | ) |
| Basic – pro-forma                                                                                            |   | $        | (1.49  | )        | $      | (2.05    | )      | $ | (4.26 | ) |
| Diluted – as reported                                                                                        |   | $        | (1.51  | )        | $      | (2.06    | )      | $ | (4.16 | ) |
| Diluted – pro forma                                                                                          |   | $        | (1.49  | )        | $      | (2.05    | )      | $ | (4.26 | ) |

 

F-22

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Options outstanding and exercisable at December 31, 2003, by pricerange are shown below.  Note that onJanuary 7, 2004, the Company accelerated the exercisability of all outstandingoptions; therefore, all outstanding options are vested and exercisable.

 
|                          |   | **Outstanding  Options** |   | **Options  Exercisable** |   |
|-------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                          |   |                     |   | **Weighted  Average**    |   |   |   | **Weighted  Average** |   |
| **Range of  Exercise Prices** |   | **Shares**               |   | **Remaining  Life**      |   | **Exercise  Price** |   | **Shares** |   | **Exercise  Price** |   |
| $0.01 to $1.00                |   | 152,003                  |   | 9.3                      |   | 0.66 |   | — |   | — |   |
| $1.01 to $2.00                |   | 137,670                  |   | 7.7                      |   | 1.54 |   | 53,419 |   | 1.56 |   |
|                          |   |                     |   |                     |   |   |   |   |   |   |   |
| $2.01 to $3.00                |   | 607,713                  |   | 8.1                      |   | 2.93 |   | 135,503 |   | 2.86 |   |
| $3.01 to $4.00                |   | 20,004                   |   | 5.3                      |   | 3.41 |   | 8,961 |   | 3.48 |   |
| $4.01 to $5.00                |   | 15,279                   |   | 1.0                      |   | 4.50 |   | 15,279 |   | 4.50 |   |
| $5.01 to $6.00                |   | 20,667                   |   | 6.1                      |   | 5.98 |   | 20,667 |   | 5.98 |   |
|                          |   | 953,336                  |   |                     |   |   |   | 233,828 |   |   |   |
|                               |        |                          |        |                          |        |  |  |  |  |  |  |  |

 

 

The amount of the pro forma charge has been determined using theBlack-Scholes model, as permitted by SFAS 123. For purposes of the calculation, management used an average interestrate of 5.18% based on the U.S. Treasury Strip (zero-coupon) bonds, a projectedvolatility rate of 80%, a dividend yield of 0% and an expected life of 5 yearsfor the grants.

 

**11. THIRD PARTY STOCK WARRANTS**

 

The Company has agreements with various entities whereby the Companygranted warrants in exchange for services. The value of the warrants was determined using the Black-Scholes optionmodel on the date of grant and a non-cash charge was recorded.  Below is a schedule showing the warrantsissued and outstanding, the expiration date, exercise price and the value ofthe non-cash charge:

 
| **Date of Grant** |   | **Warrants  Issued** |   | **Warrants  Outstanding** |   | **Expiration  Date** |   | **Exercise  Price** |   | **Value  ($In  thousands)** |   |
|-------------------|--------|----------------------|--------|---------------------------|--------|----------------------|--------|---------------------|--------|-----------------------------|--------|
| July 3, 2001      |   | 20,000               |   | 0                         |   | 7/3/03               |   | $                   | 3.45   |                        | $      | 29,700 |   |
| October 12, 2001  |   | 4,000                |   | 0                         |   | 10/12/03             |   | 3.00                |   | 3,912                       |   |
| November 11, 2002 |   | 15,750               |   | 15,750                    |   | 11/11/07             |   | 3.00                |   | 7,607                       |   |
|                   |        |                      |        |                           |        |                      |        |                     |        |                             |        |  |  |

 

The above table excludes the following warrants issued: (1) 270,003warrants issued to the Series A Preferred investors at an exercise price of$4.50 and expiration date of March 28, 2007 (see Note 9),  (2) 28,335 warrants issued for the SeniorConvertible Subordinated Debt holders with an exercise price of $5.25 with8,335 warrants expiring on September 30, 2007 and 20,000 warrants expiring onMarch 31, 2008 (see Note 16), (3) 333,336 warrants issued to the Series BPreferred investors at an exercise price of $1.50 and an expiration date ofMarch 31, 2010 (see Note 9).

 

**12. NET INCOME (LOSS)PER COMMON SHARE**

 

Basic and diluted net income/(loss) percommon share are computed by dividing net income (loss) by the weighted averagenumber of common shares and common share equivalents outstanding during theperiod.  Since the Company has a netloss from continuing operations, there were no common share equivalents thatwere dilutive during any of the periods

 

F-23

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presented. The changes in outstanding shares during the three years ended December31, 2003, 2002 and 2001 are shown below:

 
|                                      |   | **2003**  |   | **2002**  |   | **2001**  |   |
|-------------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| **Common shares:**                        |   |      |   |      |   |      |   |
| Outstanding at beginning of period        |   | 1,395,728 |   | 1,652,227 |   | 1,687,382 |   |
| Shares issued during the period           |   | 282,087   |   | 12,502    |   | 10,000    |   |
| Shares redeemed during the period         |   | 0         |   | (269,001  | )      | (45,155   | )      |
| Outstanding at end of period              |   | 1,677,815 |   | 1,395,728 |   | 1,652,227 |   |
|                                      |   |      |   |      |   |      |   |
| Basic and Diluted weighted average shares |   | 1,607,134 |   | 1,631,433 |   | 1,658,704 |   |

 

In 2001, the Company issued 10,000 shares of its common stock toPiedmont Consulting, Inc. (“Piedmont”) under the terms of a ConsultingAgreement dated as of April 30, 2001. There were 45,155 escrow shares that expired and cancelled as part ofthe Company’s initial public offering and 1998 acquisitions (see Note 9).

 

In 2002, the Company issued 12,502 shares as a result of employeesexercising stock options.  The Company purchased268,995 shares as Treasury Stock in exchange for a note due from a

shareholder (see Note 13). There were six shares that were cancelled as fractional shares remainingin the escrow account relating to the 1998 acquisitions (see Note 9).

Earnings (loss) per share is computed as follows:

 
|                                                                    |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Income Available to common shareholders:**                            |   |     |   |     |   |     |   |
| Loss from continuing operations                                         |   | $        | (2,431 | )        | $      | (2,938   | )      | $ | (3,831 | ) |
|                                                                    |   |     |   |     |   |     |   |
| Effect of Beneficial Conversion Feature of  convertible preferred stock |   | 0        |   | (810     | )      | 0        |   |
|                                                                    |   |     |   |     |   |     |   |
| Loss from continuing operations  attributable to common shareholders    |   | $        | (2,431 | )        | $      | (3,748   | )      | $ | (3,831 | ) |
|                                                                    |   |     |   |     |   |     |   |
| Income (Loss)  from discontinued operations                             |   | 0        |   | 380      |   | (3,068   | )      |
|                                                                    |   |     |   |     |   |     |   |
| Net loss attributable to common shareholders                            |   | $        | (2,431 | )        | $      | (3,368   | )      | $ | (6,899 | ) |
|                                                                    |   |     |   |     |   |     |   |
| **Earnings (loss) per share – Basic and  Diluted:**                |   |     |   |     |   |     |   |
|                                                                    |   |     |   |     |   |     |   |
| Continuing Operations                                                   |   | $        | (1.51  | )        | $      | (2.29    | )      | $ | (2.31 | ) |
|                                                                    |   |     |   |     |   |     |   |
| Discontinued Operations                                                 |   | $        | 0      |     | $      | 0.23     |   | $ | (1.85 | ) |
|                                                                    |   |     |   |     |   |     |   |
| Net Loss                                                                |   | $        | (1.51  | )        | $      | (2.06    | )      | $ | (4.16 | ) |

 

**13. RELATED PARTYTRANSACTIONS**

 

On December 1, 1999, the Company entered into a Loan Agreement withWilliam M. Rychel pursuant to which the Company loaned Mr. Rychel a total of$1,775,000 to purchase from certain shareholders a total of 806,983 shares ofour common stock.  The original term ofthe loan was one year which the Company extended until December 1, 2001 and, onDecember 1, 2001, the Company entered into another amendment with Mr. Rychelthat extended the due date of the loan until December 1, 2002.  In exchange for extending the loan, Mr.Rychel agreed to a non-compete and a confidentiality and assignment ofinventions agreement.  Under theSarbanes-Oxley Act of 2002, this loan could not be extended beyond its current maturityof December 1, 2002 or otherwise materially modified.  On November 25, 2002, the Company repurchased the 806,983

 

F-24

----

 

shares in exchange for the outstanding loan plus accrued interest of$2,250,283.  The shares repurchased havebeen put into Treasury Stock using the closing market price of the stock of$0.94 per share.  The difference betweenthe outstanding loan balance and the Treasury Stock resulted in a non-cashcharge of $1,491,719.

 

Upon consummation of the Channels Business transaction, Centiv madeloans to three former members of Centiv’s management team involved in thetransaction.  A loan in the amount of$200,000 was made to Scott Barker.  Thisloan is secured by 100,000 shares of Centiv common stock owned by Mr. Barkerand will bear interest at a rate of 25 basis points over the current rate onthe Company’s senior debt facility, as adjusted from time to time.  The principal amount of this loan plusaccrued interest was to be due and payable December 31, 2003.  Upon the completion of the Channels Businesstransaction, the Company also made loans to Dave Boston and Pat McLaughlin onthe same terms and conditions in the amounts of $30,000 and $20,000,respectively.  The loans were paid infull plus interest in January and February 2004.

 

John P. Larkin, the Company’s former President and Chief ExecutiveOfficer was an investor in the Series B Convertible Preferred Stock closed onMarch 31, 2003.  In connection with theinvestment, Mr. Larkin purchased 20,000 Units consisting of one share of SeriesB Convertible Preferred Stock and a warrant to purchase two shares of commonstock at an exercise price of

$0.50 per share.  In connectionwith that transaction, Mr. Larkin agreed with the Company to waive hisconversion rights and to grant to the Company’s Chief Financial Officer anirrevocable proxy to vote those shares (in accordance with the majority of theCompany’s capital stock entitled to vote thereon excluding these shares) untilthe Company’s stockholders ratify the issuance of the Series B ConvertiblePreferred Stock.

 

**14. RESTRUCTURING CHARGES AND OTHER EXPENSES**

** **

During 2002, as a result of the termination of the preferred supplierand support agreement with Anheuser Busch, the Company reduced headcount andother operating expenses.  Accordingly,$87,000 has been charged to operations in 2002 consisting of $75,000 forseverance costs for reductions in staff and $12,000 relating to early leasetermination cost.

 

The following table provides a rollforward of theliabilities incurred in connection with the business restructuring.

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

 

During the year ended December 31, 2003,payments of  $87,000 were made foremployee separations of $75,000 and facility closings of $12,000.  There were no additional restructuringcharges incurred in 2003.

 

F-25

----

 

**15. DISCONTINUED OPERATIONS**

 

**Channels Business**

 

Asof December 31, 2001, the Company sold the assets of its Channels Business toTK Acquisition Corporation, as successor by merger to SCB Acquisitions, inexchange for a purchase price of $7,905,000 in cash, subject to a post-closingadjustment based upon fluctuations in working capital from June 30, 2001 and December31, 2001.  The post closing adjustmentwas $1,598,573.  Another adjustment tothe purchase price is the net asset value adjustment, which is the amount bywhich the book value of the net assets (defined as accounts receivable,inventory, prepaid expenses and other assets included in the purchased assetsexcluding fixed assets less the liabilities and accrued expenses assumed by TKAcquisition) has increased or decreased from June 30, 2001 to the closing ofthe Channels Business transaction of December 31, 2001.  This net asset adjustment is estimated to bea further reduction in the purchase price of $54,000,

bringingthe net purchase price after adjustments to $6,252,427 before transactioncosts.  The Company recorded $404,000 oftransaction costs associated with financial advisor fees, legal and accountingfees.

 

TheChannels Business produced $48.4 million in revenue and had a pre-tax operatingloss of $722,000 for the year ended December 31, 2001.  The sale of the Channels Business resultedin a pre-tax loss of $2,175,000, which is comprised of the difference betweenthe purchase price and the book value of the net assets and transaction feesassociated with the sale of the business. The Company wrote off the deferred tax asset of $184,000 associated withthe Channels Business.

 

TheCompany’s 2001 financial statements have been reclassified to report separatelythe results of operations for the Channels Business.  The operating results for the year ended December 31, 2001 of thediscontinued Channels Business consist of:

 
| **($In thousands)**                                |   | **Year ended****December  31,  2001** |   |
|----------------------------------------------------|--------|---------------------------------------|--------|
|                                               |   |                                  |   |
| Net sales:                                         |   | $                                     | 48,403 |   |
|                                               |   |                                  |   |
| Loss from operations before income taxes           |   | (722                                  | )      |
|                                               |   |                                  |   |
| Loss on sale of business                           |   | (2,175                                | )      |
|   (Benefit)/provision from income  taxes |   | 184                                   |   |
|                                               |   |                                  |   |
| Loss from discontinued operations                  |   | $                                     | (3,081 | ) |

 

Summary information for theChannels Business follows:

 
| **($In thousands)**  |   | **Year ended****December  31,  2001** |   |
|----------------------|--------|---------------------------------------|--------|
|                 |   |                                  |   |
| Current assets       |   | $                                     | 9,236  |   |
|                 |   |                                  |   |
| Other assets         |   | 2,569                                 |   |
|                 |   |                                  |   |
| Total assets         |   | 11,805                                |   |
| Current liabilities  |   | (781                                  | )      |
| **Total net assets** |   | $                                     | 8,024  |   |

 

F-26

----

 

**Calgraph Technology Services Business**

 

OnFebruary 6, 2002, the Company sold the assets of the Calgraph TechnologyServices Business to Graphic Enterprises of Ohio, Inc.  The effective date of the transaction wasJanuary 31, 2002.  Centiv receivedconsideration for the sale of the Calgraph assets in the amount of $1,050,000in cash plus a minimum royalty of $625,000 to be paid over a 25-month periodbeginning in May 2002.  GraphicEnterprises also assumed certain liabilities of Calgraph.  The Company realized a pre-tax gain on thesale of $586,000, which is the cash received at closing of $1,050,000 plus thepresent value of the royalty payments of $618,000 less the book value of thenet assets of $785,000 and less transaction fees associated with the sale ofthe business of $297,000.  In addition,the Company wrote off the deferred tax asset of $98,000 relating to the CalgraphTechnology Services Business.  Thepretax loss from operations for Calgraph Technology Services Business inJanuary 2002 was $108,000.

 

**16. ****CONVERTIBLESUBORDINATED DEBT**

 

On September 30, 2002, in a private offering exempt from registration,the Company issued $1 million of Senior Subordinated Convertible Notes toprivate investors.  These notes wereconvertible into equity, at the lenders’ option, upon the closing of, and atthe same terms as,

 

F-27

----

 

the next equity financing in which the Company raised at least$1,000,000.  The loan had a term thatextended until the earlier of July 1, 2004 or two business days following theclosing of an equity financing described above and bore interest at a rate of10% per year.  In addition, the lendersreceived an aggregate of 16,667 warrants granted at the closing of the loan andwere eligible to receive an aggregate of an additional 6,667 warrants per monthuntil such time as the loan was fully repaid or converted into equity.

 

The warrant was exercisable at $5.25 per share and was callable by theCompany if the market price of the Company’s common stock closed at or above$15.00 per share for 10 consecutive trading days.  The initial 16,667 warrants granted at closing were valued at$11,858 using the Black-Scholes valuation assumptions described in Footnote 14to Notes to

Financial Statements, creating an unamortized discount on the SeniorSubordinated Convertible Notes.  Theunamortized discount was amortized to interest expense over the term of the note.

 

On March 31, 2003, $500,000 of the SeniorSubordinated Convertible Debt was converted to Series B Preferred Stock and theremaining $500,000 was repaid out of the proceeds of the Series B PreferredStock financing as described above.

 

The 8,334 warrants granted on the $500,000 ofSenior Subordinated Convertible Debt, which were converted into Series BPreferred Stock, were cancelled effective March 31, 2003.  The remaining 8,334 warrants granted on the$500,000 of Senior Subordinated Debt that was repaid are still active andoutstanding.  In addition, the Companygranted 20,000 warrants on March 31, 2003 to the holders of the SeniorSubordinated Debt that were repaid representing the warrants earned for the periodOctober 1, 2002 through March 31, 2003. The additional 20,000 warrants granted as of March 31, 2003 were valuedat $2,700 using the Black-Scholes valuation method.  Since the Company had accrued $14,400 for the warrants as ofDecember

31, 2002, an adjustment to income of $11,700was recorded for the three months ended March 31, 2003.

 

**17. SUBSEQUENT EVENTS **

 

**CORPORATERESTRUCTURING AND NEW BUSINESS PLAN**

*** ***

***Acquisition of Beijing Multimedia Limited****. *On January 29, 2004, The Company announced that it hadentered into a Stock Purchase Agreement with Eagle Treasure Limited (“EagleTreasure”), a company incorporated in the British Virgin Islands, under whichCentiv acquired all of the issued capital stock of Eagle Treasure’s subsidiary,Beijing Multimedia Limited (“Beijing Multimedia”), a company incorporated inthe British Virgin Islands.  Theacquisition of Beijing Multimedia under the Stock Purchase Agreement wasapproved and ratified by the Board of Directors of the Company on January 16,2004.  On February 4, 2004, to completethe Stock Purchase Agreement with Eagle Treasure,  Centiv issued 20,250,000 unregistered shares of its $.001 parvalue common stock in the name of Eagle Treasure in exchange for the entire202,500 shares of the issued and paid up share capital of BeijingMultimedia.  Further, Centiv assumedcertain pre-existing obligations of Beijing Multimedia, including but notlimited to the issuance of certain fee shares and stock options to employees,officers, directors, and advisors of Beijing Multimedia.  As a result of the exchange of shares,Beijing Multimedia became a wholly owned subsidiary of the Company.  On February 5, 2004, the Company filed aCurrent Report on Form 8-K with the Securities and Exchange Commissiondescribing in detail the transaction with Eagle Treasure, and the acquisitionof Beijing Multimedia.

 

F-28

----

 

***Transfer Agreement***.  Prior to the acquisition of BeijingMultimedia by the Company, under a Transfer Agreement dated December 16, 2003,Beijing Multimedia acquired certain net operating profits interests (“NOPInterests”) amounting to approximately 30 percent of the joint advertisingactivities of CITIC Cultural & Sports Industry Co. Ltd., a companyorganized under the laws of the People’s Republic of China (“CITICCultural”).  Also under the TransferAgreement, the NOP interests, as determined and under terms guaranteeingcertain minimum amounts, will be paid semi-annually to Beijing Multimedia overthe term of the Transfer Agreement which is from January 1, 2004, through thelater of December 31, 2016 or the date on which CITIC Cultural’s licenseagreements with two entities terminate, in exchange for certain NOP Cash Callstotaling $50.0 million (subsequently increased to $55.0 million) which wererequired to be paid to CITIC Cultural by Beijing Multimedia on or before March31, 2004. If Beijing Multimedia cannot meet the requirement to pay the NOP CashCalls to CITIC Cultural under the terms of the Transfer Agreement or anyamendments or extensions thereto, then the NOP Interests of Beijing Multimediashall be reduced by .0017 percent for each $100,000 in NOP Cash Calls notfunded, but not below a minimum level of fifteen (15) percent of the initialNOP Interests.

 

CITIC Cultural is acompany that specializes in cultural and media businesses, and its principalbusinesses include film production and distribution, television drama andprogram production and distribution, subway and railway advertising, magazineand newspaper publication, and sports and entertainment businesses.  CITIC Cultural is an affiliate of ChinaInternational Trust & Investment Co. Ltd. and its subsidiaries(collectively, the “CITIC Group”).  TheCITIC Group is one of the largest conglomerates in Asia, with total asset valueof approximately US$70 billion at the close of fiscal 2003.

 

The TransferAgreement also provides that during the first three years of the term of theagreement, the NOP Interests shall yield in the form of cash transfers toBeijing Multimedia a minimum of $20.0 million per year provided that the fullamount of the NOP Cash Calls, as described above, is paid to CITICCultural.  In the event that the fullamount of the NOP Cash Calls is not paid to CITIC Cultural by BeijingMultimedia, then the NOP Interests payable in the form of cash transfers shallbe prorated according to the formula for reduction of NOP Interests ascontained in the Transfer Agreement, but in any event, not below a minimumlevel of fifteen (15) percent of the initial NOP Interests, or $3.0 million peryear during the first three years of the term of the Transfer Agreement.  Beijing Multimedia has also obtained anunconditional and irrevocable third party guarantee from an individual for thepayment of the cash transfers from NOP Interests for the first three yearsunder the Transfer Agreement in the event that CITIC Cultural is unable to meetits obligation.

 

Based upon an independent valuation of the NOP Interests acquired fromCITIC Cultural, the management of Beijing Multimedia has estimated that thediscounted present value of the NOP Interests (without consideration of the NOPcash calls) is between US$40.0 million and US$80 million, and such NOPInterests are expected to contribute approximately $20.0 million per year,pre-tax cash flow to the Company, on a consolidated basis, provided that thefull amount of the NOP Cash Calls is paid, and that the level of the cashtransfers from the NOP Interests continue at similar levels beyond the firstthree years of the Transfer Agreement.

 

***Amendment of theTransfer Agreement***.  The NOP Interests of Beijing Multimedia under the TransferAgreement are subject to the completion of the NOP Cash Calls which total $50.0million (subsequently increased to $55.0 million), and, as explained above,were required to be paid to CITIC Cultural on or before March 31, 2004.  As of March 31, 2004, Beijing Multimedia wasin default under the Transfer Agreement for non-payment of the NOP Cash

 

F-29

----

 

Calls, and was subject to a reduction of its NOP Interests, asexplained above.  On April 9, 2004,CITIC Cultural, Beijing Multimedia, Centiv, and Eagle Treasure entered into aSupplemental Agreement to the Transfer Agreement, wherein the parties agreed(a) to extend the date for the payment of the NOP Cash Calls from March 31,2004, to May 31, 2004; (b) to increase the amount of the NOP Cash Calls from$50.0 million to $55.0 million; (c) that Beijing Multimedia and Centiv, jointlyand severally, would pay the $55.0 million of NOP Cash Calls as follows:  on or before April 30, 2004 - $10.0 million;on or before May 16, 2004 - $15.0 million; and, on or before May 31, 2004 -$30.0 million, and (d) that the Company would complete and file its AnnualReport on Form 10-K with the Securities and Exchange Commission and do othersuch matters so as to qualify for the NASDAQ OTC:BB on or before April 16,2004.

 

The Company did not file its Annual Report on Form 10-K or qualify forthe OTC:BB on or before April 16, 2004, and, as such, was in default under theTransfer Agreement and the related Supplemental Agreement as of that date.  Effective April 16, 2004, the parties to theSupplemental Agreement entered into an amendment agreement and extended the duedate for the Company to file its Annual Report on Form 10-K and complete othersuch matters so as to qualify for the NASDAQ OTC:BB from April 16, 2004 toApril 28, 2004.

 

***Funding the NOP CashCalls***. *** ***Inconnection with the required payment of the NOP Cash Calls by BeijingMultimedia, Centiv became a party to the Supplemental Agreement to the TransferAgreement, and has agreed to fund the NOP Cash Calls.  The Company may obtain the necessary funding through a privateplacement of its shares or through a convertible debt security to be issued tothe source(s) of the funding.  On April5, 2004, in connection with the Company’s efforts to arrange the financing toallow Beijing Multimedia and the Company to make the required NOP Cash Callpayments to CITIC Cultural, an investment firm offered to establish an equityline of credit in the initial amount of $50.0 million, with draws on the lineof credit to be available to the Company immediately following Centiv’s filingof its Annual Report on Form 10-K for the period ended December 31, 2003, there-listing of its shares on the NASDAQ OTC:BB, and the completion of thenecessary documentation.  Whilemanagement of the Company believes that the investment firm is proceeding ingood faith, there can be no assurance that the proposed credit facility will beestablished, or that it will be established in time for Beijing Multimedia andCentiv to satisfy their NOP Cash Call obligations of $55.0 million under theSupplemental Agreement to the Transfer Agreement.  In this regard, management of the Company is pursuing other sourcesof equity and debt financing to enable Beijing Multimedia and Centiv to meettheir  NOP Cash Call obligations.  As of the date of this report, neither theCompany nor Beijing Multimedia had obtained any written agreements to providethe necessary funds to meet the payment obligations to CITIC Cultural describedabove.

 

The table below shows the impact of the acquisition of BeijingMultimedia on a proforma basis as of December 31, 2003.

 
| **($In thousands)**                    |   | **As  Reported  December 31, 2003** |   | **Proforma  Adjustment** | ** ** | **Proforma  December 31, 2003** | ** ** |
|----------------------------------------|--------|-------------------------------------|--------|--------------------------|------------|---------------------------------|------------|
| Current assets                         |   | $                                   | 1,547  |                     | $          | —                          |       | $ | 1,547 |   |
| Other assets                           |   | 1,018                               |   | 71,000                   |       | 72,018                          |       |
| **Total assets**                       |   | $                                   | 2,565  |                     | $          | 71,000                          |       | $ | 73,565 |   |
|                                   |   |                                |   |                     |       |                            |       |
| Current liabilities                    |   | $                                   | 1,011  |                     | $          | 55,000                          |       | $ | 56,011 |   |
| Non-current liabilities                |   | 91                                  |   | —                   |       | 91                              |       |
| **Total liabilities**                  |   | $                                   | 1,102  |                     | $          | 55,000                          |       | $ | 56,102 |   |
|                                   |   |                                |   |                     |       |                            |       |
| Total equity                           |   | $                                   | 1,463  |                     | $          | 16,000                          |       | $ | 17,463 |   |
| **Total liabilities and total equity** |   | $                                   | 2,565  |                     | $          | 71,000                          |       | $ | 73,565 |   |

 

F-30

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***Restructuring****. *Aspart of the transaction with Eagle Treasure, Centiv (a) amended and restatedits stock plan to reserve 10,000,000 new shares of common stock for futureissuance under existing and assumed stock options and for incentivecompensation to officers, directors, and professional advisors.  The Board of Directors of the Companyrenamed the 1997 Stock Option Plan, the 2004 Non-Qualified Stock Compensation Plan (the “Plan”), filed aregistration statement covering the shares in the Plan with the Securities andExchange Commission, and issued 4,800,000 shares of common stock under the Planon February 11, 2004 to officers, directors and professional advisors, (b)created a wholly owned subsidiary, Centiv Services a Nevada corporation,and transferred its current U.S. based POP signage operations into that entity,(c) changed the makeup of its Board of Directors and Executive Management team(see below), and (d) adopted a new business plan which is designed to grow theCompany as an international multimedia holding company.

 

The acquisition of Beijing Multimedia and creation of Centiv Servicesallows the Company to act as a holding company for its businessoperations.  In the future, managementintends to conduct Centiv’s operations solely through wholly owned or majorityowned operating subsidiaries. Management believes that the holding company structure will improveCentiv’s access to capital and provide additional opportunities to makeacquisitions in the multimedia, publishing, and advertising arenas.

 

Further, on January 16, 2004, the Company’s Board of Directors approveda three-for-four (3:4) reverse stock split of the Company’s common stock.  To date, the reverse stock split has notbeen effected by the Company.

 

In addition, in January 2004, the holders of the Company’s Series BPreferred stock (770,000 shares of Series B Preferred) sold to eight investors80 percent of the total outstanding Series B Preferred stock in separatecontractual arrangements which included promissory notes and security agreements.  Centiv agreed to grant a security interestin the stock of Centiv Services as collateral for the promissory notes, and asconsideration for the purchased Series B Preferred to be converted into sharesof common stock of the Company.  ByMarch 3, 2004, all outstanding shares of Series B Preferred had been convertedinto common stock of the Company (2,566,668 common shares).

 

***Management Changes***.  In December 2003, Messrs. Thomas Pennell,Daryl Splithoff and

J. Smoke Wallin resigned as Directors of the Company.  In January 2004, the holders of a majorityof the voting power of Centiv’s Series B Convertible Preferred Stock appointedMr. Patrick Ma to fill the vacancy on Centiv’s Board of Directors created by theresignation of Director Thomas Pennell.. After the election of Mr. Ma to the Board of Directors, Messrs. JohnLarkin, Tom Mason, and Len Finelli resigned as Directors.  Thevacancies on the Board of Directors were subsequently filled by Messrs. 

 

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Mak Wai Seung (Shawn), Lau Kwok Hung, and Hu Bing to bring the totalnumber of Directors to four.

 

Also, in January 2004, the Board of Directors of the Company reached anagreement in principle with Mr. Jeffrey Hall to become the Company’s new Presidentand Director, and to serve as the Chief Executive Officer and Director of athird wholly owned subsidiary of the Company, Target Publishing Group Inc.(“Target Publishing”).  In connectionwith Mr. Hall’s prospective employment with Centiv, the Company also agreed inprinciple to acquire all of the issued and outstanding capital stock ofBrentwood Media Group Inc. (“BMG”), a California corporation, which iscontrolled and majority owned by Mr. Hall. As of the date of this report, agreements regarding Mr. Hall’semployment and the acquisition of BMG have been negotiated and are in theprocess of being finalized as to certain closing conditions, but a closing ofthe purchase of BMG has not occurred. As such, Mr. Hall’s employment, due to prior commitments, will not beginuntil sometime after April 28, 2004. The Company and Mr. Hall are in agreement as to the terms and conditionsof his employment, but there remains certain outstanding matters related to theCompany’s purchase of BMG which the parties believe will be resolved prior toApril 28, 2004.

 

***New Business Plan***.  In the future, management of the Companyintends to focus its efforts on the acquisition and development of multimediabusinesses – publishing and advertising, film production and distribution,television programming, and other multimedia-related entities – all to beowned, operated and managed as wholly owned or majority owned subsidiaries ofthe Company.  Management of the Companybelieves that the holding company structure will improve Centiv’sdiversification and ability to compete, provide better access to sources ofcapital, and provide the Company with additional opportunities to makeacquisitions of mature as well as development stage businesses withoutendangering the overall financial condition of the consolidated group as awhole.

 

***Letters of Intentand Target Acquisitions***.  Since January 2004, management of the Company has been activelyengaged in the search for and identification of potential acquisitioncandidates under its new business plan, including the acquisition of BMG, asexplained above.  As of the date of thisreport, the Company has initiated negotiations with several entities foracquisition, as well as issued certain letters of intent and term sheets withcertain other entities where completion of the acquisition process is primarilycontingent upon the re-listing of the Company’s stock on the NASDAQ OTC:BB.  There can be no assurance in thenear term that the Company will be successful in completing the acquisition ofany of the entities where negotiations have or are currently being conducted.

 

***Other Matters.***  Effective February 1, 2004, the Companyentered into a consulting agreement for professional services with anindividual.  The consultant is to assistthe Company in the development, operation and expansion of its entertainmentand multimedia business activities.  Forservices, the consultant is to receive 300,000 shares of Centiv’s common stockas a retainer, 100,000 additional shares of Centiv’s common stock as fee sharesfor consulting services, and an additional amount of shares of common stockbased on the value of each transaction, as determined by the parties, closed byCentiv as a result of the consultant’s efforts or introduction.  The Company also agreed to register theretainer and fee shares with the Securities and Exchange Commission.  The retainer and fee shares were issued tothe consultant from the Company’s non-qualified Plan as part of the 4,800,000 commonshares issued on February 11, 2004, as described above.

 

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**18. SEGMENTINFORMATION**

 

In previous years, the Company had threebusiness units:  Channels, Centiv (POP),and Services.  As mentioned in Note 15above, the Channels Business was sold as of December 31, 2001 and the CalgraphTechnology Services Business was sold effective January 31, 2002.  As a result of these divestitures, theCompany currently operates as a single business unit.  All prior year results have been restated to be comparative tothe current year’s results.

 

**19. SIGNIFICANTCUSTOMERS**

 

Although no single customer accounted formore than 10% of the sales for the years ended December 31, 2002 and 2001, on acombined basis, distributors affiliated with A-B, in the aggregate, accountedfor approximately 97% and 99% of the sales, respectively.  For the year ended December 31, 2003,distributors affiliated with A-B, in the aggregate, accounted for approximately58% of our total sales and two other customers of Instant Impact each accountedfor more than 10% of total sales and combined accounted for 25% of sales.

 

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**20. RECENT ACCOUNTINGPRONOUNCEMENTS**

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No.46 (FIN No. 46), “*Consolidationof Variable Interest Entities.*” This is and interpretation of Accounting Research Bulletin No. 51, andrevises the requirements for consolidation by business enterprises of variableinterest entities.  FIN No. 46 appliesimmediately to variable interest entities created after January 31, 2003, andto variable interest entitles in which an enterprise obtains an interest afterthat date.  It applies in the firstfiscal year or interim period beginning after June 15, 2003, to variableinterest entities in which an enterprise hold a variable interest that itacquired before February 1, 2003.  FINNo. 46 applies to public enterprises as of the beginning of the applicable interimor annual period, and it applies to nonpublic enterprises as of the end of theapplicable annual period.  FIN No. 46may be applied prospectively with a cumulative-effect adjustment as of the dateon which it is first applied or by restating previously issued financialstatements for one or more years with a cumulative-effect adjustment as of thebeginning of the first year restated. In December 2003, FASB issued a revised Interpretation No. 46 (“FIN46R”), *Consolidation of Variable InterestEntities.*  FIN 46R addressesconsolidation by business enterprises of variable interest entities andsignificantly changes the consolidation application of consolidation policiesto variable interest entities and, thus improves comparability betweenenterprises engaged in similar activities when those activities are conductedthrough variable interest entities.  TheCompany is not party to any variable interest entity.  The Company does not expect that adoption of FIN No. 46 or FIN46R will have a material effect on its financial position or results of operations.

 

OnApril 30, 2003, the FASB issued FASB Statement No. 149 (“SFAS 149”), *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.*  SFAS149 amends and clarifies the guidance on (1) derivative instruments (includingderivative instruments embedded in other contracts) and (2) hedging activitiesthat fall within the scope of FASB Statement No. 133, *Accounting for Derivative Instruments and HedgingActivities.*  SFAS 149 alsoamends certain other existing pronouncements, which will result in moreconsistent reporting of contracts that are derivatives in their entirety orthat contain embedded derivatives that warrant separate accounting.  SFAS 149 is effective (1) for contractsentered into or modified after June 30, 2003, with certain exceptions, and (2)for hedging relationships designated after June 30, 2003.  The Company does not expect SFAS 149 to havean impact on its financial position or results of operations.

 

OnMay 15, 2003, the FASB issued SFAS No. 150, “*Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity*” (“SFAS 150”), which improves the accounting for certainfinancial instruments that, under previous guidance, issuers could account foras equity or “*mezzanine”*equity,by now requiring those instruments to be classified as liabilities in thestatement of financial position.  SFAS150 requires disclosure regarding the terms of those instruments and settlementalternatives.  SFAS 150 affects anentity’s classification of the following freestanding instruments:  a) mandatorily redeemable instruments, b)financial instruments to repurchase an entity’s own equity instruments, c)financial instruments embodying obligations that the issuer must or couldchoose to settle by issuing a variable number of its shares or other equityinstruments based solely on (i) a fixed monetary amount known at inception or(ii) something other than changes in its own equity instruments, d) SFAS 150does not apply to features embedded in a financial instrument that is not aderivative in its entirety. The Company does not expect that adoption of thisstatement will have any material effect on its results of operations orfinancial position.

 

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**21. CONSOLIDATEDCONDENSED QUARTERLY INFORMATION (UNAUDITED)**

 

Selectedunaudited financial information for each of the four quarters in the yearsended December 31, 2003 and 2002 are as follows ($ In thousands, except forshare data):

 
| **2003** |   | **NET  SALES** | ** ** | **GROSS  PROFIT** | ** ** | **NET INCOME  (LOSS) FROM  CONTINUING  OPERATIONS** | ** ** | **NET INCOME  (LOSS) FROM  DISCONTINUED  OPERATIONS** | ** ** | **NET  INCOME/(LOSS)  PER SHARE BASIC  AND DILUTED FROM  CONTINUING  OPERATIONS** | ** ** | **NET  INCOME/(LOSS)  PER SHARE BASIC  AND DILUTED FROM  DISCONTINUED  OPERATIONS** | ** ** | **WEIGHTED  AVERAGE SHARES  OUTSTANDING  BASIC AND  DILUTED** | ** ** |
|----------|--------|----------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|     |   |           |       |              |       |                                                |       |                                                  |       |                                                                              |       |                                                                                |       |                                                          |       |
| First    |   | $              | 4,782      |              | $          | 1,370                                               |       | $                                                     | (60        | )                                                                                 | $          | 0                                                                                   |       | $                                                             | (0.04      | ) | $ | 0.00 |   | 1,398,728 |   |
| Second   |   | 585            |       | 338               |       | (445                                                | )          | 0                                                     |       | (0.27                                                                             | )          | 0.00                                                                                |       | 1,670,718                                                     |       |
| Third    |   | 524            |       | 280               |       | (644                                                | )          | 0                                                     |       | (0.38                                                                             | )          | 0.00                                                                                |       | 1,677,435                                                     |       |
| Fourth   |   | 375            |       | 205               |       | (1,282                                              | )          | 0                                                     |       | (0.76                                                                             | )          | 0.00                                                                                |       | 1,677,815                                                     |       |
|     |   |           |       |              |       |                                                |       |                                                  |       |                                                                              |       |                                                                                |       |                                                          |       |
| Total    |   | $              | 6,266      |              | $          | 2,193                                               |       | $                                                     | (2,431     | )                                                                                 | $          | 0                                                                                   |       | $                                                             | (1.51      | ) | $ | 0.00 |   | 1,607,134 |   |
|     |   |           |       |              |       |                                                |       |                                                  |       |                                                                              |       |                                                                                |       |                                                          |       |
| 2002     |   |           |       |              |       |                                                |       |                                                  |       |                                                                              |       |                                                                                |       |                                                          |       |
|     |   |           |       |              |       |                                                |       |                                                  |       |                                                                              |       |                                                                                |       |                                                          |       |
| First    |   | $              | 3,807      |              | $          | 958                                                 |       | $                                                     | (67        | )                                                                                 | $          | 380                                                                                 |       | $                                                             | (0.53      | ) | $ | 0.23 |   | 1,652,227 |   |
| Second   |   | 3,501          |       | 962               |       | (338                                                | )          | 0                                                     |       | (0.20                                                                             | )          | 0.00                                                                                |       | 1,653,930                                                     |       |
| Third    |   | 4,769          |       | 990               |       | (508                                                | )          | 0                                                     |       | (0.31                                                                             | )          | 0.00                                                                                |       | 1,660,805                                                     |       |
| Fourth   |   | 13,431         |       | 1,636             |       | (2,025                                              | )          | 0                                                     |       | (1.29                                                                             | )          | 0.00                                                                                |       | 1,559,468                                                     |       |
|     |   |           |       |              |       |                                                |       |                                                  |       |                                                                              |       |                                                                                |       |                                                          |       |
| Total    |   | $              | 25,508     |              | $          | 4,546                                               |       | $                                                     | (2,938     | )                                                                                 | $          | 380                                                                                 |       | $                                                             | (2.29.     | ) | $ | 0.23 |   | 1,631,433 |   |

 

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**SCHEDULE II - VALUATION AND QUALIFYINGACCOUNTS**

 

** **
| **($in thousands)**             |   | **BALANCE AT  BEGINNING  OF YEAR** |    | **CHARGED TO  COSTS AND  EXPENSES** |   | **DEDUCTIONS  AND  RECLASSIFICATIONS** |   | **BALANCE  AT END  OF YEAR** |    |
|---------------------------------|--------|------------------------------------|---------|-------------------------------------|--------|----------------------------------------|--------|------------------------------|---------|
|                            |
| **DESCRIPTION**                 |
|                            |   |                               |    |                                |   |                                   |   |                         |    |
| 2003                            |   |                               |    |                                |   |                                   |   |                         |    |
| Allowance for doubtful accounts |   | $                                  | 19,409  |                                | $      | 10,000                                 |   | $                            | (4,379  | ) | $ | 25,030 |   |
| Inventory reserves              |   | $                                  | 114,715 |                                | $      | (35,000                                | )      | $                            | (47,436 | ) | $ | 32,279 |   |
|                            |   |                               |    |                                |   |                                   |   |                         |    |
| 2002                            |   |                               |    |                                |   |                                   |   |                         |    |
| Allowance for doubtful accounts |   | $                                  | 42,546  |                                | $      | (2,000                                 | )      | $                            | (21,137 | ) | $ | 19,409 |   |
| Inventory reserves              |   | $                                  | 134,440 |                                | $      | 77,677                                 |   | $                            | (97,402 | ) | $ | 114,715 |   |
|                            |   |                               |    |                                |   |                                   |   |                         |    |
| 2001                            |   |                               |    |                                |   |                                   |   |                         |    |
| Allowance for doubtful accounts |   | $                                  | 50,000  |                                | $      | 33,000                                 |   | $                            | (40,454 | ) | $ | 42,546 |   |
| Inventory reserves              |   | $                                  | 0       |                                | $      | 134,440                                |   | $                            | 0       |   | $ | 134,440 |   |

 

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| **Officers  and Directors**                       |   | **Corporate Information**                   |   |
|---------------------------------------------------|--------|---------------------------------------------|--------|
|                                              |   |                                        |   |
| **Mak Wai Keung, Shawn**                          |   | ***Corporate Office***                      |   |
| Chief Executive Officer, President, and  Director |   | P.O. Box 113                                |   |
|                                              |   | Palos Verdes Estates, CA 90274              |   |
| **Lau Kwok Hung**                                 |   | Phone:   (949) 717-0626                |   |
| Chief Financial Officer and Director              |   | Fax:   (949) 253-5717                  |   |
|                                              |   |                                        |   |
| **Patrick Ma**                                    |   | ***Registrar and Transfer  Agent***         |   |
| Director                                          |   | American Stock Transfer & Trust Company |   |
|                                              |   | 40 Wall Street                              |   |
| **Hu Bing**                                       |   | 46th Floor                                  |   |
| Director                                          |   | New York, NY 10005                          |   |
|                                              |   |                                        |   |
| **Tsai Wai Fong, Candy**                          |   | ***Independent  Auditors***                 |   |
| Secretary                                         |   | Davis Accounting Group P.C.                 |   |
|                                              |   | 337 South Main Street                       |   |
| **Jon L. Lawver**                                 |   | Suite120                                    |   |
| Assistant Secretary                               |   | Cedar City, UT 84720                        |   |
|                                              |   |                                        |   |
|                                              |   | ***General Counsel***                       |   |
|                                              |   | Weed & Co.                              |   |
|                                              |   | 4695 MacArthur Court                        |   |
|                                              |   | Suite 1430                                  |   |
|                                              |   | Newport Beach, CA  92660               |   |

 

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