<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ____________ to ____________
Commission file number 0-5260
GENERAL AUTOMATION, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 95-2488811
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17731 Mitchell North, Irvine, CA 92653-1595
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 250-4800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
----------------------------
(Title of class)
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 aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of January 8, 1999 was $2,328,933, based on
the average of the bid and asked prices for the Registrant's stock, as traded on
the "Electronic Bulletin Board".
January 8, 1999, 9,332,641 shares of the Registrant's common stock, $.10 par
value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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GENERAL AUTOMATION, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
PART I
ITEM 1. BUSINESS................................................................... 1
ITEM 2. PROPERTIES................................................................. 7
ITEM 3. LEGAL PROCEEDINGS.......................................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................ 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...... 7
ITEM 6. SELECTED FINANCIAL DATA.................................................... 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................................... 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................. 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................ 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................... 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................... 15
ITEM 11. EXECUTIVE COMPENSATION..................................................... 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............ 21
</TABLE>
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PART I
------
ITEM 1. BUSINESS
--------
FORWARD-LOOKING STATEMENTS
- --------------------------
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, THAT INVOLVE RISKS AND
UNCERTAINTIES. A NUMBER OF IMPORTANT FACTORS, INCLUDING THOSE CONTAINED BELOW
UNDER THE HEADING "SPECIAL FACTORS", AS WELL AS FACTORS DISCUSSED ELSEWHERE IN
THIS REPORT AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION, COULD AFFECT THE COMPANY'S ACTUAL RESULTS AND CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.
GENERAL
- -------
General Automation, Inc. ("GA" or the "Company") provides computer
hardware maintenance and software support services to over 3,000 end users
throughout the United States. The Company also integrates computer hardware
manufactured by other companies with proprietary and non-proprietary software to
meet the requirements of its customers' specific applications, and installs and
supports the integrated systems. The Company also sells a line of proprietary
MultiValue database software products, and a line of connectivity products and
middleware products designed to allow easy communication and transfer of data
between MultiValue databases and other widely used software products such as
Microsoft products and JAVA products. Although the Company's operations are
conducted primarily in the United States, the Company also conducts operations
through subsidiaries in Canada, Australia and the United Kingdom.
The Company's principal executive offices are located at 17731 Mitchell
North, Irvine, California, and its telephone number is (949) 250-4800. Unless
the context otherwise requires, the "Company" or "GA" refer to General
Automation, Inc. and its consolidated subsidiaries.
SPECIAL FACTORS
- ---------------
Readers of this Report should carefully consider, in addition to the
other information contained in this Report, the following:
Going Concern Qualification. The reports of the Company's independent
public accountants on the financial statements of the Company included in this
Report on Form 10-K contain a going concern qualification. (See "Financial
Statements and Supplementary Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations.")
Recent Operating Losses; Deficit Net Worth. The Company has incurred
losses in four of its last five fiscal years. There can be no assurance that the
Company will be able to achieve or sustain profitable operations in the future.
As of September 30, 1998, the Company had a deficit net worth of $9.9 million.
(See "Financial Statements and Supplementary Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations.")
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Working Capital Deficiency; Cash Flow Constraints. As of September 30,
1998, the Company had a working capital deficiency of $13.8 million.
Accordingly, the Company continues to operate under severely restricted cash
resources, which requires that the Company carefully manage and monitor its cash
position. (See "Financial Statements and Supplementary Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Additionally, the Company's primary bank, Comerica Bank, has demanded payment in
full of the Company's $2.2 million credit line. The bank has initiated
negotiations to enter into a forbearance agreement which will allow the Company
sufficient time to find a replacement source of funds. Management is optimistic
it will enter into the forbearance agreement in early 1999.
Obligations to TMI in Default. In October 1996, the Company purchased
from Texas Micro, Inc., formerly known as Sequoia Systems, Inc. ("TMI"),
substantially all of the assets and business of TMI's Sequoia Enterprise Systems
business division. In October 1997, the Company and TMI renegotiated the payment
terms of the amount still owed by the Company to TMI in connection with that
acquisition. In connection therewith, the Company executed and delivered to TMI
an unsecured promissory note in the amount of $1,429,000, which bears interest
at the rate of 13% per year and is payable in monthly installments of $75,000
plus interest. The Company also agreed to pay an additional $5,919,000 to TMI,
$300,000 of which was paid in October 1997 and $400,000 of which was paid in
December 1997. The balance was to be paid in monthly installments based on a
percentage of the Company's revenues. The Company is in default in its payment
obligations to TMI. As of September 30, 1998, the balance owed by the Company to
TMI was $6,401,000. The Company is attempting to renegotiate these obligations.
There can be no assurance, however, that the Company will be successful in doing
so. (See "Financial Statements and Supplementary Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Obligations to Boundless in Default. In May 1995, the Company 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
MultiValue Database based business owned by Boundless. Under the terms of the
Operating Agreement which governs the conduct of GAL's operations (the
"Operating Agreement"), GAL operates and manages GA's MultiValue business and
Boundless's MultiValue 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 Company is in default in its
payment obligations to Boundless. As of September 30,1998, the amount owed by
the Company to Boundless was $2,043,000. The Company is attempting to
renegotiate these obligations. There can be no assurance, however, that the
Company will be successful in doing so. (See "Financial Statements and
Supplementary Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations.")
Under the Operating Agreement, the business and affairs of GAL are
managed exclusively by GA. However, the Operating Agreement provides that, upon
the occurrence of certain 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. GA
has not yet received notice from Boundless of any intent to replace GA as the
manager of GAL.
Limited Market for the Company's Stock. The Company's common stock was
traded on the American Stock Exchange until May 20, 1998, when trading was
suspended due to the Company's failure to meet the Exchange's minimum listing
requirements. As a result of the continuing failure of the Company to meet those
minimum listing requirements, the Company's common stock was delisted by the
American Stock Exchange on September 28, 1998. Since October 9, 1998, the
Company's common stock has traded over the counter and has been quoted on the
"Electronic Bulletin Board". The delisting of the Company's common stock by the
American Stock Exchange has resulted in a much more limited market for the
Company's common stock than existed before the delisting.
2
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Competition. The Company competes with a number of companies, many of
which have substantially greater financial, technological, marketing and other
resources than the Company. In its service business, the Company's competitors
include Wang, AT&T and IBM. The Company's competitors for the sale of hardware
include Data General Corporation, Digital Equipment Corporation, Hewlett Packard
Company, and IBM. The Company's competitors for software products include
Ardent and Pick Systems. (See "Business - Competition.")
SERVICE AND SUPPORT
- -------------------
GA maintains a high quality service organization dedicated to meeting
the complex hardware and software support requirements of several thousand end
users, and has been delivering highly skilled support services for nearly thirty
years. GA has earned a reputation for excellent quality and responsive service
through an exceptional staff of service professionals, and the Company believes
that this reputation is a key reason that customers with information-critical
applications choose to buy from GA.
GA offers three basic types of service and support, hardware maintenance
services, software support services, and professional services.
Hardware Maintenance
GA provides on-site hardware maintenance services for computer equipment
sold by GA as well as a wide variety of computer systems, workstations, tape
drives, disk subsystems, terminals, communications devices, printers and other
peripherals sold by other companies. These services are provided primarily by GA
employees operating out of one of the Company's field service offices located
throughout the United States. In some areas, however, the work is performed by
subcontractors managed by the Company.
Software Support
GA also provides software support services for GA's proprietary software
products as well as the various operating systems on which they run, such as
AIX, UNIX, UnixWare, OS/2, Novell NetWare, Windows 95 - 98, Windows NT and MS
DOS. These services are provided by phone, by remote access to the customer's
system, and on-site, and are provided primarily out of GA's offices in Irvine,
California, Marlborough, Massachusetts, and Hauppauge, New York.
Professional Services
GA also provides various professional services, including performance
tuning, system upgrade services, technical product training, system design and
site preparation, network design and configuration support, and development of
disaster recovery programs. Contract programming and consulting services are
also offered with expertise in Pick, C, C++, Visual Basic, Microsoft Access, and
Pro-IV.
The Company's hardware maintenance and software support services are
typically provided under agreements, which provide for a fixed fee. These
agreements typically provide that they may not be canceled by either the Company
or the customer during the first year of the agreement, but thereafter may be
canceled by either party on ninety days' notice.
3
<PAGE> 6
SYSTEM SALES
- ------------
GA sells complete computer systems which are configured by the Company
(or the value-added resellers through which it sells) to meet the specific
requirements of a particular end user. The hardware components for these systems
are purchased by GA from the standard product offerings of other companies, the
operating system software and proprietary GA software are loaded, the system is
tested, and then delivered to the customer. The Company no longer sells any
proprietary hardware, although some of the hardware sold by the Company is
co-labeled with both the manufacturer's and the Company's name.
The systems offered by the Company include both single processor and
multiprocessor Intel-based systems, as well as PowerPC-based single and
multiprocessor systems. These products feature a broad range of system
solutions, from a low-end, single processor, cost-effective system through an
eight-way multiprocessor enterprise server capable of supporting over 1000
users.
The systems sold by the Company are sold by it directly to the end user
as well as through a group of over 200 value-added resellers. The Company and
its value-added resellers focus their system sales on key vertical markets, such
as healthcare, finance, manufacturing, distribution, government, collection
agencies and insurance.
PROPRIETARY SOFTWARE
- --------------------
MultiValue Database Software
The Company offers a line of proprietary MultiValue database software
products which are based on the Pick Operating System. The MultiValue database
is based on a file structure that is multi dimensional. Some of these products
are designed to run native (without an underlying operating system), while
others are designed to run in concert with various operating systems, including
UNIX, AIX and Windows NT. The Company believes that among the most distinctive
characteristics of its multi-dimensional database products are their relative
ease of use, English-like information management and retrieval language, and the
speed they offer in the handling of large and complex database. Additionally,
the MultiValue database is Year 2000 Compliant. The Company's proprietary
software line is comprised of the following:
mv.BASE - a multi-value data base that runs on Windows NT and Windows
95.
mv.ENTERPRISE - a multi-value data base that runs on AIX or UNIX.
Power95Plus - a multi-value data base that runs on AIX.
Mentor Pro -a multi-value data base and operating system that runs
natively on INTEL compatible PC's.
Each of the foregoing products has been developed by the Company, but is
derived from software developed by Pick Systems. Accordingly, the Company pays
royalties to Pick Systems with respect to these products.
The Company offers its proprietary software products both as a stand
alone product as well as integrated into a system solution.
4
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Liberty Software
The Company also offers a line of proprietary connectivity software and
middleware products comprised of the following, which have been developed by the
Company and are marketed under the Liberty name:
Liberty ODBC Connection Manager - a programming tool which allows C/C++
or Visual Basic programmers to design high speed multi-threaded server
environments for Windows 95 or Windows NT to access ODBC (Open Data Base
Connectivity)Data sources.
Liberty ODBC Driver - allows data communication between multi-value data
bases and Windows applications.
Liberty Web Publisher - allows multi-value data base users a fast, easy
way to create interactive Web applications without compromising the
security of their data.
Liberty Administrator/32 - a Windows administration tool for ODBC (Open
Data Base Connectivity), enabling new and existing multi-value
applications.
Liberty JDBC Driver - enables communication between JAVA and multi-value
data bases.
("Windows" is a registered trademark of MicroSoft, Inc.)
FOREIGN OPERATIONS AND EXPORT SALES
- -----------------------------------
The Company's foreign sales were approximately 16% of total revenues in
fiscal 1998, compared to approximately 12% in fiscal 1997 and approximately 5%
in fiscal 1996. These revenues were generated primarily through the sale,
installation and maintenance of computer systems in Australia and the
distribution and support of software in Canada and the United Kingdom. The
increase in foreign sales from fiscal 1996 to fiscal 1997 was primarily due to
the Company's acquisition in October 1996 of the Sequoia Enterprise Systems
division of Sequoia Systems, Inc. and Liberty Integration Software, Inc. (See
Notes to the Company's Financial Statements included in this Report on Form 10-K
for additional information relating to the Company's foreign operations,
including financial information concerning operations by major geographic
areas.)
COMPETITION
The Company faces competition in its three primary areas of business;
software sales, systems sales and service. Companies which General Automation,
Inc. considers its primary competitors in each of the three categories include:
* Software sales - Pick Systems, and Ardent
* System Sales - IBM, Data General, Digital Equipment Corp.
and Hewlett-Packard.
* Service - Wang, AT&T and IBM.
Although the Company faces competition it is well positioned to capitalize on
the MultiValue market niche as the only single source supplier of integrated
solutions and professional services. Although the larger computer manufacturers
provide hardware into the MultiValue market they do so through various
distributors and resellers and do not have a strong focus on this market today.
Both existing MultiValue software competitors only provide software and software
services. The Company's Liberty Software has been developed to work across all
MultiValue products including database products sold by both Ardent and Pick
Systems. A significant portion of Liberty revenues are derived from sales to
Pick System and Ardent customers.
5
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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 1998, the Company spent approximately $2,200,000 for product
research and development, compared to $2,600,000 in fiscal 1997 and $1,200,000
spent in fiscal 1996. 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 fiscal 1998, the Company capitalized
approximately $500,000 in software development costs compared to under
$1,100,000 in fiscal 1997 and $200,000 in fiscal 1996.
COPYRIGHTS AND TRADEMARKS
- -------------------------
The Company holds trademark registrations protecting certain of its
trademarks. The Company's proprietary software products are protected by
copyright. The Company holds no patents which are significant to its current or
proposed operations.
As noted above, the Company's multi-dimensional database software
products are derived from software developed by Pick Systems, and are
distributed under licenses granted by Pick Systems. Invalidation or cancellation
of those licenses 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 System 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.
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 Company's
customers and thereby dramatically influence current period revenues.
At September 30, 1998 the Company had backlog of approximately
$1,013,000. At September 30, 1997, the Company's backlog was approximately
$275,000. Virtually the entire backlog at September 30, 1998 was shipped
subsequent to the fiscal year end.
EMPLOYEES
- ---------
As of September 30, 1998, the Company had approximately 160 employees,
128 of whom are employed within the U.S. 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 does not operate a type of business whose activities are
likely to require any special measures to ensure compliance with federal, state
or local provisions relating to protection of the environment. 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.
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ITEM 2. PROPERTIES
----------
The Company's headquarters and principal operations are located in a
facility of approximately 20,000 square feet in Irvine, California, which the
Company purchased in February 1995. The Company also leases an additional 10,000
square feet of space used principally for shipping/receiving in Irvine,
California. In Management's opinion, the Company's facilities are adequate for
operations in the foreseeable future.
The Company's engineering and support personnel are located in leased
facilities in Hauppauge, New York and Marlborough, Massachusetts. The Company
also leases space in ten states, primarily for sales and service offices. The
Company's subsidiaries in Australia, Canada and the United Kingdom also lease
their facilities.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Since late 1991, the Company has been a party to litigation pending
before the Circuit Court of Cook County, Illinois, County Department, Chancery
Division, entitled 520 S. Michigan Ave. Associates, Ltd. d/b/a Congress Hotel
vs. General Automation and Maxial Systems, Inc. The Company filed a counter
claim in this action and, on July 2, 1996, judgment on the counter claim was
entered in the principal amount of $81,867 in favor of the Company. The
principal claims asserted against the Company in the original complaint,
however, remain outstanding. The Congress Hotel recently emerged from Chapter 11
bankruptcy and has taken an active interest in pursuing its claim against the
Company. Attorneys for the Company are unable to determine at this time whether
or not the Company has legitimate defenses to all of the claims asserted by the
plaintiff and what the outcome of the case might be. In the event of an
unfavorable outcome to the Company, the range of potential loss could be between
$200,000 and $400,000. The Company intends to vigorously defend its position in
this matter.
In the ordinary course of business, the Company is from time to time
involved in various pending or threatened 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 condition and/or results
of operations of the Company. However, in the opinion of the Company's
management, matters currently pending or threatened against the Company (other
than the litigation with Congress Hotel, which is discussed above) 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 A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
MARKET FOR THE COMPANY'S COMMON STOCK
- -------------------------------------
The Company's common stock was traded on the American Stock Exchange
until May 20, 1998, when trading was suspended due to the Company's failure to
meet the Exchange's minimum listing requirements. The Company's common stock was
delisted by the American Stock Exchange on September 28, 1998. Since October 9,
1998, the Company's common stock has been quoted on the "Electronic Bulletin
Board" .
The following table sets forth the high and low closing sales prices
of the Company's common stock on the American Stock Exchange for each of the
periods indicated.
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Sale Prices
-----------
High Low
---- ---
Fiscal Year Ended September 30, 1997
First Quarter $3-1/8 $1-9/16
Second Quarter $2-5/8 $1-11/16
Third Quarter $1-15/16 $1-9/16
Fourth Quarter $2-9/16 $1-7/16
Fiscal Year Ended September 30, 1998
First Quarter 1 7/16 1 3/16
Second 1 5/8 1 1/4
Third Quarter (from April 1 to May 20) 1 1/4 13/16
Third Quarter (From May 21 to June 30) Trading Suspended
Fourth Quarter Trading Suspended
DIVIDEND POLICY
- ---------------
The Company has never paid a dividend on its common stock. 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.
RECORD HOLDERS
- --------------
The approximate number of holders of record of GA's outstanding common
stock as of January 8, 1999 was 878.
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following table sets forth certain selected consolidated
financial data for the Company for each of the years ended September 30, 1998,
1997, 1996, and 1995, which has been derived from audited financial statements.
The financial data for the year ended September 30, 1994 is unaudited. The
following table should be read in conjunction with (a) the audited consolidated
financial statements of the Company and notes thereto as of and for the three
years ended September 30, 1998; and (b) "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
Year(s) Ended September 30 (Note 1 & 2)
(Amounts in thousands except per share data)
--------------------------------------------
<TABLE>
<CAPTION>
1998 1997(3) 1996 1995(4) 1994(5)
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(UNAUDITED)
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OPERATING DATA:
- ---------------
Sales $ 30,666 $36,040 $23,668 $14,622 $33,948
Income (loss) from
operations (11,798) (38) 489 (1,313) 634
Net income (loss) $(12,399) $ (514) $ 275 $(1,712) $ (239)
======== ======= ======= ======= =======
Basic and diluted
Net income (loss)
per share $ (1.33) (.06) .03 (.21) (.04)
======== ======= ======= ======= =======
BALANCE SHEET DATA:
- -------------------
Working capital
(deficiency) (13,495) (6,123) (865) (1,570) 1,440
======== ======= ======= ======= =======
Total assets 14,114 24,263 11,251 10,484 18,041
======== ======= ======= ======= =======
Long-term obligations 2,210 3,269 1,072 1,305 4,247
======== ======= ======= ======= =======
Shareholders' equity
(deficit) (9,927) 2,688 703 (161) 1,960
======== ======= ======= ======= =======
</TABLE>
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(1) In August 1998, the Company restated its 1997, 1996 and 1995 financial
statements to properly reflect the deferred revenue account balance. The
financial statements for the year ended September 30, 1994 have not been
restated; however, the amounts for the year then ended reported within
this table have been adjusted for the unaudited effects of the
restatement.
(2) 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.")
(3) Effective October 11, 1996, the Company acquired substantially all of
the assets and liabilities of Sequoia Enterprise Systems ("SES"), a
division of Sequoia Systems, Inc. The acquisition of SES has been
accounted for under the purchase method of accounting. Accordingly, the
financial information for the year ended September 30,1997 includes the
results of operations from the date of the acquisition. (See Note 3 of
the Company's Financial Statements.)
(4) Effective May 22, 1995, the Company and Boundless Technologies, formerly
known as SunRiver Data Systems ("Boundless"), formed a limited liability
company ("GAL") for the purpose of combining GA's Pick based business
and Boundless' Pick based business, with the Company owning 51% and
Boundless owning 49% of GAL.
(5) On November 10, 1994, with retroactive effect to October 1, 1994, the
Company divested its Pacific Basin operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
- ---------------------
In fiscal 1998, the Company is reporting a 14.9% decline in net revenues from
the prior year. Management attributes this decline to the "aging" service
contracts which were purchased in the Sequoia Systems acquisition. As these
systems become older, the customer is upgraded to more sophisticated, albeit
less expensive, hardware and software. The associated maintenance costs are
likewise less expensive to the customer, resulting in lower service revenue to
the Company. The following table summarizes Product Sales versus
Service/Support:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
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PRODUCT SALES 10,716 10,694 9,715
SERVICE/SUPPORT 19,950 25,346 13,953
------ ------ ------
TOTAL REVENUES 30,666 36,040 23,668
====== ====== ======
</TABLE>
A review of the above table indicates that while Product Sales remain relatively
stable, the Service/Support revenue declined by approximately 21.3% in fiscal
1998. As discussed above, this reflects primarily the aging contracts from the
Sequoia Systems purchase. Management anticipates that this aging and
transitioning of contracts to newer and cheaper technology will continue in the
future. Management estimates that this form of revenues could decline at a rate
of approximately 20% per annum if left unchallenged. In this regard, the Company
has increased its inside sales force and is focusing those additions on gaining
new service business apart from those purchased from Sequoia Systems.
A review of the Cost of Sales and the associated Gross Profit Margin for the
same three years, also reveals no clear trend. The following table summarizes
those areas as related to Product Sales and Service/Support (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
COST OF SALES - PRODUCT SALES 10,162 6,661 7,887
COST OF SALES - SERVICE/SUPPORT 13,376 14,050 9,486
GROSS PROFIT 7,128 15,329 6,295
</TABLE>
10
<PAGE> 13
The significant changes in Cost of Sales and Gross Profits from 1996 to 1997 are
attributed to the acquisitions previously discussed above. The 53.5% decline in
Gross Profit for fiscal 1998 reflects both the decline in Service/Support
Revenue and the charges to inventory, moving expenses and other charges related
to down-sizing operations in the Marlborough, MA facility.
The 52.3% increase in revenues from 1996 to 1997, along with the 144.8% and
124.8% increases in Selling and Administrative and Research and Development
respectively, are attributed to the Sequoia System acquisition during fiscal
1996. In October 1996, the Company acquired substantially all of the assets and
liabilities of Sequoia Enterprise Systems (SES) from Texas Micro, Inc. (TMI)
which has resulted in a lack of comparability between the fiscal years ended
September 30, 1996 and 1997. A 43% increase in current assets is reported from
fiscal 1996 to 1997, and a 95% increase in current liabilities during the same
period. The result at the year ended September 30, 1997 is a negative working
capital position of approximately $6.1 million. The Company is also reporting a
282% increase in shareholder's equity from fiscal 1996 to 1997 after a reported
loss for the year ended September 30, 1997 of $514,000. The increase in the
reported shareholder's equity is primarily attributed to the common stock issued
in connection with the SES acquisition.
The Company is reporting a loss of $12.4 million for the year ended September
30, 1998. This represents a reported loss in four of the past five years. It
also represents a substantial increase over the $514 thousand loss reported for
the year ended September 30, 1997 vs a reported profit of $275 thousand for
fiscal 1996. A review of operating results for the years ended September 30,
1996, 1997 and 1998, reveal no clear trend in any of the major categories.
Selling and Administrative expenses have remained somewhat stable between fiscal
1997 and 1998. The increase in fiscal 1997 over 1996 is attributed to the
Sequoia Systems acquisition during fiscal 1996. The slight increase in SG&A
realized in fiscal 1998 was due to the fact that the benefits associated with
cuts in costs and expenses during the year should be realized in future periods.
This was due primarily to the $3.5 million impairment charge to Goodwill (see
Footnotes to the financial statements). In reviewing the tables above, which
disclose the decline in revenues associated with the acquisition which gave rise
to the Goodwill, along with an evaluation of the parts inventory and other asset
values associated with that purchase, Management determined the carrying amount
of the Goodwill required adjustment in accordance with SFAS 121 - Impairment of
Long-Lived Assets. Goodwill was also affected by an increase of approximately
$275 thousand due to a business acquisition by the Company's Australian
subsidiary. The single impairment charge, along with certain non-cash and other
expenses recognized during fiscal 1998, contributed significantly to the
reported loss for that year and are not expected to affect future operating
results of the Company. The table below summarizes what management considers
non-cash and other note-worthy expenses reported in the year ended September 30,
1998:
<TABLE>
<CAPTION>
<S> <C>
IN THOUSANDS:
Write off of inventories - non-cash charge 1,086
Depreciation and amortization - non-cash charge 2,914
Impairment of goodwill - non-cash charge 3,519
Cancelled contract associated with prior acquisition 1,500
Audit expense related to re-statement of prior year results 300
Costs associated with contract dispute 400
Moving expense related to down-sizing Marlborough, MA facility 100
Other expenses related to down-sizing Marlborough, MA facility* 900
-------
TOTAL 10,719
=======
</TABLE>
*The Company accrued $900,000 in rent expense related to excess space in the
Marlborough, MA facility. At September 30, 1998, approximately 25% of the
facility's 30,000 square feet were being utilized.
11
<PAGE> 14
The majority of the above costs and expenses relate primarily to the Sequoia
Systems acquisition. Management has determined that the costs and terms of that
acquisition, as well as the Boundless/Sunriver (Boundless) acquisition, cannot
be adhered to by the Company. Management has therefore proposed to both
Boundless/Sunriver and Sequoia/TMI (TMI), that the price, terms and conditions
of those acquisitions be compromised under terms and conditions that are
acceptable to all parties. Both Boundless and TMI have signed non-binding
letters of intent indicating acceptance of those terms. In this regard, the
Company has engaged the investment-banking firm of Cruttenden Partners to assist
the Company in this effort. Final terms and conditions of the proposal are
subject to the approval of all parties, however, and the Company can make no
assurances at this time that a final agreement will be reached. Management does
consider completing this proposal to be paramount for the future operating
results of the Company.
Other changes between 1997 and 1998 in Balance Sheet items worth noting include
a 24.9% decline in accounts receivable reflecting the decline in revenues
discussed above. The 60.3% decline in inventories relates directly to the
revenue decline, and the 71.2% decline in goodwill. As discussed above, a review
of future cash-flow from the Sequoia Systems contracts acquisition and related
inventory values, determined that goodwill was impaired in accordance with SFAS
121 requiring a $3.5 million write-down of that assets. The 100% decline and 39%
increase in long-term note receivable and other assets respectively, reflect
primarily the addition of a $900,000 2nd mortgage loan secured during fiscal
1998, as well as the reclassification of other accounts.
Significant changes from 1997 to 1998 are noted in current portion of long term
debt (and long term debt), note payable to TMI and due to Boundless. These large
increases in each of the accounts reflects the continued accrual of costs and
expenses associated with the original terms and conditions of those
acquisitions, while not making those required cash payments. Management has
approached both Boundless and TMI in an effort to renegotiate those terms and
conditions and to compromise the outstanding obligations to them. This matter is
discussed below in greater detail.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The liquidity of the Company remains a priority concern to Management. Although
the reported loss of $12.4 million for the year ended September 30, 1998
included non-cash charges of over $7.4, the Company clearly is struggling with
an ill-liquid condition. For the three years ended September 30, 1996, 1997 and
1998, the deficit working capital position of the Company was reported at $865
thousand, $6.2 million and $13.8 million respectively. For those same periods,
total stockholders equity was reported at $703 thousand, $2.7 million and a
deficit $9.9 million, respectively. Virtually any liquidity, activity, financial
or profitability ratio computed, reveals a Company needing strong balance sheet
management, improved liquidity and a stronger capital structure. Additionally,
during fiscal 1998, Comerica Bank, the Company's primary lending source, made
demand for payment in full of its credit line which had a balance at September
30, 1998 of $2.2 million.
Management has taken steps during most of fiscal 1998 to cut costs and expenses,
expand market opportunities and address issues which they believe will result in
an improved balance sheet and financial ratios. The Company continues to work
closely with Comerica Bank and is currently negotiating a forbearance agreement
which, if approved, will allow the Company to continue operating without the
threat of immediate legal action from the bank. Essentially, Management believes
the bank recognizes the benefits derived from the Boundless/TMI proposal, and
should allow time to bring that proposal to fruition. However, there can be no
assurances that the final terms and conditions of the forbearance agreement will
be agreed upon.
12
<PAGE> 15
In regards to Boundless/TMI, on-going negotiations with those companies to
restructure and/or compromise the current and future obligations to them are
being conducted between the Company and management of those firms. As previously
discussed, the Company has engaged the investment banking firm of Cruttenden
Partners to assist in those negotiations. Though no assurances can be given as
to the ultimate outcome, management is optimistic that some terms and conditions
with both Boundless and TMI will be reached which will be agreeable to all three
companies. Management continues to believe that the successful re-negotiated
terms of those acquisitions are vital to the on-going operations of the Company.
Because final terms and conditions of these negotiations have not been
completed, Management has made no estimates of the effects to the Company in the
form of additional debt/equity or shareholder dilution which could ultimately be
realized.
At the present time, Management is optimistic that cash-flow being generated
from normal daily operations is sufficient to cover the costs and expenses
associated with those operations. This assumption excludes payments to
Boundless/TMI, which the Company has acknowledged to Boundless/TMI that those
payments cannot be met. Beyond seeking a source to replace Comerica Bank, and
seeking ways of restructuring the Boundless/TMI obligations, Management has no
immediate plans of attempting to raise cash from outside sources, either in the
form of debt nor equity. Management also has no immediate plans for any
significant capital expenditures.
Going Concern Comment and Management's Plan of Action
The Company's independent auditors' reports for the years ended September 30,
1996, 1997 and 1998 contain a "going concern" matter of special emphasis
paragraph. The primary steps which Management will focus on in the immediate
future to address this concern include:
* Continue the negotiations with Boundless/TMI with the goal of settling
those obligations in a manner which will ultimately strengthen the
capital and liquidity of the Company, as well as results of operations
* Continue to work closely with the Company's primary bank, Comerica Bank,
to insure compliance with all covenants in any final forbearance
agreements which Management is attempting to finalize, and work towards
an orderly payment of that debt
* Continue to work with other lending sources who have given indications
of interest in replacing Comerica Bank as the Company's primary lending
source.
* Expand the Company's market niche and its opportunities involving the
internet, e-commerce, etc.
* Expand market opportunities through technology available from the
Company's foreign subsidiaries; an area which Management has a great
deal of confidence in.
* Continue with the upgrade and improvement of operating and reporting
systems within the Company in order to maintain efficiency in daily
operations.
EFFECTS OF INFLATION
- --------------------
SFAS 89 - Financial Reporting and Changing Prices, requires disclosures about
changing prices and inflation which Management deems material to an
understanding of the Company. In this regard, and as discussed above, rapid
advances in technology leads to greater opportunities for a customer base to
continually upgrade their systems and software at a lower cost to that customer.
This lower cost to a customer is translated to lower revenue for companies in
the computer industry, including General Automation, Inc. Additionally, the
related revenues associated with maintenance contracts for product and service
are clearly subject to declines as a result of these lower costs. General
Automation has taken steps to partially offset these declines by increasing and
strengthening the inside sales force in order to seek and capture more business.
YEAR 2000 ISSUES
- ----------------
As the end of the century draws near, there is concern that Year 2000 technology
problems may wreak havoc on global economies and materially effect the operating
results of companies. General Automation, Inc. is taking the steps necessary to
insure that this potential problem does not adversely affect its operating
results in the future. In this regard, Management is continuing its assessment
of Year 2000 issues.
13
<PAGE> 16
Because the Company's products are primarily written in licensed versions of the
Pick Operating System, there is effectively no Year 2000 problem due to the
design of the Pick System which took this into account at its inception.
However, the "applications" written for the Pick System, and, other Operating
Systems which host our Pick Data Base implementation, could potentially have
Year 2000 issues. Also, third parties which the Company has material
relationships with, such as vendors, may or may not be Year 2000 compliant. In
both of these instances, the Company is taking the steps necessary to verify
Year 2000 compliance and expects this assessment to be complete within the first
half of fiscal 1999.
Company's State of Readiness
The Company is confident that its own internal systems are Year 2000 compliant,
or planned up-grades are in place; e.g. accounting, reporting, etc. However, the
Company is continuing its efforts to verify third party compliance, primarily
through the use of questionnaires. Areas in which the Company will focus its
concerns will be:
* The equipment and software for its wide-area frame-relay network
* Telephone switches and hand-sets
* Corporate-headquarter alarm and entry systems
* E-mail software
* Other peripheral equipment such as fax machines, scanners, printers, etc
Costs Associated with Year 2000 Issues
Management does not expect any further material costs to be incurred as a result
of Year 2000 issues. As previously discussed, most core products used with the
underlying Pick System has been Y2K compliant since its inception.
Risks Associated with Year 2000 Issues
Management is unaware of any material risks associated with Year 2000 issues at
the present time that would affect operations of the Company.
Contingency Plans
Because the assessment of Year 2000 issues is incomplete, the Company has not
developed contingency plans for this issue. Management expects the assessment
and any related necessary contingency plans will be complete within the first
half of its fiscal 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
N/A
14
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The following financial statements are filed as a part of this report on
Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORTS OF INDEPENDENT ACCOUNTANTS F - 1 -- F - 2
Consolidated Balance Sheets at September 30, 1997 and 1998 F - 3
Consolidated Statements of Operations for the three years in the period
ended September 30, 1998 F - 4
Consolidated Statements of Stockholders' Equity (Deficit) for the three
years in the period ended September 30, 1998 F - 5
Consolidated Statements of Cash Flows for the three years in the period
ended September 30, 1998 F - 6 -- F - 7
Notes to Consolidated Financial Statements F - 8 -- F - 27
AUDITOR'S REPORT ON THE SCHEDULE F - 28 -- F - 29
SCHEDULE II Valuation and Qualifying Account F - 30
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position(s) with the Company
---- --- ----------------------------
<S> <C> <C>
Lawrence Michels 67 Chairman of the Board, Director
Robert D. Bagby 65 Vice Chairman of the Board, Director
Jane M. Christie 46 President, Chief Executive Officer,
Director
Richard H. Nance 50 Vice President Finance, Chief Financial
Officer, Secretary & Treasurer
Philip T. Noden 56 Director
Paul L. Morigi 78 Director
Robert M. McClure 63 Director
</TABLE>
Lawrence Michels has been a director of the Company since August 1990,
and Chairman of the Board of Directors since August 1993. From 1979 until
December 1992, Mr. Michels was President and Chief Executive Officer of The
Santa Cruz Operation, Inc., an international leader in the UNIX and open systems
software marketplace. Previously, he held the positions of Vice President at TRW
and President of TRW Data Systems. Mr. Michels has been providing management
consulting for various companies since 1992.
15
<PAGE> 18
Robert D. Bagby has been a director of the Company since September 1989.
From 1987 to 1994, Mr. Bagby was the Company's Vice President of Operations. In
February 1994, he was appointed President and Chief Operating Officer, and in
October 1994 he was appointed Chief Executive Officer. In May 1996, he was
appointed Vice Chairman of the Board of Directors and resigned his positions as
President, Chief Operating Officer and Chief Executive Officer.
Jane M. Christie joined the Company in 1979. In 1987, she was made
responsible for the Company's services division as well as the vertical
solutions group. Over the last twenty years, Ms. Christie has held various
senior executive positions within the Company, Sorbus and First Data Resources.
In August 1995, she became an officer of the Company and Senior Vice President
of Customer Services, Sales and Marketing. In May 1996, Ms. Christie was
appointed President and Chief Executive Officer of the Company, succeeding
Robert D. Bagby. In January 1997, Ms. Christie was elected to the Company's
Board. Ms. Christie holds a Bachelor of Science in Business Administration.
Richard H. Nance joined the Company in February 1998 as Vice President
Finance, Chief Financial Officer and Secretary/Treasurer. Mr. Nance joined
General Automation with more than twenty-four years of diversified experience in
financial management, treasury, accounting and SEC reporting. Mr. Nance is a
Certified Public Accountant and holds professional memberships in the American
Institute of Certified Public Accountants and the California Society of
Certified Public Accountants. Mr. Nance previously held senior management
positions with both state and national banks from 1974 to 1980. From 1980 to
1989, he operated his own financial consulting practice. In the period prior to
joining the Company, Mr. Nance held various executive positions, including Chief
Financial Officer of Mortgage BancFund Corporation in Irvine, California from
1989 through 1993. From 1993 through 1996 he was a principal in Calspectre
Management in Mission Viejo, California, where his responsibilities included
managing merger and acquisition analyses, SEC reporting and strategic planning
for the company's clientele. From September 1996 to October 1997 he was Chief
Financial Officer for Wiz Technology, Inc., a San Juan Capistrano, CA
distributor of budget computer software. His primary responsibility was to bring
this troubled company into compliance with various SEC regulations and auditing
rules. Mr. Nance holds two degrees, a Bachelor of Business Administration in
Banking and Finance and a Bachelor of Science in Accounting.
Philip T. Noden has been a director of the Company since January 1989.
Since 1983, he has been a member of the Board of Directors of Sanderson Group
PLC ("Sanderson"), a United Kingdom-based developer and supplier of applications
software.
Paul L. Morigi has been a director of the Company since August 1990.
From 1982 to 1987, he was Senior Vice President and a director of Advest, Inc.,
a stock brokerage firm. He is currently Chairman of the Board of Phillips Screw
Corp. Since 1987, he has been President of Paul Morigi & Company, Inc., a
Connecticut investment company and a member of the American Stock Exchange.
Robert M. McClure has been a director of the Company since April 1994.
Dr. McClure is the President of Unidot, Inc., which he founded in 1979 to
specialize in the design of sophisticated computer software and hardware. Dr.
McClure also serves as a director of The Santa Cruz Operation, Inc. and IPT
Corporation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Such
persons are also required by the SEC regulations to furnish the Company with
copies of the Section 16(a) forms, which they file.
16
<PAGE> 19
During the fiscal year ending September 30, 1998, Mr. Nance, Vice
President Finance and CFO of the Company, was not timely with respect to the
filing of Form 3, Initial Statement of Beneficial Ownership of Securities.
During the required filing period he did not own nor trade in any of the
Company's publicly traded stock. This Form has subsequently been filed. Also,
during the fiscal year ended September 30, 1998, Mr. Morigi, a director of the
Company, was not timely with respect to the filing of one report relating to the
purchase of shares of the Company's common stock.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries to or on behalf
of the Company's President and Chief Executive Officer and each other executive
officer of the Company whose total annual salary and bonus during fiscal 1998
exceeded $100,000 (hereinafter referred to as the "named executive officers")
for the years ended September 30, 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation (1)
Compensation Awards
----------------------------- ------------------
Securities All Other
Name and Principal Underlying Options Compensation
Position Year Salary ($) Bonus ($) (#) ($) (2)
- -------- ---- ---------- --------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Jane M. Christie 1998 176,300 0 100,000 0
President and CEO(3) 1997 169,000 0 200,000 2,029
1996 126,900 0 100,000 0
Robert D. Bagby 1998 147,500 0 0 4,200
Vice Chairman of the 1997 (5)145,200 0 50,000 4,000
Board(4) 1996 140,000 0 0 4,200
Richard H. Nance(6) 1998 77,000 0 100,000 0
Vice President Finance
Chief Financial Officer,
Secretary, Treasurer
</TABLE>
(1) The Company made no long-term incentive plan payouts to the named
executive officers during the 1996, 1997 and 1998 fiscal years.
(2) Includes contributions to the Company's Employee Savings Plan on behalf
of the named executive officers to match contributions (included under
salary) made by each to that Plan.
(3) Ms. Christie became President and Chief Executive Officer in May 1996.
(4) Mr. Bagby served as the Company's President, Chief Executive Officer and
Chief Operating Officer until May 1996.
(5) Includes debt forgiveness of $43,612.
(6) Mr. Nance joined the Company in February 1998 as Vice President Finance,
Chief Financial Officer, Secretary & Treasurer.
17
<PAGE> 20
COMPENSATION OF DIRECTORS
During the fiscal year ended September 30, 1998, directors who were not
employees of the Company each received a monthly retainer of $1,200 and the
Chairman received a monthly retainer of $3,500. Directors who were also
employees of the Company received no additional remuneration for serving as a
Director. Fees were accrued but not paid.
OPTION GRANTS TABLE
During fiscal 1998, options covering a total of 200,000 shares were
granted by the Company to a total of two named executive officers of the
Company. The following table contains information concerning the grant of stock
options to the named executive officers:
<TABLE>
<CAPTION>
Potential
Percent of Realizable Value at
Number of Total Assumed Annual
Securities Options Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options Employees Price Expiration for Option
Name Granted (#) in Fiscal Year ($/Sh) Date Term
- ---- ----------- -------------- -------- ---------- -------------------
5%($) 10%($)
------ ------
<S> <C> <C> <C> <C> <C> <C>
Jane M. Christie 100,000 1/3 $1.19 4/03 0 0
Richard H. Nance 100,000 1/3 $1.25 10/03 0 0
</TABLE>
OPTION EXERCISES AND YEAR-END VALUE
The following table provides information, with respect to the named
executive officers, concerning the exercise of options during fiscal 1998 and
unexercised options held as of the end of fiscal 1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs at
at FY-End (#) FY-End ($)
Shares
Acquired
on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jane M. Christie 0 0 400,000 150,000 0 0
Robert D. Bagby 0 0 50,000 0 0 0
Richard H.Nance 0 0 100,000 0 0 0
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of January 8, 1999 information
regarding the ownership of the Company's common stock by (a) each person known
to the Company to be the beneficial owner of more than 5% of the outstanding
shares of the Company's common stock, (b) each of the directors of the Company
who own common stock, (c) each of the named executive officers, and (d) all
executive officers and directors of the Company as a group.
18
<PAGE> 21
<TABLE>
<CAPTION>
Name and Address Number of Shares(1) Percentage of Class(2)
- ---------------- ------------------- ----------------------
<S> <C> <C>
Richard H. Pickup 1,342,400 11.9%
2501 Monaco Drive
Laguna Beach, CA 92651
Texas Micro, Inc. 600,000 5.3%
5959 Corporate Drive
Houston, TX 77036
Robert D. Bagby(3) 549,800 4.9%
Jane M. Christie(3) 566,590 5.0%
Lawrence Michels(3) 738,334 6.5%
Paul L. Morigi(3) 160,000 1.4%
Robert M. McClure(3) 100,000 *
Philip T. Noden(3) 50,000 *
All executive officers(4) 4,107,124 36.5%
and directors as a group
(8 persons, including those
named above)
</TABLE>
* Less than 1%
- --------------
(1) Except as set forth below, each of the persons included in the above
table has sole voting and investment power over the shares respectively
owned, except shares issuable upon exercise of stock options, and except
as to rights of the person's spouse under applicable community property
laws.
(2) The number and percentage ownership for each beneficial owner is
calculated as if all options or warrants held by such owner that are
currently exercisable were exercised and such shares ("beneficially
owned" shares) were included in the numerator as shares owned and in the
denominator as shares outstanding for purposes of the calculation for
such beneficial owner only.
(3) Shares listed for Mr. Bagby, Ms. Christie, Mr. Michels, Mr. McClure, Mr.
Morigi and Mr. Noden include 535,000, 550,000, 585,000, 90,000, 50,000
and 50,000 shares, respectively, that may be acquired through the
exercise of stock options that are currently exercisable.
(4) Includes 1,860,000 shares that may be acquired thorough the exercise of
stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
In November 1998, the Company and Leonard Mackenzie (a former officer
and director of the Company) entered into an agreement (the "Termination
Agreement") which terminated all of the Company's obligations under a letter
agreement (described below) which had been entered into by the Company and Mr.
Mackenzie in April 1997 (the "Letter Agreement"), including the Company's
obligation to issue the Warrant (which is also described below) to Mr.
Mackenzie. In consideration of the termination of the Letter Agreement, the
Company has agreed to pay to, or for the benefit of, Mr. Mackenzie, $74,166 upon
execution of the Termination Agreement, $37,500 ninety days following the
execution of the Termination Agreement, seven monthly installments of $12,222
each commencing on December 1, 1998 and continuing on the first day of each
month thereafter to and including June 1, 1999, and $11,778 on July 1, 1999.
19
<PAGE> 22
The Letter Agreement had been entered into in April 1997 in connection
with Mr. Mackenzie's resignation as an employee of the Company. Under the Letter
Agreement, Mr. Mackenzie agreed to terminate the incentive stock option which
had been granted to Mr. Mackenzie in August 1994, under which Mr. Mackenzie held
the right to purchase 300,000 shares of the Company's common stock at an
exercise price of $0.75 per share. Under the Letter Agreement, Mr. Mackenzie
also agreed to provide certain consulting services to the Company. In
consideration of the termination of Mr. Mackenzie's incentive stock option, and
the consulting services to be provided to the Company by Mr. Mackenzie, the
Letter Agreement obligated the Company to pay to, or for the benefit of, Mr.
Mackenzie, monthly payments of $27,083. The Letter Agreement provided that it
could be terminated by the Company at any time after the second anniversary of
the date of the Letter Agreement, in which event the monthly payment obligations
of the Company would terminate. Upon termination of the Letter Agreement for any
other reason, including Mr. Mackenzie's death (but excluding termination
following breach of the Letter Agreement by Mr. Mackenzie), the Letter Agreement
obligated the Company to continue making payments at the rate of $27,083 per
month until the second anniversary of the date of the Letter Agreement, and
thereafter at the rate of $20,083 per month until the third anniversary of the
date of the Letter Agreement. In addition, upon the expiration or termination of
the Letter Agreement for any reason (excluding termination following breach of
the Letter Agreement by Mr. Mackenzie), the Letter Agreement obligated the
Company to issue to Mr. Mackenzie a warrant to purchase shares of the Company's
common stock (the "Warrant"). The Warrant, if issued, would have a two year term
commencing on the date of expiration or termination of the Letter Agreement and
an exercise price equal to the fair market value per share of the Company's
common stock on the date of expiration or termination of the Letter Agreement.
The number of shares purchasable upon exercise of the Warrant would be the
quotient obtained by dividing (A) the difference, if any, between (i) $899,988,
and (ii) the sum of the aggregate compensation paid to Mr. Mackenzie under the
Letter Agreement prior to its expiration or termination, by (B) the fair market
value per share of the Company's common stock on the date of expiration or
termination of the Letter Agreement.
20
<PAGE> 23
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
Reports on Form 8-K.
During the last quarter of the fiscal year covered by this
report, the Company filed the following Reports on Form 8-K:
(1) Form 8-K filed on July 21, 1998 reporting the Company's
receipt of a letter from the American Stock Exchange
informing the Company that the Exchange was reviewing the
Company's continued listing eligibility.
(2) Form 8-K filed on September 29, 1998 reporting the
Company's receipt of notification from the American Stock
Exchange that the Company's common stock would be removed
from listing.
The following exhibits are filed as part of this report on Form 10-K:
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.
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.
21
<PAGE> 24
10.10 Amendment dated January 27, 1997 to the Loan Agreement dated October 30,
1996 between the Company and Imperial Bank, incorporated herein by
reference to Exhibit 10.10 to the Company's 10-K for the year ended
September 30, 1997.
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, incorporated herein by reference to Exhibit 10.11 to the
Company's 10-K for the year ended September 30, 1997.
10.12 The Company's 1991 Stock Option Plan, as amended, incorporated herein by
reference to Exhibit 10.12 to the Company's 10-K for the year ended
September 30, 1997.
10.13 The Company's 1991 Directors' Stock Option Plan, as amended,
incorporated herein by reference to Exhibit 10.13 to the Company's 10-K
for the year ended September 30, 1997.
10.14 Subordinated Note dated January 21, 1997 in the amount of $500,000
payable to Morgan Stanley and Company, Inc., incorporated herein by
reference to Exhibit 10.14 to the Company's 10-K for the year ended
September 30, 1997.
10.15 License Agreement dated April 26, 1996 between the Company and McDonnell
Information Systems Limited, incorporated herein by reference to Exhibit
10.15 to the Company's 10-K for the year ended September 30, 1997.
10.16 Letter agreement dated April 15, 1997 between the Company and Leonard
Mackenzie, incorporated herein by reference to Exhibit 10.16 to the
Company's 10-K for the year ended September 30, 1997.
10.17 Agreement by and between General Automation, Inc. and MDIS dated
December 22, 1997, incorporated herein by reference to Exhibit 10.17 to
the Company's 10-K for the year ended September 30, 1997.
10.18 Loan Agreement dated December 18, 1997 between the Company and Comerica
Bank, incorporated herein by reference to Exhibit 10.18 to the Company's
10-K for the year ended September 30, 1997.
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, incorporated
herein by reference to Exhibit 10.19 to the Company's 10-K for the year
ended September 30, 1997.
10.20 Letter agreement dated November 5, 1998 between the Company and Leonard
Mackenzie.
10.21 Promissory Note dated May 4, 1998 between the Company and NCR
Corporation .
21 Subsidiaries of the Company.
23.1 Consent of Independent Accountants - Cacciamatta Accountancy
Corporation.
23.2 Consent of Independent Accountants. - McGladrey & Pullen, LLP.
23.3 Consent of Independent Accountants - Price Waterhouse, LLP.
27.1 Financial Data Schedule
22
<PAGE> 25
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.
January 13, 1999 By: /s/ Jane M. Christie
------------------------------------
Jane M. Christie, President and
Chief Executive 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.
SIGNATURE TITLE DATE
/s/ Lawrence Michels
- ----------------------- Chairman of the Board January 13, 1999
Lawrence Michels Director
/s/ Robert D. Bagby
- ----------------------- Vice Chairman, Director January 13, 1999
Robert D. Bagby
/s/ Jane M. Christie
- ----------------------- President, CEO, Director January 13, 1999
Jane M. Christie
/s/ Robert M. McClure
- ----------------------- Director January 13, 1999
Robert M. McClure
/s/ Paul L. Morigi
- ----------------------- Director January 13, 1999
Paul L. Morigi
/s/ Philip T. Noden
- ----------------------- Director January 13, 1999
Philip T. Noden
/s/ Richard H. Nance
- ----------------------- Vice President and January 13, 1999
Richard H. Nance Chief Financial &
Accounting Officer
23
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
Board of Directors
General Automation, Inc.
We have audited the accompanying consolidated balance sheet of General
Automation, Inc. and Subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with 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, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As disclosed in the financial
statements, the Company's significant loss for 1998 further increased its
working capital deficit and produced a significant stockholders' deficiency. In
addition, as discussed in Note 8 to the financial statements, the Company's
primary bank has demanded payment in full of the Company's line of credit and,
as discussed in Note 3, the Company is in default on all amounts due to TMI and
Boundless. These conditions raise substantial doubt about the company's ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 18. The consolidated financial statements do not include
any adjustments that may result from the outcome of this uncertainty.
CACCIAMATTA ACCOUNTANCY CORPORATION
January 8, 1999
F-1
<PAGE> 27
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS
To the Board of Directors
General Automation, Inc.
Irvine, California
We have audited the accompanying consolidated balance sheet of General
Automation, Inc. and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Automation,
Inc. and Subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As more fully described in Note 2, the Company has restated its consolidated
financial statements to properly reflect the amounts recognized as service
revenues.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As disclosed in the financial
statements, the Company has incurred operating losses in two of the last three
years, has a working capital deficit and a deficit tangible net worth. In
addition, the Company has incurred significant losses subsequent to September
30, 1997, its primary bank has demanded payment in full of the Company's line of
credit, and other events have occurred which could adversely affect the
Company's operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 19. The financial statements do not
include any adjustments that may result from the outcome of this uncertainty.
MCGLADREY & PULLEN, LLP
Anaheim, California
December 19, 1997, except for Notes 2, 16 and 18
and the pro forma disclosures included in Notes 3
and 14 as to which the date is August 19, 1998
F-2
<PAGE> 28
GENERAL AUTOMATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 856,000 $ 797,000
Accounts receivable 4,165,000 5,548,000
Inventories 1,986,000 4,999,000
Prepaid expenses and other 1,073,000 839,000
------------ ------------
Total current assets 8,080,000 12,183,000
Long-term receivable -- 570,000
Capitalized software 1,639,000 1,794,000
Property and equipment 2,073,000 2,431,000
Goodwill 2,043,000 7,085,000
Other 279,000 200,000
------------ ------------
$ 14,114,000 $ 24,263,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit $ 2,200,000 $ 1,884,000
Current portion of long-term debt 811,000 275,000
Note payable and due to TMI 6,401,000 5,220,000
Due to Boundless 2,043,000 490,000
Accounts payable 1,805,000 3,181,000
Accrued expenses 3,860,000 2,243,000
Deferred revenue 4,711,000 5,013,000
------------ ------------
Total current liabilities 21,831,000 18,306,000
Long-term debt 2,210,000 1,141,000
Due to TMI -- 2,128,000
------------ ------------
Total liabilities 24,041,000 21,575,000
------------ ------------
Commitments and contingencies -- --
Stockholders' equity (deficit):
Common stock $.10 par value; 30,000,000 shares authorized;
9,332,641 and 9,232,591 shares outstanding at September 30,
1998 and 1997, respectively 933,000 923,000
Additional paid-in capital 45,442,000 45,516,000
Accumulated deficit (56,071,000) (43,672,000)
Cumulative translation adjustment (231,000) (79,000)
------------ ------------
Total stockholders' equity (deficit) (9,927,000) 2,688,000
------------ ------------
$ 14,114,000 $ 24,263,000
============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 29
GENERAL AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product $ 10,716,000 $ 10,694,000 $ 9,715,000
Service 19,950,000 25,346,000 13,953,000
------------ ------------ ------------
Total revenues 30,666,000 36,040,000 23,668,000
------------ ------------ ------------
Costs and expenses:
Costs of sales:
Product 10,162,000 6,661,000 7,887,000
Service 13,376,000 14,050,000 9,486,000
Selling, general and administrative 11,436,000 11,383,000 4,650,000
Research and development 2,197,000 2,599,000 1,156,000
Amortization and impairment of goodwill 5,293,000 1,385,000 --
------------ ------------ ------------
Total costs and expenses 42,464,000 36,078,000 23,179,000
------------ ------------ ------------
Income (loss) from operations (11,798,000) (38,000) 489,000
Interest income 14,000 71,000 60,000
Interest expense (591,000) (382,000) (274,000)
------------ ------------ ------------
Income (loss) before provision for income taxes (12,375,000) (349,000) 275,000
Provision for income taxes 24,000 165,000 --
------------ ------------ ------------
Net income (loss) $(12,399,000) $ (514,000) $ 275,000
============ ============ ============
Basic and diluted earnings per share:
Net income (loss) $ (1.33) $ (0.06) $ 0.03
============ ============ ============
Basic and diluted number of common shares 9,312,035 9,003,171 8,639,445
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 30
GENERAL AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN
SHARES AMOUNT CAPITAL
------------ ------------ ------------
<S> <C> <C> <C>
Balance at September 30, 1995, as restated 7,391,776 $ 739,000 $ 42,533,000
Stock options exercised 784,600 79,000 510,000
Net income -- -- --
------------ ------------ ------------
Balance at September 30, 1996, as restated 8,176,376 818,000 43,043,000
Stock options and warrants exercised 155,500 15,000 119,000
Stock and stock warrants issued for acquisitions 900,715 90,000 2,573,000
Adjustment to acquisition purchase price -- -- (219,000)
Translation adjustment -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at September 30, 1997, as restated 9,232,591 923,000 45,516,000
Stock options and warrants exercised 100,050 10,000 112,000
Adjustment to acquisition purchase price -- -- (186,000)
Translation adjustment -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at September 30, 1998 9,332,641 $ 933,000 $ 45,442,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
ACCUMULATED TRANSLATION
DEFICIT ADJUSTMENT TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Balance at September 30, 1995, as restated $(43,433,000) $ -- $ (161,000)
Stock options exercised -- -- 589,000
Net income 275,000 -- 275,000
------------ ------------ ------------
Balance at September 30, 1996, as restated (43,158,000) -- 703,000
Stock options and warrants exercised -- -- 134,000
Stock and stock warrants issued for acquisitions -- -- 2,663,000
Adjustment to acquisition purchase price -- -- (219,000)
Translation adjustment -- (79,000) (79,000)
Net loss (514,000) -- (514,000)
------------ ------------ ------------
Balance at September 30, 1997, as restated (43,672,000) (79,000) 2,688,000
Stock options and warrants exercised -- -- 122,000
Adjustment to acquisition purchase price -- -- (186,000)
Translation adjustment -- (152,000) (152,000)
Net loss (12,399,000) -- (12,399,000)
------------ ------------ ------------
Balance at September 30, 1998 $(56,071,000) $ (231,000) $ (9,927,000)
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 31
GENERAL AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(12,399,000) $ (514,000) $ 275,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain from disposal of assets -- (42,000) (55,000)
Write off of inventories 1,086,000 -- --
Depreciation and amortization 2,914,000 2,424,000 364,000
Impairment of goodwill 3,519,000 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,822,000 (258,000) 1,013,000
Inventories 1,927,000 1,023,000 (1,253,000)
Prepaid expenses and other (234,000) 196,000 (583,000)
Other assets (79,000) (113,000) (33,000)
Increase (decrease) in:
Accounts payable 1,726,000 (17,000) (52,000)
Accrued expenses 1,617,000 (35,000) 438,000
Deferred revenue (302,000) 485,000 106,000
------------ ------------ ------------
Net cash provided by operating activities 1,597,000 3,149,000 220,000
------------ ------------ ------------
Cash flows from investing activities:
Acquisitions (252,000) (330,000) --
Purchase of property and equipment (130,000) (401,000) (101,000)
Proceeds from disposal of assets -- 42,000 55,000
Capitalized software costs (496,000) (1,099,000) (168,000)
Investment in subsidiary -- -- 13,000
------------ ------------ ------------
Net cash used in investing activities (878,000) (1,788,000) (201,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 122,000 134,000 589,000
Proceeds from issuance of debt 4,031,000 3,075,000 267,000
Principal payments on debt (4,661,000) (3,953,000) (857,000)
------------ ------------ ------------
Net cash used in financing activities (508,000) (744,000) (1,000)
------------ ------------ ------------
Effect of exchange rate changes on cash (152,000) 61,000 --
------------ ------------ ------------
Net increase in cash and equivalents 59,000 678,000 18,000
Cash and equivalents, beginning of year 797,000 119,000 101,000
------------ ------------ ------------
Cash and equivalents, end of year $ 856,000 $ 797,000 $ 119,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 32
GENERAL AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 597,000 $ 339,000 $ 274,000
============ ============ ============
Income taxes $ 169,000 $ 271,000 $ --
============ ============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Acquisition of Sequoia Enterprise Systems, Inc.
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.
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 $ -- $ 220,000 $ --
============ ============ ============
Increase in cash portion of purchase price of acquisition $ 186,000 $ 219,000 $ --
============ ============ ============
Conversion of accounts payable to notes payable $ 1,549,000 $ -- $ --
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 33
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
General Automation, Inc. (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, 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.
On September 28, 1998 the Company's common stock was delisted by the
American Stock Exchange due to the Company's failure to meet the
Exchange's minimum listing requirements. Since the delisting, the
Company's stock has traded over the counter and has been quoted on the
"Electronic Bulletin Board".
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
F-8
<PAGE> 34
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Cash and cash equivalents
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less.
Accounts receivable
The allowance for doubtful accounts and sales returns includes
management's estimate of the amount expected to be lost on specific
accounts and for losses on other as yet unidentified accounts included in
accounts receivable. In estimating the allowance component for
unidentified losses and returns, management relies on historical
experience. The amounts the Company will ultimately realize could differ
materially in the near term from the amounts assumed in arriving at the
allowance for doubtful accounts and sales returns in the accompanying
financial statements.
Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of temporary cash
investments and trade receivables. The Company restricts investment of
temporary cash investments to financial institutions with investment grade
credit ratings. Credit risk on trade receivables is minimized as a result
of the large and diverse nature of the Company's customer base.
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. As customers' defective
parts are replaced by inventoried items, the cost to refurbish the part is
expensed and the refurbished part is inventoried. 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.
F-9
<PAGE> 35
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Capitalized software development costs
All capitalized software development costs are amortized either on a
straight-line basis over the remaining estimated economic life of the
product, generally five years, or the ratio of the products' current gross
revenues to the total of current and expected gross revenues, whichever
period is greater. The costs capitalized are those incurred after the
Company has determined the technical feasibility of a software project
until the time the product is available for general release to customers.
The project amortization does not commence until after the general release
of the product and is included in the cost of sales. Management
periodically compares the recorded amount of capitalized software
development costs to the net realizable value of the software product
based on expected future revenues. Any amount in excess of net realizable
value is charged to operations.
Long-lived assets
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>
<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>
Goodwill is being amortized on a straight-line basis over its estimated
useful life of sixty months.
Long-lived assets are reviewed annually for impairment whenever events or
changes in circumstances indicate that carrying amount of an asset may not
be recoverable. Impairment is necessary when the undiscounted cash flows
estimated to be generated by the asset are less than the carrying amount
of the asset.
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 and
equivalents, accounts receivable, debt, accounts payable, and accrued
expenses, other than the payable to TMI and the payable to Boundless,
approximate fair value. As discussed in Note 3, the amounts due TMI and
Boundless have payment terms based on a percentage of revenues;
accordingly, it is not practicable to estimate the fair value of these
obligations.
F-10
<PAGE> 36
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF 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.
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.
Billings in advance of revenue recognition are recorded as deferred
revenue in the accompanying financial statements and are recognized as
revenue when earned.
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.
Research and development
Company-sponsored research and development costs are charged to expense as
incurred.
Stock options
During 1997, the Company adopted FASB Statement No. 123, "Accounting for
Stock-Based Compensation", which establishes financial accounting and
reporting standards for stock-based employee compensation plans such as a
stock option plan. The Statement generally suggests, but does not require,
stock-based compensation transactions with employees be accounted for
based on the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measurable. An
enterprise may continue to follow the requirements of Accounting
Principles Board (APB) Opinion No. 25, which does not require compensation
to be recorded if the consideration to be received is at least equal to
the fair value at the measurement date. Non-employee stock-based
transactions occurring after December 15, 1995 must be accounted for at
fair value. The Company has elected to continue to follow the measurement
principles of APB Opinion No. 25 for stock-based employee compensation,
and the adoption of this pronouncement did not have a material impact on
its financial statements.
F-11
<PAGE> 37
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
Earnings per share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share, respectively. Unlike the previously reported primary earnings per
share, basic earnings per share excludes the dilutive effects of stock
options. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share. Earnings per share amounts for all
periods presented have been calculated in accordance with and, where
appropriate, restated to conform to the requirements of SFAS No. 128.
Basic EPS is calculated using income available to common stockholders
divided by the weighted average of common shares outstanding during the
year. Diluted EPS is similar to Basic EPS except that the weighted average
of common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares, such as options, had been issued. The treasury
stock method is used to calculated dilutive shares which reduces the gross
number of dilutive shares by the number of shares purchasable from the
proceeds of the options assumed to be exercised.
Diluted earnings per share are not materially different from basic
earnings per common share.
Reclassifications
Certain items in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 presentation.
F-12
<PAGE> 38
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
New accounting pronouncements
The following pronouncements will be effective for the Company's financial
statements issued for the year ending September 30, 1999.
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.
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.
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. Management has determined
the adoption of this Statement will not have a material effect on the
Company's financial statements.
F-13
<PAGE> 39
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RESTATEMENT
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, management determined that certain deficiencies existed with
respect to the deferred revenue accounting system resulting in a need to
adjust service revenues as previously reported. Accordingly, the
accompanying 1997 and 1996 consolidated financial statements have been
restated to properly reflect the recognition of service revenues (the
"Restatement"). The Restatement also included a cumulative negative
adjustment of $1,285,000 related to years prior to 1995. The effects of
the Restatement on the consolidated financial statements for 1997, 1996
and 1995 are summarized as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
1997 REPORTED INCREASE DECREASE AS RESTATED
- ----------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total assets $ 24,409 $ -- $ 146 $ 24,263
Total liabilities 18,630 2,945 -- 21,575
Stockholders equity 5,779 -- 3,091 2,688
Total revenues 36,831 -- 791 36,040
Cost of sales 20,786 -- 75 20,711
Income taxes (135) 300 -- 165
Net income (loss) 502 -- 1,016 (514)
Earnings (loss) per share $ 0.05 $ -- $ 0.11 $ (0.06)
- -----------------------------------------------------------------------------------------------------------------
1996
- -----------------------------------
Total assets $ 10,271 $ 980 $ -- $ 11,251
Total liabilities 7,493 3,055 -- 10,548
Stockholders equity 2,778 -- 2,075 703
Total revenues 25,460 -- 1,792 23,668
Cost of sales 17,433 -- 60 17,373
Selling, general and administrative 4,366 26 -- 4,392
Income taxes 615 -- 615 --
Net income 1,418 -- 1,143 275
Earnings per share $ 0.18 $ -- $ 0.15 $ 0.03
- -----------------------------------------------------------------------------------------------------------------
1995
- -----------------------------------
Total revenues $ 14,269 $ 208 $ -- $ 14,477
Selling, general and administrative 3,704 -- 145 3,559
Net loss (2,065) -- 353 (1,712)
Loss per share $ (0.26) $ -- $ 0.05 $ (0.21)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE> 40
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND DISPOSITION
Sequoia Enterprise Systems acquisition
In October 1996, the Company entered into an Asset Purchase Agreement with
Texas Micro, Inc., formerly Sequoia Systems, Inc. (TMI), pursuant to which
the Company acquired substantially all the assets and businesses of TMI's
business division known as Sequoia Enterprise Systems (SES). SES
manufactures, services, integrates and distributes fault tolerant Motorola
68K computer systems which operate under TMI's version of UNIX and Intel
based computer systems running TMI'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 agreed to pay a purchase
price of $11,347,000, assume certain liabilities of SES totaling
approximately $2,700,000, and issue TMI a Stock Purchase Warrant valued at
$500,000. The excess of the purchase price and related acquisition costs
over the fair value of net assets acquired of $8,366,000 was recorded as
goodwill.
The purchase price was to be paid in a combination of cash, notes payable
and 750,000 shares of the Company's common stock. All 750,000 shares were
issued to TMI in November 1996. The common stock was valued at: (i) $2.50
per share (400,000 shares), (ii) the average closing per share price
during the ten trading days immediately preceding the first anniversary of
the closing date (200,000 shares) and second anniversary (150,000 shares).
Because the closing price of the stock, as defined, was less than $2.50 at
both anniversaries, $219,000 and $186,000 was charged to equity with a
corresponding increase to the TMI payable in fiscal 1997 and 1998,
respectively.
On October 1, 1997, the asset purchase agreement between the company and
TMI was amended. The Company signed a $1,429,000 unsecured note payable,
interest at 13%, due in monthly installments of $75,000 plus interest. The
Company also 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. During
fiscal 1998, the Company defaulted on its payments to TMI, and is
currently attempting to renegotiate these obligations.
The 1998 evaluation of the remaining utility and recoverability of the
acquired inventory parts balances resulted in a write down of $1,086,000.
Additionally, the Company recorded accrued rent expense of $928,000 in
1998 relating to that portion of leased space acquired in the SES
acquisition no longer in use. These factors, and significantly lower than
expected revenue growth in the post acquisition period indicated an
impairment of the goodwill associated with the acquisition of SES. Revenue
growth is currently projected at a rate insufficient to recover the
carrying value of the related goodwill. Fair value was determined by
calculating the present value of expected cash flows for SES, which
resulted in the Company recording an impairment charge of $3,519,000.
F-15
<PAGE> 41
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
Unaudited pro forma consolidated sales, net loss and loss per common share
for 1997 and 1996 as though Sequoia had been acquired as of October 1,
1995:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Sales $36,730,000 $55,463,000
Net loss $ (788,000) $ (158,000)
Loss per common share $ (0.09) $ (0.02)
</TABLE>
The information presented above reflects adjustments for amortization of
goodwill, additional depreciation on revalued purchased assets, and an
estimated effective tax rate for these differences of 34%. The above
information does not reflect an adjustment of $1,771,000 (unaudited)
incurred by SES for restructuring charges in 1996 which management
believes are nonrecurring in nature.
General Automation, LLC
In May 1995, the Company and SunRiver Data Systems, now called Boundless
Technologies (Boundless) formed a limited liability company, General
Automation, LLC, (GAL) with the Company owning 51% interest and Boundless
owning a 49% interest. In accordance with the terms of the Operating
Agreement (the Agreement), GAL will be dissolved upon the earlier of
certain events as described in the Agreement or twenty years. GAL was
formed to allow the Company to acquire Boundless' version of the PICK
system.
Under the terms of the Agreement, GAL operates and manages both the
Company's and Boundless' PICK business. Boundless is entitled to receive
royalty payments from GAL equal to 12% of GAL's net revenues in the first
year of the Agreement with decreasing amounts annually to 7% in the fifth
year, 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 the cash generated by GAL, if any, after the payments of the
net revenue percentage to Boundless. Royalty expense, included in cost of
sales, amounted to $1,466,000, $2,000,000 and $2,719,000 in 1998, 1997 and
1996, respectively.
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. Although the Company has
not made the payments discussed above on a timely basis, and is currently
attempting to renegotiate these obligations, the Company has not received
any notice regarding its replacement as the manager of GAL.
F-16
<PAGE> 42
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
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. The purchase
price consisted of $60,000 Canadian dollars (approximately U.S. $40,000)
and 25,000 shares of common stock valued at $62,500. 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 of Eurosystems
In 1993, the Company sold its 61% share of Eurosystems to the minority
stockholders of Eurosystems (Krypton Group Ltd.) for a $750,000 note. In
1995, Krypton filed for bankruptcy. In 1996, the Company received a new
$600,000 note bearing interest at 10% from Future Services, Ltd., a newly
formed Company owned by the former Krypton management, to offset the
$570,000 balance on the original note. In 1998, Future Services, Ltd., was
purchased by 4 Front Software Company and the Company accepted 24,540
shares of 4 Front Software Company's common stock valued at $10 per share
in full settlement.
4. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Trade receivables $ 4,727,000 $ 5,801,000
Due from related parties -- 56,000
Allowance for doubtful accounts (562,000) (309,000)
------------- -------------
$ 4,165,000 $ 5,548,000
============= =============
</TABLE>
5. INVENTORIES
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Material and purchased subassemblies $ 1,095,000 $ 3,040,000
Support systems, spare parts and subassemblies 616,000 1,311,000
Work in process 217,000 420,000
Finished goods 272,000 588,000
------------- -------------
2,200,000 5,359,000
Allowance for obsolete and slow moving inventories (214,000) (360,000)
------------- -------------
$ 1,986,000 $ 4,999,000
============= =============
</TABLE>
F-17
<PAGE> 43
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CAPITALIZED SOFTWARE
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Capitalized software development costs, net of
accumulated amortizaton of $1,952,000 in 1998 and
$1,403,000 in 1997 $ 1,423,000 $ 1,476,000
Purchased software, net of accumulated amortization
of $294,000 in 1998 and $192,000 in 1997 216,000 318,000
------------- -------------
$ 1,639,000 $ 1,794,000
============= =============
</TABLE>
During 1997, the company acquired software for $510,000. During 1998, 1997
and 1996, the Company capitalized $496,000, $1,099,000 and $168,000 of
software development costs, respectively, and $651,000, $492,000 and
$310,000 of amortization expense, respectively, was charged to cost of
sales.
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Land and building $ 1,436,000 $ 1,436,000
Machinery and equipment 3,670,000 3,590,000
Furniture and fixtures 293,000 268,000
Leasehold improvements 72,000 97,000
------------- -------------
5,471,000 5,391,000
Accumulated depreciation and amortization (3,398,000) (2,960,000)
------------- -------------
$ 2,073,000 $ 2,431,000
============= =============
</TABLE>
8. BANK LINE OF CREDIT
The Company had a $2,000,000 line of credit with a bank expiring in
January 1998, at the bank's prime rate (8.5% at September 30, 1997) plus
2%. In December 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 (8.25% at September 30, 1998)
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 and 60% of eligible service receivables, as defined. The lines
also required the Company to maintain certain financial covenants.
In 1998 the bank notified the Company that as a result of the Company
being in violation of certain covenants, the bank was making demand for
payment in full of the outstanding balance. Subsequently, the credit
agreement was amended from a $5 million to a $2.2 million credit line.
F-18
<PAGE> 44
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Mortgage note at prime (8.25% at September 30, 1998) plus 1.5%, due in
monthly installments of $9,000 through November 2004 when the remaining
principal and interest will be due $ 976,000 $ 983,000
Second mortgage note at 12%, interest only monthly
payments, principal due April 2000 900,000 --
Note payable to vendor, interest at 18%, due in
monthly installments of $64,424 through April 2000 947,000 --
Unsecured note to related party, interest at 15%,
due in monthly installments of $24,000, subordinated
to the Company's line of credit -- 350,000
Other 198,000 83,000
------------- -------------
3,021,000 1,416,000
Less current maturities (811,000) (275,000)
------------- -------------
$ 2,210,000 $ 1,141,000
============= =============
</TABLE>
Debt maturities for each of the next five years and thereafter are:
$811,000 in 1999, $1,268,000 in 2000, $19,000 in 2001, $21,000 in 2002,
$23,000 in 2003 and $879,000 thereafter.
10. ACCRUED EXPENSES
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Rent $ 1,144,000 $ --
Payroll and related taxes 1,070,000 771,000
Consulting fee to related party 209,000 258,000
Royalties 635,000 358,000
Warranty 150,000 135,000
Board of Directors' fees 367,000 281,000
Other 285,000 440,000
------------- -------------
$ 3,860,000 $ 2,243,000
============= =============
</TABLE>
F-19
<PAGE> 45
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases certain facilities and equipment under noncancelable
operating leases. Rental expense for 1998, 1997 and 1996 was $1,899,000,
$1,392,000 and $200,000, respectively.
As of September 30, 1998, the future minimum rental commitments required
under existing noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999 $ 976,000
2000 907,000
2001 209,000
-----------
$ 2,092,000
===========
</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.
Since 1991 the Company has been a party to litigation entitled 520 S.
Michigan Ave. Associates, Ltd. d/b/a Congress Hotel v General Automation
and Maxial Systems, Inc. The Company filed a counter claim, and in July
1996, a $81,867 judgment was entered in favor of the Company. The
principal claims asserted against the Company in the original complaint,
however, remain outstanding. The Congress Hotel recently emerged from
chapter 11 bankruptcy and has taken an active interest in pursuing its
claim against the Company. Attorneys for the Company are unable to
determine whether or not the Company has legitimate defenses to all the
claims asserted by the plaintiff and what the outcome of the case might
be. In the event of an unfavorable outcome to the Company, the range of
potential loss could be between $200 and $400 thousand. The Company
intends to vigorously defend its position in this matter.
F-20
<PAGE> 46
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS
Receivables
Included in selling, general and administrative expense in 1997 is $86,000
for forgiveness of related party receivable.
Consulting agreement
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. In November 1998, the Company negotiated a
termination of this agreement, agreeing to pay $209,000 as follows:
$74,166 upon execution of the agreement, $37,500 ninety days following the
execution of the agreement in February 1999, seven monthly installments of
$12,222 beginning December 1998 and one final payment of $11,778 on July
1, 1999. Included in selling, general and administrative is $297,000 in
1998 and $394,000 in 1997 for consulting expenses to this related party.
13. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans. Under the 1991 Stock Option Plan,
the Company has reserved 2,035,000 shares of common stock. Under the 1991
Directors' Stock Option Plan, the Company has reserved 200,000 shares of
common stock. 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. In addition to the options
available under the stock option plans, in 1995 the Company 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-21
<PAGE> 47
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of stock options activity follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise price Exercisable
------------- -------------- -------------
<S> <C> <C> <C>
September 30, 1995 2,926,000 $ 0.80
Granted 60,000 $ 1.81
Exercised (732,000) $ 0.75
Canceled (71,000) $ 0.75
------------- --------------
September 30, 1996 2,183,000 $ 0.84 2,183,000
=============
Granted 960,000 $ 1.94
Exercised (55,000) $ 1.02
Canceled (300,000) $ 0.75
------------- --------------
September 30, 1997 2,788,000 $ 1.23 2,388,000
=============
Granted 300,000 $ 1.23
Exercised (100,050) $ 1.23
Canceled (734,950) $ 1.05
------------- --------------
September 30, 1998 2,253,000 $ 1.25 1,903,000
============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average
Number Number Contractual
Exercise price Outstanding Exercisable Life
- -------------- ----------- ------------ -----------
<S> <C> <C> <C>
$0.75 243,000 243,000 11 months
$0.86 970,000 970,000 18 months
$1.25 300,000 100,000 54 months
$1.94 540,000 540,000 40 months
$1.95 200,000 50,000 38 months
----------- ------------
2,253,000 1,903,000
=========== ============
</TABLE>
F-22
<PAGE> 48
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company applies APB Opinion No. 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 FASB Statement No. 123, the Company's net loss and loss per
common share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Net (loss)
As reported $ (12,399,000) $ (514,000)
Pro forma $ (12,926,000) $ (1,048,000)
Basic and diluted earnings per share:
As reported $ (1.33) $ (0.06)
Pro forma $ (1.39) $ (0.12)
</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 1998 and 1997,
respectively: expected volatility of 85% and risk-free interest 5.5%,
expected life of 5 years and no expected dividends for all years. The
estimated weighted-average fair value of stock options granted in 1998 and
1997 was $1.23 and $1.24 per share, respectively.
The Company issued warrants to purchase 250,000 shares of stock as part of
the SES acquisition as noted at Note 3. 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.
In 1997, Sanderson Computers Ltd. exercised its final warrant to purchase
100,000 shares of the Company's common stock for $0.75 per share through a
"Mirror Rights Agreement" entered into in 1989.
14. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing 401(k) plan covering substantially all
its domestic employees. Eligible employees may contribute 2% to 12% of
their compensation up to the maximum dollar amount allowed. 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 make contributions in years when it has no profits.
Contributions for 1998, 1997 and 1996 were $74,000, $94,000 and $85,000,
respectively.
F-23
<PAGE> 49
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
The provision for income taxes for 1998 and 1997 consists solely of
$24,000 and $165,000 in foreign income taxes, respectively.
Reasons for differences between income tax expense and the amount computed
by applying the federal statutory income tax rate to income (loss) before
income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Tax provision (benefit) calculated at
federal statutory rate $ (4,425,000) $ (122,000) $ 94,000
Benefit of operating loss carryforwards -- -- (240,000)
Change in valuation allowance 2,623,000 218,000 --
Expenses not currently deductible 1,826,000 43,000 123,000
Other -- 26,000 23,000
------------ ------------ ------------
$ 24,000 $ 165,000 $ --
============ ============ ============
</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, 1998, NOL carryforwards
totaled approximately $10.9 million, of which $5.2 million is subject to
the annual limitation. The carryforwards expire in various years ending
September 30 as follows:
<TABLE>
<S> <C>
2004 $ 766,000
2005 1,427,000
2006 1,631,000
2007 55,000
2008 560,000
2009 788,000
2012 5,736,000
------------
$10,963,000
============
</TABLE>
The company also has a Canadian NOL of $113,000 which can be applied to
offset future Canadian taxable income of its Liberty subsidiary. This NOL
expires in 2004.
F-24
<PAGE> 50
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES (CONTINUED)
Deferred income tax assets at September 30, 1998 and 1997 relate to the
following. A valuation allowance has been established to reduce deferred
tax assets to amounts which management believes are more likely than not
to be realized.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Inventories $ 71,000 $ 122,000
Accrued royalties 756,000 331,000
Other accrued expenses 509,000 126,000
Receivables 191,000 102,000
Goodwill 1,948,000 172,000
NOL carryforwards 3,871,000 1,862,000
------------ ------------
Deferred tax assets 7,346,000 2,715,000
Less valuation allowance (7,346,000) (2,715,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
In February and April 1998, the Company received from the Internal Revenue
Service (IRS) notices of proposed adjustments. Among other adjustments,
the IRS is proposing to reduce the annual limitation on the Company's use
of the net operating loss carryforwards which existed at the end of fiscal
year 1994 to $245,000 per year. This limitation would effectively reduce
the Company's net operating loss carryforward at September 30, 1998 to
approximately $8.7 million. In addition, the IRS is proposing adjustments
which could result in the payment of additional income taxes of up to
$250,000 plus interest. Management plans to aggressively protest these
proposed adjustments and believes that it will ultimately be resolved with
no material impact on the Company's financial statements; however, future
developments in this matter could change management's assessment of the
situation in the near term.
16. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Numerator
Net income(loss) $ (12,399,000) $ (514,000) $ 275,000
============= ============= =============
Denominator
Basic and diluted weighted average number of
common shares outstanding during the period 9,312,035 9,003,171 8,639,445
============= ============= =============
Basic and diluted net earnings (loss) per share $ (1.33) $ (0.06) $ 0.03
============= ============= =============
</TABLE>
F-25
<PAGE> 51
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SEGMENT INFORMATION
In 1996, essentially all the Company's operations were within the United
States. In 1997 and 1998, due to the acquisitions described in Note 3, the
company also had operations outside the United States. Information
concerning the company's operations by geographic area are as follows:
<TABLE>
<CAPTION>
1998 UNITED STATES AUSTRALIA OTHER ELIMINATIONS TOTAL
----------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 25,739,000 $ 3,177,000 $ 1,970,000 $ (220,000) $ 30,666,000
Operating (loss) profit (13,433,000) 29,000 1,606,000 -- (11,798,000)
Interest expense -- -- -- -- (591,000)
Interest income -- -- -- -- 14,000
--------------
Loss before income taxes -- -- -- -- $ (12,375,000)
==============
Identifiable assets $ 13,048,000 $ 2,235,000 $ 623,000 $ (1,792,000) $ 14,114,000
Identifiable liabilities $ 23,382,000 $ 344,000 $ 315,000 $ -- $ 24,041,000
</TABLE>
<TABLE>
<CAPTION>
1997 UNITED STATES AUSTRALIA OTHER ELIMINATIONS TOTAL
----------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 31,756,000 $ 2,367,000 $ 3,186,000 $ (1,269,000) $ 36,040,000
Operating (loss) profit (201,000) 175,000 (12,000) -- (38,000)
Interest expense -- -- -- -- (382,000)
Interest income -- -- -- -- 71,000
--------------
Loss before income taxes -- -- -- -- $ (349,000)
==============
Identifiable assets $ 23,346,000 $ 1,037,000 $ 823,000 $ (943,000) $ 24,263,000
Identifiable liabilities $ 21,549,000 $ 322,000 $ -- $ (296,000) $ 21,575,000
</TABLE>
F-26
<PAGE> 52
GENERAL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. MANAGEMENT'S PLANS
If the Company is unable to restructure its bank debt and other
obligations, its ability to conduct business would be adversely affected.
Management has developed the following plan to strengthen the financial
condition of the Company.
o Management is attempting to re-negotiate the terms of its
obligations to TMI and Boundless (aggregating approximately $8.4
million at September 30, 1998). There can be no assurances that
these negotiations will be successful.
o Management has engaged an investment bank in an attempt to raise new
capital.
o Management is continuing its search for a new bank to replace its
primary lender on more favorable terms.
o Management is expanding the Company's market niche to include
opportunities involving the internet and e-commerce.
F-27
<PAGE> 53
INDEPENDENT AUDITOR'S REPORT
ON THE SCHEDULE
Board of Directors
General Automation, Inc.
Our audit was made for the purpose of forming an opinion on the basic 1998
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 1998 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 tot he basic financial statements taken as a
whole.
CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
January 8, 1999
F - 28
<PAGE> 54
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
1997consolidated 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 - 29
<PAGE> 55
GENERAL AUTOMATION INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<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:
1998 $309,000 $293,000 $ (41,000) $561,000
1997 $561,000 $299,000 $(551,000) $309,000
1996 $444,000 $171,000 $ (54,000) $561,000
Inventory Reserves:
1998 $359,677 $ 60,000 $(205,266) $214,411
1997 $299,677 $ 60,000 $ -- $359,677
1996 $283,400 $ 60,000 $ (43,723) $299,677
</TABLE>
F - 30
<PAGE> 56
EXHIBIT INDEX
-------------
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.
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.
<PAGE> 57
10.10 Amendment dated January 27, 1997 to the Loan Agreement dated October 30,
1996 between the Company and Imperial Bank, incorporated herein by
reference to Exhibit 10.10 to the Company's 10-K for the year ended
September 30, 1997.
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, incorporated herein by reference to Exhibit 10.11 to the
Company's 10-K for the year ended September 30, 1997.
10.12 The Company's 1991 Stock Option Plan, as amended, incorporated herein by
reference to Exhibit 10.12 to the Company's 10-K for the year ended
September 30, 1997.
10.13 The Company's 1991 Directors' Stock Option Plan, as amended,
incorporated herein by reference to Exhibit 10.13 to the Company's 10-K
for the year ended September 30, 1997.
10.14 Subordinated Note dated January 21, 1997 in the amount of $500,000
payable to Morgan Stanley and Company, Inc., incorporated herein by
reference to Exhibit 10.14 to the Company's 10-K for the year ended
September 30, 1997.
10.15 License Agreement dated April 26, 1996 between the Company and McDonnell
Information Systems Limited, incorporated herein by reference to Exhibit
10.15 to the Company's 10-K for the year ended September 30, 1997.
10.16 Letter agreement dated April 15, 1997 between the Company and Leonard
Mackenzie, incorporated herein by reference to Exhibit 10.16 to the
Company's 10-K for the year ended September 30, 1997.
10.17 Agreement by and between General Automation, Inc. and MDIS dated
December 22, 1997, incorporated herein by reference to Exhibit 10.17 to
the Company's 10-K for the year ended September 30, 1997.
10.18 Loan Agreement dated December 18, 1997 between the Company and Comerica
Bank, incorporated herein by reference to Exhibit 10.18 to the Company's
10-K for the year ended September 30, 1997.
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, incorporated
herein by reference to Exhibit 10.19 to the Company's 10-K for the year
ended September 30, 1997.
10.20 Letter agreement dated November 5, 1998 between the Company and Leonard
Mackenzie.
10.21 Promissory Note dated May 4, 1998 between the Company and NCR
Corporation .
21 Subsidiaries of the Company.
23.1 Consent of Independent Accountants - Cacciamatta Accountancy
Corporation.
23.2 Consent of Independent Accountants. - McGladrey & Pullen, LLP.
23.3 Consent of Independent Accountants - Price Waterhouse, LLP.
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.20
[GENERAL AUTOMATION LETTERHEAD]
November 5, 1998
Mr. Leonard N. Mackenzie
2711 N. Haskell, Suite 2050 LB20
Dallas, TX 75204
Re: Termination of Consulting Agreement Dated April 15, 1997
Dear Len:
This letter is written to set forth the agreement which has been reached between
you and General Automation, Inc. (the "Company") concerning the termination of
the letter agreement between you and the Company dated April 15, 1997 (the
"Consulting Agreement"). Our agreement concerning termination of the Consulting
Agreement is as follows:
1. Termination of Consulting Agreement. The Consulting Agreement is hereby
terminated in its entirety, except as stated in the last sentence of this
Section 1. Accordingly, but without limiting the generality of the foregoing,
you shall no longer have any obligation to provide consulting services to the
Company under Section 2 of the Consulting Agreement, and the Company shall no
longer have any obligations to make payments to you or on your behalf under
Section 3 of the Consulting Agreement. The termination of the Consulting
Agreement shall not, however, affect in any manner your resignation as an
employee of the Company effective as of April 15, 1997 as contemplated by
Section 1 of the Consulting Agreement, or the termination of the Incentive Stock
Option dated August 29, 1994 previously held by you, as contemplated by Section
8 of the Consulting Agreement, or your obligations under Section 12 of the
Consulting Agreement.
2. Payments by the Company. In consideration of your execution of this letter
agreement, the Company will pay to you the amount of $75,000, without interest,
in two (2) equal payments. The first payment to be made upon signing of this
letter and the second payment to be made ninety (90) days from signing of this
letter. At your request, GA will pay an additional $134,000, without interest,
to Marian Lenore Mackenzie as additional consideration for your execution of
this letter agreement. The Company will pay this amount to Marian Lenore
Mackenzie as follows: $36,666.66 upon execution of this letter and seven (7)
monthly installments of $12,222.22 each commencing on December 1, 1998 and
continuing on the first day of each calendar month thereafter to and including
June 1, 1999, and one final installment of $11,777.80 on July 1, 1999.
<PAGE> 2
Mr. Leonard Mackenzie
November 5, 1998
Page 2
3. Release of Claims Under Consulting Agreement. You hereby release and
discharge the Company and its officers, directors, employees and agents (each a
"Company Releasee") from any and all claims, demands, causes of action,
obligations, contracts, agreements, obligations, debts and liabilities
whatsoever (collectively, "Claims"), which you now have or have ever had against
any Company Releasee under or arising out of the Consulting Agreement or any
breach or alleged breach of the Consulting Agreement. Without limiting the
generality of the foregoing, you hereby release and discharge any obligation on
the part of the Company to issue the Warrant contemplated by Section 7 of the
Consulting Agreement. In connection with the foregoing, you hereby represent and
warrant to the Company that there has been no assignment or other transfer,
voluntarily or by operation of law, to any other person or entity of any Claims
which are the subject of the release set forth in this Section 3. You further
hereby represent and warrant to the Company that your execution and delivery of
this letter agreement does not require the consent or approval of any other
person or entity.
4. Release by the Company of Claims Under Consulting Agreement. The Company
hereby releases and discharges you from any and all Claims which the Company now
has or has ever had against you under or arising out of the Consulting Agreement
or any breach or alleged breach of the Consulting Agreement, excluding only
Claims pertaining to breach of Section 12 of the Consulting Agreement. In
connection with the foregoing, the Company hereby represents and warrants to you
that there has been no assignment or other transfer, voluntarily or by operation
of law, to any person or entity of any Claims which are the subject of the
release set forth in this Section 4.
5. Taxes. You will be solely responsible for, and will pay when due, all
income, self-employment and other taxes attributable to all amounts paid to you
or on your behalf under this letter agreement.
6. Miscellaneous.
(a) Entire Agreement. This letter agreement contains the entire
understanding between the parties hereto, and supersedes any prior written
or oral agreement between the parties concerning the subject matter
contained herein. There are no representations, agreements, arrangements
or understandings, oral or written, between the parties hereto, relating
to the subject matter contained in this letter agreement, which are not
fully expressed herein.
(b) Amendment. This letter agreement shall not be modified or
amended except by a writing signed by both of the parties hereto.
<PAGE> 3
Mr. Leonard Mackenzie
November 5, 1998
Page 3
(c) Counterparts. This letter agreement may be executed in
counterparts, each of which shall be deemed to be an original, but such
counterparts, when taken together, shall constitute one and the same
agreement.
(d) Attorneys' Fees. If any action at law or equity is brought
concerning any provision of this letter agreement or the rights and duties
of any person in relation thereto, the prevailing party in such action
shall be entitled to reasonable attorneys' fees and costs in such action
in addition to any other relief to which it may be entitled.
(e) Parties in Interest. Nothing in this letter agreement, express
or implied, is intended to confer upon any person or entity, other than
the parties to this letter agreement and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by
reason of such agreement.
To acknowledge your agreement to the foregoing, please sign the additional
copy of this letter that is enclosed, and return it to me.
Very truly yours,
General Automation, Inc.
By: /s/ JANE CHRISTIE
-------------------------------------
Jane Christie, President & CEO
AGREED TO BY:
/s/ LEONARD N. MACKENZIE
- --------------------------
Leonard N. Mackenzie
<PAGE> 1
EXHIBIT 10.21
PROMISSORY NOTE
May 4, 1998
1. General Automation, Inc. currently owes NCR Corporation ("NCR"), a
Maryland corporation, the principal of $1,723,921.00. For value received,
General Automation, Inc. promises to make payments to NCR as set out in
this Promissory Note as follows:
2. The payment of the above principal, together with interest at the rate of
18% per annum shall be paid in a combination of eighteen (18) consecutive
monthly payments of $86,065.25 each and one (1) balloon payment of
$49,329.00. The first payment shall be due on May 1, 1998 with the
remaining payments due on the first of each month thereafter.
3. General Automation and NCR agree that the principal amount in Paragraph 1,
subject to future reconciliation, will be adjusted up or down to the
agreed upon amount at that time, with an appropriate adjustment to the
monthly payment in Paragraph 2. Amortization will still occur over 24
months, with a balloon payment due in 18 months.
4. PAYMENT SHALL BE SENT VIA WIRE TRANSFER USING THE FOLLOWING INFORMATION
PRIOR TO THE 1ST OF THE MONTH:
BANK NAME WACHOVIA BANK OF NORTH CAROLINA
BANK ADDRESS 10301 DAVID TAYLOR DRIVE
CHARLOTTE, NC 28282
ABA 053100494
BNF ACCT. NCR CORPORATION
BNF ACCT. NO. 8739069518
REFERENCE RFBLB65245
If General Automation fails to pay any monthly installment required to be
paid under this Promissory Note when the installment is due, all unpaid
installments shall, at NCR's option, become immediately due and payable;
and in addition to such right of acceleration, NCR shall be entitled to
any and all remedies available under the law or equity, including
collection charges of 1.5% per month and attorney fees. Subject to the
late fees, General Automation shall have five (5) days in which to cure
any defaults under this note.
4. General Automation hereby waives presentment, demand for payment or notice
of dishonor of this note, notice of protest and protest and all other
notices or demands in connection with the delivery, acceptance,
performance, default, endorsement or guaranty of this instrument.
5. General Automation shall have the right to prepay all or part of the
outstanding balance under this note without penalty and without credit for
interest paid or previously due.
6. No act or failure to act or verbal statement can waive or alter any term
or condition of this Promissory Note. This Promissory Note shall
constitute the sole agreement in regard to the above-said principal sum
and shall supersede all prior agreements and understandings, whether oral
or written. This Promissory Note may not be altered, and/or any provision
or right waived, except in a signed writing. Any provision voided by law
shall be severable and not impair any remaining provision.
7. This note cannot be assigned by General Automation without the written
consent of NCR. Any attempt to assign or otherwise transfer the obligation
of General Automation without consent shall make this notice due and
immediately payable in full.
NCR Corporation General Automation, Inc.
/s/ SANDRA A. MARTINEZ /s/ RICHARD NANCE
------------------------------ ------------------------------
By: Sandra A. Martinez By: Richard Nance
Manager, Credit & Third Party CFO, General Automation
Collections, NCR
Date: 5/4/98 Date: 5/4/98
------------------------ ------------------------
<PAGE> 1
EXHIBIT 21
The following are all of the subsidiaries of General Automation, Inc,:
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
GA Mentor Limited United Kingdom
Sequoia Systems (UK) Ltd. United Kingdom
General Automation Pty. Ltd. Australia
Sequoia Systems (Australia) Pty Ltd. Australia
Liberty Integration Software Inc. Canada
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated January 8, 1999
included in this Form 10-K in the previously filed Registration Statements of
General Automation, Inc. and Subsidiaries on Forms S-8 (No. 33-43158, 33-79038,
333-37467 and 333-09483).
CACCIAMATTA ACCOUNTANCY CORPORATION
Anaheim, California
January 12, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated December 19, 1997,
except for Notes 2,16 and 18 and the pro forma disclosures included in Notes 3
and 14 as to which the date is August 19, 1998, included in this Form 10-K in
the previously filed Registration Statements of General Automation, Inc. and
Subsidiaries on Forms S-8 (No. 33-43158, 33-79038, 333-37467 and 333-09483).
McGLADREY & PULLEN, LLP
Anaheim, California
January 12, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-43158, No. 33-79038, No. 333-09483 and No.
333-37467) of General Automation, Inc., our report dated December 9, 1996,
except as to Notes 9, 13, 14 and 15, which are as of August 19, 1998, appearing
on page F-2 of this Form 10-K/A.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
August 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EXTERNALLY
AUDITED STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 856,000
<SECURITIES> 0
<RECEIVABLES> 4,727,000
<ALLOWANCES> 562,000
<INVENTORY> 1,986,000
<CURRENT-ASSETS> 8,080,000
<PP&E> 5,471,000
<DEPRECIATION> 3,398,000
<TOTAL-ASSETS> 14,114,000
<CURRENT-LIABILITIES> 21,831,000
<BONDS> 0
0
0
<COMMON> 933,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,114,000
<SALES> 10,716,000
<TOTAL-REVENUES> 30,666,000
<CGS> 10,162,000
<TOTAL-COSTS> 23,538,000
<OTHER-EXPENSES> 17,568,000
<LOSS-PROVISION> 1,358,000
<INTEREST-EXPENSE> 591,000
<INCOME-PRETAX> (12,375,000)
<INCOME-TAX> 24,000
<INCOME-CONTINUING> (12,399,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,399,000)
<EPS-PRIMARY> (1.33)
<EPS-DILUTED> (1.33)
</TABLE>
