As Filed with the Securities and Exchange Commission on January 21, 2000
Registration No. 333-______
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
WATERS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Minnesota 3612 41-0832194
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
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2411 7th Street N.W.
Rochester, MN 55901
(507) 288-7777
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Jerry W. Grabowski
President and Chief Executive Officer
2950 Xenium Lane North #108
Plymouth, MN 55441
(612) 509-7440
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Robert K. Ranum, Esq. Katherine T. Schuda, Esq.
James A. Korn, Esq. Roya Hosseini, Esq.
Fredrikson & Byron, P.A. Fenwick & West LLP
900 Second Avenue South, Suite 1100 Two Palo Alto Square
Minneapolis, Minnesota 55402-3397 Palo Alto, CA 94306
(612) 347-7000 (650) 494-0600
Approximate date of commencement of proposed sale of the
securities to the public: Upon completion of the merger, as
described in this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum Amount of
Title of each class of securities to be Amount to be offering price aggregate registration
registered registered (1) per share offering price fee
(2)
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Common stock, par value $.10 per share (3) 375,000 shares Not Applicable $1,065,000 $282
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(1) Represents the approximate maximum number of shares issuable upon
completion of the merger as described in the registration statement.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f)(2) and 457(f)(3) under the Securities Act of
1933 (the "Securities Act") based on the product of the estimated maximum
number of shares of Garrett Communications, Inc. to be acquired in the
merger (3,250,000) multiplied by the per share book value of Garrett's
common stock on September 30, 1999, less the amount of cash to be paid by
the Registrant in the merger ($2,250,000).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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WATERS GARRETT COMMUNICATIONS, INC.
INSTRUMENTS, INC.
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Waters Instruments, Inc. and Garrett Communications,
Inc. have unanimously approved a merger between Garrett and a subsidiary of
Waters. As a result of the proposed merger, Garrett's business will be acquired
by a wholly-owned subsidiary of Waters and Garrett's shareholders will receive
cash and shares of Waters common stock. The Boards of Directors of both
companies have determined that the merger is fair and in the best interests of
their shareholders.
We cannot complete the merger unless the shareholders of both Waters and Garrett
approve certain proposals relating to the merger. Waters shareholders will vote
on these matters at their annual meeting and Garrett shareholders will vote on
these matters at a special meeting of the shareholders being held for this
purpose. The Waters Board unanimously recommends that Waters shareholders vote
to approve the matters presented at the Waters annual meeting. The Garrett Board
unanimously recommends that the Garrett shareholders vote to approve the matters
presented at Garrett's special meeting of the shareholders.
If the merger is completed, Garrett shareholders will receive 375,000 shares of
Waters common stock and $2,250,000 in cash (subject to adjustments under certain
circumstances), assuming that not more than 5% of the Garrett shareholders
dissent from the merger. As a result, we anticipate that after the merger,
Waters will have 1,846,279 shares of common stock outstanding, approximately 20%
of which will be held by former shareholders of Garrett.
You will receive a proxy card with this proxy statement/prospectus. Please mark,
sign, and return the enclosed proxy card promptly, so that your shares of common
stock are voted at the Waters annual meeting if you are a Waters shareholder, or
at the Garrett special meeting if you are a Garrett shareholder. Do this even if
you plan to attend your meeting. If you do not return your proxy card, the
effect will be a vote against the matters presented at your meeting unless you
attend the meeting and vote for such matters. If you do attend the meeting, you
can of course vote your shares in person.
The date, time, and place of the Waters annual meeting are:
__________________________, 2000
_________________, a.m., Minneapolis time
___________________________________
___________________________________
Waters common stock is listed for trading on the Nasdaq National Market under
the symbol "WTRS".
The date, time, and place of the Garrett special meeting are:
__________________, 2000, 10:00 A.M., Pacific Time, Garrett's corporate offices,
213 Hammond Avenue, Fremont, California 94539.
This proxy statement/prospectus gives you detailed information about the merger
and the other matters to be voted on at the Waters annual meeting and the
Garrett special meeting. The Waters Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1999 is attached as Annex E and the Waters Quarterly Report
on Form 10-QSB for the quarter ended September 30, 1999 is attached as Annex D
to this proxy statement/prospectus. You can also obtain information about Waters
from other documents filed with the Securities and Exchange Commission. Please
read carefully this entire document and the attached Forms 10-KSB and 10-QSB of
Waters.
Consider carefully the risk factors beginning on page _____________.
We enthusiastically support the merger and urge you to vote "FOR" the merger and
the related matters presented to you.
_______________________________
Gerald W. Grabowski
President and Chief Executive Officer,
Waters Instruments, Inc.
_______________________________
Frank Madren
President and Chief Executive Officer,
Garrett Communications, Inc.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the Waters securities to be issued in the
merger or determined if this proxy statement/prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Proxy Statement/Prospectus dated January ___,
2000, and first mailed to shareholders on or about , 2000
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WATERS INSTRUMENTS, INC.
2411 7th Street N.W.
Rochester, MN 55901
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held , 2000
To the shareholders of Waters Instruments, Inc.:
The Annual Meeting of the shareholders of Waters Instruments, Inc. will
be held at ____________________, on __________, __________, 2000, at ___:00
a.m., local time, for the following purposes:
1. To approve the issuance of up to 375,000 shares of common
stock of Waters to shareholders of Garrett in connection with
the merger of a wholly-owned subsidiary of Waters into
Garrett.
2. To approve Waters' amended and restated Bylaws, which amend
Waters' existing Bylaws to divide the Waters board of
directors into two classes, with each class serving a
staggered three-year term (except, initially, Class I
directors), to provide that directors may be removed only for
cause, to specify a mechanism for nominating directors and to
provide that certain provisions of Waters' amended and
restated Bylaws may only be amended by the vote of two-thirds
of the outstanding shares of capital stock of Waters entitled
to vote.
3. To approve an amendment to Waters 1995 Stock Option Plan to
increase the number of shares of Waters common stock available
for issuance under that plan. The amendment will be effective
only upon completion of the merger.
4. To elect six members of the board of directors of Waters to
serve as directors for the respective terms set forth in this
Proxy Statement/Prospectus.
5. To transact such other business as may be properly brought
before the meeting or any adjournment or postponement of the
annual meeting.
Approval of item 1 is a condition to the merger. Only shareholders of
record at the close of business on __________, 1999 are entitled to notice of
and to vote on all matters at the annual meeting.
Whether or not you intend to be present at the annual meeting, please
sign and date the enclosed proxy and return it in the enclosed prepaid envelope.
If you attend the annual meeting, you may vote either in person or by your
proxy. A proxy may be revoked by a shareholder at any time prior to its use as
specified in the enclosed proxy statement. Sending in a signed proxy will not
affect your right to attend the annual meeting and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS
John A. Grimstad
Secretary
January ____, 2000
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GARRETT COMMUNICATIONS, INC.
213 Hammond Avenue
Fremont, California 94539
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on ____________, 2000.
To the shareholders of Garrett Communications, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
Garrett Communications, Inc., a California corporation, will be held at
Garrett's corporate offices, located at 213 Hammond Avenue, Fremont, California
94539, on _________, 2000, at 10:00 A.M., Pacific Time, for the following
purposes:
1. To approve and adopt the Amended and Restated Agreement and
Plan of Reorganization effective as of November 3, 1999, by
and among Waters Instruments, Inc., a Minnesota corporation,
WG Merger Corp., a California corporation, Garrett, Frank
Madren, Christopher Robert, and Ross Smith, and to approve the
merger of Garrett with and into WG Merger Corp., a wholly
owned subsidiary of Waters pursuant to the merger agreement,
by which WG Merger Corp. would be the surviving corporation of
the merger; and
2. To approve the fairness of the division of the merger
consideration among the Garrett shareholders as follows: upon
the effectiveness of the merger, each share of Garrett common
stock issued and outstanding immediately before the effective
time of the merger will be converted into either $2.00 cash,
or 1/3 of a share of Waters common stock. Garrett shareholders
will receive a total of 375,000 shares of Waters common stock
and $2,250,000 in cash (subject to adjustments under certain
circumstances). The shares received in the merger will be
divided among the beneficial owners of Garrett common stock,
as follows:
o Frank Madren will receive 250,000 Waters shares in
exchange for 750,000 Garrett shares;
o Christopher Robert will receive 100,000 Waters shares
in exchange for 300,000 Garrett shares;
o Ross Smith will receive 25,000 Waters shares in
exchange for 75,000 Garrett shares; and
3. To approve the exchange of 1 share of Waters common stock for
every 3 shares of Garrett common stock received upon any
exercise of Garrett options between November 3, 1999 and the
effective date of the merger.
The cash received in the merger will be divided among all Garrett
shareholders (including Madren, Robert and Smith with respect to any
Garrett shares remaining after the exchange described above) in
proportion to the percentage of Garrett common stock owned by each
Garrett shareholder, at a price of $2.00 for each Garrett share.
The board of directors has fixed the close of business on January __,
2000 as the record date for the determination of the holders of Garrett common
stock entitled to notice of, and to vote at, the special meeting. The required
vote of the Garrett shareholders to approve and adopt the merger agreement is
based upon the number of outstanding shares of Garrett common stock and not the
number of shares that are actually voted.
The failure to submit a proxy card or to vote in person at the special
meeting and the abstention from voting by a shareholder will each have the same
effect as a vote "AGAINST" approval of the Garrett merger proposal. The merger
agreement and related matters are more fully described in the accompanying proxy
statement/prospectus and its appendices, which form a part of this notice.
BY ORDER OF THE BOARD OF DIRECTORS
Frank Madren
Chief Executive Officer
January ____, 2000
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AVAILABLE INFORMATION
Waters is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and accordingly files reports, proxy
statements and other information with the Securities and Exchange Commission.
The reports, proxy statements and other information filed by Waters with the
Securities and Exchange Commission can be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and
at the regional offices of the Securities and Exchange Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The common stock of Waters is traded on the Nasdaq National Market under
the symbol "WTRS."
Waters has filed with the Securities and Exchange Commission a
registration statement on Form S-4 under the Securities Act, relating to the
shares of the common stock of Waters into which the outstanding capital stock of
Garrett will be converted upon the completion of the merger. This proxy
statement/prospectus, which constitutes part of this registration statement,
does not contain all the information set forth or incorporated by reference in
this registration statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. This registration statement is available for inspection and copying
at the offices of the Securities and Exchange Commission set forth above.
Statements contained in this proxy statement/prospectus, or in any document
incorporated by reference are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to this registration statement or such other document, each such
statement being qualified in all respects by such reference.
All information contained in this proxy statement/prospectus relating
to Waters has been supplied by Waters, and all information relating to Garrett
has been supplied by Garrett.
No person has been authorized to give any information or to make any
representation with respect to the matters described in this proxy
statement/prospectus other than those contained in this proxy
statement/prospectus or in documents incorporated by reference, and, if given or
made, such information or representation must not be relied upon as having been
authorized by Waters or Garrett. This proxy statement/prospectus does not
constitute an offer to sell or an offer to buy any securities, or a solicitation
of an offer to sell or a solicitation of an offer to buy any securities, other
than those to which it relates, in any jurisdiction in which, or to any person
to whom, it is unlawful to make such offer or solicitation. Neither the delivery
of this proxy statement/prospectus nor the sale of any securities hereunder
shall, under any circumstances, create an implication that there has been no
change in the affairs of Waters or Garrett since the date hereof or that the
information herein is correct as of any time subsequent to its date.
This proxy statement/prospectus describes certain documents that are
not part of this proxy statement/prospectus. Copies of these documents are
available, without charge, upon oral or written request by any person, including
any beneficial owner, to whom this proxy statement/prospectus has been
delivered, in the case of documents relating to Waters, from Waters Instruments,
Inc., 2411 7th Street N.W., Rochester, Minnesota 55801, Attention: Gregg Anshus,
Chief Financial Officer, telephone number (507) 288-7777 or, in the case of
documents relating to Garrett, from Garrett Communications, Inc., 213 Hammond
Avenue, Fremont, California 94539, Attention Frank Madren, President, telephone
number (510) 438-9071. In order to ensure timely delivery of the requested
documents prior to the meetings, any such request should be made by __________,
2000.
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TABLE OF CONTENTS
Page
QUESTIONS AND ANSWERS ABOUT THE MERGER........................................1
SUMMARY FINANCIAL INFORMATION.................................................8
FORWARD-LOOKING INFORMATION...................................................9
RISK FACTORS..................................................................9
WATERS ANNUAL MEETING........................................................15
GARRETT SPECIAL MEETING......................................................18
THE MERGER...................................................................19
Background of the Merger...............................................19
Waters'Reasons for the Merger..........................................22
Garrett's Reasons for the Merger.......................................23
Opinion of Waters Financial Advisor....................................24
THE AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
AND TERMS OF THE MERGER......................................................26
Conversion of Garrett Common Stock in the Merger.......................27
Treatment of Stock Options.............................................27
Representations and Warranties.........................................27
Certain Covenants......................................................29
Interests of Garrett's Officers and Directors in the Merger............31
Conditions to Completion of the Merger; Waiver.........................31
Amendment and Termination of the Merger Agreement;
Effects of Termination..............................................33
Indemnification and Escrow.............................................33
Agreement Respecting Certain Costs.....................................33
Restrictions on Resale of Waters Common Stock..........................34
Material Federal Income Tax Consequences...............................34
Accounting Treatment...................................................36
Appraisal Rights of Dissenting Garrett Shareholders....................36
COMPARISON OF RIGHTS OF SHAREHOLDERS OF WATERS AND GARRETT...................38
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS............................43
INFORMATION CONCERNING GARRETT...............................................48
Business...............................................................48
The Market.............................................................48
Garrett Products.......................................................48
Sales and Marketing....................................................49
Backlog................................................................49
Research and Development...............................................49
Manufacturing..........................................................50
Competition............................................................50
Proprietary Rights.....................................................51
Employees..............................................................51
Facilities.............................................................51
Selected Financial Information.........................................51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF GARRETT.............................................52
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK...................54
PRINCIPAL AND MANAGEMENT HOLDERS OF GARRETT COMMON STOCK.....................54
APPROVAL OF AMENDED AND RESTATED BYLAWS......................................56
APPROVAL OF INCREASE IN SHARES RESERVED FOR ISSUANCE UNDER THE
1995 STOCK OPTION PLAN.......................................................57
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT............................59
ELECTION OF DIRECTORS........................................................59
WATERS EXECUTIVE COMPENSATION................................................61
PRINCIPAL SHAREHOLDERS OF WATERS.............................................62
INDEPENDENT ACCOUNTANTS......................................................63
LEGAL MATTERS................................................................63
EXPERTS......................................................................63
SHAREHOLDER PROPOSALS........................................................63
OTHER MATTERS................................................................63
WHERE YOU CAN FIND MORE INFORMATION..........................................64
INDEX TO FINANCIAL STATEMENTS...............................................F-1
Annex A Merger Agreement
Annex B Opinion of John G. Kinnard & Company Incorporated
Annex C Proposed Amended and Restated Bylaws
Annex D Quarterly Report on Form 10-QSB
Annex E Waters Annual Report on Form 10-KSB
Annex F California Dissenters' Rights Statute
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Please explain the merger.
A: Garrett will merge with a subsidiary of Waters. The subsidiary
will be the surviving corporation in the merger and will operate Garrett's
business as a direct, wholly-owned subsidiary of Waters.
Q: What will happen to the stock of Garrett in the merger?
A: Upon the effectiveness of the merger, each share of Garrett
common stock issued and outstanding immediately before the effective time of the
merger will be converted into either $2.00 cash, or 1/3 of a share of Waters
common stock. Garrett shareholders will receive a total of 375,000 shares of
Waters common stock and $2,250,000 in cash (subject to adjustments under certain
circumstances). The shares received in the merger will be divided among the
owners of approximately 81% of the issued and outstanding Garrett common stock,
as follows:
o Frank Madren will receive 250,000 Waters shares in exchange
for 750,000 Garrett shares;
o Christopher Robert will receive 100,000 Waters shares in
exchange for 300,000 Garrett shares; and
o Ross Smith will receive 25,000 Waters shares in exchange for
75,000 Garrett shares.
The cash received in the merger will be divided among all Garrett shareholders
(including Madren, Robert and Smith with respect to any Garrett shares remaining
after the exchange described above) in proportion to the percentage of Garrett
common stock owned by each Garrett shareholder, at a price of $2.00 for each
Garrett share The cash to be received by Garrett shareholders in the merger is
subject to adjustment up or down depending on the aggregate amount of certain
cost with respect to the merger and Garrett's business.
Q: What will happen to the stock of Waters in the merger?
A: Shares of Waters stock will remain outstanding. The total
number of outstanding shares of Waters common stock will increase by 375,000
shares as a result of the issuance of 375,000 shares in the merger.
Q: When will the merger be completed?
A: Waters and Garrett expect that the merger will become
effective promptly after shareholders of Garrett approve and adopt the merger
agreement and approve the principal terms of the merger and shareholders of
Waters approve the issuance of the shares of Waters common stock to be delivered
in connection with the merger, provided that the other conditions to the merger
have been satisfied. The Waters shareholder meeting is scheduled for __________,
2000 and the Garrett's special meeting of the shareholders is scheduled for
___________, 2000.
Q: What should I do after I read these documents?
A: You should mail your signed proxy card in the enclosed,
postage-paid envelope, as soon as possible, so that your shares will be
represented at the Waters annual meeting of the shareholders if you are a Waters
shareholder, or at the Garrett special meeting if you are a Garrett shareholder.
After the merger is completed, Garrett shareholders will be sent written
instructions for sending in their share certificates and receiving the cash and
shares of Waters common stock to which they are entitled. DO NOT SEND IN YOUR
GARRETT STOCK CERTIFICATES NOW.
Q: Can I change my vote after I have mailed a signed proxy card?
A: Yes. You can change your vote at any time before your proxy is
voted at your shareholders' meeting. You may revoke your proxy by written notice
to the Secretary of Waters if you are a Waters shareholder, or to the Secretary
of Garrett, if you are a Garrett shareholder, or you can submit a new,
later-dated proxy card.
Q: If my shares are held in "street name" by my broker, will my
broker vote my shares for me?
A: Your broker will vote your shares only if you provide
instructions on how to vote. Without instructions your shares will not be voted.
Shares that are not voted generally will be counted as votes against the merger
and the matters associated with it.
Q: Whom should I call with questions?
A: Garrett shareholders who have questions about the merger or
how to vote their shares should call _________________ at _____________.
Waters shareholders who have questions about the merger or how
to vote their shares should call _________________ at _____________.
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SUMMARY
This summary highlights selected information from this document and may
not contain all of the information that is important to you. For a more complete
understanding of the merger, you should carefully read this entire document, the
accompanying Waters Annual Report on Form 10-KSB and Waters Quarterly Report on
Form 10-QSB as well as the additional documents we refer to in this proxy
statement/prospectus. See "Where You Can Find More Information" on page ____. We
have included page references in parentheses to direct you to a more complete
description of some of the topics presented in this summary.
The Companies
Waters Instruments, Inc. and WG Merger Corp.
2411 7th Street N.W.
Rochester, MN 55901
(507) 288-7777
A Minnesota corporation since 1960, Waters Instruments, Inc. (d/b/a
Waters Corporation) is a customer-driven, electronics manufacturer and marketer
of network connectivity, contract manufacturing, agricultural electric fencing,
and medical products. Sales are conducted through four principal business units:
Farm Products {d/b/a American FarmWorks (AFW)}; Medical Products {d/b/a Waters
Medical Systems (WMS)}; Electrical Products {d/b/a Waters Technical Systems
(WTS), formerly known as Midwest WireTech}; and Network Connectivity Products
{d/b/a Waters Network Systems (WNS)}. Additional information regarding Waters is
set forth in the Annual Report on Form 10-KSB attached to this proxy
statement/prospectus as Annex E and the Quarterly Report on Form 10-QSB attached
to this Proxy Statement/Prospectus as Annex D.
WG Merger Corp. is a California corporation and a wholly-owned
subsidiary of Waters. It was formed specifically for the purpose of merging with
Garrett Communications, Inc. as contemplated by the merger agreement and has not
conducted any other business of any kind. It will survive the merger and
continue operating Garrett's business as a subsidiary of Waters.
Garrett Communications, Inc.
213 Hammond Avenue
Fremont, CA 94539
Garrett designs, manufactures and markets Ethernet local area
networking, or LAN, products that are cost-effective, easy-to-use and
standards-complaint. Garrett's Magnum line of Ethernet LAN products features
fiber-built-in networking ports to support premises fiber installations that may
need bandwidth growth over time. The Magnum line consists of more than 100
different product models, and covers a variety of 10Mb and 100Mb Ethernet LAN
physical connectivity functions, media types, sizes and styles. Garrett focuses
exclusively on Ethernet products that are rich in features, which it sells to
large quality-sensitive original equipment manufacturers, or OEMs, and value
added resellers primarily for small and medium sized organizations. Garrett
sells its products internationally through distributors.
Garrett is a California corporation founded in May, 1989. Its offices
are located at 213 Hammond Avenue, Fremont, CA 94539, telephone (510) 438-9071.
The Waters Annual Meeting of Shareholders (Pages ___ and ___)
The annual meeting of the Waters shareholders will be held on
_____________, _____________, 2000 at __:00 a.m., Minneapolis time at
_______________. The record date for Waters shareholders entitled to receive
notice of and to vote at the Waters annual meeting was the close of business on
____________, 2000. On that date there were ___________ shares of Waters common
stock outstanding and entitled to vote at the meeting.
The Waters board of directors believes that the merger is fair to and
in the best interests of the Waters shareholders and unanimously recommends that
the Waters shareholders vote in favor of the proposal to issue up to 375,000
shares of Waters common stock in connection with the merger. The Waters board of
directors also unanimously recommends that Waters shareholders vote in favor of
(a) approving the proposed amended and restated bylaws; (b) approving an
amendment to the Waters 1995 Stock Option Plan to increase the number of shares
of Waters common stock available for issuance under the plan; and (c) electing
six members of the Waters board of directors.
<PAGE>
Approval of each of the items to be considered by shareholders at the
Waters annual meeting requires the affirmative vote of the holders of at least a
majority of the shares of Waters common stock represented in person or by proxy
at the annual meeting with authority to vote on such item, but not less than
______ shares. Directors and executive officers of Waters owned ________ shares
of Waters common stock as of the record date (approximately _____% of the shares
entitled to vote) and have indicated their intention to vote in favor of the
proposals to be presented at the annual meeting.
Garrett's Special Meeting of the Shareholders (Page ____)
The special meeting of the Garrett shareholders will be held on
_____________, _____________, 2000 at 10:00 a.m., Pacific Time at Garrett's
corporate offices, 213 Hammond Avenue, Fremont, California 94539. The record
date for Garrett shareholders entitled to receive notice of and to vote at the
Garrett annual meeting was the close of business on ____________, 2000. On that
date there were ___________ shares of Garrett common stock outstanding and
entitled to vote at the meeting.
The Garrett board of directors believes that the merger is fair to and
in the best interests of the Garrett shareholders and unanimously recommends
that the Garrett shareholders vote in favor of the proposal to approve and adopt
the merger agreement and the merger. The Garrett board of directors also
unanimously recommends that Garrett shareholders vote to approve the fairness of
the division of the merger consideration among the Garrett shareholders as
described in this proxy statement/prospectus and the exchange of 1 share of
Waters common stock for every 3 shares of Garrett common stock received upon any
exercise of Garrett options between November 3, 1999 and the effective date of
the merger.
Approval and adoption of the merger agreement and the merger requires
the approval of the holders of a majority of the outstanding shares of Garrett
common stock entitled to vote on the merger. The approval of the fairness of the
division of the shares and cash to be received in the merger and the exchange of
1 share of Waters common stock for every 3 shares of Garrett common stock
received upon any exercise of Garrett options between November 3, 1999 and the
effective date of the merger will require the unanimous approval of all of the
outstanding shares of Garrett common stock. Directors and executive officers of
Garrett owned _________ shares of Garrett common stock as of the record date,
which is (approximately _____% of the shares entitled to vote) and have
indicated their intention to vote in favor of the proposals to be presented at
the special meeting.
The Merger (Page ____)
The merger agreement is attached at the back of this proxy
statement/prospectus as Annex A. We encourage you to read the merger agreement,
as it is the legal document that governs the merger.
In the proposed merger, a subsidiary of Waters will merge with Garrett,
and will continue Garrett's business as a wholly-owned subsidiary of Waters.
Shareholders of Garrett will receive cash and shares of Waters common stock in
exchange for their shares of Garrett common stock. Frank Madren, President and
Chief Executive Officer of Garrett, will become a director of Waters. Following
the merger, former shareholders of Garrett will own a total of 375,000 shares of
Waters common stock, or approximately 20% of the Waters common stock outstanding
immediately following the merger.
Effective Time of the Merger
Waters and Garrett hope to complete the merger shortly after the
meetings, provided that the conditions to the merger are satisfied and other
required matters are completed by that time.
What Garrett Shareholders Will Receive in the Merger (Page 21)
Upon the effectiveness of the merger, each share of Garrett common
stock issued and outstanding immediately before the effective time of the merger
will each be converted into either $2.00 cash, or 1/3 of a share of Waters
common stock. Garrett shareholders will receive a total of 375,000 shares of
Waters common stock and $2,250,000 in cash (subject to adjustments under certain
circumstances). The shares received in the merger will be divided among the
owners of approximately 81% of the issued and outstanding Garrett common stock,
as follows:
<PAGE>
o Frank Madren will receive 250,000 Waters shares in exchange
for 750,000 Garrett shares;
o Christopher Robert will receive 100,000 Waters shares in
exchange for 300,000 Garrett shares; and
o Ross Smith will receive 25,000 Waters shares in exchange for
75,000 Garrett shares.
The cash received in the merger will be divided among all other Garrett
shareholders in proportion to the percentage of Garrett common stock owned by
each Garrett shareholder, at a price of $2.00 per Garrett share.
Waters will not issue any fractional shares. Instead, Garrett
shareholders will receive cash for any fractional share of Waters common stock
owed to them, based on an assumed value of $6.00 for each share of Waters common
stock.
Garrett shareholders should not send in their stock certificates until
they receive written instructions to do so after the merger.
What Happens to Garrett Stock Options (Page ___)
Following the merger, each outstanding option to buy Garrett common
stock that was granted under one of Garrett's stock option plans will become an
option to buy Waters common stock. The Garrett options will continue to be
governed by Garrett stock option plans. However, the number of shares of Waters
common stock that option holders can purchase by exercising the options will be
divided by 3, and the exercise price per share will be multiplied by 3. Garrett
common stock received upon any exercise of Garrett options between November 3,
1999 and the effective date of the merger will be exchanged for Waters common
stock pursuant to the same 3 to 1 conversion ratio.
Certain Federal Income Tax Consequences (Page ___)
The merger is intended to qualify as a tax-free reorganization. It is a
condition to the merger that both Fenwick & West LLP, counsel to Garrett, and
Fredrikson & Byron, counsel to Waters, render an opinion to the effect that the
merger will be treated as a tax-free reorganization and that no gain or loss
will be recognized by a shareholder of Garrett as a result of the merger except
with respect to cash received by such shareholder. In addition to receiving
$2.00 per share according to the terms of the merger, Garrett shareholders might
receive cash in lieu of fractional shares. Any gain realized by a holder of
Garrett stock pursuant to the merger will be recognized, but only to the extent
of the cash received. Certain closing conditions must be fulfilled before either
Fenwick & West LLP or Fredrikson & Byron will issue tax opinions. Specifically,
the merger agreement sets forth closing conditions to both Waters and Garrett's
obligations requiring a $6.00 minimum price per share for Waters common stock.
If this closing condition is either waived or amended by Waters or Garrett,
neither Fenwick & West LLP nor Fredrikson & Byron will issue a tax opinion if
the Waters common stock closing price per share is at or below $5.24. See "The
Amended and Restated Agreement and Plan of Reorganization and Terms of
Merger--Material Federal Tax Consequences."
Subject to the limitations, qualifications and assumptions referred to
in the tax opinions, a Garrett shareholder will be required to recognize the
gain, if any, that he or she realizes in the transaction, but not in excess of
the cash received by the shareholder. Any recognized gain generally will be
treated as a capital gain (provided that the Garrett stock is held as a "capital
asset" at the effective date of the merger).
Tax matters are complicated, and the tax consequences of the merger to
Garrett shareholders will depend upon the facts of each shareholder's situation.
Each Garrett shareholder is urged to contact his or her own tax advisor to
understand fully how the merger will affect him or her, including how any state,
local, or foreign tax laws may apply.
Waters' Reasons for the Merger (Page ____)
The Waters board of directors believes that the merger will enhance
Waters' opportunities for growth by combining Garrett's fiber and copper
Ethernet switches, hubs, and media conversion products with Waters' existing LAN
technology. Waters believes this expanded product line will improve its
competitive position in the market for Ethernet LAN products, especially within
the communications market on which Garrett focuses. Waters expects this
communications market to be one of the more rapidly growing segments of the LAN
market for the next several years. Waters also expects to achieve synergies by
combining the Waters and Garrett sales organizations, which sell similar product
technologies into different geographical regions.
<PAGE>
Garrett's Reasons for the Merger (Page ____)
The Garrett board of directors believes the merger will provide some of
its shareholders liquidity through the receipt of cash at a favorable price and
provide other shareholders an opportunity to participate in Waters' future
growth through the receipt of Waters' publicly traded shares. The Garrett board
of directors believes that Waters' opportunities for growth following the merger
will be better than those available to Garrett as an independent entity, based
in part on Waters' relatively greater financial strength and the increased size
of its business.
Opinion of Waters' Financial Advisor (Page ____)
On October 28, 1999, John G. Kinnard & Co., financial advisor to the
Waters board, delivered its oral opinion, which subsequently was confirmed in
writing on November 3, 1999, that, as of the date of such opinion, the
consideration to be paid by Waters' shareholders in the merger is fair to such
shareholders from a financial point of view. The full text of the written
opinion of John G. Kinnard & Co., dated ___________, 1999, which sets forth the
assumptions made, general procedures followed, matters considered and
limitations on the review undertaken in connection with the opinion, is attached
hereto as Annex B. Shareholders should read such opinion carefully and in its
entirety. See "THE MERGER--Opinion of Waters' Financial Advisor."
Interests of Garrett's Officers and Directors in the Merger (Page ____)
In considering the recommendation of the Garrett board of directors
with respect to the merger agreement, the merger and the transactions related to
the merger, the Garrett shareholders should be aware that Frank Madren,
director, officer and significant shareholder of Garrett, Chuoc Linh and Mark
Vaughan, employees of Garrett, and all of the directors of Garrett have
interests in the merger that are different from the interests of the other
Garrett shareholders.
For a more detailed description of these interests, see "The Merger -
Interests of Garrett's Officers and Directors in the Merger" beginning on page
___.
Representation, Warranties and Conditions to the Merger (Page ____)
The merger agreement contains various customary representations and
warranties made by each of the parties to the agreement. The merger agreement
also contains various customary covenants, including a covenant that during the
period from the date of the merger agreement until completion of the merger,
Garrett will conduct its business in the usual and ordinary course.
Termination of the Merger Agreement (Page ____)
The merger agreement may be terminated at any time before the effective time of
the merger only by:
o mutual consent of the board of directors of Waters and the
board of directors of Garrett;
o either Waters or Garrett if, without fault of such terminating
party, the merger shall not have been consummated on or before
February 29, 2000;
o Garrett if any one of the conditions specified in Article VII
of the merger agreement has not been waived by Garrett or met
at such time as such condition can no longer be satisfied; or
o Waters if any one of the conditions specified in Article VI of
the merger agreement has not been waived by Waters or met at
such time as such condition can no longer be satisfied.
Garrett Cannot Solicit Other Offers (Page ____)
Garrett has agreed not to encourage, solicit, discuss, or negotiate
with anyone (other than Waters) regarding a merger, sale, or license of any
significant portion of Garrett's assets or stock, unless Garrett's board must do
so to meet its fiduciary obligations to the Garrett shareholders.
<PAGE>
Market Price Data and Dividend Information (Page ____)
Waters common stock is listed on the Nasdaq National Market. The Nasdaq
National Market regular session closing price for a share of Waters common stock
was $5.5625 on November 3, 1999, the last trading day prior to the public
announcement of the merger, and was $_____ on __________, 2000, the most recent
date for which prices were available prior to the printing of this proxy
statement/prospectus. See Part II, Item 5, Market for the Company's Common
Stock, on Form 10-KSB for the fiscal year ended June 30, 1999 and attached as
Annex E to this proxy statement/prospectus. Shareholders are encouraged to
obtain current market quotations.
The Waters board of directors has declared and paid a dividend to
shareholders for 22 of the last 23 years, with the first dividend paid in 1975.
In each of 1998, 1997 and 1996, the annual dividend was declared in October at
the rate of $0.04 per share or an aggregate of $58,000. The board of directors
reviews its dividend policy annually and future dividends will be dependent on
operations and the Company's cash requirements. Waters has applied to list the
shares of Waters common stock to be delivered in connection with the merger on
the Nasdaq National Market.
Garrett common stock is not publicly traded. As of the record date for
the Garrett special meeting, there were __________ shares of Garrett common
stock outstanding, held of record by a total of ____ shareholders. Garrett has
never paid cash dividends on its common stock.
Risks of the Merger (Page ____)
In considering whether to approve the merger agreement and related
matters, you should consider risks of the merger, including, among others, the
risk of fluctuations in the market price of Waters common stock, risks
associated with integrating the companies' businesses and the fact that certain
directors and officers of Garrett may have interests in the merger that are
different from or in addition to yours. We urge you to read carefully the
factors described in "Risk Factors" in making your decision.
Comparative Rights of Shareholders of Waters and Garrett (Page ____)
The rights of shareholders of Waters are governed by Minnesota law and
the articles of incorporation and amended and restated bylaws of Waters. The
rights of the shareholders of Garrett are currently governed by California law
and the articles of incorporation and bylaws of Garrett. If the merger is
completed, the rights of Garrett shareholders who become Waters shareholders
will be determined by Minnesota law and Waters' articles of incorporation and
amended and restated bylaws, which differ from California law and Garrett's
articles of incorporation and bylaws. We urge you to read the section entitled
"Comparison of Rights of Shareholders of Waters and Garrett" in making your
decision.
Other Proposals to be Presented at Waters Annual Meeting
In addition to being asked to approve the issuance of shares in
connection with the merger, shareholders of Waters will be asked to consider and
act upon the following other proposals:
Proposal No. 2: To approve Waters' amended and restated bylaws, which
amend Waters existing bylaws to divide the Waters board of directors into two
classes, with each class serving a staggered two year term (except, initially,
Class I directors), to provide that directors may be removed only for cause, to
specify a mechanism for nominating directors and to provide that certain
provisions of Waters' amended and restated bylaws may only be amended by the
vote of two-thirds of the outstanding shares of capital stock of Waters entitled
to vote. The Waters board of directors recommends that shareholders vote for the
amended and restated bylaws.
Proposal No. 3: To approve an amendment to Waters 1995 Stock Option
Plan to increase the number of shares of Waters common stock available for
issuance under that plan. The amendment will be effective only upon completion
of the merger. The Waters board of directors recommends that shareholders vote
for the amendment to Waters 1995 Stock Option Plan.
Proposal No. 4: to elect six members of the board of directors of
Waters to serve as directors for the respective terms set forth in this Proxy
Statement/ Prospectus. The Waters board of directors recommends that
shareholders vote for the nominees for directors described herein.
<PAGE>
Under the terms of the merger agreement, Proposal 1 must be approved
for the merger to be completed. Waters has agreed to take all action necessary
to increase the size of Waters' board and have Frank Madren and Christopher
Robert elected to Waters' board as soon as practicable after the merger.
SUMMARY FINANCIAL INFORMATION
Summary Unaudited Pro Forma Combined Condensed Financial Information
The following summary unaudited pro forma combined condensed financial
information combines the historical balance sheet data and statements of
operations data of Waters and Garrett after giving effect to the merger. The
unaudited pro forma combined condensed balance sheet data at September 30, 1999
gives effect to the merger as if it had occurred at September 30, 1999 and
reflects Waters' balance sheet data at September 30, 1999 and Garrett's balance
sheet data at September 30, 1999. The unaudited pro forma combined condensed
statements of operations for the twelve months ended June 30, 1999 give effect
to the merger as if it had occurred at July 1, 1998. The unaudited pro forma
combined condensed statements of operations for the twelve months ended June 30,
1999 reflect Garrett's historical results of operations recasted from its fiscal
year end of December 31, 1998 to an assumed fiscal year ended June 30, 1999 by
adding the results of operations for the six months ended June 30, 1999 to the
results of operations for the six months ended December 31, 1998. The pro forma
adjustments account for the merger as a purchase and are based upon the
assumptions set forth in the Notes to the Unaudited Pro Forma Combined Financial
Statements on page ___.
<TABLE>
<CAPTION>
Unaudited Pro Forma Statement of Operations Data: Year Ended Three Months Ended
June 30, 1999 September 30, 1999
<S> <C> <C>
Net sales $26,650,606 $8,053,607
Cost of sales 17,995,191 5,317,582
---------- ---------
Gross profit 8,655,415 2,736,025
Operating expenses 7,151,668 1,929,509
--------- ---------
Operating income 1,503,747 806,516
Net income (loss) 873,944 481,516
======= =======
Earnings per common share
Basic $0.47 $0.26
===== =====
Diluted $0.45 $0.25
===== =====
Weighted average common shares outstanding
Basic 1,844,348 1,846,279
Diluted 1,926,108 1,940,910
<CAPTION>
Unaudited Pro Forma Balance Sheet Data September 30, 1999
------------------
<S> <C>
Working capital $6,132,956
Total assets 14,606,262
Total current liabilities 4,180,762
Stockholders' Equity 10,351,500
</TABLE>
Comparative Unaudited Per Share Data
The following table sets forth certain unaudited per share data of
Waters and Garrett on a historical, pro forma combined basis. This table should
be read in conjunction with the historical financial statements and pro forma
combined condensed financial information, and the related notes, of Waters and
Garrett on page ___. See also "Unaudited Pro Forma Combined Financial
Statements." Unaudited pro forma combined and equivalent pro forma per share
data reflect the combined results of Waters and Garrett after giving effect to
the merger. In the case of operating data, the comparative per share data
reflects net income per share as if the merger had occurred on July 1, 1998 and
reflects Waters' operations for the fiscal year ended June 30, 1999 and
Garrett's operations recasted from its fiscal year ended December 31, 1998 to an
assumed fiscal year ended June 30 1999 by adding the results of operations for
the six months ended June 30 1999 to the results of operations for the six
months ended December 31, 1998. In the case of book value data, the comparative
per share pro forma data reflects book value per share as if the merger had
occurred on September 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999
<S> <C>
Waters:
Net income per share of Waters stock
Historical...................................... $0.24
Pro forma (1)................................... 0.26
Book value per share of Waters stock at period end September 30, 1999
Historical...................................... 5.26
Pro forma (1)................................... 5.61
<CAPTION>
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Garrett:
Net income per share of Garrett stock
Historical...................................... $0.09 $0.18
Book value per share of Garrett stock December 31, 1998 September 30, 1999
----------------- ------------------
Historical...................................... $0.84 $1.02
</TABLE>
- ------------------------------------
(1) Pro forma equivalent numbers were computed assuming the issuance
of 375,000 shares of Waters stock, the granting of options to
purchase 116,667 shares of Waters stock and $2,250,000 to acquire
2,250,000 shares of Garrett stock at the conversion ratio of one
share of Waters stock for every three shares of Garrett stock. The
actual number of shares of Waters stock issuable in the merger may
vary in accordance with the terms of the merger agreement.
FORWARD-LOOKING INFORMATION
Certain statements contained in this proxy statement/prospectus
(including information incorporated by reference) and other written and oral
statements made from time to time by Waters and Garrett do not relate strictly
to historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of words such as "anticipate,"
"believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan,"
"possible," "project," "should," "will," and similar words or expressions.
Waters' and Garrett's respective forward-looking statements generally relate to
their respective growth strategies, financial results, product development and
sales efforts. You should carefully consider forward-looking statements and
understand that such statements may be affected by inaccurate assumptions and
involve a variety of risks and uncertainties, known and unknown, some of which
are described below under "Risk Factors." Because of that, we cannot guarantee
any forward-looking statement and actual results may differ materially. It is
not possible to foresee or identify all factors affecting Waters' or Garrett's
respective forward-looking statements, and investors therefore should not
consider any list of factors affecting Waters' or Garrett's respective
forward-looking statements to be an exhaustive statement of all risks,
uncertainties, or potentially inaccurate assumptions. Neither Waters nor Garrett
undertakes any obligation to update any forward-looking statement.
RISK FACTORS
You should carefully consider the risks described below before voting
on the proposals contained in this proxy statement/prospectus. The risks and
uncertainties described below are not, and will not be, the only ones facing
Waters following the merger. If any of the following risks occur, the business,
financial condition or results of Waters could be materially harmed. In that
case, the trading price of Waters' common stock could decline, and you may lose
all or part of your investment.
Risk Factors Relating to the Merger
We may not achieve expected synergies.
We expect the merger to result in synergies and operating efficiencies,
including reduced overhead costs as a percentage of revenue, expanded operations
and marketing efficiencies. These expected benefits may not be achieved. Whether
we ultimately realize these benefits will depend on a number of factors, many of
which are beyond our control.
<PAGE>
Integrating our operations will be difficult and may cause harmful disruptions
to our business.
Integrating our operations may distract the attention of management and
other personnel from our day-to-day business activities. In addition, employees
of Waters and Garrett may be less productive as a result of uncertainty during
the integration process, which may disrupt our business. These disruptions or
any other difficulties with integration could seriously harm Waters. To attain
the benefits of the merger, we will have to effectively integrate Garrett's
operations with those of Waters. In particular, we must integrate management and
other personnel, information systems and financial, accounting and other
operational procedures. This process will require us to bring together
operations located in Minnesota and California and different corporate cultures.
Neither Waters nor Garrett has any experience in effecting a transaction of the
size of the merger.
The value of Waters' common stock issuable in exchange for Garrett common stock
may vary based on price fluctuations beyond the control of the company.
The value of the Waters shares that three of the Garrett shareholders
receive in the merger will vary based on fluctuations in the price of the common
stock of Waters. It is unlikely that the market value of the shares of Waters
common stock will be the same on the date of the merger as on the date of this
proxy statement/ prospectus. In the merger, shares of Garrett common stock will
convert into $2.00 cash or one-third of a share of Waters common stock. This
exchange ratio is fixed. We will not adjust the exchange ratio in the event of
any increase or decrease in the price of Waters common stock.
Waters' or Garrett's business, market determinations of the likelihood
that the merger will be consummated, general market and economic conditions and
other factors may cause changes in the market prices of Waters common stock. We
strongly advise Waters and Garrett shareholders to obtain current market quotes
for Waters common stock before they vote.
Costs of integration and transaction expenses will be substantial and could
significantly exceed our expectations.
We will incur transaction, integration and restructuring costs in
connection with the merger. We expect these costs to be substantial.
Unanticipated additional expenses related to the merger could cause these
amounts to increase significantly. Although it is impossible to determine the
actual amount of these costs in advance. We currently expect that transaction
related costs will be approximately $250,000. Most of the transaction costs will
be capitalized and will not adversely affect Waters earnings after the merger.
After the merger Waters expects to incur approximately $150,000 in integration
costs. These integration costs will likely be expressed and charged against the
earnings of Waters after the merger.
Certain Garrett officers and directors may be biased in favor of the merger
agreement due to their specific interests in the merger.
In considering the recommendation of the Garrett board of directors
with respect to the merger agreement, the merger and the transactions related to
the merger, the Garrett shareholders should be aware that Frank Madren,
director, officer and significant shareholder of Garrett, and Chuoc Linh and
Mark Vaughan, employees of Garrett, have entered into employment agreements with
Waters with respect to employment following the merger. The employment
arrangements present these individuals with potential conflicts of interest.
In addition, the merger agreement contemplates that Christopher Robert,
a significant Garrett shareholder, and Frank Madren, director, officer and
significant shareholder of Garrett, will be elected to the Waters board of
directors as soon as practicable after the effective time of the merger.
Moreover, the Garrett shareholders should be aware that Frank Madren,
Christopher Robert and Ross Smith, who together own approximately 81% of the
Garrett common stock, are entitled to receive under the merger agreement all of
the 375,000 shares of Waters common stock to be issued in the merger. In
addition, they are entitled to receive cash for any remaining shares of Garrett
common stock they hold that are not exchanged for Waters common stock. A total
of 15% of the merger shares payable to these individuals will be set aside in
escrow to satisfy any claims brought under the merger agreement for a period of
90 days after the completion of the first fiscal year-end audit of the combined
operations of Waters and the Waters wholly-owned subsidiary.
<PAGE>
Finally, the merger agreement contemplates that the unvested Garrett
options of Ross Smith, Jo Ann Madren, Percy Kawas and Robert Novak, all
directors of Garrett, will become vested as of the effective time of the merger.
Loss of our key personnel could adversely affect our business because those
people possess unique knowledge about our business and have established critical
relationships with customers and other third parties.
We must retain senior executives and other key employees to be
successful. Many of those people have developed unique knowledge of our business
during their employment with us. In addition, they have established
relationships with our customers and other third parties that are critical to
our success. We may not be able to retain key employees before or after the
merger. The loss of the services of any key employees or of any significant
group of employees could seriously harm our companies. During the pre-merger and
integration phases, competitors may seek to recruit key employees. Employee
uncertainty regarding the effects of the merger could also cause increased
turnover. Our employees are generally not bound by employment agreements. If any
of our key employees leave, we may not be able to find suitable replacements.
Risks Relating to the Continuing Business of Waters
Dependence on American FarmWorks.
Waters conducts its business through four principal business units:
Farm Products (d/b/a American FarmWorks); Medical Products (d/b/a/ Waters
Medical Systems; Electrical Products (d/b/a Waters Technical Systems) and
Network connectivity Products (d/b/a Waters Network Systems). During fiscal
1999, American FarmWorks contributed approximately 58% of Waters net sales and
approximately 75% of Waters operating income. Moreover, sales to the top three
customers of American FarmWorks accounted for approximately 41.8% of American
FarmWorks sales and 24.2% of Waters total sales. Accordingly, Waters' business
is dependent to significant extent upon the continued success of American
FarmWorks, which in turn is dependent on certain key customers. The loss of
these key customers for any reason or a decrease in sales of American FarmWorks
for other reasons could have a material adverse effect on the Company. American
FarmWorks' ability to increase sales and market share depends on the effect of
U.S. agricultural industry consolidation, the acceptance and demand for new
American FarmWorks products and general competitive and market conditions in the
markets that American FarmWorks serves.
Lack of Market Acceptance of RM3.
Waters expects continued growth in Waters Medical Systems to be driven
by sales of its RM3 Renal Preservation Monitor, a two-part system for
preservation of kidneys prior to transplant. The RM3 is a new product which has
not yet received wide acceptance in the marketplace. There is no assurance that
Waters' efforts to increase public awareness of the benefits of pulsatile
preservation will be effective in increasing demand for RM3 or that RM3 will
ever receive broad acceptance in its marketplace.
Competition.
The business areas in which Waters participates are highly competitive.
Waters' ability to compete successfully in each of its business units depends
upon the price at which Waters is willing to manufacture its product, the
quality of the product offered and the effectiveness of Waters' marketing and
distribution efforts. Competitors of the Company include established companies
with substantially greater financial and personnel resources and larger and more
experienced marketing and service organizations. Although Waters currently has
what it believes is a good relationship with its key customers, there is no
assurance that Waters will not lose these customers to competitors who are able
to offer lower prices and higher quality standards than those offered by Waters.
Several of the markets served by Waters are marked by rapid technological change
and Waters could be adversely affected by competitors' introduction of products
which are technologically superior to Water's products.
Dependence on Key Personnel.
The operations and success of Waters depends upon the experience and
knowledge of Gerald W. Grabowski, Waters' President and Chief Executive Officer.
The Company currently has no employment agreement with Gerald W. Grabowski. The
loss of Mr. Grabowski would have a material adverse effect on the Company.
<PAGE>
Risks Relating to the Business of Garrett
Garrett relies on sales of products in its Magnum product line to increase
revenues.
Garrett's future performance depends upon sales of products in its
Magnum product line. Garrett believes that revenues generated from sales of
Magnum products will account for a substantial portion of Garrett's revenues for
the foreseeable future. A decline in the price of Garrett's Magnum products
without a corresponding decrease in cost, or Garrett's inability to increase
sales of Magnum products, would harm Garrett's business and operating results
more seriously than it would if Garrett had several different product lines to
sell.
Garrett relies on original equipment manufacturers to design its products into
their systems.
Garrett's future performance depends upon sales of products to original
equipment manufacturers. Garrett must anticipate market trends and the price,
performance and features that OEMs require and then successfully develop and
manufacture products that meet these requirements. In addition, Garrett must
meet the timing requirements of OEMs and make products available to them in
sufficient quantities. If Garrett is not able to develop relationships with
additional OEMs and have its products designed into new systems developed by
existing and potential OEM customers, Garrett's business would suffer.
If additional funds are not available as needed, Garrett may not be able to take
advantage of market opportunities or otherwise grow its business.
Garrett may need to raise additional funds in the future, and
additional financing may not be available on favorable terms, if at all.
Further, if Garrett issues additional equity securities, shareholders may
experience dilution, and the new equity securities may have rights, preferences
or privileges senior to those of its common stock. If Garrett cannot raise funds
on acceptable terms, it may not be able to develop new products or enhance its
existing products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.
If Garrett's new products or product enhancements fail to achieve customer
acceptance, its business reputation and financial performance would suffer.
The market for Ethernet LAN products is characterized by technological
change, evolving industry standards and rapid changes in customer requirements.
Garrett's existing products will be rendered less competitive or obsolete if
Garrett fails to introduce new products or product enhancements that anticipate
the features and functionality that customers demand. The success of new product
introductions will depend on Garrett's ability to:
o accurately anticipate industry trends and changes in
technology standards;
o timely complete and introduce new product designs and
features;
o continue to enhance its existing product lines;
o offer products across a range of Ethernet LAN physical
connectivity functions, media types, sizes and styles; and
o respond promptly to customers' requirements and preferences.
Development delays are commonplace in the information technology
industry. Garrett has experienced delays in the development of new products and
the enhancement of existing products in the past and is likely to experience
delays in the future. Garrett may not be successful in developing and marketing,
on a timely basis or at all, competitive products, product enhancements and new
products that respond to technological change, changes in customer requirements
and emerging industry standards.
<PAGE>
Competition can lead to pricing pressures.
The market for Garrett's products is highly competitive, both as to
price and product features. The market for Ethernet LAN products is rapidly
changing and is led by a number of companies that are large enough to influence
industry standards and engage in vigorous price competition. There are also a
number of new entrants whose products compete with those of Garrett. Garrett
expects competition to increase in the future from existing competitors and from
other companies that may enter its existing or future markets with similar
products that may be less costly or provide more features or better performance
than Garrett's products. Many of Garrett's current competitors, as well as
potential competitors, have substantially greater financial, technical,
marketing and sales resources than Garrett does, and Garrett might not be able
to compete successfully against these companies. If price competition increases
significantly, competitive pressures could cause Garrett to reduce the prices of
its products, which would result in reduced profit margins and could harm its
ability to provide adequate service to its customers. A variety of other
potential actions by Garrett's competitors, including increased promotion and
accelerated introduction of new or enhanced products, could also harm Garrett's
competitive position.
International sales of Garrett's products, which Garrett expects to account for
a significant portion of its total revenue in the future, exposes Garrett to the
business and economic risks of international operations.
Sales from outside of the United States accounted for approximately 25%
of Garrett's revenue in the first nine months of 1999 and are expected to
increase over time. International operations are subject to a number of special
risks. These risks include:
o foreign government regulation;
o reduced protection of intellectual property rights in some
countries where Garrett might do business;
o longer receivable collection periods and greater difficulty in
accounts receivable collection;
o unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and
other barriers and restrictions;
o potentially adverse tax consequences;
o the burdens of complying with a variety of foreign laws and
staffing and managing foreign operations;
o general geopolitical risks, such as political and economic
instability, hostilities with neighboring countries and
changes in diplomatic and trade relationships; and
o possible recessionary environments in economies outside the
United States.
If Garrett loses key personnel or is unable to hire additional qualified
personnel as necessary, it may not be able to successfully manage its business
or sell its products.
Garrett's future performance depends to a significant degree upon the
continued contributions of its key management, product development and
operations personnel. Garrett does not presently have agreements with any of its
key personnel that require them to work for Garrett for a specific term, and
Garrett does not maintain key person life insurance policies, except with
respect to its President, Frank Madren. In addition, Garrett believes that its
future success will also depend in large part upon its ability to attract and
retain highly skilled managerial, technical and operations personnel, many of
whom are in great demand. Competition for qualified personnel is intense in the
Silicon Valley area, where Garrett's operations are headquartered, and Garrett
may not be able to attract and retain personnel.
<PAGE>
Garrett's inability to protect its intellectual property rights from third-party
challenges may significantly impair its competitive position.
Garrett depends on its proprietary technology. Despite its efforts to
protect its proprietary rights, unauthorized third parties may be able to
reverse engineer Garrett's products or obtain and use information that Garrett
regards as proprietary. Garrett's competitors could independently develop
technologies that are substantially equivalent or superior to Garrett's
technologies.
Garrett's products may infringe on the intellectual property rights of third
parties, which may result in lawsuits and prevent Garrett from selling its
products.
As the number of patents, copyrights, trademarks and other intellectual
property rights in Garrett's industry increases, products based on its
technology may increasingly become the subject of infringement claims. Third
parties could assert infringement claims against Garrett in the future.
Infringement claims with or without merit could be time consuming, result in
costly litigation, cause product shipment delays or require Garrett to enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, might not be available on terms acceptable to Garrett. In addition,
Garrett may initiate claims or litigation against third parties for infringement
of its proprietary rights or to establish the validity of its proprietary
rights. Litigation to determine the validity of any claims, whether or not the
litigation is resolved in Garrett's favor, could result in significant expense
to Garrett and divert the efforts of Garrett's technical and management
personnel from productive tasks. In the event of an adverse ruling in any
litigation, Garrett may be required to pay substantial damages, discontinue the
use and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to infringing technology. Garrett's
failure to develop or license a substitute technology could prevent Garrett from
selling is products.
Year 2000 Issues.
The impact of Year 2000 issues on Waters' business depends on the
accuracy, reliability and effectiveness of Waters' and its suppliers' and
customers' assessment and remediation of Year 2000 issues. Although Waters has
not experienced any material Year 2000 problems and is not aware of any material
Year 2000 issues with respect to its suppliers' and customers' businesses,
Waters continues to monitor its and its suppliers' and customers' Year 2000
issues. There can be no assurance that Waters' efforts will result in complete
resolution of Year 2000 issues in order to prevent a material effect on its
critical business systems.
<PAGE>
WATERS ANNUAL MEETING
Date, Time and Place of the Waters Annual Meeting
The Waters annual meeting will be held at _____ a.m., Minneapolis time,
on _________, ________, 2000, at the _______________, ______________,
_______________, Minnesota _____.
Purpose of the Waters Annual Meeting
This proxy statement/prospectus is being furnished to the Waters
shareholders in connection with the solicitation of proxies on behalf of Waters
board of directors for use at the Waters annual meeting. The purpose of the
Waters annual meeting is to consider and act upon the following proposals:
1. the approval of the issuance of up to 375,000 shares of Waters
common stock in connection with the merger;
2. the approval of Waters' amended and restated bylaws which amend
Waters existing bylaws to divide the Waters board of directors into two classes,
with each class serving a staggered two-year term (except, initially, Class I
directors), to provide that directors may be removed only for cause, to specify
a mechanism for nominating directors and to provide that certain provisions of
Waters amended and restated bylaws may only be amended by the vote of two-thirds
of the outstanding shares of capital stock of Waters entitled to vote;
3. the approval of an amendment to Waters 1995 Stock Option Plan to
increase the number of shares of Waters common stock available for issuance
under that plan;
4. to elect six members of the board of directors of Waters to serve as
directors for the respective terms set forth in this Proxy Statement/Prospectus;
5. to transact such other business as may be properly brought before
the meeting or any adjournment or postponement of the annual meeting.
Under the terms of the merger agreement, Proposal 1 must be approved
for the merger to be completed and Waters has agreed to take all action
necessary to cause Proposals 2 and 4 to occur as soon as practicable. Any other
proper business may be transacted at the Waters annual meeting or any
adjournments thereof. Waters shareholder approval of the issuance of shares in
connection with the merger is required in accordance with the rules of The
Nasdaq National Market because the Waters common stock to be issued in
connection with the merger will be in excess of 20% of the number of shares of
Waters common stock outstanding before such issuance.
Each copy of this proxy statement/prospectus is accompanied by a form
of proxy for use at the Waters annual meeting.
THE BOARD OF DIRECTORS OF WATERS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
FOREGOING PROPOSALS.
Record Date and Outstanding Shares
The Waters board of directors has fixed ____________, 1999, as the
record date for the determination of the holders of Waters common stock entitled
to receive notice of and to vote at the Waters annual meeting. Only holders of
record of Waters common stock at the close of business on that date are entitled
to notice of, and to vote at, the Waters annual meeting. On the Waters record
date, there were ____ holders of record of Waters common stock and __________
shares of Waters common stock issued and outstanding. See "Principal
Shareholders of Waters" for information regarding directors, certain executive
officers and persons known to management of Waters to be the beneficial owners
of more than 5% of the outstanding Waters common stock.
Votes Required for Approval; Effect of Abstentions and Non-Votes
The presence at the Waters annual meeting, in person or by proxy, of
holders of a majority of the outstanding shares of Waters common stock entitled
to vote at the meeting will constitute a quorum for the transaction of business.
Each share of Waters common stock entitles the holder thereof to one vote on
each matter submitted for shareholder approval.
<PAGE>
Under the rules of The Nasdaq National Market, approval of issuance of
Waters common stock in connection with the merger requires the affirmative vote
of the holders of a majority of the shares of Waters common stock voted, in
person or by proxy, at the Waters annual meeting. Under the rules of The Nasdaq
National Market, brokers who hold shares in street name for customers will not
have the authority to vote on the issuance of shares in connection with the
merger unless they receive specific instructions from beneficial owners.
Abstentions and broker non-votes will be included in determining whether a
quorum is present.
Adoption and approval of Waters amended and restated bylaws, the
amendments to the 1995 Stock Option Plan, and the election of directors require
the affirmative vote of the holders of at least a majority of the shares of
Waters common stock present in person or by proxy at the annual meeting with
authority to vote on such matters, but not less than 735,640 shares.
Proxies given to the persons named in the Waters form of proxy will be
voted FOR the election of the nominees listed under "Election of Waters
Directors" unless authority to vote is withheld. A shareholder entitled to vote
for the election of directors can withhold authority to vote for all nominees
for director or can withhold authority to vote for certain nominees for
director. Waters and Garrett have agreed in connection with the merger, that
Waters shall take all action necessary to increase the size of the Waters board
of directors and to have Frank Madren and Christopher Robert elected to the
Waters board. See "Election of Waters Directors - Nominees for Election as
Directors." Pursuant to this obligation, Waters has named Mr. Madren and Mr.
Robert as nominees for election to the Waters board effective upon and subject
to the closing of the merger.
Abstentions, directions to withhold authority and broker non-votes are
counted as shares present in the determination of whether the number of shares
of stock represented at the Waters annual meeting constitutes a quorum. In the
case of proposals requiring the affirmative vote of the holders of a majority of
shares represented in person or by proxy with authority to vote thereon,
abstentions will be counted as part of the total number of shares represented
and with authority to vote in determining whether the proposals have received
the requisite number of favorable votes, whereas broker non-votes will not be
counted as part of the total number of shares represented and with authority to
vote on such proposals. Thus, abstentions will have the same effect as votes
against any such proposal, whereas broker non-votes will have no effect in
determining whether any such proposal has been approved by the shareholders.
All executive officers and directors of Waters who, as of the Waters
record date, were shareholders of Waters, have indicated their intention to vote
their shares of Waters common stock in favor of each of the foregoing proposals.
As of the Waters record date, such persons collectively had the right to vote
approximately ______ shares of Waters common stock, representing approximately
___% of the outstanding shares of Waters common stock on such date. See
"Principal Shareholders of Waters."
Voting and Revocation of Proxies
Shareholders of record on the Waters record date are entitled to cast
their votes, in person or by properly executed proxy, at the Waters annual
meeting. All properly executed proxies that are not revoked will be voted at the
Waters annual meeting in accordance with the instructions indicated on such
proxies. If a holder of Waters common stock executes and returns a proxy and
does not specify otherwise, the shares represented by such proxy will be voted
FOR (i) approval of the issuance of Waters common stock in connection with the
merger, (ii) approval of Waters' amended and restated bylaws, (iii) approval of
the amendment to Waters' 1995 Stock Option Plan, and (iv) election of the Waters
board's nominees for directors. A shareholder of Waters who has executed and
returned a proxy may revoke it at any time before it is voted at the Waters
annual meeting by (a) executing and returning a proxy bearing a later date or
(b) filing a written notice of such revocation with the Secretary of Waters
stating that the proxy is revoked. However, no such revocation will be effective
unless and until such notice of revocation has been received by the Secretary of
Waters at or prior to the Waters annual meeting.
Waters board of directors is not aware of any business to be acted upon
at the Waters annual meeting other than as described in this proxy
statement/prospectus. If, however, other matters are properly brought before the
Waters annual meeting, or any adjournments or postponements of the annual
meeting, the persons appointed as proxies or their substitutes will have
discretion to vote or act thereon according to their best judgment and
applicable law unless the proxy indicates otherwise.
<PAGE>
Minnesota law does not require that holders of Waters common stock who
object to the issuance of Waters common stock in connection with the merger and
who vote against or abstain from voting in favor thereof be afforded any
dissenters' rights or the right to receive cash for their shares. Waters does
not intend to make any such rights available to its shareholders.
Solicitation of Proxies
In addition to solicitation by mail, the directors, officers and
employees of Waters may solicit proxies from Waters shareholders by personal
interview, telephone, telegram, facsimile or otherwise. Waters will bear the
costs of the solicitation of proxies from its shareholders, as well as the cost
associated with the printing of this proxy statement/prospectus. Arrangements
will be made with brokerage firms and other custodians, nominees and fiduciaries
who hold Waters common stock of record for the forwarding of solicitation
materials to the beneficial owners thereof. Waters will reimburse brokers,
custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses
incurred by them in connection therewith.
Adjournment of the Waters Annual Meeting
If a quorum is not present at the time the Waters annual meeting is
convened, or if for any other reason Waters board of directors believes that
additional time should be allowed for the solicitation of proxies or for the
satisfaction of conditions to the merger agreement, Waters may adjourn the
Waters annual meeting with a vote of the majority of its shareholders present or
represented at the meeting.
The failure to return a proxy or to vote in person will have no effect
on the vote on adjournment at the discretion of the Waters board of directors,
except to reduce the total number of votes counted. Brokers who hold shares in
street name for customers will not have the authority to vote unless they
receive specific instructions from beneficial owners. Under Minnesota law, such
broker non-votes will not be counted as present for purposes of determining the
number of shares represented in person or by proxy and entitled to vote on such
adjournment.
<PAGE>
GARRETT SPECIAL MEETING
Date, Time and Place of the Garrett Special Meeting
The Garrett special meeting will be held at 10:00 A.M., Pacific Time on
_________________, 2000 at Garrett's corporate offices, located at 213 Hammond
Avenue, Fremont, California 94539.
Purpose of the Garrett Special Meeting
This proxy statement/prospectus is being forwarded to the Garrett
shareholders in connection with the solicitation of proxies on behalf of the
Garrett board of directors for use at the Garrett special meeting. This proxy
statement/prospectus is also provided to Garrett shareholders as a prospectus
relating to the Waters stock to be issued in the merger.
The purpose of the Garrett special meeting is to approve and adopt the
merger agreement and the merger, approve the fairness of the division of the
merger consideration among the respective Garrett shareholders as described in
the notice of the special meeting attached to this proxy statement/prospectus,
to approve the exchange of Waters common stock for Garrett common stock received
upon the exercise of any Garrett options between November 3, 1999 and the
effective date of the merger and to transact any other business that properly
comes before the special meeting or any adjournments or postponements of the
special meeting.
The Garrett board recommends that shareholders vote for approval and
adoption of the merger agreement and the merger, for approval of the fairness of
the division of the merger consideration among the Garrett shareholders and for
approval of the exchange of Waters common stock for Garrett common stock
received upon the exercise of any options between November 3, 1999 and the
effective date of the merger.
Record Date and Outstanding Shares
The board of directors has fixed the close of business on January ___,
2000 as the record date for the determination of the holders of Garrett common
stock entitled to notice of, and to vote at, the special meeting. On the Garrett
record date there were ____ holders of record of Garrett common stock and ____
shares of Garrett common stock issued and outstanding. Each share is entitled to
one vote on each matter submitted for shareholder approval.
Voting and Revocation of Proxies
All properly signed proxies that are not revoked will be voted at the
special meeting and at any adjournments or postponements of the special meeting
according to the instructions in the proxy. If a holder of Garrett common stock
executes and returns a proxy and does not specify otherwise, the shares
represented by the proxy will be voted "for" approval of the merger agreement
and the merger, "for" approval of the fairness of the division of the shares of
Waters common stock to be issued in the merger and "for" approval of the
exchange of Waters common stock for Garrett common stock received upon the
exercise of any options between November 3, 1999 and the effective date of the
merger. A Garrett shareholder who has signed and returned a proxy may revoke it
at any time before it is voted at the special meeting by executing and returning
a proxy bearing a later date, filing written notice of revocation with the
Secretary of Garrett stating that the proxy is revoked, or attending the special
meeting and voting in person.
Votes Required for Approval; Effect of Abstentions and Non-Votes
The presence, in person or by proxy, at the special meeting of the
holders of a majority of the shares of Garrett common stock outstanding and
entitled to vote at the special meeting is necessary to constitute a quorum at
the meeting. Under California law, approval and adoption of the merger agreement
by the shareholders of Garrett requires the affirmative vote of at least a
majority of the issued and outstanding shares of Garrett common stock as of the
Garrett record date. The approval of the fairness of the division of the shares
and cash to be received in the merger requires the unanimous approval of all of
the outstanding shares of Garrett common stock. For each proposal, the failure
to vote will have the same effect as a "no" vote. Abstentions will also have the
same effect as a "no" vote. The directors and executive officers of Garrett
owned __________ shares of Garrett common stock as of the record date, which is
approximately ____% of the shares entitled to vote, and have indicated that they
intend to vote in favor of the proposals to be presented at the special meeting.
<PAGE>
Solicitation of Proxies
In addition to solicitation by mail, the directors, officers, employees
and agents of Garrett may solicit proxies from Garrett shareholders by
telephone, telegram, in person or otherwise. Garrett will bear the costs of the
solicitation of proxies from its shareholders, except that Waters will bear the
cost of printing this proxy statement/prospectus.
Other Matters
At the date of this proxy statement/prospectus, the Garrett board of
directors does not know of any business to be presented at the special meeting
other than as shown in the notice of the special meeting. If any other matters
properly come before the special meeting, it is intended that the shares
represented by proxies will be voted on those matters according to the judgment
of the persons voting the proxies.
THE MERGER
Background of the Merger
The terms of the merger agreement are the result of arm's length
negotiations between representatives of Waters and Garrett. The following is a
brief discussion of the background of these negotiations, the merger agreement,
and related transactions.
During January 1997, Waters began investigating potential business
alliances with the goal of creating a more stable supply of technology for its
ethernet networking products. At the outset, Waters contemplated a possible
acquisition or merger. As a part of that process, Waters identified Garrett as a
potential ally. Gerald Grabowski, the President of Waters, telephoned Frank
Madren, the President and CEO of Garrett, and they arranged a meeting.
On February 23 and 24, 1997, representatives of Waters and
representatives of Garrett met in San Jose, California to discuss a possible
strategic relationship between Waters and Garrett. Present at the meetings were
Frank Madren, Gerald Grabowski, Peter Wood, Garrett's Vice President and Gary
Carlson, General Manager of Waters Network Systems. At the meeting, Mr. Madren
discussed the current and future plans for the Garrett product family, general
customer base, and size and scope of Garrett.
Mr. Grabowski returned to San Jose on April 9 and 10, 1997 to pursue
the general terms and conditions of an offer that might be acceptable to Mr.
Madren and his shareholders. After this discussion, Mr. Grabowski and Mr. Madren
developed the general framework for a transaction and expressed their mutual
interest in proceeding further. During these discussions Mr. Madren indicated
that he considered the value of Garrett to be approximately .5 times the revenue
of the company. Mr. Grabowski and Mr. Madren discussed other companies that had
sold with similar multiples while also recognizing that some had sold for
considerably less due to profitability and other issues.
During the InterOp trade show (an international exposition of
networking, internet, and telecommunications manufacturers) in Las Vegas on May
7, 1997, Mr. Madren, Mr. Carlson and Mr. Grabowski met to discuss additional
information and possible terms of a transaction. Messrs. Grabowski and Carlson
met several of Garrett's associates that attended the trade show. A general
discussion followed with no consensus on possible terms of a transaction. Mr.
Grabowski advanced a price that was lower than .5 times Garrett's sales and
discussed the possibility of obtaining pooling accounting treatment for the
transaction.
At the request of Mr. Madren, a meeting was arranged between Mr.
Grabowski and Mr. Christopher Robert, a board member and major shareholder of
Garrett. This meeting occurred on June 19, 1997 at the Marriott City Center
hotel in Minneapolis, Minnesota. During this meeting, Mr. Grabowski and Mr.
Robert discussed a possible transaction and the potential business synergies
which might be achieved by merging the two companies.
Following a telephone discussion between Mr. Grabowski and Mr. Madren,
Waters performed an initial due diligence investigation of Garrett from August
25 through 28, 1997. During that session Mr. Grabowski led a team from Waters
consisting of Don Dalland, Vice President of Manufacturing, who analyzed the
<PAGE>
Garrett manufacturing processes and inventory; Gary Carlson, General Manager of
Waters Network Systems, who reviewed the customer base and distribution
strategy; and Bill Franta, board member and technical consultant, who reviewed
design and engineering capabilities.
During the Atlanta InterOp trade show on October 9, 1997, Mr. Madren
and Mr. Grabowski met again to discuss the results of the August due diligence
meetings and other business supply opportunities that existed between the two
companies. As a result, a second due diligence meeting was scheduled to cover
the Garrett financial processes.
On November 17 through 20, 1997, Mr. Grabowski and Gregg Anshus,
Waters' Chief Financial Officer, visited the Garrett facility in San Jose and
reviewed the various financial systems, tax statements, and status of financial
accounts. After the investigation, it was agreed that Garrett needed to increase
its support in accounting to improve documentation and update its financial
processes prior to proceeding with the proposed merger. It was determined this
endeavor might require several months and formal merger discussions would be
terminated until completion. During this same time, Bob Marchetti, Waters'
Systems Engineer, met with the Garrett engineering department to determine
whether Waters Network Systems could use some of the Garrett product components
in its manufacturing processes.
During the winter and spring of 1998, representatives of Waters
initiated discussions with other companies regarding possible business
alliances, mergers or acquisitions. In each case, the discussions ceased after
preliminary conversations revealed insufficient interest or other obstacles to a
transaction.
While on a visit to the Las Vegas InterOp trade show on May 6, 1998, to
evaluate possible new sources of supply, mergers and joint ventures, Mr.
Grabowski, Mr. Carlson, and Kathy Hult, Waters Director of Marketing, met with
Mr. Madren to get an update on Garrett's progress.
On May 27, 1998 Mr. Madren visited Waters' Rochester, Minnesota
facility for a plant tour and discussions to better understand Waters'
background and capability. At the same time, Mr. Madren gathered information
regarding Waters as part of Garrett's due diligence review of Waters' business.
Subsequent discussions were directed toward a business relationship in
which Waters would purchase specific Garrett products for resale under Waters'
private label. On August 10 and 11, 1998, Mr. Madren visited the Waters
Plymouth, Minnesota facility to discuss future product plans and to gain a
better understanding of the markets that Waters Network Systems serves. These
discussions included Mr. Marchetti, Mr. Carlson, and Mr. Grabowski. The outcome
was a product development strategy that matched both Garrett's and Waters'
future needs.
No further business combination discussions were held until Mr.
Grabowski and Mr. Madren met at the Building Industry Consulting Services
International ("BICSI") conference in Orlando, Florida on January 21, 1999.
BICSI is an international organization that offers certification and education
for telecommunications and building networking experts. Mr. Madren indicated
Garrett's accounting processes had been updated and he was pleased with the
business Garrett was conducting with Waters. At this point it was mutually
agreed Waters and Garrett should reexamine the possibility of a merger between
the two companies.
Mr. Grabowski and Mr. Anshus again visited the Garrett facility in San
Jose on February 17 to 18, 1999 to reexamine the financial systems and other
processes. A meeting was held with the Garrett financial representatives to
discuss Garrett's current financial status and other items necessary to permit a
merger with a public company. Each party was assigned to complete established
action items.
During a trip to San Francisco on April 8, 1999, Mr. Grabowski attended
a lunch meeting with Mr. Madren and two other Garrett board members, Ross Smith
and Percy Kawas. They discussed possible synergies and future market
opportunities.
On May 5, 1999 Mr. Madren met with Waters board of directors in
Minneapolis, Minnesota. The meeting consisted of a general discussion of the
strengths that each company brought to the proposed merger. As a result of the
May 5, 1999 meeting, the Waters board met and decided to hire the investment
banking firm of John G. Kinnard and Company, Incorporated to provide an opinion
with respect to the fairness to the Waters Shareholders of any transaction with
Garrett.
<PAGE>
On May 27, 1999 Waters board of directors met again and discussed the
potential acquisition of Garrett. Representatives of Kinnard discussed with the
board Waters' value relative to its market price. At this meeting, the board
reviewed an initial draft of the proposed merger agreement and authorized Mr.
Grabowski to proceed with the process of negotiating an agreement with Garrett.
On July 19 and 20, 1999 representatives of Kinnard, Mr. Anshus, and Mr.
Grabowski met at Garrett's San Jose facility to review all of the major merger
issues. The group met with representatives of Froshman & Billings, Garrett's
independent auditors, and discussed the steps necessary to complete the
transaction. Garrett continued to assert pricing should be based on a valuation
equal to .5 times Garrett's sales, with sales now 35% greater than the previous
year. The parties discussed the factors contributing to the increased sales and
whether such increase was sustainable. Mr. Grabowski discussed the idea of a
transaction consisting of 50% stock and 50% cash.
During the regularly scheduled board meeting of Waters on August 19,
1999, the details of the July 19 and 20 meeting at Garrett were reviewed by Mr.
Grabowski, representatives from Kinnard, and Waters' board of directors.
On September 19, 1999 Mr. Grabowski, Mr. Anshus, a representative of
Waters' audit firm of McGladrey & Pullen LLP, and a representative of Waters'
law firm of Fredrikson & Byron, P.A. met at Garrett's facilities in San Jose,
California. The purpose was to meet with the Garrett auditors, Froshman &
Billings, to understand their progress with the financial information for
Garrett, and to meet with Garrett's law firm of Fenwick & West LLP to discuss
the proposed merger agreement. Mr. Madren and Mr. Grabowski continued to discuss
price, including Garrett's assumptions with respect to future tax liabilities,
uncollectable receivables, inventory writeoffs and legal and accounting
expenses.
A meeting of Waters' board of directors was held on October 1, 1999 to
discuss the results of the meetings in San Jose and the terms of the revised
merger agreement being developed. Representatives of Kinnard presented the
current status of the information being compiled by Kinnard. The Board discussed
post merger governance issues and the advisability of adopting a staggered board
of directors to take effect upon completion of the merger. In connection with
this discussion, the Board approved amendments to Waters' bylaws implementing a
staggered board consisting of two classes to take effect upon the merger and
authorized the officers to submit the proposed amendment for shareholder
approval. After the formal part of the meeting, the Kinnard representatives left
and Mr. Madren, President of Garrett, arrived to discuss his ideas on the terms
of the agreement and to give the Board an update on Garrett's performance.
Waters argued that Garrett's valuation of $5.5 million was too high,
particularly given Garrett's assumptions regarding certain future costs
including tax liabilities, receivables, inventories and legal and accounting
expenses. Waters proposed a price of $4.5 million plus the value of Waters'
assumption of Garrett's options. Waters introduced the possibility that it might
accept Garrett's price if Garrett would guarantee that certain future "costs"
and other risk items would not exceed $1 million. No final agreement was reached
on these discussions.
The following day Mr. Grabowski and Mr. Madren continued discussions.
Mr. Madren agreed in concept that Garrett could limit the identified future
"costs" and future risk items to not more than $1 million. Mr. Grabowski agreed
in concept that a price of $4.5 million would be acceptable provided that the
identified future "costs" and other risk items did not exceed $1 million. Both
Mr. Madren and Mr. Grabowski agreed the price would be adjusted to the extent
that the identified "costs" and other risk items exceeded or were less than $1
million. Mr. Grabowski reviewed this with the Waters directors and received
their conceptual approval.
Over the next four weeks, numerous discussions and negotiations on the
details of the conceptual agreement were held between Garrett and Waters. The
details that were discussed included representations and warranties, specifics
of controllable costs, compensation agreements. The conceptual agreement
remained the same throughout this process. This led to finalization of the terms
of the merger agreement.
A Waters board meeting was held on October 28, 1999, to consider the
form of the proposed merger agreement and all open transaction issues. At the
meeting, Kinnard presented its opinion that the consideration to be paid to the
shareholders of Garrett in the merger was fair to the shareholders of Waters
from a financial point of view. The Waters board authorized Mr. Grabowski to
execute the agreement with Garrett in the form presented with such additional
changes as Mr. Grabowski and Waters legal counsel deemed appropriate. After
final negotiations with Mr. Madren and revision of the merger agreement
<PAGE>
Garrett's board of directors approved the merger agreement on November 4, 1999.
A press release regarding the execution of the merger agreement was issued on
November 4.
Waters' Reasons for the Merger
The Waters board of directors arrived at its unanimous decision to
approve the merger agreement on October 28, 1999. The Board considered the
following factors and found each factor to support its decision to approve the
merger agreement:
o Garrett's focus on fiber and copper Ethernet switches, hubs,
and media conversion products that are highly complementary to
Waters' LAN technology.
o Waters' expectation that the market for Ethernet LAN products,
especially within the communications market on which Garrett
focuses, will be one of the more rapidly growing segments of
the LAN market for the next several years.
o Waters' expectation that Garrett's research and development
capabilities could be applied to design products that can be
distributed through both Garrett and Waters distribution
channels.
o The potential synergies of the Waters and Garrett sales
organizations, which sell similar product technologies into
different geographical regions.
o The business, earnings, operations, financial condition,
competitive condition and prospects of Waters and Garrett,
both individually and on a combined basis.
o The likelihood that the public trading price of Waters common
stock would continue to trade at levels unacceptable to the
Waters Board unless Waters is successful in expanding its
business through acquisitions or internal growth.
o The fairness opinion and presentation delivered by J.G.
Kinnard to Waters' board on October 28, 1999, as confirmed in
writing on November 3, 1999, to the effect that as of such
date, the consideration to be paid by Waters shareholders was
fair, from a financial point of view, to such shareholders.
o The consideration to be paid for the Garrett stock in the
merger and the relationship between the market value of the
Waters common stock to be issued in exchange for each share of
Garrett common stock and Waters' per share earnings, before
interest and taxes, and certain other measures.
o The terms and conditions of the merger agreement, including
the parties' respective representations, warranties, and
covenants, and the conditions to their respective obligations.
o The ability of Waters to devote management time and energy to
the integration and assimilation of Garrett's business and
organization.
o The risk that the benefits sought in the merger would not be
fully realized.
o The risk that the significant time and expense that Waters has
devoted to the merger would be lost in the event the merger is
not contemplated.
o The risk that the integration of Waters' and Garrett's
businesses would be difficult due to the geographic
separation.
o The dilution of Waters shareholders resulting from the
issuance of Waters common stock in connection with the merger.
Waters' board of directors also considered negative factors relating to
the merger, including (a) the risks that the benefits sought in the merger would
not be fully realized; (b) the risk that the significant time and expense which
Waters has devoted to the merger would be lost in the event the merger is not
consummated; (c) the risk that the integration of Waters and Garrett's
businesses would be difficult due to the geographic separation of the
businesses; and (d) the dilution to Waters shareholders resulting from the
issuance of Waters common stock in connection with merger. Waters board of
directors believed that these risks were outweighed by the potential benefits to
be gained by the merger.
In view of the number and wide variety of factors considered by Waters'
board of directors, they did not consider it practical to, and did not attempt
to, quantify or otherwise assign relative weight to the specific factors
considered in approving the merger agreement. The Waters board viewed its
position and recommendations as being based upon the totality of the information
and factors presented to and considered by it. In addition, individual members
of Waters Board may have given different weight to different information and
factors.
<PAGE>
BASED UPON ITS CONSIDERATION OF THE FOREGOING MATTERS AND OTHER ADVICE
AND INFORMATION DEEMED RELEVANT, THE WATERS BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT WATERS SHAREHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER, THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Garrett's Reasons for the Merger
In approving the merger agreement, the merger and the transactions
related to the merger, the Garrett board of directors considered a number of
significant factors, including:
o The business, results of operations and financial condition of
Garrett and the competitive nature of the industry in which it
operates, based, in part, upon presentations by management of
Garrett, including management's view of the business and
financial prospects for Garrett if it were to remain
independent, taking into account Garrett's continuing
improvement in operations, its expanding position in the
communications facilities business, the foregone growth
opportunities experienced due to limited funds, and Garrett's
size and resources as compared to its competitors.
o Information available to them concerning Waters, its business,
size, market characteristics of Waters common stock and other
matters based, in part, on information provided by management
of Garrett as a result of meetings with Waters' management.
o The opportunity to fund significantly expanded business growth
opportunities based on the relatively greater financial
strength of Waters, and on the expressed desire by Waters
management and the Waters board of directors to invest in
growth opportunities in Garrett's field of business.
o The terms of the merger agreement, including the proposed
assumption of Garrett's liabilities for employee stock
options, potential taxes for prior years, and other normal
on-going product and business liabilities.
o The terms of the merger agreement, including the proposed
structure for at least 50% of the merger consideration to be a
tax-free exchange of shares, notwithstanding the fact that the
shares exchange ratio was established based on a share price
that values Waters common stock at $6.00 fixed, which is above
the trading prices for several recent months.
o The merger consideration represents a price of 400% over the
typical price paid for Garrett common stock in November 1992,
and a premium of 122% over the price of the Garrett shares
last sold to investors in May 1998.
o The exchange of Garrett common stock for cash will give
immediate liquidity to some current shareholders of Garrett.
o The exchange of Garrett common stock for Waters common stock
will give some current holders of Garrett common stock
publicly listed shares that trade on the Nasdaq National
Market and provide an opportunity to participate in future
growth of the merged businesses.
o The financial resources of Waters, which are significantly
greater than those of Garrett.
The Garrett board of directors also identified and considered a number
of potentially negative factors in its deliberations concerning the merger,
including, but not limited to:
o The risk that the potential benefits sought in the merger
might not be fully realized, if at all;
o The possibility that the merger would not be completed;
o The risk that Waters might not be able to provide on-going
cash for investment in growth; and
<PAGE>
o The risk that despite the efforts of Waters, key technical,
marketing and management personnel might not choose to remain
employed by the resulting business.
The Garrett board of directors believed that certain of these risks
were unlikely to occur, while others could be avoided or mitigated by Waters,
and that, overall, these risks were outweighed by the potential benefits of the
merger.
The Garrett Board did not assign relative weights to the factors or
determine that any factor was of particular importance. Rather, the Garrett
board of directors viewed its position and recommendations as being based upon
the totality of the information presented to and considered by them. Individual
members of the Garrett board may have given different weight to different
factors. However, after taking into account all of the factors listed above, the
Garrett board of directors unanimously agreed that the merger agreement and the
merger were in the best interests of Garrett and its shareholders and that
Garrett should proceed with the merger.
Opinion of Waters Financial Advisor
Waters has retained Kinnard to provide an opinion to the board of
directors as to the fairness, from a financial point of view, of the
consideration to be paid by the Company in connection with the merger. The
amount and form of consideration to be given by Waters was determined through
negotiations between management of Waters and Garrett and not by Kinnard. See
"Background of the Merger."
At the October 28, 1999, meeting of Waters' board of directors, Kinnard
delivered to the board of directors its oral opinion that the consideration to
be paid by Waters in the merger is fair to Waters from a financial point of
view. This opinion was subsequently delivered in writing to Waters. A copy of
the opinion of Kinnard is attached as Annex B to this Proxy
Statement/Prospectus. This summary of Kinnard's opinion is qualified in its
entirety by reference to the full text of the opinion. Waters' shareholders are
encouraged to read Kinnard's opinion carefully and in its entirety for the
procedures followed, assumptions made, other matters considered, and limits of
review by Kinnard in its opinion.
No limitations were imposed on Kinnard with respect to the scope of its
investigation. In conducting its review and in rendering its opinion, Kinnard
assumed and relied upon the accuracy, completeness, and fairness of the
financial and other information provided to it, or publicly available, and did
not assume any responsibility for independent verification of the accuracy or
completeness of such information. Kinnard has further relied upon the assurances
of the management of Waters that it is not aware of any facts that would make
the information supplied to Kinnard, or publicly available, inaccurate or
misleading. With respect to the financial projections for Waters and pro forma
combined information for Waters and Garrett, the management of Waters has
represented that such projections and pro forma combined information have been
reasonably prepared on a basis reflecting management's best currently available
estimates and judgment as to the future financial performance of Waters and the
projected combined financial performance of Waters and Garrett.
Kinnard did not make an independent appraisal of the assets or
liabilities of Garrett, and does not express an opinion regarding the
liquidation value or solvency of either company separately, or the combined
companies following the merger. Furthermore, Kinnard does not express any
opinion as to the prices at which shares of Waters' common stock may trade
following the date of its opinion, at the closing date for the merger, or at any
later time in the future. Kinnard's opinion is limited to the fairness to
Waters, from a financial perspective, of the consideration to be paid by the
Company in connection with the merger, and does not address the Company's
underlying business decision to proceed with the merger. Kinnard's opinion is
based solely on information made available to Kinnard on or before the date of
its opinion and reflects general market, economic, financial, monetary, and
other conditions as of that date. The opinion is addressed to the board of
directors of the Company and is not a recommendation as to how any shareholder
of Waters should vote at the annual meeting of its shareholders to be held in
connection with the merger.
In connection with its opinion, Kinnard reviewed, among other things,
(i) a draft of the merger agreement; (ii) certain historical financial
information for Waters and Garrett; (iii) certain projected financial
information for Garrett prepared for financial planning purposes and furnished
by the management of Garrett; and (iv) certain projected data relative to Waters
prepared and furnished by Waters' management. Kinnard made inquiries of the
management of Garrett and Waters regarding the past and current business
<PAGE>
operations, financial condition, and future prospects for Garrett. In addition,
Kinnard visited Garrett's facility, and held discussions with the senior
management of both companies to understand their reasons for completing the
merger.
In conducting the review and in performing the analyses described
below, Kinnard did not attribute any particular weight to any information or
analysis considered by it, but rather made qualitative judgments as to the
significance and relevance of each factor and analysis. Accordingly, Kinnard
believes that the information reviewed and the analysis conducted must be
considered as a whole and that considering any portion of such information,
without considering all of such information and analyses, could create a
misleading or incomplete view of the process underlying the opinion.
Analysis of Selected Publicly Traded Companies. Kinnard compared
Garrett's financial information to similar information for publicly traded
companies that produce networking equipment. Based upon the type and scope of
products sold, size and stage of development, as measured by sales, relative
profitability, as measured by operating and net income margins, and
capitalization, as measured by aggregate market value, Kinnard focused its
analysis on four companies: BOCA Research, Inc., Communications Systems, Inc.,
Digi International Inc., and Equinox Systems Inc. (the "Comparable Companies").
Kinnard calculated valuation ratios based on published stock prices for
each of the Comparable Companies. The valuation ratios calculated the market
value of each of the Comparable Companies as a multiple of several operating
statistics for the latest twelve months, including sales; earnings before
interest, taxes, depreciation, and amortization; operating income; and net
income per share; in addition to projected net income per share for both the
1999 and 2000 calendar years. The projections for net income per share were
based upon consensus estimates for these companies as reported by nationally
recognized organizations that track research reports published by analysts from
various investment firms.
After examining the historical performance and expectations for Garrett
and the Comparable Companies, Kinnard determined that a 40 percent discount from
the median valuation ratios for the Comparable Companies was appropriate to
reflect differences between the operations of Garrett and the operations of the
Comparable Companies. After applying these discounted valuation ratios to
Garrett's operating statistics, Kinnard applied an acquisition premium of 40
percent, based upon the median percentage premium paid for transactions of less
than $25 million as reported by MergerStat Review 1999, to compute an estimated
range of values for Garrett of approximately $4.9 million to $8.0 million.
Analysis of Selected Merger and Acquisition Transactions. Kinnard
reviewed numerous mergers and acquisitions that were selected on the basis of
the comparability of the acquired companies to Garrett with respect to several
factors. Criteria used in the selection of the mergers and acquisitions
included, but were not limited to, the following: the type and scope of products
sold; size and stage of development, as measured by sales; relative
profitability, as measured by operating and net income margins; and
capitalization, as measured by aggregate market value. In addition, Kinnard
concentrated on transactions that were announced since January 1, 1997, and
those for which relevant financial data was available. The following table lists
the transactions that Kinnard summarized (the "Comparable Transactions "):
<TABLE>
<CAPTION>
Effective Date of Transaction Acquiring Company Acquired Company
- --------------- ----------------- ----------------
<S> <C> <C>
June 30, 1997 Brooktrout, Inc. Xircom, Inc. (Netaccess subsidiary)
August 8, 1997 Mitel Corp. Gandalf (Technology Business)
July 8, 1998 Digi International Inc. Central Data Corporation
July 29, 1998 Digi International Inc. ITK International, Inc.
August 5, 1998 Farallon Networking (Mgmt. Group) Netopia, Inc. (Farallon Division)
December 10, 1998 Communications Systems, Inc. Transition Networks, Inc.
February 2, 1999 Perle Systems Specialx International
April 8, 1999 Communications Systems, Inc. LANart Corporation
</TABLE>
Valuation ratios were calculated for each of the Comparable
Transactions based upon several operating statistics for the latest twelve
months, including sales, operating income, and net income. The median valuation
ratios for the Comparable Transactions, less a 20 percent discount to reflect
differences between the operations of Garrett and the operations of the acquired
companies in the Comparable Transactions, were then applied to Garrett's
historical financial results to compute an estimated range of values for
Garrett's business of approximately $3.7 million to $5.7 million.
<PAGE>
Discounted Cash Flow. Kinnard assessed the present values of future
cash flows that Garrett's business activities could be expected to generate over
a defined time period and the residual value of Garrett at the end of the
projected period (the "DCF Analysis"). The projected cash flows and residual
value were discounted to the present and adjusted for the debt and cash of
Garrett as of the most recent balance sheet date to determine values for
Garrett's business. Based on Garrett's capital structure and financial
condition, the expected rates of return of investors in companies such as
Garrett, current capital market conditions, the Comparable Companies' valuation
ratios, and other relevant factors, Kinnard determined that the most appropriate
discount rates for Garrett were between 35 percent and 45 percent and that the
most appropriate multiples of operating income to determine residual value at
the end of the projected period would be between 5.0 and 7.0 times operating
income. After applying these discount rates and residual multiples to the
projections, Kinnard added an acquisition premium of 40 percent, based upon the
median percentage premium paid for transactions of less than $25 million as
reported by MergerStat Review 1999, to compute a range of values based upon the
DCF Analysis. The range in estimated values for Garrett resulting from this
analysis was approximately $4.7 million to $8.4 million.
Pro Forma Accretion (Dilution) Analysis. Using forecasts and
assumptions provided by Waters and Garrett, Kinnard presented to Waters' board
of directors an analysis which compared estimated pro forma earnings per share
for the combined company for the fiscal years 2000, 2001, and 2002 to the
estimated pro forma earnings per share of Waters on a stand alone basis. The
analysis indicated that the merger would result in dilution to Waters' earnings
per share in fiscal years 2000 and 2001, and accretion in earnings per share in
fiscal 2002, assuming there would not be any synergies or cost savings from the
merger. Kinnard also presented a sensitivity analysis showing the dollar level
of synergies or cost reductions that would be required to generate accretion in
Waters' earnings per share in fiscal years 2000 and 2001. This sensitivity
analysis indicated that based upon the projections provided by management, the
merger would be accretive to earnings per share in fiscal 2000 if Waters could
realize synergies or cost savings of at least $50,000 in that year. Similarly,
based upon the projections provided by management, the merger would be accretive
to earnings per share in fiscal 2001 if Waters could realize synergies or cost
savings of at least $225,000 in fiscal 2001.
Analysis of Consideration. Pursuant to the merger agreement, Waters
will pay $2.25 million in cash, and issue 375,000 shares of common stock of
Waters and approximately 116,667 options to purchase common stock of Waters for
all of the issued and outstanding equity securities of Garrett. Kinnard analyzed
the components of the consideration to be paid and computed an estimate of the
total value of the consideration to be paid by Waters. This estimate is
consistent with the values computed for Garrett, as described above.
Waters selected Kinnard on the basis of its experience in valuing
securities in connection with mergers and acquisitions, and knowledge of
computer networking companies. Kinnard is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate, and other
purposes. Waters has agreed to pay Kinnard a fixed fee for providing the opinion
and has agreed to reimburse Kinnard for its reasonable out-of-pocket expenses
and to indemnify Kinnard against certain liabilities, including those arising
under securities laws. Earlier in 1999, Kinnard received a fixed fee for acting
as financial advisor to Waters in another assignment.
THE AMENDED AND RESTATED AGREEMENT AND PLAN OF
REORGANIZATION AND TERMS OF THE MERGER
The description of the merger agreement contained in this proxy
statement/prospectus does not purport to be complete and is qualified in its
entirety by, and made subject to, the merger agreement, a copy of which is
attached as Annex A to this proxy statement/prospectus and incorporated herein
by reference. Shareholders are urged to read the merger agreement in its
entirety.
<PAGE>
Conversion of Garrett Common Stock in the Merger
At the effective time of the merger, each share of Garrett common stock
issued and outstanding immediately prior to the effective time of the merger
(except shares of Garrett common stock that are outstanding due to option
exercises between November 3, 1999, and the effective time) will be converted,
subject to payment of cash in lieu of fractional shares of common stock and
subject to adjustment in the event there are Garrett dissenting shares, into
either $2.00 cash or 1/3 of a share of Waters common stock. Garrett shareholders
will receive a total of 375,000 shares of Waters common stock and $2,250,000 in
cash (subject to adjustments under certain circumstances). The shares received
in the merger will be divided among the owners of approximately 81% of the
issued and outstanding Garrett common stock, as follows:
o Frank Madren will receive 250,000 Waters shares in exchange
for 750,000 Garrett shares;
o Christopher Robert will receive 100,000 Waters shares in
exchange for 300,000 Garrett shares; and
o Ross Smith will receive 25,000 Waters shares in exchange for
75,000 Garrett shares.
The cash received in the merger will be divided among all Garrett shareholders
(including Madren, Robert and Smith with respect to any Garrett shares remaining
after the exchange described above) in proportion to the percentage of Garrett
common stock owned by each Garrett shareholder, at a price of $2.00 for each
Garrett share. The cash to be received in the merger will be decreased by $2.00
for each Garrett dissenting share.
Treatment of Stock Options
Each option to purchase shares of Garrett common stock that is
outstanding at the effective time of the merger will be assumed by Waters. The
Garrett options assumed by Waters will be exercisable upon the same terms and
conditions as under the Garrett options except that the Garrett options will
entitle the holder to purchase from Waters the number of shares of Waters common
stock equal to 1 share of Waters common stock for every 3 shares of Garrett
common stock the holder is entitled to purchase under the holder's Garrett
options immediately prior to the effective time of the merger. The option
exercise price per share of Waters common stock shall be an amount (rounded to
the nearest full cent) equal to the option exercise price per share of Garrett
common stock in effect immediately prior to the effective time of the merger
divided by the ratio of one to three.
The merger agreement contemplates that the unvested Garrett options
held by Ross Smith, JoAnn Madren, Percy Kawas and Robert Novak, all directors of
Garrett, will be accelerated and fully vested as of the effective time of the
merger. In addition, each option to purchase shares of Garrett common stock that
is exercised between November 3, 1999 and the effective time will receive 1
share of Waters common stock for every 3 shares of Garrett common stock.
Waters will use its best efforts to cause the Waters common stock
issued upon exercise of the assumed Garrett options to be registered on
Securities and Exchange Commission Form S-8 as soon as practicable following the
effective time of the merger. Waters will use its best efforts to maintain the
effectiveness of such registration statement as long as any Garrett options
remain outstanding and will reserve a sufficient number of shares of Waters
common stock for issuance upon exercise of Garrett options.
Representations and Warranties
The merger agreement contains various representations and warranties
made by Garrett, and, where applicable, Frank Madren, Christopher Robert, and
Ross Smith, including representations and warranties relating to:
o due organization, valid existence and good standing;
o authority to execute and deliver the merger agreement;
o the absence of the need for certain governmental filings in
order to complete the merger;
o the absence of the need for any consent, approval, waiver or
other action by any person under any contract, agreement,
indenture, lease, instrument or other document to which
Garrett is a party;
<PAGE>
o the binding effect of the merger agreement;
o capitalization;
o the preparation of audited financial statements;
o the absence of certain material events after December 31,
1998;
o title to assets;
o claims and litigation;
o tax matters;
o benefit plans and certain matters relating to the Employee
Retirement Income Security Act of 1974, as amended;
o compliance with laws;
o broker's and finder's fees;
o intellectual property;
o environmental matters;
o contracts;
o real property;
o the absence of undisclosed material obligations;
o the absence of any citations or decisions by any governmental
or regulatory body related to Garrett products;
o the absence of any rejection or return of Garrett's products;
o the merchantability of Garrett's inventory;
o the validity of Garrett's accounts and notes receivables;
o customers and suppliers;
o year 2000 programs;
o employees;
o insurance;
o potential conflicts of interest;
o bank accounts;
o minute books; and
o the information disclosed by or on behalf of Garrett.
<PAGE>
The merger agreement contains various representations and warranties
made by Waters, including representations and warranties relating to:
o the authorization, execution, delivery and enforceability of
the merger agreement;
o the absence of the need for certain governmental filings in
order to consummate the merger;
o the absence of the need for any consent, approval, waiver or
other action by any person under any contract, agreement,
indenture, lease, instrument or other document to which Waters
is a party;
o capitalization;
o the financial statements and filings with the Securities and
Exchange Commission accurately represents Waters financial
position;
o the binding effect of the merger agreement;
o due organization, valid existence and good standing;
o material obligations and events; and
o the information disclosed by or on behalf of Waters.
Certain Covenants
Except as expressly provided in or contemplated by the merger
agreement, Garrett has agreed not to do any of the following without the prior
written consent of Waters:
o amend its articles of incorporation or bylaws;
o authorize for issuance, issue, sell, or deliver any stock of
any class or any securities convertible into shares of stock
of any class of Garrett common stock;
o split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution
in respect of its capital stock; or redeem or otherwise
acquire any shares of its capital stock or other securities;
or amend or alter any material term of any of its outstanding
securities;
o create, incur or assume any indebtedness for borrowed money
(except under current credit facilities or renewals of such
current credit facilities or renewals of such current credit
facilities on substantially the same terms as currently
exist), or assume, guarantee, endorse or otherwise become
liable or responsible for the obligations of any other person;
or make any loans, advances or capital contributions to, or
investments in, any other person; or create, incur or assume
any Lien on any material asset;
o increase the compensation of any of its directors, officers,
employees, shareholders or consultants, or accelerate the
payment of any such compensation;
o pay or accelerate or otherwise modify the payment, vesting,
exercisability, or other feature or requirement of any
pension, retirement allowance, severance, change of control,
stock option or other employee benefit;
o commit to any additional pension, profit-sharing, bonus,
incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance,
change of control, retirement or other employee benefit plan,
agreement or arrangement;
o except in the ordinary course of business, sell, transfer,
mortgage, or otherwise dispose of or encumber any real or
personal property;
<PAGE>
o pay, discharge or satisfy claims, liabilities or obligations
or cancel any debts or waive any claims or rights, which
involve payments or commitments to make payments which
individually exceed $2,000 or, in the aggregate, exceed
$5,000;
o make or agree to make any new capital expenditure exceeding
$10,000;
o enter into, amend or terminate any joint ventures or any other
agreements, commitments or contracts that, individually or in
the aggregate, are material to Garrett or any subsidiary
(except agreements, commitments or contracts expressly
provided for or contemplated by the merger agreement or for
the purchase, sale or lease of goods, services or properties
in the ordinary course of business, consistent with past
practice), or otherwise make any material change in the
conduct of the business or operations of Garrett or any
subsidiary;
o enter into or terminate, or amend, extend, renew or otherwise
modify any distribution, OEM, independent sales
representative, noncompetition, licensing, franchise, research
and development, supply or similar contract, agreement or
understanding;
o change its credit policy as to sales of inventories or
collection of receivables or its inventory consignment
practices;
o remove or permit to be removed from any building, facility or
real property any machinery, equipment, fixture, vehicle or
other personal property or parts thereof, except in the
ordinary course of business and except for movement from one
facility of Garrett to another such facility;
o alter or revise its accounting principles, procedures, methods
or practices, except as may be required by generally accepted
accounting principles;
o institute, settle or compromise any claim, action, suit or
proceeding pending or threatened by or against it involving
amounts in excess of $10,000;
o distribute or otherwise circulate any notices, directives or
other communications directed to all or groups of customers,
vendors, employees, distributors or others associated with its
business;
o take any action that would render any representation,
warranty, covenant or agreement of Garrett in this agreement
inaccurate or breached as of the closing date; or
o knowingly take any action that would have the effect of
jeopardizing the qualification of the merger as a
reorganization under Section 368(a) of the Internal Revenue
Code or cause the merger to fail to meet the standards for
such reorganization set forth in Rev. Proc. 77-37, 1977-2 C.B.
568.
In addition, Garrett agreed to:
o use all reasonable efforts to obtain all approvals and
consents of all third parties necessary on the part of the
Garrett or the Garrett shareholders to consummate the merger
agreement;
o deliver to Waters a list of names and addresses of those
persons, in Garrett's reasonable judgment are affiliates
within the meaning of Rule 145 of the rules and regulations
promulgated under the Securities Act;
o refrain from taking any action which would render any
representation, warranty or agreement of Garrett inaccurate or
breached as of the closing of the merger in any material
respect;
o solicit, entertain, discuss or consider any offer, inquiry or
proposal with respect to the sale, merger or other acquisition
or licensing of the business or assets of Garrett or of any
outstanding Garrett common stock by any third party other than
Waters, subject only to the fiduciary duties of the board of
directors of Garrett;
o not solicit approval of the Garrett shareholders for the
merger, either formally or informally, prior to the
distribution to and receipt of a prospectus;
o cause Frank Madren, Chuoc Linh and Mark Vaughan to execute and
deliver to Waters a noncompetition agreement;
<PAGE>
o cause Frank Madren, Chuoc Linh and Mark Vaughan to execute and
deliver to Waters employment agreements;
o cause each of its officers and directors to execute and
deliver to Waters such officer's and/or director's resignation
from such positions with Garrett as Waters may request
effective upon the effective time of the merger;
Each of Waters and Garrett have agreed to:
o allow the other's accountants, officers, directors, employees,
counsel and other representatives, reasonable access during
normal business hours, to all of its properties, books,
contracts, commitments and records;
o use all reasonable efforts to take all action and to do all
things necessary, proper or advisable to consummate and make
effective the transactions contemplated by the merger
agreement;
o take all actions necessary under federal or state securities
laws and use all reasonable efforts to have declared effective
or approved, all documents and notifications with the
Securities and Exchange Commission and other governmental or
regulatory bodies that are necessary or appropriate for the
completion of the merger;
o furnish to each other copies of all balance sheets and related
statements of income, changes in financial position and
Garrett's changes in shareholders' equity; and
o promptly notify each other in writing of the occurrence of any
event that shall or could reasonably be expected to result in
the failure to satisfy any of the conditions specified in the
merger agreement.
Interests of Garrett's Officers and Directors in the Merger
In considering the recommendation of the Garrett board of directors
with respect to the merger agreement, the merger and the transactions related to
the merger, the Garrett shareholders should be aware that Frank Madren,
director, officer and significant shareholder of Garrett, and Chuoc Linh and
Mark Vaughan, employees of Garrett, have entered into employment agreements with
Waters with respect to employment following the merger. The employment
arrangements present these individuals with potential conflicts of interest.
In addition, the merger agreement contemplates that Christopher Robert,
a significant Garrett shareholder, and Frank Madren, director, officer and
significant shareholder of Garrett, will be elected to the Waters board of
directors as soon as practicable after the effective time of the merger.
Moreover, the Garrett shareholders should be aware that Frank Madren,
Christopher Robert and Ross Smith, who together own approximately 81% of the
Garrett common stock, are entitled to receive under the merger agreement all of
the 375,000 shares of Waters common stock to be issued in the merger. In
addition, they are entitled to receive cash for any remaining shares of Garrett
common stock they hold that are not exchanged for Waters common stock. A total
of 15% of the merger shares payable to these individuals will be set aside in
escrow to satisfy any claims brought under the merger agreement for a period of
90 days after the completion of the first fiscal year-end audit of the combined
operations of Waters and the Waters wholly-owned subsidiary.
Finally, the merger agreement contemplates that the unvested Garrett
options of Ross Smith, Jo Ann Madren, Percy Kawas and Robert Novak, all
directors of Garrett, will become vested as of the effective time of the merger.
Conditions to Completion of the Merger; Waiver
The obligations of Waters to affect the merger are subject to the
satisfaction at or prior to the merger of certain conditions, including that:
o each representation and warranty of Garrett, and, where
applicable, Mr. Madren, Mr. Smith and Mr. Ross, and Madren
contained in the merger agreement is true in all material
respects;
o Waters has received a legal opinion from Garrett's counsel
with respect to the agreement;
o all necessary permits, authorizations, consents and approvals
have been received by Garrett;
<PAGE>
o no suit, action or other proceeding is pending or threatened
that seeks to restrain or prohibit the merger;
o no statute, rule, regulation, order, or interpretation shall
have been enacted, entered or deemed applicable by any
government or court which would make the merger illegal;
o Waters has received executed employment agreements and
executed non-competition agreements from Frank Madren, Chuoc
Linh and Mark Vaughan;
o the officers and directors of Garrett and each subsidiary
specified by Waters have tendered their respective
resignations;
o Garrett, Frank Madren, Christopher Robert and Ross Smith and
the escrow agent will have executed and delivered to Waters
the Escrow Agreement;
o the Form S-4 will be effective under the Securities Act and
the shares of Waters common stock to be delivered pursuant to
the merger have been duly listed on the Nasdaq National
Market;
o Waters has received an executed Standstill Agreement;
o Waters has received an executed affiliate letter from each
individual identified as an affiliate by Garrett;
o dissenters' rights have not been asserted with respect to more
than 5% of the outstanding Garrett shares;
o each of Waters and Garrett will receive a written opinion from
its counsel indicating that the merger will constitute a
reorganization under Section 368 of the Internal Revenue Code;
o the closing sale price of Waters common stock as quoted on the
Nasdaq National Market on the trading day immediately
preceding the closing date, as reported in the Wall Street
Journal, will be $6.00 or more; and
o Waters, WG Merger Corp., Garrett and Frank Madren will execute
and deliver an agreement respecting certain costs.
In addition, the obligations of Garrett to affect the merger are subject to the
satisfaction at or prior to the merger of certain conditions, including that:
o the representations and warranties of Waters contained in the
merger agreement are true in all material respects;
o Garrett has received a legal opinion from Waters' counsel with
respect to the agreement;
o all necessary permits, authorizations, consents and approvals
have been received;
o no suit, action or other proceeding shall be pending or
threatened by any third party or by or before any court or
governmental agency in which it is sought to restrain or
prohibit the merger;
o Waters has taken all action necessary to have Frank Madren and
Christopher Robert elected to the Waters board of directors;
o Waters and the escrow agent will execute and deliver to
Garrett, Mr. Madren, Mr. Robert and Mr. Smith the escrow
agreement;
o no statute, rule, regulation, order, or interpretation has
been enacted, entered or deemed applicable by any domestic or
foreign government or governmental or administrative agency or
court which would make the merger illegal;
o each of Garrett and Waters will receive a written opinion from
its counsel indicating that the merger will constitute a
reorganization under Section 368 of the Internal Revenue Code;
o the Form S-4 will be effective under the Securities Act and
the shares of Waters common stock to be delivered pursuant to
the merger shall have been duly listed on the Nasdaq National
Market;
<PAGE>
o the principal terms of the merger agreement will be approved
by the Garrett shareholders;
o pursuant to a letter agreement, Waters will cause the assets
of Waters Network System to be transferred to WG Merger Corp.
and WG Merger Corp. will assume the liabilities of Waters
Network Systems; and
o the closing sale price of Waters common stock as quoted on
NASDAQ on the trading day immediately preceding the effective
time of the merger, as reported on the Wall Street Journal,
will be $6.00 or more.
Amendment and Termination of the Merger Agreement; Effects of Termination
The merger agreement may be terminated at any time prior to the effective
time of the merger:
o by mutual consent of the board of directors of Waters and the
board of directors of Garrett;
o by either Waters or Garrett if, without fault of such
terminating party, the merger shall not have been completed on
or before February 29, 2000;
o by Garrett if any of the conditions specified in Article VII
of the merger agreement have not been satisfied or waived by
Garrett; or
o by Waters if any of the conditions specified in Article VI of
the merger agreement have not been satisfied or waived by
Waters.
Indemnification and Escrow
The merger agreement provides that Frank Madren, Christopher Robert and
Ross Smith will indemnify Waters and each of its subsidiaries, officers and
directors against any and all losses, damages, liabilities, interest and
penalties, costs and expenses (including, reasonable legal fees and
disbursements), but reduced by any recovery under insurance policies, and by any
net tax benefit accruing to Waters resulting from or incurred by any person to
be indemnified under the agreement by reason of any breach of any
representation, warranty, covenant or agreement of Garrett contained in the
merger agreement or any agreement, certificate or document executed and
delivered by Garrett or Mr. Madren, Mr. Robert and Mr. Smith pursuant to the
merger agreement.
The indemnification obligation will not apply unless the losses exceed
a total of $100,000.00 and, if the losses exceed the $100,000.00, then the
indemnification provided will include only losses in excess of the $100,000.00
up to the maximum value of the Waters shares that are placed in escrow.
In addition, Waters has agreed to indemnify, defend and hold harmless
the Garrett shareholders and their affiliates, agents and counsel from and
against and in respect of any and all demands, claims, actions or causes of
action, assessments, losses, damages, liabilities, interest and penalties, costs
and expenses (including, without limitation, reasonable legal fees and
disbursements incurred in connection with any action, suit, proceeding, claim,
appeal, demand, assessment or judgment), resulting from, arising out of, or
imposed upon or incurred by any person to be indemnified by reason of any breach
of any representation, warranty, covenant or agreement of Waters contained in
the merger agreement or any agreement, certificate or document executed and
delivered by Waters pursuant to or in connection with the transactions
contemplated by the merger agreement.
As security for the indemnification obligations described above,
certificates representing 15% of the shares payable to the Garrett shareholders
will be deposited in escrow. The escrow fund will be Waters' sole recourse for
indemnification and will remain in existence for the period beginning on the
date of closing and will remain in effect for 90 days after the completion of
the first fiscal year-end audit of the combined operations of Waters and
Garrett.
Agreement Respecting Certain Costs
As a condition to Waters' obligation to complete the merger, Waters,
Garrett, WG Merger Corp. and Frank Madren entered into an agreement with respect
to certain costs. The agreement provides that WG Merger Corp. will become liable
for all of the past, present and future liabilities of Garrett with respect to
the following costs:
o income tax liabilities for Garrett for the years prior to and
including 1996;
o the fees of Garrett's accountants;
<PAGE>
o the fees of Garrett's attorneys;
o liabilities with respect to Garrett and Garrett Communications
UK Limited; and
o certain obligations under a letter agreement with Mr. Doug
Thompson.
The agreement further provides the WG Merger Corp. will assume the risks
associated with the following operating contingencies:
o the inability to collect in full Garrett's accounts receivable
as of the closing date of the merger; and
o the inability to sell all of Garrett's inventory as of the
closing date of the merger.
Waters will increase the merger consideration to be paid to the Garrett
shareholders in the form of fifty percent cash and fifty percent Waters common
stock to the extent the costs incurred are less than one million dollars. In the
event that the costs exceed one million dollars, Frank Madren will reimburse
Waters for the amount the costs exceed one million dollars.
Restrictions on Resale of Waters Common Stock
The Waters common stock issuable in the merger has been registered
under the Securities Act and will be freely transferable by the recipients,
except as provided in this paragraph. The shares of Waters common stock to be
issued in the merger and received by persons who may be considered to be
"affiliates" of Garrett before the merger or "affiliates" of Waters after the
merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act or as otherwise permitted under
the Securities Act. An affiliate is a person who controls, is controlled by, or
is under common control with Garrett before the merger or Waters after the
merger. Garrett has delivered to Waters, and agreed to update as necessary, a
list identifying all persons who are affiliates of Garrett for purposes of Rule
145. Garrett has delivered to Waters from each person identified as an
affiliate, and has agreed to use all reasonable efforts to cause each person who
is subsequently identified as an affiliate to deliver to Waters at or before the
effective time of the merger, an agreement that each person will not offer to
sell, sell, or otherwise dispose of any shares of Waters common stock received
in the merger in violation of the Securities Act.
It is estimated that affiliates of Garrett will receive a maximum of
approximately 375,000 shares of Waters common stock upon completion of the
merger. The 375,000 shares would constitute approximately 20% of the total
number of shares of Waters common stock anticipated to be outstanding
immediately after the effective time of the merger, after giving effect to the
shares issued pursuant to the merger.
Material Federal Income Tax Consequences
The following discussion is a general summary of certain material
United States federal income tax consequences of the merger. This discussion is
based upon the Internal Revenue Code of 1986, as amended and the regulations
promulgated thereunder, judicial precedent relating thereto, and current rulings
and administrative practice of the Internal Revenue Service in each case as in
effect as of the date of this proxy statement/prospectus and all of which are
subject to change at any time, possibly with retroactive effect. This discussion
does not take into account the fact and circumstances of any particular
shareholder of Garrett, and assumes that the Garrett stock is held as a "capital
asset" (i.e., property held for investment) within the meaning of Section 1221
of the Code at the effective time of the merger. Neither Waters nor Garrett has
sought a ruling from the IRS with respect to the income tax consequences of the
merger and related transactions, and there can be no assurance that the IRS will
not take a different view of the transaction.
HOLDERS OF GARRETT STOCK SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
Tax Consequences of the Merger. The Merger is intended to qualify as a
reorganization under Section 368(a) of the Code. It is a condition to the merger
that both Fenwick & West LLP, counsel to Garrett, and Fredrikson & Byron, P.A.,
counsel to Waters, will render opinions, to the effect that the merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code and
that no gain or loss will be recognized by a shareholder of Garrett stock as a
result of the merger except with respect to cash received by the shareholder;
including cash received in lieu of fractional shares or pursuant to the exercise
<PAGE>
of dissenters' rights and if a holder of Garrett stock receives cash, gain, if
any, realized by the holder of Garrett stock pursuant to the merger will be
recognized, but only to the extent of the cash received. Certain closing
conditions must be fulfilled before either Fenwick & West LLP or Fredrikson &
Byron will issue tax opinions. Specifically, the merger agreement sets forth
closing conditions to both Waters and Garrett's obligations requiring a $6.00
minimum price per share for Waters common stock. If this closing condition is
either waived or amended by Waters or Garrett, neither Fenwick & West LLP nor
Fredrikson & Byron will issue a tax opinion if the Waters common stock closing
price per share is at or below $5.24.
Garrett shareholders will receive Waters stock and cash in exchange for
Garrett shares pursuant to the merger and will realize gain or loss equal to the
excess of the fair market value of the Waters stock and the cash received by the
shareholder over the shareholder's basis in his or her Garrett stock. Any loss
will not be recognized and gain will be recognized only to the extent of the
cash received. As to each shareholder, the recognized portion of the realized
gain will be treated as capital gain or, if the exchange has the effect of the
distribution of a dividend under the tests set forth in Sections 356 and 302 of
the Code, then as a taxable dividend to the extent of the shareholder's ratable
share of Garrett's accumulated earnings and profits, with the remainder of the
gain, if any, first treated as a non-taxable recovery of basis of the
shareholder in his/her stock, and then as capital gain. In applying the dividend
tests under Section 302 of the Code to a particular shareholder, Garrett stock
or Waters stock that is held by a person related to the Garrett shareholder may
be deemed to be constructively owned by the shareholder, in accordance with the
rules under Section 318 of the Code. If, at the effective time of the merger,
the Garrett shares then exchanged have been held by a Garrett participant
shareholder for more than one year, capital gain or loss recognized by the
shareholder of the effective time of the merger will be long-term capital gain
or loss. Under current law, long-term capital gains of individuals are taxed at
a maximum rate of 20%. Gain of individuals which is not long-term capital gain
will be taxed at ordinary income rates.
Characterization of Cash Received. Under Section 302, a redemption will
be treated as a sale or exchange of stock (and not as a dividend) if it is a
"complete redemption" of a shareholder's interest, if it is "substantially
disproportionate" with respect to a shareholder, or if it is "not essentially
equivalent to a dividend." In determining whether a reorganization exchange has
the effect of the distribution of a dividend, the application of Section 302 of
the Code is determined as if the gain is recognized as a result of a deemed
post-reorganization redemption of the acquiring corporation's stock. Thus, for
this purpose, each Garrett shareholder will be treated as having received solely
Waters stock for the shareholder's Garrett stock, a portion of which Waters
stock will then be treated as redeemed by Waters for an amount equal in value to
the cash that the shareholder actually received. The determination as to whether
an exchange has the effect of the distribution of a dividend is made on a
shareholder-by-shareholder basis. A distribution will be "substantially
disproportionate" with respect to a particular shareholder (thus qualifying for
sale or exchange treatment) if that shareholder's actual and constructive
percentage interest in Waters after his or her shares are treated as redeemed
is: (i) less than 80% of that shareholder's actual and constructive percentage
interest in Waters immediately prior to the redemption; (ii) less than 80% of
that shareholder's actual and constructive ownership of the Waters' common stock
(whether voting or nonvoting) immediately prior to the redemption; and, (iii)
and, after the redemption, the shareholder owns, actually and constructively,
less than 50% of the total combined voting power of all Waters stock entitled to
vote. Even if a shareholder fails to meet the "substantially disproportionate"
test described above, an exemption from dividend treatment may nevertheless be
available depending upon the individual shareholder's particular facts and
circumstances under the "not essentially equivalent to a dividend" test.
Basis and Holding Period of Waters Common Stock Received. The aggregate
basis of the Waters stock to be received by a Garrett shareholder will be the
same as the aggregate basis of the Garrett stock surrendered in exchange
therefor, decreased by the amount of cash received (including cash received in
lieu of fractional shares), and increased by the amount of gain recognized on
the exchange (excluding any portion of the gain that was treated as a dividend
and taxed as ordinary income). The holding period of the Waters stock to be
received by a Garrett shareholder will include the holding period of the Garrett
stock surrendered in exchange therefor.
Cash in Lieu of Fractional Shares. A Garrett shareholder who received
cash in lieu of a fractional share of Waters stock will generally be obligated
to report capital gain or loss equal to the difference between the cash received
and the portion of the shareholder's basis in his or her Garrett stock allocable
to the fractional share interest. The gain or loss will be long-term if the
Garrett stock has been held for more than one year at the Effective Date.
Backup Withholding. Under the Code, a payment to a shareholder of
Garrett stock may be subject, under certain circumstances, to backup withholding
at a 31% rate with respect to the amount of cash, if any, received pursuant to
<PAGE>
the merger, unless the shareholder provides proof of an applicable exemption or
a correct taxpayer identification number, and otherwise complies with applicable
requirements of the backup withholding rules. Any amounts withheld under the
backup withholding rules are not an additional tax and may be refunded or
credited against the holder's federal income tax liability, provided the
required information is furnished to the IRS.
Limitations on Tax Opinion and Discussion. The discussion of certain
U.S. federal income tax consequences presented above and the tax opinions that
will be delivered by Fenwick & West LLP and Fredrikson & Byron will be subject
to certain closing conditions and will be based on the accuracy of the
representations in the merger agreement. Specifically, the merger agreement sets
forth closing conditions to both Waters and Garrett's obligations requiring a
$6.00 minimum price per share for Waters common stock. If this closing condition
is either waived or amended by Waters or Garrett, neither Fenwick & West LLP nor
Fredrikson & Byron will issue a tax opinion if the Waters common stock closing
price per share is at or below $5.24. Neither Waters nor Garrett has requested
or will request a ruling from the IRS with regard to any of the U.S. federal
income tax consequences of the merger, and the Tax Opinion described above would
neither be binding upon the IRS nor preclude it from adopting a contrary
position.
A successful IRS challenge to the status of the merger as a tax-free
reorganization would likely result in Garrett being treated as if it had sold
all of its assets to WG Merger Corp. in a taxable transaction, followed by the
liquidation of Garrett in which the Garrett shareholders receive the sale
proceeds (cash and Waters stock) in consideration for the taxable sale of their
Garret stock. In such event, each Garrett shareholder would be required to
recognize all of his or her realized gain or loss with respect to the
disposition of each of his or her shares of Garrett stock equal to the
difference between the basis of his or her Garrett stock and the fair market
value of the property received (the cash and Waters stock). Further, in such
event, Garrett would be subject to tax on the deemed sale of its assets to WG
Merger Corp., with gain or loss for this purpose measured by the difference
between Garrett's basis in its assets and the fair market value of the
consideration deemed received (the cash and Waters stock). Such gain or loss
would be reported on its final tax return, subject to the effect of any tax
carryovers and the effect of its other income or loss for such period, and WG
Merger Corp. would become liable for any such tax liability by virtue of the
merger.
Accounting Treatment
The merger and other transactions will be accounted for using the
purchase method of accounting in accordance with generally accepted accounting
principles. These transactions result, for financial accounting purposes, in the
effective purchase of all of the Garrett stock by Waters. Accordingly, the
assets and liabilities of Garrett will be adjusted to fair value for financial
accounting purposes and the results of operations of Garrett will be included in
the results of operations of Waters for periods after the effective time of the
merger. Any excess of cost over the fair value of the net tangible assets of
Garrett acquired will be recorded as goodwill and other intangible assets and
will be amortized by charges to operations under generally accepted accounting
principles. These allocations will be made based upon valuations and other
studies that have not yet been finalized.
Appraisal Rights of Dissenting Garrett Shareholders
If the merger occurs, then under the California law regarding
dissenting shareholders' appraisal rights, Garrett shareholders who do not vote
their Garrett shares in favor of the merger may, under certain conditions,
become entitled to be paid cash for their Garrett shares instead of receiving
Waters common stock in the merger. Holders of options or warrants to purchase
Garrett stock will not be entitled to appraisal rights in connection with the
merger by virtue of holding the options or warrants.
Under the merger agreement, it is a condition to Waters' and Garrett's
obligations to complete the merger that holders of no more than 5% of the
outstanding shares of Garrett common stock have asserted dissenting
shareholders' appraisal rights.
When the merger becomes effective, shareholders of Garrett who do not
vote in favor of the merger and who comply with the procedures prescribed in
Chapter 13 of the California Corporations Code, or Chapter 13, will be entitled
to a judicial appraisal of the "fair market value" of their shares and to
require Waters to purchase the shareholder's shares for cash at that fair market
value. For this purpose, "fair market value" is determined as of the day before
the first announcement of the terms of the merger, excluding any appreciation or
depreciation in consequence of the merger.
<PAGE>
The following is a brief summary of the statutory procedures that a
shareholder of Garrett must follow in order to dissent from the merger and
perfect appraisal rights under the California Corporations Code. This summary is
not intended to be complete and is qualified in its entirety by reference to
Chapter 13, the text of which is included as Annex F to this proxy statement /
prospectus. Any Garrett shareholder considering demanding appraisal is advised
to consult legal counsel.
To exercise dissenters' appraisal rights under California law, a
Garrett shareholder must be entitled to vote on the proposal to approve the
merger (or be a transferee of record of shares held by such a shareholder).
Under Chapter 13, appraisal rights can only be exercised with respect to shares
of Garrett stock that are outstanding on the record date for the determination
of Garrett shareholders entitled to vote on the merger.
If the merger is approved by Garrett's shareholders, but any Garrett
shareholders do not vote in favor of the merger, then within 10 days after the
date of the approval of the merger by Garrett's shareholders, Waters will mail
to each Garrett shareholder who did not vote in favor of the merger a notice of
approval of the merger, together with a copy of Sections 1300, 1301, 1302, 1303
and 1304 of the California Corporations Code, a statement of the price
determined by Waters to represent the fair market value of dissenting shares,
and a brief description of the procedure to be followed if the shareholder
desires to exercise dissenters' appraisal rights under California law. The
statement of the fair market value of the Garrett stock in the notice of
approval will constitute an offer by Waters to purchase at that price any shares
of Garrett stock for which dissenters' appraisal rights are perfected.
A shareholder of Garrett wishing to require Waters to purchase his, her
or its Garrett shares pursuant to Chapter 13 must take all of the following
actions:
(1) The shareholder must not vote in favor of approval of the merger;
(2) The shareholder must make written demand upon Waters to have Waters
purchase those shares for cash at their fair market value. The demand must be
made by a person who was a shareholder of record on the record date of the
Garrett special meeting, must state the number and class of dissenting shares
held of record by the dissenting shareholder and must contain a statement of
what the shareholder claims to be the fair market value of the shares as of the
last day before the merger was first announced. The statement of fair market
value by the shareholder will constitute an offer by the shareholder to sell the
shares to Waters at the specified price. Waters must receive the written demand
within 30 days after the date on which the notice of the approval of the merger
by Garrett's shareholders is mailed to the shareholder. If Water does not
receive the shareholder's demand within this 30-day period, then the shareholder
will forfeit his, her or its appraisal rights.
(3) The shareholder must also submit to Waters, within 30 days after
the date on which the notice of approval of the merger by Garrett's shareholders
is mailed to the shareholder, at Waters' principal office or the office of its
transfer agent, the certificates representing any shares of Garrett common stock
with respect to which demand for purchase is being made, to be stamped or
endorsed with a statement that the shares are "dissenting shares."
Written demands, notices or other communications concerning the
exercise of dissenters' rights should be addressed to:
Waters Instruments, Inc.
2950 Xenium Lane North #108
Plymouth, MN 55441
Attn: Secretary
Under California law, a dissenting shareholder may not withdraw his,
her or its demand for payment of the fair market value of the shareholder's
dissenting shares in cash unless Waters consents.
If the shareholder and Waters agree that the shares of Garrett stock as
to which the shareholder is seeking appraisal rights are dissenting shares, and
also agree upon the price to be paid to purchase the shares, then the dissenting
shareholder is entitled to the agreed price, plus interest at the legal rate on
judgments under California law from the date of the agreement. Any agreements
fixing the fair market value of any dissenting shares as between Waters and any
dissenting shareholder must be filed with the Secretary of Waters.
<PAGE>
However, if Waters denies that the shareholder's shares qualify as
dissenting shares eligible for purchase under Chapter 13 or Waters and the
shareholder fail to agree upon the fair market value of the shares, then the
shareholder may, within six months after the date on which Garrett mailed to the
shareholder the notice of approval of the merger by Garrett's shareholders, but
not after that, file a complaint in the California Superior Court requesting the
court to determine whether the shareholder's shares qualify as dissenting shares
that are eligible for appraisal rights, the fair market value of the shares, or
both, or may intervene in any action pending on a complaint.
If the court is requested to determine the fair market value of the
shares, it must appoint one or more impartial appraisers to determine the fair
market value of the shares. However, if the appraisers cannot determine the fair
market value within 10 days of their appointment or within a longer time
determined by the court, then the court will determine the fair market value. If
the court determines that the shareholder's shares qualify as dissenting shares,
then after determination of their fair market value Waters must pay the
dissenting shareholder the fair market value of the shares, as determined by the
court, plus interest at the legal rate from the date on which judgment is
entered. Payment on the judgment is due upon the endorsement and delivery to
Waters of the certificates for the shares as to which the appraisal rights are
being exercised.
The costs of the appraisal action, including reasonable compensation to
the appraisers appointed by the court, will be allocated among Waters and
dissenting shareholders as the Court deems equitable. However, if the appraisal
of the fair market value of the shares exceeds the price offered by Waters, then
Waters must pay all of the costs. If the fair market value of the shares awarded
by the court exceeds 125% of the price offered by Waters for the shares in the
notice of approval of the merger by Garrett's shareholders, then the court may
in its discretion include attorneys' fees, fees of expert witnesses and interest
in the costs payable by Waters.
A written demand for appraisal must reasonably inform Garrett of the
identity of the shareholder of record making the demand and that the shareholder
intends to demand appraisal of the shareholder's shares. A demand for appraisal
should be executed by or for the Garrett shareholder of record, fully and
correctly, as that shareholder's name appears on the shareholder's stock
certificate. If Garrett common stock is owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, the demand must be executed by the
fiduciary. If Garrett common stock is owned of record by more than one person,
as in a joint tenancy or tenancy in common, the demand must be executed by or
for all joint owners. An authorized agent, including an agent for two or more
joint owners, may execute the demand for appraisal for a shareholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, he, she or it is acting as agent for the
record owner.
Shareholders of Garrett considering whether to seek appraisal should
bear in mind that the fair value of their Garrett common stock determined under
Chapter 13 could be more than, the same as, or less than the value of the
consideration they are to receive in the merger. Also, Waters reserves the right
to assert in any appraisal proceeding that, for purposes thereof, the "fair
value" of the Garrett common stock is less than the value of the consideration
to be paid in the merger.
The process of dissenting and exercising appraisal rights requires
strict compliance with technical requirements. Garrett shareholders wishing to
dissent should consult with their own legal counsel in connection with
compliance with Chapter 13 of the California Corporations Code. Any shareholder
who fails to comply with the requirements of Chapter 13 of the California
Corporations Code, attached as Annex F to this proxy statement/prospectus, will
forfeit his, her or its rights to dissent from the merger and exercise appraisal
rights and will receive shares of Waters common stock.
COMPARISON OF RIGHTS OF SHAREHOLDERS OF WATERS AND GARRETT
After the merger, the three shareholders of Garrett who receive shares
of Waters' common stock in the merger will become shareholders of Waters. This
section summarizes the material differences between the rights of the holders of
Garrett's common stock and Waters' common stock. This summary is qualified by
reference to the charter documents and other instruments of Garrett and Waters
that create the rights of their shareholders.
Certain provisions of the Waters articles and the Waters bylaws may
have the effect of delaying, deferring or preventing a change in control of
Waters without further action by the shareholders, may discourage bids for
Waters' common stock at a premium over the market price of the common stock and
may adversely affect the market price of the common stock.
<PAGE>
Waters
As of the record date, Waters currently is authorized to issue up to
(i) 5,000,000 shares of common stock, of which 1,471,279 shares are outstanding
and held of record by 651 shareholders, and (ii) 120,000 shares of preferred
stock, none of which are outstanding. The outstanding shares of Waters' common
stock are, and the shares to be issued in the merger will be, when issued and
delivered in accordance with the merger agreement, validly issued, fully paid
and nonassessable. Additional shares of common stock may be issued by Waters
from time to time. The board of directors of Waters is authorized to issue
additional shares of Waters' common stock, but not to exceed the amount
authorized by Waters' articles of incorporation, and to issue options and
warrants for the purchase of such shares, on such terms and conditions and for
such consideration as the board of directors of Waters may deem appropriate
without further shareholder action.
The board of directors, without further action by the holders of common
stock, may issue shares of preferred stock in one or more series and may fix or
alter the relative, participating, optional or other rights, preferences,
privileges and restrictions, including the voting rights, redemption provisions
(including sinking fund provisions), dividend rights, dividend rates,
liquidation preferences and conversion rights, and the description of and number
of shares constituting any wholly unissued series of preferred stock. The board
of directors, without further shareholder approval, can issue preferred stock
with voting and conversion rights which could adversely affect the voting power
of the holders of common stock. No shares of preferred stock presently are
outstanding, and Waters currently has no plans to issue shares of preferred
stock. The issuance of preferred stock in certain circumstances may have the
effect of delaying, deferring or preventing a change in control of Waters
without further action by the shareholders, may discourage bids for Waters
common stock at a premium over the market price of the common stock and may
adversely affect the market price, and the voting and other rights of the
holders, of common stock.
Garrett
Garrett's authorized capital stock consists of 10,000,000 shares of
common stock. As of the record date, _____ shares of common stock were issued
and outstanding and employee and director stock options to purchase a total of
____ shares were outstanding. All shares of Garrett's common stock outstanding
are fully paid and nonassessable. The board of directors of Garrett is
authorized to issue additional shares of Garrett's common stock, up to the
number of shares authorized by Garrett's articles of incorporation, and to issue
options and warrants for the purchase of shares of common stock, on such terms
and conditions and for such consideration as the board of directors of Garrett
may deem appropriate without further shareholder action.
Comparison of Garrett Common Stock and Waters Common Stock
As a result of the merger, three shareholders of Garrett's common stock
(Frank Madren, Christopher Robert and Ross Smith) will become holders of Waters'
common stock. These three shareholders will have different rights as
shareholders of Waters than they had as shareholders of Garrett. These
differences are due to differences in the respective articles of incorporation
and bylaws of Garrett and Waters, and differences between the corporate laws of
California, where Garrett is incorporated and by whose laws it is governed, and
the corporate laws of Minnesota, where Waters is incorporated and by whose laws
it is governed.
The following is a summary of certain significant differences between
the charter documents of Waters and Garrett and between the laws of Minnesota
and California.
Annual Meetings of Shareholders. The bylaws of Waters provide that
regular meetings of the shareholders entitled to vote shall be held on an annual
or other less frequent basis as determined by the board of directors or the
chief executive officer, provided that if a regular meeting has not been held
during the immediately preceding fifteen months, a shareholder or shareholders
holding 3% or more of the voting power of all shares entitled to vote may demand
a regular meeting of shareholders by written notice of demand given to an
officer of Waters.
Under the bylaws of Garrett, the Garrett annual meeting of shareholders
must be held each year on June 15. California law provides that if there is a
failure to hold the annual meeting for a period of 15 months after the last
annual meeting, a court may order a meeting to be held after notice to the
corporation giving it an opportunity to be heard. The Garrett bylaws provide
that all notices of meetings of shareholders must be sent not less than 10 days
nor more than 60 days before the date of the meeting. The notice must specify
the place, date, and hour of the meeting. In the case of a special meeting, the
notice must also specify the general nature of the business to be transacted. In
<PAGE>
the case of an annual meeting, the notice must specify the matters that the
board intends to present for action. The Garrett bylaws provide that if any
person or persons other than the board of directors wishes to call a special
meeting of shareholders, he or she must make a request in writing, specifying
the time of the meeting and general nature of the business proposed to be
transacted at the meeting. Garrett must notify shareholders entitled to vote
that a meeting will be held at the time requested by the shareholder, not less
than 35 days nor more than 60 days after Garrett received the request.
Special Meetings of Shareholders. The MBCA and the Waters bylaws
provide that meetings of shareholders may be called by (i) the chief executive
officer, (ii) the chief financial officer, (iii) two or more directors, (iv)
shareholders holding 10% or more of the voting power of all shares entitled to
vote (except that the voting power needed to demand a meeting to directly or
indirectly effect a business combination is 25%), or (v) any other person
authorized in the Waters articles or the Waters bylaws. The Waters bylaws
provide that special meetings of shareholders may be called only by the parties
listed in items (i) through (iv) above.
California law provides that a special meeting of shareholders may be
called by the board of directors, the Chairman of the Board, the President or
the holders of shares entitled to cast not less than 10% of the votes at the
meeting or such additional persons as may be provided in the articles or bylaws.
The Garrett bylaws provide that special meetings of the shareholders may be
called only by the board of directors, the Chairman of the Board, the President,
or by one or more shareholders holding shares entitled to cast not less than 10%
of the votes at that meeting.
Action Without Meetings of Shareholders. The MBCA provides that any
action which might be taken at a meeting of the shareholders may be taken
without a meeting if done in writing and signed by all of the shareholders
entitled to vote on that action.
California law and the Garrett bylaws provide that any action that may
be taken at a meeting of shareholders may also be taken by the written consent
of the holders of at least the same proportion of shares as would be necessary
to take the action at a meeting at which all shares entitled to vote were
present and voted. In the election of directors, however, the written consent
generally must be unanimous.
Voting Rights; Shareholder Approvals. The Waters articles provide that
each holder of record of shares of common stock shall be entitled to one vote
per share on all matters submitted to a vote of the shareholders. The Waters
bylaws provide that, except as specifically required otherwise under the Waters
articles, the Waters bylaws or the MBCA, all matters submitted to the
shareholders are decided by a majority vote of the shares entitled to vote and
represented at a meeting at which there is a quorum. The Waters articles provide
that where approval of shareholders is required by law, the affirmative vote of
the holder of at least 66-2/3% of the voting power of all shares entitled to
vote shall be required to authorize Waters to (i) merge, (ii) to exchange its
shares for shares of another corporation, (iii) to sell, lease, transfer, or
otherwise dispose of all or substantially all of its property and assets,
including its goodwill, or (iv) to commence voluntary dissolution.
The Garrett bylaws provide that each holder of Garrett's common stock
is entitled to one vote for each share held of record on each matter submitted
to a vote of shareholders (other than the election of directors). Except as
specifically required otherwise under the Garrett articles, the Garrett bylaws
or California law, shareholder actions generally require the approval of the
holders of a majority of Garrett's outstanding shares of common stock entitled
to vote and represented at a meeting at which there is a quorum.
Cumulative Voting. The Waters articles provide that no shareholder
shall have the right to cumulate his votes in the election of directors.
Under California law, any shareholder of a corporation is entitled to
cumulate his or her votes for the election of directors, if at least one
shareholder has given notice at the meeting before the voting of the
shareholder's intention to cumulate his or her votes. California corporations
are authorized, under specified circumstances, to eliminate cumulative voting in
the election of directors. Garrett's articles of incorporation do not eliminate
cumulative voting.
Mergers and Reorganizations.
California law generally requires shareholder approval of any
reorganization, including a merger, exchange reorganization and sale-of-asset
reorganization, or sale of all or substantially all of the assets of a
corporation. The vote required is the affirmative vote of the holders of a
<PAGE>
majority of the outstanding shares of each class of capital stock of the
corporation entitled to vote on the matter, unless the charter required a higher
percentage. The Garrett articles do not require a higher percentage. In general,
under California law, shareholder approval of a reorganization is not required
if a corporation, or its shareholders immediately before the reorganization, or
both, own, immediately after the reorganization, equity securities possessing
more than 5/6 of the voting power of the surviving or acquiring corporation or
its parent.
Dividends and Repurchases of Stock. The board of directors of Waters,
under the MBCA, may declare dividends without shareholder approval so long as
the corporation will be able to pay its debts in the ordinary course of business
after making the distribution.
Generally, a California corporation may pay dividends out of retained
earnings or if, after giving effect to the dividend, (i) the sum of the assets
(excluding goodwill and specified other assets) of the corporation is at least
equal to 1 1/4 times its liabilities (excluding specified deferred credits) and
(ii) the current assets of the corporation are at least equal to its current
liabilities or, if the average of the earnings of the corporation before taxes
and interest expense for the two preceding fiscal years was less than the
average of the interest expense of such corporation for those fiscal years, 1
1/4 times its current liabilities. In addition, neither a corporation nor any of
its subsidiaries is authorized to make any distribution to the corporation's
shareholders if the corporation or the subsidiary making the distribution is, or
as a result of the distribution would be, likely to be unable to meet its
liabilities.
Inspection Rights. Under the MBCA, a shareholder has an "absolute
right," upon written demand, to examine the following corporate documents: (i)
the share register; (ii) records of all proceedings of shareholders for the last
three years; (iii) records of all proceedings of the board for the last three
years; (iv) the corporation's articles and all amendments currently in effect;
(v) the corporation's bylaws and all amendments currently in effect; (vi)
certain financial statements and the financial statement for the most recent
interim period prepared in the course of operation of the corporation for
distribution to the shareholders or to a governmental agency as a matter of
public record; (vii) reports made to shareholders generally within the last
three years; (viii) a statement of the names and usual business addresses of its
directors and principal officers; (ix) voting trust agreements; (x) shareholder
control agreements; and (xi) a copy of agreements, contracts, or other
arrangements or portions of them fixing the rights of a class or series of
securities issued by the company.
Under California law, a shareholder or shareholders holding a total of
at least 5% of the outstanding voting shares of a corporation or who hold at
least 1% of the voting shares and have filed a Schedule 14B with the SEC
relating to the election of directors of the corporation have an absolute right
to do either or both of the following:
o inspect and copy the record of shareholders' names and
addresses and share holdings during usual business hours upon
five business days' prior written demand upon the corporation,
or
o obtain from the transfer agent for the corporation, upon
written demand and upon payment of its usual charges, a list
of the shareholders' names and addresses, who are entitled to
vote for the election of directors, and their share holdings,
of the most recent record date for which it has been compiled
or as of a date specified by the shareholder.
California law requires that the list be made available on or before the later
of five business days after the demand is received or the date specified in the
demand, and that a corporation has the responsibility to cause its transfer
agent to comply with the request.
Amendment to Articles. The Waters articles provide that such articles
may be amended by the affirmative vote of at least 66-2/3% of the voting power
of the shares present and entitled to vote at a duly held meeting.
Under California law, amendments to the articles of incorporation
generally require the approval of the board of directors and the holders of a
majority of outstanding shares entitled to vote and, where their rights are
affected, by the holders of a majority of the outstanding shares of a class,
whether or not the class is entitled to vote on the matter by the provisions of
the charter.
Amendment of Bylaws. The Waters bylaws provide that such bylaws may be
amended by the affirmative vote of a majority of the board of directors of
Waters, subject to the power of Waters' shareholders to change or repeal such
bylaws. The Waters bylaws further provide that the board of directors of Waters
shall not make or alter any bylaws fixing a quorum for meetings of shareholders,
<PAGE>
prescribing procedures for removing directors or filling vacancies on the board
of directors of Waters, or fixing the number of directors or their
classifications, qualifications or terms of office, but the board of directors
may adopt or amend a Bylaw to increase the number of directors.
Under California law, bylaws may be adopted, amended or repealed either
by the vote of a majority of the outstanding shares entitled to vote or by the
approval of the board of directors. The articles of incorporation or bylaws may
impose additional restrictions. Neither the Garrett articles of incorporation or
bylaws impose additional restrictions. Amendments to the bylaws specifying or
changing a fixed number of directors or the maximum or minimum number of
directors or changing from a fixed to a variable board or vice versa may only be
adopted by approval of the shareholders. The Garrett bylaws provide that new
bylaws may be adopted or the existing bylaws may be amended by the vote or
written consent of the holders of a majority of the outstanding shares entitled
to vote. The bylaws further provide that subject to the rights of the
shareholders, a bylaw may be adopted, amended or repealed by the board of
directors.
Preemptive Rights. The Waters articles state that no holder of shares
of Waters shall have preemptive rights provided by the MBCA. The MBCA defines
preemptive right as the right of a shareholder to acquire a certain fraction of
the unissued securities or rights to purchase securities of a corporation before
the corporation may offer them to other persons. Minnesota law provides that,
with some exceptions, a shareholder has a preemptive right whenever the
corporation proposes to issue new or additional shares or rights to purchase
additional shares of the same series as the series held by the shareholder,
unless denied or limited in the articles or by the board. Holders of Waters'
common stock have no subscription, redemption or conversion rights.
Holders of Garrett's common stock have no conversion, preemptive or
other rights to subscribe for additional shares, and there are no redemption
rights or sinking fund provisions with respect to the Garrett common stock.
Directors. Under the MBCA and the Waters bylaws, directors hold office
until the next annual meeting of shareholders or the election and qualification
of their successors.
The Garrett bylaws provide that the number of directors is not less
than five nor more than nine until changed by an amendment adopted by Garrett's
shareholders. The Garrett bylaws further provide that the board of directors
must fix the exact number of directors within that range. The number of
directors currently is fixed at five.
If Waters shareholders approve the proposal set forth in this proxy
statement/prospectus to amend the bylaws to provide for a staggered Board, the
board of directors will be divided into two classes of directors. Initially,
Class I directors shall be elected for a two year term and Class II directors to
a three year term. Thereafter, both classes of directors shall serve three year
terms. The proposed amendment to the Waters bylaws will further provide that (i)
vacancies shall be filled solely by the affirmative vote of at least two-thirds
of the remaining directors, (ii) shareholders may remove a director either with
cause by the affirmative vote of at least a majority of the outstanding voting
shares or without cause by the affirmative vote of at least two-thirds of the
outstanding voting shares, and (iii) the board of directors may remove a
director with cause by the affirmative vote of at least two-thirds of the
directors or, if such director ceases to be employed as President, Chief
Executive Officer or Vice President, by the affirmative vote of at least a
majority of the directors.
Personal Liability of Directors. The MBCA generally permits a Minnesota
corporation's articles to eliminate or limit a director's personal liability to
the corporation or its shareholders for monetary damages for breaches of a
director's duty as a director. However, the articles cannot deprive the
corporation or its shareholders of the right to enjoin transactions which
violate a director's duty of care. Moreover, the articles cannot limit liability
for any breach of the director's duty of loyalty, for transactions resulting in
an improper personal benefit to the director or for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law.
In addition, liability for illegal dividends, stock repurchases or other
distributions to shareholders or for violations of Minnesota's securities
statutes cannot be limited. The Waters articles include a provision limiting the
personal liability of directors to the extent permitted by the statute.
California law permits, with exceptions, a California corporation to
adopt charter provisions eliminating the liability of its directors to the
corporation or its shareholders for monetary damages for breach of the
directors' fiduciary duty of care. The Garrett articles of incorporation
eliminate the liability of directors to the fullest extent allowed by California
law. This limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission. In addition, California law
does not permit the elimination of monetary liability based on:
<PAGE>
o intentional misconduct or a knowing and culpable violation of
law,
o acts or omissions that a director believes to be contrary to
the best interests of the corporation or its shareholders or
that involve the absence of good faith on the part of the
director,
o receipt of an improper personal benefit,
o acts or omissions that show a reckless disregard for the
director's duty to the corporation or its shareholders where
the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders,
o acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's
duty to the corporation or its shareholders,
o transactions between the corporations and a director who has a
material financial interest in the transaction, or
o liability for improper distributions, loans and guarantees.
Indemnification. Article Five of the Waters bylaws provides for
indemnification of directors, officers and employees of Waters to the full
extent permitted by Minnesota law. Minnesota law provides for mandatory
indemnification of a person acting in an official capacity on behalf of the
corporation (including a director, officer, employee or agent) if such person
acted in good faith, received no improper personal benefit, acted in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful.
Garrett's articles and bylaws provide that Garrett must indemnify its
directors to the fullest extent permitted by law, including circumstances in
which indemnification is otherwise discretionary. There is no action or
procedure pending or, to the knowledge of Garrett, threatened which may result
in a claim for indemnification of any director, officer, employee or agent.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Waters
and Garrett, Waters and Garrett have been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Rights of Dissenting Shareholders. Under Section 302A.473 of the MBCA,
if a corporation calls a shareholders meeting to approve a merger in which such
corporation is a party, the sale of substantially all of the assets of the
corporation, or in certain other circumstances, the notice of the meeting must
inform each shareholder of the right to dissent from such action and must
include a copy of Section 302A.471 and Section 302A.473 of the MBCA and a brief
description of the procedure to be followed under such sections. A shareholder
who wishes to exercise dissenters' rights in such circumstances is entitled to
demand the fair value of the shares owned by such shareholder.
In general, California law requires dissenters' rights in
share-for-share reorganizations and sale of assets reorganizations where a
shareholder vote is required, as well as mergers where a shareholder vote is
required. There are some exclusions for corporations whose shares are publicly
traded.
UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Balance Sheet is derived from the
Balance Sheets of the Company and Garrett Communications, Inc. at September 30,
1999. The unaudited Pro Forma Balance Sheet reflects the Company's merger with
Garrett Communications, Inc. using the purchase method of accounting and assumes
that such acquisition was consummated as of September 30, 1999. The following
unaudited Pro Forma Statement of Operations is derived from the Statement of
Operations of Waters for the fiscal year ended June 30, 1999 and the quarter
ended September 30, 1999, both of which are included elsewhere in this
Prospectus. The unaudited Pro Forma Statement of Operations reflects the merger
<PAGE>
of Garrett with a subsidiary of the Company using the purchase method of
accounting and assumes that such acquisition was consummated as of July 1, 1998.
The unaudited Pro Forma combined condensed statements of operations for the
twelve months ended June 30, 1999 reflect Garrett's historical results of
operations recasted from its fiscal year ended December 31, 1998 to an assumed
fiscal year ended June 30, 1999 by adding and deducting the results of
operations for the six months ended June 30, 1999 and 1998, respectively, to and
from the results of operations for the fiscal year ended December 31, 1998.
The unaudited Pro Forma Statement of Operations should be read in
conjunction with the Financial Statements of the Company, the Financial
Statements of Garrett Communications and the Notes thereto included elsewhere in
this Prospectus. The Pro Forma Statement of Operations does not purport to
represent what the Company's results of operations would actually have been if
the merger with Garrett Communications, Inc. had occurred on the date indicated
or to project the Company's results of operations for any future period or date.
The pro forma adjustments, as described in the accompanying data, are based on
available information and the assumptions set forth in the footnotes below,
which management believes are reasonable.
<PAGE>
WATERS INSTRUMENT/GARRETT COMMUNICATIONS
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Adjustments
Waters Garrett for
Instruments, Communications, Inc. Acquisition Pro Forma
Inc.
------------------ ---------------------- ------------------ -------------------
Operations Statements Data:
<S> <C> <C> <C> <C>
Net Sales..................... $17,585,000 $9,065,606 $26,650,606
Cost of Sales................. 11,225,000 6,770,191 $17,995,191
------------------ ---------------------- ------------------ -------------------
Gross Profit.................. 6,360,000 2,295,415 $8,655,415
Operating Expenses............
Selling, general and
administrative.............. 4,862,000 1,921,114 (1) 368,554 $7,151,668
------------------ ---------------------- ------------------ -------------------
Total operating expenses. 4,862,000 1,921,114 368,554 $7,151,668
Operating Income (loss)....... 1,498,000 374,301 -368,554 $1,503,747
Interest income (expense), net 133,000 $133,000
Other income, net............. -7,000 197 -$6,803
Income Taxes.................. 618,000 138,000 $756,000
------------------ ---------------------- ------------------ -------------------
Net income (loss)............. $1,006,000 $236,498 -$368,554 $873,944
Earnings per common share:
basic.................... $0.68 $0.47
================== ===================
diluted.................. $0.67 $0.45
================== ===================
Weighted Average Number of
Shares Outstanding:
basic.................... 1,469,348 (2)375,000 1,844,348
================== ===================
diluted.................. 1,500,757 (3)425,351 1,926,108
================== ===================
</TABLE>
Notes:
(1) Represents the amortization of goodwill for the year ended June 30,
1999 using a useful life to 7 years.
(2) Pursuant to the merger agreement, Waters will issue 375,000 shares of
Waters common stock to Garrett shareholders.
(3) The increase in weighted average number of shares outstanding reflects
the Garrett stock options assumed by Waters.
<PAGE>
WATERS INSTRUMENT/GARRETT COMMUNICATIONS
PRO FORMA STATEMENT OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Adjustments
Waters Garrett for
Instruments, Communications, Inc. Acquisition Pro Forma
Inc.
------------------ ---------------------- ------------------ -------------------
Operations Statements Data:
<S> <C> <C> <C> <C>
Net Sales..................... $4,789,000 $3,264,607 $8,053,607
Cost of Sales................. 2,990,000 2,327,582 $5,317,582
------------------ ---------------------- ------------------ -------------------
Gross Profit.................. 1,799,000 937,025 $2,736,025
Operating Expenses............
Selling, general and
administrative.............. 1,256,000 581,370 (1) 92,139 $1,929,509
------------------ ---------------------- ------------------ -------------------
Total operating expenses. 1,256,000 581,370 92,139 $1,929,509
Operating Income (loss)....... 543,000 355,655 -92,139 $806,516
Interest income (expense), net 41,000 $41,000
Other income, net............. -4,000 -$4,000
Income Taxes.................. 220,000 142,000 $362,000
------------------ ---------------------- ------------------ -------------------
Net income (loss)............. $360,000 $213,655 -$92,139 $481,516
Earnings per common share:
basic.................... $0.24 $0.26
================== ===================
diluted.................. $0.24 $0.25
================== ===================
Weighted Average Number of
Shares Outstanding:
basic.................... 1,471,279 (2) 375,000 1,846,279
================== ===================
diluted.................. 1,507,469 (3) 433,441 1,940,910
================== ===================
</TABLE>
Notes:
(1) Represents the amortization of goodwill for the quarter ended September
30, 1999 using a useful life to 7 years.
(2) Pursuant to the merger agreement, Waters will issue 375,000 shares of
Waters common stock to Garrett shareholders.
(3) The increase in weighted average number of shares outstanding reflects
the Garrett stock options assumed by Waters.
<PAGE>
WATERS/GARRETT BALANCE SHEETS (combined)
AS OF SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Adjustments
Waters Garrett for
Instruments, Communications, Acquisition Pro Forma
Inc. Inc.
------------------ -------------------- ------------------- -------------------
ASSETS
<S> <C> <C> <C> <C>
Cash & Cash Equivalents $ 3,581,000 $ 3,907 (1) $ -2,250,000 $ 1,334,907
Net Trade Receivables 2,718,000 1,922,759 4,640,759
Inventories 2,361,000 1,544,062 3,905,062
Prepaid Expenses 86,000 18,990 104,990
Deferred Income Taxes 282,000 46,000 328,000
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 9,028,000 3,535,718 -2,250,000 10,313,718
Deposits 10,584 10,584
Investment in Affiliate 2,370 2,370
Net Fixed Assets 1,503,000 152,714 1,655,714
Other Assets 3,000 3,000
Goodwill 41,000 (2) 2,579,876 2,620,876
===================================================================================================================
TOTAL ASSETS $ 10,575,000 $ 3,701,386 $ 329,876 $ 14,606,262
===================================================================================================================
LIABILITIES & STOCKHOLDER'S EQUITY
Current Portion LTD 33,000 33,000
Accounts Payable 1,601,000 1,109,981 2,710,981
Accrued Salaries, Wages & Other
Compensation 493,000 68,428 561,428
Product Warranties 246,000 63,000 309,000
Other Accrued Liabilities 136,000 136,000
Income Taxes Payable 271,000 159,353 430,353
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,780,000 1,400,762 4,180,762
Deferred Income Taxes 59,000 15,000 74,000
Common Stock 147,000 876,898 (3) -839,398 184,500
Paid in Capital 1,285,000 (4) 2,578,000 3,863,000
Retained Earnings 6,304,000 1,408,726 (5) -1,408,726 6,304,000
Current Earnings
- -------------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 7,736,000 2,285,624 329,876 10,351,500
===================================================================================================================
TOTAL LIABILITIES & EQUITY $ 10,575,000 $ 3,701,386 $ 329,876 $ 14,606,262
===================================================================================================================
</TABLE>
Notes:
================================================================================
(1) Pursuant to the merger agreement, Garrett Communication shareholders
will receive $2,250,000 in cash.
(2) The excess of purchase price over the fair market value of net assets
as follows:
Cash $ 2,250,000
Discounted value of stock as determined by
Investment Adviser 1,615,500
Fair market value of stock options * 541,349
Pre-acquisition contingencies assumed * 458,651
==============
$ 4,865,500
Less the fair market value of net assets acquired 2,285,624
--------------
$ 2,579,876
==============
* The agreement caps the sum of the fair market value of the
options and preacquisition contingencies assumed at
$1,000,000.
(3) The net decrease in common stock resulting from the elimination of
Garrett Communications common stock and the addition of Waters common
stock of 375,000 shares at $.10 per share.
(4) The increase in additional paid-in-capital is as follows:
Discounted value of Waters common stock issued $ 1,615,500
Fair market value of stock options 541,349
Pre-acquisition contingencies assumed 458,651
--------------
$ 2,615,500
Less amount assigned to common stock 37,500
--------------
$ 2,578,000
==============
(5) The decrease resulting from the elimination of Garrett Communications
pre-merger retained earnings.
<PAGE>
INFORMATION CONCERNING GARRETT
Business
Garrett designs, manufactures and markets Ethernet local area
networking, or LAN, products that are cost-effective, easy-to-use and
standards-compliant. Garrett's Magnum line of Ethernet LAN products features
fiber-built-in networking ports to support premises fiber installations that may
need bandwidth growth over time. The Magnum line consists of more than 100
different product models, and covers a variety of Ethernet LAN physical
connectivity functions, media types, sizes and styles. Garrett focuses
exclusively on Ethernet products that are rich in features, which it sells to
large quality-sensitive OEMs, and to value added resellers primarily for small
and medium sized organizations. Garrett sells its products internationally
through distributors.
Garrett's products are designed to function across either Ethernet or
Fast Ethernet networks, and comply with the industry Ethernet standards, IEEE
802.3, to assure interoperability. Ethernet is a type of network topology that
determines how packets, or message units, are handled and sent across the
network. Standard Ethernet speed is 10 megabits per second (10Mb) and Fast
Ethernet speed is 100 megabits per second (100Mb). Ethernet is the most widely
used communication standard in local area networks, or LANs. A LAN is a group of
computers and other devices dispersed over a relatively limited area and
connected by a communications link that enables any device to interact with any
other on the network. Traditionally, networks used shared Ethernet, in which
multiple users share communication lines. Increasingly, networks are employing
Ethernet switching technology, in which a switch filters traffic and selectively
interconnects circuits. The result is a transmission path that provides a
dedicated communication between a sending and receiving computer or device.
The Market
The market for Garrett's products is driven by the demand for higher
performance and increased functionality from the various components in the
network infrastructure. Increased bandwidth, or network capacity, is necessary
to accommodate a dramatic increase in the growth of network traffic. There are
more computers on networks as hardware prices have declined and organizations
increase their dependence on their computer systems. In addition, the increasing
demands of high performance personal computers and workstations, the growth of
the Internet, intranets and electronic commerce, and the introduction of complex
graphics-intensive applications all contribute to the need to continually
increase bandwidth.
Organizations have responded to the need to increase network bandwidth
by adopting Fast Ethernet, Ethernet switching and fiber media technologies in
local area networks. Large organizations and organizations using complex
applications such as publishing, imaging and graphics were the first to address
bandwidth constraints by adopting higher speed technologies such as Fast
Ethernet. Similarly, switching products were used primarily in larger companies
because they were the first to experience congestion in their traditional
network architectures. More recently, smaller companies and organizations have
adopted Fast Ethernet and Ethernet switching technology. In addition,
organizations are increasingly choosing fiber media to enable them to expand
their networks in the future without investing in additional network
infrastructure.
Not only have the demands on Ethernet premises networks changed, but
so, too, has their role. Business critical applications in communications
facilities such as data communications centers, telephone central offices, and
Internet POPs are increasingly dependent on Ethernet products for monitoring and
managing operations. Garrett believes that premises networks have become
industrial tools that deliver competitive advantages, and that the "industrial
grade" premises networks market will continue to grow in the Internet
infrastructure as well as in industrial control applications and public
facilities. Reliable, feature-rich products are needed, and Garrett's Magnum
line is targeted at these markets.
Garrett Products
Garrett's Magnum line of products emphasizes fiber capabilities across
the range of products. The products include switches, hubs, mixed-media
concentrators, media converters, repeaters, and transceivers. The LAN standards
employed include Ethernet and Fast Ethernet, and comply with the IEEE 802.3
standard. Several Magnum products support 10/100 dual speed capabilities.
Selected models offer an optional -48 volt power supply for the communications
facilities LAN market niche.
<PAGE>
In addition to the Magnum-labeled products, Garrett sells products to
private-label OEMs who incorporate the Garrett products into their business, and
resell them using the OEMs label and identity. The Waters Network Systems
business has used several board-level Garrett products with the Waters brand
name since April 1998.
Sales and Marketing
Garrett markets its products domestically through OEMs, value added
resellers and system integrators. Garrett sells its products internationally
through distributors.
Garrett believes that it has good relationships with its resellers and
intends to continue to introduce new products through its existing distribution
channels. Garrett promotes its products by participating in industry trade
shows, by maintaining an extensive and informative web site, and other marketing
efforts.
Sales to customers outside the United States accounted for
approximately 35% of Garrett's revenue in 1997, 30% in 1998 and 25% in the first
nine months of 1999. All sales to international customers are denominated in
U.S. dollars. As a result, Garrett's operating results are subject to the risks
inherent in international transactions, including changes in regulatory
requirements, exchange rate fluctuations that may make Garrett's products more
expensive to non-U.S. purchasers, tariffs or other trade barriers and local
business and political conditions.
One customer, Black Box Corp., accounted for more than 10% of Garrett's
revenue in each of 1997, 1998 and the first nine months of 1999. No other
customer accounted for more than 10% of revenues during those periods.
Garrett believes that a high level of continuing service and support is
integral to its objective of developing and maintaining long-term relationships
with its quality-oriented customers. Garrett's customer support personnel are
responsible for servicing Garrett's products. They provide detailed manuals and
technical post-sales support, mostly by means of email and the technical
information on Garrett's web site. Internationally, Garrett provides customer
support through its distributors and resellers and via the Internet.
Garrett generally warrants its products for 3 years. The warranty is
limited to Garrett's obligation to repair or replace the defective product.
Garrett has not encountered material warranty claims in excess of reserves. In
the future, warranty claims could exceed reserves, which could impact Garrett's
results of operations. Garrett's warranty contains disclaimers of special,
consequential and indirect damages and similar provisions. However, theses
limitations of liability may not be legally enforceable in all jurisdictions.
Garrett's agreements with its resellers and distributors can generally
be terminated on short notice without cause, and do not provide for minimum
purchase commitments or preclude the reseller or distributor from offering
products that compete with those offered by Garrett. Any of Garrett's resellers
or distributors may reduce or cease their efforts to sell Garrett's products.
Backlog
Garrett generally ships products shortly after orders are received and
consequently maintains very little backlog. As a result, Garrett does not
believe that its backlog as of any particular date is indicative of future
sales.
Research and Development
Garrett's research and development efforts are focused on developing
new products and enhancements to existing products. Garrett's product
development activities are based on customer requirements and marketplace needs.
Garrett's research and development expenditures were $352,549 in 1997, $435,405
in 1998 and $325,000 in the first nine months of 1999. As of September 30, 1999,
Garrett had a total of 5 employees engaged in engineering and product
development.
Garrett continues to invest resources in engineering projects and will
devote additional resources as needed to develop and bring to market additional
products. In particular, new products and products currently under development
include:
Magnum DS80-series. This line of dual-speed switches/hubs with a
built-in Fast Ethernet fiber backbone port used in small offices and classrooms
where fiber cabling is in the infrastructure, is being expanded to include
<PAGE>
small-form-factor fiber built in. A model with copper-only ports is being added
to rationalize other similar Magnum products and to consolidate production
volumes. The new DS80-series models began shipping in the fourth calendar
quarter of 1999.
Magnum 4000-series. Currently under development, the Magnum 4000-series
models are being designed to extend the range of 10/100 half- and full-duplex
switches that are offered. Garrett expects these products to move the
capabilities of the Magnum line further into the rapidly-growing Layer 2
switches at the high end of the Magnum line. Garrett anticipates that the Magnum
4000-series switches will be available in the first calendar quarter of 2000.
Magnum 14E Media Converter. Garrett's Media Converters for 100Mb fiber
connections are being re-designed to reduce cost and to add new features such as
auto-negotiation support.
Magnum 5000 Fiber Switch, Gigabit up-link option. The Magnum Model 5000
Fiber Switches were introduced in 1999. An extension for this line is being
developed to offer a Gigabit Ethernet fiber port option on some models. The
Gigabit models are expected to be available in the third calendar quarter of
2000.
Garrett believes its future success will depend upon its ability to
enhance and expand its existing product offerings and to develop new products in
a timely manner that achieve rapid market acceptance. Substantially all of
Garrett's products are designed to provide connectivity to Ethernet LANs. If
Ethernet's importance declines as a result of alternative technologies, Garrett
may be unable for technological or other reasons to modify its products or
develop new products to support other technology. Garrett may not be successful
in developing and marketing enhanced or new products, product delays may result
in missed market opportunities, new or enhanced products may not gain market
acceptance, and Garrett may not be able to respond effectively to technological
changes or new industry standards.
Manufacturing
Garrett's manufacturing operations consist primarily of component
procurement and final assembly, test and quality control of components,
subassemblies and systems. Garrett uses local third party contractors to
manufacture and assemble printed circuit boards. The manufacturing process
enables Garrett to configure its products in combinations to meet a wide variety
of customer requirements. Garrett performs "burn-in" procedures and functional
tests, as well as comprehensive inspections to assure the quality and
reliability of its products.
Garrett does not have a long-term supply agreement with any of its
subcontractors. If any one of its subcontractors experiences financial or
operational difficulties that result in a reduction or interruption in the
supply of products to Garrett, or otherwise fails to deliver products to Garrett
on time, Garrett would be required to obtain sufficient manufacturing supply
through alternative sources. Garrett believes that alternative manufacturers are
available; however, the qualification of any alternative sources and the
commencement of volume manufacturing of Garrett's products could take a
significant period of time.
Garrett's product designs are proprietary but generally incorporate
industry standard hardware components. However, there are semiconductor devices
and components and subassemblies incorporated into Garrett's products that are
currently available only from single sources. Other components are currently
available or acquired only from a limited number of sources. To date, Garrett
has been able to obtain adequate supplies of these components, as well as
subassemblies from third party contractors, in a timely manner from existing
sources, or, when necessary, from alternative sources, or to redesign its
products to accommodate an alternative component. The inability to obtain
sufficient sole or limited source components or subassemblies as required in the
future, or to develop alternative sources or redesign its products if and as
required in the future could result in delays or reductions in product
shipments.
Competition
The markets for Garrett's products are highly competitive, and Garrett
believes that the competition will intensify. Competitive trends in Garrett's
markets are continuing declines in average selling prices, coupled with
improvements in product features and performance. Garrett expects these trends
to continue.
Garrett's primary competitors are Allied Telesyn, Asante, Canary, IMC
and Lancast. Larger companies in the Ethernet market whose low-end products may
also compete with Garrett include Nortel Networks, Cabletron, 3COM and Compaq.
Many of these competitors and Garrett's potential competitors have greater
financial, research and development, intellectual property, marketing and other
resources than those of Garrett and have broader product lines and longer
standing relationships with customers than Garrett. Garrett expects competition
to increase in the future from existing competitors and from other companies
<PAGE>
that may enter Garrett's existing or future markets. Garrett believes that its
ability to compete successfully depends upon a number of factors both within and
outside of its control, including price; announcements by Garrett and its
competitors; rapid development of new and enhanced products; product quality and
performance; experienced sales, marketing and service organizations; and
evolving standards. Garrett believes that its ability to compete is enhanced by
its exclusive focus on Ethernet products, the breadth of its product line, its
OEM relationships, particularly in private label products, its commitment to
quality and service and its aggressive pricing. Garrett may not be able to
compete successfully with its existing competitors, and it may not be able to
compete successfully with new competitors.
Proprietary Rights
Garrett treats its product designs as proprietary and relies primarily
on a combination of copyrights, trademark and trade secret laws, and employee
and third-party nondisclosure agreements, to protect its proprietary
information. Garrett has no patents or patent applications pending. The
contractual obligations may not maintain the confidentiality of Garrett's trade
secrets. In addition, proprietary information may be breached by employees,
consultants, advisors or others, and Garrett's trade secrets or proprietary
technology may otherwise become known or be independently developed by
competitors. Garrett licenses some technologies used in its products from third
parties on a non-exclusive basis.
It is possible that third parties will claim that Garrett has infringed
their current or future patents or proprietary rights. Any claims, with or
without merit, could be time-consuming, result in high legal costs, cause delays
or require Garrett to enter into royalty or licensing agreements, any of which
could harm Garrett's business. Patent litigation in particular has complex
technical issues and inherent uncertainties. If an infringement claim against
Garrett were successful and Garrett could not obtain a license on acceptable
terms, license a substitute technology or redesign to avoid infringement, its
business would be harmed.
Employees
As of September 30, 1999, Garrett had a total of 27 employees, of whom
five were primarily engaged in research and development, eleven in sales,
marketing and administration, two in customer support and nine in manufacturing.
In addition, from time to time, Garrett employs contract labor to assist with
its short-term personnel needs. Garrett believes that its future success will
depend in large part upon the continued contributions of members of Garrett's
senior management and other key personnel, and upon its ability to attract and
retain highly skilled managerial, engineering, sales, marketing and operations
personnel. In particular, the current availability of qualified sales and
engineering personnel is quite limited, and competition among companies for
qualified personnel is intense. Garrett is currently experiencing delays in
filling open sales and engineering positions.
Facilities
Garrett leases its 9,500 square foot principal facility, which is
located in Fremont, California, under a lease that expires in June 2004. Garrett
maintains sales operations in Wilmington, Delaware, St. Charles, Illinois and
Kent, Washington. In Europe, Garrett rents a facility near Southampton, England.
Garrett believes that its existing facilities are adequate to meet is current
needs and that suitable additional or alternative space will be available in the
future on commercially reasonable terms.
Selected Financial Information
This section presents historical financial data of Garrett. You should
read carefully the Garrett financial statements included in this proxy
statement/prospectus, including the notes to the financial statements. The
selected data in this section is not intended to replace the financial
statements.
Garrett derived the statement of operations data for the years ended
December 31, 1997 and 1998 and the balance sheet data as of December 31, 1997
and 1998 from the audited financial statements included in this proxy
statement/prospectus. Froshman, Billings, Williams, Chan & Lewandowski,
Garrett's independent auditors, audited these financial statements. Garrett
derived the statement of operations data for the nine months ended September 30,
1998 and 1999 and the balance sheet data as of September 30, 1999 from Garrett's
unaudited financial statements included in this proxy statement/prospectus. In
the opinion of Garrett's management, the unaudited financial statements have
been prepared on the same basis as the audited financial statements and contain
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of results of operations for these periods and financial
condition at that date. The historical results presented below are not
necessarily indicative of future results.
<PAGE>
<TABLE>
<CAPTION>
Years Ended Nine Months
December 31, Ended September 30,
1997 1998 1999 1998
---------- ---------- --------- ---------
Statement of Income Data:
<S> <C> <C> <C> <C>
Revenue................................... $8,224,481 $ 8,124,165 $8,300,725 $5,983,066
Cost of revenue........................ 6,320,482 6,191,902 6,009,286 4,545,530
---------- ---------- --------- ---------
Gross profit......................... 1,903,999 1,932,263 2,291,439 1,437,536
---------- ---------- --------- ---------
Operating expenses:
Research and development............. 352,549 435,405 324,325 295,417
Marketing and selling................ 749,364 807,155 766,954 583,530
General and administrative........... 533,757 443,243 536,810 331,848
----------- ----------- ---------- ----------
Total operating expenses........... 1,635,670 1,685,803 1,628,089 1,210,795
---------- ---------- --------- ---------
Income from operations................. 268,329 246,460 663,350 226,741
Other expenses......................... 56,405 16,783 0 16,980
------------ ------------ --------------- ----------
Income before income taxes................ 211,924 229,677 663,350 209,761
Provision for income taxes............. 38,000 52,000 265,000 48,000
------------ ------------ --------- ----------
Net income................................ 173,924 177,677 398,350 161,761
<CAPTION>
As of December 31,
1997 1998 As of September 30, 1999
---------- ---------- ---------------------------
Balance Sheet Data:
<S> <C> <C> <C>
Cash and cash equivalents................. 0 10,785 3,907
Working capital........................... 1,630,283 1,808,581 2,134,956
Total assets.............................. 2,613,113 2,888,976 3,701,386
Debt, non-current......................... 365,346 0 0
Stockholder's equity......................
Common stock........................... 514,866 852,429 876,898
Retained earnings...................... 832,699 1,010,376 1,408,726
---------- --------- ---------
Total stockholder's equity................ 1,347,565 1,862,805 2,285,624
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF GARRETT
The following discussion and analysis should be read in conjunction
with the financial statements and related notes contained elsewhere in this
proxy statement/prospectus.
General
Since its inception in May 1989, Garrett has been engaged in the design
and development of Ethernet LAN products. Garrett has a history of operations
that have been profitable over the last five years, and have expanded in
geographic scope, and product quality and features. Garrett has historically
used any net income to finance the growth of its business. Customer satisfaction
and repeat purchases continue to be the keys to Garrett's success.
During the period from January 1994 through September 1999, Garrett has
grown its revenues by over 400%. The technology changes during that time covered
three different generations of Ethernet LAN technologies. Garrett believes that
continued growth in reliability and capacity in premises networks provides a
favorable framework for continued investment in LAN products and markets.
In the absence of a merger of Garrett and Waters, Garrett believes that
it would have sufficient capital to support its current operations for at least
the next twelve months.
Results of Operations
Revenue for 1997 was $8.2 million, an increase of 13% from revenue of
$7.3 million in 1996. New Fast Ethernet products were added to the Magnum line,
resulting in additional revenue. Revenue for 1998 was $8.1 million, which was
<PAGE>
virtually flat compared to 1997. New products in the dual-speed speed category
were added to the Magnum line, while commodity products experienced additional
price pressure. Domestic revenue increased in 1998 by 15%, from $5.3 million to
$6.1 million, while international revenue declined by 31% from $2.9 million to
$2.0 million. Gross margin rose slightly in 1998 to 24%, compared to 23% in
1997.
Revenue for the first nine months of 1999 was $8.3 million, a 39%
increase compared to revenue of $6.0 million in the first nine months of 1998.
New products in the fiber LAN and data communications facilities were added to
the Magnum line, and stimulated demand for Garrett's products. In the first nine
months of 1999, international revenue was $2.0 million or 25% of revenue. A new
marketing subsidiary in the United Kingdom began to contribute to sales results
from Europe. Gross margin rose to 28% in the first nine months of 1999, compared
to 24% in the first nine months of 1998, due primarily to an increase in sales
of higher margin specialty products.
Research and development expenses consist primarily of personnel costs,
consulting fees and allocated overhead expenses. Research and development
expenses were $353,000 for 1997 and $435,000 for 1998. The increase was due
primarily to an increase in the cost of subcontracted product testing services.
Research and development expenses were $295,000 for the first nine months of
1998 and $324,000 for the first nine months of 1999. The increase was due
primarily to increased staffing.
Marketing and selling expenses relate primarily to personnel cost,
consulting fees, marketing activities and allocated overhead costs. Marketing
and selling expenses were $749,364 for 1997 and $807,155 for 1998. The change
during those times was insignificant. Marketing and selling expenses were
$583,530 for the first nine months of 1998 and $766,954 for the first nine
months of 1999. The increase resulted from increased sales staffing and
additional leased facilities space.
General and administrative expenses relate primarily to personnel
costs, consulting fees, insurance, professional services and allocated overhead
costs. General and administrative expenses were $533,757 for 1997 and $443,243
for 1998. The decrease was due to reduced expenditures primarily for legal fees
and consulting services. General and administrative expenses were $331,848 for
the first nine months of 1998 and $536,810 in the first nine months of 1999.
Interest expense consists of borrowing costs for working capital under
a bank term/revolving loan agreement. Interest expense (net of interest income)
was $50,000 for 1997 and $21,000 for 1998. This was due to paying down the bank
loan by $155,000. Interest expense (net of interest income) was zero for the
first nine months of 1999, compared to $17,000 for the first nine months of 1998
as the bank loan was reduced further.
Liquidity and Capital Resources
In 1997, Garrett financed its operations through the earnings of the
business and from borrowings under its bank line of credit. Garrett's cash at
December 31, 1997 consisted of cash and cash equivalents of less than $1,000.
Garrett had available a bank line of credit, secured by all of its assets, of
$650,000, of which $365,000 was borrowed at December 31, 1997. The bank
borrowings bore interest at 10.5%. Operating activities provided cash of
$200,853. In 1997, investing activities used cash of $32,962, relating to the
purchase of computers, software and test equipment, and financing activities
used cash of $193,970, primarily related to repayment of the outstanding balance
of $155,000 under the bank line of credit.
In 1998, Garrett financed its operations through the earnings of the
business and from the net proceeds of $337,563 from the sale of common stock.
Garrett's cash at December 31, 1998 consisted of cash and cash equivalents of
$11,000. Garrett had available a bank line of credit, secured by all of its
assets, of $500,000. The bank borrowings bore interest at 10%. Operating
activities provided cash of $71,335. Cash of $322,285 was used primarily to
support growth in inventory and accounts receivable. In 1998, investing
activities used cash of $7,390, primarily related to the purchase of production
burn-in products, and financing activities used cash of $51,263, primarily
related to repayment of the outstanding balance of $365,346 under the bank line
of credit, offset in part by the proceeds from the sale of common stock.
In the first nine months of 1999, Garrett financed its operations
through the earnings of the business. Garrett's cash at September 30, 1999
consisted of cash and cash equivalents of $4,000, compared to $33,000 at
September 30, 1998. Garrett had available a bank line of credit, secured by all
of its assets, of $500,000. There were no borrowings under this line of credit
in the first nine months of 1999. Cash of $1.0 million was used primarily to
support growth in accounts receivable, which grew to $1.9 million at September
30, 1999, from $913,000 at September 30, 1998, due to increased sales.
<PAGE>
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Garrett's exposure to market risk for changes in interest rates relates
primarily to increases or decreases in the amount of interest income Garrett can
earn on its investments and on increases or decreases in the amount of interest
expense it must pay with respect to any outstanding debt instruments. Garrett
had no debt instruments outstanding as of September 30, 1999. The risk
associated with fluctuating interest expense is limited, however, to those debt
instruments and credit facilities that are tied to market rates. Garrett does
not plan to use derivative financial instruments in its investment portfolio.
Garrett plans to ensure the safety and preservation of its invested principal
funds by limiting default risk, market risk and reinvestment risk. Garrett plans
to mitigate default risk by investing in high-credit quality securities.
PRINCIPAL AND MANAGEMENT HOLDERS OF GARRETT COMMON STOCK
The following table sets forth the beneficial ownership of Garrett Common
Stock as of November 30, 1999 for:
o each person who is known by Garrett to beneficially own more than five
percent (5%) of Garrett Common Stock;
o each of Garrett's directors;
o each of Garrett's executive officers for the fiscal year ended
December, 1999, and
o all directors and executive officers as a group.
Except as indicated in the footnotes to this table and under applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock.
5% Shareholders, Directors, Amount of Common Shares
Executive Officers, and Beneficially Owned
Directors and Executive Officers as a Group --------------------------
Number Percent
- ------------------------------------------------ -------------- -------
Frank Madren, President, Chief Executive Officer, 1,063,813(1) 38.98%
Chief Financial Officer and Director
106 Gemini Court
Los Gatos, CA 95032
Christopher Robert 449,000(2) 16.45%
14 Henry Road
Webster, MA 01570
Ross Smith, Director 340,000(3) 12.46%
209 Webster
Palo Alto, CA 94301
Jeet Makker 174,500(4) 6.39%
45452 Antelope Drive
Fremont, CA 94539
JoAnn Madren, Director 69,375(5) 2.54%
106 Gemini Court
Los Gatos, CA 95032
Percy Kawas, Director 18,750(6) *
494 Rosita Avenue
Los Altos, CA 94024
Robert Novak, Director 14,375(7) *
3550 Carter Drive, #142
South San Francisco, CA 94080
------------ -------
Officers and Directors as a Group 2,128,813 78.04%
<PAGE>
* Less than 1%
(1) Includes 1,043,500 shares of Common Stock beneficially owned by Mr.
Madren and 20,313 shares of Common Stock which are exercisable pursuant
to options issued as of December 31, 1999.
(2) Includes 449,000 shares of Common Stock beneficially owned by Mr.
Robert.
(3) Includes 330,000 shares of Common Stock beneficially owned by Mr. Smith
and 10,000 shares of Common Stock which are exercisable pursuant to
options issued as of December 31, 1999.
(4) Includes 174,500 shares of Common Stock beneficially owned by Mr.
Makker.
(5) Includes 56,250 shares of Common Stock beneficially owned by Ms. Madren
and 13,125 shares of Common Stock which are exercisable pursuant to
options issued as of December 31, 1999.
(6) Includes 10,000 shares of Common Stock beneficially owned by Mr. Kawas
and 8,750 shares of Common Stock which are exercisable pursuant to
options issued as of December 31, 1999.
(7) Includes 1,000 shares of Common Stock beneficially owned by Mr. Novak
and 13,375 shares of Common Stock which are exercisable pursuant to
options issued as of December 31, 1999.
<PAGE>
APPROVAL OF AMENDED AND RESTATED BYLAWS
(Proposal #2
Text attached as Annex C)
Staggered Election of Directors. Directors are currently elected to the
Waters' board of directors annually for a term ending at the next regular
meeting of shareholders and until a successor is elected and qualified. Section
3.2 of Waters' bylaws provide that the number of directors shall not be less
than three (3) nor more than eleven (11) and that such number shall be
determined at each annual meeting by the shareholders. Like the current bylaws,
the Amended and Restated Bylaws also provides that the shareholders shall
determine the number of directors at each annual meeting but change the limits
on the number of directors by stating that the number of directors shall be not
less than three (3) nor more than nine (9). The Amended and Restated Bylaws also
provide for the Board to be divided into three classes of directors. As
proposed, an amendment to Section 3.2 of the Amended and Restated Bylaws will
require the affirmative vote of the holders of not less than two-thirds of the
voting power of the shares entitled to vote.
If the Amended and Restated Bylaws are adopted, Waters' directors will
be divided into two classes if there are seven or fewer directors and three
classes if there are more than seven directors. If there are seven or fewer
directors, the Waters directors will be divided into two classes, designated
Class I and Class II, and each class shall consist as nearly as possible of
one-half of the total number of directors. If there more than seven directors,
the Waters directors will be divided into three classes, designated Class I,
Class II and Class III, and each class shall consist as nearly as possible of
one-third of the total number of directors. At the Annual Meeting, Class I
directors shall be elected for a two (2)-year term and Class II directors for a
three (3) year term. At each succeeding annual meeting of the shareholders at
which directors are elected, successors to the Class of directors whose term
expires at that annual meeting shall be elected for a three (3) year term. See
Proposal #4, "Election of Directors," as to the composition of each class of
directors if this proposal is adopted.
Number of Directors; Removal of Directors. The Amended and Restated
Bylaws seek to limit the manner in which changes in the size of the Board may be
made and directors removed. As under the bylaws currently in effect, proposed
Section 3.2 provides that between annual meetings the authorized number of
directors may be increased by the board of directors within the limits
established by Section 3.2. However, proposed Section 3.2 would require that any
increase or decrease, whether instituted by the directors or by the shareholders
at an annual meeting, be apportioned among the classes so as to maintain, as
nearly as possible, an equal number of directors in each class. Proposed Section
3.2 provides that no decrease may eliminate an entire class of directors, cause
any class to contain a number of directors two or more greater than any other
class, or shorten the term of any incumbent director.
Section 3.11 of the Amended and Restated Bylaws provides that directors
may be removed only for cause by vote of the holders of two-thirds of the voting
power of the shares entitled to vote or by vote of a majority of the entire
board of directors. Currently, Minnesota law provides that unless modified by
the articles of incorporation, bylaws or a shareholder agreement, directors
named by the Board to fill a vacancy may be removed at any time, with or without
cause, by a majority of the remaining directors, and all directors may be
removed at any time, with or without cause, by the affirmative vote of the
holders of voting power sufficient to elect such directors.
Sections 3.2 and 3.11 of the Amended and Restated Bylaws include a
prohibition on any amendment to such sections unless the amendment receives the
affirmative vote of the holders of not less than two-thirds of the voting power
of all shares of stock of the corporation entitled to vote. An amendment to
Section 9.1 of the bylaws, which governs amendments to the bylaws, is proposed
so as to reference the larger vote required to amend proposed Sections 3.2 and
3.11.
Shareholder Nominations for Directors. Waters' Amended and Restated
Bylaws also provide for a mechanism for shareholders to nominate directors.
Under the proposal, in order for nominations for directors by shareholders to be
considered at an annual meeting of shareholders, such nominations must be
received not later than 120 days prior to the anniversary of the date of the
proxy statement for the prior year's annual meeting or, if the date of the
annual meeting is not within 30 days of the anniversary of the prior year's
annual meeting, within ten days of the transmittal of the notice of meeting to
shareholders or other public announcement of the meeting. In addition,
shareholders making nominations are required to furnish certain information with
respect to nominees nominated by them, as well as the nominee's written consent
to being named as a nominee. The Waters board of directors believes that this
provision will help ensure that all relevant information regarding director
nominees can be made available to shareholders well in advance of an annual
meeting and that shareholders will, accordingly, be able to make informed
decisions regarding elections of directors.
<PAGE>
Reasons and Effects; Possible Advantages and Disadvantages. The
proposed amendments to Waters' bylaws are designed to ensure continuity of the
Board and orderly changes in control of the Board. The classification of
directors will have the effect of making it more difficult to change the
composition of the board of directors. The proposed amendments may also operate
to discourage or prevent takeovers, including mergers, tender offers or proxy
contests, or changes in management of Waters which are proposed to be effected
without approval of Waters' Board, whether or not such takeover or changes are
detrimental to the Company and its shareholders. The classification of the Board
pursuant to the Amended and Restated Bylaws will apply to every election of
directors, whether or not a change in control of Waters has occurred or the
holders of a majority of the voting power of Waters desire to change the Board.
In addition, the proposed amendments would delay shareholders who are not in
agreement with the policies of the board of directors from removing a majority
of the Board for two years, unless they could show cause to justify such removal
prior to the time of election at an annual meeting of shareholders. However,
particularly in view of the current environment of increasing stock
accumulations and proxy contests facing public companies, the Board believes it
prudent and in the interests of the shareholders generally to provide the
advantage of greater assurance of continuity of the Board composition and
policies which will result from the adoption of the proposed Amended and
Restated Bylaws described in this Proposal #2 and set forth in Annex C to this
proxy statement/prospectus.
Vote Required. Waters' board of directors has determined that the
adoption of the Amended and Restated Bylaws described above is advisable and has
voted unanimously to propose and recommend that Waters' bylaws be amended and
restated as set forth in Annex C to this Proxy Statement. Under applicable
Minnesota law, adoption of the Amended and Restated Bylaws requires the
affirmative vote of the holders of a majority of the voting power of the shares
represented in person or by proxy at the Annual Meeting with authority to vote
on such matter, but not less than 735,640 shares.
APPROVAL OF INCREASE IN SHARES RESERVED
FOR ISSUANCE UNDER THE 1995 STOCK OPTION PLAN
(Proposal #3)
On October 29, 1999, Waters' Board adopted, subject to shareholder
approval, an increase in the number of shares reserved for issuance pursuant to
options granted under the 1995 Stock Option Plan from 150,000 shares to 375,000
shares of Waters common stock. Incentive Stock Options granted under the 1995
Plan are intended to qualify under Section 422 of the Internal Revenue Code (or
any successor provision it relates to as "incentive" stock options which can
provide favorable tax treatment to the optionees.) Under the IRC requirements,
shareholder approval of the increase in the reserved shares must be obtained
before options covering such additional shares may receive the favorable tax
treatment. The increase in the reserved shares, therefore, is subject to
shareholder approval and, accordingly, is being presented to the shareholders
for their approval.
Nonqualified stock options may also be granted under the Plan.
A general description of the basic features of the Plan is presented
below, but such description is qualified in its entirety by reference to the
full text of the Plan, a copy of which may be obtained without charge upon
written request to Gregory J. Anshus, the Company's Chief Financial Officer.
Purpose. The purpose of the Plan is to promote the success of Waters
and its affiliates (Parent or Subsidiary of Waters) by facilitating the
employment and retention of competent persons and by providing performance
incentives to officers, directors, employees, and consultants upon whose efforts
the success of Waters and its affiliates depends.
Term. The term of the Plan expires on May 10, 2005, ten years from the
date the Plan was approved by the board of directors; however, in the event of a
sale by Waters of substantially all of its assets, or in the event of a merger,
exchange, consolidation or liquidation of Waters, the board of directors is
authorized to terminate the Plan.
Administration. The Plan is administered by the board of directors, or
to the extent empowered by the Board, by a Committee consisting of two or more
disinterested Board members. The Plan gives broad powers to the Board to
administer and interpret the Plan, including the authority to select the
director, officer, employee, consultant, or advisor of Waters or of an Affiliate
to be granted options and prescribe the form and conditions of the option (which
may vary from optionee to optionee). If the Board so directs, a stock option
committee of two or more members of Waters' board of directors or other persons
who are appointed by and serve at the pleasure of the Board and who are
"disinterested" persons as defined by the Plan, may administer the Plan.
<PAGE>
Eligibility. No person may be granted an incentive stock option under
the Plan unless the Optionee is an employee of Waters or of an affiliate. No
person may be granted a nonqualified stock option under the Plan unless the
Optionee is a director, officer, employee, consultant, or advisor of the Company
or of an affiliate. Consultants or advisors will not be eligible to receive
stock options under the Plan unless such consultant or advisor renders bona-fide
services to the Company or affiliate and such services are not in connection
with the offer or sale of securities in a capital-raising transaction.
Shares Reserved. When the Plan was originally adopted in May 1995, a
total of 150,000 shares of authorized but unissued shares of common stock of the
Company were reserved for issuance pursuant to the exercise of options to be
granted under the Plan. On October 29, 1999 the Waters Board approved an
increase in the number of shares reserved from 150,000 shares to 375,000 shares.
Shareholders are being asked to approve this increase in the number of shares
reserved under the Plan.
Options. When an option is granted under the Plan, the Board or
Committee in its discretion specifies the number of shares of common stock which
may be purchased upon exercise of the option and the option price. The option
price set by the Board may not be less than 100% of the fair market value of
Waters' common stock on the date of grant. For each incentive stock option
granted, if an optionee owns stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of Waters or of its parent
or any subsidiary, the option price per share of an incentive stock option
granted to such optionee cannot be less than one hundred ten percent (110%) of
the fair market value of the option stock per share on the date of the grant. No
incentive or nonqualified stock option will be transferable, in whole or in
part, by an optionee other than by will or by the laws of descent and
distribution and, during an optionee's lifetime, an incentive or nonqualified
stock option may be exercised only by an optionee. If an optionee attempts any
transfer of any option granted under the Plan during the optionee's lifetime,
such transfer will be void and the nonqualified or incentive stock option, to
the extent not fully exercised, will terminate. In the event of an increase or
decrease in the number of shares of common stock of Waters resulting from a
subdivision or consolidation of shares or the payment of a stock dividend or any
other increase or decrease in the number of shares of common stock effected
without receipt of consideration by Waters, the number of shares of Option Stock
reserved by the Plan and the number of shares of Option Stock covered by each
outstanding incentive and nonqualified stock option and the price per share of
such Option Stock will be equitably adjusted by the Board or the Committee, as
the case may be, to reflect such change. Additional shares of Option Stock which
may be credited by such adjustment will be subject to the same restrictions as
are applicable to the shares of Option Stock with respect to which the
adjustment relates.
Amendment. The board of directors may from time to time, in so far as
the law permits, suspend, or discontinue the Plan or revise it in any respect;
provided, however, that no such revision or amendment, except as is specifically
authorized, will impair the terms and conditions of any option which is
outstanding on the date of such revision or amendment to the material detriment
of an Optionee without the consent of such Optionee. Notwithstanding the
foregoing, no such revision or amendment will: (i) materially increase the
number of shares of common stock subject to the Plan, (ii) change the
designation of the class of employees eligible to receive options, (iii)
decrease the price at which options may be granted, or (iv) materially increase
the benefits accruing to Optionees under the Plan, unless such revision or
amendment is approved by the shareholders. Furthermore, the Plan may not,
without the approval of the shareholders, be amended in any manner that will
cause incentive stock options to fail to meet the requirements of "Incentive
Stock Options" as defined in Section 422 of the Internal Revenue Code.
Federal Income Tax Consequences of the Plan. Options granted pursuant
to the Plan are intended to qualify for favorable tax treatment to the optionee
under Section 422 of the Internal Revenue Code. Under Section 422, an employee
realizes no taxable income when the option is granted. If the employee has at
all times from the date of grant until three months before the date of exercise
been an employee of the Company, the employee will realize no taxable income
when the option is exercised. If the employee does not dispose of shares
acquired upon exercise for a period of two years from the granting of the option
and one year after receipt of the shares, the employee may sell the shares and
report any gain as long-term capital gain. No deduction is allowable to the
Company for federal income tax purposes in connection with either the grant or
exercise of an incentive stock option. If the employee should dispose of the
shares prior to the expiration of the above-described two and one-year periods,
the employee will be deemed to have received compensation taxable as ordinary
income in the year of the early sale in an amount equal to the lesser of (i) the
difference between the fair market value of the shares on the date of exercise
and the option price of the shares and (ii) the difference between the sale
price of the shares and the option price of the shares. In the event of such an
early sale, the Company will be entitled to a tax deduction equal to the amount
recognized by the employee as ordinary income.
<PAGE>
Plan Benefits. Because the options will only be granted upon the
approval of the Board or Stock Option Committee, in its discretion, future
benefits under this Plan are not determinable. The table below shows the total
number of shares underlying stock options that have been granted under the Plan
as of September 30, 1999 to the named executive officer.
Shares of Common Stock
Name and Position/Group Underlying Options Received
-------------------------- ---------------------------
Jerry W. Grabowski 56,500
President and Chief Executive Officer
Vote Required. THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS
APPROVE THE INCREASE IN THE NUMBER OF SHARES RESERVED UNDER THE 1995 STOCK
OPTION PLAN. Approval requires the affirmative vote of the holders of a majority
of the voting power of the shares represented in person or by proxy at the
Annual Meeting with authority to vote on such matter, but not less than 735,640
shares.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires Waters'
officers and directors, and persons who own more than ten percent (10%) of the
registered class of Waters' equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the SEC).
Officers, directors, and greater than ten-percent shareholders are required by
SEC regulation to furnish Waters with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms received by it,
Waters believes that, during the period from July 1, 1998 through June 30, 1999,
all filing requirements applicable to its officers, directors, and greater than
ten-percent beneficial owners were complied with.
ELECTION OF DIRECTORS
(Proposal #4)
General Information
The Waters board of directors has recommended that the Waters bylaws be
amended and restated to provide for the election of two classes of directors
with staggered terms. This proposed amendment and its effect as a protective
measure against possible takeover attempts is described above at Proposal #2.
The Board recommends that the number of directors be set at six and that six
directors be elected, three directors for a term of two years as Class I, and
three directors for a term of three year as Class II. All directors so elected
will hold office until their successors have been duly elected and qualify. If
Proposal #2 relating to the classification of the board of directors is not
approved, six directors will be elected at the meeting to hold office until the
next annual meeting of shareholders and until their successors have been duly
elected and qualified. Under applicable Minnesota law, approval of the proposal
to set the number of directors at six, as well as the election of each nominee,
requires the affirmative vote of the holders of a majority of the voting power
of the shares represented in person or by proxy at the Annual Meeting with
authority to vote on such matter, but not less than 735,640 shares.
In the absence of other instructions, each proxy will be voted for each
of the nominees listed below who have been nominated by the board of directors
into the classes and for the terms indicated following each nominee's name in
the biographical section below. If Proposal #2 relating to the classification of
the board of directors is not adopted, the proxies solicited hereby will, unless
authority is withheld, be voted for the election as directors of the six
individuals named below for a term of one year until the next annual meeting of
shareholders and until their successors have been duly elected and qualify.
All of the nominees are members of the present board of directors. If,
prior to the meeting, it should become known that any of the nominees will be
unable to serve as a director after the meeting by reason of death, incapacity
or other unexpected occurrence, the proxies will be voted for such substitute
nominee as is selected by the board of directors or, alternatively, not voted
for any nominee. The board of directors has no reason to believe that any
nominee will be unable to serve.
<PAGE>
Nominees for Directors
The names and ages of all of the director nominees and the positions
held by each with the Company are as follows:
Name Class Age Position with Company
- ---- ----- --- ---------------------
William R. Franta (1) (2) Class I 57 Director
Jerry W. Grabowski Class II 47 President, Chief Executive
Officer and Director
John A. Grimstad (1) (2) Class I 49 Secretary and Director
Charles G. Schiefelbein (1) (2) Class II 60 Director
Frank Madren Class II 61 Nominee
Christopher Robert Class I 59 Nominee
- --------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
William R. Franta (Class I, two year term) is Vice President of Product
Strategy for REAL Solutions, Inc. and has been a business development and
technology consultant since April 1996. From January 1987 to April 1996 he
served as Senior Vice President of Network Systems Corporation. He is a Director
of APA Optics in Blaine, Minnesota.
Jerry W. Grabowski (Class II, three year term) has been President and
Chief Executive Officer and a member of the board of directors of the Company
since August 1993. He additionally served as Chief Financial Officer, Secretary,
and Treasurer from December 1994 until October 1996. From 1988 until joining the
Company, he was employed as General Manager of Onan Power/Electronics Division.
Charles G. Schiefelbein, (Class II, three year term) has been since
September 1996 President of Capital Growth Services, a Consulting and Investment
Company based in Minneapolis, Minnesota. From 1979 until August 1996, Mr.
Schiefelbein was Chairman of Computer Petroleum Corporation (CPC), a public
company that provides electronic energy price and news information. From 1979,
when he founded CPC, to 1991, Mr. Schiefelbein served as Chairman and Chief
Executive Officer. He is also currently a director of Research, Inc.
John A. Grimstad (Class I, two year term) has been, since 1984, a Vice
President and shareholder of Fredrikson & Byron, P.A., Waters' legal counsel,
and serves as a Director and Secretary or Assistant Secretary of several
closely-held manufacturing companies.
Frank Madren (Class II, three year term) has been Chief Executive
Officer of Garrett since November 1992. The election of Mr. Madren to Waters'
board of directors is effective upon and subject to the closing of the merger of
Garrett with a subsidiary of Waters.
Christopher Robert (Class I, two year term) has been since 1993
President and Chief Executive Officer of Keyfile Corporation, a leading provider
of process automation software and services for automating and streamlining
e-commerce transactions over the web. The election of Mr. Robert to Waters'
board of directors is effective upon and subject to the closing of the merger of
Garrett with a subsidiary of Waters.
<PAGE>
Board and Committee Meetings
The Waters Board held 4 meetings during fiscal year 1999. Each Director
whose reelection is proposed and who served as a member of the Board during
fiscal year 1999 attended at least 75% of the aggregate number of meetings of
the Board and of the Committee of which he is a member.
Waters' board of directors has formally designated two Committees: an
Audit Committee and Compensation Committee. The Company does not have a
nominating committee.
The Audit Committee, consisting of Mr. Franta, Mr. Schiefelbein, and
Mr. Grimstad for fiscal year 1999, generally engages in oversight of the
structure of Waters' internal controls, reviews the selection of the independent
auditors, reviews the annual audit plan, and oversees Waters' financial
reporting. However, the responsibility to review and approval internal
accounting and controls, quarterly financials, registration statements, reports
to the SEC, financial press releases, cost of conduct, and any legal/ethics
audit, except as these matters have a direct bearing on the duties stated above,
remain the responsibility of the full board of directors. During fiscal year
1999, the Audit Committee met twice, and the full board of directors met once
with the Company's independent auditors to review the Company's financial
statements, accounting policies, and practices. Each Committee member was
present at the meetings. Mr. Franta, Mr. Schiefelbein, and Mr. Grimstad will
serve on the Audit Committee for fiscal year 2000.
The Compensation Committee, which for fiscal year 2000 will consist of
Mr. Franta, Mr. Grimstad, and Mr. Schiefelbein, generally assists the board of
directors in exercising its authority and discharging its responsibilities
concerning the hiring, compensation, and termination of employment of the
officers and senior managers of the Company. During fiscal year 1999, the
Compensation Committee met twice and each Committee member was present at both
meetings.
WATERS EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid or to be paid
by Waters, as well as certain other compensation paid or accrued, during fiscal
year 1999 to the named executive officer as of June 30, 1999:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
Restricted All Other
Name & Principal Fiscal Bonus $ Stock # Options LTIP Compensation
Position Year Salary $ (1) Other $ Awards $ Granted Payouts $(2)
-------- ---- -------- ---------- ------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jerry W. Grabowski 1999 161,268 33,686 - - 3,250 - 3,320
President & CEO 1998 158,524 35,278 - - 3,250 - 3,783
1997 143,780 61,000 - - - - 4,632
</TABLE>
(1) Represents incentive compensation payment.
(2) Represents insurance premiums and 401(k) match paid by the Company.
Option Grants During 1999 fiscal year
There were 3,250 shares of the Company's common stock granted in
options under the Company's 1995 Stock Option Plan during fiscal year 1999 to
the named executive officer in the Summary Compensation Table. The Company has
not granted any stock appreciation rights.
<PAGE>
<TABLE>
<CAPTION>
Number of
Securities Percent of Total Options
Underlying Options Granted to Employees in Exercise or Base Price
Name Granted (#) Fiscal Year ($/Share) Expiration Date
<S> <C> <C> <C> <C> <C>
Jerry W. Grabowski 3,250 13.8% $5.75 2/5/2008
</TABLE>
Aggregated Option Exercises During 1999 fiscal year
and fiscal year End Option Values
No options were exercised by any officers of Waters during fiscal 1999.
The following table provides information related to the number and value of
options held at fiscal year end by Jerry W. Grabowski.
<TABLE>
<CAPTION>
Shares
Acquired # of Unexercised Options at Value of Unexercised Options at
on Exercise Value Realized June 30, 1999 June 30, 1999
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
<S> <C> <C> <C> <C>
Jerry W. Grabowski 0 $ 0 56,500 exercisable $124,875 exercisable
0 unexercisable $0 unexercisable
</TABLE>
(1) Value is calculated on the basis of the difference between the option
exercise price and the closing sale price for the Company's Common
Stock at June 30, 1999 of $4.675 as quoted on the NASDAQ National
Market System, multiplied by the number of shares of Common Stock
underlying the option.
PRINCIPAL SHAREHOLDERS OF WATERS
The following table sets forth the beneficial ownership of Water's common stock
by (i) each Director and nominee of Waters, (ii) the named executive officer of
Waters in the Summary Compensation Table, and (iii) all Directors and Executive
Officers of Waters as a group, as of August 31, 1999. Except as otherwise
indicated, the persons named in the table have sole voting and investment power
with respect to all shares of common stock owned by them.
<TABLE>
<CAPTION>
Number of
Shares Percent
Beneficially of Class (1)
Name of Director or Number of Persons in Group Owned (1) Pre-Merger Post-Merger
<S> <C> <C> <C>
Charles G. Schiefelbein 204,753 (2) 13.8% 11%
Jerry W. Grabowski 69,750 (3) 4.6% 3.7%
John A. Grimstad 21,850 (4) 1.5% 1.2%
William R. Franta 10,150 (5) 0.7% 0.5%
Officers and Directors as a Group (5 persons) 324,503 (6) 20.6% 15%
- -----------------------------------------------------------
</TABLE>
(1) Under rules of the Securities and Exchange Commission, an individual is
also deemed to beneficially own shares which are not outstanding but
which the individual has the right to acquire as of December 31, 1999
or within 60 days of such date. Such shares not outstanding but so
deemed beneficially owned are treated as outstanding when determining
the percent of the class owned by the particular individual and when
determining the percent owned by the group.
(2) Includes 70,000 shares of stock held in the name of Peace Shalom
Foundation, of which Mr. Schiefelbein is a Director and Vice President,
as well as 10,050 shares which may be purchased pursuant to options
held by Mr. Schiefelbein which are or will become exercisable within 60
days of December 31, 1999.
<PAGE>
(3) Includes 56,500 shares which may be purchased pursuant to options held
by Mr. Grabowski which are or will become exercisable within 60 days of
December 31, 1999.
(4) Includes 10,050 shares which may be purchased pursuant to options held
by Mr. Grimstad which are or will become exercisable within 60 days of
December 31, 1999.
(5) Includes 10,050 shares which may be purchased pursuant to options held
by Mr. Franta which are or will become exercisable within 60 days of
December 31, 1999.
(6) Includes 104,650 shares which may be purchased pursuant to options held
by Officers and Directors which are or will become exercisable within
60 days of December 31, 1999.
INDEPENDENT ACCOUNTANTS
The firm of McGladrey & Pullen, LLP, Certified Public Accountants,
served as Waters' independent accountants for the fiscal year ended June 30,
1999. McGladrey & Pullen, LLP is expected to be designated by the Waters board
of directors to audit Waters' accounts for the new fiscal year ending June 30,
2000. Such action is customarily taken at the meeting of the Waters board of
directors immediately preceding the annual meeting of shareholders.
Representatives of McGladrey & Pullen LLP are expected to be present at
the Waters annual meeting and will be afforded the opportunity to make a
statement if they so desire. Such representatives are also expected to be
available to respond to appropriate questions.
Representatives of Froshman, Billings, Williams, Chan & Lewandowski,
Garrett's independent accountants, are expected to be present at the Garrett
special meeting and will have the opportunity to make a statement if they so
desire. Such representatives are also expected to be available to respond to
appropriate questions.
LEGAL MATTERS
The validity of the Waters common stock to be issued in connection with
the merger will be passed upon for Waters by Fredrikson & Byron, P.A.,
Minneapolis, Minnesota. Members of such firm own, in the aggregate,
approximately 21,850 shares of Waters common stock.
EXPERTS
The financial statements of Waters incorporated in this proxy
statement/prospectus by reference to the Annual Report on Form 10-KSB of Waters,
Inc. that was filed with the SEC on September 28, 1999 have been so incorporated
in reliance on the report of McGladrey & Pullen LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Garrett included in this proxy
statement/prospectus have been audited by Froshman, Billings, Williams, Chan &
Lewandowski, independent accountants, as stated in their report that is
incorporated in this proxy statement/prospectus by reference, and has been so
incorporated in reliance upon the report of such firm given on the authority of
such firm as experts in auditing and accounting.
SHAREHOLDER PROPOSALS
Shareholder proposals for consideration at Waters' 2000 Annual Meeting
must follow the procedures set forth in Rule 149-8 under the Securities Exchange
Act of 1934. To be timely under Rule 149-8, shareholder proposals must be
received by Waters by _________________, 2000 in order to be considered for
inclusion in the Waters Proxy Statement for the 2000 Annual Meeting.
<PAGE>
OTHER MATTERS
As of the date of this proxy statement/prospectus, the board of
directors of each of Waters and Garrett knows of no other matters that will be
presented for consideration at the Waters annual meeting or the Garrett special
meeting other than as described in this proxy statement/prospectus. If any other
matters shall properly come before the Waters Annual Meeting or an adjournment
or postponement thereof and be voted upon, the enclosed proxies will be deemed
to confer discretionary authority on the individuals named as proxies therein to
vote the shares represented by such proxies as to any such matters. The persons
named as proxies intend to vote or not vote in accordance with the
recommendation of the management of Waters.
WHERE YOU CAN FIND MORE INFORMATION
Waters files annual, quarterly and special reports, proxy statements,
and other information with the SEC. You may read and copy any reports,
statements or other information filed by Waters at the SEC's public reference
rooms at 450 - 5th Street NW., Washington, D.C. 20549, or at 7 World Trade
Center, Suite 1300, New York, New York 10048, or at Citicorp Center, 500 W.
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800 SEC 0330 for more information on the public reference rooms. The SEC also
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements, and other information regarding issuers, like
Waters, that file electronically with the SEC.
Waters has filed with the SEC a registration statement on Form S-4 to
register the Waters common stock to be issued in the merger. This proxy
statement/prospectus is a part of that registration statement and constitutes a
prospectus of Waters in addition to being a proxy statement of Waters for the
Annual Meeting. As allowed by SEC rules, this proxy statement/prospectus does
not contain all the information you can find in the registration statement and
the exhibits to the registration statement.
The SEC allows us to "incorporate by reference" information into this
proxy statement/prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered part of this
proxy statement/prospectus, except for any information superseded by information
in (or incorporated by reference in) this proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents
listed below that Waters has previously filed with the SEC. These documents
contain important information about Waters and its finances.
Waters SEC Filings Period
- ------------------------------------------------------- ------------------------
Annual Report on Form 10-KSB Year ended June 30, 1999
Description of Waters' common stock contained in
Waters' registration statement on Form 8-A
Description of Waters' preferred stock purchase
rights attached to its common stock contained
in Waters' registration statement on Form 8-A.
Waters is also incorporating by reference all additional documents that
it may file with the SEC between the date of this proxy statement/prospectus and
the date of the Annual Meeting.
If you are a shareholder of Waters or Garrett, Waters may have sent you
some of the documents incorporated by reference, but you can obtain any of them
from Waters or the SEC. Documents incorporated by reference are available from
Waters without charge, except for any exhibits to those documents unless we have
specifically incorporated by reference a particular exhibit in this proxy
statement/prospectus. Shareholders may obtain documents incorporated by
reference in this proxy statement/prospectus by requesting them in writing or by
telephone from the appropriate party at the following address:
Waters, Inc.
2411 7th Street N.W.
Rochester, MN 55801
If you would like to request documents from Waters, please do so by
____________, 1999 to receive them before the Annual Meeting.
<PAGE>
We have not authorized anyone to provide you with information that is
different from, or in addition to, what is contained or referred to in this
proxy statement/prospectus. Waters has supplied all information contained or
incorporated by reference in this proxy statement/prospectus relating to Waters,
and Garrett has supplied all such information relating to Garrett. If you are in
a jurisdiction where offers to exchange or sell, or solicitations of offers to
exchange or buy, the securities offered by this document or the solicitation of
proxies is unlawful, or if you are a person to whom it is unlawful to direct
these types of activities, then the offer presented in this documents does not
extend to you. The information contained in this documents speaks only as of the
date of this documents unless the information specifically indicates that
another date applies.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Garrett Communications, Inc.
Audited Financial Statements and Related Notes
Page
Independent Auditors' Report.............................................F-2
Balance Sheets...........................................................F-3
Statements of Income and Retained Earnings...............................F-4
Statements of Cash Flows.................................................F-5
Notes to the Financial Statements........................................F-7
Unaudited Financial Statements and Related Notes
Balance Sheets..........................................................F-13
Statements of Operations................................................F-14
Statements of Cash Flows................................................F-15
Notes to the Financial Statements.......................................F-16
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders
Garrett Communications, Inc.
Fremont, CA
We have audited the accompanying balance sheets of Garrett Communications, Inc.
as of December 31, 1998 and 1997, and the related statements of income and
retained earnings 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 our audits 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 Garrett Communications, Inc. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 14 to the Financial Statements, the Company is in dispute
with the Internal Revenue Service over the tax treatment of certain items. The
Company has appealed against assessments for income tax and penalties totaling
$198,000, and the ultimate outcome cannot presently be determined. Accordingly,
no provision for any liability that may result upon adjudication has been made
in the accompanying financial statements.
Los Gatos, California
August 19, 1999
<PAGE>
Garrett Communications, Inc.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31,
1998 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,785 $ --
Inventories 1,495,228 1,311,280
Accounts receivable, net of allowance for doubtful
accounts of $20,000 and $155,148, respectively
1,168,528 1,030,191
Refundable income taxes 39,989 27,658
Prepaid income taxes 22,686 50,929
Deferred income taxes 46,000 77,000
Other current assets 36,536 12,427
---------- ----------
Total current assets 2,819,752 2,509,485
Property and equipment 66,854 93,216
Investment in affiliate 2,370 --
Deposits -- 10,412
---------- ----------
$2,888,976 $2,613,113
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft -- 1,897
Payable to stockholder -- 23,480
Accounts payable and accrued expenses 896,359 744,092
Accrued payroll and related expenses 51,812 46,733
Warranty reserve 63,000 63,000
---------- ----------
Total current liabilities 1,011,171 879,202
Debt, non-current -- 365,346
Deferred income taxes 15,000 21,000
---------- ----------
Total liabilities 1,026,171 1,265,548
---------- ----------
Stockholder's Equity:
Common stock 852,429 514,866
Retained earnings 1,010,376 832,699
---------- ----------
Total stockholder's equity 1,862,805 1,347,565
---------- ----------
$2,888,976 $2,613,113
========== ==========
</TABLE>
See accompanying independent auditors' report
and notes to financial statements
<PAGE>
Garrett Communications, Inc.
Statements of Income and Retained Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---------- ----------
<S> <C> <C>
Revenue $8,124,165 $8,224,481
Cost of revenue 6,191,902 6,320,482
---------- ----------
Gross profit 1,932,263 1,903,999
---------- ----------
Operating expenses:
Research and development 435,405 352,549
Marketing and selling 807,155 749,364
General and administrative 443,243 533,757
---------- ----------
Total operating expenses 1,685,803 1,635,670
---------- ----------
Income from operations 246,460 268,329
Other expenses 16,783 56,405
---------- ----------
Income before income taxes 229,677 211,924
Provision for income taxes 52,000 38,000
---------- ----------
Net income 177,677 173,924
Retained earnings, beginning of year 832,699 658,775
---------- ----------
Retained earnings, end of year $1,010,376 $ 832,699
========== ==========
</TABLE>
See accompanying independent auditors' report
and notes to financial statements
<PAGE>
Garrett Communications, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 177,677 $ 173,924
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation expense 31,382 29,223
Loss on disposal of equipment -- 2,665
Deferred income taxes 25,000 (31,000)
Decrease (increase) in operating assets:
Inventory (183,948) (211,490)
Accounts receivable (138,337) 428,523
Refundable income taxes (12,331) (27,658)
Prepaid income taxes 28,243 (20,917)
Other current assets (24,109) 9,354
Deposits 10,412 (2,758)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 152,267 (186,184)
Accrued payroll and related expenses 5,079 8,337
Warranty reserve -- 30,000
Income taxes payable -- (1,166)
--------- ---------
Net cash provided by operating activities 71,335 200,853
--------- ---------
Cash flows from investing activities
Acquisition of affiliate (2,370) --
Purchase of property and equipment (5,020) (32,962)
--------- ---------
Net cash used in investing activities (7,390) (32,962)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 337,563 --
Line of credit (365,346) (155,004)
Repayment of stockholder (23,480) (38,966)
--------- ---------
Net cash used in financing activities (51,263) (193,970
--------- ---------
Cash and cash equivalents:
Net increase (decrease) during the year 12,682 (26,079)
Beginning of year (1,897) 24,182
--------- ---------
End of year $ 10,785 $ (1,897)
========= =========
</TABLE>
See accompanying independent auditors' report
and notes to financial statements
<PAGE>
Garrett Communications, Inc.
Statements of Cash Flows (continued)
Supplemental Disclosures of Cash Flow Information
December 31,
1998 1997
-------- --------
Cash paid during the year for income taxes $ 38,747 $118,741
Refunds received for income taxes (27,658) --
Interest paid 20,460 50,260
See accompanying independent auditors' report
and notes to financial statements
<PAGE>
Garrett Communications, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies
Nature of Business
Garrett Communications, Inc. is a privately owned corporation
established in 1989 and provides a range of high technology ethernet
products to businesses and industry, worldwide.
Basis of Preparation
The financial statements are prepared in accordance with generally
accepted accounting principles. Certain prior year amounts are subject
to reclassification in the accompanying financial statements to conform
to current year presentation.
Use of Estimates
The preparation of 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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and held in banks,
highly liquid money market funds, commercial paper and other short-term
investments with original maturities of three months or less.
Inventory
Inventories are stated at the lower of cost or market using the average
cost method.
Property and Equipment
Property and equipment is stated at cost net of accumulated
depreciation and amortization computed using the straight-line method.
Provisions for depreciation and amortization are based on estimated
useful lives of 5 to 7 years for furniture and fixtures, and 3 to 5
years for machinery and equipment and software.
Stock Option Plan
In accordance with the disclosure-only provisions of Statements of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", compensation expense would be recorded by
the Company on the date of grant only if the current market price of
the underlying stock exceeded the exercise price.
See accompanying independent auditors' report
<PAGE>
Income Taxes
Deferred income taxes are determined on the asset and liability method
in accordance with SFAS No. 109. Deferred income taxes reflect the
future tax consequences of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end.
2. Inventories
Inventories at December 31, 1998 and 1997, consisted of the following:
1998 1997
---------- ----------
Raw materials $ 687,866 $ 628,160
Work in process 355,448 328,445
Finished goods 451,914 354,675
---------- ----------
$1,495,228 $1,311,280
========== ==========
3. Property and Equipment
Property and equipment consists of the following:
December 31,
1998 1997
--------- ---------
Furniture and fixtures $ 31,314 $ 31,075
Machinery and equipment 119,349 114,568
Software 46,209 46,209
--------- ---------
196,872 191,852
Less accumulated depreciation and
amortization (130,018) (98,636)
--------- ---------
$ 66,854 $ 93,216
========= =========
4. Investment in Affiliate
The Company acquired a 40% stake in a new company in Britain, Garrett
Communications (UK) Ltd., in January, 1998. Net income of this
affiliate was not material during the year.
<PAGE>
5. Payable to Stockholder
Payable to stockholder, at December 31, 1998 and 1997, comprises the
following:
1998 1997
------------- -------
Note payable - principal $ -- $20,000
Accrued interest at 12% -- 3,480
------------- -------
$ -- $23,480
============= =======
6. Income Taxes
The provision for income taxes consists of the following:
Year Ended December 31,
1998 1997
------------- -------------
Current: Federal $ 26,000 $ 61,000
State 1,000 8,000
------------- -------------
27,000 69,000
------------- -------------
Deferred: Federal 21,000 (24,000)
State 4,000 (7,000)
------------- -------------
25,000 (31,000)
------------- -------------
$ 52,000 $ 38,000
============= =============
Deferred income taxes arise from temporary differences resulting from
income and expense items reported in different periods for financial
statement and income tax reporting purposes. Differing methods of
calculating depreciation expense and recognizing vacation expense and
expense for reserves are the principal sources of temporary
differences.
7. Debt
The Company has a revolving line of credit of $500,000, at an interest
rate of 1.50% over prime rate, which is subject to review by the bank
on January 10, 2000. The line is collateralized by all assets of the
company.
8. Operating Leases
The Company leased its facilities in Fremont under two operating
leases. Lease expense for the years ended December 31, 1998 and 1997,
was approximately $122,000 and $88,000, respectively.
<PAGE>
These operating leases have since expired. Effective June 15, 1999, the
Company has leased new premises in Fremont for a five year term. Total
rent commitments are approximately as follows:
1999 $ 120,000
2000 115,000
2001 119,000
2002 122,000
2003 126,000
Thereafter 58,000
==============
$ 660,000
==============
9. Other Expenses
Other expenses consists of the following:
Year ended December 31,
1998 1997
------------ ----------
Interest expense $ 16,980 $ 53,740
Interest income (197) -
Loss on disposal of equipment - 2,665
------------ ----------
$ 16,783
$ 56,405
============ ==========
10. Stockholder's Equity
The Company's articles of incorporation, as amended in 1993, authorize
the issue of ten million shares of common stock, with no par value.
During 1998, 396,250 new shares were issued for $337,563, bringing the
total to 2,205,000 shares issued and fully paid at a cumulative net
issue cost of $852,429 at the balance sheet date.
11. 401(k) Plan
The Company sponsors a 401(k) Profit Sharing Plan (the Plan) in which
employees age 21 and over are eligible to participate. The Company may
make discretionary contributions which will be allocated to
participants' accounts by the Advisory Committee. The Company did not
make contributions to the Plan during the years ended December 31, 1998
and 1997. The costs of administering the Plan are not material.
12. Stock Option Plan
The Company has established the 1990 Incentive Stock Option Plan (the
Option Plan) for its employees and consultants, as amended in 1993. The
Board of Directors administers the Option Plan and has sole discretion
over the granting of stock options, which may be granted to employees
and consultants only, and may be exercised at any time provided for
within the term of the Option. A maximum of 500,000 shares of the
Company's common stock can be sold pursuant to options granted under
the Option Plan.
<PAGE>
12. Stock Option Plan (continued)
The Option Plan provides that the exercise price shall be determined by
the Board of Directors, however, the price of each Option granted is
subject to the following minimum pricing:
Percentage of Years to
Grantee Market Value Expiry
Incentive Stock Options to Employees who
own more than 10% of Company Stock 110% 5*
Incentive Stock Options to other employees 100% 10*
Other Options to employees and consultants 85% 10*
* or 90 days from termination date if earlier
The Company did not recognize compensation expense on the issuance of
any options because the exercise price was not lower than the market
price of the underlying stock on the grant date.
The number and weighted average exercise price of options were as
follows:
<TABLE>
<CAPTION>
Years to December 31
1998 1998 1997 1997
Number Price Number Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 347,250 $ 0.6198 342,250 $ 0.6187
Granted during the year 67,500 $ 0.8148 5,000 $ 0.7000
Exercised during the year (56,250) $ 0.5611 - $ -
Expired during the year (15,000) $ 0.6500 - $ -
---------- -------- ---------- -----------
Exercisable at end of year 343,500 $ 0.6664 347,250 $ 0.6198
======== ======== ======= ========
</TABLE>
As of December 31, 1998, the outstanding options, all of which may be
exercised sooner at the optionee's discretion, fall due within the
following time frames:
<TABLE>
<CAPTION>
Lowest Highest Weighted average Weighted average
Number Price Price Exercise price Life remaining
<S> <C> <C> <C> <C> <C>
0-1 years 25,000 $0.5500 $0.5500 $0.5500 0.04 years
1-2 years 25,000 $0.7150 $0.7150 $0.7150 1.54 years
4-5 years 34,000 $0.5000 $0.5000 $0.5000 4.36 years
5-10 years 259,500 $0.5000 $0.9000 $0.6948 7.49 years
Overall 343,500 $0.5000 $0.9000 $0.6664 6.20 years
</TABLE>
<PAGE>
13. Economic Dependency and Credit Risk
The Company's sales to one principal customer amounted to approximately
$3,489,000 in 1998, representing 42% of total revenues before discounts
for the year.
14. Contingent Liabilities
The Company is in dispute with the Internal Revenue Service (IRS) over
the tax treatment of certain items relating to the purchase of the
Company by the present major stockholders. At issue are the treatment
of expenditures by the Company relating to the purchase of a Covenant
Not to Compete, various disputes with the former stockholders and stock
acquisition, and legal and professional fees pertaining to these
issues.
The sum assessed by the IRS, in excess of sums agreed, for federal
income tax and penalties for the years 1991 to 1996 is approximately
$198,000, which with the addition of related charges would amount to
approximately $330,000 at December 31, 1998. No amounts have been
accrued in respect of this sum, as it is not possible to assess with
any degree of certainty how much, if any, will be determined to be
payable.
The Company is vigorously defending itself against these IRS claims,
and believes that the ultimate resolution will not have a material
adverse effect on the Company's financial position.
<PAGE>
Garrett Communications, Inc.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30,
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,907 $ 33,054
Inventories 1,544,062 1,476,225
Accounts receivable, net 1,922,759 913,479
Prepaid income taxes -- 43,062
Deferred income taxes 46,000 77,000
Other current assets 18,990 32,802
---------- ----------
Total current assets 3,535,718 2,575,622
Property and equipment 152,714 76,329
Investment in affiliate 2,370 2,370
Deposits 10,584 --
---------- ----------
$3,701,386 $2,654,321
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 1,109,981 690,409
Accrued payroll and related expenses 68,428 33,023
Warranty reserve 63,000 63,000
Income taxes payable 159,353
---------- ----------
Total current liabilities 1,400,762 786,432
Deferred income taxes 15,000 21,000
---------- ----------
Total liabilities 1,415,762 807,432
---------- ----------
Stockholder's Equity:
Common stock 876,898 852,429
Retained earnings 1,408,726 994,460
---------- ----------
Total stockholder's equity 2,285,624 1,846,889
---------- ----------
$3,701,386 $2,654,321
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Garrett Communications, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 8,300,725 $ 5,983,066
Cost of revenue 6,009,286 4,545,530
----------- -----------
Gross profit 2,291,439 1,437,536
----------- -----------
Operating expenses:
Research and development 324,325 295,417
Marketing and selling 766,954 583,530
General and administrative 536,810 331,848
----------- -----------
Total operating expenses 1,628,089 1,210,795
----------- -----------
Income from operations 663,350 226,741
Other expenses -- (16,980)
----------- -----------
Income before income taxes 663,350 209,761
Provision for income taxes 265,000 48,000
----------- -----------
Net income $ 398,350 $ 161,761
=========== ===========
Earnings per share:
Basic $ 0.18 $ 0.08
=========== ===========
Diluted $ 0.16 $ 0.07
=========== ===========
Weighted average shares outstanding 2,235,270 2,015,385
Options (equivalent) 323,940 345,862
----------- -----------
Weighted average equivalents 2,559,210 2,361,247
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Garrett Communications, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 398,350 $ 161,761
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation expense 21,011 21,907
Decrease (increase) in operating assets:
Inventory (48,834) (164,945)
Accounts receivable (754,231) 116,712
Refundable income taxes 39,989 27,658
Prepaid income taxes 22,686 7,867
Other current assets 17,546 (20,375)
Deposits (10,584) 10,412
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 213,622 (53,683)
Accrued payroll and related expenses 16,616 (13,710)
Income taxes payable 159,353 --
--------- ---------
Net cash provided by operating activities 75,524 93,604
--------- ---------
Cash flows from investing activities:
Acquisition of affiliate -- (2,370)
Purchase of property and equipment (106,871) (5,020)
--------- ---------
Net cash used in investing activities (106,871) (7,390)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 24,469 337,563
Line of credit -- (365,346)
Repayment of stockholder -- (23,480)
--------- ---------
Net cash provided (used) in financing activities 24,469 (51,263)
--------- ---------
Cash and cash equivalents:
Net (decrease) increase during the period (6,878) 34,951
Beginning of period 10,785 (1,897)
--------- ---------
End of period $ 3,907 $ 33,054
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Garrett Communications, Inc.
Notes to the Financial Statements
(Unaudited)
1. Basis of Presentation
The financial statements included in this Proxy Statement/Prospectus have
been prepared by Garrett Communications, Inc. (the Company), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed, or omitted,
pursuant to these rules and regulations. The year-end balance sheet was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. These
unaudited interim financial statements should be read in conjunction with
the audited financial statements and related notes included elsewhere in
this Proxy Statement/Prospectus.
The interim financial statements presented herein as of September 30, 1999
and 1998 and for the nine month periods ended September 30, 1999 and 1998
reflect, in the opinion of management, all adjustments (which include only
normal, recurring adjustments) necessary for a fair presentation of
financial position and the results of operations and cash flows for the
periods presented. The results of operations for an interim period are not
necessarily indicative of results for the full year.
2. Inventories
Inventories at September 30, 1999 consisted of the following:
Raw materials $ 721,788
Work in process 371,414
Finished goods 450,860
---------------
$ 1,544,062
3. Industry Segment Information
The Company distributes its products through its direct sales force and
independent sales representatives in the United States, Canada and
overseas. The Company's sales to one United States based customer amounted
to approximately $3,071,000 and $2,449,000 in the first nine months of
1999 and 1998 respectively, representing 36% and 40% of total revenues
before discounts. No other customer accounted for more than 10% of sales
in either period.
Total export sales (primarily to Europe and payable in U.S. dollars) were
approximately 8% and 11% of net sales for nine month periods ended
September 30, 1999 and 1998, respectively.
At September 30, 1999, accounts receivable included $261,505, before
allowances, due from customers located outside of the U.S.
<PAGE>
Garrett Communications, Inc.
Notes to the Financial Statements
(Unaudited)
4. Line of Credit
The Company has a revolving line of credit of $500,000, at an interest
rate of 1.50% over prime rate, which is subject to review by the bank on
April 10, 2000. The line is collateralized by all assets of the Company.
5. Stockholders' Equity
The Company's articles of incorporation, as amended, authorize the issue
of ten million shares of common stock, with no par value. During the first
nine months of 1999, 41,250 new shares were issued for $24,469, bringing
the total to 2,246,250 shares issued and fully paid at a cumulative net
issue cost of $876,898 at September 30, 1999.
6. Contingent Liabilities
The Company is in dispute with the Internal Revenue Service (IRS) over the
tax treatment of certain items relating to the purchase of the Company by
the present major stockholders. At issue are the treatment of expenditures
by the Company relating to the purchase of a Covenant Not to Compete,
various disputes with the former stockholders and stock acquisition, and
legal and professional fees pertaining to these issues.
The sum assessed by the IRS, in excess of sums agreed, for federal income
tax and penalties for the years 1991 to 1996 is approximately $194,000,
which with the addition of related charges could amount to approximately
$350,000 at September 30, 1999. In November, 1999, the Company paid
approximately $194,000 to the IRS to enable a court adjudication, which
should occur by the year 2002. No amounts have been accrued or expensed in
respect of this sum, as it is not possible to assess with any degree of
certainty how much, if any, will be determined to be payable or
refundable.
The Company continues to vigorously defend itself against these IRS
claims, and to believe that the ultimate resolution will not have a
material adverse effect on its financial position.
7. Acquisition of the Company
On November 3, 1999, Waters Instruments, Inc. ("Waters") and the Company
entered into an agreement under which Waters will acquire the Company in a
transaction valued at approximately four and a half million dollars ($4.5
million). The transaction calls for the Company's shareholders to receive
$2,250,000 cash plus 375,000 shares of Waters stock in exchange for 100%
of Company's stock. In addition to shareholder approval, the transaction
is subject to customary conditions including Hart-Scott-Rodino clearance.
The companies expect completion of the transaction in February, 2000.
<PAGE>
ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
DATED EFFECTIVE NOVEMBER 3, 1999
AMONG
WATERS INSTRUMENTS, INC.,
WG MERGER CORP.,
GARRETT COMMUNICATIONS, INC.,
FRANK MADREN,
CHRISTOPHER ROBERT,
AND
ROSS SMITH
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS........................................................1
1.1) Specific Definitions......................................1
1.2) Definitional Provisions...................................6
ARTICLE II THE MERGER; CONVERSION OF SHARES..................................6
2.1 The Merger................................................6
2.2 Effective Time............................................6
2.3) Conversion of Company Common Stock........................7
2.4) Holdback Shares...........................................8
2.5) Other Company Shares and Stock Options....................9
2.6) Merger Subsidiary Shares.................................10
2.7) Exchange of Company Common Stock.........................10
2.8) Articles of Incorporation of the Surviving Corporation...12
2.9) Bylaws of the Surviving Corporation......................12
2.10) Directors and Officers of the Surviving Corporation......12
2.11) Tax Free Reorganization..................................12
2.12) Registration on Form S-4.................................12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................13
3.1) Corporate Existence and Power............................13
3.2) Corporate Authorization..................................13
3.3) Governmental Authorization: Consents.....................13
3.4) Non-Contravention........................................14
3.5) Binding Effect...........................................14
3.6) Capitalization...........................................14
3.7) Financial Statements.....................................15
3.8) Material Events..........................................15
3.9) Title to Properties; Liens...............................17
3.10) Litigation...............................................17
3.11) Taxes....................................................17
3.12) ERISA....................................................18
3.13) Compliance With Laws; Permits............................20
3.14) Finders' Fees............................................21
3.15) Intellectual Property....................................22
3.16) Environmental Matters: OSHA..............................23
3.17) Contracts................................................24
3.18) Real Estate..............................................25
3.19) Material Obligations.....................................25
3.20) The Company Products; Regulation.........................25
3.21) Returns of the Company Products..........................26
3.22) Inventory................................................26
3.23) Accounts and Notes Receivable............................26
3.24) Suppliers and Customers..................................26
3.25) Year 2000 Compliance.....................................27
3.26) Employee Relations.......................................27
3.27) Insurance................................................28
3.28) Potential Conflicts of Interest..........................28
3.29) Bank Accounts............................................29
3.30) Minute Books.............................................29
3.31) Full Disclosure..........................................29
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT.........................29
4.1) Corporate Authorization..................................29
4.2) Governmental Authorization; Consents.....................29
4.3) Capitalization...........................................30
4.4) Non-Contravention........................................30
4.5) Binding Effect...........................................31
4.6) Financial Statements and SEC Filings.....................31
4.7) Corporate Existence and Power............................31
4.8) Material Obligations; Material Events....................32
4.9) Full Disclosure..........................................32
ARTICLE V COVENANTS.........................................................32
5.1) Approvals and Consents...................................32
5.2) Affiliate Letter.........................................32
5.3) Preserve Accuracy of Representations and Warranties......33
5.4) Maintain the Company as Going Concern....................33
5.5) No Solicitation of Other Offers..........................36
5.6) Access to Information and Records Before Closing.........36
5.7) No Shareholder Solicitation..............................36
5.8) Further Actions..........................................36
5.9) Regulatory Approvals.....................................36
5.10) Additional Financial Statements and Reports..............37
5.11) Certain Notifications....................................37
5.12) Noncompetition Agreement.................................37
5.13) Employment Agreements....................................37
5.14) Resignations of Officers and Directors...................37
5.15) Maintenance of WNS.......................................37
5.16) Transfer of WNS Assets and Assumption of Liabilities.....38
ARTICLE VI CONDITIONS TO PARENT'S OBLIGATIONS...............................38
6.1) Truth of Representations and Warranties..................38
6.2) Opinion of Counsel for the Company and the Company
Shareholders.............................................38
6.3) Required Consents........................................39
6.4) Litigation Affecting Closing.............................39
6.5) Legislation..............................................39
6.6) Noncompetition and Employment Agreements.................39
6.7) Resignations.............................................39
6.8) Escrow Agreement.........................................39
6.9) Form S-4; Nasdaq Listing.................................39
6.10) Standstill Agreement.....................................39
6.11) Affiliate Letter.........................................39
6.12) Dissenters...............................................40
6.13) Tax-Free Reorganization..................................40
6.14) Minimum Parent Price Per Share...........................40
6.15) Agreement Respecting Certain Costs.......................40
ARTICLE VII CONDITIONS TO THE COMPANY'S OBLIGATIONS.........................40
7.1) Truth of Representations and Warranties..................40
7.2) Opinion of Counsel for Parent............................41
7.3) Consents.................................................41
7.4) Litigation Affecting Closing.............................41
7.5) Election to Parent Board of Directors....................41
7.6) Legislation..............................................42
7.7) Escrow Agreement.........................................42
7.8) Tax-Free Reorganization..................................42
7.9) Form S-4; Nasdaq Listing.................................42
7.10) Company Shareholder Approval.............................42
7.11) Transfer of WNS Assets and Assumption of Liabilities.....42
7.12) Minimum Parent Price Per Share...........................42
ARTICLE VIII CLOSING........................................................43
8.1) Closing Date.............................................43
8.2) Closing Deliveries of the Company........................43
8.3) Closing Deliveries of Parent.............................43
8.4) Proceedings..............................................43
ARTICLE IX INDEMNIFICATION..................................................44
9.1) Indemnification of Parent................................44
9.2) Indemnification of the Company Shareholders..............44
9.3) Third Party Claims.......................................44
9.4) Escrow...................................................45
9.5) Set-Off..................................................45
9.6) Waiver of Subrogation....................................45
9.7) Cooperation as to Indemnified Liability..................45
9.8) Determination of Payment.................................46
ARTICLE X TERMINATION.......................................................46
10.1) Termination..............................................46
10.2) Procedure and Effect of Termination......................46
ARTICLE XI ALTERNATIVE DISPUTE RESOLUTION...................................47
11.1) Agreement to Arbitrate...................................47
11.2) Non-Prevailing Party to Pay Fees and Expenses............47
ARTICLE XII OTHER PROVISIONS................................................47
12.1) Further Assurances.......................................47
12.2) Complete Agreement.......................................48
12.3) Survival of Representations, Warranties and Agreements...48
12.4) Waiver, Discharge, Amendment, Etc........................48
12.5) Notices..................................................48
12.6) Public Announcement......................................49
12.7) Expenses.................................................49
12.8) Governing Law............................................49
12.9) Successors and Assigns...................................49
12.10) Titles and Headings; Construction........................49
12.11) Benefit..................................................50
12.12) Counterparts.............................................50
12.13) Confidentiality..........................................50
EXHIBITS:
Exhibit A - Escrow Agreement
Exhibit B - Amended Articles of Incorporation of Merger Subsidiary
Exhibit C - Company Schedule of Exceptions
Exhibit D - Parent Schedule of Exceptions
Exhibit E - Affiliate Letter
Exhibit F - Noncompetition Agreement
Exhibit G - Employment Agreement - Frank Madren
Exhibit G-1 - Employment Agreement - Chuoc Linh
Exhibit G-2 Employment Agreement - Mark Vaughan
Exhibit H - Letter Agreement
Exhibit I - Legal Opinion of Counsel for Company
Exhibit J - Standstill Agreement
Exhibit K - Tax Opinion of Counsel for Company
Exhibit L - Legal Opinion of Counsel for Parent
Exhibit M - Tax Opinion of Counsel for Parent
Exhibit N - Agreement Respecting Certain Costs
Exhibit O - Officer's Certificate of Company
Exhibit P - Officer's Certificate of Parent
Exhibit Q - Agreement of Merger
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT is dated effective November 3, 1999, by and among Waters
Instruments, Inc., a Minnesota corporation ("Parent"), WG Merger Corp., a
California corporation ("Merger Subsidiary"), Garrett Communications, Inc., a
California corporation (the "Company"), and Frank Madren, an individual resident
of California, Christopher Robert, an individual resident of Massachusetts, and
Ross Smith, an individual resident of California (collectively, the
"Indemnifying Shareholders").
WHEREAS, the respective boards of directors of the constituent
companies have approved the merger of the Company with and into Merger
Subsidiary in a forward triangular merger (the "Merger"), with Merger Subsidiary
to be the surviving corporation of the Merger, upon the terms and subject to the
conditions set forth herein; and
WHEREAS, in furtherance of the Merger, and upon the terms and
conditions set forth herein, all common stock of the Company ("Company Common
Stock"), issued and outstanding at the Effective Time (as defined in Section 2.2
hereof), shall be converted into cash and common stock of Parent ("Parent Common
Stock"), and Parent shall assume all outstanding options to purchase shares of
Company Common Stock, as provided in this Agreement; and
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code") and the regulations
promulgated thereunder;
WHEREAS, the Indemnifying Shareholders are the legal and beneficial
owners of approximately 81% of the issued and outstanding Company Common Stock;
and
WHEREAS, the Parties (defined below) entered into a certain Agreement
and Plan of Reorganization dated November 3, 1999, which they desire to amend
and restate in the form of this Agreement with the same effect as if this
Agreement had been executed and delivered on November 3, 1999.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties, covenants and agreements contained herein,
and intending to be legally bound hereby, Parent, Merger Subsidiary, the
Company, and the Indemnifying Shareholders (collectively, the "Parties") hereby
agree as follows:
ARTICLE I
DEFINITIONS
1.1) Specific Definitions. As used in this Agreement, the following
terms shall have the meanings set forth or as referenced below:
"Affiliate" of any entity means any other entity that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, the first entity. Control shall mean owning more
than fifty percent (50%) of the total voting power of the entity.
"Affiliate Letter" shall have the meaning set forth in Section 5.2(a).
"Agreement" means this Agreement and all Exhibits and Schedules hereto.
"Audited Financial Statements" shall have the meaning set forth in
Section 3.7.
"Benefit Arrangements" shall have the meaning set forth in Section
3.12.5.
"CCC" means the California Corporations Code, as amended.
"Certificates" shall have the meaning set forth in Section 2.7.
"Closing" and "Closing Date" shall have the meanings set forth in
Section 8.1.
"Code" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended.
"Company" shall have the meaning set forth in the opening paragraph of
this Agreement.
"Company Common Stock" means common stock of the Company.
"Company Dissenting Shares" means any shares of capital stock of the
Company (i) that are outstanding immediately prior to the Effective Time and
(ii) with respect to which "dissenters' rights" within the meaning of Chapter 13
of the California General Corporation Law have been duly and properly exercised
and perfected in connection with the Merger.
"Company Financial Statements" shall have the meaning set forth in
Section 3.7.
"Company Options" means each outstanding option, warrant, convertible
security or other right to purchase shares of the Company Common Stock.
"Company Products" shall have the meaning set forth in Section 3.20.
"Company Securities" shall have the meaning set forth in Section 3.6.
"Company Shareholders" shall have the meaning set forth in Section
2.3(a).
"Company Systems" shall have the meaning set forth in Section 3.25.
"Conversion Fraction" shall have the meaning set forth in Section
2.5(b).
"Effective Time" shall have the meaning set forth in Section 2.2.
"Employee Plans" means any health care plan or arrangement; life
insurance or other death benefit plan; deferred compensation or other pension or
retirement plan; stock option, bonus or other incentive plan; severance, change
of control or early retirement plan; or other fringe or employee benefit plan or
arrangement; or any employment or consulting contract or executive compensation
agreement; whether the same are written or otherwise, formal or informal,
voluntary or required by law or by the Company's policies or practices,
including, without limitation, any "pension plan" as defined in Section 3(2) of
ERISA which is not a Multi-employer Plan, and any "welfare plan" as defined in
Section 3(1) of ERISA (whether or not any of the foregoing is funded), (i) to
which the Company is a party or by which the Company is bound; (ii) which the
Company has at any time established or maintained for the benefit of or relating
to present or former employees, leased employees, consultants, agents, and/or
their dependents, or directors of the Company; or (iii) with respect to which
the Company has made any payments or contributions.
"Environmental Laws or Regulations" means any one or more of the
following: the Comprehensive Environmental Response Compensation and Liability
Act ("CERCLA") as amended by the Superfund Amendments and Reauthorization Act of
1986 ("SARA"), 42 U.S.C. ss. 9601 et seq.; the Federal Resource Conservation and
Recovery Act of 1976 ("FRCRA"), 42 U.S.C. ss. 6921 et seq.; the Clean Water Act,
33 U.S.C. ss. 1321 et seq.; the Clean Air Act, 42 U.S.C. ss. 7401 et seq.; any
other federal, state, county, municipal, local or other statute, law, ordinance
or regulation which may relate to pesticides, agricultural or industrial
chemicals, wastes, Hazardous Substances (as defined herein), or the environment;
and all regulations promulgated by a regulatory body pursuant to any of the
foregoing statutes, laws, regulations, or ordinances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" shall have the meaning set forth in Section 2.4(a).
"Escrow Agent" shall have the meaning set forth in Section 2.4(a).
"Escrow Agreement" shall have the meaning set forth in Section 2.4(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Exchange Agent" shall have the meaning set forth in Section 2.7(a).
"Form S-4" shall have the meaning set forth in Section 2.12.
"Hazardous Substance" means any hazardous or toxic substances,
materials or wastes, including, but not limited to those substances, materials,
and wastes listed in the United States Department of Transportation's Hazardous
Materials Table (49 CFR Part 172.101) or by the United States Environmental
Protection Agency as hazardous substances (40 CFR Part 302) and amendments
thereto, or such substances, materials and wastes which are or become regulated
under any applicable local, state, or federal law. Hazardous Substances shall
include, but not be limited to: (i) oil, including but not limited to,
petroleum, fuel oil, sludge, oil refuse, and oil mixed with wastes; (ii)
asbestos; (iii) polychlorinated biphenyls (PCBs); (iv) substances designated as
a "hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 USC
ss. 1321 or pursuant to Section 307 of the Clean Water Act, 33 USC ss. 1317; (v)
defined as a "hazardous waste" pursuant to Section 1004 of the Resource
Conservation and Recovery Act, 42 USC ss. 6903, as amended; (vi) defined as a
"hazardous substance" pursuant to Section 101 of the Comprehensive Environmental
Response, Compensation, and Liability Act, 42 USC ss. 9601 et seq., as amended;
(vii) included as a hazardous material, substance or related material in the
Hazardous Materials Transportation Act, as amended, 40 USC ss. 1801, et seq., as
amended; or (viii) listed as a hazardous air pollutant pursuant to the federal
Clean Air Act, 42 USC ss. 7401 et seq., as amended.
"Holdback Shares" shall have the meaning set forth in Section 2.4.
"Indemnifiable Loss" shall have the meaning set forth on Section 9.1.
"Indemnifying Shareholders" shall have the meaning set forth in the
opening paragraph of this Agreement.
"Indemnitees" shall have the meaning set forth in Section 9.1.
"Intellectual Property Rights" shall have the meaning set forth in
Section 3.15.1.
"Interim Financial Statements" shall have the meaning set forth in
Section 3.7.
"IRS" means the United States Internal Revenue Service.
"Liens" shall have the meaning set forth in Section 3.4.
"Material Adverse Effect" shall have the meaning set forth in Section
3.1.
"Merger" shall have the meaning set forth in the first Recital
paragraph of this Agreement.
"Merger Cash" shall have the meaning set forth in Section 2.3(a).
"Merger Consideration" shall have the meaning set forth in Section
2.3(a).
"Merger Shares" shall have the meaning set forth in Section 2.3(a).
"Merger Subsidiary" shall have the meaning set forth in the opening
paragraph of this Agreement.
"Multi-employer Plan" shall have the meaning set forth in Section 3(37)
of ERISA.
"Parent" shall have the meaning set forth in the opening paragraph of
this Agreement.
"Parent Common Stock" means fully paid and nonassessable common stock
of Parent, par value $.10 per share.
"Parent Closing Price Per Share" means the closing sale price of Parent
Common Stock as quoted on the Nasdaq National Market on the Closing Date, as
reported in the Wall Street Journal.
"Parent Financial Statements" shall have the meaning set forth in
Section 4.6.
"Parties" means the Parent, Merger Subsidiary, the Company and the
Indemnifying Shareholders, unless otherwise specified.
"Pension Plans" shall have the meaning set forth in Section 3.12.1.
"Permits" shall have the meaning set forth in Section 3.13.
"Prevailing Party" shall have the meaning set forth in Section 11.2.
"Product Liability" means any liability, claim or expense (including
attorneys' fees) arising in whole or in part out of a breach of any product
warranty (whether express or implied), strict liability in tort, negligent
manufacture of product, negligent provision of services, product recall, or any
other liability arising from the manufacturing, packaging, labeling (including
instructions for use), or sale of products.
"Prospectus/Proxy Statement" shall have the meaning set forth in
Section 2.12.
"SEC" means the Securities and Exchange Commission, or any other
Federal agency at the time administering the Securities Act.
"SEC Filings" shall have the meaning set forth in Section 4.6.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Stock Option Plans" shall have the meaning set forth in Section 3.6.
"Survival Period" shall have the meaning set forth in Section 12.3.
"Surviving Corporation" shall have the meaning set forth in Section
2.1.
"Surviving Corporation Common Stock" shall have the meaning set forth
in Section 2.4(c).
"Taxes" means all taxes, penalties, interest, fines, duties,
withholdings, assessments, and charges assessed or imposed by any federal,
state, local or foreign governmental authority. "Tax" shall also include any
liability arising as a result of being (or ceasing to be) a member of any
affiliated, consolidated, combined, or unitary group as well as any liability
under any tax allocation, tax sharing, tax indemnity or similar agreement.
"Withheld Shares" shall have the meaning set forth in Section 2.4(c).
"WNS" means Waters Network Systems, a business unit of the Parent
created late in fiscal year 1995, through which the Parent markets and sells a
wide range of connectivity products for Token-Ring and Ethernet local area
networks (LANs).
"Year 2000 Compliant" shall have the meaning set forth in Section 3.25.
1.2) Definitional Provisions.
(a) Capitalized terms defined in a particular section of this
Agreement shall have the same definition throughout this Agreement.
(b) The words "hereof," "herein," and "hereunder" and words of
similar import, when used in this Agreement, shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement.
(c) Terms defined in the singular shall have a comparable
meaning when used in the plural, and vice-versa.
(d) References to the "knowledge" of the Company shall refer
to the collective actual knowledge of the Company's executive officers
and members of the Company's board of directors.
(e) To the best of the Company's knowledge means the knowledge
a reasonable person would possess in the performance of such person's
duties.
(f) References to an "Exhibit" or to a "Schedule" are, unless
otherwise specified, to one of the Exhibits or Schedules attached to or
referenced in this Agreement, and references to an "Article" or a
"Section" are, unless otherwise specified, to one of the Articles or
Sections of this Agreement.
(g) The term "person" includes any individual, partnership,
joint venture, corporation, limited liability company, trust,
unincorporated organization or government or any department or agency
thereof.
ARTICLE II
THE MERGER; CONVERSION OF SHARES
2.1) The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time, the Company shall be merged with and into Merger
Subsidiary in accordance with the CCC and the other applicable laws of the State
of California whereupon the separate corporate existence of the Company shall
cease and Merger Subsidiary shall continue as the surviving corporation (the
"Surviving Corporation"). From and after the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises and
be subject to all the restrictions, disabilities and duties of the Company and
Merger Subsidiary, all as more fully described by the CCC.
2.2) Effective Time. As soon as practicable after each of the
conditions set forth in Article VI and Article VII has been satisfied or waived,
the Company and Merger Subsidiary shall file, or cause to be filed, with the
Secretary of State of the State of California, the agreement of merger for the
Merger required by, and executed in accordance with, the applicable provisions
of the CCC and the other applicable laws of California, attached as Exhibit Q
hereto (the "Agreement of Merger"). The Merger shall become effective at the
time such filing is made or, if agreed to by Parent and the Company, such later
time or date set forth in the Agreement of Merger (the "Effective Time").
2.3) Conversion of Company Common Stock.
(a) At the Effective Time, by virtue of the Merger and without
any action on the part of any holder thereof, all shares of Company
Common Stock issued and outstanding immediately prior to the Effective
Time shall, subject to Subsection (b) below, be converted, subject to
the provisions of Section 2.7(f) regarding the payment of cash in lieu
of fractional shares of common stock and subject to adjustment in the
event there are Company Dissenting Shares as described below, into (i)
Three Hundred Seventy-Five Thousand (375,000) shares of Parent Common
Stock (the "Merger Shares"), and Two Million Two Hundred Fifty Thousand
Dollars ($2,250,000 in cash (the "Merger Cash"). The Merger Cash shall
be decreased by Two Dollars ($2.00) for each Company Dissenting Share.
The Merger Cash, as adjusted, and the Merger Shares are referred to as
the "Merger Consideration."
Simultaneous with the execution of this Agreement, Parent,
Merger Subsidiary, the Company and Frank Madren are entering into an
Agreement Respecting Certain Costs (the "Costs Agreement") pursuant to
Section 6.15 hereof.
If the aggregate "Covered Costs" (defined in the Costs
Agreement) as finally determined is less than One Million Dollars
($1,000,000), the difference between One Million Dollars ($1,000,000)
and the aggregate Covered Costs shall be additional Merger
Consideration (the "Additional Merger Consideration") and shall be
divided among and paid to the persons who are shareholders of record of
the Company at the Effective Time (the "Company Shareholders") as such
Company Shareholders shall agree. Such payment, if any, shall be due
and payable only after the aggregate Covered Costs have been finally
determined and shall be paid in the form of fifty percent (50%) in
shares of Parent Company Stock and fifty percent (50%) in cash. For the
purpose of the preceding sentence, Parent Company Stock shall be valued
at the closing sale price of Parent Common Stock as quoted on the
Nasdaq National Market as reported in the Wall Street Journal on the
date the aggregate Covered Costs are finally determined.
(b) Immediately following the Effective Time, the Merger
Consideration, other than the additional Merger Consideration arising
under the Costs Agreement, if any, shall be divided among the Company
Shareholders excluding shareholders holding Company Dissenting Shares,
as such Company Shareholders shall agree.
(c) If, prior to the Merger, Parent or Company recapitalizes
through a stock split of its outstanding shares into a greater number,
or a combination of its outstanding shares into a lesser number,
reorganizes, reclassifies or otherwise changes its outstanding shares
into the same or a different number of shares of other classes (other
than through a stock split or combination of shares provided for in the
previous clause), or declares a dividend on its outstanding shares
payable in shares or securities convertible into shares, the number of
shares of Parent Common Stock into which the Company shares are to be
converted will be adjusted appropriately so as to maintain the
proportionate interests of the holders of Company Common Stock and the
holders of Parent Common Stock.
2.4) Holdback Shares.
(a) Parent shall establish and maintain an escrow account (the
"Escrow Account") comprised of fifteen percent (15%) of the Merger
Shares payable to the Indemnifying Shareholders (the "Holdback Shares")
and shall designate and appoint as escrow agent Resource Trust Bank or
such other third party escrow agent that is mutually and reasonably
acceptable to Parent and the Indemnifying Shareholders (the "Escrow
Agent") to serve in accordance with the Escrow Agreement attached as
Exhibit A hereto (the "Escrow Agreement") to be entered into among
Parent, the Company, Indemnifying Shareholders and Escrow Agent on or
before the Closing Date. Such escrow of the Holdback Shares shall be
maintained for the sole purpose of satisfying claims brought pursuant
to Article IX and for the duration of the Survival Period (as defined
in Section 12.3).
(b) Upon expiration of the Survival Period, and subject to the
terms of Article IX and the Escrow Agreement, the Escrow Agent shall
deliver to the Indemnifying Shareholders a certificate representing the
number of shares of Parent Common Stock comprising the Holdback Shares,
and accrued dividends, if any.
(c) If an Indemnitee shall have asserted an Indemnifiable Loss
in accordance with Article IX and the Escrow Agreement, and such
Indemnifiable Loss is pending or unresolved at the time of the
expiration of the Survival Period, the Escrow Agent shall, subject to
the terms of the Escrow Agreement, withhold from delivery until such
matter is resolved such number of Holdback Shares, determined by
reference to the value provided below as shall equal the full amount of
such pending or unresolved Indemnifiable Loss to the extent that such
amount does not exceed the aggregate number of Holdback Shares as set
forth in Section 2.4(a) (such withheld Holdback Shares are hereinafter
referred to as the "Withheld Shares"). If it is finally determined that
Parent is entitled to recovery on account of such Indemnifiable Loss,
the amount due and payable with respect to such Indemnifiable Loss
shall be offset against the Withheld Shares and the remainder of such
Withheld Shares, if any, shall be delivered to the Indemnifying
Shareholders pursuant to this Agreement, without interest, but
including any applicable dividends. For purposes of this subsection,
each Holdback Share that is a Withheld Share shall be deemed to have a
value (and such valuation shall apply throughout the duration of the
Survival Period) equal to the Parent Closing Price Per Share subject to
the Indemnifying Shareholders' election, individually or collectively,
to pay cash in lieu of forfeiture of Holdback Shares pursuant to
Section 9.8 herein. The value of any shares of Parent Common Stock
ultimately retained by Parent hereunder shall be treated for purposes
of this Agreement as if the Indemnifying Shareholders had elected to
discharge the Indemnifying Shareholders' obligations by paying cash in
lieu of forfeiture of Holdback Shares.
(d) The Indemnifying Shareholders' right to receive Holdback
Shares upon expiration of the Survival Period is an integral part of
the consideration in the Merger, and shall not be transferable or
assignable.
2.5) Other Company Shares and Stock Options.
(a) At the Effective Time, by virtue of the Merger and without
any action on the part of any holder thereof, each outstanding share,
if any, of any other class of capital stock of the Company (other than
Company Common Stock) shall be canceled without payment of any
consideration therefor and without any conversion thereof.
(b) Each option to purchase shares of Company Common Stock
that is outstanding at the Effective Time (a "Company Option") shall,
by virtue of the Merger and without any action on the part of the
holder thereof, be assumed by Parent in such manner that Parent (i) is
a corporation "assuming a stock option in a transaction to which
Section 424(a) applies" within the meaning of Section 424 of the Code
and the regulations thereunder or (ii) to the extent that Section 424
of the Code does not apply to any such Company Option, would be such a
corporation were Section 424 of the Code applicable to such Company
Option. From and after the Effective Time, all references to the
Company in the Company Options shall be deemed to refer to Parent
(other than for purposes of determining whether there has been a change
in control of the Company). The Company Options assumed by Parent shall
be exercisable upon the same terms and conditions as under the Company
Options (including provisions thereof, if any, relating to the
acceleration of vesting upon a change in control of the Company) except
that (i) such Company Options shall entitle the holder to purchase from
Parent the number of shares of Parent Common Stock equal to one (1)
share of Parent Common Stock for every three (3) shares of Company
Common Stock the holder is entitled to purchase under such holder's
Company Options immediately prior to the Effective Time (the
"Conversion Fraction"), and (ii) the option exercise price per share of
Parent Common Stock shall be an amount (rounded to the nearest full
cent) equal to the option exercise price per share of Company Common
Stock in effect immediately prior to the Effective Time divided by the
Conversion Fraction; provided, however, that in the case of any Company
Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code ("Incentive Stock
Options"), the option price, the number of shares purchasable pursuant
to such option and the terms and conditions of exercise of such options
shall be determined in order to comply with Section 424(a) of the Code.
The shares of Company Common Stock received by an optionee upon any
exercise between November 3, 1999, and through the Closing Date shall
be exchanged for shares of Parent Common Stock pursuant to the
Conversion Fraction and in accordance with Parent's obligation to
assume all Company Options as described in this Section 2.5. For the
purposes of this Section 2.5, any option to purchase shares of Company
Common Stock exercised between November 3, 1999, and through the
Closing Date, shall be deemed to be a Company Option.
As promptly as practicable after the Effective Time, Parent
shall issue to each holder of a Company Option a written instrument
informing such holder of the assumption by Parent of such Company
Option. Parent will use its best efforts to cause the Parent Common
Stock issued upon exercise of the assumed Company Options to be
registered on SEC Form S-8 as soon as practicable following the
Effective Time, will use its best efforts to maintain the effectiveness
of such registration statement as long as such assumed Company Options
remain outstanding and will reserve a sufficient number of shares of
Parent Common Stock for issuance upon exercise thereof.
(c) Each share of Company Common Stock that is held in the
treasury of the Company or which is then owned beneficially or of
record by Parent, Merger Subsidiary or any direct subsidiary of Parent
or the Company shall be canceled without payment of any consideration
therefor and without any conversion thereof.
(d) Parent agrees that for the purposes of Section 2.5(b) of
this Agreement, unvested Company Options of Ross Smith, Jo Ann Madren,
Percy Kawas and Robert Novak, consisting of Twenty-Three Thousand Seven
Hundred Fifty (23,750) shares shall become vested as of the Closing
Date.
2.6) Merger Subsidiary Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder thereof, each share of
common stock of Merger Subsidiary issued and outstanding immediately prior to
the Effective Time shall remain issued and outstanding and constitute one share
of the common stock of the Surviving Corporation (the "Surviving Corporation
Common Stock").
2.7) Exchange of Company Common Stock.
(a) Within three (3) business days after the Effective Time,
Parent shall cause Parent's stock transfer agent or such other person
as Parent may appoint to act as exchange agent (the "Exchange Agent")
to mail or otherwise deliver to the Company, for distribution to the
Company Shareholders a form letter of transmittal (which shall specify
that delivery shall be effective, and risk of loss and title to the
certificate(s) representing Company Common Stock ("Certificate(s)")
shall pass, only upon delivery of the Certificate(s) to the Exchange
Agent or to Parent or Merger Subsidiary) and instructions for the
Company Shareholders in effecting the surrender of the Certificates in
exchange for Merger Shares and/or Merger Cash.
(b) Promptly after the Effective Time, the Exchange Agent
shall deliver to holders of Company Common Stock, upon surrender to the
Exchange Agent of one or more Certificates for cancellation, together
with a duly-executed letter of transmittal, (i) one or more
certificates representing the number of whole Merger Shares into which
all or a portion of the shares represented by the Certificate(s) shall
have been converted pursuant to Section 2.3, and/or (ii) a bank check
in the amount of cash representing the sum of (A) such holder's share
of the Merger Cash, as determined by the Company Shareholders, plus (B)
payment in lieu of any fractional Merger Share pursuant to Section
2.7(f) (relating to fractional shares).
If there has been a transfer of ownership of Company Common
Stock that is not registered in the transfer records of the Company, it
shall be a condition to the issuance of Merger Shares and Merger Cash
that the Certificate(s) so surrendered shall be properly endorsed or be
otherwise in proper form for transfer and that such transferee shall
(i) pay to the Exchange Agent any transfer or other taxes required, or
(ii) establish to the satisfaction of the Exchange Agent that such tax
has been paid or is not payable.
(c) Holders of Company Common Stock shall be entitled to any
dividends pertaining to the Merger Shares received in exchange therefor
that become payable to holders of record of Parent Common Stock as of a
record date that follows the Effective Time, which dividends shall be
delivered to the Company Shareholders after they have surrendered their
Certificate(s) for exchange.
(d) All Merger Shares, Merger Cash, and cash paid in lieu of
fractional shares pursuant to Section 2.7(f) below, shall be deemed to
have been issued and/or paid in full satisfaction of all rights
pertaining to such shares of Company Common Stock.
(e) After the Effective Time, there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates representing such shares are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided in this
Article II. As of the Effective Time, the holders of Certificates
representing shares of Company Common Stock shall cease to have any
rights as shareholders of the Company, except such rights, if any, as
they may have pursuant to the CCC. Except as provided above, until such
Certificates are surrendered for exchange, each such Certificate shall,
after the Effective Time, represent for all purposes only the right to
receive the Merger Shares and/or Merger Cash into which the shares of
Company Common Stock represented by such Certificate were converted
pursuant to Section 2.3.
(f) No fractional shares of Parent Common Stock and no
certificates or scrip therefor, or other evidence of ownership thereof,
shall be issued upon the surrender for exchange of Certificates, no
dividend or distribution of Parent shall relate to any fractional
share, and such fractional share interests shall not entitle the owner
thereof to vote or to any rights of a shareholder of Parent. All
fractional shares of Parent Common Stock to which a holder of Company
Common Stock would otherwise be entitled shall be aggregated. If a
fractional share results from such aggregation, then (in lieu of such
fractional share) the Exchange Agent shall pay to each holder of shares
of Company Common Stock who otherwise would be entitled to receive such
fractional share of Parent Common Stock an amount of cash (without
interest) determined by multiplying Six Dollars ($6.00) by the
fractional share of Parent Common Stock to which such holder would
otherwise be entitled. Parent shall make available to the Exchange
Agent any cash necessary for this purpose in consideration of the
cancellation of such fractional shares.
(g) In the event any Certificates shall have been lost, stolen
or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed Certificate, upon the making of an affidavit of
that fact by the holder thereof, such Merger Shares, Merger Cash,
and/or cash for fractional shares, if any, as may be required pursuant
to this Article II; provided, however, that Parent may, in its
discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificate to
deliver a bond in such sum as Parent may direct as indemnity against
any claim that may be made against Parent or the Exchange Agent with
respect to the Certificate alleged to have been lost, stolen or
destroyed.
2.8) Articles of Incorporation of the Surviving Corporation. The
Articles of Incorporation of Merger Subsidiary, as in effect immediately prior
to the Effective Time, shall be amended to read as set forth on Exhibit B to
this Agreement and shall be the Articles of Incorporation of the Surviving
Corporation.
2.9) Bylaws of the Surviving Corporation. The Bylaws of Merger
Subsidiary, as in effect immediately prior to the Effective Time, shall be the
Bylaws of the Surviving Corporation until thereafter amended in accordance with
applicable law.
2.10) Directors and Officers of the Surviving Corporation. The
directors and officers of Merger Subsidiary immediately prior to the Effective
Time shall be the directors and officers, respectively, of the Surviving
Corporation until their respective successors shall be duly elected and
qualified as provided for in this Agreement.
2.11) Tax Free Reorganization. The Parties intend to adopt this
Agreement as a tax-free plan of reorganization and to consummate the Merger
which is a "statutory merger" as described in Section 368(a)(1)(A) of the Code
by virtue of the provisions of Section 368(a)(2)(D) of the Code. The Parties
shall not take a position on any tax returns inconsistent with this Section
2.11, and each agrees not to take any action on or prior to the Effective Time
that causes the Merger not to qualify as a reorganization under Section 368(a)
of the Code. In addition, Parent represents now, and as of the Closing Date,
that it presently intends to continue the Company's historic business or use a
significant portion of the Company's business assets in a business.
2.12) Registration on Form S-4. As promptly as practicable after the
date of this Agreement, Parent and the Company shall prepare and file with the
SEC a Form S-4 registration statement (the "Form S-4") together with the
prospectus/proxy statement included therein (the "Prospectus/Proxy Statement")
and any other documents required by the Securities Act or the Exchange Act in
connection with the Merger. Each of Parent and the Company shall use all
reasonable efforts to have the Form S-4 declared effective under the Securities
Act as promptly as practicable after such filing. Parent shall also take any
action required to be taken under any applicable state securities or "blue sky"
laws in connection with the issuance of Parent Common Stock in the Merger. The
Company shall furnish to Parent all information concerning the Company and the
Company Shareholders as may be reasonably requested in connection with any
action contemplated by this Section 2.12.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE INDEMNIFYING SHAREHOLDERS
Except as otherwise disclosed in the Schedule of Exceptions attached to
this Agreement as Exhibit C, the Company and the Indemnifying Shareholders
represent and warrant to Parent as of the date hereof as follows, and
acknowledge that the same shall be deemed to have been relied upon by Parent,
and shall survive the Closing of this transaction as provided in Section 12.3 of
this Agreement.
3.1) Corporate Existence and Power. The Company and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and has all
corporate powers required to carry on its business as now conducted or as
currently proposed. Schedule 3.1 lists all of the Company's subsidiaries and
describes in detail any interest, direct or indirect, of the Company in any
corporation, partnership, joint venture or other business entity. The Company
and each of its subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where the failure to be
so qualified would not, individually or in the aggregate, have a material
adverse effect on the business, results of operations, financial condition or
prospects of the Company and its subsidiaries taken as a whole (a "Material
Adverse Effect"). The Company has delivered to Parent true and complete copies
of the Company and each of its subsidiaries' Articles of Incorporation and
Bylaws, as currently in effect. The Company does not, directly or indirectly,
own or have the power to vote, or to exercise a controlling influence with
respect to, any securities of any class of any person, the holders of which
class are entitled to vote for the election of directors (or persons serving
similar functions) of such person.
3.2) Corporate Authorization. The Company has full corporate power and
authority to execute and deliver this Agreement and subject to the Company
Shareholders' approval to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Company's Board of Directors and by all other necessary corporate action on
their part.
3.3) Governmental Authorization: Consents.
3.3.1 The execution, delivery and performance by the Company
of this Agreement and the consummation of the Merger by the Company require no
action by or in respect of, or filing with, any governmental body, agency,
official or authority other than (i) the filing of Agreement of Merger in
accordance with the CCC and the other applicable laws of the State of
California; (ii) compliance with any applicable requirements of the Securities
Act and the Exchange Act; (iii) compliance with any applicable state securities
or Blue Sky laws; and (iv) the filing by the Company of a Request for Tax
Clearance with the Franchise Tax Board of the State of California (the
"Franchise Tax Board") and the issuance of a Tax Clearance Certificate by the
Franchise Tax Board.
3.3.2 No consent, approval, waiver or other action by any
person under any contract, agreement, indenture, lease, instrument or other
document to which the Company is a party or by which it is bound is required or
necessary for the execution, delivery and performance of this Agreement by the
Company or the consummation of the transactions contemplated hereby.
3.4) Non-Contravention. The execution, delivery and performance by the
Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby do not and shall not (i) contravene or
constitute a default under or give rise to a penalty or right of termination,
cancellation or acceleration of any right or obligation of the Company or to a
loss of any benefit to which the Company is entitled under (A) any provision of
applicable law or regulation (assuming compliance with the matters referred to
in Section 3.3); (B) the Articles of Incorporation or Bylaws of the Company; (C)
any material agreement, contract, plant lease, arrangement or commitment; or (D)
any judgment, injunction, order, decree, administrative interpretation, award or
other instrument binding upon the Company, or (ii) result in the creation or
imposition of any Lien on any asset of the Company. For purposes of this
Agreement, "Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest, restriction on transfer or encumbrance of any kind.
3.5) Binding Effect. Subject to receipt of requisite approval of the
Company Shareholders, this Agreement constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms, except to the extent that the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and by principles of
equity regarding the availability of remedies.
3.6) Capitalization. The authorized capital stock of the Company
consists of Ten Million (10,000,000) shares of the Company Common Stock. As of
September 30, 1999, (i) Two Million Two Hundred Forty-Six Thousand Two Hundred
Fifty (2,246,250) shares of the Company Common Stock were outstanding, and (ii)
employee and director stock options to purchase an aggregate of Three Hundred
Fifty Thousand (350,000) shares were outstanding. All outstanding shares of the
Company Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable. Except for the plans referenced in Schedule 3.6
(collectively, the "Stock Option Plans"), no plans, agreements or other
arrangements pursuant to which any options, warrants or other rights to acquire
the Company Common Stock are outstanding. True and complete copies of the Stock
Option Plans have been delivered to Parent. Except as set forth in this Section
and on Schedule 3.6, there are outstanding (i) no shares of capital stock or
other voting securities of the Company, (ii) no securities of the Company
convertible into or exchangeable for shares of capital stock or voting
securities of the Company, and (iii) no options or other rights to acquire from
the Company, and no obligation of the Company to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of the Company (collectively, the "Company
Securities"). There are no outstanding obligations of the Company to repurchase,
redeem or otherwise acquire any Company Securities. There are no voting
agreements, rights of first refusal or other restrictions (other than
restrictions on transfer resulting from applicable federal and state securities
laws) applicable to any of the Company's outstanding securities.
3.7) Financial Statements. The Company has delivered to Parent its
audited financial statements for fiscal years ended December 31, 1997 and 1998
(the "Audited Financial Statements") and all interim quarterly financial
statements for fiscal year to date 1999 (the "Interim Financial Statements")
(collectively, the "Company Financial Statements"). The Company Financial
Statements (i) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto); and (ii) fairly present the
financial position of the Company as of the dates thereof and the income and
cash flows for the periods then ended (subject, in the case of the Interim
Financial Statements, to normal year-end adjustments).
3.8) Material Events. Except as disclosed in Schedule 3.8 or as
otherwise set forth in the Company Financial Statements, after December 31, 1998
(unless otherwise set forth below), there has not been:
3.8.1 Any Material Adverse Effect;
3.8.2 Discharge or satisfaction of any Lien, other than those
then required to be discharged or satisfied, or payment of any obligation or
liability, absolute, accrued, contingent or otherwise, whether due or to become
due, other than current liabilities shown on the Company Financial Statements
and current liabilities incurred since December 31, 1998, in the ordinary course
of business and consistent with its prior practice;
3.8.3 Any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of capital stock of
the Company, or any repurchase, redemption or other acquisition by the Company
of any outstanding shares of capital stock or other Company Securities;
3.8.4 Any alteration in any material term of any
outstanding security of the Company;
3.8.5 Any damage, destruction or other casualty loss (whether
or not covered by insurance) affecting the business or assets of the Company
which, in the aggregate, has had or might reasonably be expected to have, a
Material Adverse Effect;
3.8.6 Any change in any method of accounting or accounting
practice by the Company, except for any such change required by reason of a
concurrent change in generally accepted accounting principles;
3.8.7 Any labor dispute, other than routine individual
grievances, or, to the best of the Company's knowledge, any activity or
proceeding by a labor union or representative thereof to organize any employees
of the Company or any lockouts, strikes, slowdowns, work stoppages or threats
thereof by or with respect to such employees;
3.8.8 Any transaction or commitment made by the Company
relating to its assets or business (including the acquisition or disposition of
any assets), cancellation or compromise of any debt or claim, or waiver or
release of any right or any relinquishment of any contract or other right
material to the Company taken as a whole, other than transactions and
commitments in the ordinary course of business or those contemplated by this
Agreement;
3.8.9 Any (i) incurrence, assumption or guarantee by the
Company of any indebtedness other than in the ordinary course of business in
amounts and on terms consistent with past practices, (ii) issuance or sale of
any securities convertible into or exchangeable for debt securities of the
Company, or (iii) issuance or sale of options or other rights to acquire from
the Company, directly or indirectly, debt securities of the Company or any
securities convertible into or exchangeable for any such debt securities;
3.8.10 Any creation or assumption of any Lien by the Company
on any asset of the Company other than any Liens which, in the aggregate, would
not have a Material Adverse Effect;
3.8.11 Any grant of any severance or termination pay to any
officer, employee or director of the Company, any entering into of any
employment, deferred compensation or other similar agreement with any officer,
employee or director of the Company, any increase in benefits payable under any
existing severance or termination pay policies or employment agreements, or any
increase in compensation, bonus or other benefits payable to officers, directors
or employees of the Company, other than any grants or increases in the ordinary
course of business consistent with past practice;
3.8.12 Any acceleration of vesting provisions of outstanding
options and shares granted under the Company's Stock Option Plans, except
pursuant to the terms of such outstanding options and plans or as contemplated
by this Agreement;
3.8.13 Any notice or threat of termination of any contract
(including without limitation, any distributorship agreement), lease or other
agreement;
3.8.14 Any transfer or grant of any rights with respect to the
settlement, breach or infringement of any United States or foreign license,
patent, copyright, trademark, trade name, invention or similar rights, or
modification of any existing rights with respect thereto;
3.8.15 Any direct or indirect payments (other than
compensation paid in the ordinary course of the Company's business), or any
material change in the rate of compensation, commission, bonus or other direct
or indirect remuneration payable, or paid or agreed or orally promised to pay,
conditionally or otherwise, to any current or former shareholder, director,
officer, employee, salesperson, distributor or agent;
3.8.16 Any material increase or decrease in the quantity of
items of inventory not consistent with the Company's prior practice and prudent
business practices prevailing in the industry, or any purchase commitment in
excess of the normal, ordinary and usual requirements of the Company's business,
or any change in the Company's selling, pricing, advertising or personnel
practices inconsistent with its prior practice;
3.8.17 Any agreement or any commitment to take any type of
action described in Sections 3.8.1 through 3.8.17 above.
3.9) Title to Properties; Liens. The Company owns no real property
(except for leasehold interests) in connection with its business or otherwise.
The Company has good and marketable title to all of its assets material to the
business, results of operation, financial condition or prospects of the Company,
subject, in each case, only to (i) statutory Liens not delinquent or the
validity of which is being contested in good faith by appropriate proceedings,
(ii) Liens disclosed or reflected in the Company Financial Statements, (iii)
Liens for taxes not yet delinquent or the validity of which is being contested
in good faith by appropriate proceedings, and (iv) Liens and imperfections of
title and encumbrances, if any, which, individually or in the aggregate, do not
have a Material Adverse Effect. Except as set forth in Schedule 3.9, no lender
or any other person or entity has or shall have any recourse against the Company
as a result of the Company vacating and abandoning to such entity title and
possession of any of its facilities or property.
3.10) Litigation. Except as set forth in Schedule 3.10, there is no
action, suit, proceeding or, to the best of the Company's knowledge, any
investigation pending against, or, to the best of the Company's knowledge,
threatened against or affecting, the Company or any of its respective properties
before any court or arbitrator or any governmental body, agency or official.
None of the actions, suits, claims, proceedings or investigations set forth in
Schedule 3.10 (except as specifically stated thereon), individually or together
with any other, shall have a Material Adverse Effect or shall result in any
order, judgment, injunction, award or decree of any court, governmental or
regulatory body or arbitration tribunal that is not adequately reserved against
on the Company Financial Statements. The matters set forth in Schedule 3.10
include all trademark infringement or other intellectual property claims, and
all Product Liability claims or claims related to Company Products (as defined
in Section 3.20) sold or purportedly sold by the Company, against or involving
the Company and any products or product lines the Company sells or for which it
acts as a distributor or manufacturer's representative. To the best of the
Company's knowledge, Product Liability claims against the Company are covered by
insurance, subject to applicable deductibles. There are no actions, suits or
claims or legal, administrative or arbitration proceedings pending or threatened
that would give rise to any right of indemnification on the part of any director
or officer of the Company, or the heirs, executors or administrators of such
director or officer, against the Company or any successor to the business of the
Company.
3.11) Taxes. Except as set forth in Schedule 3.11, to the best of the
Company`s knowledge, the statute of limitations for the assessment of federal
income taxes has expired for all federal income tax returns of the Company or
its predecessor through the fiscal year ended December 31, 1995. As of the date
hereof, except as set forth in Schedule 3.11, the Company is not currently being
audited by any tax authority. To the best of the Company's knowledge, the
Company has filed all returns for Taxes (defined below) that it is required to
file through the date hereof, and shall, on or before the Effective Time,
prepare and file, in a manner consistent with prior years, all returns for Taxes
that it is required to file on or before the Effective Time. To the best of the
Company's knowledge, each of the federal, state, and local income tax returns
heretofore filed by the Company reflects the amounts of all items of income,
deduction, gain, loss, or credit required to be reported thereon. The Company
has timely paid or made provision for all Taxes that have been shown as due and
payable on the returns that have been filed. The Company has made or shall make
provision for all Taxes payable for any periods that end before the Effective
Time for which no returns have yet been filed and for any periods that begin
before the Effective Time and end after the Effective Time to the extent such
Taxes are attributable to the portion of any such period ending at the Effective
Time. The charges, accruals and reserves for taxes reflected on the books of the
Company are adequate to cover the Tax liabilities accruing or payable by the
Company in respect of periods prior to the Effective Time. The Company is not
delinquent in the payment of any Taxes, nor has the Company requested any
extension of time within which to file or send any return, which return has not
since been filed or sent. Except as disclosed in Schedule 3.11, no deficiency
for any Taxes has been proposed, asserted or assessed in writing against the
Company and the Company does not know of any other unassessed Tax deficiency
threatened or proposed against the Company. Except as disclosed in Schedule
3.11, the Company has not been granted any extension of the limitation period
applicable to any Tax claims. The Company is not, nor has the Company been, a
party to any tax sharing agreement with any corporation. Schedule 3.11 sets
forth all federal tax elections under the Code that are or will be in effect
with respect to any tax year of the Company, including without limitation the
tax year ended December 31, 1998, and the partial year ending at the Effective
Time. "Tax" means with respect to any person (i) any net income, gross income,
gross receipts, sales, use, ad valorem, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profit tax, custom duty or other tax, governmental fee, or
other like assessment or charge of any kind whatsoever, together with any
interest and any penalty, addition to tax or additional amount imposed by any
taxing authority (domestic or foreign) on such person and (ii) any liability of
the Company for the payment of any amount of the type described in the
immediately preceding clause (i) as a result of being a member of an affiliated
or combined group, or as a result of any spin off, distribution or other
reorganization related to the disposition of any assets or business of the
Company. The Company has not, for the 5-year period preceding the Effective
Time, been a United States real property holding corporation within the meaning
of Section 897(c) (2) of the Code. The Company has heretofore delivered to
Parent a properly executed FIRPTA exemption certificate which meets the
requirements of Section 1.1445-2 of the Treasury Regulations.
3.12) ERISA.
3.12.1 Schedule 3.12 sets forth a list identifying each
"employee benefit plan", as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974 ("ERISA"), which is or was subject to any provision
of ERISA and with respect to which the Company or any affiliate (as defined
below) has any direct or indirect, fixed or contingent liability as of the
Effective Time. Copies of such plans (and, if applicable, related trust
agreements) and all written amendments thereto, summary plan descriptions
thereof and any material written employee communications with respect to them
have been made available to Parent, together with the three most recent annual
reports (Form 5500 including, if applicable, Schedule B thereto) and any annual
accounting of plan assets prepared in connection with any such plan. For
purposes of this Section, "affiliate" of any person means any other person
which, together with the Company, is treated as a single employer under Section
414 of the Code. The only Employee Plans which individually or collectively
would constitute an "employee pension benefit plan" as defined in Section 3(2)
of ERISA (the "Pension Plans") are identified as such in the list referred to
above. Except as set forth in Schedule 3.12, neither the Company nor any
affiliate has terminated or caused to be terminated in whole or in part or
merged any Employee Plan. The Company has provided Parent with complete age,
salary, service and related data as of April 30, 1999 for employees and former
employees of the Company and any affiliate covered as of the Effective Time
under the Pension Plans.
3.12.2 No Employee Plan constitutes a "multi-employer plan,"
as defined in Section 3(37) of ERISA (a "Multi-employer Plan"); there are no
reserves, assets, surpluses or prepaid premiums under any Employee Plan which is
a welfare plan as defined in ERISA Section 3(1); no Employee Plan is subject to
Title IV of ERISA and there are no unfunded benefit obligations that are not
subject to United States law which are not accounted for by reserves shown on
the Company Financial Statements and established under generally accepted
accounting principles or otherwise noted on such Company Financial Statements.
Neither the Company nor, to the Company's knowledge, any disqualified person, as
defined in Section 4975 of the Code, has engaged in any "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of the Code,
with respect to any Employee Plan which is covered by Title I of ERISA,
excluding transactions effected pursuant to a statutory or administrative
exemption. Nothing done or omitted to be done and no transaction or holding of
any asset under or in connection with any Employee Plan has or shall make the
Company or any affiliate, officer or director of the Company subject to any
liability under Title I of ERISA or liable for any tax pursuant to Section 4975
of the Code.
3.12.3 Each Employee Plan which is intended to be qualified
under Section 401(a) of the Code is or was the subject of a favorable Internal
Revenue Service determination with respect to such qualification, and the
Company has made available to Parent copies of the most recent such
determination letters, and nothing has occurred since the date thereof that
would have an adverse effect on such qualification. There are no accrued
liabilities under any Employee Plan which have not been fully provided for by
contributions to such Employee Plans or which are not provided for on the
Company Financial Statements. Each Employee Plan has been maintained in
compliance in all material respects with its terms and with the requirements
prescribed, by any and all statutes, orders, rules and regulations, including
but not limited to ERISA and the Code, which are applicable to such Employee
Plans. Other than for claims in the ordinary course for benefits under the
Employee Plans, there are no suits, actions, claims or proceedings pending or,
to the Company's knowledge, threatened which would result in any material
liability with respect to any such Employee Plan.
3.12.4 Except as set forth on Schedule 3.12 there is no
contract, agreement, plan or arrangement covering any employee or former
employee of the Company or any affiliate that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to the terms of Section 280G or Section 162(a)(1) of the Code.
3.12.5 Schedule 3.12 sets forth a list of each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits or
for deferred compensation, profit sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits in effect at the Effective Time which (i) is
not an Employee Plan (as defined in Section 3.12.1), (ii) is entered into,
maintained or contributed to, as the case may be, by the Company or any of its
subsidiaries and (iii) covers any employee or former employee of the Company or
any of its subsidiaries. Such contracts, plans and arrangements as are described
above, copies or descriptions of all of which have been made available to
Parent, are hereinafter referred to collectively as the "Benefit Arrangements."
Each Benefit Arrangement has been maintained in substantial compliance with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations which are applicable to such Benefit Arrangement. Except
as set forth in Schedule 3.12, the Company has no liability with respect to
post-retirement medical or death benefits for retired employees other than
coverage mandated by law or death benefits under any Pension Plan.
3.12.6 Except as disclosed in Schedule 3.12, there has been no
amendment to, written interpretation or announcement (whether or not written) by
the Company or any of its affiliates relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement which
would increase the expense (whether or not such expense is recognized under
generally accepted accounting principles) of maintaining such Employee Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year ended on December 31, 1998.
3.12.7 Except as disclosed in Schedule 3.12, with respect to
any Employee Plan or Benefit Arrangement, no event has occurred, and there
exists no condition or set of circumstances in connection with which the Company
or any such plan, directly or indirectly, could be subject to any liability
under ERISA, the Code or any other law, regulation or governmental order
including, without limitation, ERISA section 409 or 502(i) or Code section 4971,
4975, 4977, 4978, 4979 or 4980. With respect to each Employee Plan and Benefit
Arrangement, except as disclosed in Schedule 3.12: (i) the Company has made all
payments due from it to date or has established a reasonable reserve therefor
and all amounts properly accrued to date as liabilities of the Company which
have not been paid have been properly recorded on the books of the Company
(including without limitation the Company Financial Statements); and (ii) no
such plan which is subject to ERISA section 302 or Code section 412 has incurred
any "accumulated funding deficiency" (as defined in either such section),
whether or not waived.
3.12.8 Except as disclosed in Schedule 3.12, the consummation
of the transactions contemplated by this Agreement shall not (i) entitle any
current or former employee of the Company or any affiliate to severance pay,
supplementary unemployment compensation or any similar payment, (ii) accelerate
the time of payment or vesting, or increase the amount, of any compensation due
to any such employee or former employee, or (iii) constitute or involve a
prohibited transaction (as defined in ERISA section 406 or Code section 4975)
that is not otherwise covered by a statutory or administrative exemption.
3.13) Compliance With Laws; Permits. Except for violations which do not
and shall not have individually or in the aggregate a Material Adverse Effect,
the Company (i) has not violated, and is not in violation of, any applicable
provision of any law, statute, ordinance or regulation and (ii) would not, to
the Company's knowledge, be in violation of any provision of any law, statute,
ordinance or regulation known to the Company that has been enacted or adopted
but is not yet effective if it were effective at the date hereof. The Company
has not made any illegal payment to any officer or employee of any governmental
or regulatory body, or made any payment to any customer for the sharing of fees
or to any customer or supplier for rebating of charges, or engaged in any other
reciprocal practices, or made any illegal payment or given any other illegal
consideration to any purchasing agent or other representative of customers in
respect of sales made or to be made by the Company. The Company has all
licenses, permits, orders and approvals of any federal, state, local or foreign
governmental or regulatory body that are material to or necessary for the
conduct of the business of the Company (collectively, "Permits"); such Permits
are in full force and effect; no material violations are or have been recorded
in respect of any Permit; and no proceeding is pending or, to the Company's
knowledge, threatened to revoke or limit any Permit.
3.14) Finders' Fees. There is no investment banker, broker, finder or
other intermediary who has been retained by or is authorized to act on behalf
of, the Company who might be entitled to any fee or commission from the Company
or Parent or any of its affiliates upon consummation of the transactions
contemplated by this Agreement.
3.15) Intellectual Property.
3.15.1 The Company owns or has the right to use all patents,
patent applications, patent rights, trademarks, trademark applications,
tradenames, logos, service marks, service mark applications, copyrights,
copyright applications, copyright registrations, discoveries, ideas, technology,
know-how, trade secrets, processes, formulas, drawings, designs, computer
programs, computer software or firmware; and all amendments, modifications, and
improvements to any of the foregoing (collectively, the "Intellectual Property
Rights") used in connection with the research, development, operation,
manufacture, marketing or sale of Company Products (as defined in Section 3.20).
Subject to the rights of third parties under contracts listed on Schedule 3.15,
all trade secrets, if any, of the Company have been developed independently by
the Company, or on behalf of the Company by independent contractors, under
circumstances or arrangements which vest in the Company the exclusive and
unencumbered rights to such trade secrets. To the Company's knowledge, the
research, development, manufacture and sale of Company Products do not
constitute or involve the misappropriation of third party's trade secrets. The
Company's rights, title and interest in and to the Intellectual Property Rights
are free and clear of all encumbrances, Liens and rights of third parties,
except as otherwise described in Schedule 3.15. Except as disclosed in Schedule
3.15, the Company has not granted, conveyed, licensed or assigned any rights in
the Intellectual Property Rights to any third party except in connection with
licenses to distributors and end users in the ordinary course of business.
Schedule 3.15 sets forth a list of all Intellectual Property Rights, specifying
as to each, as applicable (i) the nature of such Intellectual Property Right,
(ii) the owner of such Intellectual Property Right, (iii) the jurisdiction by or
in which such Intellectual Property Right has been issued or registered or in
which an application for such issuance or registration has been filed, including
the respective registration or application number, and (iv) material licenses,
sublicenses or other agreements as to which the Company is a party pursuant to
which any person is authorized to use such Intellectual Property Right,
including the identity of all parties thereto. The Company has previously
furnished or made available to Parent, copies of all such licenses, sublicenses
or other agreements.
3.15.2 All trademarks, copyrights and U.S. patents included in
the Intellectual Property Rights are believed to be valid and enforceable, to
the Company's knowledge. The Company has disclosed to Parent all material facts
of which it has knowledge which bear on the validity or enforceability of any of
the Intellectual Property Rights.
3.15.3 None of the features, components or configurations
(whether developed or under development) of the Company Products (as defined in
Section 3.20) or processes are, to the Company's knowledge, believed to
infringe, nor has any claim been made that they may infringe, the Intellectual
Property Rights of any other party. Except as disclosed in Schedule 3.15, the
Company has not been sued or charged in writing with, or been a defendant in any
claim, suit, action or proceeding relating to the Company's assets or business
which has not been finally determined prior to the date hereof and which
involves a claim of infringement of any patents, trademarks, service marks or
copyrights, or claim of unfair competition.
3.15.4 None of the Intellectual Property Rights are subject to
any outstanding order, judgment, decree, stipulation or agreement restricting
the use thereof by the Company or restricting the licensing thereof by the
Company to any person.
3.15.5. The Company has not entered into any agreement to
indemnify any person against any charge of infringement of any patent,
trademark, service mark or copyright.
3.15.6. The Company has established reasonable safeguards to
maintain the secrecy of all the Company trade secrets. To the best of the
Company's knowledge, the Company has executed agreements respecting the
non-disclosure of Company trade secrets, and the assignment of inventions with
each of its employees, excluding clerical, janitorial and similar employees. To
the best of the Company's knowledge, the information which the Company believes
constitutes trade secrets of the Company has not been disclosed by the Company
or any of its affiliates to any person, entity or governmental agencies other
than to employees, representatives or agencies of the Company and certain
governmental agencies except pursuant to confidentiality agreements or
protective orders (as appropriate).
3.16) Environmental Matters: OSHA.
3.16.1. Except as set forth in Schedule 3.16, the Company has
obtained all permits, licenses and other authorizations which are required under
the Environmental Laws or Regulations or any federal, state, county, local and
foreign laws relating to Hazardous Substances, employee safety and human health,
pollution or protection of the environment, including laws relating to
emissions, discharges, releases or threatened releases of Hazardous Substances
into the environment (including, without limitation, ambient air, surface water,
ground water, or land), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, record-keeping, or
handling of Hazardous Substances). The Company is in compliance in all material
respects with all terms and conditions of such required permits, licenses and
authorizations and in all material respects with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any of the Environmental Laws or
Regulations or in any plan, order, decree, judgment, injunction, notice or
demand letter issued, entered, promulgated or approved thereunder. The Company
is not aware of, nor has it since January 1, 1996, received notice of, any
events, conditions, circumstances, activities, practices, incidents, actions or
plans which may interfere with or prevent compliance or continued compliance
with any Environmental Laws or Regulations, or any plan, order, decree,
judgment, injunction, notice or demand letter issued, entered, promulgated or
approved thereunder, or which may give rise to any common law or legal
liability, or otherwise form the basis of any claim, action, demand, suit,
proceeding, hearing, study or investigation, based on or related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, record keeping or handling, or the emission, discharge, release or
threatened release into the environment, of any Hazardous Substance. The Company
is not a party to, nor has it since January 1, 1996, received notice of, any
civil, criminal or administrative action, suit, demand, claim, hearing,
violation, investigation, or proceeding, whether pending or threatened, against
the Company relating in any way to any Environmental Laws or Regulations or any
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder. The Company is not aware of any
Hazardous Substances located on or beneath the surface of any real property
owned or leased by the Company.
3.16.2 The Company is not operating its business in material
violation of the Occupational Safety and Health Act of 1970, or the regulations
promulgated thereunder or any similar laws or regulations of any other country.
The Company is not, nor shall it become, liable for any retroactive workers'
compensation insurance premiums relating to the period of time prior to the date
of this Agreement in excess of the reserves shown on the Company Financial
Statements.
3.17) Contracts. Schedule 3.17 sets forth a list of all of the
following contracts and other agreements to which the Company is a party or by
which the Company or its assets or properties are bound or subject:
i) customer contracts and agreements for the sale by the
Company of Company Products (as defined in Section 3.20) which by their
terms exceed one year or which are in dollar amounts in excess of Ten
Thousand Dollars ($10,000);
(ii) supply contracts, distributorship agreements and
manufacturer's representative agreements;
(iii) research and development agreements;
(iv) employment, consulting, independent contractor, severance
and indemnification agreements, arrangements or understandings that
have not expired, between the Company and any current or former
shareholder, officer, director, employee, consultant, agent or other
representative;
(v) contracts and other agreements with any labor union or
association representing any employee of the Company;
(vi) joint venture agreements;
(vii) contracts or other agreements under which the Company
agrees to indemnify any party or to share tax liability of any party;
(viii) contracts and other agreements relating to the
borrowing of money;
(ix) any equipment leases requiring payment by the Company of
at least Ten Thousand Dollars ($10,000) within a given year which are
not cancelable without penalty upon ninety (90) days notice;
(x) any software, patent or technology licenses, except any
such licenses to end users in the ordinary course of business; or
(xi) any other material contract or other agreement whether or
not made in the ordinary course of business (for the purposes of this
Subsection "material" shall mean giving rise to potential performance
obligations or other liability exceeding Twenty-Five Thousand Dollars
($25,000).
There have been delivered to Parent true and complete copies of all
such contracts and other agreements set forth in Schedule 3.17. All of such
contracts and other agreements are in full force and effect and the Company is
not in default under any of them, nor, to the best of the Company's knowledge,
is any other party to any such contract or other agreement in default
thereunder, nor does any condition exist that with notice or lapse of time or
both would constitute a default thereunder. No approval or consent of any person
is needed in order that any material contracts and other agreements to which the
Company is a party or by or to which either the Company or its assets or
properties are bound or subject continue in full force and effect following the
consummation of the transactions contemplated by this Agreement. The Company is
not a party to any material contract to sell Company Products or to provide
services to third parties which is to be performed at a price which is less than
the Company's full cost. To the best of the Company's knowledge, the
relationships of the Company with its suppliers, distributors, customers,
licensors, licensees and researchers are good commercial working relationships.
3.18) Real Estate. Schedule 3.18 sets forth a summary description of
all real property (including warehouses) owned or leased by the Company together
with encumbrances on the Company's interest. Such leases, subleases and other
agreements are in full force and effect and neither the Company nor, to the
Company's knowledge, any other party thereto is in default or has received any
notice of default thereunder. Except as described in Schedule 3.18, the Company
does not own any real property or buildings or structures located on real
property. The real estate interests of the Company are not subject to any Lien,
and the Company enjoys a right of quiet possession as against any Lien on the
property. To the Company's knowledge, except as set forth in Schedule 3.18, all
buildings and other structures located on such real property are (i) in good
operating condition and repair, normal wear and tear excepted and (ii) adequate
for the uses to which they are being put. The Company has not received any
notice nor has any knowledge of any pending, threatened or contemplated
condemnation proceeding affecting the real property owned or leased by the
Company or any part thereof or of any sale or other disposition of such real
property or any part thereof in lieu of condemnation.
3.19) Material Obligations. Except as disclosed in Schedule 3.19, the
Company does not have any material liabilities or obligations, absolute or
contingent (individually or in the aggregate) except (i) the liabilities and
obligations set forth in the Company Financial Statements; (ii) liabilities and
obligations which have been incurred subsequent to December 31, 1998, in the
ordinary course of business which are usual and normal in amount, both
individually and in the aggregate; and (iii) liabilities and obligations under a
lease for its principal offices and leases for equipment, and liabilities and
obligations under sales, procurement and other contracts and arrangements
entered into in the ordinary course of business (for the purposes of this
Subsection "material" shall mean giving rise to potential performance
obligations or other liability exceeding Twenty-Five Thousand Dollars ($25,000).
3.20) The Company Products; Regulation. Since January 1, 1996 there are
no statements, citations or decisions by any governmental or regulatory body
that any product produced, manufactured, marketed or distributed at any time by
the Company (the "Company Products") is defective or fails to meet any
applicable requirements or standards promulgated by any such governmental or
regulatory body. Since January 1, 1996, there have been no recalls voluntarily
undertaken by the Company or ordered by any such governmental or regulatory body
with respect to any of the Company Products. Except as disclosed in Schedule
3.20, there is (i) no fact relating to any of the Company Products that may give
rise to a recall of any of the Company Products or a duty to warn of a defect in
any of the Company Products; and (ii) no latent or overt design, manufacturing
or other defect in any of the Company Products.
3.21) Returns of the Company Products. Since January 1, 1996, no
customer has rejected or otherwise returned to the Company a material amount of
the Company Products by reason of manufacturing defects, non-conformity or
otherwise where such rejection or return was not in strict accordance with the
written warranties of the Company.
Schedule 3.21 sets forth all written warranties or other undertakings
or obligations of the Company under which any customer of the Company may have a
right after the Effective Time to make Product Liability claims or claims for
return, replacement and repair of the Company Products.
3.22) Inventory. The inventory (including, without limitation, finished
goods, parts and supplies) of the Company included in the latest Company
Financial Statements and inventory acquired after the date of the latest Company
Financial Statements is or was, prior to the sale thereof, (i) in good and
merchantable condition, and suitable and usable or saleable in the ordinary
course of business for the purposes for which intended, (ii) not obsolete,
damaged or defective, and (iii) reflected on the Company Financial Statements
and carried on the books of account of the Company in accordance with generally
accepted accounting principles consistently applied.
3.23) Accounts and Notes Receivable. All accounts and notes receivable
reflected on the Company Financial Statements, and all accounts and notes
receivable arising subsequent to December 31, 1998, have arisen in the ordinary
course of business of the Company, represent valid obligations due to the
Company and, subject only to a reserve for bad debts computed in a manner
consistent with past practice, have been collected or are collectible in the
ordinary course of business of the Company in the aggregate recorded amounts
thereof in accordance with their terms. All items that are required by generally
accepted accounting principles to be reflected as accounts and notes receivable
on the Company Financial Statements and on the books of account of the Company
are so reflected.
3.24) Suppliers and Customers. Schedule 3.24 is a complete list of the
Company's suppliers and customers (including without limitation its
distributors) with purchases and sales (as the case may be) exceeding Ten
Thousand Dollars ($10,000) in the applicable period, identifying sales for
calendar year 1998 and year-to-date through August 31, 1999, for the products of
each such vendor and customer. Except as disclosed in Schedule 3.24, no customer
or supplier has canceled or otherwise terminated, or threatened in writing to
cancel or otherwise terminate, its relationship with the Company during the last
twelve (12) months or has during the last twelve (12) months decreased
materially, or threatened to decrease or limit materially, its services,
supplies or material to the Company or its usage or purchase of the services or
products from the Company, as the case may be. The Company has not received any
notification of any change in its arrangements with customers or suppliers which
would have a Material Adverse Effect, nor is the Company aware of any indication
that any of its customers, suppliers or vendors may take or omit action, nor any
other material fact regarding or pertaining to its customers, suppliers or
vendors, which would have a Material Adverse Effect on Parent after the
consummation of the transactions contemplated hereby. The Merger shall not, to
the best of the Company's knowledge, have a Material Adverse Effect on the
relationship of the Company with any such customer, supplier or vendor. Except
as disclosed in Schedule 3.24, the Merger shall not cause termination of any
distributorship agreement or permit termination of any distributorship agreement
without the consent of the Company, which consent has not and shall not be given
by the Company without prior written permission from Parent.
3.25) Year 2000 Compliance. Except as disclosed in Schedule 3.25, each
system comprised of software, hardware, databases, or embedded control systems
(microprocessor controlled, robotic or other device) (collectively, "Company
Systems"), that constitutes any part of, or is used in connection with the use
or operation of any material tangible or intangible asset of the Company, and
each of the Company Products and Company Systems (i) is designed (or has been
modified) to be used prior to and after January 1, 2000, (ii) shall operate
without error arising from the creation, recognition, acceptance, calculation,
display, reporting, storage, retrieval, accessing, comparison, sorting,
manipulation, processing or other use of dates, or date-based, date-dependent or
date-related data, including but not limited to century recognition,
day-of-the-week recognition, leap years, date values and interfaces of date
functionalities, and (iii) shall not be adversely affected by the advent of the
year 2000 or subsequent years or the transition from the twentieth century
through the year 2000 and into the twenty-first century (collectively, items (i)
through (iii) are referred to herein as "Year 2000 Compliant"). Except as
disclosed in Schedule 3.25, no Company Systems that are material to the
business, finances, or operation of the Company receive data from or
communications with any component or system external to themselves (whether or
not such external component or system is the Company's or any third party's)
that is not itself Year 2000 Compliant excepting the parts of the external
component or system within which noncompliance to Year 2000 Compliance shall
have no effect on the data or communications sent to the Company, nor on the
Company Systems. Except as disclosed in Schedule 3.25 all licenses for the use
of any Company Systems-related software, hardware, databases or embedded control
system are certified by the manufacturer to be Year 2000 Compliant and to
contain the capabilities required to enable Year 2000 Compliance within the
Company computer systems (hardware and software), or the license permits the
Company or a third party to make all modifications, bypasses, de-bugging,
work-arounds, repairs, replacements, conversions or corrections necessary to
permit the Company Systems to operate compatibly, in conformance with
specifications, and to be Year 2000 Compliant. Except as disclosed in Schedule
3.25 the Company has no reason to believe that it may incur material expenses
arising from or relating to the failure of any Company Systems or Company
Products as a result of failure to be Year 2000 Compliant.
3.26) Employee Relations. The Company has delivered to Parent a
complete list of all employees of the Company stating position, salary and dates
of service. Schedule 3.17 lists all material independent contractor arrangements
of the Company. None of the Company's employees are union members. No union
organizing efforts have been conducted within the last three years or to the
best of the Company's knowledge, are now being conducted with respect to the
employees of the Company. The Company is not aware of any pending or threatened
union activity, strike, work stoppage or other labor trouble with respect to the
employees of any of the suppliers or customers of the Company. The Company is in
compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment, wages and hours, equal
opportunity, civil rights and payroll taxes, including without limitation, the
Immigration and Reform Control Act, Title VII of the Civil Rights Act of 1964,
the Civil Rights Act of 1991, the Americans with Disabilities Act, the Federal
Age Discrimination in Employment Act and any state human rights act. The Company
is not in receipt of a complaint, demand letter or charge issued by a federal,
state or local agency which alleges a violation by the Company of any federal,
state or local law or regulation respecting employment and employment practices,
terms and conditions of employment or wages and hours. The Company has no
knowledge of any pending or threatened claims by employees or former employees
for any contract claims, intentional infliction of emotional distress,
defamation or any other tort, or any claims arising from any federal, state or
local law or ordinance.
3.27) Insurance. Schedule 3.27 sets forth a list and brief description
of all policies or binders of fire, liability, Product Liability, worker's
compensation, vehicular and other insurance held by or on behalf of the Company.
To the Company's knowledge, such policies and binders are valid and enforceable
in accordance with their terms, are in full force and effect, and insure against
risks and liabilities to the extent and in the manner deemed appropriate and
sufficient by the Company. The Company is not in default with respect to any
provision contained in any such policy or binder and has not failed to give any
notice or present any claim under any such policy or binder in due and timely
fashion. The Company has received no notice of cancellation or non-renewal of
any such policy or binder. The Company has no knowledge of any inaccuracy in any
application for such policies or binders, any failure to pay premiums when due
or any similar state of facts that might form the basis for termination of any
such insurance. The consummation of the Merger shall not constitute a default
under any of such policy or binder or grounds for the termination thereof.
3.28) Potential Conflicts of Interest. Except as disclosed in Schedule
3.28, no officer or director of the Company, no entity controlled by any such
officer or director and spouse or other immediate family member of any such
officer or director:
(i) owns, directly or indirectly, any interest in (excepting
not more than 1% stock holdings for investment purposes in securities
of publicly held and traded companies), or is an officer, director,
employee or consultant of, any person which is, or is engaged in
business as, a competitor, lessor, lessee, customer or supplier of the
Company;
(ii) owns, directly or indirectly, in whole or in part, any
tangible or intangible property that the Company uses or the use of
which is necessary or desirable for the conduct of business of the
Company;
(iii) has any cause of action or other claim whatsoever
against, or owes any amount to, the Company, except for claims in the
ordinary course of business, such as for accrued vacation pay, accrued
benefits under employee benefit plans, and similar matters and
agreements existing on the date hereof; or
(iv) has made any payment of or commitment to pay any
commission, fee or other amount to, or purchase or obtain or otherwise
contract to purchase or obtain any goods or services from, any
corporation or other person of which any officer or director of the
Company, or a relative of any of the foregoing, is a partner or
shareholder (excepting stock holdings solely for investment purposes in
securities of publicly held and traded companies).
3.29) Bank Accounts. Schedule 3.29 constitutes a full and complete list
of all the bank accounts of the Company, together with the names of the persons
authorized to draw thereon.
3.30) Minute Books. The minute books of the Company contain complete
and accurate records of all meetings of and corporate actions or written
consents by the shareholders, Boards of Directors, and committees of the Boards
of Directors of the Company and its subsidiaries.
3.31) Full Disclosure. To the Company's knowledge, all documents,
contracts, instruments, certificates, notices, consents, affidavits, letters,
telegrams, telexes, statements, schedules (including Schedules to this
Agreement), exhibits (including Exhibits to this Agreement) and any other papers
whatsoever, delivered by or on behalf of the Company in connection with this
Agreement and the transactions contemplated thereby are true and complete in all
material respects and authentic. No representation or warranty of the Company
contained in this Agreement, in the Schedules hereto or in any certificate
delivered to Parent pursuant to the requirements of this Agreement or in
connection with the transactions contemplated thereby, contains an untrue
statement of a fact or omits to state a fact required to be stated therein or
necessary to make the statements made, in the context in which made, not
materially false or misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as otherwise disclosed in the Schedule of Exceptions attached
hereto as Exhibit D, Parent represents and warrants to the Company and the
Company Shareholders as of the date hereof as follows and acknowledges that the
same shall be true and correct as of the Closing Date (as if made at the
Closing), shall be deemed to have been relied upon by the Company Shareholders
and shall survive the Closing of this transaction as provided in Section 12.3 of
this Agreement:
Parent and Merger Subsidiary each represents, warrants and covenants to
the Company that:
4.1) Corporate Authorization. Each of Parent and Merger Subsidiary has
full corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by Parent's Board of Directors and Merger
Subsidiary's Board of Directors and no other corporate proceedings on the part
of either Parent or Merger Subsidiary are necessary to authorize the execution
and delivery of this Agreement or to consummate the transactions so
contemplated.
4.2) Governmental Authorization; Consents.
4.2.1 The execution, delivery and performance by Parent and
Merger Subsidiary of this Agreement and the consummation of the Merger by Parent
and Merger Subsidiary require no action by or in respect of, or filing with, any
governmental body, agency, official or authority other than (i) the filing of
Agreement of Merger in accordance with the CCC and other applicable laws of the
State of California; (ii) compliance with any applicable requirements of the
Securities Act and the Exchange Act; and (iii) compliance with any applicable
state securities or Blue Sky laws.
4.2.2 No consent, approval, waiver or other action by any
person under any contract, agreement, indenture, lease, instrument or other
document to which Parent is a party or by which it is bound is required or
necessary for the execution, delivery and performance of this Agreement by
Parent or Merger Subsidiary or the consummation of the transactions contemplated
hereby.
4.3) Capitalization. The authorized capital stock of Parent consists of
(i) Five Million (5,000,000) shares of Common Stock with a par value of $.10 per
share, of which as of August 31, 1999, there were One Million Four Hundred
Seventy-Two Thousand Two Hundred Seventy-Nine (1,472,279) shares issued and
outstanding and no shares held in Parent's treasury, and (ii) One Hundred Twenty
Thousand (120,000) shares of Preferred Stock with a par value of $25.00 per
share, of which as of the date hereof there were no shares issued and
outstanding. The authorized capital stock of Merger Subsidiary consists of One
Thousand (1,000) shares of Common Stock, One Hundred (100) of which are issued
and outstanding and owned by Parent. All issued and outstanding shares of Parent
Common Stock and Merger Subsidiary Common Stock are, and the shares of Parent
Common Stock to be issued and delivered in the Merger pursuant to Article II
hereof shall be, at the time of issuance and delivery, validly issued, fully
paid, nonassessable and free of preemptive rights. The shares of Parent Common
Stock to be issued and delivered in the Merger pursuant to Article II hereof
shall be registered under the Securities Act and duly listed for trading on the
Nasdaq National Market, subject to official notice of issuance. Except as
disclosed in the financial statements, or notes thereto, included in Parent's
quarterly report on Form 10-Q for the quarter ended March 31, 1999, and except
for options, awards, units or other rights to purchase or acquire shares of
Parent Common Stock pursuant to Parent's Stock Option Plan, there are not as of
the date of this Agreement any outstanding or authorized subscriptions, options,
warrants, calls, rights, commitments, restrictions, arrangements or any other
agreements of any character that, directly or indirectly, (i) obligate Parent to
issue any shares of capital stock or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for, any
shares of capital stock, or (ii) call for or relate to the sale, pledge,
transfer or other disposition or encumbrance by Parent of any shares of its
capital stock. There are no voting agreements, rights of first refusal or other
restrictions (other than normal restrictions on transfer under applicable
federal and state securities laws) applicable to any of Parent's outstanding
securities.
4.4) Non-Contravention. The execution, delivery and performance by
Parent and Merger Subsidiary of this Agreement and the consummation by Parent of
the transactions contemplated hereby do not and shall not (i) contravene or
constitute a default under or give rise to a right of termination, cancellation
or acceleration of any right or obligation of Parent and Merger Subsidiary or to
a loss of any benefit to which Parent and Merger Subsidiary is entitled under
(A) any provision of applicable law or regulation (assuming compliance with the
matters referred to in Section 4.2); (B) the Articles of Incorporation or Bylaws
of Parent and Merger Subsidiary; (C) any agreement, contract, plan, lease,
arrangement or commitment; or (D) any judgment, injunction, order, decree,
administrative interpretation, award or other instrument binding upon Parent and
Merger Subsidiary, or (ii) result in the creation or imposition of any Lien on
any asset of Parent and Merger Subsidiary.
4.5) Binding Effect. This Agreement constitutes a legal, valid and
binding agreement of Parent and Merger Subsidiary enforceable against Parent and
Merger Subsidiary in accordance with its terms, except to the extent that the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and by principles of equity regarding the availability of
remedies.
4.6) Financial Statements and SEC Filings. Parent has delivered to the
Company true and complete copies of (i) its annual reports on Form 10-K for its
fiscal years ended June 30, 1997, 1998 and 1999, (ii) its quarterly reports on
Form 10-Q for its fiscal quarters ended September 30, 1996, 1997 and 1998,
December 31, 1996, 1997 and 1998, and March 31, 1997, 1998 and 1999, (iii) its
proxy or information statements relating to all meetings of, or actions taken
without a meeting by, the shareholders of Parent held since April 30, 1997, and
(iv) all of its other reports or registration statements filed with the SEC
since April 30, 1997. The reports and statements so delivered are referred to
collectively in this Section as the "SEC Filings." As of their respective dates,
the SEC Filings (including all exhibits and schedules thereto and documents
incorporated by reference therein) do not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading. To Parent's knowledge, it has filed all documents required to be
filed as exhibits to its SEC Filings. The audited financial statements and
unaudited interim financial statements (the "Parent Financial Statements" for
purposes of this Article IV) of Parent included or incorporated by reference in
the SEC Filings (i) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto); (ii) complied as of their
respective dates in all respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto; and (iii)
fairly present the financial position of Parent as of the dates thereof and the
income and cash flow for the periods then ended (subject, in the case of any
unaudited interim financial statements, to normal year-end adjustments).
4.7) Corporate Existence and Power. Each of Parent and Parent's
subsidiaries (if any) and Merger Subsidiary is a corporation duly organized,
validly existing, and in good standing under the laws of its jurisdiction of
incorporation, and has all corporate powers required to carry on its business as
now conducted or as currently proposed. Except as disclosed in Schedule 4.7,
Parent has no subsidiaries or any interest, direct or indirect, in any
corporation, partnership, joint venture or other business entity. References in
this Article IV to Parent shall include Parent and its Subsidiaries. Each of
Parent and Merger Subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where the failure to be
so qualified would not, individually, or in the aggregate, have a Material
Adverse Effect. Parent does not, directly or indirectly, own or have the power
to vote, or to exercise a controlling influence with respect to, any securities
of any class of any person, the holders of which class are entitled to vote for
the election of directors (or persons serving similar functions) of such person.
4.8) Material Obligations; Material Events. Parent does not have any
liabilities or obligations, absolute or contingent (individually or in the
aggregate), that would have a Material Adverse Effect except the liabilities and
obligations set forth in the Parent Financial Statements. Except as disclosed in
the Parent Financial Statements, since December 31, 1998, there has not been any
Material Adverse Effect.
4.9) Full Disclosure. To the knowledge of Parent, all documents,
contracts, instruments, certificates, notices, consents, affidavits, letters,
telegrams, telexes, statements, schedules (including Schedules to this
Agreement), exhibits (including Exhibits to this Agreement) and any other papers
whatsoever, delivered by or on behalf of Parent in connection with this
Agreement and the transactions contemplated thereby are true and complete in all
material respects and authentic. No representation or warranty of Parent
contained in this Agreement or in the Schedules hereto or in any certificate
delivered to the Company pursuant to the requirements of this Agreement or in
connection with the transactions contemplated thereby, contains an untrue
statement of a fact or omits to state a fact required to be stated therein or
necessary to make the statements made, in the context in which made, not
materially false or misleading.
ARTICLE V
COVENANTS
The following covenants shall be applicable from and after the date of
this Agreement until the Effective Time:
5.1) Approvals and Consents. The Company shall use all reasonable
efforts to obtain all approvals and consents of all third parties necessary on
the part of the Company or the Company Shareholders to consummate the
transaction contemplated herein. Parent agrees to cooperate with the Company in
connection with obtaining such approvals and consents, and Parent shall agree,
if required by any lease or other agreement as a prerequisite to such third
party's consent, to guarantee the performance of the Surviving Corporation under
such lease or other agreement from and after the Closing. Parent shall, at its
cost and expense, obtain all approvals and consents of all third parties
necessary on the part of Parent to consummate the transactions contemplated
herein. The Company agrees to cooperate with Parent in connection with obtaining
such approvals and consents.
5.2) Affiliate Letter.
(a) The Company has delivered to Parent a list of names and
addresses of those persons, in the Company's reasonable judgment after
consultation with outside legal counsel, who, as of the date hereof,
are affiliates within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act (each such person, an
"Affiliate") of the Company. The Company shall provide Parent such
information and documents as Parent shall reasonably request for
purposes of reviewing such list and shall promptly update such list to
reflect any changes thereto. The Company shall cause to be delivered to
Parent a letter in the form attached hereto as Exhibit E (an "Affiliate
Letter"), executed by each Affiliate of the Company identified in the
foregoing list as soon as practicable prior to the Effective Time.
Parent shall be entitled to place legends as specified in such
Affiliate Letter on the certificates evidencing any of the Parent
Common Stock to be received by such Affiliate pursuant to the terms of
this Agreement, and to issue appropriate stop transfer instructions to
the transfer agent for the Parent Common Stock, consistent with the
terms of such letters.
(b) For so long as resales of shares of Parent Common Stock
issued pursuant to the Merger are subject to the resale restrictions
set forth in Rule 145 under the Securities Act, Parent shall use all
reasonable efforts to comply with Rule 144(c)(1) under the Securities
Act.
5.3) Preserve Accuracy of Representations and Warranties. The Company
shall refrain from taking any action, except with the prior written consent of
Parent, which would render any representation, warranty or agreement of the
Company in this Agreement inaccurate or breached as of the Closing (as though
made at and as of the Closing) in any material respect. At all times prior to
the Closing, each of the Company and Parent shall promptly inform the other in
writing with respect to any matters hereafter arising which, if existing or
occurring at the date of this Agreement, would have been required to be set
forth or described in the Schedule of Exceptions for the respective Parties.
5.4) Maintain the Company as Going Concern. Except as contemplated by
this Agreement, the Company shall conduct its operations according to its
ordinary and usual course of business and consistent with past practice, and the
Company shall use all reasonable efforts, to the extent that it is within the
Company's control, to preserve intact its business organization, to maintain its
prospects, to keep available the services of its officers and employees and to
maintain satisfactory relationships with licensors, licensees, suppliers,
contractors, distributors, customers and others having business relationships
with it. The Company shall promptly advise Parent orally and in writing of any
event in the business, prospects, properties, results of operations or condition
(financial or otherwise) of the Company which could have a Material Adverse
Effect on the Company and permit Parent to consult with the Company with respect
to any material changes in its business. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in or contemplated by this
Agreement or to the extent specifically disclosed on the Schedules hereto, the
Company shall not, without the prior written consent of an officer of Parent:
(a) amend its Certificate of Incorporation or Bylaws;
(b) authorize for issuance, issue, sell, or deliver (whether
through the issuance or granting of additional options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock
of any class or any securities convertible into shares of stock of any
class (other than the issuance of the number of shares of the Company
Common Stock (or part thereof) indicated in Section 3.6 hereof upon the
exercise in accordance with the current terms of the stock options
listed in Schedule 3.6 as outstanding on the date of this Agreement);
(c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock; or redeem or otherwise acquire any shares
of its capital stock or other securities (except for stock held by
employees or consultants and subject to repurchase upon termination of
employment or consulting, so long as such termination of employment or
consulting, is voluntary by the employee or consultant); or amend or
alter any material term of any of its outstanding securities;
(d) create, incur or assume any indebtedness for borrowed
money (except under current credit facilities or renewals of such
current credit facilities on substantially the same terms as currently
exist), or assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other person; or make any loans, advances or capital
contributions to, or investments in, any other person; or create, incur
or assume any Lien on any material asset;
(e) (i) increase in any manner the compensation of any of its
directors, officers, employees, shareholders or consultants, except the
compensation of employees who are not officers or directors may be
increased in the ordinary course of business and consistent with past
practice or pursuant to contractual obligations existing on the date
hereof that have been fully disclosed to Parent, or accelerate the
payment of any such compensation (whether or not any such acceleration
is consistent with past practice); (ii) pay or accelerate or otherwise
modify the payment, vesting, exercisability, or other feature or
requirement of any pension, retirement allowance, severance, change of
control, stock option or other employee benefit not required by any
existing plan, agreement or arrangement or by applicable law to any
such director, officer, employee, shareholder or consultant, whether
past or present; or (iii) commit itself to any additional pension,
profit-sharing, bonus, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, group insurance,
severance, change of control, retirement or other employee benefit
plan, agreement or arrangement, or to any employment or consulting
agreement with or for the benefit of any person, or amend any of such
plans or any of such agreements in existence on the date hereof;
(f) except in the ordinary course of business and consistent
with past practice or pursuant to contractual obligations existing on
the date hereof (i) sell, transfer, mortgage, or otherwise dispose of
or encumber any real or personal property, (ii) pay, discharge or
satisfy claims, liabilities or obligations (absolute, accrued,
contingent or otherwise), or (iii) cancel any debts or waive any claims
or rights, which involve payments or commitments to make payments which
individually exceed Two Thousand Dollars ($2,000) or, in the aggregate,
exceed Five Thousand Dollars ($5,000);
(g) make or agree to make any new capital expenditure
exceeding Ten Thousand Dollars ($10,000);
(h) enter into, amend or terminate any joint ventures or any
other agreements, commitments or contracts that, individually or in the
aggregate, are material to the Company or any subsidiary (except
agreements, commitments or contracts expressly provided for or
contemplated by this Agreement or for the purchase, sale or lease of
goods, services or properties in the ordinary course of business,
consistent with past practice), or otherwise make any material change
in the conduct of the business or operations of the Company or any
subsidiary;
(i) enter into or terminate, or amend, extend, renew or
otherwise modify (including, but not limited to, by default or by
failure to act) any distribution, OEM, independent sales
representative, noncompetition, licensing, franchise, research and
development, supply or similar contract, agreement or understanding
(except agreements, commitments or contracts expressly provided for or
contemplated by this Agreement or for the purchase, sale or lease of
goods, services or properties in the ordinary course of business,
consistent with past practice);
(j) change its credit policy as to sales of inventories or
collection of receivables or its inventory consignment practices;
(k) remove or permit to be removed from any building, facility
or real property any machinery, equipment, fixture, vehicle or other
personal property or parts thereof, except in the ordinary course of
business and except for movement from one facility of the Company to
another such facility;
(l) alter or revise its accounting principles, procedures,
methods or practices, except as may be required by generally accepted
accounting principles;
(m) institute, settle or compromise any claim, action, suit or
proceeding pending or threatened by or against it involving amounts in
excess of Ten Thousand Dollars ($10,000), at law or in equity or before
any federal, state, local, foreign or other governmental department,
commission, board, bureau, agency or instrumentality (including, but
not limited to, the FDA or any nongovernmental self-regulatory agency);
(n) distribute or otherwise circulate any notices, directives
or other communications directed to all or groups of customers,
vendors, employees, distributors or others associated with its business
(except in the ordinary course of business consistent with past
practice) without consulting with Parent, giving Parent reasonable
opportunity to comment thereon and obtaining prior to distribution
Parent's approval thereof, which shall not unreasonably be withheld;
(o) take any action that would render any representation,
warranty, covenant or agreement of the Company in this Agreement
inaccurate or breached as of the Closing Date;
(p) knowingly take any action that would have the effect of
jeopardizing the qualification of the Merger as a reorganization within
the meaning of Section 368(a) of the Code or cause the Merger to fail
to meet the standards for such reorganization set forth in Rev. Proc.
77-37, 1977-2 C.B. 568; or
(q) agree, whether in writing or otherwise, to do any of the
foregoing.
5.5) No Solicitation of Other Offers. Neither the Company nor any of
its officers or directors shall solicit, entertain, discuss or consider any
offer, inquiry or proposal with respect to the sale, merger or other acquisition
or licensing of the business or assets (or any material portion or items
thereof) of the Company or of any outstanding Company Common Stock by any third
party other than Parent, subject only to the fiduciary duties of the board of
directors of the Company.
5.6) Access to Information and Records Before Closing. Each of the
Company and Waters Network Systems ("WNS") shall afford to the other, and to the
other's accountants, officers, directors, employees, counsel and other
representatives, reasonable access during normal business hours, to all of its
properties, books, contracts, commitments and records, and, during such period,
each of the Company and WNS shall furnish promptly to the other all information
concerning business, prospects, properties, results of operations, condition
(financial or otherwise) or personnel as the other may reasonably request.
During the period from the date hereof to the Effective Time, the Parties shall
in good faith meet and correspond on a regular basis for mutual consultation
concerning the conduct of the Company's and WNS' businesses. Parent and the
Company shall hold in confidence all such nonpublic information.
5.7) No Shareholder Solicitation. In connection with the approvals
required by Section 6.3, the Company shall not solicit approval by the Company
Shareholders of the Merger, either formally or informally, prior to the
distribution to and receipt by the Company Shareholders of a prospectus
concerning the issuance of Parent Common Stock prepared in connection with a
Form S-4 Registration Statement that has been declared effective by the SEC.
5.8) Further Actions. Subject to the terms and conditions herein
provided and without being required to waive any conditions herein, each of the
Parties agrees to use all reasonable efforts to take, or cause to be taken, all
action, and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each party to this Agreement shall take all such
necessary action. Notwithstanding the foregoing or anything herein to the
contrary, none of the Company, Parent or Merger Subsidiary shall be required to
make arrangements for or to effect the cessation, sale or other disposition of
particular assets or categories of assets or businesses of Parent, Merger
Subsidiary, the Company or any of their affiliates.
5.9) Regulatory Approvals. The Company and Parent shall take all such
action as may be necessary under federal or state securities laws applicable to
or necessary for, and shall file and, if appropriate, use all reasonable efforts
to have declared effective or approved, all documents and notifications with the
SEC and other governmental or regulatory bodies that they deem necessary or
appropriate for the consummation of the Merger and the transactions contemplated
hereby, and each party shall give the other information reasonably requested by
such other party pertaining to it and its subsidiaries and affiliates to enable
such other party to take such actions, and Parent shall file in a timely manner
all reports and documents required to be so filed by or under the Exchange Act.
5.10) Additional Financial Statements and Reports. As soon as
reasonably practicable, each of the Company and Parent shall furnish to the
other copies of all balance sheets and related statements of income, changes in
financial position and changes in shareholders' equity of the Company which may
be regularly prepared in the ordinary course of business prior to the Effective
Time, including, but not limited to, monthly balance sheets and related
statements of income and quarterly balance sheets and related statements of
income, changes in financial position and changes in shareholders' equity. Such
financial statements shall be prepared in conformity with generally accepted
accounting principles applied on a consistent basis and fairly present the
financial condition, results of operations and changes in financial position of
the Company and its subsidiaries (subject, in the case of unaudited financial
statements, to the absence of complete footnotes thereto), as of the dates and
for the periods covered by such statements.
5.11) Certain Notifications. Each of the Company and Parent shall
promptly notify the other in writing of the occurrence of any event that shall
or could reasonably be expected to result in the failure to satisfy any of the
conditions specified in Articles VI or VII.
5.12) Noncompetition Agreement. To induce Parent to execute this
Agreement, the Company has caused Frank Madren to execute and deliver to Parent
as of the date hereof (but expressly contingent upon the Closing of the Merger)
a Noncompetition Agreement in the form of Exhibit F hereto.
5.13) Employment Agreements. To induce Parent to execute this
Agreement, the Company has caused Frank Madren, Chuoc Linh and Mark Vaughn to
execute and deliver to Parent as of the date hereof (but expressly contingent
upon the Closing of the Merger) Employment Agreements substantially in the form
of Exhibit G, Exhibit G-1, and Exhibit G-2 respectively, hereto.
5.14) Resignations of Officers and Directors. At the Closing, the
Company shall cause each of its officers and directors to execute and deliver to
Parent such officer's and/or director's resignation from such positions with the
Company as Parent may request effective upon the Closing of the Merger.
5.15) Maintenance of WNS. Except as contemplated by this Agreement, WNS
shall conduct its operations according to its ordinary and usual course of
business and consistent with past practice. WNS shall promptly advise the
Company orally and in writing of any event in the business, prospects,
properties, results of operations or condition (financial or otherwise) of WNS
which could have a Material Adverse Effect on WNS and permit the Company to
consult with WNS with respect to any material changes in its business. Without
limited the generality of the foregoing, and except as otherwise expressly
provided in or contemplated by this Agreement or to the extent specifically
disclosed on the Schedules hereto, WNS shall not, without the prior written
consent of the Company:
(a) except in the ordinary course of business and consistent
with past practice or pursuant to contractual obligations existing on
the date hereof, sell, transfer, mortgage, or otherwise dispose of or
encumber any real or personal property;
(b) take any action that would render any representation,
warranty, covenant or agreement of WNS in this Agreement inaccurate or
breached as of the Closing Date; or
(c) agree, whether in writing or otherwise, to do any of the
foregoing.
5.16) Transfer of WNS Assets and Assumption of Liabilities. At the
Closing, and as a condition precedent to the Company's obligation to Close,
Parent shall take all such action as may be necessary to cause the transfer to
Merger Subsidiary of title to the assets of Parent used exclusively for the
conduct of the business of WNS including, but in no way limited to, tangible and
intangible assets, customers, customer lists and intellectual property, and
Merger Subsidiary shall, in accordance therewith, assume any and all liabilities
of WNS. Employees of Parent employed by Parent to work exclusively in the
business of WNS shall at the Closing become employees of Merger Subsidiary.
Parent and the Company shall execute a letter in the form of Exhibit H, attached
hereto, (the "Letter Agreement") on or before the Closing, in accordance
herewith.
ARTICLE VI
CONDITIONS TO PARENT'S OBLIGATIONS
The obligations of Parent under this Agreement shall, at its option, be
subject to the satisfaction, on or prior to the Closing Date, of all of the
conditions set forth in this Article VI.
6.1) Truth of Representations and Warranties. The representations and
warranties of the Company and the Indemnifying Shareholders herein shall be true
in all material respects on the Closing Date with the same effect as though made
at such time, except for changes expressly contemplated by this Agreement and
except for any particular representation and warranty which specifically
addresses matters only as of a particular date (which shall remain true as of
such date). The Company and the Indemnifying Shareholders shall have performed
all material obligations and complied with all material covenants and conditions
prior to or as of the Closing Date. No events shall have occurred, no
circumstances shall exist and, collectively, no breaches of the representations
and warranties of the Company and the Indemnifying Shareholders contained in
this Agreement shall exist as of the Closing Date that have caused or could
reasonably be expected to have a Material Adverse Effect upon the Company, its
condition or its business; provided, however, that a decline in revenues or
profitability due to customer cancellation of orders, delay in customer orders,
or failure to place orders all of which are directly attributable to the public
announcement or consummation of the Merger shall not be deemed to be a material
adverse change. The Company and the Indemnifying Shareholders shall have
delivered to Parent a certificate in the form of Exhibit O dated as of the
Closing Date to all such effects.
6.2) Opinion of Counsel for the Company and the Company Shareholders.
Fenwick & West LLP, counsel for the Company with respect to the transactions
contemplated by this Agreement, shall have delivered to Parent a written
opinion, dated the Closing Date, in substantially the form of the attached
Exhibit I.
6.3) Required Consents. The Company shall have obtained all permits,
authorizations, consents and approvals required to be obtained by it pursuant to
this Agreement, in form and substance satisfactory to Parent, and Parent and
Merger Subsidiary shall have received evidence satisfactory to them of the
receipt of such permits, authorizations, consents and approvals.
6.4) Litigation Affecting Closing. No suit, action or other proceeding
shall be pending or threatened by any third party or by or before any court or
governmental agency in which it is sought to restrain or prohibit or to obtain
damages or other relief in connection with this Agreement or the consummation of
the transactions contemplated by this Agreement, and no investigation that might
result in any such suit, action or other proceeding shall be pending or
threatened.
6.5) Legislation. No statute, rule, regulation, order, or
interpretation shall have been enacted, entered or deemed applicable by any
domestic or foreign government or governmental or administrative agency or court
which would make the transactions contemplated by this Agreement illegal.
6.6) Noncompetition and Employment Agreements. Parent shall have
received executed agreements from such persons, and in such form satisfactory to
Parent, as described in Sections 5.12 and 5.13 hereof.
6.7) Resignations. The officers and directors of the Company and each
subsidiary specified by Parent shall have tendered their respective resignations
effective as of the Effective Time.
6.8) Escrow Agreement. The Company, the Indemnifying Shareholders and
the Escrow Agent shall have executed and delivered to Parent the Escrow
Agreement, as described in Section 9.4.
6.9) Form S-4; Nasdaq Listing. The Form S-4 shall have become effective
under the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order and the Prospectus/Proxy Statement shall, as of
the Closing, not be subject to any proceedings commenced or threatened by the
SEC. The shares of Parent Common Stock to be delivered pursuant to the Merger
shall have been duly listed on the Nasdaq National Market, subject to official
notice of issuance.
6.10) Standstill Agreement. Parent shall have received an executed
Standstill Agreement in substantially the form set forth on Exhibit J hereof
executed by Frank Madren and Christopher Robert, provided, however, if all of
the Waters Shareholders (as defined in the Standstill Agreement) do not execute
and deliver the Standstill Agreement on the Closing Date, then Messrs. Madren
and Robert shall not be required to sign it and if they have signed it, the
Standstill Agreement shall not be enforceable against either of them.
6.11) Affiliate Letter. Parent shall have received an executed
Affiliate Letter from each individual identified as an Affiliate by the Company.
6.12) Dissenters. The Company Dissenting Shares shall constitute no
more than five percent (5%) of the total number of shares of Company Common
Stock outstanding immediately prior to the Effective Time.
6.13) Tax-Free Reorganization. Each of Parent and the Company shall
have received a written opinion from their respective counsel to the effect that
the Merger will constitute a reorganization within the meaning of section 368 of
the Code, which opinion shall be substantially identical in form and substance.
In preparing the Company and Parent's tax opinion, counsel may rely on
representations of the Parties, and to the extent reasonably required, Company
Shareholders shall make reasonable representations thereto. The Company shall
have received from Fenwick & West LLP, counsel for Company, a written tax
opinion dated the Closing Date, in substantially the form of the attached
Exhibit K. Notwithstanding the foregoing, in the event that (i) the closing
condition set forth in Section 6.14 regarding the minimum closing sale price of
Parent Common Stock is waived or amended by all Parties pursuant to Section
12.4, and (ii) the Parent Closing Price Per Share is at or below $5.24, neither
Parent nor the Company shall receive a written opinion as set forth in this
Section.
6.14) Minimum Parent Price Per Share. The closing sale price of Parent
Common Stock as quoted on the Nasdaq National Market on the trading day
immediately preceding the Closing Date, as reported in the Wall Street Journal,
shall be Six Dollars ($6.00) or more.
6.15) Agreement Respecting Certain Costs. On the date of this Agreement
and contemporaneous with the execution and delivery of this Agreement, Parent,
Merger Subsidiary, the Company and Frank Madren shall have executed and
delivered to each other that certain Agreement Respecting Certain Costs in the
form of Exhibit N.
ARTICLE VII
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligations of the Company under this Agreement shall, at their
option, be subject to the satisfaction, on or prior to the Closing Date, of all
of the following conditions:
7.1) Truth of Representations and Warranties. The representations and
warranties of Parent herein shall be true in all material respects on the
Closing Date with the same effect as though made at such time, except for
changes expressly contemplated by this Agreement and except for any particular
representation and warranty which specifically addresses matters only as of a
particular date (which shall remain true as of such date). Parent shall have
performed all material obligations and complied with all material covenants and
conditions prior to or as of the Closing Date. No events shall have occurred, no
circumstances shall exist and, collectively, no breaches of the representations
and warranties of Parent contained in this Agreement shall exist as of the
Closing Date that have caused or could reasonably be expected to have a Material
Adverse Effect upon Parent, its condition or its business. Parent shall have
delivered to the Company a certificate in the form of Exhibit P dated as of the
Closing Date and executed by an officer of Parent to all such effects.
7.2) Opinion of Counsel for Parent. The Company and the Company
Shareholders shall have received from Fredrikson & Byron, P.A., counsel for
Parent, a written opinion dated the Closing Date, in substantially the form of
the attached Exhibit L.
7.3) Consents. Parent and Merger Subsidiary shall have obtained all
permits, authorizations, consents and approvals required to be obtained by them
pursuant to this Agreement, in form and substance satisfactory to the Company,
and the Company shall have received evidence satisfactory to it of the receipt
of such permits, authorizations, consents and approvals.
7.4) Litigation Affecting Closing. No suit, action or other proceeding
shall be pending or threatened by any third party or by or before any court or
governmental agency in which it is sought to restrain or prohibit or to obtain
damages or other relief in connection with this Agreement or the consummation of
the transactions contemplated by this Agreement, and no investigation that might
result in any such suit, action or other proceeding shall be pending or
threatened.
7.5) Election to Parent Board of Directors. Parent shall take all
action necessary to increase the size of Parent's Board and have Frank Madren
and Christopher Robert elected to Parent's Board of Directors as soon as
practicable after the Effective Time. During the Survival Period, Parent shall
take no action to cause to be removed or assist in any way in the removal of
either of Messrs. Madren or Robert from Parent's Board of Directors in the
absence of "cause." "Cause" for the purposes of the preceding sentence shall
have the meaning accorded to it by the Employment Agreement between Frank Madren
and Merger Subsidiary. Parent further agrees:
(a) As soon as practicable, after the date hereof, subject to
the consummation of the transactions contemplated by this Agreement,
the Company shall use its best efforts to obtain the agreement of its
shareholders to the amendment of its Bylaws, to the following effects.
(b) The Bylaws respecting the election of directors shall be
amended to provided that, if there are seven (7) or fewer directors,
there shall be two (2) "classes" of directors. The first class will
consist of approximately 50% of the entire Board of Directors but not
more than three (3) directors. The second class shall consist of the
remaining number of directors.
(c) Parent's Bylaws shall be amended to provide that the
persons initially elected to serve as directors in the first class
shall serve for a term of two (2) years. The Bylaws shall be amended to
provide that subsequent to such first election, the directors elected
to serve in the first class shall be nominated and elected to serve for
a term of three (3) years.
(d) Parent's Bylaws shall be amended to provide that the
persons initially elected to serve as directors in the second class
shall serve for a term of three (3) years.
(e) Following the amendment of Parent's Bylaws as contemplated
by this Section and after the Closing Date, Parent shall use its best
efforts to cause William Franta, John Grimstad and Christopher Robert
to be elected to the first class of directors for a term of two (2)
years and Gerald W. Grabowski, Frank Madren, Charles Schiefelbein to be
elected to the second class of directors for a term of three (3) years.
7.6) Legislation. No statute, rule, regulation or order or
interpretation shall have been enacted, entered or deemed applicable by any
domestic or foreign government or governmental or administrative agency or court
which would make the transactions contemplated by this Agreement illegal.
7.7) Escrow Agreement. Parent and the Escrow Agent shall have executed
and delivered to the Indemnifying Shareholders the Escrow Agreement, as
described in Section 9.4.
7.8) Tax-Free Reorganization. Each of Parent and the Company shall have
received a written opinion from their respective counsel to the effect that the
Merger will constitute a reorganization within the meaning of section 368 of the
Code, which opinion shall be substantially identical in form and substance. In
preparing the Company and Parent's tax opinion, counsel may rely on the Parties,
and to the extent reasonably required, Company Shareholders shall make
reasonable representations thereto. Parent shall have received from Fredrickson
& Byron P.A., counsel for Parent, a written tax opinion dated the Closing Date,
in substantially the form of the attached Exhibit M. Notwithstanding the
foregoing, in the event that (i) the closing condition set forth in Section 7.12
regarding the minimum closing sale price of Parent Common Stock is waived or
amended by all Parties pursuant to Section 12.4, and (ii) the Parent Closing
Price Per Share is at or below $5.24, neither Parent nor the Company shall
receive a written opinion as set forth in this Section.
7.9) Form S-4; Nasdaq Listing. The Form S-4 shall have become effective
under the Securities Act and shall not be subject to any stop order or
proceedings seeking a stop order, and the prospectus/Proxy shall not be, as of
the Closing, subject to any proceedings initiated by the SEC. The shares of
Parent Common Stock to be delivered pursuant to the Merger shall have been
listed on the Nasdaq National Market, subject to official notice of issuance.
7.10) Company Shareholder Approval. The principal terms of this
Agreement shall have been approved by the Company Shareholders, as required by
applicable law and the Company's Articles of Incorporation and Bylaws.
7.11) Transfer of WNS Assets and Assumption of Liabilities. Pursuant to
the Letter Agreement, Parent shall have caused to be transferred to Merger
Subsidiary of the assets of Parent which the Letter Agreement contemplates shall
be transferred and, in accordance therewith, Merger Subsidiary shall have
assumed the liabilities of WNS.
7.12) Minimum Parent Price Per Share. The closing sale price of Parent
Common Stock as quoted on the Nasdaq National Market on the trading day
immediately preceding the Closing Date, as reported in the Wall Street Journal,
shall be Six Dollars ($6.00) or more.
ARTICLE VIII
CLOSING
8.1) Closing Date. The consummation of the Merger provided for herein
(the "Closing") shall take place at 10:00 a.m. (local time) as soon as possible
on such date as the Parties may agree upon, but no later than the date set forth
in Section 10.1(b) (the "Closing Date"). The Closing shall take place at the
offices of the Company, or at such other place or in such other manner (e.g. by
telecopy exchange of signature pages with originals to follow by overnight
delivery) as the Parties may agree.
8.2) Closing Deliveries of the Company. In addition to, and without
limiting any other provisions of this Agreement, the Company shall deliver the
items referred to in subsections (a) through (f) below, in form reasonably
satisfactory to Parent and its counsel:
(a) Resignations, effective as of the Closing, of all of the
Company's Board of Directors and officers.
(b) Certified copies of the Company's Articles of
Incorporation and a Certificate of Good Standing, each certified by the
California Secretary of State as of a date not more than five (5)
business days prior to the Closing Date.
(c) Certificate of Status certified by the California
Secretary of State dated not more than five (5) business days prior to
Closing Date, to the effect that the Company is in good standing, has
no known unpaid tax liability, and is entitled to transact business in
the State of California.
(d) An unexpired Tax Clearance Certificate of the Franchise
Tax Board, certifying that all taxes imposed under the Bank and
Corporation Tax Law on the Company have been paid, assumed or secured
by other means.
(e) Certificates executed by the Company reasonably acceptable
to Parent certifying that an interest in the Company does not represent
a U.S. real property interest within the meaning of Section 1445 of the
Code and the regulations promulgated thereunder.
(f) All of the documents, certificates, instruments and
opinions required to be delivered to Parent under Article VI of this
Agreement.
8.3) Closing Deliveries of Parent. In addition to, and without limiting
any other provisions of this Agreement, Parent shall, at the Closing, deliver to
the Company in form reasonably satisfactory to the Company and its counsel, the
documents and opinion required to be delivered to the Company under Article VII
of this Agreement.
8.4) Proceedings. All proceedings taken and all documents executed and
delivered by the Parties at the Closing shall be deemed to have been taken and
executed simultaneously and no proceedings shall be deemed taken nor any
documents executed or delivered until all have been taken, executed and
delivered.
ARTICLE IX
INDEMNIFICATION
9.1) Indemnification of Parent. The Indemnifying Shareholders shall
indemnify, defend and hold harmless Parent and each of its subsidiaries
(including the Surviving Corporation), officers and directors (Parent and such
other indemnitees referred to in this Article IX as "Parent") from and against
and in respect of any and all demands, claims, actions or causes of action,
assessments, losses, damages, liabilities, interest and penalties, costs and
expenses (including, without limitation, reasonable legal fees and disbursements
incurred in connection therewith and in seeking indemnification therefor, and
any amounts or expenses required to be paid or incurred in connection with any
action, suit, proceeding, claim, appeal, demand, assessment or judgment), but
reduced by any recovery under insurance policies, and by any net tax benefit
accruing to Parent as a result thereof (such net tax benefit being determined
after taking into account the effect of recovery under the Escrow Agreement and
calculated at Parent's incremental effective tax rate) resulting from, arising
out of, or imposed upon or incurred by any person to be indemnified hereunder by
reason of any breach of any representation, warranty, covenant or agreement of
the Company or the Indemnifying Shareholders contained in this Agreement or any
agreement, certificate or document executed and delivered by the Company or the
Indemnifying Shareholders pursuant hereto or in connection with any of the
transactions contemplated by this Agreement ("Indemnifiable Losses"). The
indemnification provided for in this Section 9.1 will not apply unless, and will
apply only to the extent that, the Indemnifiable Losses exceed an aggregate of
One Hundred Thousand Dollars ($100,000) (the "Deductible"), after which point
the Indemnifying Shareholders shall have the obligations to indemnify, defend
and hold harmless as required by this Section with respect to Indemnifiable
Losses in excess of the Deductible; provided that the Indemnifying Shareholders'
liability under this Section 9.1 shall be limited as set forth in Section 9.5.
9.2) Indemnification of the Company Shareholders. Parent shall
indemnify, defend and hold harmless the Company Shareholders and their
affiliates, agents and counsel from and against and in respect of any and all
demands, claims, actions or causes of action, assessments, losses, damages,
liabilities, interest and penalties, costs and expenses (including, without
limitation, reasonable legal fees and disbursements incurred in connection
therewith and in seeking indemnification therefor, and any amounts or expenses
required to be paid or incurred in connection with any action, suit, proceeding,
claim, appeal, demand, assessment or judgment), resulting from, arising out of,
or imposed upon or incurred by any person to be indemnified hereunder by reason
of any breach of any representation, warranty, covenant or agreement of Parent
contained in this Agreement or any agreement, certificate or document executed
and delivered by Parent pursuant hereto or in connection with the transactions
contemplated by this Agreement.
9.3) Third Party Claims. If a claim by a third party is made against an
indemnified party and if the indemnified party intends to seek indemnity with
respect thereto under this Article IX, such indemnified party shall promptly
notify the indemnifying party of such claim; provided, however, that failure to
give timely notice shall not affect the rights of the indemnified party so long
as the failure to give timely notice does not adversely affect the indemnifying
party's ability to defend such claim against a third party. The indemnified
party shall not settle such claim without the consent of the indemnifying party,
which consent shall not be unreasonably withheld or delayed. If the indemnifying
party acknowledges in writing its indemnity obligations for Indemnifiable Losses
resulting therefrom, the indemnifying party may participate at its own cost and
expense in the settlement or defense of any claim for which indemnification is
sought; provided that, such settlement or defense shall be controlled by the
indemnified party.
9.4) Escrow. In order to provide for possible indemnification in
accordance with Article IX of this Agreement, the Escrow Agent shall retain the
Holdback Shares in the Escrow Account for the duration of the Survival Period.
Such retained Holdback Shares shall be held pursuant to and under the terms,
conditions, and instructions relating to the holding, investment, and
disbursement of the Holdback Shares, as set forth in an Escrow Agreement among
Parent, the Company, the Indemnifying Shareholders and the Escrow Agent to be
executed on or before the Closing Date in substantially the form attached hereto
as Exhibit A. Upon the expiration of the Survival Period described in Section
12.3 hereof or, if later, the final resolution of any claims for indemnification
pursuant to Article IX hereof, the Escrow Agent shall distribute to the
Indemnifying Shareholders the Holdback Shares, including any dividends or
distributions thereon as described below, to the extent that the Holdback Shares
have not been distributed to Parent in satisfaction of, or retained pending the
resolution of, any claims for indemnification pursuant to Article IX hereof.
Dividends or distributions received on the Holdback Shares shall be retained by
the Escrow Agent and shall become distributable to the Indemnifying Shareholders
only upon the expiration of the Survival Period and final resolution of any then
pending claims against the Holdback Shares and such dividends or distributions
as provided in Article IX. Subject to the Escrow Agreement, the Indemnifying
Shareholders shall retain his voting rights with respect to securities retained
by the Escrow Agent.
9.5) Set-Off. Parent's and the Surviving Corporation's recovery for
Indemnifiable Losses which do not arise out of or relate to any fraud or
intentional misrepresentation by the Company or the Indemnifying Shareholders
shall be limited exclusively to recovery from the Holdback Shares. Parent's and
the Surviving Corporation's recovery from the Company Shareholders for
Indemnifiable Loss arising out of or related to any fraud or intentional
misrepresentation by the Company or the Company Shareholders shall not be
limited to the Holdback Shares.
9.6) Waiver of Subrogation. From and after the Closing, the Company
Shareholders shall not have any rights to indemnification, contribution or
subrogation from Parent, the Company or their successors, whether pursuant to
Parent's, the Company's or their successors' Articles of Incorporation, Bylaws,
insurance policies or otherwise, with respect to acts or events occurring at or
prior to the Closing, except as otherwise provided in Section 9.2.
9.7) Cooperation as to Indemnified Liability. Each party hereto shall
cooperate fully with the other parties with respect to reasonable access to
books, records, or other documentation within such party's control, if deemed
reasonably necessary or appropriate by any party in the defense of any claim
which may give rise to indemnification hereunder.
9.8) Determination of Payment. Any amount of Indemnifiable Losses
incurred by and owed to Parent on account of a claim for damages pursuant to
Section 9.2 above will be payable to the Parent out of the Holdback Shares then
held by the Escrow Agent; provided, however, that in lieu of forfeiture of
Holdback Shares with respect to a particular claim, the Indemnifying
Shareholders may instead elect and shall be entitled to pay cash to Parent with
respect to such claim in an amount equal to the Indemnifiable Losses incurred by
or owed to Parent, and such Holdback Shares that otherwise would have been
forfeited to Parent shall instead be released from the Escrow Account and
delivered to Indemnifying Shareholders. For purposes of determining the number
of Holdback Shares to be released to Parent in satisfaction of claims for
Indemnifiable Losses or, if applicable, to the Indemnifying Shareholders upon an
election to pay cash in lieu of forfeiture of shares hereunder, such shares
shall be deemed to have a per share value equal to the Parent Closing Price Per
Share.
ARTICLE X
TERMINATION
10.1) Termination. This Agreement may be terminated at any time prior
to the Effective Time, only:
(a) by mutual consent of the Board of Directors of Parent and
the Board of Directors of the Company;
(b) by either Parent or the Company if, without fault of such
terminating party, the Merger shall not have been consummated on or
before February 29, 2000;
(c) by the Company if any of the conditions specified in
Article VII hereof has not been waived by the Company or met at such
time as such condition can no longer be satisfied; or
(d) by Parent if any of the conditions specified in Article VI
hereof has not been waived by Parent or met at such time as such
condition can no longer be satisfied.
10.2) Procedure and Effect of Termination. In the event of termination
and abandonment of the Merger by Parent or by the Company pursuant to Section
10.1 hereof, written notice thereof shall immediately be given to the other
party and this Agreement shall terminate and the Merger shall be abandoned,
without further action by any of the Parties. Merger Subsidiary agrees that any
termination by Parent shall be conclusively binding upon Merger Subsidiary,
whether given expressly on its behalf or not, and the Company shall have no
further obligation with respect to Merger Subsidiary. If this Agreement is
terminated as provided herein, no party hereto shall have any liability
hereunder or further obligation hereunder to any other party to this Agreement
except as stated in Article IX, or Section 12.7 hereof, which Sections shall
survive any such termination and continue in effect thereafter; provided,
however, that nothing in this Article X shall relieve any party of liability for
breach of this Agreement. In the event of any termination of this Agreement,
that certain Confidentiality Agreement between Parent and the Company dated
August 18, 1999, shall govern any confidential information about the other party
obtained pursuant to this Agreement.
ARTICLE XI
ALTERNATIVE DISPUTE RESOLUTION
11.1) Agreement to Arbitrate. All disputes or claims arising out of or
in any way relating to this Agreement, including the making of this Agreement,
shall be submitted to and determined by final and binding arbitration under the
rules of the American Arbitration Association. Arbitration proceedings may be
initiated by the Parent or the Surviving Corporation, on one hand, or the
Indemnifying Shareholders, on the other hand, upon notice to the other and to
the American Arbitration Association, and shall be conducted by three
arbitrators under the rules of the American Arbitration Association in
Minneapolis, Minnesota; provided, however, that the disputing parties may agree,
following the giving of such notice, to have the arbitration proceedings
conducted with a single arbitrator. The notice must specify, in general, the
issues to be resolved in any such arbitration proceeding.
The arbitrators shall be selected by agreement of the disputing parties
from a list of twelve (12) or more arbitrators proposed to the disputing parties
by the American Arbitration Association, or may be persons not on such list as
agreed to by the disputing parties. Within fifteen (15) days of the commencement
of arbitration, each disputing party shall select one person to act as
arbitrator, and the two selected shall select a third arbitrator within ten (10)
days of their appointment. If the arbitrator selected by the parties are unable
or fail to agree upon a third arbitrator, the third arbitrator shall be selected
by the American Arbitration Association.
Notwithstanding the Rules of the American Arbitration Association, the
parties shall be allowed to participate in discovery in accordance with the
Federal Rules of Civil Procedure for a period of ninety (90) days after the
filing of the answer or other responsive pleading. Unresolved discovery disputes
may be brought to the attention of the Chair of the arbitration panel and may be
disposed of by the Chair of the panel.
11.2) Non-Prevailing Party to Pay Fees and Expenses. If a party
initiates or becomes a party to an arbitration or a formal proceeding in law or
equity involving this Agreement, and if such party obtains a substantial portion
of the relief requested by that party (the "Prevailing Party"), then the
non-prevailing party shall pay all of the non-prevailing party's and the
Prevailing Party's reasonable costs and expenses, including reasonable
attorneys' fees and expenses, incurred with respect to such proceeding. If no
party obtains a substantial portion of the relief requested the Parties shall
bear their respective own expenses.
ARTICLE XII
OTHER PROVISIONS
12.1) Further Assurances. At such time and from time to time on and
after the Closing Date upon request by Parent, the Company Shareholders shall
execute, acknowledge and deliver, or shall cause to be done, executed,
acknowledged and delivered, all such further acts, deeds, assignments,
transfers, conveyances, powers of attorney and assurances that may be required
for the better conveying, transferring, assigning, delivering, assuring and
confirming to Parent, or to its respective successors and assigns all of the
Company Common Stock or to otherwise carry out the purposes of this Agreement.
12.2) Complete Agreement. The Schedules and Exhibits to this Agreement
shall be construed as an integral part of this Agreement to the same extent as
if they had been set forth verbatim herein. This Agreement and the Schedules and
Exhibits hereto, together with the Confidentiality Agreement and that certain
letter agreement regarding loan agreement of even date herewith, constitute the
entire agreement among the Parties with respect to the subject matter hereof and
supersede all prior agreements whether written or oral relating hereto.
12.3) Survival of Representations, Warranties and Agreements. The
representations, warranties, covenants and agreements contained in Articles III
and IV of this Agreement, as brought current to the Closing Date pursuant to
Section 6.1 or Section 7.1 respectively, shall survive the Closing and remain in
full force and effect for ninety (90) days after the completion of the first
fiscal year-end audit of the combined operations of Parent and the Surviving
Corporation (the "Survival Period"). Expiration of a representation, warranty,
covenant or agreement pursuant to this Section shall not limit or otherwise
affect the right of a party to indemnification under Article IX if notice was
sent to the party from whom indemnification is sought of the basis for such
claim to indemnification prior to such expiration. No independent investigation
of the Company by Parent, its counsel, or any of its agents or employees shall
in any way limit or restrict the scope of the representations and warranties
made by the Company or the Company Shareholders in this Agreement or the
agreements relating hereto.
12.4) Waiver, Discharge, Amendment, Etc. The failure of any party
hereto to enforce at any time any of the provisions of this Agreement, including
the election of such party to proceed with the Closing despite a failure of any
condition to such party's closing obligations to occur, shall in no way be
construed to be a waiver of any such provision, nor in any way to affect the
validity of this Agreement or any part thereof or the right of the party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to be a waiver of any other or subsequent breach.
This Agreement may be amended by the Company and Parent, by mutual action
approved by their respective Boards of Directors or their respective officers
authorized by such Board of Directors, at any time prior to the Closing Date.
Any amendment to this Agreement shall be in writing and signed by the Company,
the Indemnifying Shareholders, and Parent.
12.5) Notices. All notices or other communications to a party,
including consents of Parent under Sections 5.3 and 5.4, required or permitted
hereunder shall be in writing and shall be delivered personally or by telecopy
or e-mail to such party (or, in the case of an entity, to an executive officer
of such party) or shall be given by certified mail, postage prepaid with return
receipt requested, addressed as follows:
if to Parent or, after the Closing to the Company, to:
Waters Instruments, Inc.
dba Waters Corporation
2950 Xenium Lane North Suite 108
Plymouth, MN 55441
and if to the Company Shareholders, or prior to the Closing to the Company, to:
Mr. Frank Madren
Garrett Communications, Inc.
213 Hammond Avenue
Fremont, CA 94539
Any party may change the above-specified recipient and/or mailing
address by notice to all other Parties given in the manner herein prescribed.
All notices shall be deemed given on the day when actually delivered as provided
above (if delivered personally or by telecopy or e-mail) or on the day shown on
the return receipt (if delivered by mail).
12.6) Public Announcement. The Parties intend that all future
statements or communications to the public or press regarding this Agreement or
the Merger shall be mutually agreed upon by them. Neither party shall, without
such mutual agreement or the prior consent of the other, issue any statement or
communication to the public or to the press regarding this Agreement, or any of
the terms, conditions or other matters with respect to this Agreement, except as
required by law or the rules of the NASD and then only: (a) upon the advice of
such party's legal counsel; (b) to the extent required by law or the rules of
the NASD; and (c) following prior notice to, and consultation with, the other
party (which notice shall include a copy of the proposed statement or
communication to be issued to the press or public).
12.7) Expenses. Parent shall pay its own expenses incident to this
Agreement and the preparation for, and consummation of, the transactions
provided for herein.
12.8) Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Minnesota applicable to
contracts made and to be performed in Minnesota, without giving effect to
principles of conflict of laws. The Parties agree and consent to be subject to
the exclusive jurisdiction of, and exclusive venue in, the U.S. District Court
for the District of Minnesota and, in the absence of such federal jurisdiction,
the Parties agree and consent to be subject to the jurisdiction of the District
Court for the State of Minnesota, County of Hennepin, and the Parties
irrevocably waive any defense of any inconvenient forum to the maintenance of
any action or proceeding in such courts. Further, the Parties specifically agree
that either party may effect valid service of process by any means authorized
under Minnesota Law.
12.9) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Parties and the successors or assigns of the
Parties; provided that the rights of the Company and the Company Shareholders
herein may not be assigned except as provided in this Agreement and the rights
of Parent may only be assigned to an Affiliate of Parent.
12.10) Titles and Headings; Construction. The Table of Contents, titles
and headings to the Articles and Sections herein are inserted for the
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement. This Agreement shall be
construed without regard to any presumption or other rule requiring construction
hereof against the party causing this Agreement to be drafted.
12.11) Benefit. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the Parties or their respective
successors or assigns, any rights, remedies, obligations or liabilities under or
by reason of this Agreement.
12.12) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument. The Parties acknowledge that delivery
of executed copies of this Agreement may be effected by mail, facsimile or other
comparable means.
12.13) Confidentiality. Each party recognizes that it has received and
will receive confidential information concerning the other during the course of
the Merger negotiations and preparations. Accordingly, each party agrees (a) to
prevent the unauthorized disclosure of any confidential information concerning
the other that was or is disclosed during the course of such negotiations and
preparations, and is clearly designated in writing as confidential at the time
of disclosure, and (b) to not make use of or permit to be used any such
confidential information other than for the purpose of effectuating the Merger
and related transactions. The obligations of this Section will not apply to
information that (i) is or becomes part of the public domain, (ii) is disclosed
by the disclosing party to third parties without restrictions on disclosure,
(iii) is received by the receiving party from a third party without breach of a
nondisclosure obligation to the other party or (iv) is required to be disclosed
by law. If this Agreement is terminated, all copies of documents containing
confidential information shall be returned by Parent to the Company.
[This is the final page of this Agreement prior to the signature pages hereof.
The remainder of this page has been left blank intentionally.]
<PAGE>
IN WITNESS WHEREOF, each of the Parties has caused this Agreement and
Plan of Reorganization to be executed in the manner appropriate for each, and to
be dated as of the date first above written.
GARRETT COMMUNICATIONS, INC. WATERS INSTRUMENTS, INC.
By: By:
Frank Madren, President Gerald W. Grabowski, President
WG MERGER CORP.
By:
Its President Frank Madren, Indemnifying
Shareholder
Christopher Robert, Indemnifying Ross Smith, Indemnifying
Shareholder Shareholder
[Signature Page to Agreement and Plan of Reorganization]
<PAGE>
ANNEX B
November 3, 1999
Board of Directors
Waters Instruments, Inc.
2950 Xenium Lane North
Suite 108
Minneapolis, MN 55441
Directors:
You have requested our opinion, as of the date hereof, as to the fairness, from
a financial point of view, to Waters Instruments, Inc. (d/b/a Waters
Corporation) ("Waters" or the "Company") of the consideration to be paid in
connection with the proposed merger (the "Merger") involving Garrett
Communications, Inc., a privately-held California Corporation ("Garrett"). The
terms of the Merger are contained in an Agreement and Plan of Reorganization to
be dated on or about November 3, 1999 (the "Merger Agreement") between Waters,
WG Merger Corp., a California Corporation and a wholly-owned subsidiary of
Waters, Garrett, Frank Madren, Chris Robert and Ross Smith. Pursuant to the
Merger Agreement, Waters will pay approximately $2.25 million in cash, and issue
375,000 shares of common stock of Waters and approximately 116,660 options to
purchase common stock of Waters for all of the issued and outstanding equity
securities of Garrett. The transaction is subject to a vote by stockholders of
Waters, as well as a number of other closing conditions.
John G. Kinnard and Company, Incorporated ("Kinnard"), as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements, and valuations for estate, corporate, and other
purposes. Kinnard will receive a fixed fee for providing this opinion and will
be indemnified against certain liabilities that may arise from activities
related to this engagement.
In connection with this opinion, we have, among other things, reviewed (i) a
draft of the Merger Agreement; (ii) certain historical financial information for
Waters and Garrett; (iii) certain projected financial information for Garrett
prepared for financial planning purposes and furnished by the management of
Garrett; and (iv) certain projected data relative to Waters. We have made
inquiries of the management of Garrett and Waters regarding the past and current
business operations, financial condition, and future prospects for Garrett. In
addition, we visited Garrett's facility, and have held discussions with the
senior management of both companies to understand their reasons for completing
the Merger.
We have compared financial information on Garrett to similar information for
certain companies deemed comparable to Garrett and have reviewed stock market
information on such companies that have publicly traded securities. Also, we
have reviewed, to the extent publicly available, the financial terms of certain
acquisition transactions involving companies operating businesses deemed similar
to that of Garrett and analyzed the general economic outlook for companies in
the ethernet networking industry.
In conducting our review and in rendering our opinion, we have assumed and
relied upon the accuracy, completeness, and fairness of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independent verification of such information. It is
understood that we were retained by the Board of Directors of the Company, and
that the Board of Directors has not looked to us for independent verification
with respect to the financial and other information provided to us or publicly
available. We have further relied upon the assurances of the management of the
Company that it is not aware of any facts that would make the information
supplied to us, or publicly available, inaccurate or misleading. With respect to
the financial projections for the Company and pro forma combined information for
Waters and Garrett, management of Waters has represented that such projections
and pro forma combined information have been reasonably prepared on a basis
reflecting management's best currently available estimates and judgment as to
the future financial performance of the Company and the projected combined
performance of Waters and Garrett.
We did not make an independent appraisal of the assets or liabilities of
Garrett, and we do not express an opinion regarding the liquidation value or
solvency of either company separately, or the combined companies following the
Merger. Furthermore, we do not express any opinion as to the prices at which
shares of Waters' common stock may trade following the date of this opinion, at
the closing date for the Merger, or at any later time in the future. Our opinion
as expressed herein is limited to the fairness to Waters, from a financial point
of view, of the consideration to be paid by the Company in connection with the
Merger, and does not address the Company's underlying business decision to
proceed with the Merger. Our opinion is based solely on information available to
us on or before the date hereof and reflects general market, economic,
financial, monetary, and other conditions as of the date hereof.
This opinion is addressed to the Board of Directors of the Company and is not a
recommendation as to how any stockholder of Waters should vote at the meeting of
stockholders to be held in connection with the Merger. This opinion may not be
reproduced, quoted, published, or otherwise used or referred to in any manner,
nor shall any public reference to Kinnard be made, without our prior written
consent. In accordance with the rules and regulations of the Securities and
Exchange Commission Kinnard has consented to the reproduction and discussion of
this opinion in the proxy statement to be mailed to the Company's shareholders.
Based upon the foregoing, and other matters that we considered relevant, it is
our opinion that, as of the date hereof, the consideration to be paid by Waters
Instruments, Inc. (d/b/a Waters Corporation), in connection with the Merger is
fair to the Company from a financial point of view.
Very truly yours,
/s/ John G. Kinnard and Company, Incorporated
JOHN G. KINNARD AND COMPANY, INCORPORATED
<PAGE>
ANNEX C
AMENDED AND RESTATED BYLAWS
OF
WATERS INSTRUMENTS, INC.
ARTICLE 1.
OFFICES
1.1) Offices. The principal executive office of the corporation shall
be at such address as the Board of Directors may determine from time to time,
and the corporation may have offices at such other places within or without the
State of Minnesota as the Board of Directors shall from time to time determine
or the business of the corporation requires.
ARTICLE 2.
MEETINGS OF SHAREHOLDERS
2.1) Regular Meetings. Regular meetings of the shareholders of the
corporation entitled to vote shall be held on an annual or other less frequent
basis as shall be determined by the Board of Directors or by the chief executive
officer; provided, that if a regular meeting has not been held during the
immediately preceding 15 months, a shareholder or shareholders holding 3% or
more of the voting power of all shares entitled to vote may demand a regular
meeting of shareholders by written notice of demand given to an officer of the
corporation. At each regular meeting, the shareholders, voting as provided in
the Articles of Incorporation and these Bylaws, shall elect qualified successors
for directors who serve for an indefinite term or whose terms have expired or
are due to expire within six months after the date of the meeting, and shall
transact such other business as shall come before the meeting. No meeting shall
be considered a regular meeting unless specifically designated as such in the
notice of meeting or unless all the shareholders entitled to vote are present in
person or by proxy and none of them objects to such designation.
2.2) Special Meetings. Special meetings of the shareholders entitled to
vote may be called at any time by the Chairman of the Board, the chief executive
officer, the chief financial officer, two or more directors, or a shareholder or
shareholders holding ten percent (10%) or more of the voting power of all shares
entitled to vote.
2.3) Place of Meetings. Meetings of the shareholders shall be held at
the principal executive office of the corporation or at such other place, within
or without the State of Minnesota, as is designated by the Board of Directors,
except that a regular meeting called by or at the demand of a shareholder shall
be held in the county where the principal executive office of the corporation is
located.
2.4) Notice of Meetings. There shall be mailed to each holder of shares
entitled to vote, at his address as shown by the books of the corporation, a
notice setting out the place, date and hour of any regular or special meeting,
which notice shall be mailed not less than ten (10) days nor more than sixty
(60) days prior to the date of the meeting; provided, that notice of a meeting
at which there is to be considered a proposal (i) to dispose of all, or
substantially all, of the property and assets of the corporation or (ii) to
dissolve the corporation shall be mailed to all shareholders of record, whether
or not entitled to vote; and provided further, that notice of a meeting at which
there is to be considered a proposal to adopt a plan of merger or exchange shall
be mailed to all shareholders of record, whether or not entitled to vote, at
least fourteen (14) days prior thereto. Notice of any special meeting shall
state the purpose or purposes of the proposed meeting, and the business
transacted at all special meetings shall be confined to the purposes stated in
the notice, unless all of the shareholders are present in person or by proxy and
none of them objects to consideration of a particular item of business.
Attendance at a meeting by any shareholder, without objection by him, shall
constitute his waiver of notice of the meeting.
2.5) Quorum and Adjourned Meeting. The holders of thirty-three and one
third (33-1/3%) of the voting power of the shares entitled to vote at a meeting,
represented either in person or by proxy, shall constitute a quorum for the
transaction of business at any regular or special meeting of shareholders. If a
quorum is present when a duly called or held meeting is convened, the
shareholders present may continue to transact business until adjournment, even
though the withdrawal of a number of shareholders originally present leaves less
than the proportion or number otherwise required for a quorum. In case a quorum
is not present at any meeting, those present shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until the requisite number of shares entitled to vote shall be
represented. At such adjourned meeting at which the required amount of shares
entitled to vote shall be represented, any business may be transacted which
might have been transacted at the original meeting.
2.6) Voting. At each meeting of the shareholders, every shareholder
having the right to vote shall be entitled to vote in person or by proxy duly
appointed by an instrument in writing subscribed by such shareholder. Each
shareholder shall have one (1) vote for each share having voting power standing
in his name on the books of the corporation except as may be otherwise provided
in the terms of the share or as may be required to provide for cumulative voting
(if not denied by the Articles). Upon the demand of any shareholder, the vote
for directors or the vote upon any question before the meeting shall be by
ballot. All elections shall be determined and all questions decided by a
majority vote of the number of shares entitled to vote and represented at any
meeting at which there is a quorum except in such cases as shall otherwise be
required by statute, the Articles of Incorporation or these Bylaws. Except as
may otherwise be required to conform to cumulative voting procedures, directors
shall be elected by a plurality of the votes cast by holders of shares entitled
to vote thereon.
2.7) Record Date. The Board of Directors may fix a time, not exceeding
sixty (60) days preceding the date of any meeting of shareholders, as a record
date for the determination of the shareholders entitled to notice of and
entitled to vote at such meeting, notwithstanding any transfer of any shares on
the books of the corporation after any record date so fixed. The Board of
Directors may close the books of the corporation against transfer of shares
during the whole or any part of such period. In the absence of action by the
Board, only shareholders of record twenty (20) days prior to a meeting may vote
at such meeting.
2.8) Order of Business. The suggested order of business at any regular
meeting and, to the extent appropriate, at all other meetings of the
shareholders shall, unless modified by the presiding chairman, be:
(a) Call of roll
(b) Proof of due notice of meeting or waiver of
notice
(c) Determination of existence of quorum
(d) Reading and disposal of any unapproved minutes
(e) Reports of officers and committees
(f) Election of directors
(g) Unfinished business
(h) New business
(i) Adjournment.
ARTICLE 3.
DIRECTORS
3.1) General Powers. Except as authorized by the shareholders pursuant
to a shareholder control agreement or unanimous affirmative vote, the business
and affairs of the corporation shall be managed by or under the direction of a
Board of Directors.
3.2) Number, Term, Election and Qualifications. At each annual meeting
the Shareholders shall determine the number of directors which shall be not less
than three (3) nor more than nine (9); provided, that between annual meetings
the Board of Directors may increase the authorized number of directors within
the limits stated above. However, notwithstanding the foregoing no increase or
decrease in the number of directors may be effected except according to the
further provisions contained in this Section 3.2.
If there are seven (7) or fewer directors, the directors shall be
divided into two classes, designated Class I and Class II. Each class shall
consist, as nearly as possible, of one-half of the total number of directors
constituting the entire Board of Directors.
At the first meeting of Shareholders held after November 3, 1999, Class
I directors shall be elected for a two (2)-year term and Class II directors for
a three (3) year term. At each succeeding annual meeting of the shareholders at
which directors are elected, successors to the Class of directors whose term
expires at that annual meeting shall be elected for a three (3) year term.
If there are more than seven (7) directors, the directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as possible, of one-third of the total number of
directors constituting the entire Board of Directors.
A director shall hold office until the annual meeting for the year in
which such director's term expires and until such director's successor shall be
elected and shall qualify, or until such director's resignation or removal from
office. If the number of directors is changed, any increase or decrease shall be
apportioned by the Board of Directors among the classes so as to maintain, as
nearly as possible, an equal number of directors in each class. In the event an
increase or decrease makes it impossible to maintain an equal number of
directors in each class, increases shall be allocated to the class or classes
with the longest remaining term, and decreases shall be allocated to the class
with the shortest remaining term.
Any director elected to fill a vacancy resulting from an increase in
such class shall hold office for a term that shall coincide with the remaining
term of that class. In no event will a decrease in the number of directors
result in the elimination of an entire class of directors, cause any class to
contain a number of directors two or more greater than any other class, or
shorten the term of any incumbent director. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have the
same remaining term as that of such director's predecessor.
No amendment to these Bylaws shall alter, change or repeal any of the
provisions of this Section 3.2 unless the amendment effecting such alteration,
change or repeal shall receive the affirmative vote of the holders of two-thirds
(2/3) of all shares of stock of the corporation entitled to vote on all matters
that may come before each meeting of shareholders.
Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of shareholders of the corporation either
by or at the direction of the Nominating Committee of the Board of Directors or
by any shareholder of record entitled to vote in the election of directors at
such meeting who has complied with the notice procedures set forth in this
paragraph of this Section 3.2. A shareholder who desires to nominate a person
for the election to the Board of Directors at a meeting of shareholders of the
corporation and who is eligible to make such nomination must give timely written
notice of the proposed nomination to the Secretary of the corporation. To be
timely, a shareholder's notice given pursuant to this paragraph must be received
at the principal executive office of the corporation not less than one hundred
twenty (120) calendar days in advance of the date which is one year later than
the date of the proxy statement of the corporation released to shareholders of
the corporation in connection with the previous year's annual meeting of
shareholders of the corporation; provided, however, that if no annual meeting of
shareholders of the corporation was held the previous year or if the date of the
forthcoming annual meeting of shareholders has been changed by more than thirty
(30) calendar days from the date contemplated at the time of the previous year's
proxy statement or if the forthcoming meeting is not an annual meeting of
shareholders of the corporation, then to be timely such shareholder's notice
must be so received not later than the close of business on the tenth day
following the earlier of (a) the day on which notice of the date of the
forthcoming meeting was mailed or given to shareholders by or on behalf of the
corporation or (b) the day on which public disclosure of the date of the
forthcoming meeting was made by or on behalf of the corporation. Such
shareholder's notice to the Secretary of the corporation shall set forth (a) as
to each person whom the shareholder proposes to nominate for election or
re-election as a director (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person; (iii) the class and number of shares of capital stock of the corporation
which are then beneficially owned by such person, (iv) any other information
relating to such person that is required by law or regulation to be disclosed in
solicitations of proxies for the election of directors of the corporation and
(v) such person's written consent to being named as a nominee for election as a
director and to serve as a director if elected and (b) as to the shareholder
giving the notice, (i) the name and address, as they appear in the stock records
of the corporation, of such shareholder, (ii) the class and number of shares of
capital stock of the corporation which are then beneficially owned by such
stockholder, (iii) a description of all arrangements or understandings between
such shareholder and each nominee for election as a director and any other
person or persons (naming such person or persons) relating to the nomination
proposed to be made by such shareholder, and (iv) any other information required
by law or regulation to be provided by a shareholder intending to nominate a
person for election as a director of the corporation. At the request of the
Board of Directors, any person nominated by or at the direction of the Board of
Directors for election as a director of the corporation shall furnish to the
Secretary of the corporation the information concerning such nominee which is
required to be set forth in a shareholder's notice off a proposed nomination. No
person shall be eligible for election as a director of the corporation unless
nominated in compliance with the procedures set forth in this paragraph. The
chairman of a meeting of shareholders of the corporation shall refuse to accept
the nomination of any person not made in compliance with the procedures set
forth in this paragraph, and such defective nomination shall be disregarded.
3.3) Vacancies. Vacancies on the Board of Directors shall be filled by
the affirmative vote of a majority of the remaining members of the Board, though
less than a quorum; provided, that newly created directorships resulting from an
increase in the authorized number of directors shall be filled by the
affirmative vote of a majority of the directors serving at the time of such
increase. Persons so elected shall be directors until their successors are
elected by the shareholders, who may make such election at the next regular or
special meeting of the shareholders.
3.4) Quorum and Voting. A majority of the directors currently holding
office shall constitute a quorum for the transaction of business. Except as
otherwise provided in the Articles of Incorporation or these Bylaws, the acts of
a majority of the directors present at a meeting at which a quorum is present
shall be the acts of the Board of Directors.
3.5) Board Meetings; Place and Notice. Meetings of the Board of
Directors may be held from time to time at any place within or without the State
of Minnesota that the Board of Directors may designate. In the absence of
designation by the Board of Directors, Board meetings shall be held at the
principal executive office of the corporation, except as may be otherwise
unanimously agreed orally, or in writing, or by attendance. Any director may
call a Board meeting by giving 24 hours notice to all directors of the date and
time of the meeting. The notice need not state the purpose of the meeting, and
may be given by mail, telephone, telegram, or in person. If a meeting schedule
is adopted by the Board, or if the date and time of a Board meeting has been
announced at a previous meeting, no notice is required.
3.6) Absent Directors. A director may give advance written consent or
opposition to a proposal to be acted on at a Board meeting. If the director is
not present at the meeting, consent or opposition to a proposal does not
constitute presence for purposes of determining the existence of a quorum, but
consent or opposition shall be counted as a vote in favor of or against the
proposal and shall be entered in the minutes of the meeting, if the proposal
acted on at the meeting is substantially the same or has substantially the same
effect as the proposal to which the director has consented or objected.
3.7) Compensation. Directors who are not salaried officers of the
corporation shall receive such fixed sum per meeting attended or such fixed
annual sum or both as shall be determined from time to time by resolution of the
Board of Directors. Nothing herein contained shall be construed to preclude any
director from serving this corporation in any other capacity and receiving
proper compensation therefor.
3.8) Committees. The Board of Directors may, by resolution approved by
the affirmative vote of a majority of the Board, establish committees having the
authority of the Board in the management of the business of the corporation only
to the extent provided in the resolution. Each such committee shall consist of
one or more natural persons (who need not be directors) appointed by affirmative
vote of a majority of the directors present, and shall be subject at all times
to the direction and control of the Board. A majority of the members of a
committee present at a meeting shall constitute a quorum for the transaction of
business.
3.9) Committee of Disinterested Persons. The Board may establish a
committee composed of two or more disinterested directors or other disinterested
persons to determine whether it is in the best interests of the corporation to
pursue a particular legal right or remedy of the corporation and whether to
cause the dismissal or discontinuance of a particular proceeding that seeks to
assert a right or remedy on behalf of the corporation. For purposes of this
section, a director or other person is "disinterested" if the director or other
person is not the owner of more than one percent of the outstanding shares of,
or a present or former officer, employee, or agent of, the corporation or of a
related corporation and has not been made or threatened to be made a party to
the proceeding in question. The committee, once established, is not subject to
the direction or control of, or termination by, the Board. A vacancy on the
committee may be filled by a majority vote of the remaining members. The good
faith determinations of the committee are binding upon the corporation and its
directors, officers and shareholders. The committee terminates when it issues a
written report of its determinations to the Board.
3.10) Order of Business. The suggested order of business at any meeting
of the Board of Directors shall, to the extent appropriate and unless modified
by the presiding chairman, be:
(a) Roll call
(b) Proof of due notice of meeting or waiver of notice, or
unanimous presence and declaration by presiding chairman
(c) Determination of existence of quorum
(d) Reading and disposal of any unapproved minutes
(e) Reports of officers and committees
(f) Election of officers
(g) Unfinished business
(h) New business
(i) Adjournments.
3.11) Removal. Directors may be removed only for cause by the
affirmative vote of the holders of two-thirds (2/3) of all shares of stock of
the corporation entitled to vote on all matters that may come before each
meeting of shareholders or for cause by vote of a majority of the entire Board
of Directors. No amendment to these Bylaws shall alter, change or repeal any of
the provisions of this Section 3.11 unless the amendment effecting such
alteration, change or repeal shall receive the affirmative vote of the holders
of two-thirds (2/3) of all shares of stock of the corporation entitled to vote
on all matters that may come before each meeting of shareholders.
ARTICLE 4.
OFFICERS
4.1) Number and Designation. The corporation shall have one or more
natural persons exercising the functions of the offices of chief executive
officer and chief financial officer. The Board of Directors may elect or appoint
such other officers or agents as it deems necessary for the operation and
management of the corporation including, but not limited to, a Chairman of the
Board, a President, one or more Vice Presidents, a Secretary and a Treasurer,
each of whom shall have the powers, rights, duties and responsibilities set
forth in these Bylaws unless otherwise determined by the Board. Any of the
offices or functions of those offices may be held by the same person.
4.2) Election, Term of Office and Qualification. At the first meeting
of the Board following each election of directors, the Board shall elect
officers, who shall hold office until the next election of officers or until
their successors are elected or appointed and qualify; provided, however, that
any officer may be removed with or without cause by the affirmative vote of a
majority of the Board of Directors present (without prejudice, however, to any
contract rights of such officer).
4.3) Resignation. Any officer may resign at any time by giving written
notice to the corporation. The resignation is effective when notice is given to
the corporation, unless a later date is specified in the notice, and acceptance
of the resignation shall not be necessary to make it effective.
4.4) Vacancies in Office. If there be a vacancy in any office of the
corporation, by reason of death, resignation, removal or otherwise, such vacancy
shall.be filled for the unexpired term by the Board of Directors.
4.5) Chief Executive Officer. Unless provided otherwise by a resolution
adopted by the Board of Directors, the chief executive officer (a) shall have
general active management of the business of the corporation; (b) shall, when
present and in the absence of the Chairman of the Board, preside at all meetings
of the shareholders and Board of Directors; (c) shall see that all orders and
resolutions of the Board are carried into effect; (d) shall sign and deliver in
the name of the corporation any deeds, mortgages, bonds, contracts or other
instruments pertaining to the business of the corporation, except in cases in
which the authority to sign and deliver is required by law to be exercised by
another person or is expressly delegated by the Articles, these Bylaws or the
Board to some other officer or agent of the corporation; (e) may maintain
records of and certify proceedings of the Board and shareholders; and (f) shall
perform such other duties as may from time to time be assigned to him by the
Board.
4.6) Chief Financial Officer. Unless provided otherwise by a resolution
adopted by the Board of Directors, the chief financial officer (a) shall keep
accurate financial records for the corporation; (b) shall deposit all monies,
drafts and checks in the name of and to the credit of the corporation in such
banks and depositories as the Board of Directors shall designate from time to
time; (c) shall endorse for deposit all notes, checks and drafts received by the
corporation as ordered by the Board, making proper vouchers therefor; (d) shall
disburse corporate funds and issue checks and drafts in the name of the
corporation, as ordered by the Board; (e) shall render to the chief executive
officer and the Board of Directors, whenever requested, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation; and (f) shall perform such other duties as may be prescribed by the
Board of Directors or the chief executive officer from time to time.
4.7) Chairman of the Board. The Chairman of the Board shall preside at
all meetings of the shareholders and of the Board and shall exercise general
supervision and direction over the more significant matters of policy affecting
the affairs of the corporation, including particularly its financial and fiscal
affairs.
4.8) President. Unless otherwise determined by the Board, the President
shall be the chief executive officer. If an officer other than the President is
designated chief executive officer, the President shall perform such duties as
may from time to time be assigned to him by the Board.
4.9) Vice President. Each Vice President shall have such powers and
shall perform such duties as may be specified in these Bylaws or prescribed by
the Board of Directors. In the event of absence or disability of the President,
the Board of Directors may designate a Vice President or Vice Presidents to
succeed to the power and duties of the President.
4.10) Secretary. The Secretary shall, unless otherwise determined by
the Board, be secretary of and attend all meetings of the shareholders and Board
of Directors, and may record the proceedings of such meetings in the minute book
of the corporation and, whenever necessary, certify such proceedings. The
Secretary shall give proper notice of meetings of shareholders and shall perform
such other duties as may be prescribed by the Board of Directors or the chief
executive officer from time to time.
4.11) Treasurer. Unless otherwise determined by the Board, the
Treasurer shall be the chief financial officer of the corporation. If an officer
other than the Treasurer is designated chief financial officer, the Treasurer
shall perform such duties as may be prescribed by the Board of Directors or the
chief executive officer from time to time.
4.12) Delegation. Unless prohibited by a resolution approved by the
affirmative vote of a majority of the directors present, an officer elected or
appointed by the Board may delegate in writing some or all of the duties and
powers of his office to other persons.
ARTICLE 5.
INDEMNIFICATION
5.1) The corporation shall indemnify such persons, for such expenses
and liabilities, in such manner, under such circumstances, and to such extent,
as permitted by Minnesota Statutes, Section 302A.521, as now enacted or
hereafter amended.
ARTICLE 6.
SHARES AND THEIR TRANSFER
6.1) Certificate of Stock. Every owner of stock of the corporation
shall be entitled to a certificate, in such form as the Board of Directors may
prescribe, certifying the number of shares of stock of the corporation owned by
him. The certificates for such stock shall be numbered (separately for each
class) in the order in which they are issued and shall, unless otherwise
determined by the Board, be signed by the chief executive officer, the chief
financial officer, or any other officer of the corporation. A signature upon a
certificate may be a facsimile. Certificates on which a facsimile signature of a
former officer, transfer agent or registrar appears may be issued with the same
effect as if he were such officer, transfer agent or registrar on the date of
issue.
6.2) Stock Record. As used in these Bylaws, the term "shareholder"
shall mean the person, firm or corporation in whose name outstanding shares of
capital stock of the corporation are currently registered on the stock record
books of the corporation. The corporation shall keep, at its principal executive
office or at another place or places within the United States determined by the
Board, a share register not more than one year old containing the names and
addresses of the shareholders and the number and classes of shares held by each
shareholder. The corporation shall also keep at its principal executive office
or at another place or places within the United States determined by the Board,
a record of the dates on which certificates representing shares were issued.
Every certificate surrendered to the corporation for exchange or transfer shall
be cancelled and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been so
cancelled (except as provided for in Section 6.4 of this Article 6).
6.3) Transfer of Shares. Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate
(or his legal representative or duly authorized attorney-in-fact) and upon
surrender for cancellation of the certificate or certificates for such shares.
The shareholder in whose name shares of stock stand on the books of the
corporation shall be deemed the owner thereof for all purposes as regards the
corporation; provided, that when any transfer of shares shall be made as
collateral security and not absolutely, such fact, if known to the corporation
or to the transfer agent, shall be so expressed in the entry of transfer; and
provided, further, that the Board of Directors may establish a procedure whereby
a shareholder may certify that all or a portion of the shares registered in the
name of the shareholder are held for the account of one or more beneficial
owners.
6.4) Lost Certificate. Any shareholder claiming a certificate of stock
to be lost or destroyed shall make an affidavit or affirmation of that fact in
such form as the Board of Directors may require, and shall, if the directors so
require, give the corporation a bond of indemnity in form and with one or more
sureties satisfactory to the Board of at least double the value, as determined
by the Board, of the stock represented by such certificate in order to indemnify
the corporation against any claim that may be made against it on account of the
alleged loss or destruction of such certificate, whereupon a new certificate may
be issued in the same tenor and for the same number of shares as the one alleged
to have been destroyed or lost.
ARTICLE 7.
GENERAL PROVISIONS
7.1) Distributions; Acquisitions of Shares. Subject to the provisions
of law, the Board of Directors may authorize the acquisition of the
corporation's shares and may authorize distributions whenever and in such
amounts as, in its opinion, the condition of the affairs of the corporation
shall render it advisable.
7.2) Fiscal Year. The fiscal year of the corporation shall be
established by the Board of Directors.
7.3) Seal. The corporation shall have such corporate seal or no
corporate seal as the Board of Directors shall from time to time determine.
7.4) Securities of Other Corporations.
(a) Voting Securities Held by the Corporation. Unless
otherwise ordered by the Board of Directors, the chief executive
officer shall have full power and authority on behalf of the
corporation (i) to attend and to vote at any meeting of security
holders of other companies in which the corporation may hold
securities; (ii) to execute any proxy for such meeting on behalf of the
corporation; and (iii) to execute a written action in lieu of a meeting
of such other company on behalf of this corporation. At such meeting,
by such proxy or by such writing in lieu of meeting, the chief
executive officer shall possess any may exercise any and all rights and
powers incident to the ownership of such securities that the
corporation might have possessed and exercised if it had been present.
The Board of Directors may from time to time confer like powers upon
any other person or persons.
(b) Purchase and Sale of Securities. Unless otherwise ordered
by the Board of Directors, the chief executive officer shall have full
power and authority on behalf of the corporation to purchase, sell,
transfer or encumber any and all securities of any other company owned
by the corporation and may execute and deliver such documents as may be
necessary to effect such purchase, sale, transfer or encumbrance. The
Board of Directors may from time to time confer like powers upon any
other person or persons.
7.5) Shareholder Agreements. In the event of any conflict or
inconsistency between these Bylaws, or any amendment thereto, and any
shareholder control agreement, whenever adopted, such shareholder control
agreement shall govern.
ARTICLE 8.
MEETINGS
8.1) Waiver of Notice. Whenever any notice whatsoever is required to be
given by these Bylaws, the Articles of Incorporation or any of the laws of the
State of Minnesota, a waiver thereof given by the person or persons entitled to
such notice, whether before, at or after the time stated therein and either in
writing, orally or by attendance, shall be deemed equivalent to the actual
required notice.
8.2) Telephone Meetings and Participation. A conference among directors
by any means of communication through which the directors may simultaneously
hear each other during the conference constitutes a Board meeting, if the same
notice is given of the conference as would be required for a meeting, and if the
number of directors participating in the conference would be sufficient to
constitute a quorum at a meeting. Participation in a meeting by that means
constitutes presence in person at the meeting. A director may participate in a
Board meeting not heretofore described in this paragraph, by any means of
communication through which the director, other directors so participating, and
all directors physically present at the meeting may simultaneously hear each
other during the meeting. Participation in a meeting by that means constitutes
presence in person at the meeting. The provisions of this section shall apply to
committees and members of committees to the same extent as they apply to the
Board and directors.
8.3) Authorization Without Meeting. Any action of the shareholders, the
Board of Directors, or any committee of the corporation which may be taken at a
meeting thereof, may be taken without a meeting if authorized by a writing
signed by all of the holders of shares who would be entitled to vote on such
action, by all of the directors (unless less than unanimous action is permitted
by the Articles of Incorporation), or by all of the members of such committee,
as the case may be.
ARTICLE 9.
AMENDMENTS OF BYLAWS
9.1) Amendments. Except as otherwise provided in specific provisions of
these Bylaws, these Bylaws may be altered, amended, added to or repealed by the
affirmative vote of a majority of the members of the Board of Directors at any
regular meeting of the Board or at any special meeting of the Board called for
that purpose, subject to the power of the shareholders to change or repeal such
Bylaws and subject to any other limitations on such authority of the Board
provided by the Minnesota Business Corporation Act.
<PAGE>
The undersigned, John Grimstad, Secretary of Waters Instruments, Inc.
hereby certifies that the foregoing Restated Bylaws were duly adopted as the
Bylaws of the corporation by its Board of Directors on October 28, 1999.
Secretary
<PAGE>
ANNEX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
================================================================================
FORM 10-QSB
================================================================================
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
Commission file number 0-1388:
WATERS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter.)
(d/b/a Waters Corporation)
Minnesota 41-0832194
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2411 Seventh Street NW
Rochester, Minnesota 55901
(Address of principal executive offices)
(507) 288-7777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.10 Par Value - 1,471,279 shares outstanding as of November 12,
1999.
Transitional Small Business Disclosure Format (check one) :
Yes _ _ No _X_
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Operations
(Thousands, except
per share data)
<TABLE>
<CAPTION>
For The Three Months
Ended September 30,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
NET SALES $ 4,789 $ 4,462
COST OF GOODS
SOLD 2,990 2,748
----------- -----------
GROSS PROFIT 1,799 1,714
OPERATING EXPENSES
Administrative 435 392
Selling 711 561
Research and Development 110 120
----------- -----------
Total Operating Expenses 1,256 1,073
OPERATING INCOME 543 641
OTHER INCOME (EXPENSE)
Net Interest Income (Expense) 41 27
Net Other Income (Expense) (4) (2)
----------- -----------
INCOME BEFORE INCOME TAX 580 666
INCOME TAX PROVISION 220 253
----------- -----------
NET INCOME $ 360 $ 413
=========== ===========
EARNINGS PER COMMON SHARE
BASIC $ 0.24 $ 0.28
DILUTED $ 0.24 $ 0.28
=========== ===========
Weighted Average
Number of Shares Outstanding - Basic 1,471,279 1,467,448
Weighted Average
Number of Shares Outstanding - Diluted 1,507,469 1,495,928
</TABLE>
See Notes to Financial Statements
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
WATERS INSTRUMENTS, INC.
Balance Sheet
(Thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Unaudited)
------- -------
<S> <C> <C>
Current Assets `
Cash & Cash Equivalents $ 3,581 $ 3,618
Net Trade Receivables 2,718 2,835
Inventories 2,361 1,871
Prepaid Expenses 86 101
Deferred Income Taxes 282 282
------- -------
Total Current Assets 9,028 8,707
Fixed Assets
Property, Plant & Equipment 5,670 5,617
Less Accumulated Depreciation 4,167 4,058
------- -------
Net Fixed Assets 1,503 1,559
Other Assets 3 3
Goodwill 41 45
------- -------
TOTAL ASSETS $10,575 $10,314
======= =======
Current Liabilities
Current Maturities of
Long-term Debt $ 33 $ 35
Accounts Payable 1,601 1,460
Accrued Salaries, Wages and
Other Compensation 493 626
Product Warranties 246 231
Other accrued liabilities 136 128
Income Taxes Payable 271 399
------- -------
Total Current Liabilities 2,780 2,879
------- -------
Long-term Debt, Less Current
Maturities 0 0
Deferred Income Taxes 59 59
------- -------
TOTAL LIABILITIES 2,839 2,938
------- -------
Stockholders' Equity
Common Stock 147 147
Additional Paid-in Capital 1,285 1,285
Retained Earnings 6,304 5,944
------- -------
TOTAL STOCKHOLDERS' EQUITY 7,736 7,376
======= =======
TOTAL LIABILITIES & EQUITY $10,575 $10,314
======= =======
</TABLE>
See Notes to Financial Statements
<PAGE>
ITEM 1. Financial Statements
WATERS INSTRUMENTS, INC.
Statement of Cash Flows
(Thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1999 1998
(Unaudited) (Unaudited)
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Cash received from customers $ 4,903 $ 4,687
Interest received 42 28
------- -------
Cash provided from operations 4,945 4,715
Cash paid to suppliers and employees 4,577 3,201
Taxes paid 349 38
Interest paid 1 1
------- -------
Cash disbursed from operations 4,927 3,240
------- -------
Net cash provided by operations 18 1,475
CASH FLOWS FROM INVESTING
Net acquisition of fixed assets (53) (38)
------- -------
Net cash used for investing (53) (38)
CASH FLOWS FROM FINANCING
Reduction of Long-Term Debt (2) (3)
------- -------
Net cash used for financing (2) (3)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (37) 1,434
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,618 1,375
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,581 $ 2,809
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATIONS:
Net Income $ 360 $ 413
Depreciation and Amortization 113 115
Provisions For Losses On Accounts Receivable 3 3
CHANGES IN ASSETS AND LIABILITIES:
Accounts Receivable 114 224
Inventories (490) 382
Prepaid Expenses and Deferred Income Taxes 15 (7)
Accounts Payable and Accrued Expenses (97) 345
------- -------
NET CASH PROVIDED BY OPERATIONS $ 18 $ 1,475
======= =======
</TABLE>
See Notes to Financial Statements
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
WATERS INSTRUMENTS, INC.
d/b/a Waters Corporation
Notes to Financial Statements
September 30, 1999
The financial statements have been prepared by Waters Corporation without audit
and pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in the financial statements includes
normal recurring adjustments and reflects all adjustments, which are, in the
opinion of management, necessary for a fair presentation of such financial
statements. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes the information presented is not misleading.
It is suggested that these condensed financial statements are read in
conjunction with the financial statements and the accompanying notes included in
the Company's 10KSB 1999 Annual Report.
The marketable securities included as cash equivalents on the balance sheet and
cash flow statements meet the definition of cash equivalents set forth in
paragraph 8 and 9 of SFAS95.
Inventories consisted of the following:
September 30, 1999 June 30, 1999
-------------------------------------------------------------------
Raw Materials $1,942,000 $1,600,000
Work-In-Process 50,000 38,000
Finished Goods 369,000 233,000
------------------------------------------------------------------
Total Inventories $2,361,000 $1,871,000
Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Requirements
Waters Corporation's working capital position on September 30, 1999 was
$6,248,000, a 7% increase from the $5,828,000 amount on June 30, 1999. The cash
balance for the Company was $3,581,000 on September 30, 1999, compared to the
cash balance of $3,618,000 on June 30, 1999.
<PAGE>
In December 1998, Waters renewed the bank's $1,000,000 line of credit commitment
and extended it to December 15, 1999. The bank's line of credit charges interest
at the bank's base (prime) rate. The prime rate was 8.25% at September 30, 1999.
The Company has not borrowed against the line of credit during Fiscal Year 2000
and believes that its existing funds, cash generated from operations, and
short-term borrowing under the Company's line of credit will be adequate to meet
the Company's foreseeable operating activities and outlays for capital
expenditures. Waters has not been charged a commitment fee on the bank line of
credit.
Inventories increased by $490,000 from the June 30, 1999 amount due primarily to
the replenishment of depleted AFW stock resulting from strong customer demand
generated during the quarter ending June 30, 1999 and a surplus resulting from
the Company's safety stock requirements. Management believes that these
inventories will be reduced to acceptable levels in the second quarter of FY2000
as seasonal demand begins to ramp up for AFW.
Capital expenditures were $53,000 for the quarter ended September 30, 1999. The
company estimates that capital expenditures for the three remaining quarters of
the current Fiscal Year will approach $300,000 in total. Improvements to
manufacturing equipment and information systems comprised the bulk of the
quarter's capital expenditures. The company anticipates continued improvements
in its overall efficiency and management of the corporation as a result of these
capital expenditures.
On November 4, 1999, the Company announced that it has signed a definitive
agreement for its Waters Network Systems business unit to merge with Garrett
Communications, Inc., a San Jose, California company that serves the computer
networking market. It is anticipated that the transaction will be completed in
January 2000.
The completion of the merger is subject to customary closing conditions,
including approval by the Company's shareholders. The agreement contemplates
that the Company's stock will have a market value of at least $6 per share at
the time of closing.
The agreement calls for Waters to issue 375,000 shares of its common stock and
pay $2,250,000 in cash for all outstanding stock of Garrett. In addition,
outstanding options to purchase Garrett stock will be converted to options to
purchase Waters common stock at a ratio of one (1) option share of Waters for
every three (3) option shares of Garrett. Garrett presently has grants
outstanding for 350,000 shares.
Waters intends to use its cash reserves to fully fund the cash portion of the
transaction.
Results of Operations
Net sales for the quarter ended September 30, 1999 were $4,789,000, an increase
of 7% when comparing to the comparable quarter of the prior year.
<PAGE>
Waters Medical Systems (WMS) had net sales of $493,000 for the quarter ended
September 30, 1999, a decrease of 23% over the comparable quarter of the prior
year. The Company believes this resulted from its customers' timing in their
capital budget ordering cycles as well as softness in Oxicom demand in the
cardiac market.
Independent scientific research strongly recommends pulsatile preservation as
the standard for renal preservation. To the best of the Company's knowledge, the
RM3 is the only perfusion device that is FDA 510(k) approved.
To heighten the awareness and establish quality standards for preserving organs,
WMS is working with physicians, surgeons, scientists and preservation
specialists to form an international society for organ preservation.
American FarmWorks
American FarmWorks' (AFW) net sales for the quarter ended September 30, 1999
were $2,904,000 compared to $2,533,000 during the same period of the prior year.
The Company believes that AFW's sales and market share will increase during the
remainder of the fiscal year as a result of the U.S. agricultural retail
industry consolidation, the launch of new products, lower cost procurement, high
quality products and on-time delivery performance.
The Company continues to position American FarmWorks for future international
sales growth. With its recent CSA approval, required for sales into Canada,
distribution has recently been established. The Company believes Central and
South America offer significant sales potential, as AFW has a differential
advantage over competitors with its wide range of high quality, lower-cost
solar, battery and new 240-volt 50/60-cycle electric fence controllers.
Shipments of the 240-volt electric fencers began in November 1998.
AFW directly targets the equine market by manufacturing and marketing a fencer
and fence system that meets the unique needs of horse owners. The horse market
is enjoying increased popularity with many urbanites using their discretionary
income to purchase hobby farms and/or board horses. The Company believes
electric fencing to be the safest and most cost-effective method to contain
horses.
AFW has received a patent on its Direct Discharge design, a revolutionary
concept for electric fence controllers. This unique state-of-the-art technology
provides improved benefits over traditional available technologies by reducing
hardware and installation costs through eliminating the need for a separate
grounding system and improving customer safety by qualifying for UL listing.
Waters Network Systems
Waters Network Systems' (WNS) net sales for the quarter ended September 30, 1999
increased to $708,000 compared to $678,000 the prior year. The Company
anticipates higher revenues for Waters Network Systems to continue due primarily
to expansion of distribution channels, regional sales offices and new products.
In addition, the Company intends to expand beyond the education market to OEM,
industrial and commercial markets.
<PAGE>
Waters Technical Systems
Waters Technical Systems' (WTS) net sales were up slightly to $684,000 for the
first quarter ending September 30, 1999 compared to $609,000 the prior year. The
Company expects shipments to ramp up during Fiscal Year 2000 including to
Winnebago Industries, a leading world-class motor home manufacturer. The
Company believes that increased sales and margin improvement can be achieved by
providing turnkey operation services as well as continuing to focus on improving
the efficiency of its manufacturing processes.
General
For the quarter ended September 30, 1999, gross profit, for the Company as a
whole, decreased to 37.6% of net sales, down from 38.4% reported for the
comparable period of last year. This slight reduction in gross margins occurred
as a result of a temporary product mix shift.
Operating expenses were $1,256,000 for the quarter ended September 30, 1999,
representing an increase of $183,000 from the comparable figure of $1,073,000
for the prior year. The increased operating expenses resulted from the Company's
efforts to fund long-range strategic initiatives, the expansion of distribution
channels, and deployment of new product technologies.
Net income for the Company for the quarter ended September 30, 1999 was a profit
of $360,000, or $.24 per share, on revenues of $4,789,000. For the comparable
quarter of the prior year, the Company had a profit of $413,000, or $0.28 per
share, on revenues of $4,462,000.
The weighted-average number of shares of common stock used to compute the basic
earnings per share was increased by 36,190 and 28,480 shares for the quarters
ended September 30, 1999 and 1998, respectively, for the assumed exercise of the
employee stock options in computing the diluted per-share data.
Provided the acquisition is completed, the Company's transaction with Garrett
Communications, Inc. will impact the Company's results of operations. Garrett's
sales in 1998 were $8.1 million, with a year-to-date growth rate of 35 percent
through the third quarter of 1999. The Company expects revenue of the two
companies after completion of the merger to approach $30 million, with the
combined Garrett and Waters Network Systems operating as a wholly owned
subsidiary of Waters Instruments, Inc.
<PAGE>
Year 2000 Issue
At the turn of the century, time sensitive software using two digits may not
identify the year 2000 (Y2K). This could disrupt the ability to conduct normal
business operations due to system failure and miscalculations. The Company
completed an assessment for Y2K compliance during fiscal 1998 and developed a
plan to resolve all major issues by December 1999.
The plan consists of identifying those systems where the Company has exposure to
Y2K issues, development and implementation of action plans to be Y2K compliant,
and the final testing of each major area of exposure for compliance. The Company
has identified three critical compliance areas: 1) financial and information
system applications; 2) manufacturing applications; and 3) third-party
relationships.
In accordance with the program, the Company has conducted an internal review of
all systems and contacted all software suppliers. In the financial and
information systems area, the Company has replaced the core financial and
reporting systems with programs believed to be Y2K compliant. In the
manufacturing area, the Company has reviewed all areas and believes them to be
materially Y2K compliant. In the manufacturing area, the Company is in the
process of identifying areas of exposure. The Company has contacted most of the
third parties with which it has significant relationships, most of which state
they intend to be Y2K compliant by the Year 2000. The Company will continue to
monitor such relationships and the third party readiness for the remainder of
1999.
As of September 30, 1999, the Company had incurred $16,723 in Y2K compliance
costs and $6,741 in capital expenditures for information systems that are Y2K
compliant. The Company estimates future expenditures not to exceed $15,000 to
complete Y2K compliance.
Cautionary Statements
Certain statements in this Management's Discussion and Analysis are
forward-looking statements that involve a number of risks and uncertainties,
which may cause the Company's future operations and results of operations to
differ materially from those anticipated in this report. Specifically, these
include statements relating to (A) the sufficiency of capital, which depends on
the Company meeting its expenses and revenue projections, the completion and
success of the transaction with Garrett Communications, Inc., as well as general
competition and market conditions; (B) increased shipments within the WTS
business unit, including to Winnebago Industries, depend on continued expansion
of key customers; (C) increased revenues within the WNS unit, which depend on
the expanded distribution channels, the success of the new regional sales
offices and the acceptance and demand of its new products within the educational
market as well as the OEM, industrial and commercial markets; (D) sales and
market share increases within AFW depend on the actual effect of U.S.
agricultural retail industry consolidation, the acceptance and demand of new AFW
products, as well as general competitive and market conditions; (E) the
completion of the merger with Garrett and the combined revenues depend on
certain conditions (discussed in this report) being met, the success of the
integration of the two companies, and general business and competitive
conditions; and (F) the success of the Company's Year 2000 compliance efforts,
which depend on the accuracy of its assessment of the necessary remediation
efforts and projected costs as well as the accuracy of assurances received from
third parties. Such risks and uncertainties could cause actual results to differ
from those projected.
<PAGE>
PART-II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 Financial Data Schedule (submitted only in electronic format).
(B) A Form 8-K dated November 4, 1999 was filed on November 4, 1999 to
report the Company's announcement of the merger of Waters Network Systems and
Garrett Communications, Inc.
In accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
WATERS INSTRUMENTS, INC.
By: /S/ Jerry W. Grabowski
Jerry W. Grabowski
President and Chief Executive Officer
November 15, 1999
<PAGE>
ANNEX E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 1999
Commission file number 0-1388
WATERS INSTRUMENTS, INC.
(d/b/a Waters Corporation)
State of Incorporation: Minnesota
IRS Employer Identification No. 41-0832194
2411 Seventh Street, NW.
Rochester, Minnesota 55901
(507) 288-7777
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10
Par Value Per Share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the past 90
days. Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
The net sales for the Company for the Fiscal Year ended June 30, 1999 were
$17,585,000.
The aggregate market value of the voting stock held by non- affiliates of the
Company on August 31, 1999 was $5,936,843. The number of shares outstanding of
the Company's Common Stock on August 31, 1999 was 1,471,279.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instructions E3), the responses to items 9, 10, 11 and 12 of
Part III of this report are incorporated herein by reference to certain
information contained in the Company's definitive proxy statement for its 1999
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before October 28, 1999.
Transitional Small Business Disclosure Format (Check One) Yes __ No X
<PAGE>
PART I ITEM 1. BUSINESS
(a) Business Development
A Minnesota corporation since 1960, Waters Instruments, Inc. (d/b/a Waters
Corporation) is a customer-focused, market-driven provider of value-added
technology solutions. During Fiscal Year 1999, sales were conducted through four
principal business units: Farm Products {d/b/a American FarmWorks (AFW)};
Medical Products {d/b/a Waters Medical Systems (WMS)}; Electrical Products
{d/b/a Waters Technical Systems (WTS)}; and Network Connectivity Products {d/b/a
Waters Network Systems (WNS)}.
(b) Business of Issuer
(1) American FarmWorks
American FarmWorks manufactures and sells electric fence controllers used for
livestock, predator, and pet containment. The Company considers itself the
largest of the four major suppliers of such controllers in the United States.
Fence controllers convert both AC and DC power into low-current, high- voltage
impulses on a wire fence producing a stinging, but safe shock.
American FarmWorks' sales arise primarily through major farm equipment and
hardware distributors, suppliers and retailers. During Fiscal Year 1999, sales
to AFW's top three customers accounted for approximately 41.8% of AFW's total
sales or 24.2% of the Company's total sales.
American FarmWorks sells to distribution channels through independent
representatives. Sales by AFW in Fiscal Year 1999 were 57.9% of the Company's
total sales compared to 59.1% in Fiscal Year 1998.
There were no significant sales from AFW made to governmental agencies;
likewise, there are no contracts subject to renegotiation. Raw materials used in
the production of fence controllers are generally available from a number of
suppliers. Patents are not significant to the manufacture of electric fence
controllers; however, the Company received a patent in fiscal 1999 on a direct
discharge design that it believes offers significant advantages over traditional
electric fence technologies. The new products using the direct discharge
technology will be released in the first quarter of Fiscal Year 2000.
Trademarks associated with the business are believed to be of value and include:
American FarmWorks, Blitzer, BullDozer, Captivator, Cobra, Dyna-Charge,
Electro-Line, HOL-DEM, Hot Spark, International, Jewel, Solar Blitz, Solar Bull,
Sting Ray, Super Charger, ThunderBolt and Wasp.
American FarmWorks' business is seasonal, with peak customer demand occurring in
the spring and summer months. Backlog is not significant in this unit's
operations since most orders are filled within days after receipt. (2) Waters
Medical Systems
<PAGE>
Waters Medical Systems manufactures and markets electronic medical instruments
for cardiovascular and organ preservation used in laboratories, clinics and
hospitals. The RM3 Renal Preservation Monitor, a two-part kidney preservation
system, was developed by WMS to preserve kidneys for transplant while
significantly improving post-surgical patient outcomes. With a vast medical
equipment industry, WMS focuses on being the dominant supplier in specific
market niches. Sales by WMS in both Fiscal Year 1998 and 1999 represented 13.3%
of the Company's total sales.
Sales of WMS' products are made to a large number of customers in the health
care field primarily through the use of independent representatives. WMS' top
five customers contributed 24.1% of the business unit's total sales in Fiscal
Year 1999.
No significant sales of WMS products are made to the United States Government
and no contracts are subject to renegotiation. Although this business unit does
not require large working capital funds, accounts receivable can approach two
month's sales due to the slow reimbursement practices of third-party insurers
and administrators. Raw materials necessary in the manufacture of this business
unit's products are generally available from a number of suppliers.
The Company holds several patents relating to its current and new medical
product lines. The significance of the patents pending on new products is yet to
be determined. Waters Medical Systems' business experiences no seasonal sales
variations.
The products of Waters Medical Systems are subject to governmental regulation by
the FDA under the Federal Food and Drug and Cosmetic Act (the "FDCA"). Before
either a Class I or Class II device may be marketed, Section 510(k) of the FDCA
requires that the manufacturer submit to the FDA, at least 90 days before
marketing begins, a premarket notification of its intent to market the device.
If the FDA accepts the sufficiency of the premarket notification, the device may
then be marketed. All of WMS' current products are FDA approved.
The FDA classifies medical devices into three categories that determine the
degree of regulatory control to which the manufacturer of the device is subject.
At present, all of WMS' products are Class II devices, which are subject to
performance standards in addition to general controls, and have appropriate FDA
marketing approvals. Any new versions of the present product offerings or future
new products will require the lengthy process of obtaining FDA approval.
All manufacturers of medical devices are subject to general controls of FDA,
which presently include regulations on annual registration, device listing, good
manufacturing practices, labeling, and the misbranding and adulteration
provisions of the FDCA. The FDCA also provides for the unscheduled inspection of
facilities. Waters Medical Systems believes that it is in compliance with all
applicable FDA regulations and practices, and that continued compliance will not
result in significant additional expenditures. (3) Waters Technical Systems
<PAGE>
Waters Technical Systems provides contract manufacturing of electromechanical
assemblies, wiring harnesses and cable assemblies for a variety of technology
markets. The industry in which the business unit operates is marked by a large
number of relatively small suppliers operating predominantly on a regional
basis. The Company believes Waters Technical Systems competes effectively within
its regional area.
In an industry that traditionally provides low margins, WTS was able to double
its gross margins in Fiscal Year 1999 through cost-containment efforts and
engineering and manufacturing investments. At the same time, sales increased by
12.0% through the focus and development of larger customer accounts. Sales by
WTS in Fiscal Year 1999 represented 15.2% of the Company's total sales compared
to 15.1% in Fiscal Year 1998.
WTS sells primarily direct through an internal sales team to OEMs. In Fiscal
Year 1999, WTS served a relatively small number of customers, with ten customers
representing about 93.1% of the business unit's sales. Several key customers,
including Winnebago Industries, signed long-term agreements with WTS.
As a turnkey operation, this business unit is often required to order
significant inventories of raw materials to provide adequate lead-time for
meeting customer delivery requirements. Raw materials necessary to this unit's
business are generally available from a number of suppliers. Patents and
proprietary rights are of no significance to WTS' business. (4) Waters Network
Systems
Waters Network Systems manufactures and markets a wide range of connectivity
products for Ethernet and Token-Ring local area networks (LANs). The products
provide the ability to connect computers and peripherals to a network within
school or business buildings. While the industry for network products is
competitive and covers a wide range of applications, WNS primarily focuses on
the educational segment to provide classroom solutions not being met by other
manufacturers.
During Fiscal Year 1999, Waters Network Systems continued to expand its product
line to include a wide range of Ethernet, Fast Ethernet and dual-speed hubs,
switches and media converters for both copper and fiber LANs. These products
provide the flexibility to increase the speed or capacity of current networks as
well as to easily manage LANs. The Company believes WNS offers the widest range
of classroom hubs and switches in the industry.
The LAN products are sold primarily through dealers that resell the products as
well as provide network cabling installations. Less than 18% of the WNS total
sales are purchased directly by school districts or local Boards of Education.
The sales cycle in education is long, frequently taking a year from having the
products specified to the actual installation. Many of the dealers currently
have been awarded the bids for specific school districts, with the installation
to occur in Fiscal Year 2000.
Sales by WNS in Fiscal Year 1999 increased 20.8% over the prior year,
representing 13.6% of the Company's total sales compared to 12.5% in Fiscal Year
1998. The educational market for LAN installations is seasonal, with sales
peaking during the summer months when school is out of session.
The demand for network products exists in all new schools being built as well as
for retrofitting and upgrading technology in most existing schools. While grants
and bond issues fund the majority of networks, over 30,000 school districts and
libraries have applied for supplementary funding through the Federal
Communications Commission's (FCC) E-rate program. Favoring the rural low-income
school districts, funding of the E-rate program will continue to have a strong
impact on the timing of sales for network products. In the 1999/2000 school
year, the FCC will fund $2.25 billion of the $2.44 billion requested by schools
and libraries through the E-rate program for internal connections (wide and
local area networks) and telecommunications services/Internet access. The
Company believes that WNS will realize increased sales growth resulting from the
$1.5 billion being requested for internal connections through E-rate funding. 5)
Information as to Company's Business as a Whole
<PAGE>
During Fiscal Years 1999 and 1998, the Company expended $526,000 and $538,000
for research and development activities, respectively.
The Company had a total of 146 employees as of June 30, 1999, of which 117 were
regular full-time employees. This compares to a total of 135 employees as of
June 30, 1998, of which 116 were regular full-time employees.
(c) Financial Information about Foreign and Domestic Operations and Export Sales
The Company maintains no offices or facilities outside of the United States and
sells the majority of its products in the United States. Export sales were
$463,000 in Fiscal Year 1999, compared to $344,000 in Fiscal Year 1998. Most
sales for foreign exports have been made through unrelated foreign dealers in
major European, Asian, and South American markets and by a number of export
dealers in outlying countries. In Fiscal Year 1999, the Company had no
significant activities outside of the United States. PART 1 ITEM 2. PROPERTIES
The Company owns a 66,000 square-foot, steel and cement block building located
on 10.9 acres in Valley High Industrial Park, Rochester, Minnesota. The building
houses the corporate headquarters and production facilities for all of the
business units. Fourteen thousand square feet are devoted to office and
engineering space with the remaining area used for manufacturing and
warehousing. Approximately 16% is used by Waters Medical Systems, 24% by Waters
Technical Systems, 53% by American FarmWorks, and 7% by Waters Network Systems.
The Company currently leases 2,500 square feet of office space in a Plymouth,
Minnesota office complex for use as sales and corporate offices. The lease
extends through October 31, 2001 and requires a monthly payment of $ 2,079.00.
The Company believes that insurance coverage on its properties is adequate.
PART 1 ITEM 3. LEGAL PROCEEDINGS
During Fiscal Year 1999, the Company did not have and currently does not have
any legal proceedings pending which are outside of routine litigation that is
incidental to the business.
PART 1 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the Company's 1999 Fiscal Year.
PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol WTRS. Below are the high and low bid prices for each quarter of Fiscal
Years 1999 and 1998 as reported on the NASDAQ National Market. These quotations
represent prices between dealers, do not include retail markups, markdowns, or
commissions, and may not represent actual transactions.
<TABLE>
<S> <C> <C> <C>
1999 High Low
First Quarter 9/30/98 5-1/2 3-5/8
Second Quarter 12/31/98 6-3/8 3-7/8
Third Quarter 3/31/99 5-3/4 4
Fourth Quarter 6/30/99 5-1/2 3-7/8
1998
First Quarter 9/30/97 7 4-5/8
Second Quarter 12/31/97 7-3/4 5-3/4
Third Quarter 3/31/98 6-1/4 5-1/4
Fourth Quarter 6/30/98 6-3/4 5-1/8
</TABLE>
<PAGE>
As of August 31, 1999 the Company had approximately 670 shareholders of record.
Dividend Summary
The Board of Directors of the Company declared a dividend at a regularly
scheduled meeting held on October 22, 1998. The dividend was based on Fiscal
Year 1998 operating results. The Company paid the dividend in December 1998 at
the rate of $.04 per share, or an aggregate amount of $58,000. The Company also
paid a dividend in December 1997 of $.04 per share for an aggregate amount of
$58,000.
The Board of Directors will review its dividend policy and make an appropriate
decision at its regularly scheduled meeting to be held in connection with the
Company's 1999 Annual Meeting of Shareholders.
The Company has paid its shareholders annual dividends for 22 of the last 23
years, with the first dividend paid in 1975.
<PAGE>
PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance on June 30, 1999 was $3,618,000, an increase of
$2,243,000 from its June 30, 1998 balance of $1,375, 000. The Company's working
capital position at June 30, 1999 was $5,828,000, an increase of 24% from the
$4,684,000 amount at June 30, 1998.
In December 1998, the Company renewed the bank's $1,000,000 line of credit
commitment and extended it to December 15, 1999. The bank's line of credit
charges interest at the bank's base (prime) rate, which was 7.75% at June 30,
1999. The Company did not borrow against the line of credit during Fiscal Year
1999 and believes that its existing funds, cash generated from operations, and
short-term borrowing under the Company's line of credit will be adequate to meet
the Company's foreseeable operating activities and outlays for capital
expenditures.
The increase in net cash provided by operations during Fiscal Year 1999 resulted
primarily from the Company's increased earnings and the temporary delay in
accounts payable disbursements during the Company's successful implementation of
Y2K compliant information systems.
Capital expenditures were $244,000, during Fiscal Year 1999, a decrease of
$382,000 from Fiscal Year 1998. Improvements to manufacturing equipment and
information systems comprised the bulk of capital expenditures in Fiscal Year
1999. The Company anticipates continued improvements in its overall efficiency
and management of the corporation as a result of these capital expenditures.
RESULTS OF OPERATIONS
Fiscal Year 1999 Compared with Fiscal Year 1998
Net sales for Fiscal Year 1999 were $17,585,000, an increase of 11.4% from net
sales of $15,785,000 experienced in Fiscal Year 1998.
Net sales in Waters Medical Systems increased 11.4% in Fiscal Year 1999 compared
to Fiscal Year 1998. Increased demand for the Company's oximetry and the
recently released RM3 renal preservation devices were the primary factors for
Waters Medical Systems' higher revenues for Fiscal Year 1999 as compared to the
prior year.
Independent scientific research strongly recommends pulsatile preservation as
the standard for renal preservation. Consequently WMS is actively working with
physicians, surgeons, scientists and preservation specialists to increase public
awareness and establish quality standards for preserving organs. The Company
believes that heightened public awareness regarding the results of clinical
research on the benefits of pulsatile preservation will result in increased
demand for its RM3.
Waters Medical Systems recently obtained CE Mark approval for its RM3 Renal
Preservation Monitor, a requirement to sell in Europe. In addition, during
FY1999, the WMS business unit received ISO 9002 and EN 46002 certification. The
Company believes that the CE Mark approval for the RM3 and ISO and EN
certification for its medical products will provide further market penetration
and sales growth.
Waters Technical Systems' (WTS) net sales increased 12.0% to $2,669,000 compared
to Fiscal Year 1998. WTS recently established a partnership agreement with
Winnebago Industries, a leading world-class motor home manufacturer, to provide
wire harness assemblies. Shipments began in the third quarter of Fiscal Year
1999 and are expected to continue to ramp up during Fiscal Year 2000. The
Company believes that increased sales and margin improvement can be achieved by
providing turnkey operation services as well as continuing to focus on improving
the efficiency of its manufacturing processes.
<PAGE>
Net sales in American FarmWorks in Fiscal Year 1999 increased 9. 2% compared to
Fiscal Year 1998. The Company believes that AFW's sales and market share will
increase as a result of the U.S. agricultural retail industry consolidation, the
launch of new products, lower cost procurement, high quality products and on-
time delivery performance.
The Company continues to position American FarmWorks for future international
sales growth. With its recent CSA approval, required for sales into Canada,
distribution has recently been established. The Company believes Central and
South America offer significant sales potential, as AFW has a differential
advantage over competitors with its wide range of high quality, lower-cost
solar, battery and new 240-volt 50/60-cycle electric fence controllers.
Shipments of the 240-volt electric fencers began in November 1998.
AFW is directly targeting the equine market by manufacturing and marketing a
fencer and fence system that directly meets the unique needs of horse owners.
The horse market is enjoying increased popularity with many urbanites using
their discretionary income to purchase hobby farms and/or board horses. The
Company believes electric fencing to be the safest and most cost-effective
method to contain horses.
AFW has received a patent on its Direct Discharge design, a revolutionary
concept for electric fence controllers. This unique state-of-the-art technology
provides improved benefits over traditional available technologies by reducing
hardware and installation costs through eliminating the need for a separate
grounding system and improving customer safety by qualifying for UL listing.
Waters Network Systems' (WNS) net sales increased 20.8% in Fiscal Year 1999
compared to Fiscal Year 1998. The Company anticipates higher revenues for Waters
Network Systems to continue due primarily to expansion of distribution channels,
regional sales offices and new products. In addition, the Company intends to
expand beyond the education market to OEM, industrial and commercial markets.
Additional comparative information about industry segments can be found in Note
#9 in Notes to Financial Statements contained in this report.
The gross profit improved in Fiscal Year 1999 to 36.2% of net sales from 33.2%
for Fiscal Year 1998. Productivity improvements within the American FarmWorks,
Waters Medical Systems, Waters Technical Systems and Waters Network Systems
business units contributed to improvement in gross profit in Fiscal Year 1999.
Operating expenses were $4,862,000 for Fiscal Year 1999, representing an
increase of $628,000, or 14.8%, from the comparable figure of $4,234,000 for
Fiscal Year 1998. The increase in operating expenses resulted from the Company's
efforts to fund future growth opportunities by adding field sales personnel,
pursuing strategic partnerships, expanding distribution channels and marketing
new products.
Improved working capital during Fiscal Year 1999 provided interest income of
$138,000, compared to interest income of $93,000 during Fiscal Year 1998.
Interest expenses, principally lease financing on the Company's equipment, were
$5,000 during Fiscal Year 1999, compared to $7,000 in Fiscal Year 1998.
Net income for the Company for Fiscal Year 1999 was $1,006,000 compared to a net
income of $685,000 in Fiscal Year 1998. In addition to increased sales in each
industry segment, a significant reason for the Company's continued improvement
in net income since Fiscal Year 1993 relates to continuous reductions in
manufacturing costs and increases in sales volume.
<PAGE>
Year 2000 Issue
At the turn of the century, time sensitive software using two digits may not
identify the year 2000 (Y2K). This could disrupt the ability to conduct normal
business operations due to system failure and miscalculations. The Company
completed an assessment for Y2K compliance during fiscal 1998 and developed a
plan to resolve all major issues by December 1999.
The plan consists of identifying those systems where the Company has exposure to
Y2K issues, development and implementation of action plans to be Y2K compliant,
and the final testing of each major area of exposure for compliance. The Company
has identified three critical compliance areas: 1) financial and information
system applications; 2) manufacturing applications; and 3) third- party
relationships.
In accordance with the program, the Company has conducted an internal review of
all systems and contacted all software suppliers. In the financial and
information systems area, the Company has replaced the core financial and
reporting systems with Y2K compliant programs. In the manufacturing area, the
Company has reviewed all areas and believes them to be materially Y2K compliant.
In the manufacturing area, the Company is in the process of identifying areas of
exposure. The Company has contacted most of the third parties, with which it has
significant relationships, most, of which state they intend to be Y2K compliant
by the Year 2000. The Company will continue to monitor such relationships and
the third party readiness throughout 1999.
As of June 30, 1999, the Company has incurred $34,951 in Y2K compliance costs
and $85,530 in capital expenditures for information systems that are Y2K
compliant. The Company estimates future expenditures not to exceed $50,000 to
complete Y2K compliance.
Cautionary Statements
Certain statements in this Management's Discussion and Analysis are
forward-looking statements that involve a number of risks and uncertainties,
which may cause the Company's future operations and results of operations to
differ materially from those anticipated in this report. Specifically, these
include statements relating to (A) the sufficiency of capital, which depends on
the Company meeting its expenses and revenue projections, as well as general
competition and market conditions; (B) increased shipments within the WTS
business unit which depend on continued expansion of key customers; (C)
increased revenues within the WNS unit, which depend on the expanded
distribution channels, the success of the new regional sales offices and the
acceptance and demand of its new products within the educational market; (D)
increased demand for the RM3 depends on the Company's success in increasing the
public's awareness of the product's benefits; (E) further market penetration and
sales growth within WMS depend on the actual impact of CE Mark approval and ISO
and EN certification, as well as general competitive and market conditions; (F)
sales and market share increases within AFW depend on the actual effect of U.S.
agricultural retail industry consolidation, the acceptance and demand of new AFW
products, as well as general competitive and market conditions; and (G) the
success of the Company's Year 2000 compliance efforts, which depend on the
accuracy of its assessment of the necessary remediation efforts and projected
costs as well as the accuracy of assurances received from third parties.
<PAGE>
PART II ITEM 7. FINANCIAL STATEMENTS
<TABLE>
INDEX TO FINANCIAL STATEMENTS
(a) The following documents are filed as part of this report:
(1) Financial Statements:
<S> <C>
Page Number
Management's Responsibility for Financial Reporting 11
Independent Auditor's Report 12
Balance Sheets 13
Statements of Operations 14
Statements of Stockholders' Equity 14
Statements of Cash Flows 15
Notes to Financial Statements 16-24
</TABLE>
<PAGE>
Management's Responsibility for Financial Reporting
August 11, 1999
To the Stockholders of Waters Instruments, Inc.
Rochester, Minnesota
The management of Waters Corporation has prepared and is responsible for the
financial statements and related financial information contained in this report.
The financial statements were prepared in accordance with generally accepted
accounting principles, using management's best judgment and estimates. The other
financial data contained in this report is consistent with that in the financial
statements.
The Company maintains internal accounting control systems designed to provide
reasonable assurance that assets are safeguarded from loss or unauthorized use.
The management further maintains that it is conducting its affairs according to
the highest of personal and corporate conduct. We believe our systems for these
purposes are effective and the cost of the systems does not exceed the benefits
obtained.
The Audit Committee, composed exclusively of outside directors, meets
periodically with the Company's management and independent auditors on financial
reporting matters. The independent public accountants have free access to the
Audit Committee and have met with the Committee, without management present, to
discuss their audit results and opinions on the quality of financial reporting.
McGladrey & Pullen, LLP, independent auditors, was retained to audit Waters'
financial statements and to issue a professional opinion as to whether such
statements present fairly, in all material respects, the Waters' financial
position, results of operations and cash flows.
/s/ Gregory J. Anshus
Gregory J. Anshus
Chief Financial Officer
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Waters Instruments, Inc.
Rochester, Minnesota
We have audited the accompanying balance sheets of Waters Instruments, Inc.
(d/b/a Waters Corporation) as of June 30, 1999 and 1998 and the related
statements of operations, 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 Waters Instruments, Inc. as of
June 30, 1999 and 1998 and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Rochester, Minnesota
September 28, 1999
<PAGE>
<TABLE>
Balance Sheets
<S> <C> <C>
June 30
In Thousands 1999 1998
Current assets
Cash and equivalents (Note 2) $ 3,618 $ 1,375
Trade receivables (Notes 3 and 5) 2,835 2,667
Inventories (Notes 4 and 5) 1,871 2,015
Prepaid expenses 101 72
Deferred income taxes (Note 6) 282 200
_______ _______
Total current assets 8,707 6,329
Property, plant and equipment (Note 5)
Land 128 128
Building 1,510 1,505
Machinery and equipment 2,342 2,220
Office furniture and equipment 1,637 1,520
_______ _______
5,617 5,373
Less accumulated depreciation 4,058 3,621
_______ _______
Net property, plant and equipment 1,559 1,752
Other assets
Costs in excess of net assets of
businesses acquired, net of
amortization 45 62
Investments 3 3
_______ _______
Total other assets 48 65
_______ _______
Total assets $10,314 $ 8,146
Current liabilities
Current maturities of long-term
debt (Note 5) 35 11
Trade payables 1,460 898
Accrued expenses
Salaries, wages, and other
Compensation 626 456
Product warranties 231 195
Other accrued liabilities 128 12
Income taxes payable 399 73
_______ _______
Total current liabilities 2,879 1,645
Long-term debt (Note 5) 0 36
Deferred income taxes (Note 6) 59 56
Stockholders' equity (Note 7)
Preferred stock, par value $25;
Authorized: 120,000 shares;
issued and outstanding: none
Common stock, par value
$.10 per share; Authorized:
5,000,000 shares;
issued and outstanding: 1,471,279
shares (1999), 1,467,448 shares (1998) 147 147
Additional paid-in capital
1,285 1,266
Retained earnings 5,944 4,996
_______ _______
Total stockholders' equity 7,376 6,409
_______ _______
Total liabilities and equity $10,314 $ 8,146
<FN>
The accompanying notes are an integral part of the financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Statements of Operations
<S> <C> <C>
Year ended June 30
In Thousands, except per share data 1999 1998
Net sales $ 17,585 $ 15,785
Cost of goods sold 11,225 10,547
Gross profit 6,360 5,238
Operating expenses
Administrative 1,759 1,463
Selling 2,577 2,233
Research and development 526 538
Total operating expenses 4,862 4,234
Operating income 1,498 1,004
Other income
Interest income 138 93
Interest expense (5) (7)
Other income, net (7) 15
________ ________
Income before income taxes 1,624 1,105
Income tax provision (Note 6) 618 420
________ ________
Net income $ 1,006 $ 685
Net income per share - basic (Note 8) $ .68 $ .47
Net income per share - diluted
(Note 8) $ .67 $ .46
Weighted average number of shares
outstanding - basic 1,469,348 1,464,838
Weighted average number of shares
outstanding - diluted 1,500,757 1,500,272
</TABLE>
<TABLE>
Statements of Stockholderhareholder's' Equity Investment
<S> <C> <C> <C> <C>
Common Stock Additional
In Thousands Outstanding Paid In Retained
Shares Amount Capital Earnings
Balance June 30,
1997 1,462 146 1,246 4,369
Net Income for
the period - - - 685
Dividends paid
($.04/share) - - - (58)
Issuance of common
Stock 5 1 20 -
Balance June 30,
1998 1,467 $ 147 $ 1,266 $ 4,996
Net Income for
the period - - - 1006
Dividends paid
($.04/share) - - - (58)
Issuance of
common stock 4 - 19 -
Balance June 30,
1999 1,471 $ 147 $ 1,285 $ 5,944
<FN>
The accompanying notes are an integral part of the financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Statements of Cash Flow
<S> <C> <C>
(In Thousands)
Year Ended June 30
1999 1998
Cash flows from operations
Cash received from customers $ 17,417 $ 15,061
Interest received 138 93
Cash paid to suppliers and
employees (14,642) (14,289)
Interest paid (5) (7)
Income taxes paid (370) (445)
________ ________
Net cash provided by operations 2,538 413
Cash flows from investing
Capital expenditures (244) (626)
Proceeds from sales of property
and equipment 0 3
________ ________
Net cash used for investing (244) (623)
Cash flows from financing
Proceeds from sale of common stock 19 21
Payment of long-term debt (12) (10)
Dividends paid (58) (58)
________ ________
Net cash used for financing (51) (47)
Net increase (decrease) in cash and
equivalents 2,243 (257)
Cash and equivalents, beginning
of year 1,375 1,632
________ ________
Cash and equivalents, end of
year $ 3,618 $ 1,375
________ ________
Reconciliation of net income to net
cash from operations:
Net income $ 1,006 $ 685
Depreciation and amortization 454 425
Loss on sale of property and
equipment 0 6
Deferred income taxes (79) 56
Changes in assets and liabilities
Accounts receivables (168) (712)
Inventories 144 (243)
Prepaid expenses (29) 43
Trade payables 562 253
Accrued expenses 322 (100)
Income taxes payable 326 0
________ ________
Net cash provided by operations $ 2,538 $ 413
<FN>
The accompanying notes are an integral part of the financial
statements
</FN>
</TABLE>
<PAGE>
Notes to Financial Statements
1. Nature of Business and Significant Accounting Policies
A. Nature of Business
The Company operates four principal business units: Waters Network Systems
(WNS), Waters Technical Systems (WTS), American FarmWorks (AFW), and Waters
Medical Systems (WMS). The sales of products from all four business units occur
principally within the United States. Waters Network Systems, the most recently
formed business unit, addresses local area network connectivity solutions for
educational and other markets. Waters Technical Systems is a contract
manufacturer of electromechanical assemblies, cable and harness assemblies for
the construction, industrial, communications and computer industries. American
FarmWorks manufactures and markets electric fence controllers for animal
containment to agricultural cooperatives, mass merchandisers focusing on the
retailer market, and lawn and garden stores. Waters Medical Systems designs and
manufactures organ preservation devices and cardiovascular analytical
instruments used in hospitals and laboratories. The Company extends credit in
the normal course of business and performs ongoing credit evaluations of its
customers' financial conditions, but generally requires no collateral.
B. Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, and accounts
payable approximate the carrying amount because of the short maturity of those
instruments.
C. Financial Statement Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
D. Inventories
Inventories are recorded at the lower of FIFO (first-in, first-out) method cost
or market.
E. Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over
estimated useful lives of 5 to 40 years for buildings and improvements, and 3 to
10 years for machinery, equipment, and office furniture. The present values of
capital lease obligations are classified as long-term debt and the related
assets are included in equipment. Amortization of equipment under capital leases
is included in depreciation expense.
F. Intangible Asset
Cost in excess of net assets acquired is amortized on a straight- line basis
over a twenty-year period beginning in 1983. Amortization of $17,000 is recorded
annually. Accumulated amortization at June 30, 1999 and 1998 was $305,000 and
$288,000, respectively.
G. Long-lived Assets and Goodwill
The Company assesses long-lived assets for impairment under FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Under those rules, property and equipment and
goodwill associated with assets acquired in a purchase business combination are
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
H. Product Warranty
Some of the Company's products are currently covered by product warranties for
one year after date of purchase. At the time of sale, the Company recognizes an
estimated warranty cost based on prior history and expected future claims.
I. Employee Benefits
The Company has a 401(k) deferred savings plan for all employees (associates)
who have completed six months of service. The Company may make matching and
discretionary contributions. The Plan has a calendar year-end. During each of
the fiscal years ending June 30, 1999 and 1998, the Company expensed $25,000 and
$24,000 in matching contributions, respectively.
The Company offers medical insurance to its associates, which it self-insures up
to $25,000 per individual and $1,000,000 in aggregate.
J. Statement of Cash Flows
For purposes of the statement of cash flows, highly liquid investments purchased
with maturities of three months or less are considered to be cash equivalents.
<TABLE>
<S> <C> <C>
In thousands: 1999 1998
Supplemental schedule of non-cash
investing and financing activities:
Office furniture and equipment
acquired with capital lease $ 0 $ 18
</TABLE>
K. Revenue Recognition
The Company recognizes revenue when the product is shipped from its warehouse.
L. Research and Development
Research and Development costs are expensed as incurred.
M. Advertising Costs
The Company follows the policy of charging the production costs of advertising
to expense as incurred. Advertising expenses for the years ended June 30, 1999
and 1998 were $398,000 and $390,000, respectively.
N. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
O. Net Income per Common Share
Net income per basic share is computed based upon the weighted average number of
common shares issued and outstanding during each year. Dilutive per share
amounts assume conversion, exercise or issuance of all potential common stock
instruments (stock options and warrants as discussed in Note 7) unless the
effect is to reduce a loss or increase income per share.
P. Comprehensive Income
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS N. 130 requires other comprehensive income to include
foreign currency translation adjustments, unrealized gains and losses on
marketable securities and minimum pension liability adjustments. The June 30,
1999 financial statements do not reflect any items of comprehensive income.
2. Credit Risks and Concentrations
At June 30, 1999 and 1998, the Company had cash with a financial institution in
excess of the Federal Deposit Insurance Corporation insurance coverage. The
Company has performed an evaluation of the relative credit standing of this
financial institution and believes it has limited its credit exposure
accordingly. In addition, the Company maintains cash balances in a money market
mutual fund with Norwest Funds. Such funds are not insured and totaled
$3,486,000 at June 30, 1999 and $1,528,000 at June 30, 1998. The Company has not
incurred any losses in such accounts.
3. Trade Accounts Receivable
<TABLE>
Trade accounts receivable consist of the following:
<S> <C> <C>
In Thousands 1999 1998
Trade accounts receivable $2,877 $2,705
Less allowance for doubtful
accounts 42 38
______ ______
Totals $2,835 $2,667
</TABLE>
4. Inventories
<TABLE>
Inventories consist of the following:
<S> <C> <C>
In Thousands 1999 1998
Raw materials $1,600 $1,647
Work-in-process 38 197
Finished goods 233 171
______ ______
Totals $1,871 $2,015
</TABLE>
5. Long-term Debt and Line of Credit
<TABLE>
Long-term debt consists of the following:
<S> <C> <C>
In Thousands 1999 1998
Capital lease obligations
due in varying monthly
installments through
January 2000 collateralized
by related equipment. $ 35 $47
Less current maturities 35 11
____ ____
Net long-term debt $ 0 $ 36
</TABLE>
Scheduled maturities, by fiscal year, of long-term debt
are as follows:
2000 $35
<TABLE>
At June 30, property, plant and equipment includes the
following amounts for capital leases:
<S> <C> <C>
In Thousands 1999 1998
Property, plant and
equipment $ 54 $ 67
Accumulated amortization 16 18
____ ____
Net assets under capital
lease $ 38 $ 49
</TABLE>
<TABLE>
At June 30, 1999, the Company had the following minimum
commitments for payment of rentals under capital leases:
<S> <C>
2000 $37
___
Total lease commitments 37
Less amount representing
interest 2
____
Present value of lease
payments, included in
long-term debt $ 35
</TABLE>
Line of Credit:
The Company has a $1,000,000 line of credit with its bank. Borrowings under the
line are charged interest at the prime rate and are collateralized by accounts
receivable and inventories. The prime rate was 7.75% at June 30, 1999. The
credit agreement expires December 15, 1999. The credit agreement requires the
Company to meet certain financial ratios and covenants. There were no borrowings
outstanding under the line of credit at June 30, 1999.
6. Income Taxes
<TABLE>
The income tax provision charged to continuing operations for the years ended
June 30, 1999 and 1998 are as follows:
<S> <C> <C>
In Thousands 1999 1998
Current:
US federal $628 $418
State 69 58
____ ____
Total current 697 476
Deferred:
US federal (69) (50)
State (10) (6)
____ ____
Total deferred (79) (56)
____ ____
Total current and deferred: $618 $420
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the US federal income tax rate to pretax
income for continuing operations for the years ended June 30, 1999
and 1998 due to the following:
<TABLE>
<S> <C> <C>
In Thousands 1999 1998
Computed "expected" tax expense $568 $387
Increase (decrease) in income
taxes resulting from:
Non-deductible expenses 14 12
State taxes, net of federal
tax benefits 56 31
Tax credits (27) (22)
Other 7 12
____ ____
Total $618 $420
</TABLE>
<TABLE>
Net deferred tax assets consist of the following components as of
June 30, 1999 and 1998:
<S> <C> <C>
In Thousands 1999 1998
Deferred tax assets
Employee benefits and
severance $119 $ 87
Inventory and receivable
allowances 77 42
Warranty and contingency
reserves 86 71
____ ____
Total deferred tax assets $282 $200
Deferred tax liabilities
Property and equipment $ 59 $ 56
____ ____
Total deferred tax liabilities 59 56
____ ____
Net deferred tax assets $223 $144
</TABLE>
<TABLE>
The components giving rise to the net deferred tax assets described above have
been included in the Company's Balance Sheets as of June 30, 1999 and 1998 as
follows:
<S> <C> <C>
In Thousands 1999 1998
Current assets $282 $200
Noncurrent liabilities (59) (56)
____ ____
Net deferred tax assets $223 $144
</TABLE>
7. Stock Options
In 1985, the Company adopted an Incentive Stock Option Plan (the "1985 ISO
Plan") and a Non-Qualified Stock Option Plan (the "1985 NQ Plan"), both of which
had a term of ten years and terminated on March 20, 1995. As of June 30, 1995,
all options granted under the 1985 ISO Plan and the 1985 NQ Plan had terminated
except for one option for the purchase of 5,000 shares exercisable at $2.1875
per share.
The Board of Directors adopted the 1995 Stock Option Plan (the "1995 Plan") in
May 1995 and the shareholders of the Company approved the 1995 Plan at the
Company's annual meeting in October 1995. The 1995 Plan provides for the grant
of both incentive stock options and non- qualified stock options and reserves
150,000 shares of the Company's Common Stock for issuance under the 1995 Plan
and any previous plans of the Company, to be granted on a one-for-one basis. The
outstanding 5,000 share option under the Company's 1985 ISO Plan therefore
reduces the shares reserved for issuance under the 1995 Plan to 145,000 shares.
In December 1996, the Board of Directors adopted the Associates Stock Purchase
Plan (the "ASP Plan"), which was approved by shareholders at the 1997 Annual
Meeting. The ASP Plan is available to associates who have worked at least six
months with the Company and are regularly scheduled to work at least 20 hours a
week. The ASP Plan is carried out in 12-month phases commencing on January 1,
1997. Company stock bought under the ASP Plan is purchased at the lesser of 85%
of the stock price at the beginning or end of the phase.
Grants under these plans are accounted for using APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under these plans. Had compensation cost for the plans based on their
grant date fair value of awards (the method described in FASB Statement No. 123)
reported net income and earnings per share would have been reduced to the pro
forma amounts reported below:
<TABLE>
<S> <C> <C>
1999 1998
Net Income In thousands
As reported $1006 $ 685
Pro forma 934 601
_____________________________________________________
Basic Earnings per Share
As reported $ .68 $ .47
Pro forma .64 .41
_____________________________________________________
Diluted Earnings per Share
As reported $ .67 $ .46
Pro forma .62 .40
______________________________________________________
</TABLE>
The fair value of each option has been estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1999, dividend rate of .74% to 1.00%; price volatility
of 57.8% to 70.2%, risk-free interest rates of 4.9% and 5.5% and expected lives
of 10 years.
A summary of the status of the stock option plan at June 30, 1999 and 1998, and
changes during the years ended on those dates are as follows:
<TABLE>
<S> <C> <C> <C> <C>
1999 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding,
beginning of year 93,300 $3.74 55,000 $2.13
Granted 32,550 4.99 38,300 6.05
Exercised/forfeited - - - -
Outstanding,
end of year 125,850 $4.06 93,300 $3.74
Exercisable at
end of year 125,850 93,300
Weighted-average
fair value per
share of options
granted during
the year $ 3.55 $ 3.53
</TABLE>
<TABLE>
As of June 30, 1999, the options outstanding have a weighted average
remaining contractual life of 7.62 years, and exercise prices and
unexercised options as follows:
<S> <C> <C>
Exercise Price Shares Average Contractual Life
2.13 50,000 6 years
2.19 5,000 5.5 years
4 10,050 9.33 years
5.438 22,500 9.5 years
5.75 28,250 8.5 years
6.88 10,050 8.33 years
</TABLE>
Earnings per Share
The weighted-average number of shares of common stock used to compute the basic
earnings per share were increased by 31,409 in 1999 and 35,434 in 1998 for the
assumed exercise of the stock options and warrants (Note 7), in computing the
diluted earnings per share data.
9. Industry Segments and Significant Customers
Effective July 1, 1998, the Company adopted FASB Statement No. 131, Disclosures
about Segment of an Enterprise and Related Information. Statement No. 131
superseded FASB Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and in interim financial reports. Statement No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of Statement No. 131 did not
affect results of operations or financial position, or the disclosure of segment
information.
Operating income is total revenue less operating expenses, excluding interest
and general corporate expenses. The Company did not have any sales between
industry segments. Identifiable assets by industry segment include both assets
directly identified with those operations and an allocable share of jointly used
assets. General corporate assets consist primarily of cash, cash equivalents and
building costs. The accounting policies applied to determine segment information
are the same as those described in the summary of significant accounting
policies. Management evaluates the performance of each segment based on profit
and loss from operations before income taxes, exclusive of non-recurring gains
or losses. The following table summarizes data by industry segment.
<TABLE>
<S> <C> <C>
In Thousands 1999 1998
Net Sales
WNS $ 2,390 $ 1,978
WTS 2,669 2,383
AFW 10,187 9,325
WMS 2,339 2,099
_______ _______
$17,585 $15,785
Operating Income (Loss)
WNS $ (133) $ (193)
WTS 73 (165)
AFW 2,425 1,957
WMS 888 867
General Corporate Expenses $(1,755) $ (1,462)
_______ ________
Operating Income $ 1,498 $ 1,004
Provision for income taxes
WNS $ (84) $ (101)
WTS (106) (174)
AFW 488 383
WMS 271 274
Corporate 49 38
_______ _______
$ 618 $ 420
Capital Expenditures
WNS $ 0 $ 28
WTS 44 142
AFW 96 208
WMS 4 39
_______ _______
$ 144 $ 417
Depreciation and Amortization
WNS $ 8 $ 6
WTS 64 46
AFW 173 193
WMS 25 21
_______ _______
$ 270 $ 266
Identifiable Assets
WNS $ 1,142 $ 1,260
WTS 736 781
AFW 2,679 2,625
WMS 747 710
Corporate 5,010 2,770
_______ _______
$10,314 $ 8,146
</TABLE>
<TABLE>
Significant customers (sales > 10% of net sales)
<S> <C> <C>
WTS
No. of customers 2 4
Sales to those customers $ 1,546 $ 1,703
AFW
No. of customers 2 1
Sales to those customers $ 3,800 $ 2,140
WNS
No. of customers 1 3
Sales to those customers $ 944 $ 761
</TABLE>
<TABLE>
Information of geographic information:
<S> <C> <C>
Revenues 1999 1998
United States $17,122,000 $15,441,000
Other Regions 463,000 344,000
___________ ___________
Total $17,585,000 $15,785,000
Long-lived assets 1999 1998
United States $1,607,000 $1,817,000
Other Regions - -
__________ __________
Total $1,607,000 $1,817,000
</TABLE>
PART II ITEM 8. ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(a) Identification
The names and ages of executive officers of the Company, their positions and
offices presently held, and the periods of service as such are as follows:
<TABLE>
<S> <C> <C> <C>
NAME AGE POSITION YEAR IN WHICH
FIRST BECAME
AN OFFICER
Jerry W. Grabowski 47 President, Chief
Executive Officer,
and Director 1993
Gregory J. Anshus 41 Chief Financial
Officer and Treasurer 1996
</TABLE>
The following information is presented as to the business experience of each
Executive Officer during the past five or more years.
Mr. Grabowski was elected President, Chief Executive Officer, and a member of
the Company's Board of Directors on August 1, 1993. He was additionally elected
Chief Financial Officer and Treasurer in January 1995 and served until his
successor, Gregory J. Anshus, was elected on October 22, 1996. From 1988 until
joining the Company, Mr. Grabowski was employed as General Manager of Onan
Power/Electronics Division of the Cummins Engine Company.
Mr. Anshus was elected Chief Financial Officer and Treasurer on October 22,
1996. Since joining the Company in October 1991, he served in various accounting
positions in the Company. From October 1994 until his election, Mr. Anshus
served as Controller of the Company. Until joining the Company, Mr. Anshus
served as Controller of B&F Companies.
Additional information required under this item is incorporated by reference to
the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders.
<PAGE>
PART III ITEM 10. EXECUTIVE COMPENSATION
Information required under this item is incorporated by reference to the
Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders.
PART III ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is incorporated by reference to the
Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders.
PART III ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is incorporated by reference to the
Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders.
PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index following the signature page of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the fourth quarter
of Fiscal Year 1999.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Rochester, Minnesota, on September 28, 1999.
WATERS INSTRUMENTS, INC.
/s/ Jerry W. Grabowski
By Jerry W. Grabowski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Company in the
capacities and on the dates indicated.
Signature Title Date
/s/ Jerry W. Grabowski
___________________________________
Jerry W. Grabowski
President, Chief Executive Officer, (Principal Executive Officer) and
Director
September 28, 1999
/s/ Gregory J. Anshus
___________________________________
Gregory J. Anshus
Chief Financial Officer (Principal Financial Officer)
September 28, 1999
/s/ William R. Franta
___________________________________
William R. Franta
Director
September 28, 1999
/s/ John A. Grimstad
___________________________________
John A. Grimstad
Director and Secretary
September 28, 1999
/s/ Charles G. Schiefelbein
___________________________________
Charles G. Schiefelbein
Director
September 28, 1999
<PAGE>
<TABLE>
Exhibit Index for Form 10-KSB (for the Fiscal
<S> <C>
Year ended June 30, 1999) Page Number
3.1 Restated Articles of Incorporation,
as amended to date, incorporated by
reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the fiscal
year ended January 31, 1989. *
3.2 Restated Bylaws, as amended to date,
incorporated by reference to the description
of such amendment set forth under the caption
"Amendment to Bylaws" of the Company's definitive
proxy statement for its 1988 Annual Meeting of Shareholders. *
10.1 Management Incentive Compensation Plan,
incorporated by reference to the description of
such Plan set forth under the caption "Compensation Plans"
of the Company's definitive proxy statement for its 1989
Annual Meeting of Shareholders. (1) *
10.2 1985 Incentive Stock Option Plan and Form of Stock Option
Agreement, incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1985. *
10.3 1985 Nonqualified Stock Option Plan and Form of Stock
Option Agreement, incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1986. *
10.4 1993 Employment Agreement between the Company and
Gerald W. Grabowski incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1993. (1) *
10.5 1995 Stock Option Plan incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996. *
10.6 Settlement Agreement with Wedge-Loc providing for the
$240,000, incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1996. *
10.7 1997 Associates Stock Purchase Plan incorporated by
reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended
June 30, 1998. *
23.1 Independent Auditor's Consent 27
24.1 Power of Attorney 28
27 Financial Data Schedule (filed in electronic formal only)
<FN>
(1) Indicates a management compensatory plan.
*Incorporated by reference; SEC File No. 0-1388.
</FN>
</TABLE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB AMENDED
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 1999
Commission file number 0-1388
WATERS INSTRUMENTS, INC.
(d/b/a Waters Corporation)
State of Incorporation: Minnesota
IRS Employer Identification No. 41-0832194
2411 Seventh Street, NW.
Rochester, Minnesota 55901
(507) 288-7777
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value Per Share
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of Company's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
The net sales for the Company for the Fiscal Year ended June 30,
1999 were $17,585,000.
The aggregate market value of the voting stock held by non-
affiliates of the Company on August 31, 1999 was $5,441,843. The
number of shares outstanding of the Company's Common Stock on
August 31, 1999 was 1,471,279.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instructions E3), the responses to items 9,
10, 11 and 12 of Part III of this report are incorporated herein
by reference to certain information contained in the Company's
definitive proxy statement for its 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange
Commission on or before October 28, 1999.
Transitional Small Business Disclosure Format (Check One) Yes __ No X
<PAGE>
This amendment is filed for purposes of changing the aggregate market
value of the voting stock held by non-affiliates of the Company on
August 31, 1999 and the date of the Auditor's Letter, both of
which were incorrectly stated in the Form 10-KSB filed on
September 28, 1999.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Waters Instruments, Inc.
Rochester, Minnesota
We have audited the accompanying balance sheets of Waters
Instruments, Inc. (d/b/a Waters Corporation) as of June 30, 1999
and 1998 and the related statements of operations, 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 Waters Instruments, Inc. as of June 30, 1999 and 1998 and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Rochester, Minnesota
August 11, 1999
<PAGE>
<TABLE>
Balance Sheets
<S> <C> <C>
June 30
In Thousands 1999 1998
Current assets
Cash and equivalents (Note 2) $ 3,618 $ 1,375
Trade receivables (Notes 3 and 5) 2,835 2,667
Inventories (Notes 4 and 5) 1,871 2,015
Prepaid expenses 101 72
Deferred income taxes (Note 6) 282 200
_______ _______
Total current assets 8,707 6,329
Property, plant and equipment (Note 5)
Land 128 128
Building 1,510 1,505
Machinery and equipment 2,342 2,220
Office furniture and equipment 1,637 1,520
______ ______
5,617 5,373
Less accumulated depreciation 4,058 3,621
______ ______
Net property, plant and equipment 1,559 1,752
Other assets
Costs in excess of net assets of
businesses acquired, net of
amortization 45 62
Investments 3 3
________ _______
Total other assets 48 65
________ ________
Total assets $ 10,314 $ 8,146
Current liabilities
Current maturities of long-term
debt (Note 5) 35 11
Trade payables 1,460 898
Accrued expenses
Salaries, wages, and other
Compensation 626 456
Product warranties 231 195
Other accrued liabilities 128 12
Income taxes payable 399 73
______ ______
Total current liabilities 2,879 1,645
Long-term debt (Note 5) 0 36
Deferred income taxes (Note 6) 59 56
Stockholders' equity (Note 7)
Preferred stock, par value $25;
Authorized: 120,000 shares;
issued and outstanding: none
Common stock, par value
$.10 per share; Authorized:
5,000,000 shares;
issued and outstanding: 1,471,279
shares (1999), 1,467,448 shares
(1998) 147 147
Additional paid-in capital
1,285 1,266
Retained earnings 5,944 4,996
______ _____
Total stockholders' equity 7,376 6,409
_______ ______
Total liabilities and equity $10,314 $8,146
<FN>
The accompanying notes are an integral part of the financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Statements of Operations
<S> <C> <C>
Year ended June 30
In Thousands, except per share data 1999 1998
Net sales $ 17,585 $ 15,785
Cost of goods sold 11,225 10,547
Gross profit 6,360 5,238
Operating expenses
Administrative 1,759 1,463
Selling 2,577 2,233
Research and development 526 538
Total operating expenses 4,862 4,234
Operating income 1,498 1,004
Other income
Interest income 138 93
Interest expense (5) (7)
Other income, net (7) 15
_______ ______
Income before income taxes 1,624 1,105
Income tax provision (Note 6) 618 420
_______ ______
Net income $ 1,006 $ 685
Net income per share - basic (Note 8) $ .68 $ .47
Net income per share - diluted
(Note 8) $ .67 $ .46
Weighted average number of shares
outstanding - basic 1,469,348 1,464,838
Weighted average number of shares
outstanding - diluted 1,500,757 1,500,272
</TABLE>
<TABLE>
Statements of Stockholderhareholder's' Equity Investment
<S> <C> <C> <C> <C>
Common Stock Additional
In Thousands Outstanding Paid In Retained
Shares Amount Capital Earnings
Balance June 30,
1997 1,462 146 1,246 4,369
Net Income for
the period - - - 685
Dividends paid
($.04/share) - - - (58)
Issuance of common
Stock 5 1 20 -
Balance June 30,
1998 1,467 $ 147 $ 1,266 $ 4,996
Net Income for
the period - - - 1006
Dividends paid
($.04/share) - - - (58)
Issuance of
common stock 4 - 19 -
Balance June 30,
1999 1,471 $ 147 $ 1,285 $ 5,944
<FN>
The accompanying notes are an integral part of the financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Statements of Cash Flow
<S> <C> <C>
(In Thousands)
Year Ended June 30
1999 1998
Cash flows from operations
Cash received from customers $17,417 $15,061
Interest received 138 93
Cash paid to suppliers and
employees (14,642) (14,289)
Interest paid (5) (7)
Income taxes paid (370) (445)
_______ ________
Net cash provided by operations 2,538 413
Cash flows from investing
Capital expenditures (244) (626)
Proceeds from sales of property
and equipment 0 3
_______ ______
Net cash used for investing (244) (623)
Cash flows from financing
Proceeds from sale of common stock 19 21
Payment of long-term debt (12) (10)
Dividends paid (58) (58)
_______ _______
Net cash used for financing (51) (47)
Net increase (decrease) in cash and
equivalents 2,243 (257)
Cash and equivalents, beginning
of year 1,375 1,632
_______ _______
Cash and equivalents, end of
year $ 3,618 $ 1,375
_______ _______
Reconciliation of net income to net
cash from operations:
Net income $ 1,006 $ 685
Depreciation and amortization 454 425
Loss on sale of property and
equipment 0 6
Deferred income taxes (79) 56
Changes in assets and liabilities
Accounts receivables (168) (712)
Inventories 144 (243)
Prepaid expenses (29) 43
Trade payables 562 253
Accrued expenses 322 (100)
Income taxes payable 326 0
_______ _______
Net cash provided by operations $ 2,538 $ 413
<FN>
The accompanying notes are an integral part of the financial
statements
</FN>
</TABLE>
<PAGE>
Notes to Financial Statements
1. Nature of Business and
Significant Accounting Policies
A. Nature of Business
The Company operates four principal business units: Waters Network
Systems (WNS), Waters Technical Systems (WTS), American FarmWorks
(AFW), and Waters Medical Systems (WMS). The sales of products from
all four business units occur principally within the United States.
Waters Network Systems, the most recently formed business unit,
addresses local area network connectivity
solutions for educational and other markets. Waters Technical
Systems is a contract manufacturer of electromechanical assemblies,
cable and harness assemblies for the construction, industrial,
communications and computer industries. American FarmWorks
manufactures and markets electric fence controllers for animal
containment to agricultural cooperatives, mass merchandisers
focusing on the retailer market, and lawn and garden stores. Waters
Medical Systems designs and manufactures organ preservation devices
and cardiovascular analytical instruments used in hospitals and
laboratories. The Company extends credit in the normal course of
business and performs ongoing credit evaluations of its customers'
financial conditions, but generally requires no collateral.
B. Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable,
and accounts payable approximate the carrying amount because of the
short maturity of those instruments.
C. Financial Statement Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from these estimates.
D. Inventories
Inventories are recorded at the lower of FIFO (first-in, first-out)
method cost or market.
E. Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
over estimated useful lives of 5 to 40 years for buildings and
improvements, and 3 to 10 years for machinery, equipment, and office
furniture. The present values of capital lease obligations are
classified as long-term debt and the related assets are included in
equipment. Amortization of equipment under capital leases is
included in depreciation expense.
F. Intangible Asset
Cost in excess of net assets acquired is amortized on a straight-
line basis over a twenty-year period beginning in 1983. Amortization
of $17,000 is recorded annually. Accumulated amortization at June
30, 1999 and 1998 was $305,000 and $288,000, respectively.
G. Long-lived Assets and Goodwill
The Company assesses long-lived assets for impairment under FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." Under those
rules, property and equipment and goodwill associated with assets
acquired in a purchase business combination are included in
impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
H. Product Warranty
Some of the Company's products are currently covered by product
warranties for one year after date of purchase. At the time of sale,
the Company recognizes an estimated warranty cost based on prior
history and expected future claims.
I. Employee Benefits
The Company has a 401(k) deferred savings plan for all employees
(associates) who have completed six months of service. The Company
may make matching and discretionary contributions. The Plan has a
calendar year-end. During each of the fiscal years ending June 30,
1999 and 1998, the Company expensed $25,000 and $24,000 in matching
contributions, respectively.
The Company offers medical insurance to its associates, which it
self-insures up to $25,000 per individual and $1,000,000 in
aggregate.
J. Statement of Cash Flows
For purposes of the statement of cash flows, highly liquid
investments purchased with maturities of three months or less are
considered to be cash equivalents.
<TABLE>
<S> <C> <C>
In thousands: 1999 1998
Supplemental schedule of non-cash
investing and financing activities:
Office furniture and equipment
acquired with capital lease $ 0 $ 18
</TABLE>
K. Revenue Recognition
The Company recognizes revenue when the product is shipped from its
warehouse.
L. Research and Development
Research and Development costs are expensed as incurred.
M. Advertising Costs
The Company follows the policy of charging the production costs of
advertising to expense as incurred. Advertising expenses for the
years ended June 30, 1999 and 1998 were $398,000 and $390,000,
respectively.
N. Income Taxes
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
O. Net Income per Common Share
Net income per basic share is computed based upon the weighted
average number of common shares issued and outstanding during each
year. Dilutive per share amounts assume conversion, exercise or
issuance of all potential common stock instruments (stock options
and warrants as discussed in Note 7) unless the effect is to reduce
a loss or increase income per share.
P. Comprehensive Income
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components. SFAS N. 130
requires other comprehensive income to include foreign currency
translation adjustments, unrealized gains and losses on marketable
securities and minimum pension liability adjustments. The June 30,
1999 financial statements do not reflect any items of comprehensive
income.
2. Credit Risks and Concentrations
At June 30, 1999 and 1998, the Company had cash with a financial
institution in excess of the Federal Deposit Insurance Corporation
insurance coverage. The Company has performed an evaluation of the
relative credit standing of this financial institution and believes
it has limited its credit exposure accordingly. In addition, the
Company maintains cash balances in a money market mutual fund with
Norwest Funds. Such funds are not insured and totaled $3,486,000 at
June 30, 1999 and $1,528,000 at June 30, 1998. The Company has not
incurred any losses in such accounts.
3. Trade Accounts Receivable
<TABLE>
Trade accounts receivable consist of the following:
<S> <C> <C>
In Thousands 1999 1998
Trade accounts receivable $2,877 $2,705
Less allowance for doubtful
accounts 42 38
______ ______
Totals $2,835 $2,667
</TABLE>
4. Inventories
<TABLE>
Inventories consist of the following:
<S> <C> <C>
In Thousands 1999 1998
Raw materials $1,600 $1,647
Work-in-process 38 197
Finished goods 233 171
______ ______
Totals $1,871 $2,015
</TABLE>
5. Long-term Debt and Line of Credit
<TABLE>
Long-term debt consists of the following:
<S> <C> <C>
In Thousands 1999 1998
Capital lease obligations
due in varying monthly
installments through
January 2000 collateralized
by related equipment. $ 35 $47
Less current maturities 35 11
____ ____
Net long-term debt $ 0 $ 36
</TABLE>
Scheduled maturities, by fiscal year, of long-term debt
are as follows:
2000 $35
<TABLE>
At June 30, property, plant and equipment includes the
following amounts for capital leases:
<S> <C> <C>
In Thousands 1999 1998
Property, plant and
equipment $ 54 $ 67
Accumulated amortization 16 18
____ ____
Net assets under capital
lease $ 38 $ 49
</TABLE>
<TABLE>
At June 30, 1999, the Company had the following minimum
commitments for payment of rentals under capital leases:
<S> <C>
2000 $37
___
Total lease commitments 37
Less amount representing
interest 2
____
Present value of lease
payments, included in
long-term debt $ 35
</TABLE>
Line of Credit:
The Company has a $1,000,000 line of credit with its bank.
Borrowings under the line are charged interest at the prime rate and
are collateralized by accounts receivable and inventories. The prime
rate was 7.75% at June 30, 1999. The credit agreement expires
December 15, 1999. The credit agreement requires the Company to meet
certain financial ratios and covenants. There were no borrowings
outstanding under the line of credit at June 30, 1999.
6. Income Taxes
<TABLE>
The income tax provision charged to continuing operations for the
years ended June 30, 1999 and 1998 are as follows:
<S> <C> <C>
In Thousands 1999 1998
Current:
US federal $628 $418
State 69 58
____ ____
Total current 697 476
Deferred:
US federal (69) (50)
State (10) (6)
____ ____
Total deferred (79) (56)
____ ____
Total current and deferred: $618 $420
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the US federal income tax rate to pretax
income for continuing operations for the years ended June 30, 1999
and 1998 due to the following:
<TABLE>
<S> <C> <C>
In Thousands 1999 1998
Computed "expected" tax expense $568 $387
Increase (decrease) in income
taxes resulting from:
Non-deductible expenses 14 12
State taxes, net of federal
tax benefits 56 31
Tax credits (27) (22)
Other 7 12
____ ____
Total $618 $420
</TABLE>
<TABLE>
Net deferred tax assets consist of the following components as of
June 30, 1999 and 1998:
<S> <C> <C>
In Thousands 1999 1998
Deferred tax assets
Employee benefits and
severance $119 $ 87
Inventory and receivable
allowances 77 42
Warranty and contingency
reserves 86 71
____ ____
Total deferred tax assets $282 $200
Deferred tax liabilities
Property and equipment $ 59 $ 56
____ ____
Total deferred tax liabilities 59 56
____ ____
Net deferred tax assets $223 $144
</TABLE>
<TABLE>
The components giving rise to the net deferred tax assets described
above have been included in the Company's Balance Sheets as of June
30, 1999 and 1998 as follows:
<S> <C> <C>
In Thousands 1999 1998
Current assets $282 $200
Noncurrent liabilities (59) (56)
____ ____
Net deferred tax assets $223 $144
</TABLE>
7. Stock Options
In 1985, the Company adopted an Incentive Stock Option Plan (the
"1985 ISO Plan") and a Non-Qualified Stock Option Plan (the "1985 NQ
Plan"), both of which had a term of ten years and terminated on
March 20, 1995. As of June 30, 1995, all options granted under the
1985 ISO Plan and the 1985 NQ Plan had terminated except for one
option for the purchase of 5,000 shares exercisable at $2.1875 per
share.
The Board of Directors adopted the 1995 Stock Option Plan (the "1995
Plan") in May 1995 and the shareholders of the Company approved the
1995 Plan at the Company's annual meeting in October 1995. The 1995
Plan provides for the grant of both incentive stock options and non-
qualified stock options and reserves 150,000 shares of the Company's
Common Stock for issuance under the 1995 Plan and any previous plans
of the Company, to be granted on a one-for-one basis. The
outstanding 5,000 share option under the Company's 1985 ISO Plan
therefore reduces the shares reserved for issuance under the 1995
Plan to 145,000 shares.
In December 1996, the Board of Directors adopted the Associates
Stock Purchase Plan (the "ASP Plan"), which was approved by
shareholders at the 1997 Annual Meeting. The ASP Plan is available
to associates who have worked at least six months with the Company
and are regularly scheduled to work at least 20 hours a week. The
ASP Plan is carried out in 12-month phases commencing on January 1,
1997. Company stock bought under the ASP Plan is purchased at the
lesser of 85% of the stock price at the beginning or end of the
phase.
Grants under these plans are accounted for using APB Opinion No. 25
and related interpretations. Accordingly, no compensation cost has
been recognized for grants under these plans. Had compensation cost
for the plans based on their grant date fair value of awards (the
method described in FASB Statement No. 123) reported net income and
earnings per share would have been reduced to the pro forma amounts
reported below:
<TABLE>
<S> <C> <C>
1999 1998
Net Income In thousands
As reported $1006 $ 685
Pro forma 934 601
_____________________________________________________
Basic Earnings per Share
As reported $ .68 $ .47
Pro forma .64 .41
_____________________________________________________
Diluted Earnings per Share
As reported $ .67 $ .46
Pro forma .62 .40
______________________________________________________
</TABLE>
The fair value of each option has been estimated at the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1999, dividend rate of
.74% to 1.00%; price volatility of 57.8% to 70.2%, risk-free
interest rates of 4.9% and 5.5% and expected lives of 10 years.
A summary of the status of the stock option plan at June 30, 1999
and 1998, and changes during the years ended on those dates are as
follows:
<TABLE>
<S> <C> <C> <C> <C>
1999 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding,
beginning of year 93,300 $3.74 55,000 $2.13
Granted 32,550 4.99 38,300 6.05
Exercised/forfeited - - - -
Outstanding,
end of year 125,850 $4.06 93,300 $3.74
Exercisable at
end of year 125,850 93,300
Weighted-average
fair value per
share of options
granted during
the year $ 3.55 $ 3.53
</TABLE>
<TABLE>
As of June 30, 1999, the options outstanding have a weighted average
remaining contractual life of 7.62 years, and exercise prices and
unexercised options as follows:
<S> <C> <C>
Exercise Price Shares Average Contractual Life
2.13 50,000 6 years
2.19 5,000 5.5 years
4 10,050 9.33 years
5.438 22,500 9.5 years
5.75 28,250 8.5 years
6.88 10,050 8.33 years
</TABLE>
8. Earnings per Share
The weighted-average number of shares of common stock used to
compute the basic earnings per share were increased by 31,409 in
1999 and 35,434 in 1998 for the assumed exercise of the stock
options and warrants (Note 7), in computing the diluted earnings per
share data.
9. Industry Segments and Significant Customers
Effective July 1, 1998, the Company adopted FASB Statement No. 131,
Disclosures about Segment of an Enterprise and Related Information.
Statement No. 131 superseded FASB Statement No. 14, Financial
Reporting for Segments of a Business Enterprise. Statement No. 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and in interim financial reports. Statement No. 131 also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of
Statement No. 131 did not affect results of operations or financial
position, or the disclosure of segment information.
Operating income is total revenue less operating expenses, excluding
interest and general corporate expenses. The Company did not have
any sales between industry segments. Identifiable assets by industry
segment include both assets directly identified with those
operations and an allocable share of jointly used assets. General
corporate assets consist primarily of cash, cash equivalents and
building costs. The accounting policies applied to determine segment
information are the same as those described in the summary of
significant accounting policies. Management evaluates the
performance of each segment based on profit and loss from operations
before income taxes, exclusive of non-recurring gains or losses. The
following table summarizes data by industry segment.
<TABLE>
<S> <C> <C>
In Thousands 1999 1998
Net Sales
WNS $ 2,390 $ 1,978
WTS 2,669 2,383
AFW 10,187 9,325
WMS 2,339 2,099
_______ _______
$17,585 $15,785
Operating Income (Loss)
WNS $ (133) $ (193)
WTS 73 (165)
AFW 2,425 1,957
WMS 888 867
General Corporate Expenses $(1,755) $ (1,462)
_______ ________
Operating Income $ 1,498 $ 1,004
Provision for income taxes
WNS $ (84) $ (101)
WTS (106) (174)
AFW 488 383
WMS 271 274
Corporate 49 38
_______ _______
$ 618 $ 420
Capital Expenditures
WNS $ 0 $ 28
WTS 44 142
AFW 96 208
WMS 4 39
_______ _______
$ 144 $ 417
Depreciation and Amortization
WNS $ 8 $ 6
WTS 64 46
AFW 173 193
WMS 25 21
_______ _______
$ 270 $ 266
Identifiable Assets
WNS $ 1,142 $ 1,260
WTS 736 781
AFW 2,679 2,625
WMS 747 710
Corporate 5,010 2,770
_______ _______
$10,314 $ 8,146
</TABLE>
<TABLE>
Significant customers (sales > 10% of net sales)
<S> <C> <C>
WTS
No. of customers 2 4
Sales to those customers $ 1,546 $ 1,703
AFW
No. of customers 2 1
Sales to those customers $ 3,800 $ 2,140
WNS
No. of customers 1 3
Sales to those customers $ 944 $ 761
</TABLE>
<TABLE>
Information of geographic information:
<S> <C> <C>
Revenues 1999 1998
United States $17,122,000 $15,441,000
Other Regions 463,000 344,000
___________ ___________
Total $17,585,000 $15,785,000
Long-lived assets 1999 1998
United States $1,607,000 $1,817,000
Other Regions - -
__________ __________
Total $1,607,000 $1,817,000
</TABLE>
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Rochester, Minnesota, on October 6, 1999.
WATERS INSTRUMENTS, INC.
/s/ Jerry W. Grabowski
By Jerry W. Grabowski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this
Report has been signed by the following persons on behalf of the Company in
the capacities and on the dates indicated.
Signature Title Date
/s/ Jerry W. Grabowski
___________________________________
Jerry W. Grabowski
President, Chief Executive Officer, (Principal Executive Officer) and
Director
October 6, 1999
/s/ Gregory J. Anshus
___________________________________
Gregory J. Anshus
Chief Financial Officer (Principal Financial Officer)
October 6, 1999
*
___________________________________
William R. Franta
Director
October 6, 1999
*
___________________________________
John A. Grimstad
Director and Secretary
October 6, 1999
*
___________________________________
Charles G. Schiefelbein
Director
October 6, 1999
* Signed on behalf of the Director by Jerry Grabowski, Power of Attorney
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-KSB/A
(Number 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
Commission File No.: 0-1388
WATERS INSTRUMENTS, INC.
(d/b/a Waters Corporation)
(Name of Small Business Issuer as specified in its charter)
Minnesota 41-0832194
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2411 Seventh Street NW, Rochester, Minnesota 56001
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (507) 288-7777
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.10 par value per share
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $17,585,000.
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of August 31, 1999 was approximately $5,441,843.
There were 1,472,279 shares of Common Stock, $.10 par value, outstanding as of
August 31, 1999.
-------------------------
Transitional Small Business Disclosure Format (check one). Yes [ ] No [ X ]
<PAGE>
This Amendment No. 2 to the Issuer's Form 10-KSB for the fiscal year
ended June 30, 1999, is being filed in order to file Items 9, 10, 11 and 12
under Part III, which the Company originally intended to incorporate by
reference to a proxy statement. The proxy statement will not be filed within 120
days of June 30, 1999.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The names and ages of executive officers and directors of the Company, their
positions and offices presently held, and the periods of service as such are as
follows:
<TABLE>
<CAPTION>
Year in which first
Position with the Company and became an Officer
Name Age Principal Occupation or Director
<S> <C> <C> <C>
Jerry W. Grabowski 47 President, Chief Executive Officer, 1993
and Director of the Company
Gregory J. Anshus 42 Chief Financial Officer and Treasurer of the 1996
Company
William R. Franta 57 Director. Business Development & Technology 1997
Consultant in Minneapolis, Minnesota.
John A. Grimstad 49 Secretary and General Counsel of the Company. 1996
Vice President of Fredrikson & Byron, P. A. in
Minneapolis, Minnesota
Charles G. Schiefelbein 60 Director. President of Capital Growth Services 1986
of Minneapolis, Minnesota.
</TABLE>
The following information is presented as to the business experience of each
executive officer and director during the past five or more years and his
directorships of other publicly held corporations:
Mr. Grabowski has been President, Chief Executive Officer and a member of the
Company's Board of Directors since August 1, 1993. He additionally served as
Chief Financial Officer, Treasurer and Secretary from December 1994 until
October 1996. From 1988 until joining the Company, Mr. Grabowski was employed as
General Manager of Onan Power/Electronics Division of the Cummins Engine
Company.
Mr. Anshus was elected Chief Financial Officer and Treasurer on October 22,
1996. Since joining the Company in October 1991, he served in various accounting
positions in the Company. From October 1994 until his election, Mr. Anshus
served as Controller of the Company. Until joining the Company, Mr. Anshus
served as Controller of B&F Companies.
Mr. Franta has been the Vice President of Marketing at Centron since August
1997. Between February 1997 and August 1997, he was a Business Development &
Technology Consultant in Minneapolis, Minnesota. From January 1987 to February
1997 he served as Senior Vice President of Network Systems Corporation. He is a
Director of HEI, Inc. in Victoria, Minnesota.
<PAGE>
Mr. Grimstad has been, since 1984, a Vice President and shareholder of
Fredrikson & Byron, P.A., the Company's counsel, and serves as a Director and
Secretary or Assistant Secretary of several closely-held manufacturing
companies. He has served as the Company's Secretary since 1996.
Mr. Schiefelbein, since September 1996 has been President of Capital Growth
Services, a consulting and investment company, based in Minneapolis, Minnesota.
From 1979 until August 1996, Mr. Schiefelbein was Chairman of Computer Petroleum
Corporation (CPC), a public company that provides electronic energy price and
news information. From 1979, when he founded CPC, to 1991, Mr. Schiefelbein
served as Chairman and Chief Executive Officer. He is also currently a director
of Research, Inc.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent (10%) of the
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the SEC). Officers, directors, and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, the Company believes that, during the period from July 1, 1998
through June 30, 1999, all filing requirements applicable to its officers,
directors, and greater than ten-percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid or to be paid by the
Company, as well as certain other compensation paid or accrued, during fiscal
year 1999 to the named executive officer as of June 30, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
Restricted All Other
Name & Principal Fiscal Bonus $ Stock # Options LTIP Compensation
Position Year Salary $ (1) Other $ Awards $ Granted Payouts $(2)
-------- ---- -------- --------- ------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jerry W. Grabowski 1999 161,268 33,686 - - 3,250 - 3,320
President & CEO 1998 158,524 35,278 - - 3,250 - 3,783
1997 143,780 61,000 - - - - 4,632
</TABLE>
(1) Represents incentive compensation payment.
(2) Represents insurance premiums and 401(k) match paid by the Company.
Option Grants During Fiscal Year 1999
There were 3,250 shares of the Company's common stock granted in options under
the Company's 1995 Stock Option Plan during fiscal year 1999 to the named
executive officer in the Summary Compensation Table. The Company has not granted
any stock appreciation rights.
<TABLE>
<CAPTION>
Number of
Securities Percent of Total Options
Underlying Options Granted to Employees in Exercise or Base Price
Name Granted (#) Fiscal Year ($/Share) Expiration Date
<S> <C> <C> <C> <C>
Jerry W. Grabowski 3,250 13.8% $5.75 2/5/2008
</TABLE>
<PAGE>
Option Exercises During Fiscal Year 1999 And Fiscal Year-End Option Values
The named executive officer in the Summary Compensation Table did not exercise
any options during fiscal year 1999.
<TABLE>
<CAPTION>
Shares # of Unexercised Options at Value of Unexercised Options at
Acquired Value June 30, 1999 June 30, 1999
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
<S> <C> <C> <C> <C>
Jerry W. Grabowski 0 $ 0 56,500 exercisable $124,875 exercisable
0 unexercisable $0 unexercisable
</TABLE>
(1) Value is calculated on the basis of the difference between the option
exercise price and the closing sale price for the Company's Common
Stock at June 30, 1999 of $4.625 as quoted on the NASDAQ National
Market System, multiplied by the number of shares of Common Stock
underlying the option.
Compensation of Directors
Each non-employee, non-officer Director receives an annual retainer fee of
$4,000, $350 for each attended quarterly meeting of the Board, $50 for each
breakfast or dinner meeting of the Board, $150 for each attended meeting of a
Committee on which he serves and a fee of $500 for each time he provides
additional services as a special consultant to the Company, plus, in each case,
reimbursement of travel expenses. Such Directors also receive a monthly stipend
of $50 to cover miscellaneous travel, telephone, and meal expenses associated
with Board responsibilities.
Employment Contracts and Termination of Employment Arrangements
The Company has entered into an employment agreement with Jerry W. Grabowski,
which provides for compensation in the event Mr. Grabowski's employment with the
Company is terminated under certain circumstances. Upon termination of
employment initiated by the Company's Board of Directors, Mr. Grabowski will
have the right to receive an amount equal to twelve-months' base salary and the
cost of all existing health/medical and other benefit plans enjoyed by Mr.
Grabowski on the effective date of termination (subject to the terms of the
plans) or substantially the same benefits if the terms of a plan exclude
non-employees. Mr. Grabowski will also be entitled to receive on August 31, in
the year immediately following the "Performance Period" (most recently ended
fiscal year) in which a termination occurred, the incentive compensation he
would have earned had his employment not been terminated, in an amount
proportionate to the number of months that he was employed by the Company prior
to such termination. In the event Mr. Grabowski's employment with the Company is
terminated within one year of a change in control, then upon such termination in
addition to the Company's obligation stated above, the Company will pay Mr.
Grabowski an additional amount equal to the base salary, then in effect, for one
year.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders
The following table provides information concerning the only persons known to
the Company to be the beneficial owners of more than 5% of the Company's
outstanding Common Stock as of September 30, 1999 or as otherwise indicated:
<TABLE>
<CAPTION>
Number of Shares
Name and Address of Beneficial Owner Beneficially Owned Percent of Class
- - ------------------------------------ ------------------ ----------------
<S> <C> <C>
Charles G. Schiefelbein
2920 Norwest Center, Minneapolis, MN 55402 204,753 (1) 13.8%
Woodland Investment Company
3007 Skyway Circle North, Irving, TX 75038 172,000 (2) 11.7%
Kohl Gift Trust
3007 Skyway Circle North, Irving, TX 75038 90,000 (3) 6.1%
</TABLE>
(1) Includes 70,000 shares of stock held in the name of Peace Shalom
Foundation, of which Mr. Schiefelbein is a Director and Vice President,
as well as 3,350 shares which may be purchased pursuant to options held
by Mr. Schiefelbein which are or will become exercisable within 60 days
of September 30, 1999.
(2) According to the most current Schedule 13D filed by Woodland Investment
Company and information provided by it, the power to vote and dispose
(or to direct the vote or disposition) of such shares is shared with
Atlee M. Kohl and Nicole F. Kohl, each of whom are thereby deemed to be
beneficial owners of such shares.
(3) According to the most current Schedule 13D filed by Kohl Gift Trust,
the power to vote and dispose (or to direct the vote or disposition) of
such shares is shared with Atlee M. Kohl who is deemed to be a
beneficial owner of such shares.
Management Shareholdings
The following table sets forth the beneficial ownership of the Company's Common
Stock by (i) each director of the Company, (ii) the named executive officer in
the Summary Compensation Table, and (iii) all directors and executive officers
as a group, as of September 30, 1999. Except as otherwise indicated, the persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock owned by them.
<TABLE>
<CAPTION>
Number of Shares Percent
Name of Director or Number of Persons in Group Beneficially Owned(1) of Class (1)
- - ---------------------------------------------- --------------------- ------------
<S> <C> <C>
Charles G. Schiefelbein 204,753 (2) 13.8%
Jerry W. Grabowski 69,750 (3) 4.6%
John A. Grimstad 21,850 (4) 1.5%
William R. Franta 10,150 (5) 0.7%
Officers and Directors as a Group (6 persons) 324,503 (6) 20.6%
</TABLE>
<PAGE>
(1) Under rules of the Securities and Exchange Commission, an individual is
also deemed to beneficially own shares which are not outstanding but
which the individual has the right to acquire as of September 30, 1999
or within 60 days of such date. Such shares not outstanding but so
deemed beneficially owned are treated as outstanding when determining
the percent of the class owned by the particular individual and when
determining the percent owned by the group.
(2) Includes 70,000 shares of stock held in the name of Peace Shalom
Foundation, of which Mr. Schiefelbein is a Director and Vice President,
as well as 10,050 shares which may be purchased pursuant to options
held by Mr. Schiefelbein which are or will become exercisable within 60
days of September 30, 1999.
(3) Includes 56,500 shares which may be purchased pursuant to options held
by Mr. Grabowski which are or will become exercisable within 60 days of
September 30, 1999.
(4) Includes 10,050 shares which may be purchased pursuant to options held
by Mr. Grimstad which are or will become exercisable within 60 days of
September 30, 1999.
(5) Includes 10,050 shares which may be purchased pursuant to options held
by Mr. Franta which are or will become exercisable within 60 days of
September 30, 1999.
(6) Includes 104,650 shares which may be purchased pursuant to options held
by Officers and Directors which are or will become exercisable within
60 days of September 30, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To management's knowledge, no director, officer, or ten percent Shareholder or
any affiliates of such persons had in fiscal years 1998 or 1999 or currently has
any material interest, direct or indirect, in any transaction in which the
Company was involved.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in Rochester, Minnesota, on
October 28, 1999.
WATERS INSTRUMENTS, INC.
/s/ Jerry W. Grabowski
By Jerry W. Grabowski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment has been signed by the following persons on behalf of the Company in
the capacities and on the dates indicated.
Signature Title Date
/s/ Jerry W. Grabowski
- - ------------------------ President, Chief Executive Officer,
Jerry W. Grabowski (Principal Executive Officer) and
Director October 28, 1999
/s/ Gregory J. Anshus
- - ------------------------ Chief Financial Officer (Principal
Gregory J. Anshus Financial Officer) October 28, 1999
*
- - ------------------------
William R. Franta Director October 28, 1999
*
- - ------------------------
John A. Grimstad Director and Secretary October 28, 1999
*
- - ------------------------ Director October 28, 1999
Charles G. Schiefelbein
* Signed on behalf of the director by Jerry
Grabowski as attorney in fact
<PAGE>
ANNEX F
CHAPTER 13 OF THE CALIFORNIA CORPORATIONS CODE
DISSENTERS' RIGHTS
SECTION 1300. Right to Require Purchase--"Dissenting Shares" and "Dissenting
Shareholder" Defined.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the National Market System of the NASDAQ Stock Market,
and the notice of meeting of shareholders to act upon the reorganization
summarizes this section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with respect to which
there exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for payment
are filed with respect to 5 percent or more of the outstanding shares of that
class.
(2) Which were outstanding on the date for the determination
of shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SECTION 1301. Demand for Purchase.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. Endorsement of Shares.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. Agreed Price--Time for Payment.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
SECTION 1304. Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting shares is
in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. Appraisers' Report--Payment--Costs.
(a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has intervened,
is entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. Dissenting Shareholder's Status as Creditor.
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. Dividends Paid as Credit Against Payment.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. Continuing Rights and Privileges of Dissenting Shareholders.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. Termination of Dissenting Shareholder Status.
Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. Suspension of Proceedings for Payment Pending Litigation.
If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
SECTION 1311. Exempt Shares.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. Attacking Validity of Reorganization or Merger.
(a) No shareholder of a corporation who has a right under this chapter
to demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to shareholders of the controlled party,
and (2) a person who controls two or more parties to a reorganization shall have
the burden of proving that this transaction is just and reasonable as to the
shareholders of any party so controlled.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Minnesota Statutes Section 302A.521, subd. 2, requires Waters to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
Waters, against judgments, penalties, fines, settlements, and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if certain statutory standards are met. In
addition, Section 302A.521, subd. 3, requires payment by Waters, upon written
request, of reasonable expenses in advance of final disposition of the
proceeding in certain circumstances. A decision as to required indemnification
is made by a disinterested majority of the board of directors present at a
meeting at which a disinterested quorum is present, or by a designated committee
of the board, by special legal counsel, by the shareholders, or by a court.
Section 302A.521 contains detailed terms regarding such right of indemnification
and reference is made thereto for a complete statement of such indemnification
rights.
Waters' Amended and Restated Bylaws provide for indemnification by
Waters to the full extent permitted by Minnesota Statutes Section 302A.521, as
now enacted or hereafter amended, against and with respect to threatened,
pending, or completed actions, suits, or proceedings arising from, or alleged to
arise from, a party's actions or omissions as a director, officer, employee, or
agent of Waters. Generally, under Minnesota law, indemnification will be
available only where an officer or director can establish that he or she acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of Waters.
In addition to providing indemnification as outlined above, Waters also
purchases individual insurance coverage for its directors and officers. Subject
to the stated conditions, the policy insures the directors and officers of
Waters against liability arising out of actions taken in their official
capacities. To the extent that such actions cannot be indemnified by Waters, the
policy provides individual liability insurance protection for the directors and
officers of Waters.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
2 Amended and Restated Plan of Reorganization, dated November 3,
1999, among Waters Instruments, Inc., WG Merger Corp., Garrett
Communications, Inc., Frank Madren, Christopher Robert Ross
Smith, including the Exhibits thereto. (The Agreement and Plan
of Merger is furnished as Annex A to the Proxy
Statement/Prospectus forming a part of this Registration
Statement.) Upon the request of the Commission, Waters agrees
to furnish supplementally to the Commission a copy of any
disclosure schedules to the Agreement and Plan of Merger.
5 Opinion of Fredrikson & Byron, P.A. regarding validity of
shares.
*8.1 Opinion and Consent of Fredrikson & Byron, P.A. regarding
certain tax matters.
*8.2 Opinion and Consent of Fenwick & West LLP. regarding
certain tax matters.
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5).
*23.2 Consent of Fenwick & West LLP.
23.3 Consent of McGladrey & Pullen LLP, independent accountants for
Waters Instruments, Inc.
23.4 Consent of Froshman, Billings, Williams, Chan & Lewandowski,
independent auditors for Garrett Communications, Inc.
23.5 Consent of John G. Kinnard & Company (included in Annex B to
the Proxy Statement/Prospectus forming a part of this
Registration Statement)
24 Power of Attorney (filed with the signature page to the Form
S-4).
99.1 Form of Proxy to be used by Waters Instruments, Inc.
shareholders.
99.2 Form of Proxy to be used by Garrett Communications, Inc.
shareholders.
*99.3 Consent of Frank Madren
*99.4 Consent of Christopher Robert
* To be filed by amendment.
(b) Financial Statement Schedules
Not applicable.
(c) Reports, Opinions and Appraisal Materially Related to the Transaction.
Opinion of John G. Kinnard & Company is furnished as Annex B to the
Proxy Statement/Prospectus forming a part of this Registration
Statement.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) (i) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(ii) The registrant undertakes that every prospectus [a] that
is filed pursuant to paragraph (b)(i) immediately preceding, or [b] that
purports to meet the requirements of Section 10(a)(3) of the Securities Act and
is used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on January 21, 2000.
WATERS INSTUMENTS, INC.
By: /s/ Jerry W. Grabowski
Jerry W. Grabowski
President and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Jerry W.
Grabowski and Gregory J. Anshus, and each of them, as his or her true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, any registration statement filed
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and any and
all instruments or documents filed as part of or in connection with any of such
amendments or registration statements, and each of the undersigned does hereby
ratify and confirm all that said attorney-in-fact and agent, or his or her
substitutes, shall do or cause to be done by virtue hereof.
Signature Title Date
/s/ Jerry W. Grabowski President, Chief Executive January 21, 2000
Jerry W. Grabowski Officer and Director
(principal executive officer)
/s/ Gregory J. Anshus Chief Financial Officer and January 21, 2000
Gregory J. Anshus Treasurer
(principal financial and accounting officer)
/s/ William R. Franta Director January 21, 2000
William R. Franta
/s/ Charles G. Schiefelbien Director January 21, 2000
Charles G. Schiefelbien
/s/ John A. Grimstad Director January 21, 2000
John A. Grimstad
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
EXHIBIT INDEX
TO
FORM S-4 REGISTRATION STATEMENT
-----------
WATERS INSTRUMENTS, INC.
2 Amended and Restated Plan of Reorganization, dated November 3, 1999,
among Waters Instruments, Inc., WG Merger Corp., Garrett
Communications, Inc., Frank Madren, Christopher Robert Ross Smith,
including the Exhibits thereto. (The Agreement and Plan of Merger is
furnished as Annex A to the Proxy Statement/Prospectus forming a part
of this Registration Statement.) Upon the request of the Commission,
Waters agrees to furnish supplementally to the Commission a copy of any
disclosure schedules to the Agreement and Plan of Merger.
5 Opinion of Fredrikson & Byron, P.A. regarding validity of shares.
*8.1 Opinion and Consent of Fredrikson & Byron, P.A. regarding certain
tax matters.
*8.2 Opinion and Consent of Fenwick & West LLP. regarding certain tax
matters.
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5).
*23.2 Consent of Fenwick & West LLP.
23.3 Consent of McGladrey & Pullen LLP, independent accountants for Waters
Instruments, Inc.
23.4 Consent of Froshman, Billings, Williams, Chan & Lewandowski,
independent auditors for Garrett Communications, Inc.
23.5 Consent of John G. Kinnard & Company (included in Annex B to the Proxy
Statement/Prospectus forming a part of this Registration Statement)
24 Power of Attorney. (filed with the signature page to the Form S-4)
99.1 Form of Proxy to be used by Waters Instruments, Inc. shareholders.
99.2 Form of Proxy to be used by Garrett Communications, Inc. shareholders.
*99.3 Consent of Frank Madren
*99.4 Consent of Christopher Robert
_________________
* To be filed by amendment.
FREDRIKSON & BYRON, P.A.
Attorneys At Law
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3397
(612) 347-7000
FAX: (612) 347-7077
January 21, 2000
Waters Instruments, Inc.
2411 Seventh Street N.W.
Rochester 55903
Re: Registration Statement on Form S-4
Ladies/Gentlemen:
We are acting as counsel for Waters Instruments, Inc. (the
"Company"), a Minnesota corporation, in connection with the registration by the
Company of 375,000 shares of the Company's Common Stock, par value $.10 (the
"Shares"), pursuant to the Company's Registration Statement on Form S-4 being
filed with the Securities and Exchange Commission (the "Registration
Statement"). The Shares are to be issued in connection with the merger of WG
Merger Corp. ("Merger Subsidiary"), a wholly-owned subsidiary of the Company,
with and into Garrett Communications, Inc. ("Garrett"), pursuant to the
Agreement and Plan of Reorganization dated November 3, 1999 among the Company,
Merger Subsidiary, Garrett, Frank Madren, Christopher Robert and Ross Smith (the
"Merger Agreement").
In connection with rendering this opinion, we have examined
and relied upon originals or copies, certified or otherwise identified to our
satisfaction, of such corporate records, agreements and other instruments,
certificates of officers, certificates of public officials and other documents
as we have deemed necessary or appropriate as a basis for the opinions expressed
herein.
In connection with our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents tendered to us
as originals, the legal capacity of all natural persons and the conformity to
original documents of all documents submitted to us as certified or photostatic
copies.
Based on, and subject to, the foregoing, it is our opinion
that:
1. The Company has the corporate authority to issue the Shares
in the manner and under the terms set forth in the Registration Statement.
2. The Shares have been duly authorized and, when issued and
delivered to holders of Garrett common stock in accordance with the Merger
Agreement, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5
to the Registration Statement, to its use as a part of the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Proxy Statement/Prospectus constituting a part of the Registration Statement.
Very truly yours,
FREDRIKSON & BYRON, P.A.
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statement on
Form S-4 of Waters Instruments, Inc. of our report dated August 11, 1999 on the
financial statements of Waters Instruments, Inc., which report appears in the
Annual Report on Form 10-KSB for the year ended June 30, 1999 and the reference
to our firm under the headings Merger, Independent Accountants, and Experts.
/s/ McGladrey & Pullen, LLP
Rochester, Minnesota
January 21, 2000
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation in the Registration Statement on Form S-4 of
Waters Instruments, Inc. of our report dated August 19, 1999 on the financial
statements of Garrett Communications, Inc., which report appears in the
Financial Statements for the years ended December 31, 1998 and 1997.
Los Gatos, California
January 21, 2000
/s/ Froshman, Billings,
Williams, Chan & Lewandowski
Certified Public Accountants
WATERS INSTRUMENTS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
This PROXY is solicited on behalf of the Board of Directors. The undersigned
hereby appoints JERRY W. GRABOWSKI and GREGORY J. ANSHUS, with full power of
substitution, as proxy to vote for me and in my name with like effect as if I
were personally present and voting at the Annual Meeting of Shareholders of
Waters Instruments, Inc. (d/b/a Waters Corporation), called to be held at ___
PM, _________, _______, 2000, local time, at _____________________, Minneapolis,
Minnesota and at all adjournments thereof, hereby revoking any proxy or proxies
heretofore given:
The Board of Directors recommends that you vote "FOR" the following proposals:
(1) PROPOSAL TO APPROVE THE ISSUANCE OF 375,000 SHARES OF COMMON STOCK to
shareholders of Garrett Communications, Inc., in connection with the merger of a
wholly owned subsidiary of Waters in Garrett. A copy of the Merger Agreement is
attached as Appendix A to the Proxy Statement/Prospectus for the Annual Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) PROPOSAL TO APPROVE WATERS' AMENDED AND RESTATED BYLAWS which amend Waters'
existing Bylaws to divide the Waters board of directors into two classes, with
each class serving a staggered three-year term (except, initially, Class I
directors), to provide that directors may be removed only for cause, to specify
a mechanism for nominating directors and to provide that certain provisions of
Waters' amended and restated Bylaws may only be amended by the vote of
two-thirds of the outstanding shares of capital stock of Waters entitled to
vote.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) PROPOSAL TO APPROVE AN AMENDMENT TO WATERS 1995 STOCK OPTION PLAN to
increase the number of shares of Waters common stock available for issuance
under that plan. The amendment will be effective only upon completion of the
merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(4) ELECTION OF DIRECTORS.
[ ] FOR all nominees except those written in this box.
Nominees: William R. Franta, Jerry W. Grabowski, John A. Grimstad,
Charles G. Schiefelbein, Frank Madren, Christopher Robert
[-------------------------------------------]
[ ] WITHHOLD AUTHORITY to
vote for all nominees
(5) OTHER MATTERS. In their discretion, the appointed proxies are
authorized to vote upon such others business as may properly come
before the Meeting or any adjournment.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN FOR A PARTICULAR PROPOSAL, WILL BE VOTED FOR SUCH PROPOSAL.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting and
the accompanying Proxy Statement/Prospectus.
Date _______________, 2000. ___________________________________________
___________________________________________
PLEASE DATE AND SIGN ABOVE exactly as name
appears at the left, indicating, where
appropriate, official position or
representative capacity. If stock is held in
joint tenancy, each joint owner should sign.
If signing for a corporation or partnership
as agent, attorney or fiduciary, indicate
the capacity in which you are signing.
DETACH HERE
PROXY
GARRETT COMMUNICATIONS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
________________, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF GARRETT
The undersigned hereby appoints Frank Madren and ______, or either of
them, as proxies, each with full power of substitution, and hereby authorizes
them to represent and to vote, as designated below, all shares of Common Stock,
no par value, of Garrett Communications, Inc. ("Garrett"), held of record by the
undersigned on January ___, 2000, at the Special Meeting of Shareholders of
Garrett to be held at Garrett's corporate offices, located at 213 Hammond
Avenue, Fremont, California 94539, on ________, _________, 2000, at 10:00 a.m.,
Pacific Time, and at any adjournments or postponements thereof.
THIS PROXY WILL BE VOTED AS DIRECTED ON THE REVERSE SIDE. WHEN NO CHOICE IS
INDICATED, THIS PROXY WILL BE VOTED "FOR" APPROVAL OF THE MERGER AGREEMENT AND
THE MERGER (PROPOSAL 1), "FOR" APPROVAL OF THE FAIRNESS OF THE DIVISION OF THE
SHARES OF WATERS COMMON STOCK TO BE ISSUED IN THE MERGER (PROPOSAL 2), AND "FOR"
APPROVAL OF THE EXCHANGE OF WATERS COMMON STOCK FOR GARRETT COMMON STOCK
RECEIVED UPON THE EXERCISE OF ANY OPTIONS BETWEEN NOVEMBER 3, 1999 AND THE
EFFECTIVE DATE OF THE MERGER (PROPOSAL 3). In their discretion, the proxy
holders are authorized to vote upon such other business as may properly come
before the meeting or any adjournments or postponements thereof.
[ X ] Please mark votes as
in this example.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
The Board of Directors recommends that you vote FOR Proposals 1, 2 and 3.
1. To approve and adopt the Amended and Restated Agreement and Plan of
Reorganization effective as of November 3, 1999, by and among Waters
Instruments, Inc., a Minnesota corporation, WG Merger Corp., a California
corporation, Garrett, Frank Madren, Christopher Robert, and Ross Smith, and to
approve the merger of Garrett with and into WG Merger Corp., a wholly owned
subsidiary of Waters pursuant to the merger agreement, by which WG Merger Corp.
would be the surviving corporation of the merger.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To approve the fairness of the division of the merger consideration among the
Garrett shareholders as follows: upon the effectiveness of the merger, each
share of Garrett common stock issued and outstanding immediately before the
effective time of the merger will be converted into either $2.00 cash, or 1/3 of
a share of Waters common stock. Garrett shareholders will receive a total of
375,000 shares of Waters common stock and $2,250,000 in cash. The shares
received in the merger will be divided among the beneficial owners of Garrett
common stock, as follows:
o Frank Madren will receive 250,000 Waters shares in exchange
for 750,000 Garrett shares;
o Christopher Robert will receive 100,000 Waters shares in
exchange for 300,000 Garrett shares; and
o Ross Smith will receive 25,000 Waters shares in exchange for
75,000 Garrett shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To approve the exchange of 1 share of Waters common stock for every 3 shares
of Garrett common stock received upon any exercise of Garrett options between
November 3, 1999 and the effective date of the merger.
The cash received in the merger will be divided among all Garrett
shareholders (including Madren, Robert and Smith with respect to any
Garrett shares remaining after the exchange described above) in
proportion to the percentage of Garrett common stock owned by each
Garrett shareholder, at a price of $2.00 for each Garrett share.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Please sign exactly as your name(s) appear(s) on your stock certificate. If
shares of stock stand of record in the names of two or more persons or in the
name of husband and wife, whether as joint tenants or otherwise, both or all of
such persons should sign the proxy. If shares of stock are held by record by a
corporation, the proxy should be executed by the president or vice president and
the secretary or assistant secretary. Executors, administrators or their
fiduciaries who execute the above proxy for a deceased shareholder should give
their full title. Please date the proxy.
Signature:___________________________________ Date:_____________________________
Signature:___________________________________ Date:_____________________________
