As Filed with the Securities and Exchange Commission on February 9, 2000
Registration No. 333-95191
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
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)
- ------------------------------------------- ------------------- ------------------ ------------------ --------------
Common stock, par value $.10 per share 401,041 shares Not Applicable $1,203,123 $282(3)
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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 (3,276,041) 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).
(3) The entire fee was paid at the time of the original filing of the
Registration Statement on January 21, 2000.
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:
March 15, 2000
1:30, p.m., Minneapolis Time
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402
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:
March 15, 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, as amended, 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 9.
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.
- --------------------------------------------------------------------------------
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 February 9, 2000,
and first mailed to shareholders on or about February 11, 2000
<PAGE>
WATERS INSTRUMENTS, INC.
2411 7th Street N.W.
Rochester, MN 55901
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held March 15, 2000
To the shareholders of Waters Instruments, Inc.:
The Annual Meeting of the shareholders of Waters Instruments, Inc. will be
held at 1100 International Centre, 900 Second Avenue South, Minneapolis, MN,
55402, on Wednesday, March 15, 2000, at 1:30 p.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 February 1, 2000 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
February 11, 2000
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GARRETT COMMUNICATIONS, INC.
213 Hammond Avenue
Fremont, California 94539
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on March 15, 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 Wednesday, March 15, 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 February 1,
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
February 11, 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 February 28,
2000.
<PAGE>
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, as amended
Annex F California Dissenters' Rights Statute
<PAGE>
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. In connection with the merger, Waters, Garrett and Frank Madren
have agreed to adjust the amount of cash and number of shares payable in the
merger to the extent certain costs are greater or less than $1,000,000. If the
costs are less than $1,000,000, Waters must pay the difference to the
shareholders of Garrett 50% in cash and 50% in Waters Stock valued at market
price on the date the costs are determined. If the costs are greater than
$1,000,000, Frank Madren must reimburse Waters in an amount equal to the
difference.
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 March 15,
2000 and the Garrett's special meeting of the shareholders is scheduled for
March 15, 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 Frank Madren at 510-438-9071.
Waters shareholders who have questions about the merger or how
to vote their shares should call Gregg Anshus at 507-288-7777.
<PAGE>
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, as amended, 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 64. 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, as amended, 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-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 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 (Page 15)
The annual meeting of the Waters shareholders will be held on
Wednesday, March 15, 2000, at 1:30 p.m., Minneapolis time at 1100 International
Centre, 900 Second Avenue South, Minneapolis, Minnesota. 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 February 1, 2000. On that date there
were 1,494,279 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
747,140 shares. Directors and executive officers of Waters owned 324,503 shares
of Waters common stock as of the record date (approximately 20.6% 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 18)
The special meeting of the Garrett shareholders will be held on
Wednesday, March 15, 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 February 1, 2000. On that date there
were 2,324,375 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 1,440,750 shares of Garrett common stock as of the record date,
which is (approximately 62% 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 19)
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 26)
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 27)
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, in converting the options from
Garrett common stock to Waters common stock, the number of shares 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 34)
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 22)
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 23)
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 24)
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 November 3, 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 31)
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
31.
Representation, Warranties and Conditions to the Merger (Page 27)
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 33)
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 30)
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
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 $6.5625 on February 7, 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 2,324,375 shares of Garrett common stock
outstanding, held of record by a total of 14 shareholders. Garrett has never
paid cash dividends on its common stock.
Risks of the Merger (Page 9)
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 38)
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 pages 45, 46 and 47.
<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 pages 45, 46 and 47. 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 expensed 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, pursuant to the proposals set forth in this proxy
statement/prospectus, will receive 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 until 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 a 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 1:30 p.m., Minneapolis time,
on Wednesday, March 15, 2000, at the offices of Fredrikson & Byron, P.A., 1100
International Centre, 900 Second Avenue South, Minneapolis, Minnesota 55402.
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 February 1, 2000, 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 649 holders of record of Waters common stock and 1,494,279
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 747,140 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 324,503 shares of Waters common stock, representing approximately
20.6% 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
Wednesday, March 15, 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 February 1,
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 14 holders of record of Garrett common stock and
2,324,375 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 1,440,750 shares of Garrett common stock as of the record date, which is
approximately 62% 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.
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
multiplied by 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 effect 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 1,494,279 shares are outstanding
and held of record by 649 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, 2,324,375 shares of common stock were
issued and outstanding and employee and director stock options to purchase a
total of 241,250 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 February 1, 2000, the record date, 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, 1,133,188(1) 48.1%
Chief Financial Officer and Director
Christopher Robert 449,000 19.3%
Ross Smith, Director 340,000 14.6%
Jeet Makker 174,500 7.5%
JoAnn Madren, Director 1,133,188(1) 48.1%
Percy Kawas, Director 18,750 *
Robert Novak, Director 14,375(4) *
------------ -------
Executive Officers and Directors as a Group 1,506,313 63.0%
<PAGE>
* Less than 1%
(1) Includes 1,043,500 shares of Common Stock beneficially owned by Mr.
Madren, 56,250 shares of Common Stock beneficially owned by Ms. Madren,
options to purchase 20,313 shares of Common Stock issued to Mr. Madren
and options to purchase 13,125 shares of Common Stock issues to Ms.
Madren, all of which are currently exercisable.
(2) Includes 330,000 shares of Common Stock beneficially owned by Mr. Smith
and options to purchase 10,000 shares of Common Stock which are
currently exercisable.
(3) Includes 10,000 shares of Common Stock beneficially owned by Mr. Kawas
and options to purchase 8,750 shares of Common Stock which are
currently exercisable.
(4) Includes 1,000 shares of Common Stock beneficially owned by Mr. Novak
and options to purchase 13,375 shares of Common Stock which are
currently exercisable.
<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 two or three classes of directors
depending on the number 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 747,140 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 747,140
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 747,140 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 February 28, 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
February 28, 2000 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>
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.
23.1* Consent of Fredrikson & Byron, P.A. (included in Exhibit 5).
23.2* Consent of McGladrey & Pullen LLP, independent accountants for
Waters Instruments, Inc.
23.3* Consent of Froshman, Billings, Williams, Chan & Lewandowski,
independent auditors for Garrett Communications, Inc.
23.4* Consent of John G. Kinnard & Company (included in Kinnard's
Opinion attached as Annex B to the Proxy Statement/Prospectus)
24* Power of Attorney.
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.
* Filed with the Registration Statement to which this Pre-Effective Amendment
No. 1 relates.
<PAGE>
(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 Pre-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis, State of Minnesota, on February 9,
2000.
WATERS INSTRUMENTS, 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 February 9, 2000
Jerry W. Grabowski Officer and Director
(principal executive officer)
* Chief Financial Officer and
Gregory J. Anshus Treasurer
(principal financial and accounting officer)
* Director
William R. Franta
* Director
Charles G. Schiefelbien
* Director
John A. Grimstad
*By /s/ Jerry W. Grabowski
Attorney in Fact
<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.
23.1* Consent of Fredrikson & Byron, P.A. (included in Exhibit 5).
23.2* Consent of McGladrey & Pullen LLP, independent accountants for
Waters Instruments, Inc.
23.3* Consent of Froshman, Billings, Williams, Chan & Lewandowski,
independent auditors for Garrett Communications, Inc.
23.4* Consent of John G. Kinnard & Company (included in Kinnard's
Opinion attached as Annex B to the Proxy Statement/Prospectus)
24* Power of Attorney.
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.
* Filed with the Registration Statement to which this Pre-Effective Amendment
No. 1 relates.
<PAGE>
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 1:30
p.m., Wednesday, March 15, 2000, local time, at the offices of Fredrikson &
Byron, P.A., 1100 International Centre, 900 Second Avenue South, 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.
