**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 fiscal year  ended December 31, 2002**                                                                                                                                                       |
|                               |   |                                                                                                                                                                                                   |
|                               |   | **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) |
|                                                                                             |   |                                  |
| **998 Forest Edge Drive, Vernon Hills, Illinois 60061**                                          |
| **(Address  of Principal Executive Offices, including Zip Code)**                                |
|                                                                                             |   |                                  |
| **(847) 876-8300**                                                                               |
| (Registrant’s  telephone number, including area code)                                       |
|                                                                                             |   |                                  |
| Securities Registered Pursuant to Section 12(b) of the Act:                                      |
| **None**                                                                                         |
|                                                                                             |   |                                  |
| Securities Registered Pursuant to Section 12(g) of the Act:                                      |
| **Class  A Common Stock, $.001 par value**                                                       |
| **and**                                                                                          |
| **Warrants  to purchase Class A Common Stock, at exercise prices between  $1.00 and $1.75** |
| (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: ý   No: o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10K.  ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).  Yes  o  No  ý.

 

As of June 28, 2002 (thelast business day of the most recently completed second fiscal quarter), theaggregate market value of voting and non-voting stock held by non-affiliates ofthe registrant was approximately $4,814,797 (based upon the last reported salesprice of the Common Stock as reported by the Nasdaq SmallCap Market).  Shares of Common Stock held by each executiveofficer, director, and shareholders with beneficial ownership of greater than10% of the outstanding Common Stock of the registrant and persons or entitiesknown to the registrant to be affiliates of the foregoing have been excluded inthat such persons may be deemed to be affiliates. This assumption regardingaffiliate status is not necessarily a conclusive determination for otherpurposes.

 

The number of shares ofClass A Common Stock outstanding (excluding treasury shares of 806,983) as ofMarch 31, 2003 was 4,997,035.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of theregistrant’s Definitive Proxy statement for the 2003 Annual Meeting ofStockholders of Centiv,  Inc. areincorporated by reference into Part III of this Report.

 

 

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**CENTIV,INC.**

**TABLE OFCONTENTS**

 
| **ITEM**                                                                                        |   |
|-------------------------------------------------------------------------------------------------|--------|
| **PART I**                                                                                      |   |
|                                                                                            |   |
| 1. Business                                                                                     | 3      |
|                                                                                            |   |
| 2.  Properties                                                                                  | 6      |
|                                                                                            |   |
| 3. Legal Proceedings                                                                            | 6      |
|                                                                                            |   |
| 4.  Submission of Matters to a Vote of Security Holders                                         | 7      |
|                                                                                            |   |
| **PART II**                                                                                     |   |
|                                                                                            |   |
| 5.  Market for the Company’s Common Equity and Related Stockholder Matters                 | 7      |
|                                                                                            |   |
| 6. Selected Financial  Data                                                                     | 12     |
|                                                                                            |   |
| 7.  Management’s Discussion and Analysis of Results of Operations and Financial  Condition | 13     |
|                                                                                            |   |
| 7A.  Quantitative and Qualitative Disclosures About Market Risks                                | 31     |
|                                                                                            |   |
| 8.  Financial Statements and Supplementary Data                                                 | 31     |
|                                                                                            |   |
| 9.  Changes in and Disagreements with Accountants on Accounting and Financial  Disclosure       | 31     |
|                                                                                            |   |
| **PART III**                                                                                    |   |
|                                                                                            |   |
| 10.  Directors and Executive Officers of the Company                                            | 31     |
|                                                                                            |   |
| 11. Executive  Compensation                                                                     | 31     |
|                                                                                            |   |
| 12.  Security Ownership of Certain Beneficial Owners and Management                             | 32     |
|                                                                                            |   |
| 13.  Certain Relationships and Related Transactions                                             | 32     |
|                                                                                            |   |
| 14. Controls and  Procedures                                                                    | 32     |
|                                                                                            |   |
| **PART IV**                                                                                     |   |
|                                                                                            |   |
| 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K                           | 32     |
|                                                                                            |   |
|  Signatures                                                                                | 36     |

 

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**ITEM1.  BUSINESS.**

 

**Overview/History**

 

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

 

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 serviceoperations included field service technicians, customer support call center,component repair 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 the value-added wholesale distribution ofcomputer graphics technologies throughout North America. The Company sold thisbusiness effective December 31, 2001 and it is reflected as *DiscontinuedOperations* in the Summary of Selected Financial Information andSelected Financial Information.

 

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

 

**Strategy**

 

The Company’s strategy is to offer web services for consumer brandcompanies to manage their in-store and on-premise point-of-purchase (POP)process.  These services allow a useraccess to an information database for selecting sign templates approved orcreated by manufacturers, input data for the sign templates and select signageproducts for production.  The finalproduct is print quality digitally produced signage that is mass customized forthe unique requirements of each retail location.  Using

 

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Internet technology as the access medium, the Company offers thesecustomers on-demand, mass customized digitally produced POP signs andadvertising materials for use in in-store or on-premise marketing.  The Company believes its products result infaster, more effective POP campaigns and allow customers to enhance their brandimage while maintaining control over the use and integrity of that brand image.

 

**The Company’s Divisions and Products**

 

By 2001, we began tofocus on and dedicate our resources to our Centiv POP Business.  We sold our Channels Business effectiveDecember 31, 2001, and we sold our CalGraph Business effective January 31,2002.

 

Weare 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 printingmethods and distributed to retail stores.

 

Recent advances inweb-based technology and digital printing hardware  have created a new market for customized POP signage usingdisplay graphics printers, software and media. These technologies will allow retailers and wholesalers to quickly andeasily create, print and display retail signs that are more responsive to theirneeds in full color with photo-realistic quality.

 

During 1998, as part ofits key strategic objectives, the Company was engaged by Anheuser-Busch todesign, implement, and support a customized POP sign-making system, whichallows Anheuser-Busch distributors to make POP signs quickly and without theuse of highly trained, dedicated personnel. The Company provided product research and development, training,installation, and technical support for the beverage manufacturers’ distributors.The Company also provided outsource fulfillment of inks and media used in thesign-making process.  As of March 31,2003, this activity will be eliminated as Anheuser-Busch (A-B) has informed theCompany that they do not intend to renew our preferred supplier technicalsupport agreement.  While Centiv valuedits relationship with Anheuser Busch, the contract did not include the InstantImpact web-based process for POP design and delivery.  The Anheuser-Busch relationship was part of the legacy businessmodel as a wholesaler of digital printing hardware and provider of consumableprinting materials. The A-B relationship had never involved the use of InstantImpactä.

 

In assessing the A-Brelationship, no single customer accounted for more than 10% of the sales forthe years ended December 31, 2002 and 2001. On a combined basis, however, distributors affiliated withAnheuser-Busch accounted for approximately 97% and 99% of the sales for theyears ended December 31, 2002 and 2001, respectively.  For the year ended December 31, 2000, Anheuser-Busch accountedfor 97% of net sales.   Internationalsales were insignificant for the years ended December 31, 2002, 2001 and 2000.

 

**Products and Markets**

 

Beginning in 2003,Centiv’s business model is exclusively focused on the web-based solution InstantImpactä which uses anonline, Internet-based interface that allows customers to create and ordercustomized digital promotions using a standard Web browser and manufacturercreated or approved

 

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templates.  Customers have the option of having theirsigns printed at a central print facility owned and operated by Centiv, or theymay print locally at various print devices connected to their local computer.  Our Internet-based solution provides aclosed-loop information feedback that allows corporate customers to use thisinformation to measure the effectiveness of their retail campaigns andpromotions at the regional or national level.

 

Our Internet-basedon-demand POP approach offers traditional retailer marketers an entirely newway to individually customize various forms of signage used in the retailenvironment.  Our solution allowsclients to increase their brand awareness, closely control and monitor theirbrand image and digital assets and project a consistent message nationallywhile allowing local customization.

 

Our solution helpscustomers gain market share and increase sales.  Additionally, this technology provides quicker turnarounds thatenable clients and merchants to preview signage on-line and either print attheir location or have them delivered within two business days.  This system allows clients to launch newpromotions rapidly and better react to changing consumer trends.

 

We intend to pursuecross-marketing and co-marketing agreements with companies that serve retailand manufacturing sector as well as potential opportunities to license ourInternet technology and print center services.

 

**Backlog**

 

The Company does not havesignificant backlog as we are 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 quartermay not represent a significant percentage of the products to be sold in thatquarter.   Therefore, management doesnot consider order backlog a significant indicator of the Company’s futurerevenues.

 

**Competition**

 

Currently, there is nocompany that offers the complete solution that Centiv provides. The process ofobtaining custom POP signage is highly fragmented and inefficient. There areseveral large public companies, which provide a wide variety of  in-store marketing solutions, but none ofthese companies have chosen to enter the POP sector as defined by Centiv and asa result do not compete directly with Centiv’s solution. These companiesinclude Catalina Marketing Corp. (NYSE: POS), Insignia Systems, Inc. (Nasdaq:ISIG) and Valassis Communications, Inc. (NYSE: VCI). There are also numerousindependent and franchised signage providers and traditional commercialprinters, including Fastsigns International, Inc. and Kinko’s, Inc.

 

The competition isfurther fragmented by specialized value added resellers of these variousservices. Although we are not aware of anysimilar technology to our Instant Impact system or competitors offering acomparable range of products and services, there are direct competitorsoffering certain customary products and services and there are potentialcompetitors currently focusing on other segments of the POP market.  Specifically, in the turn-key field deployedPOP print systems, the principal competition potentially comes from highlyspecialized Value Added Resellers.

 

**Intellectual Property**

 

OnMarch 21, 2001, we filed a patent application with the United StatesPatent and Trademark Office relating to our sign creation and deliverymanagement system for creating POP signage. In addition, we filed an internationalpatent application for the same invention to protect patent rights in foreigncountries.  We will market and sell thissystem, which allows a user access to an information database for

 

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selectingsign templates, inputting data for the sign templates and selecting signageproducts for production of the sign templates. The user can then order thecreated sign templates having data input and selected signage products fordelivery to the user.

 

We seek to protect ourtrade secrets and proprietary know-how, in part, by confidentiality agreementswith employees, consultants, advisors and others.  There can be no assurance that such employees, consultants, advisorsor others will maintain the confidentiality of such trade secrets orproprietary information, or that the trade secrets or proprietary know-how ofthe Company will not otherwise become known or be independently developed bycompetitors in such a manner that we will have no practical recourse.

 

**Product Research and MarketDevelopment**

 

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 toexisting products on a cost-effective and timely basis.

 

If we are unable fortechnological 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, 2002 wehad 45 full-time employees.  With theelimination the Anheuser Busch business, we will have 24 full-timeemployees.  Our employees are notrepresented by a labor union and we believe that relations with employees aresatisfactory.

 

**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               |   |                             |       |                 |       |              |       |   |
| (Corporate  Headquarters)             |   | 20,000                           |       | 5/31/08              |       | $                 | 14,832     |   |
|                                  |   |                             |       |                 |       |              |       |
| 750  Forest Edge Drive                |   |                             |       |                 |       |              |       |   |
| Vernon  Hills, Illinois               |   |                             |       |                 |       |              |       |   |
| (Sales  and Technical Support Office) |   | 3,400                            |       | 4/15/03              |       | $                 | 6,000      |   |

 

**ITEM3.  LEGAL PROCEEDINGS.**

 

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.

 

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

 

None

 

**PART II**

** **

**ITEM5.  MARKET PRICE OF AND DIVIDENDS ON THECOMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

 

**Public Market for Common Stock**

 

The Company’s commonstock is quoted on the Nasdaq SmallCap Market under the symbol “CNTV.”  The following table sets forth, for theperiods indicated, the high and low closing prices per share of the commonstock as reported on the Nasdaq SmallCap Market.  As of March 31, 2003, the closing price of the Company’s commonstock on the Nasdaq SmallCap Market was $0.40.

 
| **2001**     |   | **High** |   | **Low** |   |
|--------------|--------|----------|--------|---------|--------|
|         |   |     |   |    |   |
| 1st  Quarter |   | $        | .99    |    | $      | .38 |   |
| 2nd  Quarter |   | 1.30     |   | .38     |   |
| 3rd  Quarter |   | 1.70     |   | .80     |   |
| 4th  Quarter |   | 1.40     |   | .81     |   |
|              |        |          |        |         |        |  |  |

 
| **2002**     |   | **High** |   | **Low** |   |
|--------------|--------|----------|--------|---------|--------|
|         |   |     |   |    |   |
| 1st  Quarter |   | $        | 1.30   |    | $      | .60 |   |
| 2nd  Quarter |   | 1.62     |   | .75     |   |
| 3rd  Quarter |   | 1.25     |   | .85     |   |
| 4th  Quarter |   | 1.18     |   | .20     |   |
|              |        |          |        |         |        |  |  |

 

**Holders**

 

As of February 28, 2003,there were approximately 47 holders of record and 798 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 ofResults of Operations and Financial Condition—Liquidity and Capital Resources.”

 

In addition, the Companymay not pay any cash dividends on its common stock unless it has paid dividendson all outstanding shares of its Series B Preferred Stock, which shares wereissued in a private placement transaction on March 31, 2003.  Unless previously converted, dividends onthe

 

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outstanding preferredstock will begin to accrue on April 1, 2004 at an annual rate equal to 8% of thepurchase price of the Series B Preferred.

 

**Recent Issuances of UnregisteredSecurities**

 

Series B Convertible Preferred Stock: 

 

On March 31, 2003, theCompany sold, in a private placement exempt from registration, 500,000 units, each consisting of one share of Series BConvertible Preferred Stock (the “Series B Preferred”) and one warrant topurchase two shares of Common Stock (the “Warrant”), which amounted to 20%warrant coverage.  As part of theprivate placement, the holders of $500,000 of the outstanding ConvertibleSubordinated Debt converted into Series B Preferred on the same terms.  The remaining $500,000 was repaid in fullfrom proceeds of this offering.  Inaddition, the Company issued an additional 270,000 shares of Series B Preferredin conversion of 135,000 of its outstanding Series A Convertible PreferredStock (the “Series A Preferred”). No Warrants were issued in connectionwith the shares of Series B Preferred issued in exchange for the Series APreferred.  In addition, the warrants topurchase Series A Preferred held by the Series A Preferred investors werecancelled with no value in connection with the conversion.  Theremaining 81,000 outstanding shares of Series A Preferred was converted onMarch 31, 2003 into 810,000 shares of common stock in accordance with the termsof the Series A Preferred certificate of designations.

 

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

 

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

 

Asstated, the Series B Preferred is initially convertible into 10 shares ofCommon Stock for each share of the Series B Preferred.  This conversion ratio, however, is subjectto anti-dilution adjustment if the Company issues any capital stock (orsecurities exercisable for or convertible into capital stock) for a per shareprice less than the then current conversion price of $0.50 per share, exceptfor issuances pursuant to the Company’s stock option plan and certain otherissuances to business partners.  Theanti-dilution adjustment will be made on a full-ratchet basis.  The price anti-dilution protection will notapply until the Company’s stockholders ratify the authorization of the Series BPreferred.

 

Thepurchasers of the Series B Preferred may voluntarily convert the Series BPreferred at any time.  The Series BPreferred will be automatically converted if (i) the Company meets eitherConversion Milestone defined below, or (ii) holders of 2/3 of the outstandingshares of the Series B Preferred agree to convert.  In either event, however, an automatic conversion will only occurif a registration

 

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statementcovering the resale of the shares issuable upon conversion is in effect at thattime. “Conversion Milestone” shall mean either (a) the Company’s pretaxearnings from ongoing operations are equal to or greater than $6 million in theaggregate in any four consecutive fiscal quarters******as determined in accordance with UnitedStates Generally Accepted Accounting Principles (“GAAP”) as applied by theCompany on the date when the Series B Preferred was first issued and theclosing trading price of the Company’s Common Stock is equal to or greater than$2.00 per share (as adjusted for any stock dividends, combinations or splitswith respect to such shares after the filing date hereof) for ten consecutiveTrading Days (as defined below), or (b) the closing of a “firm commitment”underwritten public offering of Common Stock in which the public offering priceper share of Common Stock is at least equal to 3 times the then-applicableconversion price for the Series B Preferred and which offering results in grossproceeds to the Company of not less than $15 million.  “Trading Day” shall mean a business day on which at least 50,000shares of Common Stock are traded on the principal United States securitiesexchange or automated quotation system on which such security is listed ortraded.

 

TheCompany agreed to file a registration statement By April 30, 2003 on Form S-3(or Form S-1 if Form S-3 is unavailable) to cover the resale of the shares ofCommon Stock issuable upon conversion of the Series B Preferred and the sharesof Common Stock issuable upon exercise of the Warrants.  The Company also agreed to use its bestefforts to have the registration statement declared effective and 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. In addition, the Company granted thepurchasers of the Series B Preferred piggy-back registration rights on anyother registration 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.

 

If the Company fails tofile a resale registration statement with the SEC within 30 days of theclosing, fails to have the registration statement declared effective within 90days of the closing or thereafter fails to maintain the effectiveness orcurrency of the registration statement (except during a Blackout Period), thenthe Company will compensate the purchasers of the Series B Preferred for thedelay in an amount equal to 1% of the purchase price paid by such purchasersfor each month of delay (pro-rated to the day).  This compensation may, at the option of the Company, be issued inshares of Common Stock at the then fair market value. This compensation will bethe exclusive remedy for the purchasers of the Series B Preferred for theCompany’s failure to obtain or maintain the effectiveness of any particularregistration statement after exercising its best efforts.

 

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 determine 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 issue 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 any 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 included cash proceeds of $2,000,000 plus the conversion of$500,000 of the Company’s Senior Convertible Subordinated Debt that was issuedon September 28, 2002.  The remainingSenior Convertible Subordinated Debt of $500,000 was repaid out of the proceedsof this financing and as of March 31, 2003 the Company is debt free.  Aggregatetransaction costs of $90,000

 

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representinglegal, accounting and registration fees were incurred bringing the netproceeds, after  repaying theSubordinated Debt and transaction costs, to $1,410,000.

 

Senior SubordinatedConvertible Debt:

 

On September 30, 2002,the Company issued $1 million of Senior Subordinated Convertible Notes tocertain existing investors in the Company in a private offering.  These notes are convertible into equity, atthe lenders’ option upon the closing of, and on the same terms as, the next equityfinancing in which the Company raises at least $1,000,000.  The loan has a term that extends until theearlier of July 1, 2004 or two business days following the closing of an equityfinancing described above and pays interest at a rate of 10% per year.  In addition, the lenders received anaggregate of 50,000 warrants granted at the closing of the loan and willreceive an aggregate of an additional 20,000 warrants per month until such timeas the loan is fully repaid or converted into equity.   The warrant is exercisable at $1.75 per share and is callable bythe Company if the market price of the Company’s common stock closes at orabove $5.00 per share for 10 consecutive trading days.  The initial 50,000 warrants granted atclosing were valued at $11,858 using the Black-Scholes valuation methodcreating an unamortized discount on the Senior Subordinated ConvertibleNotes.  The unamortized discount will beamortized to interest expense over the term of the note.  As of December 31, 2002, we have accrued anadditional 60,000 warrants to cover the three months of October, November andDecember.  Using the Black-Scholesvaluation method, the additional warrants were valued at $14,400 and recordedas interest expense.

 

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

 

The 25,000 warrantsgranted on the $500,000 of Senior Subordinated Convertible Debt, which wereconverted into Series B Preferred Stock, were cancelled effective March 31,2003.  The remaining 25,000 warrantsgranted on the $500,000 of Senior Subordinated Debt that was repaid are stillactive and outstanding.  In addition,the Company granted 60,000 warrants on March 31, 2003 to the holders of theSenior Subordinated Debt that were repaid representing the warrants earned forthe period October 1, 2002 through March 31, 2003.

 

Other Warrants Issued:

 

On July 3, 2001, theCompany issued warrants to purchase of up to 60,000 shares of common stock toPiedmont Consulting, Inc. (“Piedmont”) under the terms of a ConsultingAgreement.  The warrants are exercisableat $1.15 per share and expire in two years. The Company agreed to grant Piedmont certain rights for the registrationunder the Securities Act of 1933, as amended, of these shares.

 

On October 12, 2001, theCompany issued warrants to purchase up to 12,000 shares of common stock toSelling Dynamics, L.L.C. in partial payment for consulting services.  The warrants are exercisable at $1.00 pershare and expire in 2 years.

 

On November 11, 2002, theCompany issued warrants to purchase up to 47,250 shares of common stock toSatterfield & Associates in partial payment for recruiting services inconnection with the hiring of John Larkin, Centiv’s newly hired President andChief Executive Officer.  The warrantsare exercisable at $1.00 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 the warrantsissued were exempt from registration under the Securities Act of 1933, asamended, by virtue of Section 4(2) thereof, no public sale having beeninvolved.

 

10

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Securities Authorized forIssuance Under Equity Compensation Plan:

 

As of December 31, 2002,the Company maintains a 1997 Stock Option Plan covering 1,500,000 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 shareholders.

 

Pursuant to the offermade to John Larkin as President and Chief Operation Officer of Centiv,1,423,000 options were granted on October 28, 2002 outside of the Stock OptionPlan.  The vesting period of the optionsinclude 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 shareholders as it was part of anemployment offer to hire.

 

Below is a tablesummarizing the securities authorized for issuance under equity compensationplans as of December 31, 2002:

 
| **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     |   | 1,105,462                                                   |   | $1.06                                                          |   | 357,038                                                    |   |
| Not  Previously Approved Plans |   | 1,423,000                                                   |   | $1.00                                                          |   | 0                                                          |   |
| Total                          |   | 2,528,462                                                   |   | $1.02                                                          |   | 357,038                                                    |   |

 

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**ITEM 6.  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, 2002 presentation.

 
|                                                        |   | **Years  Ended December 31,**              |   |
|-------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                        |   | **2002**                                   |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                        |   | **(in  thousands, except per share data)** |   |
| Statement  of Operations Data:                              |   |                                       |   |   |   |   |   |   |   |   |   |
| Net  Sales                                                  |   | $                                          | 25,508 |   | $ | 12,432 |   | $ | 15,242 |   | $ | 16,922 |   | $ | 8,134 |   |
| Cost  of goods sold                                         |   | 20,962                                     |   | 9,982 |   | 12,749 |   | 12,271 |   | 5,941 |   |
| Gross  profit                                               |   | 4,546                                      |   | 2,450 |   | 2,493 |   | 4,651 |   | 2,193 |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Operating  expenses:                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Selling,  general and Administrative                        |   | 5,390                                      |   | 4,309 |   | 3,872 |   | 2,255 |   | 1,199 |   |
| Depreciation                                                |   | 570                                        |   | 313 |   | 100 |   | 88 |   | 50 |   |
| Restructuring  charges                                      |   | 87                                         |   | — |   | — |   | 445 |   | — |   |
| Operating  income (loss)                                    |   | (1,501                                     | )      | (2,172 | ) | (1,479 | ) | 1,863 |   | 944 |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Loss  on repurchase of stock                                |   | 1,492                                      |   | — |   | — |   | — |   | — |   |
| Interest  expense (income)                                  |   | (104                                       | )      | 872 |   | 375 |   | 157 |   | 37 |   |
| Income  (loss) before taxes                                 |   | (2,889                                     | )      | (3,044 | ) | (1,854 | ) | 1,706 |   | 907 |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Provision  (benefit) for income taxes                       |   | 49                                         |   | 787 |   | (609 | ) | 731 |   | 380 |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Income/(Loss)  from continuing operations                   |   | (2,938                                     | )      | (3,831 | ) | (1,245 | ) | 975 |   | 527 |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Gain/(loss)  from discontinued operations, net of tax       |   | 380                                        |   | (3,068 | ) | (1,089 | ) | (8,093 | ) | (436 | ) |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Net  income (loss)                                          |   | $                                          | (2,558 | ) | $ | (6,899 | ) | $ | (2,334 | ) | $ | (7,118 | ) | $ | 91 |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Effect  of beneficial conversion feature of preferred stock |   | (810                                       | )      | — |   | — |   | — |   | — |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Net  loss attributable to common stockholders               |   | $                                          | (3,368 | ) | $ | (6,899 | ) | $ | (2,334 | ) | $ | (7,118 | ) | $ | 91 |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Basic  and diluted weighted average shares outstanding      |   | 4,894,152                                  |   | 4,976,024 |   | 6,130,366 |   | 6,161,664 |   | 5,889,459 |   |
|                                                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Basic  and diluted loss applicable to common shares:        |   |                                       |   |   |   |   |   |   |   |   |   |
| Continuing  operations                                      |   | $                                          | (0.77  | ) | $ | (0.77 | ) | $ | (0.20 | ) | $ | 0.16 |   | $ | 0.09 |   |
| Discontinued  operations                                    |   | 0.08                                       |   | (0.62 | ) | (0.18 | ) | (1.32 | ) | (0.07 | ) |
| Net  income (loss)                                          |   | $                                          | (0.69  | ) | $ | (1.39 | ) | $ | (0.38 | ) | $ | (1.16 | ) | $ | 0.02 |   |

 

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|                                 |   | **Years  Ended December 31,** |   |
|--------------------------------------|--------|-------------------------------|--------|
|                                 |   | **2002**                      |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                 |   | **(in  thousands)**           |   |
| Balance  Sheet Data:                 |   |                          |   |   |   |   |   |   |   |   |   |
| Working  capital (deficit)           |   | $                             | 783    |   | $ | (2,201 | ) | $ | 2,461 |   | $ | 9,289 |   | $ | 11,821 |   |
| Net  assets, discontinued operations |   | 0                             |   | 906 |   | 16,031 |   | 14,665 |   | 16,917 |   |
| Total  assets                        |   | 6,388                         |   | 9,144 |   | 35,270 |   | 37,340 |   | 37,156 |   |
|                                 |   |                          |   |   |   |   |   |   |   |   |   |
| Total  debt                          |   | 990                           |   | 795 |   | 12,847 |   | 4,264 |   | 720 |   |
| Shareholders’  equity           |   |                          |   |   |   |   |   |   |   |   |   |
| Due  from stockholders               |   | (267                          | )      | (2,366 | ) | (1,941 | ) | (1,780 | ) | (608 | ) |
| Paid-in  capital                     |   | 21,755                        |   | 19,623 |   | 19,526 |   | 22,563 |   | 22,563 |   |
| Accumulated  deficit                 |   | (20,013                       | )      | (16,645 | ) | (9,746 | ) | (7,412 | ) | (293 | ) |
| Total  stockholders’ equity     |   | $                             | 1,475  |   | $ | 612 |   | $ | 7,839 |   | $ | 13,371 |   | $ | 21,662 |   |

 

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.**

 

The following discussionshould be read in conjunction with the information contained in theConsolidated Financial Statements, including the related notes.

 

**Overview**

 

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

 

Theroots of Centiv’s introduction to the custom POP segment were formed in 1998when we partnered with Anheuser-Busch (A-B) to design, configure, deliver andimplement a proprietary A-B POP signage system in over 730 A-B wholesaledistributors in the United States and 16 foreign countries. This led to arelationship with Anheuser-Busch pursuant to which we have installed a POPsystem for A-B allowing distributors to access that system to create customsignage using templates created by A-B. In addition, as part of our agreement, Centiv maintained rights tosupply consumable print materials to these distributors supported by anin-house call center service. As a result of our exposure to the custom signagebusiness Centiv invested in the development of a web- based platform for thecollaborative versioning of POP signage. Beginning in 2001, Centiv began the commercialization of InstantImpact.   In December 2002, A-B notifiedCentiv that upon its expiration on March 31, 2003, Centiv will no longer be thepreferred supplier for various

 

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consumablesof the system and our preferred supplier technical support agreement will notbe renewed.  Our activities with A-B andits distributors will terminate upon the expiration of the agreement.

 

Salesto A-B and its wholesale distributor network were $24.9 million during2002.  With the termination of thepreferred supplier and support agreement effective March 31, 2003, we expectthat the sales to A-B and the wholesale distributor network will declinesubstantially during 2003 and be fully eliminated after March 31, 2003.  We do not believe that sales from ourInstant Impact product will be sufficient to replace the sales lost from A-Band its wholesale distributor network during 2003.  In response to this, we have undertaken a downsizing of our operationsand have reduced our headcount and other operating expenses to a level that webelieve will enable us to continue to operate our business.  Although there can be no assurance that wewill be able to offset this loss of revenue sufficiently by cutting expenses orincreasing revenue from other sources, we believe the actions taken, along withcapital raised with the sale of the Series B Preferred Stock, will provideadequate financing through at least the end of April 2004.

 

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

 

Although no singlecustomer accounted for more than 10% of the sales for the years ended December31, 2002 and 2001, on a combined basis, however, distributors affiliated withAnheuser-Busch accounted for approximately 97% and 99% of the sales.  For the year ended December 31, 2000,Anheuser-Busch accounted for 97% of net sales.   International sales were insignificant for the years endedDecember 31, 2002, 2001 and 2000.

 

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

 

•***CalGraph Business***:Formerly a wholly owned subsidiary of the Company, CalGraph 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,component repair 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 the value-added wholesale distribution ofcomputer graphics technologies throughout North America. The Company sold thisbusiness effective December 31, 2001 and it is reflected as *DiscontinuedOperations* in the Summary of Selected Financial Information andSelected Financial Information.

 

•***Technology******SystemsBusiness***:  Prior todivestiture by the Company, the Technology Systems Division designed, assembledand sold  custom or “made-to-order”premium services or workstations and related technology to value addedresellers, vertical market computer resellers, corporations, universities andgovernment agencies.  The Company soldthe business effective October 31, 2000 and it is reflected as *DiscontinuedOperations* in the Summary of Selected Financial Information andSelected Financial Information.

 

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**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 ouroperating expense is relatively fixed. Since we do not obtain long-term purchase orders or commitments from ourcustomers, we must anticipate the future volume of orders based upon historicalpurchasing practices.  Cancellations,reductions or delays in orders by a customer or group of customers could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

Selling, general andadministrative (SG&A) expenses include costs for sales representatives,marketing and advertising of our 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 Sub Debt , offset by interest income associatedwith loans to shareholders.

 

In previous years, weoperated four business units:  Channels,Centiv POP, CalGraph and Technology Systems. As discussed above, the Technology Systems Business was sold as ofOctober 31, 2000, the Channels Business was sold as of December 31, 2001 andthe CalGraph Business was sold effective January 31, 2002.  We now have a single business segment,Centiv.  The financial results of theChannels, CalGraph and Technology Systems Businesses have been reflected asdiscontinued operations as these business units have been divested.  The prior years financial statements havebeen restated to conform to the December 31, 2002 presentations.

 

**Critical Accounting Matters**

 

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.

 

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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:

 

Revenue Recognition andAccounts 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.

 

Inventory Reserves:

 

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.

 

Valuation Allowance ofDeferred 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 tax benefitdepends on the existence of sufficient taxable income within the carry-back orcarry-forward period under the tax law.

 

Changes in circumstances,such as the company generating taxable income, could cause a change injudgement about 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-lived assets, income taxes and warranties require judgments on complexmatters that are often subject to multiple external sources of authoritativeguidance such as the Financial Accounting Standards Board, Securities andExchange Commission, etc.  Although nospecific conclusions reached by these authorities appear likely to cause amaterial change in the Company’s accounting policies, outcomes

 

16

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cannot be predicted withconfidence.  Also see Note 2 to theCompany’s Consolidated Financial Statements, which provide a summary of theCompany’s significant accounting policies.

 

**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. Our sales to A-B and its distributors will terminateupon the expiration of our preferred supplier technical support agreement onMarch 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. Excluding the equipment upgrade, the marginimprovement was attributable to the web based sales as well as the technicalsupport call center now being handled directly by Centiv instead of beingoutsourced to another entity.

 

***SG&A Expenses from continuing operations.* **SG&A expenses from continuing operationsincreased $1.1 million or 25% to $5.4 million for the year ended December 31,2002 compared to $4.3 million for the year ended December 31, 2001.  The increase in SG&A expenses over theprior year is primarily from administrative costs that due to the divestituresof the other businesses are now being absorbed entirely by Centiv.  In addition, the SG&A expenses included$260,000 for 2002 relating to legal expenses associated with the termination ofthe Encad supply agreement, defense of the Centiv trademark, and costsassociated with reincorporation of the Company from Georgia to Delaware. Centivpurchased inks 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 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 806,983 shares ofcommon stock in exchange for an outstanding loan plus accrued interest of $2.3million from the prior Chief Executive

 

17

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Officer.  The shares repurchased have been put intothe Company’s 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 $1.5 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. Thedifference between the Company’s effective and statutory tax rates wasprimarily due to the valuation reserve for the deferred tax asset and statetaxes, 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 is attributable primarily to the improvementin gross profit as well as a reduction 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.

 

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 and 2000:

 
|                                             |   | **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 | ) |

 

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***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.  The  reduction in the net loss is attributable tothe higher sales / gross profit and lower interest expense, partially offset bythe $1.5 million of other expense associated with the repurchase of thetreasury 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 $1.00 per share as of the date of commitment. The warrants with anexercise price of $1.50 per share, were valued at $810,000 using theBlack-Scholes valuation method. The beneficial conversion feature wascalculated to be $810,000 at the commitment date of March 28, 2002 and has beenrecorded as Additional Paid in Capital. Since the preferred shares areconvertible immediately, the entire amount of the beneficial conversion featurehas been accreted into the Accumulated 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 $0.77 per share is flat with prior year.  The loss for the year ended December 31,2002 included a loss of $0.17 per share relating to the beneficial conversionfeature of the preferred stock (see Note 9). The net income (loss) applicableto common shares from discontinued operations improved $0.70 per share from aloss of $0.62 per share for the year ended December 31, 2001 to income of $0.08for the year ended December 31, 2002.

 

**Year Ended December 31, 2001 Compared With Year EndedDecember 31, 2000.**

 

***Net Sales from continuing operations.***  The Centiv POP Business net sales decreased$2.8 million, or 18.4%, to $12.4 million for the year ended December 31, 2001compared to $15.2 million for the year ended December 31, 2000.  The decline is attributable to $4.2 millionof equipment sold in the fourth quarter of 2000.  This was a one-time equipment upgrade of several customers’ POPsystems used in the printing of custom signage.  Excluding the $4.2 million equipment upgrade, the Centiv Businesssales grew $1.4 million or 12.6%, to $12.4 million for the year ended December31, 2001 compared to $11.0 million for the year ended December 31, 2000.

 

***Gross Profit from continuing operations.***  Despite the revenue decline of $2.8 million,gross profit for the Centiv POP Business decreased only $43,000 or 1.7%, to$2.45 million for the year ended December 31, 2001 compared to $2.49 millionfor the year ended December 31, 2000. Gross profit as a percentage of sales for the Centiv POP Businessincreased to 19.7% for the year ended December 31, 2001 compared to 16.4% forthe year ended December 31, 2000.  Theincrease in gross profit as a percentage to sales is attributable to the lowermargin equipment upgrade program that occurred during 2000 as well as highermargin product sales for the year ended December 31, 2001.

 

***SG&A Expenses from continuing operations****.*** **SG&A expenses from continuingoperations increased $437,000, or 11%, to $4.3 million for the year endedDecember 31, 2001 compared to $3.9 million for the year ended December 31,2000.  SG&A expenses as a percentageof sales were 34.7% and 25.4% for the years ended December 31, 2001 and 2000,respectively.  SG&A expenses for theperiod ending December 31, 2001 include expenses of approximately $2.2 millionrelating to the product launch of Centiv’s web enabled custom signage orderentry and fulfillment system.

 

***Depreciation Expense from continuing operations.***  Depreciation expense from continuing operationsincreased $212,000, or 212%, to $312,000 for the year ended December 31, 2001,compared to $100,000 for the year ended December 31, 2000.  The increase is due to new financialsoftware package and the web enabled customer signage order entry and fulfillmentcenter that was placed in operation during 2001.

 

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***Interest Expense.***  Net interest expense from continuingoperations increased $497,000 to $872,000 for the year ended December 31, 2001compared to $375,000 for the year ended December 31, 2000.  The increase in interest expense relates tothe Company having a higher average bank debt for the year ended December 31,2001 compared to the average bank debt for the year ended December 31,2000.  However, the Company reduced thebank debt to $795,000 as of December 31, 2001 from $11.1 million as of December31, 2000 due to strong working capital management as well as using the proceedsfrom the sale of the Channels Business. During the year ended December 31, 2001, the Company also paid off a$1.8 million note issued to certain dissenting shareholders in connection withthe settlement of a dissenters’ claim in 2000. Interest expense for 2002 was significantly reduced due to the pay downof the bank debt and the pay off of the dissenter’s note payable during 2001 aswell as the private capital investment of $2.2 million, which occurred duringthe first quarter of 2002.

 

***Benefit for Income Taxes.***  The Company’s effective tax rate fromcontinuing operations was a tax provision of 25.8% for the year ended December31, 2001 as compared to tax benefit of 32.8% for the year ended December 31,2000.  The Company recorded a valuationreserve against the deferred income tax asset of $2.1 million for the yearended December 31, 2001.  The Companymaintains a valuation allowance with respect to deferred tax assets as a resultof the uncertainty of ultimate realization. At December 31, 2001, the Company had net operating loss carry-forwardsof approximately $5.3 million expiring in various years through 2021. Thedifference between the Company’s effective and statutory tax rates wasprimarily due to the valuation reserve for the deferred tax asset, theamortization of non-deductible goodwill and to state taxes, net of the federalbenefit.

 

***Loss from Continuing Operations.***  Loss from continuing operations increased$2.6 million to a loss of $3.8 million for the year ended December 31, 2001compared to a loss of $1.2 million for the year ended December 31, 2000.  This increase is attributable to thevaluation reserve of $2.1 million for the Company’s net loss carry forwardrecorded for the year ended December 31, 2001, an increase in depreciationexpense of $212,000 during 2001 and an increase in interest expense of $497,000during 2001.

 

***Discontinued Operations.***  Net sales from discontinued operationsdecreased $32.2 million, or 36%, to $56.5 million for the year ended December31, 2001 compared to $88.7 million for the year ended December 31, 2000.  Of the decrease of $32.2 million in netsales, $24.5 million relates to the Channels Business which was sold onDecember 31, 2001,  $6.7 million relatesto the Technology Systems Business which was divested on October 31, 2000, and$1.0 million relates to the CalGraph Business which was sold January 31, 2002.

 

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 ofthe discontinued operations for the years ending December 31, 2001 and 2000:

 

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|                                             |   | **Year  ending December 31, 2001** |   |
|--------------------------------------------------|--------|------------------------------------|--------|
| **(In Thousands)**                               |   | **Channels**                       |   | **CalGraph** | ** ** | **Technology  Systems** | ** ** | **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 | ) |

 
|                                             |   | **Year  ending December 31, 2000** |   |
|--------------------------------------------------|--------|------------------------------------|--------|
| **(In Thousands)**                               |   | **Channels**                       |   | **CalGraph** | ** ** | **Technology  Systems** | ** ** | **Total** | ** ** |
| Net  sales                                       |   | $                                  | 72,854 |   | $ | 9,104 |   | $ | 6,747 |   | $ | 88,705 |   |
| Gain  (loss) from operations before income taxes |   | (2,144                             | )      | 729 |   | (190 | ) | (1,605 | ) |
| Gain  (loss) on sale of Business                 |   | —                             |   | — |   |   |   | — |   |
| Provision  (Benefit) from income taxes           |   | (721                               | )      | 277 |   | (72 | ) | (516 | ) |
| Gain  (loss) from discontinued operations        |   | $                                  | (1,423 | ) | $ | 452 |   | $ | (118 | ) | $ | (1,089 | ) |

 

***Net Loss.***  Net loss increased $4.6 million to a net loss of $6.9 million forthe year ended December 31, 2001 compared to a net loss of $2.3 million for theyear ended December 31, 2000.  Theincrease in net loss is attributable to the $2.1 million valuation reserveagainst the Company’s net operating loss carry forward that was recorded forthe year ended December 31, 2001 and the $2.4 million loss on the sale of theChannels Business.

 

***Basic and Diluted Loss Applicable to Common Shares.***  Loss applicable to common shares increased$1.01 to a loss of $1.39 for the year ended December 31, 2001 compared to aloss of $0.38 for the year ended December 31, 2000.  The net loss applicable to common shares from continuingoperations increased $0.57 to a loss of $0.77 for the year ended December 31,2001 compared to a loss of $0.20 for the year ended December 31, 2000.  The net loss applicable to common sharesfrom discontinued operations increased $0.44 to a loss of $0.62 for the yearended December 31, 2001 compared to loss of $0.18 for the year ended December31, 2000.

 

**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 two shares of Common Stock (the “Warrant”), which amounted to 20%warrant coverage.  As part of theprivate placement, the holders of $500,000 of the outstanding 

 

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ConvertibleSubordinated Debt converted into Series B Preferred on the same terms.  The remaining $500,000 was repaid in fullfrom proceeds of this offering.  Inaddition, the Company issued an additional 270,000 shares of Series B Preferredin conversion of 135,000 of its outstanding Series A Convertible PreferredStock (the “Series A Preferred”). No Warrants were issued in connectionwith the shares of Series B Preferred issued in exchange for the Series APreferred.  In addition, the warrants topurchase Series A Preferred held by the Series A Preferred investors werecancelled with no value in connection with the conversion.  Theremaining 81,000 outstanding shares of the Series A Preferred was converted onMarch 31, 2003 into 810,000 shares of common stock in accordance with the termsof the Series A Preferred certificate of designations.

 

Thepurchase price for each unit was $5.00 per unit (the “Purchase Price”).  Because each share of Series B Preferred isconvertible, initially, into ten shares of Common Stock, the effective purchaseprice was $0.50 for each share of Common Stock purchased.  The Warrant gives the holder the right,until seven years after the issuance of the Warrant, to purchase two shares ofCommon Stock at a purchase price of $0.50 per share.  Neither the Series B Preferred nor the Warrants have been registeredunder the Securities Act of 1933. Therefore, they may not be offered or sold in the United States absentregistration or an applicable exemption from registration requirements (seeNote 17 to Notes of Financial Statements).

 

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

 

Thenet proceeds to the Company from the sale of the Series B Preferred Stock willbe used for working capital and to finance the operations of the Company.

 

Withthe termination of the preferred supplier and support agreements withAnheuser-Busch, the credit facilities with Cole Taylor Bank were terminatedeffective March 31, 2003.

 

Salesto A-B and its wholesale distributor network were $24.9 million during2002.  With the termination of thepreferred supplier and support agreement effective March 31, 2003, we expectthat the sales to A-B and the wholesale distributor network will declinesubstantially during 2003 and be fully eliminated after March 31, 2003.  We do not believe that sales from ourInstant Impact product will be sufficient to replace the sales lost from A-Band its wholesale distributor network during 2003.  In response to this, we have undertaken a downsizing of ouroperations and have reduced our headcount and other operating expenses to alevel that we believe will enable us to continue to operate our business.  Although there can be no assurance that wewill be able to offset this loss of revenue sufficiently by cutting expenses orincreasing revenue from other sources, we believe the actions taken, along withcapital raised with the sale of the Series B Preferred Stock, will provideadequate financing through at least the end of April 2004.

 

On December 31, 2002, theCompany had $1.3 million in cash and working capital of $783,000 compared to$228,000 in cash and negative working capital of $2.2 million on December 31,2001.

 

**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 $699,000 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/accruedexpense cash usage was primarily from the payment of transaction costs as wellas other payments relating to vendor settlements associated with the sale ofthe Channels Business.  The Company hadnon-cash items affecting the operating cash flows for the year ended

 

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December 31, 2002 of $1.8million consisting primarily of $1.5 million for the loss on the repurchase oftreasury stock and $570,000 of depreciation expenses, partially offset by$488,000 for the 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 toone-time expenditures for splitting the software licenses and computer hardwaredue to the 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 a privateequity 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 Companyreceived $1,000,000 from the issuance of convertible subordinated debt (seeNote 16 of the Notes to Consolidated Financial 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. TheCompany had borrowings of $5.2 million under this financing and had repaid allof the borrowings.   The Company had noborrowings under this facility as of December 31, 2002.  In light of the expiration of theAnheuser-Busch preferred supplier and technical support agreement, thisfacility was terminated by Cole Taylor Bank effective March 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 continuingoperations generated cash of $4.7 million due to increased sales in the fourthquarter of 2000 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.

 

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 equipmentpurchases, $0.8 million was for a new state of the art accounting andwarehousing package that was implemented during the second quarter of 2001 and$0.6 million was for the development and implementation of the InstantImpact  web-enabled order entry andfulfillment software package.  Cash of$5.9 million was generated from the sale of the Channels Business on December31, 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 certaindissenting shareholders in connection with the settlement of a dissenters’ claimthat was recorded for the year ended December 31, 2000.  The Company no longer has any outstandingliabilities concerning the settlement.

 

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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 will bear aninterest rate of 25 basis points over the Company’s current rate on the creditfacility.  The principal amount of thisloan plus accrued interest shall be due and payable on December 28, 2003.  The Company also recorded interest income of$175,000 on a loan to another shareholder.

 

**Cashflow for 2000:**

 

For the year endedDecember 31, 2000, the Company used $6.2 million in cash from operatingactivities.  The cash used in operationsresulted primarily from the Company’s net loss of $2.3 million as well as anincrease in accounts receivable of $3.9 million offset by accounts payable andaccrued expenses of $1.8 million.  Thechange in accounts receivable was attributable to the timing of sales in thefourth quarter of 2000.  Net assets fromdiscontinued operations used $393,000 of cash from higher inventory balancesoffset by lower accounts receivable.

 

For the year endedDecember 31, 2000, the Company used cash in investing activities of $1.4million for the purchase of property and equipment, which primarily consistedof capital improvements for new computer equipment and software.

 

For the year endedDecember 31, 2000, the Company had cash provided by financing activities of$6.4 million.  Cash was provided fromthe Company’s credit facility in the amount of $6.8 million and from a noterelating to the dissenters’ settlement in the amount of $1.7 million.  The Company used $3.1 million to purchasethe dissenters’ shares, which consists of: (1) a cash payment of $275,000 paid at closing of the dissenters claim;(2) a note in the amount of $1.7 million payable to the dissenters; and (3) theexchange of the net assets of the Tekgraf Systems Division in the amount of$1.1 million.  The Company recordedinterest income of $161,000 on a loan to a shareholder for the year endedDecember 31, 2000.

 

**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 Regarding Forward-LookingStatements**

 

**Safe Harbor For Forward-LookingStatements**

 

This report andstatements we or our representatives make contain forward-looking statementsthat 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 report.  We develop forward-lookingstatements by combining currently available information with our beliefs andassumptions. These statements often contain words like “believe,” “expect,”“anticipate,” “intend,” “contemplate,” “seek,” “plan,” “estimate” or similarexpressions. Forward-looking statements do not guarantee future performance.Recognize these statements for what they are and do not rely upon them asfacts.

 

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 report. We make these statements underthe protection afforded them by Section 21E of the Securities Exchange Act of1934, as amended.  Because we cannotpredict all of the risks and 

 

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uncertainties that mayaffect us, or control the ones we do predict, these risks and uncertainties cancause our results to differ materially from the results we express in ourforward-looking statements.

 

**Factors That May Affect FutureResults**

 

You should carefullyconsider the risks and uncertainties described below and other information inthis report. These are not the only risks and uncertainties that we face.Additional risks and uncertainties that we do not currently know about or thatwe currently believe are immaterial may also harm our business operations. Ifany of these risks or uncertainties occurs, it could have a material adverseeffect on our business.

 

**Risks Related to Our Company**

 

**We have incurred operating losses in five of the past sixyears.**

 

During fiscal years 1997,1998, 1999, 2000, 2001 and 2002, we experienced net income (losses) of($393,337), ** **$91,167, ($7,118,331),($2,334,000), ($6,899,000), and ($2,558,000) respectively. We cannot be certainthat we will achieve profitability in the future.  If we do achieve profitability, we cannot be certain that we cansustain or increase profitability on a quarterly or annual basis in thefuture.  If we are unable to becomeprofitable, our liquidity could be materially harmed.

 

Priorto its sale, our Channels Business and CalGraph Business accounted for themajority of our revenues and our Centiv Business revenues are not expected inthe near term to replace our revenues from our Channels and CalGraphBusinesses.

 

TheChannels Business comprised approximately 71% of our revenue for the year endedDecember 31, 2001, and more than 70% for each of our two prior fiscal years.The CalGraph Business comprised approximately 12% of our revenue for the yearended December 31, 2001, and more than 10% for each of the two prior fiscalyears.  Centiv Business  revenues are not expected to equal or exceedour revenues from the Channels and CalGraph Businesses in the near term, and wewill be operating at a loss until the revenues generated by the Centiv Businessincrease sufficiently to offset its expenses. The sale of the Channels Businessand the CalGraph Business significantly reduced our revenues and our totaloperations. There can be no assurance that we will have sufficient operationsand revenue to achieve profitability.

 

Salesto Anheuser Busch (A-B) and its wholesale distributor network were $24.9million during 2002.  With thetermination of the preferred supplier and support agreement effective March 31,2003, we expect that the sales to A-B and the wholesale distributor networkwill decline substantially during 2003 and be fully eliminated after March 31,2003.  We do not believe that sales fromour Instant Impact product will be sufficient to replace the sales lost fromA-B and its wholesale distributor network during 2003.  In response to this, we have undertaken adownsizing of our operations and have reduced our headcount and other operatingexpenses to a level that we believe will enable us to continue to operate ourbusiness.  While there can be noassurance that we will be able to offset this loss of revenue sufficiently bycutting expenses or increasing revenue from other sources, we believe theactions taken, along with capital raised with the sale of the preferred stock,will provide adequate financing through at least the end of 2003 and into 2004.

 

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**Wecannot predict our future results because our Centiv Business has a limitedoperating history, particularly as a stand-alone business**.

 

Givenour limited operating history in the Centiv Business, particularly as astand-alone business it will be difficult to predict our future results. Youshould consider the uncertainties that we may encounter as an early stagecompany in a new and rapidly evolving market. These uncertainties include:

 

•                                          marketacceptance of the Centiv products or services;

•                                          consumerdemand for, and acceptance of our Centiv products, services and follow-onproducts;

•                                          our abilityto create user-friendly applications; and

•                                          our unprovenand evolving business model.

 

**OurCentiv Business has not generated significant revenues to date and incurredlosses in fiscal years 2000, 2001, and 2002, and we expect these losses tocontinue into fiscal year 2003.**

 

TheCentiv Business was commenced in 1998, has a limited operating history andincurred losses for 2000, 2001 and 2002, although it did make an operatingprofit in 1998 and 1999. We expect these losses to continue into fiscal year2003. The Centiv Business will need to achieve greater revenues to achieveprofitability. There can be no assurance that we will be successful inincreasing revenues of the Centiv Business, or generating acceptable margins,or, if we do, that operation of the Centiv Business will be a profitablebusiness enterprise. If we are unable to achieve significantly greaterrecurring revenue from our Centiv Business, our losses will likely continueindefinitely. We will likely have to seek additional outside sources of capitalfor our Centiv Business. There can be no assurance that we will be able toobtain such capital on favorable terms and conditions or at all. If this occursthe market price of our common stock could suffer.

 

On acombined basis, distributors affiliated with Anheuser-Busch accounted forapproximately 97% and 99% of the sales for the year ended December 31, 2002 and2001, respectively.  For the year endedDecember 31, 2000, Anheuser-Busch accounted for 97% of net sales.  This relationship will terminate as of March31, 2003 as Anheuser-Busch has notified us of their intention not to renew ourpreferred supplier technical support agreement upon its expiration.  There can be no assurance that we will beable to offset this loss of revenue sufficiently by cutting expenses or that wewill be able to replace this lost revenue.

 

**Our quarterly and annual sales and financial results havevaried significantly in the past, and we expect to experience fluctuations inthe future, which means that period-to-period comparisons are not necessarilymeaningful or indicative of future performance.**

 

Our 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 our customers dobusiness. Furthermore, we may be unable to control spending in a timely mannerto compensate for any unexpected revenue shortfall. Accordingly, we cannotassure you that sales and net income, if any, in any particular quarter willnot be lower than sales and net income, if any, in a preceding or comparablequarter or quarters.  As a result of theexpiration of our preferred supplier technical support agreement with Anheuser-Busch,our sales in 2003 will likely be substantially lower than previous years.  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 our securities mayfluctuate significantly in response to variations in our quarterly or annualresults of operations.

 

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**We maynot be able to sustain or accelerate growth, or sustain or accelerate recurringrevenue from the Centiv Business.**

 

There can be no assurancethat demand for our Centiv services and products will increase or be sustained,or that our current or future products will have market acceptance in that productcategory. Our acquisition costs per customer are currently very high due to thesignificant costs associated with sales, product development and marketing. Tothe extent we do not achieve growth and this cost per customer is not reduced,it will be difficult for us to generate meaningful revenue at acceptablemargins or achieve profitability. To the extent that our Centiv Business modelis not successful, because market acceptance declines, or other competingtechnologies evolve in connection with the evolving Internet market or for anyother reason, we might have future unexpected declines in revenue. In order toachieve and maintain profitability, our POP program needs to achieve nationalprogram status.  In order to obtainparticipating manufacturers and retailers at the rate desired, this serviceprogram must achieve increases in sales. In achieving these results, we will be competing for the marketingexpenditures or branded product manufacturers who use various forms ofpoint-of-purchase marketing methods.  Wecannot assure you that our POP program will achieve or maintain the marketplaceacceptance or profitability necessary to compete successfully with traditionalmarketing methods.

 

**Rapidtechnological change could render our POP products and services obsolete.**

 

TheInternet and the e-commerce industries are characterized by rapid technologicalinnovation, sudden changes in user and customer requirements and preferences,frequent new product and service introductions and the emergence of new industrystandards and practices. Each of these characteristics could render our Centivservices, products, intellectual property and systems obsolete. The rapidevolution of our market requires that we improve continually the performance,features and reliability of our products and services, particularly in responseto competitive offerings. Our success also will depend, in part, on ourability:

 

•                                          To develop orlicense new products, services and technology that address the varied needs ofour customers and prospective customers, and

•                                          To respond totechnological advances and emerging industry standards and practices on acost-effective and timely basis.

 

If weare unable, for technical, financial, legal or other reasons, to adapt in atimely manner to changing market conditions or user preferences, we could losecustomers, which would cause a decrease in our revenue.

 

**We maybe unable to obtain additional capital if needed to grow our business, whichwould adversely impact our business.  Ifwe raise additional financing, you may suffer significant dilution.**

 

Althoughwe expect that our current cash and cash from operations will be sufficient tosatisfy our working capital and capital expenditure needs over the next 12months, if our revenues do not grow to cover our expenses, we will need to seekadditional third-party investment in order to provide additional workingcapital.****Wecannot be certain that financing from third parties will be available onacceptable terms to us or at all. Our future capital requirements will dependupon several factors, including the rate of market acceptance of our productsand services, our ability to expand our customer base and our level ofexpenditures for sales and marketing. If our capital requirements varymaterially from those currently planned, we may require additional financingsooner than anticipated. If we cannot raise funds on acceptable terms, we maynot be able to develop our products and services, take advantage of futureopportunities or respond to competitive pressures or unanticipatedrequirements, any of which could have a material adverse effect on our abilityto grow our business. Further, if we issue equity securities, you willexperience dilution of your ownership percentage, and the new equity securitiesmay have rights, preferences or privileges senior to those of our common stock.

 

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**Many of our competitors have significantly greater resourcesthan we do and may be able to respond more quickly to new or emergingtechnologies and changes in customer requirements.**

 

While Centiv does nothave any direct competition today for its entire range of products, there arecertain potential competitors who are focused on portions of the Centivproducts and could represent competition at some future date.  Companies that represent potentialcompetition in the Corporate POP market include Insignia Systems, Inc.(Nasdaq:  ISIG) and Catalina Marketing(NYSE:  POS).

 

Certain of our potentialcompetitors have significantly greater financial, technical, marketing, andother resources than we do and may be able to respond more quickly to new oremerging technologies and changes in customer requirements. Additionalcompetition could result in price reductions, reduced margins and loss ofmarket. We cannot guarantee that we will be able to compete successfullyagainst future competitors or that future competitive pressures will notmaterially and adversely affect our business, financial condition and resultsof operations.

 

**Our business depends on our intellectual property rights, andif we fail to protect them, our competitive position will suffer.**

 

Although we have madeapplications, we have no current patents, and our success partially depends onour ability to preserve our trade secrets and to operate without infringing onthe proprietary rights of third parties. We seek to protect our trade secretsand proprietary know-how, in part, by confidentiality agreements withemployees, consultants, advisors and others. We cannot guarantee that theseindividuals will maintain the confidentiality of our trade secrets andproprietary know-how, or that our competitors will not learn of orindependently develop our trade secrets or proprietary know-how in a mannerthat leaves us with no practical recourse.

 

**If we lose the services of our key personnel, we may beunable to replace them, and our business could be negatively affected.**

 

Our success depends inlarge part on the continued service of our management and other key personneland our ability to continue to attract, motivate and retain highly qualifiedemployees.  In particular, the servicesof John Larkin, our President and Chief Executive Officer, and Thomas Mason,our Vice President, Finance and Chief Financial Officer are integral to the executionof our business strategy.  If one ormore of our key employees leaves Centiv, we will have to find a replacementwith the combination of skills and attributes necessary to execute ourstrategy.  Because competition fromother technology companies for skilled employees is intense, and the process offinding qualified individuals can be lengthy and expensive, we believe that theloss of the services of key personnel could negatively affect our business,financial condition and results of operations.

 

**Many of our customers operate in a highly regulated industry.**

 

Substantially all of ournet sales in 2002 came from customers engaged in the alcoholic beveragesindustry.  If the regulation of thisindustry were to limit advertisement in any material way, our relationship withthese customers could suffer.

 

28

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**Risks Related to Our Industry**

 

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

 

From time to time themarket for our products and services experiences weak economic conditions. Tothe extent that general economic conditions affect the demand for products andservices in this market, it could have an adverse effect on our ability to sellour products and services.

 

**Risks Related to Our Capital Stock**

 

**The public market for our common stock may be volatile.**

 

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

 

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

 

•                  actual or anticipated fluctuations inour 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,especially the Nasdaq SmallCap Market, have experienced significant price andvolume fluctuations that have affected the market prices of many technologycompanies’ stocks.  These fluctuationshave often been unrelated or disproportionate to operating performance.  These broad market or technology sectorfluctuations may adversely affect the market price of our common stock. Generaleconomic, political and market conditions such as recessions and interest ratefluctuations may also have an adverse effect on the market price of our commonstock.  In addition, the market price ofour common stock has also been and is likely to continue to be affected byexpectations of analysts and investors.

 

**We may not be able to maintain our eligibility for the NasdaqSmallCap Market.**

 

In order for our commonstock to continue to be traded on the Nasdaq SmallCap Market, we must maintainshareholders’ equity of at least $2.5 million, market capitalization of atleast $35 million, or net income from continuing operations of at least$500,000 in the latest fiscal year or in two of the last three fiscalyears.  We also must have a bid pricefor our common stock of at least $1 per share, have a public float of 500,000shares, and meet certain other criteria. In December of 2002, we receivednotice from the Nasdaq SmallCap Market that we were not in compliance with thelisting requirements.  We have submitteda detailed plan to Nasdaq for regaining and maintaining compliance with therequirements.  However, we cannot assureyou that we can maintain compliance with these standards or that our stock willcontinue to be listed on the Nasdaq SmallCap Market.  The loss of the listing of our common stock on the NasdaqSmallCap Market would impair the marketability of our common stock.

 

29

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**Since our executive officers, directors and substantialshareholders have substantial control of our voting stock, takeovers notsupported by them will be more difficult, possibly preventing you fromobtaining optimal share price.**

 

The control of a significantamount of our stock by insiders could adversely affect the market price of ourcommon stock.  As of March 31, 2003, ourexecutive officers and directors and their affiliates beneficially own orcontrol 20,500 shares, or 0.4%, of the outstanding common stock and 200,000shares or 1.6% of the as converted Series B Preferred Stock.    Shareholders holding more than 5% of thecommon stock, own or control 2,037,529 shares or 40.8% of the common stock or16.0% of the total voting power of the outstanding capital stock. Prior totheir conversion effective March 31, 2003, the holders of Series A PreferredStock as a group controlled 2,160,000 shares of common stock on an as-convertedbasis or 34% of the outstanding voting power of the Company.  The holders of Series B Preferred Stock as agroup control 7,700,000 shares of common stock as-converted basis or 60.6% ofthe outstanding voting power of the Company. For this purpose, beneficial ownership includes any shares a director orexecutive officer can vote or transfer, shares subject to stock options andwarrants that are exercisable currently or become exercisable within sixty (60)days and shares subject to convertible securities that are convertiblecurrently or within sixty (60) days.  Ifour executive officers and directors choose to act or vote together, they willhave the ability to influence significantly all matters requiring the approvalof our stockholders, including the election of directors and the approval ofsignificant corporate transactions.  Withoutthe consent of these stockholders, we could be prevented from entering intotransactions that could be beneficial to us.

 

**Our preferred stock has certain preferences over our commonstock with regard to liquidation, and dividends and election of directors.**

 

Our issued andoutstanding Series B Convertible Preferred Stock (the “Series B Preferred”)will begin to accrue dividends on April 1, 2004 at an annual rate equal to 8%of the Series B Preferred purchase price. The Series B Preferred also has a liquidation preference equal to twotimes the Series B Preferred purchase price plus all accrued and unpaiddividends.  The Series B Preferred isalso subject to redemption at our option on March 31, 2007.  If we fail to make that redemption, theholders of the Series B Preferred will become entitled to elect a majority ofour board of directors.  Prior to March 31, 2007, subject to certainlimitations, holders of Series B Preferred are entitled to appoint one memberto our board of directors and to appoint one observer.

 

**Our ability to issue additional preferred stock may adverselyaffect the rights of our common stockholders and may make takeovers moredifficult, possibly preventing you from obtaining optimal share price.**

 

Our Certificate ofIncorporation authorize 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 boardof directors is empowered, without shareholder approval (but subject toapplicable government regulatory restrictions), to issue additional preferredstock with dividend, liquidation, conversion, voting or other rights that couldadversely affect the voting power or other rights of the holders of the commonstock. In the event of an issuance, the preferred stock could be used, undercertain circumstances, as a method of discouraging, delaying or preventing achange in control of Centiv.

 

**If we redeem our outstanding warrants, it may be disadvantageousto the warrant holders.**

 

Wemay redeem the remaining outstanding warrants issued in connection with theSeries A Preferred upon 15 business days notice at a price of $0.01 per shareat any time that the closing price for the common stock on the principalexchange or quotation system on which it is traded exceeds certain thresholdsfor 10 consecutive trading days. Redemption of the warrants could

 

30

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force their holders to(i) exercise the warrants and pay the exercise price at a time when it may bedisadvantageous for them to do so, (ii) sell the warrants at the then-currentmarket price when they might otherwise wish to hold the warrants, or (iii)accept the nominal redemption price that, at the time the warrants are calledfor redemption, is likely to be substantially less than the market value of thewarrants.  The conditions required forus to redeem the warrants are not currently satisfied, and, therefore, we donot anticipate redeeming the warrants in the foreseeable future.

 

**ITEM7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT 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.  The Companyperforms ongoing credit evaluations and charges uncollectible amounts to operationswhen they are determined to be uncollectible.

 

**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA.**

 

See the ConsolidatedFinancial Statements beginning on page F-1. Consolidated condensed quarterly financial information on the Company isincluded in Note 21 of Notes to the Consolidated Financial Statements.

 

**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None

 

**PART III**

 

**ITEM10.  DIRECTORS AND EXECUTIVE OFFICERS OFTHE COMPANY.**

 

The information relatingto the Company’s directors, nominees for election as directors and executiveofficers under the headings “Election of Directors”,  “Executive Officers” and “Section 16(a) Beneficial OwnershipReporting Compliance” in the Company’s definitive proxy statement for the 2003Annual Meeting of Shareholders is incorporated herein by reference to suchproxy statement.

 

**ITEM11.  EXECUTIVE COMPENSATION.**

 

The information under theheadings “Executive Compensation” and “Director Compensation” in the Company’s definitive proxy statement forthe 2003 Annual Meeting of Shareholders is incorporated herein by reference tosuch proxy statement.

 

31

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**ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT.**

 

The information under theheading “Ownership of Centiv Common Stock” in the Company’s definitive proxystatement for the 2003 Annual Meeting of Shareholders is incorporated herein byreference to such proxy statement.

 

**ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

 

The information under theheading “Certain Relationships and Related Transactions” in the Company’sdefinitive proxy statement for the 2003 Annual Meeting of Shareholders isincorporated herein by reference to such proxy statement.

 

**ITEM14.  CONTROLS AND PROCEDURES.**

 

(a) Evaluation ofDisclosure Controls and Procedures

 

The Company’s ChiefExecutive Officer and its Chief Financial Officer, have reviewed and evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))as of a date within 90 days of the filing date of this annual report on Form10-K (the “Evaluation Date”). Based on their review and evaluation, the 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

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s internal controls subsequent to theEvaluation Date, or any significant deficiencies or material weaknesses in suchinternal controls requiring corrective actions. As a result, no correctiveactions were taken.

 

**PART IV**

 

**ITEM14.  EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K.**

 
| (a)(1) | Consolidated Financial  Statements.                              |
|--------|------------------------------------------------------------------|
|   |                                                             |
|   | Report  of Independent Certified Public Accountants              |
|   |                                                             |
|   | Consolidated Balance Sheets                                      |
|   |                                                             |
|   | Consolidated  Statements of Operations                           |
|   |                                                             |
|   | Consolidated Statements  of Changes in Stockholders’ Equity |

 

32

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|    | Consolidated  Statements of Cash Flows                                                           |
|---------|--------------------------------------------------------------------------------------------------|
|    |                                                                                             |
|    | Notes to  Consolidated Financial Statements                                                      |
|    |                                                                                             |
| (a) (2) | Consolidated Financial  Statement Schedule for the Years Ended December 31, 2002, 2001 and 2000. |
|    |                                                                                             |
|    | Schedule II - Valuation and Qualifying  Accounts on page F-32.                                   |

 

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.

 

Consolidated condensedquarterly financial information on the Company is included in Note 21 of Notesto the Consolidated Financial Statements.

 

(a) (3) Exhibits.

 

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

 
| **EXHIBIT  NO.** |   | **DESCRIPTION OF EXHIBIT**                                                                                                                                                                                                                                                                                                                  |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                        |
| 2.1              |   | Asset Purchase  Agreement dated October 29, 2001 by and between Tekgraf, Inc. and SCB  Acquisitions, LLC (Filed as Appendix A to the Company’s Definitive Proxy  Statement filed October 21, 2002 and incorporated herein by reference).                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                                                                        |
| 2.2              |   | Asset Purchase  Agreement effective as of January 31, 2002 by and among CalGraph Technology  Services, Inc., Centiv, Inc., the sole shareholder of CalGraph and Graphic  Enterprises of Ohio, Inc. (Filed as Exhibit 99.2 to the Company’s Current  Report on Form 8-K filed February 20, 2002 and incorporated herein by  reference). |
|             |   |                                                                                                                                                                                                                                                                                                                                        |
| 2.3              |   | Agreement and Plan of  Merger dated as of June 11, 2002 by Centiv, Inc., a Georgia corporation and  Centiv, Inc., a Delaware corporation (Filed as Exhibit 2.3 to the Company’s  Quarterly Report on Form 10-Q filed on August 12, 2002 and incorporated  herein by reference).                                                        |
|             |   |                                                                                                                                                                                                                                                                                                                                        |
| 3.1              |   | Certificate of  Incorporation of Centiv, Inc. dated April 11, 2002 and related Certificate of  Designations, Preferences and Rights filed May 21, 2002. (Filed as Exhibit  3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 12, 2002  and incorporated herein by reference).                                         |
|             |   |                                                                                                                                                                                                                                                                                                                                        |
| 3.2              |   | Bylaws of Centiv, Inc.  (Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on  August 12, 2002 and incorporated herein by reference).                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                        |
| 3.3              |   | Certificate of  Designations, Preferences and Rights filed March 31, 2003.                                                                                                                                                                                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                        |
| 4.1              |   | Form of Securities  Purchase Agreement dated March 28, 2002 by and among Centiv, Inc. and the  purchasers identified on Exhibit A thereto (Filed as Exhibit 4.1 to the  Company’s Annual Report on form 10-K filed on April 1, 2002 and incorporated  herein by reference).                                                            |
|             |   |                                                                                                                                                                                                                                                                                                                                        |
| 4.2              |   | Form of Investors  Rights Agreement dated March 28, 2002 by and among Centiv, Inc. and the  investors who are signatories thereto (Filed as Exhibit 4.2 to the Company’s                                                                                                                                                               |

 

33

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|   |   | Annual Report on form 10-K  filed on April 1, 2002 and incorporated herein by reference).                                                                                                                                                                                                                                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.3    |   | Form of Warrant issued  pursuant to Securities Purchase Agreement dated March 28, 2002 by and among  Centiv, Inc. and the purchasers identified on Exhibit A thereto (Filed as  Exhibit 4.3 to the Company’s Annual Report on form 10-K filed on April 1,  2002 and incorporated herein by reference).                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.4    |   | Form of Securities  Purchase Agreement dated March 31, 2003 by and among Centiv, Inc. and the  purchasers identified on Exhibit A.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.5    |   | Form of Amended and  Restated Investors Rights Agreement dated March 31, 2003 by and among Centiv,  Inc. and the investors who are signatories thereto.                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 4.6    |   | Form of Warrant issued  pursuant to Securities Purchase Agreement dated March 31, 2003 by and among  Centiv, Inc. and the purchasers identified on Exhibit A thereto.                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Loan Agreement dated  June 12, 2002 between the Company and Cole Taylor Bank. (Filed as Exhibit  10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 12, 2002 and  incorporated herein by reference).                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Security Agreement  dated June 12, 2002 between the Company and Cole Taylor Bank. (Filed as  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August  12, 2002 and incorporated herein by reference).                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Redemption Agreement  dated November 25, 2002 between the Company and William M. Rychel (Filed as  Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on December 4,  2002 and incorporated herein by reference).                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Amended and Restated  Loan and Security Agreement dated June 9, 2000 between Tekgraf, Inc., as  Borrower and all Subsidiaries of Borrower, as Subsidiary Guarantors, and  Wachovia Bank, National Association, as Lender (Filed as Exhibit 10.36 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000  and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | Loan agreement between  William Rychel and Tekgraf, Inc. dated December 1, 1999 (filed as Exhibit 8  to Schedule 13-D dated December 3, 1999 and incorporated hereinby reference).                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6   |   | Non-Competition and  Confidentiality Agreement between William M. Rychel and the Company dated as  of November 30, 2001 (Filed as Exhibit 10.4 to the Company’s Current Report  on Form 8-K filed on December 4, 2001 and incorporated herein by reference).                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7   |   | Amendment No. 1 to Loan  Agreement between William M. Rychel and Tekgraf, Inc. dated as of December 1,  2000 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed  on December 5, 2000 and incorporated herein by reference).                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8   |   | Amendment No. 2 to Loan  Agreement between William M. Rychel and Tekgraf, Inc. dated as of December 1,  2001 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed  on December 4, 2001 and incorporated herein by reference).                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 11.1   |   | Statements of  Computation of Earnings Per Share                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 21.1   |   | Subsidiaries                                                                                                                                                                                                                                                                                                                                                                      |

 

34

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| 23.1   |   | Consent of Grant  Thornton LLP                                                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                      |
| 99.1   |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted 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, 2002:

 

Current Report on Form8-K filed December 4, 2002, which included disclosure under Item 5 relating tothe repurchase by the Company of shares owned by William M. Rychel and pledgedas security for an outstanding loan.

 

Current Report on Form8-K filed December 18, 2002, which included disclosure under Item 5 relating toreceipt by the Company of notification from the Nasdaq SmallCap Market ofnon-compliance with minimum bid price listing requirement.

 

Current Report on Form8-K filed December 27, 2002, which included disclosure under Item 5 relating toreceipt by the Company of notification from the Nasdaq SmallCap Market ofnon-compliance with minimum stockholders’ equity and other requirements.

 

----

*   Indicates compensatory plan or arrangement.

 

35

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**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 4th DAY OF APRIL, 2003.

 
|   | Centiv, Inc. |
|--------|--------------|
|   | (Registrant) |
|   |         |
|   |         |
|   | By:          | /s/ John P. Larkin |   |
|   |         | John P. Larkin |
|   |         | 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/ John P. Larkin            |                 |      | Chief Executive  Officer,                               |     | April 4, 2003 |
|                          | John P. Larkin       |      | President and Director  (principal   executive officer) |     |   |
|                          |                 |      |                                                    |     |
| /s/ Thomas M. Mason           |                 |      | Chief Financial Officer  and                            |     | April 4, 2003 |
|                          | Thomas M. Mason      |      | Director (principal  financial  and accounting officer) |     |   |
|                          |                 |      |                                                    |     |
|                          |                 |      |                                                    |     |
|                          |                 |      |                                                    |     |
| /s/ Frank X  Dalton, Jr. |                 |      | Director                                                |     | April 4**,**  2003 |
|                          | Frank X. Dalton, Jr. |      |                                                    |     |   |
|                          |                 |      |                                                    |     |
| /s/ Steven Carnevale          |                 |      | Director                                                |     | April 4**,**  2003 |
|                          | Steven Carnevale     |      |                                                    |     |   |
|                          |                 |      |                                                    |     |
| /s/ Kim Feil                  |                 |      | Director                                                |     | April 4**,**  2003 |
|                          | Kim Feil             |      |                                                    |     |   |
|                               |                      |           |                                                         |          |  |  |  |  |

 

36

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**CERTIFICATIONS**

 

I, John P. Larkin,certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Centiv, Inc;

 

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

 

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

 

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

 

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

 

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

 

(c)                                  presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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

 

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

 

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

 

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

 
| Date:  | April 4, 2003 |   | /s/ John P. Larkin      |   |
|--------|---------------|--------|-------------------------|--------|
|   |          |   | John P. Larkin          |
|   |          |   | Chief Executive Officer |
|        |               |        |                         |        |  |

 

37

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**CERTIFICATIONS**

 

I, Thomas M. Mason,certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Centiv, Inc;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

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

 

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

 

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

 

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

 

(c)                                  presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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

 

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

 

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

 

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

 
| Date:  | April 4, 2003 |   | /s/ Thomas M. Mason     |   |
|--------|---------------|--------|-------------------------|--------|
|   |          |   | Thomas M. Mason         |
|   |          |   | Chief Financial Officer |
|        |               |        |                         |        |  |

 

38

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**Centiv, Inc.**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Financial Statements of Centiv, Inc.**

 
| Report  of Independent Certified Public Accountants – Grant Thornton LLP | F-2    |
|-------------------------------------------------------------------------------|--------|
|                                                                          |   |
| Consolidated Balance Sheets                                                   | F-3    |
|                                                                          |   |
| Consolidated Statements of  Operations                                        | F-4    |
|                                                                          |   |
| Consolidated  Statements of Changes in Stockholders’ Equity              | F-5    |
|                                                                          |   |
| Consolidated Statements of  Cash Flows                                        | F-6    |
|                                                                          |   |
| Notes to  Consolidated Financial Statements                                   | F-7    |

 

F-1

----

 

**REPORTOF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**

 

To the Board of Directors and Stockholders of Centiv, Inc.

 

We have audited the accompanying consolidated balance sheets of Centiv,Inc. and Subsidiaries as of December 31, 2002, 2001 and 2000, and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for the years then ended.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of Centiv,Inc. and subsidiaries as of December 31, 2002, 2001 and 2000, and theconsolidated results of their operations and their cash flows for the yearsthen ended, in conformity with accounting principles generally accepted in theUnited States of America.

 

We have also audited Schedule II for the years ended December 31, 2002,2001 and 2000.  In our opinion, thisschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly, in all material respects, the information setforth therein.

 

 
| /s/ Grant Thornton, LLP                          |   |
|--------------------------------------------------|--------|
|                                             |
| Chicago, Illinois                                |
| January 31, 2003, except for Notes 9 and Note 17 |
| for which the date is March 31, 2003             |

 

F-2

----

 

CENTIV, INC.

BALANCE SHEETS

($in thousands)

 
|                                                                                                                                                                                                                  |   | **December 31,  2002** |   | **December  31,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                                                                                                            |   |                   |   |                    |   |
| Current assets:                                                                                                                                                                                                       |   |                   |   |                    |   |
| Cash and cash equivalents                                                                                                                                                                                             |   | $                      | 1,304  |                    | $      | 228 |   |
| Accounts receivable, less allowance for doubtful accounts of $19 and  $43 at December 31, 2002 and 2001, respectively                                                                                                 |   | 1,668                  |   | 969                     |   |
| Inventories, net                                                                                                                                                                                                      |   | 824                    |   | 978                     |   |
| Prepaid expenses and other assets                                                                                                                                                                                     |   | 565                    |   | 278                     |   |
| Income taxes receivable                                                                                                                                                                                               |   | 21                     |   | 617                     |   |
| Deferred income taxes – current                                                                                                                                                                                  |   | 162                    |   | 303                     |   |
| Net current assets, discontinued operations                                                                                                                                                                           |   | —                 |   | 2,801                   |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Total current assets                                                                                                                                                                                                  |   | 4,544                  |   | 6,174                   |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Property and equipment, net                                                                                                                                                                                           |   | 1,707                  |   | 2,071                   |   |
| Other assets                                                                                                                                                                                                          |   | 137                    |   | 39                      |   |
| Net other assets, discontinued operations                                                                                                                                                                             |   | —                 |   | 860                     |   |
| Total assets                                                                                                                                                                                                          |   | $                      | 6,388  |                    | $      | 9,144 |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| **LIABILITIES**                                                                                                                                                                                                       |   |                   |   |                    |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Current liabilities:                                                                                                                                                                                                  |   |                   |   |                    |   |
| Current debt                                                                                                                                                                                                          |   | $                      | — |                    | $      | 795 |   |
| Accounts payable                                                                                                                                                                                                      |   | 2,888                  |   | 3,617                   |   |
| Accrued expenses                                                                                                                                                                                                      |   | 733                    |   | 1,000                   |   |
| Contract obligation and deferred income                                                                                                                                                                               |   | 140                    |   | 208                     |   |
| Net current liabilities, discontinued operations                                                                                                                                                                      |   | —                 |   | 2,755                   |   |
| Total current liabilities                                                                                                                                                                                             |   | 3,761                  |   | 8,375                   |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Deferred income taxes                                                                                                                                                                                                 |   | 162                    |   | 157                     |   |
| Convertible Subordinated Debt                                                                                                                                                                                         |   | 990                    |   | —                  |   |
| Total liabilities                                                                                                                                                                                                     |   | 4,913                  |   | 8,532                   |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Commitments and Contingencies                                                                                                                                                                                         |   | —                 |   | —                  |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                                        |   |                   |   |                    |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Class A Common Stock $.001 par value, 35,000,000 shares authorized;  4,994,018 shares issued and 4,187,035 shares outstanding at December 31,  2002, and 4,956,535 shares issued and outstanding at December 31, 2001 |   | 5                      |   | 5                       |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Treasury Stock, at cost, 806,983 shares at December 31, 2002                                                                                                                                                          |   | (759                   | )      | —                  |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Preferred Stock, $.001 par value, 5,000,000 shares authorized; 216,000  and no shares issued and outstanding at December 31, 2002 and 2001,  respectively (liquidation value of $2,160,000 at December 31, 2002)      |   | —                 |   | —                  |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Due from stockholders                                                                                                                                                                                                 |   | (267                   | )      | (2,366                  | )      |
| Additional paid-in capital                                                                                                                                                                                            |   | 22,509                 |   | 19,618                  |   |
| Accumulated deficit                                                                                                                                                                                                   |   | (20,013                | )      | (16,645                 | )      |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Total stockholders’ equity                                                                                                                                                                                       |   | 1,475                  |   | 612                     |   |
|                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                       |   | $                      | 6,388  |                    | $      | 9,144 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-3

----

 

CENTIV,INC.

STATEMENTS OF OPERATIONS

 

($in thousands, except per share data)

 
|                                                                                                                          |   | **YEARS ENDED DECEMBER 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                          |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Net sales                                                                                                                     |   | $                            | 25,508 |   | $ | 12,432 |   | $ | 15,242 |   |
| Cost of goods sold                                                                                                            |   | 20,962                       |   | 9,982 |   | 12,749 |   |
| Gross profit                                                                                                                  |   | 4,546                        |   | 2,450 |   | 2,493 |   |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Operating expenses:                                                                                                           |   |                         |   |   |   |   |   |
| Selling, general and administrative                                                                                           |   | 5,390                        |   | 4,309 |   | 3,872 |   |
| Depreciation                                                                                                                  |   | 570                          |   | 313 |   | 100 |   |
| Restructuring Charges                                                                                                         |   | 87                           |   | 0 |   | 0 |   |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Loss from operations                                                                                                          |   | (1,501                       | )      | (2,172 | ) | (1,479 | ) |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Loss on Repurchase of Stock (Note 13)                                                                                         |   | (1,492                       | )      | — |   | — |   |
| Interest income (expense)                                                                                                     |   | 104                          |   | (872 | ) | (375 | ) |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Loss before income tax provision (benefit)                                                                                    |   | (2,889                       | )      | (3,044 | ) | (1,854 | ) |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Provision (benefit) for income taxes from continuing operations                                                               |   | 49                           |   | 787 |   | (609 | ) |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Income / (loss) from continuing operations                                                                                    |   | (2,938                       | )      | (3,831 | ) | (1,245 | ) |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Income (loss) from discontinued operations (net of tax  provision/(benefit) of $98 in 2002, $180 in 2001, and $(516) in 2000) |   | 380                          |   | (3,068 | ) | (1,089 | ) |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Net loss                                                                                                                      |   | $                            | (2,558 | ) | $ | (6,899 | ) | $ | (2,334 | ) |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Effect of beneficial conversion feature of preferred stock (Note 9)                                                           |   | (810                         | )      | — |   | — |   |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Net loss attributable to common stockholders                                                                                  |   | $                            | (3,368 | ) | $ | (6,899 | ) | $ | (2,334 | ) |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Basic and diluted weighted average shares outstanding                                                                         |   | 4,894,152                    |   | 4,976,024 |   | 6,130,366 |   |
|                                                                                                                          |   |                         |   |   |   |   |   |
| Basic and Diluted Income/(Loss) applicable to common shares                                                                   |   |                         |   |   |   |   |   |
| Continuing operations                                                                                                         |   | $                            | (0.77  | ) | $ | (0.77 | ) | $ | (0.20 | ) |
| Discontinued operations                                                                                                       |   | $                            | 0.08   |   | $ | (0.62 | ) | $ | (0.18 | ) |
| Net loss                                                                                                                      |   | $                            | (0.69  | ) | $ | (1.39 | ) | $ | (0.38 | ) |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-4

----

 

CENTIV, INC.

CHANGES IN STOCKHOLDERS’ EQUITY 

 
| **($ in  000’s)**                               |   | **Number  Of Shares  Class A** |   | **Class A  Common  Stock** |   | **Number  Of Shares  Treasury** |    | **Treasury  Stock** |   | **Number  Of Shares  Class B** |      | **Class B  Common  Stock** |   | **Number of  Preferred  Shares** |   | **Preferred  Stock** |    | **Due from  Stock-  holders** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings  (Deficit)** |   | **Total** |   |
|------------------------------------------------------|--------|--------------------------------|--------|----------------------------|--------|---------------------------------|---------|---------------------|--------|--------------------------------|-----------|----------------------------|--------|----------------------------------|--------|----------------------|---------|-------------------------------|--------|----------------------------------|--------|-----------------------------------|--------|-----------|--------|
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Balances at 12/31/99                                 |   | 3,202,032                      |   | $                          | 3      |                            |    |                |   |                           | 3,126,299 |                       | $      | 3                                |   | 0                    |    | $                             | 0      |                             | $      | (1,780                            | )      | $         | 22,557 |   | $ | (7,412 | ) | $ | 13,371 |   |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Interest on loan to Stockholder                      |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    | (161                          | )      |                             |   |                              |   | (161      | )      |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Stock options and warrants issued for services       |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   | 70                               |   |                              |   | 70        |   |
| Conversion of Class B  to  Class A Common Stock |   | 3,126,299                      |   | 3                          |   |                            |    |                |   | (3,126,299                     | )         | (3                         | )      |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Repurchase of Dissenters’ shares                |   | (1,266,333                     | )      | (1                         | )      |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   | (3,106                           | )      |                              |   | (3,107    | )      |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Net loss                                             |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   | (2,334                            | )      | (2,334    | )      |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Balances at 12/31/00                                 |   | 5,061,998                      |   | $                          | 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          |   | 30,000                         |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   | 97                               |   |                              |   | 97        |   |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Escrow shares cancellation                           |   | (135,463                       | )      |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Net loss                                             |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   | (6,899                            | )      | (6,899    | )      |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Balances at 12/31/01                                 |   | 4,956,535                      |   | $                          | 5      |                            | 0       |                | $      | 0                              |      | 0                          |   | $                                | 0      |                 | 0       |                          | $      | 0                                |   | $                                 | (2,366 | )         | $      | 19,618 |   | $ | (16,645 | ) | $ | 612 |   |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Repurchase Shares                                    |   | (806,983                       | )      |                       |   | 806,983                         |    | (759                | )      |                           |      |                       |   |                             |   |                 |    | 2,251                         |   |                             |   |                              |   | 1,492     |   |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Interest on loan to stockholders                     |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    | (152                          | )      |                             |   |                              |   | (152      | )      |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Stock options exercised                              |   | 37,483                         |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   | 18                               |   |                              |   | 18        |   |
|                                                 |   |                           |   |                       |   |                            |    |                |   |                           |      |                       |   |                             |   |                 |    |                          |   |                             |   |                              |   |      |   |
| Issuance of 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                                 |   | 4,187,035                      |   | $                          | 5      |                            | 806,983 |                | $      | (759                           | )         | 0                          |   | $                                | 0      |                 | 216,000 |                          | $      | 0                                |   | $                                 | (267   | )         | $      | 22,509 |   | $ | (20,013 | ) | $ | 1,475 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

F-5

----

 

CENTIV, INC.

STATEMENTS OF CASH FLOWS

 

($ in thousands)

 
|                                                                                       |   | **YEARS  ENDED DECEMBER 31,** |       |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                       |   | **2002**                      |       | **2001** |   | **2000** |   |
| **Cash  flows from operating activities:**                                                 |   |                          |       |   |   |   |   |
| Net loss                                                                                   |   | $                             | (2,558     | ) | $ | (6,899 | ) | $ | (2,334 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                          |       |   |   |   |   |
| Provision for  doubtful accounts receivable                                                |   | (2                            | )          | 33 |   | 33 |   |
| Provision  /write-down of inventory                                                        |   | 77                            |       | 134 |   | 0 |   |
| Depreciation                                                                               |   | 570                           |       | 313 |   | 100 |   |
| Non-cash loss on  note from shareholder                                                    |   | 1,492                         |       | — |   | — |   |
| Non-cash  interest on note payable (receivable)                                            |   | (34                           | )          | 65 |   | 0 |   |
| Non-cash  compensation for warrants and stock options                                      |   | 26                            |       | 97 |   | 70 |   |
| Amortization of  Discount on Convertible Subordinated Debt                                 |   | 2                             |       | — |   | — |   |
| (Gain) Loss on  sale of Businesses                                                         |   | (488                          | )          | 2,092 |   | — |   |
| Loss on disposal  of assets                                                                |   | 125                           |       | — |   | — |   |
| Deferred taxes                                                                             |   | 49                            |       | 1,300 |   | (413 | ) |
| Changes in net  assets and liabilities                                                     |   |                          |       |   |   |   |   |
| Accounts  receivable                                                                       |   | (697                          | )          | 4,716 |   | (3,942 | ) |
| Inventories                                                                                |   | 77                            |       | (113 | ) | (724 | ) |
| Prepaid expenses  and other assets                                                         |   | (57                           | )          | (793 | ) | 15 |   |
| Accounts payable  and accrued expenses                                                     |   | (1,248                        | )          | (44 | ) | 1,791 |   |
| Deferred income  and contract obligation                                                   |   | (68                           | )          | 51 |   | 271 |   |
| Income taxes                                                                               |   | 596                           |       | (382 | ) | (683 | ) |
| Net assets,  discontinued operations                                                       |   | 123                           |       | 7,232 |   | (393 | ) |
| Total  adjustments                                                                         |   | 543                           |       | 14,701 |   | (3,875 | ) |
| **Net  cash (used in)  provided by operating  activities**                            |   | **(2,015**                    | **)**      | **7,802** | ** ** | **(6,209** | **)** |
|                                                                                       |   |                          |       |   |   |   |   |
| **Cash  flows from investing activities:**                                                 |   |                          |       |   |   |   |   |
| Purchase of  property and equipment – continuing operations                           |   | (331                          | )          | (1,323 | ) | (638 | ) |
| Purchase of  property and equipment – discontinued operations                         |   | —                        |       | (132 | ) | (808 | ) |
| Proceeds from  sale of Businesses                                                          |   | 1,250                         |       | 5,931 |   | — |   |
| **Net  cash provided by (used in) investing activities**                                   |   | **919**                       | ** ** | **4,476** | ** ** | **(1,446** | **)** |
|                                                                                       |   |                          |       |   |   |   |   |
| **Cash  flows from financing activities:**                                                 |   |                          |       |   |   |   |   |
| Proceeds, net,  from credit facility                                                       |   | (795                          | )          | (10,347 | ) | 6,878 |   |
| Proceeds from  issuance of Preferred Stock                                                 |   | 2,025                         |       | — |   | — |   |
| Proceeds from  issuance of Convertible Subordinated Debt                                   |   | 1,000                         |       | — |   | — |   |
| Proceeds from  capital lease financings                                                    |   | 76                            |       | — |   | — |   |
| Proceeds from  exercise of  stock options                                             |   | 18                            |       | — |   | — |   |
| Dissenters’  settlement payments                                                      |   | —                        |       | (1,769 | ) | (275 | ) |
| Loan to  stockholder                                                                       |   | (152                          | )          | (425 | ) | (161 | ) |
| **Net  cash provided by (used in) financing activities**                                   |   | **2,172**                     | ** ** | **(12,541** | **)** | **6,442** | ** ** |
|                                                                                       |   |                          |       |   |   |   |   |
| **Increase  (decrease) in cash and cash equivalents**                                      |   | **1,076**                     | ** ** | **(263** | **)** | **(1,213** | **)** |
| Cash and cash  equivalents, beginning of year                                              |   | 228                           |       | 491 |   | 1,704 |   |
| Cash and cash  equivalents, end of year                                                    |   | $                             | 1,304      |   | $ | 228 |   | $ | 491 |   |
|                                                                                       |   |                          |       |   |   |   |   |
| Supplemental  disclosure of cash flow information:                                         |   |                          |       |   |   |   |   |
|                                                                                       |   |                          |       |   |   |   |   |
| Cash paid during  the year for interest                                                    |   | $                             | 116        |   | $ | 1,046 |   | $ | 472 |   |
| Cash paid during  the year for income taxes                                                |   | $                             | —     |   | $ | — |   | $ | 66 |   |
| Divestiture of  Tekgraf Systems, Inc. in exchange for Dissenters’ shares stock        |   | $                             | —     |   | $ | — |   | $ | 1,127 |   |
| Note payable for  Dissenter’s settlement in exchange for Dissenters’ shares      |   | $                             | —     |   | $ | — |   | $ | 1,705 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-6

----

 

CENTIV, INC.

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

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

 

**ORGANIZATION**

 

Weare a developer and provider of Web-enabled point-of-purchase (POP) solutionsfor consumer goods manufacturers and multi-location retailers.  Our Instant Impact solution allows marketingmanagers, brand managers and retailers to create, edit and schedule delivery ofcustomized POP signage, using field-editable sign templates created and/orapproved by manufacturers. Instant Impact POP signage is print quality anddigitally produced for the unique requirements of each retail location, allowingusers to target specific consumer segments at the point-of-purchase andaccumulate quantitative data for analysis and feedback on the success of theirin-store or on-premise marketing campaigns. Our products allow useraccess to an information database for selecting sign templates approved orcreated by manufacturers, input data for the sign templates and select signageproducts for production of the sign templates. Our Internet-based user interface is clear, flexible, user-friendly andchangeable to allow control of the message at a corporate or local store level.Instant Impact signage can either be printed in a Centiv print center, or anindustry-standard print-formatted file can be delivered via the Internet to anyprint provider in the world.

 

Theroots of Instant Impact were formed in 1998 when we partnered withAnheuser-Busch to design, configure, deliver and implement POP signage systemsin over 730 Anheuser-Busch wholesale distributors in the United States and 16foreign countries. This led to our relationship with Anheuser-Busch pursuant towhich we have installed a POP system for Anheuser-Busch allowing distributorsto access that system to create custom signage using templates created byAnheuser-Busch.  We supply technicalsupport call service and various supplies for that system.   In December 2002, Anheuser-Busch notifiedCentiv that upon its expiration on March 31, 2003, we will no longer be thepreferred supplier for various consumables of the system and the preferredsupplier technical support agreementwill not be renewed.

 

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 serviceoperations included field service technicians, customer support call center,component repair and refurbishment facilities and parts logistics.  The Company sold this business effectiveJanuary 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 thisbusiness effective December 31, 2001 and it is reflected as *DiscontinuedOperations.*

 

•***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 and it is reflected as *Discontinued Operations.*

 

F-7

----

 

Sales to Anheuser Busch (A-B) and its wholesale distributornetwork were $24.9 million during 2002. With the termination of the preferred supplier and support agreementeffective March 31, 2003, we expect that the sales to A-B and the wholesaledistributor network will decline substantially during 2003 and be fullyeliminated after March 31, 2003.  We donot believe that sales from our Instant Impact product will be sufficient toreplace the sales lost from A-B and its wholesale distributor network during2003.  In response to this, we haveundertaken a downsizing of our operations and have reduced our headcount andother operating expenses to a level that we believe will enable us to continueto operate our business.  Managementbelieves the actions taken, along with capital raised with the sale of thepreferred stock, as discussed in Note 9, will provide adequate financingthrough at least the end of April 2004.

 

**BASIS OF PRESENTATION**

 

Thefinancial statements are prepared onthe basis of generally accepted accounting principles.  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, 2002 and 2001, and reported amounts of revenues andexpenses for each of the three years in the period ended December 31, 2002,2001 and 2000.  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.

 

**NATURE OF OPERATIONS**

 

Centivoffers web services for consumer brand companies to manage their in-store andon-premise point-of-purchase (POP) process.  The final product ishigh quality digitally produced signage that is mass customized for the uniquerequirements of each retail location.  The POP materials are either produced at our digital print center orprinted remotely at the customer’s location. Revenue consists of web services, design services, POP materials,supplies and equipment.

 

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

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

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

 

**CASH AND CASH EQUIVALENTS**

 

TheCompany considers all highly liquid investments with a remaining maturity ofthree months or less when purchased to be cash equivalents.

 

F-8

----

 

**REVENUE AND ACCOUNTS RECEIVABLES**

 

Salesare recognized upon the shipment of products to the customer or when theservice has been performed.

 

Themajority of the Company’s accounts receivable are due from companies in theconsumer goods manufacturing industry. Credit is extended based on evaluation of a customers’ financialcondition and, generally, collateral is not required.  Accounts receivable are due within 30 days and are stated atamounts due from customers net of an allowance for doubtful accounts.  The Company determines its allowance byconsidering a number of factors, including the length of time trade accountsreceivable are past due, the Company’s previous loss history, the customer’scurrent ability to pay its obligation to the Company, and the condition of thegeneral economy and the industry as a whole. The Company writes-off accounts receivable when they becomeuncollectible, and payments subsequently received on such receivables arecredited to the allowance for doubtful accounts.

 

**INVENTORIES**

 

Inventoriesare stated at the lower of cost or market (determined principally by the first-in, first-out method, whichapproximates average cost).  The Companymaintains a reserve for its estimate of excess, obsolete and damaged goods.

 

**PROPERTY AND EQUIPMENT**

 

Propertyand equipment are stated at cost. Property and equipment are depreciated on a straight-line basis overtheir 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.

 

**INCOME TAXES**

 

Theprovision for income taxes and corresponding balance sheet accounts aredetermined 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.  Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized.

 

F-9

----

 

**STOCK INCENTIVE PLANS**

 

TheCompany maintains a stock incentive plan. See Note 10 for additional information regarding this plan.  The Company accounts for this plan under therecognition and measurement principles of Accounting Board Opinion No. 25,“Accounting for 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.

 

Thefollowing table illustrates the effect of net income and earnings per share ifthe Company had applied the fair value recognition provisions of FinancialAccounting Standards Board (FASB) Statement of 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)**                                                                                                          |   | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                                                                                          |   |     |       |     |       |     |       |
| Net  loss – as reported                                                                                                  |   | $        | (2,558     | )        | $          | (6,899   | )          | $ | (2,334 | ) |
|                                                                                                                          |   |     |       |     |       |     |       |
| Deduct:   stock-based compensation expense  determined under the fair value based method for all awards, net of tax |   | 22       |       | (182     | )          | (43      | )          |
|                                                                                                                          |   |     |       |     |       |     |       |
| Net  loss – pro forma                                                                                                    |   | $        | (2,468     | )        | $          | (7,081   | )          | $ | (2,377 | ) |
|                                                                                                                          |   |     |       |     |       |     |       |
| Earnings  per share:                                                                                                          |   |     |       |     |       |     |       |
| Basic  – as reported                                                                                                     |   | $        | (0.69      | )        | $          | (1.39    | )          | $ | (0.38 | ) |
| Basic  – pro-forma                                                                                                       |   | $        | (0.67      | )        | $          | (1.42    | )          | $ | (0.39 | ) |
| Diluted  – as reported                                                                                                   |   | $        | (0.69      | )        | $          | (1.39    | )          | $ | (0.38 | ) |
| Diluted  – pro forma                                                                                                     |   | $        | (0.67      | )        | $          | (1.42    | )          | $ | (0.39 | ) |

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

TheCompany’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.

 

**SHIPPING AND HANDLING FEES AND COSTS**

 

Shipping and handling fees are billed to customersand are classified as revenue and the shipping and handling costs areclassified as costs of goods sold as required per the Emerging Issues TaskForce (“EITF”) released in Issue no. 00-10, “Accounting for Shipping andHandling Fees and Costs.”

 

**LONG LIVED ASSETS**

 

InAugust 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment ofLong-Lived Assets.”  SFAS No. 144 iseffective for fiscal years beginning after December 15, 2001, and addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.

 

F-10

----

 

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

 

**BASIS OF PRESENTATION**

 

Certainprior year amounts have been reclassified to conform with the 2002presentation.

 

**3.****              INVENTORIES**

 

Inventories,net of reserves, at December 31, 2002 and 2001 consist of the following:

 
|            |   | **2002** |   | **2001** | ** ** |
|-----------------|--------|----------|--------|----------|------------|
|            |   |     |   |     |       |
| Finished  goods |   | $        | 824    |     | $          | 978 |   |
|                 |        |          |        |          |            |  |  |

 

**4.****              PROPERTYAND EQUIPMENT, NET**

 

Propertyand equipment, net of accumulateddepreciation, at December 31, 2002 and 2001, consists of the following:

 
| **($ in thousands)**              |   | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------|--------|----------|------------|----------|------------|
|                              |   |     |       |     |       |
| Furniture  and fixtures           |   | $        | 192        |     | $          | 276 |   |
| Machinery  and computer equipment |   | 623      |       | 569      |       |
| Computer  software                |   | 1,690    |       | 1,554    |       |
| Leasehold  improvements           |   | 25       |       | 3        |       |
|                              |   | 2,530    |       | 2,402    |       |
| Less:  accumulated depreciation   |   | (823     | )          | (331     | )          |
|                              |   |     |       |     |       |
| Property  and equipment, net      |   | $        | 1,707      |     | $          | 2,071 |   |

 

**5.****              CURRENTDEBT**

 

In June 2002, the Company entered into aLoan and Security Agreement (the “Agreement”), with Cole Taylor Bank, whichexpires on June 30, 2004, that provides for a revolving credit facilityinitially for $750,000 with the possibility of increases up to $2.0 million.The availability under the credit facility will be increased to $2.0 million ifthe Company achieves earnings beforeinterest, taxes, depreciation and amortization of at least $50,000 for three (3) consecutivemonths.  The Company did notachieve these milestones, therefore the availability under the credit facilitywas $750,000.  Outstanding advancesunder the Agreement bear interest at prime plus 1.00%.   Pursuant to the terms of the Agreement, theCompany has pledged accounts receivables, inventory and equipment ascollateral.  The Company had borrowingsof $629,000 under this

 

F-11

----

 

credit facility and has repaid all of theborrowings.  As of December 31, 2002,the Company had no borrowings under this $750,000 credit facility.

 

In accordance with the Agreement, the Company isrequired to maintain certain financial covenants, which specifically includetangible net worth, a debt to equity ratio and a debt service coverageratio.  The Company was below the debtservice coverage ratio required under the bank agreement for the three monthsended December 31, 2002, at which time the Company had no borrowings under thisAgreement.

 

In September 2002, the Company entered into asupplemental credit facility with Cole Taylor Bank.  The supplemental credit facility provided up to $5.2 million inpurchase order financing.  This facilitywas used to finance the inventory requirements for the large-scale equipmentupgrade with Anheuser Busch and its wholesalers. The maturity date for thisfinancing is February 15, 2003 and bears interest 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 noborrowings outstanding under this facility.

 

With the termination of the preferred supplier andsupport agreements with Anheuser-Busch, the credit facilities with Cole TaylorBank were terminated effective March 31, 2003.

 

**6.****              INCOMETAXES**

 

Theprovision (benefit) for income taxesfor the years ended December 31, 2002, 2001 and 2000 is as follows:

 
| **($ in thousands)**           |   | **2002** | ** ** | **2001**   | ** ** | **2000** | ** ** |
|--------------------------------|--------|----------|------------|------------|------------|----------|------------|
|                           |   |     |       |       |       |     |       |
| **Current**                    |   |     |       |       |       |     |       |
| Federal                        |   | $        | 0          |       | $          | 0        |       | $ | (600 | ) |
| State                          |   | 0        |       | 0          |       | (112     | )          |
| **Subtotal Current**           |   | **$**    | **0**      | ** ** | **$**      | **0**    | ** ** | **$** | **(712** | **)** |
|                           |   |     |       |       |       |     |       |
| **Deferred**                   |   |     |       |       |       |     |       |
| Federal                        |   | $        | (307       | )          | $          | (953     | )          | $ | (380 | ) |
| State                          |   | (42      | )          | (135       | )          | (33      | )          |
| Change  in valuation allowance |   | 496      |       | 2,055      |       | 0        |       |
| **Subtotal Deferred**          |   | **$**    | **147**    | ** ** | **$**      | **967**  | ** ** | **$** | **(413** | **)** |
|                           |   |     |       |       |       |     |       |
| **Total Provision/(Benefit)**  |   | **$**    | **147**    | ** ** | **$**      | **967**  | ** ** | **$** | **(1,125** | **)** |

 

Areconciliation of federal statutoryand effective income tax rates is as follows: 

 
|                                        |   | **2002** |   | **2001** | ** ** | **2000** | ** ** |
|---------------------------------------------|--------|----------|--------|----------|------------|----------|------------|
|                                        |   |     |   |     |       |     |       |
| Statutory  U.S. federal income tax rate     |   | (34.0    | )%     | (34.0    | )%         | (34.0    | )%         |
| Effect  of:                                 |   |     |   |     |       |     |       |
| State  income taxes, net of federal benefit |   | (2.5     | )      | (3.0     | )          | (3.3     | )          |
| Nondeductible  stock repurchase write-off   |   | —   |   | 12.2     |       | 1.8      |       |
| Nondeductible  goodwill amortization        |   | 21.0     |   | —   |       | —   |       |
| Nondeductible  meals and entertainment      |   | 0.3      |   | 0.3      |       | 0.9      |       |
| Nondeductible  foreign loss                 |   | —   |   | 0.1      |       | 0.6      |       |
| Return  to accrual reconciliation           |   | (0.3     | )      | 1.8      |       | 0.4      |       |
| Sale  of Channels business                  |   | —   |   | 3.1      |       | —   |       |
| Valuation  reserve for NOL carry forward    |   | 20.5     |   | 34.7     |       | —   |       |
| Other,  net                                 |   | 1.1      |   | 1.1      |       | 1.1      |       |
|                                        |   |     |   |     |       |     |       |
| Effective  income tax rate                  |   | 6.1      | %      | 16.3     | %          | (32.5    | )%         |

 

F-12

----

 

Ananalysis of the deferred income taxassets and liabilities at December 31, 2001 and 2000 is as follows:

 
| **($ in thousands)**                                    |   | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------------------|--------|----------|------------|----------|------------|
| Current  deferred income tax assets:                    |   |     |       |     |       |
| Accounts  receivable                                    |   | $        | 8          |     | $          | 56 |   |
| Inventory                                               |   | 45       |       | 52       |       |
| Accruals                                                |   | 105      |       | 162      |       |
| 263A  Capitalization                                    |   | 4        |       | 33       |       |
| Total  current deferred income tax assets               |   | $        | 162        |     | $          | 303 |   |
|                                                    |   |     |       |     |       |
| Noncurrent  deferred income tax assets:                 |   |     |       |     |       |
| Net  operating loss carryforward                        |   | 2,840    |       | 2,055    |       |
| Valuation  allowance on net operating loss carryforward |   | (2,840   | )          | (2,055   | )          |
| Total  non-current deferred income tax asset            |   | $        | 0          |     | $          | 0 |   |
|                                                    |   |     |       |     |       |
| Noncurrent  deferred income tax liabilities, net        |   |     |       |     |       |
| Depreciation                                            |   | (191     | )          | (103     | )          |
| Other                                                   |   | 29       |       | (55      | )          |
| Total  noncurrent deferred income tax liabilities       |   | (162     | )          | (157     | )          |
|                                                    |   |     |       |     |       |
| Noncurrent  deferred income tax asset (liability), net  |   | $        | (162       | )        | $          | (157 | ) |
|                                                    |   |     |       |     |       |
| Net  Deferred income tax asset (liability)              |   | $        | 0          |     | $          | 146 |   |

 

The Company maintains a valuation allowancewith respect to deferred tax assets as a result of the uncertainty of ultimaterealization.  At December 31, 2002, theCompany had net operating loss carry-forwards of approximately $7.3 million,expiring in various years through 2022.

 

**7.****              COMMITMENTSAND CONTINGENCIES**

 

**OPERATING LEASES**

 

TheCompany leases office space under various operating leases that expire through2008.  At December 31, 2002, minimumrentals due under these leases  were as follows (in thousands):

 
| 2003   |   | $   | 249    |   |
|--------|--------|-----|--------|--------|
| 2004   |   | 220 |   |
| 2005   |   | 224 |   |
| 2006   |   | 222 |   |
| 2007   |   | 228 |   |
| 2008   |   | 110 |   |
|   |   | $   | 1,253  |   |

 

Rentexpense for the years ended December 31, 2002, 2001 and 2000 was approximately$269,000, $218,000 and $215,000,****respectively.

 

F-13

----

 

**CAPITAL LEASES**

 

TheCompany leases office and production equipment under various capital leasesthat expire through 2007.  Theoutstanding balance under the capital leases was $76,000 as of December 31,2002 and was reflected as an accrued liability.  The payments including interest due under these leases were asfollows (in thousands):

 
| 2003                                         |   | $      | 39     |   |
|----------------------------------------------|--------|--------|--------|--------|
| 2004                                         |   | 31     |   |
| 2005                                         |   | 7      |   |
| 2006                                         |   | 7      |   |
| 2007                                         |   | 1      |   |
| Total  Lease payments                        |   | $      | 85     |   |
|                                         |   |   |   |
| Less:  Amounts representing interest    |   | (9     | )      |
|                                         |   |   |   |
| Present  Value of net minimum lease payments |   | $      | 76     |   |

 

Theequipment has a net carrying cost of $85,000 and $0 at December 31, 2002 and 2001, respectively.

 

**8.****              LITIGATION**

 

TheCompany is involved in certain claims arising in the normal course ofbusiness.  In the opinion of managementof the Company, although the outcomes of the claims are uncertain, in the aggregate,they are not likely to have a material adverse effect on the Company.

 

**9.****              CAPITALSTRUCTURE**

 

OnNovember 11, 1997, in connection with the initial public offering of theCompany’s securities, 2,100,000 units were issued.  Each unit consisted of one share of Class A Common Stock and oneRedeemable Warrant.  The Class A CommonStock and Redeemable Warrant were transferable separately immediately uponissuance.

 

**CLASS A COMMON STOCK**

 

OnJune 2, 1997, the Company authorized 31,666,667 shares of Class A Common Stock,$.001 par value.  Holders of Class ACommon Stock have the right to cast one vote for each share held of record onall matters submitted to a vote of holders of Class A Common Stock.

 

**REDEEMABLE WARRANTS**

 

Aspart of the Company’s initial public offering, the investor received aRedeemable Warrant that entitled the registered holder to purchase one share ofClass A Common Stock at an exercise price of $8.40 at any time until the fifthanniversary of the date of issue, which was November 10, 2002.  Beginning on the first anniversary of thedate of issue, the Redeemable Warrants were redeemable by the Company on 30days written notice and at a redemption price of $.05 per Redeemable

 

F-14

----

 

Warrantif the closing price of the Class A Common Stock for any 30 consecutive tradingdays ending within 15 days of the notice of redemption averages in excess of$11.75 per share.  All RedeemableWarrants must be redeemed if any are redeemed. The Company has reserved from its authorized but unissued shares asufficient number of shares of Class A Common Stock for issuance upon theexercise of the Redeemable Warrants. The Redeemable Warrants did not contain any voting or other rights of astockholder of the Company. These redeemable warrants expired on November 10,2002.

 

**CLASS B COMMON STOCK**

 

OnJanuary 21, 2000, the Company eliminated its dual class of stock and alloutstanding shares of Class B Common Stock were converted into Class A CommonStock on a one-for-one basis. On May 1, 1997, the Company increased theoutstanding shares from 100 to 3,424 by declaring a 34.24-for-1 stock split ofthe Company’s common stock (par value of $1.00).  On June 2, 1997, the Company declared a 400-for-1 stock split ofthe Company’s common stock pursuant to which all of the Company’s outstandingcommon stock was exchanged for 4,000,000 shares of Class B Common Stock with apar value of $.001.** **DuringOctober 1997, the Company effected a .83333325-for-1 reverse stock splitpursuant to which the outstanding shares of Class B Common Stock were exchangedfor 3,333,333 shares of Class B Common Stock. Each share of Class B Common Stock was entitled to five votes on allmatters on which stockholders 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 her lifetime,or (iii) the conversion of an aggregate of 75% of the authorized shares ofClass B Common Stock.

 

**ESCROW SHARES**

 

Inconnection with the Company’s initial public offering of its securities, theholders of the Company’s Class B Common Stock agreed to place an aggregate of166,667 shares into escrow.  As part ofthe settlement of a claim brought by former dissenting shareholders inconnection with the conversion of the Class A Common Stock, 57,067 escrowshares have been forfeited.  In March2001, the remaining 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.

 

The number of outstanding shares does not include228,266 shares held in escrow in connection with an acquisition by the Companypursuant to a Pledge, Security and Escrow  Agreement dated June 2, 1997. All of the interest in and title to these 228,266 shares was transferredto Anita Ltd. and then subsequently transferred to the Company as part of aSettlement Agreement and Mutual Releases dated as of December 21, 2000.  These shares will ultimately be releasedfrom the escrow to the Company and will be cancelled.  Therefore, the Company has, for accounting purposes, treatedthese shares as cancelled effective as of December 21, 2000.

 

F-15

----

 

**PREFERRED STOCK**

 

TheCompany 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 ofredemption and liquidation preferences. There were no outstanding shares of preferred stock as of December 31,2001.

 

SeriesA Convertible Preferred Stock:

 

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

 

The Series A Convertible Preferred stock had aliquidation preference over common stock equal to the purchase price of theconvertible preferred stock plus any accrued but unpaid dividends.  The Series A Convertible Preferred stock began to accrue dividends on March 31, 2003 at an annual rate equal to8% of the purchase price of the convertible preferred stock.  In addition, if not previously convertedinto common stock, the Series A Convertible Preferred stock was subject toredemption at the option of the Company on the fourth anniversary of theissuance of the convertible preferred stock at a redemption price equal to thepurchase price plus any accrued but unpaid dividends.  If the Company failed to redeem the convertible preferred stockon that date, the holders of the convertible preferred stock become entitled toelect a majority of the board of directors. Notwithstanding the foregoing, directors elected by virtue of the votingrights of the Series A Convertible Preferred stock would have had to recusethemselves from any vote to redeem all or a portion of the convertiblepreferred stock.

 

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

 

TheCompany recorded a beneficial conversion feature on the convertible preferredstock and warrants based on the fair value of the common stock of $1.00 pershare as of the date of commitment. The warrants with an exercise price of$1.50 per share, were valued at $810,000 using the Black-Scholes valuationmethod. The beneficial conversion feature was calculated to be $810,000 at thecommitment date of March 28, 2002 and has been recorded as Additional Paid inCapital. As the preferred shares were convertible immediately, the entireamount of the beneficial conversion feature was accreted into the AccumulatedDeficit at March 31, 2002.

 

The Series A Convertible Preferred Stock was initiallyconvertible into ten shares of common stock for each share of the Series AConvertible Preferred stock.  Thisconversion ratio, however, was subject to anti-dilution adjustment for stocksplits, combinations and other similar changes and if the Company issued,except in limited circumstances, any capital stock for a per share price lessthan the then current conversion price.

 

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

 

The Company did, in fact, recognize $20 million inrevenues for the 12-month period ending March 31, 2003 and thus, all of theSeries A Convertible Preferred stock issued and outstanding as of the close ofbusiness on March 31, 2003 was converted into common stock and the associatedwarrants were converted into warrants to purchase common stock.

 

F-16

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OnMarch 31, 2003, as part of the issuanceof Series B Convertible Preferred Stock, the investors who also owned Series APreferred Stock converted 135,000 sharesof  Series A Convertible Preferred Stock(the “Series A Preferred”) into 270,000 shares of Series B PreferredStock.  The associated warrants werecancelled for no value.  NoWarrants were issued in connection with the shares of Series B Preferred issuedin conversion for the Series A Convertible Preferred.  The remaining 81,000outstanding shares of Series A Convertible Preferred were converted on March31, 2003 into 810,000 shares of common stock in accordance with the terms ofthe Series A Preferred certificate of designations. Therefore, as of March 31,2003, there were no shares of Series A Preferred Stock outstanding.

 

SeriesB Convertible Preferred Stock:

 

OnMarch 31, 2003, the Company sold, in a private placement exempt fromregistration, 500,000 units, eachconsisting of one share of Series B Convertible Preferred Stock (the “Series BPreferred”) and one warrant to purchase two shares 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 $500,000 wasrepaid in full from proceeds of this offering. In addition, the Company issued an additional 270,000 shares of Series BPreferred in conversion of 135,000 of its outstanding Series A ConvertiblePreferred Stock (the “Series A Preferred”). No Warrants were issued inconnection with the shares of Series B Preferred issued in conversion of theSeries A Preferred.  In addition, thewarrants 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 was converted onMarch 31, 2003 into 810,000 shares of common stock in accordance with the termsof the Series A Preferred certificate of designations.

 

The purchase price for each unit was $5.00 per unit (the“Purchase Price”).  Because each shareof Series B Preferred is convertible, initially, into ten shares of CommonStock, the effective purchase price was $0.50 for each share of Common Stockpurchased.  The Warrant gives the holderthe right, until seven years after the issuance of the Warrant, to purchase twoshares of Common Stock at a purchase price of $0.50 per share.  Neither the Series B Preferred nor theWarrants have been registered under the Securities Act of 1933.  Therefore, they may not be offered or soldin the United States absent registration or an applicable exemption fromregistration requirements.

 

F-17

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The Series B Preferred has a liquidation preference overCommon Stock equal to two times the Purchase Price plus any accrued and unpaiddividends.  If not previously converted,the Series B Preferred will begin to accrue dividends on April 1, 2004 at anannual rate equal to 8% of the Purchase Price per year.  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 is initiallyconvertible into 10 shares of Common Stock for each share of the Series BPreferred.  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 of $0.50 pershare, except for issuances pursuant to the Company’s stock option plan andcertain other issuances to business partners. The anti-dilution adjustment will be made on a full-ratchet basis.  The price anti-dilution protection will notapply until the Company’s stockholders ratify the authorization of the Series BPreferred.

 

The purchasers of the Series B Preferred may voluntarilyconvert the Series B Preferred at any time. The Series B Preferred will be automatically converted if (i) theCompany meets either Conversion Milestone defined below, or (ii) holders of 2/3of the outstanding shares of the Series B Preferred agree to convert.  In either event, however, an automaticconversion will only occur if a registration statement covering the resale ofthe shares issuable upon conversion 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 determined in accordance with United StatesGenerally Accepted Accounting Principles (“GAAP”) as applied by the Company onthe date when the Series B Preferred was first issued and the closing tradingprice of the Company’s Common Stock is equal to or greater than $2.00 per share(as adjusted for any stock dividends, combinations or splits with respect 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 3 times the then-applicable conversion price for theSeries B Preferred and which offering results in gross proceeds to the Companyof not less than $15 million.  “TradingDay” 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 Series B Preferred Stockfinancing included cash proceeds of $2,000,000 plus the conversion of $500,000of the Company’s Senior Convertible Subordinated Debt that was issued onSeptember 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 is debt free.  Aggregatetransaction costs of $90,000 representing legal, accounting and registrationfees were incurred bringing the net proceeds, after  repaying the Subordinated Debt and transaction costs, to$1,410,000.

 

**10.****       STOCKOPTION PLAN**

 

TheCompany’s Board of Directors and stockholders approved the 1997 Stock OptionPlan (the “Plan”) covering 1,500,000 shares of the Company’s Class A CommonStock 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 RevenueCode or (ii) non-qualified stock options. Incentive options granted under the Plan are exercisable for a period ofup to ten years from the date of grant at an exercise price that is not lessthan the fair market value of the stock on the date of

 

F-18

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grant,except that the term of an incentive option granted under the Plan to astockholder owning more than 10% of the outstanding voting power may not exceedfive years and its exercise price may not be less than 110% of the fair marketvalue of the stock on the date of grant. In addition, to the extent that the aggregate fair market value, as ofthe date of grant, of the stock for which incentive options become exercisablefor the first time by an optionee during the calendar year exceeds $100,000,the portion of such option that is in excess of the $100,000 limitation will betreated as a non-qualified option.  TheCompany’s Board of Directors administers the Plan, which expires in August2007.  The Company has 357,038 stockoptions available for future grant at December 31, 2002.

 

Asummary of stock options as of December 31, 2002, 2001 and 2000 and activityduring the period ending those dates is as follows:

 
|                                                                   |   | **2002**                                   |   | **2001**                              |   | **2000**                                   |       |
|------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------------------------|--------|--------------------------------------------|------------|
|                                                                   |   | **Weighted  Average  Exercise**            |   | **Weighted  Average  Exercise**       |   | **Weighted  Average  Exercise**            |       |
|                                                                   |   | **Options**                                |   | **Price ($)**                         |   | **Options**                                |       | **Price ($)** |   | **Options** |   | **Price ($)** |   |
| Options  at beginning of period                                        |   | 935,587                                    |   | 1.35                                  |   | 596,837                                    |       | 2.12 |   | 275,500 |   | 2.78 |   |
| Granted                                                                |   | 2,008,125                                  |   | 0.97                                  |   | 510,500                                    |       | 0.62 |   | 446,837 |   | 1.91 |   |
| Exercised                                                              |   | (37,500                                    | )      | 0.47                                  |   | 0                                          |       | — |   | 0 |   | — |   |
| Forfeited                                                              |   | (377,750                                   | )      | 1.54                                  |   | (171,750                                   | )          | 1.86 |   | (125,500 | ) | 2.83 |   |
| Outstanding  at the end of period                                      |   | 2,528,462                                  |   | 1.02                                  |   | 935,587                                    |       | 1.35 |   | 596,837 |   | 2.12 |   |
| Options  exercisable at end of period                                  |   | 603,254                                    |   | 1.24                                  |   | 433,546                                    |       | 1.75 |   | 170,087 |   | 2.14 |   |
|                                                                   |   |                                       |   |                                  |   |                                       |       |   |   |   |   |   |   |
|                                                                   |   |                                       |   |                                  |   |                                       |       |   |   |   |   |   |   |
| Weighted average fair value of options granted  during the period are: |   |
|                                                                   |   |                                       |   |                                  |   |                                       |       |   |   |   |   |   |   |
|                                                                   |   | **2002**                                   |   | **2001**                              |   | **2000**                                   | ** ** |
|                                                                   |   | **Weighted  Average  Exercise  Price ($)** |   | **Weighted  Fair  Market  Value ($)** |   | **Weighted  Average  Exercise  Price ($)** |       | **Weighted  Fair  Market  Value ($)** |   | **Weighted  Average  Exercise  Price ($)** |   | **Weighted  Fair  Market  Value ($)** |   |
| Option  granted during the year                                        |   |                                       |   |                                  |   |                                       |       |   |   |   |   |   |   |
| Option  price > fair market value                                   |   | 0.89                                       |   | 0.85                                  |   | 0.52                                       |       | 0.47 |   | — |   | — |   |
| Option  price = fair market value                                      |   | 0.97                                       |   | 0.97                                  |   | 0.65                                       |       | 0.65 |   | 1.91 |   | 1.91 |   |
| Option  price < fair market value                                   |   | —                                     |   | —                                |   | —                                     |       | — |   | — |   | — |   |

 

Thesale of the Channels Business (See Note 15) involved five members of managementwhose stock options vested immediately upon the consummation of the ChannelsBusiness transaction with the vesting period extended to one year or December28, 2002.  The Company recorded anexpense of $60,528 relating to the accelerated vesting and extension of thevesting period of the stock options for the five members of management.

 

Pursuantto the offer made to John Larkin as President and Chief Operation Officer ofCentiv, 1,423,000 options were granted on October 28, 2002 outside of the StockOption Plan.  The vesting period of theoptions include 85,000 shares vesting immediately and the remaining vest

 

F-19

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over asix-year period.  There are provisionsto accelerate the vesting period ifcertain revenue targets are achieved in 2003 and 2004.

 

The Companyapplies APB Opinion No. 25 (“APB 25”) and related Interpretations in accountingfor the Plan.  The Financial AccountingStandards Board issued Statement No. 123, “Accounting for Stock-BasedCompensation” (“FAS 123”) changing the methods for recognition of cost on planssimilar 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 illustratesthe 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, “Accountingfor stock-based Compensation,” to stock-based compensation.  The following table also provides the amountof Stock-Based compensation cost included in net income as reported.

 

Hadcompensation cost for the Plan been determined on a fair value basis inaccordance with the provisions of FAS 123, the Company’s net loss for the threeyears ended December 31, 2002, 2001 and 2000 would have been as follows:

 
| **($ in thousands)**                                                                                                     |   | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                                                                                     |   |     |       |     |       |     |       |
| Net  loss – as reported                                                                                             |   | $        | (2,558     | )        | $          | (6,899   | )          | $ | (2,334 | ) |
| Deduct:   stock-based compensation expense  determined under the fair value based method for all awards, net of tax |   | 22       |       | (182     | )          | (43      | )          |
|                                                                                                                     |   |     |       |     |       |     |       |
| Net  loss – pro forma                                                                                               |   | $        | (2,468     | )        | $          | (7,081   | )          | $ | (2,377 | ) |
|                                                                                                                     |   |     |       |     |       |     |       |
| Earnings  per share:                                                                                                     |   |     |       |     |       |     |       |
| Basic  – as reported                                                                                                |   | $        | (0.69      | )        | $          | (1.39    | )          | $ | (0.38 | ) |
| Basic  – pro-forma                                                                                                  |   | $        | (0.67      | )        | $          | (1.42    | )          | $ | (0.39 | ) |
| Diluted  – as reported                                                                                              |   | $        | (0.69      | )        | $          | (1.39    | )          | $ | (0.38 | ) |
| Diluted  – pro forma                                                                                                |   | $        | (0.67      | )        | $          | (1.42    | )          | $ | (0.39 | ) |

 

Optionsoutstanding and exercisable at December 31, 2002, by price range:

 
|                          |   | **Outstanding  Options** | ** ** | **Options  Exercisable** | ** ** |
|-------------------------------|--------|--------------------------|------------|--------------------------|------------|
|                          |   |                     | ** ** | **Weighted  Average**    | ** ** |   | ** ** |   | ** ** |
| **Range of  Exercise Prices** |   | **Shares**               | ** ** | **Remaining  Life**      | ** ** | **Exercise  Price** | ** ** | **Shares** |   | **Weighted Average  Exercise Price** | ** ** |
| $0.25  to $0.75               |   | 240,500                  |       | 8.2                      |       | 0.49 |   | 96,375 |   | 0.49 |   |
| $0.76  to $1.25               |   | 2,030,125                |       | 9.6                      |       | 0.97 |   | 284,875 |   | 0.98 |   |
| $1.26  to $1.75               |   | 87,837                   |       | 6.8                      |       | 1.51 |   | 87,837 |   | 1.51 |   |
| $1.76  to $2.25               |   | 155,000                  |       | 7.2                      |       | 2.06 |   | 119,167 |   | 2.07 |   |
| $2.26  to $3.00               |   | 15,000                   |       | 6.0                      |       | 3.00 |   | 15,000 |   | 3.00 |   |
|                          |   |                     |       |                     |       |   |   |   |   |   |   |
|                          |   | 2,528,462                |       |                     |       |   |   | 603,254 |   |   |   |

 

F-20

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Theamount of the pro forma charge has been determined using the Black-Scholes model, as permitted byFAS 123.  For purposes of thecalculation, management used an average interest rate of 5.18% based on theU.S. Treasury Strip (zero-coupon) bonds, a projected volatility rate of 80%, adividend yield of 0% and an expected life of 5 years for the grants.

 

**11.****       THIRD PARTY STOCK WARRANTS**

 

TheCompany has agreements with various entities whereby the Company grantedwarrants in exchange for services.  Thevalue of the warrants was determined using the Black-Scholes option model onthe date of grant and a non-cash charge was recorded. Below is a schedule showingthe warrants issued, the expiration date, exercise price and the value of thenon-cash charge:

 
| **Date of Grant**  |   | **Number of****Warrants** | ** ** | **Expiration****Date** | ** ** | **Exercise****Price** | ** ** | **Value  ($ in thousands)** |   |
|--------------------|--------|---------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------------|--------|
| July  3, 2001      |   | 60,000                    |       | 7/3/03                 |       | $                     | 1.15       |                        | $      | 29,700 |   |
| October  12, 2001  |   | 12,000                    |       | 10/12/03               |       | 1.00                  |       | 3,912                       |   |
| November  11, 2002 |   | 47,250                    |       | 11/11/07               |       | 1.00                  |       | 7,607                       |   |
|                    |        |                           |            |                        |            |                       |            |                             |        |  |  |

 

Theabove table excludes the following warrants issued: (1) 216,000 warrants(convertible into 2,160,000 common shares) issued to the Series A PreferredShareholders (see Note 9),  (2) 50,000warrants issued and another 60,000 warrants accrued for the Senior ConvertibleSubordinated Debt holders (see Note 16).

 

**12.****       NETINCOME (LOSS) PER COMMON SHARE**

 

Basicand diluted net income/(loss) per common share are computed by dividing netincome (loss) by the weighted average number of common shares and common shareequivalents outstanding during the period. Since the Company has a net loss from continuing operations, there wereno common share equivalents that were dilutive during any of the periods presented.  The changes in outstanding shares during thethree years ended December 31, 2002, 2001 and 2000 are shown below:

 
|                                       |   | **2002**  |   | **2001**  | ** ** | **2000**   | ** ** |
|--------------------------------------------|--------|-----------|--------|-----------|------------|------------|------------|
| **Common  shares:**                        |   |      |   |      |       |       |       |
| Outstanding  at beginning of period        |   | 4,956,535 |   | 5,061,998 |       | 6,328,331  |       |
| Shares  issued during the period           |   | 37,500    |   | 30,000    |       | 0          |       |
| Shares  redeemed during the period         |   | (807,000  | )      | (135,463  | )          | (1,266,333 | )          |
| Outstanding  at end of period              |   | 4,187,035 |   | 4,956,535 |       | 5,061,998  |       |
|                                       |   |      |   |      |       |       |       |
| Basic  and Diluted weighted average shares |   | 4,894,152 |   | 4,976,024 |       | 6,130,366  |       |

 

In2000, the Company settled a lawsuit involving shareholders who exerciseddissenters’ rights with regard to the Company’s conversion of all Class BCommon Stock to Class A Common Stock pursuant to a vote at a special meeting ofshareholders held on January 21, 2000. The terms of the settlement are set forth in a Settlement Agreement andMutual Releases dated December 21, 2000

 

F-21

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(“SettlementAgreement”).  The Settlement Agreementresulted in the Company redeeming 1,191,333 shares of Class B Common Stock and75,000 Class A Shares.

 

In2001, the Company issued 30,000 shares of its common stock to Piedmont Consulting, Inc. (“Piedmont”)under the terms of a Consulting Agreement dated as of April 30, 2001.  There were 135,463 escrow shares thatexpired and cancelled as part of the Company’s initial public offering and 1998acquisitions (see Note 9).

 

In2002, the Company issued 37,500 shares as a result of employees exercisingstock options.  The Company purchased806,983 shares as Treasury Stock in exchange for a note due from a shareholder(see Note 13).  There were 17 sharesthat were cancelled as fractional shares remaining in the escrow accountrelating to the 1998 acquisitions (see Note 9).

 

Earnings(loss) per share is computed as follows:

 
|                                                                    |   | **2002** |   | **2001** | ** ** | **2000** | ** ** |
|-------------------------------------------------------------------------|--------|----------|--------|----------|------------|----------|------------|
| **Income  Available to common shareholders:**                           |   |     |   |     |       |     |       |
| Loss from continuing operations                                         |   | $        | (2,938 | )        | $          | (3,831   | )          | $ | (1,245 | ) |
|                                                                    |   |     |   |     |       |     |       |
| Effect  of Beneficial Conversion Feature of convertible preferred stock |   | (810     | )      | 0        |       | 0        |       |
|                                                                    |   |     |   |     |       |     |       |
| Loss  from continuing operations attributable to common shareholders    |   | $        | (3,748 | )        | $          | (3,831   | )          | $ | (1,245 | ) |
|                                                                    |   |     |   |     |       |     |       |
| Income  (Loss) from discontinued operations                             |   | 380      |   | (3,068   | )          | (1,089   | )          |
|                                                                    |   |     |   |     |       |     |       |
| Net  loss attributable to common shareholders                           |   | $        | (3,368 | )        | $          | (6,899   | )          | $ | (2,334 | ) |
|                                                                    |   |     |   |     |       |     |       |
| **Earnings  (loss) per share – Basic and Diluted:**                |   |     |   |     |       |     |       |
| Continuing  Operations                                                  |   | $        | (0.77  | )        | $          | (0.77    | )          | $ | (0.20 | ) |
| Discontinued  Operations                                                |   | 0.08     |   | (0.62    | )          | (0.18    | )          |
| Net  Loss                                                               |   | $        | (0.69  | )        | $          | (1.39    | )          | $ | (0.38 | ) |

 

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

 

OnDecember 1, 1999, the Company entered into a Loan Agreement with William M.Rychel pursuant to which the Company loaned Mr. Rychel a total of $1,775,000 topurchase from certain shareholders a total of 806,983 shares of our commonstock.  The original term of the loanwas one year which the Company extended until December 1, 2001 and, on December1, 2001, the Company entered into another amendment with Mr. Rychel thatextended 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 the Sarbanes-OxleyAct of 2002, this loan could not be extended beyond its current maturity ofDecember 1, 2002 or otherwise materially modified.  On November 25, 2002, the Company repurchased the 806,983 sharesin exchange for the outstanding loan plus accrued interest of $2,250,283.  The shares repurchased have been put intoTreasury Stock using the closing market price of the stock of $0.94 pershare.  The difference between theoutstanding loan balance and the Treasury Stock resulted in a non-cash chargeof $1,491,719.

 

Uponconsummation of the Channels Business transaction, Centiv made loans to threeformer members of Centiv’s management team involved in the transaction.  A loan in the amount of

 

F-22

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$200,000was made to Scott Barker.  This loan issecured by 100,000 shares of Centiv common stock owned by Mr. Barker and willbear interest at a rate of 25 basis points over the current rate on theCompany’s senior debt facility, as adjusted from time to time.  The principal amount of this loan plus accruedinterest shall be due and payable December 31, 2003.  Upon the completion of the Channels Business transaction, theCompany also made loans to Dave Boston and Pat McLaughlin on the same terms andconditions in the amounts of $30,000 and $20,000, respectively.

 

JohnP. Larkin, the Company’s President and Chief Executive Officer was an investorin the Series B Convertible Preferred Stock closed on March 31, 2003.  In connection with the investment, Mr.Larkin purchased 20,000 Units consisting of one share of Series B ConvertiblePreferred Stock and a warrant to purchase two shares of common stock at anexercise price of $0.50 per share.  Inconnection with that transaction, Mr. Larkin agreed with the Company to waivehis conversion rights and to grant to the Company’s Chief Financial Officer an irrevocableproxy to vote those shares (in accordance with the majority of the Company’scapital stock entitled to vote thereon excluding these shares) until theCompany’s stockholders ratify the issuance of the Series B ConvertiblePreferred Stock.

 

**14.****       RESTRUCTURING CHARGES AND OTHER EXPENSES**

 

During 2002, as a resultof the termination of the preferred supplier and support agreement withAnheuser Busch, the Company reduced headcount and other operatingexpenses.  Accordingly, $87,000 has beencharged to operations in 2002 consisting of $75,000 for severance costs forreductions in staff and $12,000 relating to early lease termination cost.

 

During2000, the Company continued its consolidation and centralization effort.  Therefore, the Company recorded a restructuringcharge of $541,000 relating to the Channels Business’ employee severance andleased premises no longer necessary to the Company during the fourth quarter of2000.  The restructuring charges wererecorded in discontinued operations for the year ended December 31, 2000.

 

Thefollowing table provides a rollforward of the liabilities incurred inconnection with the business restructuring.

** **
| **($ in thousands)  Type of Cost** |   | **December  31,  2001  Balance** |       | **2002  Restructuring  Charges  Against the  Reserve** |       | **2002  Restructuring  Accrual** |       | **December  31,  2002  Balance** |       |
|------------------------------------|--------|----------------------------------|------------|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
|                               |   |                             | ** ** |                                                   | ** ** |                             | ** ** |                             | ** ** |
| Employee Separations               |   | $                                | 11         |                                                   | $          | (11                              | )          | $                                | 75         |   | $ | 75 |   |
| Facility Closings                  |   | 84                               |       | (84                                                    | )          | 12                               |       | 12                               |       |
| Total                              |   | $                                | 95         |                                                   | $          | (95                              | )          | $                                | 87         |   | $ | 87 |   |

 

During the year ended December 31, 2002, paymentsof  $95,000 were made for employeeseparations of $11,000 and facility closings of $84,000. In addition, theCompany recorded additional restructuring charges of $87,000 relating to thetermination of the Anheuser Busch termination of the preferred supplier and supportagreement.

 

F-23

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**15.****       DISCONTINUED OPERATIONS**

 

**ChannelsBusiness**

 

As of December 31, 2001,the Company sold the assets of its Channels Business to TK AcquisitionCorporation, as successor by merger to SCB Acquisitions, in exchange for apurchase price of $7,905,000 in cash, subject to a post-closing adjustmentbased upon fluctuations in working capital from June 30, 2001 and December 31,2001.  The post closing adjustment was$1,598,573.  Another adjustment to thepurchase price is the net asset value adjustment, which is the amount by whichthe book value of the net assets (defined as accounts receivable, inventory,prepaid expenses and other assets included in the purchased assets excludingfixed 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, bringing the net purchaseprice after adjustments to $6,252,427 before transaction costs.  The Company recorded $404,000 of transactioncosts associated with financial advisor fees, legal and accounting fees.

 

The Channels Businessproduced $48.4 million in revenue and had a pre-tax operating loss of $722,000for the year ended December 31, 2001. The sale of the Channels Business resulted in a pre-tax loss of$2,175,000, which is comprised of the difference between the purchase price andthe book value of the net assets and transaction fees associated with the saleof the business.  The Company wrote offthe deferred tax asset of $184,000 associated with the Channels Business.

 

The Company’s2001, 2000 and 1999 consolidated financial statements have been reclassified toreport separately the results of operations for the Channels Business.  The operating results for the years endedDecember 31, 2001 and 2000 of the discontinued Channels Business consist of:

 

|                                      |   | **Year ended**         |   |
|-------------------------------------------|--------|------------------------|--------|
| **($ in thousands)**                      |   | **December 31,  2001** |   | **December 31,  2000** |   |
|                                      |   |                   |   |   |   |
| Net  sales:                               |   | $                      | 48,403 |   | $ | 72,854 |   |
|                                      |   |                   |   |   |   |
| Loss  from operations before income taxes |   | (722                   | )      | (2,144 | ) |
| Loss  on sale of business                 |   | (2,175                 | )      | 0 |   |
| (Benefit)/provision  from income taxes    |   | 184                    |   | (721 | ) |
|                                      |   |                   |   |   |   |
| Loss  from discontinued operations        |   | $                      | (3,081 | ) | $ | (1,423 | ) |

 

F-24

----

 

Summary information for the Channels Business follows:

 

|                 |   | **Year ended**         |   |
|----------------------|--------|------------------------|--------|
| **($ in thousands)** |   | **December 31,  2001** |   | **December 31,  2000** |   |
|                 |   |                   |   |   |   |
| Current  assets      |   | $                      | 9,236  |   | $ | 18,161 |   |
| Other  assets        |   | 2,569                  |   | 2,991 |   |
| Total  assets        |   | 11,805                 |   | 21,152 |   |
| Current  liabilities |   | (781                   | )      | (6,935 | ) |
| **Total net assets** |   | $                      | 8,024  |   | $ | 14,217 |   |

 

**TekgrafTechnology Systems Division**

 

As of October 31, 2000,the Company sold the assets of its Tekgraf Systems Division to MicroEnvironments, LLC, a limited liability company, controlled by Anita, Ltd., oneof the dissenting shareholders in the Dissenter’s Lawsuit.  As consideration for the assets of theTekgraf Systems division, Anita, Ltd. transferred to the Company 375,752 sharesof Class A common stock in partial settlement of the Dissenter’s Lawsuit.  Tekgraf Systems is an integrator of desktopPC’s and servers.  The divisionproduced  $6.0 million in revenue and hada pre-tax operating loss of $190,000 for the ten months ended October 31, 2000.

 

The results of operationsfor the Tekgraf Technology Systems Division have been reclassified todiscontinued operations.  The operatingresults for the year ended December 31, 2000 of the discontinued TekgrafTechnology Systems Division consist of:

 
|                                      |   | **December 31,  2000** |   |
|-------------------------------------------|--------|------------------------|--------|
|                                      |   | **($ in thousands)**   |   |
| Net  sales:                               |   | $                      | 6,747  |   |
|                                      |   |                   |   |
| Loss  from operations before income taxes |   | (190                   | )      |
| Benefit  from income taxes                |   | (72                    | )      |
|                                      |   |                   |   |
| Loss  from discontinued operations        |   | $                      | (118   | ) |

 

**CalgraphTechnology Services Business**

 

On February 6,2002, the Company sold the assets of the Calgraph Technology Services Businessto Graphic Enterprises of Ohio, Inc. The effective date of the transaction was January 31, 2002.  Centiv received consideration for the saleof the Calgraph assets in the amount of $1,050,000 in cash plus a minimumroyalty of $625,000 to be paid over a 25 month period beginning in May 2002.  Graphic Enterprises also assumed certainliabilities of Calgraph.  The Companyrealized a pre-tax gain on the sale of $586,000, which is the cash received atclosing of $1,050,000 plus the present value of the royalty payments of$618,000 less the book value of the net assets of $785,000 and less transactionfees associated with the sale of the business of $297,000.  In

 

F-25

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addition, theCompany 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.****      ****CONVERTIBLE SUBORDINATED DEBT**

 

On September 30, 2002,the Company issued $1 million of Senior Subordinated Convertible Notes toprivate investors.  These notes areconvertible into equity, at the lenders’ option upon the closing of, and at thesame terms as, the next equity financing in which the Company raises at least$1,000,000.  The loan has a term thatextends until the earlier of July 1, 2004 or two business days following theclosing of an equity financing described above and pays interest at a rate of10% per year.  In addition, the lendersreceived an aggregate of 50,000 warrants granted at the closing of the loan andwill accrue an aggregate of an additional 20,000 warrants per month until suchtime as the loan is fully repaid or converted into equity.   The warrant has a five-year life with anexercise price of $1.75 per share and is callable by the Company if the marketprice of the Company’s common stock closes at or above $5.00 per share for 10consecutive trading days.  The initial50,000 warrants were valued at $11,858 using the Black-Scholes valuation methodcreating an unamortized discount on the Senior Subordinated ConvertibleNotes.  The unamortized discount will beamortized to interest expense over the term of the note.

 

The Company accrued20,000 warrants per month beginning in October 2002 until such time the loan isrepaid or converted into equity. Using the Black-Scholes valuation method, a totalof 60,000 additional warrants have been accrued as of December 31, 2002 at avalue of $14,400.

 

**17.****       SUBSEQUENT EVENT – CAPITALINVESTMENT **

 

On March 31, 2003, theCompany sold, in a private placement exempt from registration, 500,000 units, each consisting of one share of Series BConvertible Preferred Stock (the “Series B Preferred”) and one warrant topurchase two shares of Common Stock (the “Warrant”), which amounted to 20%warrant coverage.  As part of the privateplacement, the holders of $500,000 of the outstanding Convertible SubordinatedDebt converted into Series B Preferred on the same terms.  The remaining $500,000 was repaid in fullfrom proceeds of this offering.  Inaddition, the Company issued an additional 270,000 shares of Series B Preferredin conversion of 135,000 of its outstanding Series A Convertible PreferredStock (the “Series A Preferred”). No Warrants were issued in connectionwith the shares of Series B Preferred issued in exchange for the Series APreferred.  In addition, the warrants topurchase Series A Preferred held by the Series A Preferred investors werecancelled for no value in connection with the conversion.  Theremaining 81,000 outstanding shares of Series A Preferred was converted onMarch 31, 2003 into 810,000 shares of common stock in accordance with the termsof the Series A Preferred certificate of designations.

 

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

 

F-26

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

 

Asstated, the Series B Preferred is initially convertible into 10 shares ofCommon Stock for each share of the Series B Preferred.  This conversion ratio, however, is subjectto anti-dilution adjustment if the Company issues any capital stock (orsecurities exercisable for or convertible into capital stock) for a per shareprice less than the then current conversion price of $0.50 per share, exceptfor issuances pursuant to the Company’s stock option plan and certain otherissuances to business partners.  Theanti-dilution adjustment will be made on a full-ratchet basis.  The price anti-dilution protection will notapply until the Company’s stockholders ratify the authorization of the Series BPreferred.

 

Thepurchasers of the Series B Preferred may voluntarily convert the Series BPreferred at any time.  The Series BPreferred will be automatically converted if (i) the Company meets eitherConversion Milestone defined below, or (ii) holders of 2/3 of the outstandingshares of the Series B Preferred agree to convert.  In either event, however, an automatic conversion will only occurif a registration statement covering the resale of the shares issuable uponconversion is in effect at that time. “Conversion Milestone” shall meaneither (a) the Company’s pretax earnings from ongoing operations are equal toor greater than $6 million in the aggregate in any four consecutive fiscalquarters******asdetermined in accordance with United States Generally Accepted AccountingPrinciples (“GAAP”) as applied by the Company on the date when the Series BPreferred was first issued and the closing trading price of the Company’sCommon Stock is equal to or greater than $2.00 per share (as adjusted for anystock dividends, combinations or splits with respect to such shares after thefiling date hereof) for ten consecutive Trading Days (as defined below), or (b)the closing of a “firm commitment” underwritten public offering of Common Stockin which the public offering price per share of Common Stock is at least equalto 3 times the then-applicable conversion price for the Series B Preferred andwhich offering results in gross proceeds to the Company of not less than $15million.  “Trading Day” shall mean abusiness day on which at least 50,000 shares of Common Stock are traded on theprincipal United States securities exchange or automated quotation system onwhich such security is listed or traded.

 

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

 

F-27

----

 
| **($ in thousands)**                   |   | **As Reported  December 31, 2002** |      | **Private Equity  Adjustment** |   | **Pro forma  December 31, 2002** |       |
|----------------------------------------|--------|------------------------------------|-----------|--------------------------------|--------|----------------------------------|------------|
| Current  assets                        |   | $                                  | 4,544     |                           | $      | 1,500                            |       | $ | 6,023 |   |
| Other  assets                          |   | 1,844                              |      | 0                              |   | 1,844                            |       |
| **Total assets**                       |   | **$**                              | **6,388** | ** **                     | **$**  | **1,500**                        | ** ** | **$** | **7,888** | ** ** |
|                                   |   |                               |      |                           |   |                             |       |
| Current  liabilities                   |   | $                                  | 3,761     |                           | $      | 90                               |       | $ | 3,851 |   |
| Convertible  Subordinated Debt         |   | 990                                |      | (990                           | )      | 0                                |       |
| Non  current liabilities               |   | 162                                |      | 0                              |   | 162                              |       |
| **Total liabilities**                  |   | **$**                              | **4,913** | ** **                     | **$**  | **(900**                         | **)**      | **$** | **4,013** | ** ** |
|                                   |   |                               |      |                           |   |                             |       |
| Total  equity                          |   | $                                  | 1,475     |                           | $      | 2,400                            |       | $ | 3,875 |   |
| **Total liabilities and total equity** |   | **$**                              | **6,388** | ** **                     | **$**  | **1,500**                        | ** ** | **$** | **7,888** | ** ** |

 

The Company believes thatthis financing will be adequate to satisfy its current and planned operationsfor at least the next 12 months.

 

**18.****       SEGMENTINFORMATION**

 

In previous years, theCompany had three business units: Channels, Centiv (POP) and Services. As mentioned in Note 15 above, the Channels Business was sold as ofDecember 31, 2001 and the Calgraph Technology Services Business was soldeffective January 31, 2002.  As a resultof these divestitures, the Company currently operates as a single businessunit.  All prior year results have beenrestated to be comparative to the current year’s results.

 

**19.****       SIGNIFICANTCUSTOMERS**

 

No single customeraccounted for more than 10% of the sales for the years ended December 31, 2002and 2001.  On a combined basis, however,distributors affiliated with Anheuser-Busch accounted for approximately 97% and99% of the sales for the years ended December 31, 2002 and 2001,respectively.  For the year endedDecember 31, 2000, Anheuser-Busch accounted for 97% of net sales.   International sales were insignificant forthe years ended December 31, 2002, 2001 and 2000.

 

**20.****       RECENTACCOUNTING PRONOUNCEMENTS**

 

On July 20, 2001, theFinancial Accounting Standard Board (FASB) issued SFAS No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Intangible Assets.”  SFAS No. 141 is effective for all businesscombinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15,2001; however, certain provisions of this Statement apply to goodwill and otherintangible assets acquired between July 1, 2001, and the

 

F-28

----

 

effective date of SFASNo. 142.  Major provisions of theStatements and their effective dates for the Company are as follows:

 

1.               Allbusiness combinations initiated after June 30, 2001 must use the purchasemethod of accounting.  The pooling ifinterest method of accounting is prohibited except for transactions initiatedbefore July 1, 2001.

 

2.               Intangibleassets acquired in a business combination must be recorded separately fromgoodwill if they arise from contractual or other legal rights or are separablefrom the acquired entity and can be sole, transferred, licensed, rented, orexchanged, either individually or as part of a related contract, asset, orliability.

 

3.               Goodwilland other intangible assets with indefinite lives, acquired after June 30,2001, are not amortized.  EffectiveJanuary 1, 2002, all previously recognized goodwill and intangible assets withindefinite lives will no longer be subject to amortization.

 

4.               EffectiveJanuary 1, 2002, goodwill and intangible assets with indefinite lives will betested for impairment annually and whenever there is an impairment indicated.

 

5.               Allacquired goodwill must be assigned to reporting units for purposes ofimpairment testing and sgment reporting.

 

At December 31, 2002, theCompany had no goodwill recorded.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the impairment or Disposal of Long-LivedAssets.”  SFAS No. 144 is effective forfiscal years beginning after December 15, 2001, and addresses financialaccounting and reporting 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-Lived Assetsto Be Disposed Of,” and the accounting and reporting provisions of AccountingPrinciples Board Opinion No. 30. “Reporting the Results of Operations – Reporting the Effects of Disposalof a Segment of a Business, and Extraordinary, Unusual and InfrequentlyOccurring Events and Transactions,” for the disposal of a segment of abusiness.

 

The Company adopted SFASNo. 144 at January 1, 2002, and that adoption did not have a material effect onits results of operations or financial position.

 

InApril 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4,44, and 46, Amendment of FASB Statement No. 13, and Technical Corrections,“SFAS No. 145 addresses a variety of accounting practices.  The provisions of this statement related tothe rescission of Statement No. 4 (Reporting Gains and Losses fromExtinguishment of Debt) are effective for fiscal years beginning after May 15,2002.  The provisions of this statementrelated to Statement No. 13 (Accounting of Leases) are effective fortransactions occurring after May 15, 2002. All other provisions of this statement are effective for financialstatements issued on or after May 15, 2002. Statement No. 44 was entitles “According for Intangible Assets of MotorCarriers” and Statement No. 64 was entitled “Extinguishments of Debt Made toSatisfy Sinking-Fund Requirements.”

 

Thecompany adopted those provisions of SFAS No. 145 that were effective as of May15, 2002.  Adoption of those provisionsdid not have a material effect on the Company’s results of operations orfinancial position.  For thoseprovisions that are effective for fiscal years beginning after May 15, 2002,the Company does not expect that adoption of those provisions will have amaterial effect on its results of operations or financial position.

 

F-29

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InJune 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities,” This statement requires recognition of costsassociated with exit or disposal activities when they are incurred rather thanat the date of a commitment to an exit or disposal plan.  This new statement is effective for exit ordisposal activities that are initiated after December 31, 2002.  The Company does not expect that adoption ofthis statement will have a material effect on its results of operations orfinancial position.

 

InNovember 2002, the FASB issued Interpretation No. 45 (FIN No. 45), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” This is an interpretation of FASBStatements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FINNo. 45 elaborates on the disclosures to be made by a guarantor in its interimand annual financial statements about its obligations under certain guaranteesthat it has issued.  It also clarifiesthat a guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The initial recognition andinitial measurement provisions of FIN No. 45 are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002, irrespective ofthe guarantor’s fiscal year-end.  Thedisclosure requirements in FIN No.45 are effective for financial statements ofinterim or annual periods ending December 15, 2002.  The Company does not expect that adoption of this interpretationwill have a material effect on its results of operations or financial position.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition for a voluntarychange to the fair value method of accounting for stock-based employeecompensation.  In addition, thisstatement amends the disclosure requirements of SFAS No. 123 to require moreprominent disclosures in both the annual and interim financial statements aboutthe method of accounting for stock-based employee compensation and the effectof the method on reported amounts.  Theamendments to SFAS No. 123 in paragraphs 2(a)-2(e) of this statement wereeffective for financial statements for fiscal years ending after December 15,2002 and were adopted by the Company in 2002. Adoption of these paragraphs did not have a material effect on theCompany’s results of operations or financial positions.  The amendment to SFAS No. 123 in paragraph2(f) of this Statement and the amendment to Opinion 28 in paragraph 3 areeffective for financial reports containing condensed financial statements forinterim periods beginning after December 15, 2002.  The Company does not expect that adoption of these portions ofthe statement will have a material effect on its results of operations orfinancial positions.

 

InJanuary 2003, the FASB issued Interpretation No.46 (FIN No. 46), “Consolidationof Variable Interest Entities.”  This isand interpretation of Accounting Research Bulletin No. 51, and revises therequirements for consolidation by business enterprises of variable interestentities.  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 applicableinterim or annual period, and it applies to nonpublic enterprises as of the endof the applicable annual period.  FINNo. 46 may be applied prospectively with a cumulative-effect adjustment as ofthe date on which it is first applied or by restating previously issuedfinancial statements for one or more years with a cumulative-effect adjustmentas of the beginning of the first year restated.  The Company is not party to any variable interest entity.  The Company does not expect that adoption ofthis interpretation will have a material effect on its results of operations orfinancial position.

 

F-30

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

 

Selected unauditedfinancial information for each of the four quarters in the years ended December31, 2002 and 2001 are as follows ($ in thousands, except for share data):

 

 
|     |   | **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** |   |
|----------|--------|----------------|--------|-------------------|--------|-----------------------------------------------------|--------|-------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|
|     |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
| **2002** |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
|     |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
| First    |   | $              | 3,807  |              | $      | 958                                                 |   | $                                                     | (67    | )                                                                                | $      | 380                                                                                |   | $                                                             | (0.17  | ) | $ | 0.08 |   | 4,956,535 |   |
| Second   |   | 3,501          |   | 962               |   | (338                                                | )      | 0                                                     |   | (0.08                                                                            | )      | 0.00                                                                               |   | 4,961,645                                                     |   |
| Third    |   | 4,769          |   | 990               |   | (508                                                | )      | 0                                                     |   | (0.10                                                                            | )      | 0.00                                                                               |   | 4,982,766                                                     |   |
| Fourth   |   | 13,431         |   | 1,636             |   | (2,025                                              | )      | 0                                                     |   | (0.43                                                                            | )      | 0.00                                                                               |   | 4,678,252                                                     |   |
|     |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
| Total    |   | $              | 25,508 |              | $      | 4,546                                               |   | $                                                     | (2,938 | )                                                                                | $      | 380                                                                                |   | $                                                             | (0.77  | ) | $ | 0.08 |   | 4,894,152 |   |
|     |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
|     |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
| **2001** |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
|     |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
| First    |   | $              | 2,934  |              | $      | 608                                                 |   | $                                                     | (413   | )                                                                                | $      | 98                                                                                 |   | $                                                             | (0.08  | ) | $ | 0.02 |   | 5,061,998 |   |
| Second   |   | 2,999          |   | 602               |   | (438                                                | )      | 140                                                   |   | (0.09                                                                            | )      | 0.03                                                                               |   | 4,929,906                                                     |   |
| Third    |   | 3,222          |   | 727               |   | (686                                                | )      | (253                                                  | )      | (0.14                                                                            | )      | (0.05                                                                              | )      | 4,956,535                                                     |   |
| Fourth   |   | 3,277          |   | 513               |   | (2,294                                              | )      | (3,053                                                | )      | (0.46                                                                            | )      | (0.62                                                                              | )      | 4,956,535                                                     |   |
|     |   |           |   |              |   |                                                |   |                                                  |   |                                                                             |   |                                                                               |   |                                                          |   |
| Total    |   | $              | 12,432 |              | $      | 2,450                                               |   | $                                                     | (3,831 | )                                                                                | $      | (3,068                                                                             | )      | $                                                             | (0.77  | ) | $ | (0.62 | ) | 4,976,024 |   |

 

F-31

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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

** **
| **($ in thousands)  DESCRIPTION** |   | **BALANCE AT  BEGINNING  OF YEAR** |    | **CHARGED TO  COSTS AND  EXPENSES** |   | **DEDUCTIONS  AND  RECLASSIFICATIONS** |   | **BALANCE  AT END  OF YEAR** |    |
|-----------------------------------|--------|------------------------------------|---------|-------------------------------------|--------|----------------------------------------|--------|------------------------------|---------|
|                              |   |                               |    |                                |   |                                   |   |                         |    |
| 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 |   |
|                              |   |                               |    |                                |   |                                   |   |                         |    |
| 2000                              |   |                               |    |                                |   |                                   |   |                         |    |
| Allowance  for doubtful accounts  |   | $                                  | 17,000  |                                | $      | 33,000                                 |   | $                            | 0       |   | $ | 50,000 |   |
| Inventory  reserves               |   | $                                  | 0       |                                | $      | 0                                      |   | $                            | 0       |   | $ | 0 |   |

 

F-32

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| **Officers and Directors**   |   | **Corporate Information**                           |
|------------------------------|--------|-----------------------------------------------------|
|                         |   |                                                |
| **John P. Larkin**           |   | ***Corporate Office***                              |
| Chief Executive Officer  and |   | 998 Forest Edge Drive                               |
| Director                     |   | Vernon Hills, Illinois  60061                       |
|                         |   | Phone:                                              | (847) 876-8300 |
| **Thomas M. Mason**          |   | Fax:                                                | (847) 955-1269 |
| Chief Financial  Officer,    |   |                                                |
| Secretary and Director       |   | ***Registrar and Transfer Agent***                  |
|                         |   | American Stock Transfer  & Trust Company        |
| **John Bauer**               |   | 40 Wall Street                                      |
| Chief Marketing Officer      |   | 46th Floor                                          |
|                         |   | New York, New York  10005                           |
| **James M. Kearney**         |   |                                                |
| Chief Information  Officer   |   | ***Independent Auditors***                          |
|                         |   | Grant Thornton LLP                                  |
| **Steven J. Carnevale.**     |   | 175 West Jackson Blvd.                              |
| Director                     |   | Chicago, Illinois 60604                             |
|                         |   |                                                |
| **Frank X. Dalton, Jr.**     |   | ***General Counsel***                               |
| Director                     |   | Gardner Carton &  Douglas LLC                   |
|                         |   | 191 N. Wacker Drive,  Suite 3700                    |
| **Kim Feil**                 |   | Chicago, Illinois 60606                             |
| Director                     |   |                                                |
|                         |   | ***Annual Shareholders’ Meeting***             |
|                         |   | The annual meeting of  shareholders will be held on |
|                         |   | Thursday, May 22, 2003,  at 10:00 a.m. CST          |
|                         |   | Centiv Headquarters                                 |
|                         |   | 998 Forest Edge Drive                               |
|                         |   | Vernon Hills, Illinois  60061                       |
|                         |   | Phone:                                              | (847) 876-8300 |

 

 

F-33

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