SecProbe.io

CORRESP
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filename1.htm

September 29, 2004

U.S. Securities and Exchange
Commission

450 Fifth Street, N.W.

Washington, D.C.  20549

Attn:       Thomas A. Jones

Re:          Waters
Instruments, Inc.

Schedule 14A
Preliminary Proxy Materials

Filed September 15,
2004

Ladies and Gentlemen:

On behalf of Waters
Instruments, Inc. (the “Company”),
we submit this letter in response to general comments provided by the staff of
the Securities and Exchange Commission (the “Staff”)
in a telephone conversation on September 16, 2004.  In such conversation,  Staff indicated it was monitoring the Company’s preliminary proxy
statement, particularly relating to Proposal No. 2 which related to an increase
in the number of authorized shares.
Included with this letter is an excerpt from the Company’s preliminary proxy
statement  which has been revised to
bifurcate the proposal into two separate proposals and to reflect the general
comments provided.  By submitting these
suggested changes at this time, we respectfully request that when conducting
your review of the preliminary proxy statement, that you issue comments in
response to these additional proposed changes as well.

We hope to mail the final proxy
statement no later than Wednesday, October 6, 2004 in order to provide adequate
time before our now revised annual meeting date of November 3, 2004.  We appreciate your efforts in resolving
these outstanding comments prior to our anticipated mailing date.  If you have any questions regarding these
matters, please contact me (612-492-7176).

  Sincerely,

  Elizabeth M.
  Reiskytl

  cc:

  Jerry
  Grabowski

Revised
Excerpt from Waters Instruments, Inc. Proxy Statement for Annual Meeting now to
be held November 3, 2004:

AMENDMENT TO INCREASE AUTHORIZED SHARES

(Proposal #2)

General

On August 21, 2004, the Board
of Directors of the Company unanimously approved an amendment to the Company’s
Articles of Incorporation which increases the total number of authorized shares
from 5,000,000 common shares, with a par value of $.10 per share, and 120,000
preferred shares, with a par value of $25 per share,  to 25,000,000 shares,
consisting solely of 20,000,000 common shares and 5,000,000 undesignated
shares, each with a par value of $.01 per share solely for the purpose of a
statute or regulation imposing a tax or fee based upon the capitalization of
the corporation (the “Amendment”). As of September 8, 2004, there were
2,395,796 common shares outstanding and no preferred shares outstanding. The
previously authorized preferred shares were eliminated. As of September 8, 2004,
the following common shares were reserved for issuance: (i) 449,850 shares
under the 1995 Stock Option Plan, of which there are outstanding options to
purchase 200,475 shares; (ii) 222,150 shares under the 1997 Associates Stock
Purchase Plan; and (iii) 550,000 shares under the 2004 Equity Incentive Plan,
of which there are no outstanding options.

Reason for the Amendment

The Board of Directors believes
that the proposed increase in the authorized common shares and the inclusion of
undesignated shares, following the elimination of the preferred shares, is in
the best interests of the Company and its shareholders and believes that it is
advisable to authorize such additional shares and have them available in
connection with possible future transactions, such as financings, strategic
alliances, corporate mergers, acquisitions, possible funding of new product
programs or businesses and other uses not presently determinable and as may be
deemed feasible and in our best interests.
Given the Company’s recently experienced growth, as evidenced by its
acquisition on September 27, 2004 of Rutland Electric Fencing Co. Limited (through its subsidiary, Waters Zareba
Systems Europe Limited), combined with plans to further grow the Company
and provide greater liquidity to shareholders in the future, the directors
desire to maximize its flexibility and availability for future share
issuances.  The Company has no current
commitments or plans for the issuance of the common shares other than in
connection with our employee stock purchase and incentive compensation
plans.  Neither the Board of Directors
nor management of the Company is aware of any specific effort to accumulate the
Company’s securities or to obtain control of the Company by means of a merger,
tender offer or solicitation of proxies in opposition to management.

The Company’s existing Articles
of Incorporation authorize 5,120,000 shares, consisting of 5,000,000 common
shares, with a par value of $.10 per share, and 120,000 preferred shares, with
a par value of $25 per share, and do not permit the Board to establish other
classes of stock.  The Amendment
increases the total number of shares the Company is authorized to issue from
5,120,000 shares to 25,000,000 shares and eliminates the previously authorized
preferred shares. The Amendment authorizes the Board to establish from
the5,000,000 undesignated shares, by resolution adopted and filed with the
Minnesota Secretary of State in the manner provided by

law, one or more classes or
series (which may include but is not limited to designation as additional
common shares) and to fix the relative rights and preferences of each such
class or series.  The rights and
preferences of such designated shares may include rights far more beneficial to
such holders than to the holders of Common Stock, including rights with respect
to voting, payment upon liquidation, receipt of dividends, payment of
distributions and other preferences.
These shares will be available for issuance by the Board at such times
and for such purposes as the Board may deem advisable without further action by
the shareholders, except as may be required by law or regulatory authorities.

Approval of an increase in the authorized number of common shares generally empowers the directors of the Company to issue additional common shares without giving notice to the shareholders or obtaining their approval, except in certain circumstances such as in connection with the adoption of certain employee benefit plans or the issuance of private equity that is subject to The Nasdaq Stock Market shareholder approval rules. The Nasdaq rules generally require us to obtain shareholder approval for issuances of common shares in connection with (i) the acquisition of another company if an officer, director or significant shareholder has a 5% or greater interest (or a 10% interest collectively) or the issuance or potential issuance of stock will be equal to 20% or more of the outstanding shares or voting power before the issuance, (ii) the sale of common shares in a private transaction if the sale is equal to 20% or more of the outstanding common shares or voting power and is sold for less than the greater of book or market value of the stock, (iii) the issuance of common shares that results in a change of control or (iv) the adoption of certain stock option or purchase plans or other equity compensation arrangements.

The Amendment will change the
par value of the Company’s common shares from $.10 per share to $.01 per share
solely for the purpose of a statute or regulation imposing a tax or fee based
upon the capitalization of the corporation.
Each share of the Company’s common stock outstanding when the Amendment
becomes effective will be reclassified as a share with a par value to $.01
solely for the purposes described above.
This change is intended to make the Company’s Articles of Incorporation
consistent with Minnesota’s Business Corporation Act which has essentially
eliminated par value, capital surplus and stated capital as operative concepts.
No preferred shares are outstanding.

Existing Antitakeover Provisions

The Company’s proposal to increase the authorized number of common shares is not submitted in response to any accumulation of stock or threatened takeover. However, the increase in authorized common stock could, under certain circumstances, be construed as having an anti-takeover effect by, for example, diluting the stock ownership of shareholders and possibly making it more difficult to effect a change in the composition of the Board of Directors through the removal or addition of directors, or to accomplish a given transaction that may be in the shareholders’ interests. Further, the dilutive effect may limit the participation of shareholders in a merger or similar business combination, whether or not such transaction is favored by management. Except as noted below, the Company does not have any provisions in its governing documents that have an anti-takeover effect nor does it have plans to subsequently implement measures having anti-takeover effects. The Company’s existing Articles of Incorporation authorize a class of 120,000 preferred shares that is undesignated as to rights, preferences, privileges and restrictions. The Board has the authority to determine the rights, preferences, privileges and restrictions of these shares in one or more series and to issue such shares without

shareholder approval.   In the event of a proposed merger, tender offer or other attempt to gain control of the Company of which the Board does not approve, the Board could create a series of preferred shares with rights and preferences that could impede the completion of such a transaction and issue such preferred shares to persons who would support the Board in opposing the transaction. Up until the time the preferred shares are eliminated if the Articles are amended as proposed, the Board does not intend to issue any of the currently authorized preferred shares except on terms which the Board deems to be in the best interests of the Company and its then existing shareholders. The Amendment eliminates these preferred shares.

The Company’s Bylaws provide
for staggered election of directors, limit the number of directors and restrict
the removal of directors.  Paragraph 3.2
of the Company’s Bylaws provides that shareholders shall determine the number
of directors at each annual meeting, but restricts the number of directors to
not less than three (3) and not more than seven (7) and provides that if there
are seven (7) or fewer directors, the Board shall be divided into two classes.  If there are more than seven (7) directors,
the directors shall be divided into three classes.  Paragraph 3.2 requires the affirmative vote of the holders of not
less than two-thirds (2/3) of the voting power outstanding to amend the
provision.  As a result of this
provision, the Company’s Board is divided into two classes and one class of
directors is elected as each annual meeting for a three-year term.  The classification of directors has the
effect of making it more difficult to change the composition of the Board of
Directors.  Paragraph 3.3 of the
Company’s Bylaws requires an affirmative vote of a majority of the directors to
fill newly created directorships.
Paragraph 3.11 of the Company’s Bylaws provides that directors may be
removed only for cause by affirmative vote of two-thirds (2/3) of the
shareholders or by vote of the majority of the entire Board of Directors.

Potential
Additional Antitakeover Plans

The Board of Directors has
decided to consider the advisability of adopting anti-takeover defenses.  In its deliberations, the Board has
discussed adopting a shareholder rights plan, commonly called a “Poison
Pill.”  The Board has not adopted such a
plan, but if approval of the proposed Amendment is given, it is likely the
Board of Directors will systematically prepare for the adoption of such a plan
and, if at the end of its deliberations, determines the adoption of such a plan
is in the best interests of the shareholders, will adopt and implement such a
plan.

VOTE REQUIRED

According to the Company’s
Articles of Incorporation, the vote required to approve the proposed Amendment
is (i) the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the voting power of all shares entitled to vote, or (ii)
except as otherwise required by law, the affirmative vote of the holders of a
majority of the voting power of all shares entitled to vote provided such
amendment does not receive the negative vote of the holders of more than
twenty-five percent (25%) of the voting power of all shares entitled to vote.

AMENDMENT TO FURTHER INCREASE AUTHORIZED
SHARES

(Proposal #3)

General

On August 21, 2004, the Board
of Directors of the Company unanimously approved an amendment to the Company’s
Articles of Incorporation in addition to the amendment set forth under Proposal
#2 above.  This additional amendment
would increase the number of undesignated shares by 35,000,000, and thus the
total number of authorized shares would be 60,000,000, consisting of 20,000,000
common shares and 40,000,000 undesignated shares, each with a par value of $.01
per share solely for the purpose of a statute or regulation imposing a tax or
fee based upon the capitalization of the corporation (the “Amendment”). As of
September 8, 2004, there were 2,395,796 common shares outstanding and no
preferred shares outstanding. The previously authorized preferred shares were
eliminated pursuant to Proposal #2 above. As of September 8, 2004, the
following common shares were reserved for issuance: (i) 449,850 shares under
the 1995 Stock Option Plan, of which there are outstanding options to purchase
200,475 shares; (ii) 222,150 shares under the 1997 Associates Stock Purchase
Plan; and (iii) 550,000 shares under the 2004 Equity Incentive Plan, of which
there are no outstanding options.

Reason for the Amendment

The Board of Directors believes
that the proposed increase in the authorized undersignated shares is in the
best interests of the Company and its shareholders and believes that it is
advisable to authorize such additional shares and have them available in
connection with possible future transactions, such as financings, strategic
alliances, corporate mergers, acquisitions, possible funding of new product
programs or businesses and other uses not presently determinable and as may be
deemed feasible and in our best interests.
In addition, the Board of Directors believes that it is desirable for
the Company to have the flexibility to issue shares of stock without further
shareholder action, except as otherwise provided by law.  Given the Company’s recently experienced
growth, as evidenced by its recent acquisition on September 27, 2004 of Rutland
Electric Fencing Co. Limited (through
its subsidiary, Waters Zareba Systems Europe Limited), combined with
plans to further grow the Company and provide greater liquidity to shareholders
in the future, the directors desire to maximize its flexibility and
availability for future share issuances.
The Company has no current commitments or plans to designate shares
other than perhaps for a poison pill as discussed above.

Rights
and Preferences of the Undesignated Shares

The authorization of
undesignated shares in the Company’s Articles of Incorporation allows the Board
to establish from such undesignated shares, by resolution adopted and filed
with the Minnesota Secretary of State in the manner provided by law, one or
more classes or series (which may include but is not limited to designation as
additional common shares) and to fix the relative rights and preferences of
each such class or series.  As described
above in Proposal #2, such rights may be with respect to voting, payment upon
liquidation, receipt of dividends, payment of distributions and other
preferences, all of which may be far more beneficial to such preferred stock
holders than to holders of Common Stock.

VOTE REQUIRED

According to the Company’s
Articles of Incorporation, the vote required to approve the proposed Amendment
is (i) the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the voting power of all shares entitled to vote, or (ii)
except as otherwise required by law, the