<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K/A
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 22, 1997
WATSON GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
0-16011 95-2873758
(Commission File No.) (IRS Employer Identification No.)
32-B Mauchly
Irvine, California 92718
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)-727-4020
N.A.
(Former name or former address, if changed since last report.)
<PAGE> 2
Item 1. Changes in Control of Registrant
See Item 2 below, which is incorporated herein by this reference.
Item 2. Acquisition or Disposition of Assets
On May 22, 1997, Watson General Corporation (the "Company") acquired all
of the outstanding capital stock of USTMAN Industries, Inc. ("USTMAN"), a
subsidiary of NDE Environmental Corporation ("NDE"), pursuant to a Stock
Purchase Agreement between the Company and NDE. USTMAN provides statistical
inventory reconciliation services for owners of underground storage tanks. The
purchase price was $5.25 million in cash and a $500,000 promissory note. The
note bears interest at the rate of 8.5% per annum, payable quarterly, with all
principal due on June 1, 1998. Repayment of the note has been guaranteed by
USTMAN and by two other subsidiaries of the Company, Watson Systems, Inc. and
EnvirAlert, Inc. Immediately prior to the closing, all cash and cash equivalents
of USTMAN on the close of business on May 21, 1997 were transferred to NDE. In
addition, the Stock Purchase Agreement provides for an adjustment to the
purchase price within 60 days after the closing to reflect the difference, if
any, between the working capital balance of USTMAN at the closing (after taking
into account the transfer of cash and cash equivalents to NDE on May 21) and
$424,271 (representing the working capital balance of USTMAN as of December 31,
1996). The amount of consideration for USTMAN was determined by negotiation
based upon the customer base, licenses and revenues of USTMAN. A copy of the
Stock Purchase Agreement is attached to this Form 8-K as Exhibit 2.1 hereto and
is incorporated herein by this reference.
The Company obtained $7,000,000 of financing for the USTMAN acquisition
and for working capital from Sagaponack Partners, L.P. ("Sagaponack"), a private
investment firm based in San Francisco and New York, and its foreign affiliate,
Sagaponack International Partners, L.P. (collectively, the "Investors"),
pursuant to a Securities Purchase Agreement dated May 22, 1997. Senior
Subordinated Notes in the aggregate principal amount of $7,000,000 were issued
to the Investors, and are due and payable in five years, subject to mandatory
prepayment in certain circumstances. Interest on the notes is 10% per annum for
the first year, payable quarterly, and increases by one percent each year during
the term of the Notes, subject to further adjustment in specified instances. The
notes are secured by the assets of the Company, including the stock of its
subsidiaries, and by the assets of the principal subsidiaries of the Company,
including USTMAN and Watson Systems, Inc. The notes are subject to mandatory
prepayment in the event that the Company completes a public offering of
newly-issued shares of Common Stock (a "Stock Offering"), or in the event that
one or more persons (other than the Investors or their transferees) acquire at
least 50% of the outstanding Common Stock or of the operating assets of the
Company (a "Company Sale"). In addition, the Company must apply toward reduction
of principal at least 50% of any excess cash (defined as cash and cash
equivalents of the Company existing at the end of a calendar quarter after
expenses of the Company have been paid for or provided for and less any sums
which the Company in good faith has reserved for expenditures in the next two
calendar quarters). The Company may elect to prepay all or a portion (in
multiples of $250,000) of the outstanding principal balance at any time.
During the time that the Senior Subordinated Notes remain outstanding,
the Company is subject to a number of negative covenants, as set forth in the
Securities Purchase Agreement. In addition, upon the
<PAGE> 3
occurrence of an Event of Default, as defined in the Securities Purchase
Agreement, the Senior Subordinated Notes can become immediately due and payable.
Pursuant to the Securities Purchase Agreement, Sagaponack was issued
7,304,520 shares of the Company's Common Stock, representing 40% of the total
number of shares of Common Stock outstanding immediately after such issuance,
and warrants to purchase shares of Common Stock in an amount sufficient, upon
the exercise of any outstanding options and warrants, for Sagaponack to maintain
its 40% ownership of the outstanding Common Stock of the Company. Such warrants
will be at the same price and term as the options or warrants exercised by third
parties. The Company has granted Sagaponack two demand registration rights with
respect to its Common Stock, warrants and shares issuable upon the exercise of
warrants, as well as "piggyback" registration rights with respect to such
securities.
If, upon the occurrence of the first Event of Liquidity (as defined),
the Company's cumulative adjusted Earnings Before Taxes, Depreciation and
Appreciation (EBTDA) per share is not greater than 90% of the amount calculated
for such date on certain projections provided to the Investors, then the Company
will be obligated to issue additional shares of Common Stock to Sagaponack in an
amount sufficient to increase the percentage of the Company's Common Stock
issued to Sagaponack from 40% to the Adjusted Base Ownership Percentage, as
defined. However, in no event shall the Adjusted Base Ownership Percentage be
greater than 49.999%. If the Company pays all principal of and interest on the
Senior Subordinated Notes prior to October 30, 1998 (other than where such
repayment is required as a result of a Stock Offering, Company Sale or
acceleration of the indebtedness pursuant to the Securities Purchase Agreement),
then no adjustment pursuant to the foregoing shall be required.
If, on a Warrant Adjustment Date (as defined), the Company's performance
is less than 70% of that anticipated at the time that the Securities Purchase
Agreement was executed, warrants to purchase shares of Common Stock will be
issued to the Investors based upon the amount of such deficiency. The warrants
issued will have an exercise price of $0.001 per share and will be exercisable
at any time. A "Warrant Adjustment Date" is defined as the earlier of (a) the
third anniversary of the date of the Securities Purchase Agreement or such other
date thereafter designated by the Investors, (b) the date of a Stock Offering,
and (c) a Company Sale.
The Securities Purchase Agreement obligates the Company to cause USTMAN
to be merged into the Company immediately and to cause Watson Systems, Inc. to
be merged into the Company within 15 days after the closing. In addition, the
Company is obligated to sell Toxguard Fluid Technologies and Toxguard Systems,
Inc. as soon as possible.
Pursuant to the Securities Purchase Agreement, the Company has entered
into a five-year financial advisory agreement with Sagaponack Management Co.
Inc. ("SMC"), pursuant to which SMC has been engaged on an exclusive basis to
render financial advisory services to the Company. If, during the term of the
agreement, the Company determines to undertake a public or private sale of debt
or equity securities, other than a financing provided by SMC or its affiliated
entities, with respect to which the Company uses the services of a financial
intermediary, the Company has agreed to retain SMC as a co-managing underwriter
or placement agent if SMC is licensed to perform and is reasonably capable of
performing such services. In addition, if the Company during the term of the
agreement determines to undertake
<PAGE> 4
certain business transactions and requires the services of a financial advisor,
the Company shall retain SMC as the financial advisor.
Pursuant to the Securities Purchase Agreement, the Company has entered
into a Company Agreement with the Investors pursuant to which the Company has
agreed that the Board of Directors will at all times consist of five members,
and that the Company will nominate to become members of the Board two persons
designated by the Investors and one person selected from a list of persons
specified in the Company Agreement. The Company also agreed to nominate Dan R.
Cook as a member of the Board of Directors. In addition, pursuant to a
Shareholders Agreement entered into among the Investors and certain shareholders
of the Company, including Charles A Watson, Ronald G. Crane and Dan R. Cook, the
shareholders are obligated to vote their shares during any election of directors
of the Company for the two nominees of the Investors and for the person
nominated from the list of persons specified in the Company Agreement, unless
the Investors have sufficient votes to cause the election of such persons. Such
obligation shall terminate 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.
Upon the closing of the Securities Purchase Agreement, Joseph
Christoffel, Dennis Mulligan, James Smathers, and Charles Watson resigned as
Directors of the Company. Ronald Crane as the sole remaining director elected
Barry Rosenstein, Marc Weisman, and Dan Cook to the Board. The then Board
elected Don Phillips as Director, in accordance with the Company Agreement.
Copies of the Securities Purchase Agreement, Warrant Agreement, Stock
Pledge Agreement, Security Agreement, financial advisory agreement, Company
Agreement and Shareholders Agreement are attached to this Current Report on Form
8-K as exhibits hereto and are incorporated herein by this reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
- Financial Statements of Ustman Industries, Inc. for the years
ended December 31, 1995 and 1996, together with Report of
Independent Accountants.
- Unaudited Financial Statements of Ustman Industries, Inc. at
March 31, 1997 and for the three months ended March 31, 1996
and 1997.
(b) Pro Forma Financial Information.
- Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1997
- Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended September 30, 1996.
- Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the quarter ended March 31, 1997.
<PAGE> 5
- Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
(c Exhibits.
All Exhibits, except Exhibit 23, were filed with the original Current Report on
Form 8-K on June 6, 1997. Exhibit 23 is attached hereto.
Exhibit 2.1 Stock Purchase Agreement
Exhibit 2.2 Securities Purchase Agreement
Exhibit 2.3 Warrant Agreement
Exhibit 2.4 Stock Pledge Agreement
Exhibit 2.5 Security Agreement
Exhibit 2.6 Financial Advisory Agreement
Exhibit 2.7 Company Agreement
Exhibit 2.8 Shareholder Agreement
Exhibit 23 Consent of Independent Auditors
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Watson General Corporation
By:
Date 8/1/97
/s/ JOSEPH L. CHRISTOFFEL
---------------------------------------------
Joseph L. Christoffel, Chief Financial Officer
<PAGE> 6
Financial Statements
Ustman Industries, Inc.
Years ended December 31, 1996 and 1995
with Report of Independent Auditors
<PAGE> 7
Ustman Industries, Inc.
Financial Statements
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors ................................................1
Audited Financial Statements
Balance Sheets ................................................................2
Statements of Earnings ........................................................4
Statements of Stockholders' Equity ............................................5
Statements of Cash Flows ......................................................6
Notes to Financial Statements .................................................7
</TABLE>
<PAGE> 8
Report of Independent Auditors
The Board of Directors and Stockholders
Ustman Industries, Inc.
We have audited the accompanying balance sheets of Ustman Industries, Inc. as of
December 31, 1996 and 1995, and the related statements of earnings,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ustman Industries, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Denver, Colorado
July 29, 1997
<PAGE> 9
Ustman Industries, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 323,587 $ 248,014
Accounts receivable, net of allowance of $30,325
and $40,000 at December 31, 1996 and 1995,
respectively 454,374 514,698
Current portion of notes receivable 48,072 44,072
Related party receivables 44,614 1,294,185
Prepaid expenses and other 87,060 37,307
Deferred tax assets - 16,597
---------------------------------
Total current assets 957,707 2,154,873
Property, plant, and equipment:
Computer equipment 385,753 448,998
Machinery and equipment 22,618 44,171
Furniture and fixtures 40,840 82,253
---------------------------------
449,211 575,422
Accumulated depreciation (21,808) (193,920)
---------------------------------
427,403 381,502
Long-term notes receivable 42,240 84,400
Intangible assets, net of accumulated amortization
of $78,655 and $25,693 at December 31, 1996 and
1995, respectively 3,499,614 39,041
Other assets, net 107,078 338,054
---------------------------------
Total assets $5,034,042 $2,997,870
=================================
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,706 $ 35,620
Accrued expenses:
Salaries and wages 76,323 52,716
Other 123,154 62,137
Deferred income 60,198 74,761
Income taxes payable to parent 77,457 312,335
Deferred tax liability 861 -
---------------------------------
Total current liabilities 378,699 537,569
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 1,000
Issued and outstanding shares - 1,000 10 10
Additional paid-in capital 4,655,333 1,279,708
Retained earnings - 1,180,583
---------------------------------
Total stockholders' equity 4,655,343 2,460,301
---------------------------------
Total liabilities and stockholders' equity $5,034,042 $2,997,870
=================================
</TABLE>
See accompanying notes.
<PAGE> 11
Ustman Industries, Inc.
Statements of Earnings
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------------
<S> <C> <C>
Net sales $3,853,164 $3,953,851
Cost of sales 1,506,656 1,383,361
---------------------------------
Gross profit 2,346,508 2,570,490
General and administrative expenses 1,907,824 1,780,184
---------------------------------
Operating profit 438,684 790,306
Interest income 64,987 54,855
---------------------------------
Earnings before income taxes 503,671 845,161
Income tax expense 196,240 329,712
---------------------------------
Net earnings $ 307,431 $ 515,449
=================================
</TABLE>
See accompanying notes.
<PAGE> 12
Ustman Industries, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 1,000 $10 $1,279,708 $ 665,134 $1,944,852
Net earnings - - - 515,449 515,449
-------------------------------------------------------------------------
Balances at December 31, 1995 1,000 10 1,279,708 1,180,583 2,460,301
Net earnings - - - 307,431 307,431
Cash distribution to parent - - (124,375) (1,488,014) (1,612,389)
Contributed capital - - 3,500,000 - 3,500,000
-------------------------------------------------------------------------
Balances at December 31, 1996 1,000 $10 $4,655,333 $ - $4,655,343
=========================================================================
</TABLE>
See accompanying notes.
<PAGE> 13
Ustman Industries, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 307,431 $ 515,449
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 414,794 358,282
Deferred income taxes 17,458 (16,597)
(Gain) loss on sale of property, plant, and equipment (67) 3,244
Changes in operating assets and liabilities:
Accounts receivable 60,324 281,776
Related party receivables 1,249,571 (1,030,935)
Prepaid expenses and other (49,753) 13,720
Accounts payable and accrued expenses (145,168) (32,042)
Deferred income (14,563) (22,297)
------------------------------
Net cash provided by operating activities 1,840,027 70,600
INVESTING ACTIVITIES
Capital expenditures (177,078) (144,754)
Proceeds from sale of property, plant, and equipment 388 -
Collections on notes receivable 38,160 50,700
Increase in other assets (13,535) (9,824)
------------------------------
Net cash used in investing activities (152,065) (103,878)
FINANCING ACTIVITIES
Equity distribution (1,612,389) -
------------------------------
Net cash used in financing activities (1,612,389) -
------------------------------
Net increase (decrease) in cash and cash equivalents 75,573 (33,278)
Cash and cash equivalents at beginning of year 248,014 281,292
==============================
Cash and cash equivalents at end of year $ 323,587 $ 248,014
==============================
SUPPLEMENTAL INFORMATION
Noncash pushdown of goodwill by parent in connection
with the Company's acquisition $3,500,000 $ -
==============================
</TABLE>
See accompanying notes.
<PAGE> 14
Ustman Industries, Inc.
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION
Ustman Industries, Inc. (the "Company") provides environmental services to
owners and operators of underground and aboveground storage tanks in the United
States and abroad. These products and services include statistical inventory
reconciliation and other monitoring methods approved by various regulatory
authorities.
For the period January 1, 1995 until October 1996, the Company was a
wholly-owned subsidiary of Technology Environmental, Inc. ("TEI"). In October
1996, the Company became a wholly owned subsidiary of NDE Environmental
Corporation ("NDE"). See discussions of the acquisitions of the Company at Note
3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company primarily generates income through the testing of underground
storage tanks and related software services. Sales are recognized when services
are performed. Prepaid contracts are recorded as deferred income and recognized
as the contract is completed.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Upon sale or retirement,
the cost of the assets and related accumulated depreciation are removed from the
accounts, and the resulting gains or losses are reflected in operations.
Depreciation is computed on the straight-line method using a five-year life.
Depreciation charged to expense was $130,856 and $283,941 for the years ended
December 31, 1996 and 1995, respectively. Expenditures for repairs and
maintenance are charged to earnings as incurred, and major renewals or
betterments are capitalized. Repairs and maintenance charged to expense totaled
$10,031 and $6,247 for the years ended December 31, 1996 and 1995, respectively.
<PAGE> 15
Ustman Industries, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Goodwill 15 years
Other intangible assets 5 years
</TABLE>
The carrying values of intangible assets are reviewed in connection with the
Company's compliance with FAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, discussed below.
No write-downs of intangible assets in 1996 or 1995 resulted from this review.
INCOME TAXES
The Company files consolidated federal tax returns with its parents. Income
taxes are provided using the liability method and assuming the Company operated
on a stand-alone basis. The provision for income taxes includes federal and
state taxes currently payable and deferred assets and liabilities caused by
timing differences between the financial statements and the tax basis of assets
and liabilities.
ADVERTISING
Advertising costs are expensed as incurred and include trade shows, direct
mailings, and trade publications. Advertising expenses were $280,568 and
$241,870 for the years ended December 31, 1996 and 1995, respectively.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE> 16
Ustman Industries, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosures of fair value information about financial instruments for
which it is practicable to estimate that value. The Company's financial
instruments consist principally of cash and cash equivalents, receivables, and
accounts payable. The Company believes all of the financial instruments'
recorded values approximate current values.
CONCENTRATION OF CREDIT RISK
The Company grants credit to its customers, who consist primarily of major oil
companies and convenience store owners/operators located in the United States
and Canada. The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. Management believes the allowance for doubtful
accounts is adequate to absorb any expected losses.
NEW ACCOUNTING STANDARDS
In March 1995, FAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, was issued, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. FAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed of. The Company adopted FAS No. 121 in the first quarter of 1996.
The effect of adoption was not material.
3. ACQUISITIONS OF THE COMPANY
In October 1996, the Company's parent TEI sold all of the outstanding common
stock of the Company to NDE along with the common stock of two other
subsidiaries owned by TEI for approximately $12,500,000 (the "NDE Acquisition").
The Company remained a subsidiary of NDE until May 1997 when all of the common
stock of the Company was purchased by Watson General Corporation for a cash
purchase price of $5,250,000 and an 8% note for $500,000. Both acquisitions were
treated as purchases by the acquiring company.
<PAGE> 17
Ustman Industries, Inc.
Notes to Financial Statements (continued)
3. ACQUISITIONS OF THE COMPANY (CONTINUED)
Upon completion of the NDE Acquisition, the purchase price was allocated to the
assets acquired and liabilities assumed of the purchased companies and all
amounts were recorded at their fair values. This included resetting the
accumulated depreciation of fixed assets to zero. NDE's purchase price in excess
of the net assets of the purchased companies was assigned to goodwill and
allocated to the acquired companies based upon the estimated future cash flows
of their operations. The respective amounts of goodwill were contributed as
additional capital to the companies by NDE. As of the acquisition date, the
Company was allocated $3,500,000 of goodwill.
4. NOTE RECEIVABLE
In June 1994, the Company entered into a licensing agreement with E-Z Serve
Management Company ("E-Z Serve") whereby E-Z Serve agreed to pay $198,000 in
exchange for a perpetual license to use the Company's software. Payments are
made annually on the first of each year beginning January 1, 1995 and continue
through January 1, 1999. Interest has been imputed at 8%.
5. INTANGIBLE ASSETS
Intangible assets, net of amortization, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------------
<S> <C> <C>
Goodwill $3,500,000 $ -
Other 78,269 64,734
Accumulated amortization (78,655) (25,693)
-------------------------------
Total $3,499,614 $39,041
===============================
</TABLE>
6. OTHER ASSETS
Other assets include certain purchased proprietary software and are being
amortized over five years. Amortization expense for the years ended December 31,
1996 and 1995 was $230,977 in both periods.
<PAGE> 18
Ustman Industries, Inc.
Notes to Financial Statements (continued)
7. COMMITMENTS
The Company's office space is leased under a noncancelable operating lease
agreement. Under the terms of the lease, the Company is required to make the
following minimum payments:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
1997 $ 74,952
1998 77,724
=========
Total $ 152,676
=========
</TABLE>
Rental expense for the years ended December 31, 1996 and 1995 was $80,387 and
$73,389, respectively.
8. EMPLOYEE BENEFIT PLAN
The Company participated in the TEI 401(k) defined contribution plan until its
acquisition by NDE. It now participates in NDE's 401(k) plan. Under the NDE
plan, full-time employees are eligible to participate after six months of
service. At NDE's discretion, it can match annually, with equivalent value of
NDE stock (using the market value as of December 31), 50% of a participant's
voluntary contributions, up to 3% of a participant's compensation, and 100% for
contributions between 3% to 6% of a participant's compensation.
No expense for matching contributions was recorded in 1996 or 1995.
9. INCOME TAXES
The Company is included in its parent's consolidated federal and state income
tax returns and is allocated an amount due to the parent for its relative
portion of the consolidated income tax expense. For purposes of showing the
Company on a stand-alone basis, federal and state income taxes have been
computed by assuming the Company filed a separate income tax return. All related
tax assets and liabilities are due from/to the Company's parent. The Company
offset amounts due to/from its parent as fulfillment for its portion of income
tax expense totaling $413,660 and $413,274 during the years ended December 31,
1996 and 1995, respectively.
<PAGE> 19
Ustman Industries, Inc.
Notes to Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets and liabilities at December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $11,599 $15,300
Accrued expenses 13,475 9,880
---------------------------------
25,074 25,180
Deferred tax liability:
Prepaid expenses (25,935) (8,583)
---------------------------------
Net deferred tax assets (liability) $ (861) $16,597
=================================
</TABLE>
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------------------------------------
<S> <C> <C> <C>
1996:
Federal $155,412 $ 15,176 $170,588
State 23,370 2,282 25,652
----------------------------------------
$178,782 $ 17,458 $196,240
========================================
1995:
Federal $300,745 $(14,427) $286,318
State 45,564 (2,170) 43,394
----------------------------------------
$346,309 $(16,597) $329,712
========================================
</TABLE>
<PAGE> 20
Ustman Industries, Inc.
Notes to Financial Statements (continued)
10. RELATED PARTY TRANSACTIONS
Related party receivables reflect charges to TEI and NDE for services performed
in the ordinary course of business and intercompany transfers which occurred
when the Company was owned by TEI and NDE. At December 31, 1996 and 1995,
intercompany receivables were $44,614 and $1,294,185, respectively. The
Company's parent allocates interest income to the Company based upon the
receivable balance. For the years ended December 31, 1996 and 1995, intercompany
interest income was $51,914 and $48,899, respectively.
General and administrative expenses include corporate costs totaling $110,283
and $62,432 for the years ended December 31, 1996 and 1995, respectively. These
costs relate primarily to salary and employee benefits, legal, accounting, and
travel expenses. Although management believe such allocations are reasonable,
they are not able to determine whether such amounts are indicative of the actual
costs that would have been incurred had the Company operated on a stand-alone
basis.
11. CONTINGENCIES
The Company is involved in litigation and routine claims from time to time. In
management's opinion, the litigation and claims in which the Company is
currently involved are not material to the Company's financial position, results
of operations or cash flows.
<PAGE> 21
Ustman Industries, Inc.
Balance Sheet
March 31, 1997
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 320,000
Accounts receivable 866,000
Current portion of notes receivable 42,000
Intercompany receivable 194,000
Prepaid and other current assets 148,000
----------
Total current assets 1,570,000
Property and equipment, net 458,000
Intangibles and goodwill 3,487,000
----------
Total assets $5,515,000
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 76,000
Accrued expenses 272,000
Income taxes payable 194,000
----------
Total current liabilities 542,000
Shareholder's equity:
Common stock
Additional paid-in capital 4,780,000
Retained earnings 193,000
----------
Total shareholder's equity 4,973,000
----------
Total liabilities and shareholder's equity $5,515,000
==========
</TABLE>
<PAGE> 22
Ustman Industries, Inc.
Consolidated Statements of Operations
Three Months Ended March 31, 1997 and 1996
<TABLE>
1997 1996
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $1,459,000 $981,000
Cost of sales 383,000 372,000
---------- --------
Gross profit 1,076,000 609,000
Selling, general and administrative expenses 572,000 456,000
Interest income, net 2,000 37,000
---------- --------
Income from operations before income taxes 506,000 190,000
Income tax expense (189,000) (73,000)
---------- --------
Net income $ 317,000 $117,000
========== ========
</TABLE>
<PAGE> 23
Ustman Industries, Inc.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996
1997 1996
(unaudited) (unaudited)
----------- -----------
Cash flows used in operating activities:
Net income $ 317,000 $ 117,000
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 160,000 91,000
(Increase) decrease in:
Accounts receivable (364,000) 17,000
Current portion of notes receivable 2,000
Other current assets (61,000) (32,000)
Long term receivables 42,000
Accounts payable and accrued expenses 164,000 44,000
--------- ---------
216,000 281,000
--------- ---------
Cash flows used in investing activities:
Purchase of property and equipment (70,000 (28,000)
Cash flows used in financing activities:
Intercompany advances (149,000) (289,000)
--------- ---------
Decrease in cash (3,000) (36,000)
Cash, beginning 323,000 248,000
--------- ---------
Cash, ending $ 320,000 $ 212,000
========= =========
<PAGE> 24
USTMAN TECHNOLOGIES, INC.
NOTE TO UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments consisting of normal recurring accruals necessary to
present fairly the Company's financial position as of March 31, 1997 and the
results of operations and cash flows for the three-month periods ended March 31,
1997 and 1996. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of operations
for the three-month period ended March 31, 1997 are not necessarily indicative
of those to be expected for the entire year.
<PAGE> 25
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 22, 1997, Watson General Corporation (the "Company") completed the
private placement of $7 million principal amount of its 10% Senior Subordinated
Notes Due 2002 and 7,304,520 shares of its common stock (the "Private
Placement") and used most of the proceeds therefrom to acquire all of the
outstanding capital stock of USTMAN Industries, Inc. ("USTMAN"), a subsidiary of
NDE Environmental Corporation ("NDE"), pursuant to a Stock Purchase Agreement
between the Company and NDE.
The following unaudited pro forma condensed consolidated balance sheet at
March 31, 1997 reflects the historical consolidated balance sheets of the
Company and USTMAN, adjusted to give effect to the acquisition, as if such
acquisition had occurred at March 31, 1997 and the Private Placement as if it
had occurred at March 31, 1997.
The following unaudited pro forma condensed consolidated statements of
operations are presented to reflect the acquisition of USTMAN as if such
acquisition had occurred on October 1, 1995 for the year ended September 30,
1996 and on October 1, 1996 for the six month period ended March 31, 1997. The
USTMAN acquisition will be accounted for using the purchase method. USTMAN
prepares its financial statements on the basis of a December 31 fiscal year-end.
The unaudited pro forma condensed consolidated statements of operations combine
the results of operations of the Company for the year ended September 30, 1996
with the results of operations of USTMAN for the year ended December 31, 1996,
and the results of operations of the Company and of USTMAN for the six month
period ended March 31, 1997. Accordingly, USTMAN net sales of approximately
$1,001,000 and net income of $65,000 were included in the unaudited pro forma
condensed consolidated statements of operations for both the fiscal periods
ended September 30, 1996 and March 31, 1997.
The unaudited pro forma condensed consolidated balance sheet and statements
of operations and accompanying notes should be read in conjunction with the
respective historical consolidated financial statements of the Company, as set
forth in its Form 10-K-SB for the year ended September 30, 1996 and its Form
10-Q-SB for the period ended March 31, 1997 and those of USTMAN contained
herein.
The unaudited pro forma condensed consolidated financial information is
based on the consolidated financial statements of the Company and USTMAN giving
effect to the transactions under the assumptions and adjustments outlined in the
accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company's management believes are reasonable given
the circumstances. The unaudited pro forma condensed consolidated balance sheet
and statements of operations are provided for comparative purposes only and are
not necessarily indicative of the results that would have been obtained had the
acquisitions and the Private Placement occurred on the dates indicated or that
may be achieved in the future.
<PAGE> 26
WASON GENERAL CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
WATSON PRO FORMA PRO FORMA
GENERAL USTMAN ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets
Cash and cash equivalents $265,000 $320,000 $6,741,000 A $2,076,000
(5,250,000) B
Accounts receivable 449,000 908,000 1,357,000
Prepaid expenses and other
current assets 116,000 148,000 264,000
--------------------------------------- -----------
830,000 1,376,000 1,491,000 3,697,000
Property and equipment 388,000 458,000 846,000
Intercompany rec/pay 194,000 (194,000) B
Deferred debt issue costs 1,241,000 A 1,241,000
Deposits and other assets 11,000 11,000
Intangibles and goodwill 2,322,000 3,487,000 1,515,000 B 7,324,000
--------------------------------------- -----------
2,721,000 4,139,000 2,562,000 9,422,000
--------------------------------------- -----------
Total assets $3,551,000 $5,515,000 $4,053,000 $13,119,000
======================================= ===========
Liabilities and shareholders' equity:
Current liabilities
Accounts payable, accrued
expenses and other
liabilities $1,017,000 $542,000 $544,000 B $2,103,000
Current portion of LT debt 264,000 (105,000) A 159,000
--------------------------------------- -----------
1,281,000 542,000 439,000 2,262,000
Long term debt and other
liabilities 418,000 6,000,000 A 6,918,000
500,000 B
Deferred employee benefits 434,000 434,000
Shareholders' equity
Common stock 9,534,000 1,000,000 A 10,534,000
Additional paid in capital 653,000 4,780,000 1,294,000 A 1,740,000
(207,000) A
(4,780,000) B
Accumulated deficit (8,769,000) 193,000 (193,000) B (8,769,000)
--------------------------------------- -----------
1,418,000 4,973,000 (2,886,000) 3,505,000
--------------------------------------- -----------
Total liabilities & shareholders' equity $3,551,000 $5,515,000 $4,053,000 $13,119,000
======================================= ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
<PAGE> 27
WATSON GENERAL CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
WATSON PRO FORMA PRO FORMA
GENERAL USTMAN ADJUSTMENTS CONSOLIDATED
----------------------------------------- --------------
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER DECEMBER
30, 1996 31, 1996
-----------------------------
<S> <C> <C> <C> <C>
Net sales $4,089,000 $3,853,000 $ $7,942,000
Cost of sales 2,498,000 1,507,000 4,005,000
------------------------------ ------------
Gross profit 1,591,000 2,346,000 3,937,000
Selling, general and administrative 3,368,000 1,908,000 (28,000)C 5,305,000
(125,000)F
182,000 G
Research and development 185,000 185,000
Interest and other expense 99,000 (65,000) 732,000 D 1,214,000
248,000 E
200,000 H
----------------------------------------- ------------
Loss before provision for income taxes (2,061,000) 503,000 (1,209,000) (2,767,000)
Provision for income taxes 5,000 196,000 I 201,000
----------------------------------------- ------------
Net income (loss) $(2,066,000) $307,000 $(1,209,000) $(2,968,000)
========================================= ============
Net loss per share $(0.22) $(0.18)
============= ============
Weighted average shares 9,434,000 16,739,000
============= ============
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
WATSON PRO FORMA PRO FORMA
GENERAL USTMAN ADJUSTMENTS CONSOLIDATED
------------------------------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $2,170,000 $2,460,000 $ $4,630,000
Cost of sales 961,000 777,000 1,738,000
----------------------------- --------------
Gross profit 1,209,000 1,683,000 2,892,000
Selling, general and administrative 1,719,000 1,074,000 (14,000) C 2,808,000
(62,000) F
91,000 G
Research and development 167,000 167,000
Interest and other expense 71,000 (3,000) 366,000 D 658,000
124,000 E
100,000 H
------------------------------------------ --------------
Loss before provision for income taxes (748,000) 612,000 (605,000) (741,000)
Provision for income taxes 5,000 234,000 I 239,000
------------------------------------------ --------------
Net loss $(753,000) $378,000 $(605,000) $(980,000)
========================================== ==============
Net loss per share $(0.07) $(0.05)
=============== ==============
Weighted average shares 10,687,000 17,992,000
=============== ==============
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
<PAGE> 29
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
A. To reflect the financing received from Sagaponack Partners, LP in the
amount of $7,000,000 in exchange for $7,000,000 principal amount of Senior
Subordinated Notes with interest at 10% and issuance of 7,304,250 shares
of common stock. An original issue discount (OID) of $1,000,000 was
recorded in connection with the valuation of the common stock issued in
the transaction, which is a preliminary estimate and subject to adjustment
upon completion of a valuation study by a qualified specialist.
Approximately $1,448,000 of debt issuance costs were capitalized in
connection with the financing, and are being amortized over the life of
the loan (5 years).
B. To reflect consideration paid and the purchase price allocation in
connection with the Company's acquisition of Ustman Industries, Inc.
(Ustman). The purchase price was $6,126,000, comprised of $5,250,000 in
cash, $500,000 in debt and a $376,000 preliminary price adjustment payable
within ninety days. The price adjustment is subject to change based upon
final determination of working capital accounts at May 22, 1997.
Estimated purchase price in excess of net tangible assets acquired:
Purchase price $6,126,000
Less estimated fair market value of recorded net
tangible assets of acquired company 1,199,000
Excess of purchase price over fair value of net tangible ----------
assets acquired $4,927,000
==========
The above purchase price allocation is preliminary and subject to change
as additional information necessary to complete the allocation becomes
available. Of the $4,927,000 excess of purchase price over fair value of
net tangible assets acquired, the Company has made a preliminary
allocation of $3,300,000 to acquired software and the remainder to
goodwill.
C. Adjustment of compensation expense for executives in connection with a
signed employment agreement with the new President and agreements with
prior executives.
D. Interest on notes issued in the transaction.
E. Amortization expense for deferred debt issuance costs over five years on a
straight- line basis.
F. Amortization expense for software over eight years on a straight-line
basis.
<PAGE> 30
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
G. Amortization expense for excess of purchase price over fair value of net
assets acquired over fifteen years on a straight-line basis.
H. Amortization expense for original issue discount on debt over five years
on a straight-line basis.
I. There is no pro forma tax benefit due to net losses incurred by Watson
General.
J. The Company issued several severance packages to executives and Directors
in connection with the acquisition, consisting of $67,000 in cash, 10,000
shares of common stock valued at $13,750 and the restructuring of certain
option agreements to purchase common stock, some of which were issued
below fair market value at the date of grant. These transactions will be
recognized as charges in periods following the merger.
K. The Company is currently investigating the disposition of two of its
subsidiaries, Toxguard Fluid Technologies and Toxguard Systems, Inc. This
information have not been reflected in the accompanying pro forma
condensed consolidated financial statements.
L. On July 12, 1997, the Company settled a lawsuit with an unfavorable
outcome to the Company of $200,000 in cash and 50,000 shares of common
stock, valued at $68,750 at the date of issue. This transaction has not
been reflected in the accompanying pro forma condensed consolidated
financial statements.
<PAGE> 31
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-64310) of Watson General Corporation and in the related
Prospectus of our report dated July 29, 1997, with respect to the financial
statements of Ustman Industries, Inc. included in this Current Report (Form
8-K/A) to be filed with the Securities and Exchange Commission on or about July
31, 1997.
/s/ ERNST & YOUNG LLP
Denver, Colorado
July 31, 1997
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-64310) of Watson General Corporation and in the related
Prospectus of our report dated July 29, 1997, with respect to the financial
statements of Ustman Industries, Inc. included in this Current Report (Form
8-K/A) to be filed with the Securities and Exchange Commission on or about July
31, 1997.
/s/ ERNST & YOUNG LLP
Denver, Colorado
July 31, 1997
