<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to _______
Commission File Number 0-16011
WATSON GENERAL CORPORATION
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-2873757
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization Identification No.)
32-B MAUCHLY 92718
IRVINE, CALIFORNIA
(Address of principal (Zip Code)
executive offices)
</TABLE>
Issuer's telephone number: (714) 727-4020
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO
PAR VALUE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form this 10-KSB or any amendment
thereto. [X]
State issuer's revenues for its most recent fiscal year: $ 2,990,000
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold on DECEMBER 13, 1995 was
$16,210,003. For purposes of the foregoing calculation only, all directors and
executive officers of the registrant have been deemed affiliates.
The number of shares outstanding of the issuer's common stock, as of DECEMBER
13, 1995, was 9,746,591.
================================================================================
<PAGE> 2
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
Watson General Corporation (the "Registrant" or the "Company"), a California
Corporation founded in 1947 and based in Irvine, California, is an emerging
growth company in the environmental services industry. The Company is
currently positioned to capitalize on its unique niche within the underground
storage tank (USTs) monitoring business and other allied markets. Watson
General identifies its customers as those who benefit from emerging
technologies to protect against, prevent, or clean up environmental
contamination.
The Company's goal is to increase its revenues significantly by:
~ Building long-term relationships with customers and, in the
process, develop strong recurring revenue streams with value-added or
additional services.
~ Rapidly gaining major shares in niche environmental markets by
delivering proprietary products and services. Enhance those products
and services that are traditionally viewed as "expenses" and "dictated
by regulators" so that they enhance the customers' bottom line.
~ Focusing on niches where there is currently little or no
competition.
~ Furthering growth by acquiring businesses that add market share
and/or technologies to the Company, and by forming strategic alliances
to market and deliver the Company's proprietary products and services.
The Company is engaged in niche market environmental businesses through its
operating subsidiaries:
<TABLE>
<CAPTION>
Subsidiary Product/Service
---------------------------------------- -----------------------------------------------
<S> <C>
EnvirAlert, Inc. Environmental operating software to manage
and control UST monitoring equipment
Toxguard Systems, Inc. Environmental consulting and project management
Toxguard Fluid Technologies, Inc. On-site antifreeze recycling
</TABLE>
During the fourth quarter of fiscal 1995 the Company signed a letter of intent
to purchase all of the outstanding common stock of EnviroQuest Technologies,
Ltd., a national provider of statistical inventory reconciliation services,
headquartered in Kansas City, Missouri. Statistical inventory reconciliation
software is an approved method of leak detection for underground storage tanks
and is synergistic to the software systems and services provided by the
Company's EnvirAlert, Inc. subsidiary.
2
<PAGE> 3
<TABLE>
<CAPTION>
Representative Customers
------------------------
<S> <C>
Amoco ARCO
Department of Defense Econo Lube N' Tune
Federal Aviation Administration Goodyear
GTE Hertz
IT Corporation Jacobs Engineering
Kaiser Permanente Laidlaw Transportation
City of Long Beach Port of Long Beach
County of Los Angeles Los Angeles Freightliner
Mayflower Transportation MCI
Ogden Aviation Pacific Bell
City of San Diego Port of San Diego
Sears Southern California Gas
Southland Corporation Texaco
TNT Truck Lines U-Haul
Union Pacific Railroad Univ. of Southern California(USC)
UPS U.S. Postal Service
Weyerhaeuser
</TABLE>
THE MARKETS AND PRODUCTS
Environmental Operating Software and Monitoring Systems
Computing power, communications, and the integration of high-tech measuring
devices are dramatically changing the way business is coping with ever
increasing pressures to protect the environment. The Company considers itself
to be the leader in these new and emerging trends. The dominant market
position of the Company's EnvirAlert subsidiary in underground storage tank
monitoring software has poised the Company for major market expansion in this
emerging arena.
The Company provides total tank/site management services to the UST owner that
desires to outsource the management of his sites, including data collection,
record keeping and reporting, alarm detection and notification, preventative
maintenance, leak detection, and inventory loss detection. If the acquisition
of EnviroQuest Technologies, Ltd. occurs, the Company will add yet another
method of leak detection, statistical inventory reconciliation ("SIR"), to its
service offerings.
The Environmental Protection Agency (EPA) estimates that there are currently
over 1.75 million underground storage tanks in the U.S., of which 25% either
have leaked or are leaking. Because over 50% of the U.S. population receives
some or all of its drinking water from groundwater, the risks posed by leaking
USTs are a significant threat to the integrity of the nation's water supply.
In 1988, the U.S. Congress amended the Resource Conservation and Recovery Act
of 1976 to require the EPA to develop regulations to protect human health and
property from leaking USTs. The EPA mandated that all underground petroleum
storage tanks have an approved monitoring system in place by 1998. By that
year, depending on the age of individual tanks, owners of USTs are required to
monitor their tanks, as well as their total tank delivery systems, for leaks,
and in the event of a leak, to immediately notify the responsible government
agency of the leak.
3
<PAGE> 4
Environmental Monitoring Software
One common means of leak detection is to install tank monitoring equipment in
or around the tank itself. Information from this equipment is used to produce
EPA reports and track inventory. Seeing a market need to make this information
available to the tank owner at his office, the Company developed a remote
monitoring software product called TankControl(R). Additionally, the Company
provides full remote monitoring services for those firms that want to
out-source this process. In an Investor's Business Daily article, the
Company's software was recognized for its ability to fulfill these
requirements. To the best of its knowledge, Watson General has the only
software product capable of interfacing with virtually every leak detection
device manufactured.
The Company is now recognized as a leader in the remote monitoring of
underground storage tanks. Its software packages are monitoring over 5,000
tanks
Two other common means of leak detection are tank integrity testing and
statistical inventory reconciliation ("SIR"). Industry estimates indicate that
in excess of 500,000 tanks are currently meeting compliance utilizing tank
integrity testing. This method ceases to be an approved method for most tanks
in 1998 and will have to find other monitoring methods such as SIR or tank
monitoring equipment. SIR provides a cost effective method for these tank
owners to meet compliance.
TankControl(R) Software
This environmental systems software is for use principally by the petroleum
products industry. The software provides the ability to remotely monitor and
control dissimilar tank monitoring equipment (all major manufacturers
supported) and point of sale devices from a single location utilizing a
Microsoft Windows(R)-based PC operating system. TankControl(R) provides
automatic polling of sites, allowing for the automated collection of
information, thus eliminating human error. The software provides tools for the
management of environmental information as well as management information such
as inventory control, delivery routing and scheduling, and competitive pricing
analysis.
"Operators don't have to automate the collection of the tank
monitoring information to meet EPA regulations. However, Watson's
software enables station operators to combine government paperwork
with more accurate inventory control and thus streamline a business
process while meeting federal regulation."
-- Investors Business Daily, September 19, 1994
The Company has demonstrated leadership in automation control of:
Petroleum marketers site management
Purchase/delivery/inventory of product
Point-of-sale remote communications
Underground storage tank monitoring
Remediation site control
During the Company's third fiscal quarter of 1994 (ended June 30th), Southland
Corporation's 7-11 convenience store chain completed a nationwide installation
of the Company's underground storage tank monitoring software in over 2,400
sites.
4
<PAGE> 5
In August 1994, the Company signed an agreement with Schlumberger Technologies
to market the Company's remote monitoring software product. Amoco Oil was
announced as the first customer under this new marketing agreement. Amoco
utilizes the Company's software package through Schlumberger's Micro-Max cash
registers to monitor retail inventory level data collection for delivery
schedules and purchasing patterns.
In September 1994, the Company signed an agreement with Emco Wheaton to market
the Company's monitoring software product. Emco Wheaton develops and
manufactures products and systems for the environmentally safe handling and
transfer of petroleum and petro-chemicals. Emco Wheaton distributes its
products and systems to over 100 countries from manufacturing and assembly
plants in the United States, Canada, England, France, Germany and Japan, as
well as from a distribution facility in Australia.
At September 30, 1995, the Company's subsidiary EnvirAlert, Inc. had no
material backlog, and employed seven people.
Environmental Cleanup and Prevention Services
Increasing concerns for public health, both today and in the future, have
fostered an environmental movement to regulate the use and handling of toxic
materials, mandate clean-up and prevent future contamination. Sums already
spent or required to be spent in the future on clean-up alone are enormous.
Billions of dollars have been or are budgeted to clean up contamination of the
environment. Businesses today realize that they have cradle-to-grave liability
for handling and use of materials, such as petroleum distillates, pesticides,
and cleaning solvents. The Company believes that these environmental pressures
are escalating and has chosen niches where regulatory requirements are likely
to become more stringent.
Environmental Consulting and Professional Services
Environmental consulting and construction project management provide a
significant portion of the Company's business today. In fiscal 1994, the
Company began curtailing its capital intensive construction activities in favor
of the use of sub-contractors. With this move, focus has been placed on
project management and professional services for clean-up of contaminates and
the prevention of contamination.
The Company's subsidiary, Toxguard Systems, Inc., specializes in the petroleum
and fuel storage systems industry and the related soil and groundwater
contamination clean-up projects. Toxguard services the entire Southern
California region, providing project management services for customers as well
as installation and removal of aboveground and underground storage tanks. It
performs site assessments, remediates and monitors contaminated sites and
specializes in the design and installation of tank systems and state-of-the-art
monitoring systems. Toxguard designs clean-up programs for contaminated soil
and groundwater locations. In addition to environmental consulting, it offers
complete 24-hour remote monitoring to the underground storage tank owners and
remote control and monitoring of site clean-up projects by utilizing the
specialized computer software capabilities of its sister Company, EnvirAlert.
Major contracts are often obtained through sealed bid process and often require
the posting of a completion bond. As of September 30, 1995, Toxguard had
committed $73,000 for bonding requirements and the Company was assisting
Toxguard with bonding requirements by pledging certain
5
<PAGE> 6
fixed assets as bond collateral. It is anticipated that up to $100,000 of the
Company's working capital may be held by bonding companies from time to time
with respect to Toxguard projects.
The Company does not anticipate any shortage of materials required to service
this industry. There is an adequate labor pool, and the business is not
seasonal in the areas serviced by Toxguard. The business is not capital
intensive, as the major component of the cost of sales is labor or
subcontractor labor. No major expenditures on research or new product
development are planned. It is standard practice to obtain a substantial
customer deposit before commencing work on new contracts.
At September 30, 1995, Toxguard had backlog orders of approximately $700,000
compared with approximately $500,000 at September 30, 1994. All current
backlog orders are expected to be completed within the current fiscal year.
The industry is fragmented among several small companies operating in each
geographical region. Larger companies often sub-contract for the services of a
company such as Toxguard, and generally are not considered to be in direct
competition with the sub-contractor.
Toxguard Systems, Inc. employs eleven people.
Mobile Antifreeze Recycling Industry
Waste antifreeze is considered by federal regulations to be a hazardous waste.
Nearly all types of repair or maintenance facilities have waste antifreeze on
premises in some form and quantity and are required under various federal,
state, and local regulations to dispose of this waste by a timely and
environmentally safe method. Over 300 million gallons of antifreeze are
manufactured each year in the United States. Traditionally waste haulers have
hauled waste antifreeze from generators to disposal sites. Transportation and
accounting for waste generated have created significant liabilities for
generators.
The 1990 Pollution Prevention Act declares the national policy to be
"....pollution that cannot be prevented should be recycled in an
environmentally safe manner, whenever feasible....". In fact, public sentiment
has swung dynamically toward the recycling of wastes. This change has also
impacted the disposal methods for waste antifreeze. Waste antifreeze recycling
technologies such as simple filtering, de-ionization, reverse osmosis, and
distillation have been available for some time. However, only recently has
equipment been available to deploy recycling on a mobile basis. Mobile
recycling holds promise for a cost effective and environmentally responsible
method of waste antifreeze disposal along with elimination of transportation
risks.
In June 1993, the Company entered the mobile antifreeze/coolant recycling
business through its wholly owned subsidiary, Toxguard Fluid Technologies, Inc.
The Company operates mobile recycling vans which employ reverse osmosis
technology. The Company now has over 1,200 customers including gasoline
stations, repair facilities and related automotive service outlets, trucking
and fleet companies and military and governmental facilities. The Company is
initially targeting over 16,000 facilities in Southern California that are
identified as a potential customer base, and has plans to expand. The Company
believes that the recycling of waste antifreeze will become increasingly
popular due to recent changes in technology, toxic substance laws and
regulation, and a general shift in public attitude in favor of recycling.
Toxguard Fluid Technologies, Inc. employs ten people.
6
<PAGE> 7
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Compliance with federal, state and local environmental regulations has not had
a material effect on the capital expenditures, operations or competitive
position of the Company or its subsidiaries. Such regulations should, however,
increase the need for the environmental companies' products and services, thus
enhancing the future operations and competitive position of the Company.
BUSINESS UNIT CHANGES
In May 1995, the Company divested its interest in Biopraxis, Inc., a
development stage enterprise formed during 1994 to develop and commercialize
certain worldwide patents related to the removal and prevention of heavy metals
and radioactive contaminants from affected sites, by selling all of its
Biopraxis common stock in exchange for a promissory note in the amount of
$80,000.
During the first quarter of fiscal 1996 the Company signed a letter of intent
to purchase all of the outstanding common stock of EnviroQuest Technologies,
Ltd., a national provider of statistical inventory reconciliation services,
headquartered in Kansas City, Missouri. Closing of the acquisition is
contingent upon the satisfactory completion of due diligence efforts by the
Company and the acceptance of a definitive agreement by the Shareholders and
Directors of both the Company and EnviroQuest Technologies, Ltd.
ITEM 2. DESCRIPTION OF PROPERTY
The Company and its subsidiaries currently operate out of leased office and
warehouse space located at 32-B Mauchly, Irvine, California.
Management believes that its corporate offices are suitable and adequate for
its present needs. There are no plans to lease any additional space. Should
the Company complete the acquisition of EnviroQuest Technologies, Ltd., it will
continue to lease the office space currently occupied by that company in Kansas
City, Missouri.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company is a
party, or to which any of its property is subject, nor is such litigation
threatened, other than ordinary routine litigation which is incidental to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1995.
7
<PAGE> 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the NASDAQ SmallCap
market. The symbol for the Company's Common Stock is "WGEN". High and low bid
prices for each quarterly period within the two most recent fiscal years were
as follows based upon information supplied to the Company by NASDAQ:
<TABLE>
<CAPTION>
Year Ended September 30, 1995 4th Qtr. 3rd Qtr 2nd Qtr. 1st Qtr.
-------- -------- -------- --------
<S> <C> <C> <C> <C>
High bid 4-3/8 2-3/8 3-1/4 5
Low bid 1-11/16 1-11/16 1-7/8 3-1/8
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1994 4th Qtr 3rd Qtr. 2nd Qtr. 1st Qtr.
------- -------- -------- --------
<S> <C> <C> <C> <C>
High bid 5-1/8 5-1/8 6-1/8 5
Low bid 3-1/4 3-3/8 4-1/2 3
</TABLE>
As of December 13, 1995, there were approximately 400 record holders of the
Company's Common Stock. This number does not include shareholders who maintain
their security positions with their security broker in street name.
The Company has never declared a cash dividend on its Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION OF ANALYSIS OR PLAN OF OPERATION
Results of Operations
The Company reported a net loss of $1,106,000 for fiscal 1995 compared to
$1,851,000 for fiscal 1994. The decreases in operating losses are due in
significant part to:
Elimination of expenses due to the Company divesting itself of its
interest in Biopraxis, Inc. a development stage enterprise formed
during 1994. In December 1994, management and the Company's Board of
Directors made a strategic review of the Company's operations and
determined that the Company should focus its resources upon expansion
of its environmental software, environmental remediation and
antifreeze recycling businesses.
Elimination of marketing ramp up costs of the Company's Toxguard Fluid
Technologies antifreeze recycling subsidiary. This subsidiary now
has 1,200 customers for its services in the Los Angeles basin.
Increased Sales.
Though losses were incurred in fiscal year 1995 the Company has continued to
improve its gross margins. The Company's gross profit for fiscal 1995 was
$1,144,000 or 38% of sales versus gross profit of
8
<PAGE> 9
$610,000 or 36% of sales in fiscal 1994, and gross profit of $557,000 or 17% of
sales in fiscal 1993. The Company expects to maintain these higher gross
margins as it emphasizes its environmental software, remediation, and
antifreeze recycling businesses.
Net sales for fiscal 1995 were $2,990,000, an increase from $1,681,000 for
fiscal 1994. During the year the Company's EnvirAlert subsidiary increased the
number of tanks and devices being monitored to over 5,000 as compared to
approximately 4,000 late in the prior year. In the first quarter of fiscal 1996
the Company signed a letter of intent to purchase all of the outstanding common
stock of EnviroQuest Technologies, Ltd., a national provider of statistical
inventory reconciliation services, headquartered in Kansas City, Missouri.
This acquisition is expected to have a significant positive sales impact in
1996.
Selling, general and administrative expenses decreased to $2,193,000 in fiscal
1995 compared to $2,447,000 in fiscal 1994. This decrease is in large part due
to reduced legal costs and the divestiture of Biopraxis, Inc.
Liquidity & Capital Resources
The Company effectively financed its net cash used in operating activities for
the fiscal year by issuance of common stock.
At September 30, 1995 the Company's current assets exceeded current liabilities
by $731,000 compared to $434,000 at September 30, 1994. This position has
improved due to the completion of two private placements in which the Company
sold a total of 628,572 shares of common stock for $1,100,000 during the 1st
quarter of fiscal 1996.
The Company has historically relied upon shareholder capital to fund
operational deficits, and expects to continue funding any operating deficits
through equity infusions in fiscal 1996. The Company is in the process of
negotiating an equity financing arrangement expected to net funds in excess of
amounts required to adequately finance operations and expansion plans,
including the acquisition of EnviroQuest Technologies, Ltd., during fiscal
1996.
If the Company does not obtain adequate equity financing, management plans to
recommend to the Company's Board of Directors that the Company divest certain
subsidiaries or assets, and severely curtail operating expenses in order to
finance its ongoing environmental monitoring software business.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are attached as an exhibit to this report and are
incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
<PAGE> 10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
CHARLES A. WATSON has served as a director of the Company since 1972 and as the
Company's Chairman of the Board since 1985. He was appointed the Company's
President, Chief Executive Officer and Chief Financial Officer in September
1987. He relinquished the post of Chief Financial Officer in 1991, the post of
President in January 1993, and the post of Chief Executive Officer in July
1994. Mr. Watson is 65.
RONALD G. CRANE has served as a Director of the Company since 1973. At the
January 19, 1993 Watson General Corporation Board of Directors meeting, Mr.
Crane was appointed President and Chief Operating Officer of the Company. In
July 1994 Mr. Crane was appointed Chief Executive Officer. Mr. Crane is also
President and Chief Executive Officer of Toxguard Systems, Inc. and EnvirAlert,
Inc. Mr. Crane is 49.
JOSEPH L. CHRISTOFFEL has served on the Board of Directors since February 1993.
He is a certified public accountant and was appointed by the Board of Directors
as Secretary and Chief Financial Officer of the Company in January 1993. He
has been a CPA since 1977, has practiced public accounting and has held the
position of Chief Financial Officer for both private and public organizations.
During the last five years he has been the owner of SMS, a data processing firm
and a partner of TRIAAC, a development and services company, both in
Sacramento, California. Mr. Christoffel is 43.
DENNIS E. MULLIGAN was elected to serve on the Board of Directors in 1992.
Since 1977, he has been a principal with Lambert Smith Hampton, a large
commercial real estate brokerage company. He has been a Watson General
shareholder since 1978. Mr. Mulligan is 50.
JAMES M. SMATHERS has served as a Director of the Company since 1972. Mr.
Smathers has been a certified public accountant for over 29 years, and had
established his own accounting firm from 1968 until he retired in 1985. Mr.
Smathers is 69.
10
<PAGE> 11
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation provided to
the Company's Chief Executive Officer. No other executive officer or employee
received, total annual salary and bonus exceeding $100,000.00.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL FISCAL SALARY ALL OTHER
POSITION YEAR COMPENSATION
<S> <C> <C> <C>
RONALD G. CRANE(1) 1995 75,000
Chief Executive Officer 1994 73,558
President 1993 66,964
CHARLES A. WATSON(2) 1995 84,000 34,992(3)
Chairman of the Board 1994 82,385 33,792(3)
1993 79,100 33,291(3)
</TABLE>
(1) Mr. Crane did not receive any bonus or other annual compensation during
the fiscal year ended September 30, 1995. Mr. Crane did not receive or
exercise any options to purchase Common Stock during the fiscal year ended
September 30, 1995. Mr. Crane did not receive any long-term incentive plan
award during the fiscal year ended September 30, 1995. Mr. Crane received no
other compensation during the fiscal year ended September 30, 1995. Mr. Crane
does not have an employment agreement with the Company.
(2) Mr. Watson did not receive any bonus or other annual compensation. Mr.
Watson did not receive or exercise any options to purchase Common Stock during
the fiscal year ended September 30, 1995 and held no unexercised options on
September 30, 1995. In addition, Mr. Watson did not receive any long-term
incentive plan award during the fiscal year ended September 30, 1995. Mr.
Watson does not have an employment agreement with the Company.
(3) The Company has also adopted a retirement plan for Mr. Charles A. Watson.
Benefits of $2,700 per month are payable to Mr. Watson or his wife, if she
survives him, for life with a ten year guaranteed payment, subject also to
annual cost of living increases.
In accordance with the Statement of Financial Accounting Standards No. 106
("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than
Pensions," the Company elected for immediate recognition under SFAS 106 and the
projected benefit obligation of $462,000 or $.08 per share relating to prior
service costs under the agreement was recognized as a cumulative effect of
accounting change as of October 1, 1991.
Other Compensation
Commencing January 4, 1994, the Company began compensating outside Directors
$250.00 for physical attendance per Board of Directors meetings. Prior to this
date members of the Board of Directors received no compensation for services
rendered in their capacity as Directors.
11
<PAGE> 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of December 13, 1995 of persons (other than
officers or directors of the Company) known to the Company to own more than 5%
of the Company's outstanding Common Stock.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned Outstanding Shares
- ---- ------------------ ------------------
<S> <C> <C>
James C. Ray 628,572(1) 6.50%
1140 Airport Road
Minden, NV 89423
</TABLE>
(1) Includes 57,143 shares of common stock owned by June M. Ray, the spouse of
James C. Ray.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of December 13, 1995 of (i) each director, (ii)
the chief executive officer of the Company named in the Summary Compensation
Table appearing in Item 10, and (iii) all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned Outstanding Shares
- ---- ------------------ ------------------
<S> <C> <C>
Charles A. Watson 1,216,000 12.48%
5166 Soledad Road
San Diego, CA 92109
Ronald G. Crane 1,129,500(1) 10.81%
9152 Shady Hollow Way
Fair Oaks, CA 95628
Joseph L. Christoffel 350,000(2) 3.47%
4711 Copperfield Cir.
Roseville, CA 95746
James M. Smathers 133,750(3) 1.36%
3261 Purer Road
Escondido, CA 92029
Dennis E. Mulligan 55,000(4) less than 1%
141 Seventh Street
Del Mar, CA 92108
All officers and directors
as a group (five persons) 2,884,250 26.41%
</TABLE>
(1) Includes options granted by the Company to purchase up to 400,000 shares
of common stock. The options are fully vested and expire September 30, 1998.
The options are exercisable at $1.50 per share. Includes options granted by
the Company to purchase up to 300,000 shares of Common Stock. Options vest as
to 100,000 shares on each of May 27, 1994, 1995, and 1996. All options expire
five years from vesting and are exercisable at $2.625 per share after vesting.
12
<PAGE> 13
(2) Includes options granted by the Company to purchase up to 350,000 shares
of common stock. Options to purchase 50,000 shares are fully vested and expire
on May 27, 1998. The remainder vest as to 100,000 shares on each of May 27,
1994, 1995, and 1996 and expire five years from vesting. All options are
exercisable at $2.625 per share after vesting.
(3) Includes options granted by the Company to purchase up to 76,518 shares of
common stock. The options are fully vested and expire June 28, 1998, and are
exercisable at $2.44 per share.
(4) Includes options granted by the Company to purchase up to 50,000 shares of
common stock. The options are fully vested and expire February 17, 2000, and
are exercisable at $2.625 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1993, Charles A. Watson promised to loan $200,000 to the Company at
simple interest of five percent (5%) if collections from certain receivables of
the Company and certain proceeds from the exercise of securities of the Company
did not reach $700,000 by December 15, 1993. The Company received in excess of
$700,000 from said collection and exercises and the loan was therefore not
made.
In December 1994, Charles A. Watson loaned $49,900 to the Company at no
interest as earnest monies for the potential acquisition of real property
located in San Diego, California. The transaction contemplated involves the
acquisition, remediation of petrochemical contamination, and resale of a small
strip shopping center. The real property was acquired with debt financing and
certain receivership monies gained upon acquisition of the property. The loan
of $49,900 was repaid by the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Certificate of Amendment of Articles of Incorporation dated
February 14, 1991 is incorporated herein by reference to Form 10-K for
fiscal year 1991.
3.2 The Articles of Incorporation and bylaws are incorporated
herein by reference to Form 10-Q for the quarter ended March 31, 1989.
Material contracts:
10.1 The non-statutory stock option agreement between the
Company and Ronald G. Crane is an informal
plan adopted by the Board of Directors in
July 1992. A description of this plan is
incorporated herein by reference to the
information contained in Item 11 of this
report.
10.2 Watson General Corporation Retirement Plan is
incorporated herein by reference to the
Company's Form 10-K for fiscal year 1992.
10.3 Modified stock option agreement dated January 4, 1994
between the Company, on the one hand, and
Ronald G. Crane, Joseph L. Christoffel, and
William R.
13
<PAGE> 14
Kughn on the other hand is incorporated
herein by reference to the Company's Form
10-KSB/A2 for fiscal year 1993.
10.4 Stock option agreement dated June 28, 1993 between
the Company and James M. Smathers is
incorporated herein by reference to the
Company's Form 10-KSB/A2 for fiscal year
1993.
10.5 Stock option agreement dated February 16, 1995
between the Company and Dennis Mulligan.
21 Subsidiaries of Registrant
27 Financial Data Schedule
(B) DURING THE REGISTRANT'S FISCAL QUARTER ENDED SEPTEMBER 30, 1995, THE
REGISTRANT FILED THE FOLLOWING CURRENT REPORTS ON FORM 8-K:
None.
14
<PAGE> 15
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 hereunto duly authorized.
WATSON GENERAL CORPORATION
Date: December 26, 1995 By /s/ RONALD G. CRANE
-------------------------------------
Ronald G. Crane
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ CHARLES A. WATSON Chairman of the Board, December 26, 1995
- ---------------------------------- and Director
(Charles A. Watson)
/s/ RONALD G. CRANE Chief Executive Officer, December 26, 1995
- ---------------------------------- President and Director
(Ronald G. Crane)
/s/ JOSEPH L. CHRISTOFFEL Chief Financial Officer (Principal December 26, 1995
- ---------------------------------- Financial Officer and Principal
(Joseph L. Christoffel) Accounting Officer), Secretary and
Director
/s/ DENNIS E.MULLIGAN Director December 26, 1995
- ----------------------------------
(Dennis E. Mulligan)
/s/ JAMES M. SMATHERS Treasurer, and Director December 26, 1995
- ----------------------------------
(James M. Smathers)
</TABLE>
15
<PAGE> 16
Financial Statements
Watson General Corporation
Consolidated Financial Statements
Years ended September 30, 1995 and 1994
CONTENTS
Report of Independent Auditors............................................F-1
Financial Statements
Consolidated Balance Sheets...............................................F-2
Consolidated Statements of Operations.....................................F-3
Consolidated Statements of Shareholders' Equity...........................F-4
Consolidated Statements of Cash Flows.....................................F-5
Notes to Consolidated Financial Statements................................F-6
16
<PAGE> 17
Report of Independent Auditors
Board of Directors and Shareholders
Watson General Corporation
We have audited the accompanying consolidated balance sheets of Watson General
Corporation as of September 30, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended September 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Watson
General Corporation at September 30, 1995 and 1994, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended September 30, 1995, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Orange County, California
December 1, 1995
F-1
<PAGE> 18
Watson General Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1995 1994
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 393,000 $ 448,000
Restricted cash 73,000 -
Accounts receivable (less allowance for doubtful accounts of
$6,000 in 1995 and $10,000 in 1994) (Note 2) 723,000 223,000
Prepaid expense and other current assets 129,000 92,000
--------------------------
Total current assets 1,318,000 763,000
Furniture and equipment:
Machinery and equipment 392,000 332,000
Computers and equipment 163,000 156,000
Furniture and fixtures 99,000 99,000
Automobiles and trucks 151,000 131,000
--------------------------
805,000 718,000
Accumulated depreciation 496,000 408,000
--------------------------
309,000 310,000
Property held for sale (less accumulated depreciation of $4,000),
(Note 3) 303,000 -
Intangible assets (less accumulated amortization of $103,000 in
1995 and $153,000 in 1994) (Note 1) 386,000 414,000
Deposits and other assets 5,000 4,000
Note receivable from sale of Biopraxis (less deferred gain of
$80,000 in 1995) (Note 1) - -
--------------------------
Total assets $ 2,321,000 $ 1,491,000
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 329,000 $ 209,000
Accrued expenses 192,000 81,000
Current portion of long-term debt (Note 4) 66,000 39,000
--------------------------
Total current liabilities 587,000 329,000
Long-term debt, less current portion (Note 4) 351,000 65,000
Other long-term liabilities 8,000 -
Deferred employee benefits (Note 7) 435,000 434,000
Commitments and contingencies (Note 7)
Shareholders' equity (Note 6):
Common stock, no par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 9,118,019 in 1995 and
7,934,446 in 1994 6,737,000 5,354,000
Additional paid-in capital 153,000 153,000
Accumulated deficit (5,950,000) (4,844,000)
--------------------------
Total shareholders' equity 940,000 663,000
--------------------------
Total liabilities and shareholders' equity $ 2,321,000 $ 1,491,000
==========================
</TABLE>
See accompanying notes.
F-2
<PAGE> 19
Watson General Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1995 1994
---------------------------
<S> <C> <C>
Net sales $ 2,990,000 $ 1,681,000
Cost of sales 1,846,000 1,071,000
Selling, general and administrative expenses 2,193,000 2,447,000
---------------------------
(1,049,000) (1,837,000)
Other income (expense):
Interest expense (79,000) (52,000)
Interest income 27,000 43,000
---------------------------
Loss before provision for income taxes (1,101,000) (1,846,000)
Provision for income taxes (5,000) (5,000)
---------------------------
Net loss (1,106,000) (1,851,000)
===========================
Per share amounts:
Net loss $ (.13) $ (.24)
===========================
</TABLE>
See accompanying notes.
F-3
<PAGE> 20
Watson General Corporation
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL DEFERRED ACCUMU- SHARE-
COMMON STOCK PAID-IN COMPEN- LATED HOLDERS'
SHARES AMOUNT CAPITAL SATION DEFICIT EQUITY
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 7,006,671 $3,605,000 $153,000 $(4,000) $(2,993,000) $ 761,000
Adjustment of common stock and
estimated net offering costs
issued in connection with
private placement 1,616 2,000 - - - 2,000
Exercise of B warrants ($2.75)
(Note 6) 412,888 1,136,000 - - - 1,136,000
Exercise of private placement
warrants ($3.50) (Note 6) 29,500 103,000 - - - 103,000
Exercise of stock options
($1.00) 475,000 475,000 - - - 475,000
Common stock issued to settle
accounts payable 5,771 17,000 - - - 17,000
Common stock issued in
connection with settlement
of lawsuit (Note 7) 3,000 16,000 - - - 16,000
Amortization of deferred
compensation - - - 4,000 - 4,000
Net loss - - - - (1,851,000) (1,851,000)
----------------------------------------------------------------------------
Balance at September 30, 1994 7,934,446 5,354,000 153,000 - (4,844,000) 663,000
Adjustment of common stock and
common stock issued to
settle accounts payable 2,852 8,000 - - - 8,000
Common stock issued in
connection with the
Regulation S offering
(Note 6) 1,180,721 1,375,000 - - - 1,375,000
Net loss - - - - (1,106,000) (1,106,000)
----------------------------------------------------------------------------
Balance at September 30, 1995 9,118,019 $6,737,000 $153,000 $ - $(5,950,000) $ 940,000
============================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 21
Watson General Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1995 1994
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,106,000) $(1,851,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 133,000 111,000
Common stock issued to settle lawsuit (Note 7) - 16,000
Common stock issued to settle accounts payable 8,000 17,000
Amortization of deferred compensation - 4,000
Deferred employee benefits 1,000 5,000
Net changes in operating assets and liabilities (Note 1) (372,000) 446,000
--------------------------
Net cash used in operating activities (1,336,000) (1,252,000)
INVESTING ACTIVITIES
Purchases of furniture and equipment, net (100,000) (148,000)
Purchase of property held for sale (Note 3) (7,000) -
Proceeds from the sale of vehicle - 16,000
--------------------------
Net cash used in investing activities (107,000) (132,000)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 103,000 123,000
Principal payments on long-term debt (90,000) (177,000)
Proceeds from issuance of common stock 1,375,000 1,716,000
--------------------------
Net cash provided by financing activities 1,388,000 1,662,000
--------------------------
Increase (decrease) in cash and cash equivalents (55,000) 278,000
Cash and cash equivalents at beginning of year 448,000 170,000
--------------------------
Cash and cash equivalents at end of year $ 393,000 $ 448,000
==========================
</TABLE>
See accompanying notes.
F-5
<PAGE> 22
Watson General Corporation
Notes to Consolidated Financial Statements
September 30, 1995
1. ACCOUNTING POLICIES
BUSINESS
Watson General Corporation (the Company) is a holding company with investments
in Toxguard Systems, Inc. (Toxguard), an environmental consulting and
construction project management company; Envir-Alert, Inc. (Envir-Alert), an
environmental software company; Toxguard Fluid Technologies, Inc., an antifreeze
recycling business; and a corporate joint venture with Lion's Den Productions,
Inc. which has certain royalty agreements with Sea World, Inc. and Anheuser
Busch. The joint venture is virtually inactive.
During May 1995, the Company divested its interest in Biopraxis, Inc., a
development stage enterprise formed during 1994 to develop and commercialize
certain worldwide patents related to the removal and prevention of heavy metals
and radioactive contaminants from affected sites, by selling all of its
Biopraxis common stock in exchange for a promissory note in the amount of
$80,000. Collection of this non-interest bearing note is contingent upon
Biopraxis achieving positive cash flows in the future. As the sale was made to a
highly leveraged, thinly capitalized entity, the collectibility of the note is
uncertain and, therefore, the Company has deferred gain recognition on the sale.
Under the sale agreement, the Company retained rights to certain specified
technologies which were being developed by Biopraxis. Furthermore, the agreement
does not require the Company to have any financial responsibility for the future
operations of Biopraxis. During fiscal 1995 and 1994, the Company incurred
losses of $277,000 and $174,000 respectively, related to the development stage
activities of Biopraxis.
The Company's investments consist of 87% of the outstanding preferred stock and
96% of the outstanding common stock of Toxguard, and 89% of the outstanding
common stock of Envir-Alert. Toxguard Fluid Technologies, Inc., is wholly owned
by the Company.
The Company's consolidated operations in 1995 and 1994 were concentrated in a
single business segment-environmental service to industry.
F-6
<PAGE> 23
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The Company incurred net losses of $1,106,000 and $1,851,000 for the years ended
September 30, 1995 and 1994, respectively. Additionally, the Company's
operations have resulted in negative cash flows of $1,336,000 and $1,252,000 for
the years then ended. The Company has historically relied upon shareholder
capital to fund operational deficits. The Company continues to negotiate equity
financing arrangements and management believes that future proceeds from such
arrangements will be in excess of amounts required to adequately finance
operations and expansion plans during fiscal 1996. (See Note 8)
In December 1994, management and the Company's Board of Directors made a
strategic review of the Company's operations and determined that the Company
should focus its resources upon expansion of its environmental software,
environmental remediation and antifreeze recycling businesses and deemphasize
the construction aspect of remediation and focus on higher margin activities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
PROPERTY, FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost and generally depreciated under the
straight-line method over their estimated useful lives of four to seven years.
Property available for sale is carried at the lower of amortized cost or
estimated net realizable value and consists of an operating retail strip center
located in El Cajon, California (Note 3). Depreciation is provided using the
straight-line method over the building's estimated useful life of 25 years.
F-7
<PAGE> 24
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
LONG LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. Long
Lived Assets include property, furniture and equipment and identifiable
intangible assets including goodwill. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 at a future date and, based on current
circumstances, does not believe the effect of adoption will be material.
INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1995 1994
-------------------------
<S> <C> <C>
Goodwill $489,000 $489,000
Technology - 75,000
Organization costs - 3,000
-------------------------
489,000 567,000
Less accumulated amortization 103,000 153,000
-------------------------
$386,000 $414,000
=========================
</TABLE>
Goodwill is amortized on a straight-line basis over 20 years. Capitalized
technology and organization costs are amortized on a straight-line basis over
five years. Amortization expense amounted to $28,000 and $40,000 for 1995 and
1994, respectively.
Annually, at each balance sheet date, the Company evaluates the realizability of
goodwill based upon expectations of undiscounted cash flows and operating income
for each subsidiary having a material goodwill balance. Based upon its most
recent analysis, the Company believes that no material impairment of goodwill
exists at September 30, 1995.
F-8
<PAGE> 25
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Sales include costs incurred and estimated profits on long-term contracts. Such
estimated profits have been computed by applying the various percentages of
completion of the contracts, measured by the ratio of costs incurred to
estimated total costs, to the estimated ultimate profits. Estimated losses are
fully recognized in the year such estimates are determined.
The Company recognizes revenue from sales of software licenses upon delivery of
the software product to a customer. The Company recognizes maintenance revenue
from service contracts over the term of the service agreement.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common shares
outstanding. Common equivalent shares have not been considered in the loss per
share computations because the effect is antidilutive. Weighted average shares
for computing loss per share were 8,370,000 and 7,722,000 for fiscal 1995 and
1994, respectively.
STATEMENT OF CASH FLOWS
The Company considers highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
Changes in operating assets and liabilities as shown in the consolidated
statements of cash flows, net of acquired assets and liabilities, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1995 1994
------------------------
<S> <C> <C>
Restricted cash $ (73,000) -
Accounts receivable (500,000) $ 838,000
Prepaid expense and other current assets (37,000) (4,000)
Refundable income taxes - 102,000
Deposits and other assets (1,000) 1,000
Accounts payable 120,000 (374,000)
Accrued expenses 111,000 (117,000)
Other long-term liabilities 8,000 -
------------------------
$(372,000) $ 446,000
========================
</TABLE>
F-9
<PAGE> 26
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS (CONTINUED)
The Company paid state franchise taxes of $5,000 and $5,000 and interest of
$79,000 and $52,000 in 1995 and 1994, respectively.
Noncash investing and financing activities during the year ended September 30,
1995 consist of property acquired for debt in the amount of $300,000.
Restricted cash represents cash on deposit with an insurance company as
collateral for a contract performance bond.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No 109, Accounting for Income Taxes. That statement
requires that deferred income taxes are provided based on the estimated future
tax effects of differences between financial statement carrying amounts and the
tax bases of existing assets and liabilities. The statement also requires that
deferred tax assets must be reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax asset may not be realized.
2. ACCOUNTS RECEIVABLE
Accounts receivable net of allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1995 1994
-------------------
<S> <C> <C>
Amounts billed $537,000 $208,000
Retainages billed 83,000 -
Recoverable costs and accrued profit on contracts in
process - not billed 103,000 15,000
-------------------
$723,000 $223,000
===================
</TABLE>
Retainages represent amounts withheld from billings by customers or prime
contractors as security for job completion. Amounts recorded are expected to be
collected within one year.
F-10
<PAGE> 27
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
3. PROPERTY HELD FOR SALE
In December 1994, the Company purchased a secured adjustable rate loan dated
March 29, 1989 with a face value of $1,400,000 from a major bank. The loan was
secured with a Commercial Deed of Trust, Assignment of Rents, and Security
Agreement for a 12,215 square foot strip shopping mall located in El Cajon,
California. The bank sold the loan to the Company for $300,000. Professional
environmental assessments of the property securing the loan, made on behalf of
the bank, revealed that there is hydrocarbon contamination present.
To finance the purchase of the loan, acquisition and foreclosure costs, and in
part pay for additional environmental assessments of the property, the Company:
- - Entered into a loan agreement with a lending institution which paid the
$300,000 to purchase the note. The loan incurs interest at a rate of 14%
with interest only payable monthly through maturity at June 23, 1996 and
is secured by the purchased note and the Company's underlying security
interest in the property. The Company paid a loan origination fee of
$25,600. Maturity of the loan may be extended to December 23, 1996 at the
Company's option for a fee equal to 2% of the outstanding principal
balance.
- - Borrowed $49,900 interest free from the Mary L. Watson Trust, of which
Charles A. Watson, a director, is the beneficial owner.
In March 1995, the Company completed foreclosure proceedings and took possession
of the property and a Receiver's account totaling $147,000. At that time, the
Company paid in full the $49,900 interest free note.
The Company has completed its own environmental assessment on the property which
indicates that the level of hydrocarbon contamination is significantly less than
previously detected. The Company's management believes that, given the results
of its assessment and current environmental laws and regulations, no remediation
of the property is required. At December 1, 1995, the Company was negotiating
with governmental authorities for a "no further action" letter which would clear
the title to the property from any restrictions on transferability. Based on the
results of its negotiations, management anticipates that the "no further action"
letter will be received by mid-January 1996.
F-11
<PAGE> 28
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
3. PROPERTY HELD FOR SALE (CONTINUED)
Once title to the property is transferable, it is the Company's intention to
proceed with a sale of the property. At September 30, 1995, property available
for sale consists of the following:
<TABLE>
<S> <C>
Land $142,000
Building 165,000
--------
307,000
Accumulated depreciation (4,000)
--------
$303,000
========
</TABLE>
The Company leases retail space to tenants under non cancellable triple net
lease agreements. During fiscal 1995 the Company recognized rental revenues of
$39,000. At September 30, 1995, future minimum lease payments to be received are
as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
SEPTEMBER 30 AMOUNT
------------------- --------
<S> <C>
1996 $ 52,000
1997 52,000
1998 44,000
1999 40,000
2000 20,000
--------
$208,000
========
</TABLE>
F-12
<PAGE> 29
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1995 1994
------------------------
<S> <C> <C>
Note payable to a lending institution secured by
real property, interest only payable monthly at a rate
of 14% through maturity at June 23, 1996; the
Company expects to exercise its option to extend
maturity to December 23, 1996 for a fee equal to
two percentage points on the outstanding principal
balance (Note 3). $300,000 $ -
Service fleet vehicle loans and other amounts owed,
due in monthly installments through 1999 at rates
ranging from 8.75% to 15.9%, collateralized by
the related asset 117,000 104,000
-----------------------
417,000 104,000
Less current portion 66,000 39,000
-----------------------
Long-term portion $351,000 $ 65,000
=======================
</TABLE>
Principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
SEPTEMBER 30 AMOUNT
------------------- --------
<S> <C>
1996 $ 66,000
1997 321,000
1998 18,000
1999 12,000
--------
$417,000
========
</TABLE>
F-13
<PAGE> 30
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1995 1994
----------------------------
<S> <C> <C>
Current:
Federal $ - $ -
State (5,000) (5,000)
---------------------------
Total $ (5,000) $ (5,000)
===========================
</TABLE>
A reconciliation of taxes computed at the statutory federal income tax rate to
income tax expense is as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Benefit from continuing operations computed at
statutory rate $ 376,000 $ 627,000
Losses without tax benefit (376,000) (627,000)
California franchise tax (5,000) (5,000)
---------------------------
$ (5,000) $ (5,000)
===========================
</TABLE>
At September 30, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $4,900,000 which begin to expire in
fiscal year 2007. In addition, the Company has net operating loss carryforwards
for California income tax purposes of approximately $2,900,000 which begin to
expire in fiscal year 1998.
Pursuant to the Tax Reform Act of 1986, use of the Company's net operating loss
carryforwards may be substantially limited if a cumulative change in ownership
of more than 50% occurs within a three-year period.
F-14
<PAGE> 31
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of September 30, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 1,949,000 $ 1,540,000
Accrued expenses 16,000 16,000
------------------------------
Total deferred tax assets 1,965,000 1,556,000
Valuation allowance (1,944,000) (1,546,000)
-------------------------------
21,000 10,000
Deferred tax liabilities:
Tax over book depreciation (21,000) (10,000)
-------------------------------
Net deferred tax assets $ - $ -
===============================
</TABLE>
A valuation reserve of $1,944,000 has been set up due to the realizability of
the deferred tax assets and liabilities. The change in the valuation allowance
for 1995 is approximately $398,000 and $700,000, respectively.
6. STOCKHOLDERS' EQUITY
STOCK ISSUANCE
During 1995, the Company completed the sale of 1,000,000 share of common stock
to foreign investors pursuant to Regulation S of the Securities Act of 1933, as
amended. Proceeds from this issuance were $1,375,000, net of issuance costs of
$296,000. The stock issuance agreement contained valuation clauses forcing the
delivery of additional shares of common stock, at no cost to the investor, if
the per unit common stock market price at a specified valuation date fell below
predetermined prices. Based on these provisions, the Company delivered an
additional 180,721 shares of common stock at no cost to the investor.
F-15
<PAGE> 32
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
On September 1, 1992, the Company granted to a key employee nonstatutory options
to purchase 400,000 shares of common stock at an exercise price of $1.50 per
share. These options were exercisable immediately and expire on September 30,
1998.
During 1993, the Company entered into an agreement with an employee to issue
options for the purchase of 10,000 shares at $1.50 per share for each $500,000
in billed revenue of Envir-Alert between June 1, 1993 and June 1, 1995. At
September 30, 1995, no options were granted pursuant to this agreement.
During 1993, the Company granted options for the purchase of 1,000 shares of
common stock at $1.50 per share to a vendor of Toxguard Fluid Technologies.
Additional options may be granted to the vendor based on cash received from
referred customers through September 30, 1996, divided by the difference between
the current market price and the option price, deemed to be 75% of the current
market price. No options were earned under the agreement as of September 30,
1995. Options granted to the vendor are exercisable and expire three years from
the date of grant.
During 1993, the Company granted nonqualified options for the purchase of
1,083,250 shares to employees and directors at exercise prices equal to the
market price of common shares on the date of grant. As of September 30, 1995,
options for the purchase of 4,732 have been exercised and options for 778,518
shares are exercisable. The remaining options granted for 300,000 shares vest on
May 27, 1996. Options granted expire at various dates through 2000.
During 1994, the Company granted nonqualified options for the purchase of 3,000
shares to employees at exercise prices equal to the market price of common
shares on the date of grant. As of September 30, 1995, options for 3,000 shares
are immediately exercisable and expire at various dates through 1999.
During 1995, the Company granted nonqualifed options for the purchase of 52,000
shares to employees and directors at exercise prices equal to the market price
of common shares on the date of grant. As of September 30, 1995, options for
52,000 shares are immediately excercisable and expire at various dates through
2000.
F-16
<PAGE> 33
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
On March 30, 1995, the Company granted nonqualified options for the purchase of
10,000 shares to a vendor at an exercise price equal to the market price of
common shares on the date of grant. These options for 10,000 shares are
immediately exercisable and expire on March 30, 2000. At September 30, 1995 none
of these options had been exercised.
The following table summarizes stock option activity for the two years ended
September 30, 1995.
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES PER SHARE
--------------------------
<S> <C> <C>
Outstanding and exercisable on September 30, 1993 1,953,518 $1.00 to $2.63
Granted 3,000 $2.63 to $5.00
Exercised 475,000 $1.00
Expired or forfeited - -
--------------------------
Outstanding and exercisable on September 30, 1994 1,481,518 $1.00 to $5.00
Granted 62,000 $1.88 to $2.63
Exercised - -
Expired or forfeited - -
--------------------------
Outstanding and exercisable on September 30, 1995 1,543,518 $1.00 to $5.00
==========================
</TABLE>
WARRANTS
During 1993, the Company completed a private placement offering of 177,380 units
at $6.00 per unit. Each unit consisted of four shares of common stock and a
warrant to purchase one share of common stock. As of September 30, 1995, 29,500
shares had been issued on warrants exercised. The warrants, of which 147,880
remain outstanding, have an exercise price of $3.50 per share and expire on
December 31, 1995.
In connection with the private placement, the Company issued a warrant to the
selling agent for the purchase of 50,000 units, identical to those sold in the
private placement, at $6.00 per unit, exercisable through March 16, 1998. All
warrants issued to the selling agent remain outstanding at September 30, 1995.
F-17
<PAGE> 34
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
As of September 30, 1993, 538,965 Series B warrants issued pursuant to the
Toxguard acquisition agreement remained outstanding and unexercised. In November
1993, the Company's Board of Directors authorized a reduction in the exercise
price for Series B warrants to $2.75 per share. The offer was effective from
November 9 to November 30, 1993. A total of 412,888 warrants were exercised
during the special offer. As of their original expiration date, September 30,
1994, 126,077 Series B warrants remained outstanding and unexercised. The
expiration date was extended to December 31, 1994 whereupon the warrants expired
unexercised.
7. COMMITMENTS AND CONTINGENCIES
DEFERRED EMPLOYEE BENEFIT AGREEMENT
In July 1991, the Company entered into a deferred compensation agreement with
the President and Chairman. The benefits as defined under the agreement require
the Company to pay $2,700 per month with such payments continuing throughout the
President's lifetime with a minimum ten year guaranteed payment. Upon his death,
benefits may continue to his beneficiaries as defined under the agreement.
Monthly payments will be adjusted on an annual basis based on the Department of
Labor Consumer Price Index. As of the effective date of the agreement, the
benefits are fully vested.
LEASES
The Company leases its facilities under noncancelable operating leases through
July 1997. Future minimum payments under these leases are as follows:
<TABLE>
<CAPTION>
September 30
------------
<S> <C>
1996 53,000
1997 44,000
------
97,000
======
</TABLE>
Rent expense totaled $75,000 and $80,000 for the years ended September 30, 1995
and 1994, respectively.
F-18
<PAGE> 35
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
During fiscal 1994, the Company and its former president settled their
respective causes of action surrounding a charge of wrongful termination and a
cross-action alleging misappropriation of trade secrets and unfair competition.
Pursuant to the settlement, the Company remitted $110,000, commenced payments of
$3,000 per month through March 1995, under the terms of a professional services
agreement and delivered 3,000 shares of common stock. In return, the former
president agreed to cancel promissory notes from the Company of approximately
$83,000 (and related accrued interest of $40,000), has returned approximately
73,000 owned common shares of a subsidiary of the Company, agreed to a
noncompete arrangement, and agreed to exclusively license certain technologies
to the Company.
The Company and its subsidiaries are involved in various claims and lawsuits
arising in the ordinary course of business. It is management's opinion that the
outcome of these actions will not have a material effect on the consolidated
financial statements of the Company and its subsidiaries.
8. SUBSEQUENT EVENTS
PRIVATE PLACEMENT OF COMMON STOCK
During November 1995, the Company completed two private placement offerings in
which a total of 628,572 shares of common stock were issued to investors in
exchange for $1,100,000. The shares issued have not been registered under the
Securities Act of 1993, as amended (the Act), as they are exempt under
Regulation D promulgated by the Securities and Exchange Commission under the
Act.
LETTER OF INTENT TO ACQUIRE ENVIROQUEST
The Company has signed a letter of intent to purchase all of the outstanding
common stock of EnviroQuest Technologies, Ltd. (EnviroQuest), a national
provider of statistical inventory reconciliation services. The Company has paid
to the Shareholders of EnviroQuest a deposit in the amount of $35,000. If, at
the expiration of the letter on February 2, 1996, the transaction has not
closed, the deposit will be forfeited. Closing of the acquisition is contingent
upon the satisfactory completion of due diligence efforts by the Company and the
acceptance of a definitive agreement by the Shareholders and Directors of both
the Company and EnviroQuest.
F-19
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ------------
<S> <C> <C>
3.1 Certificate of Amendment of Articles of Incorporation
dated February 14, 1991 is incorporated herein by reference to
Form 10-K for fiscal year 1991 . . . . . . . . . . . . . . . . . . .
3.2 The Articles of Incorporation and bylaws are incorporated
herein by reference to Form 10-Q for the quarter ended
March 31, 1989 . . . . . . . . . . . . . . . . . . . . . .. . . . .
Material contracts:
10.1 The non-statutory stock option agreement between the
Company and Ronald G. Crane is an informal plan adopted by the
Board of Directors in July 1992. A description of this plan is
incorporated herein by reference to the information contained
in Item 11 of this report . . . . . . . . . . . . . . . . . . . . .
10.2 Watson General Corporation Retirement Plan is incorporated
herein by reference to the Company's Form 10-K for fiscal year
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3 Modified stock option agreement dated January 4, 1994
between the Company, on the one hand, and Ronald G. Crane,
Joseph L. Christoffel, and William R. Kughn on the other hand
is incorporated herein by reference to the Company's
Form 10-KSB/A2 for fiscal year 1993 . . . . . . . . . . . . .. . . .
10.4 Stock option agreement dated June 28, 1993 between the
Company and James M. Smathers is incorporated herein by
reference to the Company's Form 10-KSB/A2 for fiscal year 1993 . . .
10.5 Stock option agreement dated February 16, 1995 between the
Company and Dennis Mulligan . . . . . . . . . . . . . . . . . . . .
21 Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . . .
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE> 1
EXHIBIT 10.5
STOCK OPTION AGREEMENT
This Stock Option Agreement, (the "Agreement") is made and entered
into this 16th day of February, 1995 between Watson General Corporation
("Company"), and Dennis Mulligan ("Principal").
WHEREAS, the Principal has served for an extended period of time as a
member of the Board of Directors of the Company; and
WHEREAS, the Company is desirous of recognizing the Principal's
service as a member of the Board of Directors of the Company;
NOW, THEREFORE, in consideration of the Principal's past service on
the Company's Board of Directors and for the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties agree as follows:
1. Issuance of Options. Upon the terms and subject to the conditions
set forth in this Agreement, the Company hereby grants to Principal the right
and option ("Option") to purchase up to Fifty Thousand (50,000) shares of the
Company's authorized but unissued Common Stock (the "Shares").
2. Option Price. The Option price for all Options issuable pursuant
to Section 1 above shall be $2.625 per share, subject to adjustment as provided
in Section 6 hereof.
3. When Options May Be Exercised. Each Option issued pursuant to
Section 1 shall be exercisable at any time and from time to time, as to all or
any portion of the Shares, from the date of issuance until the fifth
anniversary of such issuance.
4. Investment Intent of Principals. Principal acknowledges that the
Option(s) issuable to Principal pursuant to this Agreement and the Shares
issuable upon exercise of such Option(s) (the "Restricted Securities") have not
been registered under the Securities Act of 1933, as amended (the "Act") or
applicable state securities laws. Principal acknowledges that the offer, sale
and delivery of the Restricted Securities to him is made in reliance upon his
representations, warranties, agreements and undertakings reflected herein.
<PAGE> 2
Principal represents and warrants that he is acquiring the Restricted
Securities solely for his own account and interest and not with a view to
distribute them to the public.
4.1 Principal understands and agrees that unless the
Restricted Securities either are registered under the Act or are disposed of in
transactions for which exemptions from such registration are available,
Principal must continue to own and hold the Restricted Securities for his own
account and interest indefinitely. Principal further understands that whether
an exemption from the registration requirements of the Act will be available
for such future transactions as he may propose will depend upon the nature of
each such transaction, the pertinent surrounding facts and circumstances then
extant, and the then applicable law.
4.1 Any certificate evidencing the Restricted Securities
shall bear a legend substantially in the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW AND MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAW.
5. Exercise of Options. Each Option, or any portion of such Option,
may be exercised from time to time, which exercise shall be effective
immediately upon written notice to the Company at its principal offices,
setting forth the number of Shares with respect to which the Option is being
exercised, accompanied by the full amount of the purchase price for such
Shares. The purchase price shall be payable in cash. Upon receipt of notice
and payment, the Company shall promptly make arrangements for the issuance of
the number of Shares as to which the Option was exercised. Upon exercise of
the Option, the number of Shares subject to the Option shall be automatically
reduced to the extent of the number of Shares as to which the Option is
exercised, and the Option shall remain in effect as the remaining number of
Shares. The Company reserves the right to require Principal, before receipt of
the Shares, to represent and warrant in writing, in form and substance
reasonably satisfactory to the Company, that the Shares purchased are being
acquired without any view to distribution and to agree in writing to the
imposition of legends on the
<PAGE> 3
share certificates setting forth any restrictions upon disposition required by
applicable federal or state securities laws.
6. Adjustments. If all or any portion of an Option issued pursuant
to this Agreement is exercised subsequent to any stock dividend, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property for stock, separation, reorganization, or liquidation,
as a result of which shares of any class shall be issued in respect of
outstanding shares of Common Stock or shares, or shares of Common Stock shall
be changed into the same or a different number of shares of the same or another
class or classes, the Principal exercising such Option shall receive, upon the
exercise of such exercise right, the aggregate number and class of shares
which, if the Option had been exercised at the date hereof and the shares
acquired thereby had not been disposed of, Principal would be holding as a
result of any such stock dividend, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property for stock,
separation, reorganization, or liquidation; provided, however, that no
fractional share shall be issued upon any such exercise.
7. Assignability of Options. An Option issued pursuant to this
Agreement may not be assigned, transferred, pledged, hypothecated, sold or
otherwise disposed of, in whole or in part, either voluntarily or
involuntarily, except as hereinafter provided, and the Option may be exercised,
during the lifetime of an Principal, only by him. Any attempted assignment,
transfer, pledge, hypothecation, sale or other disposition of an Option
contrary to the provisions hereof, and the levy of any execution, attachment or
similar process upon an Option, shall be null and void and without effect.
Notwithstanding the foregoing, Principal should die prior to the
earlier of the expiration of this Agreement or the exercise in full of the
Option, then the Option may be exercised by the Investor's executors or
administrators. The Option, to the extent not so exercised, shall forthwith
terminate.
8. Registration Rights. The Company covenants and agrees to provide
the following registration rights at any time from and after the second
anniversary of the date of this Agreement to Principal:
8.1 Whenever the Company proposes to file a registration
statement relating to any of its capital stock under the Act, other than a
registration statement required to be filed in respect of employee benefit
plans on Form S-8 or similar form
<PAGE> 4
relating to securities issued in connection with a reorganization, the Company
shall, at least seven business days prior to such filing, give written notice
thereof to Principal. Upon receipt by the Company, not more than four business
days after receipt of such notice by Principal, of a written request by the
Principal for registration of all or a portion of the Shares then owed by
Principal (the "Registrable Shares"), the Company shall include separate
registration statement concurrently filed, and shall use all reasonable efforts
to cause such registration statement to become effective with respect to such
Registrable Shares, unless the managing underwriter therefor concludes in its
reasonable good faith judgment that compliance with this Section 8.1 would
materially adversely affect such offering. If the managing underwriter
determines in good faith that a portion but not all of such Registrable Shares
may be included, then only such portion shall be included.
8.2 The Company will use all reasonable efforts to cause
such registration statement to remain effective until the earlier of 45 days
from the effective date of the registration statement or the date that the
Principal completes his distribution of the Registrable Shares. The Company
will use all reasonable efforts to effect such qualifications under applicable
blue sky or other state securities laws as may be reasonably requested by the
Principal to permit or facilitate such sale or other distribution. The Company
will cause the Registrable Shares for which the registration statement is
effected to be listed on any national securities exchange or quoted on any
stock quotation system on which the shares of Common Stock are listed or
quoted.
8.3 The Principal shall furnish to the Company such
information as the Company may reasonably request and as shall be required in
connection with any registration, qualification or compliance referred to in
this Section 8. The Company agrees to furnish to the Principal the number of
prospectuses, offering circulars or other documents, or any amendments or
supplements thereto, incident to any registration, qualification or compliance
referred to in this Section 8 as the Principal from time to time may reasonably
request.
8.4 The Company shall bear all expenses of registrations,
qualifications or compliance pursuant to this Section 8 (other than
underwriting discounts and commissions and brokerage commissions and fees, if
any, payable with respect to the Registrable Shares or the cost of counsel for
the Principal), including, without limitation, registration fees, printing
expenses, expenses of blue
<PAGE> 5
sky or other state securities law registration or compliance, and legal and
auditing fees incurred by the Company in connection therewith.
8.5 In connection with any registration of Registrable
Shares pursuant to this Section 8, the Company agrees to provide reasonable
cooperation to Principal and any underwriters participating in such offering,
including, without limitation, entering into such customary underwriting or
other agreements (which may contain customary representations and warranties by
the Company and indemnification provisions); furnishing a customary comfort
letter or letters, dated the date of the final prospectus with respect to the
Registrable Shares, from the independent Principal and any such underwriters;
furnishing an opinion of counsel for the Company, dated the date of the closing
of the sale of the Registrable Shares, with respect to such matters as may be
reasonably requested; and making available for inspection by the Principal and
his agents all financial and other records, corporate documents and properties
of the Company as shall be reasonably requested.
8.6 During the effectiveness of a registration statement in
which Registrable Shares are included pursuant to this Section 8, the Company
will notify each Principal promptly of any notice from a regulatory authority
affecting the sale of the Registrable Shares and of any event or facts that, in
the reasonable judgment of the Company, should be set forth in such
registration statement. The Company will, as promptly as practicable, take
such action as may be necessary to amend or supplement such registration
statement in order to set forth or reflect such event or facts.
8.7 In the event of the registration of any Registrable
Shares pursuant to this Section 8, each party hereto (the "Indemnifying
Party"), to the extent permitted by law, shall indemnify and hold harmless the
other party hereto and its officers, directors, employees and agents
(collectively, the "Indemnified Parties") against any losses, claims, damages
or liabilities, joint or several (collectively "Claims"), to which any of the
Indemnified Parties may become subject under the Act or otherwise, insofar as
such Claims (or actions in respect thereof) arise out off or are based upon any
untrue statement or alleged untrue statement of material fact contained in the
registration statement (or any document contained in or incorporated by
reference in the registration statement) relating to the Registrable Shares, or
arise out of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Indemnified Party for any legal
or
<PAGE> 6
other expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any Claims; provided however, that the Indemnifying
Party will not be liable in any such case to the extent that any such Claim
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made or incorporated by reference with written
information provided by such Indemnified Party specifically for use in the
preparation thereof. The indemnity provided by this paragraph shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Party. If the indemnification provided for by this paragraph
is unavailable to a party that would have been an Indemnified Party in respect
of any Claims, then each party that would have been an Indemnifying Party
shall, in lieu of indemnifying such Indemnified Party, contribute to the extent
permitted by law to the amount paid or payable by such Indemnified Party as a
result of such Claims in such proportion as is appropriate on an equitable
basis to reflect the relative fault of the Indemnifying Party on the one hand
and such Indemnified Party on the other hand in connection with the statement
or omission which resulted in such Claims; provided, however, that no person
guilty of fraudulent misrepresentation within the meaning of Section 11 (f) of
the Act shall be entitled to contribution from any person who was not found
guilty of such fraudulent misrepresentation.
9. Governing Law. The interpretation, performance and enforcement of
this Agreement shall be governed by the internal laws of the State of
California without giving effect to any choice-of-law provisions of such laws.
10. Binding Effect. The terms, conditions and provisions of this
Agreement shall inure to the benefit of any successors or assigns of the
Principals, and shall be binding upon any successors or assigns of the Company.
11. Reservation of Shares. The Company will at all times reserve and
keep available out of its authorized capital stock, solely for issuance upon
the exercise of each Option issued pursuant hereto, such number of shares of
Common Stock as shall be issuable upon the exercise of such Option(s). Such
Common Stock, when issued pursuant to this Agreement, shall be duly and validly
issued, fully paid and nonassessable.
12. Notices. Any notice or other communication between the parties
hereto shall be sufficiently given if sent by certified or registered mail,
postage prepaid, or by telecopy, if to Company, addressed to it at 32-B
Mauchly, Irvine, California 92718, or if to Principal, addressed to him at P.O.
Box 1723 Rancho Santa Fe, Ca
<PAGE> 7
92067 or to such other address as shall hereafter be designated in writing by
one party to the other. Such notice or other communication shall be deemed to
be given on the date sent.
13. Rights of Principal. Prior to the exercise of an Option, except
as otherwise provided herein, Principal shall not be entitled to any rights of
a stockholder of the Company, with respect to the shares underlying the
unexercised portion of the Option, including without limitation the right to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive notice of any proceedings of the
Company.
14. Captions. The headings of the sections of this Agreement are
intended solely for convenience of reference and are not intended and shall not
be deemed for any purpose whatever to modify or explain or place any
construction upon any of the provisions of this Agreement.
15. Arbitration. Any controversy or claim arising out of or relating
to the terms of this Agreement, or otherwise related to the compliance by
either party with its obligations hereunder, shall be settled by binding
arbitration in accordance with the rules of the American Arbitration
Association, and judgment on the award rendered by the arbitrator(s) may be
entered by any court having jurisdiction thereof. Any party to this Agreement
may submit to arbitration any such controversy or claim.
16. Attorney's Fees. In the event any party hereto shall institute
an action to enforce any rights hereunder, the prevailing party in such action
shall be entitled, in addition to any other relief granted, to such reasonable
attorneys' fees as may be awarded.
17. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior and contemporaneous agreements and understandings of
the parties, and there are no representations, warranties or other agreements
between the parties in connection with the subject matter hereof except as
specifically set forth herein. No supplement, modification, amendment, waiver
or termination of this Agreement shall be deemed or shall constitute a waiver
of any provision hereof (whether or not similar), nor shall waiver constitute a
continuing waiver.
<PAGE> 8
18. Severability. If any provision of this Agreement or any part
thereof shall be held invalid, illegal or void, the remainder of such provision
of this Agreement or part thereof shall continue in full force and effect as if
the void, illegal or invalid provision or part had not been contained herein.
In the event that any material provision of this Agreement in a manner
consistent with their original intentions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this day and year first above written.
WATSON GENERAL CORPORATION
By: /s/ CHARLES A. WATSON
---------------------------
Charles A. Watson, Chairman
By: /s/ DENNIS MULLIGAN
---------------------------
Dennis Mulligan
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<S> <C> <C>
A-Accurate Moving, Inc. California Idle Corporation
EnvirAlert, Inc. Delaware
Toxguard Fluid Technologies, Inc. California
Three Generations Moving, Inc. California Idle Corporation
Toxguard Systems, Inc. Nevada
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 466,000
<SECURITIES> 0
<RECEIVABLES> 729,000
<ALLOWANCES> 6,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,318,000
<PP&E> 805,000
<DEPRECIATION> 496,000
<TOTAL-ASSETS> 2,321,000
<CURRENT-LIABILITIES> 587,000
<BONDS> 351,000
<COMMON> 6,737,000
0
0
<OTHER-SE> (5,797,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,321,000
<SALES> 2,990,000
<TOTAL-REVENUES> 2,990,000
<CGS> 1,846,000
<TOTAL-COSTS> 1,846,000
<OTHER-EXPENSES> 2,193,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,000
<INCOME-PRETAX> (1,101,000)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (1,106,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,106,000)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
