<PAGE> 1
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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 June 30, 1997
[ ] 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)
CALIFORNIA 95-2873757
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization Identification
No.)
12265 W. BAYAUD AVE #110 80228
LAKEWOOD, CO
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (303) 986-8011
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: $2,325,076.
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 September 18, 1997 was
$11,925,350 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 September
18, 1997, was 18,344,633.
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<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, at year end, in Irvine California, is an
emerging growth company in the environmental services industry. During the
fiscal year the Company engaged in three different businesses, leak detection,
antifreeze recycling, and removal/installation of underground storage tanks,
through its wholly-owned operating subsidiaries, Ustman Industries, Inc, Watson
Systems, Inc., Toxguard Fluid Technologies, Inc. and Toxguard Systems, Inc.
The Company's strategic plan calls for it to reposition itself in pursuit of its
most significant market opportunity, leak detection/monthly monitoring of
underground storage tanks ("UST's") and to eliminate its existing holding
company structure. As part of this strategic plan, the Company intends to divest
Toxguard Fluid Technologies, Inc (on-site antifreeze recycling). Subsequent to
the end of the fiscal year Toxguard Systems, Inc. ceased operations and filed a
voluntary petition for bankruptcy under Chapter 7 of the bankruptcy code.
The Company is an industry leader in the remote monitoring/monthly monitoring
for leak detection and inventory management of UST's, utilizing a form of leak
detection known as Statistical Inventory Reconciliation ("SIR"). The Company
offers a comprehensive range of services and products that 1) enables
cost-effective compliance with EPA and State regulatory requirements, and 2)
provides value-added fuel management and cost reduction capabilities to the tank
owner.
Representative Leak Detection Customers
Amoco
Circle K
Chevron
Emro Marketing Co.
Ultramar
Super America
Dairy Mart Convenience Stores
Uni-Mart
Pantry, Inc.
Silcorp
Cumberland Farms
E-Z Serve
Total Petroleum
Pioneer Petroleum
Diamond Shamrock
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THE MARKETS AND PRODUCTS
Leak Detection/Monthly Monitoring of Underground Storage Tanks
The Company's strategic plan is to focus on services/products directed to the
owners of UST's, providing cost-effective regulatory compliance for leak
detection monthly monitoring, and fuel management. The Company's customers are
primarily petroleum-related, including oil, transportation and retail companies,
but also include federal and municipal agencies, and other commercial and
industrial tank owners.
By December 1998, compliance requirements for over 1,200,000 underground storage
tanks (UST's) will accelerate to require monthly monitoring for most tanks and
their surrounding delivery systems (i.e., pipes and dispensers). Some newer
tanks may be excluded from this requirement.
Leak detection emerged as a major issue in the U.S. during the second half of
the 1980's. Public and regulatory concerns arose that leaking tanks (whether the
tanks were in fact leaking, or whether they might leak in the future) posed a
contamination threat to the U.S. underground water supply, which supplies a
large part of the drinking water used in the U.S. Additionally, leaks from tanks
containing petroleum products or derivatives created the risk of underground or
aboveground fires and explosions, resulting from discharges or fumes. As any UST
is vulnerable to leakage over time, without a proper leak detection system
installed and working, the harmful effects of leaking UST's remain a constant
threat.
Regulation of UST's is not new, nor are long-standing commitments by regulators
to address this issue likely to change. Beginning in 1988, the EPA mandated that
virtually every tank (depending on local and State regulatory requirement) must
have a leak detection system in place by December 1998. This mandate was
implemented on a phased approach based upon the age of the tank.
There are five methods of leak detection currently used. The first three of
these methods are the primary methods currently in use:
1) Tank Tightness Testing,
2) Automatic Tank Gauges ("ATG's"); and
3) Statistical Inventory Reconciliation ("SIR")
4) Vapor Monitoring Wells
5) Secondary Containment with Interstitial Monitoring
Of the three primary methods of leak detection currently used, the first, Tank
Tightness Testing, will for the most part not meet the new EPA requirements for
monthly monitoring, which become effective in December 1998, as Tank Tightness
Testing is generally performed annually. Tank Tightness Testing normally
requires that the station be closed, the tank be filled, isolated and shut down,
and then tested for loss of product. These tests result in loss of sales and
corresponding customer inconvenience.
Automatic Tank Gauges, which have been used since the 1970's, are instruments
(i.e., electronic gauges) that go into the tank. They 1) report the gallons in
the tank; and 2) test for leaks (however, like the Tank Tightness Test, many
existing ATG's currently in use only test the tank, and not the piping). ATG's
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were originally used for fuel management purposes (i.e., inventory control), and
not for regulatory compliance for release detection requirements.
Of the three methods, Statistical Inventory Reconciliation ("SIR") is the most
cost-effective method that complies with the December 1998 leak
detection/monthly monitoring requirements. Unlike Tank Tightness Testing and
many existing ATG's, SIR checks the integrity of piping, dispensers and tanks
since it looks for losses of inventory from the whole system, rather than just
from one part of it. Its annual cost is normally less than that of a Tank
Tightness Test, and, in addition to meeting the December 1998 regulatory
requirements for monthly monitoring, it provides more information useful for
inventory management and control.
In 1988, when the EPA leak detection requirements first went into effect, there
were about 2 million UST's in the U.S. Since then, the number has declined
dramatically, to about 1.2 million tanks, as a result of the phase-out of older
tanks. The core UST population in the U.S., representing the existing 1.2
million UST's, are used primarily for storage of petroleum products and
derivatives, which must be located underground, and for which no alternative
method of storage exists.
Of these 1.2 million tanks, it is estimated that up to 500,000 tanks, are either
1) using Tank Tightness Testing, and will have to convert to another method by
December 1998, or 2) not utilizing any leak detection system. Because of SIR's
inherent advantage in providing the most practical and cost-effective means for
regulatory compliance (as well as inventory management), the industry has
recognized that SIR may become the method of choice for the preponderance of
these tank owners because SIR most closely approximates, or is less than, their
current costs of Tank Tightness Testing.
In early 1996, the Company completed the acquisition of EnviroQuest
Technologies, Ltd., an industry leader in Statistical Inventory Reconciliation
("SIR") software. EnviroQuest was consolidated operationally with another of the
Company's subsidiaries, EnvirAlert, Inc., and a new corporate name, Watson
Systems, Inc., was adopted.
In May of 1997 the Company acquired USTMAN Industries ("USTMAN") the number one
provider of SIR software and services in the United States. USTMAN was founded
in 1990, and was the first SIR company to receive third-party certification
after the EPA approved the SIR method. Since that time, USTMAN has grown to
become the leader in SIR with a proven record of outstanding customer service.
Upon the completion of the acquisition of USTMAN the Company announced plans for
a major restructuring and consolidation to be completed by September 1997. Among
the steps to be taken are:
o The Kansas City Missouri and Irvine, California operations of Watson
General will be closed and their operations consolidated into the
Lakewood, Colorado operations of USTMAN.
o A reduction in personnel at the combined operations will be made in
order to optimize staffing by eliminating duplicate functions, and
thereby reducing operating expense levels.
o The Watson General holding company structure will be collapsed in favor
of a single corporate entity for all operations. The Company's name will
be changed to Ustman
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Technologies, Inc., pending approval by shareholders at the annual meeting
planned for October 30, 1997.
As a clear industry leader for SIR services and software, the Company believes
it is well positioned to capture a significant portion of this market. The
Company has the largest installed base of customers (including top-tier national
oil and gas companies and leading independent petroleum marketers), a well-known
brand name, an established reputation for quality, consistency, reliability and
technological innovation, a national sales force and marketing network, and
cutting-edge, competitively superior software products and services.
The Company offers a comprehensive range of services and products in the
industry including:
USTMAN SIR Statistical inventory reconciliation service for UST leak
detection and regulatory compliance
SIRPLUS Automatic tank level monitoring gauge system with automatic
meter reading capabilities and the SIR System.
EXTREME Software to gather and SIR inventory data remotely and
transmit it for SIR processing
At June 30, 1997, the Company's leak detection/monthly monitoring of underground
storage tanks business had no material backlog, and employed 45 people.
On-Site Antifreeze Recycling
Toxguard Fluid Technologies, Inc. ("TFT") is a provider of on-site antifreeze
recycling in the environmental services industry.
TFT entered the mobile antifreeze/coolant recycling business in June 1993,
commencing operations in Irvine, CA. TFT has grown to become the largest on-site
mobile recycler of used antifreeze in the U.S. It services customers throughout
Southern California including gasoline stations, repair facilities and related
automotive service outlets, trucking and fleet companies, and governmental
facilities.
Toxguard Fluid Technologies employs 11 people
Underground Tank and Remediation Services
Toxguard Systems, Inc. ("TSI") is a provider of custom environmental consulting
services, and installation/removal of under and above ground storage tank
systems. Subsequent to the end of the fiscal year TSI ceased operations and
filed a voluntary petition for bankruptcy under Chapter 7.
At June 30, 1997 Toxguard Systems employed 11 people.
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
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regulations should, however, increase the need for the Company's 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 for
which the company is fully reserved.
On January 30, 1996, the Company acquired all of the outstanding capital stock
of EnviroQuest Technologies, Ltd. ("ETL"), a Kansas City, Missouri based
developer of Statistical Inventory Reconciliation (SIR) software to monitor
underground storage tanks for leak detection. After the acquisition the
subsidiary was renamed Watson Systems, Inc. ("WSI"), and the Company's previous
environmental software activities were combined into WSI.
The adjusted purchase price was $1,740,000, consisting of 184,000 shares of the
Company's common stock valued at $483,000, options to acquire 220,000 shares of
common stock valued at $367,000, $800,000 in cash, $51,000 in promissory notes
and $39,000 of direct acquisition costs. In accordance with settlement and
release agreements entered into by the Company and the former shareholders of
ETL following the acquisition, the number of common shares of the Company issued
in exchange for ETL shares was reduced by 816,000 shares, promissory notes in
the amount of $194,000 issued by the Company were returned, and a former owner
of ETL resigned as a Director of the Company and released the Company from its
obligation to seek his election to the Board.
In May, 1997, the Company acquired all of the outstanding capital stock of
USTMAN Industries, Inc. ("USTMAN"), a Lakewood, Colorado based provider of
Statistical Inventory Reconciliation services. The purchase price was $5.25
million in cash and a $500,000 promissory note. The note bears interest at the
rate of 8.5% per annum, payable quarterly, with all principal due on June 1,
1998. Repayment of the note has been guaranteed by USTMAN and by one other
subsidiary of the Company, Watson Systems, Inc. and EnvirAlert, Inc. Immediately
prior to the closing, all cash and cash equivalents of USTMAN on the close of
business on May 21, 1997 were transferred to NDE. In addition, the Stock
Purchase Agreement provides for an adjustment to the purchase price estimated at
$376,000. The Company is currently disputing this purchase price adjustment with
NDE.
The Company obtained $7,000,000 of financing for the USTMAN acquisition and for
working capital from Sagaponack Partners, L.P. ("Sagaponack"), a private
investment firm based in San Francisco and New York, and its foreign affiliate,
Sagaponack International Partners, L.P. (collectively, the "Investors"),
pursuant to a Securities Purchase Agreement dated May 22, 1997. Senior
Subordinated Notes in the aggregate principal amount of $7,000,000 were issued
to the Investors, and are due and payable in five years, subject to mandatory
prepayment in certain circumstances. Interest on the notes is 10% per annum for
the first year, payable quarterly, and increases by one percent each year during
the term of the Notes, subject to further adjustment in specified instances. The
notes are secured by the assets of the Company, including the stock of certain
of its subsidiaries, and by the assets of the principal subsidiaries of the
Company, including USTMAN and Watson Systems, Inc.
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Sagaponack was issued 7,304,520 shares of the Company's Common Stock,
representing 40% of the total number of shares of Common Stock outstanding
immediately after such issuance, and warrants to purchase shares of Common Stock
in an amount sufficient, upon the exercise of any outstanding options and
warrants, for Sagaponack to maintain its 40% ownership of the outstanding Common
Stock of the Company. Such warrants will be at the same price and term as the
options or warrants exercised by third parties.
ITEM 2. DESCRIPTION OF PROPERTY
At June 30, 1997 the Company and its subsidiaries operated out of leased office
and warehouse space located at 32-B Mauchly, Irvine, California, and 12255 W.
Bayaud Ave Lakewood, Colorado.
The Company plans to close its Irvine, California offices at the end of its
lease which expires in August, 1997. Management believes that its corporate
offices in Lakewood, Colorado are suitable and adequate for its present needs.
There are no plans to lease any additional space.
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 last quarter
of the fiscal year ended June 30, 1997.
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 June 30, 1997 4th Qtr. 3rd Qtr 2nd Qtr. 1st Qtr.(1)
-------- ------- -------- -----------
<S> <C> <C> <C> <C>
High bid $2-1/8 $2-1/8 $2-5/16
Low bid 1-5/16 29/32 7/8
Year Ended June 30, 1997 4th Qtr. 3rd Qtr 2nd Qtr. 1st Qtr.(1)
-------- ------- -------- -----------
High bid 2-3/8 2-7/8 3-1/8 4-1/8
Low bid 1-1/2 1-11/16 2-1/4 2
</TABLE>
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(1) The Company changed its fiscal year in July of 1997 to end June 30. Due
to this change the 1st calendar quarter of the fiscal year ended June
30, 1997 is the same time period as the fourth quarter of the fiscal
year ended September 30, 1996 and is not replicated here.
As of September 18, 1997, 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.
During the months of February, 1997 to April, 1997 the Company sold 455,000
shares of unregistered common stock at a price of $1.00 to accredited investors.
The Company claimed an exemption under Section 42, sale of non-public
securities. 20,000 shares of unregistered common stock were issued as
commissions.
On May 22, 1997 the Company sold 7,304,520 shares of unregistered common stock
as more fully disclosed in Item 1.
The Company has never declared a cash dividend on its Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION OF ANALYSIS OR PLAN OF OPERATION
The Company reported a net loss of $1,979,000 for the nine months ended June 30,
1997 compared to $2,066,000 for the twelve month fiscal year ended September 30,
1996. The increase in annualized operating losses are due in significant part
to:
Write off of the Company's investment in Toxguard Systems, Inc. which
filed for bankruptcy. This charge is partially offset by the
elimination of the net losses of Toxguard Systems from the Company's
consolidated financial statements.
Settlement of a lawsuit with National Environmental Tank Test Company.
Costs for the closure of the Company's Kansas City Office.
The Company's strategic plan calls for it to reposition itself in pursuit of its
most significant market opportunity, leak detection/monthly monitoring of
underground storage tanks ("UST's") and to eliminate its existing holding
company structure. As part of this strategic plan, the Company intends to divest
its Toxguard Fluid Technologies, Inc (on-site antifreeze recycling) subsidiary.
Subsequent to June 30, 1997 Toxguard Systems, Inc. ceased operations and filed a
voluntary petition for bankruptcy under Chapter 7.
In May of 1997 the Company acquired USTMAN Industries ("USTMAN") the number one
provider of SIR software and services in the United States. USTMAN was founded
in 1990, and was the first SIR company to receive third-party certification
after the EPA approved the SIR method. Since that time, USTMAN has grown to
become the leader in SIR with a proven record of outstanding customer service.
Upon the completion of the acquisition of USTMAN the Company announced plans for
a major restructuring and consolidation to be completed by September 1997. This
restructuring and consolidation is anticipated to result in annual savings of
approximately $1,700,000.
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Net sales for the nine months ended June 30, 1997 were $2,325,000, an increase
from $1,236,000 for the nine months ended June 30, 1996 (net sales of Toxguard
Systems, Inc. have been excluded). This increase is due primarily to the
acquisition of EnviroQuest Technologies in January 1996 and USTMAN Industries in
May 1997. The remaining increase was due to increased volume of services
performed by the Company's other subsidiaries and the gain on sale of property
held for sale. There were no material price increases during the year.
The Company's sales depend in part upon its customer's decision as to when to
implement measures to meet 1998 compliance requirements. The Company believes
that the market for its services may accelerate as compliance deadlines
approach.
Selling, general and administrative expenses increased to $2,912,000 in the nine
month fiscal year ended June 30, 1997 compared to $3,368,000 for the twelve
months ended September 30, 1997. The increase is in large part due to additional
costs of the new operating subsidiaries identified above and the other one-time
charges identified above.
Liquidity & Capital Resources
The Company effectively financed its net cash used in operating activities for
the fiscal year by issuance of common stock.
At June 30, 1997 the Company's current liabilities exceeded current assets by
$119,000 compared to a deficit of current assets over current liabilities of
$598,000 at September 30, 1996. The Company's business does not require material
ongoing capital expenditures.
In May 1997 the Company obtained $7,000,000 in financing for the acquisition of
USTMAN Industries, and working capital. The Company management believes that as
a result of this financing the Company will have adequate resources for the next
twelve months of operations.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are attached as an exhibit to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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. In May, 1997 Mr.
Crane relinquished the position of President. Mr. Crane is also President and
Chief
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Executive Officer of Toxguard Systems, Inc. and EnvirAlert, Inc. Mr. Crane
is a Director of Toxguard Systems, Inc. which as previously disclosed has filed
for bankruptcy (see Item 1). Mr. Crane is 51.
DAN R. COOK has served as a Director of the Company since May 1997. At the May
22, 1997 Watson General Corporation Board of Directors meeting, Mr. Cook was
appointed President of the Company. In 1992 Mr. Cook was appointed as Chief
Operating Officer of USTMAN Industries, and has also been its President since
January 1994. Mr. Cook is also a CPA. Mr. Cook is 47.
BARRY S. ROSENSTEIN has served as a Director of the Company since May 1997. Mr.
Rosenstein is a Managing Partner of Sagaponack Partners, L.P. and Sagaponack
International Partners, L.P. From 1991 to 1996 Mr. Rosenstein served as a
General Partner of Genesis Merchant Group Securities and served as the head of
its Investment/Merchant Banking Group. Mr. Rosenstein is currently a director of
Venture Stores, Inc., PDS Associates, and Marisa Christina, Inc. Mr. Rosenstein
is 38.
MARC A. WEISMAN has served as a Director of the Company since May 1997. Mr.
Weisman is a Managing Partner of Sagaponack Partners, L.P. and Sagaponack
International Partners, L.P. From January 1996 to August 1996, Mr. Weisman
served as Director in the Principal Transactions Group at CS First Boston where
he ran the High Yield Real Estate Finance Division. From 1988 to 1996, Mr.
Weisman was Chief Financial Officer and Executive Vice President of the Adco
Group, a privately held real estate and financial services company. Mr. Weisman
is currently a director of two private companies: Product Resources, Inc. and
Superior Bank SFB. Mr. Weisman is 44.
DONALD W. PHILLIPS has served as a Director of the Company since May 1997. Mr.
Phillips is the President and CEO of Forstmam-Leff International, Inc. a Refco
Group, Ltd. Company. From 1990 to 1997, Mr. Phillips was Chairman of Equity
Institutional Investors. Mr. Phillips is a Director of several manufacturing and
investment companies.
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 ALL OTHER
POSITION YEAR SALARY COMPENSATION
- ------------------ ------ ------- ------------
<S> <C> <C> <C>
RONALD G. CRANE(1) 1997 59,319(4)
Chief Executive Officer 1996 75,000
Ex-President 1995 75,000
CHARLES A. WATSON(2) 1997 54,923(4) 27,978(3)(4)
Retired Chairman 1996 84,000 36,183(3)
of the Board 1995 84,000 34,992(3)
</TABLE>
(1) Mr. Crane did not receive any bonus or other annual compensation during the
fiscal year ended June 30, 1997. Mr. Crane did not receive or exercise any
options to purchase Common Stock during the fiscal year ended June 30,
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1997. Certain options granted to Mr. Crane in prior years were restructured
during the year ended June 30, 1997, see footnote 99999 under Item 11 below.
Mr. Crane did not receive any long-term incentive plan award during the
fiscal year ended June 30, 1997. Mr. Crane received no other compensation
during the fiscal year ended June 30, 1997.
(2) Mr. Watson resigned from the Company on May 22, 1997. 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 June 30, 1997 and held no unexercised options on June 30, 1997. In
addition, Mr. Watson did not receive any long-term incentive plan award
during the fiscal year ended June 30, 1997. Mr. Watson does not have an
employment agreement with the Company.
(3) The Company has 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.
(4) The Company changed its fiscal year in July of 1997 to end June 30. The
amount presented is for the nine-month period October 1, 1996 to June 30,
1997.
In accordance with the Statement of Financial Accounting Standards No. 106
("SFAS 106"), "Employers' Accounting for Post Retirement 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
On May 22, 1997 the Company began paying $25,000 per quarter to Sagaponack
Partners, L.P as. compensation for the Board of Director fees of Barry
Rosenstein and Marc Weisman.
On May 22, 1997 the Company began to pay Don Phillips Board of Directors fees of
$1,667, along with reasonable expenses, for physical attendance per Board of
Directors meeting, plus $5,000 annually. In addition the Company has represented
that it will issue to Don Phillips shares of common stock of the Compnay equal
to one tenth of one percent of the outstanding stock of the Company at the
conclusion of each year of service on the Board of Directors.
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 September 18, 1997 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>
Sagaponack Partners, L.P. 7,337,853(1) 40.0%
170 Columbus Ave., 5th Floor
San Francisco, CA 94133
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED OUTSTANDING SHARES
- ---- ------------------ ------------------
<S> <C> <C>
Charles A. Watson 1,045,000 5.7%
5166 Soledad Road
San Diego, CA 92109
</TABLE>
(1) Does not include 2,625,432 warrants to purchase shares of Common Stock which
are exercisable at the times and prices, and to the extent, that other
options and warrants of the Company are exercised after May 22, 1997 in
order to maintain Sagaponack Partners, L.P.'s 40% ownership of the
outstanding Common Stock of the Company.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of September 18, 1997 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>
Ronald G. Crane 1,121,500(1) 5.89%
12265 W. Bayaud Ave, #110
Lakewood, CO 80228
Dan R. Cook 600,000(2) 3.17%
12265 W. Bayaud Ave., #110
Lakewood, CO 80228
Barry S. Rosenstein 7,337,853(3) 40.00%
170 Columbus Ave., 5th Floor
San Francisco, CA 94133
Marc A. Weisman 0 0.00%
645 Fifth Ave., 8th Floor
New York, NY 10022
Donald W. Phillips 0 0.00%
111 W. Jackson Blvd., Ste 1800
Chicago, IL 60604
Joseph L. Christoffel 350,000(4) 1.87%
12265 W. Bayaud Ave., #110
Lakewood, CO 80228
All officers and directors
as a group (five persons) 9,409,353 47.06%
</TABLE>
(1) Includes options granted by the Company to purchase up to 700,000 shares of
common stock. The options are fully vested and expire April 3, 2002. The
options are exercisable at $1.53 per share.
(2) Includes options granted by the Company to purchase up to 600,000 shares of
common stock. The options vest as to 150,000 on each of April 30, 1998,
1999, 2000, 2001 and expire three years from vesting. All options are
exercisable at $1.00 per share.
12
<PAGE> 13
(3) Includes 7,337,853 shares of Common Stock owned by Sagaponack Partners, L.P.
which are indirectly beneficially owned by Mr. Rosenstein as the managing
member of RSP Capital, L.L.C. which is the general partner of Sagaponack
Partners, L.P.
Does not include 2,625,432 warrants to purchase shares of Common Stock which
are exercisable at the times and prices, and to the extent, that other
options and warrants of the Company are exercised after May 22, 1997 in
order to maintain Sagaponack Partners, L.P.'s 40% ownership of the
outstanding Common Stock of the Company. Mr. Rosenstein indirectly
beneficially owns these warrants as the managing member of RSP Capital,
L.L.C. that is the general partner of Sagaponack Partners, L.P.
(4) Includes options granted by the Company to purchase up to 350,000 shares of
common stock. The options are fully vested and expire April 3, 2002. The
options are exercisable at $1.53 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 loan of $49,900 was repaid by the Company.
In November 1996, Charles A. Watson agreed to loan the Company $200,000 at an
annual interest rate of 10.25% for a period of 120 days. In November and
December 1996 $165,000 was drawn from this commitment. The loan is secured by
the Company's stock in Watson Value Assets LLC that was formed in October 1996.
The loan 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. Kughn on the other hand is
incorporated herein by reference to the Company's Form 10-KSB/A2
for fiscal year 1993.
13
<PAGE> 14
10.4 Stock purchase agreement dated January 30, 1996 between the
Company and the Shareholders of EnviroQuest Technologies, Ltd.
is incorporated herein by reference to the Company's Current
Form 8-K filed on February 13, 1996.
10.5 Settlement agreement and release agreement dated April 5, 1996
between the Company and Frances Marencik a former shareholder of
EnviroQuest Technologies, Ltd. is incorporated herein by
reference to the Company's Current Form 8-K/A filed on April 15,
1996.
10.6 Settlement agreement and release agreement dated July 29, 1996
between the Company and John Marencik a former shareholder of
EnviroQuest Technologies, Ltd. is incorporated herein by
reference to the Company's Current Form 8-K filed on August 12,
1996.
10.7 Stock Option agreement dated April 3, 1997 between the Company and
Ronald G. Crane.
10.8 Stock Option agreement dated April 3, 1997 between the Company and
Joseph L. Christoffel.
10.9 Stock Option agreement dated May 22, 1997 between the Company and
Dan R. Cook.
10.10 Employment agreement dated May 22, 1997 between the Company and
Dan R. Cook.
10.11 Employment agreement dated May 22, 1997 between the Company and
Ronald G. Crane.
10.12 Employment agreement dated May 22, 1997 between the Company and
Joseph L. Christoffel.
10.13 Stock purchase agreement dated May 22, 1997 between the Company
and NDE Environmental Corporation for the purchase of the common
stock of USTMAN Industries is incorporated herein by reference
to the Company's Current Form 8-K filed on June 6, 1997.
10.14 Securities purchase agreement dated May 22, 1997 between the
Company and Sagaponack Partners, L.P. and Sagaponack
International Partners, L.P. is incorporated herein by reference
to the Company's Current Form 8-K filed on June 6, 1997.
10.15 Warrant agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. is incorporated herein by reference to
the Company's Current Form 8-K filed on June 6, 1997.
14
<PAGE> 15
10.16 Stock pledge agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International Partners,
L.P. is incorporated herein by reference to the Company's
Current Form 8-K filed on June 6, 1997.
10.17 Security agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International Partners,
L.P. is incorporated herein by reference to the Company's
Current Form 8-K filed on June 6, 1997.
10.18 Financial advisory agreement dated May 22, 1997 between the
Company and Sagaponack Management Company is incorporated herein
by reference to the Company's Current Form 8-K filed on June 6,
1997.
10.19 Company agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International Partners,
L.P. is incorporated herein by reference to the Company's
Current Form 8-K filed on June 6, 1997.
10.20 Shareholder agreement dated May 22, 1997 between Sagaponack
Partners, L.P., Sagaponack International Partners, L.P. and
certain shareholders of the Company is incorporated herein by
reference to the Company's Current Form 8-K filed on June 6,
1997.
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(B) DURING THE REGISTRANT'S QUARTER ENDED JUNE 30, 1997, THE REGISTRANT
FILED THE FOLLOWING CURRENT REPORTS ON FORM 8-K:
8/K Acquisition of Ustman Industries, Inc and
financing by Sagaponack Partners, L.P. and
Sagaponack International, L.P. Filed 6/7/97
15
<PAGE> 16
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: September 25, 1997 By /s/ RONALD G. CRANE
-------------------------------------
Ronald G. Crane
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ RONALD G. CRANE Chief Executive Officer, September 25, 1997
- ------------------------------------ and Director
(Ronald G. Crane)
/s/ DAN R. COOK President and Director September 25, 1997
- ------------------------------------
(Dan R. Cook)
/s/ JOSEPH L. CHRISTOFFEL Chief Financial Officer (Principal September 25, 1997
- ------------------------------------ Financial Officer and Principal
(Joseph L. Christoffel) Accounting Officer), Secretary
/s/ BARRY S. ROSENSTEIN Co-Chairman of Board of Directors, September 25, 1997
- ------------------------------------ and Director
(Barry S. Rosenstein)
/s/ MARC A. WEISMAN Co-Chairman of Board of Directors, September 25, 1997
- ------------------------------------ and Director
(Marc A. Weisman)
/s/ DONALD W. PHILLIPS Director September 25, 1997
- ------------------------------------
(Donald W. Phillips)
</TABLE>
<PAGE> 17
Consolidated Financial Statements
Watson General Corporation
For the nine months ended June 30,
1997 and 1996 (unaudited) and the year
ended September 30, 1996
with Report of Independent Auditors
<PAGE> 18
Watson General Corporation
Consolidated Financial Statements
For the nine months ended June 30, 1997 and 1996
(unaudited) and the year ended September 30, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.......................................................1
Financial Statements
Consolidated Balance Sheets..........................................................2
Consolidated Statements of Operations................................................3
Consolidated Statements of Shareholders' Equity......................................4
Consolidated Statements of Cash Flows................................................5
Notes to Consolidated Financial Statements...........................................6
</TABLE>
<PAGE> 19
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 June 30, 1997 and September 30, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the nine months ended June 30, 1997 and the year ended September 30, 1996. 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 June 30, 1997 and September 30, 1996, and the
consolidated results of its operations and its cash flows for the nine months
ended June 30, 1997 and the year ended September 30, 1996, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
September 19, 1997
<PAGE> 20
Watson General Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 799,000 $ 240,000
Accounts receivable (less allowance for doubtful
accounts of $89,000 in 1997 and $93,000 in 1996)
(Note 3) 662,000 670,000
Prepaid expense and other current assets 418,000 93,000
------------ ------------
Total current assets 1,879,000 1,003,000
Furniture and equipment:
Machinery and equipment 686,000 754,000
Computers and equipment 749,000 169,000
Furniture and fixtures 219,000 137,000
Automobiles and trucks 100,000 160,000
Leasehold improvements 5,000 5,000
------------ ------------
1,759,000 1,225,000
Accumulated depreciation 1,004,000 756,000
------------ ------------
755,000 469,000
Property held for sale (less accumulated depreciation
of $11,000 in 1996) (Note 4) -- 337,000
Intangible assets (less accumulated amortization of
$377,000 in 1997 and $272,000 in 1996) (Note 1) 8,546,000 2,434,000
============ ============
Total assets $ 11,180,000 $ 4,243,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Note payable $ -- $ 105,000
Accounts payable 264,000 564,000
Accrued expenses 504,000 346,000
Deferred revenue 147,000 132,000
Current portion of long-term debt (Note 5) 1,083,000 454,000
------------ ------------
Total current liabilities 1,998,000 1,601,000
Long-term debt, less current portion (Note 5) 6,423,000 450,000
Other long-term liabilities -- 20,000
Deferred employee benefits (Note 8) 434,000 435,000
Commitments and contingencies (Note 8)
Shareholders' equity (Note 7):
Common stock, no par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 18,344,633 in 1997
and 10,487,401 in 1996 10,373,000 9,100,000
Additional paid-in capital 1,947,000 653,000
Accumulated deficit (9,995,000) (8,016,000)
------------ ------------
Total shareholders' equity 2,325,000 1,737,000
------------ ------------
Total liabilities and shareholders' equity $ 11,180,000 $ 4,243,000
============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 21
Watson General Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS YEAR ENDED
ENDED JUNE 30 ENDED JUNE 30 SEPTEMBER 30
1997 1996 1996
------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
Net sales $ 2,325,000 $ 2,541,000 $ 4,089,000
Cost of sales 836,000 1,467,000 2,683,000
Selling, general and administrative 2,912,000 2,311,000 3,368,000
expenses
write-off of investment in Toxguard
Systems, Inc. (Note 1) 384,000
----------- ----------- -----------
(1,807,000) (1,237,000) (1,962,000)
Other income (expense):
Interest expense (172,000) (96,000) (134,000)
Interest income 4,000 30,000 35,000
----------- ----------- -----------
(168,000) (66,000) (99,000)
Loss before income taxes (1,975,000) (1,303,000) (2,061,000)
Provision for income taxes (4,000) (5,000) (5,000)
----------- ----------- -----------
Net loss $(1,979,000) $(1,308,000) $(2,066,000)
=========== =========== ===========
Per share amounts:
Net loss $ (.17) $ (.13) $ (.22)
=========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 22
Watson General Corporation
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMU- SHARE-
----------------------------- PAID-IN LATED HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $ 9,118,019 6,737,000 $ 153,000 $ (5,950,000) $ 940,000
Common stock issued in
exchange for shares of
Envir-Alert, Inc. 11,095 32,000 -- -- 32,000
Common stock and options
issued in connection
with the acquisition
of Watson System,
Inc., net of
adjustment (Note 2) 184,000 483,000 367,000 -- 850,000
Costs associated with
prior year private
placement -- (18,000) -- -- (18,000)
Common stock and options
issued in connection
with private
placements (Note 7) 1,174,287 1,866,000 133,000 -- 1,999,000
Net loss -- -- -- (2,066,000) (2,066,000)
------------ ------------ -------------- ------------ ------------
Balance at September 30, 1996 10,487,401 9,100,000 653,000 (8,016,000) 1,737,000
Common stock issued in
exchange for shares of
Envir-Alert, Inc. 4,379 12,000 -- -- 12,000
Common stock and options
issued in connection
with private
placement to the
Investors (Notes 2 & 7) 7,337,853 713,000 1,294,000 -- 2,007,000
Common stock issued in
connection with
private placements
(Note 7) 465,000 455,000 -- -- 455,000
Common stock issued
for settlement of
lawsuit (Note 1) 50,000 93,000 -- -- 93,000
Net loss -- -- -- (1,979,000) (1,979,000)
------------ ------------ -------------- ------------ ------------
Balance at June 30, 1997 18,344,633 $ 10,373,000 $ 1,947,000 $ (9,995,000) $ 2,325,000
============ ============ ============== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 23
Watson General Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS YEAR ENDED
ENDED JUNE 30 ENDED JUNE 30 SEPTEMBER 30
1997 1996 1996
--------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,979,000) $ (1,308,000) $ (2,066,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 388,000 229,000 435,000
Gain on sale of property held for sale (Note 4) (363,000) -- --
Write-off of net investments in Toxguard Systems,
Inc. (Note 1) 293,000 -- --
Interest reclassed to debt principal 76,000 -- --
Issuance of common stock to settle lawsuit (Note 1) 93,000 -- --
Loss on sale of equipment 6,000 -- --
Net changes in operating assets and liabilities (Note 1) 238,000 248,000 406,000
--------------- --------------- ---------------
Net cash used in operating activities (1,248,000) (831,000) (1,225,000)
INVESTING ACTIVITIES
Purchases of furniture and equipment (27,000) (48,000) (139,000)
Improvements on property held for sale (Note 4) -- -- (41,000)
Proceeds from sale of property held for sale 315,000 -- --
Acquisition of USTMAN, net of cash acquired (5,247,000) -- --
Acquisition of Watson System, Inc., net of cash acquired -- (572,000) (612,000)
--------------- --------------- ---------------
Net cash used in investing activities (4,959,000) (620,000) (792,000)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 455,000 1,811,000 1,866,000
Proceeds from issuance of stock options -- -- 133,000
Proceeds from issuance of long-term debt, net 6,724,000 -- 337,000
Principal payments on long-term debt (413,000) (118,000) (454,000)
Prior year private placement costs -- -- (18,000)
--------------- --------------- ---------------
Net cash provided by financing activities 6,766,000 1,693,000 1,864,000
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents 559,000 242,000 (153,000)
Cash and cash equivalents at beginning of period 240,000 393,000 393,000
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 799,000 $ 635,000 $ 240,000
=============== =============== ===============
</TABLE>
See accompanying notes.
5
<PAGE> 24
Watson General Corporation
Notes to Consolidated Financial Statements
(Information for the nine months ended June 30, 1996 is unaudited)
June 30, 1997
1. ACCOUNTING POLICIES
BUSINESS
Watson General Corporation (the Company) is a holding company providing
environmental services to owners of underground storage tanks through its
subsidiaries, Ustman Industries, Inc. (USTMAN) (Note 2), Watson Systems, Inc.
(Watson Systems) (Note 2), Toxguard Fluid Technologies, Inc., Envir-Alert, Inc.
(Envir-Alert) and Toxguard Systems, Inc. (Toxguard) (Note 9). The Company's
services include leak detection, removal and installation of underground storage
tanks and antifreeze recycling in the United States and abroad. The Company owns
87% of the outstanding preferred stock and 96% of the outstanding common stock
of Toxguard. All other subsidiaries are wholly owned by the Company.
In June 1997, merger agreements were filed to merge USTMAN, Watson Systems and
Envir-Alert into the Company.
In July 1997, Toxguard's Board of Directors elected to cease operations and
place Toxguard in Chapter 7 under the Bankruptcy Code, as current obligations
could no longer be met. On August 27, 1997, Toxguard voluntarily filed under
Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court Central
District of California. As of June 30, 1997, the Company has written off its net
investment and net goodwill in Toxguard of $91,000 and $293,000, respectively,
as a result of Toxguard's bankruptcy filing (Note 9).
The Company's consolidated operations for the nine months ended June 30, 1997
and 1996 and the year ended September 30, 1996 were concentrated in a single
business segment-environmental industry. The Company's largest customer
accounted for approximately 12% of sales for the year ended September 30, 1996.
There were no customers greater than 10% of sales for the nine months ended June
30, 1997 and 1996.
BASIS OF PRESENTATION
Effective July 1, 1997, the Company has elected to change its fiscal year to a
period beginning July 1 and ending June 30. Accordingly, the accompanying
consolidated financial statements present the transition period from the prior
fiscal year end of September 30, 1996 to June 30, 1997. Unaudited consolidated
results of operations and cash flows for the period October 1, 1995 to June 30,
1996 are presented for comparative purposes.
6
<PAGE> 25
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
1. ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that Watson
General Corporation will continue as a going concern. The Company incurred net
losses of $1,979,000 and $2,066,000 for the nine months ended June 30, 1997 and
the year ended September 30, 1996, respectively. Additionally, the Company's
operations have resulted in negative cash flows of $1,248,000 and $1,225,000 for
the nine months ended June 30, 1997 and the year ended September 30, 1996,
respectively. The Company's subsidiary USTMAN, acquired in May 1997, reported
net income of $561,000, $307,000 and $515,000 for the nine months ended June 30,
1997 and the years ended December 31, 1996 and 1995, respectively. Additionally,
USTMAN's operations have resulted in positive cash flows of $1,840,000 and
$71,000 for the years ended December 31, 1996 and 1995, respectively. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the outcome of this
uncertainty.
PRINCIPLES OF CONSOLIDATION
Except for the net assets of Toxguard, which have been written off as of June
30, 1997, as a result of the voluntary Chapter 7 bankruptcy filing of that
entity, 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.
RECLASSIFICATIONS
Certain amounts from the prior year have been reclassified to conform to the
current year presentation.
PROPERTY, FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost and generally are 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 4). Depreciation is provided using the
straight-line method over the building's estimated useful life of 25 years.
7
<PAGE> 26
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
1. ACCOUNTING POLICIES (CONTINUED)
ASSET IMPAIRMENT
The Company recognizes impairment losses 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. In such circumstances, those assets are written down to estimated fair
value. Long-lived assets include property, furniture and equipment, identifiable
intangible assets and goodwill. Long-lived assets held for sale are valued at
the lower of their carrying amount (amortized cost) or reformatted for value
less cost to sell.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
The FASB issued Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, which requires an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. The
Company will apply the new rules prospectively to transactions beginning in the
first quarter of 1997. Based on current circumstances, the Company believes the
application of the new rules will not have a material impact on the financial
statements.
DEFERRED DEBT AND EQUITY ISSUANCE COSTS
In connection with the private placement of its Senior Subordinated Notes of
$7,000,000 and 7,304,520 shares of its common stock (Notes 2, 5 and 7), the
Company incurred costs of $2,010,000. The Company allocated the costs of
$1,722,000 and $288,000 to intangible assets and common stock, respectively. The
deferred debt issuance costs included in intangible assets are being amortized
over the term of the Senior Subordinated Notes using the straight-line method.
8
<PAGE> 27
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
1. ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1997 1996
----------- -----------
<S> <C> <C>
Goodwill $ 2,999,000 $ 1,804,000
Technology 4,200,000 900,000
Deferred debt issuance costs 1,722,000 --
Copyrights and organization costs 2,000 2,000
----------- -----------
8,923,000 2,706,000
Less accumulated amortization (377,000) (272,000)
----------- -----------
$ 8,546,000 $ 2,434,000
=========== ===========
</TABLE>
Goodwill related to the USTMAN and Watson Systems, Inc. acquisitions is
amortized over 15 years. Other goodwill ($92,000, net carrying value at June
30,1997) is amortized over 20 years. Acquired technology is amortized between 5
and 8 years, and capitalized copyrights and organization costs are amortized on
a straight-line basis over 5 years. Amortization expense amounted to $223,000,
$126,000 and $169,000 for the nine months ended June 30, 1997 and 1996, and the
year ended September 30, 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, accounts receivable and accounts payable
approximated their carrying amounts due to the relatively short maturity of
these items. The fair value of the Company's long-term debt approximated their
carrying amounts at June 30, 1997, based on rates currently available to the
Company for debt with similar terms and remaining maturities.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
9
<PAGE> 28
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
1. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues from underground storage tank monitoring, leak detection and related
software services are recognized as services are performed.
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.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Compensation cost for
performance shares is recorded over the vesting period from the date the
underlying stock options are exercised based on the fair market value of the
Company's stock on the option exercise date.
LAWSUIT SETTLEMENT
In May 1997, the Company settled a lawsuit with National Environmental Tank Test
Company (NETTCO), a former affiliate, with an unfavorable outcome to the Company
of $200,000 in cash and 50,000 shares of common stock valued at $93,000. The
lawsuit was related to the breach of an affiliate sales agreement.
10
<PAGE> 29
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
1. ACCOUNTING POLICIES (CONTINUED)
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 11,727,000, 10,063,000 and 9,434,000 for the
nine months ended June 30, 1997 and 1996, and for the year ended September 30,
1996, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share (Statement No. 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
have an antidilutive effect and would not have an effect on the Company's
earnings per share for the nine months ended June 30, 1997 and 1996, and the
year ended September 30, 1996.
INCOME TAXES
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 using statutory tax rates expected to be in
effect in the period in which the deferred tax item is expected to be settled.
Deferred tax assets are 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.
STATEMENT OF CASH FLOWS
The Company considers highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
11
<PAGE> 30
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
1. ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS (CONTINUED)
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>
NINE MONTHS NINE MONTHS YEAR ENDED
ENDED JUNE 30 ENDED JUNE 30 SEPTEMBER 30
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Restricted cash $ -- $ 73,000 $ 73,000
Accounts receivable, net 315,000 67,000 158,000
Prepaid expense and other current (76,000) (17,000) 107,000
assets
Accounts payable (26,000) (37,000) 164,000
Accrued expenses 123,000 169,000 (42,000)
Deferred revenue 15,000 (7,000) (13,000)
Note payable (105,000) -- (24,000)
Other long-term liabilities (8,000) -- (17,000)
------------ ------------ ------------
$ 238,000 $ 248,000 $ 406,000
============ ============ ============
</TABLE>
The Company paid state franchise taxes of $5,000, $5,000 and $5,000 for the nine
months ended June 30, 1997 and 1996, and for the year ended September 30, 1996,
respectively. The Company paid interest of $90,000, $97,000 and $91,000 for the
nine months ended June 30, 1997 and 1996, and for the year ended September 30,
1996, respectively.
In connection with the acquisition of USTMAN and Watson Systems in May 1997 and
in January 1996, respectively, (Note 2), the Company funded the acquisition as
follows:
<TABLE>
<CAPTION>
WATSON
USTMAN SYSTEMS
------------ ------------
<S> <C> <C>
Fair value of assets acquired $ 6,126,000 $ 2,007,000
Less:
Cash acquired (3,000) (227,000)
Liabilities assumed -- (267,000)
Purchase price adjustment liability (376,000) --
Notes payable issued (500,000) (51,000)
Common stock issued -- (483,000)
Stock options issued -- (367,000)
------------ ------------
Cash paid $ 5,247,000 $ 612,000
============ ============
</TABLE>
12
<PAGE> 31
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
1. ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS (CONTINUED)
Noncash investing and financing activities during fiscal 1996, in addition to
the noncash portion of the acquisition of Watson Systems, consists of the
issuance of 11,095 shares of common stock with a value of $32,000 and the
incurrence of a liability for approximately $12,000 for shares to be issued in
fiscal 1997 to acquire a former 8% minority interest in the outstanding common
stock interest in EnvirAlert.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Issues
requiring significant assumptions include estimates of future cash flows used in
the evaluation of the recoverability of goodwill, and estimates made in
establishing the allowance for doubtful accounts.
UNAUDITED INFORMATION
Unaudited financial information for the nine months ended June 30, 1996 has been
prepared on the same basis as the audited consolidated financial statements. In
the opinion of management, such unaudited information includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of this information.
2. ACQUISITIONS
On May 22, 1997, the Company acquired all of the outstanding capital stock of
USTMAN Industries, Inc. (USTMAN), a subsidiary of NDE Environmental Corporation
(NDE), pursuant to a Stock Purchase Agreement between the Company and NDE (the
USTMAN Acquisition). USTMAN provides statistical inventory reconciliation
services for owners of underground storage tanks. The purchase price was $5.25
million in cash and a $500,000 promissory note. The note bears interest at the
rate of 8.5% per annum, payable quarterly, with all principal due on June 1,
1998. Repayment of the note has been
13
<PAGE> 32
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
2. ACQUISITIONS (CONTINUED)
guaranteed by USTMAN and Watson Systems, Inc. Immediately prior to the closing,
all cash and cash equivalents of USTMAN on the close of business on May 21, 1997
were transferred to NDE. In addition, the Stock Purchase Agreement provides for
an adjustment to the purchase price within 60 days after the closing to reflect
the difference, if any, between the working capital balance of USTMAN at the
closing (after taking into account the transfer of cash and cash equivalents to
NDE on May 21) and $424,271 (representing the working capital balance of USTMAN
as of December 31, 1996.) The Company has estimated the purchase price
adjustment to be $376,000 (Note 5) and is currently disputing this amount with
NDE.
The acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on the estimated fair value at the date of
acquisition. The Company's purchase price in excess of the net assets of the
purchased companies was assigned to goodwill and software based upon the
estimated future cash flows of their operations. As of the acquisition date, the
Company made a preliminary allocation of $1,622,000 to goodwill and $3,300,000
to software. The Company is amortizing the goodwill and software assets on a
straight-line basis over 15 and 8 years, respectively.
The Company obtained $7,000,000 of financing for the USTMAN acquisition and for
working capital from Sagaponack Partners, L.P. (Sagaponack), a private
investment firm based in San Francisco and New York, and its foreign affiliate,
Sagaponack International Partners, L.P. (collectively, the Investors), pursuant
to a Securities Purchase Agreement dated May 22, 1997 (Note 5).
On January 30, 1996, the Company acquired all of the outstanding capital stock
of EnviroQuest Technologies, Ltd., a Kansas City, Missouri based developer of
Statistical Inventory Reconciliation software to monitor underground storage
tanks for leak detection as required by federal, state and local regulations.
After acquisition the subsidiary was renamed Watson Systems, Inc., and the
Company's previous environmental software activities were combined into Watson
Systems.
14
<PAGE> 33
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
2. ACQUISITIONS (CONTINUED)
The adjusted purchase price was $1,740,000, consisting of 184,000 shares of the
Companys common stock valued at $483,000, options to acquire 220,000 shares of
common stock valued at $367,000, $800,000 in cash, $51,000 in promissory notes
and $39,000 of direct acquisition costs. The acquisition has been accounted for
under the purchase method of accounting and, accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on the
estimated fair value at the date of acquisition. This allocation resulted in
$1,270,000 of costs in excess of net assets acquired which has been recorded as
goodwill and is being amortized on a straight-line basis over 15 years.
In accordance with settlement and release agreements entered into by the Company
and the former shareholders of Watson Systems following the acquisition, the
number of common shares of the Company issued in exchange for Watson Systems
shares was reduced by 816,000 shares, promissory notes in the amount of $194,000
issued by the Company were returned and a former owner of Watson Systems
resigned as a Director of the Company and released the Company from its
obligation to seek his election to the Board.
USTMAN's and Watson Systems' results of operations have been included in the
consolidated results of the Company from May 23, 1997 and February 1, 1996,
respectively. Proforma unaudited consolidated operating results of the Company,
USTMAN, and Watson Systems for the nine months ended June 30, 1997 and 1996,
assuming the acquisitions had been made as of the beginning of each fiscal
period are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
1997 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 5,201,000 $ 5,917,000
Net loss 2,705,000 2,752,000
Net loss per share $ (.23) $ (.27)
</TABLE>
15
<PAGE> 34
3. ACCOUNTS RECEIVABLE
Accounts receivable net of allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1997 1996
------------- -------------
<S> <C> <C>
Amounts billed $ 662,000 $ 650,000
Retainages billed -- 18,000
Recoverable costs and accrued profit on
contracts in process - not billed -- 2,000
------------- -------------
$ 662,000 $ 670,000
============= =============
</TABLE>
There are no contract receivables at June 30, 1997. 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.
4. PROPERTY HELD FOR SALE
Property available for sale consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996
---------------
<S> <C>
Land $ 142,000
Building 206,000
---------------
348,000
Accumulated depreciation (11,000)
---------------
$ 337,000
===============
</TABLE>
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 was hydrocarbon contamination present.
16
<PAGE> 35
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
4. PROPERTY HELD FOR SALE (CONTINUED)
To finance the purchase of the loan, acquisition and foreclosure costs, and in
part pay for additional environmental assessments of the property, the Company:
o Entered into a loan agreement with a lending institution which paid the
$300,000 to purchase the note. The loan incurred interest at a rate of 14%
with interest only payable monthly through maturity at June 23, 1996
(extended to December 23, 1996 through payment of a fee equal to 2% of the
outstanding principal balance) 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.
o 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 completed its own environmental assessment on the property which
indicated that the level of hydrocarbon contamination was significantly less
than previously detected. On January 4, 1996, the Company's management received
a "no further action" letter from the San Diego Department of Environmental
Health which cleared the title to the property from any restrictions on
transferability.
On October 1, 1996, the Company borrowed $375,000 to refinance the original note
payable. This new borrowing was secured by the property, bears interest at 9.75%
adjustable semi-annually, and is payable in monthly installments of $3,557, with
any remaining principal due October 1, 2001.
Also on October 1, 1996, the Company formed a wholly owned limited liability
company (LLC), Watson Value Assets LLC (WVA) into which the property for sale
was transferred for liability purposes. In future years the LLC will be
consolidated with the operations of Company.
In December 1996, WVA sold the property for $700,000. WVA received $281,000 in
cash and its note, dated October 1, 1996, of $374,000 and interest of $3,000 was
paid in full by the buyer. The Company recorded a gain on the sale of the
property of $363,000 in the nine months ended June 30, 1997.
17
<PAGE> 36
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1997 1996
-------------- --------------
<S> <C> <C>
Senior Subordinated Notes Payable to the Investors (Note 2) $ 6,093,000 $ --
Note payable to NDE, all principal due on June 1, 1998,
interest payable quarterly at 8.5%, guaranteed by
USTMAN, Watson Systems, Inc. and EnvirAlert, Inc., 500,000 --
maturing June 1998 (Note 2)
Purchase price adjustment payable to NDE, due upon
settlement of disputed purchase price (Note 2) 376,000 --
Note payable to a lending institution in monthly
installments of $3,143 including interest at 9.12%, 55,000 --
maturing January 1999
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
extended the loan through December 23, 1996 for a fee -- 300,000
equal to 2% of the outstanding principal balance (Note 4)
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 32,000 55,000
Note payable to bank in monthly installments of $10,750
including interest at 1.5% over the corporate base
rate (10.5% at September 30, 1996) adjusted quarterly,
with any remaining unpaid principal due November 2000,
collaterized by a security interest in accounts
receivable and certain property and equipment of the
Company 381,000 447,000
Guarantor of note payable to bank in monthly
installments of $3,259 including interest at 10.5%,
with any remaining principal due November 1997 28,000 43,000
Unsecured notes payable to former employees and officers
of an acquired subsidiary. The notes are non-interest
bearing with various maturities through January 30, 1998 35,000 51,000
Unsecured note payable to a former officer and
stockholder in monthly installments of $226, including
interest at 6.5%, maturing December 2000 6,000 8,000
-------------- --------------
7,506,000 904,000
Less current portion 1,083,000 454,000
-------------- --------------
Long-term portion $ 6,423,000 $ 450,000
============== ==============
</TABLE>
18
<PAGE> 37
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
On May 22, 1997, the Company completed the private placement of its Senior
Subordinated Notes in the aggregate principal amount of $7,000,000 and 7,304,520
shares of its common stock (Note 7) to the Investors, and used most of the
proceeds therefrom to acquire all of the outstanding capital stock of USTMAN
(Note 2). The notes are due and payable in five years, subject to mandatory
prepayment in certain circumstances. Interest on the notes is 10% per annum for
the first year, payable quarterly, and increases by one percent each year during
the term of the Notes, subject to further adjustment in specified instances. The
notes are secured by the assets of the Company, including the stock of certain
of its subsidiaries, and by the assets of the principal subsidiaries of the
Company, including USTMAN and Watson Systems, Inc. The notes are subject to
mandatory prepayment in the event that the Company completes a public offering
of newly-issued shares of Common Stock (a Stock Offering), or in the event that
one or more persons (other than the Investors or their transferees) acquire at
least 50% of the outstanding Common Stock or of the operating assets of the
Company (a Company Sale). In addition, the Company must apply toward reduction
of principal at least 50% of any excess cash.
During the time that the Senior Subordinated Notes remain outstanding, the
Company is subject to a number of negative covenants, as set forth in the
Securities Purchase Agreement. As of June 30, 1997, the Company was in
compliance or had received a waiver for the covenants. In addition, upon the
occurrence of an Event of Default, as defined in the Securities Purchase
Agreement, the Senior Subordinated Notes can become immediately due and payable.
The note payable to a lending institution is guaranteed by the Small Business
Administration under a loan agreement which permits borrowings up to $500,000.
The note payable is personally guaranteed by two former owners of Watson
Systems. The note contains certain restrictions which, among other things, limit
the amount of salaries, bonuses and dividends payable to officers and directors
of the Company.
The note payable to NDE was issued in connection with the purchase of all
Ustman's capital stock from NDE (Note 2) in May 1997.
Principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30 AMOUNT
-------------------------- --------------
<S> <C>
1998 $ 1,083,000
1999 152,000
2000 106,000
2001 73,000
2002 7,076,000
--------------
$ 8,490,000
==============
</TABLE>
19
<PAGE> 38
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS YEAR ENDED
ENDED JUNE 30 ENDED JUNE 30 SEPTEMBER 30
1997 1996 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State (4,000) (5,000) (5,000)
--------- --------- ---------
Total $ (4,000) $ (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>
NINE MONTHS NINE MONTHS YEAR ENDED
ENDED JUNE 30 ENDED JUNE 30 SEPTEMBER 30
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Benefit from loss before provision for
income taxes computed at statutory rate $ 673,000 $ 393,000 $ 642,000
Nondeductible expense (137,000) -- --
Losses without tax benefit (536,000) (393,000) (642,000)
California franchise tax (4,000) (5,000) (5,000)
----------- ----------- -----------
$ (4,000) $ (5,000) $ (5,000)
=========== =========== ===========
</TABLE>
At June 30, 1997, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $7,500,000 which begin to expire in fiscal
year 2007.
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.
20
<PAGE> 39
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
6. 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 June 30, 1997 and
September 30, 1996 as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $3,015,000 $ 2,864,000
Accrued expenses 54,000 60,000
Book depreciation over tax 56,000 -
Other 28,000 -
---------- ----------
Total deferred tax assets 3,153,000 2,924,000
Valuation allowance (1,415,000) (2,532,000)
---------- ----------
1,738,000 392,000
Deferred tax liabilities:
Amortization of purchased technology (1,738,000) (357,000)
Tax over book depreciation - (35,000)
---------- ----------
Net deferred tax assets $ - $ -
========== ===========
</TABLE>
A valuation reserve of $1,415,000 has been established due to uncertainty as to
the realizability of the Company's net deferred tax assets and liabilities. The
change in the valuation allowance for the nine months ended June 30, 1997 and
the year ended September 30, 1996 is approximately $1,117,000 and $588,000,
respectively.
7. STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
On May 22, 1997, the Company completed the private placement of $7 million
principal amount of its 10% Senior Subordinated Notes (Note 5) due 2002 and
7,304,520 shares of its common stock to the Investors and used most of the
proceeds therefrom to acquire all of the outstanding capital stock of USTMAN.
21
<PAGE> 40
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
SALE OF COMMON STOCK (CONTINUED)
During fiscal 1997, the Company completed four private placement offerings in
which a total of 465,000 shares of common stock were issued to investors in
exchange for $455,000. 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.
If, upon the occurrence of the first Event of Liquidity (as defined), the
Company's cumulative adjusted Earnings Before Taxes, Depreciation and
Amortization (EBTDA) per share is not greater than 90% of the amount calculated
for such date on certain projections provided to the Investors, then the Company
will be obligated to issue additional shares of Common Stock to the Investors in
an amount sufficient to increase the percentage of the Company's Common Stock
issued to the Investors from 40% to the Adjusted Base Ownership Percentage, as
defined. However, in no event shall the Adjusted Base Ownership Percentage be
greater than 49.999%. If the Company pays all principal of and interest on the
Senior Subordinated Notes prior to October 30, 1998 (other than where such
repayment is required as a result of a Stock Offering, Company Sale or
acceleration of the indebtedness pursuant to the Securities Purchase Agreement),
then no adjustment pursuant to the foregoing shall be required.
During fiscal 1996, the Company completed three private placement offerings in
which a total of 1,174,287 shares of common stock were issued to investors in
exchange for $1,866,000. The shares issued have not been registered under the
Securities Act of 1933, as amended (the Act), as they are exempt under
Regulation D promulgated by the Securities and Exchange Commission under the
Act.
In connection with the private placement of its Senior Subordinated Notes of
$7,000,000 and 7,304,520 shares of its common stock, the Company recorded an
original issue discount of $1,000,000 to estimate the value of the 7,304,520
shares of common stock issued in May 1997.
In June 1997, the Investors exercised warrants for a noncash purchase of 33,333
shares of the Company's common stock in order to maintain its 40% ownership of
the outstanding common stock of the Company.
22
<PAGE> 41
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
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 June 30, 1997, 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 originally
expired on December 31, 1995, however, on December 12, 1995 the Board of
Directors extended the expiration date through December 31, 1997.
In connection with a fiscal 1995 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.
On February 6, 1996 35,000 additional warrants were issued at the same price per
unit which are exercisable immediately and expire on February 6, 2001. All
warrants issued to the selling agent remain outstanding at June 30, 1997.
The Company issued warrants for 100,000 shares exercisable at $1.62 per share
through August 1999 in connection with the fiscal 1996 private placements of the
Company's common stock. All of these warrants remain outstanding at June 30,
1997.
Pursuant to the Securities Purchase Agreement, the Investors were issued
7,304,520 shares of the Company's Common Stock, representing 40% of the total
number of shares of Common Stock outstanding immediately after such issuance,
and warrants to purchase shares of Common Stock in an amount sufficient, upon
the exercise of any outstanding options and warrants, for the Investors to
maintain its 40% ownership of the outstanding Common Stock of the Company. Such
warrants will be at the same price and term as the options or warrants exercised
by third parties.
If, on a Warrant Adjustment Date (as defined), the Company's EBTDA is not
greater than 70% of that anticipated at the time that the Securities Purchase
Agreement was executed, warrants to purchase shares of Common Stock will be
issued to the Investors based upon the amount of such deficiency. The warrants
issued will have an exercise price of $0.001 per share and will be exercisable
at any time. A "Warrant Adjustment Date" is defined as the earlier of (a) the
third anniversary of the date of the Securities Purchase Agreement or such other
date thereafter designated by the Investors, (b) the date of a Stock Offering,
and (c) a Company Sale.
23
<PAGE> 42
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
7. 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 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 June 30, 1997, options
for the purchase of 4,732 shares have been exercised and the remaining options
are exercisable. 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 June 30, 1997, the options are immediately
exercisable and expire at various dates through 1999.
During 1995, the Company granted nonqualified 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 June 30, 1997, the options are
immediately exercisable and expire at various dates through 2000.
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 June 30, 1997 none of
these options had been exercised.
On January 30, 1996, in connection with the acquisition of Watson Systems the
Company granted nonqualified options for the purchase of 220,000 shares at an
exercise price of $2.50. As of September 30, 1996 the options are immediately
exercisable and expire at various dates through January 30, 2001. At June 30,
1997 none of these options had been exercised.
On February 5, 1996, in connection with a private placement, the Company granted
nonqualified options for the purchase of 285,715 shares at an exercise price of
$1.75 per share. The options are immediately exercisable and expire on November
8, 1996. At June 30, 1997 none of these options had been exercised.
24
<PAGE> 43
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
On July 16, 1996, the Company granted nonqualified options to purchase 5,000
shares to an employee at an exercise price of $1.63. These options are
immediately exercisable and expire on July 16, 2001. At June 30, 1997 none of
these options had been exercised.
The following table summarizes stock option activity for the nine months ended
June 30, 1997 and the year ended September 30, 1996.
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES PER SHARE
------------- ---------------
<S> <C> <C>
Outstanding and exercisable on September 30, 1995 1,543,518 $1.00 to $5.00
Granted 453,715 $1.63 to $1.75
Exercised -- --
Expired or forfeited (1,000) $1.50
------------ --------------
Outstanding and exercisable on September 30, 1996 1,996,233 $1.00 to $5.00
Granted 3,979,950 $0.01 to $4.50
Exercised -- --
Expired or forfeited (1,513,233) $1.63 to $5.00
------------ --------------
Outstanding and exercisable on June 30, 1997 4,462,950 $0.01 to $5.00
============ ==============
</TABLE>
In calculating pro forma information regarding net income and earnings per
share, as required by Statement 123, the fair value was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the options on the Company's common stock:
risk-free interest rate of 5.25%; a dividend yield of 0%; volatility of the
expected market price of the Company's common stock of 0.78; and a
weighted-average expected life of the option of 4.6 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for the nine months ended June 30, 1997 and 1996 and the year
ened September 30, 1996 is summarized below:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS YEAR ENDED
ENDED JUNE 30 ENDED JUNE 30 SEPTEMBER 30
1997 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
Pro forma net loss $3,322,000 $1,370,000 $ 2,137,000
Pro forma net loss per share $ (.28) $ (.14) $ (.23)
</TABLE>
25
<PAGE> 44
Watson General Corporation
Notes to Consolidated Financial Statements (continued)
(Information for the nine months ended June 30, 1996 is unaudited)
8. 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 and certain equipment under noncancelable
operating leases with future minimum payments as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30 AMOUNT
---------------------- ------------
<S> <C>
1998 $ 102,000
1999 109,000
2000 113,000
2001 116,000
2002 59,000
------------
$ 499,000
============
</TABLE>
Rent expense totaled $80,000, $77,000 and $94,000 for the nine months ended June
30, 1997 and 1996, and the year ended September 30, 1996, respectively.
LITIGATION
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.
26
<PAGE> 45
9. SUBSEQUENT EVENTS
As a result of Toxguard filing under Chapter 7 of the Bankruptcy Code (Note 1)
in August 1997, the Company has written off its net investment in Toxguard at
June 30, 1997. Toxguard owed $356,000 to its creditors at the time of filing for
bankruptcy. The bankruptcy proceedings for Toxguard have not yet been approved
and settled by the U.S. Bankruptcy court and accordingly, there is uncertainty
as to the ultimate resolution of creditors' claims. In management's opinion, the
ultimate resolution of the bankruptcy proceedings will not have a material
effect on the consolidated financial statements of the Company and its
subsidiaries.
27
<PAGE> 1
EXHIBIT 10.7
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement") is made as of the third day
of April, 1997, between Watson General Corporation, a California corporation
(the "Company"), and Ronald G. Crane ("Crane").
The Company hereby grants an option to purchase shares of the Company's
Common Stock to Crane, and Crane hereby accepts the option, on the following
terms and conditions:
Section 1. GRANT OF OPTION.
The Company hereby grants to Crane the right and option ("Option") to
purchase up to Seven Hundred Thousand (700,000) shares of the Company's
authorized but unissued Common Stock (the "Shares"), all of which have been
reserved for issuance pursuant to the Option.
Section 2. OPTION PRICE.
The Option price shall be $1.53 per share, representing the closing bid
price of the Common Stock on the last trading day before the issuance of the
Option, subject to adjustment as provided in Section 6 hereof.
Section 3. WHEN OPTION MAY BE EXERCISED.
Each Option issued pursuant to Section I shall be exercisable at any time
and from time to time, as to all or any portion of the Shares, from the date
hereof until the close of business on the fifth anniversary of the date of this
Option.
Section 4. INVESTMENT REPRESENTATION OF EMPLOYEE.
Crane acknowledges that the Option and the Shares issuable upon exercise
of the Option (the "Restricted Securities") have not been registered under the
Securities Act of 1933, as amended (the "Act") or applicable state securities
laws. Crane 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. Crane 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. Crane 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, Crane must continue to own and hold the Restricted
Securities for his own account and interest indefinitely. Crane further
understands that whether an exemption from the registration requirements of the
Act will be available for such future transactions
<PAGE> 2
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.
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.
Section 5. EXERCISE OF OPTION.
The Option, or any portion of the Option, may be exercised from time to
time, in whole or in part, in accordance with the provisions of Section 3 above,
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 or
by check. Upon receipt of notice and payment, the Company shall promptly make
arrangements for the issuance to Crane 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 to the remaining number of Shares. The Company reserves the right to
require Crane, 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 share certificates setting
forth any restrictions upon disposition required by applicable federal or state
securities laws.
Section 6. ADJUSTMENTS.
If all or any portion of the Option 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 of Common Stock shall
be changed into the same or a different number of shares of the same or another
class or classes, Crane 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,
Crane would be holding as a result of any such stock dividend, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of
<PAGE> 3
property for stock, separation, reorganization, or liquidation; provided,
however, that no fractional share shall be issued upon any such exercise.
Section 7. ASSIGNABILITY OF THE OPTION.
The Option may not be assigned, transferred, pledged, hypothecated, sold
or otherwise disposed of, in whole or in part, either voluntarily or
involuntarily, except with the prior written consent of the Company, and the
Option may be exercised, during the lifetime of Crane, only by him. Any
attempted assignment, transfer, pledge, hypothecation, sale or other disposition
of the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect. Notwithstanding the foregoing, upon the death of Crane, the
Option may be exercised by the estate and/or beneficiary of Crane.
Section 8. REGISTRATION RIGHTS.
The Company covenants and agrees to provide the following registration
rights at any time from and after the date of this Agreement to Crane:
8.1 (a) If the Company receives a written request from Crane that
the Company effect a registration statement and any related blue sky
qualification or compliance with respect to all or a part of the Shares of the
Common Stock of the Company issued or issuable upon exercise of the Option
("Registrable Shares"), the Company will, as soon as reasonably practicable,
effect such registration and all such qualifications and compliances as would
reasonably permit or facilitate the sale and distribution of all or such portion
of the Registrable Shares; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance, pursuant
to this Section 8.1: (1) if the Company shall furnish to Crane a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its shareholders for such registration to be effected at such
time, in which event the Company shall have the right to defer the filing of the
registration statement for a period of not more than 60 days after receipt of
the request under this Section 8.1; provided, however, that the Company shall
not utilize this right more than once; (2) if the Company has already effected a
registration pursuant to this Section 8.1; or (3) in any particular
jurisdiction in which the Company would be required to qualify to do business in
effecting such registration, qualification or compliance. Subject to the
foregoing, the Company shall file a registration statement covering the
Registrable Shares as soon as practicable after receipt of the request.
(b) 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 or any registration statement on Form S-4 or similar
form relating to securities issued in connection with a reorganization, the
Company shall, at least seven business days prior
<PAGE> 4
to such filing, give written notice thereof to Crane. Upon receipt by the
Company, not more than four business days after receipt of such notice by Crane,
of a written request by Crane for registration of all or a portion of the
Registrable Shares then owned by Crane, the Company shall include such
Registrable Shares in such registration statement or in a 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 Crane
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 Crane 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 Crane 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 Crane 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 Crane from time to time may reasonably request.
8.4 The Company will 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
Crane), including, without limitation, registration fees, printing expenses,
expenses of blue 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 Crane 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 certified public accountants of the
Company and addressed to Crane 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
<PAGE> 5
respect to such matters as may be reasonably requested; and making available for
inspection by Crane 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 Crane 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 of 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 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 in such registration statement in reliance
upon and in conformity 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.
Section 9. RESERVATION OF SHARES.
<PAGE> 6
The Company will at all times reserve and keep available out of its
authorized capital stock, solely for issuance upon the exercise of this Option,
such number of shares of Common Stock as shall be issuable upon the exercise of
this Option. Such Common Stock, when issued pursuant to this Agreement, shall be
duly and validly issued, fully paid and nonassessable.
Section 10. RIGHTS OF OPTIONEE.
With respect to the shares underlying this Option, prior to the exercise
of this Option, except as otherwise provided herein, Crane shall not be entitled
to any rights of a stockholder of the Company, 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.
Section 11. GENERAL PROVISIONS.
11.1 Severability. If any provision of this agreement is held to
be unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, all other provisions of this agreement shall be deemed valid and
enforceable to the extent possible.
11.2 Successors. This agreement shall inure to the benefit of and
be binding upon the successors of the parties hereto.
11.3 Notices. Any notice or other communication provided for in
this agreement shall be in writing and sent if to the Company to its principal
office at 32-B Mauchly, Irvine, CA 92718, Attention: President, or at such other
address as the Company may from time to time in writing designate, and if to
Crane at 9152 Shady Hollow Way, Fair Oaks, CA 95628 or at such address as Crane
may from time to time in writing designate. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number specified pursuant to this Section 11 and a
verification of receipt is received, (ii) if given by mail, three days after
such communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iii) if given by any other means, when actually
delivered at such address.
11.4 Entire Agreement. This agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
any prior agreements, undertakings, commitments and practices relating to the
subject matter hereof.
11.5 Amendments. No amendment or modification of the terms of
this agreement shall be valid unless made in writing and duly executed by both
parties.
<PAGE> 7
11.6 Governing Law. This agreement shall be governed by and
construed in accordance with the laws of the State of California without regard
to conflicts of law doctrines and any court action arising out of this Agreement
shall be brought in any court of competent jurisdiction within the State of
California, County of Orange.
11.7 Headings. Section and other headings contained in this
agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this agreement.
IN WITNESS WHEREOF, the parties have executed this Option as of the date
first above written.
WATSON GENERAL CORPORATION
By: /s/CHARLES A. WATSON
-----------------------------------
CHARLES A. WATSON, Chairman
/s/ RONALD G. CRANE
---------------------------------------
RONALD G. CRANE
<PAGE> 8
WAIVER OF DEMAND REGISTRATION RIGHT
Provided that this agreement is executed on behalf of Watson General
Corporation, a California corporation (the "Company") and delivered to the
undersigned on or before May 30, 1997, the undersigned hereby agrees to amend
his Stock Option Agreement with the Company dated April 3, 1997 (the "Stock
Option Agreement") as follows:
1. The undersigned hereby waives his right to demand the filing of a
registration statement by the Company, pursuant to Section 8.1 of the Stock
Option Agreement, with respect to the resale by him of all or a portion of his
Registrable Securities (as that term is defined in the Stock Option Agreement).
2. In lieu of such demand registration right, the undersigned shall have
the right, at any time and from time to time, at the election of the
undersigned, to exercise his right for a cashless exercise of all or a portion
of the options subject to the Stock Option Agreement by notifying the Company
that he is exercising a number of options. The number of shares to be issued to
the undersigned shall equal the product of (a) the fair market value per share
less the exercise price, divided by the fair market value per share, times (b)
the number of options to be exercised. For purposes of the foregoing sentence,
the fair market value per share of the Company's Common Stock shall be deemed to
be the average of the closing sale or bid price of the Common Stock for the five
trading days immediately prior to the delivery of such election by the
undersigned to the Company.
All other terms and conditions of the Stock Option Agreement shall remain
unchanged.
/s/RONALD G. CRANE
------------------------------
Dated: May 21, 1997 Ronald G. Crane
AGREED AND ACCEPTED:
WATSON GENERAL CORPORATION
By /s/ DAN R. COOK
------------------------------- Dated: May 21, 1997
Dan R. Cook
<PAGE> 1
EXHIBIT 10.8
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement") is made as of the third day
of April, 1997, between Watson General Corporation, a California corporation
(the "Company"), and Joseph L. Christoffel ("Christoffel ").
The Company hereby grants an option to purchase shares of the Company's
Common Stock to Christoffel , and Christoffel hereby accepts the option, on the
following terms and conditions:
Section 1. GRANT OF OPTION.
The Company hereby grants to Christoffel the right and option ("Option")
to purchase up to Three Hundred Fifty Thousand (350,000) shares of the Company's
authorized but unissued Common Stock (the "Shares"), all of which have been
reserved for issuance pursuant to the Option.
Section 2. OPTION PRICE.
The Option price shall be $1.53 per share, representing the closing bid
price of the Common Stock on the last trading day before the issuance of the
Option, subject to adjustment as provided in Section 6 hereof
Section 3. WHEN OPT10N 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
hereof until the close of business on the fifth anniversary of the date of this
Option.
Section 4. INVESTMENNT REPRESENTATION OF EMPLOYEE.
Christoffel acknowledges that the Option and the Shares issuable upon
exercise of the Option (the "Restricted Securities") have not been registered
under the Securities Act of 1933, as amended (the "Act") or applicable state
securities laws. Christoffel 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. Christoffel 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.
Christoffel 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, Christoffel must continue to
own and hold the Restricted Securities for his own account and interest
indefinitely. Christoffel 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
<PAGE> 2
transaction, the pertinent surrounding facts and circumstances then extant, and
the then applicable law.
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.
Section 5. EXERCISE OF OPTION.
The Option, or any portion of the Option, may be exercised from time to
time, in whole or in part, in accordance with the provisions of Section 3 above,
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 or
by check. Upon receipt of notice and payment, the Company shall promptly make
arrangements for the issuance to Christoffel 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 to the remaining number of Shares. The Company reserves the right to
require Christoffel, 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 share certificates setting
forth any restrictions upon disposition required by applicable federal or state
securities laws.
Section 6. ADJUSTMENTS.
If all or any portion of the Option 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 of Common Stock shall be
changed into the same or a different number of shares of the same or another
class or classes, Christoffel 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, Christoffel would be holding as a result of any such stock
dividend, split-up, recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of
<PAGE> 3
property for stock, separation, reorganization, or liquidation; provided,
however, that no fractional share shall be issued upon any such exercise.
Section 7. ASSIGNABILITY OF THE OPTION.
The Option may not be assigned, transferred, pledged, hypothecated, sold
or otherwise disposed of, in whole or in part, either voluntarily or
involuntarily, except with the prior written consent of the Company, and the
Option may be exercised, during the lifetime of Christoffel, only by him. Any
attempted assignment, transfer, pledge, hypothecation, sale or other disposition
of the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect. Notwithstanding the foregoing, upon the death of Christoffel,
the Option may be exercised by the estate and/or beneficiary of Christoffel.
Section 8. REGISTRATION RIGHTS.
The Company covenants and agrees to provide the following registration
rights at any time from and after the date of this Agreement to Christoffel:
8.1 (a) If the Company receives a written request from
Christoffel that the Company effect a registration statement and any related
blue sky qualification or compliance with respect to all or a part of the Shares
of the Common Stock of the Company issued or issuable upon exercise of the
Option ("Registrable Shares "), the Company will, as soon as reasonably
practicable, effect such registration and all such qualifications and
compliances as would reasonably permit or facilitate the sale and distribution
of all or such portion of the Registrable Shares; provided, however, that the
Company shall not be obligated to effect any such registration, qualification or
compliance, pursuant to this Section 8.1: (1) if the Company shall furnish to
Christoffel a certificate signed by the President of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the registration statement for a period of not more than 60
days after receipt of the request under this Section 8.1; provided, however,
that the Company shall not utilize this right more than once; (2) if the Company
has already effected a registration pursuant to this Section 8.1; or (3) in any
particular jurisdiction in which the Company would be required to qualify to do
business in effecting such registration, qualification or compliance. Subject to
the foregoing, the Company shall file a registration statement covering the
Registrable Shares as soon as practicable after receipt of the request.
(b) 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 or any registration statement on Form S-4 or similar
form relating to securities issued in connection with a reorganization, the
Company shall, at least seven business days prior
<PAGE> 4
to such filing, give written notice thereof to Christoffel. Upon receipt by the
Company, not more than four business days after receipt of such notice by
Christoffel, of a written request by Christoffel for registration of all or a
portion of the Registrable Shares then owned by Christoffel, the Company shall
include such Registrable Shares in such registration statement or in a 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 Christoffel
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 Christoffel 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 Christoffel 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 Christoffel 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 Christoffel from time to time may reasonably request.
8.4 The Company will 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 Christoffel),
including, without limitation, registration fees, printing expenses, expenses of
blue 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 Christoffel 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 certified public accountants of the
Company and addressed to Christoffel and any such underwriters; furnishing an
opinion of counsel
<PAGE> 5
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 Christoffel 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 Christoffel 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 of 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 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 in such registration statement in reliance
upon and in conformity 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.
<PAGE> 6
Section 9. 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 this Option,
such number of shares of Common Stock as shall be issuable upon the exercise of
this Option. Such Common Stock, when issued pursuant to this Agreement, shall be
duly and validly issued, fully paid and nonassessable.
Section 10. RIGHTS OF OPTIONEE.
With respect to the shares underlying this Option, prior to the exercise
of this Option, except as otherwise provided herein, Christoffel shall not be
entitled to any rights of a stockholder of the Company, 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.
Section 11. GENERAL PROVISIONS.
11.1 Severability. If any provision of this agreement is held to
be unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, all other provisions of this agreement shall be deemed valid and
enforceable to the extent possible.
11.2 Successors. This agreement shall inure to the benefit of and
be binding upon the successors of the parties hereto.
11.3 Notices. Any notice or other communication provided for in
this agreement shall be in writing and sent if to the Company to its principal
office at 32-B Mauchly, Irvine, CA 92718, Attention: President, or at such other
address as the Company may from time to time in writing designate, and if to
Christoffel at 4711 Copperfield Circle, Roseville, CA 95746, or at such other
address as Christoffel may from time to time in writing designate. Each such
notice or other communication shall be effective (i) if given by
telecommunication, when transmitted to the applicable number specified pursuant
to this Section 11 and a verification of receipt is received, (ii) if given by
mail, three days after such communication is deposited in the mails with first
class postage prepaid, addressed as aforesaid or (iii) if given by any other
means, when actually delivered at such address.
11.4 Entire Agreement. This agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
any prior agreements, undertakings, commitments and practices relating to the
subject matter hereof.
11.5 Amendments. No amendment or modification of the terms of
this agreement shall be valid unless made in writing and duly executed by both
parties.
<PAGE> 7
11.6 Governing Law. This agreement shall be governed by and
construed in accordance with the laws of the State of California without regard
to conflicts of law doctrines and any court action arising out of this Agreement
shall be brought in any court of competent jurisdiction within the State of
California, County of Orange.
11.7 Headings. Section and other headings contained in this
agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this agreement.
IN WITNESS WHEREOF, the parties have executed this Option as of the date
first above written.
WATSON GENERAL CORPORATION
By: /s/ CHARLES A. WATSON
-----------------------------------
CHARLES A. WATSON, Chairman
/s/ JOSEPH CHRISTOFFEL
-----------------------------------
JOSEPH CHRISTOFFEL
<PAGE> 8
WAIVER OF DEMAND REGISTRATION RIGHT
Provided that this agreement is executed on behalf of Watson General
Corporation, a California corporation (the "Company") and delivered to the
undersigned on or before May 30, 1997, the undersigned hereby agrees to amend
his Stock Option Agreement with the Company dated April 3, 1997 (the "Stock
Option Agreement") as follows:
1. The undersigned hereby waives his right to demand the filing of a
registration statement by the Company, pursuant to Section 8.1 of the Stock
Option Agreement, with respect to the resale by him of all or a portion of his
Registrable Securities (as that term is defined in the Stock Option Agreement).
2. In lieu of such demand registration right, the undersigned shall have
the right, at any time and from time to time, at the election of the
undersigned, to exercise his right for a cashless exercise of all or a portion
of the options subject to the Stock Option Agreement by notifying the Company
that he is exercising a number of options. The number of shares to be issued to
the undersigned shall equal the product of (a) the fair market value per share
less the exercise price, divided by the fair market value per share, times (b)
the number of options to be exercised. For purposes of the foregoing sentence,
the fair market value per share of the Company's Common Stock shall be deemed to
be the average of the closing sale or bid price of the Common Stock for the five
trading days immediately prior to the delivery of such election by the
undersigned to the Company.
All other terms and conditions of the Stock Option Agreement shall remain
unchanged.
Dated: May 21, 1997 /s/ JOSEPH L. CHRISTOFFEL
------------------------------
Joseph L. Christoffel
AGREED AND ACCEPTED:
WATSON GENERAL CORPORATION
By /s/ DAN R. COOK
--------------------------------- Dated: May 21, 1997
Dan R. Cook
<PAGE> 1
EXHIBIT 10.9
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement") is made as of the 21st day
of May, 1997, between Watson General Corporation, a California corporation (the
"Company"), and Dan R. Cook ("Employee").
The Company hereby grants an option to purchase shares of the Company's
Common Stock to Employee, and Employee hereby accepts the option, on the
following terms and conditions:
Section 1. GRANT OF OPTION.
The Company hereby grants to Employee the right and option ("Option") to
purchase up to Six Hundred Thousand (600,000) shares of the Company's authorized
but unissued Common Stock (the "Shares"), all of which have been reserved for
issuance pursuant to the Option.
Section 2. OPTION PRICE.
The Option price shall be $1.00 per share, subject to adjustment as
provided in Section 6 hereof.
Section 3. WHEN OPTION MAY BE EXERCISED.
The Option shall be exercisable as follows:
(a) Provided that Employee is still employed by the Company or
any subsidiary of the Company, Employee shall have the right to purchase up to
150.000 Shares at any time and from time to time, as to all or any portion of
the Shares, from the April 30, 1998 through 5:00 p.m., California time on April
30, 2001.
(b) Provided that Employee is still employed by the Company or
any subsidiary of the Company, Employee shall have the right to purchase up to
150,000 Shares at any time and from time to time, as to all or any portion of
the Shares, from April 30, 1999 through 5:00 p.m., California time, on April 30,
2002.
(c) Provided that Employee is still employed by the Company or
any subsidiary of the Company. Employee shall have the right to purchase up to
150,000 Shares at any time and from time to time, as to all or any portion of
the Shares, from April 30, 2000 through 5:00 p.m., California time, on April 30,
2003.
(d) Provided that Employee is still employed by the Company or
any subsidiary of the Company. Employee shall have the right to purchase up to
150,000 Shares at any time and from time to time, as to all or any portion of
the Shares, from April 30, 2001 through 5:00 p.m., California time, on April 30.
2004.
Section 4. INVESTMENT REPRESENTATION OF EMPLOYEE.
Employee acknowledges that the Option and the Shares issuable upon
exercise of the Option (the "Restricted Securities") have not been registered
under the Securities Act of 1933, as amended (the "Act") or applicable state
securities laws. Employee 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. Employee represents
and warrants that he is
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<PAGE> 2
10.7 Headings. Section and other headings contained in this agreement are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this agreement.
IN WITNESS WHEREOF, the parties, have executed this Option as of the date
first above written.
WATSON GENERAL CORPORATION
By /s/ RONALD G. CRANE
--------------------------------
Ronald G. Crane
/s/ DAN R. COOK
----------------------------------
Dan R. Cook
15
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of May 21,
1997 by and between Watson General Corporation, a California corporation (the
"Company") and Dan R. Cook ("Employee").
WITNESSETH:
WHEREAS, the Company desires to enter into this Employment Agreement with
the Employee and the Employee desires to enter into this Employment Agreement
with the Company, on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties agree as follows:
1. Term. The Company agrees to employ Employee and Employee hereby accepts
such employment, in accordance with the terms of this Agreement, commencing May
22, 1997, and ending May 20, 2001, unless this Agreement is earlier terminated
as provided herein.
2. Services and Exclusivity of Services. So long as this Agreement shall
continue in effect, Employee shall devote Employee's full business time, energy
and ability exclusively to the business, affairs and interests of the Company
and its affiliates or subsidiaries ("Affiliates") and matters related thereto.
shall use Employee's best efforts and abilities to promote the Company's
interests and shall perform the services contemplated by this Agreement in
accordance with policies established by and under the direction of the board of
directors of the Company (the "Board").
Without the prior express written consent of the Board, Employee shall
not, directly or indirectly, during the term of this Agreement, engage in any
activity competitive with or adverse to the Company's business, whether alone,
as a partner, officer, director, employee or significant investor of or in any
other entity. An investment of greater than 5% of the outstanding capital or
equity securities of an entity shall be deemed significant for these purposes.
Notwithstanding anything herein to the contrary, the Employee shall not be
precluded from engaging in other paid or unpaid pursuits outside his employment
with the Company hereunder, provided that such other pursuits (1) do not compete
with the Company, and (2) do not with the Employee's performance of his
employment obligations to the Company under this Agreement, and provided
further, that with respect to all other paid pursuits, the Employee gives prior
written notice of such other paid pursuit(s) to the Company.
The Company acknowledges that the Employee is currently under a two year
contract to provide consulting services to Tanknology Environmental, Inc. The
Company acknowledges that the Employee's fulfillment of his obligations under
such consulting contract, as such obligations have been described to the Company
by the Employee, will not violate any of the Employee's obligations to the
Company hereunder and will not violate any other term or provision of this
Agreement.
Employee represents to the Company that Employee has no other outstanding
commitments inconsistent with any of the terms of this Agreement or the services
to be rendered hereunder.
3. Duties and Responsibilities. Employee shall serve as President of
Watson General or its successor, which in either event shall include the assets
and business of USTMAN Industries (the "Subsidiary"), for the duration of this
Agreement. In the performance of Employee's duties,
1
<PAGE> 2
which shall include the duties usually vested in a president of a corporation,
Employee shall report directly to the Board and shall be subject to the
direction of the Board and shall be subject to the direction of the Board and to
such limits on Employee's authority as the Board may from time to time impose.
Employee agrees to observe and comply with the rules and regulations of
the Company as adopted by the Board respecting the performance of Employee's
duties and agrees to carry out and perform orders, directions and policies of
the Company and its Board as they may be, from time to time, stated either
orally or in writing.
During the term of this Agreement, the Board shall nominate Employee to
serve on the Board.
4. Compensation.
(a) Base Compensation. During the term of this Agreement, the
Company agrees to pay Employee a base salary at the rate of One Hundred Thirty
Thousand Dollars ($130,000) per year, payable in accordance with the Company
practices in effect from time to time (the "Base Salary").
(b) Annual Cash Bonus. During the term of this Agreement, the
Company agrees to pay Employee an annual cash bonus (the "Cash Bonus"), equal to
the following percent of the Company's earnings before income taxes,
depreciation and amortization ("EBTDA") and as further defined in the Securities
Purchase Agreement Dated May 21, 1997 Among Watson General Corporation,
Sagaponack Partners, L.P. and Sagaponack International Partners, L.P., provided
in each case that the EBTDA for such year is at least 90% of the targeted EBTDA
(after employees bonus calculation) for such year as specified in Exhibit A to
this Agreement (which Exhibit is hereby incorporated herein by this reference):
<TABLE>
<S> <C>
Year 1 2.00% of EBTDA
Year 2 1.50% of EBTDA
Year 3 1.25% of EBTDA
Year 4 1.00% of EBTDA
</TABLE>
Year 1 will take into account a credit for the costs of the restructuring of the
Company anticipated to occur during the first three months of this Agreement,
which costs are estimated to be approximately $200,000.
(c) Grant of Common Stock. In consideration for Employee's
execution of this Agreement with the Company, the Company agrees to issue to
Employee an aggregate of Fifty Thousand (50,000) shares of the Company's Common
Stock, or options or warrants to purchase such number of shares, on terms to be
agreed by mutual good faith consent.
(d) Stock Option. Concurrent with the execution of this Agreement
by the parties hereto, the Company shall issue to Employee a stock option in the
form of Exhibit B hereto.
(e) Investment Intent of Employee. Employee acknowledges that the
shares of Common Stock and stock option issuable to him pursuant to this
Agreement and the shares of Common Stock issuable upon exercise of such option
(collectively. the "Restricted Securities") have not been registered under the
Securities Act of 1933, as amended (the "Act"), or applicable state securities
laws. Employee 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. Employee 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
2
<PAGE> 3
public, until such time, if any, as the resale of the Restricted Securities by
him is the subject of an effective registration statement or is otherwise
permitted under the Act. Employee 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, Employee
must continue to own and hold the Restricted Securities for his own account and
interest indefinitely. Employee 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. 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.
(f) Registration Rights. The Company covenants and agrees to
provide the following registration rights at any time from and after the date of
this Agreement to Employee:
(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 or any registration statement on Form S-4, or
similar form 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 Employee. Upon receipt by the Company, not more than
four business days after receipt of such notice by Employee, of a written
request by Employee for registration of all or a portion of the shares of
Common Stock issued to Employee pursuant to this Agreement or issued or issuable
to Employee upon exercise of the option granted pursuant to this Agreement
("Registrable Shares") then owned by Employee, the Company shall include such
Registrable Shares in such registration statement or in a 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 paragraph (f)(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. Notwithstanding anything in this
paragraph (f)(1) to the contrary, Employee shall have no registration rights
with respect to any Registrable Shares which are then eligible for immediate
resale pursuant to Rule 144 under the Act.
(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 Employee 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 Employee 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.
(3) Employee 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 paragraph (f).
The Company agrees to furnish to Employee the number of prospectuses, offering
circulars or other documents, or any amendments
3
<PAGE> 4
or supplements thereto, incident to any registration, qualification or
compliance referred to in this paragraph (f) as Employee from time to time may
reasonably request.
(4) The Company will bear all expenses of registrations,
qualifications or compliance pursuant to this paragraph (f) (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
Employee), including, without limitation, registration fees, printing expenses,
expenses of blue sky or other state securities law registration or compliance,
and legal and auditing fees incurred by the Company in connection therewith.
(5) In connection with any registration of Registrable Shares
pursuant to this paragraph (f), the Company agrees to provide reasonable
cooperation to Employee 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 certified public accountants of the
Company and addressed to Employee 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 Employee and his agents all
financial and other records, corporate documents and properties of the Company
as shall be reasonably requested.
(6) During the effectiveness of a registration statement in
which Registrable Shares are included pursuant to this paragraph (f), the
Company will notify Employee 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.
(7) In the event of the registration of any Registrable Shares
pursuant to this paragraph (f), 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 of 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 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 in such registration statement in reliance
upon and in conformity with written information provided by such Indemnified Pam
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
4
<PAGE> 5
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.
(f) CPA Continuing Education Requirements. During the term of
this Agreement, the Company shall reimburse Employee for the reasonable costs
and expenses incurred by Employee in satisfying Employee's continuing education
requirements as a certified public accountant.
(g) Disability Coverage. The Company shall provide disability
insurance for Employee during the term of this Agreement, which insurance shall
provide not less than 100% of Employee's base salary for the first six months of
disability, 50% for the next six months, and 25% for the next six months.
(h) Additional Benefits. Employee shall also be entitled to all
rights and benefits for which Employee is otherwise eligible under any life,
medical, dental, disability, or insurance plan or policy or other plan or
benefit that the Company or its Affiliates may provide for Employee, which shall
be not less than the benefits provided for senior employees or for employees of
the Company Generally, as from time to time in effect, during the term of this
Agreement (collectively, "Additional Benefits"). The Company reserves the right
to modify, suspend or discontinue any and all of the above referenced benefit
plans, practices, policies and programs at any time (whether before or after
termination of employment) without notice to or recourse by Employee, provided
such modification, suspension or discontinuance applies equally to all employees
of the Company subject to such plan.
(i) Vacation. Employee shall be entitled to paid vacation during
employment in accordance with the policies and practices of the Company.
(j) Key Man Insurance. During the term of this Agreement, the
Company shall have the right to maintain "key man" life insurance on Employee,
and the Company shall be the beneficiary under any such insurance policy.
Employee shall reasonably cooperate with the Company in connection with the
application for such insurance.
5. Termination. This Agreement and all obligations hereunder (except the
obligations contained in Sections 7, 8, 9, 10 and 11 (Confidential Information,
Inventions and Patents, No Solicitation of Customers, Noninterference with
Employees and Assistance in Patent Applications) which shall survive any
termination hereunder) shall terminate upon the earliest to occur of any of the
following:
(a) Expiration of Term. The expiration of the term provided for
in Section 1 or the voluntary termination by Employee or retirement from the
Company in accordance with the normal retirement policies of the Company.
(b) Death or Disability of Employee. The death or disability of
Employee. For the purposes of this Agreement, disability shall mean the absence
of Employee performing Employee's duties with the Company on a full-time basis
for a period of one hundred twenty (120) or more consecutive business days in
any twelve (12) month period, as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to Employee or
Employee's legal representative (such agreement as to acceptability not to be
withheld unreasonably). If Employee shall become disabled, Employee's
employment may be terminated by written notice from the Company to Employee,
provided that the Company has then in effect the disability insurance provided
for in Section 4(g) of this Agreement.
5
<PAGE> 6
(c) For Cause. The Company may terminate Employee's employment
and all of Employee's rights to receive Base Salary, Cash Bonus and any
Additional Benefits hereunder (to the extent not yet accrued) for cause. For
purposes of this Agreement, the term "cause" shall be defined as any of the
following:
(1) Employee's material breach of any of the duties and
responsibilities under this Agreement (other than as a result of incapacity due
to Employee's disability);
(2) Employee's conviction by or entry of a plea of guilty or
nolo contendere in, a court of competent jurisdiction for a felony.
(3) Employee's commission of an act of fraud upon the Company
or any personal dishonesty, incompetence, negligence, or willful or negligent
misconduct that in the good faith judgment of the Board adversely affects the
Company. including immoderate use of alcoholic beverages or narcotics or other
substance abuse.
(4) Employee's willful failure or refusal to perform
Employee's duties or responsibilities under this Agreement or Employee's
material violation of any duty of loyalty to the Company or a breach of
Employee's fiduciary duty.
Notwithstanding the foregoing, Employee shall not be terminated
for cause pursuant to clauses (1) through (4) of this Section 5(c) unless and
until Employee has received written notice of proposed termination for cause
which specifies in reasonable detail the cause and Employee has had an
opportunity to be heard before the Board of the Company, and thereafter the
Board by a vote of not less than two-thirds of all members present vote to
terminate Employee for cause. Employee shall be deemed to have had such an
opportunity to be heard before the Board if given written or telephonic notice
at least 72 hours in advance of a meeting.
(d) Without Cause. Notwithstanding any other provision of this
Section 5, the Company shall have the right to terminate Employee's employment
with the Company without cause at any time, but any such termination other than
as expressly provided in Section 5(a), (b), or (c) herein shall be without
prejudice to Employee's rights to receive the Base Salary, Cash Bonus and all
other compensation provided under this Agreement for the lesser of twelve (12)
months or the remainder of the term of this Agreement.
(e) Exclusive Remedy. Employee agrees that the payments expressly
provided and contemplated by this Agreement shall constitute the sole and
exclusive obligation of the Company in respect of Employee's employment with and
relationship to the Company and that the payment thereof shall be the sole and
exclusive remedy for any termination of Employee's employment. Employee
covenants not to assert or pursue any other remedies, at law or in equity, with
respect to any termination of employment.
6. Business Expenses. During the term of this Agreement, to the extent
that such expenditures satisfy the criteria under the Internal Revenue Code for
deductibility by the Company (whether or not fully deductible by the Company)
for federal income tax purposes as ordinary and necessary business expenses, the
Company shall reimburse Employee promptly for reasonable business expenditures
made and substantiated in accordance with policies, practices and procedures
established from time to time by the Company generally with respect to other
senior employees and incurred in the pursuit and furtherance of the Company's
business and good will.
7. Confidential Information. Employee acknowledges that the nature of
Employee's engagement by the Company is such that the Employee shall have
access to information of a confidential and/or trade secret nature which has
great value to the Company and which constitutes a substantial basis and
foundation upon which the business of the company is based. Such
6
<PAGE> 7
information includes financial, manufacturing and marketing data, techniques,
processes, formulas, developmental or experimental work, work in process,
methods trade secrets including, without limitation, customer lists and lists of
customer sources), or any other secret or confidential information relating to
the products, services, customers, sales or business affairs of the Company or
its Affiliates (the "Confidential Information"). Employee shall keep all such
Confidential Information in confidence during the term of the this Agreement and
at all times thereafter and shall not disclose any of such Confidential
Information to any other person, except to the extent such disclosure is (i)
necessary to the performance of this Agreement and in furtherance of the
Company's best interests, or (ii) required by applicable law. Upon termination
of Employee's employment with the Company, Employee shall deliver to the Company
all documents, records, notebooks, work papers, and all similar material
containing any of the foregoing information, whether prepared by Employee, the
Company or anyone else, which is in the possession, custody or control of
Employee.
8. Inventions and Patents. Except as may be limited by Section 2870 of the
California Labor Code, all inventions, designs, improvements, patents,
copyrights and discoveries conceived by Employee during the term of this
Agreement which are useful in or directly or indirectly related to the business
of the Company or to any experimental work carried on by the Company, shall be
the property of the Company. Employee will promptly and fully disclose to the
Company all such inventions, designs, improvements, patents, copyrights and
discoveries (whether developed individually or with other persons) and shall
take all steps necessary and reasonable required to assure the Company's
ownership thereof and to assist the Company in protecting or defending the
Company's proprietary nights therein.
Employee acknowledges hereby receipt of written notice from the Company
pursuant to California Labor Code Section 2872 that this Agreement (to the
extent it requires an assignment or offer to assign rights to any invention of
Employee) does not apply fully to an invention which qualifies fully under
California Labor Code Section 2870.
9. Non-Solicitation of Customers. Employee agrees that for a period of one
year after the termination of employment with the Company, Employee will not, on
behalf of Employee or on behalf of any other individual, association or entity,
call on any of the customers of the Company or any Affiliate of the Company for
purpose of Soliciting or inducing any of such customers to acquire (or
providing to any of such customers) any product or service provided by the
Company or any Affiliate of the Company, nor will Employee in any way, directly
or indirectly as agent or otherwise, in any other manner solicit, influence or
encourage such customers to take away or to divert or direct their business to
Employee or any other person or entity by or with which Employee is employed,
associated, affiliated or otherwise related.
10. Non-interference with Employees. In order to protect the Confidential
Information, Employee agrees that during the term hereof and for a period of one
year thereafter, Employee will not, directly or indirectly, induce or entice any
employee of the Company or ITS Affiliates to leave such employment or cause
anyone else to leave such employment.
11. Assistance in Patent Applications. Employee agrees at the Company's
sole expense to assist the Company in obtaining United States or foreign letters
patent and copyright registrations covering inventions assigned hereunder to the
Company and that Employee's obligation to assist the Company shall continue
beyond the termination of Employee's employment. If the Company is unable
because of Employee's mental or physical incapacity or for any other reason to
secure Employee's signature to apply or to pursue any application for any United
States or foreign letter, patent or copyright registrations covering assigned
to the Company, then Employee hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as Employee's agent and
attorney-in-fact to act for and in Employee's behalf and stead to execute and
file any such applications and to do all other lawfully permitted acts to
further the
7
<PAGE> 8
prosecution and issuance of letters patent or copyright registrations thereon
with the same legal force and effect as if executed by Employee. Employee
thereby waives and quitclaims to the Company any and all claims of any patent or
copyright resulting from any such application for letters patent or copyright
registrations assigned hereunder to the Company. Employee will further assist
the Company in every way to enforce any copyrights or patents obtained
including, without limitation, testifying in any suit or proceeding involving
any of the copyrights or patents or executing any documents deemed necessary by
the Company, all without further consideration but at the expense of the
Company.
12. Remedies. The parties hereto agree that the services to be rendered
by Employee pursuant to this Agreement, and the rights and privileges granted to
the Company pursuant to this Agreement, are of a special, unique, extraordinary
and intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of this
Agreement by Employee. This Section 12 shall not be construed as a waiver of any
other rights or remedies which the Company may have for damages or otherwise.
13. Severability. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
14. Succession. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns and any such successor
or assignee shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" and "assignee" shall
include any person, firm, corporation or other business entity which at any
time, whether by purchase, merger or otherwise, directly or indirectly acquires
the stock of the Company or to which the Company assigns this Agreement by
operation of law or otherwise. The obligations and duties of Employee hereunder
are personal and otherwise not assignable. Employee's and Company's obligations
and representations under this Agreement will survive the termination of
Employees employment, regardless of the manner of such termination
15. Notices. Any notice or other communication provided for in this
Agreement shall be in writing and sent if to the Company to its principal
office to the Attention of the Chairman of the Board or at such other address
as the Company may from time to time in writing designate, and if to Employee at
such address as Employee may from time to time in writing designate. Each such
notice or other communication shall be effective (i) if given by
telecommunication, when transmitted to the applicable number (if any) specified
pursuant to this Section 15 and a verification of receipt is received, (ii) if
given by mail, three days after such communication is deposited in the mails
with first class postage prepaid, addressed as aforesaid or (iii) if given by
any other means, when actually delivered at such address.
16. Entire Agreement. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof and supersedes any prior
agreements, undertakings, commitments and practices relating to Employee's
employment by the Company.
17. Amendments. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and duly executed by both
parties.
8
<PAGE> 9
18. Waiver. No failure on the part of any party to exercise or delay in
exercising any right hereunder shall be deemed a waiver thereof or of any other
right, nor shall any single or partial exercise preclude any further or other
exercise of such right or any other right.
19. Governing Law. This Agreement, and the legal relations between the
parties, shall be governed by and construed in accordance with the laws of the
State of California without regard to conflicts of law doctrines and any court
action arising out of this Agreement, subject to Section 20 below, shall be
brought in any court of competent jurisdiction within the State of California,
County of Orange unless otherwise agreed in writing by the parties.
20. Arbitration. Any dispute, controversy or claim arising out of or in
respect to this Agreement (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof shall at the request of
either party be submitted and settled by arbitration conducted in the city or
county of Colorado in which Company's executive offices are then located in
accordance with the Voluntary Labor Arbitration Rules of the American
Arbitration Association. The arbitration of such issues, including the
determination of any amount of damages suffered, shall be final and binding upon
the parties to the maximum extent permitted by law. Judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. Include only one of the following clauses: Each party shall bear its
own expenses and one-half the aggregate amount of arbitration costs, except that
the arbitrator may in his or her discretion award reasonable expenses (including
reimbursement of the assigned arbitrator costs) to the prevailing party.
21. Withholding. All compensation payable hereunder, including salary and
other benefits, shall be subject to applicable taxes and withholding
requirements.
22. Counterparts. This Agreement and any amendment hereto may be executed
in one or more counterparts. All of such counterparts shall constitute one and
the same agreement and shall become effective when a copy signed by each party
has been delivered to the other party.
23. Headings. Section and other headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning,
or interpretation of this Agreement.
24. Interpretation. The provisions of this Agreement shall be interpreted
in a reasonable manner to effect the intent of the parties.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WATSON GENERAL CORPORATION
-----------------------------------
By /s/ RONALD G. CRANE
---------------------------------
Ronald G. Crane
Its
--------------------------------
/s/ DAN R. COOK
-----------------------------------
Dan R. Cook
Address:
11357 West 76 Street Place
Arvada, Colorado 80005
10
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as
of May 22, 1997 by and between Watson General Corporation, a California
corporation (the "Company") and Ronald G. Crane ("Employee").
WITNESSETH:
WHEREAS, the Company and Employee desire to enter into this
Agreement to assure the Company of the continuing service of Employee and to set
forth the terms and conditions of Employee's employment with the Company;
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the parties agree as follows:
1. Term. The Company agrees to employ Employee and Employee hereby accepts
such employment, in accordance with the terms of this Agreement, commencing May
21, 1997 and ending November 20, 1997, unless this Agreement is earlier
terminated as provided herein. Prior to the commencement of this Agreement,
Employee's employment by the Company shall continue on its current terms and
conditions.
2. Services. So long as this Agreement shall continue in effect, Employee
shall use Employee's best efforts and abilities to promote the Company's
interests and shall perform the services contemplated by his Agreement in
accordance with policies established by and under the direction of the board of
directors of the Company (the "Board").
Without the prior express written authorization of the Board, Employee
shall not, directly or indirectly, during the term of this Agreement, engage in
any activity competitive with the Company's business, whether alone, as a
partner, officer, director, employee or significant investor of or in any other
entity. (An investment of greater than 5% of the outstanding capital or equity
securities of an entity shall be deemed significant for these purposes.)
3. Duties and Responsibilities. Employee shall serve in such executive
capacities and perform such duties as may be reasonably requested by the Board
for the duration of this Agreement. In the performance of Employee's duties,
Employee shall report directly to the Board and shall be subject to the
direction of the Board and to such limits on Employee's authority as the Board
may from time to time impose.
Employee agrees to observe and comply with the rules and regulations of
the Company as adopted by the Board respecting the performance of Employee's
duties and agrees to carry out and perform orders, directions and policies of
the Company and its Board as they may be, from time to time, stated either
orally or in writing.
<PAGE> 2
4. Compensation
(a) Base Compensation. During the term of this Agreement, the
Company agrees to pay Employee a base salary at the rate of Twelve Thousand
Dollars ($12,000) per month, payable on the Company's regularly scheduled pay
days (the "Base Salary").
(b) Additional Benefits. Employee shall also be entitled to all
rights and benefits for which Employee currently is otherwise eligible under any
vacation and holiday leave plan, bonus plan, incentive, participation or extra
compensation plan, profit-sharing plan, life, medical, dental, disability, or
insurance plan or policy or other plan or benefit that the Company may provide
for Employee or for senior employees of the Company, as from time to time in
effect, during the term of this Agreement (collectively, "Additional Benefits").
(c) Overall Qualification. The Company reserves the right to
modify, suspend or discontinue any and all of the above referenced Additional
Benefits at any time (whether before or after termination of employment) without
notice to or recourse by Employee, provided that such modification, suspension
or discontinuance relates to all employees entitled to such benefit.
5. Termination. This Agreement and all obligations hereunder (except the
obligations contained in Sections 7, 8, 9, 10, 11, and 12 (Confidential
Information, Inventions and Patents, Non-Competition, No Solicitation of
Customers, Noninterference with Employees and Assistance in Patent Applications)
which shall survive any termination hereunder) shall terminate upon the earliest
to occur of any of the following:
(a) Expiration of Term. The expiration of the term provided for
in Section 1 or the voluntary termination by Employee or retirement from the
Company in accordance with the normal retirement policies of the Company.
(b) Death or Disability of Employee. The death or disability of
Employee. For the purposes of this Agreement, disability shall mean the absence
of Employee performing Employee's duties with the Company on a full-time basis
for a period of forty (40) or more business days during the term of this
Agreement, as a result of incapacity due to mental or physical illness which is
determined to be total and permanent by a physician selected by the Company or
its insurers and acceptable to Employee or Employee's legal representative (such
agreement as to acceptability not to be withheld unreasonably). If Employee
shall become disabled, Employee's employment may be terminated by written notice
from the Company to Employee.
(c) For Cause. The Company may terminate Employee's employment
and all of Employee's rights to receive Base Salary and any Additional Benefits
hereunder for cause. For purposes of this Agreement, the term "cause" shall be
defined as any of the following:
<PAGE> 3
(i) Employee's conviction by, or entry of a plea of guilty or
nolo contendere in, a court of competent jurisdiction for a felony or
misdemeanor (other than minor traffic violations or similar offenses).
(ii) Employee's commission of an act of fraud upon the Company
or any personal dishonesty, incompetence, negligence, or willful or negligent
misconduct, including immoderate use of alcoholic beverages or narcotics or
other substance abuse, as determined by a court of competent jurisdiction.
(iii) Employee's willful failure or refusal to perform
Employee's duties or responsibilities under this Agreement or Employee's
material violation of any duty of loyalty to the Company or a breach of
Employee's fiduciary duty.
Notwithstanding the foregoing, Employee shall not be terminated
for cause pursuant to clause (iii) of this Section 5(c) unless and until
Employee has received written notice of proposed termination for cause detailing
in reasonable detail the failure(s) and/or refusal(s) and Employee does not cure
such failure(s) and/or refusal(s) within thirty (30) days after such receipt.
(d) Without Cause. Notwithstanding any other provision of this
Section 5, the Company shall have the right to terminate Employee's employment
with the Company without cause at any time, but any such termination other than
as expressly provided in Section 5(a), (b), or (c) herein shall not affect
Employee's rights to receive the Base Salary provided under this Agreement for
the remainder of the term of this Agreement.
6. Business Expenses. During the term of this Agreement, and whether or
not fully deductible by the Company for federal income tax purposes as ordinary
and necessary business expenses, the Company shall reimburse Employee promptly
for reasonable business expenditures, including without limitation travel from
Employee's home to the Company's place of business, made and substantiated in
accordance with current policies, practices and procedures and incurred in the
pursuit and furtherance of the Company's business and good will.
7. Confidential Information. Employee acknowledges that the nature of
Employee's engagement by the Company is such that the Employee shall have access
to information of a confidential and/or trade secret nature which has great
value to the Company and which constitutes a substantial basis and foundation
upon which the business of the company is based. Such information includes
financial, manufacturing and marketing data, techniques, processes, formulas,
developmental or experimental work, work in process, methods, trade secrets
(including, without limitation, customer lists and lists of customer sources),
or any other secret or confidential information relating to the products,
services, customers, sales or business affairs of the Company or its Affiliates
(the "Confidential Information"). Employee shall keep all such Confidential
Information in confidence during the term of the this Agreement and at any time
thereafter and shall not disclose any of such Confidential Information to any
other person, except to the extent
<PAGE> 4
such disclosure is (i) necessary to the performance of this Agreement and in
furtherance of the Company's best interests or (ii) required by applicable law.
Upon termination of Employee's employment with the Company, Employee shall
deliver to the Company all documents, records, notebooks, work papers, and all
similar material containing any of the foregoing information, whether prepared
by Employee, the Company or anyone else.
8. Inventions and Patents. Except as may be limited by Section 2870 of the
California Labor Code, all inventions, designs, improvements, patents,
copyrights and discoveries conceived by Employee during the term of this
Agreement which are useful in or directly or indirectly related to the business
of the Company or to any experimental work carried on by the Company, shall be
the property of the Company. Employee will promptly and fully disclose to the
Company all such inventions, designs, improvements, patents, copyrights and
discoveries (whether developed individually or with other persons) and shall
take all steps necessary and reasonable required to assure the Company's
ownership thereof and to assist the Company in protecting or defending the
Company's proprietary rights therein.
Employee acknowledges hereby receipt of written notice from the Company
pursuant to California Labor Code Section 2872 that this Agreement (to the
extent it requires an assignment or offer to assign rights to any invention of
Employee) does not apply fully to an invention which qualifies fully under
California Labor Code Section 2870.
9. Non-Competition. In order to protect the Confidential Information,
Employee agrees that during the term of Employee's employment, Employee shall
not, directly or indirectly, whether as an owner, partner, shareholder, agent,
employee, creditor, or otherwise, promote participate or engage in any activity
or other business competitive with the Company' business.
10. Non-Solicitation of Customers. Employee agrees that for a period of
one year after the termination of employment with the Company, Employee will
not, on behalf of Employee or on behalf of any other individual, association or
entity, call on any of the customers of the Company or any Affiliate of the
Company for purpose of soliciting or inducing any of such customers to acquire
(or providing to any of such customers) any product or service provided by the
Company or any Affiliate of the Company, nor will Employee in any way, directly
or indirectly, as agent or otherwise, in any other manner solicit, influence or
encourage such customers to take away or to divert or direct their business to
Employee or any other person or entity by or with which Employee is employed,
associated, affiliated or otherwise related.
11. Noninterference with Employees. In order to protect the Confidential
Information, Employee agrees that during the term hereof and for a period of one
year thereafter, Employee will not, directly or indirectly, induce or entice any
employee of the Company or its Affiliates to leave such employment or cause
anyone else to leave such employment.
<PAGE> 5
12. Assistance in Patent Applications. Employee agrees to assist the
Company in obtaining United States or foreign letters patent and copyright
registrations covering inventions assigned hereunder to the Company and that
Employee's obligation to assist the Company shall continue beyond the
termination of Employee's employment. If the Company is unable because of
Employee's mental or physical incapacity or for any other reason to secure
Employee's signature to apply or to pursue any application for any United States
or foreign letters patent or copyright registrations covering inventions
assigned to the Company, then Employee hereby irrevocably designates and
appoints the Company and its duly authorized officers and agents as Employee's
agent and attorney-in-fact to act for and in Employee's behalf and stead to
execute and file any such applications and to do all other lawfully permitted
acts to further the prosecution and issuance of letters patent or copyright
registrations thereon with the same legal force and effect as if executed by
Employee. Employee thereby waives and quitclaims to the Company any and all
claims of any patent or copyright resulting from any such application for
letters patent or copyright registrations assigned hereunder to the Company.
Employee will further assist the Company in every way to enforce any copyrights
or patents obtained including, without limitation, testifying in any suit or
proceeding involving any of the copyrights or patents or executing any documents
deemed necessary by the Company, all without further consideration but at the
expense of the Company.
13. Remedies. The parties hereto agree that the services to be rendered by
Employee pursuant to this Agreement, and the rights and privileges granted to
the Company pursuant to this Agreement, are of a special, unique, extraordinary
and intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of this
Agreement by Employee. This Section 13 shall not be construed as a waiver of any
other rights or remedies which the Company may have for damages or otherwise.
14. Severability. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
15. Succession. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns and any such successor
or assignee shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" and "assignee" shall
include any person, firm, corporation or other business entity which at any
time, whether by purchase, merger or otherwise, directly or indirectly acquires
the stock of the Company or to which the Company assigns this Agreement by
operation of law or otherwise. The obligations and duties of Employee hereunder
are personal and otherwise not assignable. Employee's obligations
<PAGE> 6
and representations under this Agreement will survive the termination of
Employees employment, regardless of the manner of such termination
16. Notices. Any notice or other communication provided for in this
Agreement shall be in writing and sent if to the Company to its principal
offices at 32-B Mauchly, Irvine, California 92718, Attention: President, or at
such other address as the Company may from time to time in writing designate,
and if to Employee at 9152 Shady Hollow Way, Fair Oaks, California 95628, or at
such other address as Employee may from time to time in writing designate. Each
such notice or other communication shall be effective (i) if given by mail,
three days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (ii) if given by any other means,
when actually delivered at such address.
17. Entire Agreement. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof and supersedes any prior
agreements, undertakings, commitments and practices relating to Employee's
employment by the Company.
18. Amendments. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and duly executed by both
parties.
19. Waiver. No failure on the part of any party to exercise or delay in
exercising any right hereunder shall be deemed a waiver thereof or of any other
right, nor shall any single or partial exercise preclude any further or other
exercise of such right or any other right.
20. Governing Law. This Agreement, and the legal relations between the
parties, shall be governed by and construed in accordance with the laws of the
State of California without regard to conflicts of law doctrines and any court
action arising out of this Agreement shall be brought in any court of competent
jurisdiction within the State of California.
21. Arbitration. Any dispute, controversy or claim arising out of or in
respect to this Agreement (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof shall at the request of
either party be submitted and settled by arbitration conducted in Orange County,
California in accordance with the Voluntary Labor Arbitration Rules of the
American Arbitration Association. The arbitration of such issues, including the
determination of any amount of damages suffered, shall be final and binding upon
the parties to the maximum extent permitted by law. Judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. Include only one of the following clauses: Each party shall bear its
own expenses and one-half the aggregate amount of arbitration costs, except that
the arbitrator may in his or her discretion award reasonable expenses (including
reimbursement of the assigned arbitrator costs) to the prevailing party.
<PAGE> 7
22. Withholding. All compensation payable hereunder, including salary and
other benefits, shall be subject to applicable taxes and withholdings.
23. Counterparts. This Agreement and any amendment hereto may be executed
in one or more counterparts. All of such counterparts shall constitute one and
the same agreement and shall become effective when a copy signed by each party
has been delivered to the other party.
24. Headings. Section and other headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
25. Interpretation. The provisions of this Agreement shall be interpreted
in a reasonable manner to effect the intent of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WATSON GENERAL CORPORATION
By /s/ DAN R. COOK
-----------------------------------
Dan R. Cook
Its President
----------------------------------
EMPLOYEE:
/s/ RONALD G. CRANE
-------------------------------------
RONALD G. CRANE
<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as
of May 22, 1997 by and between Watson General Corporation, a California
corporation (the "Company") and Joseph Christoffel ("Employee").
WITNESSETH:
WHEREAS, the Company and Employee desire to enter into this
Agreement to assure the Company of the continuing service of Employee and to set
forth the terms and conditions of Employee's employment with the Company;
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the parties agree as follows:
1. Term. The Company agrees to employ Employee and Employee hereby accepts
such employment, in accordance with the terms of this Agreement, commencing May
21, 1997 and ending November 20, 1997, unless this Agreement is earlier
terminated as provided herein. Prior to the commencement of this Agreement,
Employee's employment by the Company shall continue on its current terms and
conditions.
2. Services. So long as this Agreement shall continue in effect, Employee
shall use Employee's best efforts and abilities to promote the Company's
interests and shall perform the services contemplated by his Agreement in
accordance with policies established by and under the direction of the board of
directors of the Company (the "Board").
Without the prior express written authorization of the Board, Employee
shall not, directly or indirectly, during the term of this Agreement, engage in
any activity competitive with the Company's business, whether alone, as a
partner, officer, director, employee or significant investor of or in any other
entity. (An investment of greater than 5% of the outstanding capital or equity
securities of an entity shall be deemed significant for these purposes.)
3. Duties and Responsibilities. Employee shall serve in such executive
capacities and perform such duties as may be reasonably requested by the Board
for the duration of this Agreement. In the performance of Employee's duties,
Employee shall report directly to the Board and shall be subject to the
direction of the Board and to such limits on Employee's authority as the Board
may from time to time impose.
Employee agrees to observe and comply with the rules and regulations of
the Company as adopted by the Board respecting the performance of Employee's
duties and agrees to carry out and perform orders, directions and policies of
the Company and its Board as they may be, from time to time, stated either
orally or in writing.
<PAGE> 2
4. Compensation
(a) Base Compensation. During the term of this Agreement, the
Company agrees to pay Employee a base salary at the rate of Seven Thousand Five
Hundred Dollars ($7,500) per month, payable on the regularly scheduled pay days
of the Company (the "Base Salary").
(b) Additional Benefits. Employee shall also be entitled to all
rights and benefits for which Employee currently is otherwise eligible under any
vacation or holiday leave plan, bonus plan, incentive, participation or extra
compensation plan, profit-sharing plan, life, medical, dental, disability, or
insurance plan or policy or other plan or benefit that the Company may provide
for Employee or for senior employees of the Company, as from time to time in
effect, during the term of this Agreement (collectively, "Additional Benefits").
(c) Overall Qualification. The Company reserves the right to
modify, suspend or discontinue any and all of the above referenced Additional
Benefits at any time (whether before or after termination of employment) without
notice to or recourse by Employee, provided that such modification, suspension
or discontinuance relates to all employees entitled to such benefit.
5. Termination. This Agreement and all obligations hereunder (except the
obligations contained in Sections 7, 8, 9, 10, 11, and 12 (Confidential
Information, Inventions and Patents, Non-Competition, No Solicitation of
Customers, Noninterference with Employees and Assistance in Patent Applications)
which shall survive any termination hereunder) shall terminate upon the earliest
to occur of any of the following:
(a) Expiration of Term. The expiration of the term provided for
in Section 1 or the voluntary termination by Employee or retirement from the
Company in accordance with the normal retirement policies of the Company.
(b) Death or Disability of Employee. The death or disability of
Employee. For the purposes of this Agreement, disability shall mean the absence
of Employee performing Employee's duties with the Company on a full-time basis
for a period of forty (40) or more business days during the term of this
Agreement, as a result of incapacity due to mental or physical illness which is
determined to be total and permanent by a physician selected by the Company or
its insurers and acceptable to Employee or Employee's legal representative (such
agreement as to acceptability not to be withheld unreasonably). If Employee
shall become disabled, Employee's employment may be terminated by written notice
from the Company to Employee.
(c) For Cause. The Company may terminate Employee's employment
and all of Employee's rights to receive Base Salary and any Additional Benefits
hereunder for cause. For purposes of this Agreement, the term "cause" shall be
defined as any of the following:
<PAGE> 3
(i) Employee's conviction by, or entry of a plea of guilty or
nolo contendere in, a court of competent jurisdiction for a felony or
misdemeanor (other than minor traffic violations or similar offenses).
(ii) Employee's commission of an act of fraud upon the Company
or any personal dishonesty, incompetence, negligence, or willful or negligent
misconduct, including immoderate use of alcoholic beverages or narcotics or
other substance abuse, as determined by a court of competent jurisdiction.
(iii) Employee's willful failure or refusal to perform
Employee's duties or responsibilities under this Agreement or Employee's
material violation of any duty of loyalty to the Company or a breach of
Employee's fiduciary duty.
Notwithstanding the foregoing, Employee shall not be terminated
for cause pursuant to clause (iii) of this Section 5(c) unless and until
Employee has received written notice of proposed termination for cause detailing
in reasonable detail the failure(s) and/or refusal(s) and Employee does not cure
such failure(s) and/or refusal(s) within thirty (30) days after such receipt.
(d) Without Cause. Notwithstanding any other provision of this
Section 5, the Company shall have the right to terminate Employee's employment
with the Company without cause at any time, but any such termination other than
as expressly provided in Section 5(a), (b), or (c) herein shall not affect
Employee's rights to receive the Base Salary provided under this Agreement for
the remainder of the term of this Agreement.
6. Business Expenses. During the term of this Agreement, and whether or
not fully deductible by the Company for federal income tax purposes as ordinary
and necessary business expenses, the Company shall reimburse Employee promptly
for reasonable business expenditures, including without limitation travel from
Employee's home to the Company's place of business, made and substantiated in
accordance with current policies, practices and procedures and incurred in the
pursuit and furtherance of the Company's business and good will.
7. Confidential Information. Employee acknowledges that the nature of
Employee's engagement by the Company is such that the Employee shall have access
to information of a confidential and/or trade secret nature which has great
value to the Company and which constitutes a substantial basis and foundation
upon which the business of the company is based. Such information includes
financial, manufacturing and marketing data, techniques, processes, formulas,
developmental or experimental work, work in process, methods, trade secrets
(including, without limitation, customer lists and lists of customer sources),
or any other secret or confidential information relating to the products,
services, customers, sales or business affairs of the Company or its Affiliates
(the "Confidential Information). Employee shall keep all such Confidential
Information in confidence during the term of this Agreement and at any time
thereafter and shall not disclose any of such Confidential Information to any
other person, except to the extent
<PAGE> 4
such disclosure is (i) necessary to the performance of this Agreement and in
furtherance of the Company's best interests or (ii) required by applicable law.
Upon termination of Employee's employment with the Company, Employee shall
deliver to the Company all documents, records, notebooks, work papers, and all
similar material containing any of the foregoing information, whether prepared
by Employee, the Company or anyone else.
8. Inventions and Patents. Except as may be limited by Section 2870 of the
California Labor Code, all inventions, designs, improvements, patents,
copyrights and discoveries conceived by Employee during the term of this
Agreement which are useful in or directly or indirectly related to the business
of the Company or to any experimental work carried on by the Company, shall be
the property of the Company. Employee will promptly and fully disclose to the
Company all such inventions, designs, improvements, patents, copyrights and
discoveries (whether developed individually or with other persons) and shall
take all steps necessary and reasonable required to assure the Company's
ownership thereof and to assist the Company in protecting or defending the
Company's proprietary rights therein.
Employee acknowledges hereby receipt of written notice from the Company
pursuant to California Labor Code Section 2872 that this Agreement (to the
extent it requires an assignment or offer to assign rights to any invention of
Employee) does not apply fully to an invention which qualifies fully under
California Labor Code Section 2870.
9. Non-Competition. In order to protect the Confidential Information,
Employee agrees that during the term of Employee's employment, Employee shall
not, directly or indirectly, whether as an owner, partner, shareholder, agent,
employee, creditor, or otherwise, promote, participate or engage in any activity
or other business competitive with the Company business.
10. Non-Solicitation of Customers. Employee agrees that for a period of
one year after the termination of employment with the Company, Employee will
not, on behalf of Employee or on behalf of any other individual, association or
entity, call on any of the customers of the Company or any Affiliate of the
Company for purpose of soliciting or inducing any of such customers to acquire
(or providing to any of such customers) any product or service provided by the
Company or any Affiliate of the Company, nor will Employee in any way, directly
or indirectly, as agent or otherwise, in any other manner solicit, influence or
encourage such customers to take away or to divert or direct their business to
Employee or any other person or entity by or with which Employee is employed,
associated, affiliated or otherwise related.
11. Noninterference with Employees. In order to protect the Confidential
Information, Employee agrees that during the term hereof and for a period of one
year thereafter, Employee will not, directly or indirectly, induce or entice any
employee of the Company or its Affiliates to leave such employment or cause
anyone else to leave such employment.
<PAGE> 5
12. Assistance in Patent Applications. Employee agrees to assist the
Company in obtaining United States or foreign letters patent and copyright
registrations covering inventions assigned hereunder to the Company and that
Employee's obligation to assist the Company shall continue beyond the
termination of Employee's employment. If the Company is unable because of
Employee's mental or physical incapacity or for any other reason to secure
Employee's signature to apply or to pursue any application for any United States
or foreign letters patent or copyright registrations covering inventions
assigned to the Company, then Employee hereby irrevocably designates and
appoints the Company and its duly authorized officers and agents as Employee's
agent and attorney-in-fact to act for and in Employee's behalf and stead to
execute and file any such applications and to do all other lawfully permitted
acts to further the prosecution and issuance of letters patent or copyright
registrations thereon with the same legal force and effect as if executed by
Employee. Employee thereby waives and quitclaims to the Company any and all
claims of any patent or copyright resulting from any such application for
letters patent or copyright registrations assigned hereunder to the Company.
Employee will further assist the Company in every way to enforce any copyrights
or patents obtained including, without limitation, testifying in any suit or
proceeding involving any of the copyrights or patents or executing any documents
deemed necessary by the Company, all without further consideration but at the
expense of the Company.
13. Remedies. The parties hereto agree that the services to be rendered by
Employee pursuant to this Agreement, and the rights and privileges granted to
the Company pursuant to this Agreement, are of a special, unique, extraordinary
and intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of this
Agreement by Employee. This Section 13 shall not be construed as a waiver of any
other rights or remedies which the Company may have for damages or otherwise.
14. Severability. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
15. Succession. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns and any such successor
or assignee shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" and "assignee" shall
include any person, firm, corporation or other business entity which at any
time, whether by purchase, merger or otherwise, directly or indirectly acquires
the stock of the Company or to which the Company assigns this Agreement by
operation of law or otherwise. The obligations and duties of Employee hereunder
are personal and otherwise not assignable. Employee's obligations
<PAGE> 6
and representations under this Agreement will survive the termination of
Employees employment, regardless of the manner of such termination.
16. Notices. Any notice or other communication provided for in this
Agreement shall be in writing and sent if to the Company to its principal
offices at 32-B Mauchly, Irvine, California 92718, Attention: President, or at
such other address as the Company may from time to time in writing designate,
and if to Employee at 4711 Copperfield Circle, Roseville, California 95746, or
at such other address as Employee may from time to time in writing designate.
Each such notice or other communication shall be effective (i) if given by mail,
three days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (ii) if given by any other means,
when actually delivered at such address.
17. Entire Agreement. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof and supersedes any prior
agreements, undertakings, commitments and practices relating to Employee's
employment by the Company.
18. Amendments. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and duly executed by both
parties.
19. Waiver. No failure on the part of any party to exercise or delay in
exercising any right hereunder shall be deemed a waiver thereof or of any other
right, nor shall any single or partial exercise preclude any further or other
exercise of such right or any other right.
20. Governing Law. This Agreement, and the legal relations between the
parties, shall be governed by and construed in accordance with the laws of the
State of California without regard to conflicts of law doctrines and any court
action arising out of this Agreement shall be brought in any court of competent
jurisdiction within the State of California.
21. Arbitration. Any dispute, controversy or claim arising out of or in
respect to this Agreement (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof shall at the request of
either party be submitted and settled by arbitration conducted in Orange County,
California in accordance with the Voluntary Labor Arbitration Rules of the
American Arbitration Association. The arbitration of such issues, including the
determination of any amount of damages suffered, shall be final and binding upon
the parties to the maximum extent permitted by law. Judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. Include only one of the following clauses: Each party shall bear its
own expenses and one-half the aggregate amount of arbitration costs, except that
the arbitrator may in his or her discretion award reasonable expenses (including
reimbursement of the assigned arbitrator costs) to the prevailing party.
<PAGE> 7
22. Withholding. All compensation payable hereunder, including salary and
other benefits, shall be subject to applicable taxes and withholdings.
23. Counterparts. This Agreement and any amendment hereto may be executed
in one or more counterparts. All of such counterparts shall constitute one and
the same agreement and shall become effective when a copy signed by each party
has been delivered to the other party.
24. Headings. Section and other headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
25. Interpretation. The provisions of this Agreement shall be interpreted
in a reasonable manner to effect the intent of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WATSON GENERAL CORPORATION
By /s/ DAN R. COOK
-------------------------------
Dan R. Cook
Its PRESIDENT
------------------------------
EMPLOYEE:
/s/ JOSEPH CHRISTOFFEL
---------------------------------
JOSEPH CHRISTOFFEL
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
A-Accurate Moving, Inc. California Idle Corporation
EnvirAlert, Inc. Delaware
Toxguard Fluid Technologies, Inc. California
Three Generations Moving, Inc. California Idle Corporation
Watson Systems, Inc. Missouri
Watson Value Assets, LLC California
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-64310) of Watson General Corporation and in the related Prospectus of
our report dated September 19, 1997, with respect to the consolidated financial
statements of Watson General Corporation included in this Annual Report (Form
10-KSB) for the nine months ended June 30, 1997.
/s/Ernst & Young LLP
Orange County, California
September 25, 1997
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 799,000
<SECURITIES> 0
<RECEIVABLES> 662,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,879,000
<PP&E> 1,759,000
<DEPRECIATION> 1,004,000
<TOTAL-ASSETS> 11,180,000
<CURRENT-LIABILITIES> 1,998,000
<BONDS> 6,423,000
0
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<COMMON> 10,373,000
<OTHER-SE> (8,048,000)
<TOTAL-LIABILITY-AND-EQUITY> 11,180,000
<SALES> 2,325,000
<TOTAL-REVENUES> 2,325,000
<CGS> 836,000
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<INTEREST-EXPENSE> 172,000
<INCOME-PRETAX> (1,975,000)
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<INCOME-CONTINUING> (1,979,000)
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