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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17731 Mitchell North, Irvine, California 92614
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 250-4800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.10 par value American Stock Exchange
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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 $13,685,800 as of January 6, 1998.
The number of shares of the registrant's Common Stock, $.10 par value,
outstanding as of January 6, 1998 was 9,252,951.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on February 6, 1998 are incorporated by reference into
Part III hereof, to the extent indicated herein
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PART I
ITEM 1. BUSINESS
The discussion in this document contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document.
GENERAL
General Automation, Inc. ("GA" or the "Company"), incorporated in
California in 1967 and reincorporated in Delaware in 1986, integrates systems,
software and services for application solutions. GA has positioned itself as a
strong service and support company offering open systems and complementary
software products to a worldwide network of value-added resellers. GA's product
lines include a broad range of hardware platforms including Intel and Motorola
PowerPC based systems, coupled with efficient and cost effective application
environments, providing a full range of systems, complementary operating
environments and high quality customer services. The Company's headquarters,
including manufacturing and integration, corporate and administrative
operations, are located in Irvine, California. GA also has other offices in
various locations throughout the United States and has established European and
Australian offices through its wholly owned subsidiaries in the United Kingdom
and Australia.
The Company's products are sold in the United States through over 200
value-added resellers. In addition, it sells its products in Europe, Canada,
Mexico, Central and South America, Guam, Taiwan, Australia, New Zealand,
Singapore, Hong Kong, Africa and the People's Republic of China through
distributors and value-added resellers. The Company provides service and support
throughout North America to over 3,000 customers.
ACQUISITIONS AND DIVESTITURES
Sequoia Enterprise Systems
On October 11, 1996 (the "Closing Date"), the Company purchased from
Sequoia Systems, Inc. ("SSI") substantially all of the assets and business of
SSI's Sequoia Enterprise Systems business division ("SES"). SES manufactures,
services, integrates and distributes fault-tolerant Motorola 68K computer
systems operating under SSI's version of UNIX and Intel based computer systems
running SSI's and Alpha Micro's versions of the Pick application environment and
database software products, and engages in various related distribution
arrangements. The Company's purchase of SES was made pursuant to an Asset
Purchase Agreement dated as of October 3, 1996 between the Company and SSI (the
"Purchase Agreement").
In exchange for SES, the Company has (i) agreed to pay a purchase price
of $11,347,000 (the "Purchase Price"), (ii) assumed certain liabilities of SSI
totaling approximately $2,700,000 and (iii) issued to SSI a Stock Purchase
Warrant entitling SSI to purchase 250,000 shares of the Company's common stock
at an exercise price of $2.50 per share (the "Warrant"), which will be
exercisable during the three year period commencing on the first anniversary of
the Closing Date.
The Purchase Price will be paid by the Company in a combination of cash,
notes payable and shares of the Company's common stock. The Purchase Agreement
provided for payment by the Company of the cash portion of the Purchase Price in
monthly installments, with the amount of each such installment being based
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on a percentage of the gross revenues received by the Company during the month
to which the installment relates from the operation of SES and the Company's
overall service and support operations. In October, 1997, the Company and SSI
agreed to restructure the method in which the deferred Purchase Price must be
paid. Commencing with October, 1997 the Company agreed to make a $300,000
payment in October, 1997 and another $400,000 payment in December, 1997. In
addition, the Company will make monthly payments of $75,000 plus interest for
all amounts due through September 30, 1997, which totals $1,429,000, plus a
varying percentage of the Company's revenue (primarily 10%). Based on current
projections, the Company expects to have the full payment of these obligations
in two years.
The purpose for the October 1997 amendment of the Purchase Agreement was
to enable the Company to preserve more of its cash by lengthening the period for
completing the payment of the Purchase Price. The total Purchase Price is not
affected by the amendment of the Purchase Agreement. The amendment of the
Purchase Agreement provides that the Company will be required to make the
monthly installments until the date at which the total value of the Company's
stock issued to SSI (to be valued as set forth in the Purchase Agreement and
summarized in the following paragraph) combined with the aggregate monthly
installments equal the Purchase Price.
On November 5, 1996, the Company issued 750,000 shares of its common
stock to SSI to be applied toward the Purchase Price (the "Payment Stock"). For
purposes of applying the same toward the Purchase Price, the Payment Stock will
be valued as follows: (i) 400,000 shares will be valued at $2.50 per share; (ii)
200,000 shares will be valued at the average of the closing per share sales
prices of the Company's common stock on the American Stock Exchange 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 will be
valued at the average of the closing per share sales prices of the Company's
common stock on the American Stock Exchange during the ten trading days
immediately preceding any date on which a valuation of such shares is made for
purposes of determining the payment of the Purchase Price; provided, however,
that if the Purchase Price has not been paid in full prior to the second
anniversary of the Closing Date, these shares will be valued at the average of
the closing per share sales prices of a share of the Company's common stock on
the American Stock Exchange 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 the stockholders' equity for $219,000 and increased
the recorded amount of the payable to Sequoia Systems, Inc. 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
will also adjust stockholders' equity.
The acquisition was accounted for using the purchase method.
Accordingly, the total consideration was allocated to the assets acquired and
liabilities assumed based on their fair values. The total cost in excess of net
assets acquired of approximately $8,366,000 is being amortized over five years.
During 1997, $1,385,000 was amortized.
SSI has agreed not to sell, make any short sale of, loan, or grant any
option for the purchase of, any of the Payment Stock without the prior written
consent of the Company (i) until the first anniversary of the Closing Date, with
respect to any shares of the Payment Stock in excess of 400,000 shares; and (ii)
until the second anniversary of the Closing Date, with respect to any shares of
the Payment of Stock in excess of 600,000 shares. The Company has granted to SSI
piggyback registration rights with respect to the Payment Stock and the shares
issuable upon exercise of the Warrant.
Under the Purchase Agreement, until the earlier of (i) payment of at
least 75% of the Purchase Price; or (ii) the date on which SSI no longer is the
holder of at least 50% of the shares of the Payment Stock (or if the Warrant has
been exercised, the aggregate of the Payment Stock and the shares issued upon
exercise of the
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Warrant), SSI will be entitled to designate an individual for election to the
Board of Directors of the Company ("SSI's Designee"); provided, however, that
such individual is reasonably acceptable to the Company at the time of his
initial designation. Once appointed to the Company's Board, SSI's Designee will
serve until the first annual meeting of the stockholders of the Company
following the Closing Date and until his successor shall be duly elected and
qualified or until his earlier death, disability, removal or resignation. For
the current year and the 1998 year, SSI has declined to designate a candidate
Liberty
Effective October 1, 1996, GA acquired all of the outstanding shares of
Liberty Integration Software, Inc. ("Liberty"). Liberty was purchased through
the issuance of 25,000 shares of the Company's common stock, and three equal
payments of $20,000 (CDN), or approximately $40,000 in U.S. dollars. Liberty is
operated as a wholly owned subsidiary. Liberty offers a full suite of enterprise
connectivity products and services which are focused on providing connectivity
solutions between MultiValue databases and industry standard developments such
as data warehousing, OLAP engines, client/server development tools and internet
WWW applications. Liberty began operations in July 1995. Effective July 1, 1997,
GA acquired from Liberty Project Limited Partnership ("LPLP") all rights to
certain software products which Liberty had theretofore distributed under a
license granted by LPLP. In consideration for these products, the Company issued
a total of 125,715 shares of the Company's common stock.
General Automation LLC
Effective May 22, 1995, GA and Boundless Technologies (formerly known as
"SunRiver Data Systems") ("Boundless") formed a limited liability company,
General Automation LLC ("GAL"), with the Company owning 51% and Boundless 49%.
GAL was formed to allow GA to acquire the Pick based business owned by
Boundless. This business had been acquired by Boundless from AT&T Global
Information Systems in December 1994 along with a terminal business which
complemented Boundless's existing business and which Boundless retained.
Under the terms of the Operating Agreement which governs the conduct of
GAL's operations (the "Operating Agreement"), GAL operates and manages GA's Pick
business and Boundlesss's Pick business. Under the Operating Agreement,
Boundless is entitled to receive cash distributions from GAL in an amount equal
to a percentage of GAL's net revenues, which is payable whether or not GAL is
profitable or generating positive cash flow. The percentage of net revenues to
which Boundless is entitled was 12% for the first year of the Operating
Agreement (subject to a minimum of $2,900,000 in the first year only) and will
decline annually thereafter in steps until it reaches 7% in the fifth year.
Subsequent to the fifth year of the Operating Agreement, the percentage of net
revenues to be paid to Boundless is to be determined by negotiations between GA
and Boundless. GA is entitled to retain all cash generated by GAL, if any, after
the payment to Boundless of the net revenue percentage described above.
Under the Operating Agreement, the business and affairs of GAL are managed
exclusively by GA. However, in the event that GAL fails to achieve agreed upon
revenue or profit projections, Boundless has the right to thereafter jointly
manage GAL with GA. Further, upon the occurrence of certain other events,
including the failure of GAL to pay to Boundless the percentage of net revenues
to which Boundless is entitled, Boundless has the right to thereafter replace GA
as the sole manager of GAL. The Company has not made the payments discussed
above on a timely basis. The Company has not received any notice regarding its
replacement as GAL manager.
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During the first year of the Operating Agreement, GA received a management
fee of $1,031,000 in connection with its duties as manager of GAL. However,
subsequent to the first year of the Operating Agreement, GA is not entitled to
any compensation for acting as manager of GAL.
In May 2000, GA will have the right to purchase Boundless's entire interest
in GAL for a number of shares of GAL common stock equal to 9% of each class of
GA's then outstanding capital stock. If GA exercises this right of purchase,
it is obligated, immediately following the issuance of stock to Boundless, to
register the shares so issued under the Securities Act of 1933.
EUROSYSTEMS
In October 1992, the Company signed an agreement with Krypton Group Ltd. to
form a holding company, Eurosystems GA Ltd. ("Eurosystems"), a UK corporation.
Under the terms of the agreement, the Company received 61% of the common shares
of Eurosystems in exchange for its shares in General Automation France SA,
General Automation SA, (Belgium), and General Automation Italia SpA (Italy).
Krypton Group Ltd., ("Krypton"), a UK corporation, received 39% of the common
shares in exchange for its 100% share holding in Eurosystems Belgium SA and
Eurosystems SA (France), its 55% share holding in Eurosystems GmbH (Germany) and
its 85% share holding in Eurosystems Maintenance SA (France). On October 29,
1993, with retroactive effect to September 30, 1993, the Company sold its 61%
share holding in Eurosystems to Krypton for cash and a $990,000 note. In 1994,
payments were suspended by Krypton, and a $240,000 reserve was established by
the Company in fiscal year 1994. In 1995, Krypton filed for bankruptcy. On March
14, 1996, the Company received a new $600,000 note from Future Services Ltd., a
newly-formed company in Great Britain owned by the former Krypton management.
In October, 1997 the Company agreed with a plan by Future Services Ltd. to
sell its companies in Belgium, France and Italy to a U. S. A. NASDQ firm named 4
Front Software, Inc. For the $600,000 note held by GA, GA received 24,540 shares
of 4 Front common stock valued at $245,000 and a note for $350,000 from Future
Services Ltd. payable in three years.
SERVICE AND SUPPORT
GA maintains a high quality service organization dedicated to meeting the
complex support requirements of several thousand end users. The Company is a
leader in the support industry and has been delivering highly skilled technical
services for over 28 years. GA has earned a reputation for quality and
responsive service through our staff of service professionals. The service
business generates over 70% of GA's revenue and is a key reason that customers
with information-critical applications choose to buy from GA. With the
acquisition of the service operations of SES, GA has integrated the fault
tolerant and SES Intel based systems into GA's support organization.
GA offers four basic lines of service:
1. Technical field service for the equipment sold by GA and its
distributors, and under the maintenance agreements assumed or
acquired through the acquisition of SES and GA's participation in GAL
with Boundless.
2. Software maintenance services of GA's operating environments.
Additional software support has been sold for complementary operating
environments such as Pick, V-Mark Software, Unidata, Unix, AIX,
Windows 95 and Windows NT.
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3. Professional services, introduced in 1995, that include performance
tuning, system upgrade services, technical product training, system
design and site preparation, network design and configuration
support, and disaster recovery programs. Contract programming and
consulting services are also offered with expertise in Pick, C, C++,
Visual Basic, Microsoft Access, COBOL, FORTRAN, and Pro-IV. Disaster
recovery has proven to be a strong area of interest, furnishing GA's
end user customers with assistance in developing disaster recovery
plans as well as the assurance that systems will be made available in
the case of an emergency.
4. Ready response service provides a central call handling and technical
call screening facility and is particularly attractive for those
dealers who are of such size that they cannot afford to put the
support staff in place to handle their after-market support
effectively and at the same time continue to develop application
products and expand their market. These services are not only
profitable for the Company, but also leverage its technical staff
while making the dealer more successful. These services also afford
GA the opportunity to provide help desk support to segments of the
industry outside the traditional MultiValue marketplace.
GA is an authorized service provider for Acer, thereby allowing GA to
provide hardware support for any Pick applications running on Acer products. GA
may also provide depot services, at any of GA's nationwide locations, to
resellers and end users of Acer products.
In order to properly service the Company's maintenance contracts, the
Company maintains in inventory quantities of parts and subassemblies related to
the 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.
SYSTEM AND SOFTWARE PRODUCTS
GA continues its penetration into the open systems market with the
PowerPC Superscaler RISC multiprocessor (from Groupe Bull) and Intel Pentium
multiprocessor systems (from NCR, previously AT&T Global Information Systems).
The distribution agreements for these systems commenced in 1995. Both Groupe
Bull's and NCR's products and services complement those offered by GA and
feature (a) a broad range of system solutions starting at a low-end single
processor cost-effective entry level system through an eight-way multiprocessor
enterprise server; (b) a commitment to offer products at a cost-effective
discount, allowing GA to move product successfully through the channel while
allowing GA to achieve its profitability goals; (c) a complementary service and
support network that could be leveraged worldwide to complement the effective
and growing services offered by GA; and (d) a strong investment in distributed
processing, local area networks, and wide area networks to ensure high
connectivity solutions.
PowerPC Systems
In 1997, GA added new software products to expand the line for PowerPC
symmetric multiprocessor systems manufactured by Groupe Bull and Motorola.
Called the PowerAdvantage(TM) series, these computers offer excellent
price/performance with a state-of-the-art RISC CPU. The PowerAdvantage product
family coupled with GA's mv.BASE, mv.ENTERPRISE software products offer a price
competitive solution, offer a broad market from entry level to high end level
systems supporting over 1000 users.
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Intel Based Systems
Through its participation in GAL with Boundless, in May 1995 GA began
delivery of a line of single and multiprocessor Intel-based servers. In
September 1995, a distribution agreement was signed under which the Company
purchases systems directly from NCR.
NCR's server family offers a broad range of Microchannel and PCI/EISA
computers. Numerous upgradeable components make expanding these systems fast and
simple. NCR is a leader in providing exceptional price/performance UNIX and NT
systems.
GA introduced the following NCR PCI/EISA entry-level servers in 1996:
(a) the S10, a single processor system featuring a Pentium processor (90 Mhz,
133 Mhz, or 166 Mhz), ECC memory, and a PCI/EISA I/O bus, and (b) the S40, a
high performance four-way symmetric multiprocessor server featuring EISA,
dual-PCI I/O buses and SCSI II support.
The WorldMark server line demonstrates NCR's commitment to enterprise
computing. GA introduced the WorldMark 4100 and 4500 systems in fiscal 1996. The
4100 is a one to eight processor MCA system and the 4500 is a two to sixteen
processor system. Both systems offer Pentium Pro support and many expandability
and high availability features.
DISCOUNTINUATION OF PROPRIETARY SYSTEMS
During the year, the Company discontinued manufacturing its A200 and
A500 product lines. The revenue and margin impact to the Company were not
significant as the Company replaced these systems with systems purchased by the
Company for resale by it.
SOFTWARE
The value-added channel served by GA is primarily based on resellers and
dealers whose information-critical applications are written to be compliant
with a multi-dimensional database environment standard. This standard is
supported by a collection of system software providers including Unidata, V-Mark
Software, Pick Data Systems, and GA. Although implementations are similar, GA
has differentiated its product offering through enhanced system administration,
network integration, database interoperability, and performance.
GA's multi-dimensional database environments can be run native on a
system architecture or in concert with an advanced operating system such as
UNIX, AIX and Windows NT. GA offers native and UNIX/AIX resident versions for
the Intel and PowerPC microprocessors.
The Intel-based native solution is marketed under the name Mentor PRO
and is sold as a software only solution designed to run on a wide selection of
generic PC type platforms. The Intel/Unix based solution is sold under the name
Mentor Operating Environment (MOE) and is delivered on the AT&T system
platforms. The PowerPC/AIX based solution is sold under the name Power95(TM) and
is delivered on the PowerAdvantage system series. Power95 is a derivative of
R91(R), GA's Motorola 680X0 native multi-dimensional database. Power95 was
jointly developed by GA and Groupe Bull. R91 was developed to run a native
Motorola 680X0 architecture and features significant enhancements in terms of
ease of use, system administration, distributed processing, and PC network
integration. In March 1996, GA started distributing preview copies of mv.BASE, a
Windows NT and Windows 95 implementation of its multi-dimensional database.
Shipments of this software package began in the first quarter of fiscal 1997.
mv.BASE offers an
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easy migration path for applications designed for Pick-compatible databases to
move to a client/server environment. Included with the product are tools which
provide interoperability with Windows applications and files, as well as a
programming interface for application-specific client software. Optional ODBC
support allows ODBC-compliant applications to access mv.BASE data. mv.BASE
supports serial terminal users as well as PC clients and continues to provide
the high performance, easy to use database environment for which GA is known.
For 1998, the Company expects mv.BASE sales to be significantly higher than the
1997 first year level of $400,000.
In August 1997, the Company introduced its second major new product of
the year, mv.Enterprise, a product designed to enable the traditional high-end
SES end-user to migrate to an open systems environment.
The Pick operating system, from which GA's software products are
derived, was designed as a database management operating system; it supports
hierarchical, flat and relational database files. The Company believes that
among the most distinctive characteristics of its operating environment products
are their relative ease of programming, an English-like information management
and retrieval language, and the speed they offer in the handling of large and
complex databases. They include an advanced, database-oriented version of the
popular BASIC programming language, with automatic compilation and line editing.
CUSTOMERS AND MARKETING
GA delivers its products and services through a strong international
value-added reseller channel with over 200 active dealers. GA has increased its
marketing activity by the creation of an end user newsletter (Priority One) and
a series of direct mail pieces focused on enhancing the relationship between GA
and the end user. Through GA's participation in GAL with Boundless, GA's
distribution channel has doubled in size and offers cross-selling opportunities.
GA is selling into an approximately $750 million segment of a larger $9
billion market. GA's value-added resellers focus on key vertical markets such as
healthcare, finance, manufacturing, distribution, government, travel, and
insurance. Approximately 18% of GA's product revenue comes from 30 major
resellers and distributors located outside of North America. To expand on that
business, in 1995 the Company formed a wholly-owned subsidiary, GA Mentor Ltd.
headquartered in the United Kingdom, and established a sales office to better
serve GA's customers in the United Kingdom, France, Belgium, Italy, and Germany.
GA also has strong associations in Asia and the Pacific Basin with resellers and
distributors in Australia, New Zealand, Singapore, Hong Kong, and Malaysia which
GA services out of its Irvine, California office. Additionally, the SES
acquisition included companies in Australia, Canada and the United Kingdom;
these operations provide products, and services.
GA's focus for growth includes the following elements: (a) working
closely with GA's value-added resellers and dealers to make them more successful
and thus increase sales through GA, (b) offering complementary services that
enhance the resellers' and dealers' business and increase revenues for them as
well as GA, (c) expanding the value-added channel through an investment in
marketing and direct sales techniques that leverage GA's products and service
strengths, (d) strengthening GA's position in international markets and (e)
focusing on GA's end users to provide more services, add-on products, and growth
paths to new systems.
In 1997, the Company continued to expand its marketing and sales
organizations. GA's marketing organization added the product-line manager
concept to foster the rapid acceptance of the two new products discussed above.
Late in the year, the Company appointed a new Executive Vice President of Sales
&
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Marketing. This addition, coupled with the staff improvements earlier in the
year, is expected to strengthen the Company's sales and marketing capabilities.
FOREIGN OPERATIONS AND EXPORT SALES
The Company's export sales were 12% of total revenue in fiscal 1997,
compared to approximately 5% of total revenues in fiscal 1996, and 8% in fiscal
1995. These revenues were generated primarily through operations in Australia
and United Kingdom. The increase in foreign sales was primarily due to the
acquisition of SES and Liberty.
PURCHASED COMPONENTS AND SYSTEMS
The Company purchases computer systems and components from various
manufacturers including NCR in the United States and Groupe Bull in France.
Delays are possible in that the GA orders from its dealers and value-added
resellers may not match production queues at the factories. The delays are
expected to be minimal and not material to the Company's operations.
COMPETITION
GA markets software, systems and service and therefore faces three types
of competitors. The leading software competitors are Pick Systems, V-Mark
Software, and Unidata. These three US-based organizations do not sell system
solutions and focus entirely on software and software support. Pick Systems, a
privately held corporation headquartered in Irvine, California, is GA's primary
competitor on GA's native Intel-based operating environment. V-Mark Software,
headquartered in Westboro, Massachusetts, and Unidata, located in Denver,
Colorado, offer UNIX resident database operating
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environments. The number of firms serving the Pick marketplace continue to
consolidate, with the GA acquisitions earlier in the year and the recently
announced merger of V-Mark Software and Unidata. GA competes through its
differentiated software products with enhanced system administrators, network
integration, database interoperability and performance.
GA's primary system competitors are International Business Machines,
Data General, Digital Equipment Corporation, and Hewlett Packard. GA's key
differentiation is servicing an established dealer base which prefers GA's
software and service to that which is available on these competing platforms.
However, these competitors have substantially greater resources than GA.
GA's competition with respect to the servicing of GA delivered systems
comes primarily from a handful of third party service providers. These companies
tend to compete on price, offering inferior technical support. With the PowerPC
and Intel-based solutions, GA is competing against system providers such as
Wang, AT&T, and IBM. From a software support vantage point, support is primarily
limited to GA developed operating environments. GA competes with GA's
distributors, such as Monolith Corporation, for dealer direct telephone support,
but is primarily the dominant support provider for GA developed software
solutions.
PRODUCT DEVELOPMENT
Because of rapid technological changes, the market in which the Company
competes requires continuous expenditures to develop and improve its products.
During fiscal 1997, the Company spent approximately $2,600,000 for product
research and development, a significant increase over the $1,200,000 spent in
1996 and the $600,000 expended in 1995. The increase in research and development
costs during the year ended September 30, 1997 is primarily due to GA's
development and introduction of it's previously discussed new products during
the year. Certain development costs relating to computer software are
capitalized in accordance with Statement No. 86 of the Financial Accounting
Standards Board, while all other costs associated with product development are
charged to operations as incurred. During 1997, the Company capitalized
$1,100,000 in software development costs compared to under $200,000 in 1996 and
1995. This increase was caused by costs associated with the two new major
products introduced in 1997 which were developed jointly by the Company's
engineering staff in Irvine and the former SES staff.
PATENTS AND TRADEMARKS
The Company holds trademark registrations protecting certain of its
trademarks. The Company's major product line utilizes Pick software as its
operating system. The Company is authorized, on a non-exclusive basis, to use
and sublicense the use of the Pick software indefinitely, in accordance with the
terms of license agreements. The Company does not rely upon and does not believe
that its success is dependent upon patent protection; rather, the Company
believes that its success is dependent upon the knowledge and experience of its
management and technical personnel and its ability to market its existing
products and to develop new products. Invalidation or cancellation of the Pick
licenses, however, could adversely impact the Company's business. The Company
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 not to adversely impact operations of the Company.
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SYSTEM INTEGRATION
The Company provides system integration, acquiring components,
subassemblies and systems. Basic systems are received from its platform
suppliers (Groupe Bull and AT&T) and are configured to the customers'
requirements. Software is loaded and the finished systems are thoroughly tested
prior to shipment. The Company currently performs these functions at its Irvine,
California headquarters, and Marlborough, MA, utilizing highly-skilled system
engineers and technicians to insure product performance and quality.
BACKLOG
Orders from dealers and other customers for GA's products generally
specify delivery dates of 30 days or less, and the Company rarely receives an
order that has scheduled delivery dates beyond three months. Because of these
order/delivery patterns, the backlog at the end of a period may appear to be low
and is not a significant indicator of future revenues.
The compressed order delivery cycle mentioned above can result in
period-to-period fluctuations in the Company's revenues since it is dependent
upon short term orders which can be deferred or delayed by the dealers and
thereby dramatically influence current period revenues.
At September 30, 1997 the Company had a manufacturing backlog of
$275,000. At September 30, 1996 the backlog was approximately $500,000.
EMPLOYEES
As of September 30, 1997, the Company had approximately 163 employees.
The Company has never had a work stoppage and none of the Company's U.S.
employees is represented by a labor union.
GOVERNMENT REGULATIONS
The Company is subject to certain federal, state and local provisions
relating to protection of the environment. The Company does not operate a type
of business whose activities are likely to require any special measures to
ensure compliance with those provisions. Accordingly, the Company does not
believe that any material capital expenditures will be required for compliance
with such provisions or that such provisions will have any material effect upon
its earnings or competitive position.
PROPERTIES
In February 1995, the Company purchased a 20,000 square feet facility in
Irvine, California. This facility is used as the Company's headquarters and
houses its principal operations.
The Company's engineering and support personnel are located in leased
facilities in Hauppauge, New York and Marlborough, MA. The Company also leases
space in ten states, primarily for sales and service offices. The acquisition of
SES in October 1996 brings with it major leases in Marlborough, Massachusetts
and Irvine, California. These leases have been either sublet or renewed at
substantially less space footage and expense. The Company's subsidiaries in
Australia, Canada and United Kingdom have operations in leased facilities.
11
<PAGE> 12
LEGAL PROCEEDINGS
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 "Property"). The lawsuit sought relief from alleged
environmental contamination 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 issued in December 1997,
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 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.
In the ordinary course of business, the Company is generally subject to
claims, complaints and legal actions. The litigation process is inherently
uncertain and it is possible that the resolution of such matters might have a
material adverse effect upon the financial position of the Company. However, in
the opinion of management, matters currently threatened or pending against the
Company are not expected to have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The table below provides certain information regarding the selling price of the
Company's common stock for each quarter during the two fiscal years ended
September 30, 1997 and September 30, 1996. The Company's common stock is listed
on the American Stock Exchange and is quoted under the symbol GA. The following
table sets forth the range of high and low prices for the common stock of the
Company for the fiscal quarter indicated, as reported by the American Stock
Exchange.
<TABLE>
<CAPTION>
Sale Prices
--------------------
High Low
-------- --------
<S> <C> <C>
Fiscal Year Ended September 30, 1997
Fourth Quarter $2 9/16 $1 7/16
Third Quarter $1 15/16 $1 9/16
Second Quarter $2 5/8 $1 11/16
First Quarter $3 1/8 $1 9/16
Fiscal Year Ended September 30, 1996
Fourth Quarter $3 1/16 $1 15/16
Third Quarter $3 1/16 $2 11/16
Second Quarter $2 1/2 $1 1/16
First Quarter $ 15/16 $ 9/16
</TABLE>
The Company has never paid a dividend on its common stock. The Board of
Directors reviews the financial condition of the Company periodically and
evaluates whether to declare dividends. Given the Company's present financial
condition the Company does not expect to pay any dividends in the foreseeable
future. The Company's current line of credit requires the Company to receive
bank approval prior to paying any dividends.
The approximate number of holders of record of common stock of the
Company as of January 9, 199 was 899.
13
<PAGE> 14
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, 1995, 1994 and 1993 which has been derived from audited financial
statements. 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.
<TABLE>
<CAPTION>
Year Ended
September 30(1)
---------------
1997(5) 1996 1995(4) 1994(3) 1993(2)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Data:
Sales, net $ 36,831 $ 25,460 $ 14,269 $ 34,614 $ 42,878
-------- -------- -------- -------- --------
Income (loss) from
operations 678 2,247 (1,666) 1,300 (351)
-------- -------- -------- -------- --------
Net income (loss)
before extraordinary
items 502 1,418 (2,065) 427 (1,477)
Extraordinary items 0 0 0 0 900
-------- -------- -------- -------- --------
Net income (loss) $ 502 $ 1,418 $ (2,065) $ 427 $ (577)
======== ======== ======== ======== ========
Earnings per share:
Income (loss) before
extraordinary items $ .05 $ .18 $ (.26) $ .04 $ (.13)
Extraordinary items 0 0 0 0 .08
-------- -------- -------- -------- --------
Net income (loss) $ .05 $ .18 $ (.26) $ .04 $ (.05)
======== ======== ======== ======== ========
Working capital
(Deficiency)
(3,032) 1,210 (638) 2,725 1,457
====== ===== ==== ===== =====
Total Assets 24,409 10,271 10,484 18,041 22,456
====== ====== ====== ====== ======
Total Debt 10,648 1,835 2,424 4,247 5,397
====== ===== ===== ===== =====
Shareholders' Equity 5,779 2,778 771 3,246 2,264
===== ===== === ===== =====
</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's Pick based business,
with the Company owning 51% and Boundless owning 49% o f 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
for SES from the date of the acquisition. (See Note 11 of the Company's
Financial Statements)
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On October 11, 1996, the Company purchased from Sequoia Systems, Inc.
substantially all of the assets and business of Sequoia Enterprise Systems
business division (SES). A comparison of the 1996 and 1997 statement of
operations of SES combined with the Company as if the acquisition had taken
place as of October 1, 1995 is as follows:
<TABLE>
<CAPTION>
Pro-Forma
(In Thousands)
Year Ended September 30
-----------------------
1997 1996
---- ----
<S> <C> <C>
Revenues 37,521 57,255
====== ======
Gross Margin 16,651 20,606
====== ======
Operating Expenses 15,748 18,913
====== ======
Operating income 381 1,693
====== ======
</TABLE>
A comparison of the Company's 1997 financial results follows:
REVENUES
Net Revenues
(In Thousands)
Year Ended September 30
-----------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Product $10,694 $ 9,715 $ 7,020
------- ------- -------
Service and Support $26,137 $15,745 $ 7,249
------- ------- -------
Total Revenues $36,831 $25,460 $14,269
======= ======= =======
</TABLE>
The three-year table above shows a continuing increase in revenues for
both products and service. These increases are a direct result of the Company's
participation in GAL with Boundless and the acquisition of SES.
1997 vs. 1996
15
<PAGE> 16
Total revenues increased $11,371,000 or 44.7% in 1997 over 1996,
primarily due to the acquisition of SES (described in "Business Acquisitions and
Divestitures" above). Product sales increased $979,000, or 10.1%, in fiscal
1997, while service revenues dramatically increased by $10,392,000 or 66.0% The
increase in fiscal 1997 revenues is not the result of pricing actions by the
Company.
The SES/GA Proforma shows a $19,734,000 decline in revenues. This decline
was anticipated by management and was the result of unusually high 1996 sales
levels of the SES TPL systems at discounted prices and the extended selling
cycle to generate new sales due to the change in ownership.
1996 vs. 1995
Total revenues increased $11,191,000, or 78.4%, in fiscal 1996 over fiscal
1995 primarily due to a full year of participation in GAL with Boundless (see
"Business-Acquisitions and Divestitures"), and a full year of sales of new
products introduced late in fiscal 1995. Product sales increased 38.4%, or
$2,695,000, while service revenues increased 117.2%, or $8,496,000.
GROSS MARGIN
<TABLE>
<CAPTION>
Gross Margin
(In Thousands)
Year Ended
September 30
--------------
1997 1996 1995
---- ---- ----
% of % of % of
Amount Sales Amount Sales Amount Sales
------ ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Products 4,033 37.7 $ 1,828 18.8 $ 518 7.4
------ ----- ------- ----- ------- -----
Service and Support 12,012 46.0 $ 6,199 39.4 $ 2,285 31.5
------ ----- ------- ----- ------- -----
Total Sales $16,045 43.6 $ 8,027 31.5 $ 2,803 19.6
======= ==== ======= ==== ======= ====
</TABLE>
GA sells its hardware products through a nationwide dealer network, and
dealers sell to the end-users, pricing their products as the competition will
allow. Company pricing strategies in the past have been aimed at stimulating
dealer orders through pricing concessions; general price decreases or increases
are not the normal technique used by the Company. The dealers generally are
selling a system, complete with application software, in a "bundled" proposal,
as a turn-key sale. The direct competitive pressures facing the dealers are
closely tied to the cost/benefit relationship of their proposal versus those of
other firms.
1997 vs. 1996
The Company's gross profit margins significantly increased in fiscal
1997 to 43.6% from fiscal 1996 gross profit margins of 31.5%. Gross profit
margins for both product sales and service and support increased during fiscal
1997. Gross profit margin for product sales increased to 37.7% from 18.8% in
1996. This increased is attributed to product sales from the Sequoia operations
for product upgrades and replacements to the traditional customer base. Gross
profit margins in service improved to 46.0% from 39.4% in fiscal 1996
16
<PAGE> 17
due to increase in revenues in excess of subcontracted maintenance costs and
fixed overhead costs and Sequoia's higher profit margin on maintenance
contracts.
The proforma gross margin decreased 19% as a percent of revenues during
the period. The decline is associated with the revenue decline discussed earlier
and higher.
17
<PAGE> 18
1996 vs. 1995
The Company's overall gross profit margin percentage increased 11.9%
from 19.6% in fiscal 1995 to 31.5% in fiscal 1996. Gross margin percentages for
products increased 11.4%, while service margins increased from 31.5% to 39.4%.
The increase in product margin was due to increased sales volume in relation to
relatively fixed direct labor and overhead costs and the divestiture of two of
the three vertical product lines which had resulted in negative gross margin in
the prior year. The increase in service margins is due to increased revenues in
excess of increased overhead and third party maintenance costs.
EXPENSES
<TABLE>
<CAPTION>
Expenses
(In Thousands)
Year Ended September 30
----------------------------------------------------------------
1997 1996 1995
------ ------ ------
% of % of % of
Amount Sales Amount Sales Amount Sales
<S> <C> <C> <C> <C> <C> <C>
Research and $2,599 7.1 $1,156 4.5 $ 584 4.1
Development:
Selling and $11,383 30.9 $4,366 17.1 $3,704 25.9
Administrative:
Other: $1,385 3.8 $ 258 1.0 $ 181 1.3
Interest: $ 311 0.8 $ 214 .8 $ 399 2.8
------- ---- ------ ---- ------ ----
Total $15,678 42.6 $5,994 23.5 $4,868 34.1
======= ==== ====== ==== ====== ====
</TABLE>
Research and Development expenses increased $1,443,000 from fiscal 1996
to fiscal 1997 due to the combining of departments as a result of the SES
acquisition. Management implemented cost reductions to eliminate the duplication
of overhead costs, however, a significant portion of the cost is directly
associated with specific engineering tasks and will continue into the following
year. Research and development expenses increased $572,000 from fiscal 1995 to
fiscal 1996 as a result of activities related to GAL. The Company anticipates
1998 expenses to approximate 1997 historical levels.
Selling and administrative expenses increased $7,017,000 or 161%, from
fiscal 1996. This dramatic increase is due to the combining of departments as a
result of the SES acquisition. The Company incurred one time costs associated
with facility relocation, employee severance compensation, travel and lodging,
and other costs generated by the assimilation of SES. Management implemented
cost reductions to eliminate the duplication of overhead and operating expenses.
The majority of the cost reductions will not be evident until 1998. The 1997
administrative expenses also included a $400,000 charge of a license agreement
with MDIS which was terminated. In addition, in April 1997, the Company entered
into a three-year consulting agreement with a former officer of the Company and
recorded a charge of $394,000.
18
<PAGE> 19
Selling and administrative expenses increased $663,000 from fiscal 1995
to fiscal 1996. This increase reflects the GAL activities for a full year in
fiscal 1996 vs. seven months in fiscal 1995.
Other expense increased $1,127,000 from 1996 primarily due to the amortization
of goodwill associated with the SES acquisition.
Interest expense associated with higher borrowing increased by $97,000
to $311,000 for 1997. The new line of credit effective December 31, 1997 does
not change the borrowing rate but it does expand the borrowing base.
The Company recorded tax benefits of $135,000 in fiscal 1997 versus an
expense of $615,000 in fiscal 1996. At September 30, 1997, the Company had
substantial amounts of deferred tax assets primarily related to net operating
loss carryforwards. In prior years, management has fully reserved these deferred
tax assets. In 1997, management reduced the valuation allowance on the Company's
net deferred tax assets since they believe it is more likely than not that
deferred tax assets of $550,000 will be realized. As a result, income tax
expense was reduced from expected amounts.
Management's belief that it is more likely than not that the deferred
tax assets will be realized is based partially on the Company's 1997 US income
tax payable of $225,000 which is available for refund through 2000. In addition,
the Company's recent history of US taxable income before the utilization of net
operating loss carryforwards for the years ending September 30, 1997, 1996 and
1995 of $2,000,000, $1,300,000, and $1,260,000, supports management's belief
that it is more likely than not that the recorded deferred tax assets will be
realized. Management estimates that the recorded deferred tax assets will be
recovered within the next fiscal year. If the Company is unable to generate the
income necessary to realize the recorded amounts of deferred tax assets, these
assets would be charged to operations. At September 30, 1997, management has
reserved $2,165,000 of the total deferred tax assets of $2,715,000. Even though
the Company has significant reserves on deferred tax assets and significant net
operating loss carryforwards, the Company may be required to pay US income taxes
in the future since the use of its loss carryforwards for US tax purposes is
limited to $545,000 per year.
Net Profit/Loss
1997 vs. 1996
Consolidated net income was $502,000 for fiscal 1997 compared to $1,418,000
in fiscal 1996. The decrease in net income of $916,00 for fiscal 1997 is the
result of increased operating expenses associated with the acquisition of SES.
These expenses were partially offset by a decrease in the deferred tax valuation
reserve of $332,000. The Company experienced significant costs increases in
Research, Development and Administration and an increase in the amortization of
goodwill from the acquisition of SES. In fiscal 1997, the Company capitalized
$1,100,000 in development costs for the mv.BASE and mv.ENTERPRISE new products
which will increase amortization expense in 1998.
The proforma operating income decreased by $1,312,000 or 78%. This
decline is the result of the $19,734,000 decline in revenues and the level of
operating expenses as a percent to sales growing from 33% of revenues in 1996 to
43% in 1997. The Company has taken measures in 1997 to reduce these expenses
which are expected to be realized in 1998.
19
<PAGE> 20
1996 vs. 1995
Net income was $1,418,000 for fiscal 1996 compared to a net loss of
$2,065,000 for fiscal 1995. The improvement in net income of $3,483,000 for
fiscal 1996 over fiscal 1995 is the result of a full year of participation in
GAL with Boundless, the divestiture of two vertical product lines, and increased
income from the introduction of the Company's Power95 line released at the end
of fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had a $3,000,000 deficit working capital
primarily caused by 5,200,000 of current liabilities related to the acquisitions
of Sequoia and the $625,000 payment due to Boundless
During fiscal 1997, the Company generated $3,149,000 of cash flow from
operations as compared to $220,000 for fiscal 1996 and a use of cash from
operations for 1995 of $343,000. The Company's cash generated before
depreciation and amortization and deferred taxes was $2,334,000 for fiscal 1997
compared to $1,727,000 for fiscal 1996 and a use of cash of $1,710,000 for
fiscal 1995. The improvement for 1997 and 1996 was a result of increased sales
levels from the previous year combined with the disposition of unprofitable
operations in fiscal 1995. Working capital requirements increased $1,507,000 in
fiscal 1996 due to increase in inventory levels and decreases in advances from
customers, partially offset by a decrease in receivables.
Cash used in investing activities increased from $201,000 in 1996 to
$1,788,000 in fiscal 1997 primarily due to increased capitalized software
development costs. During fiscal 1997, the Company capitalized $1,100,000 of
software development costs primarily related to mv.Base and mv.Enterprise
products. The decrease from 1995 levels of cash used in investing activities of
$1,527,000 was primarily the result of decrease in facility costs related to the
move to the Company's new facilities.
Cash used in financing activities was $774,000 in fiscal 1997 compared
to break-even in fiscal 1996 and proceeds from financing activities of
$1,741,000 in 1995. During fiscal 1997, the Company repaid amounts primarily
related to the SES. The 1995 proceeds were generated by the sale of SGA Pacific.
The Company had an agreement with Imperial Bank for a revolving line of
credit, not to exceed $2,000,000, collaterized by domestic accounts receivable.
The amount of advances was dependent upon eligible accounts receivable. The
varying domestic sales activities impacted the Company's full utilization of
this facility. At September 30, 1997, the balance of the loan was $1,884,000; on
this date GA was not in compliance with current ratios covenants of the line of
credit. The Company received a waiver from the lender with regards to the
covenant.
Effective December 18, 1997, the Company entered into a $5,000,000 line
of credit with Comerica Bank. The agreement requires interest at prime plus 2%.
Advances under the line are limited to 80% of eligible product receivables and
60% of eligible service receivables. The agreement contains various covenants
and restrictions, including restrictions on the Company's ability to pay
dividends. Management believes that the credit facility is sufficient to meet
its requirements. As of January 9, 1998, $1,900,000 was drawn on this line of
credit and $800,000 available for future borrowings.
20
<PAGE> 21
Effective October 11, 1997, the Company acquired the Sequoia Enterprise
Systems (SES) operations from Sequoia Systems, Inc. The purchase price was
$11,347,000. This acquisition was important because it opened up the high-end
fault tolerant Pick marketplace to GA and it added $12,679,000 in service and
support revenues. (See Note 11 to the Financial Statements). September 30, 1997,
the Company had $7,300,000 in outstanding debt related to this acquisition. The
majority of this debt requires payments based on a percentage of revenues.
Management expects that $5,200,000 of this debt will be paid in 1998.
In January 1997, the Company borrowed a total of $500,000 from certain
individuals. The loan is evidenced by a Subordinated Promissory Note which bears
interest at the rate of 15% per annum, is payable in twenty-four equal monthly
installments, and is subordinated to all indebtedness of the Company to banks
and other financial institutions. (See " Certain Relationships and Related
Transactions".) At
In April 1996 the Company entered into a license agreement with McDonnell
Douglas Information Systems Limited ("MDIS"), under which the Company acquired
rights to use and sublicense certain software owned by MDIS. The Company's
agreement with MDIS called for the Company to make six annual payments to MDIS
on April 26 of each year from 1997 through 2002, inclusive, of $400,000,
$650,000, $700,000, $700,000, $700,000 and $700,000, respectively. The Company
did not make the payment due in April 1997, and has entered into an agreement
with MDIS to end the contract. GA will make twelve monthly payments in 1998
totaling $400,000, which has been reserved in 1997.
Accounting Pronouncements
The FASB has issued various pronouncements which will be adopted as
required. (See Note 1 to the Financial Statements).
YEAR 2000 ISSUES
Problem:
The Year 2000 Issue is the result of computer programs which do not have
sufficient digits to define the Year 2000. Any company whose computer programs
are date-sensitive may find their systems recognizing the year 2000 as 1900.
This situation could be disruptive to a company's operations, invoicing,
inventory controls and other business activities.
Current Internal Systems:
Based on a recent assessment, the Company has determined that its systems used
to support its operations are compatible with the year 2000. Consequently, the
Company does not feel that its operations will be adversely affected by the Year
2000 nor will it experience material additional costs associated with this.
Service and Support Contracts.
The Company has approximately 4,000 service and support contracts. On those
systems the Company will provide modest upgrades to bring the systems into
compliance. Management does not believe this will be a costly undertaking since
the Pick solution has not used a two digit conversion from its inception.
Certain customers do not have or have acquired elsewhere, hardware and software
from sources other than GA. In these cases, the Company will offer professional
services on a fee basis to bring them into compliance. In some cases, the
customers may have to purchase all or part of new systems.
21
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules on Page 28 of this report.
22
<PAGE> 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On September 11, 1997, the Company dismissed Price Waterhouse LLP as the
Company's independent accountants. The Company's decision to change independent
accountants was approved by the Audit Committee of the Company's Board of
Directors. Neither of the reports of Price Waterhouse LLP on the Company's
financial statements for the two most recent fiscal years preceding the
dismissal contained an adverse opinion or a disclaimer of opinion, nor was
either such report qualified or modified as to uncertainty, audit scope or
accounting principles. During the Company's two most recent fiscal years
preceding the dismissal and through September 11, 1997, there were no
disagreements with Price Waterhouse LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Price Waterhouse
LLP, would have caused them to make a reference thereto in their report on the
financial statements for such years. During the Company's two most recent fiscal
years preceding and thorough September 11, 1997, there have been no reportable
events (as defined in Regulation S-K Item 304(a)(1)(v). Price Waterhouse LLP has
furnished a letter addressed to the Securities and Exchange Commission stating
that Price Waterhouse LLP agree with the above statements.
The Company engaged McGladrey & Pullen as its new independent
accountants as of October 7, 1997. During the Company's two most recent fiscal
years preceding the dismissal of Price Waterhouse LLP, and through October 7,
1997, neither the Company nor anyone on its behalf consulted with McGladrey &
Pullen regarding either (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements; or (ii)
any matter that was ether a subject of disagreement (as defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to that Item) or a
reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the directors and executive officers of
the Company, see the information appearing in the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held February 6, 1998 under the caption
"Election of Directors" and under the caption "Compliance with Section 16(a) of
the Securities Exchange Act of 1934", which information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information with respect to the compensation of certain executive
officers of the Company, see the information appearing in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held February 6, 1998
under the caption "Executive Compensation", which information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information with respect to the security ownership of certain
beneficial owners and management of the Company, see the information appearing
in the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held February 6, 1998 under the caption "Security Ownership of Certain
Beneficial Owners and Management", which information is incorporated herein by
reference.
23
<PAGE> 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information with respect to certain relationships and related
transactions, see the information appearing on the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held on February 6, 1998 under the
caption "Certain Relationships and Related Transactions", which information is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
See Index to Consolidated Financial Statements and Schedules on Page 28
of this report.
Reports on Form 8-K
(1) 8-K Filed August 4, 1997 regarding the acquisition of certain assets
from Liberty Project Limited Partnership, and the issuance of securities
by the Company in reliance on the exemption from registration under the
Securities Act of 1933 provided by Regulation S.
(2) 8-K/A filed August 29, 1997 for the purpose of filing the following
financial statements in connection with the acquisition by the Company
of the Sequoia Enterprise Systems division of Sequoia Systems, Inc.
(a) Financial statements of the Sequoia Enterprise Systems Division
of Sequoia Systems, Inc.:
Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Operations for the Three Years Ended
June 30, 1996
Consolidated Statements of Cash Flows for the Three Years Ended
June 30, 1996
Statements of Parent Investment for the Three Years Ended June
30, 1996
Notes to Consolidated Financial Statements
(b) Pro Forma financial Information:
Unaudited Pro Forma Condensed Financial Information - Description
of Transaction
Unaudited Pro Forma Condensed Statement of Operations for the
Nine Months Ended June 30, 1997
Unaudited Pro Forma Condensed Statement of Operations for the
Year Ended September 30, 1996
(3) 8-K filed September 18, 1997, as amended by an 8-K/A filed September 19,
1997, regarding the dismissal of Price Waterhouse LLP as the Company's
independent accountants.
24
<PAGE> 25
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(4) 8-K filed October 8, 1997 regarding the engagement of McGladrey & Pullen
as the Company's independent accountants.
Financial Statements
3.1 Amended Certificate of Incorporation of the Company, incorporated
herein by reference to Exhibit 3(a) to the Company's 10-K for the
year ended June 30, 1989.
3.2 Bylaws of the Company, incorporated herein by reference to
Exhibit 3.0 to the Company's 10-K for the year ended June 30,
1988.
10.1 License Agreement dated November 23, 1982 between the Company and
Pick Computer Works, Inc. incorporated herein by reference to
Exhibit 10 to the Company's Registration Statement on the Form
S-1 filed June 5, 1986.
10.2 The following agreements between the Company and Sanderson
Electronics PLC, dated as of January 6, 1989: Common Stock
Warrant Agreement ("Mirror Rights Agreement"), and Common Stock
Registration Rights Agreement, incorporated herein by reference
to Exhibit 10(x) to the Company's 10-K for the year ended June
30, 1989.
10.3 Agreement between the Company and Future Services Ltd., dated
March 16, 1996, incorporated herein by reference to Exhibit 10(m)
to the Company's 10-K for the year ended September 30, 1996.
10.4 Operating Agreement dated May 22, 1995 between the Company and
SunRiver Data Systems, incorporated herein by reference to
Exhibit 10(n) to the company's 10-K for the year ended September
30, 1996.
10.5 Asset Purchase Agreement dated as of October 3, 1996 between the
Company and Sequoia Systems, Inc., incorporated herein by
reference to Exhibit 2 to the Company's 8-K filed October 15,
1996.
10.6 Stock Purchase Warrant dated October 11, 1996 issued by the
Company to Sequoia Systems, inc., incorporated herein by
reference to Exhibit 4.1 to the Company's 8-K filed October 15,
1996.
10.7 Registration Rights Agreement dated October 11, 1996 between the
Company and Sequoia Systems, Inc., incorporated herein by
reference to Exhibit 4.2 to the Company's 8-K filed October 15,
1996.
25
<PAGE> 26
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
10.8 Loan Agreement dated October 30, 1996 between the Company and
Imperial Bank, incorporated herein by reference to Exhibit 10(r)
to the Company's 10-K for the year ended September 30, 1996.
10.10* Amendment dated January 27, 1997 to the Loan Agreement dated
October 30, 1996 between the Company and Imperial Bank.
10.11* Stock Option Agreement dated March 21, 1995 entered into between
the Company and each of Messrs. Lawrence Michels, Robert Bagby
and Leonard Mackenzie.
10.12* The Company's 1991 Stock Option Plan, as amended.
10.13* The Company's 1991 Directors' Stock Option Plan, as amended.
10.14* Subordinated Note dated January 21, 1997 in the amount of
$500,000 payable to Morgan Stanley and Company, Inc.
10.15* License Agreement dated April 26, 1996 between the Company and
McDonnell Information Systems Limited.
10.16* Letter agreement dated April 15, 1997 between the Company and
Leonard Mackenzie.
10.17 Agreement by and between General Automation, Inc. and MDIS dated
December 22, 1997.
10.18 Loan Agreement dated December 18, 1997 between the Company and
Comerica Bank.
10.19 Letter Agreement dated October 1, 1997 between the Company and
Texas Micro, Inc., formerly Sequoia Systems, Inc. ("Texas
Micro"), amending the Asset Purchase Agreement between the
Company and Texas Micro dated October 3, 1996 and the
Registration Rights Agreement between the Company and Texas Micro
dated October 11, 1996, together with the related Promissory Note
dated October 1, 1997 in the original principal amount of
$1,428,899 payable by the Company to Texas Micro.
21* Subsidiaries of the Company.
23.1* Consent of Independent Accountants - McGladrey & Pullen, LLP.
23.2* Consent of Independent Accountants - Price Waterhouse, LLP.
27* Financial Data Schedule.
- ------------------
* Previously filed.
26
<PAGE> 27
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: January 12, 1998 By: /s/ John R. Donnelly
---------------- -------------------------
John R. Donnelly
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, January 12, 1998
- ------------------------------- Director
Lawrence Michels
/s/ Robert D. Bagby Vice Chairman, Director January 12, 1998
- -------------------------------
Robert D. Bagby
/s/ Jane M. Christie President, CEO, Director January 12, 1998
- -------------------------------
Jane M. Christie
s/ Leonard M. Mackenzie Director January 12, 1998
- -------------------------------
Leonard N. Mackenzie
/s/ Robert M. McClure Director January 12, 1998
- -------------------------------
Robert M. McClure
/s/ Paul L. Morigi Director January 12, 1998
- -------------------------------
Paul L. Morigi
/s/ Philip T. Noden Director January 12, 1998
- -------------------------------
Philip T. Noden
/s/ John R. Donnelly Vice President and January 12, 1998
- ------------------------------- Chief Financial &
John R. Donnelly Accounting Officer
</TABLE>
27
<PAGE> 28
GENERAL AUTOMATION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORTS ON THE
FINANCIAL STATEMENTS F-1 and F-2
-------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets F-3 and F-4
Consolidated statements of operation F-5
Consolidated statements of stockholders' equity F-6
Consolidated statements of cash flows F-7 and F-8
Notes to consolidated financial statements F-9 - F-28
-------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
ON THE SCHEDULE F-29 and F-30
-------------------------------------------------------------------------------
SCHEDULE
Schedule II - Valuation and qualifying account F-31
-------------------------------------------------------------------------------
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
General Automation, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows, 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 consolidated 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 provides a reasonable basis for our opinion expressed above.
Price Waterhouse LLP
Costa Mesa, California
December 9, 1996
F-1
<PAGE> 30
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.
McGLADREY & PULLEN, LLP
Anaheim, California
December 19, 1997
F-2
<PAGE> 31
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 5,358,000 3,600,000
Due from related parties 56,000 86,000
Inventories (Note 2) 4,999,000 2,979,000
Prepaid expenses 569,000 768,000
Deferred tax asset (Note 9) 550,000 -
----------- -----------
TOTAL CURRENT ASSETS 12,329,000 7,552,000
Long-Term Receivable (Note 11) 570,000 570,000
Property, Plant and Equipment (Note 3) 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 $24,409,000 $10,271,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 32
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) $ 1,884,000 $ 528,000
Accounts payable 3,806,000 2,967,000
Advances from customers 1,338,000 709,000
Accrued expenses, including $258,000 due to a related
party in 1997 (Note 5) 2,838,000 1,903,000
Notes payable and current maturities of long-term
debt (Note 6) 5,495,000 235,000
------------ ------------
TOTAL CURRENT LIABILITIES 15,361,000 6,342,000
------------ ------------
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 and 12)
Stockholders' Equity (Notes 6, 8 and 11)
Common stock, par value $.10 per share:
Authorized 30,000,000 shares;
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 (40,581,000) (41,083,000)
Cumulative translation adjustment (79,000) -
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,779,000 2,778,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $24,409,000 $10,271,000
=========== ===========
</TABLE>
F-4
<PAGE> 33
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 26,137,000 15,745,000 7,249,000
------------ ------------ ------------
TOTAL 36,831,000 25,460,000 14,269,000
------------ ------------ ------------
Costs and Expenses
Cost of sales:
Product 6,661,000 7,887,000 6,502,000
Service 14,125,000 9,546,000 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 4,366,000 3,704,000
Research and development 2,599,000 1,156,000 584,000
Amortization of goodwill 1,385,000 - -
Other, net - 258,000 181,000
------------ ------------ ------------
TOTAL 36,153,000 23,213,000 15,935,000
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 678,000 2,247,000 (1,666,000)
Interest Income 71,000 60,000 35,000
Interest Expense (382,000) (274,000) (434,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES 367,000 2,033,000 (2,065,000)
Provision (Benefit) for Income Taxes (Note 9) (135,000) 615,000 -
------------ ------------ ------------
NET INCOME (LOSS) $ 502,000 $ 1,418,000 $ (2,065,000)
============ ============ ============
Net income (loss) per common and
common equivalent share $ 0.05 $ 0.18 $ (0.26)
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 34
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
Net (loss) - - - (2,065,000) -
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 7,391,776 739,000 42,533,000 (42,501,000) -
Net income - - - 1,418,000 -
Stock options and warrants
exercised (Note 8) 784,600 79,000 510,000 - -
----------- ----------- ------------ ------------ ---------
Balance at September 30, 1996 8,176,376 818,000 43,043,000 (41,083,000) -
Net income - - - 502,000 -
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 9,232,591 $ 923,000 $ 45,516,000 $(40,581,000) $ (79,000)
=========== =========== ============ ============ =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 35
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 income (loss) $ 502,000 $ 1,418,000 $(2,065,000)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Gain from disposal of assets (42,000) (55,000) -
Depreciation and amortization 2,424,000 364,000 355,000
Deferred taxes (550,000) - -
Changes in assets and liabilities:
(Increase) decrease:
Receivable (124,000) 1,993,000 (3,846,000)
Inventories 1,023,000 (1,253,000) 563,000
Prepaid expenses 466,000 (583,000) (11,000)
Other assets (113,000) (33,000) 79,000
Increase (decrease):
Accounts payable 58,000 8,000 1,662,000
Advances from customers (440,000) (2,692,000) 3,160,000
Accrued expenses (55,000) 1,053,000 (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 -
Capitalized software costs (1,099,000) (168,000) (178,000)
Investment in subsidiary - 13,000 (21,000)
----------- ----------- -----------
NET CASH (USED IN) INVESTING (1,788,000) (201,000) (1,527,000)
ACTIVITIES ------------ ------------ ------------
Cash Flows Provided by (Used In) Financing
Activities
Proceeds from issuance of common stock 134,000 589,000 -
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 PROVIDED BY (USED IN)
FINANCING ACTIVITIES (744,000) (1,000) 1,741,000
----------- ----------- -----------
Effect of exchange rate changes on cash 61,000 - -
----------- ----------- -----------
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> 36
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 Noncash 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> 37
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 when earned.
F-9
<PAGE> 38
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
Capitalized Software Development costs:
All capitalized software development costs are amortized on a straight-line
basis over the remaining estimated economic life of the product, generally three
to five years. 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> 39
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 equivalents shares.
The weighted average shares outstanding used for computing earnings per share
were as follows: 1997 10,102,522; 1996 7,677,627; 1995 8,036,572.
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 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.
F-11
<PAGE> 40
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
consolidated financial statements.
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. Nonemployee 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 consolidated financial
statements.
F-12
<PAGE> 41
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New accounting pronouncements:
During the year, FASB issued several accounting pronouncements that will effect
or possibly effect the accounting and reporting of the Company. Following are
the requirements of these pronouncements:
Earnings per share:
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
earnings (loss) per share as follows: 1997 $0.06; 1996 $0.18 and 1995
$(0.26). 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 consolidated 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 that 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
consolidated financial statements.
F-13
<PAGE> 42
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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> 43
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 -
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 income taxes $ 659,000 $ 615,000
Accrued payroll 771,000 499,000
Accrued consulting fee 258,000 -
Accrued royalties 358,000 252,000
Accrued warranty 135,000 78,000
Other 657,000 459,000
---------- ----------
$2,838,000 $1,903,000
========== ==========
</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> 44
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 was $1,884,000. 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.
Long-term debt at September 30, 1997 consists of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <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
Note payable related to Sequoia acquisition (A) 1,429,000
Payable related to Sequoia acquisition (A) 5,919,000
Other notes payable 83,000
----------
8,764,000
Less current maturities 5,495,000
----------
$3,269,000
==========
</TABLE>
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> 45
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
(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.
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 reserves 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.
F-17
<PAGE> 46
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. STOCK OPTIONS AND WARRANTS (CONTINUED)
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>
A further summary about options outstanding at September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------- ----------------------------------
Weighted-Average
Remaining Weighted-Average
Number Contractual Life Number Contractual Life
------------- ---------------- ------------- ----------------
<S> <C> <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>
F-18
<PAGE> 47
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company applies APB 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 income As reported $ 502,000 $ 1,418,000
Pro forma (32,000) 1,369,000
Earnings per common and common equivalent
share, primary and fully diluted As reported $ 0.05 $ 0.18
Pro forma - 0.18
</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.
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.
F-19
<PAGE> 48
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. INCOME TAXES
The provision (benefit) for income taxes consist of the following for the years
ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ----------
<S> <C> <C> <C>
Current
Federal $ 225,000 $482,000 $ -
State 45,000 133,000 -
Foreign 145,000 - -
Deferred (550,000) - -
--------- -------- ----------
$(135,000) $615,000 $ -
========= ======== ==========
</TABLE>
Reasons for differences between income tax expense (benefit) and the amount
computed by applying the federal statutory income tax rate to income (loss)
before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Tax provision (benefit) calculated at
Federal statutory rate $ 125,000 $ 691,000 $(702,000)
Change in valuation allowance (332,000) - -
Benefit of operating loss carryforwards - (355,000) -
State income taxes 45,000 133,000 -
Expenses not deductible 43,000 123,000 -
Tax benefits not provided on losses of
domestic and foreign operations - - (405,000)
Income from sale of foreign subsidiary - - 1,054,000
Other (16,000) 23,000 53,000
----------- --------- ---------
Provision (benefit) for income taxes $ (135,000) $ 615,000 $ -
=========== ========= =========
</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.
The carryforwards expire in various years ending September 30 as follows:
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
2004 $ 739,000
2005 1,427,000
2006 1,631,000
2007 55,000
2008 560,000
2009 788,000
----------
$5,200,000
==========
</TABLE>
F-20
<PAGE> 49
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
<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 (2,165,000) (2,497,000)
----------- -----------
$ 550,000 $ -
=========== ===========
</TABLE>
Management has reduced the valuation allowance on the Company's net deferred tax
assets available since they believe it is more likely than not that the deferred
tax asset of $550,000 will be realized. Management based this assessment
partially on the Company's 1997 U.S. tax payable of $225,000 which is available
for refund through 2000. In addition, the Company's recent history of U.S.
taxable income before the utilization of net operating loss carryforwards for
the years ended September 30, 1997, 1996 and 1995 of $2,000,000, $1,300,000, and
$1,260,000, supports management's belief that it is more likely than not that
the recorded deferred tax assets will be realized. Management estimates that the
recorded deferred tax assets will be recovered within the next fiscal year. If
the Company is unable to generate the income necessary to realize the recorded
amounts of deferred tax assets, these assets would be charged to operations.
F-21
<PAGE> 50
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $32,547,000 $2,367,000 $3,186,000 $(1,269,000) $36,831,000
Operating profit
(losses) 515,000 175,000 (12,000) - 678,000
Interest expense (382,000)
Interest income 71,000
-----------
INCOME BEFORE
INCOME TAXES $ 367,000
===========
Identifiable assets $23,492,000 $1,037,000 $ 823,000 $ (943,000) $24,409,000
=========== ========== ========== ========== ===========
Identifiable liabilities $18,604,000 $ 322,000 $ - $ (296,000) $18,630,000
=========== ========== ========== ========== ===========
</TABLE>
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.
F-22
<PAGE> 51
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
payment of 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-23
<PAGE> 52
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
Sequoia Enterprise Systems acquisition: (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 results of operations and earnings 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> <C> <C>
Sales $37,521,000 $57,255,000
=========== ===========
Net income $ 228,000 $ 985,000
=========== ===========
Earnings per common and common equivalent share $ 0.02 $ 0.12
=========== ===========
</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 SunRiver's 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
$2,000,000 in costs of sales relating to this arrangement. Included in accounts
payable and accrued expenses at September 30, 1997 is approximately $625,000,
due to Boundless, in connection with this Agreement.
F-24
<PAGE> 53
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
General Automation, LLC: (continued)
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.
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.
F-25
<PAGE> 54
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
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. The total consideration, which is
the aggregate of the Company's historical basis in the stock exchanged and the
cash, amounted to $243.
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.
F-26
<PAGE> 55
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
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>
<CAPTION>
<S> <C>
1998 $ 676,000
1999 564,000
2000 563,000
2001 100,000
----------
$1,903,000
==========
</TABLE>
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.
F-27
<PAGE> 56
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
F-28
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
General Automation, Inc.
Our audits of the consolidated financial statements of General Automation, Inc.
and its subsidiaries referred to in our report dated December 9, 1996 with
respect to the consolidated financial statements included in this Annual Report
on Form 10-K also included an audit of Financial Statement Schedule II of
General Automation, Inc. and its subsidiaries for the years ended September 30,
1996 and 1995. In our opinion, this Financial Statement Schedule of General
Automation, Inc. and its subsidiaries for the years ended September 30, 1996 and
1995 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements for the years ended September 30, 1996 and 1995.
PRICE WATERHOUSE LLP
Costa Mesa, California
December 9, 1996
F-29
<PAGE> 58
INDEPENDENT AUDITOR'S REPORT
ON THE SCHEDULE
To the Board of Directors
General Automation, Inc.
Irvine, California
Our audit was made for the purpose of forming an opinion on the basic 1997
consolidated financial statements taken as a whole. The supplemental schedule II
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated financial
statements. The information for 1997 included in this schedule has been
subjected to the auditing procedures applied in our audit of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
McGLADREY & PULLEN, LLP
Anaheim, California
December 19, 1997
F-30
<PAGE> 59
GENERAL AUTOMATION INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Balance at Provisions
Beginning Charged to Balance at
of Year Expense Charge-Offs End of Year
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
1997 $561,000 $299,000 $(551,000) $ 309,000
======== ======== ========= =========
1996 $444,000 $171,000 $ (54,000) (1) $ 561,000
======== ======== ========= =========
1995 $688,000 $112,000 $(351,000) (2) $ 444,000
======== ======== ========= =========
</TABLE>
(1) Write-offs, net of recoveries.
(2) Represents allowance for doubtful accounts of SGA Pacific, Ltd. which
was sold by the Company effective October 1, 1994.
F-31
<PAGE> 60
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Amended Certificate of Incorporation of the Company, incorporated
herein by reference to Exhibit 3(a) to the Company's 10-K for the
year ended June 30, 1989.
3.2 Bylaws of the Company, incorporated herein by reference to
Exhibit 3.0 to the Company's 10-K for the year ended June 30,
1988.
10.1 License Agreement dated November 23, 1982 between the Company and
Pick Computer Works, Inc. incorporated herein by reference to
Exhibit 10 to the Company's Registration Statement on the Form
S-1 filed June 5, 1986.
10.2 The following agreements between the Company and Sanderson
Electronics PLC, dated as of January 6, 1989: Common Stock
Warrant Agreement ("Mirror Rights Agreement"), and Common Stock
Registration Rights Agreement, incorporated herein by reference
to Exhibit 10(x) to the Company's 10-K for the year ended June
30, 1989.
10.3 Agreement between the Company and Future Services Ltd., dated
March 16, 1996, incorporated herein by reference to Exhibit 10(m)
to the Company's 10-K for the year ended September 30, 1996.
10.4 Operating Agreement dated May 22, 1995 between the Company and
SunRiver Data Systems, incorporated herein by reference to
Exhibit 10(n) to the company's 10-K for the year ended September
30, 1996.
10.5 Asset Purchase Agreement dated as of October 3, 1996 between the
Company and Sequoia Systems, Inc., incorporated herein by
reference to Exhibit 2 to the Company's 8-K filed October 15,
1996.
10.6 Stock Purchase Warrant dated October 11, 1996 issued by the
Company to Sequoia Systems, inc., incorporated herein by
reference to Exhibit 4.1 to the Company's 8-K filed October 15,
1996.
10.7 Registration Rights Agreement dated October 11, 1996 between the
Company and Sequoia Systems, Inc., incorporated herein by
reference to Exhibit 4.2 to the Company's 8-K filed October 15,
1996.
<PAGE> 61
Exhibit
Index Description
- ------- -----------
10.8 Loan Agreement dated October 30, 1996 between the Company and
Imperial Bank, incorporated herein by reference to Exhibit 10(r)
to the Company's 10-K for the year ended September 30, 1996.
10.10* Amendment dated January 27, 1997 to the Loan Agreement dated
October 30, 1996 between the Company and Imperial Bank.
10.11* Stock Option Agreement dated March 21, 1995 entered into between
the Company and each of Messrs. Lawrence Michels, Robert Bagby
and Leonard Mackenzie.
10.12* The Company's 1991 Stock Option Plan, as amended.
10.13* The Company's 1991 Directors' Stock Option Plan, as amended.
10.14* Subordinated Note dated January 21, 1997 in the amount of
$500,000 payable to Morgan Stanley and Company, Inc.
10.15* License Agreement dated April 26, 1996 between the Company and
McDonnell Information Systems Limited.
10.16* Letter agreement dated April 15, 1997 between the Company and
Leonard Mackenzie.
10.17 Agreement by and between General Automation, Inc. and MDIS dated
December 22, 1997.
10.18 Loan Agreement dated December 18, 1997 between the Company and
Comerica Bank.
10.19 Letter Agreement dated October 1, 1997 between the Company and
Texas Micro, Inc., formerly Sequoia Systems, Inc. ("Texas
Micro"), amending the Asset Purchase Agreement between the
Company and Texas Micro dated October 3, 1996 and the
Registration Rights Agreement between the Company and Texas Micro
dated October 11, 1996, together with the related Promissory Note
dated October 1, 1997 in the original principal amount of
$1,428,899 payable by the Company to Texas Micro.
21* Subsidiaries of the Company.
23.1* Consent of Independent Accountants - McGladrey & Pullen, LLP.
23.2* Consent of Independent Accountants - Price Waterhouse LLP.
27* Financial Data Schedule.
- --------------
* Previously filed.
<PAGE> 1
EXHIBIT 10.17
[GENERAL AUTOMATION LETTERHEAD]
December 19, 1997
Via Telecopy and Mail
- ---------------------
Mr. Matt O'Malley
Director
Worldwide Product Marketing
MDIS Limited
Boundary Way, Hemel Hempstead
Hertfordshire
HP2 7HU
UNITED KINGDOM
RE: SETTLEMENT AGREEMENT
GENERAL AUTOMATION, INC./MDIS LIMITED
REALITY X LICENSE AGREEMENT
Dear Matt:
This letter constitutes the Settlement Agreement between MDIS Limited
("MDIS") and General Automation, Inc. ("GAI"), regarding all matter relating to
the licensing of the Reality X Software by GAI pursuant to a certain license
agreement dated April 26, 1996 ("the License Agreement").
MDIS and GAI have held discussions and exchanged letters regarding the
terms and conditions of this settlement and this letter contains the final and
complete agreement between GAI and MDIS on the subject of Reality X and the
License Agreement. This Agreement contains provisions suggested by both MDIS and
GAI.
GAI and MDIS agree as follows:
1. Upon execution of this Settlement Agreement, the License Agreement
shall be canceled and considered by the parties as void and of no effect. GAI
and MDIS shall have no rights or duties still existent from that License
Agreement or from any amendments or modifications or arising from that License
Agreement or the subject matter thereof.
<PAGE> 2
Page 2
2. GAI shall, within twenty (20) business days from the execution of
this Settlement Agreement:
(a) Certify to MDIS that GAI has deleted and removed from its computer
libraries all source code and software supplied by MDIS relating to
Reality X; and
(b) GAI shall return all documentation and related materials and any
and all copies thereof associated with Reality X.
3. GAI certifies that GAI, and any subsidiary or associated company,
will not reverse engineer or recompile any of the unique features or unique
functions of Reality X based upon the access GAI has had to the Reality X
software and technology.
4. GAI and MDIS shall not disclose the terms, conditions or fact of
this Settlement Agreement, in whole or in part. The parties shall not take any
affirmative act to publicize this settlement or any portion thereof. Neither
party shall make any announcement, outside their companies, regarding the
termination of the relationship between GAI and MDIS on Reality X, or regarding
the circumstances leading up to the termination without the written consent of
the other party. Excepted from this provision on non-disclosure are orders of
courts and requirements of law that necessitate disclosure. In the event a press
release is required, GAI and MDIS shall consult and agree upon the language of
such a release.
5. GAI and MDIS shall remove any reference to the relationship between
the parties regarding Reality X from literature or web sites or other public
publications. This shall be done within twenty (20) business days of the
execution of this Agreement. If GAI or MDIS refer to their relationship in a
publication that would be costly to amend, then in that case only, the change
will be made at the next publication date of that document.
6. MDIS shall, within twenty (20) business days from the execution of
this Settlement Agreement:
(a) Return any and all documents, software, equipment or written
materials MDIS received from GAI;
(b) MDIS shall remove from its software libraries and other
depositories, including all its computers, any and all software, source
code, object code or other materials relating to Power95 and shall
certify to GAI in writing that MDIS has nothing left relating to
Power95; and
<PAGE> 3
Page 3
(c) MDIS agrees that MDIS, its subsidiaries or associated companies or
others at their behest, has not and will not, in any way whatsoever,
reverse engineer or recompile any of the features or functions of
Power95, or any other GAI software made available to MDIS since
execution of the License Agreement.
7. GAI shall, in full and complete settlement of the differences
between the parties and in consideration of the promises and undertakings of
MDIS set forth in this Settlement Agreement, pay to MDIS the total sum of Four
Hundred Thousand Dollars ($400,000.00.) as follows:
[1] Thirty-Five Thousand Dollars ($35,000.00) on December 31, 1997;
[2] Thirty-Five Thousand Dollars ($35,000.00) on the last day of
January, 1998 and in each of the next Nine (9) succeeding months
through October 31, 1998;
[3] Fifteen Thousand Dollars ($15,000.00) on November 30, 1998.
8. GAI will make each payment by forwarding a check for the stated
amount, by airborne mail service, to the attention of Matt O'Malley at the
address stated herein. GAI will not pay any interest on any payment unless that
payment is made more than ten (10) business days after the due date of the
payment. Any interest charged shall be at the prime rate, but only on that
payment and only during the period it remains unpaid.
9. MDIS and GAI hereby release each other and give up any and all
claims and rights they may have against each other regarding Reality X, the
License Agreement, or the acts or actions that resulted from the License
Agreement. The parties intend this release to be the broadest form of release
permissible by law, it being the intention of both parties that from this day
forward, that they each shall not be able to make any claims, file any causes of
action or seek any consideration for or relating to the events surrounding their
relationship regarding Reality X and the License Agreement. This release binds
and releases, the officers, directors and employees and agents, subsidiaries and
associated entities of MDIS and of GAI. This release does not include the terms
and conditions of this Settlement Agreement.
10. This Settlement Agreement includes all the terms and conditions of
settlement between GAI and MDIS on Reality X, Power95 and the License Agreement.
Any prior writings, oral discussions between and amongst the parties or their
representatives are of no force or effect.
11. This Settlement Agreement shall be governed by the laws of the
State of California. Any disputes or litigation relating to this Settlement
Agreement shall occur only in
<PAGE> 4
Page 4
Orange County, California. Both parties agree that they will submit themselves
to the jurisdiction of the courts in Orange County for purposes of this
Agreement.
12. No waiver of any breach of this Settlement Agreement shall be
claimed by a party or deemed to constitute consent to any continuation of such
breach, act or omission.
13. If any provision of this Settlement Agreement is invalidated or
limited in any jurisdiction, for any reason whatsoever, the Settlement Agreement
shall remain binding among the parties and in full force and effect except that,
in such jurisdiction, the invalid or limited provision shall be deemed separable
or limited to the extent of such contravention and shall not affect any other
provision of the Agreement.
14. Notices regarding this Agreement shall be delivered by telefax,
airborne delivery or mail, postage prepaid, and shall be deemed completed when
actually received and shall be addressed as follows:
GENERAL AUTOMATION, INC.
General Automation, Inc.
17731 Mitchel North
Irvine, CA 92614
USA
Attention: Jane Christie, President & CEO
Attention: John Donnelly, CFO
<PAGE> 5
Page 5
MDIS LIMITED
------------
MDIS Limited
Boundary Way, Hemel Hempstead
Hertfordshire
HP2 7HU
UNITED KINGDOM
Attention: Matt O'Malley
15. GAI and MDIS warrant and represent that by executing this
Settlement Agreement that they each have the full authority to bind their
companies and related entities.
GAI and MDIS hereby agree to the terms and conditions of this Agreement
and execute this Agreement, binding their respective companies.
MDIS LIMITED
By: /s/ MATT O'MALLEY
--------------------------------
Matt O'Malley, Director
Worldwide Marketing
Dated:
------------------------------
ATTEST:
[SIG]
-----------------------
GENERAL AUTOMATION, INC.
By: /s/ JANE M. CHRISTIE
--------------------------------
Jane M. Christie, President & CEO
Dated: 12/19//97
----------------------------
ATTEST:
[SIG]
-----------------------
<PAGE> 6
[GENERAL AUTOMATION LETTERHEAD]
PROMISSORY NOTE
---------------
US$400,000.00 December 19, 1997
Irvine, California
FOR VALUE RECEIVED, General Automation, Inc. (the "Maker"), promises to
pay to MDIS Limited, at the offices of MDIS Limited, the principal sum of FOUR
HUNDRED THOUSAND U.S. DOLLARS ($400,000.00).
1. Payment of the $400,000.00 shall be made in accordance with the terms and
conditions set forth in the Settlement Agreement between MDIS Limited and
General Automation, Inc. dated the same date as this promissory note.
2. This promissory note may not be assigned, pledged, hypothecated or
transferred without the prior written consent of General Automation, Inc.
which consent may be withheld in General Automation's sole discretion.
3. All rights and obligations hereunder shall be governed by the laws of the
State of California and this Note is executed as an instrument under seal.
ATTEST: GENERAL AUTOMATION, INC.
By: /s/ ISABEL ZAVALA By: /s/ JOHN R. DONNELLY
------------------------- -------------------------
Isabel Zavala John R. Donnelly
Vice President Finance
CFO
<PAGE> 1
[COMERICA LOGO]
LOAN & SECURITY AGREEMENT
(ACCOUNTS AND INVENTORY)
- --------------------------------------------------------------------------------
OBLIGOR # NOTE # AGREEMENT DATE
DECEMBER 18, 1997
- --------------------------------------------------------------------------------
CREDIT LIMIT INTEREST RATE B+2.00% OFFICER NO./INITIALS
$5,000,000.00 10.50% 48154 DIANA FISK
- --------------------------------------------------------------------------------
THIS AGREEMENT is entered into on DECEMBER 18, 1997, between COMERICA
BANK-CALIFORNIA ("Bank") as secured party, whose Headquarter Office is 335 WEST
SANTA CLARA STREET, SAN JOSE, CA and GENERAL AUTOMATION INC. ("Borrower"), a
DELAWARE CORPORATION whose sole place of business (if it has only one), chief
executive office (if it has more than one place of business) or residence (if an
individual) is located at 17731 MITCHELL NORTH, IRVINE, CA. The parties agree as
follows:
1. DEFINITIONS
1.1 "Agreement" as used in this Agreement means and includes this Loan
& Security Agreement (Accounts and Inventory), any concurrent or subsequent
rider to this Loan & Security Agreement (Accounts and Inventory) and to any
such rider.
1.2 "Bank Expenses" as used in this Agreement means and includes: all
costs or expenses required to be paid by Borrower under this Agreement
which are paid or advanced by Bank; taxes and insurance premiums of every
nature and kind of Borrower paid by Bank; filing, recording, publication
and search fees, appraiser fees, and/or fees and costs, and title insurance
premiums paid or incurred by Bank in connection with Bank's transactions
with Borrower; costs and expenses incurred by Bank in collecting the
Receivables (with or without suit) to correct any default or enforce any
provision of this Agreement, or in gaining possession of, maintaining,
handling, preserving, storing, shipping, selling, disposing of, preparing
for sale and/or advertising to sell the Collateral, whether or not a sale
is consummated; costs and expenses of suit incurred by Bank in enforcing or
defending this Agreement or any portion hereof, including, but not limited
to, expenses incurred by Bank in attempting to obtain relief from any stay,
restraining order, injunction or similar process which prohibits Bank from
exercising any of its rights or remedies; and attorneys' fees and expenses
incurred by Bank in advising, structuring, drafting, reviewing, amending,
terminating, enforcing, defending or concerning this Agreement, or any
portion hereof or any agreement related hereto, whether or not suit is
brought. Bank Expenses shall include Bank's in-house legal charges at
reasonable rates.
1.3 "Base Rate" as used in this Agreement means that variable rate of
interest so announced by Bank at its headquarters office in San Jose,
California as its "Base Rate" from time to time and which serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto.
1.4 "Borrower's Books" as used in this Agreement means and includes
all of the Borrower's books and records including but not limited to:
minute books; ledgers; records indicating, summarizing or evidencing
Borrower's assets, liabilities, Receivables, business operations or
financial condition, and all information relating thereto, computer
programs; computer disk or tape files; computer printouts; computer runs;
and other computer prepared information and equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of: (1)
EIGHTY percent ( 00.00%) of the net amount of Eligible Accounts after
deducting therefrom all payments, adjustments and credits applicable
thereto ("Accounts Receivable Borrowing Base"); and (2) the amount, if any,
of the advances against Inventory agreed to be made pursuant to any
Inventory Rider ("Inventory Borrowing Base"), or other rider, amendment or
modification to this Agreement, that may now or hereafter be entered into
by Bank and Borrower.
* 60% OF ELIGIBLE SERVICE RELATED ACCOUNTS RECEIVABLE LESS THAN 60 DAYS
PAST DUE, NOT TO EXCEED $2,000,000.00.
1.6 "Cash Flow" as used in this Agreement means for any applicable
period of determination, the Net Income (after deduction for income taxes
and other taxes of such person determined by reference to income or profits
of such person) for such period, plus, to the extent deducted in
computation of such Net Income, the amount of depreciation and amortization
expense and the amount of deferred tax liability during such period, all
as determined in accordance with GAAP. The applicable period of
determination will be N/A, beginning with the period from _________________
to ___________________.
1.7 "Collateral" as used in this Agreement means and includes each and
all of the following: the Receivables; the Intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other assets
of Borrower in which Bank receives a security interest or which hereafter
come into the possession, custody or control of Bank; and the proceeds of
any of the foregoing, including, but not limited to, proceeds of insurance
covering the collateral and any and all Receivables, Intangibles,
negotiable collateral, Inventory, equipment, money, deposit accounts or
other tangible and intangible property of borrower resulting from the sale
or other disposition of the collateral, and the proceeds thereof.
Notwithstanding anything to the contrary contained herein, collateral shall
not include any waste or other materials which have been or may be
designated as toxic or hazardous by Bank.
1.
<PAGE> 2
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
1.8 "Credit" as used in this Agreement means all Obligations, except
those obligations arising pursuant to any other separate contract, instrument,
note, or other separate agreement which, by its terms, provides for a specified
interest rate and term.
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, non-affiliated customer
receivables, United States government securities, claims against the United
States government, and inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination, (i) all liabilities of a person that should
be classified as current in accordance with GAAP, including without limitation
any portion of the principal of the indebtedness classified as current, plus
(ii) to the extent not otherwise included, all liabilities of the Borrower to
any of its affiliates whether or not classified as current in accordance with
GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount determined
by taking the amount of the Credit owned at the beginning of a given day,
adding any new Credit advanced or incurred on such date, and subtracting any
payments or collections which are deemed to be paid and are applied by Bank in
reduction of the Credit on that date under the provisions of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of Borrower which are due and payable within thirty (30) days,
or less, from the date of Invoice, have been validly assigned to Bank and
strictly comply with all of Borrower's warranties and representations to Bank;
but Eligible Accounts shall not include the following; (a) accounts with
respect to which the account debtor is an officer, employee, partner, joint
venturer or agent of Borrower; (b) accounts with respect to which goods are
placed on consignment, guaranteed sale or other terms by reason of which the
payment by the account debtor may be conditional; (c) accounts with respect to
which the account debtor is not a resident of the United States; (d) accounts
with respect to which the account debtor is the United States or any
department, agency or instrumentality of the United States; (e) accounts with
respect to which the account debtor is any State of the United States or any
city, county, town, municipality or division thereof; (f) accounts with respect
to which the account debtor is a subsidiary of, related to, affiliated or has
common shareholders, officers or directors with Borrower; (g) accounts with
respect to which Borrower is or may become liable to the account debtor for
goods sold or services rendered by the account debtor to Borrower; (h) accounts
not paid by an account debtor within ninety (90) days from the date of the
Invoice; (i) accounts with respect to which account debtors dispute liability
or make any claim, or have any defense, crossclaim, counterclaim, or offset;
(j) accounts with respect to which any Insolvency Proceedings is filed by or
against the account debtor, or if an account debtor becomes insolvent, fails or
goes out of business; and (k) accounts owed by any single account debtor which
exceed twenty percent (20%) of all of the Eligible Accounts; and (l) accounts
with a particular account debtor on which over twenty-five percent (25%) of the
aggregate amount owing is greater than ninety (90) days from the date of the
invoice.
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and includes for any
applicable period of determination, the sum, without duplication, or (a) all
interest paid or payable during such period by a person on debt of such person,
plus (b) all payments of principal or other sums paid or payable during such
period by such person with respect to debt of such person having a final
maturity more than one year from the date of creation of such debt, plus (c)
all debt discount and expenses amortized or required to be amortized during
such person, plus (d) the maximum amount of all rents and other payments paid
or required to be paid by such person during such period under any lease or
other contract or arrangement providing for use of real or personal property in
respect of which such person is obligated as a lessee, use or obligor, plus (e)
all dividends and other distributions paid or payable by such person or
otherwise accumulated during such period on any capital stock of such person,
plus (f) all loans or other advances made by such person during such period to
any Affiliate of such person. The applicable period of determination will be
N/A, beginning with the period from ____________ to ____________.
1.15 "GAAP" as used in this Agreement means as of any applicable period,
generally accepted accounting principles in effect during such period.
1.16 "Insolvency Proceeding" as used in this Agreement means and includes
any proceeding or case commenced by or against the Borrower, or any guarantor
of Borrower's Obligations, or any of Borrower's account debtors, under any
provisions of the Bankruptcy Code, as amended, or any other bankruptcy or
insolvency law, including but not limited to assignments for the benefit of
creditors, formal or informal moratoriums, composition or extensions with some
or all creditors, any proceeding seeking a reorganization, arrangement or any
other relief under the Bankruptcy code, as amended, or any other bankruptcy or
insolvency law.
1.17 "Intangibles" as used in this Agreement means an includes all of
Borrower's present and future general intangibles and other personal property
(including, without limitation, any and all rights in any legal proceedings,
goodwill, patents, trade names, copyrights, trademarks, blueprints, drawings,
purchase orders, computer programs, computer disks, computer tapes, literature,
reports, catalogs and deposit accounts) other than goods and Receivables, as
well as Borrower's Books relating to any of the foregoing.
CA L&S (12-84)
2.
<PAGE> 3
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
1.18 "Inventory" as used in this Agreement means and includes all
present and future inventory in which Borrower has any interest, including, but
not limited to, goods held by Borrower for sale or lease or to be furnished
under a contract of service and all of Borrower's present and future raw
materials, work in process, finished goods, advertising materials, and packing
and shipping materials, wherever located and any documents of title representing
any of the above, and any equipment, fixtures or other property used in the
storing, moving, preserving, identifying, accounting for and shipping or
preparing for the shipping of inventory, and any and all other items hereafter
acquired by Borrower by way of substitution, replacement, return, repossession
or otherwise, and all additions and accessions thereto, and the resulting
product or mass, and any documents of title respecting any of the above.
1.19 "Net Income" as used in this agreement means the net income (or
loss) of a person for any period determined in accordance with GAAP but
excluding in any event:
(a) any gains or losses on the sale or other disposition, not in
the ordinary course of business, of investments or fixed or
capital assets, and any taxes on the excluded gains and any tax
deductions or credits on account on any excluded losses; and
(b) in the case of the Borrower, net earnings of any Person in
which Borrower has an ownership interest, unless such net earnings
shall have actually been received by Borrower in the form of cash
distributions.
1.20 "Judicial Officer or Assignee" as used in this Agreement means and
includes any trustee, receiver, controller, custodian, assignee for the benefit
of creditors or any other person or entity having powers or duties like or
similar to the powers and duties of trustee, receiver, controller, custodian or
assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any and
all loans, advances, overdrafts, debts, liabilities (including, without
limitation, and all amounts charged to Borrower's account pursuant to any
agreement authorizing Bank to charge Borrower's account), obligations, lease
payments, guaranties, covenants and duties owing by Borrower to Bank of any kind
and description whether advanced pursuant to or evidenced by this Agreement; by
any note or other instrument; or by any other agreement between Bank and
Borrower and whether or not for the payment of money, whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including, without limitation, any debt, liability or
obligation owing from Borrower to others which Bank may have obtained by
assignment, participation, purchase or otherwise, and further including, without
limitation, all interest not paid when due and all Bank Expenses which Borrower
is required to pay or reimburse by this Agreement, by law, or otherwise.
1.22 "Person" or "person" as used in this Agreement means and includes
any individual, corporation, partnership, joint venture, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency or other entity.
1.23 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing to
Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all contracts
or agreements (whether or not yet earned or due), all merchandise returned to or
reclaimed by Borrower and the Borrower's books (except minute books) relating to
any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means indebtedness
of the Borrower to third parties which has been subordinated to the Obligations
pursuant to a subordination agreement in form and content satisfactory to the
Bank.
1.25 "Subordination Agreement" as used in this Agreement a
subordination agreement in form satisfactory to Bank making all present and
future indebtedness of the Borrower to TEXAS MICRO INC. subordinate to the
Obligations.
1.26 "Tangible Effective Net Worth" as used in this Agreement means net
worth as determined in accordance with GAAP consistently applied, increased by
Subordinated Debt if any, and decreased by the following: patents, licenses,
goodwill, subscription lists, organization expenses, trade receivables converted
to notes, and money due from affiliates (including officers, directors,
subsidiaries and commonly held companies.
1.27 "Tangible Net Worth" as used in this Agreement means, as of any
applicable date of determination, the excess of:
a. the net book value of all assets of a person (other than
patents, patent rights, trademarks, trade names, franchises,
copyrights, licenses, goodwill, and similar intangible assets)
after all appropriate deductions in accordance with GAAP
(including, without limitation, reserves for doubtful receivables,
obsolescence, depreciation and amortization), over
b. all total liabilities of such person.
1.28 "Total Liabilities" as used in this Agreement means the total of
all items of indebtedness, obligation or liability which, in accordance with
GAAP consistently applied, would be included in determining the total
liabilities of the Borrower as of the date Total Liabilities is to be
determined, including without limitation (a) all obligations secured by any
mortgage, pledge, security interest or other lien on property owned or acquired,
whether or not the obligations secured thereby shall have been assumed; (b) all
obligations which are capitalized lease obligations; and (c) all guaranties,
endorsements or other contingent or surety obligations with respect to the
indebtedness of others, whether
CA L&S (12-84)
3.
<PAGE> 4
LOAN SECURITY AGREEMENT
(Accounts & Inventory)
or not reflected on the balance sheets of the Borrower, including any
obligation to furnish funds, directly or indirectly through the purchase
of goods, supplies, services, or by way of stock purchase, capital
contribution, advance or loan or any obligation to enter into a contract
for any of the foregoing.
1.29 "Working Capital" as used in this Agreement means, as of
any applicable date of determination, Current Assets less Current
Liabilities.
1.30 Any and all terms used in this Agreement shall be
construed and defined in accordance with the meaning and definition of
such terms under and pursuant to the California Uniform Commercial Code
(hereinafter referred to as the "Code") as amended.
2. LOAN AND TERMS OF PAYMENT
For value received, Borrower promises to pay to the order of Bank such
amount, as provided for below, together with interest, as provided for
below,
2.1 Upon the request of Borrower, made at any time and from
time to time during the term hereof, and so long as no Event of Default
has occurred, Bank shall lend to Borrower an amount equal to the
Borrowing Base; provided, however, that in no event shall Bank be
obligated to make advances to Borrower under this Section 2.1 whenever
the Daily Balance exceeds, at any time, either the Borrowing Base or
the sum of FIVE MILLION AND NO/100 ($5,000,000.00), such amount being
referred to herein as "Overadvance".
2.2 Except as hereinbelow provided, the Credit shall bear
interest, on the Daily Balance owing, at a rate of TWO AND NO/1000
(2.000%) percentage points per annum above the Base Rate (the "Rate").
The Credit shall bear interest, from and after the occurrence of an
Event of Default and without constituting a waiver of any such Event of
Default, on the Daily Balance owing, at a rate three (3) percentage
points per annum above the Rate. All interest chargeable under this
Agreement that is based upon a per annum calculation shall be computed
on the basis of a three hundred sixty (360) day year for actual days
elapsed.
The Base Rate as of the date of this Agreement is EIGHT AND
500/1000 (8.500%) per annum. In the event that the Base Rate announced
is, from time to time hereafter, changed, adjustment in the Rate shall
be made and based on the Base Rate in effect on the date of such change.
The Rate, as adjusted, shall apply to the Credit until the Base Rate is
adjusted again. The minimum interest payable by the Borrower under this
Agreement shall in no event be less than _____ N/A____ per month. All
interest payable by Borrower under the Credit shall be due and payable
on the first day of each calendar month during the term of this
Agreement and Bank may, at its option, elect to treat such interest and
any and all Bank Expenses as advances under the Credit, which amounts
shall thereupon constitute Obligations and shall thereafter accrue
interest at the rate applicable to the Credit under the terms of the
Agreement.
2.3 Without affecting Borrower's obligation to repay
immediately any Overadvances in accordance with Section 2.1 hereof, all
Overadvances shall bear additional interest on the amount thereof at a
rate equal to ___N/A____ (N/A %) percentage points per month in excess
of the interest rate set forth in Section 2.2, from the date incurred
and for each month thereafter, until repaid in full.
3. TERM
3.1 This Agreement shall remain in full force and effect until
terminated by notice, by either party. Notice of such termination
shall be effectuated by mailing of a registered or certified letter not
less than thirty (30) days prior to the effective date of such
termination, addressed to the other party at the address set forth
herein and the termination shall be effective as of the date so fixed in
such notice. Notwithstanding the foregoing, should Borrower be in
default of one or more of the provisions of this Agreement, Bank may
terminate this Agreement at any time without notice. Notwithstanding
the foregoing, should either Bank or Borrower become insolvent or
unable to meet its debts as they mature, or fall, suspend, or go out of
business, the other party shall have the right to terminate this
Agreement at any time without notice. On the date of termination all
Obligations shall become immediately due and payable without notice or
demand; no notice of termination by Borrower shall be effective until
Borrower shall have paid all Obligations to Bank in full.
Notwithstanding termination, until all Obligations have been fully
satisfied, Bank shall retain its security interest in all existing
Collateral and Collateral arising thereafter, and Borrower shall
continue to perform all of its Obligations.
3.2 After termination and when Bank has received payment in
full of Borrower's Obligations to Bank, Bank shall reassign to Borrower
all Collateral held by Bank, and shall execute a termination of all
security agreements and security interests given by Borrower to Bank,
upon the execution and delivery of mutual general releases.
4. CREATION OF SECURITY INTEREST
4.1 Borrower hereby grants to Bank a continuing security
interest in all presently existing and hereafter arising Collateral in
order to secure prompt repayment of any and all Obligations owed by
Borrower to Bank and in order to secure prompt performance by Borrower
of each and all of its covenants and Obligations under this Agreement
and otherwise created. Bank's security interest in the Collateral shall
attach to all Collateral without further act on the part of Bank or
Borrower. In the event that any Collateral, including proceeds, is
evidenced by or consists of a letter of credit,
CA L&S (1-94)
4.
<PAGE> 5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
advice of credit, instrument, money, negotiable documents, chattel paper or
similar property (collectively, "Negotiable Collateral"), Borrower shall,
immediately upon receipt thereof, endorse and assign such Negotiable Collateral
over to Bank and deliver actual physical possession of the Negotiable
Collateral to Bank.
4.2 Bank's security interest in Receivables shall attach to all
Receivables without further act on the part of Bank or Borrower. Upon request
from Bank, Borrower shall provide Bank with schedules describing all
Receivables created or acquired by Borrower (including without limitation
agings listing the names and addresses of, and amounts owing by date by account
debtors), and shall execute and deliver written assignments of all Receivables
to Bank all in a form acceptable to Bank, provided, however, Borrower's failure
to execute and deliver such schedules and/or assignments shall not affect or
limit Bank's security interest and other rights in and to the Receivables.
Together with each schedule, Borrower shall furnish Bank with copies of
Borrower's customers' invoices or the equivalent, and original shipping or
delivery receipts for all merchandise sold, and Borrower warrants the
genuineness thereof. Bank or Bank's designee may notify customers or account
debtors of collection costs and expenses to Borrower's account but, unless and
until Bank does so or gives Borrower other written instructions, Borrower shall
collect all Receivables for Bank, receive in trust all payments thereon as
Bank's trustee, and, if so requested to do so from Bank, Borrower shall
immediately deliver said payments to Bank in their original form as received
from the account debtor and all letters of credit, advices of credit,
instruments, documents, chattel paper or any similar property evidencing or
constituting Collateral. Notwithstanding anything to the contrary contained
herein, if sales of inventory are made for cash, Borrower shall immediately
deliver to Bank, in identical form, all such cash, checks, or other forms of
payment which Borrower receives. The receipt of any check or other item of
payment by Bank shall not be considered a payment on account until such check
or other item of payment is honored when presented for payment, in which event,
said check or other item of payment shall be deemed to have been paid to Bank
TWO ( 2 )calendar days after the date Bank actually
receives, such check or other item of payment.
4.3 Bank's security interest in inventory shall attach to all inventory
without further act on the part of Bank or Borrower. Upon Bank's request
Borrower will from time to time at Borrower's expense pledge, assemble and
deliver such inventory to Bank or to a third party as Bank's bailee; or hold
the same in trust for Bank's account or store the same in a warehouse in Bank's
name; or deliver to Bank documents of title representing said inventory; or
evidence of Bank's security interest in some other manner acceptable to Bank.
Until a default by Borrower under this Agreement or any other Agreement between
Borrower and Bank, Borrower may, subject to the provisions hereof and consistent
herewith, sell the inventory, but only in the ordinary course of Borrower's
business. A sale of inventory in Borrower's ordinary course of business does
not include an exchange or a transfer in partial or total satisfaction of a
debt owing by Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of this Agreement, and at any time or times hereafter at
the request of Bank, all financing statements, continuation financing
statements, security agreements, mortgages, assignments, certificates of title,
affidavits, reports, notices, schedules of accounts, letters of authority and
all other documents that Bank may request, in form satisfactory to Bank, to
perfect and maintain perfected Bank's security interest in the Collateral and
in order to fully consummate all of the transactions contemplated under this
Agreement. Borrower hereby irrevocably makes, constitutes and appoints Bank
(and any of Bank's officers, employees or agents designated by Bank) as
Borrower's true and lawful attorney-in-fact with power to sign the name of
Borrower on any financing statements, continuation financing statements,
security agreement, mortgage, assignment, certificate of title, affidavit,
letter of authority, notice of other similar documents which must be executed
and/or filed in order to perfect or continue perfected Bank's security interest
in the Collateral.
Borrower shall make appropriate entries in Borrower's Books disclosing
Bank's security interest in the Receivables, Bank (through any of its officers,
employees or agents) shall have the right at any time or times hereafter during
Borrower's usual business hours, or during the usual business hours of any
third party having control over the records of Borrower, to inspect and verify
Borrower's Books in order to verify the amount or condition of, or any other
matter, relating to, said Collateral and Borrower's financial condition.
4.5 Borrower appoints Bank or any other person whom Bank may designate as
Borrower's attorney-in-fact, with power: to endorse Borrower's name on any
checks, notes, acceptances, money order, drafts or other forms of payment or
security that may come into Bank's possession; to sign Borrower's name on any
invoice or bill of lading relating to any Receivables, on drafts against
account debtors, on schedules and assignments of Receivables, on verifications
of Receivables and on notices to account debtors; to establish a lock box
arrangement and/or to notify the post office authorities to change the address
for delivery of Borrower's mail addressed to Borrower to an address designated
by Bank, to receive and open all mail addressed to Borrower, and to retain all
mail relating to the Collateral and forward all other mail to Borrower; to
send, whether in writing or by telephone, requests for verification of
Receivables; and to do all things necessary to carry out this Agreement.
Borrower ratifies and approves all acts of the attorney-in-fact. Neither Bank
nor its attorney-in-fact will be liable for any acts or omissions or for any
error of judgement or mistake of fact or law. This power being coupled with an
interest, is irrevocable so long as any Receivables in which Bank has a
security interest remain unpaid and until the Obligations have been fully
satisfied.
4.6 In order to protect or perfect any security interest which Bank is
granted hereunder, Bank may, in its sole discretion, discharge any lien or
encumbrance or bond the same, pay any insurance, maintain guards, warehousemen,
or any personnel to protect the Collateral, pay any service bureau, or, obtain
any records, and all costs for the same shall be added to the Obligations and
shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to this
Agreement or relating to Borrower to Bank's parent, affiliates, subsidiaries
and service providers.
CA L&S (1-94)
5.
<PAGE> 6
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
5. CONDITIONS PRECEDENT
5.1 Conditions precedent to the making of the loans and the extension
of the financial accommodations hereunder, Borrower shall execute, or cause
to be executed, and deliver to Bank, in form and substance satisfactory to
Bank and its counsel, the following:
a. This Agreement and other documents required by Bank;
b. Financing statements (Form UCC-1) in form satisfactory to Bank
for filing and recording with the appropriate governmental
authorities;
c. If Borrower is a corporation, then certified extracts from the
minutes of the meeting of its board of directors, authorizing the
borrowings and the grantings of the security interest provided
for herein and authorizing specific officers to execute and
deliver the agreements provided for herein;
d. If Borrower is a corporation, then a certificate of good
standing showing that Borrower is in good standing under the laws
of the state of its incorporation and certificates indicating
that Borrower is qualified to transact business and is in good
standing in any other state in which it conducts business;
e. If Borrower is a partnership, then a copy of Borrower's
partnership agreement certified by each general partner of
Borrower;
f. UCC searches, tax lien and litigation searches, fictitious
business statement filings, insurance certificates, notices or
other similar documents which Bank may require and in such form
as Bank may require, in order to reflect, perfect or protect
Bank's first priority security interest in the Collateral and in
order to fully consummate all of the transactions contemplated
under this Agreement;
g. Evidence that Borrower has obtained insurance and acceptable
endorsements;
h. Waivers executed by landlords and mortgagees of any real
property on which any Collateral is located; and
i. Warranties and representations of others.
6. WARRANTIES, REPRESENTATIONS AND COVENANTS.
6.1 If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank.
Borrower's Borrowing Base at all times pertinent hereto shall not be less
than the advances made hereunder. Bank shall have the right to recompute
Borrower's Borrowing Base in conformity with this Agreement.
6.2 If any warranty is breached as to any account, or any account is
not paid in full by an account debtor within NINETY (90) days from the date
of invoice, or an account debtor disputes liability or makes any claim with
respect thereto, or a petition in bankruptcy or other application for
relief under the Bankruptcy Code or any other insolvency law is filed by or
against an account debtor, or an account debtor makes an assignment for the
benefit of creditors, becomes insolvent, fails or goes out of business,
then Bank may deem ineligible any and all accounts owing by that account
debtor, and reduce Borrower's Borrowing Base by the amount thereof. Bank
shall retain its security interest in all Receivables and accounts, whether
eligible or ineligible, until all Obligations have been fully paid and
satisfied. Returns and allowances, if any, as between Borrower and its
customers, will be on the same basis and in accordance with the usual
customary practices of the Borrower, as they exist at this time. Any
merchandise which is returned by an account debtor or otherwise recovered
shall be set aside, marked with Bank's name, and Bank shall retain a
security interest therein. Borrower shall promptly notify Bank of all
disputes and claims and settle or adjust them on terms approved by Bank.
After default by Borrower hereunder, no discount, credit or allowance shall
be granted to any account debtor by Borrower and no return of merchandise
shall be accepted by Borrower without Bank's consent. Bank may, after
default by Borrower, settle or adjust disputes and claims directly with
account debtors for amounts and upon terms which Bank considers advisable,
and in such cases Bank will credit Borrower's account with only the net
amounts received by Bank in payment of the accounts, after deducting all
Bank Expenses in connection therewith.
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral. Bank
has and shall continue to have a first priority perfected
security interest in and to the Collateral. The Collateral shall
at all times remain free and clear of all liens, encumbrances and
security interests (except those in favor of Bank).
b. All accounts are and will, at all times pertinent hereto, be
bona fide existing Obligations created by the sale and delivery
of merchandise or the rendition of services to account debtors in
the ordinary course of business, free of liens, claims,
encumbrances and security interests (except as held by bank and
except as may be consented to, in writing, by Bank) and are
unconditionally owed to Borrower without defenses, disputes,
offsets, counterclaims, rights of return or cancellation, and
Borrower shall have received no notice of actual or imminent
bankruptcy or insolvency of any account debtor at the time an
account due from such account debtor is assigned to Bank.
6.
CA L&S (1-94)
<PAGE> 7
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
c. At the time each account is assigned to Bank, all property giving rise
to such account shall have been delivered to the account debtor or to the
agent for the account debtor for immediate shipment to, and unconditional
acceptance by, the account debtor. Borrower shall deliver to Bank, as Bank
may from time to time require, delivery receipts, customer's purchase
orders, shipping instructions, bills of lading and any other evidence of
shipping arrangements. Absent such a request by Bank, copies of all such
documentation shall be held by Borrower as custodian for Bank.
6.4 At the time each eligible account is assigned to Bank, all such
eligible accounts will be due and payable on terms set forth in Section 1.7, or
on such other terms approved in writing by Bank in advance of the creation of
such accounts and which are expressly set forth on the face of all invoices,
copies of which shall be held by Borrower as custodian for Bank, and no such
eligible account will then be past due.
6.5 Borrower shall keep the Inventory only at the following locations:
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF and the owner or
mortgagees of the respective locations are: ________________________________
____________________________________________________________________________.
a. Borrower, immediately upon demand by Bank therefor, shall now and from
time to time hereafter, at such intervals as are requested by Bank,
deliver to Bank, designations of inventory specifying Borrower's cost of
inventory, the wholesale market value thereof and such other matters and
information relating to the inventory as Bank may request;
b. Borrower Inventory, valued at the lower of Borrower's cost or the
wholesale market value thereof, at all times pertinent hereto shall not be
less than N/A Dollars ($ N/A) which no less than N/A Dollars ($ N/A) shall
be in raw materials and finished goods;
c. All of the Inventory is and shall remain free from all purchase money
or other security interests, liens or encumbrances, except as held by Bank;
d. Borrower does not keep and hereafter at all times shall keep correct
and accurate records itemizing and describing the kind, type, quality and
quantity of the inventory, its cost therefor and selling price thereof,
and the daily withdrawals therefrom and additions thereto, all of which
records shall be available upon demand to any of Bank's offices, agents
and employees for inspection and copying;
e. All Inventory, now and hereafter at all times, shall be new inventory
of good and merchantable quality free from defects;
f. Inventory if not now and shall not at any time or times hereafter be
located or stored with a bailee, warehouseman or other third party without
Bank's prior written consent, and, in such event, Borrower will
concurrently therewith cause any such bailee, warehouseman or other third
party to issue and deliver to Bank, in a form acceptable to Bank, warehouse
receipts in Bank's name evidencing the storage of Inventory or other
evidence of Bank's prior rights in the Inventory. In any event, Borrower
shall instruct any third party to hold all such Inventory for Bank's
account subject to Bank's security interests and its instructions; and
g. Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours, to inspect and examine
the Inventory and to check and test the same as to quality, quantity,
value and condition and Borrower agrees to reimburse Bank for Bank's
reasonable costs and expenses in so doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower
will not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or encumbrance
upon any of the Collateral to any person, association, firm, corporation,
entity or governmental agency or instrumentality;
b. Permit any levy, attachment or restraint to be made affecting any of
Borrower's assets;
c. Permit any judicial officer or assignee to be appointed or to take
possession of any or all of Borrower's assets;
d. Other than sales of inventory in the ordinary course of Borrower's
business, to sell, lease, or otherwise dispose of, move, or transfer,
whether by sale or otherwise, any of Borrower's assets;
e. Change in name, business structure, corporate identity or structure;
add any new fictitious names, liquidate, merger or consolidate with or
into any other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization;
CA L&S (1-94) 7.
<PAGE> 8
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
h. Enter into any transaction not in the usual course of Borrower's
business:
i. Make any Investment in securities of any person, association,
firm, entity, or corporation other than the securities of the United
States of America;
j. Make any change in Borrower's financial structure or in any of
its business objectives, purposes or operations which would adversely
affect the ability of Borrower to repay Borrower's Obligations;
k. Incur any debts outside the ordinary course of Borrower's
business except renewals or extensions of existing debts and interest
thereon;
l. Make any advance or loan except in the ordinary course of
Borrower's business as currently conducted;
m. Make loans, advances or extensions of credit to any Person,
except for sales on open account and otherwise in the ordinary
course of business;
n. Guarantee or otherwise, directly or indirectly, in any way be or
become responsible for obligations of any other person, whether by
agreement to purchase the indebtedness of any other Person, agreement
for the furnishing of funds to any other Person through the
furnishing of goods, supplies or services, by way of stock purchase,
capital contribution, advance or loan, for the purpose of paying or
discharging (or causing the payment or discharge of) the indebtedness
of any other person, or otherwise, except for the endorsement of
negotiable instruments by the Borrower in the ordinary course of
business for deposit or collection;
o. (a) Sell, lease, transfer or otherwise dispose of properties and
assets having and aggregate book value of more than N/A Dollars
($ N/A) (whether in one transaction or in a series of transactions)
except as to the sale of inventory in the ordinary course of
business; (b) change its name, consolidate with or merge into any
other corporation, permit another corporation to merge into it,
acquire all or substantially all the properties or assets of any
other Person, enter into any reorganization or recapitalization or
reclassify its capital stock, or (c) enter into any sale-leaseback
transaction;
p. Purchase or hold beneficially any stock or other securities of,
or make any investment or acquire any interest whatsoever in, any
other Person, except for the common stock of the Subsidiaries owned
by the Borrower on the date of this Agreement and except for
certificates of deposit with maturities of one year or less of United
States commercial banks with capital, surplus and undivided profits
in excess of One Hundred Million Dollars ($100,000,000) and direct
obligations of the United States Government maturing within one year
from the date of acquisition thereof;
q. Allow any fact, condition or event to occur or exist with respect
to any employee pension or profit sharing plans established or
maintained by it which might constitute grounds for termination of any
such plan or for the court appointment of a trustee to administer any
such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for
personal, family or household purposes exceeded seventy-five percent (75%) in
dollar volume of its total sales of all goods during the twelve (12) months
preceding the filing by Bank of a financing statement describing the
Collateral. At no time hereafter shall Borrower's sales for resale goods for
personal, family or household purposes exceed seventy-five percent (75%) in
dollar volume of its total sales.
6.8 Borrower's sole place of business or chief executive office or
residence is located at the address indicated above and Borrower covenants and
agrees that it will not, during the term of this Agreement, without prior
written notification to Bank, relocate said sole place of business or chief
executive office or residence.
6.9 If Borrower is a corporation, Borrower represents, warrants and
covenants as follows:
a. Borrower will not make any distribution or declare or pay any
dividend (in stock or in cash) to any shareholder or on any of its
capital stock, of any class, whether now or hereafter outstanding, or
purchase, acquire, repurchase, or redeem or retire any such capital
stock;
b. Borrower is and shall at all times hereafter be a corporation
duly organized and existing in good standing under the laws of the
state of its incorporation and qualified and licensed to do business
in California or any other state in which it conducts its business;
CA L&S (1-94)
8.
<PAGE> 9
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
c. Borrower has the right and power and is duly authorized to
enter into this Agreement; and
d. The execution by Borrower of this Agreement shall not
constitute a breach of any provision contained in Borrower's
articles of incorporation or by-laws.
6.10 The execution of and performance by Borrower of all of the terms
and provisions contained in this Agreement shall not result in a breach of
or constitute an event of default under any Agreement to which Borrower is
not or hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition
by purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchases of inventory in
the ordinary course of business.
6.12 All assessments and taxes, whether real, personal or otherwise,
due or payable by, or imposed, levied or assessed against, Borrower or any
of its property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of it
by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof. Borrower will
make timely payment or deposit of all F.I.C.A. payments and withholding
taxes required of it by applicable laws, and will upon request furnish Bank
with proof satisfactory to it that Borrower has made such payments or
deposit. If Borrower fails to pay any such assessment, tax, contribution,
or make such deposit, or furnish the required proof, Bank may, in its sole
and absolute discretion and without notice to borrower, (i) make payment of
the same or any part thereof, or (ii) set up such reserves in Borrower's
account as Bank deems necessary to satisfy the liability therefor, or
both. Bank may conclusively rely on the usual statements of the amount
owing or other official statements issued by the appropriate governmental
agency. Each amount so paid or deposited by Bank shall constitute a Bank
Expense and an additional advance to Borrower.
6.13 There are no actions or proceedings pending by or against
Borrower or any guarantor of Borrower before any court or administrative
agency and Borrower has no knowledge of any pending, threatened or imminent
litigation, governmental investigations or claims, complaints, actions or
prosecutions involving Borrower or any guarantor of Borrower, except as
heretofore specifically disclosed in writing to Bank. If any of the
foregoing arise during the term of the Agreement, borrower shall
immediately notify Bank in writing.
6.14 a. Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers
and all other hazards and risks ordinarily insured against by other
owners who use such properties in similar businesses for the full
insurable value thereof. Borrower shall also keep and maintain
business interruption insurance and public liability and property
damage insurance relating to Borrower's ownership and use of the
Collateral and its other assets. All such policies of insurance shall
be in such form, with such companies, and in such amounts as may be
satisfactory to Bank. Borrower shall deliver to Bank certified copies
of such policies of insurance and evidence of the payments of all
premiums therefor. All such policies of insurance (except those of
public liability and property damage) shall contain an endorsement in
form satisfactory to Bank showing Bank as a loss payee thereof, with a
waiver of warranties (Form 438-BFU), and all proceeds payable
thereunder shall be payable to Bank and, upon receipt by Bank, shall
be applied on account of the Obligations owing to Bank. To secure the
payment of the Obligations, Borrower grants Bank a security interest
in and to all such policies of insurance (except those of public
liability and property damage) and the proceeds thereof, and Borrower
shall direct all insurers under such policies of insurance to pay all
proceeds thereof directly to Bank.
b. Borrower hereby irrevocably appoints Bank (and any of Bank's
officers, employees or agents designated by Bank) as Borrower's
attorney for the purpose of making, selling and adjusting claims under
such policies of insurance, endorsing the name of Borrower on any
check, draft, instrument or other item of payment for the proceeds of
such policies of insurance and for making all determinations and
decisions with respect to such policies of insurance. Borrower will
not cancel any of such policies without Bank's prior written consent.
Each such Insurer shall agree by endorsement upon the policy or
policies of insurance issued by it to Borrower as required above, or
by independent instruments furnished to Bank, that it will give Bank
at least ten (10) days written notice before any such policy or
policies of insurance shall be altered or cancelled, and that no act
or default of Borrower, or any other person, shall affect the right of
Bank to recover under such policy or policies of insurance required
above or to pay any premium in whole or in part relating thereto.
Bank, without waiving or releasing any Obligations or any Event of
Default, may, but shall have no obligation to do so, obtain and
maintain such policies of insurance and pay such premiums and take any
other action with respect to such policies which Bank deems advisable.
All sums so disbursed by Bank, as well as reasonably attorneys' fees,
court costs, expenses and other charges relating thereto, shall
constitute Bank Expenses and are payable on demand.
CA L&S (1-94)
9.
<PAGE> 10
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
6.15 All financial statements and information relating to Borrower
which have been or may hereafter be delivered by Borrower to Bank are true and
correct and have been prepared in accordance with GAAP consistently applied and
there has been no material adverse change in the financial condition of Borrower
since the submission of such financial information to Bank.
6.16 a. Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently
applied with ledger and account cards and/or computer tapes and
computer disks, computer printouts and computer records pertaining
to the Collateral which contain information as may from time to
time be requested by Bank, not modify or change its method of
accounting or enter into, modify or terminate any agreement
presently existing, or at any time hereafter entered into with any
third party accounting firm and/or service bureau for the
preparation and/or storage of Borrower's accounting records
without the written consent of Bank first obtained and without
said accounting firm and/or service bureau agreeing to provide
information regarding the Receivables and Inventory and Borrower's
financial condition to Bank; permit Bank and any of its employees,
officers or agents, upon demand, during Borrower's usual business
hours, or the usual business hour of third persons having control
thereof, to have access to and examine all of the Borrower's Books
relating to the Collateral, Borrower's Obligations to Bank,
Borrower's financial condition and the results of Borrower's
operations and in connection therewith, permit Bank or any of its
agents, employees or officers to copy and make extracts therefrom.
b. Borrower shall deliver to Bank within FORTY-FIVE (45) days
after the end of each QUARTER, a COMPANY PREPARED balance sheet
and profit and loss statement covering Borrower's operations and
deliver to Bank within ninety (90) days after the end of each of
Borrower's fiscal years a(n) CPA UNQUALIFIED AUDITED statement of
the financial condition of the Borrower for each such fiscal year,
including but not limited to, a balance sheet and profit and loss
statement and any other report requested by Bank relating to the
Collateral and the financial condition of Borrower, and a
certificate signed by an authorized employee of Borrower to the
effect that all reports, statements, computer disk or tape files,
computer printouts, computer runs, or other computer prepared
information of any kind or nature relating to the foregoing or
documents delivered or caused to be delivered to Bank under this
subparagraph are complete, correct and thoroughly present the
financial condition of Borrower and that there exists on the date
of delivery to Bank no condition or event which constitutes a
breach or Event of Default under this Agreement.
c. In addition to the financial statements requested above, the
Borrower agrees to provide Bank with the following schedules:
X Accounts Receivable Agings on a MONTHLY basis
-----
X Accounts Payable Agings on a MONTHLY basis
-----
Job Progress Reports on a basis; and
----- -------
SEQUOIA SERVICE CONTRACTS on a QUARTERLY basis
BORROWING BASE CERTIFICATES on a MONTHLY BASIS FOR BOTH
PRODUCTS SALES AND SERVICE CONTRACTS.
6.17 Borrower shall maintain the following financial ratios and
covenants on a consolidated and non-consolidated basis:
a. Working Capital in an amount not less than n/a
b. Tangible Effective Net Worth in an amount not less than
$3,700,000.00 on 12/31/97; STEPPING UP TO $4,000,000.00 ON
3/31/98, TO $4,300,000.00 ON 6/30/98 AND TO $4,600,000.00 ON
9/30/98.
c. a ratio of Current Assets to Current Liabilities of not less
than N/A
d. a quick ratio of cash plus securities plus Receivables to
Current Liabilities of not less than N/A
e. a ratio of Total Liabilities (less debt subordinated to Bank)
to Tangible Effective Net Worth of less than 3.00:1.00
f. a ratio of Cash Flow to Fixed Charges of not less than N/A
g. Net income after taxes of N/A
h. Borrower shall not without Bank's prior written consent acquire
or expend for or commit itself to acquire or expend for fixed
assets by lease, purchase or otherwise in an aggregate amount
that exceeds ONE HUNDRED FIFTY THOUSAND AND NO/100 Dollars
($150,000.00) in any fiscal year; and
i. DOWN STREAMING OF FUNDS TO SUBSIDIARIES TO BE LIMITED TO
---------------------------------------------------------------
$100,000.00 ANNUALLY.
---------------------------------------------------------------
j. TWO ACCOUNTS RECEIVABLE AUDITS PER YEAR PLUS NEXT AUDIT TO
---------------------------------------------------------------
INCLUDE INVENTORY CED AUDIT.
---------------------------------------------------------------
k. BORROWER WILL BE CHARGED $5,000.00 FOR EACH COVENANT
VIOLATION
---------------------------------------------------------------
AND $500.00 FOR LATE STATEMENTS.
---------------------------------------------------------------
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors and
shareholders) shall be excluded from Borrower's assets for all purposes
hereunder.
CA L&S (1-94)
10.
<PAGE> 11
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
6.18 Borrower shall promptly supply Bank (and cause any guarantor to supply
Bank) with such other information (including tax returns) concerning its affair
(or that of any guarantor) as Bank may request from time to time hereafter, and
shall promptly notify Bank of any material adverse change in Borrower's
financial condition and of any condition or event which constitutes a breach of
or an event which constitutes an Event of Default under this Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and able
to pay its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank for all
sums expended by Bank in connection with any action brought by Bank to correct
any default or enforce any provision of this Agreement, including all Bank
Expenses; Borrower authorizes and approves all advances and payments by Bank for
items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this
Agreement shall be automatically deemed repeated with each advance and shall be
conclusively presumed to have been relied on by Bank regardless of any
investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements which
Borrower shall give, or cause to be given, to Bank, either now or hereafter.
6.22 Borrower shall keep all of its principal bank accounts with Bank and
shall notify the Bank immediately in writing of the existence of any other bank
account, deposit account, or any other account into which money can be
deposited.
6.23 Borrower shall furnish to the Bank: (a) as soon as possible, but in
not event later than thirty (30) days after Borrower knows or has reason to
know that any reportable event with respect to any deferred compensation plan
has occurred, a statement of the chief financial officer of Borrower setting
forth the details concerning such reportable event and the action which Borrower
proposes to take with respect thereto, together with a copy of the notice of
such reportable event given to the Pension Benefit Guaranty Corporation, if a
copy of such notice is available to Borrower; (b) promptly after the filing
thereof with the United States Secretary of Labor or the Pension Benefit
Guaranty Corporation, copies of each annual report with respect to each
deferred compensation plan; (c) promptly after receipt thereof, a copy of any
notice Borrower may receive from the Pension Benefit Guaranty Corporation or the
Internal Revenue Service with respect to any deferred compensation plan;
provided, however, this subparagraph shall not apply to notice of general
application issued by the Pension Benefit Guaranty Corporation or the Internal
Revenue Service; and (d) when the same is made available to participants in the
deferred compensation plan, all notices and other forms of information from time
to time disseminated to the participants by the administrator of the deferred
compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in compliance
with all federal, state and municipal laws, regulations and ordinances relating
to the handling, treatment and disposal of toxic substances, wastes and
hazardous material and shall maintain all necessary authorizations and permits.
6.25 Borrower shall maintain insurance on the life of N/A in an amount not
to be less than NO/100 Dollars ($ N/A) under one or more policies issued by
insurance companies satisfactory to Bank, which policies shall be assigned to
Bank as security for the indebtedness and on which Bank shall be named as sole
beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to the
following employees: N/A to an aggregate of N/A Dollars ($ N/A) per N/A.
7. EVENTS OF DEFAULT Any one or more of the following events shall
constitute a default by Borrower under this Agreement:
a. If Borrower fails or neglects to perform, keep or observe any term,
provision, condition, covenant, agreement, warranty or representation
contained in this Agreement, or any other present or future agreement
between Borrower and Bank;
b. If any representation, statement, report or certificate made or
delivered by Borrower, or any of the officers, employees or agents to Bank
is not true and correct;
c. If Borrower fails to pay when due and payable or declared due and
payable, all or any portion of the Borrower's Obligations (whether of
principal, interest, taxes, reimbursement of Bank Expenses, or otherwise);
d. If there is a material impairment of the prospect of repayment of all
or any portion of Borrower's Obligations or a material impairment of the
value or priority of Bank's security interest in the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject to a
writ or distress warrant, or are levied upon, or come into the possession
of any Judicial Officer or Assignee and the same are not released,
discharged or bonded against within (10) days thereafter;
f. If any insolvency Proceeding is filed or commenced by or against
Borrower without being dismissed within ten (10) days thereafter;
CA L&S (1-94) 11.
<PAGE> 12
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
g. If any proceeding is filed or commenced by or against Borrower for
its dissolution or liquidation;
h. If Borrower is enjoined, restrained or in any way prevented by
court order from continuing to conduct all or any material part of its
business affairs;
i. If a notice of lien, levy or assessment is filed of record with
respect to any or all of Borrower's assets by the United States
Government, or any department, agency or instrumentality thereof, or
by any state, county, municipal or other government agency, or if any
taxes or debts owing at any time hereafter to any one or more of such
entities becomes a lien, whether choate or otherwise, upon any or all
of the Borrower's assets and the same is not paid on the payment date
thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon any
or all of Borrower's assets and the same is not satisfied, dismissed
or bonded against within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside computer
service bureau at the time this Agreement is entered into or during
the term of this Agreement such an agreement with an outside service
bureau is entered into, and at any time thereafter, without first
obtaining the written consent of Bank, Borrower terminates, modifies,
amends or changes its contractual relationship with said computer
service bureau or said computer service bureau fails to provide Bank
with any requested information or financial data pertaining to Bank's
Collateral, Borrower's financial condition or the results of
Borrower's operations;
l. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an
acceleration of the maturity of Borrower's indebtedness to others,
whether under any indenture, agreement or otherwise;
m. If Borrower makes any payment on account of indebtedness which has
been subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any warranty
or representation made to Bank by any officer or director of Borrower,
or if any such warranty or representation is withdrawn by any officer
or director;
o. If any party subordinating its claims to that of Bank's or any
guarantor of Borrower's Obligations dies or terminates its
subordination or guaranty, becomes insolvent or an Insolvency
Proceeding is commenced by or against any such subordinating party or
guarantor;
p. If Borrower is an individual and Borrower dies;
q. If there is a change of ownership or control of N/A percent (___%)
or more of the issued and outstanding stock of Borrower; or
r. If any reportable event, which the Bank determines constitutes
grounds for the termination of any deferred compensation plan by the
Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer
any such plan, shall have occurred and be continuing thirty (30) days
after written notice of such determination shall have been given to
Borrower by Bank, or any such Plan shall be terminated within the
meaning of Title IV of the Employment Retirement Income Security Act
("ERISA"), or a trustee shall be appointed by the appropriate United
States District Court to administer any such plan, or the Pension
Benefit Guaranty Corporation shall institute proceedings to terminate
any plan and in case of any event described in this Section 7.0, the
aggregate amount of the Borrower's liability to the Pension Benefit
Guaranty Corporation under Sections 4062, 4063 or 4064 of ERISA shall
exceed five percent (5%) of borrower's Tangible Effective Net Worth.
Notwithstanding anything contained in Section 7 to the contrary,
Bank shall refrain from exercising its rights and remedies and Event
of Default shall thereafter not be deemed to have occurred by reason
of the occurrence of any of the events set forth in Sections 7.a, 7.f
or 7.j of this Agreement if, within ten (10) days from the date
thereof, the same is released, discharged, dismissed, bonded against
or satisfied; provided, however, if the event is the institution of
Insolvency Proceedings against Borrower, Bank shall not be obligated
to make advances to Borrower during such cure period.
8. BANK'S RIGHTS AND REMEDIES
8.1 Upon the occurrence of an Event of Default by Borrower under
this Agreement, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all
of which are authorized by Borrower:
a. Declare Borrower's Obligations, whether evidenced by this
Agreement, installment notes, demand notes or otherwise, immediately
due and payable to the Bank;
b. Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, or any other agreement between Borrower
and Bank;
c. Terminate this Agreement as to any future liability or obligation
of Bank, but without affecting Bank's rights and security interests in
the Collateral, and the Obligations of Borrower to Bank;
CA L&S (1-94) 12.
<PAGE> 13
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
d. Without notice to or demand upon Borrower or any guarantor, make
such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Bank so requires and to
make the Collateral available to Bank as Bank may designate. Borrower
authorizes Bank to enter the premises where the Collateral is located,
take and maintain possession of the Collateral and the premises (at no
charge to Bank), or any part thereof, and to pay, purchase, contest or
compromise any encumbrance, charge or lien which in the opinion of
Bank appears to be prior or superior to its security interest and to
pay all expenses incurred in connection therewith;
e. Without limiting Bank's rights under any security interest, Bank
is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks and advertising matter, or any
property of a similar nature as it pertains to the Collateral, in
completing production of, advertising for sale and selling any
Collateral and Borrower's rights under all licenses and all franchise
agreement shall inure to Bank's benefit, and Bank shall have the right
and power to enter into sublicense agreements with respect to all such
rights with third parties on terms acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sales and sell (in the manner provided for
herein) the Inventory;
g. Sell or dispose the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including
Borrower's premises) as is commercially reasonable in the opinion of
Bank. It is not necessary that the Collateral be present at any such
sale;
h. Bank shall give notice of the disposition of the Collateral as
follows:
(1) Bank shall give the Borrower and each holder of a security
interest in the Collateral who has filed with Bank a written
request for notice, a notice in writing of the time and place of
public sale, or, if the sale is a private sale or some
disposition other than a public sale is to be made of the
Collateral, the time on or after which the private sale or other
disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower's address appearing in this Agreement, at
least five (5) calendar days before the date fixed for the sale,
or at least five (5) calendar days before the date on or after
which the private sale or other disposition is to be made, unless
the Collateral is perishable or threatens to decline speedily in
value. Notice to persons other than Borrower claiming an interest
in the Collateral shall be sent to such addresses as have been
furnished to Bank;
(3) If the sale is to be a public sale, Bank shall also give
notice of the time and place by publishing a notice one time at
least five (5) calendar days before the date of the sale in a
newspaper of general circulation in the county in which the sale
is to be held; and
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection with
Bank's enforcement and exercise of any of its rights and remedies as
herein provided, whether or not suit is commenced by Bank;
j. Any deficiency which exists after disposition of the Collateral
as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third
parties, to Borrower by Bank, or, in Bank's discretion, to any party
who Bank believes, in good faith, is entitled to the excess; and
k. Without constituting a retention of Collateral in satisfaction of
an obligation within the meaning of 9505 of the Uniform Commercial
Code or an action under California Code of Civil Procedure 726, apply
any and all amounts maintained by Borrower as deposit accounts (as
that term is defined under 9105 of the Uniform Commercial Code) or
other accounts that Borrower maintains with Bank against the
Obligations.
8.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative, Bank shall have all other rights and
remedies not inconsistent herewith as provided by law or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and no
waiver by Bank of any default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election or
acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY
If Borrower fails to pay promptly when due to another person or entity, monies
which Borrower is required to pay by reason of any provision in this Agreement,
Bank may, but need not, pay the same and charge Borrower's account therefor, and
Borrower shall promptly reimburse Bank. All such sums shall become additional
indebtedness owing to Bank, shall bear interest at the rate hereinabove
provided, and shall be secured by all Collateral. Any payments made by Bank
shall not constitute (i) an agreement by it to make similar payments in the
future, or (ii) a waiver by Bank of any default under this Agreement, Bank need
not inquire as to, or contest the validity of, any such expense, tax, security
interest, encumbrance or lien and the receipt of the usual official notice of
the payment thereof shall be conclusive evidence that the same was validly due
and owing. Such payments shall constitute Bank Expenses and additional advances
to Borrower.
CA L&S (1-94) 13.
<PAGE> 14
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
10. WAIVERS
10.1 Borrower agrees that checks and other instruments received by
Bank in payment or on account of Borrower's Obligations constitute only
conditional payment until such items are actually paid to Bank and Borrower
waives the right to direct the application of any and all payments at any
time or times hereafter received by Bank on account of Borrower's
Obligations and Borrower agrees that Bank shall have the continuing
exclusive right to apply and reapply such payments in any manner as Bank
may deem advisable, notwithstanding any entry by Bank upon its books.
10.2 Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension
or renewal of any or all commercial paper, accounts, documents,
instruments chattel paper, and guarantees at any time held by Bank on
which Borrower may in any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible
for (a) the safekeeping of the Inventory; (b) any loss or damage thereto
occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehousemen, bailee, forwarding agency or other person whomsoever. All
risk of loss, damage or destruction of inventory shall be borne by
Borrower.
10.4 Borrower waives the right and the right to assert a
confidential relationship, if any, it may have with any accountant,
accounting firm and/or service bureau or consultant in connection with any
information requested by Bank pursuant to or in accordance with this
Agreement, and agrees that a Bank may contact directly any such
accountants, accounting firm and/or service bureau or consultant in order
to obtain such information.
10.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION
HEREUNDER, OR CONTEMPLATED HEREUNDER, OR ANY OTHER CLAIM (INCLUDING TORT
OR BREACH OF DUTY CLAIMS) OR DISPUTE HOWSOEVER ARISING BETWEEN BANK AND
BORROWER.
10.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails
to pursue or enforce any term, such waiver, delay or failure to pursue or
enforce shall only be effective with respect to that single act and shall
not be construed to affect any subsequent transactions or Bank's right to
later pursue such rights and remedies.
11. ONE CONTINUING LOAN TRANSACTION All loans and advances heretofore, now or
at any time or times hereafter made by Bank to Borrower under this Agreement or
any other agreement between Bank and Borrower, shall constitute one loan secured
by Bank's security interests in the Collateral and by all other security
interests, liens, encumbrances heretofore, now or from time to time hereafter
granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the Obligations
are consumer loan, that portion shall not be secured by any deed of trust or
mortgage on or other security interest in the Borrower's principal dwelling
which is not a purchase money security interest as to that portion, unless
expressly provided to the contrary in another place, or (ii) if the Borrower (or
any of them) has (have) given or give(s) Bank a deed of trust or mortgage
covering real property, that deed of trust or mortgage shall not secure the loan
and any other Obligation of the Borrower (or any of them), unless expressly
provided to the contrary in another place.
12. NOTICES Unless otherwise provided in this Agreement, all notices or
demands by either party on the other relating to this Agreement shall be in
writing and sent by regular United States mail, postage prepaid, properly
addressed to Borrower or to Bank at the addresses stated in this Agreement, or
to such other addresses as Borrower or Bank may from time to time specify to the
other in writing. Requests to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE Bank is hereby authorized to make loans and
advances hereunder upon telephonic or other instructions received from anyone
purporting to be an officer, employee, or representative of Borrower, or at the
discretion of Bank if said loans and advances are necessary to meet any
Obligations of Borrower to Bank. Bank shall have no duty to make inquiry or
verify the authority of any such party, and Borrower shall hold Bank harmless
from any damage, claims or liability by reason of Bank's honor of, or failure to
honor, any such instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS Any documents, schedules, invoices or
other papers delivered to Bank, may be destroyed or otherwise disposed of by
Bank six (6) months after they are delivered to or received by Bank, unless
Borrower requests, in writing, the return of the said documents, schedules,
invoices or other papers and makes arrangements, at Borrower's expense, for
their return.
15. CHOICE OF LAW The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined according to the laws of the
State of California. The parties agree that all actions or proceedings arising
in connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or the County of Santa
Clara.
16. GENERAL PROVISIONS
16.1 This Agreement shall be binding and deemed effective when executed
by the Borrower and accepted and executed by Bank at its headquarter
office.
14.
<PAGE> 15
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
16.2 This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties, provided,
however, that Borrower may not assign this Agreement or any rights
hereunder without Bank's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Bank
shall release Borrower or any guarantor from their Obligations to Bank.
Bank may assign this Agreement and its rights and duties hereunder. Bank
reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in Bank's rights and
benefits hereunder. In connection therewith, Bank may disclose all
documents and information which Bank now or hereafter may have relating to
Borrower or Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth
herein for convenience only; unless the contrary is compelled by the
context, everything contained in each paragraph applies equally to this
entire Agreement.
16.4 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Bank or Borrower, whether under any
rule of construction or otherwise; on the contrary, this Agreement has been
reviewed by all parties and shall be construed and interpreted according
to the ordinary meaning of the words used so as to fairly accomplish the
purposes and intentions of all parties hereto. When permitted by the
context, the singular includes the plural and vice versa.
16.5 Each provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
16.6 This Agreement cannot be changed or terminated orally. Except as
to currently existing Obligations owing by Borrower to Bank, all prior
agreements, understandings, representations, warranties, and negotiations,
if any, with respect to the subject matter hereof, are merged into this
Agreement.
16.7 The parties intend and agree that their respective rights,
duties, powers, liabilities, obligations and discretions shall be
performed, carried out, discharged and exercised reasonably and in good
faith.
16.8 In addition, if this Agreement is secured by a deed of trust or
mortgage covering real property, then the trustor or mortgagor shall not
mortgage or pledge the mortgaged premises as security for any other
indebtedness or obligations. This Agreement, together with all other
indebtedness secured by said deed of trust or mortgage, shall become due
and payable immediately, without notice, at the option of Bank, (a) if said
trustor or mortgagor shall mortgage or pledge the mortgaged premises for
any other indebtedness or obligations or shall convey, assign or transfer
the mortgaged premises by deed, installment sale contract or other
instrument; (b) if the title to the mortgaged premises shall become vested
in any other person or party in any manner whatsoever, or (c) if there is
any disposition (through one or more transactions) of legal or beneficial
title to a controlling interest of said trustor or mortgagor.
IN WITNESS WHEREOF, the parties hereto have caused this Loan & Security
Agreement (Accounts and Inventory) to be executed as of the date first
hereinabove written.
ATTEST:
- ----------------------------------
Title:
BORROWER: GENERAL AUTOMATION, INC.
Accepted and effective as of By: [SIG]
DECEMBER 16, 1997 at Bank's ------------------------------
Headquarter Office Signature of
Title: VP Finance
---------------------------
By:
- ---------------------------------- ------------------------------
Signature of
By: /s/ DIANA FISK Title:
------------------------------ ---------------------------
Signature of DIANA FISK
Title: Vice President By:
--------------------------- ------------------------------
Signature of
Title:
---------------------------
By:
------------------------------
Signature of
Title:
---------------------------
15.
CA L&S (1-94)
<PAGE> 1
EXHIBIT 10.19
TEXAS MICRO INC.
5959 Corporate Drive
Houston, Texas 77036
October 1, 1997
General Automation, Inc.
17731 Mitchell North
Irvine, California 92614
Re: Asset Purchase Agreement
Ladies and Gentlemen:
Reference is made to (a) that certain Asset Purchase Agreement (the
"Purchase Agreement") dated as of October 3, 1996 between Sequoia Systems, Inc.,
a Delaware corporation now known as Texas Micro Inc. ("Texas Micro"), and
General Automation, Inc., a Delaware corporation ("GA"), and (b) that certain
Registration Rights Agreement (the "Registration Rights AGREEMENT") dated as of
October 11, 1997 between Texas Micro and GA. Capitalized terms used but not
defined herein shall have the meanings ascribed to such terms in the Purchase
Agreement.
Notwithstanding anything contained in the Purchase Agreement or the
Registration Rights Agreement to the contrary, Texas Micro and GA hereby agree
as follows:
1. Payment of Purchase Price. Texas Micro and GA hereby agree that the
total Purchase Price, after any adjustment thereto to be made pursuant to
Section 8.6(d) of the Purchase Agreement, is $ 11,346,611, of which $2,717,712
has heretofore been paid by GA to Texas Micro leaving a balance due of
$8,628,899 (the "Remaining Balance"). The Remaining Balance, including, but not
limited to, all Deferred Payments which are due or are to become due and the
payment required to be made by GA on October 11, 1997 pursuant to Section 3.2(f)
of the Purchase Agreement, shall be paid in cash, with $7,200,000 of the
Remaining Balance to be paid pursuant to, and on the terms and conditions
provided in, this letter agreement (the "Letter Agreement Amount") and $
1,428,899 of the Remaining Balance to be paid pursuant to, and on the terms and
conditions provided in, the Promissory Note attached hereto as Exhibit A (the
"Promissory Note"), which is incorporated herein by reference as if set forth
herein in full. Texas Micro and GA acknowledge and
<PAGE> 2
General Automation, Inc.
October 1, 1997
Page 2
agree, (i) that GA has heretofore delivered 350,000 shares of Stock to Texas
Micro for which no value has been assigned for purposes of the payment of the
Purchase Price, (ii) that such shares of Stock shall be valued at the times and
in the manner provided in Section 3.2(c) of the Purchase Agreement and (iii)
that, in determining whether the Letter Agreement Amount has been paid in full,
the Letter Agreement Amount shall be reduced by an amount equal to the value of
such shares of Stock (as so determined and at such times), it being understood
and agreed that the valuation of such shares of Stock shall not affect the
obligation of GA to make the payments in cash required under Section 2 hereof at
the times and in the amounts required thereunder unless the aggregate cash
payments received by Texas Micro from GA in payment of the Letter Agreement
Amount plus the valuation of such shares equals or exceeds the Letter Agreement
Amount.
2. Mandatory Payments. (a) The following amounts shall be due and
payable by GA to Texas Micro towards the Remaining Balance on the following
respective dates:
(i) an amount equal to $300,000 shall be due and payable on the date
hereof;
(ii) an amount equal to $400,000 shall be due and payable on December
15, 1997; and
(iii) an amount equal to the Percentage Amount (as hereinafter defined)
shall be due and payable on the 1 5th day of each month commencing with
December 15, 1997 and continuing thereafter until the Purchase Price shall
have been paid in full (each such payment, a "Percentage Payment").
Each Percentage Payment shall be accompanied by a worksheet certified by GA's
chief financial of officer which sets forth the calculation of such Percentage
Payment and the cumulative amount paid with respect to all Percentage Payments.
Not more than once every six months, Texas Micro may, following written request
and reasonable notice, inspect the records of GA to verify the calculations of
the Percentage Payments.
(b) For purposes of this letter agreement, "Percentage Amount" means,
with respect to any Percentage Payment, the sum of:
(i) an amount equal to 18% of all gross revenues received by GA from
sales of any products in or manufactured from Inventory and/or any license
fees paid by Texas Micro in connection with the Business prior to the
Closing Date;
(ii) an amount equal to five percent of all gross revenues received by
GA from sales of any products by the Business excluding the sales described
in clause (i) above, and
<PAGE> 3
General Automation, Inc.
October 1, 1997
Page 3
(iii) during the period commencing on October 1, 1997 and continuing
thereafter until and including April 15, 1998, an amount equal to five
percent of all gross revenues received by GA with respect to all of GA's
service and support operations, and at any time thereafter, subject to
Section 2(c), an amount equal to ten percent of all gross revenues received
by GA with respect to all of GA's service and support operations,
in each case, based on the sales of products or the rendition of services and
support operations by GA, as applicable, during the second full calendar month
ending prior to the date on which such Percentage Payment is due and payable
(i.e., the calculation of the Percentage Amount related to the Percentage
Payment due on December 15, 1997 is to be based on the calendar month ending on
October 31, 1997, the calculation of the Percentage Amount related to the
Percentage Payment due on January 31, 1998 is to be based on the calendar month
ending on November 30, 1997, etc.).
(c) Notwithstanding anything to the contrary contained in Section 2(b),
on and after May 15, 1998, GA shall have the right to transfer any portion of
any Percentage Payment which is based upon the gross revenues received by GA
with respect to GA's service and support operations and which is in excess of
five percent of such gross revenues to the outstanding principal balance of the
Promissory Note, provided that (i) immediately prior to such transfer, the Note
has not been paid in full, (ii) GA shall have provided Texas Micro with written
notice of such election prior to the date on which the applicable PERCENTAGE
PAYMENT IS DUE AND PAYABLE, AND (III) AT THE time of such transfer, the amount
transferred to the outstanding principal balance of the Promissory Note is not
past due.
(d) Except as otherwise specifically provided in this letter agreement,
(i) all payments hereunder shall be made to Texas Micro on the date when due and
shall be made in lawful money of the United States of America, and (ii) whenever
any payment to be made hereunder shall be stated to be due on a day other than a
business day, the due date thereof shall be extended to the next succeeding
business day and, with respect to payments of principal, interest (if any) shall
be payable thereon during such extension at the rate of interest that otherwise
applied to such payment.
(e) In the event that GA fails to pay any amount when due hereunder,
such amount, to the extent permitted by applicable law, shall bear interest at a
rate per annum equal to the lesser of the Highest Lawful Rate (as defined in the
Promissory Note) and 16%, and such amount (together with such interest) shall be
due and payable by GA on demand.
3. Registration Statement. GA shall not be required to perform any of
its obligations under Section 2.01 or Section 2.02 of the Registration Rights
Agreement. Without limiting the generality of the foregoing, GA shall not be
required to cause the registration statement previously
<PAGE> 4
General Automation, Inc.
October 1, 1997
Page 4
filed by it with the Securities and Exchange Commission on Form S-1 to become or
remain effective.
4. Prepayments. GA may prepay the Letter Agreement Amount in whole at
any time or from time to time in part without premium or penalty.
5. Release of Claims. (a) Texas Micro hereby releases and discharges GA
and its officers, directors, employees and agents, whether past, present or
future (collectively, the "GA. Released Parties"), from any and all claims,
demands, costs, liabilities, damages, expenses, compensation and actions and
causes of action of every nature, whether in law or in equity (collectively,
"Claims"), which Texas Micro had or now has or makes claim to have against any
of the GA Released Parties, or any of them, to the extent, but only to the
extent, that such Claims directly or indirectly relate to (i) the failure of GA
to make any Deferred Payment in a timely manner or (ii) the failure of GA to
file a registration statement pursuant to the Registration Rights Agreement in a
timely manner or have such registration statement declared effective.
(b) Texas Micro hereby represents and warrants to GA that there has
been no assignment of any Claims which are the subject to the release set forth
in Section 5(a) above.
6. Representations and Warranties. GA hereby represents and warrants to
Texas Micro that this letter agreement has been duly authorized, executed and
delivered on behalf of GA and constitutes a legal, valid and binding obligation
of GA, enforceable against GA in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency or other laws of
general application relating to the enforcement of creditors' rights. Texas
Micro hereby represents and warrants to GA that this letter agreement has been
duly authorized, executed and delivered on behalf of Texas Micro and constitutes
a legal, valid and binding obligation of Texas Micro, enforceable against Texas
Micro in accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency or other laws of general application relating
to the enforcement of creditors' rights
7. Effectiveness. This letter agreement shall not become effective
unless and until (a) it has been duly executed and delivered by each of GA and
Texas Micro and (b) GA shall have duly executed and delivered to Texas Micro the
Promissory Note in the form attached hereto as Exhibit A.
8. Binding Effect. This letter agreement shall be binding upon and
shall inure to the benefit of and be enforceable by GA and Texas Micro and their
respective successors and assigns.
<PAGE> 5
General Automation, Inc.
October 1, 1997
Page 5
9. Counterparts. This letter agreement may be signed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this letter agreement to produce or account for
more than one such counterpart.
10. Interpretation. To the extent that the terms of this letter
agreement vary from the terms of the Purchase Agreement and/or the Registration
Rights Agreement, this letter agreement shall constitute an amendment of the
Purchase Agreement or the Registration Rights Agreement, as applicable. In this
letter agreement, unless a clear contrary intention appears, the words "herein",
"hereof ' and "hereunder" and other words of similar import refer to this letter
agreement as a whole and not to any particular Section or other subdivision. The
headings herein are for convenience only and shall not affect the construction
hereof. No provision of this letter agreement shall be interpreted or construed
against GA or Texas Micro because that party or its legal counsel drafted such
provision.
11. Governing Law. THIS LETTER AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY,
THE INTERNAL LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICTS OF LAW.
12. Entire Agreement. This letter agreement and the Promissory Note (a)
constitute the entire contract between GA and Texas Micro relative to the
matters covered hereby, (b) supersede all prior agreements, consents and
understandings relating to such matters and (c) may not be contradicted by
evidence of prior, contemporaneous or subsequent oral agreements of GA and Texas
Micro.
If the foregoing accurately sets forth your agreement with respect to
the matters covered hereby, please execute this letter agreement in the space
provided below.
Very truly yours,
TEXAS MICRO INC.
By: /s/ MICHAEL STEWART
--------------------------------
Michael Stewart
President and Chief Executive
Officer
<PAGE> 6
General Automation, Inc.
October 1, 1997
Page 6
AGREED TO AND ACCEPTED as of
the date first above written:
GENERAL AUTOMATION, INC.
By: /s/ JANE M. CHRISTIE
-------------------------
Name: Jane M. Christie
-------------------------
Title: President & CEO
-------------------------
<PAGE> 7
PROMISSORY NOTE
$1,428,899 October 1, 1997
FOR VALUE RECEIVED, on the dates and in the amounts herein stipulated,
GENERAL AUTOMATION, INC., a Delaware corporation ("Maker"), hereby promises to
pay to the order of TEXAS MICRO INC., a Delaware corporation ("Payee"), the
principal sum of $ 1,428,899, or so much thereof as may be outstanding
hereunder, together with interest on the principal amount hereof remaining
unpaid from time to time, as herein specified. Capitalized terms used but not
defined herein shall have the meanings ascribed to such terms in that certain
Asset Purchase Agreement dated as of October 3, 1996 between Maker and Payee.
The outstanding principal hereof, and accrued and unpaid interest
thereon, shall be due AND PAYABLE in installments as follows:
(a) installments, each in an amount equal to $75,000 plus accrued and
unpaid interest thereon, shall be due and payable, the first such
installment to be due and payable on November 15, 1997, and successive
installments to be due and payable on the 15th of each month thereafter
until the outstanding principal balance of this Note is less than $75,000;
and
(b) a final installment, in an amount equal to the outstanding
principal balance hereof plus any and all accrued and unpaid interest
thereon, shall be due and payable on the 15th day of the first month
following the date of the last payment due under clause (a) above.
The outstanding principal balance hereof shall bear interest prior to
maturity at a varying rate per annum which shall from day to day be equal to the
lesser of the Highest Lawful Rate (as hereinafter defined) and 13%, each such
change in the rate of interest charged on the indebtedness hereunder to become
effective on the effective date of each change in the Highest Lawful Rate.
Maker and Payee, by its acceptance of this Note, acknowledge and agree
that, in addition to the indebtedness of Maker to Payee evidenced by this Note
and the Letter Agreement (as hereinafter defined), certain inter-company
accounts are in existence as of the date of this Note between Maker and Payee.
If, upon final reconciliation of such inter-company accounts, it is determined
that Payee is indebted to Maker for any amount, Payee shall retain such amount
and the amount so retained shall be deemed to be a prepayment of installments
due under this Note in reverse order of maturity, provided, however, that if the
amount so retained is in excess of the outstanding principal balance under this
Note plus all accrued and unpaid interest thereon, the excess shall be promptly
paid by Payee to Maker. In addition, if Payee shall hereafter receive any funds
from former customers of Sequoia Systems, Inc. related to the business sold by
Payee to Maker on
Page 1 of Six
<PAGE> 8
October 11, 1996 which belong to Maker, Payee shall retain such funds and the
amount so retained shall be deemed to be a prepayment of installments due under
this Note in the order of maturity; provided, however, that if the amount so
retained is in excess of the outstanding principal balance under this Note plus
all accrued and unpaid interest thereon, the excess shall be promptly paid by
Payee to Maker. Payee shall promptly notify Maker in writing of its receipt and
application of any such funds, which notice shall specify the amount received,
the date of receipt of the same by Payee and the party from whom such funds were
received.
For purposes of this Note:
(a) "Business Day" means any day, excluding Saturday, Sunday and any
other day on which banks are required or authorized to close in Houston,
Texas; and
(b) "Highest Lawful Rate" means the maximum nonusurious interest rate,
if any, that at any time or from time to time may be contracted for, taken,
reserved, charged or received by Payee with respect to the indebtedness of
Maker to Payee evidenced by this Note under laws applicable to Payee.
Except as otherwise specifically provided in this Note, (a) all
payments under this Note shall be made to Payee on the date when due and shall
be made in lawful money of the United States of America, and (b) whenever any
payment to be made under this Note shall be stated to be due on a day other than
a Business Day, the due date thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest shall be
payable thereon during such extension at the rate of interest that otherwise
applied to such installment.
In the event that Maker fails to pay any amount when due hereunder,
such amount, to the extent permitted by applicable law, shall bear interest at a
rate per annum equal to the lesser of the Highest Lawful Rate and 16%, and such
amount (together with such interest) shall be due and payable by Maker on
demand.
Maker may prepay this Note in whole at any time or from time to time in
part without premium or penalty but with accrued interest to the date of
prepayment on the amount so prepaid. All prepayments shall be applied first to
unpaid interest accrued to the date of such prepayment, and the balance, if any,
shall be applied to the outstanding principal of this Note and interest on the
amount of principal so prepaid shall thereupon cease to accrue.
For so long as any indebtedness is outstanding hereunder or under that
certain letter agreement of even date herewith between Maker and Payee (the
"Letter Agreement"), Maker shall not, without the consent of Payee, incur any
indebtedness in connection with the acquisition of any entity or business (by
purchase of assets, purchase of stock or other equity interests, merger or
otherwise) unless either (a) such indebtedness is subordinate in all respects,
including in right of payment, to the indebtedness of Maker to Payee hereunder
and under the Letter Agreement, or (b)
Page 2 of Six
<PAGE> 9
the outstanding principal balance of this Note and all accrued and unpaid
interest thereon is paid in full prior to or concurrently with the incurrence of
such indebtedness.
If any of the following events (each an "Event of Default") shall occur
and be continuing:
(a) Maker shall fail to pay when due any amount owing to Payee under
this Note or under the Letter Agreement and such failure shall not have
been remedied within five days following written notice thereof by Payee to
Maker;
(b) Maker shall fail to perform any other term, covenant or agreement
contained in this Note and such failure shall not have been remedied within
30 days following written notice thereof by Payee to Maker;
(c) Maker shall be adjudicated insolvent, or shall generally not pay,
or admit in writing its inability to pay, its debts as they mature, or
shall make a general assignment for the benefit of creditors, or any
proceeding shall be instituted by Maker seeking to adjudicate itself
insolvent, seeking liquidation, winding-up, reorganization, arrangement,
adjustment, protection, relief or composition of it or its debts under any
law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of
a receiver, trustee or other similar of official for it or for any
substantial part of its assets or properties, or Maker shall take any
action in furtherance of any of such actions;
(d) any proceeding of the type referred to in clause (c) above is filed
or commenced against Maker, or Maker by any act indicates its approval
thereof, consents thereto or acquiesces therein, or an order for relief is
entered in an involuntary case under the bankruptcy laws of the United
States, or an order, judgment or decree is entered appointing a trustee,
receiver, custodian, liquidator or similar of official or adjudicating
Maker insolvent, or approving the petition in any such proceedings, and
such order, judgment or decree remains in effect for 60 days; or
(e) this Note or the Letter Agreement shall (other than with the
consent of Payee), at any time after its execution and delivery and for any
reason, cease to be in full force and effect, or be declared to be null and
void, or the validity or enforceability hereof or thereof shall be
contested by any person or entity, or Maker (other than in good faith)
shall deny that it has any further liability hereunder or thereunder;
then, (i) upon the occurrence of any Event of Default described in clause (c) or
(d) above, the entire unpaid principal amount of this Note, all interest accrued
and unpaid thereon and all other amounts payable by Maker under this Note, shall
automatically become immediately due and payable, without presentment for
payment, demand, protest, notice of intent to accelerate, notice of acceleration
or further notice of any kind, all of which are hereby expressly waived by
Maker, and Payee may thereupon exercise any and all rights and remedies
available to it at law, in equity or otherwise. Upon the occurrence of any other
Event of Default, Payee may, by written notice to
Page 3 of Six
<PAGE> 10
Maker, declare the entire unpaid principal amount of this Note, all interest
accrued and unpaid thereon and all other amounts payable by Maker under this
Note, to be forthwith due and payable, whereupon all such amounts shall become
and be forthwith due and payable, without presentment for payment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by Maker, and Payee may thereupon exercise any and all rights and remedies
available to it at law, in equity or otherwise.
Except for the notices specified herein, if default is made in the
prompt payment of this Note when due or declared due and the same is placed in
the hands of an attorney for collection, or suit is brought on same, or the same
is collected through probate, bankruptcy or other judicial proceedings, then
Maker agrees to pay to Payee all reasonable attorneys' fees and other reasonable
expenses incurred by Payee in the enforcement or collection hereof, including
costs of court.
Maker and any and all endorsers, guarantors and sureties severally
waive all notices, demands for payment, presentment for payment, protest and
notice of protest, notice of intent to accelerate, notice of acceleration, any
other notices of any kind, the filing of suit hereon for the purpose of fixing
liability and diligence in taking any action to collect amounts called for
hereunder, and consent that the time of payment hereof may be extended and
re-extended from time to time without notice to them or any of them.
It is the intention of the parties hereto to comply with the usury laws
of the State of Delaware and of the United States of America. The parties hereto
do not intend to contract for, charge or receive any interest or other charge
which is usurious and, by execution of this Note, Maker acknowledges and agrees
that Payee has no such intent. This Note is hereby expressly limited so that in
no event whatsoever, whether by reason of acceleration of maturity hereof, or
otherwise, shall the amount paid, or agreed to be paid, to Payee or any other
holder hereof for the use, forbearance or detention of the money to be due
hereunder, or otherwise, or for the payment or performance of any covenant or
obligation contained herein, exceed the Highest Lawful Rate. If from any
circumstance whatsoever fulfillment of any provisions hereof, at the time
performance of such provisions shall be due, shall involve exceeding the valid
limits prescribed by law, then the obligation to be fulfilled shall be reduced
to the Highest Lawful Rate, and if from any such circumstance Payee, or any
other holder hereof, shall ever receive as interest or otherwise an amount which
will exceed the Highest Lawful Rate, such amount which would be excessive
interest shall be applied to the reduction of the principal amount owing
hereunder or under the Letter Agreement and not to the payment of interest, or
if such excessive interest exceeds the unpaid balance of principal hereof and
the Letter Agreement, such excess shall be refunded to Maker. All sums paid and
agreed to be paid to Payee, or any other holder hereof, for the use, forbearance
or detention of the indebtedness of Maker shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the
period until payment in full on this Note (or any renewals, extensions and
rearrangements hereof) so that the actual rate of interest on account of this
indebtedness evidenced by this Note is uniform throughout the term of this Note
(and all renewals, extensions and rearrangements hereof) and does not exceed the
Highest Lawful Rate. The terms and provisions of this paragraph shall control
and supersede any other provision of this Note.
Page 4 of Six
<PAGE> 11
Any and all notices, requests or other communications hereunder shall
be given in writing and delivered by (a) regular, overnight or registered or
certified mail (return receipt requested), with first class postage prepaid, (b)
hand delivery, (c) facsimile transmission, (d) electronic mail or (e) overnight
courier service, to the parties at the following addresses or facsimile numbers:
(i) if to Maker, to
General Automation, Inc.
17731 Mitchell North
Irvine, California 92614
Attention: Chief Financial Officer
Facsimile Number: (714) 752-6772; and
(ii) if to Payee, to
Texas Micro Inc.
5959 Corporate Drive
Houston, Texas 77036
Attention: Michael Stewart
Facsimile Number: (713) 541-8231
or at such other address or number as shall be designated by Maker or Payee in a
notice to the other given in accordance with this paragraph. Except as otherwise
provided in this Note, all such communications shall be deemed to have been duly
given, (A) in the case of a notice sent by regular mail, three Business Days
after it is duly deposited in the mails, (B) in the case of a notice sent by
registered or certified mail, on the date received for (or refused) on the
return receipt, (C) in the case of a notice delivered by hand, when personally
delivered, (D) in the case of a notice sent by facsimile or electronic mail,
upon transmission subject to telephone confirmation of receipt, and (E) in the
case of a notice sent by overnight mail or overnight courier service, the date
delivered at the designated address, in each case given or addressed as
aforesaid.
This Note shall be binding upon Maker and its successors and permitted
assigns and shall inure to the benefit of Payee and its successors and assigns.
No amendment, modification, restatement or supplement of this Note
shall be valid unless the same is in writing and signed by Maker and Payee. No
waiver of any provision of this Note shall be valid unless in writing and signed
by the person or entity against whom that waiver is sought to be enforced. No
failure or delay on the part of Payee in exercising any right, power or
privilege hereunder and no course of dealing between Maker and Payee shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder. No
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<PAGE> 12
notice to or demand on Maker in any case shall entitle Maker to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of Payee to any other or further action in any
circumstances without notice or demand.
Neither this Note nor any right, interest or obligation hereunder may
be assigned by Maker without the prior written consent of Payee and any attempt
to do so shall be null and void; provided, however, that no assignment by Maker
of any of its rights, interests or obligations hereunder shall relieve Maker of
its obligations under this Note unless Payee expressly agrees otherwise in
writing. Payee may assign any of its rights, interests and obligations under
this Note to any person or entity; provided, however, that Maker shall not be
obligated to make any payment under this Note to such assignee until notice of
such assignment is given by Payee to Maker.
Should any clause, sentence or paragraph of this Note be judicially
declared to be invalid, unenforceable or void, such decision will not have the
effect of invalidating or voiding the remainder of this Note, and the part or
parts of this Note so held to be invalid, unenforceable or void will be deemed
to have been stricken herefrom as if such stricken part or parts had never been
included herein.
Time is of the essence of this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE AND THE APPLICABLE LAWS OF THE UNITED STATES OF
AMERICA, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
EXECUTED to be EFFECTIVE as of the day and year first above written.
GENERAL AUTOMATION, INC.
By: /s/ JANE M. CHRISTIE
----------------------------------
Printed Name: Jane M. Christie
------------------------
Title: President & CEO
-------------------------------
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