SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
Commission File Number 001-10647
PRECISION OPTICS CORPORATION, INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-279-5294
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
22 EAST BROADWAY
GARDNER, MASSACHUSETTS 01440
(Address of principal executive offices) (Zip Code)
Issuer's telephone number is (508) 630-1800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if no disclosure of delinquent filers to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
The issuer's revenues for its most recent fiscal year were $8,055,271.
The aggregate market value of the voting stock, consisting solely of
common stock, held by non-affiliates of the issuer computed by reference to the
closing price of such stock was $7,808,409 as of June 30, 1996.
The number of shares of outstanding common stock of the issuer as of
August 31, 1996 was 5,980,502.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on November 12, 1996 is incorporated into Part III of
this Form 10-KSB.
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PART I
ITEM 1. BUSINESS
Business Development.
Precision Optics Corporation, Inc. (the "Company") designs, develops,
manufactures, and sells specialized optical systems and components and optical
thin film coatings.
The Company completed a private placement of 1,000,000 shares of Common
Stock in August 1990, an initial public offering of 1,200,000 shares of Common
Stock in November 1990, and a public offering of 1,176,250 shares of Common
Stock in February 1992. In conjunction with these offerings, the Company issued
warrants for a total of 320,000 shares of Common Stock to the selling agent and
underwriters for the offerings. Before these offerings, the Company was
privately held. Precision Optics Corporation, Inc. was incorporated in
Massachusetts in 1982.
In August 1992, the Company established a wholly-owned subsidiary in
Hong Kong to market and sell the Company's products throughout the Pacific Rim
marketplace and to engage in general activities relating to the Company's
business. Also in August 1992, the Company established a wholly-owned
subsidiary, Precise Medical, Inc. ("Precise Medical"), to market and sell
medical video endoscopy systems that incorporated the Company's products
directly to end users (hospitals, physicians, etc.). On July 14, 1993, the
Company closed Precise Medical because of its inability to achieve acceptance in
the medical video systems marketplace.
References to the Company contained herein include its two wholly-owned
subsidiaries except where the context otherwise requires.
Business of Issuer.
The Company designs, develops, manufactures, and sells specialized
optical systems and components and optical thin film coatings. The Company
conducts business in one industry segment only. The Company's products and
services fall into the following areas: medical products for use by hospitals
and physicians, industrial optical products and services and advanced optical
system design and development services and products, primarily under contract
either directly or indirectly with the United States Government ("the
Government").
PRINCIPAL PRODUCTS AND SERVICES AND METHODS OF DISTRIBUTION
Medical Products. The Company's medical products are endoscopes and
image couplers, beamsplitters, and adapters, which are used as accessories to
endoscopes.
In January 1991, the Company began the design and development of
endoscopes using various optical technologies for use in a variety of minimally
invasive surgical and diagnostic procedures throughout the human body. The
Company's endoscope sales have been primarily to manufacturers of video cameras
and medical products and video endoscopy systems. In addition to its existing
line of endoscopes, the Company is continuing to develop different types of
endoscopes that incorporate varying types of construction and technology for
varying medical specialties and functionality.
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The Company developed and has manufactured and sold since 1985 a
proprietary product line of state-of-the-art instrumentation to couple
endoscopes to video cameras. Included in this product line are image couplers,
which physically connect the endoscope to the video camera system and transmit
the image viewed through the scope to the video camera. Another product -- the
beamsplitter --performs the same function while preserving for the viewer an
eyeport for direct, simultaneous viewing through the endoscope. The Company has
sold these devices primarily to endoscope and video camera manufacturers and
suppliers for resale under its customers' names.
The Company's image couplers and beamsplitters can withstand
surgery-approved sterilization. The Company also offers autoclavable image
couplers, which are able to withstand sterilization in superheated steam under
pressure. Autoclavability is a preferred method of sterilization because of its
relative speed, safety, and efficiency. The Company believes there is a trend
toward increased sterilization of medical instruments and that it is the only
company in the world that produces autoclavable image couplers. The Company has
investigated the development of an autoclavable beamsplitter. Although
autoclavable endoscopes and video cameras, the necessary components to a fully
autoclavable video-monitored endoscopy, are not yet available, the Company is in
the process of developing an autoclavable endoscope and believes that video
camera manufacturers are attempting to develop autoclavable video cameras.
There can be no assurance as to the general market acceptance of any of
the Company's new products.
Included in the Company's medical products sales are sales of image
couplers and beamsplitters for video-monitored examination of a variety of
industrial cavities and interiors. The Company has developed, and may develop in
the future, specialized borescopes for industrial applications.
Advanced Optical Design and Development Services. The Company provides
on a contract basis advanced lens design, image analysis, optical system design,
structural design and analysis, prototype production and evaluation, optics
testing, and optical system assembly. Some of the Company's development
contracts have led to optical system production business for the Company, and
the Company believes its prototype development service may lead to new product
production from time to time.
Within the advanced optical design and development area, the Company's
sales recently have been largely of night-vision products and services. The
Company designs, manufactures, and sells night-vision optical systems and
components that permit users to see in extreme low light.
Under contract with a customer that produces and sells aviation
night-vision goggles to the United States Army, the Company has designed and
produced the eyepieces for aviators' night-vision goggles. Under contract with
the same customer, the Company designed and currently produces collimator
assemblies for night-vision goggles used by ground personnel.
Under additional design and development contracts with the same
customer, the Company has designed an objective lens for aviators' night-vision
goggles, designed and built prototypes of an objective lens for ground personnel
goggles, designed and built new lens system prototypes for night driver's
viewers and armament sites, and designed and built a magnifier attachment for
ground
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personnel goggles. In addition, the Company has designed and currently produces
a new objective lens and eyepiece for aviators' night-vision goggles.
The Company has in the past and expects in the future to have
difficulty competing for production contracts for night-vision products due to
the lower prices offered by foreign manufacturers. In addition, Government
budget uncertainties and efforts to lower the federal budget deficit and defense
spending may adversely affect the Company. The Company believes, however, that
some of its night-vision products and development work incorporate new
technology which the Government may use to update its existing equipment.
In addition to its night-vision related design and development, the
Company designs, develops, and manufactures thin film coatings and performs thin
film coatings for use on various optical products. Many of the Company's
advanced optical design and development projects and the manufacture of the
Company's medical and night-vision products have been significantly dependent
upon the Company's thin film capabilities. Presently, optical thin film business
not associated with other Company business and products is limited or very
specialized.
The Company has also developed a lens-prism system which it has sold
for industrial use as part of an automated registration system for machines and
has developed and sells a lens system for optical character reading.
COMPETITION AND MARKETS
The areas in which the Company engages are highly competitive and
include both foreign and domestic competitors. Many of the Company's competitors
are larger and have substantially greater resources than the Company.
Furthermore, other domestic or foreign companies, some with greater experience
in the optics industry and greater financial resources than the Company, may
seek to produce products or services that compete with those of the Company. The
Company may establish or use production facilities overseas to produce key
components to the Company's business, such as lenses. The Company believes that
the cost savings from such production may be essential to the Company's ability
to compete on a price basis in the medical and night-vision optics areas and to
the Company's profitability, and that the Company's inability to establish or
maintain such production facilities could materially, adversely affect the
Company.
The Company believes that competition for sales of its products and
services, which have been principally sold to OEM customers, is based on
performance and other technical features, as well as other factors, such as
scheduling and reliability, in addition to competitive price.
The Company currently sells its image couplers, beamsplitters, and
adapters to a market that consists of approximately 30 potential OEM customers,
15 of which are in the United States. These potential customers sell video
cameras, endoscopes, or video-endoscopy systems. The Company has made sales to
approximately 10 of these customers, most of which are camera suppliers and all
of which are United States companies. The Company estimates that it has
approximately 30% of the market share in these products and anticipates growth
in this area. The Company's primary competition in this area is the customers'
own in-house capabilities to manufacture such products. The Company believes
that these customers typically purchase products from the Company, despite their
in-house capabilities, because they choose to devote their own technical
resources to their primary
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products, such as cameras or endoscopes. The Company estimates that
approximately 50% of the market demand for image couplers, beamsplitters, and
adapters is met by "captive" or in-house capabilities. The Company anticipates
increased demand for its autoclavable products because it believes there is a
trend towards more stringent sterilization of medical instruments.
The Company has marketed and sold its endoscopes to OEM video camera
and video endoscopy suppliers for resale under the purchaser's name. A number of
domestic and foreign competitors also sell endoscopes to such OEM suppliers, and
the Company's share of the endoscope market is nominal. The Company believes
that, while its resources are substantially more limited than these competitors,
the Company may be able to be more responsive to the needs of endoscope users.
With respect to the Company's advanced optical design and development
services not related to night-vision or thin film coatings, the Company has
numerous customers and competitors. The ability to supply design and development
services to such customers is highly dependent upon a company's and its
employees' reputations and prior experience.
With respect to night-vision optics, the Company's sales of its
products and services have been almost exclusively to one customer, which sells
night-vision equipment to the United States Army. The Company faces intense
competition for production of night-vision products from foreign manufacturers.
In the night-vision optical design area, the Company has numerous competitors.
The Company's business in the night-vision optics area is highly dependent upon
the Company's reputation and performance, as well as upon Government contracts
and policy. The Company believes the demand for night-vision optics generally,
which are used extensively in drug and law enforcement and surveillance as well
as search and rescue missions and military applications, will lessen. Recent
experience with lens sales for new consumer night vision products also suggests
that market growth in this area is severely limited.
The Company's thin film coatings competitors are numerous and have deep
and broad capabilities.
The Company has had negligible direct export sales to date.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends to a large degree
on its ability to continue to conceive and to develop new optical products and
services and to enhance the performance characteristics and methods of
manufacture of existing products. Accordingly, it expects to continue to seek to
obtain product-related design and development contracts with customers and to
invest its own funds on its research and development.
The Company received approximately $1,060,000 and $752,000 for the
fiscal years ended June 30, 1996 and 1995, respectively, from customers for
customer-sponsored design and development projects. Levels of customer contract
funded research and development can fluctuate greatly in any given period
depending upon the mix between design efforts and hardware development, which is
generally more expensive and time consuming than the design phases. In addition
to customer-sponsored research and development, the Company spent approximately
$433,000 and $363,000 of its own funds during fiscal years 1996 and 1995,
respectively, on the Company's own research and
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development. The Company expects to continue making significant Company-funde
expenditures for research and development.
RAW MATERIALS AND PRINCIPAL SUPPLIERS
For all of the Company's products, except for thin film coatings, the
basic raw material is precision grade optical glass, which the Company obtains
from several major suppliers. Outside vendors grind and polish all of the
Company's lenses and prisms. For optical thin film coatings, the basic raw
materials are metals and dielectric compounds, which the Company obtains from a
variety of chemical suppliers. The Company believes that its demand for these
raw materials and services is small relative to the total supply and that
materials and services required for the production of its products are currently
available in sufficient production quantities and will be available for fiscal
year 1997. The Company believes, however, that there are relatively few
suppliers of the high quality lenses and prisms which its endoscopes may
require. Depending upon the market acceptance of the Company's endoscopes, the
Company may seek to assure itself of a timely supply of lenses, prisms, or other
key materials or components through the acquisition of a supplier or expanded
manufacturing facilities of its own.
PATENTS AND TRADEMARKS
The Company relies, in part, upon patents, trade secrets, and
proprietary knowledge as well as personnel policies and employee confidentiality
agreements concerning inventions and other creative efforts to develop and to
maintain its competitive position. The Company does not believe that its
business is dependent upon any patent, patent pending, or license, although it
believes that trade secrets and confidential know-how may be important to the
Company's scientific and commercial success.
The Company plans to file for patents, copyrights, and trademarks in
the United States and in appropriate countries to protect its intellectual
property rights whenever possible. The Company holds the rights to two United
States patents and has Japanese and German patent applications pending relating
to one of its image couplers and holds the rights to a United States patent to
one of its endoscopes. The Company has received jointly with a customer a patent
relating to one of its night-vision designs. The Company will assign its rights
under this night-vision patent to such customer for night-vision applications.
The Company knows of no infringements of its patents. Although the Company plans
to protect any patents it has from infringement, it may not be able to pursue
such protection for economic reasons. While the Company believes that its
pending applications relate to patentable devices or concepts, there can be no
assurance that patents will be issued or that any patents issued can be
successfully defended or will effectively limit the development of competitive
products and services.
Although the Company seeks to protect its proprietary information,
there can be no assurance that others will not either develop independently the
same or similar information or gain access to the Company's proprietary
information or that disputes will not arise as to proprietary rights to such
information.
The Company's products may now or in the future infringe upon others'
patents or proprietary technology. The Company's defense of any such claims
could have a material, adverse effect on the Company.
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EMPLOYEES
As of June 30, 1996, the Company had fifty-five full-time employees and
one part-time employee.
CUSTOMERS
Sales to the Company's three largest customers, in terms of total
sales, during fiscal year 1996 were approximately 42%, 14% and 12%. Sales to the
Company's two largest customers, in terms of total sales during fiscal year 1995
were approximately 43% and 18%.
ENVIRONMENTAL PROTECTION AND THE EFFECT OF EXISTING OR PROBABLE
GOVERNMENT REGULATIONS ON THE BUSINESS
The Company's operations are subject to a variety of federal, state,
and local laws and regulations relating to the discharge of materials into the
environment or otherwise relative to the protection of the environment. From
time to time the Company uses a small amount of hazardous materials in its
operations. Although the Company believes that it complies with all applicable
environmental laws and regulations, any failure to comply with such laws and
regulations could have a material, adverse effect on its capital expenditures,
earnings, and competitive position.
NEED FOR GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES AND
EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON THE BUSINESS
The Company currently sells and markets four medical products, the
marketing of which may require the permission of the United States Food and Drug
Administration ("FDA"). Pursuant to the Company's notification to the FDA of its
intent to market its laparoscope, additional types of endoscopes which it has
developed and is developing, image coupler, beamsplitter, and adapters, the FDA
has determined that each such device is substantially equivalent to a device
marketed in interstate commerce and that the Company may market such devices,
subject to the general controls provisions of the Food, Drug and Cosmetic Act.
Furthermore, the Company plans to market additional endoscopes and related
medical products that may require the FDA's permission to market such products.
The Company may also develop additional products or seek to sell some of its
current or future medical products in a manner that requires the Company to
obtain the permission of the FDA to market such products, as well as the
regulatory approval or license of other federal, state, and local agencies or
similar agencies in other countries. There can be no assurance that the Company
will be able to maintain the FDA's permission to market its current products or
to obtain such regulatory permission, approvals, or licenses for any of its
other products. Furthermore, potential adverse FDA regulation affecting the
Company which might arise from future legislation or administrative action
cannot be predicted. In addition, FDA regulations may be established that could
prevent or delay regulatory clearances or approval of the Company's products.
The inability of the Company to secure any necessary licenses or regulatory
approvals or permission from the FDA could have a material adverse effect on its
business. The FDA has authority to conduct detailed inspections of manufacturing
plants in order to assure that "good manufacturing practices" are being followed
in the manufacture of medical devices, to require periodic reporting of product
defects to the FDA, and to prohibit the exploitation of devices which do not
comply with law. Failure to comply with applicable regulatory
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requirements can, among other things, result in fines, suspensions of regulatory
clearances or approvals, product recalls, operating restrictions, and criminal
prosecution.
ITEM 2. DESCRIPTION OF PROPERTY
The Company conducts its domestic operations at two facilities in
Gardner and Fitchburg, Massachusetts. The Gardner facility is leased from a
corporation owned by an officer-shareholder-director of the Company, and the
Company's lease expires in December 1999. The Fitchburg facility is under a
three year lease which commenced on November 1, 1995. The Company rents office
space in Hong Kong for sales, marketing, and supplier liaison activities of its
Hong Kong subsidiary.
The Company believes these facilities are adequate for its current
operations; significant increases in production or the addition of significant
equipment additions or manufacturing capabilities in connection with the
production of the Company's line of endoscopes and other products may, however,
require the acquisition or lease of additional facilities. The Company may
establish production facilities domestically or overseas to produce key
assemblies or components, such as lenses, for the Company's products. Overseas
facilities may subject the Company to the political and economic risks
associated with overseas operations. The loss of or inability to establish or
maintain such additional domestic or overseas facilities could materially,
adversely affect the Company's competitive position and profitability.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries and their property are not party or
subject to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal year 1996.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and directors are as follows:
Position with the Company
Name or Principal Occupation
Richard E. Forkey President, Treasurer, and
Director
Jack P. Dreimiller Senior Vice President,
Finance and Chief Financial
Officer
Robert C. Meinhold Vice President, Sales and Marketing
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Edward A. Benjamin Director and Clerk. Mr. Benjamin is a
partner in the law firm of Ropes
& Gray, Boston, Massachusetts
Joel R. Pitlor Director. Mr. Pitlor is president of
J.R. Pitlor, a management consulting
firm based in Cambridge, Massachusetts.
Robert R. Shannon Director. Mr. Shannon is a professor
at the Optical Sciences Center of the
University of Arizona in Tuscon,
Arizona.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock currently trades on the Boston Stock
Exchange under the symbol "POC" and is listed on the National Association of
Securities Dealers Automated Quotation (NASDAQ) System under the symbol "POCI."
From January 1991 to December 1991, the Boston Stock Exchange was the principal
market in which the Company's stock was publicly traded. Since January 1992,
NASDAQ has been the principal market in which the Company's stock is publicly
traded. The high and low sales prices for the Company's stock for each full
quarterly period within the two most recent fiscal years were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1995 1996
---- ----
Quarter High Low High Low
----------------------------------------------------------------------
First $1 7/8 $1 1/4 $1 7/8 $1 1/8
Second $1 5/8 $1 1/4 $1 7/8 $1 1/4
Third $1 7/16 $1 1/8 $2 $1 1/4
Fourth $1 9/16 $1 $2 $1 1/8
</TABLE>
As of August 31, 1996 there were approximately 110 holders of record of
the Company's common stock. The Company has never paid a dividend on its common
stock and does not intend to pay a dividend in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
When used in this discussion, the words "believes", "anticipates",
"intends to", and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. See
"Important Factors Regarding Forward-Looking Statements" filed with the
Company's Quarterly Report on Form 10-QSB for the period ending March 31, 1996
as Exhibit 99 and incorporated herein by reference. Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as of
the date hereof. The Company undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 1996, the Company's cash and cash
equivalents increased by approximately $90,000 to $2,618,000. The increase in
cash and cash equivalents was due to cash generated by operating activities of
approximately $817,000, less capital expenditures of approximately $616,000,
increases in other assets, primarily patents, of approximately $60,000 and
repayment of a capital lease obligation of approximately $51,000.
During the quarter ending March 31, 1996, the Company entered into a
five-year capital lease obligation for the acquisition of optical thin film
coating equipment totaling approximately $299,000.
The Company intends to continue devoting significant resources to
internally-funded research and development spending on both new products and the
improvement of existing products. The Company also intends to devote resources
to the marketing and product support of its endoscope product line, and the
development of new methods of distribution. These investments may temporarily
result in negative cash flow, but the Company anticipates that the results of
these efforts will translate into increased revenues and profits.
Furthermore, depending upon the market acceptance of the Company's
products, the Company believes that it may be obligated to acquire new
facilities, add additional manufacturing or research and development equipment,
or acquire a business that manufactures or sells to the Company components,
materials, supplies, or services used in the manufacture, marketing,
distribution, or servicing of the Company's new products, as well as the
Company's existing products.
The Company continues to maintain a secured line of credit of $500,000
available with a bank at 1/4% over the prime rate.
The Company's cash and cash equivalents and available lines of credit
are considered sufficient to support working capital and investment needs for
the foreseeable future.
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FISCAL YEAR 1996 RESULTS OF OPERATIONS
Total revenues for the fiscal year 1996 were approximately $8,055,000,
an increase of approximately $477,000 or 6.3%, over fiscal year 1995.
The revenue increase over the prior year was due to higher sales of
medical products (up 30.3%) and higher sales of night vision products (up 1.8%),
partially offset by lower sales of industrial products (down 23.2%). The
increase in sales of medical products was primarily attributable to higher sales
of endocouplers, which increased by 89% for the year to record levels. The
reduction in industrial sales was due primarily to lower sales of industrial
lenses to a significant customer. This customer accounted for 12%, 18%, and 7%
of the Company's total revenues for fiscal years 1996, 1995 and 1994,
respectively. Future sales to this customer, if any, are uncertain at this time.
Gross profits decreased by approximately $123,000 in fiscal year 1996,
and as a percentage of revenues, decreased from 34.1% to 30.6% compared to the
previous year. The decrease in gross profit was due primarily to an unfavorable
shift in sales mix away from industrial products, which have relatively higher
gross margins than other product lines, and higher occupancy and depreciation
expenses related to equipment and manufacturing facilities additions.
For the fiscal years ended June 30, 1996, 1995 and 1994, approximately
45%, 45% and 43% of the Company's total revenues, respectively, were derived
from production and development contracts and subcontracts involving the
Government and its agencies. The Company's current Government business is
substantially comprised of subcontracts with one customer consisting of
night-vision advanced development programs on a cost-plus-fixed-fee basis
extending approximately through September 1996, and two fixed-price production
subcontracts for night-vision lens systems with deliveries scheduled
approximately through September, 1997. The Government may terminate a government
contract at any time, with or without cause. After expiration of the current
subcontracts, there can be no assurance that the Government will award future
contracts or subcontracts or the customers to which it sells.
Selling, general and administrative expenses increased by approximately
$191,000 or 10% in fiscal year 1996 compared to fiscal year 1995. The increase
was due primarily to higher spending on new product research and development,
principally related to medical products, which increased by 19% to approximately
$433,000 in fiscal year 1996, higher advertising expenditures targeted at the
industrial marketplace, and higher depreciation and amortization expenses.
Interest expense relates primarily to capital lease obligations
incurred in the third quarter of fiscal years 1994 and 1996.
Interest income increased by approximately $32,000 in fiscal year 1996
due to the higher investment base of cash equivalents and higher interest rates.
The provision for income taxes as a percentage of pretax income is
lower than the federal statutory income tax rate primarily due to recognition of
available tax credits and future tax deductions not previously benefited.
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FISCAL YEAR 1995 RESULTS OF OPERATIONS
Total revenues for fiscal year 1995 were approximately $7,578,000, an
increase of approximately $446,000 or 6.3%, over fiscal year 1994.
The revenue increase over the prior year was due primarily to higher
sales of industrial products. Sales of OEM medical and night-vision products
were approximately equivalent to the prior year. Within the OEM medical product
line, sales of endoscopes, while still relatively small, increased by
approximately 70% over the prior year.
Gross profit increased by approximately $665,000 in fiscal year 1995,
and as a percentage of revenues, increased from 26.9% to 34.1% compared to
fiscal year 1994. The higher gross profit percentage in fiscal year 1995 was due
primarily to a favorable shift in sales mix to industrial products which have
relatively higher gross margins, and to the recording in fiscal year 1994 of
certain one-time start-up costs related to a night-vision production
subcontract.
Selling, general and administrative expenses increased by approximately
$176,000 or 10% in fiscal year 1995 compared to fiscal year 1994. The increase
was due primarily to higher spending on new product research and development,
principally related to medical products, which increased by 88% to approximately
$363,000 in fiscal year 1995.
Interest expense in fiscal year 1995 and 1994 related primarily to a
capital lease obligation incurred in the third quarter of fiscal year 1995, and
was higher due to a full year of expense in 1995 versus three months in 1994.
Interest income increased by approximately $48,000 in fiscal year 1995
due to the higher investment base of cash equivalents and higher interest rates.
The provision for income taxes in fiscal year 1995 differed from the
amount computed when applying the United States federal income tax rate to
income before taxes, due primarily to the utilization in fiscal 19995 of net
operating loss and tax credit carryforwards.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements are filed on pages 13 to 26 of
this Form 10-KSB.
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PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Precision Optics Corporation, Inc.:
We have audited the accompanying consolidated balance sheets of Precision Optics
Corporation, Inc. (a Massachusetts corporation) and subsidiaries as of June 30,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Precision Optics Corporation,
Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen
Boston, Massachusetts
July 24, 1996
-14-
3145003.02
<PAGE>
<TABLE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1996 AND 1995
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSETS 1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $ 2,617,813 $ 2,527,846 Accounts payable $ 829,428 $ 467,961
Accounts receivable (net of Accrued payroll 81,990 65,006
allowance for doubtful accounts Accrued profit sharing and bonuses 93,938 140,000
of approximately $82,000 and Accrued professional services 49,360 48,855
$86,000 in l996 and 1995, Accrued vacation 5l,88l 44,932
respectively) 1,139,804 1,416,371 Accrued warranty expense 50,000 45,000
Inventories 1,863,694 1,468,479 Accrued income taxes 35,383 50,784
Deferred tax asset 119,000 52,000 Other accrued liabilities 51,638 40,654
Prepaid expenses 44,684 22,874 Current portion of capital
Refundable income taxes 30,276 - lease obligation 82,678 28,686
---------- -------- -------- --------
Total current assets 5,815,271 5,487,570 Total current liabilities 1,326,296 931,878
--------- --------- --------- ---------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment 2,049,758 1,244,304 CAPITAL LEASE OBLIGATION, NET
OF CURRENT PORTION 278,949 84,829
Leasehold improvements 420,230 344,718 --------- ---------
Vehicles 44,742 33,654
Furniture and fixtures 102,976 88,003
--------- ----------
2,617,706 1,710,679 COMMITMENTS (Notes 3 and 4)
Less--Accumulated depreciation 1,531,228 1,246,843
and amortization --------- ---------
1,086,478 463,836
--------- --------- STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
OTHER ASSETS: Authorized--10,000,000 shares
Cash surrender value of life Issued and outstanding--5,980,502 59,805 59,805
insurance policies 52,851 49,057 Additional paid-in capital 5,145,655 5,145,655
Patents 125,995 84,000
Deferred costs, net 2,025 3,909 Retained earnings (deficit) 271,915 (133,795)
---------- -------- --------- ---------
Total other assets 180,871 136,966 Total stockholders' equity 5,477,375 5,071,665
--------- --------- --------- ---------
$ 7,082,620 $6,088,372 $ 7,082,620 $ 6,088,372
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
15
3145003.02
<PAGE>
<TABLE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<CAPTION>
<S> <C> <C> <C>
- ---------
1996 1995 1994
REVENUES $ 8,055,271 $ 7,578,097 $ 7,131,888
COST OF GOODS SOLD 5,592,871 4,992,785 5,211,575
--------- --------- ---------
Gross profit 2,462,400 2,585,312 1,920,313
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,128,155 1,937,497 1,761,103
--------- --------- ---------
Operating income 334,245 647,815 159,210
INTEREST EXPENSE (16,639) (9,598) (4,356)
Interest Income 124,104 92,499 44,203
------------ ------------ ----------
Income before provision for income taxes 441,710 730,716 199,057
Provision for Income Taxes 36,000 150,000 -
------------ ------------ ----------
Net income $ 405,710 $ 580,716 $ 199,057
============ ============ ============
INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .07 $ .10 $ .03
============== ============== ==============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 6,116,569 6,066,366 6,085,275
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
16
3145003.02
<PAGE>
<TABLE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<CAPTION>
<S> <C> <C> <C> <C> <C>
RETAINED
ADDITIONAL EARNINGS TOTAL
NUMBER OF COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT) EQUITY
BALANCE, JUNE 30, 1993 5,707,626 $ 57,076 $ 4,974,289 $ (913,568) $ 4,117,797
Proceeds from exercise of
options to purchase common
stock 272,876 2,729 23,366 - 26,095
Net income - - - 199,057 199,057
----------- ----------- ------------ --------- ---------
BALANCE, JUNE 30, 1994 5,980,502 59,805 4,997,655 (714,511) 4,342,949
Tax benefit from exercise of
options to purchase common
stock - - 148,000 - 148,000
Net income - - - 580,716 580,716
----------- ----------- ----------- --------- ---------
BALANCE, JUNE 30, 1995 5,980,502 59,805 5,145,655 (133,795) 5,071,665
Net income - - - 405,710 405,710
------------- ------------- ----------- --------- ---------
BALANCE, JUNE 30, 1996 5,980,502 $ 59,805 $ 5,145,655 $ 271,915 $ 5,477,375
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
17
3145003.02
<PAGE>
<TABLE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 405,710 $ 580,716 $ 199,057
Adjustments to reconcile net income to net cash provided
by (used in) operating activities-
Depreciation and amortization 308,275 184,849 121,212
Deferred income taxes (67,000) (52,000) -
Changes in assets and liabilities-
Accounts receivable 276,567 (123,485) (467,119)
Inventories (395,215) 86,378 (187,446)
Prepaid expenses (21,810) (4,091) 8,499
Refundable income taxes (30,276) - 31,069
Accounts payable 361,467 16,732 (94,173)
Accrued payroll 16,984 (5,527) (2,246)
Accrued profit-sharing and bonuses (46,062) 140,000 -
Accrued professional services 505 (3,238) (23,523)
Accrued income taxes (15,401) 47,722 -
Accrued restructuring - (4,695) (133,466)
Other accrued liabilities 22,933 (17,413) 11,158
----------- ------------ ------------
Net cash provided by (used in) operating activities 816,677 845,948 (536,978)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (615,798) (115,602) (171,206)
(Increase) decrease in other assets (59,844) (47,717) 1,718
------------ ----------- ------------
Net cash used in investing activities (675,642) (163,319) (169,488)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligation (51,068) (26,603) (11,461)
Tax benefit from stock options exercised - 148,000 -
Proceeds from issuance of common stock - - 26,095
--------------- --------------- ------------
Net cash provided by (used in) financing activities (51,068) 121,397 14,634
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 89,967 804,026 (691,832)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,527,846 1,723,820 2,415,652
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,617,813 $2,527,846 $1,723,820
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the year for-
Interest $ 16,639 $ 9,598 $ 4,356
============ ============ ============
Income taxes $ 151,325 $ 6,278 $ (29,613)
=========== ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTMENT ACTIVITIES:
Capital lease obligation $ 299,180 $ - $ 151,579
============ ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
18
3145003.02
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Precision Optics Corporation, Inc. (the Company) designs, manufactures
and sells optical systems, components and thin-film coatings. The
Company conducts business in one industry segment only and its
customers are primarily domestic. The Company's products and services
fall into two principal areas: medical products for use by hospitals
and physicians and advanced optical system design and development
services and products, primarily under contract either directly or
indirectly with the United States Government.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its two wholly owned subsidiaries, Precise Medical,
Incorporated, which was inactivated during fiscal 1994, and Wood's
Precision Optics Corporation, Ltd. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenues
Revenues for industrial and medical products sold in the normal course
of business are recognized upon shipment. Contract revenues are
recognized under the percentage-of-completion method. The percentage of
completion is determined by computing the percentage of the actual cost
of work performed to the anticipated total contract costs, or on the
basis of units shipped. When the estimate on a contract indicates a
loss, the Company's policy is to record the entire loss in the current
period.
Cash and Cash Equivalents
The Company includes in cash equivalents all highly liquid investments
with original maturities of three months or less at the time of
acquisition. Cash equivalents at June 30, 1996 and 1995 include
approximately $1,455,000 and $1,880,000, respectively, of United States
Treasury bills.
19
3145003.02
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and include material, labor and manufacturing overhead. The
components of inventories are as follows at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Raw material $ 1,282,924 $ 915,932
Work-in-progress 502,658 391,318
Finished goods 78,112 161,229
------------ ----------
$ 1,863,694 $ 1,468,479
=========== ===========
</TABLE>
Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations, using the straight-line and declining-balance methods,
which allocate the cost of property and equipment over the following
estimated useful lives:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Machinery and equipment 5-7 Years
Leasehold improvements Life of lease
Vehicles 3 Years
Furniture and fixtures 5 Years
Significant Customers and Concentration of Credit Risk
Revenues from the Company's three largest customers were approximately
42%, 14% and 12%, respectively, of total revenues for the year ended
June 30, 1996. Revenues from the Company's two largest customers were
approximately 43% and 18%, respectively, of total revenues for the year
ended June 30, 1995. Revenues from the Company's largest customer were
approximately 51% of total revenues for the year ended June 30, 1994.
No other customers accounted for more than 10% of the Company's
revenues in each of the three years ended June 30, 1996. At June 30,
1996 and 1995, receivables from the Company's largest customer were
approximately 58% and 44% of total accounts receivable, respectively.
20
3145003.02
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Significant Customers and Concentration of Credit Risk (Continued)
Approximately 44%, 45% and 43% of the Company's revenues for the years
ended June 30, 1996, 1995 and 1994, respectively, were derived from
sales to agencies of the government or customers that supply agencies
of the government.
Research and Development
Research and development costs, which are expensed as incurred, are
included in selling, general and administrative expenses and include
direct costs plus overhead. Such costs totaled approximately $433,000,
$363,000 and $193,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
Income per Common and Common Equivalent Share
Income per common and common equivalent share is computed based on the
weighted average number of common and common equivalent shares (if
dilutive) outstanding during each year. The difference between the
weighted average shares outstanding under the primary and fully diluted
methods is not significant.
Foreign Currency Translation
The Company translates certain accounts and financial statements of its
foreign subsidiary in accordance with SFAS No. 52, Foreign Currency
Translation. The functional currency of the Company's foreign
subsidiary is the United States dollar. Accordingly, translation gains
or losses are reflected in the accompanying consolidated statements of
operations and have not been significant.
Other Assets
Patents and deferred costs are carried at cost, less accumulated
amortization of approximately $60,000 and $44,000 at June 30, 1996 and
1995, respectively. Such costs are amortized using the straight-line
method over their legal or estimated useful lives, generally five to
seventeen years.
21
3145003.02
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Reclassifications
Certain reclassifications have been made to the prior years' balances
to conform with the current year's presentation.
(2) LINE OF CREDIT
At June 30, 1996, the Company had available a demand line of credit of
$500,000 at an interest rate equal to the bank's prime rate (8.25% at
June 30, 1996) plus 0.25%. At June 30, 1996, there were no borrowings
outstanding under this line of credit. Borrowings under this line of
credit are secured by all assets of the Company. The line of credit
expires on November 30, 1996; however, the Company anticipates renewal.
(3) CAPITAL LEASE OBLIGATION
At June 30, 1996, future minimum lease payments under capital lease
obligations are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
FISCAL YEAR AMOUNT
1997 $ 109,000
1998 109,000
1999 93,920
2000 72,808
2001 42,474
-----------
Total minimum lease payments 427,202
Amount representing interest (65,575)
---------
Present value of minimum lease payments 361,627
Less--Current portion 82,678
----------
$ 278,949
==========
</TABLE>
22
3145003.02
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(3) CAPITAL LEASE OBLIGATION (Continued)
Capital leases are secured by all assets of the Company under a
security agreement subordinate to the Company's demand line of credit.
(4) RELATED PARTY TRANSACTIONS AND COMMITMENTS
The Company leases one of its facilities from a corporation owned by an
officer of the Company. The lease, which was renewed during fiscal
1995, terminates in December 1999 and requires lease payments of $9,000
per month. The Company may terminate the lease as of the end of any
calendar year during the term by providing written notice to the lessor
by June 30 of such year.
Total future minimum rental payments under all operating leases for
fiscal 1997 are $208,000.
Rent expense on operating leases was approximately $187,000, $144,000
and $133,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
The Company paid fees to a director of approximately $60,000 during
each of fiscal 1996, 1995 and 1994 for consulting services. Another
director is a partner in a law firm that has performed legal services
for the Company during fiscal 1996, 1995 and 1994.
(5) STOCKHOLDERS' EQUITY
In conjunction with previous equity offerings, the Company issued
warrants to acquire a total of 320,000 shares of common stock, of which
warrants for 23,500 shares expired during fiscal 1996. Warrants for
76,500 shares have an exercise price of $4.50 per share and expire on
January 15, 1997. Warrants for 220,000 shares expire on October 23,
1998 and have an exercise price of $1.375 per share. As of June 30,
1996, all of these warrants were exercisable.
During 1989, the stockholders approved a stock option plan (the Plan)
for key employees. The Plan, as amended, authorizes the grant of
options to purchase up to 1,110,000 shares of the Company's common
stock at an exercise price not less than 100% of the fair market value
per share at the date of grant. Options granted are exercisable for a
period determined by the Board of Directors, not to exceed 10 years
from the date of grant. At June 30, 1996, 200,748 shares of common
stock were available for future grants under the Plan.
23
3145003.02
<PAGE>
<TABLE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(5) STOCKHOLDERS' EQUITY (Continued)
The following is a summary of transactions in the Plan for the three
years ended June 30, 1996:
<CAPTION>
<S> <C> <C>
NUMBER OPTION PRICE
OF SHARES PER SHARE
Options outstanding, June 30, 1993 582,876 $ .067- $5.6875
Exercised (272,876) .067-.50
Canceled (15,000) 4.4375
----------- -------------
Options outstanding, June 30, 1994 295,000 3.500- 5.6875
Granted 395,000 1.3750
Canceled (295,000) 3.500- 5.6875
---------- ---------------
Options outstanding, June 30, 1995 395,000 1.375
Granted 60,000 1.375 - 1.50
--------- ---------------
Options outstanding, June 30, 1996 455,000 $ 1.375 - $1.50
========= ================
Options exercisable, June 30, 1996 164,834 $ 1.375 - $1.50
========= ================
</TABLE>
In addition, the Company has granted options outside the Plan,
primarily to directors and consultants at 100% of the fair market value
per share at the date of grant. During fiscal 1995, options for 30,000
shares at $1.375 per share, including options for 15,000 shares issued
to replace existing options, were granted to two directors of the
Company, which became exercisable in four equal annual installments
beginning on December 15, 1994. Also during fiscal 1995, options for
35,000 shares at $1.375 per share, including options for 15,000 shares
issued to replace existing options, were granted to two consultants and
one former employee of the Company; 15,000 such shares were exercisable
at December 15, 1994, and 20,000 shares became exercisable in four
equal annual installments beginning on December 15, 1994. During fiscal
1996, options for 60,000 shares at $1.30 per share were granted to a
consultant to the Company, which became exercisable in five equal
annual installments beginning on July 31, 1995. As of June 30, 1996,
options for 221,617 shares were outstanding at exercise prices ranging
from $.067 to $5.6875 per share, of which 148,617 were exercisable
within the same exercise price range.
24
3145003.02
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(6) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, whereby a deferred tax asset or liability
is measured by the enacted tax rates that would be in effect when any
differences between the financial statement and tax bases of assets and
liabilities reverse.
The provision for income taxes in the accompanying consolidated
statements of operations consists of the following for the three years
ended June 30, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Current-
Federal $ 67,000 $ 52,000 $ -
State 3,000 - -
Foreign 33,000 2,000 -
---------- ---------- -----------
103,000 54,000 -
Deferred-
Federal (67,000) (52,000) -
Charge in lieu of income taxes - 148,000 -
------------- --------- -----------
$ 36,000 $150,000 $ -
========= ======== ==========
</TABLE>
A reconciliation of the federal statutory rate to the Company's
effective tax rate for the three years ended June 30, 1996 is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Income tax provision at federal statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from--
Utilization of operating loss carryforwards - (3.1) -
Operating loss carryforwards not benefited - - 14.0
Temporary items with no tax benefit 7.3 - (49.5)
Tax credits utilized (4.1) (6.4) -
Change in valuation allowance (35.5) (7.1) -
Prior year tax adjustments 5.0 - -
Other 1.5 3.1 1.5
------- ------- -------
Effective tax rate 8.2% 20.5% -%
======== ======= =======
25
</TABLE>
3145003.02
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Continued)
(6) INCOME TAXES (Continued)
The components of the net deferred tax asset at June 30, 1996 and 1995
are approximately as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Reserves and accruals not yet deducted for tax
purposes $ 175,000 $ 265,000
Other temporary differences 17,000 17,000
---------- ----------
192,000 282,000
Valuation allowance (73,000) (230,000)
---------- ----------
Net deferred tax asset $ 119,000 $ 52,000
========== ==========
</TABLE>
A full valuation allowance was provided upon the adoption of SFAS No.
109 in 1993 due to the uncertainty at that time of the future
realizability of the Company's deferred tax asset. During fiscal 1996
and 1995, the Company reduced the valuation allowance by $157,000 and
$52,000, respectively, which represents recognition of the portion of
the deferred tax asset that can be carried back to offset the prior
years' tax liabilities, if necessary.
(7) PROFIT SHARING PLAN
The Company has a defined contribution profit-sharing plan that covers
all eligible employees. The Company has accrued and expensed an
employer contribution to this plan of $50,000 in fiscal 1996 and
$50,000 in fiscal 1995. No employer contributions were made in fiscal
1994.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
26
3145003.02
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; Compliance with
--------------------------------------------------
Section 16(a) of the Exchange Act. The Company will furnish to the
Securities and Exchange Commission a definitive Proxy Statement (the
"Proxy Statement") not later than 120 days after the close of its fiscal
year ended June 30, 1996. The information required by this item is
incorporated herein by reference to the Proxy Statement.
ITEM 10 EXECUTIVE COMPENSATION. The information required by this item is
-----------------------
incorporated herein by reference to the Proxy Statement.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT. The information required by this item is incorporated
herein by reference to the Proxy Statement.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information
----------------------------------------------
required by this item is incorporated herein by reference to the Proxy
Statement.
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits.
The exhibits listed below are filed with or incorporated by reference
in this report.
3.1 Articles of Organization of the Company<F1>
3.2 By-laws of Precision Optics Corporation, Inc.<F2>
4.1 Specimen common stock certificate<F1>
4.2 Private Placement Selling Agent Common Stock Warrant No. 4 dated
April 28, 1992 issued to James L. Davis and Schedule 1 of
Omitted Documents<F3>
4.3 Initial Public Offering Common Stock Purchase Warrant No. 3 date
July 10, 1992 issued to John C. Michalak and Schedule 2 of
Omitted Documents<F3>
4.4 Warrant No. U-1 to Purchase Shares of Common Stock of the Company
dated January 24, 1992 issued to Nathan Newman and Schedule 3 of
Omitted Documents<F3>
4.5 Promissory Note dated December 5, 1991 between the Company and
The First National Bank of Boston<F4>
4.6 Agreement Restricting Sale of Stock dated January 15, 1992 by and
among Richard E. Forkey, the Company, Kennedy, Mathews, Landis,
Healy & Pecora Incorporated, and Equity Securities Trading
Co., Inc.<F3>
4.7 Option Share Escrow Agreement by and among the Company, the
Commissioner of Commerce for the State of Minnesota, Resource
Bank & Trust, and David McNally and Schedule of Omitted
Documents<F4>
10.1 Lease dated June 29, 1984 between the Company and Equity,
First Amendment to Commercial Lease dated June 25, 1990, and
letter agreement dated June 25, 1990 renewing such lease<F1>
27
3145003.02
<PAGE>
10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan
amended to date (the Plan")<F5>
10.3 Stock Option to Joel R. Pitlor dated May 30, 1989 and letter
agreement dated June 25, 1990 amending such option<F1>
10.4 Stock Option to Robert R. Shannon dated June 25, 1990<F2>
10.5 Stock Option to Joel R. Pitlor dated April 7, 1992 and Schedule
4 of Omitted Documents<F3>
10.6 Form of the Company's Non-disclosure and Non-Competition
Agreement<F1>
10.7 Three separate life insurance policies on the life of
Richard E. Forkey<F1>
10.8 Agreement dated October 19, 1991 between the Boston Stock
Exchange and the Company<F2>
10.9 Agreement dated November 18, 1991 between The NASDAQ Stock
Market and the Company<F3>
10.10 Master Lease Finance Agreement dated November 3, 1993 between
the Company and BancBoston Leasing.<F5>
10.11 Second Amendment to Commercial Lease between the
Company and Equity dated December 9, 1994.
10.12 Lease dated November 1, 1995 between the Company and
Janice M. Bouchard, Trustee of Authority Drive Realty Trust.
21 Subsidiaries of Precision Optics Corporation, Inc.
99 Important Factors Regarding Forward-Looking Statements.<F6>
[FN]
<F1> Incorporated herein by reference to the Company's Registration
Statement on Form S-18 (No. 33-36710-B).
<F2> Incorporated herein by reference to the Company's 1991 Annual Report
on Form 10-KSB.
<F3> Incorporated herein by reference to the Company's 1992 Annual Report
on Form 10-KSB.
<F4> Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (No.33-43929).
<F5> Incorporated herein by reference to the Company's 1994 Annual Report
on Form 10-KSB.
<F6> Incorporated herein by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended March 31, 1996.
[/FN]
(b) Reports on Form 8-K.
None.
28
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: September 19, 1996 PRECISION OPTICS CORPORATION, INC.
By:/s/ Richard E. Forkey
Richard E. Forkey
Chairman of the Board and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:/s/ Richard E. Forkey By:/s/ Jack P. Dreimiller
Richard E. Forkey Jack P. Dreimiller
President, Treasurer, and Senior Vice President, Finance
Director (Principal and Chief Financial Officer
Executive Officer) (Principal Financial and
Accounting Officer)
September 19, 1996 September 19, 1996
- ------------------------------ ------------------
Date Date
By:/s/ Joel R. Pitlor By:/s/ Edward A. Benjamin
Joel R. Pitlor Edward A. Benjamin
Director Director
September 19, 1996 September 19, 1996
- -------------------------------- ------------------
Date Date
By:/s/ Robert R. Shannon
Robert R. Shannon
Director
September 19, 1996
- --------------------------------
Date
29
3145003.02
<PAGE>
INDEX TO EXHIBITS
3.1 Articles of Organization of the Company<F1>
3.2 By-laws of Precision Optics Corporation, Inc.<F2>
4.1 Specimen common stock certificate<F1>
4.2 Private Placement Selling Agent Common Stock Warrant No. 4 dated
April 28, 1992 issued to James L. Davis and Schedule 1 of Omitted
Documents<F3>
4.3 Initial Public Offering Common Stock Purchase Warrant No. 3 dated
July 10, 1992 issued to John C. Michalak and Schedule 2 of Omitted
Documents<F3>
4.4 Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated
January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted
Documents<F3>
4.5 Promissory Note dated December 5, 1991 between the Company and The
First National Bank of Boston.<F4>
4.6 Agreement Restricting Sale of Stock dated January 15, 1992 by and among
Richard E. Forkey, the Company, Kennedy, Mathews, Landis, Healy &
Pecora Incorporated, and Equity Securities Trading Co., Inc.<F3>
4.7 Option Share Escrow Agreement by and among the Company, the
Commissioner of Commerce for the State of Minnesota, Resource Bank &
Trust, and David McNally and Schedule of Omitted Documents<F4>
10.1 Lease dated June 29, 1984 between the Company and
Equity, First Amendment to Commercial Lease dated
June 25, 1990, and letter agreement dated June 25,
1990 renewing such lease<F1>
10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to
date (the "Plan")<F5>
10.3 Stock Option to Joel R. Pitlor dated May 30, 1989 and letter agreement
dated June 25, 1990 amending such option<F1>
10.4 Stock Option to Robert R. Shannon dated June 25, 1990<F2>
10.5 Stock Option to Joel R. Pitlor dated April 7, 1992 and Schedule 4 of
Omitted Documents<F3>
10.6 Form of the Company's Non-disclosure and Non-Competition Agreement<F1>
10.7 Three separate life insurance policies on the life of
Richard E. Forkey<F1>
10.8 Agreement dated October 19, 1991 between the Boston Stock Exchange and
the Company<F2>
10.9 Agreement dated November 15, 1991 between The NASDAQ Stock Market and
the Company<F3>
10.10 Master Lease Finance Agreement dated November 3, 1993 between the
Company and BancBoston Leasing.<F5>
10.11 Second Amendment to Commercial Lease between the
Company and Equity dated December 9, 1994.
10.12 Lease dated November 1, 1995 between the Company and
Janice M. Bouchard, Trustee of Authority Drive Realty Trust.
21 Subsidiaries of Precision Optics Corporation, Inc.
99 Important Factors Regarding Forward-Looking Statements.<F6>
[FN]
<F1> Incorporated herein by reference to the Company's Registration Statement
on Form S-18 (No. 33-36710-B).
<F2> Incorporated herein by reference to the Company's 1991 Annual Report on
Form 10-KSB.
<F3> Incorporated herein by reference to the Company's 1992 Annual Report on
Form 10-KSB.
<F4> Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (No.33-43929).
30
3145003.02
<PAGE>
<F5> Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-KSB.
<F6> Incorporated herein by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1996.
[/FN]
31
3145003.02
<PAGE>
EXHIBIT 10.12
COMMERCIAL LEASE
Lease Agreement entered into as of this 1st day of November, 1995, by
and between Janice M. Bouchard, Trustee of Authority Drive Realty Trust, 180
Authority Drive, Fitchburg, Massachusetts, under declaration of trust dated July
13, 1995, and recorded in the Worcester North District Registry Of Deeds at Book
2732, Page 52 (hereinafter referred to as the "Lessor"), and Precision Optics
Corporation, Inc., 22 East Broadway, Gardner, Massachusetts (hereinafter
referred to as the "Lessee").
1. The Lessor does hereby lease, demise and let unto the Lessee those
premises described as follows:
Approximately Eight Thousand, Four Hundred Sixteen (8,416) square feet
within the building located at 190 Authority Drive, Fitchburg,
Massachusetts, together with the right to use in common with the Lessor
and any other tenants of Lessor, the landscaped grounds, parking and
truck access to the premises located at 180 - 190 Authority Drive,
Fitchburg, Massachusetts (hereinafter referred to as the "demised
premises" or the "leased premises"), being a portion of the premises
described in a Deed dated July 13, 1995, and recorded in the Worcester
North District Registry Of Deeds at Book 2732, Page 57. Please see
Exhibit "A" of the Commercial Lease attached hereto.
The Lessor and Lessee agree that the leased premises shall be measured
(in accordance with BOMA/ANSI standards) after the date of commencement of this
Lease to confirm the actual square footage, which will then be used for purposes
of the annual fixed rental rate established in Paragraph 3 below. (Any credit
due Lessee because the actual amount of space is less than the amount indicated
in this paragraph will be deducted by Lessee against the next installment(s) of
rent due under this Lease and any payment owed by Lessee because of underpayment
shall be paid by Lessee with the next installment(s) of rent due under this
Lease.
2. The term of the Lease shall be for three (3) years commencing on
November 1, 1995, and ending on October 31, 1998.
3. The annual fixed rent shall be paid by Lessee to Lessor at an
address provided by Lessor to Lessee in equal monthly installments as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AMOUNT PER
YEAR ANNUAL MONTHLY SQUARE FOOT
---- ------ ------- -----------
1 $50,496.00 $ 4,208.00 $6.00
2 $53,020.08 $ 4,418.50 $6.30
3 $55,671.84 $ 4,639.32 $6.62
</TABLE>
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3150414.01
<PAGE>
4. In addition to the annual fixed rent, Lessee shall pay its pro rata
share of real estate taxes (quarterly or as invoiced by the City Assessor for
the City of Fitchburg), fire and casualty insurance and common area maintenance
(driveways, parking lots, landscaping and the like), which pro rata share shall
be equal to thirty-three (33%) percent (approximate percentage of building
leased by Lessee) of said costs attributable to the building and land located at
190 Authority Drive, Fitchburg, Massachusetts, 01420. Lessee shall pay Lessor
its pro rata share of such expenses within twenty (20) days of receipt of an
invoice from Lessor (including appropriate backup such as copies of tax bills,
casualty insurance invoices and other matters).
5. Upon the execution of this Commercial Lease, Lessee shall pay to
Lessor a security deposit in the amount of $8,000.00, which security deposit
shall be held in escrow by Lessor, with all interest being retained by Lessor,
for the term of this Lease. Lessor shall return the security deposit to Lessee
within thirty (30) days of the expiration of the term of this Lease, provided
Lessee is not in default of the terms of this Commercial Lease. In the event
Lessee is in default of any of the terms of this Commercial Lease. Lessor shall
use the security deposit to cure the defaults and shall return any unused
portion to Lessee within a reasonable time, not to exceed sixty (60) days, after
said defaults are completely cured.
6. Lessee shall be responsible for and pay, as they become due, all
bills for electricity, water, sewer and other utilities (whether they are used
for furnishing heat or other purposes) that are furnished to the leased premises
and all bills for fuel, solely to the extent such bills relate to actual use of
such utilities by Lessee with respect to its occupancy of the leased premises.
Notwithstanding this provision, Lessee acknowledges and recognizes any and all
of its additional obligations concerning utilities which are contained in this
Commercial Lease.
Upon execution of this Commercial Lease, Lessor shall make arrangements
with an insured contractor to separately meter the gas consumption between the
demised premises and the remaining unleased area of the premises situated at 190
Authority Drive, Fitchburg, Massachusetts. Lessor agrees that such work shall be
completed within thirty (30) days of the execution of this Commercial Lease.
Upon Lessor leasing said remaining unleased area of the premises
situated at 190 Authority Drive, Fitchburg, Massachusetts to another tenant,
other than Priority Manufacturing, Inc. and/or Mar-Lee Mold, Inc., which shall
use this remaining space for temporary storage of plastic resin during
construction activity at 180 Authority Drive, Fitchburg, Massachusetts, the
Parties shall make arrangements with an insured contractor to separately meter
the electrical consumption between the demised premises and the remaining
portion of the premises situated at 190 Authority Drive, Fitchburg,
Massachusetts. Until such time as said unleased premises are leased, Lessee
shall pay any and all bills for electricity for the premises at 190 Authority
Drive, Fitchburg, Massachusetts. Notwithstanding the terms of this paragraph,
Lessor agrees to monitor the activities of Priority Manufacturing, Inc. and/or
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3150414.01
<PAGE>
Mar-Lee Mold, Inc. to assure that they efficiently operate the lighting when
moving materials within said remaining unleased area.
Lessor and Lessee shall equally divide the proposed utility separation
cost up to a total cost of $4,500.00. Should the actual cost exceed $4,500.00,
Lessee shall not be responsible for any amount in excess of $2,250.00, and the
Lessor shall pay all such excess. Upon execution of this Commercial Lease,
Lessee shall pay to Lessor $1,125.00, which represents one-half (1/2) of the
anticipated costs to Lessee of the separation of the gas metering.
Upon execution of this Commercial Lease, Lessee shall make immediate
arrangements with the City Of Fitchburg for direct billing of the water and
sewer use of 190 Authority Drive, Fitchburg, Massachusetts, to Lessee. In the
event said remaining unleased area of the premises situated at 190 Authority
Drive, Fitchburg, Massachusetts, are leased, Lessor and/or said new tenant shall
make arrangements with the City Of Fitchburg for direct billing of the water and
sewer use of 190 Authority Drive, Fitchburg, Massachusetts, to said new tenant
and thereafter the bills for water and sewer consumption shall be prorated for
all tenants of 190 Authority Drive, Fitchburg, Massachusetts, based on actual
use.
7. As the utility room for 190 Authority Drive, Fitchburg,
Massachusetts is situated within the demised premises, in the event said
remaining unleased area is leased, Lessee shall allow any new tenant(s)
reasonable access to the utility room for all necessary purposes associated with
the utility room.
8. Lessee intends to utilize the demised premises for light
manufacturing and office purposes, shipping and receiving and for uses ancillary
thereto. No trade or occupation shall be conducted on the leased premises or use
made thereof which shall be unlawful, improper, noisy, offensive, or contrary to
any law or regulation, including but not limited to the rules and regulations
promulgated by the City Of Fitchburg Redevelopment Authority for 231 Industrial
Park; the Zoning By Laws of the City of Fitchburg, Massachusetts; the laws and
regulations of the Commonwealth Of Massachusetts, including M.G.L. c. 21E; and
the laws and regulations of the United States Of America. In addition, Lessee
agrees that no use shall be made of the leased premises which materially
interferes with the use being made of the premises located at 180 Authority
Drive, Fitchburg, Massachusetts and any use which may be made of the remaining
unleased area of the premises located at 190 Authority Drive, Fitchburg,
Massachusetts.
9. Lessee shall indemnify and hold harmless Lessor from and against any
loss, damage, liability, costs or expense, including without limitation,
reasonable attorney's fees, suffered by Lessor by reason of the release,
discharge, storage or use by Lessee, its agents, and invitees on the demised
premises or the property located at 180 - 190 Authority Drive, Fitchburg,
Massachusetts, after the commencement date of this Commercial Lease, of any oil,
hazardous materials or hazardous waste, as defined from time to time under
applicable state and federal laws or regulations.
-3-
3150414.01
<PAGE>
Likewise, Lessor shall indemnify and hold harmless Lessee from and
against any loss, damage, liability, costs or expense, including without
limitation, reasonable attorney's fees, suffered by Lessee by reason of the
release, discharge, storage or use by Lessor, its agents, and invitees on the
demised premises or the property located at 180 - 190 Authority Drive,
Fitchburg, Massachusetts of any oil, hazardous materials or hazardous waste, as
defined from time to time under applicable state and federal laws or
regulations.
Upon execution of this Commercial Lease, Lessee shall provide Lessor
with a written list of any and all hazardous materials, as that term is defined
by M.G.L. c. 21E, that Lessee intends to use and/or store at the demised
premises.
10. In executing this Commercial Lease, Lessee fully and completely
understands and is aware that the remaining unleased area of the premises
located at 190 Authority Drive, Fitchburg, Massachusetts, which is directly
adjacent to the demised premises, may be utilized for manufacturing, light
manufacturing, assembly, light assembly and/or warehouse purposes. While not
making any guaranty, Lessor shall use all reasonable efforts to ensure that any
use made of the remaining unleased area of the premises located at 190 Authority
Drive, Fitchburg, Massachusetts, will not materially interfere with Lessee's
proposed use of the demised premises.
11. Lessee shall procure at Lessee's sole expense all necessary permits
and licenses, including any and all accessory expenses associated with obtaining
said permits and licenses, before using and/or occupying the demised premises
and before undertaking any work on the demised premises. Lessee shall do all
such work in a good and workmanlike manner, employing materials of good quality
which substantially conform to the structure and materials currently existing at
the demised premises.
12. The Lessee shall not assign or sublet this Commercial Lease without
first obtaining on each occasion the written consent of the Lessor, which
consent shall not be unreasonably withheld, conditioned or delayed. In the event
that Lessor consents to any assignment or subletting of any or all of the
demised premises and the rent and other sums and considerations received by
Lessee on account of such assignment or sublease of the demised premises or any
part thereof, as the case may be, shall exceed the Annual Fixed Rent and
additional rent due hereunder, Lessee shall pay to Lessor, as an additional
charge, fifty percent (50%) of such excess less Lessee's reasonable expenses
incurred to obtain such sublease or assignment, including brokerage commissions,
advertising and reasonable attorney's fees. Such excess shall be paid monthly as
received by Lessee. No such assignment or subletting shall in any way impair the
continuing primary liability of Lessee hereunder, and no consent to any
assigning or subletting in a particular instance shall be deemed to be a waiver
of the obligation to obtain the Lessor's approval in the case of any other
assignment or subletting. Notwithstanding anything to the contrary in the
foregoing or in this Commercial Lease elsewhere contained, Lessee may, without
either notice to or consent of Lessor, assign this Commercial Lease or sublet
all or any portion of the demised premises in connection with any
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<PAGE>
merger, consolidation, reorganization or other corporate restructuring of
Lessee, or any sale of all or substantially all the stock or assets of Lessee,
provided only that the successor corporation or entity acquiring Lessee's stock
or assets agrees to be bound by all the terms and provisions of this Commercial
Lease for the benefit of Lessor.
13. The Lessee agrees to maintain the leased premises in the same
condition as they are at the commencement of the term or as they may be put in
during the term of this Lease, reasonable wear and tear, damage by fire and
other casualty only excepted. Whenever necessary, Lessee shall replace plate
glass and other glass therein, acknowledging that the leased premises are now in
good order and the glass whole. The Lessee shall not permit the leased premises
to be overloaded, damaged, stripped, or defaced, or suffer any waste.
14. The Lessor agrees to maintain the structural integrity of the roof,
foundation and exterior walls so as not to materially interfere with Lessee's
use of the premises excepting only those circumstances where damage to same has
been caused by the negligence, acts or omissions of the Lessee, its assigns,
agents or employees.
15. The Lessee agrees to keep the demised premises in good order and
repair, and in at least as good order and repair as they are in on the
commencement date, reasonable use and wear and damage by fire or casualty only
excepted; and to keep all fixtures and equipment now or hereafter on the demised
premises, including, without limitation, all interior walls, all floors, all
heating, plumbing, electrical, air conditioning, and mechanical fixtures and
equipment serving only the demised premises, in good order and repair, and in at
least as good order and repair as they are in on the commencement date,
reasonable wear and tear and damage by fire or casualty only excepted; and to
make all repairs and replacements and to do all other work necessary for the
foregoing purposes, both ordinary and extraordinary. It is further agreed that
the exception of reasonable use and wear shall not apply so as to permit Lessee
to keep the demised premises in anything less than suitable, efficient and
usable condition considering the nature of the demised premises and the use
reasonably made thereof, or in less than good order, repair, and condition.
16. Lessee agrees to pay its pro rata share, as defined in Paragraph 4
of this Commercial Lease, for any expenditures regarding the replacement of any
fixtures and equipment which serve the premises situated at 190 Authority Drive,
Fitchburg, Massachusetts. To the extent these are capital expenditures as
generally defined by generally accepted accounting principles and may be
amortized, any tax benefits shall be fairly apportioned between Lessor and/or
any new tenant and Lessee such that Lessee shall only pay its pro rata portion
of the annual charge-off of such capital expenditures determined by dividing the
original cost of the capital expenditure by the number of years of useful life
thereof (the useful life shall be reasonably determined by Lessor in accordance
with generally accepted accounting principles and practices in effect at the
time of acquisition of the capital item).
-5-
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<PAGE>
17. The Lessee shall not permit any use of the leased premises which
will make voidable any insurance on the property of which the leased premises
are a part, or on the contents of said property, or which shall be contrary to
any law or regulation, from time to time, established by the New England Fire
Insurance Rating Association, or any similar body succeeding to its powers.
In the event Lessee's use or occupancy of the demised premises causes
any increase in insurance premiums for the buildings or premises located at 180
- - 190 Authority Drive, Fitchburg, Massachusetts, Lessee shall pay such
additional costs.
18, The Lessee agrees to maintain in full force a comprehensive
commercial liability insurance policy in the amount of $3,000,000.00 (combined
single limit) written by an insurance company reasonably acceptable to the
Lessor, under which the Lessee and Lessor are named as insured's or loss payees.
The Lessee shall deposit with the Lessor certificates for such insurance at or
prior to the commencement of the term, and thereafter within thirty days prior
to the expiration of any such policies. All such insurance certificates shall
provide that such policy shall not be canceled without at least ten (10) days
prior written notice to each assured named therein. Each said insurance policy
shall, to the extent available, include a provision by which the insurer waives
all rights of subrogation against the Lessor. Any insurance policy maintained by
Lessor concerning the demised premises shall, to the extent available, also
include a provision by which the insurer waives all rights of subrogation
against the Lessee.
19. The Lessee shall not make structural alterations or additions to
the leased premises, but may make non-structural alterations provided the Lessor
consents thereto, in writing, which consent shall not be unreasonably withheld,
conditioned or delayed. All such allowed alterations shall be made at the
Lessee's expense and shall be in quality at least equal to the present
construction. Lessee shall not permit any mechanics' liens, or similar liens, to
remain upon the leased premises for labor and materials furnished to Lessee, or
claimed to have been furnished to Lessee, in connection with work of any
character performed or claimed to have been performed at the direction of the
Lessee and shall cause any such lien of record to be released or bonded off
forthwith without cost to the Lessor. Any such alterations or improvements made
by the Lessee shall become the property of the Lessor at the termination of the
occupancy as provided herein, unless such alterations or improvements may be
removed by Lessee without damage to the structural integrity of the premises.
Upon removal of same, Lessee agrees to restore the premises to its condition
prior to the making of the alteration or improvement.
20. The Lessor and Lessor's designees, shall have the right to enter
upon the demised premises, during normal business hours, for the purpose of
inspecting same and determining the need for repairs. If Lessee is obligated to
make repairs, pursuant to the terms hereof, Lessor may demand that Lessee make
same forthwith, and if Lessee refuses or neglects to commence such repairs and
complete same with reasonable dispatch, after such demand,
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<PAGE>
Lessor may (but shall not be required to) make or cause such repairs to be made
and shall not be responsible to Lessee for any loss or damage that may be
accrued to Lessee's stock or business by reason thereof. If Lessor makes or
causes such necessary repairs to be made, Lessee agrees to pay Lessor forthwith
as additional rent, for the cost thereof, and in default of such payment, Lessor
shall have the remedies provided herein as well as other remedies provided by
law.
21. The Lessee agrees to indemnify and save harmless, the Lessor from
and against all claims of whatever nature arising from any act, omission, or
negligence of the Lessee or Lessee's contractors, licensee's, agents, servants,
or employee's, or arising from any accident, injury or damage whatsoever, caused
to any person, or to the property of any person, occurring during the term
hereof, in or about the demised premises. This indemnity and hold harmless
agreement shall include indemnity against all reasonable costs, expenses and
liabilities incurred in or in connection with any such claim or proceedings
brought thereon, and the defense thereof, including reasonable attorney's fees.
The Lessee shall save the Lessor harmless from all loss and damage
occasioned by the use or escape of water or by the bursting of pipes, or by any
nuisance made or suffered on the leased premises, unless such loss is caused by
the negligence of the Lessor. The removal of snow and ice from the sidewalks and
entrance ways bordering upon the leased premises shall be the Lessee's
responsibility.
22. The Lessee also agrees to keep Lessee's fixtures, merchandise and
equipment insured against loss or damage by fire or other casualty. It is
understood that Lessee assumes all risks of damage to Lessee's property arising
from any cause whatsoever, including, but not limited to loss by theft.
23. Should a substantial portion of the leased premises, or of the
property of which they are apart, be damaged by fire or other casualty, or be
taken by eminent domain, the Lessor may elect to terminate this Lease. When such
fire, casualty, or taking renders the leased premises or a portion thereof
substantially unsuitable for their intended use, a just and proportionate
abatement of the rent shall be made. Lessee may elect to terminate this Lease
if:
a. The Lessor fails to give written notice within thirty (30)
days of its intention to restore the leased premises; or b.
The Lessor fails to restore the leased premises to a condition
substantially suitable for their intended use within ninety
(90) days of said fire, casualty, or
taking.
If less than a substantial portion of the leased premises, or of the
property of which they are a part, is damaged by fire or other casualty, or
taken by eminent domain, the Lessor shall, as promptly as practicable, make
arrangements to repair, reconstruct or replace the
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<PAGE>
destroyed portions of the leased premises or the property of which they are a
part, to as nearly as possible the condition prior to such destruction.
The Lessor reserves, and the Lessee grants to the Lessor, all rights
which the Lessee may have for damages or injury to the leased premises for any
taking by eminent domain, except for damage to the Lessee's fixtures, property,
or equipment.
24. In the event that Lessee shall default in the payment of any
installment of rent or other sums herein provided for, and said default shall
continue for seven (7) days after written notice to Lessee from Lessor of such
default, or if the Lessee shall default in the observance or performance of any
other of the Lessee's covenants, agreements, or obligations hereunder, and such
default shall continue for twenty (20) days after written notice to Lessee from
Lessor of such default, or if the Lessee shall be declared bankrupt or insolvent
according to the law, or shall enter an assignment for the benefit of creditors,
then the Lessor shall have the right thereafter to enter and take complete
possession of the leased premises and to terminate this Lease and/or remove the
property of the Lessee, without prejudicing any other remedies available under
this Lease or at law for arrears of rent or other damages. The Lessee shall
indemnify the Lessor against all loss of rent and other payments which the
Lessor may incur by reason of such termination during the residue of the term of
this Lease or any extension. If the Lessee shall default in the observance or
performance of any conditions or covenants on the Lessee's part to be observed
or performed under or by virtue of any of the provisions of this Lease, the
Lessor, without being under obligation to do so and without thereby waiving such
default, may remedy such default for the account and at the expense of the
Lessee. If the Lessor makes any expenditures or incurs any obligations for the
payment of money in connection therewith, including but not limited to
reasonable attorney's fees in instituting, prosecuting and defending any action
or proceedings, such sums paid or obligations incurred, with interest at the
rate of twelve (12%) percent per annum and costs, shall be paid to the Lessor by
the Lessee forthwith as additional rent.
25. The Lessee, subject to the terms and conditions of this Lease, on
payment of the rent and observing, keeping, and performing all of the terms and
provisions of this Lease on their part to be observed, kept and performed, shall
lawfully, peaceably and quietly have, hold, occupy and enjoy the demised
premises during the term hereof without hinderance or rejection by any persons
claiming under Lessor.
26. Any notice from the Lessor to the Lessee relating to the leased
premises, or to the occupancy thereof, shall be deemed duly served, if left at
the leased premises, addressed to the Lessee, or mailed to the leased premises,
registered or certified mail, return receipt requested, postage prepaid, and
addressed to the Lessee. Any notice to the Lessor by the Lessee relating to the
leased premises or to the occupancy thereof, shall be deemed duly served if
mailed to the Lessor by registered or certified mail, return receipt requested,
postage prepaid, and addressed to the Lessor at 180 Authority Drive, Fitchburg,
Massachusetts,
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<PAGE>
01420, or such other address as the Lessor may, from time to time advise in
writing, with a copy to John M. Dombrowski, Esq., 32 School Street, Leominster,
Massachusetts, 01453.
27. If the Lessee wishes to continue its tenancy after the end of the
leased term, he will notify the Lessor in writing at least ninety (90) days
before the end of the lease term, and join in negotiations as to the rental and
other terms of an extension or renewal. If it fails to give such notice, or if
the parties are unable to agree on the terms of continued tenancy, the Lease
shall end at the conclusion of the original term. Nothing contained in this
paragraph shall, however, obligate the Lessor to extend the period of the
Lessee's occupancy, or to negotiate new terms if it wishes for any reason to
have the Lease terminated at the end of the original term.
28. The Lessee shall at the expiration or other termination of the
Lease, remove all Lessee's goods and effects from the leased premises
(including, without hereby limiting the generality of the foregoing, all signs
or lettering affixed or painted by the Lessee, either inside or outside the
leased premises). Lessee shall deliver to the Lessor the leased premises and all
keys, locks thereto, and other fixtures connected therewith and all alterations
and additions made to or upon the leased premises, in the same condition as they
were at the commencement of the term, or as they were put in during the term
hereof, reasonable wear and tear and damage by fire or other casualty only
excepted. In the event of the Lessee's failure to remove any of the Lessee's
property from the premises, Lessor is hereby authorized, without liability to
Lessee for loss or damage thereto, and at the sole risk of the Lessee, to remove
and store any of the property at Lessee's expense or to retain same under
Lessor's control or to sell at public or private sale, without notice, any or
all of the property not so removed and to apply the net proceeds of such sale to
the payment of any sums due hereunder, or to dispose of such property.
29. The Lessor shall in no event be in default in the performance of
any of its obligations hereunder unless and until Lessor failed to perform such
obligations within thirty (30) days, or such additional time as is reasonably
required to correct any such default after written notice by Lessee to Lessor
pursuant to paragraph 26 of this Commercial Lease properly specifying wherein
the Lessor has failed to perform any such obligation.
30. Failure on the part of the Lessor to complain of any action or
non-action on the part of the Lessee, no matter how long the same may continue,
shall never be deemed to be a waiver by Lessor of any of its rights hereunder.
No waiver at any time of any of the provisions hereof by Lessor shall be
construed as a waiver of any of the other provisions hereof and a waiver at any
time of any of the provisions hereof shall not be construed as a waiver at any
subsequent time of the same provisions. The consent or approval of Lessor to or
of any action by Lessee requiring Lessor's consent or approval shall not be
deemed to waive or render unnecessary Lessor's consent or approval to or of any
subsequent similar act by Lessee.
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Similarly, failure on the part of the Lessee to complain of any action
or non-action on the part of the Lessor, no matter how long the same may
continue, shall never be deemed to be a waiver by Lessee of any of its rights
hereunder. No waiver at any time of any of the provisions hereof by Lessee shall
be construed as a waiver of any of the other provisions hereof and a waiver at
any time of any of the provisions hereof shall not be construed as a waiver at
any subsequent time of the same provisions. The consent or approval of Lessee to
or of any action by Lessor requiring Lessee's consent or approval shall not be
deemed to waive or render unnecessary Lessee's consent or approval to or of any
subsequent similar act by Lessor.
31. No payment by Lessee, or acceptance by Lessor, of a lesser amount
then shall be due from Lessee to Lessor shall be treated otherwise than as a
payment on account. The acceptance by Lessor of a check for a lesser amount,
with an endorsement of statement thereon, or upon any letter accompanying such
check, that such lesser amount is payment in full shall be given no effect, and
Lessor may accept such check without prejudice to any other rights or remedies
which Lessor may have against Lessee.
32. If any term or provision of this Lease, or the application thereof
to any person or circumstance shall to any extent be invalid or unenforceable,
the remainder of this Lease, or the application of such term or provision to
persons or circumstances other than those to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Lease shall be valid and be enforced to the fullest extent permitted by
law.
33. Lessee shall have the right of first refusal to lease the unleased
adjacent area within 190 Authority Drive, Fitchburg, Massachusetts, which
consists of approximately 17,500 square feet. Lessor shall notify Lessee of any
offer from any other prospective tenant, which Lessor in its sole discretion
deems tenable, for said unleased adjacent area and shall provide Lessee with
copies of any written offer or letter of intent submitted by the prospective
tenant. Lessee shall have the option to match this offer within five (5)
business days of receipt of Lessor's notice. This right of first refusal shall
extend to each and every offer from any prospective tenant deemed tenable by
Lessor during the term of this Commercial Lease.
34. Upon reasonable notice to Lessor and/or any subsequent tenant of the
said unleased adjacent area, Lessee shall have the right to occasional use of
the loading docks, which docks are not included in the demised premises, as
indicated on Exhibit A of this Commercial Lease, for the purposes of loading and
unloading various equipment and supplies.
35. Lessee agrees to provide and pay for regular, ongoing trash removal
service adequate to ensure that the demised premises are kept in a clean and
orderly condition. Lessee agrees that such trash removal service shall be
performed by a vendor acceptable to Lessor.
36. Lessee shall have the right to use twenty-five (25) designated
parking spaces for itself, its employees, invitees, customers and other persons
visiting the demised premises,
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which parking spaces are situated directly in front of the main entrance between
180 and 190 Authority Drive, Fitchburg, Massachusetts, as more specifically
shown on Exhibit "B" of the Commercial Lease attached hereto.
37. Within thirty (30) days of the execution of this Commercial Lease,
Lessee shall construct safety railings in said loading dock area for the
protection of bottle gas storage, compressors and the like.
38. Lessor and Lessee represent and warrant each to the other that
neither has employed any broker other than Anderson-Howard Commercial Real
Estate, 54 Main Street, Leominster, Massachusetts with respect to this
Commercial Lease and each shall hold harmless the other from any claim for
brokerage or other commission arising from any breach of the foregoing warranty.
Lessor shall pay all brokers fees of Anderson-Howard Commercial Real Estate.
39. Except as herein otherwise expressly provided, the terms hereof
shall be binding upon and shall inure to the benefit of the heirs, legal
representatives, successors and assigns, respectively, of the Lessor and the
Lessee.
40. This Lease shall be governed exclusively by the provisions hereof
and by the laws of the Commonwealth of Massachusetts, as the same may from time
to time exist.
41. This Lease shall be subject and subordinate to any and all
mortgages, deeds of trust, and other instruments in the nature of a mortgage now
or at any time hereafter on the property of which the leased premises are a
part, provided that Lessor shall use best efforts to obtain from the current and
any future holder of any mortgage, deed of trust or other instrument for the
benefit of Lessee a so-called recognition and non-disturbance agreement in form
and substance reasonably acceptable to such mortgagee and to Lessee. Lessee
shall, when requested, promptly execute and deliver such written instruments as
shall be necessary to show the subordination of this Lease to said mortgages,
deeds of trust, or other instruments in the nature of a mortgage.
42. In the event Lessor decides to sell the premises located at 190
Authority Drive, Fitchburg, Massachusetts, Lessor agrees to notify Lessee of its
intention prior to advertising or listing the premises with a real estate broker
and to entertain any offers to purchase said premises from Lessee.
43. This instrument contains the entire agreement between the parties
and supersedes all prior or contemporaneous oral or written agreements, and it
may not be modified except by a writing signed and/or executed by all parties.
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44. Reference in this Lease agreement to the Lessee shall be deemed to
refer to the Lessee or Lessees named herein, and if there are more than one
Lessee, their obligations hereunder shall be joint and several.
IN WITNESS WHEREOF, the parties hereto set their hands and seals as of
the lst day of November, 1995.
Hereunto duly authorized,
LESSOR:
Janice M. Bouchard, Trustee of
Authority Drive Realty Trust
Hereunto duly authorized,
LESSEE:
Jack P. Dreimiller, Chief
Financial Officer
Precision Optics Corporation, Inc.
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EXHIBIT A
That certain parcel of land located on the southerly side of Authority Drive,
Fitchburg, Massachusetts, shown as Lot 6B on the plan titled "Plan of Land in
Fitchburg, Massachusetts, for Fitchburg Redevelopment Authority" dated June 7,
1982, recorded in Worcester Northern District Registry of Deeds, Plan Book 256,
Plan 7, Large Plan Book 21, Plan 21, bounded and described as follows:
Beginning at the northeasterly corner thereof at the point in the southerly
sideline of Authority Drive which is the most northwesterly corner of Lot 6C
shown in the plan recorded in said Registry of Deeds, Plan Book 264, Page 1,
THENCE S. 87(degree) 59' 42" W., along the southerly sideline of Authority
Drive, five hundred fifty-five and 63/100 (555.63) feet, to a point;
THENCE westerly, along the southerly sideline of Authority Drive, by a curve to
the right with a radius of 530.00 feet, eighty-five and 00/100 (85.00) feet
measured along the arc of the curve, to Lot 6A on said plan;
THENCE S. 2(degree) 48' 30" E., by Lot 6A, three hundred thirty-five and 84/100
(335.84) feet, to a corner at State Highway Route 2;
THENCE easterly along the State Highway by a curve to the right with a radius of
2,900.00 feet, six hundred twenty-one and 32/100 (621.32) feet measured along
the arc of the curve, to a point;
THENCE S. 84(degree) 10' 13" E., along the State Highway fifteen and 85/100
(15.85) feet, to a corner, at said Lot 6C;
THENCE N. 2(degree) 00' 18" W., along said Lot 6C, three hundred forty-nine and
54/100 (349.54) feet to the place of beginning.
Containing 209,173 square feet.
EXCEPTING from the above described parcel of land (i.e. Lot 6B) is the
triangular piece of land (located in the southeasterly corner of Lot 6B) taken
by the Commonwealth of Massachusetts (along with adjoining land) by the Notice
of Taking dated March 23, 1983 recorded in said Registry of Deeds, Book 1312,
Page 491. See also Plan Book 261, Page 13, Large Plan Book 22, Page 5, and, in
particular, Parcel 4-17 on Sheet 4 of 10. The approximate description of said
triangular piece of land is:
BEGINNING at the southeasterly corner of Lot 6B as shown on said plan recorded
in said Registry of Deeds, Plan Book 256, Plan 7, Large Plan Book 21, Plan 21;
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THENCE N. 2(degree) O' 18" W., beside Lot 6C referred to hereinabove 48.58 feet,
to the northerly sideline of the State Highway taking;
THENCE S. 72(degree) 13' 11" W., by the northerly sideline of the State Highway
taking 124.91 feet to the former location of the State Highway (said former
location being the southerly sideline of Lot 6B as described above);
THENCE easterly by a curve to the right with a radius of 2,900.00 feet, along
the southerly boundary of Lot 6B as described above, approximately 105.25 feet
measured along the arc of said curve, to a point;
THENCE S. 84(degree) 10' 13" E., along the southerly boundary of Lot 6B as shown
on said plan, 15.85 feet to the place of beginning.
CONTAINING approximately 2,750 square feet of land.
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EXHIBIT 21
SUBSIDIARIES OF PRECISION OPTICS CORPORATION, INC.
1. Wood's Precision Optics Corporation, Limited, organized under
the laws of Hong Kong.
2. Precise Medical, Inc., incorporated in Massachusetts.
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