WATSON GENERAL CORP, SC 13D, 1997-06-02

WATSON GENERAL CORP
SC 13D, 1997-06-02
HAZARDOUS WASTE MANAGEMENT

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 13D

UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )*

WATSON GENERAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Issuer)

Common Stock, without par value
- --------------------------------------------------------------------------------
(Title of Class of Securities)

942900 10 1
-----------------------------------------
(CUSIP Number)

Stephen E. Newton Heller Ehrman White & McAuliffe 601 South Figueroa Street,
40th Floor Los Angeles, CA 90017-5758 (213) 689-0200
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
-----------------------------------------
May 22, 1997

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ].

NOTE: Six copies of this statement, including all exhibits, should be filed with
the Commission. See Rule 13d-1(a) for other parties to whom copies are to be
sent.

*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).

SEC 1746 (12-91)

<PAGE> 2
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 2 OF 12 PAGES

- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON

Sagaponack Partners, L.P.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (A) [ ]
(B) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*

AF
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION

Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF
SHARES 7,304,520
BENEFICIALLY -----------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 0
PERSON -----------------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER

7,304,520
-----------------------------------------------------------
10 SHARED DISPOSITIVE POWER

0
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

7,304,520
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* [X]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

40%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*

PN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.

<PAGE> 3
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 3 OF 12 PAGES

- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON

RSP Capital, L.L.C.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (A) [ ]
(B) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*

OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION

Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY -----------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 7,304,520
PERSON -----------------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER

0
-----------------------------------------------------------
10 SHARED DISPOSITIVE POWER

7,304,520
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

40%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*

OO
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.

<PAGE> 4
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 4 OF 12 PAGES

- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON

Sagaponack International Holdings, L.L.C.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (A) [ ]
(B) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*

Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY -----------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 0
PERSON -----------------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER

0
-----------------------------------------------------------
10 SHARED DISPOSITIVE POWER

4,065,751
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* [X]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)

- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*

<PAGE> 5
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 5 OF 12 PAGES

- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON

Sagaponack International Partners, L.P.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (A) [ ]
(B) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*

AF
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION

Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY -----------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 0
PERSON -----------------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER

0
-----------------------------------------------------------
10 SHARED DISPOSITIVE POWER

4,065,751
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*

<PAGE> 6
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 6 OF 12 PAGES

- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON

Barry S. Rosenstein I.D. No. ____________

- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (A) [ ]
(B) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*

USA
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY -----------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 7,304,520
PERSON -----------------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER

0
-----------------------------------------------------------
10 SHARED DISPOSITIVE POWER

7,304,520
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

40%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*

IN
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.

<PAGE> 7
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 7 OF 12 PAGES

ITEM 1(A). NAME OF ISSUER:

Watson General Corporation

ITEM 1(B). ADDRESS OF ISSUER'S PRINCIPAL EXECUTIVE OFFICES:

32-B Mauchly, Irvine, California 92718.

ITEM 1(C). TITLE OF CLASS OF EQUITY SECURITIES

Common Stock, no par value (the "Common Stock").

ITEM 2. IDENTITY AND BACKGROUND.

This report on Schedule 13D is filed in connection with the acquisition
of 7,304,520 shares (the "Shares") of the Common Stock of the Issuer by
Sagaponack Partners, L.P., as described in Item 4.

(a) The Reporting Persons are:

Sagaponack Partners, L.P., a Delaware limited partnership ("SPLP");

RSP Capital, L.L.C., a Delaware limited liability company ("RSPC");

Sagaponack International Holdings L.L.C., a Delaware limited liability company
("SIH");

Sagaponack International Partners, L.P., a Cayman Islands limited partnership
("SIP"); and

Barry S. Rosenstein, an individual.

SIH has an option to purchase 55.66075% of the Shares owned by SPLP and
may, therefore, be deemed a beneficial owner of 55.66075% of the Shares. SIP is
the 99% in interest member of SIH, which is managed by the majority in interest
vote of its members, and may be deemed to share dispositive power with respect
to the Shares subject to the option held by SIH and may, therefore, be deemed to
have beneficial ownership of such Shares.

RSPC is the general partner of SPLP and SIP. Mr. Rosenstein is the
Managing Member of RSPC. Mr. Rosenstein and RSPC may be deemed to share voting
and dispositive power with respect to the Shares owned by SPLP and those deemed
to be beneficially owned by SIP and may, therefore, be deemed to have beneficial
ownership of the Shares. Mr. Rosenstein and RSPC disclaim beneficial ownership
of the Shares.

(b) The address of the principal offices of SPLP, RSPC, SIH and SIP,
and the principal business address of Mr. Rosenstein, is 170 Columbus Avenue,
Fifth Floor, San Francisco, CA 94133.

(c) The principal business of SPLP, SIP and SIH is investments. The
principal business of RSPC is to invest in and act as managing partner of SPLP
and SIP. Mr. Rosenstein's principal occupation is managing SPLP as the Managing
Member of RSPC.

<PAGE> 8
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 8 OF 12 PAGES

(d) None of the persons identified in Item 2(a) has been convicted in
any criminal proceeding (excluding traffic violations or similar misdemeanors)
during the last 5 years.

(e) None of the persons identified in Item 2(a) was a party to any
civil proceeding during the last 5 years as a result of which it or he has been
subject to a judgment, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to, federal or state securities laws
or finding any violation with respect to such laws.

(f) Mr. Rosenstein is a citizen of the United States of America.

ITEM 3. SOURCE AND AMOUNT OF FUNDS AND OTHER CONSIDERATION.

Reference is made to Item 4 for a description of the transaction in
which SPLP acquired Common Stock of the Issuer and for the definitions of the
capitalized terms not previously defined in this Schedule 13D. The consideration
for the Shares issued to SPLP was the purchase by SPLP and SIP of the Notes,
representing a loan of $7,000,000 to the Issuer from SPLP and SIP. The purchase
of the Notes was funded by a capital call to the limited partners of SPLP and
SIP pursuant to the terms of the respective partnership agreements of those
entities.

ITEM 4. PURPOSE OF TRANSACTION.

On May 22, 1997, the Issuer issued the 7,304,520 Shares to SPLP
pursuant to the terms of a Securities Purchase Agreement dated as of May 22,
1997 (the "Purchase Agreement") among the Issuer, SPLP and SIP. Under the
Purchase Agreement, SPLP and SIP made a term loan of $7,000,000 to the Issuer by
means of purchases of Senior Subordinated Notes of the Issuer (the "Notes"). The
Shares, representing 40% of the issued and outstanding Common Stock immediately
following their issuance, were issued in consideration of the purchase of the
Notes by SPLP and SIP. The Issuer also issued to SPLP warrants to purchase
2,625,432 shares of Common Stock (the "Warrants") exercisable at the times and
prices, and to the extent, that other options and warrants outstanding at the
date of the Purchase Agreement are subsequently exercised. The Warrants were
issued under a Warrant Agreement dated May 22, 1997 (the "Warrant Agreement")
between SPLP and the Issuer.

SPLP acquired the Shares to obtain a controlling equity interest in the
Issuer and for investment. The purpose of the Warrants is to permit SPLP to
maintain its 40% equity interest in the Issuer in the event that additional
shares of Common Stock are issued on the exercise of warrants and options.

The Purchase Agreement provides for the issuance of additional shares
of Common Stock (the "Additional Shares") to SPLP, to increase SPLP's equity
interest up to a maximum of 49.999% of the Issuer's then outstanding Common
Stock in the event that the Issuer fails to achieve certain operating
objectives. The Purchase Agreement also provides for the issuance of additional
Warrants (the "Additional Warrants"). The number of Additional Shares and
Additional Warrants issuable is based on a sliding scale in proportion to the
Issuer's operating shortfall against the operating objectives.

Under an Option Agreement dated May 22, 1997 between SPLP and SIH, (the
"Option Agreement") SPLP granted an option to SIH to purchase 55.66075% of the
Shares and Warrants held by SPLP at the time the option is exercised.

<PAGE> 9
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 9 OF 12 PAGES

In connection with the Purchase Agreement, SPLP and SIP entered into a
Company Agreement dated May 22, 1997 (the "Company Agreement") with the Issuer
and a Shareholders Agreement dated May 22, 1997 (the "Shareholders Agreement")
with certain shareholders of the Issuer having voting power with respect to
approximately 8.4% of the shares of Common Stock outstanding after the issuance
of the Shares to SPLP. The Company Agreement provides that so long as SPLP
and/or SIP or their successors or assigns own any Common Stock, the board of
directors of the Issuer will consist of five directors and that the Issuer and
its management will nominate as candidates for directors (a) two persons
designated by SPLP and/or SIP, (b) one person from a list of five individuals
who have been agreed upon by SPLP and the Issuer, and (c) Dan R. Cook, the
President of the Issuer. The designated individuals are to be nominated as soon
as possible. The shareholders who executed the Shareholders Agreement have
agreed to vote their shares of the Issuer to elect the candidates nominated by
the Issuer and its management under the Company Agreement as long as SPLP and/or
SIP own or control directly or indirectly at least 10% of the outstanding Common
Stock.

ITEM 5. INTEREST IN SECURITIES OF THE ISSUER.

(a) SPLP is the direct beneficial owner of 7,304,520 shares of Common
Stock, constituting 40% of the issued and outstanding Common Stock as of May 22,
1997 (the "Outstanding Shares") based on the information included in the
Issuer's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1997.
The 7,304,520 Shares do not include (a) 2,625,432 shares issuable on exercise of
the Warrants, (b) the Additional Shares and Additional Warrants and (c) the
shares of Common Stock issuable on the exercise of the Additional Warrants. As
described in Item 4, the Warrants are only exercisable at the times and to the
extent that other warrants and options to purchase Common Stock outstanding at
May 22, 1997 are exercised, and there is no assurance that the Warrants will
become exercisable. As described in Item 4, SPLP may become entitled to receive
the Additional Shares and Additional Warrants if the Issuer fails to achieve
certain operating objectives, and there is no assurance that SPLP will become
entitled to receive any Additional Shares and Additional Warrants.

SIH and SIP may be deemed to be beneficial owners of 55.66075%
(4,065,751) of the Shares, constituting 22.3% of the Outstanding Shares, which
it has an option to purchase from SPLP under the Option Agreement. The 4,065,751
Shares do not include (a) shares issuable on exercise of the Warrants which are
subject to the Option Agreement, (b) the Additional Shares and Additional
Warrants which, if issued, may be subject to the Option Agreement and (c) the
shares of Common Stock issuable on the exercise of the Additional Warrants which
may become subject to the Option Agreement. As described in Item 4, the Warrants
are only exercisable at the times and to the extent that other warrants and
options to purchase Common Stock outstanding at May 22, 1997 are exercised, and
there is no assurance that the Warrants will become exercisable. As described in
Item 4, SPLP may become entitled to receive the Additional Shares and Additional
Warrants if the Issuer fails to achieve certain operating objectives, and there
is no assurance that SPLP will become entitled to receive any Additional Shares
and Additional Warrants.

By virtue of the relationships described in Item 2, Barry S. Rosenstein
and RSPC may be deemed to share indirect ownership of the Shares owned directly
beneficially by SPLP and the Shares deemed to be owned by SIP. Mr. Rosenstein
and RSPC disclaim all such beneficial ownership.

(b) SPLP has the sole power to vote and direct the disposition of the
7,304,520 Shares, and SIH may be deemed to have the sole power, and SIP may be
deemed to share the power, to direct the disposition of the 4,065,751 Shares
subject to the Option Agreement, excluding in each case (a) shares issuable on
exercise of the Warrants, (b) the Additional Shares and Additional Warrants and
(c) the shares of Common Stock issuable on the exercise of the Additional
Warrants. By virtue of the relationships described in Item 2, Barry S.
Rosenstein and

<PAGE> 10
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 10 OF 12 PAGES

RSPC may be deemed to share the power to vote and direct the
disposition of the Shares directly beneficially owned by SPLP and to share the
power to direct the disposition of the Shares deemed to be beneficially owned by
SIH and SIP.

(c) None of the persons named in response to Item 5(a) effected any
transactions in the securities of the Issuer during the past 60 days other than
the transactions described in Item 4.

(d) Not applicable.

(e) Not applicable.

ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS
WITH RESPECT TO SECURITIES OF THE ISSUER.

The Purchase Agreement includes agreements with respect to the original
issuance of securities and the issuance of additional securities of the Issuer
to SPLP as described in Item 4. The Warrant Agreement and the Warrants provide
for the grant of Warrants and the issuance of Common Stock on the exercise of
the Warrants as described in Item 4. The Company Agreement and the Shareholders
Agreement include Agreements relating to the voting of Common Stock for the
election of directors of the Issuer as described in Item 4. The Option Agreement
grants an option to SIH to purchase securities of the Issuer as described in
Item 4.

ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.

Exhibit 7(a) Securities Purchase Agreement dated as of May 22,
1997 among the Issuer, SPLP and SIP.

Exhibit 7(b) Warrant Agreement dated as of May 22, 1997 between
the Issuer and SPLP.

Exhibit 7(c) Company Agreement dated as of May 22, 1997 among the
Issuer, SPLP and SIP.

Exhibit 7(d) Shareholders Agreement dated as of May 22, 1997 among
SPLP, SIP and certain shareholders of the Issuer.

Exhibit 7(e) Option Agreement dated as of May 22, 1997 between
SPLP and SIH.

Exhibit 7(f) Joint Filing Agreement

<PAGE> 11
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 11 OF 12 PAGES

SIGNATURES

After reasonable inquiry and to the best of my knowledge and belief , I
certify that the information set forth in this statement is true, complete and
correct.

DATED: MAY 30, 1997

SAGAPONACK PARTNERS, L.L.P.

BY: RSP Capital, L.L.C.
its General Partner

BY: /s/ BARRY S. ROSENSTEIN
--------------------------------------
Barry S. Rosenstein
Managing Member, RSP Capital, L.L.C.

RSP CAPITAL, L.L.C.

BY: /s/ BARRY S. ROSENSTEIN
--------------------------------------
Barry S. Rosenstein
Managing Member

SAGAPONACK INTERNATIONAL HOLDINGS, L.L.C.

BY: /s/ BARRY S. ROSENSTEIN
--------------------------------------

NAME: Barry S. Rosenstein
------------------------------------
TITLE: Authorized Officer
-----------------------------------

<PAGE> 12
SCHEDULE 13D

CUSIP NO. 942900 10 1 PAGE 12 OF 12 PAGES

SAGAPONACK INTERNATIONAL PARTNERS, L.P.

BY: RSP Capital, L.L.C.
its General Partner

BY: /s/ BARRY S. ROSENSTEIN
--------------------------------------
Barry S. Rosenstein
Managing Member, RSP Capital, L.L.C.

/s/ BARRY S. ROSENSTEIN
---------------------------------------------
BARRY S. ROSENSTEIN (INDIVIDUALLY)

<PAGE> 1
EXHIBIT 7(a)

================================================================================

SECURITIES PURCHASE AGREEMENT

DATED AS OF

MAY 22, 1997

AMONG

WATSON GENERAL CORPORATION,

SAGAPONACK PARTNERS, L.P.,

AND

SAGAPONACK INTERNATIONAL PARTNERS, L.P.

================================================================================

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1

DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.3 Other Definitional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

SECTION 2

THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1 The Senior Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1.1 The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1.2 Form of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2 The Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2.1 Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.2 Execution of Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.3 Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.4 Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.5 Mutilated or Missing Share Certificates . . . . . . . . . . . . . . . . . . . . . 15
2.2.6 Payment of Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.7 Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.8 Adjustment in Base Ownership Percentage . . . . . . . . . . . . . . . . . . . . . 16
2.3 The Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3.1 Issuance of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.4 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4.1 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4.2 Mechanics of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4.3 Further Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4.4 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.5.1 Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.5.2 Interest Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.5.3 Interest Payment Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6 Mandatory Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6.1 Scheduled Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6.2 Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.7 Overdue Payments; Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>

- i -

<PAGE> 3

<TABLE>
<S> <C>
2.8 Optional Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.8.1 At Any Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.8.2 Effect of Notice of Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.9 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.9.1 Demand Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.9.2 Incidental Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.9.3 Registration Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.9.4 Preparation; Reasonable Investigation. . . . . . . . . . . . . . . . . . . . . . 24
2.9.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.10 Issuance of Adjustment Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

SECTION 3

REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1 Representations and Warranties of Investors . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.1 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.2 Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.3 Legal Status; Qualification. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.4 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.5 Corporate Power and Authority; Governmental or Other Consents . . . . . . . . . . 27
3.1.6 Due Authorization; Validity; Enforceability . . . . . . . . . . . . . . . . . . . 28
3.1.7 Truth and Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2 Representations and Warranties of Company . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2.1 Legal Status; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2.2 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2.3 Corporate Power and Authority; Governmental or Other Consents . . . . . . . . . . 29
3.2.4 Due Authorization; Validity; Enforceability . . . . . . . . . . . . . . . . . . . 29
3.2.5 Ownership of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2.7 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.8 Truth and Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.9 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.11 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.13 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.14 Debt Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.2.15 Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.2.16 Certain Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2.17 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2.18 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.2.19 Hazardous Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.2.20 No Subordination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>

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<TABLE>
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3.2.21 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2.22 Regulations G, U, T and X. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2.23 Investment Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.24 Foreign Investment in Real Property Tax Act. . . . . . . . . . . . . . . . . . . 36
3.2.25 Foreign Corrupt Practices Act. . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.26 Valid Issuance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.27 Acquisition Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.28 Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.2.29 Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.2.30 Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

SECTION 4

CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.1 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.2 Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.3 Executed Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.4 Certified Documents, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.6 Other Acts, Conditions, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.7 Documents in Satisfactory Form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.8 Transaction Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.9 Pro Forma Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.10 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.11 Fees and Disbursements of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.12 California Permit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.13 Waiver of Demand Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

SECTION 5

AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.1 Punctual Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.2 Accounting Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.3 Reporting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.4 Existence; Compliance With Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.6 Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.7 Taxes and Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.8 Notice to Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.9 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.10 Notice to Investors Regarding ERISA Matters. . . . . . . . . . . . . . . . . . . . . . . . . 44
5.11 Visitation Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.12 Performance of Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>

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<TABLE>
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5.13 Worker Adjustment Retraining and Notification Act Notice. . . . . . . . . . . . . . . . . . 45
5.14 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.15 Divestitures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.16 Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

SECTION 6

NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.1 Use of Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.2 Dividends, Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.3 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.4 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.5 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.6 Subsidiaries; Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.7 Guaranteed Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.8 Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.9 Restrictions on Sales of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.10 Management or Consulting Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.11 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.12 Amendments of Corporate Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
6.13 Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
6.14 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
6.15 Sale or Issuance of Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.16 Lease Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.17 Deposit Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

SECTION 7

EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.3 No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7.4 Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

SECTION 8

MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.2 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.3 Costs, Expenses, Management and Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . 56
8.4 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.5 Entire Agreement, Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.6 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>

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<TABLE>
<S> <C> <C>
8.7 Severability of Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.8 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.9 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.10 Incorporation of Exhibits and Schedules by Reference. . . . . . . . . . . . . . . . . . . . 58
8.11 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.12 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

</TABLE>

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<PAGE> 7

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT is entered into as of this
22nd day of May, 1997, by and among WATSON GENERAL CORPORATION, a California
corporation ("Company"), and SAGAPONACK PARTNERS, L.P., a Delaware limited
partnership and SAGAPONACK INTERNATIONAL PARTNERS, L.P., a Cayman Islands
limited partnership (each, an "Investor" and together, the "Investors").

BACKGROUND

Company currently owns three active Subsidiaries, Toxguard
Fluid, Toxguard Systems and Watson Systems. It wishes to divest itself of
Toxguard Fluid and Toxguard Systems and to merge Watson Systems into itself.
In addition, it wishes to acquire all of the shares of stock of Ustman from
Seller and thereupon to merge Ustman into itself. In order to finance these
transactions, Company wishes to borrow $7,000,000. Investors are prepared,
subject to the conditions specified herein, to make such loan.

NOW, THEREFORE, Company and Investors hereby agree as follows:

SECTION

DEFINITIONS

1.1 Certain Defined Terms.

The following terms used in this Agreement have the following
meanings:

"Acquisition" means the acquisition of by Company of all of
the shares of stock of Ustman from Seller pursuant to the Acquisition
Agreement.

"Acquisition Agreement" means an agreement dated May 21, 1997,
pursuant to which Company has agreed to purchase all of the shares of stock of
Ustman from Seller.

"Act" means the Securities Act of 1933, as amended from time
to time, or any successor statute.

"Adjusted Base Ownership Percentage" shall have the meaning
set forth in Section 2.2.8.

"Adjusted Date" shall have the meaning set forth in Section
2.2.8.

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<PAGE> 8

"Adjusted EBTDA" means, at any time, earnings from continuing
operations before taxes, depreciation and amortization for each monthly
accounting period in respect of which Company shall have delivered financial
statements hereunder, computed in accordance with GAAP, but excluding (i) a
one-time restructuring charge of up to $200,000 taken during 1997 in connection
with the closing of Company's Kansas City facility and Company's headquarters
in Irvine, California, (ii) all fees paid from time to time to Management,
(iii) any non-cash accounting charges which in accordance with GAAP arise in
connection with this Agreement, the Acquisition Agreement or the Senior
Subordinated Notes, (iv) any amounts paid to Dan Cook in warrants, options or
common stock pursuant to the Cook Employment Agreement and (v) out-of-pocket
amounts paid in connection with the closing of the transaction contemplated by
the Loan Documents and the Warrant Agreement. If any of the Existing Debt is
repaid prior to the repayment dates set forth in the "Debt Amortization"
schedule set forth in the Projections, an interest expense deduction in the
amount equal to the product of (a) the amount prepaid times (b) the rate at
which the prepared amount bore interest immediately prior to prepayment shall
be made to Adjusted EBTDA.

"Adjusted EBTDA Per Share" means, at any time, Adjusted EBTDA
at such time divided by the average number of shares of stock of Company
outstanding during the immediately preceding twelve-month period on a fully
diluted basis.

"Adjustment Warrants" means the warrants issued pursuant to
Section 2.10.

"Affiliate" means, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including,
with its correlative meanings, "controlled by" and "under common control with")
means possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities,
or partnership or other ownership interests, by contract or otherwise),
provided that, in any event: (a) any Person which owns directly or indirectly
5% or more of the securities having ordinary voting power for the election of
directors or other members of the governing body of a corporation or 5% or more
of the partnership or other ownership interests of any other Person (other than
as a limited partner of such other Person) will be deemed to control such
corporation or other Person and (b) each stockholder, director or officer of
Company or any of its Affiliated Companies shall be deemed to be an Affiliate
of Company and each of such Affiliated Companies.

"Affiliated Companies" of Company means Watson Systems, Inc.
and Ustman, and any Subsidiary of Company or of Watson Systems, Inc. or Ustman
created after the date hereof.

"Agreement" means this Securities Purchase Agreement, as it
may be amended from time to time.

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<PAGE> 9

"Applicable Rate" means (i) for the period from the date
hereof until the first anniversary hereof, 10%; (ii) for the period from said
first anniversary until the second anniversary hereof, 11%; (iii) for the
period from said second anniversary until the third anniversary thereof, 12%;
(iv) for the period from said third anniversary until the fourth anniversary
hereof, 13% and (v) for the period from said fourth anniversary and at all
times thereafter, 14%.

"Balance Sheet Date" has the meaning set forth in Section
3.2.6.

"Bankruptcy Code" means the Bankruptcy Reform Act, Title 11 of
the United States Code, as amended or recodified from time to time, or any
successor statute.

"Base Ownership Percentage" has the meaning set forth in
Section 2.2.1. hereof.

"Board" means the Board of Conveyors of the Federal Reserve
System.

"Business" means the business of Company and its Affiliated
Companies as presently conducted and as proposed to be conducted in the
Business Plan.

"Business Day" means any day on which commercial banks in New
York, New York are required to be open for business.

"Business Plan" means the investment memorandum of Company
dated January 8, 1997, which has been delivered to Investors.

"Capital Expenditure" for any period means the aggregate of
all expenditures (including that portion of Capital Leases which is
capitalized on the consolidated balance sheet of Company and its Affiliated
Companies) by Company and its Affiliated Companies during such period that, in
conformity with GAAP, are included in property, plant and equipment reflected
on the consolidated balance sheet of Company and its Affiliated Companies.

"Capital Lease" as applied to any Person, means any lease of
any property (real, personal or mixed) by that Person as lessee which, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.

"CERCLA" has the meaning set forth in Section 3.2.19.

"Closing Date" means the date on which all of the conditions
precedent set forth in Section 4 have been met and the Loan has been disbursed
to Company hereunder.

"Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute.

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<PAGE> 10

"Common Stock" means Company's Common Stock.

"Company" has the meaning set forth in the first paragraph of
this Agreement.

"Company Agreement" means the Company Agreement between
Company and the Investors.

"Company Pledge Agreement" means an agreement substantially in
the form of Exhibit G, pursuant to which Company has pledged all of the shares
of stock owned by it in its Subsidiaries and all other instruments owned by it
to Investors to secure Company's obligations hereunder and under the Senior
Subordinated Notes.

"Company Sale" means the date on which a Person or group of
Persons (other than the Investors or their transferees) acting in concert shall
have acquired directly or indirectly, and in one or a series of transactions,
at least 50% of (i) the outstanding shares of Common Stock, whether by merger,
purchase or otherwise or (ii) the operating assets of Company.

"Company Security Agreement" means an agreement substantially
in the form of Exhibit H, pursuant to which Company has pledged all of its
personal property including its accounts, contract rights and general
intangibles to Investor to secure Company's obligations hereunder and under the
Senior Subordinated Notes.

"Cook Employment Agreement" means an agreement dated May 21,
1997 between Company and Dan R. Cook.

"Cumulative Adjusted EBTDA" means the total Adjusted EBTDA
from the Closing Date until the first Event of Liquidity.

"Cumulative Adjusted EBTDA Per Share" means the Cumulative
Adjusted EBTDA divided by the average fully diluted number of shares
outstanding from the Closing Dated to the first Event of Liquidity.

"Current Assets" means, at any date of determination thereof,
all amounts that would, in accordance with GAAP, be included as current assets
on a consolidated balance sheet of Company and its Affiliated Companies as of
such date.

"Current Liabilities" means, at any date of determination
thereof, all amounts that would, in accordance with GAAP, be included as
current liabilities on a consolidated balance sheet of Company and its
Affiliated Companies as of such date.

"Deficit Adjustment Factor" means, in the event a Projection
Deficit exists, a rate equal to the sum of (a) the product of (i) 29.76% less
the Stated Base Factor and (ii) the

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<PAGE> 11

Projection Deficit divided by 13.4% and (b) the Stated Base Factor. For
example, if the Stated Base Factor is 11% and the Projection Deficit is 5%, the
Deficit Adjustment Factor shall be 18%, or (a)(i) 29.76% less 11%, or 18.76%,
multiplied by (ii) 5% divided by 13.4%, or 37.31%, the product equal to 7%,
plus (b) 11%.

"Dollars" and "$" mean the lawful money of the United States
of America.

"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor statute.

"ERISA Affiliate" means any company which, as of a given
moment, is a member of a "controlled group of corporations" or a group of
"trades or businesses (whether or not incorporated) which are under common
control" (as defined in Sections 414(b) and (c) of the Code, respectively) of
which Company or any of its Affiliated Companies is a member.

"Events of Default" means each of the events set forth in
Section 7.1.

"Events of Liquidity" means each of (i) a Stock Offering, (ii)
a sale of all or substantially all of Company's assets, (iii) any event
pursuant to which any Person other than the Investors acquire the ability,
directly or indirectly, by contract or otherwise (other than as a result of
owning shares of Common Stock issued to Sagaponack Partners, L.P., pursuant to
Section 2.2.1), to elect or to control a majority of the members of Company's
Board of Directors and (iv) the occurrence of May 22, 2000.

"Excess Cash" means, at any time, (i) with respect to payment
of principal, all cash and cash equivalents of Company existing at the end of a
calendar quarter after expenses of Company, including interest payments, have
been paid or provided for less any sums which Company, in good faith, has
reserved for expenditures in the next two succeeding calendar quarters for a
specific business purpose which are not prohibited pursuant to the terms of
this Agreement and (ii) with respect to payment of interest on the Senior
Subordinated Notes, all cash and cash equivalents of Company existing at the
end of a calendar quarter after expenses of Company (other than interest on the
Senior Subordinated Notes) have been paid or provided for less any sums which
Company, in good faith, has reserved for expenditures in the next two
succeeding calendar quarters for a specific business purpose which are not
prohibited pursuant to the terms of this Agreement.

"Existing Debt" means the Indebtedness described on Schedule
1.2 hereof.

"Fair Market Value" means (a) in the case of the third
anniversary of the date hereof or such other date after the third anniversary
of the date hereof designated by the Investors, the average of the bid and ask
price of Company's securities for the 30 days immediately prior to such date,
(b) in the case of a Stock Offering, the per share offering price of the stock
offered, (c) in the case of a Company Sale which is a sale of outstanding
shares of

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<PAGE> 12

Common Stock, the per share price paid for the shares sold in the Company Sale
and (d) in the case of a Company Sale which is a sale of assets of Company, the
per share price paid for such assets adjusted to take into account the
percentage of assets purchased minus liabilities payable were Company to
liquidate immediately after the Company Sale (for example, if 75% of Company's
assets are purchased, the per share price paid for the assets shall be the
total consideration minus liabilities payable were Company to liquidate
immediately after the Company Sale paid for such assets divided by a number
equal to 75% of the then outstanding shares of Common Stock).

"Financial Statements" means for Ustman, the unaudited income
statements and balance sheets for the twelve month period ending December 31,
1995 and December 31, 1996 and the unaudited income statement and balance sheet
for the three month period ending March 31, 1997 and, for Watson, the audited
income statements, balance sheet and cash flow statements for the twelve month
periods ending September 30, 1994 and September 30, 1995, September 30, 1996
and the unaudited income statement and balance sheet for the six month period
ending March 31, 1997.

"Fiscal Year" means the fiscal year of Company, which shall be
the twelve-month period ending on the last day in the month of September, or
such other fiscal years as Company may from time to time elect.

"GAAP" means generally accepted accounting principles and
practices, consistently applied, as promulgated in (i) the documents of Rule
203 of the Code of Professional Conduct of the American Institute of Certified
Public Accountants, (ii) Statement of Accounting Standards No. 43 "Omnibus
Statement on Auditing Standards" of the Auditing Standards Board of the
American Institute of Certified Public Accountants and (iii) any superseding or
supplemental documentation of equal authority promulgating generally accepted
accounting principles and practices, all as in effect from time to time.
Accounting principles and practices are "consistently applied" when the
accounting principles and practices observed in a current period are comparable
in all material respects to the accounting principles and practices applied in
the preceding period.

"Guaranteed Indebtedness" of any Person means all Indebtedness
(x) of any Person other than such Person and either (y) guaranteed directly or
indirectly in any manner by such Person, or in effect guaranteed directly or
indirectly by such Person through an agreement (a) to pay or purchase such
Indebtedness or to advance or supply funds for the payment or purchase of such
Indebtedness, (b) to purchase, sell or lease (as lessee or lessor) property, or
to purchase or sell services, primarily for the purpose of enabling the debtor
to make payment of such Indebtedness or to assure the holder of such
Indebtedness against loss, (c) to supply funds to or in any other manner invest
in the debtor (including any agreement to pay for property or services
irrespective of whether or not such property is received or such services are
rendered and any agreement to maintain working capital or other balance sheet
condition) or (d) otherwise to assure the holder of such Indebtedness against
loss or (z) secured

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<PAGE> 13

by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any lien, security interest or other
charge or encumbrance upon or in property (including without limitation
accounts and contract rights) owned by such Person, even though such Person
has not assumed or become liable for the payment of such Indebtedness.

"Hazardous Material" means any hazardous or toxic substance,
material or waste which is or becomes regulated by the State of California, any
regional or local governmental authority within the State of California, or the
United States Government and includes, without limitation, any material or
substance that is or becomes defined as a "hazardous substance," "pollutant,"
"contaminant," "toxic chemical," "hazardous material," "toxic substance," or
"hazardous chemical" under (i) CERCLA; (ii) the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. Section 1101 et seq.; (iii) the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq.; (iv)
the Toxic Substance Control Act, 15 U.S.C. Section 2601 et seq.; (v) the
Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et seq.; (vi)
the Federal Water Pollution Control Act, 33 U.S.C. Section 1521 et seq.; (vii)
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.;
(viii) regulations promulgated under any of the above statutes; or (ix) any
applicable state, regional or local statute, ordinance, rule or regulation that
has a scope or purpose similar to those identified above, including, but not
limited to, California Health and Safety Code Sections 25115, 25117, 25249.8,
25316, 25501(j), 25501(k) and 25501.1. The term "Hazardous Material" also
means (i) asbestos, polychlorinated biphenyls ("PCBs") and urea-formaldehyde
and (ii) any substance containing petroleum, as defined in Section 9001(8) of
the Resource Conservation and Recovery Act (42 U.S.C. Section 6991(8)), or 40
C.F.R. Section 280.1, or any derivative of such petroleum. References to any
statute, ordinance, rule or regulation in this definition shall be deemed to
refer to such statute, ordinance, rule or regulation as amended from time to
time, or any successor statute, ordinance, rule or regulation.

"Indebtedness" means, for any Person, (i) all indebtedness or
other obligations of such Person for borrowed money or for the deferred
purchase price of property or services, (ii) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (iii) all obligations
under leases which shall have been or should be, in accordance with GAAP,
recorded as Capital Leases in respect of which such Person is liable as lessee,
(iv) liabilities in respect of unfunded vested benefits under any Plan, (v) all
obligations owed pursuant to any interest rate hedging arrangement or in
respect of any letter of credit established for the account of such Person
(including without limitation all obligations to reimburse the issuer thereof
in respect of amounts drawn thereunder) and (vi) all Guaranteed Indebtedness.

"Indemnified Liabilities" has the meaning set forth in Section 8.4

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<PAGE> 14

"Indemnitees" has the meaning set forth in Section 8.4.

"Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original
issue discount on any Indebtedness and the current interest portion of any
deferred payment obligation) and all but the principal component of rentals in
respect to Capital Leases, paid, accrued or scheduled to be paid or accrued by
Company and its Affiliated Companies during such period, all determined in
accordance with GAAP.

"Investment" as applied to any Person, means any direct or
indirect purchase or other acquisition by that Person of stock or other
securities, or of a beneficial interest in stock or other securities, of any
other Person (other than a Subsidiary), or any direct or indirect loan, advance
(other than advances to employees for moving and travel expenses, drawing
accounts, and similar expenditures in the ordinary course of business) or
capital contribution by that Person to any other Person, including all
Indebtedness and accounts receivable from that other Person which are not
current assets or did not arise from sales of goods or services to that other
Person in the ordinary course of business. The amount of any Investment (other
than loans, advances and accounts receivable) shall be the original cost of
such Investment plus the cost of all additions thereto, and the amount of any
Investment shall be without any adjustments for increases or decreases in
value, or write-ups, write-downs, or write-offs with respect to such
Investment.

"Investor" and "Investors" have the meanings set forth in the
first paragraph of this Agreement.

"Investor's Notice" has the meaning set forth in Section
2.5.3.

"Letter of Intent" means the amended letter of intent dated
April 9, 1997 from the Managing Partner of Investors to the President and Chief
Executive Officer of Company attaching an amended summary term sheet thereto.

"Liabilities" means obligations of any nature, whether
absolute, accrued, contingent or otherwise, whether due or to become due and
whether or not required to be reflected or reserved against on a balance sheet
under GAAP, including without limitation, in the case of Company or any of its
Affiliated Companies, obligations arising from or in connection with the
operation of Company and the Business prior to the consummation of the
Acquisition, for which Company or any of its Affiliated Companies could be
liable after the consummation of the Acquisition, whether or not assumed under
the Acquisition Agreement.

"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind, whether voluntary or involuntary,
including any conditional sale or other

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<PAGE> 15

title retention agreement, any lease in the nature thereof, and the filing of,
or agreement to give, any financing statement under the Uniform Commercial Code
of any jurisdiction.

"Loan" means the total amount advanced by Investors to Company
pursuant to Section 2.1.

"Loan Documents" means this Agreement, the Pledge Agreement,
each Security Agreement and each Senior Subordinated Note.

"Management" means Sagaponack Management Co. Inc.

"Material Agreements" means the Loan Documents and the Warrant
Agreement.

"Multiemployer Plan" has the meaning set forth in Section
3.2.15.

"NDE Note" means a note of Company payable Seller given in
connection with the Acquisition with a maturity of May 21, 1998 and having a
maximum principal amount of $500,000.

"Net Adjustment Percentage" means, for any quarter, the excess
of the Deficit Adjustment Factor over the Stated Base Factor for such quarter.

"Obligations" means all obligations of every nature of Company
from time to time owed to Investor under any of the Loan Documents, including,
without limitation, all obligations of Company under this Agreement and the
Senior Subordinated Note.

"PBGC" means the Pension Benefit Guaranty Corporation or any
successor to its functions.

"Pension Plan" has the meaning set forth in Section 3.2.15.

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<PAGE> 16

"Permitted Senior Debt" means Senior Debt which is incurred by
Company to institutional lenders or other investors approved by Investors in
aggregate principal outstanding amounts not to exceed the following amounts in
the following years:

<TABLE>
<S> <C>
for the period from, the date hereof
until the first anniversary hereof $0

for the period from said first anniversary
until the second anniversary hereof $1,000,000

for the period from said second
anniversary until the third
anniversary thereof $3,000,000

and for the period from said third
succeeding anniversary until the fifth
anniversary hereof $5,000,000;
</TABLE>

provided that no such Permitted Senior Debt may be incurred in any period in
which Cumulative Adjusted EBTDA Per Share does not equal or exceed the
projected aggregate amount thereof as shown on the Projections.

"Permitted Investments" means Investments in: (i) obligations
issued or guaranteed by the United States of America; (ii) certificates of
deposit, bankers acceptances and other "money market instruments" issued by any
bank or trust company organized under the laws of the United States of America
or any state thereof and having capital and surplus in an aggregate amount not
less than $500,000,000; (iii) open market commercial paper bearing the highest
credit rating issued by Standard & Poor's Corp. or by another nationally
recognized credit rating firm; (iv) repurchase agreements entered into with any
bank or trust company organized under the laws of the United States of America
or any state thereof having capital and surplus in an aggregate amount not less
than $500,000,000; (v) shares of "money market funds", each having net assets
of not less than $500,000,000; in each case maturing or being due or payable in
full not more than 180 days after Company's acquisition thereof and (vi) shares
of stock in Affiliated Companies to the extent such shares are pledged to
Investor pursuant to the Pledge Agreement to secure Company's obligations to
Investors hereunder and under the Senior Subordinated Notes. "Permitted
Investments" also means any Investment in a Person (other than an Affiliate
which is not an Affiliated Company) in the ordinary course of business which
does not exceed $100,000.

"Person" means and includes natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts and other organizations, whether or not legal entities, and
governments and agencies and political subdivisions thereof.

- 10 -
<PAGE> 17

"Plan" means an "employee benefit plan" (as defined in Section
3(3) of ERISA) maintained or contributed to by Company or any of its Affiliated
Companies.

"Potential Default" means any condition, event or act which,
with the giving of notice, passage of time or both, would constitute an Event
of Default.

"Prepayment Price" has the meaning set forth in Section 2.8.1.

"Process" means the statistical inventory reconciliation
monthly monitoring process of determining leakage from underground storage
tanks.

"Projection Deficit" means, at any time, the percentage equal
to the excess of 70% of the Cumulative EBTDA Per Share forecast in the
Projections over the actual percentage of Cumulative EBTDA Per Share set forth
in the Projections that is achieved. For example, if the amount of Cumulative
EBTDA Per Share as a percent of that projected is 65%, the Projection Deficit
shall be 5%, or 70% less 65%. At no time shall such Projection Deficit exceed
13.4%.

"Projections" shall mean the projections of Company attached
to this Agreement as Schedule 3.2.29.

"Registration" means registration of Registrable Securities
under the Act.

"Registrable Securities" mean each of the shares of Common
Stock issued pursuant hereto, the Warrants and each share of Common Stock
issued or issuable upon exercise of any of the Warrants which can be registered
under the Securities Act.

"Reportable Event" means a "reportable event" (as defined in
Section 4043(b) of ERISA) with respect to which reporting to the PBGC within 30
days of occurrence has not been waived.

"Securities" means the Senior Subordinated Notes, the Common
Stock issued pursuant thereto and the Warrants.

"Securities Act" means the Securities Act of 1933, as amended.

"Security Agreements" shall mean Company Security Agreement,
the Watson Systems Security Agreement, the Toxguard Fluid Security Agreement
and the Toxguard Systems Security Agreement.

"Seller" means NDE Environmental Corporation, a Delaware
corporation.

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<PAGE> 18

"Senior Debt" means Indebtedness of Company which is senior,
in any way, whether in right of payment or security or otherwise, to the
obligation of Company in respect of the Senior Subordinated Notes, excluding
Indebtedness described on Schedule 1.2.

"Senior Subordinated Debt" means the Indebtedness of Company
created pursuant to this Agreement, including the principal amount of the
Senior Subordinated Notes, and any interest payable thereon.

"Senior Subordinated Note" means any promissory notes
evidencing all or any part of the Senior Subordinated Debt, including the notes
to be issued by Company to the Investors on the Closing Date in the principal
amount of $7,000,000, and any note or notes subsequently issued in place of
such notes.

"Share Certificate" means a certificate representing shares of
Common Stock issued to an Investor hereunder pursuant to Section 2.2.1 in the
form of Exhibit I.

"Shareholders Agreement" means an agreement of even date
herewith among certain holders of Common Stock or warrants to purchase Common
Stock, and each Investor.

"Solvent" means, when used with respect to any Person, that:
(a) the fair valuation of all of its property is in excess of the total amount
of its debts (including contingent liabilities as properly valued) as of the
date solvency is determined under the Bankruptcy Code or any applicable
enactment of the Uniform Fraudulent Transfer Act or similar statute; (b) the
present fair salable value of all of its property is more than the amount that
will be required to pay the Person's existing debts (including contingent
liabilities as properly valued) as they become absolute and matured, as
determined in accordance with any applicable enactment of the Uniform
Fraudulent Conveyance Act or similar statute; (c) it does not intend to incur,
nor believe that it will incur, nor reasonably should believe that it will
incur, debts beyond its ability to pay as they mature, as determined in
accordance with the Bankruptcy Code, any applicable enactment of the Uniform
Fraudulent Conveyance Act, any applicable enactment of the Uniform Fraudulent
Transfer Act or any similar statute and (d) is not engaged in a business or a
transaction or about to be engaged in a business or a transaction for which its
property constitutes (i) unreasonably small capital, for purposes of the
Bankruptcy Code and any applicable enactment of the Uniform Fraudulent
Conveyance Act, or similar statute or (ii) unreasonably small assets, for
purposes of any applicable enactment of the Uniform Fraudulent Transfer Act, or
similar statute.

"Stated Base Factor" means (i) for the period from the date
hereof until the first anniversary hereof, 10%; (ii) for the period from said
first anniversary until the second anniversary hereof, 11%; (iii) for the
period from said second anniversary until the third anniversary thereof, 12%;
(iv) for the period from said third anniversary until the fourth anniversary
hereof, 13% and (v) for the period from said fourth anniversary and at all
times thereafter, 14%.

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<PAGE> 19

"Stock Offering" means an offering, by Company after the date
hereof, of newly-issued shares of Common Stock, to the public pursuant to a
registration statement under the Act.

"Subsidiary" of any Person means a corporation of which more
than 50% of the outstanding shares of capital stock of each class having
ordinary voting power is owned by such Person, by one or more Subsidiaries of
such Person, or by such Person and one or more of its Subsidiaries.

"Toxguard Fluid" means Toxguard Fluid Technologies, Inc., a
California corporation and a wholly owned subsidiary of Company.

"Toxguard Fluid Security Agreement" means an agreement
substantially in the form of Exhibit F, pursuant to which Toxguard Fluid has
pledged all of its personal property assets, including its accounts, contract
rights and general intangibles to Investor to secure Company's obligations in
respect of the Loan.

"Toxguard Systems" means Toxguard Systems, Inc., a Nevada
corporation of which Company owns 96% of the common stock and 87% of the
preferred stock.

"Toxguard Systems Security Agreement" means an agreement
substantially in the form of Exhibit F, pursuant to which Toxguard Systems has
pledged all of its personal property assets, including accounts, contract
rights and general intangibles to Investor to secure Company's obligations in
respect of the Loan.

"Transfer" means the sale, pledge, assignment or other
transfer of the Senior Subordinated Notes, Company's Common Stock issued
pursuant hereto, or the Warrants, in whole or in part, and of the rights of the
holder thereof under any of the foregoing and this Agreement.

"Transfer Agent" means US Stock Transfer Corporation or such
other Person Company contractually designates to perform the duties of a
transfer agent on behalf of Company.

"Ustman" means Ustman Industries, Inc., a Delaware
corporation.

"WARN Act" has the meaning set forth in Section 5.14.

"Warrant Adjustment Amount" means at the time of determination
$7,000,000 minus all principal payments made on the Senior Subordinated Notes
prior thereto.

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<PAGE> 20

"Warrant Adjustment Date" shall mean the earlier of (a) the
third anniversary of the date hereof or such other date after the third
anniversary of the date hereof designated by the Investors, (b) the date of a
Stock Offering and (c) Company Sale.

"Warrant Agreement" means the Warrant Agreement issued by
Company to an Investor in the form of Exhibit K.

"Warrants" means the warrants issued pursuant to the Warrant
Agreement.

"Watson Systems" means Watson Systems, Inc., a Missouri
corporation and a wholly owned subsidiary of Company.

"Watson Systems Security Agreement" means an agreement
substantially in the form of Exhibit F, pursuant to which Watson Systems has
pledged all of its personal property, including its accounts, contract rights
and general intangibles to Investor to secure Company's obligations in respect
of the Loan.

"Welfare Plan" has the meaning set forth in Section 3.2.15.

"Working Capital" means the amount by which Current Assets
exceeds Current Liabilities.

1.2 Accounting Terms.

For purposes of this Agreement, all accounting terms not
otherwise defined herein have the meanings assigned to them in conformity with
GAAP.

1.3 Other Definitional Provisions.

Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, to the singular
include the plural, and to the part include the whole. The term "including" is
not limiting and the term "or" has the inclusive meaning represented by the
term "and/or". The words "hereof", "herein", "hereunder", and similar terms
in this Agreement refer to this Agreement as a whole and not to any particular
provision of this Agreement. References to "Sections", "Exhibits" and
"Schedules" are to Sections, Exhibits and Schedules, respectively, of this
Agreement, unless otherwise specifically provided. Terms defined herein may be
used in the singular or the plural.

- 14 -
<PAGE> 21

SECTION 2

THE SECURITIES

2.1 The Senior Subordinated Note.

2.1.1 The Loan. Investors severally agree to make a term
loan to Company on the Closing Date, upon the terms and conditions of this
Agreement, in the principal amount of $7,000,000. The amount of the Loan shall
be disbursed to Company on the Closing Date, less any fees and expenses payable
by Company pursuant to this Agreement to the extent not otherwise paid by
Company. The amount of the Loan shall be deemed received by Company when such
amount has been wire transferred in accordance with instructions provided by
Company, and each Investor has provided Company with a FedWire identification
number with respect to such wire transfer. Investors and Company agree that
$5,100,000 is the "issue price" for the Senior Subordinated Notes under Section
1273 of the Code, and to report consistently that amount as the "issue price"
of the Senior Subordinated Notes. Investors will provide any independent
appraisal of the "issue price" of the Senior Subordinated Notes required by
Section 1273 of the Code or, in connection with GAAP, any required appraisal of
the fair market value of the Securities, and in such event the appraisal value
shall thereupon be utilized by the Company.

2.1.2 Form of Notes. Company's obligation to repay the Loan
shall be evidenced by a Senior Subordinated Notes in substantially the form of
Exhibit A, in the aggregate principal amount of $7,000,000, registered in the
name of Investors.

2.2 The Common Stock.

2.2.1 Issuance of Common Stock. On the Closing Date, in
consideration of the purchase by Investors of the Senior Subordinated Notes,
Company shall issue to Sagaponack Partners, L.P. 7,304,520 shares of Company's
Common Stock which represent in the aggregate 40% of the issued and outstanding
shares of Company's Common Stock immediately after issuance of such Common
Stock to Sagaponack Partners, L.P. (the "Base Ownership Percentage"). On the
Closing Date, Company shall deliver to Sagaponack Partners, L.P. one or more
Share Certificates representing the Common Stock issued pursuant to this
Section 2.2.1.

2.2.2 Execution of Share Certificates. Share Certificates
may be signed on behalf of Company by any Person, including the Transfer Agent,
authorized by Company to do so. Any Person who, on the actual date of the
execution of a Share Certificate, is authorized by Company to sign the Share
Certificate, may sign on Company's behalf even if such Person was not
authorized to do so on the Closing Date.

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<PAGE> 22

2.2.3 Registration. Company and the Transfer Agent may deem
and treat the registered Investor of a Share Certificate as the absolute owner
for all purposes, notwithstanding any notation of ownership or other writing
thereon made by anyone.

2.2.4 Exchanges. At the option of any Investor, any Share
Certificate issued to such Investor may be exchanged when surrendered at the
principal office of Company or the principal office of the Transfer Agent for
one or more Share Certificates, as the case may be, representing in the
aggregate a shares of Common Stock of a like number and kind in Company by such
Investor. Share Certificates surrendered for exchange shall be canceled by
Company or Company shall cause the Transfer Agent to cancel such Share
Certificates.

2.2.5 Mutilated or Missing Share Certificates. If any of
the Share Certificates shall be mutilated, lost, stolen or destroyed, Company
shall issue, or shall cause the Transfer Agent to issue, in exchange and
substitution for and upon cancellation of such Share Certificates, a new Share
Certificate representing an equivalent number of shares of Common Stock, but
only upon receipt of evidence of such loss, theft or destruction reasonably
satisfactory to Company or, if requested by Company, upon receipt of a duly
executed indemnification agreement reasonably satisfactory to Company or the
Transfer Agent; provided, however, that no Investor shall be required to
deliver an indemnity bond.

2.2.6 Payment of Expenses and Taxes. Company shall pay all
expenses and taxes imposed by law or any governmental agency, including any
documentary stamp taxes, attributable to the issuance of Common Stock pursuant
hereto; provided, that nothing in this Section 2.2.6 shall make Company liable
for any income taxes payable by the Investor and associated with the issuance
of the Common Stock pursuant hereto.

2.2.7 Securities Law Compliance. If the issuance of
any of the Common Stock hereunder requires the registration with, or approval
of, any governmental authority or requires listing on any national securities
exchange or national market system before such Common Stock may be so issued,
Company shall at its own expense cause such Common Stock to be duly registered,
approved or listed, as the case may be, so that such Common Stock may be issued
in accordance with the terms hereof.

2.2.8 Adjustment in Base Ownership Percentage. If upon the
occurrence of the first Event of Liquidity Company has achieved Cumulative
Adjusted EBTDA Per Share not greater than 90% of the Cumulative Adjusted EBTDA
Per Share as calculated for such date with respect to the Projections, the Base
Ownership Percentage shall be changed to a percentage calculated by (i)
determining the percentage by which Cumulative Adjusted EBTDA Per Share was
lower than Cumulative Adjusted EBTDA Per Share as shown for such date on the
Projections (but not lower than 70% of Cumulative Adjusted EBTDA Per Share as
shown for such date on the Projections) and subtracting that percentage from
90%, (ii) dividing such amount by 80%, (iii) adding the result to 100% and (iv)
multiplying such result by the Base Ownership Percentage. The resulting
percentage shall be the "Adjusted Base

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<PAGE> 23

Ownership Percentage". The date upon which the Investor completes this
calculation shall be called the "Adjustment Date". Except as provided below,
on the Adjustment Date Company shall issue to Sagaponack Partners, L.P.
additional shares of Common Stock (the "Adjustment Shares") in an amount that,
together with the shares of Common Stock issued to Sagaponack Partners, L.P. on
the Closing Date, Sagaponack Partners, L.P. will have been issued shares of
Common Stock equal to the Adjusted Base Ownership Percentage. Notwithstanding
the foregoing, if the Adjusted Base Ownership Percentage shall at any time
equal or exceed 50%, the Adjusted Base Ownership Percentage shall thereafter be
49.999%. The Adjustment Shares shall be issued in the same manner as the
shares of Common Stock issued on the Closing Date. Notwithstanding the
foregoing, no adjustment shall be made to the Base Ownership Percentage if
Company pays all principal of and interest on the Senior Subordinated Notes
prior to October 30, 1998 except in the event payment of principal and accrued
interest is required as a result of a Stock Offering, Company Sale or
acceleration of the Indebtedness pursuant hereto.

2.3 The Warrants.

2.3.1 Issuance of Warrants. On the Closing Date Company
shall enter into a Warrant Agreement in the form of Exhibit K and shall issue
to Sagaponack Partners, L.P. Warrants in the amounts set forth in the Warrant
Agreement upon the terms and conditions set forth in the Warrant Agreement.
The aggregate number of Warrants to be issued to Sagaponack Partners, L.P. on
the Closing Date pursuant hereto shall be 2,625,432 (subject to adjustment
pursuant to the terms of the Warrant Agreement) which is an amount which, when
the Warrants are exercised, will keep the aggregate number of shares of Common
Stock plus the shares of Common Stock issuable under the Warrants equal to the
Base Ownership Percentage, assuming all options, warrants and convertible
securities had been exercised or converted, as the case may be. If on the
Adjustment Date an Adjusted Base Ownership Percentage is determined, Company
shall issue to Company additional Warrants such that the total number of
Warrants issued to the Investor which, when exercised, will keep the aggregate
number of shares of Common Stock plus the shares of Common Stock issuable under
the Warrants will be equal to the Adjusted Base Ownership Percentage, assuming
all options, warrants and convertible securities had been exercised or
converted, as the case may be.

2.4 Transfers.

2.4.1 Transfers. After September 21, 1997, either Investor
may make one or more Transfers from time to time to any Person provided that
such Transfer is made in compliance with the Act and any applicable state
securities laws. Company shall cooperate in connection with any such Transfer.
Upon any Transfer, the transferee shall, to the extent of such Transfer, be
entitled to exercise the rights of the Investor making such Transfer and shall
thereafter be deemed an "Investor" under this Agreement.

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<PAGE> 24

2.4.2 Mechanics of Transfer. Company shall keep at its
principal office a register for the registration of any Senior Subordinated
Notes as to both principal and stated interest. If any Investor desires to
make a Transfer, such Investor shall surrender to Company the Senior
Subordinated Note or Notes to be Transferred. Upon such surrender, Company
shall promptly issue a new Senior Subordinated Note or Notes to the transferee
(and to the transferor as to any portion not Transferred) in the form of
Exhibit A in the aggregate principal amount of the Senior Subordinated Note or
Notes surrendered. Company shall register the new Senior Subordinated Notes as
to both principal and stated interest in the names of the transferees (and the
transferor as to any portion not Transferred).

2.4.3 Further Assurance. Company shall, from time to time
at the request of any Investor, execute and deliver to such Investor or to such
party or parties as such Investor may designate, all further instruments as
may, in such Investor's opinion be necessary or advisable to give full force
and effect to any Transfer and shall provide to such Investor or to such party
or parties as such Investor may designate, all such information as such
Investor may request.

2.4.4 Information. In connection with any Transfer, an
Investor may disclose all documents and information which such Investor now has
or may hereafter acquire relating to the Loan, the Loan Documents, Company or
any of its Affiliated Companies or the Business; provided that the Person to
whom such documents and information are disclosed agree to maintain the
confidentiality thereof.

2.5 Interest.

2.5.1 Interest Rate. Except as provided in Sections 2.5.3
and 2.7, each Senior Subordinated Note shall bear interest at a per annum rate
equal to the Applicable Rate in effect from time to time. Interest on the
amount of the Senior Subordinated Notes outstanding from time to time shall be
computed on the basis of a 360-day year, actual days elapsed, from the date of
disbursement of the Loan until repayment.

2.5.2 Interest Payments. The first payment of interest on
the outstanding principal amount of the Senior Subordinated Notes shall be due
and payable by Company to Investors quarterly in arrears commencing on the date
three months after the date hereof and on each subsequent date three months
thereafter until the Loan is paid in full. Notwithstanding the foregoing
unless Company shall have Excess Cash in respect of any quarter it may give
notice to Investor that it wishes to defer the next succeeding interest
payment, and upon the making of such request, the amount of interest then
accrued and unpaid shall be capitalized and bear interest as if it were a
portion of the then outstanding principal amount of the Loan. Each interest
payment hereunder shall be paid by wire transfer in immediately available
funds.

2.5.3 Interest Payment Adjustment. If Company determines
that it is required by the laws or regulations of the United States (or any
political subdivision or taxing authority

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<PAGE> 25

thereof or therein) to withhold any portion of any interest payment to any
Investor, Company shall immediately give such Investor notice of its intention
to withhold (the "Company's Notice"). Within 30 days of receipt of Company's
Notice, such Investor, if it is not a corporation, partnership or other entity
organized under the laws of the United States or any subdivision thereof or is
not otherwise a resident of the United States, may elect, by delivering written
notice to Company (the "Investor's Notice"), to have the amount of such payment
and all succeeding payments increased by an amount such that the amount paid by
Company to such Investor after withholding shall be the same as that which
would have been paid had no withholding occurred. The Investors agree (i) to
take each reasonable measure necessary to avoid Company's obligation to
increase the amount of its payment pursuant to this Section 2.5.3 and (ii) not
to transfer, sell or assign one or more of the Senior Subordinated Notes, or
any portion thereof, to any Person with respect to which Company would be
obligated to increase the amounts of payments pursuant to this Section 2.5.3.

2.6 Mandatory Repayment.

2.6.1 Scheduled Repayments. Company shall repay the
original principal amount of the Senior Subordinated Note together with all
accrued and unpaid interest thereon on the date five (5) years after the date
of this Agreement. Each principal payment hereunder shall be paid by wire
transfer in immediately available funds.

2.6.2 Mandatory Prepayment. Notwithstanding the provisions
of Section 2.6.1, all outstanding principal and interest relating to the Senior
Subordinated Notes shall be due and payable as soon as practicable but in no
event later than 15 Business Days after (i) the closing of a Stock Offering or
(ii) a Company Sale. In addition, at a time when there exists any Excess Cash,
Company shall promptly notify the Investors thereof and shall as soon as
practicable, but in no event later than 15 Business Days thereafter, apply not
less than 50% of such Excess Cash to the prepayment of then outstanding
principal and interest on the Senior Subordinated Notes; provided that
prepayments resulting from Excess Cash shall not be required more than once per
calendar quarter.

2.7 Overdue Payments; Business Days. If any principal amount of,
or interest on, any Senior Subordinated Notes is not paid when due (whether by
acceleration or otherwise), or if any other sum owed to any Investor pursuant
to this Agreement or any other Loan Document is not paid when due, then
interest shall accrue on such delinquent amount from the date such delinquent
amount was due (not giving effect to any grace or cure periods) until paid at a
rate of 4% per annum above the rate on the Senior Subordinated Notes in effect
at the time of the occurrence of such default in payment, compounded quarterly,
or at the maximum rate permitted by law, whichever is less. Whenever any
payment of principal or interest on the Senior Subordinated Notes shall be
stated to be due, or whenever any date specified herein would otherwise occur,
on a day other than a Business Day, such payment shall be made, and such other
date shall be deemed to occur, on the next succeeding Business Day. Any such
extension of time shall be included in the computation of interest payable.

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<PAGE> 26

2.8 Optional Prepayment.

2.8.1 At Any Time. Company may, at its option, prepay all
or any portion of the outstanding principal amount of the Senior Subordinated
Notes, in multiples of $250,000 or the entire principal amount then outstanding
of the Senior Subordinated Notes, upon compliance with the provisions of this
Section 2.8. Upon such prepayment of the Senior Subordinated Notes, Company
shall pay to the holders thereof (i) the amount of principal in respect of the
Senior Subordinated Notes to be prepaid and (ii) the interest relating to such
principal amount which is accrued but unpaid up to and including the date of
prepayment, (the amounts described in clauses (i) and (ii) being collectively
referred to as the "Prepayment Price"). Such prepayment shall be applied to
reduce the principal amounts payable under the Senior Subordinated Notes in the
reverse order in which such amounts are due. At least 30 days written notice
shall be given to the holders of the Senior Subordinated Notes of the election
of Company to prepay the principal amounts, or a permitted portion thereof, of
the Senior Subordinated Notes, specifying the amount to be prepaid and the date
upon which such prepayment is to be made.

2.8.2 Effect of Notice of Prepayment. Once notice of
prepayment is mailed, Senior Subordinated Notes called for prepayment shall
become due and payable on the prepayment date and at the Prepayment Price.
Upon surrender to Company, the Senior Subordinated Notes shall be paid at the
Prepayment Price.

2.9 Registration Rights

2.9.1 Demand Registration

2.9.1.1 Request for Registration. If at any time
Company receives from an Investor or its transferee (the "Initiating Investor")
a written request that Company effect a registration with respect to an
offering of outstanding Registrable Securities, Company shall:

(i) Promptly, but in any event within five
Business Days, give written notice of the proposed Registration to each other
Investor and (ii) as soon as practicable, but in any event within 90 days after
receipt of the request of the Initiating Investor, effect such Registration of
the Registrable Securities of the Initiating Investor together with all or such
portion of the Registrable Securities of any other Investor who has given
written notice to Company within 20 days after receiving such written notice
from Company pursuant to clause (i) above. Such obligation shall include,
without limitation, the execution of an undertaking to file post-effective
amendments and to effect appropriate registrations or qualifications under
applicable blue sky or other state securities laws and appropriate compliance
with exemptive regulations issued under the Act and any other governmental
requirements or regulations. Company shall have the right, exercisable one
time only, to delay the effectiveness of such request of the Initiating
Investor until up to 60 days

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<PAGE> 27

after delivery of the request if the Board of Directors of Company has
determined in good faith that such a Registration would be seriously
detrimental to Company at such time. No further delays after such 60 days
shall be permitted. The Initiating Investor may withdraw the request during
such 60 day period, in which event the Initiating Investor shall not be deemed
to have made the request. Company shall not be obligated to take any action to
effect any Registration pursuant to this Section after the closing of the sale
of Registrable Securities resulting from two previous Registrations effected
pursuant to requests under this Section 2.9.1.1.

2.9.1.2 Underwriting. If the Initiating Investor
intends to use an underwriter to distribute the Registrable Securities covered
by its request, it shall so advise Company in their request and Company shall
include such information in its written notice to the other Investors. In such
event, the right of any Investor to Registration pursuant to this Subsection
shall be conditioned upon such Investor's participation in such underwriting
and the inclusion of all or part of such Investor's Registrable Securities in
the underwriting, unless otherwise mutually agreed by the Initiating Investor
and such Investor. Company shall enter into an underwriting agreement with an
underwriter selected by the Initiating Investor, but subject to the approval of
Company which shall not be unreasonably withheld. The underwriting agreement
may contain provisions regarding indemnification and contribution from Company.
Notwithstanding any other provision of this Subsection, if the underwriter
advises the Initiating Investor and Company in writing that marketing factors
require a limitation of the number of shares to be included in the
underwriting, then shares of Common Stock other than Registrable Securities
shall first be excluded from such Registration to the extent required by such
underwriting limitation. If the underwriter advises the Initiating Investor
that after exclusion of Common Stock other than Registrable Securities, any
portion of the Registrable Securities need to be excluded from the
Registration, then the Initiating Investor shall be entitled, on behalf of all
Investors, either (i) to require that the Registration be deferred for such
period of time as the Initiating Investor, Company and the underwriter may
mutually agree upon, but in no event for more than 90 days from delivery of a
written notice of the Initiating Investor to Company requesting such delay or
(ii) to withdraw the Registration request, in which case it shall not count as
one of the Investors' two demand Registrations. If any Investor Securities
disapproves of the terms of the underwriting, such Investor may elect to
withdraw therefrom by written notice to Company, the underwriter and the
Initiating Investor delivered at least seven days prior to the effective date
of the registration statement. The Registrable Securities so withdrawn also
shall be withdrawn from Registration.

2.9.2 Incidental Registration.

2.9.2.1 If at any time Company proposes to register
any of its securities under the Act, whether or not for sale for its own
account, on a form and in a manner which would permit registration of shares of
Common Stock for sale to the public under the Securities Act, it will each such
time give prompt written notice to the each Investor

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<PAGE> 28

of its intention to do so, describing such securities and specifying the form
and manner and the other relevant facts involved in such proposed registration,
and upon the written request of any Investor delivered to Company within 30
days after the giving of any such notice (which request shall specify the
shares of Common Stock intended to be disposed of by the Investor and the
intended method of disposition thereof), Company will effect the registration
under the Securities Act of all Registrable Securities which Company has been
so requested to register by the Investor to the extent requisite to permit the
disposition (in accordance with the intended methods thereof as aforesaid) of
the Common Stock so to be registered, provided that if, at any time after
giving such written notice of its intention to register any of its securities
and prior to the effective date of the registration statement filed in
connection with such registration, Company shall determine for any reason not
to register such securities, Company may, at its election, give written notice
of such determination to the Investor and thereupon shall be relieved of its
obligation to register any Common Stock in connection with such registration
(but not from its obligation to pay the Registration Expenses already incurred
in connection therewith as provided in Section 2.9.2.2).

2.9.2.2 Company will pay all Registration Expenses in
connection with each Registration of Registrable Securities requested by the
Investor pursuant to this Section 2.9. The term "Registration Expenses" shall
mean all expenses incident to Company's performance of or compliance with this
Section 2.9 including, without limitation, all registration and filing fees;
all fees and expenses of complying with securities or blue sky laws; all
printing expenses; the fees and disbursements of counsel for Company and of its
independent public accountants, including the expenses of any special audits
required by or incident to such performance and compliance; and the reasonable
fees and disbursements of one counsel for each Investor, but excluding any
allocation of Company personnel or other general overhead expenses of Company
or other expenses for the preparation of financial statements or other data
normally prepared by Company in the ordinary course of its business, which
shall be borne by Company in all cases. Registration Expenses shall not
include underwriting discounts and commissions and applicable transfer taxes,
if any, payable pro rata with respect to all shares included in the
distribution; each Investor shall bear its pro rata portion of such discounts,
commissions and taxes.

2.9.3 Registration Procedures.

(a) When Company is required to effect the
Registration of any Registrable Securities as provided in this Section 2.9,
Company will as expeditiously as possible:

(i) prepare and (in any event within 60
days after the end of the period within which requests for registration may be
delivered to Company) file with the Securities and Exchange Commission (the
"Commission") a registration statement on the appropriate form with respect to
such Registrable Securities and cause such registration statement to become
effective as promptly as practicable;

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<PAGE> 29

(ii) prepare and file with Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Securities covered by such
registration statement until the earlier of: (a) such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the seller thereof set forth in such registration
statement or (b) the expiration of nine months after such registration
statement becomes effective;

(iii) furnish to the seller of such
Registrable Securities such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus included in
such registration statement (including each preliminary prospectus and any
summary prospectus), in conformity with the requirements of the Securities Act,
such documents incorporated by reference in such registration statement or
prospectus, and such other documents, as the seller may reasonably request;

(iv) use its best efforts to register or
qualify all Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions within the United
States and its territories as the seller shall reasonably request, and do any
and all other acts and things which may be necessary or advisable to enable the
seller to consummate the disposition in such jurisdictions of its covered by
such registration statement, except that Company shall not for any such purpose
be required to qualify generally to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified, or to subject itself to taxation
in any such jurisdiction, or to consent to general service of process in any
such jurisdiction;

(v) furnish to the seller of Registrable
Securities a signed counterpart, addressed to the seller, of (A) an opinion of
counsel for Company, dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), and (B) a "cold comfort"
letter signed by the independent public accountants who have certified
Company's financial statements included in such registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's
counsel and its accountants' letters delivered to underwriters in underwritten
public offerings of securities and, in the case of the accountants' letter,
such other financial matters, as the seller or any Investor may reasonably
request;

(vi) immediately notify the seller of
Registrable Securities covered by such registration statement, at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of

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<PAGE> 30

which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing, and at
the request of the seller prepare and furnish to the seller a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing; and

(vii) otherwise use its best efforts to
comply with all applicable rules and regulations of the Commission, and make
available to its securities holders, as soon as reasonably practicable, an
earnings statement covering the period of at least 12 months, but not more than
18 months, beginning with the first month of the first fiscal quarter after the
effective date of such registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act.

(b) If Company at any time proposes to register any
of its securities under the Securities Act whether or not for sale for its own
account as contemplated by Section 2.9.2, and such securities are to be
distributed by or through one or more underwriters, Company shall, if requested
by the Investor who requests incidental registration of Registrable Securities
in connection therewith pursuant to Section 2.9.2, arrange for such
underwriters to include such Registrable Securities among those securities to
be distributed by or through such underwriters; provided, however that if the
underwriters shall determine as provided in Section 2.9.2, that the inclusion
of all or a specified portion of such Registrable Securities would adversely
affect such offering, the Investor requesting incidental registration shall
have its Registrable Securities excluded from such underwritten offering on a
pro rata basis with Company's securities. The Investor on whose behalf such
Registrable Securities are to be distributed by such underwriters shall be a
party to any such underwriting agreement and the representations and warranties
by, and the other agreements on the part of, Company to and for the benefit of
such underwriters, shall also be made to and for the benefit of Investor.

(c) If the Investor has requested inclusion of
Registrable Securities in an underwritten offering, such units may be excluded
if all of the following conditions are met:

(i) the managing underwriter shall have
determined (and shall have advised the Investor in writing) that, in its
opinion, the registration and distribution of all or a specified portion of the
Common Stock as part of the proposed distribution of securities by the
underwriters will materially and adversely affect the distribution of such
securities (such opinion to state the specific reasons therefore);

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<PAGE> 31

(ii) Company and the underwriters shall have
first excluded from the proposed offering any securities offered by officers,
directors or holders of securities other than the Investors and

(iii) Company and the underwriters shall
exclude from the proposed offering on a pro-rata basis any securities offered
by Company.

2.9.4 Preparation; Reasonable Investigation.

In connection with the preparation and filing of each
registration statement registering Common Stock under the Securities Act,
Company will give the Investor on whose behalf such units are to be registered
and its underwriter, if any, and its counsel and accountants, the opportunity
to participate in the preparation of such registration statement, each
prospectus included therein or filed with the Commission, and each amendment
thereof or supplement thereto, and will give each of them such access to its
books and records and such opportunities to discuss the business of Company
with its officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinion of such Investor and
such underwriters or their respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.

2.9.5 Indemnification.

(a) In the event of any registration of any securities of
Company under the Securities Act pursuant to Section 2.9, Company will, and
hereby does, indemnify and hold harmless each Investor selling any Registrable
Securities covered by such registration statement, its directors and officers,
and each other Person, if any, who controls such Investor within the meaning or
the Securities Act, against any losses, claims, damages, liabilities and
expenses (including reasonable legal fees and expenses and costs of
investigation), joint or several, to which such Investor or any such director
or officer or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions or proceedings in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such securities were registered under
the Securities Act, any preliminary prospectus, final prospectus or summary
prospectus included therein, or any amendment or supplement thereto, or any
document incorporated by reference therein or (ii) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and Company will
reimburse such Investor, and each such director, officer, and controlling
person for any legal or any other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding.

(b) If the indemnification provided for in this Section
2.9.4 is unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages,

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<PAGE> 32

liabilities, expenses or action in respect thereof referred to herein, then the
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities,
expenses or actions in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand, and the indemnified
party on the other, in connection with the statement or omissions which
resulted in such losses, claims, damages, liabilities, expenses or actions as
well as any other relevant equitable considerations, including the failure to
give the notice required hereunder. The relative fault of the indemnifying
party and the indemnified party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
relates to information supplied by the indemnifying party or the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. Company and the
Investors agree that it would not be just and equitable if contributions
pursuant to this Section were determined by pro rata allocation or by any other
method of allocation which did not take account of the equitable considerations
referred to above. The amount paid or payable to an indemnified party as a
result of the losses, claims, damages, liabilities or action in respect
thereof, referred to above, shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
contribution provisions of this Section, in no event shall the amount
contributed by any seller of shares exceed the aggregate net offering proceeds
received by such seller from the sale of such shares. No Person guilty of
fraudulent misrepresentations (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who is not
guilty of such fraudulent misrepresentation.

(c) Promptly after receipt by an indemnified party of
notice of the commencement of any action or proceeding involving a claim
referred to in the preceding subdivisions of this Section 2.9.4, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subdivisions of this Section 2.9.4. In case any such
action is brought against an indemnified party, the indemnifying party shall be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified, to the extent that it may wish,
with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof; provided, however, that if
the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action or
proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably

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<PAGE> 33

determined by such counsel to be necessary to protect the interests of the
indemnified party or parties (and the indemnifying party or parties shall bear
the reasonable legal and other expenses incurred in connection therewith). No
indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a full and final
release from all liability in respect to such claim or litigation.

(e) Indemnification similar to that specified in the
preceding subdivisions of this Section 2.4 (with appropriate modifications)
shall be given by Company and each seller of Registrable Securities with
respect to any required registration or other qualification of such shares of
Common Stock under any federal or state law or regulation of governmental
authority other than the Securities Act.

2.10 Issuance of Adjustment Warrants.

If on a Warrant Adjustment Date there shall exist a Projection
Deficit, Company shall issue to the Investors, warrants to purchase a number of
shares of Common Stock (the "Adjustment Warrants") equal to the number
determined by (i) determining for each whole or partial fiscal quarter prior to
the Warrant Adjustment Date the amount (the "Net Adjustment Amount") equal to
25% (prorated for a period that is less than a fiscal quarter) of the product
of the Net Adjustment Percentage times the Warrant Adjustment Amount, (ii)
increasing the amount of each Net Adjustment Amount from the end of each such
fiscal quarter through the Warrant Adjustment Date by an amount per annum,
compounded quarterly, equal to the Deficit Adjustment Factor times the Net
Adjustment Amount (such increased amount to be the "Increased Net Adjustment
Amount") (iii) adding together the Increased Net Adjustment Amounts for each
whole or partial fiscal quarter prior to the Warrant Adjustment Date and (iv)
dividing that amount by the Fair Market Value. Exhibit M is an example of the
number of Adjustment Warrants to be issued pursuant to the preceding formula.
Adjustment Warrants issued pursuant to this Section 2.10 shall be issued on the
Warrant Adjustment Date in the same manner and in the same percentage (as
between the Investors) as the Warrants issued pursuant to Section 2.3, except
that the exercise price for the Adjustment Warrants shall be $0.001 per share
and the Adjustment Warrants shall be exercisable at any time after issuance.

SECTION 3

REPRESENTATIONS AND WARRANTIES

3.1 Representations and Warranties of Investors.

Each Investor represents and warrants to Company with respect
to its Securities purchase that:

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<PAGE> 34

3.1.1 Investment. The Securities are being acquired for
investment for such Investor's own account, not as a nominee or agent, and not
with a view to the distribution of any part thereof.

3.1.2 Sophistication. Such Investor has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of Investor's investment in the Securities; such Investor has
the ability to bear the economic risks of such investment; such Investor has
the capacity to protect such Investor's own interests in connection with the
transactions contemplated by this Agreement; and Investor has had an
opportunity to obtain such financial and other information from Company as
Investor deems necessary or appropriate in connection with evaluating the
merits of the investment in the Securities; provided, however, that none of
such Investor's representations hereunder are intended in any way to limit the
scope or applicability of Company's representations and warranties in this
Agreement, the truth, accuracy and completeness of which such Investor has
relied upon in its investment in the Securities.

3.1.3 Legal Status; Qualification. Each Investor is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Each Investor is duly qualified
or licensed to do business and in good standing as a foreign corporation in all
jurisdictions in which such qualification or licensing is required.

3.1.4 No Violation. The execution, delivery and performance
by each Investor of the Loan Documents to which it may be a party: (a) do not
conflict with its articles or certificate of incorporation or bylaws and (b) do
not violate any provision of any law, rule, regulation or ordinance, or any
order or ruling of any court or governmental entity.

3.1.5 Corporate Power and Authority; Governmental or Other
Consents. Each Investor has the requisite corporate power and authority to
execute, deliver and perform its obligations under the Loan Documents to which
it is a party. No governmental or other consents, approvals, authorizations,
registrations, declarations or filings are required for the execution, delivery
and performance of the Loan Documents.

3.1.6 Due Authorization; Validity; Enforceability. The Loan
Documents have been duly authorized, executed and delivered, and constitute
legal, valid and binding obligations of such Investor enforceable in accordance
with their respective terms except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and general principles
of equity (whether considered in an action at law or in equity).

3.1.7 Truth and Accuracy of Information. None of the
documents, instruments and other information furnished to Company by an
Investor contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make any

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<PAGE> 35

statements made therein not misleading. No representation, warranty or
statement made by an Investor in the Loan Documents contains any untrue
statement of a material fact, or omits or will omit to state a material fact
necessary to make any statements made therein not misleading.

3.2 Representations and Warranties of Company.

On and as of the Closing Date, Company represents and warrants
to Investors, which representations and warranties shall survive the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby, notwithstanding any investigation made by Investors, and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all Obligations of Company to Investors, that,
giving effect to the consummation of the transactions contemplated hereunder
and under the other Material Agreements (including without limitation the
Acquisition):

3.2.1 Legal Status; Qualification. The authorized
capitalization and all outstanding shares of capital stock and options,
warrants and similar rights to subscribe to or purchase capital stock of
Company and its Affiliated Companies and all registrations rights and similar
rights are set forth on Exhibit B. Company and each of its Affiliated
Companies is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Company and
each of its Affiliated Companies are duly qualified or licensed to do business
and in good standing as a foreign corporation in all jurisdictions in which
such qualification or licensing is required.

3.2.2 No Violation. Except as set forth on Schedule 3.2.2,
the execution, delivery and performance by Company and each of its Affiliated
Companies of the Loan Documents and any of the other Material Agreements to
which it may be a party, and any other instruments or documents it executed and
delivered hereunder: (a) do not conflict with its articles or certificate of
incorporation or bylaws, (b) do not violate any provision of any law, rule,
regulation or ordinance, or any order or ruling of any court or governmental
entity and (c) do not result in a breach of or constitute a default (or an
event which with the passage of time or giving of notice, or both, would
constitute a default) under, or cause or permit the acceleration of the
maturity of or give rise to any right of termination, cancellation, imposition
of fees or penalties under, any contract, obligation, debt, note, bond, lease,
mortgage, license, indenture or other instrument to which Company or any of its
Affiliated Companies is a party or by which Company or any of its Affiliated
Companies, or any of their respective properties or assets, may be bound.

3.2.3 Corporate Power and Authority; Governmental or Other
Consents. Company and its Affiliated Companies have all requisite corporate
power and authority to carry on their business as presently conducted and as
proposed to be conducted in the Business Plan, and to own, lease, sell or
operate their properties. Company and its Affiliated Companies have the
requisite corporate power and authority to execute, deliver and perform

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<PAGE> 36

their obligations under the Loan Documents and any of the Material Agreements
to which they are a party, and any other instruments or documents executed and
delivered by them hereunder. No governmental or other consents, approvals,
authorizations, registrations, declarations or filings are required for the
execution, delivery and performance of the Material Agreements by Company and
its Affiliated Companies. Neither Company nor any of its Affiliated Companies
is subject to any law, rule or regulation restricting in any way its ability to
incur indebtedness or to issue shares of its capital stock or rights to acquire
such shares.

3.2.4 Due Authorization; Validity; Enforceability. The
Material Agreements and all other instruments or documents executed by Company
or any of its Affiliated Companies, as the case may be, in connection with the
Material Agreements have been duly authorized, executed and delivered, and
constitute legal, valid and binding obligations of Company or such Affiliated
Company, as the case may be, enforceable in accordance with their respective
terms except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and general principles of equity
(whether considered in an action at law or in equity).

3.2.5 Ownership of Assets. Except as set forth on Schedule
3.2.5, Company and each of its Affiliated Companies (i) is the true and lawful
owner or has the lawful right to use all of the assets used in its business and
(ii) has good and marketable title (and with respect to real property, fee
simple title, and with respect to leased property, a leasehold interest in
accordance with the terms of the lease relating to such property) to its
interest in such assets free and clear of all claims, Liens, title defects and
objections, easements, equities, rights of way, covenants, restrictions,
security interests or other encumbrances other than Liens securing Senior Debt,
Liens permitted to exist pursuant to Section 6.5, and involuntary Liens arising
in the ordinary course of business and securing sums not yet due.

3.2.6 Financial Statements. Company has delivered to
Investors true and complete copies of the Financial Statements, attached as
Exhibit C. The Financial Statements present fairly the consolidated financial
condition and results of operations of Company and its Affiliated Companies,
disclose all liabilities of Company and its Affiliated Companies that are
required to be reflected or reserved against under GAAP, whether liquidated or
unliquidated, fixed, contingent or inchoate, and have been prepared in
accordance with GAAP, except that the unaudited Financial Statements prepared
as of, and for the period ending on, March 31, 1997 (the "Balance Sheet Date")
do not have footnotes and are subject to normal year end adjustments which,
individually and in the aggregate, are not material.

3.2.7 Absence of Undisclosed Liabilities. Neither Company
nor any of its Affiliated Companies has any Liabilities except (i) Liabilities
that are fully reflected or reserved against in the Financial Statements, which
reserves are appropriate and reasonable or (ii) Liabilities incurred in the
ordinary course of business since the Balance Sheet Date.

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<PAGE> 37

3.2.8 Truth and Accuracy of Information. None of the
documents, instruments and other information furnished to Investors by Company,
including without limitation the Business Plan, contains any untrue statement
of a material fact or omits to state any material fact necessary in order to
make any statements made therein not misleading. No representation, warranty
or statement made by Company in the Loan Documents or the other Material
Agreements, or in any document, certificate, exhibit or schedule attached to
any of the Loan Documents or the other Material Agreements, contains or will
contain any untrue statement of a material fact, or omits or will omit to state
a material fact necessary to make any statements made therein not misleading.
There is no fact which materially and adversely affects the condition
(financial or otherwise), results of operations, business, properties or
prospects of Company or any of its Affiliated Companies and which has not been
disclosed in the documents provided to Investors. The projections were
prepared in good faith, there is a reasonable basis for such Projections, and
such Projections represent Company's best estimate of the future performance of
Company and its Affiliated Companies.

3.2.9 Absence of Certain Changes. Except as set forth in
Schedule 3.2.9, since the Balance Sheet Date, neither Company nor any of its
Affiliated Companies has:

(a) suffered any material adverse change in its
financial condition, working capital, assets, Liabilities, earnings, reserves,
business, operations or prospects;

(b) suffered any loss, damage, destruction or
other casualty materially and adversely affecting any of its properties, assets
or business (whether or not covered by insurance);

(d) sold, transferred, assigned or otherwise
disposed of any of its property or assets in excess individually of $10,000 or
permitted, or allowed, any of its property or assets to be subjected to any
Lien or restriction of any kind, except for properties and assets sold or
encumbered since the Balance Sheet Date in the ordinary course of business and
consistent with past practice;

(e) declared, paid or set aside for payment any
dividend or other distribution in respect of its capital stock or other
securities or equity interests or, directly or indirectly, redeemed, purchased
or otherwise acquired any shares of its capital stock or other securities or
equity interests or

(f) made any change in any method of accounting
or accounting practice or any change in depreciation or amortization policies
or rates theretofore adopted.

3.2.10 Regulatory Compliance. Company and its Affiliated
Companies possess all permits and other authorizations from federal, foreign,
state and local governmental

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<PAGE> 38

authorities required by applicable provisions of law, including state and
federal securities laws and regulations, to permit them to operate the
Business.

3.2.11 Litigation. Except as set forth in Schedule 3.2.11,
there is no (a) legal, administrative, arbitration or other proceeding, suit,
claim or action of any nature, or investigation, pending or threatened against
Company or any of its Affiliated Companies, whether at law or in equity, or
before or by any arbitrator or any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality;
or (b) judgment, decree, injunction or order of any court, governmental
department, commission, agency, instrumentality or arbitrator against Company
or any of its Affiliated Companies.

3.2.12 Taxes. Company and each of its Affiliated Companies
has duly and timely filed all federal, state, local and foreign tax reports and
returns required to be filed on or before the Closing Date with respect to all
federal, state, local and foreign taxes, including, but not limited to, all
income, property, and sales and use taxes. All taxes and other related charges
due or claimed to be due from Company or any of its Affiliated Companies by
federal, state, local or foreign taxing authorities have been paid. The
federal income tax returns of Company or of any of its Affiliated Companies
have not been examined in the past five years. All deficiencies and
assessments resulting from examination of federal, state, local and foreign
income tax returns have been paid. There are no outstanding agreements or
waivers extending the statutory period of limitation applicable to any federal,
state, local or foreign income tax return or report for any period. Neither
Company nor any of its Affiliated Companies is a "consenting corporation"
within the meaning of Section 341(f)(1) of the Code. There are no pending
assessments or adjustments of taxes payable with respect to any year for
Company or any of its Affiliated Companies. Neither Company nor any of its
Affiliated Companies has any liability for taxes of any kind in connection with
the operation of the Business prior to the Acquisition except as specifically
described on Schedule 3.2.12.

3.2.13 Insurance. There has been maintained for Company and
each of its Affiliated Companies insurance in such amounts and covering such
risks as is usually carried by companies engaged in similar businesses and
owning or leasing similar properties. All such policies are in full force and
effect, and all premiums with respect thereto are currently paid. A complete
list of all such policies is contained in Schedule 3.2.13.

3.2.14 Debt Instruments. Schedule 3.2.14 contains a complete
list of all loan agreements, promissory notes, letters of credit, security
agreements or other financing documents to which Company or any of its
Affiliated Companies is a party or by which Company or any of its Affiliated
Companies or any of their properties or assets (including, without limitation,
equipment subject to any equipment lease), is bound which individually involve
an obligation of $25,000 or more (the "Debt Instruments"), together with a
description of the term and amount owing in respect thereof. Except as set
forth in Schedule 3.2.14, there are no existing defaults by Company or any of
its Affiliated Companies any other obligor under or party to any such Debt
Instrument, and no event has occurred which (whether with

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<PAGE> 39

notice, lapse of time, or both, or the happening or occurrence of any other
event) would constitute a default by Company or any of its Affiliated
Companies.

3.2.15 Benefit Plans. Except as set forth in Schedule
3.2.15:

(a) neither Company nor any of its Affiliated
Companies maintains or contributes to any "employee pension benefit plan", as
such term is defined in Section 3(2) of ERISA; and each such plan set forth in
Schedule 3.2.15 ("Pension Plan") is in substantial compliance with the
applicable provisions of ERISA, the Code, and all other law. Complete copies
of all Pension Plans and all summary plan descriptions of Pension Plans, as in
effect on the date hereof, have been delivered to Investor;

(b) no Pension Plan, fiduciary thereof or trust
created thereunder has engaged in a transaction that might reasonably be
expected to subject Company or any of its Affiliated Companies, directly or
indirectly, to any tax on prohibited transactions imposed by Section 4975 of
the Code or to any civil penalty imposed by Section 502 of ERISA;

(c) neither Company nor any of its Affiliated
Companies maintains or contributes to any "employee welfare benefit plan", as
such term is defined in Section 3(1) of ERISA; and each such plan set forth in
Schedule 3.2.15 ("Welfare Plan") is in substantial compliance with the
applicable provisions of ERISA, the Code, and all other law. Complete copies
of all Welfare Plans, and all summary plan descriptions of Welfare Plans, as in
effect on the date hereof, have been provided to Investor;

(d) neither Company nor any of its Affiliated
Companies maintains or contributes to any bonus, incentive compensation, stock
option, stock purchase, or other fringe benefit plan or program, whether or not
reflected in a written document;

(e) there are no claims, pending or threatened,
involving any Pension Plan, Welfare Plan or plan or program described in
paragraph (d) of this Section 3.2.15 (including, for purposes of this
paragraph, any Plan or any plan or program described in paragraph (d) of this
Section 3.2.15 maintained or contributed to by Company or any of its Affiliated
Companies within 6 years prior to the Closing Date), by any employee or former
employee (or beneficiary thereof) of Company or any of its Affiliated Companies
or current or former ERISA Affiliates (other than claims for benefits), and
there is no reasonable basis upon which to anticipate any such claim;

(f) no Pension Plan has (i) incurred an
"accumulated funding deficiency" (within the meaning of Section 412(a) of the
Code), whether or not waived; (ii) been a plan with respect to which a
Reportable Event has occurred within six years prior to the Closing Date; or
(iii) been a plan with respect to which any termination liability to the PBGC
has been or is expected to be incurred or with respect to which there exist
conditions or events that have occurred presenting a risk of termination by the
PBGC; and

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<PAGE> 40

(g) neither Company nor any of its Affiliated
Companies or current or former ERISA Affiliates: (i) has, since September 26,
1980, incurred a partial or complete withdrawal from a "multiemployer plan"
within the meaning of Section 3(37) of ERISA to which Company or any of its
Affiliated Companies has been obligated to contribute ("Multiemployer Plan")
which resulted in the imposition of withdrawal liability under the
Multiemployer Pension Plan Amendments Act of 1980, as amended, that has not
been assessed and paid in full on the date hereof, or which could result in the
imposition of withdrawal liability under such act; or (ii) participates in any
Multiemployer Plan with respect to which Company or any of its Affiliated
Companies or ERISA Affiliates would have withdrawal liability in the event of a
complete withdrawal on the Closing Date.

3.2.16 Certain Contracts and Commitments. Except as set
forth in Schedule 3.2.16:

(a) neither Company nor any of its Affiliated
Companies has any collective bargaining or union contracts or agreements;

(b) neither Company nor any of its Affiliated
Companies has entered into any written agreement restricting it from carrying
on its business within the United States or any subdivision thereof;

(c) neither Company nor any of its Affiliated
Companies is a party to any "safe harbor lease" as defined in Section 168(f)(8)
of the Internal Revenue Code of 1954 as in effect prior to amendment by the Tax
Equity and Fiscal Responsibility Act of 1982 and

(d) neither Company nor any of its Affiliated
Companies is in default on any Indebtedness, or on any material lease,
commitment, contract, instrument or obligation by which it or its properties or
assets is bound.

3.2.17 Labor Matters. Except to the extent set forth in
Schedule 3.2.17: (a) Company and each of its Affiliated Companies is and has
been in material compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
including, without limitation, any such laws respecting employment
discrimination, occupational safety and health, and unfair labor practices; (b)
there is no unfair labor practice complaint against Company or any of its
Affiliated Companies pending or threatened before the National Labor Relations
Board or any comparable state, local or foreign agency; (c) there is no labor
strike, dispute, slowdown or stoppage actually pending or threatened against or
directly affecting Company or any of its Affiliated Companies; (d) no union
representation question exists or no union organization effort is underway,
respecting the employees of Company or any of its Affiliated Companies; (e) no
grievance or arbitration proceeding arising out of or under collective
bargaining agreements is pending and no claims therefor exist; (f) no
collective bargaining agreement which is binding on Company or any of its
Affiliated Companies restricts it from relocating or closing any of its

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<PAGE> 41

operations; (g) neither Company nor any of its Affiliated Companies has
experienced any material work stoppage in the last 18 months; (h) neither
Company nor any of its Affiliated Companies is delinquent in payments to any of
its employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed by them to the Closing Date or amounts
required to be reimbursed to such employees or (i) upon termination of the
employment of any of the employees of Company or any of its Affiliated
Companies after the Closing Date, neither Company nor any of its Affiliated
Companies will be liable to any of its employees for severance pay.

3.2.18 Compliance with Law. Company and each of its
Affiliated Companies is in compliance with all laws, regulations and orders
applicable to the Business, including, without limitation, applicable building,
zoning or health laws, ordinances and regulations. Neither Company nor any of
its Affiliated Companies has received any notification that it is in violation
of any such laws, regulations or orders and neither Company nor any of its
Affiliated Companies nor any employee thereof (while acting in such capacity),
has made any payment to any Person, which payment violates any statute or law.

3.2.19 Hazardous Material

(a) Except as set forth in Schedule 3.2.19:

(i) neither Company nor any of its
Affiliated Companies has caused, is causing or threatens to cause any disposals
or releases of any Hazardous Material on or under any properties which it owns,
leases or operates, and no such disposals or releases occurred prior to Company
or any of its Affiliated Companies having taken title to (or possession or
operation of) any of such properties; and no such disposals or releases are
migrating or have migrated off of such properties either in subsurface soils or
in groundwater;

(ii) neither Company nor any of its
Affiliated Companies has either (A) arranged for the disposal or treatment of
Hazardous Material at any facility owned or operated by another Person or (B)
accepted any Hazardous Material for transport to disposal or treatment
facilities or other sites selected by Company or any of its Affiliated
Companies from which facilities or sites there has been a release or there is a
release or threatened release of a Hazardous Material;

(iii) Company does not have any actual
knowledge of, or any reason to believe or suspect, that any release or
threatened release of any Hazardous Material originating from a property other
than those owned, leased or operated by Company or any of its Affiliated
Companies has come to be (or may come to be) located on or under properties
owned, leased, occupied or operated by Company or any of its Affiliated
Companies;

(iv) none of the properties of Company or
any of its Affiliated Companies is in material violation of any federal, state
or local law, ordinance or regulation

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<PAGE> 42

relating to industrial hygiene, anti-pollution or to the environmental
conditions on, under or about such properties, including, but not limited to,
soil and ground water condition and

(v) there has been no litigation or any
other actions, claims, demands or requests for information brought or
threatened against Company or any of its Affiliated Companies, or any
settlement reached by Company or any of its Affiliated Companies with, any
party or parties alleging the presence, disposal, release or threatened
release of any Hazardous Material on, from or under any of such properties.

(b) For purposes of this Agreement, the terms
"disposal" and "release" shall have the definitions assigned thereto by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
42 U.S.C. Section 9601 et seq., as amended ("CERCLA").

3.2.20 No Subordination. Except as set forth in Schedule
3.2.20, there is no agreement, indenture, contract or instrument to which
Company or any of its Affiliated Companies is a party or by which it may be
bound that requires the subordination in right of payment of any of the
Obligations to the repayment of any other obligation of Company.

3.2.21 Solvency. Company and each of its Affiliated
Companies is Solvent after giving effect to, the transactions contemplated by
the Material Agreements and the Acquisition Agreement. No transfer of property
is being made and no obligation is being incurred in connection with the
transactions contemplated by the Material Agreements and the Acquisition
Agreement with the intent to hinder, delay or defraud either present or future
creditors of Company or any of its Affiliated Companies.

3.2.22 Regulations G, U, T and X. Neither Company nor any of
its Affiliated Companies is engaged in the business of extending credit for the
purposes of purchasing or carrying margin stock (as defined, from time to time,
in Regulations G and U promulgated by the Board). No part of the proceeds of
the Loan will be used to purchase or carry any margin stock or to extend credit
to others for the purpose of purchasing or carrying any margin stock or for the
purpose of reducing or retiring any Indebtedness which was originally incurred
to purchase or carry margin stock or for any other purpose which might
constitute the Loan a "purpose credit" within the meanings of Regulations G, U,
T or X of the Board.

3.2.23 Investment Company Act. Neither Company nor any of
its Affiliated Companies is an "investment company", or a company "controlled"
by an "investment company", within the meaning of the Investment Company Act of
1940, as amended.

3.2.24 Foreign Investment in Real Property Tax Act. Neither
Company nor any of its Affiliated Companies is now or ever has been a United
States real property holding corporation, as defined in Section 897(c)(2) of
the Code and Section 1.897-2(b) of the regulations promulgated thereunder.

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<PAGE> 43

3.2.25 Foreign Corrupt Practices Act. Neither Company nor
any of its Affiliated Companies has made, offered or agreed to offer anything
of value to any government official, political party, candidate for political
office or any person that Company or any of its Affiliated Companies knows or
has reason to know will offer anything of value to any government official,
political party or candidate for political office, nor has it taken any action
which would cause it to be in violation of any law of any foreign jurisdiction
or the United States of America, including the Foreign Corrupt Practices Act of
1977, as amended. There is not now nor has there ever been any employment of,
or beneficial ownership of Company or any of its Affiliated Companies by, any
foreign governmental or political official.

3.2.26 Valid Issuance. All of the outstanding capital stock
of Company and each of its Affiliated Companies has been duly authorized,
validly issued, is fully paid and non-assessable, and has been issued in
compliance with the Act and all applicable state securities laws.

3.2.27 Acquisition Agreement. Company has delivered to
Investor a true, correct and complete copy of the Acquisition Agreement
(including without limitation all exhibits and schedules thereto) as in effect
on and as of the Closing Date; there are no other agreements or instruments
between the parties thereto pertaining to the Acquisition. To the best
knowledge of Company and its management, each of the representations and
warranties made by Seller in the Acquisition Agreement is true, correct and
complete as of the Closing Date and all such representations and warranties are
incorporated herein by this reference mutatis mutandis as if fully set forth
herein and are hereby confirmed by Company for the benefit of Investors as of
the Closing Date. As of the Closing Date, (i) all of the conditions precedent
to the consummation of the Acquisition, as contemplated by the Acquisition
Agreement, have been satisfied, (ii) none of such conditions has been waived
and (iii) all of the covenants therein to be performed or observed by the
parties thereto prior to the Closing Date have been so performed or observed.
Company hereby assigns to Investor each and every one of Company's rights under
the Acquisition Agreement, including without limitation the right to proceed
directly against Seller in Investors' name and Company's name to enforce
Company's rights under the Acquisition Agreement against Seller or any third
party. Seller has acknowledged that Company has assigned all of its rights
under the Acquisition Agreement to Investor and a copy of such assignment is
attached hereto as Exhibit J.

3.2.28 Employment Agreements. Except as set forth on
Schedule 3.2.28, neither Company nor any of its Affiliated Companies has any
employment or consulting agreement or understanding with respect to any Person
other than the arrangements referred to in Sections 4.8, 8.3 and 6.10.

3.2.29 Projections. Attached hereto as Schedule 3.2.29 are
projections as to the consolidated and consolidating financial performance of
Company and each of its Affiliated Companies from the Closing Date (after
giving effect to the transactions contemplated by the Material Agreements and
the Acquisition Agreement) through the fifth anniversary of the

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<PAGE> 44

Closing Date, which projections have been certified by each of Joseph L.
Christoffel, Ronald G. Crane and Dan Cook, as being their good-faith best
estimate of the financial performance of Company and each Affiliated Company,
during such period.

3.2.30 Deposit Accounts. Schedule 3.2.30 is a complete list
of all deposit or other accounts with a current balance in excess of $5,000
maintained with banks and financial institutions by Company and each Affiliated
Company, other than Ustman. Except as set forth on Schedule 3.2.30, Company
has notified the institution where each such account is maintained of the
existence of a security interest therein in favor of the Investors.

SECTION 4

CONDITIONS PRECEDENT

The obligation of Investor to make the Loan is subject to the
fulfillment of all of the following conditions prior to, or contemporaneously
with, the disbursement of the Loan:

4.1 Legal Matters.

All legal matters incidental to the making of the Loan shall
be satisfactory to Investors.

4.2 Representations and Warranties.

The representations and warranties of Company contained herein
shall be true and correct in all material respects on and as of the Closing
Date, with the same effect as though made on and as of the Closing Date; and as
of the Closing Date, no Event of Default or Potential Default shall have
occurred and be continuing and no Event of Default or Potential Default shall
occur upon the consummation of the transactions contemplated by the Material
Agreements, except as set forth on Schedule 4.2. Investor shall have received
a certificate of an officer of Company certifying the provisions of this
Section 4.2.

4.3 Executed Documents.

Company shall have delivered, or shall have caused to be
delivered, to Investors, the following documents, duly executed by all parties
thereto:

(a) this Agreement;

(b) Senior Subordinated Notes in the principal
amount of the Loan;

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<PAGE> 45

(c) the Pledge Agreement and each together with
the shares of stock of each of Company's Subsidiaries, with stock powers
attached or endorsed to the Investors and each Security Agreement, together
with a file-stamped copy of each appropriate UCC-1 duly executed by each party
to a Security Agreement and such other evidences of the security interest and
created thereby as Investors may reasonably request in order to create a prior
perfected first Lien in all of such parties assets;

(d) the Warrant Agreement;

(e) the Share Certificates;

(f) an opinion of counsel for Company in
substantially the form of Exhibit D;

(g) the Acquisition Agreement and all other
agreements and instruments not otherwise required to be furnished pursuant to
this Section 4.3, relating to any debt or equity investment in Company or any
of its Affiliated Companies in connection with the transactions contemplated by
the Material Agreements;

(h) a letter from Company to the Investors
undertaking to pay certain fees to the Investors under certain circumstances;

(i) the Shareholders Agreement; and

(j) the Company Agreement.

4.4 Certified Documents, Etc.

Company shall have delivered, or shall have caused to be
delivered, to Investors copies of the following documents, duly certified, or
the following certificates, as applicable:

(a) resolutions of the board of directors of
Company and each Affiliated Company of Company which is a party to any of the
Material Agreements authorizing (1) the execution, delivery and performance of
the Material Agreements, (2) the consummation of the transactions contemplated
by the Material Agreements, and (3) all other actions to be taken by Company or
such Affiliated Company, as the case may be, in connection with the Material
Agreements;

(b) certificates, signed by the Secretary or an
Assistant Secretary of Company and each Affiliated Company of Company which is
a party to any of the Material Agreements, dated as of the Closing Date, as to
the incumbency, and containing the specimen signature or signatures, of the
Person or Persons authorized to execute the Material

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<PAGE> 46

Agreements on behalf of Company or such Affiliated Company, as the case may be,
together with evidence of the incumbency of such Secretary or Assistant
Secretary;

(c) the certificates or articles of incorporation
of Company and each Affiliated Company of Company which is a party to any of
the Material Agreements, certified as of a recent date by the Secretary of
State of the state under the laws of which such Person is incorporated, and
copies of the bylaws of Company and each Affiliated Company of Company which is
a party to any of the Material Agreements, each certified as of the Closing
Date by the Secretary or an Assistant Secretary of Company or such Affiliated
Company, as the case may be; and

(d) a certificate of status or good standing of
Company and each Affiliated Company of Company which is a party to any of the
Material Agreements, from the Secretary of State of the state under the laws of
which such Person is incorporated, and of each state or other jurisdiction in
which Company or such Affiliated Company is qualified to do business, dated as
of a recent date.

4.5 Insurance.

Company shall have furnished evidence satisfactory to
Investors that Company and its Affiliated Companies maintain the insurance
required by Section 5.5.

4.6 Other Acts, Conditions, Etc.

All acts, conditions and things (including, without
limitation, the obtaining of any necessary regulatory approvals and the making
of any required filings, recordings or registrations) required to be done and
performed and to have happened precedent to the execution, delivery and
performance of the Material Agreements and the Acquisition Agreement and to
constitute the same legal, valid and binding obligations of the parties
thereto, enforceable in accordance with their respective terms, shall have been
done and performed and shall have happened in due and strict compliance with
all applicable laws; the transactions contemplated by the Acquisition Agreement
and the Credit Agreement shall be ready in all respects to be consummated
simultaneously with the consummation of the transactions contemplated hereby
and by the other Material Agreements.

4.7 Documents in Satisfactory Form.

All documentation, including, without limitation,
documentation for corporate and legal proceedings, and all instruments in
connection with the transactions contemplated by the Material Agreements and
the Acquisition Agreement and all documents executed and delivered in
connection with the Material Agreements and the Acquisition Agreement shall be
reasonably satisfactory in form and substance to Investor (including without
limitation all disclosure schedules prepared in connection with the Material
Agreements and the Acquisition

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<PAGE> 47

Agreement), and Investors shall have received all further information and
documents which Investors may reasonably have requested, such documents where
appropriate to be certified by proper authorities and corporate officials and
parties.

4.8 Transaction Fee.

Company shall have paid to Management a transaction fee of
$210,000 and the first quarterly installment of the annual fee referred to in
the final sentence of Section 8.3.

4.9 Pro Forma Balance Sheet.

Investor shall have received and be satisfied with (i) the
Financial Statements and (ii) pro forma balance sheet of Company and each of
its Affiliated Companies (consolidated and consolidating) at January 31, 1997,
which pro forma balance sheet shall: (a) reflect the effect on Company and each
of its Affiliated Companies of the transactions contemplated by the Material
Agreements and the Acquisition Agreement; (b) contain a certificate of Company
and each of its Affiliated Companies, executed on its behalf by the chief
financial officer of Company or such Affiliated Company, as the case may be, to
the effect that the pro forma balance sheet reflects such chief financial
officer's good-faith best estimate as to the financial position of Company or
such Affiliated Company, as the case may be, at January 31, 1997, after giving
effect to the transactions contemplated by the Material Agreements and the
Acquisition Agreement; and (c) be in form and substance acceptable to
Investors.

4.10 Solvency.

Company shall have furnished evidence satisfactory to
Investors that, after giving effect to the transactions contemplated by the
Material Agreements, Company will be Solvent. Such evidence shall include the
items referred to in Sections 4.9 and 4.10 accompanied by an officer's
certificate substantially in the form of Exhibit E.

4.11 Fees and Disbursements of Counsel.

Heller Ehrman White & McAuliffe, counsel to Investors, shall
have received payment from Company as provided in Section 8.3.

4.12 California Permit.

Company shall have obtained (and delivered to Investor a copy
of) a permit issued by the California Department of Corporations qualifying the
offer and sale by Company of the Senior Subordinated Note and the securities
issued and issuable under the Warrant Agreement, respectively, under the
California Corporate Securities Law of 1968, as amended.

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<PAGE> 48

4.13 Waiver of Demand Rights

On or before the Closing Date, Ronald G. Crane and Joseph L.
Christoffel shall have executed and delivered to Company a waiver of their
demand registration rights in the form of Exhibit L.

SECTION 5

AFFIRMATIVE COVENANTS

Company covenants that so long as any of the Obligations of
Company to any Investor hereunder or under any of the other Loan Documents
remains outstanding, and until final payment in full of the Senior Subordinated
Notes, Company shall, and shall cause each of Company's Affiliated Companies
to:

5.1 Punctual Payments.

Pay when due: (a) the interest, principal and premium (if
any) on the Senior Subordinated Notes, at the times and place and in the manner
specified therein and (b) any fees or other liabilities due hereunder at the
times and place and in the manner specified herein.

5.2 Accounting Records.

Maintain adequate books and records in accordance with GAAP,
and permit any representative of any Investor, at any reasonable time, to
inspect, copy, audit and examine such books and records and inspect the
properties of Company and its Affiliated Companies, all at the expense of
Company.

5.3 Reporting Requirements.

Provide Investors all of the following:

(a) as soon as available and in any event within
30 days after the end of each month, consolidated balance sheets of Company and
its Affiliated Companies as of the end of such month and statements of income
and retained earnings of Company and its Affiliated Companies for such month
and for the Fiscal Year to date, prepared in accordance with GAAP and certified
in a manner acceptable to Investors by the chief financial officer of Company
or such Affiliated Company, as the case may be, certifying as to the accuracy
and completeness of such balance sheets and statements of income and retained
earnings and further certifying that as of the last day of such month, to the
best of each such officer's knowledge after due and diligent inquiry, no Event
of Default or Potential Default has occurred and is continuing or, if an Event
of Default or Potential Default has occurred and is

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<PAGE> 49

continuing, a statement as to the nature thereof and the action which Company
and its Affiliated Companies propose to take with respect thereto;

(b) as soon as available and in any event within
90 days after and as of the end of each Fiscal Year, audited consolidated
financial statements of Company and its Affiliated Companies, together with an
unqualified report thereon of a certified public accountant satisfactory to
Investors, to include a balance sheet, statements of income, shareholders'
equity and cash flows, and footnotes, all prepared in accordance with GAAP;

(c) as soon as possible and in any event within
five Business Days after Company has knowledge of the occurrence of any Event
of Default or Potential Default, a statement of the chief executive officer or
chief financial officer of Company setting forth details of such event and the
action which Company and its Affiliated Companies propose to take with respect
thereto;

(d) promptly after the filing thereof with the
Secretary of Labor or the PBGC, copies of each annual report filed with respect
to each Plan for each Plan year, if any, certified by independent public
accountants;

(e) as soon as possible and in any event within
five Business Days after acquiring knowledge thereof, written notice of all
litigation, actions, suits or proceedings threatened or commenced affecting
Company or any of its Affiliated Companies or the properties or business of
Company or any of its Affiliated Companies if the relief sought thereunder is
either unspecified as to amount, is for damages in excess of $25,000 or would,
if awarded, materially and adversely affect the business, properties, condition
(financial or otherwise), or operations of Company or any of its Affiliated
Companies; and as soon as possible and in any event within five Business Days
after any material development or change in the status of any such litigation,
action, suit or proceeding, notice of such development or change;

(f) promptly after the furnishing thereof, copies
of any statement or report furnished to any other holder of the debt or equity
securities of Company or any of its Affiliated Companies, including without
limitation any statement or report furnished pursuant to the terms of any
stock purchase, indenture, loan or credit or similar agreement, and not
otherwise required to be furnished to Investor pursuant to any other clause of
this Section 5.3; and

(g) from time to time, such other information or
documents respecting the business, properties or the condition or operations,
financial or otherwise, of Company or any of its Affiliated Companies as
Investors may from time to time reasonably request.

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<PAGE> 50

5.4 Existence; Compliance With Law.

Except for the mergers and divestitures referred to in
Sections 5.14, 5.15 and 5.16, preserve and maintain its corporate existence,
and all of its licenses, permits, governmental approvals, rights, privileges
and franchises necessary or desirable in the normal conduct of its business as
now conducted or presently proposed to be conducted; conduct its business in an
orderly and regular manner; comply with the provisions of all documents
pursuant to which it is organized or which govern its continued existence; and
comply with the requirements of all applicable laws, rules, regulations,
ordinances, orders of any governmental authority and requirements for the
maintenance of its insurance, licenses, permits, governmental approvals,
rights, privileges and franchises, including, but not limited to, all
applicable federal, state, regional or local environmental laws, rules,
regulations, ordinances and orders.

5.5 Insurance.

Maintain and keep in force insurance of the types and in
amounts customarily carried in lines of business similar to its line of
business, including without limitation fire, extended coverage, public
liability, property damage, business interruption, environmental liability,
key-man life insurance and workers' compensation, together with insurance
covering insurable liabilities arising from or in connection the operation of
the Business prior to the consummation of the Acquisition, for which Company or
any of its Affiliated Companies could be liable after the consummation of the
Acquisition, whether or not assumed under the Acquisition Agreement, carried
with companies and in amounts satisfactory to Investors, and deliver to
Investors, from time to time, at any Investor's request, schedules setting
forth all insurance then in effect.

5.6 Facilities.

Maintain and preserve all of its properties useful or
necessary to its business in good repair and condition and from time to time
make necessary repairs, renewals and replacements thereto so that such
properties shall be fully and efficiently preserved and maintained.

5.7 Taxes and Other Liabilities.

Pay and discharge when due any and all Indebtedness,
obligations, assessments and taxes, both real and personal and including
federal and state income taxes, except such as it may in good faith contest or
as to which a bona fide dispute may arise, provided provision is made to the
satisfaction of Investors for eventual payment thereof in the event that it is
found that the same is an enforceable obligation.

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<PAGE> 51

5.8 Notice to Investors.

Promptly (but in no event more than five Business Days after
the occurrence of each such event or matter) give notice in writing to
Investors of: (a) any change in its name, organizational structure or
composition; (b) any termination or cancellation of any insurance policy which
it is required to maintain; (c) any uninsured or partially uninsured loss
through liability or property damage, or through fire, theft or any other cause
affecting its property in excess of an aggregate of $50,000; or (d) any other
matter which has resulted in a material adverse change in its financial
position.

5.9 ERISA.

Comply with the provisions of ERISA and the Code with respect
to each of its Plans and pay and discharge promptly any liability imposed upon
it pursuant to the provisions of Title IV of ERISA; provided, however, that it
shall not be required to pay any such liability if: (a) the amount,
applicability or validity thereof shall be diligently contested in good faith
by appropriate proceedings and (b) it shall have set aside on its books
reserves which, in the opinion of its independent certified public accountants,
are adequate with respect thereto.

5.10 Notice to Investors Regarding ERISA Matters.

Deliver to Investors within 10 days, after: (a) the
occurrence of any Reportable Event with respect to any Plan, a copy of the
materials that are filed with the PBGC in connection therewith, or if no
materials are required to be filed, notice of such Reportable Event; (b) it or
the administrator of any Plan files with participants, beneficiaries or the
PBGC a notice of intent to terminate any Plan, a copy of such notice; (c) the
receipt of notice by it or the administrator of any Plan from the PBGC of the
PBGC's intention to terminate any Plan or to appoint a trustee to administer
any Plan, a copy of such notice; (d) the filing thereof with the Internal
Revenue Service, a copy of each annual report that is filed on Treasury Form
5500 (or derivatives thereof) with respect to any Plan, together with all
attachments, opinions and schedules that are required to accompany such report;
(e) it knows or has reason to know of any event or condition that could
reasonably be expected to constitute grounds for the termination of (or the
appointment of a trustee to administer) any Plan under the provisions of
Section 4042 of ERISA, an explanation of such event or condition; (f) its
receipt of an assessment of withdrawal liability under Section 4201 of ERISA
from a Multiemployer Plan, a copy of such assessment; (g) it knows or has
reason to know that an application is to be, or has been, made to the Secretary
of the Treasury for a waiver of the minimum funding standard under the
provisions of Section 412 of the Code, a copy of such application or an
explanation of the relevant circumstances; (h) it establishes a new Plan or a
plan or program described in paragraph (d) of Section 3.2.15, a copy of such
Plan or, if none, a written description thereof; (i) it becomes obligated to
make contributions to a Multiemployer Plan not described in Schedule 3.2.15, a
statement describing such obligation and an estimate of any potential
withdrawal liability associated with such obligation; (j) it receives notice of
liability for a civil

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<PAGE> 52

penalty imposed under Section 502 of ERISA or for a tax imposed under Section
4975 of the Code, a copy of such notice; or (k) it knows or has reason to know
that a claim described in paragraph (e) of Section 3.2.15 has been or may
reasonably be expected to be made, a copy of such claim or an explanation
thereof.

5.11 Visitation Rights.

At any time upon reasonable notice to Company and from time to
time, permit Investors or any agents or representatives of Investors to examine
and make copies of and abstracts from its records and books of account, and
visit its properties and discuss its affairs, finances and accounts with any of
its officers or directors, all at the expense of Company.

5.12 Performance of Agreements.

Perform all of the obligations to be performed by it under
each lease, indenture, agreement, contract and other instrument to which it is
a party or by which it and its properties may be bound or affected if the
failure to so perform such obligations might materially and adversely affect
its business, properties, condition (financial and otherwise) or operations or
which might materially and adversely affect its ability to perform its
obligations hereunder, under the other Material Agreements or under any other
document, instrument or agreement issued in connection herewith or therewith;
provided, however, that it shall strictly perform each of its obligations under
the Loan Documents.

5.13 Worker Adjustment Retraining and Notification Act Notice.

In connection with termination of employment of any of its
employees, timely provide such employees with adequate notice of termination as
required by the Worker Adjustment Retraining and Notification Act, as amended
from time to time, or any successor statute (the "WARN Act"), and comply with
all other requirements of the WARN Act and any rules and regulations
promulgated thereunder.

5.14 Merger.

Cause Watson Systems to be merged into Company as soon as
possible but in any event not later than 15 days after the Closing Date.

5.15 Divestitures.

Cause the shares of stock of Toxguard Fluid and Toxguard
Systems to be sold as soon as possible upon such terms and for such
consideration as shall be acceptable to Investors.

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<PAGE> 53

5.16 Acquisition.

Cause the Acquisition to be of assets and not of stock unless
immediately after and giving effect thereto, Company shall merge Ustman into
Company leaving Company the sole surviving entity.

SECTION 6

NEGATIVE COVENANTS

Company further covenants that so long as any of the
Obligations of Company to any Investor hereunder or under any of the other Loan
Documents remains outstanding, and until final payment in full of the Senior
Subordinated Notes, without the prior written consent of Investors, Company
shall not, and shall not allow any of Company's Affiliated Companies to:

6.1 Use of Funds.

Use the proceeds of the Loan for any purpose other than (a) to
pay up to $5,250,000 in connection with the transactions contemplated in the
Acquisition Agreement, (b) transaction costs in connection herewith, (c) in the
amounts and for the purposes set forth on Schedule 6.1 hereto and (d) for
working capital purposes.

6.2 Dividends, Distributions.

Declare or pay any dividend or distribution either in cash,
stock or any other property on its capital stock now or hereafter outstanding
or on any warrant, option or other right to acquire capital stock now or
hereafter outstanding (other than the securities issued or issuable under the
Warrant Agreement or the instruments (and in the amounts) set forth on Schedule
6.2 hereof) or redeem, retire, purchase or otherwise acquire any shares of any
class of its capital stock now or hereafter outstanding or any warrant, option
or other right to acquire capital stock now or hereafter outstanding (other
than the securities issued or issuable under the Warrant Agreement or the
instruments (and in the amounts) set forth on Schedule 6.2 hereof), including
without limitation any put, call or other right to payment under any warrant,
option or other right to acquire capital stock now or hereafter outstanding
(other than the securities issued or issuable under the Warrant Agreement or
the instruments (and in the amounts) set forth on Schedule 6.2 hereof).

6.3 Business.

Discontinue the Business or engage in any business activities
or operations substantially different from or unrelated to the Business.

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<PAGE> 54

6.4 Indebtedness.

Create, incur, assume or permit to exist any Indebtedness
(other than the Obligations); provided, however, that this Section 6.4 shall
not prohibit:

(a) the incurrence of Permitted Senior Debt;

(b) unsecured Indebtedness and other liabilities
incurred in the ordinary course of business, excluding, however, Guaranteed
Indebtedness and Indebtedness incurred through the borrowing of money;

(c) Indebtedness for taxes, assessments,
governmental charges or levies to the extent that payment thereof shall not at
the time be required to be made in accordance with the provisions of Section
5.7;

(d) the NDE Note;

(e) Indebtedness of Company and its Affiliated
Companies existing as of the Closing Date, as described on Schedule 6.4 and
approved by Investors; or

(f) Indebtedness which is expressly subordinated
to the Obligations in accordance with terms agreed upon by the Investors.

6.5 Liens.

Create or suffer to exist any Lien or any other type of
preferential arrangement, upon or with respect to any of its properties,
whether now owned or hereafter acquired, or assign any right to receive income
to secure any Indebtedness of any Person except:

(a) Liens created or permitted by the Loan
Documents;

(b) leases permitted under Section 6.16 and
lessor interests in security deposits given pursuant to leases of real property
entered into by Company or any of its Affiliated Companies, as lessee, in the
ordinary course of business within the limits of Section 6.16;

(c) Liens for current taxes (except United States
income taxes), assessments or other governmental charges (i) which are not
delinquent or remain payable without any penalty or (ii) the validity of which
is contested in good faith by appropriate proceedings upon stay of execution of
the enforcement thereof and which are in respect of claims for current taxes,
assessments or other governmental charges not exceeding an aggregate amount of
$50,000 for Company and its Affiliated Companies;

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<PAGE> 55

(d) Liens, for charges not exceeding an aggregate
amount of $25,000 for Company and its Affiliated Companies, incurred in the
ordinary course of business in connection with worker's compensation,
unemployment insurance or other forms of governmental insurance or benefits, or
to secure performance of tenders, statutory obligations, leases and contracts
(other than for borrowed money) entered into in the ordinary course of business
or to secure obligations on surety or appeal bonds;

(e) Liens of attachment and judgment respecting
claims, the validity of which is being contested in good faith by appropriate
proceedings upon stay of execution of the enforcement thereof (i) in an
aggregate amount not exceeding $50,000 for Company and its Affiliated Companies
or (ii) which shall be vacated within 30 days after the creation thereof; and

(f) mechanics', materialmen's or other similar
Liens arising in the ordinary course of business which either (i) are inchoate
and relate to an obligation which is not yet due and payable or (ii) are being
contested in good faith by appropriate proceedings upon stay of execution of
the enforcement thereof and are in an aggregate amount not exceeding $50,000
for Company and its Affiliated Companies.

6.6 Subsidiaries; Investments.

Create any Subsidiary, make any capital contribution to or
other investment in any of Company's Affiliates or Affiliated Companies or make
any Investment, except for Permitted Investments. Notwithstanding the
provisions of the preceding sentence, Company may, with the prior written
consent of Investors, create a Subsidiary provided that (i) Company shall not
make any capital contribution to or other investment in any such Subsidiary
unless such contribution or investment is approved in advance by Investors,
(ii) each of the terms, covenants and conditions of the Material Agreements
applicable to the business and operations of Company shall be applicable to the
business and operations of such Subsidiary, including without limitation all
financial covenants and reporting requirements which, unless otherwise required
by Investors, shall be applied on a consolidated basis, (iii) all financial
statements shall be prepared on a consolidated and consolidating basis and (iv)
Company shall own 100% of the capital stock of such Subsidiary and Company
shall not permit such Subsidiary to sell or issue shares of capital stock of
such Subsidiary to any Person other than Company.

6.7 Guaranteed Indebtedness.

Create, assume, incur, or be or become liable for any
Guaranteed Indebtedness except: (a) it may endorse negotiable instruments for
deposit or collection in the ordinary course of business; (b) any of Company's
Affiliated Companies may guaranty or become jointly liable with respect to the
Obligations; and (c) it may guaranty or become jointly liable

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<PAGE> 56

on any Indebtedness or Lien which such guarantor would have been permitted to
incur under Sections 6.4 and 6.5.

6.8 Mergers.

Except for mergers required by Sections 5.14 and 5.16, merge
with or into or consolidate with or into another Person; acquire all or
substantially all of the assets or capital stock of any Person; or, in the case
of Company, except in the event of a public offering pursuant to a registration
statement under the Act, permit any sale, transfer or other disposition of 50%
or more of its outstanding voting stock, whether in one transaction or a series
of related transactions, to any Person or Persons other than the Acquisition.

6.9 Restrictions on Sales of Assets.

Sell or otherwise dispose of any property except:

(a) sales, leases, rentals or dispositions of
property as a result of a constructive loss of the property or a decision to
dispose under a fix/sell analysis;

(b) sales, leases, rentals or dispositions of
property in the ordinary course of business and for consideration not less than
the fair market value thereof, so long as at the time of such transaction no
Event of Default or Potential Default has occurred and is continuing and such
transaction would not cause an Event of Default or Potential Default; and

(c) the sale of not less than all of the issued
and outstanding shares of stock of Toxguard Fluid and Toxguard Systems owned by
Company upon terms and conditions and for such consideration as shall be
acceptable to Investors.

6.10 Management or Consulting Fees.

Pay fees to any Person for consulting services or the
management of the Business or of any assets of Company or any of its Affiliated
Companies except for (a) the management of Plan assets, (b) the fees payable
pursuant to Section 4.8 and 8.3 and (c) fees payable to the Persons and in the
amounts set forth on Schedule 6.10.

6.11 Transactions with Affiliates.

Lend or advance money to, or contract with or engage in any
other transactions with Affiliates, except in the ordinary course of business
and on terms and for consideration which are no less favorable than the terms
and consideration which Company or such Affiliated Company, as the case may be,
would be obligated to pay or entitled to receive in an arm's length transaction
except for the fees payable under Sections 4.8 and 8.3.

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<PAGE> 57

6.12 Amendments of Corporate Documents.

Amend its articles or certificate of incorporation or bylaws.

6.13 Executive Compensation.

Allow any of its officers, directors or employees to use any
assets or property of Company or any of its Affiliated Companies for personal
purposes. Neither Company nor any of its Affiliated Companies shall increase
the salary or other compensation or benefits paid or provided to any officer
or director of Company or such Affiliated Company except to the extent that
such increase (a) is commercially reasonable and in accordance with industry
standards and (b) is approved by a majority of the non-employee members of the
Board of Directors of Company or such Affiliated Company, as the case may be.

6.14 Compliance with ERISA.

Do any of the following:

(a) engage in any transaction in connection with which it
could be subject to either a material civil penalty assessed pursuant to the
provisions of Section 502 of ERISA or a material tax imposed under the
provisions of Section 4975 of the Code;

(b) terminate any Plan in a "distress termination" under
Section 4041 of ERISA, or take any other action which could result in a
material liability of it to participants, beneficiaries or the PBGC;

(c) take any action (including a failure to act) that
would result in a complete or partial withdrawal from any Multiemployer Plan,
if such withdrawal could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise) or operations of Company and
its Affiliated Companies viewed as a whole; or

(d) take any action (including a failure to act) that
would cause any Pension Plan that is qualified under Section 401(a) of the Code
to cease to be so qualified.

6.15 Sale or Issuance of Stock.

Issue any shares of capital stock of Company or any option,
warrant, convertible security or any right to purchase any shares of capital
stock of Company or permit to remain outstanding any shares of capital stock of
Company or any option, warrant convertible security or any right to purchase
any shares of capital stock other than the securities set forth on Schedule B.
Except for the pledge to Investors of the shares of the Affiliated Companies
pursuant to the Pledge Agreement and the divestitures required by Section 5.15,
sell, pledge, or otherwise transfer any shares of capital stock of any
Subsidiary;

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<PAGE> 58

or issue any class or series of capital stock which requires (by its terms,
pursuant to separate agreement or upon shareholder request) the payment of
dividends thereon or redemption thereof prior to the final payment in full of
the Senior Subordinated Notes.

Create or suffer to exist any obligations for the payment of
rent for any property under leases or agreements to lease which would cause the
direct or contingent aggregate liabilities of Company and its Affiliated
Companies (a) in respect of any such obligation to exceed $250,000 payable over
the term of such obligation or (b) in respect of all such obligations to exceed
$100,000 payable in any period of 12 months.

(d) Deposit Accounts.

Maintain balances in excess of $10,000 in the aggregate in any
depository facility located outside of the State of California; provided,
however that Company may maintain balances at a commercial bank in Denver,
Colorado in amount as necessary to develop and maintain a banking relationship
with such commercial bank. Promptly upon the creation of any account of any
deposit or other account with any depository institution, Company shall, and
shall cause each Affiliated Company to, notify the depository institution of
the security interest of Investors in said account and to use best efforts to
promptly obtain the acknowledgment of the security interest Investors therein
by such depository and deliver such acknowledgment to Investors.

SECTION 7

EVENTS OF DEFAULT

7.1 Events of Default.

The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:

(a) Company shall fail (i) to pay when due any principal
payable under the Loan Documents, (ii) to pay any interest payment under the
Loan Documents within five days after the date such payment is due or (iii) to
pay any other amount payable under the Loan Documents within 10 days after the
earlier of Company's knowledge that such amount is due or notice to Company
from any Investor that such amount is due;

(b) any representation or warranty made by Company in the
Loan Documents shall at any time prove to be incorrect in any material respect
on or as of the date made or deemed

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<PAGE> 59

made and which, if correctable, is not corrected within 30 days after the date
the representation or warranty was made or deemed made;

(c) Company shall fail (i) to observe or perform any
obligation, covenant or other provision contained in the Loan Documents which
failure is not cured within 30 days after the earlier of Company's knowledge
thereof or notice thereof from any Investor or (ii) to cause any of Company's
Affiliated Companies to observe and perform any such obligation, covenant or
provision where required to do so by the Loan Documents which failure is not
cured within 30 days after the earlier of Company's knowledge thereof or notice
thereof from any Investor;

(d) (i) any default or event which with the passage of
time or giving of notice or both would constitute a default by Company or any
of Company's Affiliated Companies in the Payment of any principal or interest
on any other Indebtedness other than a default under item (4) of the second
paragraph on page 2 of the U.S. Small Business Administration Note, dated May
17,1995, in favor of Boatman's First National Bank of Kansas City in the
original principal amount of $500,000, which Indebtedness in the aggregate
exceeds $250,000, or (ii) any breach or default or event which with the passage
of time or giving of notice or both would constitute a default with respect to
any other material term of any evidence of any such Indebtedness, or of any
loan agreement, mortgage, indenture or other agreement relating thereto, if the
effect of such default, event or breach is to give the holder or holders of
that Indebtedness (or a trustee or other agent on behalf of such holder or
holders) the right to accelerate such Indebtedness, regardless of whether such
holder has in fact accelerated such Indebtedness which breach or default or
event specified in this subparagraph (i) shall remain unremedied for a period
of 30 days after the earlier of Company's knowledge thereof or notice thereof
from any Investor.

(e) any breach or default by Company or any of Company's
Affiliated Companies with respect to any material term of any of the Material
Agreements other than the Loan Documents, which breach or default is not cured
within 30 days after the earlier of Company's knowledge thereof or notice
thereof from any Investor;

(f) the entry of any judgment, order or decree against
Company or any of its Affiliated Companies; or the filing of a notice of
judgment lien against Company or any of its Affiliated Companies; or the
recording of any abstract of judgment against Company or any of its Affiliated
Companies in any county in which Company or such Affiliated Company has an
interest in real property; or the service of a notice of levy or of a writ of
attachment or execution, or other like process, against the assets of Company
or any of its Affiliated Companies; and such judgment, judgment lien, levy,
attachment or execution shall exceed $100,000 individually or in the aggregate
and shall not have been vacated, discharged or stayed within 60 days from the
entry thereof;

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<PAGE> 60

(g) Company or any of its Affiliated Companies shall
become insolvent, or shall suffer or consent to or apply for the appointment of
a receiver, trustee, custodian or liquidator of itself or any of its property,
or shall generally fail to pay its debts as they become due, or shall make a
general assignment for the benefit of creditors; Company or any of its
Affiliated Companies shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors
or any other relief under the Bankruptcy Code, or under any state or federal
law granting relief to debtors, whether now or hereafter in effect; or any
involuntary petition or proceeding pursuant to the Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors is filed or commenced against Company or any of its
Affiliated Companies, which petition or proceeding (i) results in the entry of
an order for relief or any such adjudication of relief, or (ii) remains
unreleased, undischarged, or unbonded for a period of 60 days or (iii) Company
or such Affiliated Company file an answer admitting jurisdiction of the court
and the material allegations of the petition; or Company or any of its
Affiliated Companies shall be adjudicated a bankrupt, or an order for relief
shall be entered by any court of competent jurisdiction under the Bankruptcy
Code or any other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors;

(h) the dissolution or liquidation of Company or any of
its Affiliated Companies; or Company or any of its Affiliated Companies or any
of the directors or shareholders of Company or any of its Affiliated Companies
shall take action seeking to effect the dissolution or liquidation of Company
or any of its Affiliated Companies;

(i) the occurrence of one or more of the events described
in Section 5.10 which could be reasonably expected to have a material adverse
effect on the condition (financial or otherwise) or operations of Company or
any of its Affiliated Companies;

(j) any of the Loan Documents or any of the other Material
Agreements shall, at any time, cease to be in full force and effect except in
accordance with its terms or shall be declared null and void pursuant to a
judicial or other governmental act, or the validity or enforceability thereof
shall be contested by any party thereto;

(k) except in the event of a public offering pursuant to a
registration statement under the Act, any Person or Persons other than the
Investors and any Person to which an Investor Transfers shares of Common Stock
shall acquire 50% or more of Company's voting stock;

(l) any breach or default by Company or any of its
Affiliated Companies of any term of any lease, commitment, contract, instrument
or obligation to which it is a party, or by which its properties or assets are
bound, which breach or default has, or is reasonably expected to have, a
material adverse effect on the condition (financial or otherwise) or operations
of Company and its Affiliated Companies taken as a whole and such breach or
default is not cured within 30 days after the occurrence thereof;

- 54 -
<PAGE> 61

(m) Company or any of its Affiliated Companies shall be
served with or receive a notice from any federal, state, regional or local
environmental regulatory agency alleging that Company or any of its Affiliated
Companies may be liable for the costs of investigation or remediation of a
release or threatened release of any Hazardous Material originating from or
affecting property or properties owned, leased or operated by Company or any of
its Affiliated Companies which liability could be material to Company and
either (i) any such agency has obtained a judgment or other remedial action
with respect to the subject matter of notice or (ii) 90 days shall have elapsed
since Company's receipt of such notice and such agency has not rescinded such
notice in writing in its entirety;

(n) the Environmental Protection Agency or any successor
to its rule making or enforcement authority shall cease to approve of the
Process as means of determining leakage from underground storage tanks; or

(o) on or before the earlier of the date that is third
anniversary of the date hereof and the Warrant Adjustment Date, Company shall
not have authorized the issuance of shares of Common Stock in a number in
excess of the sum of (i) the shares of Common Stock outstanding on that date,
(ii) the options, warrants, convertible securities and other rights to purchase
shares of Common Stock outstanding on that date, (iii) the shares of Common
Stock issuable pursuant to the Warrants, (iv) the shares of Common Stock
issuable under the Adjustment Warrants issued pursuant to Section 2.10 and (v)
shares of Common Stock to be issued pursuant to Section 2.2.8 hereof or Company
shall not have on or before such date taken all acts necessary or appropriate
to permit Company to perform each of its obligations hereunder. Investors
agree to vote the Shares of Common Stock held by them to accomplish each item
set forth in this clause (o).

7.2 Remedies.

If an Event of Default shall occur, any Indebtedness of
Company under the Loan Documents, any term of the Senior Subordinated Notes to
the contrary notwithstanding, shall (i) in the case of an Event of Default
described in clause (a) of Section 7.1, at the option of Investor, and (ii) in
the case of any other Event of Default, at the option of the holders of a
majority in interest of the then outstanding principal amount of the Senior
Subordinated Notes, and without notice, become immediately due and payable
without presentment, demand, protest or notice of dishonor, all of which are
hereby expressly waived by Company, and Investor or holders shall have all
rights, powers and remedies available under any of the Loan Documents, or
accorded by law; provided, however, that upon the occurrence of an Event of
Default described in clause (g) of Section 7.1, such Indebtedness shall become
immediately due and payable without any election on the part of the holders.
All rights, powers and remedies of Investors may be exercised by Investors at
any time and from time to time after the occurrence of an Event of Default.
All rights, powers and remedies of Investors in connection with the Loan
Documents are cumulative and not exclusive and shall be in addition to any
other rights, powers or remedies provided by law or equity, including, without

- 55 -
<PAGE> 62

limitation, the right to set-off any liability owing by Investors to Company
against any liability of Company to Investors as provided in Section 7.4.

7.3 No Waiver.

No delay, failure or discontinuance of Investors, or any
holder of any of the Senior Subordinated Notes, in exercising any right, power
or remedy under the Loan Documents shall affect or operate as a waiver of such
right, power or remedy; nor shall any single or partial exercise of any such
right, power or remedy preclude, waive or otherwise affect any other or further
exercise thereof or the exercise of any other right, power or remedy. Any
waiver, permit, consent or approval of any kind by Investors, or any holder of
any Senior Subordinated Note, of any breach of or default under the Loan
Documents must be in writing and shall be effective only to the extent set
forth in such writing.

7.4 Set-Off.

In addition to any rights, powers or remedies now or hereafter
granted under this Agreement or applicable law, and not by way of limitation of
any such rights, powers or remedies, upon the occurrence and during the
continuance of any Event of Default, each Investor is hereby authorized by
Company at any time or from time to time, without notice to Company or to any
other Person (any such notice being hereby expressly waived), to the fullest
extent permitted by law, to set off, appropriate and apply all indebtedness or
obligations owing by such Investor to or for account of Company against all of
the obligations of Company to such Investor now or hereafter arising under this
Agreement or any of the other Loan Documents.

SECTION 8

MISCELLANEOUS

8.1 Notices.

In order to be effective, any notice or other communication
required or permitted hereunder, shall, unless otherwise stated herein, be in
writing and shall be transmitted by messenger, delivery service, mail, telex,
telegram, telecopy or cable, if to Company, at Company's address set forth
under its name on the signature page, and if to an Investor, to the address set
forth under its name on the signature page hereof or at such other address as a
party shall designate in a written notice to the other parties hereto given in
accordance with this Section 8.1. All notices and other communications shall
be effective (i) if sent by messenger or delivery service, when delivered, (ii)
if sent by mail, five days after having been sent by certified mail, with
return receipt requested, (iii) if sent by telegraph or cable, when delivered
to the telegraph or cable company or (iv) if sent by telex or telecopier,

- 56 -
<PAGE> 63

when sent. In order to be effective, any notice transmitted to an address
outside the United States of America by any means other than telex or
telecopier shall at the time of transmittal be duplicated by counterpart telex
or telecopier notice.

8.2 Successors and Assigns.

This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns, except that
neither Company nor any of its Affiliated Companies may assign or transfer its
rights hereunder or any interest herein or delegate its duties hereunder
without the prior written consent of Investors.

8.3 Costs, Expenses, Management and Attorneys' Fees.

Company shall reimburse Investors for all out-of-pocket costs
and expenses, including, without limitation, reasonable attorneys' fees
(including, without limitation, the reasonable allocated cost of in-house legal
counsel), expended or incurred by Investors in investigation, due diligence of
Company, Ustman and the negotiation and preparation of the Loan Documents and
the Warrant Agreement, the closing of the transactions contemplated by the Loan
Documents and the Warrant Agreement, the administration of the Loan, the
enforcement of any of the Loan Documents or the Warrant Agreement, the
prosecution or defense of actions for declaratory relief in any way related to
any of the Loan Documents or the Warrant Agreement or the collection of any sum
which becomes due pursuant to any of the Loan Documents or the Warrant
Agreement; provided that Company shall not be obligated to reimburse Investors
for costs and expenses under this Section 8.3 for the Administration of the
Loan in excess of $10,000 for any 12 month period. On the Closing Date,
Company shall pay all fees and expenses of Investors' counsel incurred in
connection with the negotiation and preparation of the Loan Documents and the
Warrant Agreement and the closing of the transactions contemplated by the Loan
Documents and the Warrant Agreement, plus an amount estimated by such counsel
to be sufficient to pay the fees and expenses which will be incurred in
connection with such transactions after the Closing Date; any additional fees
and expenses will be billed as incurred and shall be paid by Company within 30
days of receipt by Company of the invoice therefor. In addition, Company shall
pay to Management an annual fee of $100,000 payable quarterly with the first
such payment due on the date hereof and payable thereafter on each quarterly
date until the fifth anniversary hereof.

8.4 Indemnity.

In addition to the payment of expenses pursuant to Section
8.3, and whether or not the transactions contemplated hereby shall be
consummated, Company agrees to indemnify, pay and hold each Investor and any
subsequent holder of any Senior Subordinated Note, and the officers, directors,
employees, attorneys and agents of Investors and such subsequent holders
(collectively, the "Indemnitees") harmless from and against all other
liabilities, obligations, losses, damages, penalties, claims, costs, expenses
and disbursements

- 57 -
<PAGE> 64

of any kind or nature whatsoever (including, without limitation, the reasonable
'fees and disbursements of counsel chosen for such Indemnitee by such
Indemnitee, in connection with any investigative, administrative or judicial
proceeding, whether or not such Indemnitee shall be designated a party
thereto), which may be imposed on, incurred by, or asserted against
Indemnitees, in any manner relating to or arising out of: (a) this Agreement,
the other Loan Documents or any of the other Material Agreements; (b)
Investor's agreement to make the Loan; (c) the making of the Loan; (d) the use
or intended use of the proceeds of the Loan; (e) the violation of any
securities law by Company; (f) the failure of any of the parties to the
Material Agreements to comply with any law, rule or regulation applicable to
the transactions contemplated thereby or (g) the Business (the "Indemnified
Liabilities"); provided that Company shall have no obligation to an Indemnitee
hereunder with respect to any Indemnified Liability arising from the gross
negligence or willful misconduct on the part of such Indemnitee in respect of
any act related thereto. To the extent that the undertaking to indemnify, pay
and hold harmless set forth in the preceding sentence may be unenforceable
because it is violative of any law or public policy, Company shall contribute
the maximum portion which it is permitted to pay and satisfy under applicable
law, to the payment and satisfaction of all Indemnified Liabilities incurred by
the Indemnitees or any of them. The obligations under this Section 8.4 shall
survive the expiration or termination of this Agreement.

8.5 Entire Agreement, Amendment.

The Loan Documents (including the Exhibits and Schedules
thereto) executed by Company in connection with, or as required by, this
Agreement constitute the entire agreement between Company and Investors with
respect to the Loan; supersede all prior or contemporaneous negotiations,
communications, discussions and correspondence concerning the subject matter
hereof; and may be amended or modified only with the written consent of the
holders of a majority in principal amount of the Senior Subordinated Notes then
outstanding, except that no such amendment or modification shall become
effective if it extends the maturity or reduces the rate of interest payable
with respect to the Senior Subordinated Notes, alters the terms of payment of
the principal, interest and premium (if any) under the Senior Subordinated
Notes, or reduces the percentage of holders of principal amount of' the Senior
Subordinated Notes necessary to approve modifications or amendments to this
Agreement without the consent of each holder of the Senior Subordinated Notes
affected thereby. Whenever the consent or approval of the Investor is
required, such consent or approval must be given in writing by the holders of a
majority in principal amount of the Senior Subordinated Notes then outstanding.

8.6 Time.

Time is of the essence of each and every provision of the Loan
Documents.

- 58 -
<PAGE> 65

8.7 Severability of Provisions.

If any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or 'any remaining provisions of this Agreement.

8.8 Governing Law.

This Agreement and the Senior Subordinated Notes shall be
governed by and construed in accordance with the law of the State of New York
applicable to contracts entered into and to be performed wholly within New York
by New York residents. The parties consent to the non-exclusive jurisdiction
of any state or federal court in New York, New York.

8.9 Arbitration.

Any controversy or claim arising out of or relating to this
contract, or the breach thereof, including any issues pertaining to the
arbitrability of such controversy or claim, shall be settled by arbitration
administered by the American Arbitration Association under its Commercial
Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may
be entered in any court having jurisdiction thereof. All such arbitration
proceedings shall be held in New York, New York. The arbitrator shall have the
right to grant reasonable attorneys fees to the prevailing party.

8.10 Incorporation of Exhibits and Schedules by Reference.

All Exhibits and Schedules to this Agreement are incorporated
herein by this reference.

8.11 Counterparts.

This Agreement may be executed in separate counterparts, each
of which, when so executed, shall be deemed to be an original and all of which,
when taken together, shall constitute but one and the same agreement.

8.12 Survival.

The representations, warranties, covenants and agreements made
herein shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, notwithstanding any
investigation made by Investor, its agents or representatives. All statements
as to factual matters contained in any certificate, exhibit or

- 59 -
<PAGE> 66

other instrument delivered by or on behalf of Company pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties of Company hereunder as of the date of such
certificate, exhibit or schedule.

- 60 -
<PAGE> 67

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in the Borough of Manhattan, State of New York the day and year first
written above.

WATSON GENERAL CORPORATION

By: [SIG]
-------------------------------
Title: ____________________________

Address for Notice:
32-B Mauchly
Irvine, California 92718
Telecopier: 714-753-7986
Attn: Mr. Ronald G. Crane

SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner

By: [SIG]
-------------------------------
Title: ____________________________

Address for Notice:

645 5th Avenue
8th Floor
New York, New York 10022
Tel: 212-848-0276
Fax: 212-355-5056
Attn: Marc Weisman, Esquire

<PAGE> 68

SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: RSP Capital L.L.C., its supervising
general partner

By: [SIG]
-------------------------------
Title: ____________________________

Address for Notices:

645 5th Avenue
8th Floor
New York, New York 10022
Tel: 212-848-0276
Fax: 212-355-5056
Attn: Marc Weisman, Esquire

<PAGE> 69
EXHIBITS

Exhibit A: Form of Senior Subordinated Promissory Note
Exhibit B: Capitalization
Exhibit C: Financial Statements
Exhibit D: Form of Legal Opinion
Exhibit E: Form of Financial Condition Certificate

- 63 -

<PAGE> 70

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in the Borough of Manhattan, State of New York the day and year first
written above.

WATSON GENERAL CORPORATION

By: [SIG]
-------------------------------
Title: ____________________________

Address for Notice:
32-B Mauchly
Irvine, California 92718
Telecopier: 714-753-7986
Attn: Mr. Ronald G. Crane

SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner

By: [SIG]
-------------------------------
Title: ____________________________

Address for Notice:

645 5th Avenue
8th Floor
New York, New York 10022
Tel: 212-848-0276
Fax: 212-355-5056
Attn: Marc Weisman, Esquire

<PAGE> 71

SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: RSP Capital L.L.C., its supervising
general partner

By: [SIG]
-------------------------------
Title: ____________________________

Address for Notices:

645 5th Avenue
8th Floor
New York, New York 10022
Tel: 212-848-0276
Fax: 212-355-5056
Attn: Marc Weisman, Esquire

<PAGE> 72

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in the Borough of Manhattan, State of New York the day and year first
written above.

WATSON GENERAL CORPORATION

By: _______________________________
Title: ____________________________

Address for Notice:
32-B Mauchly
Irvine, California 92718
Telecopier: 714-753-7986
Attn: Mr. Ronald G. Crane

SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner

By: _______________________________
Title: ____________________________

Address for Notice:

645 5th Avenue
8th Floor
New York, New York 10022
Tel: 212-848-0276
Fax: 212-355-5056
Attn: Marc Weisman, Esquire

-61-
<PAGE> 73

SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: RSP Capital L.L.C., its supervising
general partner

By: _______________________________
Title: ____________________________

Address for Notices:

645 5th Avenue
8th Floor
New York, New York 10022
Tel: 212-848-0276
Fax: 212-355-5056
Attn: Marc Weisman, Esquire

- 62 -

<PAGE> 1
EXHIBIT 7(b)

===============================================================================

WARRANT AGREEMENT

DATED AS OF

MAY 22, 1997

BY AND BETWEEN

WATSON GENERAL CORPORATION

AND

SAGAPONACK PARTNERS, L.P.

===============================================================================

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

SECTION 2 THE WARRANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Issuance of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Manner of Exercise of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Issuance of Shares Upon Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4 Payment of Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Reservation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.7 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.8 Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

SECTION 3 ANTI-DILUTION PROTECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1.1 Change in Covered Options . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1.2 Change in Base Ownership Percentage. . . . . . . . . . . . . . . . . . . . . . 7

SECTION 4 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.1 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.3 Costs of Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.4 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.6 Consent to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.7 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.8 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.9 Incorporation of Exhibits and Schedules by Reference . . . . . . . . . . . . . . . . . . 9
4.10 Entire Agreement; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>

- i -
<PAGE> 3

WARRANT AGREEMENT

This WARRANT AGREEMENT is entered into as of this 22nd day of May, 1997,
by and between Watson General Corporation, a California corporation (the
"Company") and Sagaponack Partners, L.P., a California limited partnership (the
"Investor").

BACKGROUND

The Company is authorized to issue one class of Common Stock. The Common
Stock is not convertible.

Pursuant to this Agreement, the Company shall issue 2,625,432 warrants
to the Investor entitling the Investor to purchase an aggregate of 2,625,432
shares of common stock of the Company, subject to adjustment as set forth
herein. Such warrants shall entitle the Investor to purchase shares of Common
Stock.

AGREEMENT

NOW, THEREFORE, the Company and the Investor agree as follows:

SECTION 1

DEFINITIONS

1.1 Certain Defined Terms. The following terms used in this
Agreement have the following meanings:

"Accredited Investor" has the meaning given to that term in
Section 501(a) of Regulation D promulgated under the Act.

"Act" means the Securities Act of 1933, as amended from time
to time, or any successor statute.

"Adjusted Base Ownership Percentage" shall have the meaning
given such term in the Securities Purchase Agreement.

"Applicable Percentage" means the Base Ownership Percentage or
the Adjusted Base Ownership Percentage, whichever is applicable at the time of
determination.

- 1 -
<PAGE> 4

"Base Ownership Percentage" shall have the meaning given such
term in the Securities Purchase Agreement.

"Closing Date" means the date on which the proceeds of the
Senior Secured Notes are disbursed to the Company pursuant to the Securities
Purchase and Security Agreement.

"Common Stock" means any class or series of common stock
issued by the Company.

"Covered Exercise" means any exercise of a Covered Option.

"Covered Option" means any warrant, option or right to
purchase shares of Common Stock, including, without limitation, pursuant to any
of the documents or instruments set forth on Schedule 1 hereto, whether granted
prior or subsequent to the date of this Warrant Agreement, other than any
option or warrant granted pursuant to this Warrant Agreement or pursuant to the
Securities Purchase Agreement.

"Exercisable Warrants" shall have the meaning given such term
in Section 2.2 hereof.

"Exercise Notice" shall mean a written notice to the Company
stating the number of Exercisable Warrants being exercised and the number of
shares of Common Stock with respect to which the Exercisable Warrants are being
exercised.

"Exercise Price" means with respect to any Covered Exercise,
the exercise price per share of the Covered Option.

"Fair Value" of a share of Common Stock on any specified date
means:

(i) If shares of Common Stock are then listed or admitted to
trading on any national securities exchange or traded on any national market
system, the average of the daily closing prices for the thirty (30) trading
days before such date, excluding any trades which are not bona fide, arm's
length transactions. The closing price for each day shall be the last sale
price on such date or, if no such sale takes place on such date, the average of
the closing bid and asked prices on such date, in each case as officially
reported on the principal national securities exchange or national market
system on which such shares are then listed, admitted to trading or traded.

(ii) If no shares of Common Stock are then listed or admitted
to trading on any national securities exchange or traded on any national market
system, the average of the reported closing bid and asked prices thereof on
such date in the over-the-counter market as shown by the National Association
of Securities Dealers automated quotation system or, if

- 2 -
<PAGE> 5

such shares are not then quoted in such system, as published by the National
Quotation Bureau, Incorporated or any similar successor organization, and in
either case as reported by any member firm of the New York Stock Exchange
selected by the Holder.

(iii) If no shares of Common Stock are then listed or admitted
to trading on any national exchange or traded on any national market system,
and if no closing bid and asked prices thereof are then so quoted or published
in the over-the-counter market, the fair value of a share of Common Stock shall
be as mutually agreed by the Company and the Holder; provided, however that if
the Company and such Holder are unable to mutually agree upon the fair value,
the Company and such Holder shall, within five (5) days from the date that
either party determines that they cannot agree and so notifies the other party
in writing, jointly retain an investment banking firm, or a nationally
recognized accounting firm or other firm providing similar valuation services,
satisfactory to each of them. If the Company and such Holder are unable to
agree on the selection of such a firm within such five (5) day period, the
Company and such Holder shall, within twenty (20) days after expiration of such
five (5) day period, each retain a separate independent investment banking firm
(which firm, in either case, shall not be the investment banking firm regularly
retained by the Company or such Holder). If either the Company or such Holder
fail to retain such an investment banking firm during such twenty (20) day
period, then the independent investment banking firm retained by such Holder or
the Company, as the case may be, shall alone take the actions described below.
Such firms shall determine within thirty (30) days of being retained the fair
value of a share of Common Stock and deliver their opinion in writing to the
Company and to such Holder as to such fair value. If such firms cannot jointly
agree upon such fair value, then, unless otherwise directed in writing by both
the Company and such Holder, such firms, in their sole discretion, shall choose
another investment banking firm independent of the Company and such Holder,
which firm shall make such determination, and render such an opinion as
promptly as practicable. In either case, the determination so made shall be
conclusive and binding on the Company and such Holder. The fees and expenses
for such determination made by any and all such investment banking or other
firms shall be paid by the Company. In the determination of the fair value of
a share of Common Stock, there shall not be taken into consideration any
premium for shares representing control of the Company or any discount related
to shares representing a minority interest therein or related to any
illiquidity or lack of marketability of shares arising from contractual
restrictions on the transfer of shares of Common Stock or restrictions on
transfer under federal and applicable state securities laws.

"Holder" means any registered holder of Warrants or Warrant
Shares.

- 3 -
<PAGE> 6

"Securities Purchase Agreement" means the Securities Purchase
Agreement between the Company and the Investor of even date herewith.

"Transfer" means the sale, pledge, assignment or other
transfer of the Warrants or the Warrant Shares, in whole or in part, and of the
rights of the Holders under this Agreement.

"Warrants" means the warrants issued pursuant to this
Agreement, which, when exercised, give the Holder thereof the right to obtain
one share of Common Stock per warrant, subject to adjustment as provided
herein.

1.2 Interpretation

Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, to the singular
include the plural, and to the part include the whole. The term "including" is
not limiting and the term "or" has the inclusive meaning represented by the term
"and/or." The words "hereof," "herein," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. References to "Articles", "Sections," "Subsections,"
"Exhibits," and "Schedules" are to Articles, Sections, Subsections, Exhibits and
Schedules, respectively, of this Agreement, unless otherwise specifically
provided. Terms defined herein may be used in the singular or the plural. Any
capitalized terms used herein which are not specifically defined herein have the
meaning given to them in the Loan Agreement.

SECTION 2

THE WARRANTS

2.1 Issuance of Warrants

The Company hereby grants and issues to the Investor 2,625,432
Warrants to purchase 2,625,432 shares of Common stock. The number of Warrants
issued pursuant hereto shall (i) increase or decrease, as the case may be,
pursuant to Section 3 hereof and (ii) increase from time to time as more Covered
Options are issued so that at all times the number of Warrants issuable
hereunder is not less than (a) the sum of (i) the number of Warrants issuable
hereunder at such time plus (ii) the number of Covered Options outstanding at
such time, times (b) the Applicable Percentage.

2.2 Manner of Exercise of Warrants

The Investor may exercise the Warrants only after a Covered Exercise
has occurred. The number of Warrants which shall become exercisable whenever a
Covered

- 4 -
<PAGE> 7

Exercise occurs (the "Exercise Warrants") shall be determined by multiplying
(i) the number of shares of Common Stock issued upon such Covered Exercise
times (ii) the Percentage determined by dividing (x) the Applicable Percentage
by (y) the number obtained by subtracting the Applicable Percentage from one.
The Company shall notify the Holder within five (5) days of each Covered
Exercise. The Holder shall have the right to purchase from the Company, and
the Company shall issue and sell to such Holder, one share of Common Stock for
each Warrant exercised, upon delivery to the Company at its principal office of
an Exercise Notice and upon payment to the Company of the Exercise Price in
lawful money of the United States of America.

At the election of the Holder, the Holder may elect to exercise its
option for a cashless exercise of Warrants by notifying the Company of such
election and the Company shall issue to the Holder a number of shares of Common
Stock equal to the product of (a) the excess of the Fair Market Value per share
over the Exercise Price and (b) the number of Warrants to be exercised, such
product to be divided by (c) the Fair Market Value per share. For purposes of
calculating the Adjusted Base Ownership Percentage under Section 2.2.8 of the
Securities Purchase Agreement, the number of shares of Common Stock issued
pursuant to a Covered Exercise shall be deemed to be the number of shares of
Common Stock that would have been issued had such exercise been for cash,
notwithstanding whether or not the Covered Exercise was for cash or was
cashless.

2.3 Issuance of Shares Upon Exercise

Upon exercise of a Warrant, the Company shall issue and cause to be
delivered to the Holder, registered in such name or names as the Holder may
designate a certificate representing the share or shares of Common Stock
issuable upon the exercise of such Warrant. Such certificate shall be deemed to
have been issued and any person so designated shall be deemed to have become a
holder of record of such Common Stock as of the date of delivery of the Exercise
Notice to the Company and payment of the Exercise Price. The Warrants may be
exercised, at the election of the Holder thereof, for all or any portion of the
number of Warrants which have become exercisable pursuant to Section 2.2.

2.4 Payment of Expenses and Taxes

The Company shall pay all expenses and taxes imposed by law or any
governmental agency, including any documentary stamp taxes, attributable to the
issuance of Warrant Shares upon the exercise of Warrants; provided, that nothing
in this Section 2.4 shall make the Company liable for any income taxes payable
by the Holder and associated with the issuance of the Warrants or the exercise
thereof.

- 5 -
<PAGE> 8

2.5 Reservation of Shares.

The Company covenants and agrees that, so long as any Warrants remain
outstanding, the Company shall (i) at all times have authorized and reserved a
number of shares of Common Stock sufficient to provide for the exercise of the
Warrants and (ii) take all such action as may be required to assure that the par
value, if any, per share of Common Stock is at all times equal to or less than
the average Exercise Price of all Covered Options as in effect from time to
time.

2.6 Securities Law Compliance

If the issuance of any shares of Common Stock required to be reserved
for purposes of the exercise of any Warrants requires the registration with, or
approval of, any governmental authority or requires listing on any national
securities exchange or national market system before such shares may be so
issued, the Company shall at its expense use its best efforts to cause such
shares to be duly registered, approved or listed, as the case may be, so that
such shares may be issued in accordance with the terms hereof; provided,
however, that the foregoing shall not apply to the extent that such issuance
would require registration or qualification as a public offering solely due to
the Transfer of the Warrants by one or more Holders to Persons who are not
Accredited Investors.

2.7 Fractional Shares

The Company need not issue fractional shares upon the exercise of
Warrants but in lieu thereof may pay to the Holder the Fair Value of such
fractional shares; provided, however, that in the event that the Company
undertakes a reduction in the number of shares of Common Stock outstanding, it
shall be required to issue fractional shares to any Holder which exercises all
or any part of its Warrants.

2.8 Exchanges

At the option of the Holder, this Warrant Agreement Certificate may be
exchanged when surrendered at the principal office of the Company for one or
more Warrant Agreement representing in the aggregate a Warrant or Warrants to
acquire a like number and kind of shares of Common Stock in the Company by the
Holder.

- 6 -
<PAGE> 9

SECTION 3

ANTI-DILUTION PROTECTION

3.1 Adjustments

If all or any portion of Exercisable Warrants issued pursuant hereto 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, the Investor
exercising such Exercisable Warrants shall receive, upon the exercise of such
exercise right, the aggregate number and class of shares which, if the
Exercisable Warrants had been exercised at the date hereof and the shares
acquired thereby had not been disposed of, such Investor would be holding as a
result of any such stock dividend, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property for stock,
separation, reorganization, or liquidation; provided however, that no fractional
share shall be issued upon any such exercise if the Company pays the Holder the
Fair Value of any fractional shares which would have been issued to such Holders
but for this clause.

In the event that the Applicable Percentage should increase at any time
during the term of this Agreement, then the Investor shall be entitled to
exercise, with respect to any Exercisable Warrants then exercisable and on the
same terms and conditions thereof, an additional number of Warrants such that,
when aggregated with the Exercisable Warrants, shall equal the number of
Exercisable Warrants that would have been issued to Investor pursuant to this
Warrant Agreement had the increased Applicable Percentage been in effect as the
time that the applicable Covered Exercise occurred. Such additional Warrants
shall be deemed Exercisable Warrant for purposes of this Warrant Agreement.

3.1.1 Change in Covered Options. If the number of shares of Common Stock
issued and/or issuable under or in connection with any Covered Option increase,
then the number of Warrants issuable hereunder shall increase by a number which
is an equal percentage of the warrants to the percentage increase or decrease of
the number of warrants issued or issuable under the Covered Options.

3.1.2 Change in Base Ownership Percentage. If an Adjusted Base Ownership
Percentage is determined, the number of Warrants issuable hereunder shall
increase by a percentage equal to the percentage by which the Adjusted Ownership
Percentage is greater than the Base Ownership Percentage.

- 7 -
<PAGE> 10

SECTION 4

MISCELLANEOUS

4.1 Transfers.

After September 21, 1997, the Holder may make one or more Transfers from
time to time to any Person provided that such Transfer is made in compliance
with the Act and any state securities laws. Upon any Transfer, the transferee
shall, to the extent of such Transfer, be entitled to exercise the rights of the
Investor making such Transfer and thereafter be deemed an "Investor" under this
Warrant Agreement. The Company shall effect each such Transfer in the manner
described in Section 2.4.2 of the Securities Purchase Agreement.

4.2 Notices

In order to be effective, any notice or other communication required or
permitted hereunder shall, unless otherwise stated herein, be in writing and
shall be transmitted by messenger, delivery service, mail, telegram, telecopy or
cable, at its address set forth on Schedule 4.2 or at such other address as a
party shall designate in a written notice to the other parties hereto given in
accordance with this Section. All notices and other communications shall be
effective (i) if sent by messenger or delivery service, when delivered, (ii) if
sent by mail, five days after having been sent by certified mail, with return
receipt requested, (iii) if sent by telegraph or cable, when delivered to the
telegraph or cable company or (iv) if sent by telecopier, when sent. In order to
be effective, any notice transmitted to an address outside the United States of
America by any means other than telecopier shall at the time of transmittal be
duplicated by counterpart telecopier notice.

4.3 Costs of Enforcement

If any party to this Agreement seeks to enforce its rights under this
Agreement by legal proceedings or otherwise, the non-prevailing party shall pay
all reasonable costs and expenses incurred by the prevailing party, including,
without limitation, all reasonable attorneys' fees.

4.4 Successors and Assigns

This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, except that the
Company may not assign or transfer its rights hereunder or any interest herein
or delegate its duties hereunder except (i) as permitted by the Securities
Purchase Agreement or (ii) with the prior written consent of the Holders.

- 8 -
<PAGE> 11

4.5 Governing Law

This Agreement shall be governed by and construed in accordance
with the laws of the State of New York applicable to contracts entered into and
to be performed wholly within New York by New York residents.

4.6 Consent to Jurisdiction

The Company hereby consents to the non-exclusive jurisdiction,
venue and forum of any state or federal court in New York, New York with respect
to any action, whether commenced by the Investor or any other Person, which, in
whole or in part, in any way arises under or relates to this Agreement.

4.7 Execution in Counterparts

This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which, when so
executed, shall be deemed to be an original and all of which, when taken
together, shall constitute but one and the same agreement.

4.8 Remedies

In the event of a breach by the Company of this Agreement, any
Holder injured by such breach, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, shall be entitled to
specific performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach of this Agreement by the Company and hereby waives the
defense in any action for specific performance that a remedy at law would be
adequate.

4.9 Incorporation of Exhibits and Schedules by Reference

All Exhibits and Schedules to this Agreement are incorporated
herein by this reference.

4.10 Entire Agreement; Amendment

This Agreement (including the Exhibits, Schedules and the parts
of the Loan Agreement incorporated by reference herein) constitute the entire
agreement between the Company and the Investor with respect to the subject
matter hereof, superseding all prior or contemporaneous negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be modified or amended or any provision

- 9 -
<PAGE> 12

hereof may be waived only with the written consent of the Company and the
Holders of at least two-thirds (2/3) of the aggregate number of Warrants then
outstanding.

- 10 -
<PAGE> 13

IN WITNESS WHEREOF, the parties hereto have executed this Company
Agreement as of the date and year first above written.

The Company: WATSON GENERAL CORPORATION
a California corporation

By: [SIG]
-----------------------------------------
Chairman of the Board

The Investors: SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner

By: [SIG]
-----------------------------------------
Title:

SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: RSP Capital L.L.C., its supervising
general partner

By: [SIG]
-----------------------------------------
Title:

<PAGE> 1
EXHIBIT 7(c)

COMPANY AGREEMENT

THIS COMPANY AGREEMENT, dated as of May 22, 1997, is by and between
WATSON GENERAL CORPORATION, a California corporation (the "Company") and
SAGAPONACK PARTNERS, L.P., a California limited partnership and SAGAPONACK
INTERNATIONAL PARTNERS, L.P., a Cayman Islands limited partnership
(individually, an "Investor" and, together, the "Investors").

I. BACKGROUND

1. The Company is authorized to issue 7,304,520 shares of Common
Stock, (the "Shares") and 2,625,432 warrants to purchase Common Stock sold on
or about the date hereof to an Investor (the "Warrants"); and

2. The parties deem it in the best interests of the Company to
provide for the nomination of directors as herein provided and delivery of this
Company Agreement is a condition to the investment to be made by an Investor
concurrently herewith.

II. AGREEMENT

In consideration of the agreements and mutual covenants set forth
herein, the parties agree as follows:

1. BOARD OF DIRECTORS AND CERTIFICATE OF INCORPORATION.

(A) DIRECTORS DESIGNATED BY INVESTORS. The Board of
Directors of the Company shall at all times consist of 5 members. The Company
hereby agrees that the Company and its management will nominate to become
members of the Company's Board of Directors two persons designated in writing
by an Investor (the "Investors Designated Directors") and one person designated
pursuant to clause (b) below. Such nomination shall be made as soon as
possible after designation of such persons by an Investor. The Company and its
management shall not nominate at any one time more than 5 persons to become
members of the Company's Board of Directors.

(B) DIRECTOR SELECTED FROM SCHEDULE 1. Attached hereto as
Schedule 1 is a list of persons from which the members of the Company's Board
of Directors and Investors Designated Directors shall select the person to be
nominated by the Company to one of the five directors. Such nomination shall
be made as soon as possible hereafter.

(C) DAN R. COOK. In addition to the foregoing, the
Company agrees that as soon hereafter as possible it will nominate Dan R. Cook
to become a member of the Company's Board of Directors.

<PAGE> 2

(D) REPLACEMENT DIRECTORS. The Investors may from time to
time designate one or more persons to replace one or more of the directors
designated by it if (i) such director resigns, (ii) such directors becomes
unable to serve as a director or (iii) the Investors determine that they desire
a director to be replaced. The Investors may designate a person or persons to
replace directors pursuant to the immediately preceding sentence by giving
notice to the Company of the person or persons that the Investors have
designated to be nominated to be a director or directors, as the case may be.
Upon each such designation by an Investor, the Company shall be obligated to
nominate such person or persons to become members of the Company's Board of
Directors as soon as possible thereafter.

If a person designated and nominated pursuant to clause (b)
resigns or becomes unable to serve as a director, then the remaining four
directors shall select one person from the person listed on Schedule 1 not
nominated prior thereto. If there are no persons listed on Schedule 1 which
have not been nominated prior thereto, the Investors shall provide a list of
not fewer than three persons from which the remaining directors shall select
the person to be nominated. The Company shall be obligated to nominate such
person or persons to become members of the Company's Board of Directors.

(E) ADDITIONAL DIRECTORS. In the event that the Board of
Directors shall, in accordance with the provisions of the Articles of
Incorporation of the Company, increase the number of members of the Company's
Board of Directors by 2 or more members, the Company and its management shall
nominate the persons designated by an Investor to fill such additional director
positions so that if such designated person is elected to be a member of the
Company's Board of Directors, persons designated by the Investors will equal a
number of members of the Company's Board of Directors equal to the number of
members necessary to constitute a majority of the members of the Company's
Board of Directors minus one member. Such nomination shall be made as soon as
possible after such designation by an Investor.

(F) VOTING UPON EVENT OF DEFAULT. If and whenever an
Event of Default (as such term is defined in the Securities Purchase Agreement,
dated the date hereof, between the Company and an Investor) shall occur, then
in such event and at all times thereafter the Company and its management shall
upon the written request of an Investor nominate to become a member or members
of the Company's Board of Directors each person designated by an Investor in
such written request. Such nomination shall be made as soon as possible after
such designation by an Investor. The obligation of the Company under this
subsection (f) shall apply notwithstanding (i) how many persons designated by
an Investor are or will become members of the Company's Board of Directors and
(ii) that an Investor may designate persons to fill every member position on
the Company's Board of Directors.

2. EQUITABLE RELIEF. The parties hereto agree and declare that
legal remedies may be inadequate to enforce the provisions of this Agreement
and that equitable relief, including specific performance an injunctive relief,
may be used to enforce such provisions.

- 2 -
<PAGE> 3

3. MISCELLANEOUS.

(A) NOTICES. Any and all notices, designations, consents,
offers, acceptances, or any other communication provided for herein shall be
given in writing delivered personally (including delivery by courier or by
facsimile if received during normal working hours) or by registered or
certified mail, addressed, if to the Company, to Watson General Corporation,
32-B Mauchly, Irvine, California 92718, Attn: Mr. Ronald G. Crane. Except as
otherwise provided in this Agreement, each such notice shall be deemed given
when delivered or on a date which is 4 days after it is mailed in any post
office or branch post office regularly maintained by the United States Postal
Service (registered or certified, which postage prepaid and properly
addressed).

(B) AMENDMENT. No change in or modification of this
Agreement shall be valid unless the same shall be in writing and signed by an
Investor and the Company.

(C) WAIVER. No failure or delay on the party of the
parties or any of them in exercising any right, power or privilege hereunder,
nor any course of dealing between the parties or any of them shall operate as a
waiver of any such right, power or privilege nor shall any single or partial
exercise of any such right, power or privilege preclude the simultaneous or
later exercise of any other right, power or privilege. The rights and remedies
herein expressly provided are cumulative and are not exclusive of any rights or
remedies which the parties or any of them would otherwise have. No notice to
or demand on the company in any case shall entitle the Company to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the other parties or any of them to take any other or
further action in any circumstances without notice or demand.

(D) COUNTERPARTS. This Agreement may be executed in two
or more counterparts each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.

(E) GOVERNING LAW. This Agreement shall be governed by,
and construed and enforced in accordance with, the laws of the State of
California without regard to principles of conflict of laws.

(F) BENEFIT AND BIDING EFFECT. Except as otherwise
provided in this Agreement, no right under this Agreement shall be assignable
and any attempted assignment in violation of this provision shall be void.
This Agreement shall be binding upon and inure to the benefit of the parties
and their executors, administrators, personal representatives, heirs,
successors and permitted assigns. Except as set forth in this clause (i), this
Agreement does not create and shall not be construed as creating any rights
enforceable by any Person not a party hereto.

- 3 -
<PAGE> 4

(G) TERM. The obligations of the Company hereunder shall
terminate at such time as Investor, nor any successor or assign of any
Investor, owns any shares of Common Stock.

(H) SEVERABILITY. In the event that any potion of this
agreement shall be held to be invalid or unenforceable to any extent, such
portion shall be enforced to the fullest lawful extent and the remaining parts
hereof shall nevertheless continue to be valid and enforceable as though the
invalid portions were not a part hereof. If any time period set forth herein
is held by a court of competent jurisdiction to be unenforceable, a different
time period that is determined by the court to be more reasonable shall replace
the unenforceable time period.

- 4 -
<PAGE> 5

IN WITNESS WHEREOF, the parties hereto have executed this
Company Agreement as of the date and year first above written.

The Company: WATSON GENERAL CORPORATION
a California corporation

By:____________________________________________
Chairman of the Board

The Investors: SAGAPONACK PARTNERS, L.P.

By:____________________________________________
Title:

SAGAPONACK INTERNATIONAL PARTNERS, L.P.

By:____________________________________________
Title:

- 5 -
<PAGE> 6
SCHEDULE 1

Corey Horwitz

Jon Deitcher

Alex Troy

Stephen J. Meringoff

Harris Maslansky

- 6 -
<PAGE> 7

IN WITNESS WHEREOF, the parties hereto have executed this
Company Agreement as of the date and year first above written.

The Company: WATSON GENERAL CORPORATION
a California corporation

By: [SIG]
--------------------------------------------
Chairman of the Board

The Investors: SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner

By: [SIG]
--------------------------------------------
Title:

SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: RSP Capital L.L.C., its supervising general
partner

By: [SIG]
--------------------------------------------
Title:

<PAGE> 8

IN WITNESS WHEREOF, the parties hereto have executed this
Company Agreement as of the date and year first above written.

The Company: WATSON GENERAL CORPORATION
a California corporation

By: [SIG]
--------------------------------------------
Chairman of the Board

The Investors: SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner

By: [SIG]
--------------------------------------------
Title:

SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: RSP Capital L.L.C., its supervising general
partner

By: [SIG]
--------------------------------------------
Title:

<PAGE> 1
EXHIBIT 7(d)

SHAREHOLDERS AGREEMENT

THIS SHAREHOLDERS AGREEMENT, dated as of May 22, 1997, is by and among
SAGAPONACK PARTNERS, L.P., a California limited partnership, and SAGAPONACK
INTERNATIONAL PARTNERS, L.P., a Cayman Islands limited partnership
(individually, an "Investor" and, together, the "Investors"), and DAN R. COOK,
RONALD G. CRANE, LEON M. BRONFIN, RON E. AINSWORTH, ANDREW BOYD-JONES, THE
CRANE FAMILY REVOCABLE TRUST DATED 8/19/96, RONALD G. CRANE AND KAREN M. CRANE,
TRUSTEES and THE CHARLES A. & MARY L. WATSON TRUST DATED 7/14/86, MARY L.
WATSON, TRUSTEE (Cook, Crane, Bronfin, Ainsworth, Boyd-Jones, The Crane Family
Revocable Trust and The Charles A. & Mary L. Watson Trust hereinafter referred
to collectively as the "Shareholders" and individually as a "Shareholder").

I. BACKGROUND

1. Watson General Corporation, a California corporation (the
"Company") is authorized to issue 7,304,520 shares (the "Shares") of common
stock of the Company ("Common Stock") and 2,625,432 warrants to purchase Common
Stock sold on or about the date hereof to an Investor (the "Warrant"); and

2. Each Shareholder is the record and beneficial owner of the
number of issued and outstanding Securities appearing opposite his name in
Exhibit A to this Agreement, free and clear of all options, liens, encumbrances
or charges of any kind except as set forth in this Agreement; and

3. The parties deem it in the best interests of the Company to
provide for the election of directors as herein provided and delivery of this
Shareholders Agreement is a condition to the investment to be made by an
Investor concurrently herewith.

II. AGREEMENT

In consideration of the agreements and mutual covenants set forth
herein, the parties agree as follows:

1. BOARD OF DIRECTORS.

(A) SHAREHOLDERS VOTE. The Company may, from time to
time, nominate persons to become members of the Company's Board of Directors
pursuant to the terms of a subsection of Section 1(a), (b), (d), (e) and (f) of
the Company Agreement, dated the date hereof, between the Investors and the
Company (the "Company Agreement"). Such persons so nominated shall be
hereinafter called, individually, a "Nominated Person" and, collectively, the
"Nominated Persons". Each Shareholder hereby agrees that he/it will cause all
shares of

<PAGE> 2

Common Stock registered in the name of such Shareholder to be voted, and will
otherwise take or cause to be taken all such other action as may be necessary,
so that each Nominated Person will be elected as a member of the Company's
Board of Directors so long as the Investors vote their shares of Common Stock
for such Nominated Persons and cause all other shares of Common Stock under
their direct or indirect control to be voted for such Nominated Persons. The
obligations set forth in the immediately preceding sentence shall not apply to
subsequent holders of shares of Common Stock held by a Shareholder if such
shares were sold to such subsequent holder in a bona fide third-party sale.
Notwithstanding the foregoing, the Shareholders will not be obligated to vote
their shares of Common Stock for Nominated Person at any meeting of the
shareholders of the Company if (i) it is conclusively and reasonably determined
that the number of shares of Common Stock owned or controlled by the Investors
represents a majority of the shares of Common Stock present in person or by
proxy and entitled to vote at such meeting, (ii) cumulative voting provisions
in the California Corporation Code shall have not been amended or modified in a
way that requires the Investors to own or control more than a majority of the
Common Stock in order for the Investors to elect a majority of the members of
Company's Board of Directors and (iii) Company's constituent documents shall
not have been amended or modified in a way that requires the Investors to own
or control more than a majority of the common Stock in order for the Investors
to elect a majority of Company's Board of Directors.

2. REPRESENTATIONS. Each Shareholder represents that such
Shareholder is the record and beneficial owner of the number of issued and
outstanding Securities appearing opposite such Holder's name in Exhibit A
attached hereto, free and clear of any option, lien, encumbrance or charge of
any kind whatsoever, except as created by or described in this Agreement and
Shareholders Agreement.

3. EQUITABLE RELIEF. The parties hereto agree and declare that
legal remedies may be inadequate to enforce the provisions of this Agreement
and that equitable relief, including specific performance an injunctive relief,
may be used to enforce such provisions.

4. MISCELLANEOUS.

(A) NOTICES. Any and all notices, designations, consents,
offers, acceptances, or any other communication provided for herein shall be
given in writing delivered personally (including delivery by courier or by
facsimile if received during normal working hours) or by registered or
certified mail, addressed to a Shareholder at the address indicated for such
Shareholder on the Schedule of Shareholders attached hereto, or to such other
address as may be designated in writing by any such party. Except as otherwise
provided in this Agreement, each such notice shall be deemed given when
delivered or on a date which is 4 days after it is mailed in any post office or
branch post office regularly maintained by the United States Postal Service
(registered or certified, which postage prepaid and properly addressed).

- 2 -
<PAGE> 3

(B) AMENDMENT. No change in or modification of this
Agreement shall be valid unless the same shall be in writing and signed by an
Investor and Shareholders representing more than 50% of the Common Stock held
by the Shareholders in the aggregate.

(D) COUNTERPARTS. This Agreement may be executed in two
or more counterparts each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.

(E) GOVERNING LAW. This Agreement shall be governed by,
and construed and enforced in accordance with, the laws of the State of
California without regard to principles of conflict of laws.

(G) TERM. The obligations of the Shareholders hereunder
shall not be effective at such time as the aggregate number of shares of Common
Stock owned by an Investor or under the direct or indirect control of an
Investor is less than 10% of the total outstanding number of shares of Common
Stock.

- 3 -
<PAGE> 4

IN WITNESS WHEREOF, the parties hereto have executed this
Shareholders Agreement as of the date and year first above written.

Shareholders: DAN R. COOK

_________________________________________
RONALD G. CRANE

_________________________________________
LEON M. BRONFIN

_________________________________________
RON E. AINSWORTH

_________________________________________
ANDREW BOYD-JONES

_________________________________________
THE CRANE FAMILY REVOCABLE TRUST DATED
8/19/96, RONALD G. CRANE AND KAREN M.
CRANE TRUSTEES

_________________________________________
RONALD G. CRANE

_________________________________________
KAREN M. CRANE

THE CHARLES A. and MARY L. WATSON TRUST
DATED 7/14/86, MARY L. WATSON, TRUSTEE

_________________________________________
MARY L. WATSON

- 4 -
<PAGE> 5

The Investors: SAGAPONACK PARTNERS, L.P.

By:______________________________________
Title:

SAGAPONACK INTERNATIONAL PARTNERS, L.P.

By:______________________________________
Title:

- 5 -
<PAGE> 6

SCHEDULE 1

Corey Horwitz
Jon Deitcher
Alex Troy
Stephen J. Meringoff
Harris Maslansky

- 6 -
<PAGE> 7

EXHIBIT A

SCHEDULE OF SHAREHOLDERS

Shares of Common Stock

Dan R. Cook
Address:

Charles A. Watson
Address

Ronald G. Crane
Address:

Leon M. Bronfin
Address:

Ron E. Ainsworth
Address:

Andrew Boyd-Jones
Address:

<PAGE> 8

EXHIBIT B

CONSENT AND ACKNOWLEDGMENT OF SPOUSE

Each of the undersigned, being the spouse of one of he Holders who is a
party to the foregoing Shareholders Agreement, dated as of May 21, 1997 (the
"Agreement"), hereby declares that he or she has read the Agreement in its
entirety and being convinced of the wisdom and equity of the terms thereof, and
in consideration of the premises and of the provisions thereof, hereby
expresses acceptance of the Agreement and hereby agrees to all of the
provisions thereof.

The undersigned hereby additionally agrees to the following
terms an conditions with respect to such Agreement, so long as the Agreement
remains in full force and effect:

1. That during her lifetime, she will not cause or allow
her community interest in Securities (as defined in the Agreement) owned by her
and her husband to be transferred to any person other than her spouse, nor will
she create or allow to be created any tenancy with right of survivorship in any
person other than her spouse with respect other community interest in such
Securities.

2. That upon her death, she will bequeath her community
property interest in the Securities owned by her and her husband to her spouse.

3, That in the event of the death of her spouse, the
provisions of the Agreement shall be binding upon her to the extent of any and
all interest that she may then have or thereby acquire in the Securities owned
by her and her husband, whether as a community property interest or an interest
acquired by right of survivorship, or as an intestate successor, heir, legatee,
or otherwise.

4. That the undersigned, for herself, her heirs,
successors, assigns and personal representative, agrees that in the event the
community property interest of the undersigned in the Securities owned by her
and her husband shall not have been validly bequeathed by her at the time of
her death in the manner provided by the foregoing paragraph 2 of this Consent,
then such decedent's community property interest in such Securities shall be
offered to the Company by her personal representative pursuant to the terms and
provisions of the Agreement.

5. That she will at any time upon request make, execute,
and deliver such instruments and documents as may be necessary to carry out the
provisions of the Agreement.

6. That this Consent is not a present transfer or release
of any rights which the undersigned may have in any of the community property
of her marriage.

<PAGE> 9
7. That this consent may be executed in counterparts,
which together constitute one and the same instruments.

_________________________________________
Name:

<PAGE> 1
EXHIBIT 7(e)

OPTION AGREEMENT

This Option Agreement (the "Agreement") is made as of May 22, 1997
between Sagaponack Partners, L.P., a Delaware limited partnership ("Partners")
and Sagaponack International Holdings L.L.C., a Delaware limited liability
company ("International").

Partners hereby grants to International an option to purchase from
Partners shares of common stock of Watson General Corporation ("Watson") and
warrants to purchase shares of common stock of Watson, and International hereby
accepts the option on the following terms and conditions:

1. Grant of Option. Partners hereby grants to International the right
and option ("Option") to purchase from up to 55.66075% of the shares of common
stock of Watson held by the Partners at the time of exercise (the "Shares") and
55.66075% of the warrants to purchase shares of common stock of Watson held by
Partners at the time of exercise (the "Warrants"). The Shares and Warrants have
been issued prior hereto by Watson to Partners.

2. Option Price. The Option price shall be $0.01 per Share and $0.01
per Warrant.

3. Exercise Period. The Option may be exercised in whole or in part
at any time prior to May 22, 2007.

4. Exercise Procedure. The Option or any part thereof may be exercised
from time to time in accordance with Sections 1, 2 and 3 above, which exercise
shall be immediately effective upon written notice to Partners setting forth the
number of Shares and/or Warrants, as the case may be, with respect to which the
Option is being exercised, accompanied by the full amount of the Option price
for such Shares and/or Warrants, as the case may be. Upon exercise of the
Option, the number of Shares and Warrants subject to the Option shall be
automatically reduced to the extent of the number of Shares and Warrants as to
which the Option is exercised, and the Option shall remain in effect as to the
remaining number of Shares and Options.

5. 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
Watson, or shares of common stock of Watson shall be changed into the same or a
different number of shares of the same or another class or classes,
International shall receive, upon the exercise of such exercise right, the
aggregate number and class of shares which, if the Option has been exercised at
the date hereof and the Shares and Warrants acquired thereby had not been
disposed of, International would be holding as a result of any such stock
dividend, split-up, recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of property for stock, separation, reorganization, or
liquidation.

<PAGE> 2

6. 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.

7. Successors. This Agreement shall inure to the benefit of and be
binding upon the successors of the parties hereto.

8. 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.

9. Amendments. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and duly executed by both
parties.

10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York 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 New York.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
first date written above.

SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner

By: _______________________________
Title: ____________________________

SAGAPONACK INTERNATIONAL HOLDINGS L.L.C.
By: Sagaponack Management Company, its managing member

By: _______________________________
Title: ____________________________

- 2 -

<PAGE> 1

EXHIBIT 7(f)

JOINT FILING AGREEMENT

In accordance with Rule 13d-1(f) under the Securities Exchange Act of
1934, as amended, the undersigned hereby agree to the joint filing with all
other Reporting Persons identified in item 2(a) of the Schedule 13D referred to
below on behalf of each of them of a statement on Schedule 13D (including
amendments thereto) with respect to the Common Stock, no par value, of Watson
General Corporation and that this Agreement be included as an Exhibit to such
joint filing. This Agreement may be executed in any number of counterparts all
of which taken together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the undersigned hereby execute this Agreement this
30th day of May, 1997.

SAGAPONACK PARTNERS, L.L.P.

BY: RSP Capital, L.L.C.
its General Partner

BY: /s/ BARRY S. ROSENSTEIN
----------------------------------
Barry S. Rosenstein
Managing Member, RSP Capital, L.L.C.

RSP CAPITAL, L.L.C.

BY: /s/ BARRY S. ROSENSTEIN
----------------------------------
Barry S. Rosenstein
Managing Member

<PAGE> 2

SAGAPONACK INTERNATIONAL HOLDINGS, L.L.C.

BY: /s/ BARRY S. ROSENSTEIN
--------------------------------

NAME: Barry S. Rosenstein
-----------------------------
TITLE: Authorized Officer
------------------------------

SAGAPONACK INTERNATIONAL PARTNERS, L.P.

BY: RSP Capital, L.L.C.
its General Partner

BY: /s/ BARRY S. ROSENSTEIN
------------------------------
Barry S. Rosenstein
Managing Member, RSP Capital, L.L.C.

/s/ BARRY S. ROSENSTEIN
------------------------------------
BARRY S. ROSENSTEIN (INDIVIDUALLY)

-2-