<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file Number 0-5260
GENERAL AUTOMATION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2488811
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17731 Mitchell North, Irvine, California 92614
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (949) 250-4800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.10 par value American Stock Exchange
- ---------------------------- ------------------------------------
Title of class Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of voting stock held by non-affiliates of
the registrant was $7,606,102 as of August 6, 1998 based on the last known trade
on May 20, 1998.
The number of shares of the registrant's Common Stock, $.10 par value,
outstanding as of August 6, 1998 was 9,332,641.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
AMENDMENT OF 1997 ANNUAL REPORT ON FORM 10K TO REFLECT
RESTATEMENTS OF FINANCIAL STATEMENTS
In August 1998, the Company restated its financial statements for the years
ended September 30, 1997, 1996 and 1995 (the Restatement). The Restatement was
necessitated when the Company's management determined that certain system
deficiencies existed with respect to the deferred revenue accounting system
resulting in a need to adjust service revenues. As a result of the Restatement,
the Company reported a net loss of $514,000 for the year ended September 30,
1997; net income of $275,000 for the year ended September 30, 1996; and a net
loss of $1,712,000 for the year ended September 30, 1995. (See Note 13 to the
financial statements).
As reported on a Current Report on Form 8-K dated June 11, 1998, the Company's
independent audit firm of McGladrey & Pullen LLP, as well as the former audit
firm of PricewaterhouseCoopers LLP, withdrew their audit opinions for the years
ended September 30, 1997 and 1996 and 1995, respectively, after management had
notified both audit firms that based on an internal audit, management believed
financial information reported in those years required adjustments to properly
reflect the recognition of service revenue.
General information in the originally filed 1997 Annual Report on Form 10-K was
presented as of the filing date of January 12, 1998, as indicated. Unless
otherwise stated, such information has not been updated in this amended Annual
Report on Form 10-K unless changes have been made, as appropriate, to reflect
the Restatement.
PART I
ITEM 1 - BUSINESS
Unchanged
ITEM 2 - PROPERTIES
Unchanged
ITEM 3 - LEGAL PROCEEDINGS
Since late 1991 the Company has been a party to litigation pending before the
Circuit Court of Cook County, Ill., County Department, Chancery Division,
entitled 520 S. Michigan Ave. Associates, Ltd. d/b/a/ Congress Hotel v General
Automation and Maxial Systems, Inc. The Company filed a counter claim, and on
July 2, 1996, judgment was entered in the principal amount of $81,867 in favor
of the Company. The principal claims asserted against the Company in the
original complaint, however, remain outstanding. The Congress Hotel recently
emerged from chapter 11 bankruptcy and have taken an active interest in
pursuing their claim against the Company. Attorneys for the Company are unable
to determine whether or not the Company has legitimate defenses to all of the
claims asserted by the plaintiff and what the outcome of the case might be. In
the event of an unfavorable outcome to the Company, the range of potential loss
could be between $200 and $400 thousand. The Company intends to vigorously
defend its position in this matter.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Unchanged
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Unchanged
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data for the Company for each of the years ended September 30, 1997,
1996, and 1995, which has been derived from audited financial statements. The
financial data for the years ended September 30, 1994 and 1993 are unaudited.
The following table should be read in conjunction with (a) the audited
consolidated financial statements of the Company and notes thereto as of and for
the three years ended September 30, 1997; and (b) "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
2
<PAGE> 3
<TABLE>
<CAPTION>
Year Ended
September 30-As Restated
-----------------------------------------------------------------
1997(5) 1996 1995(4) 1994(3)(6) 1993(2)(6)
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Data:
Sales, net $ 36,040 $ 23,668 $ 14,622 $ 33,948 $ 42,258
-------- -------- -------- -------- --------
(Loss) income
from operations (38) 489 (1,313) 634 (971)
-------- -------- -------- -------- --------
Net (loss) income
before extraordinary
items (514) 275 (1,712) (239) (2,097)
Extraordinary items 0 0 0 0 900
-------- -------- -------- -------- --------
Net (loss) income $ (514) $ 275 $ (1,712) $ (239) $ (1,197)
======== ======== ======== ======== ========
Earnings per share:
Net (Loss) income
before extraordinary
items $ (.06) $ .03 $ (.21) $ .04 $ (.13)
Extraordinary items 0 0 .08
-------- -------- -------- -------- --------
Net (loss) income (.06) .03 (.21) .04 (.05)
======== ======== ======== ======== ========
Working capital
(deficiency) (6,123) (865) (1,570) 1,440 838
======== ======== ======== ======== ========
Total assets 24,263 11,251 10,484 18,041 22,456
======== ======== ======== ======== ========
Long-term obligations 3,269 1,072 1,305 4,247 5,397
======== ======== ======== ======== ========
Shareholders'
equity (deficit) 2,688 703 (161) 1,960 1,644
======== ======== ======== ======== ========
</TABLE>
- -------------------------
(1) No dividends have been paid on the Company's Common stock during any of
the periods presented. (See "Market for the Company's Common Equity and
Related Stockholder Matters.")
(2) On October 29, 1993, with retroactive effect to September 30, 1993, the
Company divested its European operations.
(3) On November 10, 1994, with retroactive effect to October 1, 1994, the
Company divested its Pacific Basin operations.
(4) Effective May 22, 1995, the Company and Boundless Technologies
("Boundless") formed a limited liability company ("GAL") for the purpose
of combining GA's Pick based business and Boundless' Pick based
business, with the Company owning 51% and Boundless owning 49% of GAL.
(5) Effective October 11, 1996, the Company acquired substantially all of
the assets and liabilities of Sequoia Enterprise Systems ("SES"), a
division of Sequoia Systems, Inc. The acquisition of SES has been
accounted for under the purchase method of accounting. Accordingly, the
financial information for the year ended September 30,1997 includes the
results of operations from the date of the acquisition. (See Note 11 of
the Company's Financial Statements.)
(6) In August 1998, the Company restated its 1997, 1996 and 1995 financial
statements to properly reflect the recognition of service revenues. The
financial statements for the years ended September 30, 1994 and 1993
have not been restated; however, the amounts for the years then ended
reported within this table have been adjusted for the unaudited effects
of the Restatement.
3
<PAGE> 4
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, the Company acquired substantially all of the assets and
liabilities of Sequoia Enterprise Systems (SES) from Texas Micro, Inc. (TMI)
which has resulted in a lack of comparability between the fiscal years ended
September 30, 1996 and 1997. A 43% increase in current assets is reported from
fiscal 1996 to 1997, and a 95% increase in current liabilities during the same
period. The result at the year ended September 30, 1997 is a negative working
capital position of approximately $6.1 million. The Company is also reporting a
282% increase in shareholder's equity from fiscal 1996 to 1997 after a reported
loss for the year ended September 30, 1997 of $514,000. The increase in the
reported shareholder's equity is primarily attributed to the common stock issued
in connection with the SES acquisition.
Cash flows for the three years ended September 30, 1997, 1996 and 1995 have been
significantly affected by the acquisitions of Boundless and SES. The most
significant change is noted in fiscal 1997 as reflected in the increase in
depreciation and amortization of $2.4 million from $364,000 in fiscal year 1996.
While cash provided by operating activities in fiscal 1997 was over $3.1
million, cash used in investing activities for the same period was $1.8 million;
largely attributed to capitalized of software development costs. These
capitalized costs are associated with the Company's Mvbase product.
Subsequent to the filing of the 1997 Annual Report on Form 10-K, certain events
took place which affected the liquidity, and potentially, the ability of the
Company to operate effectively on a daily basis. Some of these events have been
reported in prior Form 8-K filings and include the following:
o On April 7, 1998, Comerica Bank, the Company's primary bank, made demand
for payment in full of the Company's outstanding credit line. The bank
subsequently amended the credit line from a $5.5 million credit
facility, down to $2.2 million.
o On July 16, 1998, the American Stock Exchange notified the Company it
was reviewing the Company's eligibility for continued listing on the
Exchange due to the Company falling below certain minimum listing
guidelines. Being de-listed from the Exchange could have a material
adverse effect on the market price of the Company's publicly traded
Common stock.
o The Company is in default on certain obligations related to the
acquisitions of the SES and Boundless. These obligations total
approximately $8.4 million at August 30, 1998.
o The Company has experienced significant losses in fiscal 1998 through
August 1998, which has a significant negative impact on the capital
structure and liquidity of the Company.
o In February and April 1998, the Company received from the Internal
Revenue Service (IRS) notices of proposed adjustments. Among other
adjustments, the IRS is proposing to reduce the annual limitation on the
Company's use of the net operating loss carryforwards which existed at
the end of fiscal year 1994 to $245,000 per year. This limitation would
effectively reduce the Company's net operating loss carryforward at
September 30, 1997 to approximately $3 million. In addition, the IRS is
proposing adjustments which could result in the payment of additional
income taxes of up to $250,000 plus interest. Management plans to
aggressively protest these proposed adjustments and believes that it
will ultimately be resolved with no material impact on the Company's
financial statements; however, future developments in this matter could
change management's assessment of the situation in the near term.
o Since late 1991 the Company has been a party to litigation pending
before the Circuit Court of Cook County, Ill., County Department,
Chancery Division, entitled 520 S. Michigan Ave. Associates, Ltd. d/b/a/
Congress Hotel v General Automation and Maxial Systems, Inc. The Company
filed a counter claim, and on July 2, 1996, judgment was entered in the
principal amount of $81,867 in favor of the Company. The principal
claims asserted against the Company in the original complaint, however,
remain outstanding. The Congress Hotel recently emerged from chapter 11
bankruptcy and have taken an active interest in pursuing their claim
against the Company. Attorneys for the Company are unable to determine
whether or not the Company has legitimate defenses to all of the claims
asserted by the plaintiff and what the outcome of the case might be. In
the event of an unfavorable outcome to the Company, the range of
potential loss could be between $200 and $400 thousand. The Company
intends to vigorously defend its position in this matter.
In order to improve the financial condition of the Company and address the
liquidity problem, management of the Company, among other things, has taken the
following steps:
o On May 4, 1998 the Company refinanced its corporate headquarters
facility resulting in net funds of $860,000 to be used for working
capital. (See Note 15 to the financial statements)
o The Company converted short-term trade payables totaling over $1.5
million to a long-term note payable. (See Note 15 to the financial
statements).
o The Company has consolidated certain operations in the U.S., resulting
in an estimated reduction of general and administrative expenses of
$900,000 on an annual basis.
o Management is re-negotiating the terms of the acquisitions made in 1996
and 1995 (See Note 15 to the financial statements) with the ultimate
goal of strengthening shareholder's equity, improving the working
capital position and eliminating a substantial amount of outstanding
debt. The goal will also be to meet the minimum numerical guidelines for
continued listing on the American Stock Exchange. Until these
negotiations are complete, management is unable to determine what impact
these acquisition related obligations will have on the financial
position or results of operations of the Company. Additionally, there
can be no assurances that these negotiations will be successful, or that
even if successful, the Company will maintain its listing on the
American Stock Exchange.
4
<PAGE> 5
o Field auditors for a commercial lender capable of replacing the Comerica
Bank credit line, have completed their initial work and are awaiting
results of restated financial statements and the related SEC filings, in
order to make a final credit decision in this regard. While management
feels confident of finding a lender to replace Comerica Bank, no
assurances can be made in this regard.
RESULTS OF OPERATIONS
On October 11, 1996, the Company purchased from Sequoia Systems, Inc. (also
known as Texas Micro, Inc. or TMI) substantially all of the assets and business
of The Sequoia Enterprise Systems (SES) business division. The following
unaudited financial information gives effect to the SES acquisition as if it
occurred on October 1, 1995:
PRO-FORMA (IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
REVENUES 36,730 55,463
GROSS MARGIN 15,935 18,874
OPERATING EXPENSES 15,748 18,839
OPERATING INCOME 187 35
</TABLE>
A comparison of revenues, as restated, for the three years ended September 30,
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
PRODUCT SALES 10,694 9,715 7,020
SERVICE AND SUPPORT 25,346 13,953 7,602
TOTAL REVENUES 36,040 23,668 14,622
</TABLE>
The loss from operations for the year ended September 30, 1997 of $38,000
includes amortization and depreciation charges of approximately $2.4 million,
income tax from foreign operations of $165,000 and net interest expense of
$311,000, resulting in a net loss for the year of $514,000. This compares to a
net income of $275,000 and a net loss of $1.7 million for the years ended
September 30, 1996 and 1995, respectively. Management expects the trend of
losses will continue throughout fiscal 1998 and that the losses could be
significant.
Gross Profit Margins improved over the three years from 21%, 27% and 42% for the
years ended 1995, 1996 and 1997, respectively. Management attributes this
improved trend to the Company's business being more dependent on service
revenues vs. product income. From fiscal 1995 to fiscal 1997, service revenues
as a percent of total revenues grew from 53% to 69%. Management expects the
trend of increasing efforts towards the higher-margin service revenue will
continue in the near future.
The apparent trend in increased revenues for the three years is primarily
attributed to acquisitions made during those years. The Sequoia Systems
purchase, previously reported in 1996, was the major contributor towards revenue
growth for the year ended September 30, 1997. As a result of this acquisition,
and in anticipation of the acquisition of NCE, Inc., also previously reported,
the Company also realized a 159% increase in Selling, General and Administrative
Expenses. This increase was greatly affected, and expected, in anticipation of
greater revenue growth for fiscal 1998. In 1997, the Company also incurred a
$400,000 charge related to a license agreement which was terminated, and a
$394,000 charge related to a three-year consulting contract with a former
officer of the Company. Management has subsequently determined that the
anticipated growth in revenue for fiscal 1998 is not going to be realized, and
the planned acquisition of NCE, Inc. has been delayed.
5
<PAGE> 6
Accordingly, and as previously mentioned, management has begun consolidating
certain U.S. operations in order to cut expenses for fiscal 1998. Subsequent to
the year ended September 30, 1997 the cost reductions, on an annualized basis,
are estimated to be over $900,000. Additionally, the Company is working under a
joint venture agreement with NCE, Inc. which should result in additional savings
for both companies. This agreement was entered into anticipating the proposed
acquisition of NCE, Inc. will be finalized in the near future. However, no
assurances can be made that this transaction will ultimately close.
Revenues increased by approximately 62% from fiscal 1995 to 1996. This increase
is largely attributed to the Company's participation in GAL with Boundless with
corresponding increases in the related cost of sales and expenses are also
primarily attributed to this acquisition.
SUMMARY AND FORWARD LOOKING INFORMATION
Management is clearly aware of the need to control expenses in the future, seek
additional revenue growth and work towards better balance sheet management to
improve all key financial ratios. Management is also aware that, while
successful negotiations of the terms of the acquisitions previously discussed
are not certain, they are material to the on-going operations of the Company.
Management will continue these negotiations with determination, and with the
goal that terms will be agreed upon which benefit all three companies and their
respective shareholders.
YEAR 2000 ISSUES AND CONSEQUENCES
As the end of the century draws near, there is concern that Year 2000 technology
problems may wreak havoc on global economies and materially affect the operating
results of companies. General Automation, Inc. is taking steps to prevent this
potential problem from adversely affecting its operating results in the future.
In this regard, management is continuing its as-yet-incomplete assessment of
Year 2000 issues.
Because the Company's products are primarily written in licensed versions of the
Pick Operating System, there is effectively no Year 2000 problem due to the
design of the Pick System which took this into account at its inception.
However, the "applications" written for the Pick System, and, other Operating
Systems which host our Pick Data Base implementation, could potentially have
Year 2000 issues. Also, third-parties which the Company has material
relationships with, such as vendors, may, or may not, be Year 2000 compliant. In
both of these instances, the Company is taking the steps necessary to verify
Year 2000 compliance and expects this assessment to be complete within the first
quarter of fiscal 1999.
(a) Company's State of Readiness
The Company is confident that its own internal systems are Year 2000 compliant,
or planned up-grades are in place; e.g. accounting, reporting, etc. However, the
Company is continuing its efforts to verify third party compliance, primarily
through the use of questionnaires. Areas in which the Company will focus its
concerns will be:
o The equipment and software for its wide-area frame-relay network
o Telephone switches and hand-sets
o Corporate-headquarter alarm and entry systems
o E-mail software
o Other peripheral equipment such as fax machines, scanners, printers, etc
(b) Costs Associated with Year 2000 Issues
Management has not, at this date, made any estimates of costs associated with
this procedure. Management does anticipate that selling Year 2000 compliant
software-upgrades will actually be an income-producer in the near future. The
Company has not made estimates yet as to the potential income to be gained from
these upgrades.
6
<PAGE> 7
(c) Risks Associated with Year 2000 Issues
Management is unaware of any material risks associated with Year 2000 issues at
the present time. Management does expect that, as previously discussed,
additional revenues could be generated as a result of selling product upgrades
that address this issue.
(d) Contingency Plans
Because the complete assessment of Year 2000 issues is incomplete, the Company
has not developed contingency plans for this issue. Management expects the
assessment and any related necessary contingency plans will be complete within
the first quarter of its fiscal 1999.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on Page 8.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Unchanged.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
See Index to Consolidated Financial Statements on Page 8.
Financial Statement Schedules and Exhibits were unchanged.
Reports on Form 8-K
Unchanged.
7
<PAGE> 8
GENERAL AUTOMATION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
INDEPENDENT AUDITOR'S REPORTS ON THE FINANCIAL STATEMENTS F-1 - F-2
FINANCIAL STATEMENTS
Consolidated balance sheets F-3 - F-4
Consolidated statements of operation F-5
Consolidated statements of stockholders' equity F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-28
</TABLE>
8
<PAGE> 9
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENERAL AUTOMATION, INC.
DATE: AUGUST 19, 1998 By: /s/ RICHARD NANCE
-----------------------------------
RICHARD NANCE
Vice President, and Chief
Financial & Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Lawrence Michels Chairman of the Board August 19, 1998
- ----------------------------------- Director
Lawrence Michels
/s/ Robert D. Bagby Vice Chairman, Director August 19, 1998
- -----------------------------------
Robert D. Bagby
/s/ Jane M. Christie President, CEO, Director August 19, 1998
- -----------------------------------
Jane M. Christie
/s/ Leonard M. Mackenzie Director August 19, 1998
- -----------------------------------
Leonard N. Mackenzie
/s/ Robert M. McClure Director August 19, 1998
- -----------------------------------
Robert M. McClure
/s/ Paul L. Morigi Director August 19, 1998
- -----------------------------------
Paul L. Morigi
/s/ Philip T. Noden Director August 19, 1998
- -----------------------------------
Philip T. Noden
/s/ Richard Nance Vice President and August 19, 1998
- ------------------------------------ Chief Financial and
Richard Nance Accounting Officer
</TABLE>
9
<PAGE> 10
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS
To the Board of Directors
General Automation, Inc.
Irvine, California
We have audited the accompanying consolidated balance sheet of General
Automation, Inc. and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity 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 generally accepted auditing standards.
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Automation,
Inc. and Subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As more fully described in Note 13, the Company has restated its consolidated
financial statements to correct the amounts recognized as service revenues.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As disclosed in the financial
statements, the Company has incurred operating losses in two of the last three
years, has a working capital deficit and a deficit tangible net worth. In
addition, as discussed in Note 14, the Company has incurred significant losses
subsequent to September 30, 1997, its primary bank has demanded payment in full
of the Company's line of credit, and other events have occurred which could
adversely affect the Company's operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 15. The financial
statements do not include any adjustments that may result from the outcome of
this uncertainty.
McGLADREY & PULLEN, LLP
Anaheim, California
December 19, 1997, except for Notes 9, 10, 13, 14, 15 and the pro-forma
disclosures included in Notes 8 and 11 as to which the date is August 19, 1998.
F-1
<PAGE> 11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
General Automation, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and changes in
stockholders' equity present fairly, in all material respects, the financial
position of General Automation, Inc. and its subsidiaries at September 30, 1996,
and the results of their operations and their cash flows for each of the two
years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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.
As discussed in Note 13, the Company has restated its consolidated financial
statements to properly reflect the recognition of service revenues as of
September 30, 1996 and for the two years then ended.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As disclosed in the financial
statements, the Company has incurred operating losses in two of the last three
years and a working capital deficit and a deficit tangible net worth. In
addition, as discussed in Note 14, the Company has suffered recurring losses
from operations subsequent to September 30, 1997, its primary bank has demanded
payment in full of the Company's line of credit, and other events have occurred
which could adversely affect the Company's operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 15. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
December 9, 1996, except for Notes 9, 13, 14 and 15 which are as of August 19,
1998
F-2
<PAGE> 12
GENERAL AUTOMATION, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS (Note 6) 1997 1996
----------- -----------
<S> <C> <C>
Current Assets
Cash $ 797,000 $ 119,000
Accounts receivable, net of allowance for doubtful
accounts of $309,000 in 1997 and $561,000 in 1996
(Note 13) 5,492,000 4,580,000
Due from related parties 56,000 86,000
Inventories (Note 2) 4,999,000 2,979,000
Prepaid expenses and other current assets (Note 13) 839,000 768,000
----------- -----------
TOTAL CURRENT ASSETS 12,183,000 8,532,000
Long-Term Receivable (Note 11) 570,000 570,000
Property, Plant and Equipment (Notes 3 and 15) 2,431,000 1,392,000
Goodwill, net of accumulated amortization of $1,385,000 7,085,000
Other Assets, net (Note 4) 1,994,000 757,000
----------- -----------
TOTAL ASSETS $24,263,000 $11,251,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 13
GENERAL AUTOMATION, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ ------------
<S> <C> <C>
Current Liabilities
Bank line of credit (Note 6 and 14) $ 1,884,000 $ 528,000
Accounts payable (Note 13) 3,671,000 2,907,000
Advances from customers (Note 13) 5,013,000 4,439,000
Accrued expenses, including $258,000 due to a
related party in 1997 (Notes 5) 2,243,000 1,288,000
Notes payable and current maturities of long-term
debt (Note 6) 5,495,000 235,000
------------ ------------
TOTAL CURRENT LIABILITIES 18,306,000 9,397,000
------------ ------------
Long-Term Debt, excluding current maturities,
including a note payable to related party of
$350,000 in 1997 (Note 6) 3,269,000 1,072,000
------------ ------------
Deferred Credit 79,000
------------
Commitments and Contingencies (Notes 11, 12, 14 and 15)
Stockholders' Equity (Notes 6, 8, 11, 13 and 14)
Common stock, par value $.10 per share;
30,000,000 authorized; issued and outstanding:
1997 -- 9,232,591 shares; 1996 -- 8,176,376 shares 923,000 818,000
Additional paid-in capital 45,516,000 43,043,000
Accumulated deficit (43,672,000) (43,158,000)
Cumulative translation adjustment (79,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,688,000 703,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,263,000 $ 11,251,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 14
GENERAL AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF OPERATION
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Product $ 10,694,000 $ 9,715,000 $ 7,020,000
Service (Note 13) 25,346,000 13,953,000 7,457,000
------------ ------------ ------------
TOTAL 36,040,000 23,668,000 14,477,000
------------ ------------ ------------
Costs and Expenses (Note 13)
Cost of sales:
Product 6,661,000 7,887,000 6,502,000
Service 14,050,000 9,486,000 4,964,000
Selling and administrative, including
consulting expense of $394,000 in 1997
to a related party and $86,000 in 1997
for forgiveness of related
party receivable (Note 5) 11,383,000 4,392,000 3,559,000
Research and development 2,599,000 1,156,000 584,000
Amortization of goodwill 1,385,000 0 0
Other, net 0 258,000 181,000
------------ ------------ ------------
TOTAL 36,078,000 23,179,000 15,790,000
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (38,000) 489,000 (1,313,000)
Interest Income 71,000 60,000 35,000
Interest Expense (382,000) (274,000) (434,000)
------------ ------------ ------------
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES (349,000) 275,000 (1,712,000)
Provision for Income Taxes (Note 9) 165,000 0 0
------------ ------------ ------------
NET (LOSS) INCOME (NOTE 13) $ (514,000) $ 275,000 $ (1,712,000)
============ ============ ============
Net (loss) income per common and
common equivalent share $ (0.06) $ 0.03 $ (0.21)
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 15
GENERAL AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional Cumulative
--------------------------- Paid-In Accumulated Translation
Shares Amount Capital Deficit Adjustment
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 11,366,776 $ 1,137,000 $ 42,420,000 $(40,457,000) $ 146,000
as previously reported
Prior period adjustment
(Note 13) (1,285,000)
----------- ----------- ------------ ------------ ------------
Balance at September 30,
1994, as restated 11,366,776 1,137,000 42,420,000 (41,742,000) 146,000
Net (loss) (1,712,000)
Stock retired from sale
of SGA (4,100,000) (410,000) 113,000 21,000 (146,000)
Stock issued for legal
settlement 125,000 12,000
----------- ----------- ------------ ------------ ------------
Balance at September 30, 1995,
as restated 7,391,776 739,000 42,533,000 (43,433,000) -0-
Net income 275,000
Stock options exercised
(Note 8) 784,600 79,000 510,000
Balance at September 30, 1996,
as restated 8,176,376 818,000 43,043,000 (43,158,000) -0-
Net (loss) (514,000)
Stock options and warrants
exercised (Note 8) 155,500 15,000 119,000
Stock and stock warrants
issued for acquisitions
(Note 11) 900,715 90,000 2,573,000
Adjustment to cash portion
of purchase price of
acquisition (Note 11) (219,000)
Translation adjustment (79,000)
----------- ------------ ------------ ------------ ------------
Balance at September 30, 1997,
as restated 9,232,591 $ 923,000 $ 45,516,000 $(43,672,000) $ (79,000)
=========== ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 16
GENERAL AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows Provided By (Used In) Operating
Activities
Net (loss) income $ (514,000) $ 275,000 $(1,712,000)
Adjustments to reconcile net (loss)
income to net cash provided by (used in)
operating activities:
Gain from disposal of assets (42,000) (55,000) 0
Depreciation and amortization 2,424,000 364,000 355,000
Changes in assets and liabilities:
(Increase) decrease:
Receivables (258,000) 1,013,000 (3,846,000)
Inventories 1,023,000 (1,253,000) 563,000
Prepaid expense and other current assets 196,000 (583,000) (11,000)
Other assets (113,000) (33,000) 79,000
Increase (decrease):
Accounts payable (17,000) (52,000) 1,662,000
Advances from customers 485,000 106,000 2,807,000
Accrued expenses (35,000) 438,000 (240,000)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,149,000 220,000 (343,000)
----------- ----------- -----------
Cash Flows (Used In) Investing Activities
Acquisitions (330,000)
Purchase of property, plant and equipment (401,000) (101,000) (1,328,000)
Proceeds from disposal of assets 42,000 55,000 0
Capitalized software costs (1,099,000) (168,000) (178,000)
Investment in subsidiary 13,000 (21,000)
----------- ----------- -----------
NET CASH (USED IN) INVESTING
ACTIVITIES (1,788,000) (201,000) (1,527,000)
----------- ----------- -----------
Cash Flows (Used In) Provided By Financing
activities
Proceeds from issuance of common stock 134,000 589,000 0
Proceeds from issuance of notes 3,075,000 267,000 1,357,000
Principal payments on notes payable (3,953,000) (857,000) (1,407,000)
Proceeds from sale of SGA Pacific 1,791,000
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (744,000) (1,000) 1,741,000
----------- ----------- -----------
Effect of exchange rate changes on cash 61,000 0 0
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 678,000 18,000 (129,000)
Cash at beginning of year 119,000 101,000 230,000
----------- ----------- -----------
Cash at end of year $ 797,000 $ 119,000 $ 101,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 17
GENERAL AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- -----------
<S> <C> <C> <C>
Cash Paid During the Period for:
Interest $ 339,000 $ 274,000 $ 452,000
=========== ========= ===========
Income taxes $ 271,000 $ $
=========== ========= ===========
Supplemental Disclosure of Non-cash Investing
and Financing Activities
Acquisition of Sequoia Enterprise Systems,
Inc (Note 11)
Working capital acquired, net of cash $ 2,298,000 $ $
Fair value of long-term assets acquired 1,470,000
Goodwill recorded on acquisition 8,366,000
Long-term debt assumed (9,472,000)
Common stock and warrants issued (2,375,000)
----------- --------- -----------
$ 287,000 $ $
=========== ========= ===========
Acquisition of Liberty Integration
Software, Inc. (Note 11)
Working capital acquired, net of cash $ (5,000)
Fair value of long-term assets acquired 12,000
Goodwill recorded on acquisition 104,000
Common stock issued (68,000)
----------- --------- -----------
$ 43,000 $ $
=========== ========= ===========
Acquisition of Software for Common Stock
(Note 11) $ 220,000 $ $
=========== ========= ===========
Increase in Cash Portion of Purchase Price
of Acquisition (Note 11) $ 219,000 $ $
=========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE> 18
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company is engaged in the development, design and sale of computer software
and hardware and related field support services. The Company has divisions and
subsidiaries located in the United States, Canada, Australia and England. The
Company sells products in the United States through over 200 value-added
resellers based on credit terms established for individual customers. The
Company provides service and support throughout North America to over 3,000
customers.
The Company's major product line utilizes Pick software as its operating system.
The Company is authorized, on a nonexclusive basis, to use and sublicense the
use of the Pick software indefinitely, in accordance with the terms of license
agreements. Invalidation or cancellation of the Pick license could adversely
impact the Company's business. Management does not believe that it is operating
in such a manner as to prompt cancellation of any of the Pick licenses.
Furthermore, management believes that there are alternative courses of action
which could be pursued in the event of such a cancellation so as to not
adversely impact the operations of the Company.
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
all of its wholly-owned subsidiaries: Sequoia Systems (UK) Limited, Liberty
Integration Software, Inc., General Automation, LLC and General Automation PTY
Ltd. (formally known as Sequoia Asian Pacific PTY Ltd) and its wholly-owned
subsidiary Sequoia Systems (Australia) PTY Ltd. All significant intercompany
transactions and accounts have been eliminated.
REVENUE RECOGNITION:
Revenues for sales of products are recognized when shipped. Revenue is not
recognized on product sales if significant obligations remain or collectibility
is in doubt. Revenues for maintenance service contracts are recognized on a
monthly basis ratably over the period of the contracts. Cash payments received
and billings in advance of revenue recognition are recorded as a liability
"advances from customers" and recognized as revenue is earned.
F-9
<PAGE> 19
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WARRANTIES:
All products, except the lowest-end models, carry a one-year warranty, during
which all maintenance, labor and parts are covered. The Company defers the
recognition of a portion of the revenue allocated to the maintenance obligation
and accrues for expected future warranty costs at the time of sale.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Cost elements include primarily materials. Market is considered to be selling
price less allowance for normal selling expenses. In order to properly service
the Company's maintenance contracts, the Company maintains quantities of parts
and subassemblies related to the computer systems of its customers with
maintenance contracts. Some of these parts do not use current technologies;
however, the Company will continue to utilize them in service contracts as long
as its customer base continues to operate with older technology. These parts are
classified as inventory in the accompanying consolidated balance sheet. When a
part is placed in a customer's system, the cost to refurbish the replaced part
is expensed and the refurbished part is replaced into inventory. The Company
amortizes the costs of these component parts over a seven-year life and
periodically evaluates the remaining utility and recoverability of the recorded
balances.
PROPERTY, PLANT AND EQUIPMENT:
Depreciation and amortization of property, plant and equipment are provided over
the estimated useful lives of the assets using the straight-line method.
Estimated useful lives are as follows:
Building 30 years
Machinery and equipment 3-7 years
Furniture and fixtures 3-7 years
Leasehold improvements Lease term or asset life,
whichever is less.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS:
All capitalized software development costs are amortized either on a
straight-line basis over the remaining estimated economic life of the product,
generally three to five years, or the ratio of the products' current gross
revenues to the total of current and expected gross revenues, whichever period
is greater. The costs capitalized are those incurred after the Company has
determined the technical feasibility of a software project until the time the
product is available for general release to customers. The project amortization
does not commence until after the general release of the product and is included
in the cost of sales. Management periodically compares the recorded amount of
capitalized software development costs to the net realizable value of the
software product based on expected future revenues. Any amounts in excess of net
realizable value is charged to operations.
F-10
<PAGE> 20
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL:
Goodwill is being amortized on a straight-line basis over its estimated useful
life of sixty months. Management periodically evaluates goodwill for impairment
by comparison of the recorded amount to the estimated gross future cash flows.
If permanent impairment is indicated, the Company reduces the recorded amount of
goodwill to its estimated fair value.
INCOME TAXES:
Deferred taxes are accounted for using an asset and liability approach, whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
RESEARCH AND DEVELOPMENT:
Company-sponsored research and development costs are charged to expenses as
incurred.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Earnings per Common and Common equivalent share are determined by dividing net
income by the weighted-average number of Common and Common equivalent shares
outstanding during the year. Dilutive Common stock equivalents related to stock
options were determined using the treasury stock method. Earnings per Common and
Common equivalent share assuming full dilution are not materially different from
primary earnings per Common and Common equivalent shares.
The weighted-average shares outstanding used for computing earnings per share
were as follows:
1997 9,003,171
1996 8,639,445
1995 8,036,572
F-11
<PAGE> 21
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company values financial instruments as required by the Financial Accounting
Standards Board (FASB) Statement No. 107, "Disclosure about Fair Value of
Financial Instruments". The carrying amounts of cash, accounts receivable,
accounts payable, accrued liabilities and debt, except for the $5,919,000
payable related to the Sequoia acquisition, approximate fair value. As discussed
in Note 11, it was not practicable to estimate the fair value of a portion of
the long-term receivable since the time and amounts of the principal payments
are not fixed. As discussed in Note 6, the payable related to the Sequoia
acquisition has repayment terms based on a percentage of revenues. As the
repayment terms are not fixed, it is not practicable to estimate the fair value
of this payable.
FOREIGN CURRENCY TRANSLATION:
The financial statements of the Company's investment in its foreign operations
are translated into U.S. dollars in accordance with FASB Statement No. 52,
"Foreign Currency Translation". The functional currency of the Company's foreign
investments and operating divisions include the Australian dollar and other
currencies. The net assets of these operations are translated at the current
rate of exchange. Income and expense items are translated at the average
exchange rate for the year. The resulting translation adjustment is recorded
directly as a separate component of stockholders' equity.
ACCOUNTING ADOPTIONS:
During 1997, the Company adopted FASB Statement No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
This Statement requires that long-lived assets to be held and used by an entity
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. The adoption of this Statement did not have an effect on the
financial statements.
During 1997, the Company adopted FASB Statement No. 123, "Accounting for
Stock-Based Compensation", which establishes financial accounting and reporting
standards for stock-based employee compensation plans such as a stock option
plan. The Statement generally suggests, but does not require, stock-based
compensation transactions with employees be accounted for based on the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. An enterprise may continue to
follow the requirements of Accounting Principles Board (APB) Opinion No. 25,
which does not require compensation to be recorded if the consideration to be
received is at least equal to the fair value at the measurement date.
Non-employee stock-based transactions occurring after December 15, 1995 must be
accounted for at fair value. The Company has elected to continue to follow the
measurement principles of APB Opinion No. 25 for stock-based employee
compensation, and the adoption of this pronouncement did not have a material
impact on its financial statements.
F-12
<PAGE> 22
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS:
During the year, FASB issued several accounting pronouncements that will affect
or possibly affect the accounting and reporting of the Company. Following are
the requirements of these pronouncements:
(Loss) earnings per share:
In February, 1997, FASB issued Statement No. 128, "Earnings Per Share", which
supersedes APB Opinion No. 15. Statement No. 128 requires the presentation of
earnings per share by all entities that have Common stock or potential Common
stock, such as options, warrants and convertible securities outstanding that
trade in a public market. Those entities that have only Common stock
outstanding are required to present basic earnings per share amounts. Diluted
per share amounts assume the conversion, exercise or issuance of all
potential Common stock instruments unless the effect is to reduce a loss or
increase the income per Common share from continuing operations. All entities
required to present per share amounts must initially apply Statement No. 128
for annual and interim periods ending after December 15, 1997. Earlier
application is not permitted. Under Statement No. 128, the Company would have
reported basic (loss) earnings per share as follows: 1997 ($0.06); 1996 $0.04
and 1995 $(0.21). Diluted earnings per share would have been the same as the
amounts previously reported as primary earnings per share.
Reporting comprehensive income:
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
consolidated financial statements. It does not address issues of recognition
or measurement for comprehensive income and its components. The Statement
requires a company to disclose in the financial statements the various
components of comprehensive income. The provisions of this Statement will be
effective for the Company's financial statements issued for the year ending
September 30, 1999.
Segment disclosure:
The FASB has also issued Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information." Statement No. 131 modifies the
disclosure requirements for reportable segments and is effective for the
Company's year ending September 30, 1999. The Company has not determined if
the adoption of this Statement will require the Company to report segments.
Software revenue recognition:
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2 "Software Revenue Recognition". SOP 97-2
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The SOP is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
Earlier applications is encouraged but management has not decided when they
will adopt the provisions of the SOP. Management has not determined if the
adoption of this Statement will have a material effect on the Company's
financial statements.
F-13
<PAGE> 23
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 2. INVENTORIES
Inventories consist of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Material and purchased subassemblies $3,040,000 $1,549,000
Support systems, spare parts and subassemblies, net 1,311,000 1,606,000
Work-in-process 420,000 115,000
Finished goods, primarily demo equipment 588,000 9,000
---------- ----------
5,359,000 3,279,000
Less inventory reserves 360,000 300,000
---------- ----------
$4,999,000 $2,979,000
========== ==========
</TABLE>
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and building $1,436,000 $1,276,000
Machinery and equipment 3,590,000 2,133,000
Furniture and fixtures 268,000 213,000
Leasehold improvements 97,000 50,000
---------- ----------
5,391,000 3,672,000
Less accumulated depreciation and amortization 2,960,000 2,280,000
---------- ----------
$2,431,000 $1,392,000
========== ==========
</TABLE>
Depreciation and amortization expense relating to property, plant and equipment
for 1997, 1996 and 1995 amounted to $554,000, $64,000 and $60,000, respectively.
F-14
<PAGE> 24
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 4. OTHER ASSETS, NET
Other assets consist of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Capitalized software development costs,
net of accumulated amortization of
$1,403,000 in 1997 and $1,110,000 in 1996 $1,476,000 $ 670,000
Purchased software, net of accumulated
amortization of $192,000 in 1997 318,000 -0-
Other 200,000 87,000
---------- ----------
$1,994,000 $ 757,000
========== ==========
</TABLE>
During 1997, the Company acquired software of $510,000 through various
acquisitions. During 1997, 1996 and 1995, the Company capitalized $1,099,000,
$168,000 and $178,000 of software development costs, respectively, and $492,000,
$310,000 and $295,000, respectively, of such costs were amortized and included
in cost of sales.
NOTE 5. ACCRUED EXPENSES AND RELATED PARTY TRANSACTIONS
Accrued expenses consist of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued payroll $ 771,000 $ 499,000
Accrued consulting fee 258,000 -0-
Accrued royalties 358,000 252,000
Accrued warranty 135,000 78,000
Other 721,000 459,000
---------- ----------
$2,243,000 $1,288,000
========== ==========
</TABLE>
In April 1997, the Company entered into a consulting agreement with a former
officer for a three-year period at $325,000 per year. In connection with this
agreement, the former officer's employment with the Company was terminated and
outstanding stock options with an intrinsic value of $300,000 were terminated.
The Company expensed the intrinsic value of the stock options upon execution of
the agreement and is amortizing the remaining portion of the amount due over the
life of the agreement. Future amounts due under the agreement are $325,000 in
1998 and 1999 and $189,000 in 2000. The Company may terminate this agreement
after a two-year period. Upon termination of this agreement, the Company is
obligated to issue a warrant to purchase a number of shares of the Company's
Common stock equal to any unpaid amount under this agreement divided by the fair
market value of the Company's Common stock at that time. The exercise price of
the warrants would be the fair value at the time of issuance. The warrant would
expire two years after issuance. The issuance of the warrant would satisfy any
remaining obligations under this agreement.
F-15
<PAGE> 25
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 6. NOTES PAYABLE, LONG-TERM DEBT AND SUBSEQUENT EVENT
The Company has a $2,000,000 line of credit with a bank that expires in January
1998. The agreement bears interest at the bank's prime rate (8.5% at September
30, 1997) plus 2%. Borrowings under the line are secured by substantially all
the Company's assets. The agreement requires the Company to maintain certain
financial covenants and also precludes the Company from paying dividends without
the bank's approval. At September 30, 1997, the Company was not in compliance
with the working capital covenant and had received a waiver of this covenant
from the bank for September 30, 1997. The outstanding balance at September 30,
1997 and 1996 was $1,884,000 and $528,000, respectively. On December 18, 1997,
the Company entered into a new $5,000,000 line of credit with a different bank
and repaid the previous amount outstanding. Borrowings under the new line of
credit are secured by all assets of the Company and bear interest at the prime
rate plus 2%. The new line expires 30 days after notice or immediately upon
default. Advances under the line are limited to 80% of eligible product
receivables plus 60% of eligible service receivables, as defined. The new line
also requires the Company to maintain certain financial covenants and precludes
the payment of dividends or entering into acquisitions without prior bank
approval. Management believes that the Company will be able to meet the
covenants in the new agreement. (See Note 14)
Long-term debt at September 30, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Unsecured note-payable to related party bearing interest
at 15%, payable in monthly payments of $24,000,
subordinate to the Company's line of credit $ 350,000 $ --
Mortgage note payable bearing interest at prime (8.5%
at September 30, 1997) plus 1.5%, payable in monthly
payments of $9,000 through November 2004 when the
remaining principal and interest is due 983,000 990,000
Note payable related to Sequoia acquisition (A) 1,429,000 --
Payable related to Sequoia acquisition (A) 5,919,000 --
Other notes payable 83,000 317,000
---------- ----------
8,764,000 1,307,000
Less current maturities 5,495,000 235,000
---------- ----------
$3,269,000 $1,072,000
========== ==========
</TABLE>
- ------------------
(A) On October 1, 1997, an amendment to the asset purchase agreement between
the Company and Sequoia Systems, Inc. (Note 11) was made that modified
certain of the payment terms. In connection therewith, the Company
signed a $1,429,000 note payable. The unsecured note bears interest at
13% and is due in monthly installments of $75,000 plus interest. In
addition, the Company has agreed to pay $5,919,000 as follows: $300,000
on October 1, 1997; $400,000 on December 15, 1997 and the balance due
based upon a percentage of revenues (primarily 10%) as defined in the
agreement. Management has estimated the maturity of this portion of this
payable is as follows: 1998 $3,620,000; 1999 $1,599,000.
Payment requirements on principal balances at September 30, 1997 are due as
follows for the years ended September 30: 1998 $5,495,000; 1999 $2,318,000; 2000
$17,000; 2001 $18,000; 2002 $24,000; and thereafter $892,000.
F-16
<PAGE> 26
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing 401(k) plan covering substantially all of its
domestic employees. Eligible employees may contribute 2% to 12% of their
compensation up to the maximum dollar amount allowed by the taxing authorities.
The Company contributes from profits amounts equal to 50% of each employee's
contribution which are limited to 3% of the employee's compensation. The Company
may elect to, although it is not obligated to, make contributions in years when
it has no profits. Contributions for 1997, 1996 and 1995 were $94,000, $85,000
and $78,000, respectively.
NOTE 8. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans. Under the 1991 Stock Option Plan, the
Company has reserved 2,035,000 shares of Common stock. Under the 1991 Director's
Stock Option Plan, the Company has reserved 200,000 shares of Common stock. The
1991 Stock Option Plan was amended in January 1997 to increase the authorized
shares from 1,300,000 to 2,035,000. Under terms of the Plans, options are
granted with an exercise price not less than the fair market value of the Common
stock at the date the options are granted. All options expire five years from
the date of grant and contain vesting provisions established by the Board of
Directors. In addition to the options available under the stock option plans, in
1995 the Company also issued, to certain directors, options to acquire 1,455,000
shares of Common stock at $0.86 per share. These options were vested upon grant
and expire in March 2000.
A summary of stock options at September 30, 1997, 1996 and 1995 and changes
during the years then ended, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ---------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 2,183,000 $0.84 2,926,000 $0.80 1,196,000 $0.75
Granted 960,000 1.94 60,000 1.81 1,755,000 0.84
Exercised (55,000) 1.02 (732,000) 0.75
Expired or
terminated (300,000) 0.75 (71,000) 0.75 (25,000) 0.75
---------- ----- --------- ----- --------- -----
Outstanding, end of year 2,788,000 $1.23 2,183,000 $0.84 2,926,000 $0.80
========== ===== ========= ===== ========= =====
Exercisable, end of year 2,388,000 $0.95 2,183,000 $0.84 2,926,000 $0.80
========== ===== ========= ===== ========= =====
Available for grant
under existing plans,
end of year 168,000 93,000 82,000
========= ========= =========
</TABLE>
F-17
<PAGE> 27
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 8. STOCK OPTIONS AND WARRANTS (CONTINUED)
A further summary about options outstanding at September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Exercise Prices Outstanding Exercisable
--------------- ---------------------------------- -----------------------------
Weighted-Average
Remaining Weighted-Average
Exercise Price Number Contractual Life Number Contractual Life
-------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
$0.75 343,000 23 months 343,000 23 months
$0.86 1,455,000 30 months 1,455,000 30 months
$1.81 30,000 43 months 30,000 43 months
$1.94 660,000 52 months 560,000 52 months
$1.95 300,000 50 months
--------- ---------
2,788,000 2,388,000
=========. =========
</TABLE>
The Company applies APB No. Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized. Had compensation cost for
the Company's stock option plan been determined based on the fair value at the
grant dates for awards under this plan consistent with the method of Statement
No. 123, the Company's net income and earnings per Common and Common equivalent
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C> <C>
Net (loss) income As reported $ (514,000) $275,000
Pro forma (1,048,000) 226,000
(Loss) earnings per Common and Common
equivalent share, primary and
fully diluted As reported $ (0.06) $ 0.03
Pro forma (0.12) 0.03
</TABLE>
The pro forma compensation cost was recognized for the fair value of the stock
options granted, which was estimated using the Black-Scholes model with the
following weighted-average assumptions for 1997 and 1996, respectively: expected
volatility of 85% and 92% and risk-free interest 5.5% and 5.4%, expected life of
5 years and no expected dividends for all years. The estimated weighted-average
fair value of stock options granted in 1997 and 1996 was $1.24 and $1.33 per
share, respectively.
The Company issued warrants for purchase of 250,000 shares of stock as part of
the purchase agreement for Sequoia Enterprise Systems as noted at Note 11. The
exercise price for each share of stock subject to the warrant is $2.50 per
share. The fair value of the warrant at the date of issuance was estimated to be
$2.00 per share, totaling $500,000 and was recorded as part of the acquisition
cost. The warrants can be exercised either in whole or in part and expire
October 2000. As discussed in Note 5, the Company also may be required to issue
additional warrants to a related party upon the occurrence of certain events.
F-18
<PAGE> 28
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 8. STOCK OPTIONS AND WARRANTS (CONTINUED)
On May 2, 1997, Sanderson Computers Ltd. exercised its warrant to purchase
100,000 shares of the Company's Common stock for $0.75 per share. This warrant
was available to Sanderson through a "Mirror Rights Agreement" entered into in
1989. In 1996, Sanderson also acquired 56,100 shares through the "Mirror Rights
Agreement." At September 30, 1997, no future "Mirror Rights" exist.
NOTE 9. INCOME TAXES
The provision for income taxes for the year ended September 30, 1997 consists
solely of $165,000 in foreign income taxes.
Reasons for differences between income tax expense and the amount computed by
applying the federal statutory income tax rate to (loss) income before income
taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Tax provision (benefit) calculated at
federal statutory rate $(122,000) $ 94,000 $ (582,000)
Benefit of operating loss carryforwards (240,000)
Change in valuation allowance 218,000
Expenses not deductible 43,000 123,000
Tax benefits not provided on losses of
domestic and foreign operations (525,000)
Income from sale of foreign subsidiary 1,054,000
Other 26,000 23,000 53,000
--------- --------- ----------
Provision for income taxes $ 165,000 $ -0- $ -0-
========= ========= ==========
</TABLE>
The Company has net operating loss (NOL) carryforwards which can be utilized to
offset future taxable income. The U.S. NOL is subject to an annual limitation on
its use of $545,000 due to a change in the Company's ownership in November 1994.
At September 30, 1997, these carryforwards totaled approximately $5.2 million
(See Note 14). The carryforwards expire in various years ending September 30 as
follows:
<TABLE>
<S> <C>
2004 $ 766,000
2005 1,427,000
2006 1,631,000
2007 55,000
2008 560,000
2009 788,000
-----------
$ 5,227,000
===========
</TABLE>
F-19
<PAGE> 29
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES (CONTINUED)
The Company also has a Canadian NOL of $215,000 which can be applied to offset
future Canadian taxable income of its Liberty subsidiary. This NOL expires in
2004.
Deferred income tax assets as of September 30, 1997 and 1996, relate to the
following. A valuation allowance has been established to reduce deferred tax
assets to amounts which management believes are more likely than not to be
realized.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Inventory $ 122,000 $ 102,000
Accrued royalties 331,000 70,000
Other accrued expenses 126,000 159,000
Receivables 102,000 191,000
Goodwill 172,000
NOL carryforwards 1,862,000 1,975,000
----------- -----------
TOTAL 2,715,000 2,497,000
Valuation allowance (2,715,000) (2,497,000)
----------- -----------
$ -0- $ -0-
=========== ===========
</TABLE>
NOTE 10. SEGMENT INFORMATION
In 1996 and 1995, essentially all of the Company's operations were within the
United States. In 1997, due to the acquisitions described in Note 11, the
Company also had operations outside the United States. Information concerning
the Company's operations by geographic area for 1997 is as follows:
<TABLE>
<CAPTION>
United States Australia Other Eliminations Total
------------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $31,756,000 $2,367,000 $3,186,000 $(1,269,000) $36,040,000
Operating (loss) profit (201,000) 175,000 (12,000) (38,000)
Interest expense (382,000)
Interest income 71,000
-----------
(LOSS) BEFORE INCOME
TAXES $ (349,000)
===========
Identifiable assets $23,346,000 $1,037,000 $ 823,000 $ (943,000) $24,263,000
Identifiable liabilities $21,549,000 $ 322,000 $ $ (296,000) $21,575,000
</TABLE>
F-20
<PAGE> 30
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Sales and transfers between geographic areas are made with reference to
prevailing market prices and at prices approximately equal to those charged to
unaffiliated distributors. Operating income is revenue less related costs and
operating expenses, including other income and expense, but excluding interest
income and expense.
Identifiable assets are those of the Company that are identified with operations
in each geographic area.
No single customer or group of related customers accounted for 10% or more of
consolidated revenues during any of the periods presented. Export revenues of
the U.S. segment were less than 10% of total revenues.
NOTE 11. ACQUISITIONS AND DISPOSITIONS
Sequoia Enterprise Systems acquisition:
On October 3, 1996, the Company entered into an Asset Purchase Agreement (the
Agreement) with Sequoia Systems, Inc. (SSI). Pursuant to the Agreement, which
closed on October 11, 1996 (the Closing Date), the Company acquired
substantially all of the assets and businesses of SSI's business division known
as Sequoia Enterprise Systems (SES). SES manufactures, services, integrates and
distributes fault tolerant Motorola 68K computer systems which operate under
SSI's version of UNIX and Intel based computer systems running SSI's Alpha
Micro's versions of the "PICK" application environment and database software
products. This acquisition was accounted for as a purchase business combination.
In exchange for the business of SES, the Company has agreed to pay a purchase
price of $11,347,000 (the Purchase Price), assume certain liabilities of SES
totaling approximately $2,700,000, and issue SSI a Stock Purchase Warrant (the
Warrant) valued at $500,000 (Note 8). The excess of the purchase price and
related acquisition costs over fair value of the net assets acquired of
$8,366,000 was recorded as goodwill.
The Purchase Price is to be paid in a combination of cash, notes payable and
750,000 shares of the Company's Common stock (the Payment Stock). All 750,000
shares of the Payment Stock were issued to SSI in November 1996. For purposes of
applying the Payment Stock towards the Purchase Price, the Payment Stock will be
valued as follows: (i) 400,000 shares (the Initial Shares) of the Payment Stock
were valued at $2.50 per share, (ii) 200,000 shares will be valued at the
average closing per share price during the ten trading days immediately
preceding the first anniversary of the closing date, ($1.87 at October 11, 1997)
and (iii) the remaining 150,000 shares (the Remaining Shares) will be valued at
the average closing per share price during the ten trading days immediately
preceding any date on which a valuation of the remaining shares is made for the
purposes of determining the payment of the Purchase Price; provided however, if
the Purchase Price is not paid in full prior to the second anniversary of the
Closing Date, the Remaining Shares will be valued at the average closing per
share price during the ten trading days immediately preceding the second
anniversary of the Closing Date. At September 30, 1997, the value of the
remaining 150,000 shares of Common stock has been estimated at $1.87 per share.
The Company charged stockholders' equity for $219,000 and increased the recorded
amount of the payable to SSI for the decrease in the value of the stock which
occurred in 1997. Any future changes in the value of the remaining 150,000
shares of Common stock through the final settlement date will also adjust
stockholder's equity
SSI has agreed not to sell, make any short sale, loan or grant any options for
the purchase of any Payment Stock or until the first anniversary of the Closing
Date, with respect to any of the shares in excess of 400,000 shares of the
Payment Stock and until the second anniversary of the Closing Date with respect
to any shares of the Payment Stock in excess of 600,000 shares.
F-21
<PAGE> 31
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (C0NTINUED)
- --------------------------------------------------------------------------------
NOTE 11. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The assets acquired by the Company did not include the accounts receivable of
SES. However, SSI was obligated to pay the Company an amount equal to 40% of the
SES accounts receivable collections in existence on the Closing Date, as
collections were made, until the Company received the total amount of
$1,560,000.
Unaudited pro forma consolidated sales, net (loss) and (loss) per share for 1997
and 1996 as though Sequoia had been acquired as of October 1, 1995 is as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <S> <C>
Sales $36,730,000 $55,463,000
Net (loss) $ (788,000) $ (158,000)
(Loss) per Common and Common equivalent sha $ (0.09) $ (0.02)
</TABLE>
The information presented above reflects adjustments for amortization of
goodwill, additional depreciation on revalued purchased assets, and an estimated
effective tax rate for these differences of 34%. The above information does not
reflect an adjustment of $1,771,000 (unaudited) incurred by SES for
restructuring charges in 1996 which management believes are nonrecurring in
nature.
General Automation, LLC:
In May 1995, the Company and SunRiver Data Systems, now called Boundless
Technologies (Boundless) formed a limited liability company, General Automation,
LLC, (GAL) with the Company owning 51% interest and Boundless owning a 49%
interest. In accordance with the terms of the Operating Agreement (the
Agreement), GAL will be dissolved upon the earlier of certain events as
described in the Agreement or twenty years. GAL was formed to allow the Company
to acquire Boundless' version of the PICK system.
Under the terms of the Agreement, GAL operates and manages both the Company's
and Boundless' PICK business. Boundless is entitled to receive payments from GAL
in an amount equal to a percentage of GAL's net revenues, as defined in the
Agreement, whether or not GAL is profitable. The percentage of net revenue which
Boundless is entitled to receive is 12% in the first year of the Agreement with
decreasing amounts annually to 7% in the fifth year. However, the percentage of
net revenues payable to Boundless is subject to certain adjustments. Subsequent
to the fifth year of the agreement, the percentage of net revenues to be paid to
Boundless is to be determined by negotiations between the parties. The Company
is entitled to retain all of the cash generated by GAL, if any, after the
payments of the net revenue percentage to Boundless. The Company accounts for
the payments due to Boundless as royalty expense and has included approximately
$2 million in costs of sales relating to this arrangement. Included in accounts
payable and accrued expenses at September 30, 1997 is approximately $490,000,
due to Boundless, in connection with this Agreement.
In May 2000, the Company has the option to purchase Boundless' interest in GAL
for Common stock in the Company, equal to 9% of each class of the then
outstanding stock in the Company. Upon issuance of the stock to Boundless, the
Company is immediately obligated to register the shares in accordance with the
Securities Act of 1933.
F-22
<PAGE> 32
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 11. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Under the terms of the Agreement, the Company has been designated as the sole
manager of GAL. However, if GAL fails to achieve certain agreed upon revenue or
profit projections, Boundless has the right to jointly manage GAL with the
Company. Further, Boundless may replace the Company as the manager of GAL upon
the occurrence of certain other events, including the failure to pay Boundless
the percentage of net revenues discussed above. The Company has not made the
payments discussed above on a timely basis. The Company has not received any
notice regarding its replacement as the manager of GAL.
During the first year of the Agreement, the Company received a management fee of
$1,031,000, for managing GAL. However, the Company will not be entitled to any
compensation or management fees subsequent to the first year.
Liberty Acquisition:
Effective October 1, 1996, the Company entered into an agreement whereby it
acquired all of the issued and outstanding shares of Liberty Integration
Software, Inc. (Liberty). Liberty offers products and services which provide
connectivity solutions between MultiValue databases and industry standard
developments such as data warehousing, OLAP engines, client server development
tools and internet applications. Liberty began operations in July 1995. The
purchase price consisted of $60,000 Canadian (approximately $40,000 U.S.
dollars) and 25,000 shares of GAI Common stock. This acquisition was accounted
for as a purchase business combination. In July 1997, the Company also acquired
all rights to certain software products which Liberty previously distributed
under a license agreement for 125,715 shares of Common stock valued at $220,000.
The pro forma effect of these acquisitions was not material.
Disposition to Sanderson Computers:
The Company entered into an agreement with Sanderson Computers, Inc., (SCI)
effective August 28, 1995, whereby SCI is responsible for the worldwide sales of
the Zebra 2000 Library Automation Software Applications and Maxial Hotel
Management Software Applications systems. Additionally, SCI has assumed the
responsibility for completing the Company's backlog of Zebra 2000 contracts,
which totaled approximately $400,000 at the date of the agreement. The Company
will receive royalty payment from the Maxial software revenues and an annual
exclusivity fee of $20,000. The Company will receive no revenues from the Zebra
2000 systems, as that product is owned by SCI's parent to whom the Company was
paying a royalty. The exclusivity granted to SCI is for a period of one year,
renewable for two consecutive one-year periods and will expire on September 30,
1998. SCI has used the Company employees to provide support to its customers who
use these systems, for which the Company has been compensated at fair value.
SGA acquisition and disposition:
Effective October 1, 1989, the Company acquired a 29.3% interest in SGA Pacific
Limited (SGA), a distributor of the Company's products in Australia, New Zealand
and Asia in exchange for the stock of the Company's wholly-owned subsidiaries in
Singapore and Hong Kong, and for cash of $38,000. The total consideration, which
is the aggregate of the Company's historical basis in the stock exchanged and
the cash, amounted to $243,000.
F-23
<PAGE> 33
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 11. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
On July 1, 1990, the Company purchased an additional 21.8% interest in SGA from
Sanderson Electronics, PLC, for $875,000. As the Company became a majority
(51.1%) stockholder, SGA's operations were consolidated with the Company from
July 1, 1990. On November 10, 1994, with retroactive effect from October 1,
1994, the Company sold its 51% share of SGA Pacific, Ltd. to Sanderson
Technology, Ltd. In consideration, Sanderson Technology Ltd. paid the Company
$1,000,000 in cash, $1,000,000 in a 24-month note, plus transferred 4,100,000
shares of the Company's Common stock back to the Company, which were retired.
This brought Sanderson's interest in the Company down to under 10%. The sale was
recorded as capital transaction due to the related party nature of the
transaction.
Disposition of Eurosystems:
Effective September 30, 1993, the Company sold its 61% share of Eurosystems to
the minority stockholders of Eurosystems (Krypton Group Ltd.) for $750,000. The
terms included a note receivable in the amount of $750,000 if paid by December
31, 1993, or $795,000, including $45,000 interest if paid before March 31, 1994.
If not repaid by March 31, 1994, the note was repayable in 33-monthly
installments of $30,000. The note was not paid by March 31, 1994 and after
receiving six-monthly installments, payments were suspended by Krypton. In 1995,
Krypton filed for bankruptcy.
In March 1996, the Company received a new $600,000 note from Future Services,
Ltd., a newly formed Company in Great Britain and owned by the former Krypton
management, to repay the $570,000 note receivable balance currently recorded in
the balance sheet. This note bears interest at 10%, payable monthly, with the
Company sharing 50% of the net profits of Future Services, Ltd. until the debt
is repaid. Subsequent to September 30, 1997, Future Services, Ltd., was
purchased by 4 Front Software Company. The Company received 24,540 shares of 4
Front Software Company's Common stock valued at $245,000. The Company amended
the note and reduced the amount due to $350,000, payable in three years.
Management expects to receive full collection of the remaining $350,000. During
1997, the Company recorded $38,000 of interest income on this note, which was
received in cash.
McDonnell Information Systems Limited:
In April 1996, the Company entered into a license agreement with McDonnell
Information Systems Limited (MDIS) of the United Kingdom. This agreement was to
give the Company rights to sell certain software owned by MDIS. A dispute arose
as to the effectiveness of the software and the agreement was terminated in
December 1997 with the Company agreeing to pay $400,000 in twelve-monthly
payments. This amount has been accrued in the Company's 1997 financial
statements.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Operating leases:
The Company leases certain facilities and equipment under noncancelable
operating leases. Rental expense for the years ended September 30, 1997, 1996
and 1995 were $1,392,000, $200,000 and $305,000, respectively.
As of September 30, 1997, the future minimum rental commitments required under
existing noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1998 $ 676,000
1999 564,000
2000 563,000
2001 100,000
----------
$1,903,000
==========
</TABLE>
F-24
<PAGE> 34
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation:
The Company is a defendant in various lawsuits and claims which have arisen in
the normal course of its business. While it is not possible to predict with
certainty the outcome of such litigation and claims, it is the opinion of
Company management, based in part on consultations with counsel, that the
liability of the Company, if any, arising from the ultimate disposition of any
or all such lawsuits and claims is not material to the consolidated financial
statements of the Company.
In 1991, the Company was named as one of three defendants in a lawsuit brought
by the owner of certain real property once leased and used by a division of the
Company. The lawsuit sought relief from alleged environmental damages which may
have occurred on the property before, during, or after the time the Company
leased the property. In August 1997, for the purpose of settling the lawsuit,
all of the parties to the lawsuit, including the Company, entered into a Consent
Decree, and the Company entered into related agreements with the three insurance
companies which had been funding the Company's defense of the lawsuit under
insurance policies held by the Company. Under the Consent Decree issued in
December 1997 and the related agreements, the Company will be released from all
liability related to the lawsuit in exchange for payments totaling $1,050,000,
funded by the Company's insurance carriers, to an escrow account, which has been
established to finance the remediation of the contamination on and around the
property. Management believes the ultimate resolution of this matter will not
result in any future liabilities to the Company and no liability has been
recorded.
NOTE 13. RESTATEMENT
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, management determined that certain system deficiencies existed with
respect to the deferred revenue accounting system resulting in a need to adjust
service revenues as previously reported. Accordingly, the accompanying
consolidated financial statements for the years ended September 30, 1997, 1996
and 1995 have been restated to properly reflect the recognition of service
revenues (the "Restatement"). Additionally, management has determined that it
should provide an additional valuation allowance of $300,000 against deferred
tax assets previously recognized as current assets in the Company's 1997
consolidated balance sheet (refer to Note 9). The Restatement also included a
cumulative negative adjustment of $1,285,000 related to years prior to 1995. The
effects of the Restatement on the consolidated financial statements for 1997,
1996 and 1995 are summarized as follows:
For the year ended September 30, 1997-in thousands:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED INCREASE DECREASE AS RESTATED
------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Total Assets $ 24,409 $ 146 $ 24,263
Total Liabilities 18,630 $2,945 21,575
Shareholder Equity 5,779 3,091 2,688
Total Revenues 36,831 791 36,040
Cost of Sales 20,786 75 20,711
Income Taxes (135) $ 300 165
Net Income (loss) 502 1,016 (514)
Earnings (loss)
per share $ 0.05 $ 0.11 $ (0.06)
</TABLE>
F-25
<PAGE> 35
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
As of and for the year ended September 30, 1996-in thousands:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED INCREASE DECREASE AS RESTATED
------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Total assets $10,271 $ 980 $ 11,251
Total liabilities 7,493 3,055 10,548
Stockholders' equity 2,778 $ 2,075 703
Total revenues 25,460 1,792 23,668
Cost of sales 17,433 60 17,373
Selling and
administrative
expenses 4,366 $ 26 4,392
Income taxes 615 615 0
Net income 1,418 1,143 275
Earnings per share $ 0.18 $ 0.15 $ 0.03
</TABLE>
As of and for the year ended September 30, 1995-in thousands:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED INCREASE DECREASE AS RESTATED
------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Total revenues $14,269 $208 $ 14,477
Selling and
administrative 3,704 $ 145 3,559
Net (loss) (2,065) 353 (1,712)
(Loss) per share $ (0.26) 0.05 $ (0.21)
</TABLE>
NOTE 14. SUBSEQUENT EVENTS
1. On April 7, 1998 the Company's primary bank, Comerica Bank, notified the
Company that as a result of the Company being in violation of certain
covenants of the original loan agreement in the amount of $5 million dated
December 18, 1997, that the bank was making demand for payment in full of
the outstanding balance at that time. Subsequently, the credit agreement
was amended from a $5 million to a $2.2 million credit line. The
outstanding balance at August 19, 1998 was $2.2 million (unaudited).
Another commercial lender has completed their field audit in anticipation
of paying off Comerica Bank, and is awaiting evaluation of the restated
financial statements and other related SEC filings in order to
F-26
<PAGE> 36
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
complete this transaction although no assurance can be made in the regard.
If the Company is unable to restructure or payoff Comerica Bank, its
ability to conduct its business on a day-to-day basis would be materially
adversely affected.
2. On July 16, 1998 the Company was notified by the American Stock Exchange
(the Exchange) that it had fallen below certain of the Exchange's listing
guidelines and the Company was being reviewed for continued listing
eligibility. On July 27, 1998 the Company's management met with the
Exchange and outlined its arguments for its continued listing.
Subsequently, the Exchange informed the Company that it would continue the
Company's listing on the Exchange until the required SEC reports were filed
and the Exchange had an opportunity to evaluate whether or not the Company
met its numerical guidelines. Currently, the Company does not meet the
Exchange's listing requirements. If the American Stock Exchange does
de-list the Company, it could have a material adverse effect on the
marketability and market value of the Company's publicly traded Common
stock.
3. For the nine months ended June 30, 1998, the Company incurred net losses
from operations of approximately $4.4 million (unaudited), effectively
eliminating shareholders' equity.
4. In February and April 1998, the Company received from the Internal Revenue
Service (IRS) notices of proposed adjustments. Among other adjustments, the
IRS is proposing to reduce the annual limitation on the Company's use of
the net operating loss carryforwards which existed at the end of fiscal
year 1994 to $245,000 per year. This limitation would effectively reduce
the Company's net operating loss carryforward at September 30, 1997 to
approximately $3 million. In addition, the IRS is proposing adjustments
which could result in the payment of additional income taxes of up to
$250,000 plus interest. Management plans to aggressively protest these
proposed adjustments and believes that it will ultimately be resolved with
no material impact on the Company's financial statements; however, future
developments in this matter could change management's assessment of the
situation in the near term.
5. Since late 1991 the Company has been a party to litigation pending before
the Circuit Court of Cook County, Ill., County Department, Chancery
Division, entitled 520 S. Michigan Ave. Associates, Ltd. d/b/a/ Congress
Hotel v General Automation and Maxial Systems, Inc. The Company filed a
counter claim, and on July 2, 1996, judgment was entered in the principal
amount of $81,867 in favor of the Company. The principal claims asserted
against the Company in the original complaint, however, remain outstanding.
The Congress Hotel recently emerged from chapter 11 bankruptcy and have
taken an active interest in pursuing their claim against the Company.
Attorneys for the Company are unable to determine whether or not the
Company has legitimate defenses to all of the claims asserted by the
plaintiff and what the outcome of the case might be. In the event of an
unfavorable outcome to the Company, the range of potential loss could be
between $200 and $400 thousand. The Company intends to vigorously defend
its position in this matter.
NOTE 15. MANAGEMENT'S PLANS
If the Company is unable to restructure its bank debt, as discussed in Note 14,
and other obligations, as discussed below, or if the Company is delisted from
the American Stock Exchange, the Company's ability to conduct its business on a
day-to-day basis would be adversely affected. Management has developed a
business plan (the "Plan") in order to strengthen the financial condition of the
Company and attempt to meet the minimum guidelines for continued listing with
the American Stock Exchange. In addition to the Company's current negotiations
to restructure its bank debt, as discussed in Note 14, the Plan, among other
things, includes the following:
1. On May 4, 1998 the Company completed the refinancing of its corporate
headquarters facility in the amount of $900,000. Net proceeds from the loan
to the Company was $860,000 to be used for working capital. In connection
with the transaction, the Company issued a promissory note for $900,000
secured by a second trust deed on the corporate headquarters building,
bearing interest at 12% per annum, payable interest-only monthly, with
total principal and outstanding-interest due in full on April 30, 2000. The
Company also issued five-year warrants to the lenders covering an aggregate
of 200,000 shares of the Company's common stock, with an exercise price of
$1.19 per share. The Company has guaranteed to the lender a 20% internal
rate of return on the loan after considering the value of the warrants.
F-27
<PAGE> 37
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. Short-term debt to certain creditors, totaling over $1.5 million, has been
restructured in the form of notes payable, which are due in monthly
installments over a two year period with interest at 12% per annum.
3. The Company has consolidated certain U.S. operations, resulting in an
estimated reduction of general administrative expenses of $900,000 on an
annual basis (unaudited).
4. Management is re-negotiating the terms of certain obligations related to
acquisitions completed in 1996 and 1995 (total balance of approximately
$8.4 million (unaudited) as of August 19, 1998) with the ultimate goal of
strengthening shareholder's equity, improving the working capital position
and eliminating a substantial amount of outstanding debt. The goal will
also be to meet the minimum numerical guidelines for continued listing on
the American Stock Exchange. Until these negotiations are complete,
management is unable to determine what impact these acquisition related
obligations will have on the financial position or results of operations of
the Company. Additionally, there can be no assurances that these
negotiations will be successful, or that even if successful, the Company
will maintain its listing on the American Stock Exchange.
F-28
<PAGE> 38
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-43158, No. 33-79038, No. 333-09483 and No.
333-37467) of General Automation, Inc., our report dated December 9, 1996,
except as to Notes 9, 13, 14 and 15, which are as of August 19, 1998, appearing
on page F-2 of this Form 10-K/A.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
August 19, 1998
<PAGE> 39
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated December 19, 1997,
except for Notes 9, 10, 13, 14 and 15 and the pro forma disclosures included in
Notes 8 and 11 as to which the date is August 19, 1998, included in this Form
10-K/A in the previously filed Registration Statements of General Automation,
Inc. and Subsidiaries on Form S-8 (No. 33-43158, 33-79038 and 333-09483).
McGladrey & Pullen, LLP
Anaheim, California
August 19, 1998
