10-Q 1 gaexpress_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 THREE AND NINE MONTHS ENDED June 30, 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 [ ] Yes [X] As of June 30, 2001 there were 14,721,265 shares of common stock of the Registrant outstanding. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL AUTOMATION, INC. AND SUBSIDIARIES (dba GA eXpress, Inc.) CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, SEPTEMBER 30, 2001 2000 ------------- ------------- ASSETS Current assets: Cash and equivalents $ 1,316,000 $ 403,000 Accounts receivable 1,778,000 1,297,000 Prepaid expenses and other 228,000 436,000 ------------- ------------- Total current assets 3,322,000 2,136,000 Capitalized software 390,000 1,559,000 Property and equipment 152,000 1,484,000 Other 230,000 23,000 ------------- ------------- $ 4,094,000 $ 5,202,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current portion of long-term debt $ 1,279,000 $ 1,917,000 Bank line of credit - 275,000 Accounts payable 1,251,000 3,085,000 Accrued expenses 1,691,000 954,000 Deferred revenue 416,000 550,000 Net liabilities of discontinued operations - 642,000 ------------- ------------- Total current liabilities 4,637,000 7,423,000 Long-term debt 4,530,000 5,171,000 ------------- ------------- Total liabilities 9,167,000 12,594,000 ------------- ------------- Commitments and contingencies - - Stockholders' deficit: Common stock, $.10 par value; 50,000,000 shares authorized; 14,721,265 shares issued and outstanding 1,461,000 1,461,000 Additional paid-in capital 49,147,000 48,836,000 Accumulated deficit (55,332,000) (57,370,000) Accumulated other comprehensive loss (349,000) (319,000) ------------- ------------- Total stockholders' deficit (5,073,000) (7,392,000) ------------- ------------- $ 4,094,000 $ 5,202,000 ============= ============= The accompanying notes are an integral part of these financial statements. 1 GENERAL AUTOMATION, INC. AND SUBSIDIARIES (dba GA eXpress, Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED JUNE 30, ---------------------------- 2001 2000 ------------- ------------- Revenues: Product $ 734,000 $ 1,415,000 Services 141,000 343,000 ------------- ------------- 875,000 1,758,000 Cost of revenues Product 299,000 888,000 Services 250,000 164,000 ------------- ------------- 549,000 1,052,000 Gross profit 326,000 706,000 ------------- ------------- Operating expenses: Selling, general and administrative 513,000 700,000 Research and development 247,000 135,000 Impairment of goodwill - 99,000 Amortization of goodwill - 10,000 Depreciation 39,000 62,000 ------------- ------------- 799,000 1,006,000 ------------- ------------- Loss from operations (473,000) (300,000) ------------- ------------- Other income (expense) Royalties 263,000 - Interest, net (101,000) (232,000) Other, net 18,000 - ------------- ------------- 180,000 (232,000) ------------- ------------- Loss from continuing operations before taxes (293,000) (532,000) Provision for income taxes - 20,000 ------------- ------------- Loss from continuing operations (293,000) (552,000) Discontinued operations- Loss from discontinued operations - (1,136,000) ------------- ------------- Loss before extraordinary item (293,000) (1,688,000) Extraordinary item- Gain on forgiveness of debt 1,870,000 - ------------- ------------- Net income (loss) $ 1,577,000 $ (1,688,000) ============= ============= Basic earnings (loss) per share: Continuing operations $ (0.02) $ (0.04) Discontinued operations - (0.09) Extraordinary item 0.13 - ------------- ------------- Net income (loss) $ 0.11 $ (0.13) ============= ============= Diluted earnings (loss) per share: Continuing operations $ (0.02) $ (0.04) Discontinued operations - (0.09) Extraordinary item 0.13 - ------------- ------------- Net income (loss) $ 0.11 $ (0.13) ============= ============= Weighted average number of common shares: Basic 14,721,265 13,483,307 ============= ============= Diluted 15,695,797 13,483,307 ============= ============= The accompanying notes are an integral part of these financial statements. 2 GENERAL AUTOMATION, INC. AND SUBSIDIARIES (dba GA eXpress, Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) NINE MONTHS ENDED JUNE 30, ------------------------------ 2001 2000 ------------- ------------- Revenues: Products $ 2,632,000 3,012,000 Services 564,000 656,000 ------------- ------------- 3,196,000 3,668,000 Cost of revenues: Products 1,423,000 1,596,000 Services 711,000 335,000 ------------- ------------- 2,134,000 1,931,000 Gross profit 1,062,000 1,737,000 ------------- ------------- Operating expenses: Selling, general and administrative 2,225,000 1,567,000 Research and development 1,374,000 330,000 Writedown of capitalized software to net realizable value 503,000 - Impairment of goodwill - 297,000 Amortization of goodwill - 31,000 Depreciation 141,000 188,000 ------------- ------------- 4,243,000 2,413,000 ------------- ------------- Loss from operations (3,181,000) (676,000) ------------- ------------- Other income (expense): Royalties 951,000 - Gain on sale of building 1,179,000 - Litigation settlement 500,000 - Interest, net (375,000) (667,000) Other income 184,000 - ------------- ------------- 2,439,000 (667,000) ------------- ------------- Income (loss) from continuing operations before taxes (742,000) (1,343,000) Provision for income taxes 47,000 24,000 ------------- ------------- Loss from continuing operations (789,000) (1,367,000) ------------- ------------- Discontinued operations: Loss from discontinued operations (1,179,000) (2,292,000) Gain on sale of discontinued operation 2,136,000 - ------------- ------------- Income (loss) from discontinued operations 957,000 (2,292,000) ------------- ------------- Loss before extraordinary item 168,000 (3,659,000) Extraordinary item- Gain on forgiveness of debt 1,870,000 - ------------- ------------- Net income (loss) $ 2,038,000 $ (3,659,000) ============= ============= Basic earnings (loss) per share: Continuing operations $ (0.05) $ (0.11) Discontinued operations 0.06 (0.18) Extraordinary item 0.13 - ------------- ------------- Net income (loss) $ 0.14 $ (0.29) ============= ============= Diluted earnings (loss) per share: Continuing operations $ (0.05) $ (0.11) Discontinued operations 0.06 (0.18) Extraordinary item 0.12 - ------------- ------------- Net income (loss) $ 0.13 $ (0.29) ============= ============= Weighted average number of common shares: Basic 14,721,265 12,482,769 ============= ============= Diluted 15,695,797 12,482,769 ============= ============= The accompanying notes are an integral part of these financial statements. 2 GENERAL AUTOMATION, INC. AND SUBSIDIARIES (dba GA eXpress, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

~~SIX~~NINE MONTHS ENDED ~~MARCH~~JUNE 3130 ---------------------------- 2001 2000 ------------- ------------- Cash flows from operating activities: Net income (loss) $ ~~459~~2,038,000 $(13,~~247~~659,000) Adjustments to reconcile net income (loss) to net cash provided by (used in)operating activities: Extraordinary gain on forgiveness of debt (1,870,000) - Gain on sale of discontinued operations (2,136,000) - Loss from discontinued operations 1,179,000 ~~(585~~2,292,000) Gain on sale of building (1,179,000) - Write-down of capitalized software to net realizable value 503,000 - Depreciation and amortization ~~744~~1,154,000 ~~515~~516,000 Embedded interest - 22,000 Stock issued in legal settlement - 75,000 Value of warrants charged to operations 27,000 - Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (~~171~~481,000) ~~380~~(261,000) Inventory - ~~171~~(55,000) Prepaid expenses and other ~~117~~208,000 5871,000 Increase (decrease) in: Accounts payable ~~305~~112,000 ~~(66~~1,319,000) Accrued expenses ~~542~~641,000 94(606,000) Deferred revenue (97131,000) 12(53,000) ------------- ------------- Net cash provided by operating activities ~~266~~65,000 (~~571~~339,000) ------------- ------------- Cash flows from investing activities: Proceeds from sale of building 2,373,000 - Proceeds from sale of discontinued operation 1,558,000 - ~~Acquisitions and related adjustments - (273,000)~~ Purchase of property and equipment (8158,000) (59152,000) Capitalized software costs (192,000) (1,~~147~~548,000) Other assets (28179,000) 37- Acquisitions and related adjustments - (273,000) ------------ ------------ Net cash provided by (used in) investing activities 3,~~703~~402,000 (1,~~442~~973,000) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of ~~common~~debt ~~stock -~~ 1,~~445~~280,000 ~~Proceeds from issuance of debt 300,000~~ 500,000 Principal payments on debt (2,~~079~~548,000) (~~355~~365,000) Proceeds from issuance of common stock - 1,445,000 ------------- ------------- Net cash provided by (used in) financing activities (1,~~779~~268,000) 1,~~590~~580,000 ------------- ------------- Cash used in discontinued operations (1,243,000) - ------------- ------------- Approximate effect of exchange rate changes on cash (3943,000) (3098,000) ------------- ------------- Net increase (decrease) in cash and equivalents ~~908~~913,000 (~~453~~830,000) Cash and equivalents, beginning of period 403,000 991,000 ------------- ------------- Cash and equivalents, end of period $ 1,~~311~~316,000 $ ~~538~~161,000 ============= ============= The accompanying notes are an integral part of these financial statements. 3

GENERAL AUTOMATION, INC., AND SUBSIDIARIES (dba GA eXpress, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BUSINESS AND BASIS OF PRESENTATION Nature of business ------------------ General Automation, Inc., dba GA eXpress, 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 calendar 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, has current liabilities in excess of current assets by $1,315,000 and has a total stockholders' deficit of $5,073,000 at June 30, 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 in ongoing negotiations with trade creditors and former employees with debts totaling approximately $1.0 million. There can be no assurance that management will be successful in these negotiations. 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 nine months ended June 30, 2001 are as follows:

2001 2000 ------------------------------- -------------------------------- Service Product Total Service Product Total Revenues: E-Path $70 83,000 $ ~~352~~481,000 $ ~~423~~564,000 $~~284~~ 582,000 $ ~~282~~483,000 $ ~~566~~1,065,000 Operating Systems ~~873~~1,275,000 1,~~025~~357,000 12,~~898~~632,000 ~~661~~951,000 ~~710~~1,652,000 12,~~371~~603,000 ---------- ---------- ---------- --------- ---------- ---------- Total ~~943~~$1,358,000 $1,~~377~~838,000 2$3,~~321~~196,000 ~~945~~$1,533,000 ~~992~~$2,135,000 1$3,~~937~~668,000 ========== ========== ========== ========== ========== ===========

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 second quarter of fiscal 2001. During the nine months ended June 30, 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 nine months ended June 30, 2001, the Company amortized $228,000. 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 $951,000 for the nine months ended June 30, 2001 in connection with this agreement of which $702,000 has not been paid. The Company has initiated an action against the buyer of the Company's pick business for payment of outstanding amounts due. Despite the current litigation, the Company believes it is appropriate to recognize revenue pursuant to the royalty agreement. While the Company is confident that it will ultimately prevail, there can be no absolute assurance as to the ultimate outcome. 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 approximately $2,100,000. During the third quarter, the Company negotiated for the release of the hold back associated with the initial sales which resulted in net cash to the Company of approximately $150,000. Note 6 - EXTRAORDINARY ITEM During the three months ended June 30, 2001, the Company negotiated settlements of amounts due to certain vendors and unsecured creditors. The aggregate value of these debts totaled approximately $3,000,000. Total payments to be made under the settlement arrangements to creditors is $562,000. Incremental costs, expenses and adjustments to carrying value directly related to these settlements amounted to $568,000. In connection therewith, the Company recognized an extraordinary gain on settlement of such debt of $1,870,000. Note 7 - PER SHARE INFORMATION During the three and nine months ended June 30, 2001, the Company had 2,096,154 common stock equivalents outstanding that have been included in the calculation of diluted shares outstanding using the treasury stock method. During the same 2000 periods, no securities covertible into common stock were used to calculate diluted shares outstanding as their effects would be anti-dilutive. 6 Note 8 - FINANCING ACTIVITIES On June 29, 2001, the Company negotiated an amendment (the "Amendment") to its September 30, 1999 Loan Agreement, as amended October 3, 2000 and closed $1,276,500 of secured notes (the "Notes") due December 29, 2002. The Notes represented proceeds of $950,000, and a rollover of accrued interest on certain indebtedness previously incurred totaling $326,500. Interest on the Notes accrue at 10% per annum, payable upon maturity of the Note. The security advanced by the Company shall be a first lien security interest in a certain Pick receivable and royalties (collectively, "Pick Security") due to the Company arising out of the Company's previous sale of the Pick business. Payments received from the Company under the Pick Systems Asset Purchase Agreement will be used to pay down the Notes. Additionally, upon execution of the Amendment, previous agreements were cancelled. The Company incurred aggregate debt issuance costs totaling $174,000 in connection with this transaction. See Note 9 for discussion of warrants issued for debt costs. Note 9 - COMMOM STOCK PURCHASE WARRANT TRANSACTIONS During the nine months ended June 30, 2001, the Board of Director authorized the issuance of warrants to purchase 1,500,000 shares of common stock at $0.13 per share. The warrants are fully vested and are exercisable at any time. The warrants expire five years from the date of grant. The Company determined the value of such warrants to be $140,000. The Company allocated a portion the costs of these warrants totaling $28,000 to the costs of the Notes described in Note 8 and a portion totaling $55,000 to the extraordinary item described in Note 6. The remainder of the costs of these warrants totaling $57,000 were charged to operations. In connection with the Amendment (Note 8), the Company issued warrants to purchase 1,096,154 shares of common stock. The warrants may be exercised into shares of common stock at an exercise price of $0.26 per share, with the exception of warrants to purchase 205,475 shares of common stock, which have an exercise price of $0.45 per share. The Company valued these warrants, in the aggregate, at $172,000 and will charge interest expense to operations over the term of the Notes. The warrant holders may elect to cancel any outstanding debt and/or accrued interest, including the notes, as payment of the exercise price of the warrants. Warrant holders may also exchange other securities of the Company held at the market price thereof in payment of the exercise price of warrants. The warrants shall expire on the earlier of (i) six years from the date of repayment of the indebtedness due under the Amendment or (ii) 10 years from the date of original issuance thereof. The warrants shall be detachable from the Notes and may be exercised, transferred or sold independently of the Notes. 7 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. During the third fiscal quarter, we negotiated settlements with certain vendors aggregating approximately $3,000,000 for cash totaling $562,000. On June 29, 2001, the Company secured a debt financing generating $950,000 in gross proceeds. Management is continuing efforts to improve the Company's financial condition and is currently discussing with lenders various restructurings of outstanding debt. In addition, management is in discussions with the Company's former employees to pay prior payroll liabilities. There is no assurance management will be successful in its continuing efforts. (2) RESULTS OF OPERATIONS: Revenues decreased by $472,000 or 13% during the nine months ended June 30, 2001 to $3,196,000. Revenues decreased by $883,000 or 50% from $1,758,000 to $875,000 during the three months ended June 30, 2001. 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. Selling, general and administrative expenses declined from $880,000 during the three months ended March 31, 2001 to $513,000 for the three months ended June 30, 2001, a decrease of 45%. Additionally, selling, general and administrative expenses decreased to $513,000 during the three months ended June 30, 2001 compared to $700,000 for the three months ended June 30, 2000, a decrease of 27%. These declines are principally due to reductions of legal and professional fees as well as administrative support, rents and other administrative costs. Research and development expenses increased from $135,000 during the three-month period 2000 to $247,000 during 2001 to focus on its new products. 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 for the three and nine months ended June 30, 2001 compared to the same 2000 periods result from the decrease in debt outstanding. Our discontinued operations were completely sold. Accordingly our losses were reduced during the nine months ended June 30, 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. (3) LIQUIDITY AND CAPITAL RESOURCES The Company has suffered recurring losses from operations, and at June 30, 2001, has a working capital deficit of $1,315,000 and a shareholders' deficit of $5,073,000. As discussed elsewhere, management paid in full its outstanding bank line of credit, sold our corporate office building allowing us to reduce debt further. Additionally, the Company raised $950,000 during the third quarter 2001 and negotiated unsecured creditor settlements representing approximately $3,100,000. At June 30, 2001, the Company had cash on hand totaling $1,316,000 to be used to settle amounts due creditors. The Company requires additional funds from outside sources, whether debt or equity, in order to meet its obligations and continue to operate. 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. In addition, the Company has payroll-related obligations to former employees which management is attempting to repay in full over a period of time. There can be no assurance that management will be successful in these negotiations. Management 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 materialized. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK N/A 8 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. 9 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 August 20, 2001 --------------------------- --------------- Jane M. Christie Date President, Chief Executive Officer and Principal Accounting Officer 10

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