10-Q 1 gaauto_10q.txt -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q -------------------------------------------------------------------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED March 31, 2001 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 I.D. No.) incorporation or organization) 17731 MITCHELL NORTH, IRVINE, CALIFORNIA 92614 ---------------------------------------- ----- (Address of principal executive offices) (Zip code) Registrant's telephone number including area code: (949) 250-4800 -------------- 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: No [X] Yes [ ] As of June 1, 2001 there were 14,607,896 shares of common stock of the Registrant outstanding. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL AUTOMATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, SEPTEMBER 30, 2001 2000 ------------- ------------- ASSETS Current assets: Cash and equivalents $ 1,311,000 $ 403,000 Accounts receivable 1,240,000 1,297,000 Prepaid expenses and other 319,000 436,000 ------------- ------------- Total current assets 2,870,000 2,136,000 Capitalized software 618,000 1,559,000 Property and equipment 184,000 1,484,000 Other 51,000 23,000 ------------- ------------- $ 3,723,000 $ 5,202,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Bank line of credit $ - $ 275,000 Current portion of long-term debt 1,054,000 1,917,000 Accounts payable 3,390,000 3,085,000 Accrued expenses 1,496,000 954,000 Deferred revenue 453,000 550,000 Net liabilities of discontinued operations - 642,000 ------------- ------------- Total current liabilities 6,393,000 7,423,000 Long-term debt 4,530,000 5,171,000 ------------- ------------- Total liabilities 10,923,000 12,594,000 ------------- ------------- Commitments and contingencies - - Stockholders' deficit: Common stock, $.10 par value; 50,000,000 shares authorized; 14,607,896 shares issued and outstanding 1,461,000 1,461,000 Additional paid-in capital 48,836,000 48,836,000 Accumulated deficit (57,139,000) (57,370,000) Accumulated other comprehensive loss (358,000) (319,000) ------------- ------------- Total stockholders' deficit (7,200,000) (7,392,000) ------------- ------------- $ 3,723,000 $ 5,202,000 ============= ============= The accompanying notes are an integral part of these financial statements. 1 GENERAL AUTOMATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MARCH 31 ---------------------------- 2001 2000 ------------- ------------- Revenues: Product $ 467,000 $ 627,000 Services 534,000 230,000 ------------- ------------- 1,001,000 857,000 Cost of revenues Product 462,000 194,000 Services 221,000 168,000 ------------- ------------- 683,000 362,000 Gross profit 318,000 495,000 ------------- ------------- Operating expenses: Selling, general and administrative 881,000 1,580,000 Research and development 462,000 108,000 Depreciation 49,000 60,000 ------------- ------------- 1,392,000 1,748,000 ------------- ------------- Loss from operations (1,074,000) (1,253,000) ------------- ------------- Other income (expense) Royalties 564,000 - Interest, net (104,000) (204,000) Other, net 22,000 (18,000) ------------- ------------- 482,000 (222,000) ------------- ------------- Income (loss) from continuing operations before taxes (592,000) (1,475,000) Provision for (benefit from) income taxes - - ------------- ------------- Income (loss) from continuing operations (592,000) (1,475,000) ------------- ------------- Discontinued operations: Income (loss) from discontinued operations (71,000) 449,000 Gain on sale of discontinued operation 2,136,000 - ------------- ------------- Income from discontinued operations 2,065,000 449,000 ------------- ------------- Net income (loss) $ 1,473,000 $ (1,026,000) ============= ============= Basic and diluted income (loss) per share: Income (loss) from continuing operations $ (0.04) (0.12) Income (loss) from discontinued operations 0.14 0.04 ------------- ------------- Net income (loss) $ 0.10 $ (0.08) ============= ============= Basic and diluted number of common shares 14,607,896 12,367,682 ============= ============= The accompanying notes are an integral part of these financial statements. 2 GENERAL AUTOMATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED MARCH 31, ------------------------------ 2001 2000 ------------- ------------- Revenues: Products $ 1,120,000 992,000 Services 1,201,000 945,000 ------------- ------------- 2,321,000 1,937,000 Cost of revenues: Products 1,044,000 393,000 Services 541,000 485,000 ------------- ------------- 1,585,000 879,000 Gross profit 736,000 1,059,000 ------------- ------------- Operating expenses: Selling, general and administrative 1,713,000 2,235,000 Research and development 1,127,000 206,000 Writedown of capitalized software to net realizable value 503,000 - Depreciation 102,000 128,000 ------------- ------------- 3,445,000 2,471,000 ------------- ------------- Loss from operations (2,709,000) (1,412,000) ------------- ------------- Other income (expense): Royalties 829,000 - Gain on sale of building 1,179,000 - Litigation settlement 500,000 - Interest, net (271,000) (430,000) Other expense 22,000 (18,000) ------------- ------------- 2,259,000 (448,000) ------------- ------------- Income (loss) from continuing operations before taxes (450,000) (1,860,000) Provision for (benefit from) income taxes 47,000 28,000 ------------- ------------- Income (loss) from continuing operations (497,000) (1,832,000) ------------- ------------- Discontinued operations: Loss from discontinued operations (1,179,000) 585,000 Gain on sale of discontinued operation 2,136,000 - ------------- ------------- Income (loss) from discontinued operations 957,000 585,000 ------------- ------------- Net income (loss) $ 459,000 $ (1,247,000) ============= ============= Basic and diluted income (loss) per share: Income (loss) from continuing operations $ (0.03) $ (0.04) Income (loss) from discontinued operations 0.06 (0.06) ------------- ------------- Net loss $ 0.03 $ (0.10) ============= ============= Basic and diluted number of common shares 14,607,896 11,976,951 ============= ============= The accompanying notes are an integral part of these financial statements. 2 GENERAL AUTOMATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

GENERAL AUTOMATION, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 BUSINESS AND BASIS OF PRESENTATION Nature of business General Automation, Inc. (the "Company") is engaged in the development, design and sale of computer software and related software consulting services. The Company has subsidiaries in Canada, Australia and England. The Company's major product line is data connectivity software that enables businesses to connect legacy applications and databases to e-business exchanges and trading partners over the Internet marketed under the name E-Path. In addition, the Company provides a range of custom and packaged consulting programs in order to help customers build and deploy their e-business applications. The Company continues its development of its Selva Server product which is expected to be launched before the end of 2001, assuming that the Company receives adequate funding. As discussed more thoroughly in Note 5, the Company's database management and hardware service businesses are presented as discontinued operations in the accompanying consolidated financial statements. All such business were sold prior to the end of the most recent fiscal quarter. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (US) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) Considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Sequoia Systems (UK) Limited, Liberty Integration Software, Inc., General Automation, LLC and General Automation PTY Ltd. All significant intercompany transactions have been eliminated in consolidation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K. 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 has incurred significant losses from operations, its current liabilities exceed current assets by $3,523,000 and total stockholders' deficit was $7,200,000 at March 31, 2001. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management plans to re-negotiate with holders of the existing subordinated convertible debt totaling approximately $3.9 million terms and conditions which the Company can better meet in the future. The Company may be unable to comply with all the covenants and conditions of the subordinated convertible debt. Management is in discussions with the debt holders attempting to secure more favorable terms. In addition, the Company is negotiating with trade creditors and former employees with debts totaling approximately $4,900,000. There can be no assurance that management will be successful in these negotiations. Management entered into negotiations to secure short-term financing of $1.5-$2 million under terms and conditions to be agreed upon. There can be no assurances that this funding will materialize. The Company is currently negotiating material contracts for the sale of its E-Path products to customers which management believes will provide additional liquidity for operations. There can be no assurances these contracts will ultimately materialize. Management intends to continue to expand its B2B software development, and commence distribution of the "Selva" product line later in the year. The consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. 4 Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications--Certain prior period balances have been reclassified to conform to the current period presentation. Revenue Recognition The Company's revenues are derived from software licensing arrangements and fees charged for services. Software is generally licensed for internal use by its customers. Licenses are generally based on the number of users of the Company's software. The Company's revenue recognition policies are in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended and SOP 98-9, Software Revenue Recognition, With Respect to Certain Transactions. In general, software license revenues are recognized when a non- cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable; professional services revenues are recognized as such services are performed; and maintenance revenues, or post-contract customer support, or PCS, including revenues bundled with software agreements which entitle the customers to technical support and future unspecified enhancements to our products, are deferred and recognized ratably over the related contract period, generally twelve months. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as software products, post contract customer support, installation or training. The determination of fair value is based on objective evidence which is specific to the Company. If evidence of fair value does not exist for all elements of a license agreement and PCS is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. Services that the Company provides are not essential to the functionality of the software. The Company records unearned revenue for software arrangements when cash has been received from the customer and the arrangement does not qualify for revenue recognition under the Company's revenue recognition policy. The Company records accounts receivable for software arrangements when the arrangement qualifies for revenue recognition but cash or other consideration has not been received from the customer. The Company's professional services include consulting services, training-related services to customers and partners, and software maintenance services, including technical support, to the Company's customers and partners. Revenue from consulting services is typically recognized as services are performed. Maintenance fees relating to technical support and upgrades are recognized ratably over the maintenance period, if significant. If insignificant, the Company accrues the estimated costs of such service at the time of delivery. NOTE 2 - CONTINUING OPERATIONS The Company's US operations are primarily devoted to the continued enhancement, licensing, and support of E-Path web products. The US operations, along with our Canadian subsidiary have also continued development of Selva Server web products which are expected to be launched later in 2001, subject to available cash requirements. The Australian and United Kingdom (UK) operations continue to focus their efforts on supporting operating systems (UNIX, Novell, OS/2) and contract programming utilizing C++ and Visual Basic; the UK operations began licensing E-Path during 2001. Revenues from continuing operations by product and services For the six months ended March 31, 2001 are as follows:

5 NOTE 3 - WRITEDOWN OF CAPITALIZED SOFTWARE TO NET REALIZABLE VALUE In March 2001, management determined that the market for certain of its software products under development had become saturated and decided not to pursue further development efforts. Accordingly, the Company wrote-off unamortized capitalized software costs of $503,000 during the first quarter of 2001. During the six months ended March 31, 2001, the Company capitalized $192,000 of costs related to Selva Server. No amounts were capitalized in 2000 for the Selva product. No costs have been amortized related to the Selva Server products since they have not been sold. The Company amortizes its software costs on a straight-line basis over the period expected to be benefited. Management is currently evaluating its method for amortization of E-Path costs since its sales activities have only partially commenced. During the six months ended March 31, 2001, the Company amortized $630,000. No amounts were amortized related E-Path in 2000. NOTE 4 - OTHER INCOME Royalties --------- Royalties relate to the sale of the Company's Pick-based database management business in August 2000. The Company is entitled to twenty percent of certain sales by Pick Systems, Inc. for a period of twenty-four months after the sale. The Company has earned $829,000 for the six months ended March 31, 2001 in connection with this agreement of which $444,000 has not been paid. Management has initiated an action against the buyer of the Company's pick business for payment of outstanding amounts due. Sale of building ---------------- On November 1, 2000 the Company sold its administrative building for $2,373,000. Proceeds from the sale were used to pay off the related first and second mortgage notes totaling $955,000 and $922,500, respectively. Concurrent with the sale of the building, the Company entered into a month-to-month operating lease agreement whereby the Company leased back its office facilities from the purchaser at a monthly rent of $36,000. In February 2001, the Company and the lessor agreed to reduce the monthly rent to $5,000. Litigation settlement --------------------- On April 15, 1999 the Company filed a Complaint in the Orange County Superior Court against PriceWaterhouseCoopers, LLP, successor to PriceWaterhouse, which was the Company's independent auditors from 1991 through 1996. The action asserted that PriceWaterhouse was negligent in its audits of the Company's financial statements and procedures, resulting in substantial reporting errors which were only uncovered after PriceWaterhouse was replaced as the Company's independent auditors in 1997. The Company sought general and punitive damages, including its audit expenses, and losses resulting from its reliance upon the inaccurate financial statements. In December 2000, this suit was settled for $500,000. NOTE 5 DISCONTINUED OPERATIONS On January 31, 2001, the Company sold its hardware service business In an asset sale to a private investor group. The sales price was equal to $840,000 cash plus the value of accounts receivable, as defined. At the time of the sale, the hardware service business had liabilities in excess of its assets totaling $572,000, largely due to $2,437,000 of revenues deferred by the Company relating to customer support contracts. The net liabilities, together with cash received, resulted in a gain of $2,136,000. In addition, the purchase agreement provides for a contingent sales price up to 10%, not to exceed $300,000, of future revenues in excess of $7,100,000 generated by the buyer. During the three months ended March 31, 2001, the Company earned no royalties. Note 6 PER SHARE INFORMATION During the three and six months ended March 31, 2001 and 2000, the Company had no convertible securities into common stock which were be included in basic and diluted shares outstanding using the treasury stock method. 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The discussion in this document contains trend analysis and other forward looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements throughout this document. Items which could affect results expected include product acceptance, timely releases of new products, liquidity and financial condition of the Company. (1) MATERIAL CHANGES IN FINANCIAL CONDITION: During the first quarter of fiscal 2001, the Company completed the sale of its administrative building for cash proceeds of $2,373,000 and paid-off the related mortgage debt totaling $1,880,000. In addition, the Company sold its hardware services business for cash proceeds of approximately $1,558,000. Management is continuing efforts to improve the Company's financial condition and is currently discussing with unsecured lenders the possible conversion of debt into equity. In addition, management is discussing with the Company's former employees and vendors a plan that would settle all outstanding obligations for cash at a fraction of the outstanding balances. There is no assurance management will be successful in its efforts. (2) RESULTS OF OPERATIONS: Revenues increased by $384,000 or 19% during the six months ended March 31, 2001 to $2,321,000. New E-path products were introduced in the fourth quarter of fiscal 2000, but have not reached a breakeven point and, currently, amortization of capitalized costs and other direct costs of sales exceed total sales of these new products due to the fact the Company amortizes costs on a straight-line basis versus on a per-unit basis. Costs of revenues increased as a percentage of revenues largely due to the increase in the amortization of software costs previously capitalized. General and administrative expenses decreased to $1,713,000, principally due to reductions of legal and professional fees as well as administrative support, rents and other administrative costs. Other income includes royalties from the sales of our Pick business, as well as the gain on sale of building as discussed in the notes to the financial statements. The decrease in net interest expense results from the decrease in debt outstanding. Our discontinued operations were completely sold. Accordingly our losses were reduced during the six months ended March 31, 2001. Overall, we had net income from the gains on sales of assets and business. We expect to incur losses for the foreseeable future as we expand our licensing and Services. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK N/A 7 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5 - OTHER INFORMATION None. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K None. 8 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. General Automation, Inc. ------------------------ Registrant /s/ Jane M. Christie June 25, 2001 --------------------------- -------------- Jane M. Christie Date President, Chief Executive Officer and Principal Accounting Officer 9

GENERAL AUTOMATION INC 10-Q