**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-KSB**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE FISCAL YEAR ENDED: DECEMBER 31,2001**

 

**Commission File No.: 0-18809**

 

**Lightning RodSoftware, Inc.**

(Name of Small Business Issuer asspecified in its charter)

 

| **Delaware**                                                                    |   | **41-1614808**                       |
|---------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)                  |   | (IRS Employer Identification Number) |
|                                                                            |   |                                 |
| **5720 Smetana Drive, Suite 300  Minnetonka, MN 55343**                         |
| (Address of principal executive offices)(Zip Code)                              |
|                                                                            |   |                                 |
| Issuer’s telephone number,  including area code:  **(952)  939-3946** |
|                                                                            |

Securities registered pursuant to Section 12(b) ofthe Exchange Act:**  None**

 

Securitiesregistered pursuant to Section 12(g) of the Exchange Act:  **Common Stock, par value $.01 per share**

 

Checkwhether the Issuer (1) has filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes o  No ý

 

Checkif disclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained 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-KSB or any amendment to this Form10-KSB.  o

 

Issuer’s revenues for its most recent fiscal year:  $1,442,792

 

The aggregate marketvalue of the Common Stock held by shareholders other than officers, directorsand holders of more than 5% of the outstanding stock of the Registrant as ofApril 29, 2002 was approximately $1,792,000 based upon the closing price of theRegistrant’s Common Stock on such date.

 

There were 3,202,820 shares of Common Stock outstandingas of April 29, 2002.

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

None

 

TransitionalSmall Business Disclosure Format (check one). Yes o  No ý

 

 

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**LIGHTNING ROD SOFTWARE, INC.**

 

TABLE OF CONTENTS

 

**ANNUAL REPORT ON FORM 10-KSB**

**FOR YEAR ENDED DECEMBER 31, 2001**

 

 
| **PART I**                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                   |
| Item 1:   Description of Business                                                                                            |
| Item 2:   Description of Property                                                                                            |
| Item 3:   Legal Proceedings                                                                                                  |
| Item  4:   Submission of Matters to a Vote  of Security Holders                                                              |
|                                                                                                                                   |
| **PART II**                                                                                                                            |
|                                                                                                                                   |
| Item  5:   Market for Common Equity and  Related Stockholder Matters                                                         |
| Item  6:   Management’s Discussion and  Analysis or Plan of Operation                                                   |
| Item 7:   Financial Statements                                                                                               |
| Item  8:   Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                             |
|                                                                                                                                   |
| **PART III**                                                                                                                           |
|                                                                                                                                   |
| Item  9:   Directors, Executive Officers,  Promoters and Control Persons; Compliance with Section 16(a) of the Exchange  Act |
| Item 10: Executive  Compensation                                                                                                       |
| Item  11: Security Ownership of Certain Beneficial Owners and Management                                                               |
| Item  12: Certain Relationships and Related Transactions                                                                               |
| Item 13: Exhibits  and Reports on Form 8-K                                                                                             |
|                                                                                                                                   |
| Signatures                                                                                                                             |

 

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**PART I**

 

The following containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934. Lightning Rod Software, Inc.’s actual results and timingof certain events could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including, but not limited to, thoseset forth under “Risk Factors” and elsewhere in this Annual Report on Form10-KSB.

 

**ITEM 1.          DESCRIPTION OF BUSINESS**

 

**TheCompany**

 

In accordance with acertain merger agreement dated December 28, 1999, as amended on February 15,2000 (“Merger Agreement”), Atio Corporation USA, Inc., a Minnesota corporation(“Atio”) merged (the “Merger”) with and into CE Software Holdings, Inc., aDelaware corporation (“CESH”), effective as of April 28, 2000.  In conjunction with the Merger, CESH (thesurviving corporation) changed its name to Lightning Rod Software, Inc.(hereafter “LRS” or “Company” or “Registrant”).

 

Immediately prior toconsummation of the Merger, CESH spun off CE Software, Inc. (“CSI”), its whollyowned operating subsidiary, by declaring and paying a dividend of one share ofCSI Common Stock for each outstanding share of CESH Common Stock.  Substantially all of the business operationsof CESH were conducted through CSI prior to this spin-off.  Based principally on the fact that theofficers, directors and operating activities of Atio became the officers,directors and operating activities of CESH after the Merger, the Merger wasaccounted for as a reverse acquisition, and the financial statements of Atiobecame the financial statements of LRS.

 

**General**

 

Historically, LRSdeveloped and marketed proactive customer service software that personalizeson-line customer interaction experiences and builds on-line customerloyalty.  LRS’s software solutions,named Lightning Rod Interaction ManagerÔ, help companies that conduct business onthe Internet (referred to as “e-Businesses”) improve customer interactions andloyalty by anticipating customer needs and providing superior, real-timecustomer service responses.  By usingLightning Rod Interaction ManagerTM, e-Businesses are able to deliverresponsive, personalized customer service via customers’ preferredcommunications medium, including Web callback, chat, e-mail, Web collaboration,Voice over IP (VoIP), fax and telephone. Lightning Rod Interaction Manager’sÔunique ability to enable customer service anytime, anywhere, via a variety ofmedia, gives e-Businesses a competitive edge in their marketplaces.  In addition, e-Businesses using LightningRod Interaction ManagerÔ often experience greater operationaleffectiveness due to Lightning Rod Interaction Manager’sÔability to categorize customer interactions and route them to the mostappropriate customer-service representative (CSR), as well as faster customerservice software implementation since Lightning Rod Interaction ManagerÔeasily integrates with legacy technologies.

 

Since the Merger, theCompany has experienced substantial difficulty in successfully marketing itssoftware and services to prospective customers.  This difficulty has been driven in part by increasingly difficultmarket conditions, including tighter financial markets, that negativelyaffected the economy in general and prospective customers and e-Businesses inparticular.  The Company’s relativelysmall size and limited financial and personnel resources caused a substantialnumber of the Company’s prospective customers to express doubt regarding theCompany’s ability to meet future commitments relative to its software andservices.  Similarly, changing market conditionscaused some prospective customers to reduce capital expenditures, delayingpurchase commitments for the Company’s software and services.  Additionally, the Company believes that aproliferation of software represented by the Company’s

 

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competitors to be similar to the Company’s softwarecreated confusion in the market that resulted in a slower adoption of theCompany’s software.  The foregoingfactors, combined with the significant relative resources and financialstrength of many of the Company’s established and diversified competitors,contributed to a significant lengthening of the sales process.

 

As a result of theforegoing difficulties, in December 2000, the Company eliminated substantiallyall of its sales and marketing personnel in order to conserve the Company’slimited financial resources while it considered strategic alternatives.  On March 2, 2001, the Company entered into astrategic agreement with Dialogic Corporation (“Dialogic”), a subsidiary ofIntel Corporation, whereby Dialogic licensed the Company’s Lightning RodInteraction ManagerTM software. Under the terms of the agreement,the Company received a license fee equal to 50% of the license fee received byDialogic from sublicensees or other customers, subject to certain minimum andmaximum levels. The Company also agreed to provide for a monthly fee of$100,000 retroactive to January 28, 2001, consulting and development servicesto Dialogic as part of Dialogic’s effort to create certain derivative productsbased on the Company’s software.  As aresult, substantially all of the Company’s development efforts were allocatedto Dialogic, which substantially restricted the Company’s ability to providedevelopment and support services to other existing or prospective customers andstrategic partners. Under the Software License Agreement, Dialogic ownedexclusive rights to all future improvements or modifications that it developedbased on the Lightning Rod Interaction ManagerTM software, but wasrequired to pay license fees with respect thereto.  The Company also agreed to grant Dialogic, subject to mutualagreement of final terms, an option exercisable until August 1, 2001, toconvert its royalty-based license into a fully paid-up license by paying aone-time license fee of an additional two million dollars ($2,000,000).

 

Substantially all of theCompany’s revenue in fiscal 2001 came as a result of the Company’s licensingand consulting agreements with Dialogic. Furthermore, substantially all of the Company’s personnel and financialresources were dedicated to supporting those agreements.  In April 2001, the Company made additionalcuts in salaries and personnel in order to conserve resources and to continueas an active business at least to August 1, 2001, at which time Dialogic was toexercise, or not, the option for a fully paid up license.

 

On July 30, 2001,Dialogic notified the Company that it would not exercise the option for a fullypaid-up license, but rather would continue to operate under the existinglicense and consulting agreements. Without sufficient resources to continue active operations, the Companynotified Dialogic that it was terminating the consulting agreement effectiveAugust 31, 2001, and was terminating on that date as well its technical andprofessional services employees.  TheCompany announced in August 2001 that it would wind down active operations fromand after August 31, 2001, would seek to resolve any outstanding employee andcreditor issues and claims, and would endeavor to remain in existence pendingfurther evaluation of Dialogic’s success with the Company’s technology.  For its part, Dialogic indicated that itwould continue to develop the technology and prepare it for market introductionin early 2002.  The Company’s outsidedirectors resigned from the Board of Directors in August 2001 and the Company’sChief Executive Officer resigned in September 2001, leaving the Company’sGeneral Counsel as the sole remaining officer and director.

 

In the fourth quarter offiscal 2001, the Company successfully completed its efforts to resolve allknown outstanding employee and creditor issues and to otherwise wind down itsoperations to a substantially inactive status. In December 2001, the Company added three new Directors to its Board ofDirectors and formed an Executive Committee of the Board to evaluate thepotential of the Dialogic licensing agreement and to seek alternative strategicopportunities for the Company.

 

**RecentDevelopments**

 

In March 2002, Dialogicorally notified the Company that it had reorganized internally and had made astrategic decision not to market the Company’s technology under the SoftwareLicense Agreement.  Rather, Dialogicindicated that it intended to suspend the development and marketing of the

 

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technology indefinitely.  Dialogic indicated that it believed that a significant marketexisted for the technology but that for strategic reasons it had decided not toproceed to market.  The Company has madean effort to explore with Dialogic alternative ways of realizing the expectedvalue of the Software License Agreement with Dialogic’s help, but has notreceived satisfaction from those efforts.

 

In April 2002, theCompany gave Dialogic written notice that it considered Dialogic to be inbreach of the Software License Agreement. The Company demanded that Dialogiccure the breach by paying the Company a sum of money, in an amount yet to bedetermined, that the Company would have realized but for Dialogic’s breach ofthe Software License Agreement.  TheCompany is uncertain what response it will receive, if any, from Dialogic andis uncertain, given its current level of resources, what action it can take to protectits legal rights or what might result from any such action in the event thatDialogic denies the Company’s claim or otherwise ignores the Company’s demand.

 

The Company is currentlyreviewing strategic alternatives for its business given the recent action byDialogic to shelve the technology.  TheCompany is uncertain whether sufficient human and financial resources willexist to allow the Company to pursue any legal rights it may have againstDialogic, to continue preparing on a regular and ongoing basis public companyreports and filings, and otherwise to conduct even minimal business operationsfor a sustained period of time.  Givenits limited resources, there is no assurance that the Company will be able tocontinue even as an inactive entity for the period of time that may be requiredto realize any significant additional value from its software products, fromthe Software License Agreement with Dialogic, or from other strategicalternatives.

 

On April 15, 2002, the Company entered into a Software License Agreement with Atio International,Inc. and Atio Corporation (Pty) Ltd. (collectively referred to hereafter as“Atio Pty”), by which the Company licensed to Atio Pty the CyberCallÒ andAtioCall versions of its software programs (the “Licensed Software”) foruse and distribution to end user customers in Sub-Saharan Africa (the“Territory”).  Atio Pty originally developed CyberCallÒbeginning in 1993. As discussed elsewhere in “Description of Business”, in1997, the software that comprises CyberCallÒ andATIO’s management were combined with Venturian Software Enterprises, Inc., aMinnesota corporation formed in October 1992. Venturian Software Enterprises, Inc. changed its name to AtioCorporation USA, Inc. in November 1997.

 

Prior to the date of thistransaction, Atio Pty was a greater than 10% shareholder of the Company and anexclusive distributor of the Company’s software products in theTerritory.  Under the Software License Agreement, Atio Pty has access tothe Licensed Software in object and source code format on a perpetual basis unlessthe Agreement is terminated for breach.  The Agreement provides that AtioPty accepts the Licensed Software in “as is” condition and that the Companyundertakes no maintenance or support obligations.  With certainexceptions, the Company has agreed not to license the CyberCallÒ andAtioCall versions of its software to others for use in the Territory for aslong as the Software License Agreement remains in effect.  As fullconsideration for the licenses and rights granted to Atio Pty under the Agreement,Atio Pty has agreed to compensate the Company as follows:  (1) conveyand assign to the Company 401,817 shares of the Company’s common stock; (2)cancel its exclusive reseller agreement with the Company; and (3) pay theCompany 350,000 South African Rand (approximately $31,000 at the exchange rateprevailing at the time the Agreement was executed). The Company expects tocomplete this transaction in the second quarter.

 

**IndustryBackground**

 

With the widespreadadoption of the Internet as a business resource, new businesses enter andreshape established markets virtually overnight. In this environment, mostcompanies’ customers have a variety of purchasing options and are only a clickaway from the competition.  As a result,businesses need to be closer and more responsive to their customers than everbefore. Whether a company is a Fortune 500 enterprise or a newly establishedInternet-based business, the ability to provide a high quality

 

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customer experience, and thus to establish long-termcustomer relationships and loyalty, is more important than ever.  In fact, for many e-Businesses, superiorcustomer service and the brand reputation that results are becoming keycompetitive advantages.

 

Until recently, mostcustomer communications took place in person, by telephone or by letter.  In order to respond to these types ofcustomer inquiries more effectively, many companies invested substantialresources in expensive call centers and traditional direct marketinginitiatives.  Call centers typicallyserved marketing or customer service functions, employed costly technology anddid not scale effectively.  Traditionaldirect marketing is typically expensive and not effective in terms ofconversion and response rates.  With theadvent of the Internet and the proliferation of e-mail, the manner in whichbusinesses communicate with their customers and with other businesses hasundergone a fundamental change: customers are now demanding that businesses beaccessible and communicate online.

 

Given the emerging shiftto online customer interaction, traditional customer relationship management(“CRM”) software products do not address the fundamental CRM requirements ofe-Businesses. However, most companies remain unprepared to address the dramaticgrowth of e-mail and web-based communications. Various surveys of companies with content, consumer brands, travel,retail and financial services web sites have found that significant numbers ofthe surveyed companies’ web sites took longer than five days to reply to e-mailinquiries, never replied or were not accessible by e-mail.

 

There can be negativeconsequences for an e-Business if it fails to manage online customercommunications effectively.  Theseconsequences can include loss of customers, increased difficulty in acquiringnew customers and a deterioration of competitive position.  In addition, e-Businesses face higheroperating and information technology costs without efficient and reliablemanagement of online customer communications. Perhaps most significantly, e-Businesses may lose the opportunity totake advantage of new revenue-generating opportunities by failing to capitalizeupon the wealth of information conveyed through online customer communications.

 

The Company believes thatin order for e-Businesses to compete effectively in today’s rapidly changingenvironment, they must differentiate themselves by providing the highestquality customer experience in a cost-effective manner.  To accomplish this, e-Businesses require asoftware solution that:

 

•                  Enablespersonalized, online customer interaction that is timely, relevant and specificto the needs of the customer;

 

•                  Reducesoperating and information technology costs while integrating with existinge-Business and legacy systems and databases across multiple departments;

 

•                  Broadensthe opportunities for revenue generation through the extraction, analysis andmanagement of the valuable information contained within online customerinteractions; and

 

•                  Isscalable to allow for future growth.

 

**Lightning RodSoftware Technology and Services**

 

Lightning Rod InteractionManagerTM was developed to respond to these new customer service demands and wassuccessfully deployed in both business-to-business and business-to-customerapplications.  Lightning Rod InteractionManagerTM is an integrated, modular, scalable, all-media customer interactionsolution that can be tailored to meet specific e-Business customer servicecenter requirements.  The base of theLightning Rod Interaction ManagerTM system is the Interaction Gateway.  This multimedia “traffic cop” interfaceswith e-Business systems and handles the prioritization, routing and queuing ofall types of interactions independent of the communications media.  Telephone calls, e-mails, faxes, Webcallback requests, Web chat and collaboration, interactive voice response (IVR)and voice over internet protocol (“VoIP”) interactions are all handled in thesame manner, based on a

 

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company’s particular business processrequirements.  Lightning Rod InteractionManagerTM can be configured with one or more of the media-access modules andinteraction processing modules.

 

Lightning Rod Interaction ManagerTM Highlights:

 

•                  **All-media:**Lightning Rod Interaction ManagerTM provides customers with a choice ofcommunications media — telephone, e-mail, fax, Web callback, Web chat andcollaboration, IVR and VoIP — on one integrated platform.

 

•                  **QuickDeployment:** Lightning Rod Interaction ManagerTM is an integratedsoftware solution that can be deployed quickly to allow a fast return on acustomer’s investment.

 

•                  **Modular:**LightningRod Interaction ManagerTM can be configured to fit the needs for access mediaand interaction handling capabilities of most e-Businesses.

 

•                  **Scalable:**  Lightning Rod Interaction ManagerTM scalesfrom as few as ten and up to hundreds of CSR’s per system.  Multiple sites can be networked to supportdecentralized customer service centers.

 

•                  **Reporting:**  Lightning Rod Interaction ManagerTM allowsfor real-time and historical reporting of all customer service center metricsfor all media types, thereby resulting in comprehensive and meaningfulmanagement data.

 

•                  **OpenStandards:** Lightning Rod Interaction ManagerTM is built upon openstandards for easy integration with e-commerce, data warehouse, back-office andbusiness applications.  Supportedstandards include OLE, DDE, ActiveX for data, and S.100 for voice processingresources.

 

•                  **OpenSystems:**  Lightning RodInteraction ManagerTM is built to operate on Microsoft Windows NT Server and SQLServer.

 

•                  **SwitchIndependent:** Lightning Rod Interaction ManagerTM integrates with mosttelephone switches through a variety of interfaces.

 

Lightning Rod InteractionManagerTM was traditionally licensed to end customers for a one-time license feebased in part upon the number of simultaneous users and modules of LightningRod Interaction ManagerTM required by the end customer.  Module prices for larger configurations weresignificantly lower on a per-user basis.  Additional charges included services, maintenance, softwareupgrade, and third party components.

 

TheCompany released version 4.2 of the Lightning Rod Interaction ManagerTMtechnology in December 2000. Significant additions to the software included the addition of aKnowledge Manager which manages and tracks the complete interaction historyacross all media types and a Collaboration tool that allows CSR’s to interactas sales or service assistants with visitors to a website by pushing pages totheir browser and aiding in the completion of the online process.  Previous releases of the software include:CyberCallÒ 3.0 in September1998, which introduced the first all-media version of the software.

 

CyberCallÒ wasdeveloped by Atio Pty starting in 1993. In 1997, the software that comprises CyberCallÒ andATIO’s management were combined with Venturian Software Enterprises, Inc., aMinnesota corporation formed in October 1992. Venturian Software Enterprises, Inc. changed its name to AtioCorporation USA, Inc. in November 1997.

 

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**Markets andDistribution**

 

The Company believes thatthe strongest market for its software exists in the e-Business arena withcustomer contact operations between 10 and 250 CSRs.  The Company believes that this market segment has much greatergrowth potential than the higher end of the market.  Within this target category, the Company initially specificallytargeted e-Businesses spanning multiple vertical markets, including, but notlimited to, retail financial services, healthcare, manufacturing, travel andretail apparel.

 

The Company originallyfocused its efforts on several identified target sectors.  These were:

 

•                  Nichee-tailing.

•                  On-linebrokerages.

•                  e-customerservice providers.

•                  On-lineentertainment, i.e. CDs, music, etc.

•                  Nicheon-line service providers.

 

These sectors wereoriginally identified because they have the following key attributes that theCompany believed would allow it to provide the greatest value:

 

•                  Customerservice is a strategic differentiator.

•                  Newentrants can compete with superior customer service.

•                  Itsfocus is business to consumer.

•                  Substantialmarket share can be obtained, but sector is not too large to get lost amongcompetitors.

•                  Nocompetitor currently dominates the sector.

 

TheCompany initially distributed its software through both direct sales effortsand strategic reseller partnerships.

 

*Direct SalesEfforts*

 

The Company’s originalsales and marketing strategy mainly involved its professional services grouppartnering with original equipment manufacturers (“OEMs”) and value-addedresellers (“VARs”) to provide turnkey solutions that include all hardware,software and training required to deploy successfully Lightning Rod InteractionManagerÔ.  The implementation methodology applied by this group includedpre-installation customer interaction assessment and return on investmentanalysis, design, configuration of solutions and integration with existing third-partyfront office applications.  Once theprofessional services group developed a clear understanding of customer needsand objectives, the professional services organization then managed theimplementation, integration, training, maintenance and follow-up support of theLightning Rod Interaction ManagerTM system.

 

As a result of theCompany’s inability to successfully implement its direct sales and marketingefforts on a widespread scale, due in large part to tightening financialmarkets affecting e-Businesses in particular, increased competition andpotential customers’ concern regarding the Company’s financial strength andability to satisfy future obligations, in December 2000 the Company eliminatedsubstantially all of its direct sales and marketing staff in order to reducecosts and conserve financial resources.

 

*StrategicReseller Partnerships*

 

The Company’s decision toeliminate substantially all of its direct sales and marketing staff has causedthe Company to become substantially dependent upon its strategic partners tomarket its software and generate revenue opportunities.  Since March 2001, the Company has reliedprincipally on the licensing of its technology to Dialogic to generateimmediate and future revenues.  AfterMarch 2001,

 

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substantially all of the Company’s personnel andfinancial resources were devoted to supporting Dialogic’s efforts under thelicensing and consulting agreements.

 

Strategicpartners that are currently licensed to sell the Lightning Rod Interaction ManagerTMsoftware include:

 

•                  Dialogic (a division of Intel Corp.)

•                  Atio Pty (A South African company)

•                  MiTech AMS Ltd.

•                  The Support Department

 

Essentially all of theCompany’s revenue in 2001 resulted from, or through, the Company’s strategicrelationship with Dialogic.  See “RecentDevelopment” for a more complete description of the status of the Company’sagreement with Dialogic, and “Capital and Liquidity” for a more completediscussion of the Company’s current financial condition.

 

**Customers**

 

The Company had duringfiscal 2001 over 20 customers spanning the United States and South Africa.  These customers include the followinginnovative businesses: Dialogic, Stockwalk.com, e-style.com, Invacare, GageMarketing, State Capitol Credit Union, Newmed and Messania.  Dialogic accounted for 86% of the Company’stotal revenues in 2001.  In 2000, onecustomer accounted for 43% and a second customer accounted for 20% of theCompany’s total revenues.

 

**Competition**

 

The e-Business andcomputer software industries are characterized by rapid technological advances,changes in customer requirements and frequent new software introductions andenhancements, which is expected to continue.  The Company’s competitors include manyindependent software vendors that have financial, marketing, and technologicalresources far in excess of those of the Company.  Certain of these include Genesys (a division of Alcatel), AproposTechnology, Kana Communications, Interactive Intelligence, Cisco, Cellit andeGain Communications.  The Company alsofaces significant competition from large switch vendors, such as Nortel andAspect.

 

Given the Company’scurrent inactive status, the Company’s future success depends in large partupon the Company’s strategic partners’ ability to market its products.  The Company believes that its agreement withDialogic, if acted upon by Dialogic, can improve significantly the ability ofthe Company’s technology to compete with that of its larger competitors andincrease potential customers’ confidence in the Company’s technology.  (See “Recent Development” for a descriptionof the status of the Company’s licensing agreement with Dialogic.)

 

The Company believes thatthe principal competitive factors in the market include product features andfunctions, ease of understanding and operating the software, productreliability, price/performance characteristics, name recognition, andavailability and quality of support and training services.

 

Although the Companybelieves its software is well suited to support e-commerce, the Companybelieves that its Lightning Rod Interaction Manager’sTM competitiveattributes and those of software products based thereon will require futureenhancements as its users’ requirements mature and e-commerce businesspractices further develop. There can be no assurance that the Company or itsstrategic partners will be successful in developing and marketing new softwareor software enhancements on a timely basis, if at all, and the failure to do socould have a material adverse effect on its results of operations.

 

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**Sources andAvailability of Raw Materials**

 

TheCompany’s LightningRod Interaction ManagerTM runs on theMicrosoft Windows NT platform using a SQL Server database.  In addition, the Company uses Dialogic’s CTMedia hardware and software exclusively to manage the voice processing for itssoftware.

 

Lightning Rod InteractionManagerTM currently runs on Microsoft Windows NT servers only.  Our software uses other Microsofttechnologies, including Microsoft SQL Server. A decline in market acceptance for Microsoft technologies or theincreased acceptance of other server technologies could cause us, or ourstrategic partners, to incur significant development costs and could have amaterial adverse effect on the marketability of our current software.  Although we believe that Microsofttechnologies will continue to be widely used by businesses, we cannot assureyou that businesses will adopt these technologies as anticipated or will not inthe future migrate to other computing technologies that are incompatible withour current software.

 

The Company also embedslicense-monitoring software developed by Rainbow Technologies in its softwareto monitor license-use compliance under individual license agreements that areestablished and resold with each installation of the software.  The Company also embeds technology from DARTCommunications under a similar “per occurrence” arrangement for e-mail relatedsoftware code used in its products.

 

**Patents,Trademarks, Etc.**

 

The Company regards itssoftware as proprietary and attempts to protect it with copyrights, tradesecret laws, and internal nondisclosure safeguards, as well as restrictions ondisclosure and transferability that are incorporated into its software licenseagreements.  The Company licenses itssoftware to customers rather than transferring title.  Despite these restrictions, it may be possible for competitors orusers to copy aspects of the Company’s software or to obtain information thatthe Company regards as trade secrets. Computer software generally can be patented only with difficulty, andexisting copyright laws afford only limited practical protection.  Policing unauthorized use of such a broadlydisseminated product as computer software is difficult, and software piracy canbe expected to be a persistent problem for the packaged software industry.  These problems may be particularly acute ininternational markets.  However, becauseof the rapid pace of technological change in its industry, such protections areless significant than factors such as knowledge, ability, and experience of theCompany’s employees, frequent software enhancements, and the timeliness andquality of Company support services, none of which the Company currently has oris able to provide.

 

Intel Corporationacquired Dialogic Corporation in 1999. While Intel Corporation does not currently offer its own software thatcompetes with Lightning Rod Interaction ManagerTM, Intel Corporation couldpotentially develop a competitive or superior product or attempt to affect ourcurrent relationship with Dialogic Corporation.  However, the Company recently entered into a licensing agreementwith Dialogic that allows Dialogic to resell Lightning Rod Interaction ManagerTMto its customers.  While this agreementsomewhat reduces the risk that Intel will develop its own competitive product,the Dialogic agreement does not completely eliminate the risk to the Company(see “Description Of Business - General” section for further information).

 

The Company owns, inaccordance with an agreement with Atio International, Inc., all right, titleand interest in and to the Lightning Rod Interaction ManagerTM software andclaims copyright and trade secret rights therein.

 

Lightning Rod InteractionManagerTM software was initially developed by Atio Pty out of South Africa, butwas subsequently transferred to Atio International in 1997.  Development personnel located in SouthAfrica and in the United States have continued to enhance the software since1997, with all development work being conducted in the United States fromAugust 2000 until those employees were

 

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released on August 31, 2001.  The Company maintains a current copy of the source code offsiteand only releases to its customers a commercial release in object code form,except in limited situations evidenced, for example, by the Dialogic licenseagreement and the Atio license agreement.

 

The Company hasendeavored to have each of its former employees execute nondisclosure andintellectual property assignment agreements.

 

As discussed, the Companydistributes the software in assembled (object code) form only, except that theCompany provided one copy of the source code to Siemens BusinessCommunications, Inc. pursuant to an OEM Agreement with Siemens dated March 2,1998, which has since been cancelled. Also, as part of the Company’s agreement with Dialogic, a copy of thesource code was delivered to Dialogic and Dialogic has the right to modify thatsource code as it deems necessary. Likewise, as part of the Company’s agreementwith Atio Pty, a copy of the source code for an early version of the softwarewas delivered to Atio Pty and Atio Pty has the right to modify the source codeas it deems necessary for use in its licensed territory.  In addition, Atio Pty deposited a copy ofthe source code with an escrow agent pursuant to a source code escrow agreementwith Nedcor Bank of South Africa.

 

The Company currentlyholds a variety of trademarks, trademark applications, trade names andregistered copyrights but does not have exclusive rights to the use of“Lightning Rod” as a trade name.  TheCompany has agreed to transfer, effective as of the date of the Merger, all ofits rights in the former “ATIO” name to Atio International.

 

The Company filed apatent application with the U.S. Government Patent Office for its “System withMulti-media Real Time Queue Monitor” on December 2, 1999.  Given the lack of resources, the Company iscurrently uncertain as to whether it can continue to support the patentapplication process.

 

**GovernmentApprovals**

 

TheCompany’s operations and operating results are not significantly impacted byany Government approvals at this time.

 

**Effect ofGovernmental Regulations**

 

The Company’s operationsand operating results are not significantly impacted by any Governmentregulations at this time.

 

**Research andDevelopment**

 

The Company is withoutpersonnel or financial resources and therefore is unable to develop andintroduce new software or enhanced versions of existing software. As part ofthe Company’s agreement with Dialogic entered into in March 2001, a substantialportion of the Company’s software development and professional services staffwas devoted to work being performed in conjunction with Dialogic.  As such, the Company had limited developmentresources to devote to other projects. Effective August 31, 2001, the Company dismissed all of its technicaland professional services personnel and substantially ceased regular businessactivity.  The Company has no plans toinitiate research and development efforts with respect to its software in thefuture.

 

**Effect of EnvironmentalRegulation**

 

TheCompany’s operations and operating results are not impacted by anyenvironmental regulations at this time.

 

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**Employees**

 

As of December 31, 2001and continuing through the date of this filing, the Company had no full-timeemployees. The Company does have 1 part-time employee who is being compensatedsolely through the issuance of stock options.

 

**Forward-LookingStatements**

 

This Annual Reportcontains certain statements that are “forward-looking statements” as that termis defined under the Private Securities Litigation Reform Act of 1995, andwithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended.  The words “believe,” “expect,” “anticipate,”“intend,” “estimate,” “target,” “may,” “will,” “plan,” “project,” “should,”“continue,” or the negative thereof or other expressions, which are predictionsof or indicate future events and trends and which do not relate to historicalmatters, identify forward-looking statements. Such statements are based on information available to management as ofthe time of such statements and relate to, among other things, expectations ofthe business environment in which the Company operates, projections of futureperformance, perceived opportunities in the market and statements regarding theCompany’s mission and vision. Forward-looking statements involve known and unknown risks,uncertainties and other factors, which may cause the actual results,performance or achievements of the Company to differ materially fromanticipated future results, performance or achievements expressed or implied bysuch forward-looking statements.  TheCompany undertakes no obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents or otherwise.

 

**RiskFactors That May Affect Future Results**

 

The future operatingresults and performance trends of the Company may be affected by a number offactors, including, without limitation, the following: (i) the Company’sreliance upon Dialogic with regard to its future revenues, including Dialogic’swillingness to market actively the software under its license agreement withthe Company (see “Recent Development” for a discussion of the status of thelicensing agreement with Dialogic); (ii) the Company’s ability to enforce andmonitor its agreement with Dialogic; (iii) the Company’s ability to developalternative strategic initiatives; (iv) the useful life of software in themarket; (v) the Company’s reliance on one principle partner in Dialogic; (vi)declining prices of software; (vii) uncertainty in consumer acceptance of theCompany’s software; and (viii) the Company’s ability to protect its proprietarysoftware against misappropriation. These and other risks, uncertainties and assumptions identified fromtime to time in the Company’s filings with the Securities and ExchangeCommission, could cause the Company’s actual future results to differmaterially from those projected in the forward-looking statements.

 

The Company mayexperience material fluctuations in future revenues and operating results on aquarterly or annual basis resulting from a number of factors, including but notlimited to the risks discussed in the paragraph above.

 

**ITEM 2           DESCRIPTION OF PROPERTY**

 

The Company’s principalfacility in fiscal 2001 was a 20,000 square-foot office building that theCompany sublet effective August 2000 in Minnetonka, MN.  The sub-lease had an original expirationdate of May 31, 2002, but was terminated without further liability in December2001. The Company****currently uses limited office space provided by one of itsDirectors.  Prior to August 2000, theCompany sublet approximately 14,000 square feet of space in Minneapolis, MN.

 

11

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**ITEM 3.          LEGAL PROCEEDINGS**

 

None

 

**ITEM 4           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Nomatters were submitted to the stockholders in the fourth quarter of fiscal2001.

 

12

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**PART II**

 

**ITEM 5.          MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

As of April 29, 2002,there were 259 stockholders of record. The Company has never paid cashdividends on its common stock and anticipates it will retain any earnings foruse in the growth and operation of its business.

 

The Company’s commonstock currently trades Over-The-Counter (OTC) under the symbol: LROD.PK.  However, up until August 2001, the Company’scommon stock was traded on The Nasdaq Small Cap Market tier of The Nasdaq StockMarket under the symbol: LROD. The following table sets forth the range of highand low sales prices per share of common stock for the last two fiscal years asprovided by Nasdaq.

 
|                |   | **Common stock** |   |
|---------------------|--------|------------------|--------|
| **Quarter ended:**  |   | **High**         |   | **Low** |   |
| December 31,  2001  |   | $                | 0.51   |   | $ | 0.10 |   |
| September 30,  2001 |   | 0.37             |   | 0.14 |   |
| June 30, 2001       |   | 1.13             |   | 0.12 |   |
| March 31, 2001      |   | 1.88             |   | 0.59 |   |
| December 31,  2000  |   | 3.38             |   | 0.19 |   |
| September 30,  2000 |   | 6.75             |   | 2.19 |   |
| June 30, 2000       |   | 10.00            |   | 3.28 |   |
| March 31, 2000      |   | 16.50            |   | 6.38 |   |
|                     |        |                  |        |  |  |  |  |

** **

**ITEM 6.          MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

The following discussionof the Financial Condition and Results of Operations of the Company containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934.  The Company’sactual results and timing of certain events could differ materially from thoseanticipated in these forward-looking statements as a result of certain factors,including, but not limited to, those set forth under “Risk Factors” andelsewhere in this Annual Report on Form 10-KSB.

 

**Overview**

 

LRS derives its revenuesfrom the sale of software licenses and from professional services includingimplementation, customization and maintenance. License revenue is recognized when the product is delivered, thearrangement did not involve significant customization of the software,acceptance had occurred, the license fee was fixed and determinable andcollection of the fee was probable.  Servicerevenue includes revenues from maintenance contracts, implementation andcustomization services.  Revenue frommaintenance contracts is recognized ratably over the term of the contract.  Revenue from implementation andcustomization services are recognized as the services are provided.  Revenue under arrangements where multipleproducts or services are sold together is allocated to each element based onits relative fair value.

 

13

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On a go-forward basis, the Company expects to derivesubstantially all its revenue from sales made by its reseller partners. Revenuewill be recognized under these reseller agreements using the criteria foundabove.

 

The cost of licenserevenue includes royalties due to a third party for technology integrated intosome of the Company’s products, the cost of product documentation, the cost ofthe media used to deliver the products and shipping costs.  Cost of service revenue consists primarilyof personnel-related expenses, travel costs, equipment costs and overheadassociated with delivering professional services to the Company’s customers.

 

Our operating expensesare classified into three general categories: sales and marketing, research anddevelopment, and general and administrative. The Company classifies all charges to these operating expense categoriesbased on the nature of the expenditures. Although each category includes expenses that are unique to thecategory, some expenditures, such as compensation, employee benefits,recruiting costs, equipment costs, travel and entertainment costs, andthird-party professional services fees, occur in each of these categories.

 

The Company charges thetotal costs for information services and facilities to general andadministrative expense.  These costsinclude rent and other facility-related costs for the corporate office,communication charges and depreciation expense for furniture and equipment.

 

The Company had no fulltime employees as of December 31, 2001.

 

**OperatingResults:**

 

Revenues

 

Total revenues increasedby 109%, from $690,000 for the year ended December 31, 2000 to $1,443,000 forthe year ended December 31, 2001, primarily as a result of Dialogic Agreementlicense revenues earned (see further discussion in “Description ofBusiness”).  This Agreement also wasresponsible for the increase in services revenue in 2001.  In total the Dialogic Agreement constituted86% of the Company’s total revenue in 2001. License revenue represented 42% oftotal revenues for the year ended December 31, 2001 and 54% of total revenuesfor 2000.  Service revenue represented58% of total revenues for the year ended December 31, 2001 and 46% of totalrevenues for 2000.  The Company does notforesee significant ongoing revenue streams unless an agreement can be reachedwith Dialogic and/or there is an increase in sales made by the Company’s otherstrategic resellers. The likelihood of either event happening is not readilyassessable at this time.

 

License revenuesincreased by 65%, from $371,000 for the year ended December 31, 2000 to$613,000 for the year ended December 31, 2001. This increase in license revenue was due almost entirely to licenserevenue recognized under the Dialogic Agreement.

 

Service revenuesincreased by 160%, from $319,000 for the year ended December 31, 2000 to$830,000 for the year ended December 31, 2001. Service revenue increases were also due primarily to service revenuesrecognized under the Dialogic Agreement.

 

Cost of Revenues

 

Total cost of revenuesdecreased by 19%, from $1,065,000 for the year ended December 31, 2000 to$859,000 for the period ended December 31, 2001, primarily due to the reductionin staffing and headcount as the Company began to focus all its resources onsupporting the Dialogic relationship.

 

14

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Cost of license revenuesincludes third party software royalties, product packaging, documentation,production and delivery costs for shipments to customers.  The cost of license revenues decreased by69%, from $19,000 for the year ended December 31, 2000 to $6,000 for the yearended December 31, 2001.  As apercentage of license revenues, cost of license revenues was 0.1% for the yearended December 31, 2001 and 5% for the year ended December 31, 2000.  The reduction in the percentage of the costof license revenues year over year was due to the nominal costs of supportingthe Dialogic revenues as opposed to traditional direct customer sales and tothe growth in license revenues. In the future, the Company does not expect tohave any significant cost of license expenses due to the current inactivestatus of the business. Nominal expenses may be incurred, however, as strategicpartners sell the Company’s solution.

 

The cost of servicerevenues consists primarily of personnel and system costs incurred in providingcustomer support and with building the Company’s customer serviceorganization.  Cost of service revenuesdecreased by 18%, from $1,046,000 for the year ended December 31, 2000 to$853,000 for the year ended December 31, 2001. The decrease in cost of service revenues was attributable primarily to adecrease in personnel as the Company shifted its focus primarily to supportingDialogic and its other strategic resellers. As a percentage of service revenues, cost of service revenues was 103%for the year ended December 31, 2001 and 328% for the year ended December 31,2000.  The decrease is due to the focuson supporting Dialogic and other strategic resellers and to the growth inservice revenues. In the future, the Company does not expect to have anysignificant cost of service expenses due to the current inactive status of thebusiness.

 

Operating Expenses

 

*Sales and Marketing*:  Sales andmarketing expenses consist primarily of compensation and related costs forsales and marketing personnel and promotional expenditures, including publicrelations, advertising, trade shows, and marketing collateral materials.  Sales and marketing expenses decreased by97%, from $2,568,000 for the year ended December 31, 2000 to $75,000 for theyear ended December 31, 2001.  Thisdecrease was attributable primarily to the elimination of sales and marketingpersonnel at the end of 2000 as the Company began to sell and market its solutionthrough its strategic resellers in an effort to save cash.  As a percentage of total revenues, sales andmarketing expenses were 5% for the year ended December 31, 2001 and 372% forthe year ended December 31, 2000.  Thisdecrease in sales and marketing expense as a percent of total revenues was dueprimarily to an increase in total revenues over the periods compared, and tothe shift in marketing and selling through strategic partners rather thanthrough a direct sales and marketing force, which lowered sales and marketingexpenses. In the future, the Company does not expect to have any sales andmarketing expenses due to the current inactive status of the business

 

*Generaland Administrative*:**** General and administrative expenses consist primarily ofcompensation and related costs for administrative personnel, legal, accounting,facilities, depreciation/amortization, impairment expense and other generalcorporate expenses.  General andadministrative expenses decreased by 45%, from $2,344,000 for the year endedDecember 31, 2000 to $1,278,000 for the year ended December 31, 2001, dueprimarily to decreased personnel, outside consultant support, facilitiesexpenses and depreciation/amortization. As a percentage of total revenues, general and administrative expenseswere 89% for the year ended December 31, 2001 and 340% for the year endedDecember 31, 2000.  This decrease ingeneral and administrative expenses as a percent of total revenues from 2001 to2000 was due primarily to the increase in total revenues over the periodscompared, coupled with the decrease in expenditures in this area year overyear. In the future, the Company does not expect to have any significantgeneral and administrative expenses due to the current inactive status of thebusiness. However, the Company will incur and record audit fees and filing feesin 2002 in connection with the year end 2001 audit and related SEC filings.

 

15

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*Research and Development*:  Research anddevelopment expenses consist primarily of compensation and related costs forresearch and development employees and contractors and enhancement of existingtechnology and quality assurance activities. Research and development expenses decreased by 84%, from $2,252,000 forthe year ended December 31, 2000 to $353,000 for the year ended December 31,2001.  This decrease was attributableprimarily to the reduction in staffing required to support the needs of theCompany’s strategic resellers.  As apercentage of total revenues, research and development expenses were 24% forthe year ended December 31, 2001 and 326% for the year ended December 31,2000.  This decrease in research anddevelopment expense as a percent of total revenues was due primarily to theincrease in total revenues over the periods compared, coupled with a decreasein expenditures in this area year over year. In the future, the Company does not expect to have any research anddevelopment expenses due to the current inactive status of the business.

 

Other Income (Expense)

 

Other income (expense) consistsprimarily of interest earned on cash and short-term investments, offset byinterest expense related to debt owed by the Company.  The Company had net other expense of $6,000 for the year endedDecember 31, 2001 compared to net other expense of $25,000 for the year endedDecember 31, 2000, a 75% decrease.  Thedecrease in net other expense was due primarily to the payoff of the Company’snotes payable in the first half of 2001, which lowered the interest expensepaid by the Company in 2001, and to the reduction in interest income associatedwith the declining cash balance.

 

Provision for Income Taxes

 

The Company has incurredoperating losses for all periods from inception through December 31, 2001, andtherefore has not recorded a provision for income taxes.  As of December 31, 2001 and 2000, theCompany had net operating loss carryforwards for federal and state tax purposesof approximately $19,100,000 and $18,000,000, respectively.  These federal and state loss carryforwardsare available to reduce future taxable income. The federal loss carryforwards expire at various dates beginning in theyear 2012.  The Company has recorded avaluation allowance for the full amount of its gross deferred tax assets, asthe future realization of the tax benefit is not currently consideredlikely.  Under the provisions of theInternal Revenue Code, substantial changes in ownership may limit the amount ofnet operating loss carryforwards that could be utilized annually in the futureto offset taxable income.

 

Net Loss

 

The Company’s net losswas approximately $1,129,000 and $7,564,000 for the years ended December 31,2001 and 2000, respectively.  TheCompany ceased active business operations in the fourth quarter of fiscal 2001.  Consequently, the Company currently expectsto incur minimal expenditures in fiscal 2002 except as outlined above.

 

As of December 31, 2001,the Company had an accumulated deficit of approximately $21,801,000.  As a result of the Company’s past inabilityto reach profitability and the uncertainty of future revenues from the DialogicAgreement, the Company’s independent auditors have noted in their opinionregarding the Company’s December 31, 2001 financial statements that substantialdoubt currently exists regarding the Company’s ability to continue as a goingconcern.

 

Liquidity and Capital Resources

 

*HistoricalOverview*

Atio began seeking equityfinancing from institutional investors in March 1999.  To finance its operations while it was seeking this financing,Atio obtained a $1,350,000 credit line, and issued warrants to participants ofthe lender.  Nevertheless, Atio’s equityfinancing efforts were impaired by market

 

16

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conditions and Atio’s deteriorating financialcondition.  Because Atio was unable toobtain equity financing, Atio went into default under a credit agreement towhich it was a party.  Atio was forcedto significantly scale back the scope of its operations starting in August 1999because of the unavailability of additional financing.

 

Atio began negotiation ofan agreement with CESH in September 1999, and reached preliminary agreement inOctober with respect to a proposed business combination.  As part of this preliminary agreement, Atioreceived short-term financing of $150,000 from one of its two largestshareholders and a commitment of its other largest shareholder to continue tofund its development efforts.  Atio alsoreceived a limited amount of financing from CESH in the form of securedpromissory notes.  Atio also enteredinto a preliminary agreement, which was conditioned on the closing of theMerger, to restructure its credit agreement. As a result of this preliminary agreement, and the closing of theMerger, the credit line’s maturity date was extended to June 1, 2001, and LRSissued shares of its common stock to participants in the credit agreement inexchange for certain of their warrants to purchase Atio common stock.

 

At the closing of theMerger, funds in the amount of approximately $8,300,000 were made available toAtio, consisting of approximately $1,550,000 from CESH and $6,440,000 of netproceeds from a private offering of 875,000 shares of common stock, and$300,000 pursuant to a sale of new shares to an existing shareholder.

 

In addition to the fundsdiscussed above, as part of the Merger LRS received a note for approximately$510,000 from Venturian Corporation (“Venturian”).  This note represented Venturian’s agreement to purchase anadditional 78,666 LRS shares.  This notewas paid in full, and 78,666 LRS shares were accordingly issued, on June 30,2000.

 

Additionally, under theMerger Agreement, LRS held as collateral 314,062 LRS shares owned by AtioInternational to secure Atio International’s commitment to purchase anadditional 314,062 shares of LRS common stock at $6.48 per share ($2,035,000 inthe aggregate).  Atio International’scommitment was partially satisfied through providing financial support to LRS’ssoftware development team in South Africa prior to the team’s relocation to theUnited States in mid 2000.  AtioInternational did not complete the purchase of the additional stock as requiredby the Merger Agreement beyond that reflected by its financial support of thedevelopment team.  As a result, in early2001, the Company agreed with Atio International to settle all obligationsbetween LRS and Atio International by releasing 115,000 shares ofcollateralized stock.  The remainingshares held as collateral were retired, reducing the outstanding shares of theCompany by 199,062 shares.  This transactionwas reflected as a capital transaction in 2001.

 

As part of this settlement, in 2001, Atio Pty and AtioInternational agreed to accept 115,000 of newly issued shares of LRS commonstock as payment in full on a LRS note payable to affiliate in the amount of$745,200.

 

*CurrentSituation*

 

At the beginning offiscal 2001, the Company’s capital resources consisted primarily of $2,400,000million in cash. Throughout fiscal 2001, those resources were used principallyto support the Dialogic licensing and consulting agreements, to satisfyemployee related issues as the Company moved to an inactive status, and toretire creditors’ obligations.  TheCompany’s secured debt of $1,350,000 was originally scheduled to come due onJune 1, 2001.  On March 21, 2001, the Companyagreed to accelerate the payment of the secured debt by making $450,000principal payments on April 1, 2001, May 1, 2001, and the balance on June 1,2001. All of these payments were made in a timely manner.  By the end of the fourth quarter of fiscal2001, the Company was substantially inactive, having retired virtually all ofits known debt and creditor claims.  TheCompany’s chief remaining assets at December 31, 2001 were its softwareproducts and its Software License Agreement with Dialogic.

 

17

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In December 2001, theCompany added three new Directors to its Board of Directors and formed anExecutive Committee of the Board to evaluate and monitor the potential of theDialogic license agreement and to explore additional strategic alternatives.

 

In March 2002, Dialogicorally notified the Company that it had reorganized internally and had made astrategic decision not to market the Company’s technology under the SoftwareLicense Agreement.  Rather, Dialogicindicated that it intended to suspend the development and marketing of thetechnology indefinitely.  Dialogicindicated that it believed that a significant market existed for the technologybut that for strategic reasons it had decided not to proceed to market.  The Company has made an effort to explorewith Dialogic alternative ways of realizing the expected value of the SoftwareLicense Agreement with Dialogic’s help, but has not received satisfaction fromthose efforts.

 

In April 2002, theCompany gave Dialogic written notice that it considered Dialogic to be inbreach of the Software License Agreement. The Company demanded that Dialogiccure the breach by paying the Company a sum of money, in an amount yet to bedetermined, that the Company would have realized but for Dialogic’s breach ofthe Software License Agreement.  TheCompany is uncertain what response it will receive, if any, from Dialogic andis uncertain, given its current level of resources, what action it can take toprotect its legal rights or what might result from any such action in the eventthat Dialogic denies the Company’s claim or otherwise ignores the Company’sdemand.

 

The Company is currentlyreviewing strategic alternatives for its business given the recent action byDialogic to shelve the technology.  TheCompany is uncertain whether sufficient human and financial resources willexist to allow the Company to pursue any legal rights it may have againstDialogic, to continue preparing on a regular and ongoing basis public companyreports and filings, and otherwise to conduct even minimal business operationsfor a sustained period of time.  Givenits limited resources, there is no assurance that the Company will be able tocontinue even as an inactive entity for the period of time that may be requiredto realize any significant additional value from its software products, fromthe Software License Agreement with Dialogic, or from other strategicalternatives.

 

*Additional Event*

On April 15, 2002, the Company entered into a Software License Agreement with Atio International,Inc. and Atio Corporation (Pty) Ltd. (collectively referred to hereafter as“Atio Pty”), by which the Company licensed to Atio Pty the CyberCallÒ andAtioCall versions of its software programs (the “Licensed Software”) foruse and distribution to end user customers in Sub-Saharan Africa (the“Territory”).  Atio Pty originally developed CyberCallÒbeginning in 1993. As discussed elsewhere in “Description of Business”, in1997, the software that comprises CyberCallÒ andATIO’s management were combined with Venturian Software Enterprises, Inc., aMinnesota corporation formed in October 1992. Venturian Software Enterprises, Inc. changed its name to AtioCorporation USA, Inc. in November 1997.

 

Prior to the date of thistransaction, Atio Pty was a greater than 10% shareholder of the Company and anexclusive distributor of the Company’s software products in theTerritory.  Under the Software License Agreement, Atio Pty has access tothe Licensed Software in object and source code format on a perpetual basisunless the Agreement is terminated for breach.  The Agreement providesthat Atio Pty accepts the Licensed Software in “as is” condition and that theCompany undertakes no maintenance or support obligations.  With certainexceptions, the Company has agreed not to license the CyberCallÒ andAtioCall versions of its software to others for use in the Territory for aslong as the Software License Agreement remains in effect.  As fullconsideration for the licenses and rights granted to Atio Pty under theAgreement, Atio Pty has agreed to compensate the Company as follows: (1) convey and assign to the Company 401,817 shares of the Company’scommon stock; (2) cancel its exclusive reseller agreement with the Company; and(3) pay the Company 350,000 South African Rand (approximately $31,000 at theexchange rate prevailing at the time the Agreement was executed). TheCompany expects to close this transaction in the second quarter.

 

A copy of this SoftwareLicense Agreement has been included as an exhibit to this filing.

 

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**ITEM 7.          FINANCIALSTATEMENTS**

 

Lightning Rod Software, Inc.

Index to Financial Statements

 
| Report of Independent Auditors - Boulay, Heutmaker, Zibell & Co. P.L.L.P. |
|-------------------------------------------------------------------------------|
| Report of Independent Auditors - PricewaterhouseCoopers LLP                   |
|                                                                          |
| Financial Statements:                                                         |
|                                                                          |
| Balance Sheet                                                                 |
|                                                                          |
| Statement of Operations                                                       |
|                                                                          |
| Statement of Changes in Shareholders’ Equity / (Deficit)                 |
|                                                                          |
| Statement of Cash Flows                                                       |
|                                                                          |
| Notes to Financial Statements                                                 |

 

19

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REPORT OF INDEPENDENT AUDITORS

 

To the Board of Directors and Stockholders

of Lightning Rod Software, Inc.:

Minneapolis, MN

 

We have audited the accompanying balance sheet of Lightning Rod Software, Inc. (a Delaware corporation) as of December 31, 2001, and the related statements of operations, changes in shareholders’ equity / (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lightning Rod Software, Inc. as of December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s significant operating losses and its current inactive status, raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
|   |   |   |   |   | Boulay, Heutmaker, Zibell & Co. P.L.L.P. |
|--------|--------|--------|--------|--------|----------------------------------------------|
|   |   |   |   |   | Certified Public Accountants                 |

 

Minneapolis, Minnesota

May 10, 2002

 

20

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Report of Independent Auditors

 

To the Board of Directors and Shareholders

of Lightning Rod Software, Inc.:

 

In our opinion, the accompanying balance sheet and the related statement of operations, of shareholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Lightning Rod Software, Inc. at December 31, 2000, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses from operations and requires additional financing to fund operations in 2001. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

March 2, 2001

 

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** **

**LIGHTNING ROD SOFTWARE, INC.**

Balance Sheet

 
|                                                                                                                                               |   | **As of December 31** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                                                                               |   | **2001**              |    | **2000** |   |
| **ASSETS**                                                                                                                                         |   |                  |    |   |   |
| Current assets:                                                                                                                                    |   |                  |    |   |   |
| Cash                                                                                                                                               |   | $                     | 37,710  |   | $ | 2,413,746 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $0 and $94,087 in 2001  and 2000, respectively                                     |   | —                |    | 21,014 |   |
| Other receivable                                                                                                                                   |   | 20,000                |    | — |   |
| Prepaid expenses                                                                                                                                   |   | 34,803                |    | 107,690 |   |
| Total current  assets                                                                                                                              |   | 92,513                |    | 2,542,450 |   |
|                                                                                                                                               |   |                  |    |   |   |
| Property and  equipment:                                                                                                                           |   |                  |    |   |   |
| Equipment                                                                                                                                          |   | 3,735                 |    | 899,827 |   |
| Leasehold  improvements                                                                                                                            |   | —                |    | 109,082 |   |
|                                                                                                                                               |   | 3,735                 |    | 1,008,909 |   |
| Accumulated  depreciation and amortization                                                                                                         |   | (3,735                | )       | (572,812 | ) |
| Net fixed assets                                                                                                                                   |   | —                |    | 436,097 |   |
|                                                                                                                                               |   |                  |    |   |   |
| Other assets                                                                                                                                       |   |                  |    |   |   |
| Prepaid expenses  - long term                                                                                                                      |   | 29,106                |    | 63,834 |   |
| **Total  assets**                                                                                                                                  |   | $                     | 121,619 |   | $ | 3,042,381 |   |
|                                                                                                                                               |   |                  |    |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                     |   |                  |    |   |   |
| Current  liabilities:                                                                                                                              |   |                  |    |   |   |
| Accounts payable                                                                                                                                   |   | $                     | 4,429   |   | $ | 36,915 |   |
| Accrued payroll  and benefits                                                                                                                      |   | —                |    | 166,595 |   |
| Other accrued  expenses                                                                                                                            |   | 11,611                |    | 219,747 |   |
| Deferred revenue                                                                                                                                   |   | —                |    | 34,863 |   |
| Note payable -  other                                                                                                                              |   | —                |    | 1,350,000 |   |
| Note payable -  affiliate                                                                                                                          |   | —                |    | 745,200 |   |
| Total current  liabilities                                                                                                                         |   | 16,040                |    | 2,553,320 |   |
|                                                                                                                                               |   |                  |    |   |   |
| Shareholders’  equity:                                                                                                                        |   |                  |    |   |   |
| Common stock,  $.01 par value, 10,000,000 shares authorized; 3,202,820 and 3,286,882 shares  issued and outstanding in 2001 and 2000, respectively |   | 32,028                |    | 32,869 |   |
| Additional  paid-in capital                                                                                                                        |   | 21,874,115            |    | 21,128,074 |   |
| Accumulated  deficit                                                                                                                               |   | (21,800,564           | )       | (20,671,882 | ) |
| Total  shareholders’ equity                                                                                                                   |   | 105,579               |    | 489,061 |   |
|                                                                                                                                               |   |                  |    |   |   |
| Total  liabilities and shareholders’ equity                                                                                                   |   | $                     | 121,619 |   | $ | 3,042,381 |   |

 

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

 

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**LIGHTNINGROD SOFTWARE, INC.**

Statement of Operations

 
|                                         |   | **As of December 31** |       |
|----------------------------------------------|--------|-----------------------|------------|
|                                         |   | **2001**              |       | **2000** |   |
| **Revenues:**                                |   |                  |       |   |   |
| Software                                     |   | $                     | 613,126    |   | $ | 371,054 |   |
| Services                                     |   | 829,666               |       | 319,111 |   |
|                                         |   |                  |       |   |   |
| Total revenue                                |   | 1,442,792             |       | 690,165 |   |
|                                         |   |                  |       |   |   |
| **Cost  of revenues:**                       |   |                  |       |   |   |
| Software                                     |   | 5,901                 |       | 18,755 |   |
| Services                                     |   | 853,162               |       | 1,046,368 |   |
|                                         |   |                  |       |   |   |
| Total cost of  revenues                      |   | 859,063               |       | 1,065,123 |   |
|                                         |   |                  |       |   |   |
| **Gross  profit / (loss)**                   |   | 583,729               |       | (374,958 | ) |
|                                         |   |                  |       |   |   |
| **Operating  expenses:**                     |   |                  |       |   |   |
| Sales and  marketing expenses                |   | 74,901                |       | 2,568,474 |   |
| General and  administrative                  |   | 1,278,113             |       | 2,343,751 |   |
| Research and  development                    |   | 353,128               |       | 2,251,811 |   |
|                                         |   |                  |       |   |   |
| Total operating  expenses                    |   | 1,706,142             |       | 7,164,036 |   |
|                                         |   |                  |       |   |   |
| **Loss  from operations**                    |   | (1,122,413            | )          | (7,538,994 | ) |
| Interest  expense, net                       |   | 6,269                 |       | 25,372 |   |
|                                         |   |                  |       |   |   |
| **Net  loss**                                |   | $                     | (1,128,682 | ) | $ | (7,564,366 | ) |
|                                         |   |                  |       |   |   |
| Net loss per common  share:                  |   |                  |       |   |   |
| Basic and  diluted                           |   | $                     | (0.35      | ) | $ | (3.20 | ) |
|                                         |   |                  |       |   |   |
| Weighted average  common shares outstanding: |   |                  |       |   |   |
| Basic and  diluted                           |   | 3,234,372             |       | 2,367,231 |   |

 

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

 

23

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**LightningRod Software, Inc.**

Statement of Changes in Shareholders’ Equity /(Deficit)

 
|                                                                                      |   | **Common Stock**      |   | **Additional** |   |                 |   |                     |   | **Total**                  |        |
|-------------------------------------------------------------------------------------------|--------|-----------------------|--------|----------------|--------|----------------------|--------|--------------------------|--------|----------------------------|-------------|
|                                                                                      |   | **Number of  Shares** |   | **Amount**     |   | **Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Unearned  Compensation** |        | **Shareholders  Equity/(Deficit****)** |   |
|                                                                                      |   |                  |   |           |   |                 |   |                     |   |                       |        |   |   |
| Balances at  December 31, 1999                                                            |   | 557,675               |   | $              | 5,577  |                 | $      | 6,678,511                |   | $                          | (13,107,516 | ) | $ | (26,687 | ) | $ | (6,450,115 | ) |
|                                                                                      |   |                  |   |           |   |                 |   |                     |   |                       |        |   |   |
| Merger with CE  Software Holdings                                                         |   | 1,218,553             |   | 12,185         |   | 4,860,969            |   |                     |   |                       |        | 4,873,154 |   |
| Elimination of  Redeemable Common Stock upon completion of merger                         |   |                  |   |           |   | 500,000              |   |                     |   |                       |        | 500,000 |   |
| Issuance of  shares for cash and cancellation of short-term debt and notes payable        |   | 456,116               |   | 4,561          |   | 2,951,073            |   |                     |   |                       |        | 2,955,634 |   |
| Issuance of shares  upon exercise of warrants                                             |   | 179,538               |   | 1,796          |   | (1,796               | )      |                     |   |                       |        | — |   |
| Issuance of  shares through private placement offering (net of offering cost of $852,000) |   | 875,000               |   | 8,750          |   | 6,139,317            |   |                     |   |                       |        | 6,148,067 |   |
| Compensation  expense recognized                                                          |   |                  |   |           |   |                 |   |                     |   | 26,687                     |        | 26,687 |   |
| Net loss                                                                                  |   |                  |   |           |   |                 |   | (7,564,366               | )      |                       |        | (7,564,366 | ) |
|                                                                                      |   |                  |   |           |   |                 |   |                     |   |                       |        |   |   |
| Balances at  December 31, 2000                                                            |   | 3,286,882             |   | 32,869         |   | 21,128,074           |   | (20,671,882              | )      | —                     |        | 489,061 |   |
|                                                                                      |   |                  |   |           |   |                 |   |                     |   |                       |        |   |   |
| Retire shares  related to Atio Pty   for settlement of commitment                         |   | (199,062              | )      | (1,991         | )      | 1,991                |   |                     |   |                       |        | — |   |
| Issue shares  related to Atio Pty for settlement of note payable                          |   | 115,000               |   | 1,150          |   | 744,050              |   |                     |   |                       |        | 745,200 |   |
| Net loss                                                                                  |   |                  |   |           |   |                 |   | (1,128,682               | )      |                       |        | (1,128,682 | ) |
|                                                                                      |   |                  |   |           |   |                 |   |                     |   |                       |        |   |   |
| Balances at  December 31, 2001                                                            |   | 3,202,820             |   | $              | 32,028 |                 | $      | 21,874,115               |   | $                          | (21,800,564 | ) | $ | — |   | $ | 105,579 |   |

 

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

 

24

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**LightningRod Software, Inc.**

Statement of CashFlows

 
|                                                                         |   | **As of December 31** |       |
|------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                         |   | **2001**              |       | **2000** |   |
| Cash flows from  operating activities:                                       |   |                  |       |   |   |
| Net loss                                                                     |   | $                     | (1,128,682 | ) | $ | (7,564,366 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                  |       |   |   |
| Depreciation and  amortization                                               |   | 180,463               |       | 282,040 |   |
| Impairment of  equipment                                                     |   | 203,716               |       | — |   |
| Provision for  allowance for doubtful accounts                               |   | (75,719               | )          | 112,413 |   |
| Compensatory  stock options                                                  |   | —                |       | 26,687 |   |
| Loss on disposal  of leasehold improvements                                  |   | —                |       | 68,712 |   |
| Changes in  operating assets and liabilities:                                |   |                  |       |   |   |
| Accounts  receivable                                                         |   | 96,733                |       | 50,216 |   |
| Other receivable                                                             |   | (20,000               | )          | — |   |
| Prepaid expenses                                                             |   | 107,615               |       | (68,523 | ) |
| Accounts payable                                                             |   | (32,486               | )          | (1,187,712 | ) |
| Deferred revenue                                                             |   | (34,863               | )          | (55,928 | ) |
| Accrued payroll  and benefits                                                |   | (166,595              | )          | (559,301 | ) |
| Other accrued  expenses                                                      |   | (208,135              | )          | 565,902 |   |
| Net cash used in  operating activities                                       |   | (1,077,953            | )          | (8,329,860 | ) |
|                                                                         |   |                  |       |   |   |
| Cash flows from  investing activities:                                       |   |                  |       |   |   |
| Purchase of  property, equipment and leasehold improvements                  |   | —                |       | (442,456 | ) |
| Proceeds from  disposal of equipment                                         |   | 51,917                |       | — |   |
| Net cash  provided by / (used in) investing activities                       |   | 51,917                |       | (442,456 | ) |
|                                                                         |   |                  |       |   |   |
| Cash flows from  financing activities:                                       |   |                  |       |   |   |
| Net proceeds  from issuance of short-term debt and notes payable             |   | —                |       | 2,573,310 |   |
| Proceeds from  issuance of common stock                                      |   | —                |       | 8,491,369 |   |
| Payment of  short-term debt and notes payable                                |   | (1,350,000            | )          | — |   |
| Net cash (used  in) / provided by financing activities                       |   | (1,350,000            | )          | 11,064,679 |   |
|                                                                         |   |                  |       |   |   |
| Net (decrease) /  increase in cash                                           |   | (2,376,036            | )          | 2,292,363 |   |
| Cash at  beginning of year                                                   |   | 2,413,746             |       | 121,383 |   |
| Cash at end of  year                                                         |   | $                     | 37,710     |   | $ | 2,413,746 |   |
|                                                                         |   |                  |       |   |   |
| Noncash  financing transactions:                                             |   |                  |       |   |   |
| Notes payable  and due to affiliate exchanged for stock upon merger          |   | $                     | —     |   | $ | 5,485,478 |   |
| Atio Pty note  payable settlement in exchange for stock                      |   | $                     | 745,200    |   | $ | — |   |
| Supplemental  cash flow information:                                         |   |                  |       |   |   |
| Interest paid                                                                |   | $                     | 40,783     |   | $ | 264,153 |   |

 

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

 

25

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Lightning Rod Software, Inc.

Notes to Financial Statements

 

1.  Organization

 

**Description of Business**

Lightning Rod Software, Inc. (the “Company” or “LRS”), formerly Atio Corporation USA, Inc., provides customer contact automation software under the trade name Lightning Rod Interaction ManagerÔ, formerly called CyberCallÒ and AtioCall.

 

**Ability to Continue as a Going Concern**

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has an accumulated deficit through December 31, 2001 of approximately $21,801,000. This, combined with the Company’s current inactive status, raise substantial doubt about the Company’s ability to continue as a going concern. The future of the Company is largely dependent upon the outcome of its dealings with Dialogic Corporation - a subsidiary of Intel Corporation, (“Dialogic”), its ability to generate significant revenues in the near term, or its ability to raise additional capital.

 

*Key Events:*

In December 2000, the Company eliminated substantially all of its sales and marketing staff in order to reduce its cash burn rate. As a result, the Company now relies almost exclusively upon reseller agreements with strategic partners, primarily Dialogic, to generate revenue.

 

On March 2, 2001 the Company entered into a strategic agreement with Dialogic, whereby Dialogic licensed the Company’s Lightning Rod Interaction ManagerTM software. Under the terms of the agreement, the Company received license fees and a monthly fee for providing consulting and development services to Dialogic. The Company also agreed to grant Dialogic, an option exercisable until August 1, 2001, to convert its royalty-based license into a fully paid-up license by paying a one-time license fee of an additional two million dollars ($2,000,000).

 

On July 30, 2001, Dialogic notified the Company that it would notexercise the option for a fully paid up license, but rather would continue tooperate under the existing license and consulting agreements.  Without sufficient resources to continueactive operations, the Company notified Dialogic that it was terminating theconsulting agreement effective August 31, 2001, and was terminating on that dateas well its technical and professional services employees.  The Company announced in August 2001 that itwould wind down active operations from and after August 31, 2001, would seek toresolve any outstanding employee and creditor issues and claims, and wouldendeavor to remain in existence pending further evaluation of Dialogic’ssuccess with the Company’s technology. For its part, Dialogic indicated that it would continue to develop thetechnology and prepare it for market introduction in early 2002.  The Company’s outside directors resignedfrom the Board of Directors in August 2001 and the Company’s Chief ExecutiveOfficer resigned in September 2001, leaving the Company’s General Counsel asthe sole remaining officer and director.

 

In the fourth quarter of fiscal 2001, the Company successfullycompleted its efforts to resolve all known outstanding employee and creditorissues and to otherwise wind down its operations to a substantially inactivestatus.  In December 2001, the Companyadded three new Directors to its Board of Directors and formed an ExecutiveCommittee of the Board to evaluate the potential of the Dialogic licensingagreement and to seek alternative strategic opportunities for the Company.

 

In March 2002, Dialogic orally notified the Company that it hadreorganized internally and had made a strategic decision not to market theCompany’s technology under the Software License Agreement.  Rather, Dialogic indicated that it intendedto suspend the development and marketing of the technology indefinitely.  Dialogic informed the Company that itbelieved that a substantial market existed for the

 

26

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technology but that for strategic reasons it had decided not to proceedto market.  The Company has made aneffort to explore with Dialogic alternative ways of realizing the expectedvalue of the Software License Agreement with Dialogic’s help, but has notreceived satisfaction from those efforts.

 

In April 2002, the Company gave Dialogic written notice that itconsidered Dialogic to be in breach of the Software License Agreement. TheCompany demanded that Dialogic cure the breach by paying the Company a sum ofmoney, in an amount yet to be determined, that the Company would have realizedbut for Dialogic’s breach of the Software License Agreement.  The Company is uncertain what response itwill receive, if any, from Dialogic and is uncertain, given its current levelof resources, what action it can take to protect its legal rights or what mightresult from any such action in the event that Dialogic denies the Company’sclaim or otherwise ignores the Company’s demand.

 

The Company is currently reviewing strategic alternatives for itsbusiness given the recent action by Dialogic to shelve the technology.  The Company is uncertain whether sufficienthuman and financial resources will exist to allow the Company to pursue anylegal rights it may have against Dialogic, to continue preparing on a regularand ongoing basis public company reports and filings, and otherwise to conducteven minimal business operations for a sustained period of time.  Given its limited resources, there is noassurance that the Company will be able to continue even as an inactive entityfor the period of time that may be required to realize any significantadditional value from its software products, from the Software LicenseAgreement with Dialogic, or from other strategic alternatives.

 

**Merger**

In accordance with a certain merger agreement dated December 28, 1999, as amended on February 15, 2000 (“Merger Agreement”), Atio Corporation USA, Inc., a Minnesota corporation (“Atio”), merged (the “Merger”) with and into CE Software Holdings, Inc., a Delaware corporation (“CESH”), effective as of April 28, 2000. In conjunction with the Merger, CESH (the surviving corporation) changed its name to Lightning Rod Software, Inc. (hereinafter “LRS” or “Company”).

 

Immediately prior to consummation of the Merger, CESH spun off CE Software, Inc. (“CSI”), its wholly-owned operating subsidiary, by declaring and paying a dividend of one share of CSI common stock for each outstanding share of CESH common stock. Substantially all of the business operations of CESH were conducted through CSI prior to this spin-off. Based principally on the fact that the officers, directors and operating activities of Atio became the officers, directors and operating activities of CESH after the Merger, the Merger was accounted for as a reverse acquisition, and the financial statements of Atio became the financial statements of LRS.

 

2.  Summary of Significant Accounting Policies

 

**Basis of Presentation**

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

**Concentration of Credit Risk**

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. The Company monitors its customers’ financial condition to minimize its risks associated with trade accounts receivable, but generally does not require collateral from its customers.

 

27

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**Fair Value Disclosure of Financial Instruments**

The Company’s financial instruments consist of short-term trade and other receivables and trade payables for which current carrying amounts are equal to or approximate fair market value. Additionally, interest rates on outstanding debt are at rates which approximate market rates for debt with similar terms and maturities.

 

**Prior Year Reclassifications**

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

**Cash & Cash Equivalents**

The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are recorded at cost which approximates market value. Currently the Company holds all of its cash in a single account. At times during the past year the balance in this account has exceeded the FDIC insured limits of $100,000.

 

**Earnings / (Loss) per Common Share**

Net loss per common share is computed under SFAS No. 128, “Earnings Per Share”. Basic net loss per common share is computed using the weighted average number of shares of common stock outstanding. Diluted net loss per common share does not differ from basic net loss per common share since potential shares of common stock from the exercise of stock options and warrants and outstanding shares of common stock are anti-dilutive for all periods presented. Because they are anti-dilutive, net loss per common share does not include common stock options ultimately exercisable for the purchase of approximately 1,580,000 and 763,000 shares of common stock as of December 31, 2001 and 2000, respectively.

 

**Property and Equipment**

Property and equipment are stated at the lower of cost or fair value. Depreciation is determined for financial reporting purposes using the straight-line method over the estimated useful lives of three to five years. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in operations. Leasehold improvements are amortized over the shorter of their useful life or the lease term.

 

As of December 31, 2001, the Company had nominal amounts of equipment on its books. This equipment is being used to prepare Securities and Exchange Commission filings and to maintain books of record for the Company.

 

The Company’s property andequipment was composed primarily of office furniture and fixtures, computerequipment and leasehold improvements. The financial statements include animpairment charge recorded in 2001 totaling approximately $203,000 to reflect areduction in the net realizable value of the Company’s property andequipment.   The impairment charge was recorded against furniture andfixtures and computer equipment that is no longer being used in ongoingoperations of the Company.  The Company considered the age and conditionof the furniture and fixtures and computer equipment as well as pricing forcomparable items from after market vendors in determining the net realizablevalue for the assets and the amount of the impairment charge. The charge wasincluded in the General and Administrative line on the Company’s Statement ofOperations and is also shown separately on the Statement of Cash Flows.

 

**Prepaid Expenses**

The Company has prepaid expenses at December 31, 2001 comprised entirely of prepaid Directors and Officers (“D&O”) insurance premiums. The premiums relate primarily to a D&O policy that runs through April 27, 2006, although some of the prepaid expenses are for a policy that expires April 28, 2002.

 

**Comprehensive Income (Loss)**

The Company has no comprehensive income (loss) items other than net loss.

 

28

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**Research and Development**

Research and development expenditures are expensed as incurred.

 

**Software Development Costs**

Costs incurred internally in creating computer software are charged to expense when incurred. Technological feasibility is established upon completion of a working model. No costs have been capitalized pursuant to Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” since the period between achieving technological feasibility and completion of such software is relatively short and software development costs qualifying for capitalization have been insignificant.

 

**Revenue Recognition**

Revenue on software sales is recognized upon shipment, if no significant vendor obligations remain and collection is probable. The Company evaluates arrangements that include professional services to determine whether those services are essential to the functionality of other elements of the arrangement. When professional services are considered essential, revenues from the arrangement are recognized using contract accounting on a percentage of completion basis. Revenue from maintenance contracts is recognized on a straight-line basis over the contract period which is typically twelve months. Other service revenues, such as training and consulting, are recognized when services are performed.

 

During 2001 the Company recorded $500,000 in license revenue from Dialogic. Because the license revenue from this arrangement was determined to have a significant service component associated with it, the revenue was recognized over the six month service period.

 

**Income Taxes**

The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recorded based on differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

**Recently Issued Accounting Pronouncements**

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). The new statement established accounting and reporting standards for derivative instruments and hedging activities related to those instruments, as well as other hedging activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, was effective and adopted by the Company beginning January 1, 2001. The adoption of  SFAS No. 133 has not materially affected the Company’s financial position or results of operations.

 

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 101, “Revenue Recognition in Financial Statements.” SAB 101 summarizes certain of the SEC’s views regarding revenue recognition. The provisions of SAB 101, as amended by SAB 101A, are effective for the year beginning January 1, 2000. The Company analyzed the effect of the guidance outlined in SAB No. 101, as amended by SAB 101A, and believes that it does not impact the Company’s revenue recognition practices or financial statements.

 

InJune 2001, the FASB issued SFAS No. 141, “Business Combinations”, whichaddresses accounting and financial reporting for business combinations. This Statement is effective in its entirety for the Company on January 1,2002.  Also in June 2001, the FASB issued SFAS No. 142, “Goodwill andOther

 

29

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IntangibleAssets”, which addresses accounting for intangible assets acquired individuallyor with a group of other assets, except for those acquired in a businesscombination.  This Statement is effective in its entirety for the Companyon January 1, 2002.  The Company does not believe that adoption of theseStatements will have a material impact on its results of operations orfinancial position.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement is effective for fiscal years beginning after December 15, 2001, with early adoption permitted. The Company has adopted this Statement effective January 1, 2002. Management believes there will be no material effect on the Company’s financial position, results of operations or shareholders’ equity resulting from the adoption.

 

Also in 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other type of disposal of long-lived tangible assets. This Statement is effective for fiscal years beginning after June 15, 2002, with early adoption permitted.  Management believes there will be no material effect on the Company’s financial position, results of operations or shareholders’ equity resulting from the adoption.

 

3.  Employee Benefit Plan

 

Effective January 1, 1998, the Company adopted a defined contribution plan (the “Plan”) which covered all full time employees over the age of 21 who have been employed by the Company for three consecutive months. The Company matched 50% of the first 4% of the employee’s contributions. The    Company contributed $19,985 and $38,806 to the Plan for the years ended December 31, 2001 and 2000, respectively.

 

This Plan was terminated in 2001 and all money invested under the Plan was distributed to participants or to their designated accounts prior to December 31, 2001.

 

4.  Lease Commitments

 

The Company’s operations were conducted in a leased facility under an agreement originally set to expire in May 2002. This agreement was restructured to expire in December 2001. The Company has no leases of any kind at December 31, 2001.  Rent expense was $252,801 and $348,106 for the years ended December 31, 2001 and 2000, respectively.

 

There are no future minimum lease payments under operating leases at December 31, 2001.

 

5.  Income Taxes

 

As of December 31, 2001, the Company has approximately $19,100,000 of net operating loss carry forwards for federal income tax purposes which represents substantially all of the Company’s gross deferred tax asset of approximately $6,500,000. The net operating loss carry forwards are generally available to offset future taxable income and begin to expire in the year 2012. Utilization of these net operating loss carry forwards in the future by the Company may be limited or deferred subject to Section 382 of the Internal Revenue Code. The Company has recorded a valuation allowance for the full amount of its gross deferred tax asset, as the future realization of the tax benefit is not considered likely. Under provisions of the Internal Revenue Code, substantial changes in ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income.

 

30

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6.  Stock Options

 

In 2000, the Company adopted the 2000 Stock Incentive Plan (the “Plan”). The Plan provides participating employees the right to purchase common stock of the Company through incentive and non-qualified stock options. No new Stock Incentive Plans, or modifications to the Plan, were adopted in 2001. However, the Board of Directors of the Company did issue 1,400,000 stock options in 2001outside of the Plan, as well as 100,000 shares in the Plan, as further discussed below.

 

The following is a summary of stock option activity:

 
|                                                            |   | **2001**   |   | **2000**                               |   |
|-----------------------------------------------------------------|--------|------------|--------|----------------------------------------|--------|
|                                                            |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                                                            |   |       |   |                                   |   |   |   |   |   |
| Outstanding at  beginning of year                               |   | 763,407    |   | $                                      | 8.88   |   | 189,381 |   | $ | 9.63 |   |
|                                                            |   |       |   |                                   |   |   |   |   |   |
| Granted                                                         |   | 1,500,000  |   | $                                      | 0.18   |   | 824,842 |   | $ | 8.48 |   |
|                                                            |   |       |   |                                   |   |   |   |   |   |
| Forfeited                                                       |   | (682,918   | )      | $                                      | 8.79   |   | (250,816 | ) | $ | 8.12 |   |
|                                                            |   |       |   |                                   |   |   |   |   |   |
| Outstanding at  end of year                                     |   | 1,580,489  |   | $                                      | 0.66   |   | 763,407 |   | $ | 8.88 |   |
|                                                            |   |       |   |                                   |   |   |   |   |   |
| Options  exercisable at end of year                             |   | 1,571,821  |   | $                                      | 0.61   |   | 271,196 |   | $ | 9.37 |   |
|                                                            |   |       |   |                                   |   |   |   |   |   |
| Weighted average  fair value of options granted during the year |   |       |   | $                                      | 0.18   |   |   |   | $ | 8.30 |   |

 

In December 2001, the Company issued 1,500,000 options, primarily to new and remaining Board of Director members. These options have an exercise price of $0.18 per share and carry a 10 year life. The options have a vesting schedule which provides for approximately one-third of the options to vest immediately and the remaining to vest monthly over the next 2 years.

 

The option agreements related to these issuances also contain a provision which allows an individual to exercise all options, (both vested and unvested portions), immediately. However, the Company has the right, within six months of the termination of an individual for cause or through voluntary means, to repurchase from that individual, at the option price, all or any portion of the shares of option stock which had not become vested on the date of such termination.

 

At December 31, 2001, 650,000 options were available for grant, with 750,000 total options authorized for issuance under the Plan.

 

The weighted average fair value of options granted under the Plan at the date of grant was $0.18 per option during 2001. All of these options had exercise prices equal to the estimated fair value of common stock on the date of grant. The weighted average fair value of options granted under the Plan at the date of grant was $8.30 per option during 2000.

 

31

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The following summarizes information about stock options outstanding as of December 31, 2001:

 
|                      |   | **Options Outstanding** |   | **Options Exercisable** |      |
|---------------------------|--------|-------------------------|--------|-------------------------|-----------|
|                      |   | **Exercise  Price**     |   | **Number  Outstanding** |      | **Weighted  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|                      |   | $                       | 0.18   |                    | 1,500,000 |   | 9.96 |   | $ | 0.18 |   | 1,500,000 |   | $ | 0.18 |   |
|                      |   | $7.76 - $9.70           |   | 80,489                  |      | 7.84 |   | $ | 9.65 |   | 71,821 |   | $ | 9.64 |   |
| Total / Weighted  Average |   | $                       | 0.66   |                    | 1,580,489 |   | 9.85 |   | $ | 0.66 |   | 1,571,821 |   | $ | 0.61 |   |

 

Stock-Based Compensation

 

In accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), the Company has elected to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB Opinion No. 25”). Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the fair value of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation expense recognized for stock options granted to employees with an exercise price below fair market value at the date of grant was $0 and $26,687 during 2001 and 2000, respectively.

 

If the Company had elected to recognize compensation expense based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, the Company’s net income (loss) would have been as follows:

 
|                        |   | **2001** |       | **2000** |   |
|-----------------------------|--------|----------|------------|----------|--------|
| Net loss as reported        |   | $        | (1,128,682 | )        | $      | (7,564,366 | ) |
| Net income (loss) pro forma |   | $        | 642,069    |     | $      | (9,707,183 | ) |

 

The amount reflected to arrive at the pro forma net income for 2001 is primarily the result of the forfeiture in 2001 of options granted in 2000 for which pro forma compensation expense was recorded in 2000 less the pro forma compensation expense related to options granted in 2001. The pro forma basic and diluted earnings per share was $ 0.20 and $ (4.10) for 2001 and 2000, respectively.

 

For the purpose of applying the fair value method as prescribed by SFAS No. 123, the Company used the following weighted average assumptions for grants in 2001; dividend yield of 0%, expected volatility of 120%, a risk-free interest rate of 5.54% based on quoted U.S. Treasury rates on the dates of the related option grants, and an expected life of ten years. The weighted average assumptions used for grants in 2000 included; dividend yield of 0%, expected volatility of 120%, a risk-free interest rate of 6.2% based on quoted U.S. Treasury rates on the dates of the related option grants, and an expected life of seven years.

 

7.  Major Customers

 

The Company had the following customers that accounted for more than 10% of the Company’s revenue:

 

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| **Customer**                 |   | **2001Revenue** |   | **2000Revenue** |   |
|------------------------------|--------|-----------------|--------|-----------------|--------|
|                         |   |            |   |            |   |
| A                            |   | $               | 0      |            | $      | 31,400 |   |
| B - related party (Atio Pty) |   | 71,527          |   | 295,685         |   |
| C                            |   | 16,191          |   | 135,320         |   |
| D                            |   | 1,236,759       |   | 0               |   |
|                              |        |                 |        |                 |        |  |  |

 

8.  Debt

 

Note Payable - Other

 

The Companyobtained a bridge loan from CC Management LLC dated March 12, 1999. The loanwas collateralized by a first secured interest in all the Company’s tangibleand intangible assets. In late 1999, the note was restructured to address aloan default and carried an interest rate of 9% and had a maturity date of June1, 2001. On March 21, 2001, the Company agreed to accelerate the paymentof the secured debt by making $450,000 principal payments on April 1, 2001 andMay 1, 2001 and then paying the remaining principal balance of $450,000 on June1, 2001 as was originally scheduled.  The Company also agreed to certainaccelerated remedy rights in the event of a default on any of thesepayments.  The principal and interest payments required under the revisedschedule were made and the Company’s secured debt was retired in its entirety onJune 1, 2001.

 

At December 31, 2001 and 2000, there was $0 and $1,350,000 due, respectively, under this agreement.

 

9.  Related Party Transactions

 

Note Payable - Affiliate

 

In accordance with the Merger agreement, Atio Pty, a related party, had the obligation to purchase 314,062 shares of the Company’s stock at a price of $6.48 per share for a total cash commitment to the Company of $2,035,122. Atio Pty’s commitment was partially satisfied through providing financial support to LRS’s technology development team in South Africa prior to the team’s relocation to the United States of America in mid 2000. Atio Pty did not complete the purchase of the additional stock as required by the Merger Agreement beyond that reflected by its financial support of the development team. As a result, in early 2001, the Company agreed with Atio Pty to settle all obligations between LRS and Atio Pty by releasing 115,000 shares of the collateralized stock. The remaining shares held as collateral were retired, reducing the outstanding shares of the Company by 199,062 shares. This transaction was reflected as a capital transaction in 2001.

 

As part ofthis settlement, Atio Pty agreed to accept 115,000 of newly issued shares ofLRS common stock as payment in full on LRS’s note payable to affiliate in theamount of $745,200. This transaction was recorded in May 2001 as anon-cash capital transaction resulting in the retirement of the net liabilitydue to affiliate for the issuance of 115,000 shares of the Company’s stock.

 

During 2001 and 2000 Atio Pty provided development services to the Company totaling $0 and $770,979, respectively. These amounts were essentially paid through the settlement discussed above.

 

Related Party and Debt Conversion

Between October 1999 and February 2000, CESH and Venturian loaned Atio $1,741,000 and $150,000, respectively. The balance due on the notes due to CESH and Venturian at December 31, 1999 were $625,000 and $150,000, respectively. These amounts were eliminated upon completion of the Merger in April 2000.

 

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Furthermore, in conjunction with the restructuring agreement $1,990,762 worth of obligations incurred by Atio through July 31, 1999 and held by Atio International were converted into shares in 2000 upon completion of the Merger.

 

10.  Subsequent Event

 

On April 15, 2002,  the Company entered into aSoftware License Agreement with Atio International, Inc. and Atio Corporation(Pty) Ltd. (collectively referred to hereafter as “Atio Pty”), by which theCompany licensed to Atio Pty the CyberCallÒ andAtioCall versions of its software programs (the “Licensed Software”) foruse and distribution to end user customers in Sub-Saharan Africa (the“Territory”).  Atio Pty originally developed CyberCallÒbeginning in 1993. As discussed elsewhere in “Description of Business”, in1997, the software that comprises CyberCallÒ andATIO’s management were combined with Venturian Software Enterprises, Inc., aMinnesota corporation formed in October 1992. Venturian Software Enterprises, Inc. changed its name to AtioCorporation USA, Inc. in November 1997.

 

Prior to the date of this transaction, Atio Pty was agreater than 10% shareholder of the Company and an exclusive distributor of theCompany’s software products in the Territory.  Under the Software LicenseAgreement, Atio Pty has access to the Licensed Software in object and sourcecode format on a perpetual basis unless the Agreement is terminated forbreach.  The Agreement provides that Atio Pty accepts the Licensed Softwarein “as is” condition and that the Company undertakes no maintenance or supportobligations.  With certain exceptions, the Company has agreed not tolicense the CyberCallÒ and AtioCall versions of its software toothers for use in the Territory for as long as the Software License Agreementremains in effect.  As full consideration for the licenses and rightsgranted to Atio Pty under the Agreement, Atio Pty has agreed to compensate theCompany as follows:  (1) convey and assign to the Company 401,817shares of the Company’s common stock; (2) cancel its exclusive reselleragreement with the Company; and (3) pay the Company 350,000 South African Rand(approximately $31,000 at the exchange rate prevailing at the time theAgreement was executed). The Company expects to complete this transaction inthe second quarter.

 

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**ITEM 8.**                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

**Change from KPMG to PWC:**

Effective as of the date of the Merger (April 28, 2000), Atio’s financial statements became the financial statements of the Company. Because PricewaterhouseCoopers LLP (“PWC”) was the independent auditing firm that had audited such financial statements, on May 11, 2000 the board of directors of the Company determined to replace KPMG LLP (“KPMG”) with PWC as its independent auditors.

 

The reports of KPMG on the financial statements of CESH for its fiscal years ended September 30, 1999 and September 30, 1998 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

 

During the Company’s two most recent fiscal years and the subsequent interim period to date, (i) there were no disagreements between CESH and KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreement in connection with its reports on the financial statements for such years and (ii) there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K of the Securities and Exchange Commission (the “Commission”).

 

The Company had not, during its two most recent fiscal years or the subsequent interim period through the Merger date, consulted with PWC regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and no written report was provided to the Company or oral advice was provided that PWC concluded was an important factor that should be considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issue.

 

The Company furnished KPMG with a copy of the Form 8-K dated June 9, 2000 which announced this change and requested that KPMG furnish it with a letter addressed to the Commission stating whether it agreed with the above statements. A copy of KPMG’s letter to the Commission, dated May 12, 2000, is filed as Exhibit 16.1 on the Form 8-K filed with the SEC on June 9, 2000.

 

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**Resignation of****PricewaterhouseCoopers LLP and election of Boulay, Heutmaker, Zibell & Co. P.L.L.P. as independent auditors:**

 

Effective February 14, 2002, PricewaterhouseCoopers LLP resigned as theCompany’s principal independent auditors.

 

Therewere not, in connection with the audits of the fiscal years ended December 31,2000 and December 31, 1999 and any subsequent interim period through February14, 2002, the date of PricewaterhouseCoopers LLP’s resignation, anydisagreement with PricewaterhouseCoopers LLP on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure which, if not resolved to PricewaterhouseCoopers LLP’s satisfaction,would have caused it to make reference to the subject matter of thedisagreement in connection with its reports on the financial statements forsuch years, nor has PricewaterhouseCoopers LLP’s reports on the financialstatements of the Registrant for each of the past two fiscal years contained anadverse opinion or disclaimer of opinion or been qualified as to audit scope oraccounting principles except that the audit reports of  PricewaterhouseCoopers LLP on the financialstatements as of and for each of the past two fiscal years ended December 31,2000 and 1999 contained a separate paragraph stating that the Registrant hassuffered recurring losses from operations and has a working capital deficiencythat raises substantial doubt about its ability to continue as a going concern.

 

TheCompany has provided PricewaterhouseCoopers LLP with a copy of this disclosure,and requested that PricewaterhouseCoopers LLP furnish the Company with a letteraddressed to the Securities and Exchange Commission (“SEC”), stating whether itagrees with the above statements.  A copy of PricewaterhouseCoopers LLP’sletter to the SEC, dated February 20, 2002, is filed as Exhibit 99 to the Form8-K filed February 22, 2002.

 

NewIndependent Auditors:

OnFebruary 20, 2002, the Company engaged Boulay, Heutmaker, Zibell & Co.P.L.L.P. as its independent auditor to audit its financial statements for theyear ended December 31, 2001.  The decision to engage Boulay, Heutmaker,Zibell & Co. P.L.L.P. was approved by the Board of Directors.

 

Duringour fiscal years ended December 31, 2000 and December 31, 2001, and throughFebruary 14, 2002, the Company had not consulted with Boulay, Heutmaker, Zibell& Co. P.L.L.P. regarding (i) the application of accounting principles to aspecified transaction, either completed or proposed, that was an importantfactor that we considered in reaching a decision on an accounting, auditing, orfinancial reporting issue, or the type of audit opinion that might be renderedon our financial statements, or (ii) any matter that was the subject of eithera disagreement or a reportable event.

 

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## **PARTIII**

 

**ITEM 9.**                                                     DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION16(a) OF THE EXCHANGE ACT:

** **
| **Name**          |   | **Age** |   | **Position  Held** |   | **Director** |   | **Executive  Officer** |   | **Term of Service****(if Applicable)** |   |
|-------------------|--------|---------|--------|--------------------|--------|--------------|--------|------------------------|--------|----------------------------------------|--------|
| Thomas J. Patin   |   | 56      |   | General  Counsel   |   | X            |   | X                      |   | Not  Applicable                        |   |
| Sheldon T. Fleck  |   | 51      |   | Director           |   | X            |   |                   |   | Next  Annual Meeting                   |   |
| James S. Murphy   |   | 57      |   | Director           |   | X            |   |                   |   | Next  Annual Meeting                   |   |
| Thomas J. Schrade |   | 53      |   | Director           |   | X            |   |                   |   | Next  Annual Meeting                   |   |

 

Effective August 14, 2001, Thomas F. Madison, James E. Ousley and SvenA. Wehrwein resigned as members of the Board of Directors for the Company.Effective September 10, 2001, Willem Ellis resigned as Chief Executive Officerand President of the Company. Thomas J. Patin continues to serve as theCompany’s General Counsel and is the acting Chief Executive Officer. Mr. Patinis not receiving any form of cash compensation for this role, however, he didreceive new stock options in December 2001.

 

On December 17, 2001, the three new Directors outlinedabove were elected to the Company’s Board of Directors. They will serve in thiscapacity until the next annual meeting which is not presently scheduled. Theyalso were granted stock options in December 2001 as compensation in full fortheir services to the Company.

 

**ThomasJ. Patin**, 56, has been a member of the Board of Directors ofthe Registrant since the Merger. Mr. Patin was formerly a member of the Boardof Directors of then publicly traded Destron Fearing Corporation from September1998 until Applied Digital Solutions, Inc. acquired it in September 2000. Hewas a member of the Executive Committee of Destron’s Board beginning inDecember 1999. Mr. Patin also held various executive positions with Destron, includingconsultant, Executive Vice President, and General Counsel from October 1998through February 2001. From August 1992 through December 1995, Mr. Patin servedas General Counsel for Gaming Corporation of America, a publicly traded companythat was acquired by Grand Casinos, Inc. in 1995. Mr. Patin was President and aDirector of privately held TR Restaurants of Bloomington, Inc. from 1988through June 2000. Mr. Patin was formerly a partner in the Minneapolis,Minnesota law firm of Gray, Plant, Mooty, Mooty & Bennett. In 1977, Mr.Patin received his law degree from William Mitchell College of Law in St. Paul,Minnesota. He received his Bachelor’s Degree and a Master’s Degree in BusinessAdministration from the University of Michigan in 1968 and 1971, respectively.The Registrant retained Mr. Patin in December 1999 to serve as General Counselon a part-time basis.

 

**SheldonT. Fleck**, 51, has been actively engaged in venture capitalactivities since 1988. He was a Director and President of CE Software Holdings,Inc., a publicly traded company, from its founding in 1988 through February1990 and a Director until the Merger with the Registrant in 2000. Mr. Fleck wasPresident and a Director of Gaming Corporation of America, a publicly tradedcompany, from 1991 until its merger with Grand Casinos, Inc. in 1995. From itsinception until its acquisition by Grand Casinos, Inc., Mr. Fleck held variouspositions with publicly traded Grand Gaming Corp., the developer of GrandCasinos Tunica, Mississippi, including being President and a member of theBoard of Directors. From 1990 to June 1992, Mr. Fleck served as a Director andPresident of Anubis II Corp., a publicly traded

 

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blind venture pool formed by him in 1990, which acquired Isle of CapriCasinos, Inc. (NASDAQ: ISLE) in June 1992. Since June 1999, Mr. Fleck has beena Director of iXmatch, Inc., a developer of matching software solutions. Mr.Fleck has been actively engaged in real estate and other business and corporatefinance activities, including, since 1979, as a general partner in YorkInvestments, LLP, a firm that specialized in real estate syndication andmanagement. Mr. Fleck was a practicing attorney from 1977 to 1982. Mr. Fleckhas passed the certified public accountant examination and previously had beenemployed by Ernst & Young LLP as an auditor and by KPMG LLP as a taxspecialist. Mr. Fleck received a B.B.A. degree from the University of Iowa witha major in accounting in 1972, a law degree from Drake University School of Lawin 1975, and a Master of Laws degree specializing in taxation from the New YorkUniversity School of Law in 1977.

 

**James S.Murphy**, 57, has been Vice President of Finance and ChiefFinancial Officer of publicly traded Hypertension Diagnostics, Inc. since 1996.In March 2000, his title was changed to Senior Vice President, Finance andAdministration and Chief Financial Officer. Mr. Murphy was Controller of GamingCorporation of America from December 1992 through November 1995. From 1978 to1988, he was a tax partner with Fox, McCue and Murphy, a certified publicaccounting firm located in Eden Prairie, Minnesota. From 1970 to 1978, Mr.Murphy was employed by Ernst & Ernst (currently named Ernst & YoungLLP) with both audit (six years) and tax (two years) experience. Mr. Murphy isa member of the American Institute of Certified Public Accountants as well asthe Minnesota Society of CPA’s. He holds a Bachelor of Science degree fromSaint John’s University in Collegeville, Minnesota (1966) and a Master ofBusiness Administration degree (M.B.A.) from the University of Minnesota(1968).

 

**ThomasJ. Schrade,**53, is engaged in a variety of entrepreneurialactivities including, among other things, real estate development in Minnesotaand Texas, amusement park development in Nevada, importing, andconsulting.  Mr. Schrade was a member ofthe Board of Directors of Secured Access, Inc., a publicly traded company, from1998 to 1999.  From 1991 to 1995, he waspresident of Golden Nickel Casinos, Inc., which during that time became awholly owned subsidiary of Gaming Corporation of America.  From 1973 to 1995, Mr. Schrade was Treasurerand a member of the Board of Directors of Tobies Enterprises, Inc., owner and operatorof, among other things, Tobies Restaurant in Hinkley, Minnesota.  Mr. Schrade served in the United States Navyfrom 1968 to 1973.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934 requires theCompany’s executive officers, directors and persons who own more than 10percent (10%) of the Company’s Common Stock to file with the Securities andExchange Commission (“SEC”) initial reports of ownership and report changes inownership of Common Stock and other equity securities of the Company.  Officers, directors and greater than 10%shareholders (“Insiders”) are required by SEC regulations to furnish theCompany with copies of all Section 16(a) forms they file.

 

To the Company’s knowledge, based on a review of the copies of suchreports furnished to the Company, during the fiscal year ended December 31,2001, all Section 16(a) filing requirements applicable to Insiders werecomplied with.

 

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**ITEM 10.****                                              EXECUTIVE COMPENSATION**

 

*SummaryCompensation Table*

 

The following Summary Compensation Table contains informationconcerning annual and long-term compensation for the fiscal year ended December31, 2001 provided to the individuals who served as Chief Executive Officerduring fiscal 2001 and the other executive officers of the Company(collectively, the “Named Officers”) who earned remuneration exceeding $100,000for the fiscal year ended December 31, 2001 or in comparable periods.

** **

|                                                          |   | **Annual Compensation** |   | **Long Term  Compensation  Awards** |                            |         |   |
|---------------------------------------------------------------|--------|-------------------------|--------|-------------------------------------|---------------------------------|--------------|--------|
| **Name and  Principal Position**                              |   | **Fiscal  Year**        |   | **Salary**                          |                            | **Bonus**    |   | **Securities  Underlying  Options (#)** |   | **All Other  Compensation** |   |
|                                                          |   |                    |   |                                |                            |         |   |   |   |   |   |
| Willem  Ellis, Chairman of the Board, President & CEO (1) |   | 2001  2000  1999        |   | $                                   |  101,918  284,429  165,364 |         | $      |  10,000  35,000  0 |   | 0  200,000  21,336 |   | $ |  107  1,539  1,330 |   |
|                                                          |   |                    |   |                                |                            |         |   |   |   |   |   |
| Thomas  J. Patin, Director and General Counsel                |   | 2001  2000  1999        |   | 60,000  124,615  3,500              |                            | 0  0  0      |   | 600,000  74,000  0 |   | 0  0  0 |   |
|                                                          |   |                    |   |                                |                            |         |   |   |   |   |   |
| Bouwe  Hamersma, Chief Technology Officer (2)                 |   | 2001  2000  1999        |   | 47,285  149,219  33,876             |                            | 0  35,000  0 |   | 0  50,000  9,667 |   | 945  22,064  0 |   |
|                                                               |        |                         |        |                                     |                                 |              |        |  |  |  |  |  |  |  |

 

----

(1)          2001 income figures reflect only a partial year as Mr. Ellis resignedhis position with the Company in the third quarter of 2001. 2000 salaryincludes $55,000 of salary earned in 1998 and $24,429 of salary earned in 1999that were not paid until fiscal 2000 under a “salary sacrifice” plan that theCompany required executives and other key employees to agree to in order toconserve the Company’s cash resources. 2000 bonus includes $35,000 bonus earned in 1999 that was not paid until2000.  1999, 2000 and 2001 all othercompensation represents Company matching contributions under the Company’s401(k) Plan.

 

(2)          2001 income figures reflect only a partial year as Mr. Hamersmaresigned his position with the Company in the second quarter of 2001. 2000salary includes $18,386 of salary earned in 1999 that was not paid until fiscal2000 under a “salary sacrifice” plan that the Company required executives andother key employees to agree to in order to conserve the Company’s cashresources.  2000 bonus amount includes$35,000 bonus earned in 1999 that was not paid until the completion of themerger in fiscal 2000.  2001 all othercompensation expense represents Company matching contributions under theCompany’s 401(k) Plan. 2000 all other compensation includes $2,064 representingCompany matching contributions under the Company’s 401(k) Plan and $20,000 forrelocation expenses.

 

*OptionGrants in Last Fiscal Year*

 

The following table provides information regardingstock options granted during fiscal 2001 to the Named Officers.  The Company has not granted any stockappreciation rights.

 

39

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| **Name and  Principal Position** |   | **Number of  Securities  Underlying  Options  Granted (1)** |   | **Grants  % of Total  Options  Granted to  Employees in  Fiscal 2001** |   | **Exercise  Price  ($/Share) (2)** |   | **Expiration  Date** |   |
|----------------------------------|--------|-------------------------------------------------------------|--------|------------------------------------------------------------------------|--------|------------------------------------|--------|----------------------|--------|
| Willem Ellis                     |   | 0                                                           |   | 0                                                                      | %      | $                                  | 0      |                 | N/A    |   |
| Thomas J. Patin  (3)             |   | 600,000                                                     |   | 86                                                                     | %      | 0.18                               |   | 12/17/11             |   |
| Bouwe Hamersma                   |   | 0                                                           |   | 0                                                                      | %      | 0                                  |   | N/A                  |   |
|                                  |        |                                                             |        |                                                                        |        |                                    |        |                      |        |  |

 

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(1)          Options were granted in 2001 only to the new Board of Director members as discussed further above, to Mr. Patin who is continuing on as a Board of Director member, acting CEO and General Counsel, and to an individual who is helping the Company to administer its duties. In total there were 1,500,000 options granted in 2001 each with an exercise price of $0.18.

 

(2)          Exercise price equal to fair market value of the Common Stock on the date of grant.

 

(3)          Options granted to Mr. Patin in fiscal 2001vested one-third immediately (on December 17, 2001) with the balance vesting pro rata monthly over the next two years.

 

***Aggregated Option Exercises in Last Fiscal Year and FiscalYear End Option Values***

 

The purpose of the following table is to reportexercises of stock options by the Named Officers during fiscal 2001 and anyvalue of their unexercised stock options as of December 31, 2001.  The Named Officers did not exercise stockoptions in fiscal 2001 pursuant to the Company’s Stock Option Plan.

 
|            |   |                              |   |                |   | **Number of Securities  Underlying Unexercised  Options at FY End** |   | **Value of  Unexercised In-  The-Money Options at FY  End (1)** |   |
|-----------------|--------|-----------------------------------|--------|---------------------|--------|---------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
| **Name**        |   | **Shares  Acquired  on Exercise** |   | **Value  Realized** |   | **Exercisable**                                                     |   | **Unexercisable  (2)**                                          |   | **Exercisable** |   | **Unexercisable** |   |
|            |   |                              |   |                |   |                                                                |   |                                                            |   |   |   |   |   |
| Willem Ellis    |   | None                              |   | $                   | 0      |                                                                | None   |                                                            | None   |   | $ | 0 |   | $ | 0 |   |
| Thomas J. Patin |   | None                              |   | 0                   |   | 600,000                                                             |   | 0                                                               |   | 0 |   | 0 |   |
| Bouwe Hamersma  |   | None                              |   | 0                   |   | None                                                                |   | None                                                            |   | 0 |   | 0 |   |
|                 |        |                                   |        |                     |        |                                                                     |        |                                                                 |        |  |  |  |  |  |  |  |

 

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(1)           Value is based on the difference between the last saleprice of the Company’s Common Stock as reported by the Over-The-Counter PinkSheets Market on December 31, 2001 ($0.18) and the per share option exerciseprice, multiplied by the number of shares subject to in-the-money options.

 

(2)           The option agreements related to thisissuance contains a provision which allows Mr. Patin the right to exercise alloptions, (both vested and unvested portions), immediately. However, the Companyhas the right, within 6 months of the termination of Mr. Patin (for cause orthrough voluntary means), to repurchase from him, at the option price, all orany portion of the shares of option stock which had not become vested on thedate of such termination.

 

*Compensation of Directors*

 

Under the terms of the Company’s 2000 Stock Option Plan (the “2000Plan”), unless otherwise decided by the Board of Directors, each newnon-employee director receives an option to purchase 5,000 shares of CommonStock on the date of such director’s initial election.  Each incumbent non-employee directorautomatically receives an option to purchase 2,500 shares of Common Stock uponthe conclusion of

 

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each annual meeting of the Company’s shareholders.  Non-employee directors do not receive anyadditional compensation beyond the stock option grants for serving on the Boardof Directors.

 

Directors who are employees of the Company do not receive anyadditional compensation for serving on the Board of Directors.

 

The members of the Board of Directors elected at the Company’s lastannual meeting held on April 27, 2000 resigned effective August 14, 2001. OnDecember 17, 2001, the Company elected three new Directors to its Board ofDirectors and formed an Executive Committee of the Board to evaluate thepotential of the Dialogic licensing agreement and to seek alternative strategicopportunities for the Company. These new Board members were compensated with800,000 options in total on December 17, 2001. These options were issued withan exercise price of $0.18 (the value of LROD.PK stock on December 17, 2001),and vested one-third immediately with the balance vesting evenly over twoyears. The options carry a ten-year term.

 

**ITEM 11.****                                              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT**

 

The followingtable sets forth, as of April 29, 2002, the beneficial ownership of CommonStock of the Company by each director of the Company, by each executive officerof the Company named in the Summary Compensation Table herein, by all directorsand executive officers as a group, and by each stockholder who is known by theCompany to own beneficially more than 5% of the outstanding Common Stock of theCompany.

 
| **Name and  Address of Beneficial Owners  Directors and Executive Officers:**                                   |   | **Amount and  Nature of  Beneficial  Ownership (1)** |   | **Percentage  of  Outstanding  Shares (1)** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                            |   |                                                 |   |                                        |   |
| Willem Ellis,  27155 Noble Road, Shorewood, MN   55331  (6)                                           |   | 58,459                                               |   | 1.83                                        | %      |
|                                                                                                            |   |                                                 |   |                                        |   |
| Thomas J. Patin,  5720 Smetana Drive, Minnetonka, MN   55343  (2)                                     |   | 690,000                                              |   | 17.76                                       | %      |
|                                                                                                            |   |                                                 |   |                                        |   |
| Sheldon T.  Fleck, 5720 Smetana Drive, Minnetonka, MN   55343  (3)                                    |   | 830,184                                              |   | 21.48                                       | %      |
|                                                                                                            |   |                                                 |   |                                        |   |
| James S. Murphy,  5720 Smetana Drive, Minnetonka, MN   55343  (4)                                     |   | 100,000                                              |   | 3.03                                        | %      |
|                                                                                                            |   |                                                 |   |                                        |   |
| Thomas J.  Schrade, 5720 Smetana Drive, Minnetonka, MN   55343  (8)                                   |   | 120,800                                              |   | 3.63                                        | %      |
|                                                                                                            |   |                                                 |   |                                        |   |
| Bouwe Hamersma,  2201 Pine Island Rd, Minnetonka, MN   55305                                               |   | 0                                                    |   | N/A                                         |   |
|                                                                                                            |   |                                                 |   |                                        |   |
| All Directors  and Executive Officers as a Group (6 persons)  (5)                                          |   | 1,779,443                                            |   | 37.74                                       | %      |
|                                                                                                            |   |                                                 |   |                                        |   |
| **5% Shareholders:**                                                                                            |   |                                                 |   |                                        |   |
| Atio  International, Inc., c/o Atio Pty, P. O. Box 4467, Rivonia, 2128, Republic of  South Africa  (6) (7) |   | 401,817                                              |   | 12.55                                       | %      |
|                                                                                                            |   |                                                 |   |                                        |   |
| Venturian  Corporation, 11111 Excelsior Blvd, Hopkins, MN  55343  (6)                                 |   | 385,742                                              |   | 12.04                                       | %      |

 

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(1)          Beneficial ownership isdetermined in accordance with rules of the SEC, and includes voting powerand/or investment power with respect to securities.  Shares of Common Stock subject to options or warrants currentlyexercisable or exercisable within 60 days of April 29, 2002 are deemedoutstanding for computing the percentage of the person holding such options butnot deemed outstanding for computing the percentage of any other person.  Except as indicated by

 

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footnote, the Companybelieves that the persons named in this table, based on information provided bysuch persons, have sole voting power with respect to the shares of Common Stockindicated.

 

(2)          Includes 674,000 sharessubject to options and 8,000 shares subject to warrants exercisable within 60days of April 29, 2002.

 

(3)          Sheldon Fleck is both aDirector of the Company and a 5% Shareholder. Total includes 167,684 sharesowned, 62,500 shares subject to purchase from the exercise of warrants inaccordance with the Merger Agreement and 600,000 shares subject to purchasefrom the exercise of options.

 

(4)          Represents sharessubject to options exercisable within 60 days of April 29, 2002.

 

(5)          Includes 1,474,000shares subject to options and 74,500 shares subject to warrants exercisablewithin 60 days of April 29, 2002.

 

(6)          Represents shares heldas of April 29, 2002, as confirmed with transfer agent.

 

(7)          Shares held by AtioInternational, Inc. have not been adjusted to reflect the April 15, 2002agreement between the Company and Atio Pty as discussed in “Liquidity andCapital Resources” in Part II, Item 6, Management’s Discussion and Analysis orPlan of Operation in this Report on Form 10-KSB.

 

(8)          Total includes 16,800shares owned, 100,000 shares subject to purchase from the exercise of options,and 4,000 shares subject to purchase from the exercise of warrants. The optionsand warrants are all exercisable within 60 days of April 29, 2002.

 

**ITEM 12.               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The Company, AtioPty Ltd and Atio International, Inc. were parties to the Merger Agreement.  Atio Ptyis the parent corporation of Atio International.  As a result of the Merger, Atio International is asignificant holder of the Company’s Common Stock.

 

The Lightning RodInteraction ManagerTM software was initially developed in 1993 in South Africaby Atio Pty.  In 1997, Atio Ptytransferred substantially all of its rights in the Lightning Rod InteractionManagerTM software to Atio International. ** **In connection with the Merger, Atio Internationaltransferred substantially all of its rights and interest in the LightningRod Interaction ManagerTM software to the Company.

 

Inaccordance with the Merger Agreement, LROD held as collateral 314,062 sharesowned by Atio International to secure Atio International’s commitment topurchase an additional 314,062 shares of common stock at $6.48 per share($2,035,000 in the aggregate). Atio International’s commitment has beenpartially satisfied by providing financial support to LROD’s softwaredevelopment team in South Africa prior to the team’s relocation to the UnitedStates in mid 2000.  Atio International did not complete the purchase ofthe additional stock as required by the Merger Agreement beyond that reflectedby its financial support of the development team.  In May 2001 anagreement between the Company and Atio International was finalized and 115,000shares of the collateralized stock were released to Atio International. The remaining 199,062 shares held as collateral were retired, reducing theoutstanding shares of the Company.

 

Aspart of this settlement, Atio Pty and Atio International agreed to accept 115,000of newly issued shares of common stock as payment in full on a net liabilitydue to affiliate in the amount of $745,200.  This transaction was recordedin May 2001 as a non-cash capital transaction resulting in the retirement ofthe net liability due to affiliate in exchange for the issuance of 115,000shares of the Company’s stock.

 

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Atio Pty is one ofthe Company’s strategic partners.  Forthe years ended December 31, 2001 and 2000, Atio Pty accounted forapproximately $72,000 and $296,000, respectively, of the Company’s revenues.

 

Mr. Sheldon Fleckis a member of CC Management, LLC.  TheCompany had an outstanding loan of $1,350,000 payable to CC Management, LLC andparticipants. Mr Fleck was also an individual participant to the loan. The loanwas collateralized by a first secured interest in all the Company’s tangibleand intangible assets and had a maturity date of June 1, 2001. On March 21,2001, the Company agreed to accelerate the payment of the secured debt bymaking $450,000 principal payments on April 1, 2001 and May 1, 2001 and thenpaying the remaining principal balance of $450,000 on June 1, 2001 as wasoriginally scheduled.  The Company also agreed to certain acceleratedremedy rights in the event of a default on any of these payments.  Theprincipal and interest payments required under the revised schedule were madeand the Company’s secured debt was retired in its entirety on June 1, 2001.

 

The Companyreceived a note for approximately $510,000 from Venturian Corporation as partof the Merger.  This note representedVenturian’s agreement to purchase an additional 78,666 shares of Common Stockof the Company.  This note was paid infull, and 78,666 shares of Common Stock of the Company were accordingly issued,on June 30, 2000.

 

On April 15,2002,  the Company entered into a Software License Agreement with AtioInternational, Inc. and Atio Corporation (Pty) Ltd. (collectively referred tohereafter as “Atio Pty”), by which the Company licensed to Atio Pty theCyberCallÒ and AtioCallversions of its software programs (the “Licensed Software”) for use anddistribution to end user customers in Sub-Saharan Africa (the“Territory”).  Atio Pty originally developed CyberCallÒbeginning in 1993. As previously discussed in “Description of Business”,in 1997, the software that comprises CyberCallÒand ATIO’s management were combined with Venturian Software Enterprises, Inc.,a Minnesota corporation formed in October 1992.  Venturian Software Enterprises, Inc. changed its name to AtioCorporation USA, Inc. in November 1997.

 

Prior to the dateof this transaction, Atio Pty was a greater than 10% shareholder of the Companyand an exclusive distributor of the Company’s software products in theTerritory.  Under the Software License Agreement, Atio Pty has access tothe Licensed Software in object and source code format on a perpetual basisunless the Agreement is terminated for breach.  The Agreement providesthat Atio Pty accepts the Licensed Software in “as is” condition and that theCompany undertakes no maintenance or support obligations.  With certainexceptions, the Company has agreed not to license the CyberCall and AtioCallversions of its software to others for use in the Territory for as long as theSoftware License Agreement remains in effect.  As full consideration forthe licenses and rights granted to Atio Pty under the Agreement, Atio Ptycompensated the Company as follows:  (1) it conveyed and assigned tothe Company 401,817 shares of the Company’s common stock; (2) it cancelled itsexclusive reseller agreement with the Company; and (3) it paid the Company350,000 South African Rand (approximately $31,000 at the exchange rateprevailing at the time the Agreement was executed).

 

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**ITEM 13.****                                              EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)               FinancialStatements and Schedules of the Company:

 

Included in Part II, Item 7 above

 

(b)              Reportson Form 8-K

 

There were no Form 8-K filings in the fourth quarterof fiscal 2001.

 

(c)               Exhibits

 

See the Exhibit Index following Signatures.

 

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SIGNATURES

 

In accordance withSection 13 or 15(d) of the Exchange Act, the Registrant has caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                                                                                               |   | Lightning Rod  Software, Inc. |
|----------------------------------------------------------------------------------------------------|--------|-------------------------------|
|                                                                                               |
| Dated:    June  10, 2002          |   | By:                           | /s/ Thomas J. Patin |   |
|                                                                                               |   |                          | Thomas J. Patin |
|                                                                                               |   |                          | General Counsel, Acting  CEO & Director |

 

In accordance with theExchange Act, this Report has been signed by the following persons on behalf ofthe Registrant and in the capacities and on the dates indicated.

 

(Power ofAttorney)

 

Each person whosesignature appears below constitutes and appoints Thomas Patin as true andlawful attorneys–in–fact and agents, each acting alone, with fullpower of substitution and resubstitution, for him and in his name, place andstead, in any and all capacities, to sign any or all amendments to this AnnualReport on Form 10–KSB and to file the same, with all exhibits thereto,and other documents in connection therewith, with the Securities and ExchangeCommission, granting unto said attorneys–in–fact and agents, eachacting alone, full power and authority to do and perform each and every act andthing requisite and necessary to be done in and about the premises, as fully toall intents and purposes as he might or could do in person, hereby ratifyingand confirming all said attorneys–in–fact and agents, each actingalone, or his substitute or substitutes, may lawfully do or cause to be done byvirtue thereof.

 
| **Signature**          |   | **Title**                                            |   | **Date**       |
|------------------------|--------|------------------------------------------------------|--------|----------------|
|                   |   |                                                 |   |           |
| /s/ Thomas J. Patin    |   | General Counsel, Acting Chief  Executive Officer and |   | June  11, 2002 |
| Thomas J. Patin        |   | Director                                             |   |           |
|                   |   |                                                 |   |           |
|                   |   |                                                 |   |           |
| /s/ Sheldon T. Fleck   |   | Director                                             |   | June  11, 2002 |
| Sheldon T. Fleck       |   |                                                 |   |           |
|                   |   |                                                 |   |           |
|                   |   |                                                 |   |           |
| /s/  James S. Murphy   |   | Director                                             |   | June 11, 2002  |
| James  S. Murphy       |   |                                                 |   |           |
|                   |   |                                                 |   |           |
|                   |   |                                                 |   |           |
| /s/  Thomas J. Schrade |   | Director                                             |   | June 11, 2002  |
| Thomas  J. Schrade     |   |                                                 |   |           |

 

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**LIGHTNING ROD SOFTWARE, INC.**

**EXHIBIT INDEX FOR**

**FORM 10-KSB FOR 2001 FISCAL YEAR**

 
| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1                |   | Amended and Restated  Agreement and Plan of Merger by and among, among others, CE Software  Holdings, Inc., Atio Corporation USA, Inc., CC Management, LLC and Atio  Corporation (Pty) Ltd., Atio International, Inc. and Venturian Corp. dated as  of December 28, 1999 and amended as of February 15, 2000—incorporated by  reference to Appendix A to the Company’s Definitive Proxy Statement, filed  March 28, 2000. |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.1                |   | Certificate of  Incorporation as amended to date—incorporated by reference to Exhibit 3.1 to  the Company’s Registration Statement on Form S-3, Reg. No. 333-42352, filed  July 27, 2000.                                                                                                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2                |   | Bylaws as amended to  date—incorporated by reference to the exhibits filed as part of the Company’s  Registration Statement on Form S-8, Reg. No. 33-36008C.                                                                                                                                                                                                                                                              |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1               |   | 1990 Stock Option  Plan—incorporated by reference to the exhibits filed as part of the Company’s  Registration Statement on Form S-18, Reg. No. 33-36008C.                                                                                                                                                                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2               |   | Representative Form of  Incentive Stock Option Agreement under 1990 Stock Option Plan—incorporated by  reference to the exhibits filed as part of the Company’s Registration  Statement on Form S-18, Reg. No. 33-36008C.                                                                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3               |   | 1992 Stock Option Plan—incorporated  by reference to the exhibits filed as part of the Company’s Registration  Statement on Form S-8, Reg. No. 33-54210.                                                                                                                                                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4               |   | Nonemployee Directors  Stock Option Plan—incorporated by reference to the exhibits filed as part of  the Company’s Registration Statement on Form S-8, Reg. No. 33-54210.                                                                                                                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5               |   | Sublease dated July 12,  2000 between the Company and Creative Publishing International,  Inc.—incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSB  for the quarter ended June 30, 2000.                                                                                                                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6               |   | 2000 Stock Option Plan3⁄4incorporated  by reference to Appendix C to the Company’s Definitive Proxy Statement, filed  March 28, 2000.                                                                                                                                                                                                                                                                                       |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.7               |   | Representative Form of  Incentive Stock Option Agreement under 2000 Stock Option Plan — incorporated  by reference to Exhibit 10.7 to the Company’s Form 10-KSB for the year ended  December 31, 2000.                                                                                                                                                                                                                    |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8               |   | Representative Form of  Nonqualified Stock Option Agreement under 2000 Stock Option Plan —  incorporated by reference to Exhibit 10.8 to the Company’s Form 10-KSB for  the year ended December 31, 2000.                                                                                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9               |   | Software License  Agreement by and between the Company and Dialogic Corporation dated February  16, 2001 — incorporated by reference to Exhibit 10.9 to the Company’s Form  10-KSB for the year ended December 31, 2000.                                                                                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.10              |   | Master Consulting  Contract and Non-Disclosure Agreement by and between the Company and Dialogic  Corporation dated March 2, 2001 — incorporated by reference to Exhibit 10.10  to the Company’s Form 10-KSB for the year ended December 31, 2000.                                                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

 

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| 10.11  |   | Software License  Agreement by and between the Company and Atio International, Inc. and Atio  Corporation (PTY) Ltd. dated April 15, 2002. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                       |
| 23     |   | Consent of  PricewaterhouseCoopers LLP                                                                                                     |
|   |   |                                                                                                                                       |
| 23.1   |   | Consent of  Boulay, Heutmaker, Zibell & Co. P.L.L.P.                                                                                   |
|   |   |                                                                                                                                       |
| 24     |   | Power of Attorney  (contained on Signature page of this Form 10-KSB)                                                                       |

 

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