<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (date of earliest event reported): April 28, 2000
LIGHTNING ROD SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
0-18809
(Commission File Number)
41-1614808
(I.R.S. employer Identification No.)
7301 Ohms Lane, Suite 600,
Minneapolis, Minnesota 55439
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 837-4000
CE SOFTWARE HOLDINGS, INC.
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
In accordance with approval obtained at its annual meeting on April 27, 2000,
CE Software Holdings, Inc. (the "Registrant") completed the acquisition of
Lightning Rod Software, Inc. (formerly known as ATIO Corporation USA, Inc. and
hereafter "Lightning Rod") on April 28, 2000 through the merger (the "Merger")
of Lightning Rod with and into the Registrant. In accordance with the Amended
and Restated Agreement and Plan of Merger, as amended (the "Merger Agreement")
governing the transaction, the name of the Registrant became "Lightning Rod
Software, Inc." after the Merger, and the directors and officers of Lightning
Rod became the directors and officers of the Registrant. The Registrant
issued a total of 1,044,429 shares of its common stock to shareholders and
warrant holders of Lightning Rod in the Merger and assumed the obligation
to issue an additional 189,571 shares of its common stock upon exercise of
Lightning Rod options.
Immediately prior to consummation of the Merger, the Registrant declared and
paid a dividend to all of its shareholders as of record as of the close of
business on April 28, 2000 of one share of the Common Stock of CE Software,
Inc. ("CSI"), its wholly owned operating subsidiary, for each outstanding share
of the Registrant. Substantially all of the business operations of the
Registrant were conducted through CSI prior to this spin-off.
In accordance with the Merger Agreement, prior to the Merger the
Registrant's assets consisted of approximately $1,543,000 of cash and short
term investments, $548,000 of which was placed in an special escrow account
at the effective time of the Merger, and a $3,221,000 receivable from
Lightening Rod that was extinguished through the Merger. The special escrow
account is to be disbursed to CSI simultaneous with the exercise of options
on the Registrant's stock held by persons who were employees and directors
of the Registrant prior to the Merger. The Registrant had virtually no
recorded liabilities at the time of the Merger.
The Registrant also sold to one of the shareholders of Lightning Rod a total
of 70,234 shares at a price of $6.48 per share paid in cash and by cancellation
of certain indebtedness at the effective time of the Merger. The shareholder
executed a promissory note in the amount of $509,725.65 to secure its
obligation to purchase an additional 78,666 shares pursuant to the Merger
Agreement. Another Lightning Rod shareholder pledged a total of 314,062 shares
to secure its obligation to purchase a like number of shares.
The Merger was treated as a tax-free reorganization for tax purposes. For
accounting purposes, the Merger was treated as a reverse acquisition of the
Registrant by Lightning Rod. Because of the spin-off of CSI and the
subsequent private sale of securities (see item 5), the Merger had the effect
of a financing transaction for Lightning Rod. Accordingly, the historical
financial statements of Lightning Rod became the historical financial
statements of the Registrant as a result of the Merger.
ITEM 4. CHANGES IN THE REGISTRANT'S CERTIFYING ACCOUNTANT
Effective as of the date of the Merger (April 28, 2000), the financial
statements of Lightning Rod became the financial statements of the Registrant.
Because PricewaterhouseCoopers LLP ("PWC"), the independent accountants of
Lightning Rod, were the independent accountants who had audited such financial
statements, on May 11, 2000 the board of directors of the Registrant determined
to replace KPMG LLP ("KPMG") with PWC as its independent accountants.
<PAGE>
The reports of KPMG on the financial statements of the Registrant 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 Registrant's two most recent fiscal years and the subsequent
interim period through May 11, 2000, (i) there were no disagreements between
the Registrant 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 (a "Disagreement") 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 Registrant has not, during the Registrant's two most recent fiscal years or
the subsequent interim period through May 11, 2000, 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 Registrant's financial statements, and no written report was
provided to the Registrant or oral advice was provided that PWC concluded was
an important factor that should be considered by the Registrant in reaching a
decision as to an accounting, auditing or financial reporting issue.
The Registrant has furnished KPMG with a copy of this Form 8-K and has
requested that KPMG furnish it with a letter addressed to the Commission
stating whether it agrees with the above statements. A copy of KPMG's
letter to the Commission, dated May 12, 2000, is filed as Exhibit 16.1 to
this current report on Form 8-K.
ITEM 5. OTHER EVENTS
Resignation and Replacement of Officers and Directors
The Merger Agreement required that all of the officers and directors of
the Registrant resign immediately prior to the effective time of the
Merger and that the officers and directors of Lightning Rod would become
the officers and directors of the surviving corporation. Accordingly,
effective April 28, 2000, Christian F. Gurney, Richard A. Skeie, John S.
Kirk, Sheldon T. Fleck and David J. Lundquist resigned as directors of
the Registrant and the following individuals, who were directors of
Lightning Rod immediately before the Merger, became the directors of the
Registrant:
Willem Ellis, age 41, became President, Chief Executive Officer and a Director
of the Registrant as a result of the Merger. Mr. Ellis has been President,
Chief Executive Officer and a Director of Lightning Rod since October 1997.
Prior to that time, Mr. Ellis was President and a founder for more than
five years of Atio Corporation (Pty) Ltd. ("Atio"), a South African company
that developed and marketed the CyberCall software now owned by the Registrant.
Thomas Patin, age 54, became General Counsel and a Director of the Registrant
as a result of the merger. Mr. Patin has also served as a Director since
September 1998, and as Executive Vice President and General Counsel since
December 10, 1999, of Destron Fearing Corp ("DFCO"). From October 1998 until
December 10, 1999, Mr. Patin served as a consultant to DFCO. Mr. Patin has
served as the President and a
<PAGE>
Director of TR Restaurants of Bloomington, Inc.
from 1988 to present. Mr. Patin also served as General Counsel for Gaming
Corporation of America from August 1992 to December 1995.
Thomas F. Madison, age 64, became a Director of the Registrant as a result of
the Merger. Since January 1993, he has been the President and Chief Executive
Officer of MLM Partners, a consulting and small business investment company.
From December 1996 to March 1999, Mr. Madison served as Chairman of
Communications Holdings, Inc. Since August 1999, Mr. Madison has served as
Chairman of AetherWorks, Inc. From February 1994 to September 1994, Mr. Madison
served as Vice Chairman and Chief Executive Officer at Minnesota Mutual Life
Insurance Company. From June 1987 to December 1992, Mr. Madison was President
of US WEST Communications Markets, a division of US WEST, Inc. Mr. Madison also
serves on the boards of directors of Valmont Industries Inc., Reliant Energy
Minnegasco, ACI Telecentrics, Digital River, Inc., Span Link Communications
and Delaware Group of Funds.
James E. Ousley, age 64, became a director of the Registrant as a result of the
Merger. Mr. Ousley has been President and Chief Executive Officer of Syntegra
(USA) Inc. & Asia since August 31, 1999. Mr. Ousley was President and Chief
Executive Officer of Control Data Corporation ("CDC") (since the spin-off of
CDC from Ceridian Corporation ("Ceridian")) from July 31, 1992 to August 31,
1999. Mr. Ousley was President of Ceridian's Computer Products business since
1989 and was Executive Vice President of Ceridian from February 1990 until the
spin-off of the Registrant. From January 1989 to April 1989, Mr. Ousley was
Vice President, Marketing and Sales for Ceridian's Computer Products business
andprior thereto he held various positions with Ceridian. Mr. Ousley is also
a director Activcard S.A., (EASDAQ as ACTV), an internet security software
company, and Datalink Systems Corporation, a data storage integration company,
and Bell Microproducts, Inc. a company that distributes software and computer
products.
Sven A. Wehrwein, age 49, became a director of the Registrant as a result
of the Merger. From December 1998 to February 1999, Mr. Wehrwein was the Chief
Financial Officer of Digi International Inc. From November 1997 to July 1998,
Mr. Wehrwein was Chief Financial Officer of the Center for Diagnostic Imaging.
He served as Chief Financial Officer of InStent Inc. from June 1995 to August
1996. InStent was acquired by Medtronic, Inc. in June 1996. From time to time
between January 1995 and the present, Mr. Wehrwein has acted as an independent
financial consultant. From July 1990 to December 1994, Mr. Wehrwein served as
a Managing Director in the Corporate Finance Department of Wessels, Arnold &
Henderson, a Minneapolis-based investment banking firm. Mr. Wehrwein is a
Certified Public Accountant. Mr. Wehrwein also serves as a director of Zamba
Corporation and Vital Images, Inc., publicly-held companies.
In addition to Mr. Ellis, the following individuals became executive officers
of the Registrant as a result of the Merger:
Bouwe Hamersma, Age 40, became Chief Technical Officer of the Registrant as a
result of the merger. Mr. Hamersma served as Chief Technical Officer of
Lightning Rod from July 1999 until the date of the Merger. From July 1991 to
July 1999, Mr. Hamersma held various positions with Atio, lastly as Executive
Director of Customer Interactive Solutions.
<PAGE>
Jeffrey D. Skie, age 32, will become Chief Financial Officer of the Registrant
upon commencement of his employment on May 8, 2000. Mr. Skie was the Director
of Finance of Gelco Information Network, from 1997 until starting with the
Registrant. From 1992 until 1996, Mr. Skie was the Controller of Apertus
Technologies, Inc.
Private Placement
On May 1, 2000, the Registrant completed the private offering and sale of
875,000 units (each unit consisting of one share of common stock and one
warrant to purchase, at an exercise price of $10.00 per share, one share of
common stock), at a price of $8.00 per unit, raising gross proceeds of $7
million. The subscription funds for this private offering had been placed in
escrow pending completion of the Merger and the satisfaction of certain other
conditions, including shareholder approval at the April 27, 2000 shareholder
meeting.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
The following financial statements of Atio Corporation USA, Inc. are
attached as Schedule A immediately following the signature
page of this Form 8-K:
Balance Sheets as of December 31, 1999 and December 31, 1998
Statements of Operations for the years ended December 31, 1999 and
December 31, 1998
Statement of Changes in Stockholders' Equity for the years ended
December 31, 1999 and December 31, 1998
Statements of Cash Flows for the years ended December 31, 1999 and
December 31, 1998
Notes to Financial Statements
Report of Independent Accountants of PricewaterhouseCoopers LLP
The following financial statements of Lightning Rod Software, Inc.
(formerly Atio Corporation USA, Inc.) are attached as Schedule B following
the 1999 financial statements in Schedule A:
Unaudited Balance Sheets as of March 31, 2000 and March 31, 1999.
Unaudited Statement of Operations for the three months ended March 31,
2000 and March 31, 1999
Unaudited Statement of Cash Flows for the three months ended March 31,
2000 and March 31, 1999
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION
The following pro forma financial statements, which are included on pages
12 through 14 of the Definitive Proxy Statement are hereby incorporated by
reference:
Unaudited Pro Forma Combined Balance Sheet at December 31, 1999
Unaudited Pro Forma Combined Summaries of Operations for the:
Three months ended December 31, 1999,
Year ended September 30, 1999
Notes to Unaudited Pro Forma Combined Balance Sheet and Summaries of
Operations
The following pro forma financial statements are attached as Schedule C
following the historical financial statements attached to this Form 8-K:
Unaudited pro forma combined balance sheet as of March 31, 2000
Unaudited pro forma combined summary of operations for the three month
period ending March 31, 2000.
Notes to Unaudited Pro Forma Combined Balance Sheet and Summaries of
Operations
(c) EXHIBITS
The following exhibits are filed with this report on Form 8-K:
2.1 Amended and Restated Agreement and Plan of Merger dated as of December
28, 1999 between the Registrant, Lightning Rod, and certain shareholders
of Lightning Rod, together with Exhibits 1.1.4, 1.2, 5.4, 7.3, 7.8, 7.10,
and 7.11 thereto (Incorporated by reference to Appendix A on pages A-1 to
A-55 to the Definitive Proxy Statement).
3.1 Certificate of Amendment to Certificate of Incorporation
3.2 CE Software Holdings, Inc. 2000 Stock Option Plan (Incorporated by
Reference to Appendix C on pages C-1 to C-13 to the Definitive
Proxy Statement).
16.1 Letter of KPMG LLP
24.1 Consent of PricewaterhouseCoopers LLP
99.1 Press Release of the Registrant dated April 28, 2000.
27 Financial data schedule - December 31, 1999
Financial data schedule - March 31, 2000
ITEM 8. CHANGE IN FISCAL YEAR
On May 11, 2000, the Board of Directors of the Registrant adopted the fiscal
year of Lightning Rod as the fiscal year of the Registrant and therefore changed
the Registrant's fiscal year end from September 30 of each year to December
31 of each year.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
LIGHTNING ROD SOFTWARE, INC.
/s/ Willem Ellis
Willem Ellis, President and Chief Executive Officer
Dated: May 11, 2000
<PAGE>
SCHEDULE A
ATIO CORPORATION USA, INC.
Historical Financial Statements at, and for the Year ended,
December 31, 1999 and 1998
<PAGE>
ATIO Corporation USA
Financial Statements
December 31, 1999
Report of Independent Accountants
To the Board of Directors and Shareholders
of ATIO Corporation USA Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of ATIO Corporation USA Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States. 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 audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States 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 audits provide a reasonable basis for the opinion expressed
above.
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 has a shareholders' deficit that 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.
As described in Note 1 to the financial statements, in December 1999, the
Company entered into a merger agreement with CE Software Holdings, Inc.
PricewaterhouseCoopers LLP
March 10, 2000
<PAGE>
ATIO CORPORATION USA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Assets
Current assets:
Cash $ 121,383 $ 300
Accounts receivable (net) 183,643 168,754
Prepaid expenses 103,001 38,188
_____________ _____________
Total current assets 408,027 207,242
Property and equipment:
Equipment 566,454 460,026
Leasehold improvements 186,889 186,889
_____________ _____________
753,343 646,915
Accumulated depreciation and amortization (408,950) (194,699)
_____________ _____________
344,393 452,216
_____________ _____________
Total assets $ 752,420 $ 659,458
_____________ _____________
_____________ _____________
Liabilities, Redeemable Stock and Shareholders' Deficit
Current liabilities:
Accounts payable $ 1,224,627 $ 435,889
Due to affiliates 66,307 38,448
Accrued payroll and related items 725,896 270,619
Other accrued expenses 428,934 124,748
Deferred revenue 90,791 7,779
Notes payable-affiliate 2,815,980 1,636,366
Notes payable-other 1,350,000 -
_____________ _____________
Total current liabilities 6,702,535 2,513,849
_____________ _____________
Redeemable common stock 500,000 500,000
_____________ _____________
Shareholders' deficit:
Common stock at $.01 par value, 50,000,000 shares
authorized, 8,700,000 and 7,600,000 shares issued
and outstanding at December 31, 1999 and 1998 87,000 76,000
Additional paid-in capital 6,597,088 5,946,838
Unearned compensation (26,687) (49,562)
Accumulated deficit (13,107,516) (8,327,667)
_____________ _____________
Total shareholders' deficit (6,450,115) (2,354,391)
_____________ _____________
Total liabilities, redeemable stock and
shareholders' deficit $ 752,420 $ 659,458
_____________ _____________
_____________ _____________
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ATIO CORPORATION USA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
<S> <C> <C>
Revenues:
Software $ 1,244,200 $ 348,068
Services 850,901 348,517.
_____________ _____________
Total revenue 2,095,101 696,585
_____________ _____________
Cost of revenues:
Software 271,837 59,434
Services 984,604 617,707
_____________ _____________
1,256,441 677,141
_____________ _____________
Gross profit 836,660 19,444
_____________ _____________
Operating expenses:
Sales and marketing expenses 1,986,553 1,603,649
General and administrative 1,914,565 1,430,875
Research and development 1,088,089 1,105,285
_____________ _____________
Total operating expenses 4,989,207 4,139,809
_____________ _____________
Loss from operations (4,150,547) (4,120,365)
Interest expense, net 629,302 48,452
_____________ _____________
Net loss $ (4,779,849) $ (4,168,817)
_____________ _____________
_____________ _____________
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ATIO CORPORATION USA, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Total
Common Stock Additional Stock Shareholders'
Number Paid-in Accumulated Subscription Unearned Equity
of shares Amount Capital Deficit Receivable Compensation (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997 7,600,000 76,000 5,878,213 (4,158,850) (2,063,333) (267,970)
Development services
provided 548,333 548,333
Collection on stock
subscription receivable 1,515,000 1,515,000
Unearned compensation (68,625) (68,625)
Compensation expense
recognized 68,625 19,063 87,688
Net loss (4,168,817) (4,168,817)
_____________________________________________________________________________________
Balance at December 31,
1998 7,600,000 76,000 5,946,838 (8,327,667) - (49,562) (2,354,391)
Warrant for private
placement costs on
terminated offering 31,250 31,250
Warrants issued with
bridge loan 480,000 480,000
Principal shareholder
transaction 150,000 150,000
Compensation expense
recognized 22,875 22,875
Issuance of shares
for product and
distribution rights
held by a con-
trolling shareholder
(see Note 10) 1,100,000 11,000 (11,000)
Net loss (4,779,849) (4,779,849)
_____________________________________________________________________________________
Balance at December 31,
1999 8,700,000 $87,000 $6,597,088 $(13,107,516) $ - $(26,687) $(6,450,115)
_____________________________________________________________________________________
_____________________________________________________________________________________
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ATIO CORPORATION USA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,779,849) $ (4,168,817)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 214,251 125,003
Compensatory stock options 22,875 19,063
Development services - 548,333
Compensation expense converted to equity 150,000 -
Warrants issued with bridge loan 480,000 -
Warrants for terminated offering 31,250 -
Changes in operating assets and liabilities:
Account receivable (14,889) (81,353)
Prepaid expenses (64,813) 5,684
Accounts payable 788,738 183,823
Deferred revenue 83,012 7,779
Accrued payroll and benefits 455,277 246,954
Other current liabilities - -
Other accrued expenses 304,186 91,855
_____________________________
Net cash used in operating activities (2,329,962) (3,021,676)
_____________________________
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (106,428) (349,596)
_____________________________
Net cash used in investing activities (106,428) (349,596)
_____________________________
Cash flows from financing activities:
Net advances from affiliates 1,207,473 1,537,789
Proceeds from issuance of short-term notes 1,350,000 -
Subscription receivable collections - 1,515,000
_____________________________
Net cash provided by financing activities 2,557,473 3,052,789
_____________________________
Net increase (decrease) in cash 121,083 (318,483)
Cash at beginning of period 300 318,783
_____________________________
Cash at end of period $ 121,383 $ 300
_____________________________
_____________________________
Noncash investing and financing transaction:
Development services provided for payment of
stock subscription receivable - 548,333
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
1. Organization
Description of Business
ATIO Corporation USA, Inc., (the "Company" or "ATIO USA"), formerly Venturian
Software Enterprises, Inc., provides customer contact automation software
under the trade name CyberCall. The Company has provided high-technology
information services in the Upper Midwest as a value-added dealer of
Magic TM software, providing primarily consulting services and custom
applications development.
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 incurred
accumulated losses through December 31, 1999 of $13,107,516. The future of
the Company is dependent upon its ability to raise additional capital to fund
its sales and marketing efforts and the continued development of its products.
The Company has agreed to merge with CE Software, Inc. which will provide
financing for the Company.
Merger
An agreement and plan of merger (the "Merger Agreement") was executed on
December 28, 1999 by and among ATIO USA, ATIO International, Inc., ATIO
Corporation (Pty) Ltd., CE Software Holdings, Inc. ("CESH"), the ATIO
shareholders, Venturian Corp., and CC Management LLC. The agreement
provided for, among other things: the merger of ATIO and CESH; the delivery
of $5,000,000 of cash or cash equivalents by CESH for ATIO's benefit at the
close of the merger, net of any loans made through that date; short-term
funding from Venturian Corp., ATIO International Corp., and CESH to fund
continuing operations; the adoption of a new option plan; the restructuring
of theterms of the a loan agreement by and between ATIO and CC Management
LLC, dated as of March 12, 1999, as amended on June 3, 1999 and June 16,
1999; additional equity investments totaling $3,000,000 by the existing
institutional shareholders; and; a total of $7,500,000 of funding on or
before the closing of the merger, including the loans from current
institutional investors, CESH loans or available cash, and capital raised
through a private placement of equity.
The Merger Agreement requires Venturian, either by exchange of indebtedness,
by cash payment or by a combination, to purchase 148,900 shares of CESH
common stock for $964,872 on the date of merger, or forfeit a like number
of shares. The Merger Agreement further requires ATIO International to
purchase 314,062 shares of CESH common stock for $2,035,121.76 on the date
of the merger or forfeit a like number of shares of CESH stock. The merger
is subject to shareholder approval by CESH shareholders. If approved, it is
expected to close in the second quarter of 2000.
The Company expects that the net proceeds from the planned merger and a private
placement of equity that is currently underway will be sufficient to meet its
working capital and capital expenditure needs for at least the next twelve
months. After that, the Company may need to raise additional funds, and it
cannot be certain that it will be able to obtain additional financing on
favorable terms, if at all. If the Company cannot raise funds, if needed,
on acceptable terms, it may not be able to develop or enhance its products,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could seriously harm its business, financial
condition and results of operations.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE>
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.
Fair Value Disclosure of Financial Instruments
The Company's financial instruments consist of short-term trade receivables
and 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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial reporting purposes using the straight-line method over the estimated
useful lives (three to five years) of the assets and for tax purposes using
accelerated methods. 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.
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, generally 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.
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.
<PAGE>
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
As amended by SFAS No. 137, SFAS No. 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not expect
SFAS No. 133 to have a significant effect on its financial position or results
of operations.
In November 1998, the FASB cleared for issuance SOP 98-9, "Modifications of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,"
which will retain limitations of SOP 97-2 on what constitutes vendor specific
objective evidence of fair value. SOP 98-9 will be effective for all
transactions entered into in fiscal years beginning after March 15, 1999.
The Company believes that its current revenue recognition policies and
practices are consistent with the provisions of the new guidance.
In February 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when such costs should be capitalized.
The adoption of SOP 98-1 as of January 1, 1999, did not have a significant
effect on the Company's financial position or results of operations.
3. Financing and Development Services Agreement
Effective October 1, 1997, the Company entered into an agreement with
Atio International. Pursuant to the terms of the agreement, the
Company issued 2,000,000 shares of its common stock to Atio
International in exchange for $3,500,000 and a royalty-free license
with respect to Atio International's AtioCall products. The agreement
provides for the $3,500,000 to be provided in cash and development
services by Atio PTY, on behalf of Atio International, due in various
installment payments with the final payment made in August 1998.
There were additional agreements entered into in connection with the
agreement. Certain of these agreements were modified or terminated as
described in the Restructuring section of Note 10. These additional
agreements were as follows:
Technology and License Agreement
The Technology and License Agreement (the "License Agreement"), among
other things, provides (i) the Company with a worldwide exclusive right
to Atio International's AtioCall products, (ii) for the transfer of the
AtioCall product rights to the Company, subject to certain conditions, no
later than December 31, 1999, (iii) that Atio PTY furnish certain development
services to the Company in connection with this exclusive right, and (iv)
that $800,000 of the amount owed by Atio PTY for the purchase of the Company's c
ommon stock be paid by providing development services to the Company.
The restructuring accelerated the transfer. As of December 31, 1999,
Atio PTY has satisfied its obligations to the Company for the stock purchase.
Technology Development and Support Agreement
The Technology Development and Support Agreement (the "Development Agreement"),
among other things, provides for Atio PTY to perform such product development
services as to which the Company and Atio PTY mutually agree. The Company is
required to purchase development services exclusively from Atio PTY until
March 1, 1999; thereafter, the Company may purchase such services from any
source. Compensation for the development and support service is based upon
annual budgets mutually agreed to by Atio PTY and the
<PAGE>
Company. Atio PTY provided development services to the Company of $824,350
and $548,333 during 1999 and 1998, respectively, which were paid for through
an offset to the stock subscription receivable. The Development Agreement
also provides for additional compensation to Atio PTY of five percent of the
Company's gross profit from the licensing of AtioCall products for the period
from September 1, 1998 through August 31, 2000.
Shareholders' Agreement
The Shareholders' Agreement (the "Shareholders' Agreement"), among other
things, sets forth (i) various terms and restrictions for the transfer of
any of the Company's shares of common stock, (ii) certain matters with respect
to the governance of the Company, and (iii) the Company's responsibility to
redeem Sharon's shares of common stock upon his termination or death, at a
price as defined in the Shareholders' Agreement. The Shareholders' Agreement
provides rights including capital call requirements and Venturian's ability
to merge the Company with Atio International.
The principal terms of the Shareholders' Agreement shall terminate immediately
if a registration statement filed by the Company in connection with the sale
of its common shares is declared effective by the Securities and Exchange
Commission and the sale of common shares is consummated. The agreement will
terminate upon closing of the merger with CE Software, Inc.
Distribution Agreement
The Distribution Agreement (the "Distribution Agreement") provides for Atio
International to have exclusive distribution rights outside of North America
for the Company's CyberCall products.
Services Agreement
Pursuant to the terms of the Services Agreement (the "Services Agreement"),
Atio International is to provide the Company with certain general and product
development services, as defined for $29,708 per month plus quarterly and
annual incentive payments, as defined.
The term of the Services Agreement is for four years and may be renewed for
successive one year periods. The Services Agreement may be terminated by
the Company prior to that time upon written notice and may result in 12
months of additional payments upon termination.
4. Employee Benefit Plan
Effective January 1, 1998, the Company adopted a defined contribution
plan (the "Plan") which covers all full time employees who are over the
age of 21 and have been employed by the Company for three consecutive
months. The Company matches 50% of the first 4% of the employee's
contributions. During 1999, the Company contributed $25,647 to the Plan.
5. Lease Commitments
The Company's operations are conducted in a leased facility under an
agreement expiring in July 2000. In addition, the Company also leases
certain office equipment under operating leases. Rent expense was $290,186
and $316,371 for the years ended December 31, 1999 and 1998, respectively.
<PAGE>
Future minimum lease payments under operating leases are as follows:
Year Ended December 31
2000 $181,733
2001 35,656
2002 2,916
6. Income Taxes
As of December 31, 1999, the Company has approximately $9,200,000 of net
operating loss carry forwards for federal income tax purposes. 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.
No future tax benefit for such carry forwards or other temporary
differences has been recorded as a deferred tax asset since utilization
of such benefits is not presently deemed by management to be more likely
than not, based on the weight of available evidence.
7. Stock Options
In 1999, the Company adopted the 1999 Stock Incentive Plan. This plan
provides participating employees the right to purchase common stock of
the Company through incentive and non-qualified stock options. Total
shares available for grant under the 1999 Plan were 5,000,000. In
November 1996, the Company's board of directors and shareholders adopted
the 1996 Stock Option Plan (the "1996 Plan"). With the adoption of the
1999 Plan, no additional options will be granted out of the 1996 Plan.
Under the plan's, incentive stock options should be granted at the fair
market value of the common shares on the date of the grant. The option
term is fixed at the date of grant and may not exceed ten years from the
date the option is granted. Options become exercisable in installments
over three years.
Stock Split and Recapitalization
A two for one stock split was authorized as part of the mid-December
corporate resolutions. All references to shares and per share amounts
included in these financial statements and related notes have been
adjusted to give retroactive effect to the stock split. The Board also
approved increasing the number of authorized shares to 50,000,000 shares.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 1,401,500 $0.62 342,500 $0.56
Granted 1,955,852 $0.63 1,575,900 $0.63
Forfeited (418,100) (516,900) $0.57
__________ __________
Outstanding at end of year 2,939,252 $0.62 1,401,500 $0.62
__________ __________
__________ __________
Options exercisable at end of year 752,971 $0.63 50,000 $0.50
__________ __________
__________ __________
Weighted average fair value of
options granted during
the year $0.22 $0.25
</TABLE>
<PAGE>
The Company has 6,472,500 shares upon which options may be granted. The Company
has granted 2,939,252 shares through December 31, 1999. At December 31, 1999
3,533,248 options were available for grant under the plan.
The following summarizes information about stock options outstanding as of
December 31, 1999:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Excisable Price
$.50 100,000 7 years $0.50 50,000 $0.50
$.63 2,839,252 9.3 years $0.63 702,971 $0.63
_________ ________
2,939,252 752,971
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
1998; dividend yield of 0%, expected volatility of 0%, a risk-free interest
rate of 6.2% based on quoted U.S. Treasury rates on the date of the related
option grants, and an expected life of seven years.
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
$22,875 and $19,063 during 1999 and 1998, respectively.
As permitted by SFAS No. 123, the Company applies APB Opinion No. 25 and
related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation expense related thereto. 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 loss would have been as follows:
1999 1998
Net loss as reported $(4,779,849) $(4,168,817)
Net loss pro forma (5,020,627) (4,277,281)
8. Major Customers
The Company had the following customers that accounted for more than 10% of the
Company's revenue:
1999 1998
Customer Revenue Revenue
A $581,348 $182,600
B-Related party 402,622 127,722
<PAGE>
9. Debt
Factored Accounts Receivable
On January 7, 1999, the Company factored, with recourse, their accounts
receivable balance through Silicon Valley Financial Services. The amount
factored included a significant portion of the December 31, 1998 accounts
receivable balance. Once Silicon Valley Financial Services was repaid
during March 1999, this financing arrangement was terminated at an immaterial
cost to the Company.
Note Payable - Other
The Company obtained a bridge loan with CC Management LLC dated March 12, 1999.
The initial maximum borrowing amount was $1,000,000 and was
available subject to an interim drawdown schedule of $550,000 available
immediately increased by $150,000 in each of the three succeeding months.
The loan is collateralized by a first secured interest in all the Company's
tangible and intangible assets currently owned or hereinafter acquired.
Interest on the principal accrues at 12.875% and is payable monthly. The
principal amount plus any accrued interest was due on August 30, 1999.
On June 3, 1999, the Company entered into a Loan Restructure Agreement
with the lender. The lender agreed to extend the time period for the
private placement from June 1, 1999 to July 15, 1999, advance the final
$150,000 on June 3, 1999 pursuant to the original bridge loan agreement,
and to advance up to an additional $350,000 on or after June 7, 1999 for
a maximum borrowing of $1,350,000. At December 31, 1999, $1,350,000 was
due under this agreement plus accrued interest of $120,735. The Company
was in violation of its loan covenants during 1999 and the loan was in
default.
Under these various bridge loan agreements, the Company agreed to issue
warrants exercisable for shares equal to 5.7% of the outstanding common
stock on a fully diluted basis at the time of issuance at an exercise
price of $0.005 per warrant share. The warrants will be exercisable for
a period of seven years.
In late 1999, the Company agreed to restructure and bring this bridge loan
into compliance with CC Management LLC, conditioned on the closing of the
merger with CE Software. If the merger is completed, the note will have a
new interest rate of 9% and be extended to June 30, 2001. The maturity
date will automatically be extended to January 1, 2002 if $2,500,000 of
additional capital is not raised by ATIO before such date. The agreement
also allows for the conversion of the debt to registered common stock at
$8.00 per share and fixes the lender's warrant position at 176,301 shares
of post-merger CESH common stock. Pursuant to APB 14, the value of these
warrants was $480,000 and was fully expensed as of December 31, 1999.
10. Related Party Transactions
Due to Affiliate
Pursuant to the Services Agreement, the Company owed Venturian $51,107
and $23,248 for certain general services performed during the years
ended December 31, 1999 and 1998, respectively. In addition, pursuant
to the technology development agreement with Atio PTY the Company,
owed $15,200 relating to the licensing of AtioCall products at December
31, 1999 and 1998.
Note Payable - Affiliate
During 1999, the Company received advances totaling $634,782 from Atio
International for working capital needs. At December 31, 1999 and 1998,
$2,396,454 and $1,761,672 was due under this note. Pursuant to record
of action dated October 8, 1998, Atio International has the option to
demand repayment of the loan or
<PAGE>
to convert the loan into shares of the Company's common stock on the basis
of $.625 per share. This option is exercisable within 12 months from
September 30, 1998. Repayment would include interest calculated at U.S.
prime interest rate. The Company has accrued interest expense of $50,000
calculated at an average interest rate of 8.25%. The Company has the right
to offset recievables from affiliates and has recorded this as such.
The total receivables from affiliates offset were $383,370 and $168,754
at December 31, 1999 and 1998, respectively.
Principal Shareholder Transaction
In 1999, a principal shareholder transferred shares of the Company's common
stock, which were personally owned and held, to two executives of the Company
as part of a recruiting effort. This transaction was for the benefit of the
Company and was accounted for as such. The estimated fair value of the
transaction of $150,000 was reflected as both a deemed contribution of
capital and a compensation charge.
Restructuring
In mid-December 1999 the Board of Directors and shareholders of ATIO
restructured the business and issued several corporate resolutions. Among
them was the issuance of 1,100,000 shares of ATIO common stock as
consideration for an amendment of the License and Transfer Agreement by
ATIO Corporation International, Inc. ("International") that transferred
all ATIO International Call Product Rights and international CyberCall
distribution rights to ATIO USA. As a result of this transaction, ATIO
USA became a controlling shareholder. As such, the rights received by
ATIO USA will be accounted for at the predecessor basis of International,
which was $0.
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.
Furthermore, in conjunction with the restructuring agreement $1,990,762
worth of obligations incurred by ATIO through July 31, 1999 and held by
International will be converted into 3,145,220 shares in 2000 with the
completion of the proposed merger (see Note 1).
11. Subsequent Event
Planned Private Equity Financing
The Company and CESH have negotiated with a brokerage firm to manage a
private placement financing and assist the Company and CESH, as an agent,
in raising up to $5,000,000 of equity capital, with an over-allotment
provision of up to an additional $2,000,000, on a best-efforts basis.
The Company will sell common shares in the placement priced at $8 per
share and will have warrants with each share purchase with an exercise
price of $10 per share.
<PAGE>
LIGHTNING ROD SOFTWARE, INC.
(name changed from Atio Corporation USA, Inc. in March, 2000)
Unaudited Historical Financial Statements at, and for the Three Months
ended, March 31, 2000 and 1999
<PAGE>
ATIO Corporation USA, Inc
Balance Sheets
Three Months March 31, 1999 and 2000
<TABLE>
<CAPTION>
Unaudited Unaudited
2000 1999
<S> <C> <C>
Assets
Current Assets
Cash $ 46,525 $ 300
Accounts receivable (net) 186,698 442,251
Prepaid expenses 80,429 111,086
_____________ _______________
Total Current Assets $ 313,652 $ 553,637
Property and Equipment
Equipment 692,067 493,521
Leasehold improvements 186,889 186,890
_____________ _______________
878,956 680,411
Accumulated depreciation (465,591) (243,411)
_____________ _______________
413,365 437,000
_____________ _______________
Total Assets $ 727,017 $ 990,637
_____________ _______________
_____________ _______________
Liabilities & Shareholders' Deficit
Current Liabilities:
Accounts payable $ 779,600 $ 443,672
Due to affiliates 66,306 66,367
Accrued payroll and related items 823,526 303,681
Other accrued expenses 330,322 159,551
Deferred revenue 48,917 69,061
Other current liabilities 3,286 30,642
Notes payable - affiliate 5,070,724 1,901,597
Notes payable - other 1,350,000 550,000
_____________ _______________
Total current liabilities 8,472,681 3,524,571
_____________ _______________
Redeemable Common Stock 500,000 500,000
Shareholders' Deficit
Common stock at Par 87,000 76,000
Additional paid-in capital 6,597,088 5,926,838
Unearned compensation (20,968) (43,841)
Accumulated deficit (14,908,784) (8,992,931)
_____________ _______________
Total shareholders' deficit (8,245,664) (3,033,934)
_____________ _______________
Total liabilities and shareholders'
Deficit $ 727,017 $ 990,637
_____________ _______________
_____________ _______________
</TABLE>
<PAGE>
ATIO Corporation USA, Inc
Consolidated Statements of Operations
For the Three Months Ended March 31,
<TABLE>
<CAPTION>
Unaudited Unaudited
2000 1999
<S> <C> <C>
Revenues:
Software $ 78,142 $ 449,377
Services 76,533 182,840
___________ ____________
Total Revenue 154,675 632,217
Cost of revenues:
Software 9,086 138,327
Services 305,798 150,725
___________ ____________
314,884 289,052
___________ ____________
Gross Profit (160,209) 343,165
___________ ____________
Operating expenses:
Sales and marketing expenses 523,248 415,795
General and administrative 613,683 411,729
Research and development 403,250 194,360
___________ ____________
Total operating expenses 1,540,181 1,021,884
Loss from operations (1,700,390) (678,719)
Interest expense 100,878 6,545
___________ ____________
Net loss $(1,801,268) $ (685,264)
___________ ____________
___________ ____________
</TABLE>
<PAGE>
ATIO Corporation USA, Inc
Statement of Cash Flows
For the Three Months Ended March 31,
<TABLE>
<CAPTION>
<S> <C> <C>
Unaudited Unaudited
2000 1999
Cash flows from operating activities
Net loss $ (1,801,268) $ (685,264)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 56,642 48,712
Compensatory stock options 5,720 5,721
Noncash principal shareholder transactions - -
Warrants issued with Bridge Loan - -
Warrants for terminated offering - -
Changes in operating assets and liabilities:
Account receivable (3,055) (273,496)
Prepaid expenses 22,572 (72,899)
Accounts payable (445,030) 7,784
Due to affiliate - 27,919
Deferred revenue (41,874) 64,061
Accrued payroll and benefits 97,630 33,060
Other current liabilities 3,286 22,114
Other accrued expenses (98,612) 40,551
___________ ____________
Net cash used in operating activities (2,203,989) (781,737)
___________ ____________
Cash flows from investing activities:
Purchase of equipment and leasehold
Improvements (125,613) (33,494)
___________ ____________
Net cash used in investing activities (125,613) (33,494)
___________ ____________
Cash flows from financing activities:
Bank overdrafts - -
Net advances from affiliates 2,254,744 265,231
Proceeds from issuance of short-term notes - 550,000
Proceeds from issuance of common stock - -
Net cash provided by financing
Activities 2,254,744 815,231
___________ ____________
Net (decrease) increase in cash (74,858) -
Cash at beginning of period 121,383 300
___________ ____________
Cash at end of period $ 46,525 $ 300
___________ ____________
___________ ____________
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Lightning Rod Software, Inc. (formerly Atio Corporation
USA, Inc.)
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere herein. Historical results
and percentage relationships are not necessarily indicative of the operating
results for any future period. Within this discussion and analysis, all dollar
amounts have been rounded to the nearest thousand.
The following discussion reflects the results of operations Lightning Rod
Software, Inc. (formerly Atio Corporation USA, Inc. and hereafter LROD), a
Minnesota corporation that merged (the "Merger") with and into the Registrant
effective April 28, 2000. Immediately prior to the Merger, CE Software, Inc.,
the operating subsidiary of the Registrant, was spun-off and immediately after
the Merger, the surviving corporation completed a private financing, selling
$7 million of its common stock and warrants to purchase common stock. Based
principally on the fact that the officers, directors and operating activities
of LROD became the officers, directors and operating activities of the
Registrant after the Merger, the Merger was accounted for as a reverse
acquisition and the financial statements of LROD became the financial
statements of the Registrant.
LROD was significantly undercapitalized during the year ended December
31, 1999. As additional sources of capital were being sought, the
operations were significantly pared back, particularly sales and marketing
activities, and its results of operations for the three months ended March
31, 2000, reflect the resultant decrease in revenues. LROD's operations
from October 28, 1999 (effective date of preliminary agreement of merger terms
with the Registrant) through the effective date of the Merger were primarily
financed with advances from the Registrant. Such funding was directed
towards rebuilding the necessary resources and infrastructure to actively
market and sell products and to service customers, the revenue impact of
which was not realized by March 31, 2000.
As a result of the Merger and a private financing completed immediately after
the Merger, the Registrant, as the surviving corporation, has approximately
$8.3 million of cash and short-term investments available to finance LROD's
continuing operations.
REVENUES
Years Ended December 31, 1998 and 1999: Revenues increased from $697,000
during the year ended December 31, 1998 to $2,095,00 during the same period
in 1999, an increase of 201%. Approximately 59% of the 1999 revenues were
from licenses, all of which were from LROD's Interaction Manager (formerly
CyberCall) product. Revenue from software licenses increased by 257% compared
to the same period a year ago, due to a focused effort to market and sell the
new version of Interaction Manager (version 3.0), released in October 1998.
Revenues from LROD's services increased 144% in 1999 compared to 1998, and
accounted for approximately 41% of revenues for 1999. In 1998, revenue was
generated from both Interaction Manager and the sale of products developed by
Magic Software, which was a third party vendor that Company (formerly
conducting business as Venturian Software Enterprises, Inc.) marketed as a
reseller. Since the first sale of Interaction Manager (version 2.5) occurred
in January 1998, all of the revenues in 1997 were related to non-Interaction
Manager products and services that were either customized or project based,
including some revenue to Magic Software customers.
<PAGE>
Three Months Ended March 31, 1999 and 2000: Revenues decreased from $632,000
during the three months ended March 31, 1999 to $155,000 during the same period
in 2000, a decrease of 75%. Approximately 50% of 2000 revenues and 71% of 1999
revenues were from licenses, all of which were from the Interaction Manager
product. Revenue from software licenses decreased by 82% compared to the same
period a year ago. Revenues from services decreased by 58% for the three months
in 2000 compared to the same period in 1999, and accounted for approximately 50%
of revenues for the three months in 2000. The overall decrease in revenues and
the lower percentage of software revenues were primarily due to the limited
financial resources that had restricted new sales and marketing efforts.
COST OF REVENUES
LROD's cost of revenues is composed primarily of: 1) the costs of product
materials such as manuals, diskettes, CD-ROMS, and packaging; 2) the cost of
servers and related peripheral equipment used by customers to run Interaction
Manager and warehouse data; and 3) the labor required to install and implement
the solution for customers.
Years Ended December 31, 1998 and 1999: Total cost of revenues, as a percentage
of revenues, decreased from 97% in 1998, to 60% in 1999. The higher costs in
1998 were the consequence of disproportionately greater labor expense required
to install the earlier versions of the Interaction Manager product.
Three Months Ended March 31, 1999 and 2000: Total cost of revenues, as a
percentage of revenues, increased from 46% for the three months ended March
31, 1999, to 203% for the same period in 2000, reflective of the increases in
the number of service staff and travel costs.
SALES AND MARKETING
Years Ended December 31, 1998 and 1999: Sales and marketing expenses increased
24% from $1,604,000 to $1,987,000 from 1998 to 1999, respectively. Sales and
marketing as a percentage of revenue decrease from 230% to 95%. This improvement
was due to gaining momentum in the market and due to cost containment in the
following expense categories: salaries and benefits, travel and entertainment,
and general marketing activities. Trade show and collateral expenditures were
reduced from 1998 to 1999 as LROD found more success focusing its efforts
primarily on direct sales efforts to select e-business customers.
Three Months Ended March 31, 1999 and 2000: Sales and marketing expenses
increased 26% from $416,000 to $523,000 for the three months ended March 31,
1999 and 2000, respectively. Sales and marketing expenses as a percentage of
revenue increased from 66% to 337%, primarily a function of the lower revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses are composed principally of salaries of
administrative and technical support personnel, fees for professional services,
amortization of other intangible assets, and facilities expenses.
Years Ended December 31, 1998 and 1999: General and administrative expenses
increased from $1,431,000 in 1998 to $1,915,000 in 1999. As a percentage of
revenues, general and administrative expenses actually declined from 205% to
91%. This favorable trend as a percent of sales was primarily due to managing
overall expenses even while revenues increased. It was secondarily due to
lower occupancy costs in 1999 due to not having certain moving expenses as
in 1998.
<PAGE>
Three Months Ended March 31, 1999 and 2000: General and administrative
expenses increased from $412,000 for the three months ended March 31, 1999
to $614,000 for the same period in 2000. As a percentage of revenues, general
and administrative expenses increased from 65% to 396%, primarily a function
of the lower revenue.
RESEARCH AND DEVELOPMENT
Years Ended December 31, 1998 and 1999: Research and Development expense,
composed principally of the compensation costs of product development staff,
decreased from $1,105,000 to $1,088,000 from 1998 to 1999. Limited financial
resources constrained LROD's expenditures in this area.
Three Months Ended March 31, 1999 and 2000: Research and development expense
increased from $194,000 to $403,000 for the three months ended March 31, 2000
compared to the same period in 1999. Research and development expenses as a
percentage of revenue increased from 31% to 261%. The higher expense is due
to increasing development efforts directed at the Interaction Manager product.
INTEREST EXPENSE
Years Ended December 31, 1998 and 1999: The amount in 1999 included $480,000
for the recorded value of warrants issued to LROD's bridge lender.
Three Months Ended March 31, 1999 and 2000: Interest expense was $101,000 for
the three months ended March 31, 2000, an increase of $94,000 over the $7,000
for the comparable period in 1999. The increased interest expense is reflective
of the increased borrowings from CE Software Holdings, Inc., Venturian Corp.,
and CC Management, LLC.
LIQUIDITY AND CAPITAL RESOURCES
LROD sought equity financing from institutional investors beginning in
March 1999. To finance its operations while it was seeking this financing,
LROD obtained a $1,350,000 credit line and issued warrants to the participants
of the lender. Nevertheless, the equity financing was impaired by market
conditions and LROD's deteriorating financial condition. LROD terminated the
equity financing in August 1999. Because it did not meet the objectives for
equity financing contained in the credit agreements, it was in default under
its debt agreement at the time of such termination. LROD was forced to
significantly scale back the scope of its operations starting in August 1999
because of the unavailability of further financing.
LROD began negotiation of an agreement with the Registrant in September 1999
and reached preliminary agreement in October with respect to a proposed
business combination. As part of this preliminary agreement, LROD received
short-term financing of $150,000 from one of its two largest shareholders and
a commitment of its other largest shareholder to continue to fund its
development efforts. LROD also received a limited amount of financing from
the Registrant at this time in the form of secured promissory notes. LROD
also entered into a preliminary agreement to restructure its credit agreement,
committing to issue shares of the Registrant's stock if the Merger was completed
for the warrants held by the participants of the Lender, and to extend the
maturity of advances under the agreement to June 30, 2001.
For the three months ended March 31, 2000, LROD has been dependent on short-
term funding provided principally by the Registrant. At the closing of the
merger, however, funds in the amount of approximately $8,300,000 were made
available to LROD, consisting of approximately $1,550,000 from CE Software
Holdings, Inc. (of which approximately $548,000 is to be placed in escrow in
accordance with the agreement and plan of merger), $6,440,000 of net proceeds
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.
The funds from all of these activities will be used for marketing, sales,
product development, professional services, and expansion of infrastructure.
The Registrant anticipates that the cash provided from the aforementioned
capital sources as well as from anticipated revenues will be sufficient to
fund its operating activities through the end of the year 2000. If revenues
are less than management's expectations, the Registrant may need to obtain
financing during the year 2000. The Registrant's ability to meet its cash
requirements will be dependent upon its ability to successfully execute its
plan of operations and on resulting cash flow and the market value of its
securities.
<PAGE>
SCHEDULE C
Unaudited Pro Forma Combined Balance Sheet at, and Summary of
Operations for Three Months Ended, March 31, 2000
<PAGE>
PRO FORMA FINANCIAL INFORMATION
CE Software Holdings, Inc. and Subsidiaries
Unaudited Pro Forma Combined Balance Sheet
March 31, 2000
The following unaudited pro forma combined balance sheet as of
March 31, 2000 gives effect to: (1) the completion of the proposed
merger with ATIO (including the spin-off of CE Software) for
aggregate consideration of 1,044,429 shares of CESH (which includes
CESH shares issued due to the conversion of approximately $1,991,000
of ATIO notes payable to affiliates into ATIO common stock subsequent
to March 31, 2000 as reflected in the Agreement and Plan of Merger), (2)
the private offering issuance of approximately 875,000 shares of CESH at
an estimated offering price of $8.00 per share, net of estimated offering
costs of $560,000, for net proceeds of $6,440,000, (3) the purchase of
148,900 shares of CESH at $6.48 per share by Venturian for which $455,146
is to be paid at the effective time of the merger and the balance of
$509,726 fully paid sixty days thereafter, and (4) the amendment by CESH
of the par value of its common stock from $.10 per share to $.01 per share
as required by the Agreement and Plan of Merger, as if each of (1) through (4)
occurred on March 31, 2000. The proposed merger will be accounted for as a
reverse acquisition of CESH (a "shell company" as a result of the spin-off of
its subsidiary, CE Software) by ATIO.
The following unaudited pro forma financial data may not be indicative of what
the financial condition of CESH would have been, had the transactions to which
such data gives effect been completed on the date assumed, nor are such data
necessarily indicative of the financial condition of CESH that may exist in
the future. The following unaudited pro forma information should be read in
conjunction with the notes thereto, the other pro forma financial statement
and notes thereto, and the historical financial statements and notes thereto
of CESH and ATIO included herein.
<PAGE>
<TABLE>
<CAPTION>
CE Software CESH after CE Pro Forma Pro Forma
CESH Spinoff Software Spinoff ATIO Adjustments Combined
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $2,593,635 420,787 2,172,848 46,525 6,440,000 (B) 9,114,519
455,146 (C)
Accounts receivable 400,764 400,764 - 186,698 - 186,698
Due from affiliates - - - - - -
Notes receivable from
CE Software Holdings 2,806,344 - 2,806,344 - (2,806,344)(H) -
Notes receivable from
Venturian Corporation - - - - 509,726 (C) 509,726
Inventory 178,789 178,789 - - - -
Other current assets 375,265 374,489 776 80,429 - 81,206
________________________________________________________________________________________
Total current assets 6,354,797 1,374,829 4,979,968 313,652 4,598,528 9,892,148
________________________________________________________________________________________
Net property,
plant, and equipment 1,270,388 1,270,388 - 413,365 - 413,365
Intangible assets 15,947 15,947 - - - 23,285
Other assets 51,770 28,485 23,285 - - -
________________________________________________________________________________________
Total assets $7,692,902 2,689,649 5,003,253 727,017 4,598,528 10,328,798
________________________________________________________________________________________
________________________________________________________________________________________
Current portion of
long-term debt $104,324 104,324 - 1,350,000 - 1,350,000
Trade accounts payable 202,336 202,336 - 779,600 - 779,600
Due to affiliates - - - 66,306 - 66,306
Other accrued expenses 347,295 344,042 3,253 1,206,051 - 1,209,304
Notes payable to CESH - - - 2,806,344 (2,806,344)(H) -
Notes payable to affiliates - - - 2,264,380 (1,990,762)(A) 273,618
________________________________________________________________________________________
Total current liabilities 653,955 650,702 3,253 8,472,681 (4,797,106) 3,678,828
________________________________________________________________________________________
Long-term debt, net
of current portion1 87,588 187,588 - - - -
________________________________________________________________________________________
Total liabilities 841,543 838,290 3,253 8,472,681 (4,797,106) 3,678,828
Redeemable common stock - - - 500,000 (500,000) (A) -
Common stock 113,010 - 113,010 87,000 (87,000) (A) 31,984
10,444 (A)
8,750 (B)
1,489 (C)
(101,709)(D)
Additional paid-in capital 6,017,657 1,130,667 4,886,990 6,597,088 2,567,318 (A) 21,547,738
6,431,250 (B)
963,383 (C)
101,709 (D)
Unearned compensation - - - (20,968) - (20,968)
Retained earnings
(accumulated deficit) 720,692 720,692 - (14,908,784) (14,908,784)
________________________________________________________________________________________
Total shareholders' equity 6,851,359 1,851,359 5,000,000 (8,245,664) 9,895,634 6,649,970
________________________________________________________________________________________
Total liabilities and
shareholders' equity $7,692,902 2,689,649 5,003,253 727,017 4,598,528 10,328,798
________________________________________________________________________________________
________________________________________________________________________________________
</TABLE>
<PAGE>
CE Software Holdings, Inc. and Subsidiaries
Unaudited Pro Forma Combined Summaries Of Operations
Quarter Ended March 31, 2000
The following unaudited pro forma combined summary of operations for the quarter
ended March 31, 2000 gives effect to the completion of the proposed merger with
ATIO (including the spin-off of CE Software) for 1,044,429 shares of CESH (which
includes CESH shares issued due to the conversion of approximately $1,991,000
of ATIO notes payable to affiliates into ATIO common stock subsequent to
March 31, 2000 as reflected in the Agreement and Plan of Merger) as if it
occurred on January 1, 2000. The proposed merger will be accounted for as a
reverse acquisition of CESH ( a "shell company" as a result of the spin-off of
its operating subsidiary, CE Software) by ATIO.
The following unaudited pro forma financial data may not be indicative of what
the results of operations of CESH would have been, had the transaction to which
such data gives effect been completed on the date assumed, nor are such data
necessarily indicative of the results of operations of CESH that may exist in
the future. The following unaudited pro forma information should be read in
conjunction with the notes thereto, the other pro forma financial statement and
note thereto, and the historical financial statements and notes thereto of CESH
and ATIO included herein.
<TABLE>
<CAPTION>
CE Software CESH after CE Pro Forma Pro Forma
CESH Spinoff Software Spinoff ATIO Adjustments Combined
<S> <C> <C> <C> <C> <C> <C>
Net revenue $734,766 734,766 - 154,675 - 154,675
Cost of revenues 218,280 218,280 - 314,884 - 314,884
___________________________________________________________________________________
Gross profit 516,486 516,486 - (160,209) - (160,209)
___________________________________________________________________________________
Sales and marketing 254,376 254,376 - 523,248 - 523,24
General and administrative 591,667 492,767 98,900 613,683 17,500 (G) 730,083
Research and development 185,719 185,719 - 403,250 - 403,250
___________________________________________________________________________________
Total operating expenses 1,031,762 932,862 98,900 1,540,181 17,500 1,656,581
___________________________________________________________________________________
Operating loss (515,276) (416,376) (98,900) (1,700,390) (17,500) (1,816,790)
Other income (expense):
Interest income 78,661 1,933 76,728 - - 76,728
Interest expense (5,958) (5,958) - (100,878) 7,500(F) (93,378)
Miscellaneous income 2,601 2,601 - - - -
___________________________________________________________________________________
Total other income (expense)75,304 (1,424) 76,728 (100,878) (10,000) (16,650)
Net loss $ (439,972) (417,800) (22,172) (1,801,268) (10,000) (1,833,440)
___________________________________________________________________________________
___________________________________________________________________________________
Pro forma average common
shares outstanding (E) 3,198,426
__________
__________
Pro forma basic and
diluted loss per share (E) (0.57)
__________
__________
</TABLE>
<PAGE>
CE Software Holdings, Inc. and Subsidiaries
Notes To Unaudited Pro Forma Combined Balance Sheet And Summaries Of Operations
(A) To record the proposed ATIO merger for 1,044,429 shares of CESH (which
includes CESH shares issued due to the conversion of approximately
$1,991,000 of ATIO notes payable to affiliates into ATIO common stock
subsequent to March 31, 2000).
(B) To record the maximum number of 875,000 shares of CESH to be issued on a
private offering at an estimated offering price of $8.00 per share less
estimated offering costs of approximately $670,000.
(C) To record the issuance of 148,900 shares of CESH to Venturian at
$6.48 per share.
(D) To record the reclassification from common stock to additional paid
in capital for the amendment of the par value of CESH common stock from
$.10 per share to $.01 per share for CESH shares outstanding at March 31,
2000.
(E) For the purpose of determining pro forma basic and diluted loss per
share, the proposed issuance of 1,044,429 shares for the ATIO merger,
the proposed private offering issuance of 218,750 shares, and the proposed
issuance of 148,900 shares to Venturian were considered to have been
outstanding from January 1, 2000.
(F) To record a reduction in interest expense, calculated at an average interest
rate of 8.25%, resulting from the conversion of approximately $1,991,000 of
ATIO notes payable to affiliates to ATIO shares.
(G) To record additional general and administrative expenses that, in the
opinion of management, would have been necessary to operate CESH separately
from CE Software from January 1, 2000.
(H) To eliminate notes receivable and notes payable balances due to
consolidation.
