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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, 1998
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 (978) 630-1800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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COMMON STOCK, $.01 PAR VALUE NONE
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. ___
The issuer's revenues for its most recent fiscal year were $4,053,051.
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 $4,243,961 as of August 31, 1998.
The number of shares of outstanding common stock of the issuer as of
August 31, 1998 was 6,677,595.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held on November 10, 1998 is incorporated into Part III of
this Form 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT.
Precision Optics Corporation, Inc. (the "Company") was incorporated in
Massachusetts in 1982 and has been publicly owned since November 1990.
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, advanced optical products and thin films and advanced optical
system design and development services.
PRINCIPAL PRODUCTS AND SERVICES AND METHODS OF DISTRIBUTION
MEDICAL PRODUCTS. The Company's medical products include endoscopes and
image couplers, beamsplitters and adapters, the latter of which are used as
accessories to endoscopes.
Since January 1991, the Company has developed and sold endoscopes using
various optical technologies for use in a variety of minimally invasive surgical
and diagnostic procedures throughout the human body. The Company's current line
of specialized endoscopes include arthroscopes (which are used in joint
surgery), laryngoscopes (which are used in the diagnosis of diseases of the
larynx), laparoscopes (which are used in abdominal surgery) and stereo
endoscopes (which are currently being tested for use in cardiac surgery). 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 use in various medical specialties.
In July 1998, the Company entered into a Manufacturing Services
Agreement with a customer that is in the process of developing a sophisticated
system for computer assisted minimally invasive cardiac surgery that employs
advanced electronics and robotics and an enhanced 3-D visualization system.
Under the Agreement, the Company will be this customer's primary supplier of
stereo endoscopes and cameras, both of which will be used as key components in
the customer's surgical system. The Company has received initial orders from
this customer, with deliveries commencing later this calendar year.
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
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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 that it is the only
company in the world that produces autoclavable image couplers.
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.
OPTICAL PRODUCTS AND 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.
The Company's recent emphasis in the optical field has been in the
design, development and manufacture of specialty thin film coatings for use in
various optical products. The Company is aggressively pursuing sales, marketing
and technology development opportunities for new optical thin films in the
rapidly growing optical communications and semiconductor industries. During the
last half of fiscal year 1997, the Company began development of prototype
Wavelength Division Multiplexer (WDM) optical filters. WDMs are devices that
allow telecommunications companies to increase the transmission capacity of
fiberoptic lines. Based on development efforts to date, the Company is currently
supporting product evaluations with several potential customers in the
telecommunications and semiconductor industries.
The Company has in the past earned significant revenue from the sale of
night vision products which permit users to see in extreme low light. In recent
years, the Company has had increasing difficulty competing for and winning
production contracts for night vision products due to lower prices offered by
foreign manufacturers, Government budget uncertainties and efforts to lower the
federal budget deficit and defense spending. As a result of these factors, the
Company anticipates that revenues derived from its night vision products and
technology will continue to decline as the Company pursues opportunities in
other business segments.
COMPETITION AND MARKETS
The areas in which the Company does business 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 products area particularly and to the
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Company's profitability generally, 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.
These potential customers sell video cameras, endoscopes, or video-endoscopy
systems. The Company has made sales to approximately 20 of these customers. 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 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 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.
The Company offers advanced optical design and development services not
related to thin film coatings to a wide range of potential customers and has
numerous 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.
While the potential market for thin film coatings is perceived as
growing rapidly, particularly in the telecommunications and semiconductor
industries, 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 $988,000 and $1,410,000 for the
fiscal years ended June 30, 1998 and 1997, 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
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generally more expensive and time consuming than the design phases. In addition
to customer-sponsored research and development, the Company spent approximately
$897,000 and $428,000 of its own funds during fiscal years 1998 and 1997,
respectively, on the Company's own research and development. The Company expects
to continue making significant Company-funded expenditures for research and
development, particularly in the thin film coatings area.
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 most 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 1999. The Company believes, however, that there are relatively few
suppliers of the high quality lenses and prisms which its endoscopes may
require. The Company has therefore established an in-house optical shop for
producing ultra-high quality prisms, micro-optics and other specialized optics
for a variety of medical and industrial applications. 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 an outside supplier or expanded in-house manufacturing
facilities.
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 to the extent practicable. The Company holds the rights to
several United States and foreign patents and has several patent applications
pending. 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.
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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.
EMPLOYEES
As of June 30, 1998, the Company had forty-four full-time employees and
two part-time employees.
CUSTOMERS
Sales to the Company's three largest customers, in terms of total sales
during fiscal year 1998, were approximately 22%, 14% and 10%. Sales to the
Company's two largest customers, in terms of total sales during fiscal year
1997, were approximately 38% and 23%.
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 several 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
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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 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 quality control and 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, optical thin films, 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 1998.
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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
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Richard E. Forkey President, Treasurer and Director
Jack P. Dreimiller Senior Vice President, Finance,
Chief Financial Officer and Clerk
Kumar M. Khajurivala Vice President, Operations
Edward A. Benjamin Director. Member of Audit Committee. Mr.
Benjamin is a partner in the law firm of
Ropes & Gray, Boston, Massachusetts.
H. Angus Macleod Director. Dr. Macleod is President of the
Thin Film Center, Inc. of Tucson, Arizona,
which provides software consulting and
courses for design and analysis of thin film
optical coatings and filters.
Austin W. Marxe Director. Mr. Marxe was appointed to the
Board of Directors in August 1998. Mr. Marxe
is Managing General Partner of Special
Situations Fund III, L.P., a registered
investment company based in New York City,
and several other affiliated investment
funds.
Joel R. Pitlor Director. Member of Audit Committee.
Mr. Pitlor is president of J.R. Pitlor, a
management consulting firm based in
Cambridge, Massachusetts.
Robert R. Shannon Director. Member of Audit Committee.
Mr. Shannon is a professor at the Optical
Sciences Center of the University of Arizona
in Tuscon, Arizona.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the National Association of
Securities Dealers Automated Quotation (NASDAQ) System under the symbol "POCI."
Since January 1992, the NASDAQ SmallCap Market 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>
1997 1998
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Quarter High Low High Low
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<S> <C> <C> <C> <C>
First $ 1 3/4 $ 7/8 $3 15/16 $2 11/16
Second $ 1 3/4 $ 1 1/8 $ 4 3/4 $ 3 1/2
Third $1 15/16 $1 1/16 $ 4 1/8 $ 2 5/8
Fourth $3 11/16 $ 1 1/8 $ 3 1/8 $1 47/64
</TABLE>
As of August 31, 1998, there were 92 holders of record of the Company's
common stock.
On June 30, 1998, the Company issued pursuant to Section 4(2) of the
Securities Act of 1933 an aggregate of 500,000 shares of its common stock and
warrants exercisable for an additional aggregate of 500,000 shares of its common
stock to Special Situations Private Equity Fund, L.P. and Special Situations
Technology Fund, L.P., two affiliated private investment funds based in New York
City (the "Special Situations Funds") in exchange for aggregate cash
consideration of $1,000,000.
The terms of the warrants issued to the Special Situations Funds
provide that the warrants may be exercised at any time at a price per share of
$4.00, subject to adjustment pursuant to customary anti-dilution provisions
triggered by any future below-market issuances of Company common stock. The
warrants provide that they will terminate if not exercised within 10 days of the
Special Situations Funds' receipt of a notice from the Company which may be
delivered at the Company's option in the event that the last sale price of the
Company's common stock on the NASDAQ SmallCap Market equals or exceeds $6.00 on
each of any 20 consecutive trading days.
In connection with the issuance of common stock and warrants to the
Special Situations Funds, the Company agreed to file with the Securities and
Exchange Commission a registration statement covering the resale of shares of
common stock issued to, or issuable upon the exercise of warrants issued to, the
Special Situations Funds. Pursuant to a Registration Rights Agreement dated June
30, 1998 among the parties, the Company would be obligated to issue additional
shares of common stock
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and additional warrants to the Special Situations Funds for no additional
consideration in the event such registration statement is not declared effective
on or prior to December 31, 1998.
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" attached hereto 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 publicly release the
result of any revision to these forward-looking statements which may be made
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, 1998, the Company's cash and cash
equivalents decreased by approximately $288,000 to $2,060,000. The decrease in
cash and cash equivalents was due to cash used by operating activities of
approximately $961,000, capital expenditures of approximately $269,000,
increases in other assets, primarily patents, of approximately $117,000 and
repayment of a capital lease obligation of approximately $104,000, partially
offset by proceeds received from a private placement of Common Stock
(approximately $931,000), sale of marketable securities (approximately $187,000)
and exercise of stock options and warrants (approximately $45,000).
During the quarter ending December 31, 1997, the Company entered into a
five-year capital lease obligation for the acquisition of manufacturing
equipment totaling approximately $140,000.
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 medical and optical thin film
product lines, 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. Under the terms of the line
of credit, the Company is required to maintain certain ratios under specified
financial covenants (Debt Service Coverage, Leverage, Current Ratio), and must
maintain a minimum cash liquidity of $1,000,000. The Company was in compliance
with all
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such covenants as of June 30, 1998, except with respect to the Debt Service
Coverage ratio (for which a waiver or forbearance agreement is currently being
negotiated). There can be no assurance that the Company will be able to comply
with all of such terms. As of June 30, 1998, there were no borrowings
outstanding under the line of credit.
The Company has no material unused sources of liquidity other than its
cash and cash equivalents, accounts receivable and available lines of credit. If
these liquidity sources, along with revenues from operations, are not sufficient
to fund operations or growth, the Company will require additional financing. The
timing and amount of additional financing requirements depend on a number of
factors, including the status of development and commercialization efforts, the
cost of equipment and personnel to support manufacturing of new and existing
products, and the amount of working capital necessary to start up and maintain
operations supporting new products. The Company may seek additional funds
through public or private equity or debt financing. There can be no assurance
that such funds will be available on satisfactory terms, if at all. Lack of
necessary funds may require the Company to delay, scale back, or eliminate some
or all of its development efforts.
However, the Company believes its sources of liquidity are sufficient
to support working capital and investment needs for the foreseeable future.
FISCAL YEAR 1998 RESULTS OF OPERATIONS
Total revenues for fiscal year 1998 were approximately $4,053,000, a
decrease of approximately $3,319,000, or 45%, from fiscal year 1997.
The revenue decrease from the prior year was due to lower sales of
night vision products (down 67%), medical products (down 31%), and industrial
and thin film products (down 27%). The reduction in night vision sales was due
to successful completion during the prior fiscal year of two government
development subcontracts, and lower shipments on two government production
subcontracts. The reduction in medical products sales was due to lower shipments
of endocouplers, partially offset by higher sales of endoscopes. The higher
shipments of endocouplers in the prior year were mainly attributable to sales to
one customer representing approximately 23% of total Company revenues for fiscal
1997. No sales were made to this customer in fiscal 1998. The reduction in
industrial and thin film sales was due to lower sales of industrial lenses.
Revenues for the Company's three largest customers were approximately
22%, 14% and 10%, respectively, of total revenues for the year ended June 30,
1998. Revenues from the Company's two largest customers were approximately 38%
and 23%, respectively, for the year ended June 30, 1997.
For the fiscal years ended June 30, 1998, 1997 and 1996, approximately
25%, 38% and 44% 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 one fixed-price production subcontract with one
customer for night-vision lens systems with deliveries scheduled approximately
through July 1998. 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 to the Company.
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Gross profit decreased by approximately $1,305,000 in fiscal 1998, and
as a percentage of revenues decreased from 23.9% to 11.3% compared to the
previous year. The decrease in gross profit was due primarily to lower sales
volume as discussed above.
Selling, general and administrative expenses increased by approximately
$309,000 or 13.5% in fiscal year 1998 compared to fiscal 1997. The major reason
for the increase was higher research and development spending on new products,
which increased by approximately $469,000, or 110%, partially offset by lower
professional services and employee benefits expenses.
Interest expense relates primarily to capital lease obligations
incurred in fiscal years 1994, 1996 and 1998.
Interest income decreased by approximately $34,000 in fiscal year 1998
due to the lower investment base of cash equivalents.
The provision for income taxes in fiscal 1998 represents an adjustment
of the net deferred tax asset to an amount the Company believes is more likely
than not to be realized.
FISCAL YEAR 1997 RESULTS OF OPERATIONS
Total revenues for fiscal 1997 were approximately $7,372,000, a
decrease of approximately $683,000, or 8.5%, from fiscal 1996.
The revenue decrease was due to lower sales of non-medical products
(down 29%), partially offset by higher sales of medical products (up 22%). The
increase in sales of medical products was attributable to higher sales in all
major product categories. The reduction in non-medical sales was due primarily
to (1) lower sales of night-vision products due to completion of two government
production subcontracts and one government development subcontract and (2) lower
sales of industrial products due to discontinued sales to a significant
customer, both partially offset by higher sales of optical thin films.
Gross profit decreased by approximately $701,000 in fiscal 1997, and as
a percentage of revenues decreased from 30.6% to 23.9% compared to the previous
year. The decrease in gross profit was due primarily to the lower sales volume
and higher occupancy and depreciation expenses related to equipment and
manufacturing facilities additions.
Selling, general and administrative expenses increased by approximately
$169,000 or 7.9% in fiscal 1997 compared to fiscal 1996. The increase was due
primarily to higher spending on advertising and bid and proposal expenses
targeted at the industrial and thin films marketplace, and higher legal,
consulting and employee recruiting expenses.
Interest expense relates primarily to capital lease obligations
incurred in the third quarter of fiscal years 1994 and 1996.
Interest income decreased by approximately $20,000 in fiscal 1997 due
to the lower investment base of cash equivalents.
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The benefit for income taxes as a percentage of the pre-tax loss in
fiscal year 1997 was lower than the federal statutory income tax rate primarily
due to the Company's inability to recognize the full amount of deferred tax
assets to offset prior years' taxable income. Such tax benefits will be
recognized in future years if sufficient future taxable income is generated.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company continues to aggressively pursue sales, marketing, and
technology development efforts for new optical thin films in the rapidly growing
telecommunications and semi-conductor industries. Significant progress has been
achieved in the Company's development efforts for Wavelength Division
Multiplexer (WDM) optical filters, which are used in telecommunication systems.
These successful development efforts have resulted in prototypes of a
10-nanometer bandwidth WDM filter and several narrow (under 1-nanometer)
bandwidth filters. The Company is currently supporting product evaluation tests
with several potential optical thin film filter and coating customers for
applications in the telecommunications and semiconductor industries. The Company
believes that these efforts should lead to significant future thin film sales.
Based on a recent preliminary assessment, the Company has determined
that it is required to modify portions of its hardware and software so that its
computer systems and other date-sensitive equipment will properly utilize data
beyond December 31, 1999. The Company believes that with upgrades or
modifications to existing software and hardware, the impact of Year 2000 issues
can be mitigated. However, if such upgrades or modifications are not made, or
are not made in a timely manner, Year 2000 issues could have a material adverse
impact on the Company's operations and financial condition. The Company will
utilize primarily external resources to test and/or replace hardware and
software for Year 2000 compliance. The Company plans to complete the Year 2000
project not later than December 31, 1998, and believes the costs of the project
will not be material to the Company's operating results or financial condition.
As the Company's ongoing assessment of its Year 2000 compliance status
progresses, the Company will establish such contingency plans as it deems
necessary to address any residual Year 2000 risks. The Company currently is not
aware of any material risks to its business and operations presented by the Year
2000 compliance status of its customers, suppliers and service providers.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated Financial Statements
are filed on pages 14 through 29 of this Form 10-KSB.
-13-
<PAGE> 14
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
-14-
<PAGE> 15
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,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 23, 1998
-15-
<PAGE> 16
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,060,146 $2,348,382
Marketable securities -- 30,000
Accounts receivable (net of allowance for
doubtful accounts of approximately
$42,000 and $69,000 in 1998 and 1997, respectively) 486,070 466,811
Inventories 949,993 1,576,967
Deferred tax asset 145,000 157,300
Prepaid expenses 44,870 40,273
Refundable income taxes -- 52,970
----------- ----------
Total current assets 3,686,079 4,672,703
----------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment 2,848,555 2,474,478
Leasehold improvements 468,724 433,832
Furniture and fixtures 109,568 109,568
Vehicles 44,742 44,742
----------- ----------
3,471,589 3,062,620
Less--Accumulated depreciation and amortization 2,318,380 1,927,578
----------- ----------
1,153,209 1,135,042
----------- ----------
OTHER ASSETS:
Cash surrender value of life insurance policies 50,156 51,871
Patents, net 238,034 155,986
----------- ----------
Total other assets 288,190 207,857
----------- ----------
$ 5,127,478 $6,015,602
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
----------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 124,566 $ 271,911
Accrued payroll 121,262 81,122
Accrued profit sharing and bonuses 28,798 30,000
Accrued professional services 80,140 85,556
Accrued vacation 88,514 64,903
Accrued warranty expense 50,000 50,000
Accrued income taxes 4,924 18,946
Other accrued liabilities 91,372 42,164
Customer advances 116,841 --
Current portion of capital lease obligation 105,349 89,532
----------- ----------
Total current liabilities 811,766 734,134
----------- ----------
CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION 208,684 189,413
----------- ----------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
Authorized--10,000,000 shares
Issued and outstanding--6,618,619 and 6,021,502 shares
at June 30, 1998 and 1997, respectively 66,186 60,215
Additional paid-in capital 6,172,349 5,202,558
Accumulated deficit (2,131,507) (170,718)
----------- ----------
Total stockholders' equity 4,107,028 5,092,055
----------- ----------
$ 5,127,478 $6,015,602
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE> 17
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES $ 4,053,052 $7,372,310 $8,055,271
COST OF GOODS SOLD 3,595,756 5,610,438 5,592,871
----------- ---------- ----------
Gross profit 457,296 1,761,872 2,462,400
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,606,079 2,296,687 2,128,155
----------- ---------- ----------
Operating (loss) income (2,148,783) (534,815) 334,245
GAIN ON SALE OF MARKETABLE SECURITIES 157,417 -- --
INTEREST INCOME 70,131 104,423 124,104
INTEREST EXPENSE (26,254) (27,241) (16,639)
----------- ---------- ----------
(Loss) income before provision for income taxes (1,947,489) (457,633) 441,710
PROVISION (BENEFIT) FOR INCOME TAXES 13,300 (15,000) 36,000
----------- ---------- ----------
Net (loss) income $(1,960,789) $ (442,633) $ 405,710
=========== ========== ==========
BASIC (LOSS) EARNINGS PER SHARE $ (.32) $ (.07) $ .07
=========== ========== ==========
DILUTED (LOSS) EARNINGS PER SHARE $ (.32) $ (.07) $ .07
=========== ========== ==========
COMMON SHARES OUTSTANDING 6,099,347 5,982,210 5,980,502
=========== ========== ==========
COMMON SHARES OUTSTANDING ASSUMING DILUTION 6,099,347 5,982,210 6,116,569
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-17-
<PAGE> 18
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL RETAINED TOTAL
SHARES STOCK PAID-IN EARNINGS STOCKHOLDERS'
CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
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
Proceeds from exercise of options
to purchase common stock 41,000 410 56,903 -- 57,313
Net loss -- -- -- (442,633) (442,633)
--------- ------- ---------- ----------- -----------
BALANCE, JUNE 30, 1997 6,021,502 60,215 5,202,558 (170,718) 5,092,055
Proceeds from exercise of options
and warrants to purchase common stock 97,117 971 44,121 -- 45,092
Net proceeds from private
placement of common stock 500,000 5,000 925,670 -- 930,670
Net loss -- -- -- (1,960,789) (1,960,789)
--------- ------- ---------- ----------- -----------
BALANCE, JUNE 30, 1998 6,618,619 $66,186 $6,172,349 $(2,131,507) $ 4,107,028
========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE> 19
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,960,789) $ (442,633) $ 405,710
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities-
Depreciation and amortization 426,976 428,054 308,275
Deferred income taxes 12,300 (38,300) (67,000)
Gain on sale of marketable securities (157,417) -- --
Changes in assets and liabilities-
Accounts receivable (19,259) 672,993 276,567
Inventories 626,974 286,727 (395,215)
Prepaid expenses (4,597) 4,411 (21,810)
Refundable income taxes 52,970 (22,694) (30,276)
Accounts payable (147,345) (557,517) 361,467
Customer advances 116,841 -- --
Accrued expenses 92,319 (41,409) (21,041)
----------- ---------- ----------
Net cash (used in) provided by operating activities (961,027) 289,542 816,677
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities -- (30,000) --
Proceeds from the sale of marketable securities 187,417 -- --
Purchases of property and equipment (269,402) (444,914) (615,798)
Increase in other assets (116,507) (58,690) (59,844)
----------- ---------- ----------
Net cash used in investing activities (198,492) (533,604) (675,642)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligation (104,479) (82,682) (51,068)
Net proceeds from private placement of common stock 930,670 -- --
Proceeds from exercise of stock options and warrants 45,092 57,313 --
----------- ---------- ----------
Net cash provided by (used in) financing activities 871,283 (25,369) (51,068)
----------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (288,236) (269,431) 89,967
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,348,382 2,617,813 2,527,846
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,060,146 $2,348,382 $2,617,813
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 26,254 $ 27,241 $ 16,639
=========== ========== ==========
Income taxes $ -- $ 101,461 $ 151,325
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENT ACTIVITIES:
Capital lease obligation $ 139,567 $ -- $ 299,180
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE> 20
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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: (i) medical
products for use by hospitals and physicians and (ii) advanced
optical system design and development services and products.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its two wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) 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.
(d) 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. There were no cash equivalents at June
30, 1998. Cash equivalents at June 30, 1997 included approximately
$1,529,000 of United States Treasury bills.
(e) Marketable Securities
The Company applies SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Company's
investments in marketable securities are classified as
available-for-sale. Marketable securities had a cost and market
value of $30,000 at June 30, 1997. During fiscal 1998, the Company
sold these securities and realized a gain of approximately
$157,000.
-20-
<PAGE> 21
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
(f) 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, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw material $588,727 $1,075,294
Work-in-progress 246,264 272,980
Finished goods 118,502 228,693
-------- ----------
$949,993 $1,576,967
======== ==========
</TABLE>
(g) 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
Furniture and fixtures 5 years
Vehicles 3 years
(h) Significant Customers and Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105,
Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any
significant off-balance sheet and credit risk concentrations.
Financial instruments that subject the Company to credit risk
consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its investments in highly rated
financial institutions. The Company has not experienced any losses
on these investments to date. At June 30, 1998 and 1997,
receivables from the Company's largest customer were approximately
36% and 29% of the total accounts receivable, respectively. The
Company has not experienced any material losses related to
accounts receivable from individual customers.
-21-
<PAGE> 22
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
Revenues from the Company's three largest customers were
approximately 22%, 14% and 10%, respectively, of total revenues
for the year ended June 30, 1998. Revenues from the Company's two
largest customers were approximately 38% and 23%, respectively, of
total revenues for the year ended June 30, 1997. Revenues from the
Company's three largest customers were approximately 42%, 14% and
12% of total revenues for the year ended June 30, 1996. No other
customers accounted for more than 10% of the Company's revenues in
any of the three years ended June 30, 1998. Approximately 25%, 38%
and 44% of the Company's revenues for the years ended June 30,
1998, 1997 and 1996, respectively, were derived from sales to
agencies of the U.S. government or customers that supply agencies
of the U.S. government.
(i) Research and Development
Research and development costs, which are charged to operations as
incurred, are included in selling, general and administrative
expenses and include direct costs plus overhead. Such costs
totaled approximately $897,000, $428,000 and $433,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
(j) (Loss) Earnings per Share
Basic (loss) earnings per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted (loss) earnings per share
for the year ended June 30, 1996 includes the effect of
outstanding stock options of 136,067 shares computed in accordance
with the treasury stock method. For the years ended June 30, 1998
and 1997, the effect of stock options was antidilutive; therefore,
they were not included in the computation of diluted (loss)
earnings per share. The Company has adopted SFAS No. 128, Earnings
per Share, effective December 15, 1997. As a result, the Company's
reported earnings per share for fiscal 1997 and 1996 were
restated; however, this had no effect on previously reported
earnings per share data. The number of shares that were excluded
from the computation as their effect would be antidilutive were
1,864,500, 1,045,617 and 94,000, during fiscal 1998, 1997 and
1996, respectively.
The calculations of basic and diluted weighted average shares
outstanding are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Basic weighted average shares outstanding 6,099,347 5,982,210 5,980,502
Dilutive shares -- -- 136,067
--------- --------- ---------
Diluted weighted average shares outstanding 6,099,347 5,982,210 6,116,569
========= ========= =========
</TABLE>
-22-
<PAGE> 23
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
(k) Stock-Based Compensation
The Company accounts for its stock-based compensation under
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. In October 1995, the FASB issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123
establishes a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the
disclosure-only alternative under SFAS No. 123, which required the
disclosure of the pro forma effects on earnings and earnings per
share as if the accounting prescribed by SFAS No. 123 had been
adopted, as well as certain other information.
(l) 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.
(m) Other Assets
Patents are carried at cost, less accumulated amortization of
approximately $107,000 and $71,000 at June 30, 1998 and 1997,
respectively. Such costs are amortized using the straight-line
method over the shorter of their legal or estimated useful lives,
generally five to ten years.
(n) 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.
(2) LINE OF CREDIT
At June 30, 1998, the Company had available a demand line of credit of
$500,000 at an interest rate equal to the bank's prime rate (8.5% at June
30, 1998) plus 0.25%. Under the line of credit agreement, the Company is
required to maintain certain financial ratios (Debt Service Coverage,
Leverage, and Current Ratio) and must maintain a minimum cash liquidity
of $1,000,000. The Company is in compliance with all such financial
covenants at June 30, 1998, except the Debt Service Coverage Ratio for
which a waiver or forbearance agreement is currently being negotiated. At
June 30, 1998, there were no borrowings outstanding under this
-23-
<PAGE> 24
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
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, 1998.
(3) CAPITAL LEASE OBLIGATION
At June 30, 1998, future minimum lease payments under capital lease
obligations are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
<S> <C>
1999 $ 128,283
2000 107,171
2001 76,834
2002 34,363
2003 15,524
---------
Total minimum lease payments 362,175
Amount representing interest (48,142)
---------
Present value of minimum lease payments 314,033
Less-Current portion 105,349
---------
$ 208,684
=========
</TABLE>
Capital leases are secured by all assets of the Company under a security
agreement subordinate to the Company's demand line of credit.
(4) COMMITMENTS
(a) Related Party Transactions
The Company leases one of its facilities from a corporation owned
by an officer of the Company. The lease 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.
The Company paid fees to a director of approximately $60,000
during each of fiscal 1998, 1997 and 1996 for consulting services.
Another director is a partner in a law firm that has performed
legal services for the Company during fiscal 1998, 1997 and 1996.
-24-
<PAGE> 25
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
(b) Operating Lease Commitments
Total future minimum rental payments under all operating leases
for fiscal 1999 are $116,000 and $6,000 thereafter.
Rent expense on operating leases was approximately $217,000,
$213,000 and $187,000 for the years ended June 30, 1998, 1997 and
1996, respectively.
(5) STOCKHOLDERS' EQUITY
(a) Warrants
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 a total of 100,000 shares expired during fiscal
1997 and 1996. Warrants for 2,000 shares were exercised during
fiscal 1998. Warrants for 218,000 shares expire in approximately
equal amounts on August 21, 1998 and October 23, 1998 and have an
exercise price of $1.375 per share. As of June 30, 1998, all of
these warrants were exercisable.
During fiscal 1998, the Company completed a private placement of
500,000 shares of common stock with gross proceeds of $1,000,000.
In conjunction with this offering, the purchasers were issued
warrants to acquire 500,000 shares of common stock at an exercise
price of $4.00 per share. The warrants are immediately exercisable
and expire on June 25, 2003.
(b) Stock Options
During 1989, the stockholders approved a stock option plan (the
1989 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.
During fiscal 1998, the stockholders approved an incentive plan
(the 1997 Incentive Plan), which provides eligible participants
(certain employees, directors, consultants, etc.) the opportunity
to receive a broad variety of equity based and cash awards. A
total of 1,200,000 shares of common stock have been reserved for
issuance under the 1997 Incentive Plan. Upon the adoption of the
1997 Incentive Plan, no new awards will be granted under the 1989
Plan. At June 30, 1998, 794,000 shares of common stock were
available for future grants under the 1997 Incentive Plan.
-25-
<PAGE> 26
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
The following is a summary of transactions in the Plans for the three
years ended June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OPTION PRICE EXERCISE
OF SHARES PER SHARE PRICE
<S> <C> <C> <C>
Options outstanding, June 30, 1995 395,000 $ 1.375 $1.38
Granted 60,000 1.375-1.50 1.40
-------- -------------- -----
Options outstanding, June 30, 1996 455,000 1.375-1.50 1.38
Granted 190,000 1.5625-2.1875 1.89
Exercised (41,000) 1.375-1.5625 1.40
-------- -------------- -----
Options outstanding, June 30, 1997 604,000 1.375-2.1875 1.54
Granted 416,000 2.75-3.844 3.72
Exercised (27,500) 1.375 1.38
-------- -------------- -----
Options outstanding, June 30, 1998 992,500 1.375-3.844 2.46
-------- -------------- -----
Options exercisable, June 30, 1998 377,500 $ 1.375-3.844 $2.04
======= ============== =====
</TABLE>
In addition, the Company has granted options outside the Plans, primarily to
directors and consultants at 100% of the fair market value per share at the date
of grant. The following is a summary of all transactions outside the Plans:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE WEIGHTED
SHARES PER SHARE AVERAGE
EXERCISE
PRICE
<S> <C> <C> <C>
Options outstanding, June 30, 1995 161,617 $.07-$5.69 $ .91
Granted 60,000 1.30 1.30
------- ---------- -----
Options outstanding, June 30, 1996 221,617 .07-5.69 1.02
Granted -- -- --
------- ---------- -----
Options outstanding, June 30, 1997 221,617 .07-5.69 1.02
Exercised (67,617) .07 .07
------- ---------- -----
Options outstanding, June 30, 1998 154,000 .50-5.69 1.43
------- ---------- -----
Options exercisable, June 30, 1998 130,000 $.50-$5.69 $1.46
======= ========== =====
</TABLE>
-26-
<PAGE> 27
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options granted in fiscal 1998, 1997 and 1996 using
the Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used and the weighted average information for the years
ended June 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
1998 1997 1996
<S> <C> <C> <C>
Risk-free interest rates 6.06% 6.95% 6.83%
Expected dividend yield -- -- --
Expected lives 7 years 7 years 7 years
Expected volatility 90% 87% 87%
Weighted average fair value of grants $3.02 $1.52 $1.12
Weighted average remaining contractual life of
options outstanding 8.33 years 8.16 years 8.57 years
The effect of applying SFAS No. 123 would be as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net (loss) income $(1,960,789) $(442,633) $405,710
As reported
Pro forma (2,340,964) (520,373) 391,610
Net (loss) income per share
As reported, basic and diluted $ (.32) $ (.07) $ .07
Pro forma, basic and diluted (.38) (.09) .06
</TABLE>
(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 currently enacted tax rates applied to any temporary
differences between the financial statement and tax bases of assets and
liabilities.
-27-
<PAGE> 28
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
The provision (benefit) for income taxes in the accompanying consolidated
statements of operations consists of the following for the three years
ended June 30, 1998:
1998 1997 1996
Current--
Federal $ -- $ 26,300 $ 67,000
State 1,000 1,000 3,000
Foreign -- (4,000) 33,000
------- -------- --------
1,000 23,300 103,000
------- -------- --------
Deferred--
Federal 10,500 (34,300) (57,000)
State 1,800 (4,000) (10,000)
------- -------- --------
12,300 (38,300) (67,000)
------- -------- --------
$13,300 $(15,000) $ 36,000
======= ======== ========
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the three years ended June 30, 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income tax (benefit) provision at federal
statutory rate (34.0)% (34.0)% 34.0%
Increase (decrease) in tax resulting from-
Temporary items with no tax benefit 2.2 6.1 7.3
Tax credits utilized -- -- (4.1)
Change in valuation allowance 32.5 22.9 (35.5)
Effect of state taxes -- (4.6) --
Prior year tax adjustments -- 5.2 5.0
Other -- 1.1 1.5
----- ----- -----
Effective tax rate 0.7% (3.3)% 8.2%
===== ===== =====
</TABLE>
-28-
<PAGE> 29
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Continued)
The components of the net deferred tax asset at June 30, 1998 and 1997
are approximately as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net operating loss carryforward $622,000 $ --
Reserves and accruals not yet deducted for tax purposes 316,000 311,000
Other temporary differences 18,000 24,000
-------- ---------
956,000 335,000
Valuation allowance (811,000) (178,000)
-------- ---------
Net deferred tax asset $145,000 $ 157,000
======== =========
</TABLE>
The Company has provided a valuation allowance to reduce the net deferred
tax asset to an amount the Company believes it is "more likely than not"
to be realized. The valuation allowance increased in fiscal 1998 due to
the generation of a net operating loss carryforward. The net deferred tax
asset represents the amount that can be carried back to offset the prior
years' tax liabilities, if necessary. As of June 30, 1998, the Company
has a net operating loss carryforward for U.S. federal income taxes of
approximately $1,800,000, which expires in 2013.
(7) PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan that covers
all eligible employees. The Company has accrued and charged to operations
an employer contribution to this plan of $50,000 in fiscal 1996. No
employer contributions were made in fiscal 1998 or 1997.
-29-
<PAGE> 30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None.
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, 1998. 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.
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(1)
3.2 By-laws of Precision Optics Corporation, Inc.(2)
4.1 Specimen common stock certificate(1)
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(3)
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(3)
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(3)
4.5 Promissory Note dated December 5, 1991 between the Company and
The First National Bank of Boston(4)
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.(3)
4.7 Common Stock Purchase Warrant dated June 30, 1998 issued to
Special Situations Private Equity Fund, L.P.
4.8 Common Stock Purchase Warrant dated June 30, 1998 issued to
Special Situations Technology Fund, L.P.
4.9 Registration Rights Agreement dated as of June 30, 1998 by and
among the Company, Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.
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(1)
10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan
amended to date (the "Plan")(5)
10.3 Three separate life insurance policies on the life of Richard
E. Forkey(1)
-30-
<PAGE> 31
10.4 Master Lease Finance Agreement dated November 3, 1993 between
the Company and BancBoston Leasing(5)
10.5 Second Amendment to Commercial Lease between the Company and
Equity dated December 9, 1994(6)
10.6 Lease dated November 1, 1995 between the Company and Janice M.
Bouchard, Trustee of Authority Drive Realty Trust(6)
10.7 Precision Optics Corporation, Inc. 1997 Incentive Plan
10.8 Stock Subscription Agreement dated as of June 30, 1998 by and
among the Company, Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.
21 Subsidiaries of Precision Optics Corporation, Inc.(6)
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking Statements(7)
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-18 (No. 33-36710-B).
(2) Incorporated herein by reference to the Company's 1991 Annual Report on
Form 10-KSB.
(3) Incorporated herein by reference to the Company's 1992 Annual Report on
Form 10-KSB.
(4) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 33-43929).
(5) Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-KSB.
(6) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-KSB.
(7) Incorporated herein by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1996.
(b) REPORTS ON FORM 8-K.
None.
-31-
<PAGE> 32
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 18, 1998 PRECISION OPTICS CORPORATION, INC.
By: /s/ Richard E. Forkey
------------------------------
Richard E. Forkey
Chairman of the Board,
Chief Executive Officer,
President and Treasurer
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 Chief Financial Officer and
executive officer) Clerk (principal financial and
accounting officer)
September 18, 1998 September 18, 1998
- --------------------------------- ----------------------------------
Date Date
By: /s/ Joel R. Pitlor By: /s/ Edward A. Benjamin
----------------------------- ------------------------------
Joel R. Pitlor Edward A. Benjamin
Director Director
September 18, 1998 September 18, 1998
- --------------------------------- ----------------------------------
Date Date
By: /s/ Robert R. Shannon By: /s/ H. Angus Macleod
----------------------------- ------------------------------
Robert R. Shannon H. Angus Macleod
Director Director
September 18, 1998 September 18, 1998
- --------------------------------- ----------------------------------
Date Date
By: /s/ Austin W. Marxe
-----------------------------
Austin W. Marxe
Director
September 18, 1998
- ---------------------------------
Date
-32-
<PAGE> 33
INDEX TO EXHIBITS
3.1 Articles of Organization of the Company(1)
3.2 By-laws of Precision Optics Corporation, Inc.(2)
4.1 Specimen common stock certificate(1)
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(3)
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(3)
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(3)
4.5 Promissory Note dated December 5, 1991 between the Company and
The First National Bank of Boston(4)
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.(3)
4.7 Common Stock Purchase Warrant dated June 30, 1998 issued to
Special Situations Private Equity Fund, L.P.
4.8 Common Stock Purchase Warrant dated June 30, 1998 issued to
Special Situations Technology Fund, L.P.
4.9 Registration Rights Agreement dated as of June 30, 1998 by and
among the Company, Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.
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(1)
10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan
amended to date (the "Plan")(5)
10.3 Three separate life insurance policies on the life of Richard
E. Forkey(1)
10.4 Master Lease Finance Agreement dated November 3, 1993 between
the Company and BancBoston Leasing(5)
10.5 Second Amendment to Commercial Lease between the Company and
Equity dated December 9, 1994(6)
10.6 Lease dated November 1, 1995 between the Company and Janice M.
Bouchard, Trustee of Authority Drive Realty Trust(6)
10.7 Precision Optics Corporation, Inc. 1997 Incentive Plan
10.8 Stock Subscription Agreement dated as of June 30, 1998 by and
among the Company, Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.
21 Subsidiaries of Precision Optics Corporation, Inc.(6)
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking Statements(7)
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-18 (No. 33-36710-B).
(2) Incorporated herein by reference to the Company's 1991 Annual Report on
Form 10-KSB.
(3) Incorporated herein by reference to the Company's 1992 Annual Report on
Form 10-KSB.
(4) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 33-43929).
(5) Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-KSB.
(6) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-KSB.
(7) Incorporated herein by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1996.
-33-
<PAGE> 1
Exhibit 4.7
PRECISION OPTICS CORPORATION, INC.
SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
COMMON STOCK PURCHASE WARRANT
Precision Optics Corporation, Inc., a Massachusetts corporation (the
"COMPANY"), hereby agrees that, for value received, Special Situations Private
Equity Fund, L.P., a Delaware limited partnership, is entitled, subject to the
terms set forth below, to purchase from the Company at any time or from time to
time after June 30, 1998, and before 5:00 p.m., Boston, Massachusetts time, on
June 30, 2003, in whole or in part, an aggregate of 375,000 shares (the "WARRANT
SHARES") of the common stock of the Company, $0.01 par value per share (the
"COMMON STOCK"), at a price per share of $4.00 (the "INITIAL WARRANT PRICE").
1. EXERCISE OF WARRANT. The purchase rights exercised by this Warrant
shall be exercised by the holder surrendering this Warrant to the Company at its
principal office, accompanied by payment, in cash or by certified or official
bank check payable to the order of the Company, of the Warrant Price (as defined
in Section 3.a) payable in respect of the Warrant Shares being purchased, along
with the exercise form attached hereto duly executed by such holder. If less
than all of the Warrant Shares are purchased, the Company will, upon such
exercise, execute and deliver to the holder hereof a new Warrant (dated the date
thereof) evidencing the number of Warrant Shares not so purchased. Two business
days after the exercise of this Warrant and payment of the Warrant Price, the
Company will cause to be issued in the name of and delivered to the holder
hereof, or as such holder may direct, a certificate or certificates representing
the shares purchased. The Company may require that such certificate or
certificates contain on the face thereof legends substantially as follows:
"The shares represented by this certificate have been acquired
for investment and have not been registered under the Securities Act of
1933, as amended (the "Act") or any applicable state securities laws
and may not be offered, sold or otherwise transferred without an
effective registration statement relating thereto or an opinion of
counsel in form and substance satisfactory to the Company that such
registration is not required under the Act or such state laws."
2. NEGOTIABILITY. This Warrant is issued upon the following terms, to
which each taker or owner hereof consents and agrees:
<PAGE> 2
a. This Warrant may be sold, assigned or transferred by endorsement
(by the holder hereof executing the form of assignment attached hereto) and
delivery in the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
b. Subject to the next paragraph, any person in possession of this
Warrant, properly endorsed, is authorized to represent himself or herself as
absolute owner hereof and is granted power to transfer absolute title hereto by
endorsement and delivery hereof to a holder in due course. Each prior taker or
owner waives and renounces all of his, her or its equities or rights in this
Warrant in favor of every such holder in due course, and every such holder in
the due course shall acquire absolute title hereto and to all rights represented
hereby.
c. Until this Warrant is transferred on the books of the Company, the
Company may treat the registered holder of this Warrant as absolute owner hereof
for all purposes without being affected by any notice to the contrary.
3. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE.
a. General; Number of Shares; Warrant Price. The number of shares of
Common Stock which the holder of this Warrant shall be entitled to receive upon
each exercise hereof shall be determined by multiplying the number of shares of
Common Stock which would otherwise (but for the provisions of this Section 3) be
issuable upon such exercise, as designated by the holder of this Warrant
pursuant to Section 1 hereof, by the fraction of which (a) the numerator is the
Initial Warrant Price and (b) the denominator is the Warrant Price in effect on
the date of such exercise. The "WARRANT PRICE" shall initially be the Initial
Warrant Price, shall be adjusted and readjusted from time to time as provided in
this Section 3 and, as so adjusted or readjusted, shall remain in effect until a
further adjustment or readjustment thereof is required by this Section 3.
b. Issuance of Additional Shares of Common Stock. In case the Company
at any time or from time to time after the date hereof shall issue or sell
Additional Shares of Common Stock (as defined below) without consideration or
for a consideration per share less than the Current Market Price in effect
immediately prior to such issue or sale, then, and in each such case, subject to
Section 3.g hereof, such Warrant Price shall be reduced, concurrently with such
issue or sale, to a price (calculated to the nearest .001 of a cent) determined
by multiplying such Warrant Price by a fraction:
i. the numerator of which shall be (i) the number of shares of
Common Stock outstanding immediately prior to such issue or
sale plus (ii) the number of shares of Common Stock which the
aggregate consideration received by the Company for the total
number of such Additional Shares of Common Stock so issued or
sold would purchase at such Current Market Price; and
-2-
<PAGE> 3
ii. the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or
sale.
For purposes of this Warrant, (i) the term "ADDITIONAL SHARES OF COMMON STOCK"
means all shares (including treasury shares) of Common Stock issued or sold (or,
pursuant to Section 3.c or 3.d hereof, deemed to be issued) by the Company after
the date hereof, whether or not subsequently reacquired or retired by the
Company, other than the shares of Common Stock issued upon the exercise of this
Warrant and (ii) the term "CURRENT MARKET PRICE" means, on any date specified
herein, the average closing bid price, for the ten most recent trading days, of
the Common Stock on the Nasdaq Small Cap Market or, if the Common Stock shall
not then be quoted on the Nasdaq Small Cap Market but shall otherwise be traded
in the over-the-counter market, on such over-the-counter market. If at any time
the Common Stock shall not be quoted on the Nasdaq Small Cap Market or otherwise
traded in the over-the-counter market, the "Current Market Price" of a share of
Common Stock shall be deemed to be the fair value thereof (as determined in good
faith by the Board of Directors) as of a date which shall be within 15 days of
the date of determination.
c. Treatment of Options and Convertible Securities. In case the
Company at any time or from time to time after the date hereof shall issue,
sell, grant or assume any Options or Convertible Securities (both as defined
below), then, and in each such case, the maximum number of Additional Shares of
Common Stock (as set forth in the instrument relating thereto, without regard to
any provisions contained therein for a subsequent adjustment of such number the
purpose of which is to protect against dilution) at any time issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue, sale, grant or assumption; provided, however, that such Additional Shares
of Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 3.e hereof) of such shares would be
less than the Current Market Price in effect on the date of and immediately
prior to such issue, sale, grant or assumption, as the case may be; and
provided, further, that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
i. no further adjustment of the Warrant Price shall be made upon
the exercise of such Options or the conversion or exchange of
such Convertible Securities and the consequent issue or sale
of Convertible Securities or shares of Common Stock;
ii. if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any
increase in the consideration payable to the Company, or
decrease in the number of Additional Shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof
(by change of rate or otherwise), the Warrant Price computed
upon the original issue, sale, grant or assumption thereof,
and any subsequent
-3-
<PAGE> 4
adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options, or
the rights of conversion or exchange under such Convertible
Securities, which are outstanding at such time;
iii. upon the expiration (or purchase by the Company and
cancellation or retirement) of any such Options which shall
not have been exercised, or the expiration of any rights of
conversion or exchange under any such Convertible Securities
which (or purchase by the Company and cancellation or
retirement of any such Convertible Securities the rights of
conversion or exchange under which) shall not have been
exercised, the Warrant Price computed upon the original
issue, sale, grant or assumption thereof, and any subsequent
adjustments based thereon, shall, upon (and effective as of)
such expiration (or such cancellation or retirement, as the
case may be), be recomputed as if:
(A) in the case of Options or Convertible Securities, the
only Additional Shares of Common Stock issued or sold
were the Additional Shares of Common Stock, if any,
actually issued or sold upon the exercise of such
Options or the conversion or exchange of such
Convertible Securities and the consideration received
therefor was the consideration actually received by the
Company for the issue, sale, grant or assumption of all
such Options, whether or not exercised, plus the
consideration actually received by the Company upon such
exercise, or for the issue or sale of all such
Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any,
actually received by the Company upon such conversion or
exchange, and
(B) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued or
sold upon the exercise of such Options were issued at
the time of the issue, sale, grant or assumption of such
Options, and the consideration received by the Company
for the Additional Shares of Common Stock deemed to have
then been issued was the consideration actually received
by the Company for the issue, sale, grant or assumption
of all such Options, whether or not exercised, plus the
consideration deemed to have been received by the
Company (pursuant to Section 3.e hereof) upon the issue
or sale of such Convertible Securities with respect to
which such Options were actually exercised;
-4-
<PAGE> 5
For purposes of this Warrant, (i) the term "OPTIONS" means rights, options or
warrants to subscribe for, purchase or otherwise acquire either Additional
Shares of Common Stock or Convertible Securities and (ii) the term "CONVERTIBLE
SECURITIES" means all evidences of indebtedness, shares of stock (other than
Common Stock) or other securities directly or indirectly convertible into or
exchangeable for Additional Shares of Common Stock.
d. Treatment of Stock Dividends, Stock Splits, etc. In case the
Company at any time or from time to time after the date hereof shall declare or
pay any dividend on the Common Stock payable in Common Stock, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in Common Stock), then, and in each such case, Additional Shares of
Common Stock shall be deemed to have been issued (i) in the case of any such
dividend, immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend or (ii) in the case of any such subdivision, at the close of business
on the day immediately prior to the day upon which such corporate action becomes
effective.
e. Computation of Consideration. For the purposes of this Section 3:
i. the consideration for the issue or sale of any Additional
Shares of Common Stock shall, irrespective of the accounting
treatment of such consideration:
(A) insofar as it consists of cash, be computed at the
amount of cash actually received by the Company, without
deducting any expenses paid or incurred by the Company
or any commissions or compensations paid or concessions
or discounts allowed to underwriters, dealers or others
performing similar services in connection with such
issue or sale;
(B) insofar as it consists of property (including
securities) other than cash actually received by the
Company, or of consideration other than cash or of other
property, be computed at the fair value thereof at the
time of such issue or sale, as determined in good faith
by the Board of Directors of the Company;
(C) in case Additional Shares of Common Stock are issued or
sold together with other stock or securities or other
assets of the Company for a consideration which covers
both, be the portion of such consideration so received,
computed as provided in clauses (A) and (B) above,
allocable to such Additional Shares of Common Stock, all
as determined in good faith by the Board of Directors of
the Company;
-5-
<PAGE> 6
ii. Additional Shares of Common Stock deemed to have been issued
pursuant to Section 2.c hereof shall be deemed to have been
issued for a consideration per share determined by dividing:
(A) the total amount of cash and other property, if any,
received and receivable by the Company as direct consideration for
the issue, sale, grant or assumption of the Options or Convertible
Securities in question, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration the purpose of which
is to protect against dilution) payable to the Company upon the
exercise in full of such Options or the conversion or exchange of
such Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, in each case computing such consideration
as provided in Section 3.e.i.,
by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number the purpose of which is to protect against dilution)
issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities; and
iii. Additional Shares of Common Stock deemed to have been issued
pursuant to Section 3.d hereof shall be deemed to have been
issued for no consideration.
f. Adjustments for Combinations, etc. In case the outstanding shares
of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Warrant Price in
effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
g. Minimum Adjustment of Warrant Price. If the amount of any
adjustment of the Warrant Price required pursuant to this Section 3 would be
less than one percent (1%) of the Warrant Price in effect at the time such
adjustment is otherwise so required to be made, such amount shall be carried
forward and adjustment with respect thereto made at the time of and together
with any subsequent adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate at least one percent (1%)
of such Warrant Price.
-6-
<PAGE> 7
h. Shares Deemed Outstanding. For all purposes of the computations to
be made pursuant to this Section 3: (i) immediately after any Additional Shares
of Common Stock are deemed to have been issued pursuant to Section 3.c or 3.d
hereof, such Additional Shares shall be deemed to be outstanding, (ii) treasury
shares shall not be deemed to be outstanding, (iii) no adjustment shall be made
in the Warrant Price upon the issuance of Common Stock, Options and Convertible
Securities to employees, directors of and consultants to the Company pursuant to
the Company's 1997 Incentive Plan (under which a total of 1,200,000 shares of
Common Stock have been reserved for issuance) in respect of services rendered to
the Company by such persons and (iv) no adjustment shall be made in the Warrant
Price upon the issuance of shares of Common Stock pursuant to Options and
Convertible Securities outstanding on the date hereof, including without
limitation the Warrants, but this Section 3.h shall not prevent other
adjustments in the Warrant Price arising by virtue of such outstanding Options
or Convertible Securities pursuant to the provisions of Section 3.c hereof.
4. MERGER; REORGANIZATION. In case of any capital reorganization or
any reclassification of the shares of Common Stock of the Company, or in the
case of any consolidation with or merger of the Company into or with another
corporation or the sale of all or substantially all of its assets to another
corporation effected in such a manner that the holders of Common Stock shall be
entitled to receive stock, securities or assets with respect to or in exchange
for Common Stock, then, as part of such reorganization, reclassification,
consolidation, merger or sale, as the case may be, lawful provision shall be
made so that the holder of the Warrant shall have the right thereafter to
receive, upon the exercise hereof, the kind and amount of shares of stock or
other securities or property which the holder would have been entitled to
receive if, immediately before such reorganization, reclassification,
consolidation or merger, the holder had held the number of shares of Common
Stock which were then purchasable upon the exercise of the Warrant had the
Warrant been exercised. In any such case, appropriate adjustment (as determined
in good faith by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the rights and
interests thereafter of the holder of the Warrant, to the end that the
provisions set forth herein (including provisions with respect to adjustments of
the exercise price) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other property thereafter deliverable
upon the exercise of the Warrant.
5. REPORT AS TO ADJUSTMENTS. When any adjustment is required to be
made in the Warrant Price, the Company shall forthwith determine the new Warrant
Price; and
a. Prepare and retain on file a statement describing in reasonable
detail the method used in arriving at the new Warrant Price; and
b. Cause a copy of such statement to be mailed to the holder of this
Warrant as of a date within ten days after the date when the circumstances
giving rise to the adjustment occurred.
-7-
<PAGE> 8
6. INVESTMENT INTENT. The Warrant Shares are subject to the
Registration Rights Agreement dated as of June 30, 1998 between the Company,
Special Situations Private Equity Fund, L.P. and Special Situations Technology
Fund, L.P. However, as of the date hereof, neither this Warrant nor the Warrant
Shares have been registered under the Securities Act of 1933, as amended (the
"SECURITIES ACT"). The Warrant is issued to the holder on the condition that
this Warrant and any Common Stock purchased upon exercise of this Warrant are or
will be purchased for investment purposes and not with an intent to distribute
the same. Before making any disposition of this Warrant or of any Common Stock
purchased upon exercise of this Warrant, the holder will give written notice to
the Company describing briefly the manner of any such proposed disposition.
7. COMPANY CALL. If, prior to the exercise or earlier expiration of
this Warrant pursuant to the terms hereof, the last sale price of the Common
Stock on the Nasdaq Small Cap Market equals or exceeds $6.00 on each of any 20
consecutive trading days, the Company shall be entitled, within 10 trading days
of the last of such 20 consecutive trading days, at its option, to issue a
notice (a "CALL NOTICE") to the holder of this Warrant to the effect that the
Company is exercising its rights pursuant to this Section 7. Upon receipt of a
Call Notice (which receipt will be deemed to occur on the one business day
following the dispatch of such Call Notice by the Company by a nationally
recognized overnight courier), the holder shall have until 5.00 p.m., Boston,
Massachusetts time, on the tenth business day following receipt of the Call
Notice to exercise the Warrant in accordance with Section 1 hereof. Upon the
expiration of such ten day period, if not sooner exercised, this Warrant will
terminate and the holder's and the Company's rights and obligations hereunder
will cease without payment of consideration. Notwithstanding the foregoing
provisions of this Section 7, the Company may not issue a Call Notice unless and
until a registration statement is effective, or no longer required, with respect
to the resale of the Warrant Shares.
8. NOTICES. The Company shall mail to the registered holder of this
Warrant, at his or her last address appearing on the books of the Company, not
less than 20 days prior to the date on which (a) a record will be taken for the
purpose of determining the holders of Common Stock entitled to dividends (other
than cash dividends) or subscription right, or (b) a record will be taken (or in
lieu thereof, the transfer books will be closed) for the purpose of determining
the holders of Common Stock entitled to notice of and to vote at a meeting of
stockholders at which any capital reorganization, reclassification of shares of
Common Stock, consolidation, merger, dissolution, liquidation, winding up or
sale of substantially all of the Company's assets shall be considered and acted
upon.
Notwithstanding such notice requirements, until exercise and payment
therefor, any holder of this Warrant shall not be deemed a shareholder of the
Company with respect to shares of Common Stock underlying the Warrant.
-8-
<PAGE> 9
9. RESERVATION OF COMMON STOCK. A number of shares of Common Stock
sufficient to provide for the exercise of this Warrant on the terms and
conditions herein set forth shall at all times be reserved for the exercise of
such Warrant.
10. MISCELLANEOUS. Whenever reference is made herein to the issuance
or sale of shares of Common Stock, the term "Common Stock" shall include any
stock of any class of the Company other than preferred stock with a fixed limit
on dividends and a fixed amount payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company.
The Company will not, by amendment of its Articles of Organization or
through reorganization, consolidation, merger, dissolution or sale of assets, or
by any other voluntary act or deed, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by the Company, but will, at all times in good faith,
assist, insofar as it is able, in the carrying out of all provisions hereof and
in the taking of all other action which may be necessary in order to protect the
rights of the holder hereof against dilution.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. References to the "holder of" include the
immediate holder of Warrant Shares purchased on the exercise of this Warrant and
the holder of any new Warrants issued pursuant to Section 1 upon the purchase of
less than all of the Common Stock purchasable under this Warrant, and the word
"holder" shall include the plural thereof.
All shares of Common Stock or other securities issued upon the exercise
of this Warrant shall be validly issued, fully paid and nonassessable, and the
Company will pay all taxes in respect of the issuance thereof.
[Remainder of this page intentionally left blank.]
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<PAGE> 10
IN WITNESS WHEREOF, this Warrant has been duly executed by Precision
Optics Corporation, Inc. this 30th day of June, 1998.
PRECISION OPTICS CORPORATION, INC.
By: /s/ Richard E. Forkey
------------------------------
President
[Warrant]
<PAGE> 11
EXERCISE FORM
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
To Precision Optics Corporation, Inc.:
The undersigned, the holder of the within warrant, hereby irrevocably
elects to exercise the purchase right represented by such warrant for, and to
purchase thereunder *________________ shares of the Common Stock of Precision
Optics Corporation, Inc., and herewith makes payment of $______ therefor, and
requests that the certificates for such shares be issued in the name of, and
delivered to the undersigned.
Dated: _______________ SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
By: __________________________
Title:
[Address]
*Insert here all or such portion of the number of shares called for on the face
of the within warrant in 10,000 or more share increments with respect to which
the holder desires to exercise the purchase right represented thereby, without
adjustment for any other or additional stock, other securities, property or cash
which may be deliverable on such exercise.
<PAGE> 12
ASSIGNMENT FORM
(TO BE SIGNED ONLY UPON TRANSFER OF THE WARRANT)
For value received, the undersigned hereby sells, assigns and transfers
unto _______________________ the right represented by the within warrant to
purchase _________________ of the shares of Common Stock of Precision Optics
Corporation, Inc. to which the within warrant relates and appoints
_____________________ attorney to transfer said right on the books of Precision
Optics Corporation, Inc., with full power of substitution in the premises.
Dated:________________ SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
By: ________________________________
Title:
<PAGE> 1
Exhibit 4.8
PRECISION OPTICS CORPORATION, INC.
SPECIAL SITUATIONS TECHNOLOGY FUND, L.P.
COMMON STOCK PURCHASE WARRANT
Precision Optics Corporation, Inc., a Massachusetts corporation (the
"COMPANY"), hereby agrees that, for value received, Special Situations
Technology Fund, L.P., a Delaware limited partnership, is entitled, subject to
the terms set forth below, to purchase from the Company at any time or from time
to time after June 30, 1998, and before 5:00 p.m., Boston, Massachusetts time,
on June 30, 2003, in whole or in part, an aggregate of 125,000 shares (the
"WARRANT SHARES") of the common stock of the Company, $0.01 par value per share
(the "COMMON STOCK"), at a price per share of $4.00 (the "INITIAL WARRANT
PRICE").
1. EXERCISE OF WARRANT. The purchase rights exercised by this Warrant
shall be exercised by the holder surrendering this Warrant to the Company at its
principal office, accompanied by payment, in cash or by certified or official
bank check payable to the order of the Company, of the Warrant Price (as defined
in Section 3.a) payable in respect of the Warrant Shares being purchased, along
with the exercise form attached hereto duly executed by such holder. If less
than all of the Warrant Shares are purchased, the Company will, upon such
exercise, execute and deliver to the holder hereof a new Warrant (dated the date
thereof) evidencing the number of Warrant Shares not so purchased. Two business
days after the exercise of this Warrant and payment of the Warrant Price, the
Company will cause to be issued in the name of and delivered to the holder
hereof, or as such holder may direct, a certificate or certificates representing
the shares purchased. The Company may require that such certificate or
certificates contain on the face thereof legends substantially as follows:
"The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of
1933, as amended (the "Act") or any applicable state securities laws
and may not be offered, sold or otherwise transferred without an
effective registration statement relating thereto or an opinion of
counsel in form and substance satisfactory to the Company that such
registration is not required under the Act or such state laws."
2. NEGOTIABILITY. This Warrant is issued upon the following terms, to
which each taker or owner hereof consents and agrees:
<PAGE> 2
a. This Warrant may be sold, assigned or transferred by endorsement
(by the holder hereof executing the form of assignment attached hereto) and
delivery in the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
b. Subject to the next paragraph, any person in possession of this
Warrant, properly endorsed, is authorized to represent himself or herself as
absolute owner hereof and is granted power to transfer absolute title hereto by
endorsement and delivery hereof to a holder in due course. Each prior taker or
owner waives and renounces all of his, her or its equities or rights in this
Warrant in favor of every such holder in due course, and every such holder in
the due course shall acquire absolute title hereto and to all rights represented
hereby.
c. Until this Warrant is transferred on the books of the Company, the
Company may treat the registered holder of this Warrant as absolute owner hereof
for all purposes without being affected by any notice to the contrary.
3. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE.
a. General; Number of Shares; Warrant Price. The number of shares of
Common Stock which the holder of this Warrant shall be entitled to receive upon
each exercise hereof shall be determined by multiplying the number of shares of
Common Stock which would otherwise (but for the provisions of this Section 3) be
issuable upon such exercise, as designated by the holder of this Warrant
pursuant to Section 1 hereof, by the fraction of which (a) the numerator is the
Initial Warrant Price and (b) the denominator is the Warrant Price in effect on
the date of such exercise. The "WARRANT PRICE" shall initially be the Initial
Warrant Price, shall be adjusted and readjusted from time to time as provided in
this Section 3 and, as so adjusted or readjusted, shall remain in effect until a
further adjustment or readjustment thereof is required by this Section 3.
b. Issuance of Additional Shares of Common Stock. In case the Company
at any time or from time to time after the date hereof shall issue or sell
Additional Shares of Common Stock (as defined below) without consideration or
for a consideration per share less than the Current Market Price in effect
immediately prior to such issue or sale, then, and in each such case, subject to
Section 3.g hereof, such Warrant Price shall be reduced, concurrently with such
issue or sale, to a price (calculated to the nearest .001 of a cent) determined
by multiplying such Warrant Price by a fraction:
i. the numerator of which shall be (i) the number of shares of
Common Stock outstanding immediately prior to such issue or
sale plus (ii) the number of shares of Common Stock which the
aggregate consideration received by the Company for the total
number of such Additional Shares of Common Stock so issued or
sold would purchase at such Current Market Price; and
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<PAGE> 3
ii. the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or
sale.
For purposes of this Warrant, (i) the term "ADDITIONAL SHARES OF COMMON STOCK"
means all shares (including treasury shares) of Common Stock issued or sold (or,
pursuant to Section 3.c or 3.d hereof, deemed to be issued) by the Company after
the date hereof, whether or not subsequently reacquired or retired by the
Company, other than the shares of Common Stock issued upon the exercise of this
Warrant and (ii) the term "CURRENT MARKET PRICE" means, on any date specified
herein, the average closing bid price, for the ten most recent trading days, of
the Common Stock on the Nasdaq Small Cap Market or, if the Common Stock shall
not then be quoted on the Nasdaq Small Cap Market but shall otherwise be traded
in the over-the-counter market, on such over-the-counter market. If at any time
the Common Stock shall not be quoted on the Nasdaq Small Cap Market or otherwise
traded in the over-the-counter market, the "Current Market Price" of a share of
Common Stock shall be deemed to be the fair value thereof (as determined in good
faith by the Board of Directors) as of a date which shall be within 15 days of
the date of determination.
c. Treatment of Options and Convertible Securities. In case the
Company at any time or from time to time after the date hereof shall issue,
sell, grant or assume any Options or Convertible Securities (both as defined
below), then, and in each such case, the maximum number of Additional Shares of
Common Stock (as set forth in the instrument relating thereto, without regard to
any provisions contained therein for a subsequent adjustment of such number the
purpose of which is to protect against dilution) at any time issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue, sale, grant or assumption; provided, however, that such Additional Shares
of Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 3.e hereof) of such shares would be
less than the Current Market Price in effect on the date of and immediately
prior to such issue, sale, grant or assumption, as the case may be; and
provided, further, that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
i. no further adjustment of the Warrant Price shall be made upon
the exercise of such Options or the conversion or exchange of
such Convertible Securities and the consequent issue or sale
of Convertible Securities or shares of Common Stock;
ii. if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any
increase in the consideration payable to the Company, or
decrease in the number of Additional Shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof
(by change of rate or otherwise), the Warrant Price computed
upon the original issue, sale, grant or assumption thereof,
and any subsequent
-3-
<PAGE> 4
adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options, or
the rights of conversion or exchange under such Convertible
Securities, which are outstanding at such time;
iii. upon the expiration (or purchase by the Company and
cancellation or retirement) of any such Options which shall
not have been exercised, or the expiration of any rights of
conversion or exchange under any such Convertible Securities
which (or purchase by the Company and cancellation or
retirement of any such Convertible Securities the rights of
conversion or exchange under which) shall not have been
exercised, the Warrant Price computed upon the original
issue, sale, grant or assumption thereof, and any subsequent
adjustments based thereon, shall, upon (and effective as of)
such expiration (or such cancellation or retirement, as the
case may be), be recomputed as if:
(A) in the case of Options or Convertible Securities, the
only Additional Shares of Common Stock issued or sold
were the Additional Shares of Common Stock, if any,
actually issued or sold upon the exercise of such
Options or the conversion or exchange of such
Convertible Securities and the consideration received
therefor was the consideration actually received by the
Company for the issue, sale, grant or assumption of all
such Options, whether or not exercised, plus the
consideration actually received by the Company upon such
exercise, or for the issue or sale of all such
Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any,
actually received by the Company upon such conversion or
exchange, and
(B) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued or
sold upon the exercise of such Options were issued at
the time of the issue, sale, grant or assumption of such
Options, and the consideration received by the Company
for the Additional Shares of Common Stock deemed to have
then been issued was the consideration actually received
by the Company for the issue, sale, grant or assumption
of all such Options, whether or not exercised, plus the
consideration deemed to have been received by the
Company (pursuant to Section 3.e hereof) upon the issue
or sale of such Convertible Securities with respect to
which such Options were actually exercised;
-4-
<PAGE> 5
For purposes of this Warrant, (i) the term "OPTIONS" means rights, options or
warrants to subscribe for, purchase or otherwise acquire either Additional
Shares of Common Stock or Convertible Securities and (ii) the term "CONVERTIBLE
SECURITIES" means all evidences of indebtedness, shares of stock (other than
Common Stock) or other securities directly or indirectly convertible into or
exchangeable for Additional Shares of Common Stock.
d. Treatment of Stock Dividends, Stock Splits, etc. In case the
Company at any time or from time to time after the date hereof shall declare or
pay any dividend on the Common Stock payable in Common Stock, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in Common Stock), then, and in each such case, Additional Shares of
Common Stock shall be deemed to have been issued (i) in the case of any such
dividend, immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend or (ii) in the case of any such subdivision, at the close of business
on the day immediately prior to the day upon which such corporate action becomes
effective.
e. Computation of Consideration. For the purposes of this Section 3:
i. the consideration for the issue or sale of any Additional
Shares of Common Stock shall, irrespective of the accounting
treatment of such consideration:
(A) insofar as it consists of cash, be computed at the
amount of cash actually received by the Company, without
deducting any expenses paid or incurred by the Company
or any commissions or compensations paid or concessions
or discounts allowed to underwriters, dealers or others
performing similar services in connection with such
issue or sale;
(B) insofar as it consists of property (including
securities) other than cash actually received by the
Company, or of consideration other than cash or of other
property, be computed at the fair value thereof at the
time of such issue or sale, as determined in good faith
by the Board of Directors of the Company;
(C) in case Additional Shares of Common Stock are issued or
sold together with other stock or securities or other
assets of the Company for a consideration which covers
both, be the portion of such consideration so received,
computed as provided in clauses (A) and (B) above,
allocable to such Additional Shares of Common Stock, all
as determined in good faith by the Board of Directors of
the Company;
-5-
<PAGE> 6
ii. Additional Shares of Common Stock deemed to have been issued
pursuant to Section 2.c hereof shall be deemed to have been
issued for a consideration per share determined by dividing:
(A) the total amount of cash and other property, if any,
received and receivable by the Company as direct consideration for
the issue, sale, grant or assumption of the Options or Convertible
Securities in question, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration the purpose of which
is to protect against dilution) payable to the Company upon the
exercise in full of such Options or the conversion or exchange of
such Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, in each case computing such consideration
as provided in Section 3.e.i.,
by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number the purpose of which is to protect against dilution)
issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities; and
iii. Additional Shares of Common Stock deemed to have been issued
pursuant to Section 3.d hereof shall be deemed to have been
issued for no consideration.
f. Adjustments for Combinations, etc. In case the outstanding shares
of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Warrant Price in
effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
g. Minimum Adjustment of Warrant Price. If the amount of any
adjustment of the Warrant Price required pursuant to this Section 3 would be
less than one percent (1%) of the Warrant Price in effect at the time such
adjustment is otherwise so required to be made, such amount shall be carried
forward and adjustment with respect thereto made at the time of and together
with any subsequent adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate at least one percent (1%)
of such Warrant Price.
-6-
<PAGE> 7
h. Shares Deemed Outstanding. For all purposes of the computations to
be made pursuant to this Section 3: (i) immediately after any Additional Shares
of Common Stock are deemed to have been issued pursuant to Section 3.c or 3.d
hereof, such Additional Shares shall be deemed to be outstanding, (ii) treasury
shares shall not be deemed to be outstanding, (iii) no adjustment shall be made
in the Warrant Price upon the issuance of Common Stock, Options and Convertible
Securities to employees, directors of and consultants to the Company pursuant to
the Company's 1997 Incentive Plan (under which a total of 1,200,000 shares of
Common Stock have been reserved for issuance) in respect of services rendered to
the Company by such persons and (iv) no adjustment shall be made in the Warrant
Price upon the issuance of shares of Common Stock pursuant to Options and
Convertible Securities outstanding on the date hereof, including without
limitation the Warrants, but this Section 3.h shall not prevent other
adjustments in the Warrant Price arising by virtue of such outstanding Options
or Convertible Securities pursuant to the provisions of Section 3.c hereof.
4. MERGER; REORGANIZATION. In case of any capital reorganization or
any reclassification of the shares of Common Stock of the Company, or in the
case of any consolidation with or merger of the Company into or with another
corporation or the sale of all or substantially all of its assets to another
corporation effected in such a manner that the holders of Common Stock shall be
entitled to receive stock, securities or assets with respect to or in exchange
for Common Stock, then, as part of such reorganization, reclassification,
consolidation, merger or sale, as the case may be, lawful provision shall be
made so that the holder of the Warrant shall have the right thereafter to
receive, upon the exercise hereof, the kind and amount of shares of stock or
other securities or property which the holder would have been entitled to
receive if, immediately before such reorganization, reclassification,
consolidation or merger, the holder had held the number of shares of Common
Stock which were then purchasable upon the exercise of the Warrant had the
Warrant been exercised. In any such case, appropriate adjustment (as determined
in good faith by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the rights and
interests thereafter of the holder of the Warrant, to the end that the
provisions set forth herein (including provisions with respect to adjustments of
the exercise price) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other property thereafter deliverable
upon the exercise of the Warrant.
5. REPORT AS TO ADJUSTMENTS. When any adjustment is required to be
made in the Warrant Price, the Company shall forthwith determine the new Warrant
Price; and
a. Prepare and retain on file a statement describing in reasonable
detail the method used in arriving at the new Warrant Price; and
b. Cause a copy of such statement to be mailed to the holder of this
Warrant as of a date within ten days after the date when the circumstances
giving rise to the adjustment occurred.
-7-
<PAGE> 8
6. INVESTMENT INTENT. The Warrant Shares are subject to the
Registration Rights Agreement dated as of June 30, 1998 by and among the
Company, Special Situations Private Equity Fund, L.P. and Special Situations
Technology Fund, L.P. However, as of the date hereof, neither this Warrant nor
the Warrant Shares have been registered under the Securities Act of 1933, as
amended (the "SECURITIES ACT"). The Warrant is issued to the holder on the
condition that this Warrant and any Common Stock purchased upon exercise of this
Warrant are or will be purchased for investment purposes and not with an intent
to distribute the same. Before making any disposition of this Warrant or of any
Common Stock purchased upon exercise of this Warrant, the holder will give
written notice to the Company describing briefly the manner of any such proposed
disposition.
7. COMPANY CALL. If, prior to the exercise or earlier expiration of
this Warrant pursuant to the terms hereof, the last sale price of the Common
Stock on the Nasdaq Small Cap Market equals or exceeds $6.00 on each of any 20
consecutive trading days, the Company shall be entitled, within 10 trading days
of the last of such 20 consecutive trading days, at its option, to issue a
notice (a "CALL NOTICE") to the holder of this Warrant to the effect that the
Company is exercising its rights pursuant to this Section 7. Upon receipt of a
Call Notice (which receipt will be deemed to occur on the one business day
following the dispatch of such Call Notice by the Company by a nationally
recognized overnight courier), the holder shall have until 5.00 p.m., Boston,
Massachusetts time, on the tenth business day following receipt of the Call
Notice to exercise the Warrant in accordance with Section 1 hereof. Upon the
expiration of such ten day period, if not sooner exercised, this Warrant will
terminate and the holder's and the Company's rights and obligations hereunder
will cease without payment of consideration. Notwithstanding the foregoing
provisions of this Section 7, the Company may not issue a Call Notice unless and
until a registration statement is effective, or no longer required, with respect
to the resale of the Warrant Shares.
8. NOTICES. The Company shall mail to the registered holder of this
Warrant, at his or her last address appearing on the books of the Company, not
less than 20 days prior to the date on which (a) a record will be taken for the
purpose of determining the holders of Common Stock entitled to dividends (other
than cash dividends) or subscription right, or (b) a record will be taken (or in
lieu thereof, the transfer books will be closed) for the purpose of determining
the holders of Common Stock entitled to notice of and to vote at a meeting of
stockholders at which any capital reorganization, reclassification of shares of
Common Stock, consolidation, merger, dissolution, liquidation, winding up or
sale of substantially all of the Company's assets shall be considered and acted
upon.
Notwithstanding such notice requirements, until exercise and payment
therefor, any holder of this Warrant shall not be deemed a shareholder of the
Company with respect to shares of Common Stock underlying the Warrant.
-8-
<PAGE> 9
9. RESERVATION OF COMMON STOCK. A number of shares of Common Stock
sufficient to provide for the exercise of this Warrant on the terms and
conditions herein set forth shall at all times be reserved for the exercise of
such Warrant.
10. MISCELLANEOUS. Whenever reference is made herein to the issuance
or sale of shares of Common Stock, the term "Common Stock" shall include any
stock of any class of the Company other than preferred stock with a fixed limit
on dividends and a fixed amount payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company.
The Company will not, by amendment of its Articles of Organization or
through reorganization, consolidation, merger, dissolution or sale of assets, or
by any other voluntary act or deed, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by the Company, but will, at all times in good faith,
assist, insofar as it is able, in the carrying out of all provisions hereof and
in the taking of all other action which may be necessary in order to protect the
rights of the holder hereof against dilution.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. References to the "holder of" include the
immediate holder of Warrant Shares purchased on the exercise of this Warrant and
the holder of any new Warrants issued pursuant to Section 1 upon the purchase of
less than all of the Common Stock purchasable under this Warrant, and the word
"holder" shall include the plural thereof.
All shares of Common Stock or other securities issued upon the exercise
of this Warrant shall be validly issued, fully paid and nonassessable, and the
Company will pay all taxes in respect of the issuance thereof.
[Remainder of this page intentionally left blank.]
-9-
<PAGE> 10
IN WITNESS WHEREOF, this Warrant has been duly executed by Precision
Optics Corporation, Inc. this 30th day of June, 1998.
PRECISION OPTICS CORPORATION, INC.
By: /s/ Richard E. Forkey
------------------------------
President
[Warrant]
<PAGE> 11
EXERCISE FORM
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
To Precision Optics Corporation, Inc.:
The undersigned, the holder of the within warrant, hereby irrevocably
elects to exercise the purchase right represented by such warrant for, and to
purchase thereunder *________________ shares of the Common Stock of Precision
Optics Corporation, Inc., and herewith makes payment of $______ therefor, and
requests that the certificates for such shares be issued in the name of, and
delivered to the undersigned.
Dated: _______________ SPECIAL SITUATIONS TECHNOLOGY FUND, L.P.
By: __________________________
Title:
[Address]
*Insert here all or such portion of the number of shares called for on the face
of the within warrant in 10,000 or more share increments with respect to which
the holder desires to exercise the purchase right represented thereby, without
adjustment for any other or additional stock, other securities, property or cash
which may be deliverable on such exercise.
<PAGE> 12
ASSIGNMENT FORM
(TO BE SIGNED ONLY UPON TRANSFER OF THE WARRANT)
For value received, the undersigned hereby sells, assigns and transfers
unto _______________________ the right represented by the within warrant to
purchase _________________ of the shares of Common Stock of Precision Optics
Corporation, Inc. to which the within warrant relates and appoints
_____________________ attorney to transfer said right on the books of Precision
Optics Corporation, Inc., with full power of substitution in the premises.
Dated:________________ SPECIAL SITUATIONS TECHNOLOGY FUND, L.P.
By: ________________________________
Title:
<PAGE> 1
Exhibit 4.9
EXECUTION VERSION
REGISTRATION RIGHTS AGREEMENT
This Agreement (the "AGREEMENT") is made as of June 30, 1998 by and
among Precision Optics Corporation, Inc. a Massachusetts corporation (the
"COMPANY") and Special Situations Private Equity Fund, L.P., a Delaware limited
partnership, and Special Situations Technology Fund, L.P., a Delaware limited
partnership (collectively, the "INVESTORS").
WHEREAS, pursuant to a Stock Subscription Agreement dated as of
June 30, 1998 by and among the Company and the Investors (the "SUBSCRIPTION
AGREEMENT"), the Investors have purchased from the Company an aggregate of
500,000 shares (the "SHARES") of the common stock, $0.01 par value per share, of
the Company (the "COMMON STOCK") and warrants (the "WARRANTS") exercisable for
an additional aggregate of 500,000 shares (the "WARRANT SHARES") of Common
Stock; and
WHEREAS, the Company and the Investors wish to provide certain
arrangements with respect to the registration of the Shares and the Warrant
Shares under the Securities Act;
NOW, THEREFORE, in consideration of the mutual promises and obligations
contained herein, the parties agree as follows:
1. DEFINITIONS.
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the Exchange Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder, and any successor to
such statute or such rules and regulations.
"FORM S-3", "FORM S-4" and "FORM S-8" mean respective forms under the
Securities Act and any successor registration forms.
"REGISTER", "REGISTERED", and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement or similar document in
compliance with the Securities Act and the automatic effectiveness or the
declaration or ordering of effectiveness of such registration statement or
document.
"REGISTRABLE SECURITIES" means (i) the Shares and the Warrant Shares
and (ii) any common stock or other securities issued or issuable with respect to
any Registrable Securities by way of stock dividend or stock split or in
connection with a combination of shares,
<PAGE> 2
recapitalization, merger, consolidation or other reorganization or otherwise.
Registrable Securities shall cease to be Registrable Securities (i) when a
registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement or (ii) if earlier,
on the second anniversary of the exercise in full or earlier termination of the
Warrant. For purposes of this Agreement, the number of shares of Registrable
Securities outstanding at any time shall be determined by adding the number of
Shares outstanding which are, and the maximum number of Warrant Shares which
upon issuance would be, Registrable Securities.
"REGISTRATION EXPENSES" means all expenses incident to performance of
or compliance with Sections 2 and 3 hereof by the Company, including without
limitation all registration and filing fees, all listing fees, all fees and
expenses of complying with securities or blue sky laws, all printing and
automated document preparation expenses, all messenger and delivery expenses,
the fees and disbursements of counsel for the Company and of its independent
public accountants, including the expenses of any special audits required by or
incident to such performance and compliance, and the fees and disbursements of
counsel for the Investors, but excluding applicable transfer taxes, if any,
which shall be borne by the sellers of the Registrable Securities in all cases.
"RULE 144" means Rule 144 promulgated under the Securities Act, as
amended, and any successor rule or regulation thereto.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, and any successor to such
statute or such rules and regulations.
2. REQUIRED REGISTRATION.
2.1 REGISTRATION OF SHARES AND WARRANT SHARES. Upon the issuance to the
Investors of the Shares in accordance with the terms and conditions of the
Subscription Agreement, the Company will use its best efforts to effect, prior
to December 31, 1998 but in no event earlier than October 23, 1998, the
registration under the Securities Act of such Shares and the Warrant Shares.
2.2 POSTPONEMENT. The Company may postpone for a period of up to 60
days the filing of any registration required pursuant to Section 2.1 (regardless
of whether such 60 day period ends after December 31, 1998) if the Board of
Directors of the Company in good faith determines that such registration is
likely to have an adverse effect on any plan, proposal or agreement by the
Company with respect to any financing, acquisition, recapitalization,
reorganization or other material transaction or development.
2.3 PAYMENT OF EXPENSES. The Company hereby agrees to pay all
Registration Expenses in connection with all registrations effected pursuant to
this Section 2. However, the
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Company shall not be required to pay for any expenses of such registration
proceeding if the registration request is withdrawn at any time at the request
of the Investors (in which case the Investors shall bear such expenses).
3. REGISTRATION PROCEDURES. If and whenever the Company is required to use its
best efforts to effect the registration of any Registrable Securities under the
Securities Act as provided in Section 2 hereof, the Company will as
expeditiously as reasonably possible:
3.1 REGISTRATION STATEMENT. Prepare and file with the Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective. Each
registration requested pursuant to Section 2 shall be effected by the filing of
a registration statement on Form S-3 (or such other form as the Company may be
eligible to file in the event it is not eligible to effect the registration of
the resale of its securities on Form S-3), unless the use of a different form
has been agreed to in writing by the Company and the Investors. Such
registration statement shall be for an offering to be made on a continuous or
delayed basis (a so-called "shelf registration statement").
3.2 AMENDMENTS AND SUPPLEMENTS TO REGISTRATION STATEMENT. Prepare and
file with the Commission such amendments and supplements to such registration
statements and the prospectuses used in connection therewith as may be necessary
to keep such registration statements effective and to comply with the provisions
of the Securities Act with respect to the disposition of all Registrable
Securities and other securities, if any, covered by such registration statements
until the earlier of (i) such time as all of such Registrable Securities have
been disposed of in accordance with the intended methods of disposition by the
Investors set forth in such registration statement or (ii) the second
anniversary of the exercise in full or earlier termination of the Warrant.
3.3 COOPERATION. Use its best efforts to cooperate with the Investors
in the disposition of the Common Stock covered by such registration statement.
3.4 FURNISHING OF COPIES OF REGISTRATION STATEMENTS AND OTHER
DOCUMENTS. Furnish to the Investors such number of conformed copies of such
registration statement and of each such amendment and supplement thereto (in
each case including all exhibits, except that the Company shall not be obligated
to furnish the Investors with more than two copies of such exhibits other than
incorporated documents), such number of copies of the prospectus included in
such registration statement (including each preliminary prospectus and any
summary prospectus), each in conformity with the requirements of the Securities
Act, such documents incorporated by reference in such registration statement or
prospectus and such other documents as the Investors may reasonably request in
order to facilitate the disposition of their Registrable Securities covered by
such registration statement.
3.5 STATE SECURITIES LAWS. Use its best efforts to register or qualify
such Registrable Securities under such securities or blue sky laws of such
jurisdictions as the Investors shall
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<PAGE> 4
reasonably request, and do any and all other acts and things which may be
necessary or advisable to enable the Investors to consummate the disposition in
such jurisdictions of their Registrable Securities covered by such registration
statement; PROVIDED, HOWEVER, that the Company shall not be obligated to file
any general consent to service of process or to qualify as a foreign corporation
or subject the Company to taxation in any jurisdiction in which it is not so
qualified.
3.6 NOTICE OF PROSPECTUS DEFECTS. Immediately notify the Investors when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing, and at the request of the Investors prepare
and furnish to them a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
3.7 GENERAL COMPLIANCE WITH FEDERAL SECURITIES LAWS. Otherwise use its
best efforts to comply with the Securities Act, the Exchange Act and any other
applicable rules and regulations of the Commission, and make available to its
securities holders, as soon as reasonably practicable, an earning statement
covering the period of at least 12 months after the effective date of such
registration statement, which earning statement shall satisfy Section 11(a) of
the Securities Act and any applicable regulations thereunder, including Rule
158.
3.8 EXCHANGE LISTING. Use its best efforts to list such Registrable
Securities on the Nasdaq Small Cap Market, if such Registrable Securities are
not already so listed.
3.9 TRANSFER AGENT. Provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement.
3.10 SELLER INFORMATION. The Company may require the Investors to
furnish the Company such information regarding the Investors and the
distribution of the Registrable Securities as the Company may from time to time
reasonably request in writing and which shall be required by the Securities Act
(or similar state laws) or by the Commission in connection therewith.
4. ADDITIONAL ISSUANCE. In the event that the registration statement filed
pursuant to Section 3.1 is not declared effective on or prior to December 31,
1998 (the "DEFAULT DATE"), the Company will issue and deliver, free of charge
and without cost, to the Investors (i) within 10 business days of the Default
Date, (x) certificates representing a number of fully paid, nonassessable shares
of Common Stock equal to the aggregate of 2.0% of the Shares and (y) a
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<PAGE> 5
warrant exercisable (on the same terms and conditions as are then applicable to
the Warrant) for a number of fully paid, nonassessable shares of Common Stock
equal to the aggregate of 2.0% of the Warrant Shares and (ii) within 10 business
days of the last date of each additional 30-day period in which such
registration statement shall not have been declared effective, (x) additional
certificates representing a number of fully paid, non-assessable shares of
Common Stock equal to the aggregate of 2.0% of the Shares and (y) an additional
warrant exercisable (on the same terms and conditions as are then applicable to
the Warrant) for a number of fully paid, nonassessable shares of Common Stock
equal to the aggregate of 2.0% of the Warrant Shares. Shares and warrants issued
pursuant to this Section 4 shall be allocated to the Investors pro rata based on
the number of Shares purchased by each pursuant to the Subscription Agreement.
Any and all shares of Common Stock issued, and any and all shares of Common
Stock issuable upon exercise of warrants issued, pursuant to this Section 4
shall constitute "Registrable Securities," and the Company shall be required to
register them under the Securities Act in accordance with the provisions of this
Agreement. The remedies set forth in this Section 4 shall be in addition to, and
not in limitation of, any other rights and remedies available to the Investors
under this Agreement and applicable law.
5. BLACKOUT PERIOD. Upon written notice by the Company while any registration
statement filed pursuant to Section 2 is effective, if it is determined in good
faith by the Company's Board of Directors that in its reasonable judgment the
obligation of the Company to comply with the disclosure requirements of the
Securities Act would interfere with any financing, acquisition, corporate
reorganization or other material transaction involving the Company or would
require premature disclosure thereof, the Investors will not for a period of 60
days (a "BLACKOUT PERIOD") or, if shorter, until the Company notifies the
Investors in writing that the Blackout Period is terminated, sell any
Registrable Securities pursuant to any such registration statement. Each notice
given pursuant to this Section 5 shall contain an approximation of the
anticipated length of the Blackout Period, which shall not be longer than is
reasonably required and in any event not longer than 60 days. Promptly upon the
Company's determination that a Blackout Period is no longer necessary, the
Company will notify the Investors in writing that the Blackout Period has
terminated. In no event shall the Company give notice of a Blackout Period more
than once in any 180-day period.
6. INDEMNIFICATION AND CONTRIBUTION.
6.1 INDEMNITIES TO THE INVESTORS. In the event of any registration of
any Registrable Securities under the Securities Act pursuant to Section 2
hereof, the Company will, and hereby does, indemnify and hold harmless the
Investors, its partners, directors and officers, and each other person, if any,
who controls the Investors within the meaning of Section 15 of the Securities
Act (each such Person being referred to herein as a "COVERED PERSON"), against
any losses, claims, damages or liabilities, joint or several, to which such
Covered Person may be or become subject under the Securities Act, the Exchange
Act, any other securities or other law of any jurisdiction, common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any
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<PAGE> 6
untrue statement or alleged untrue statement of any material fact contained or
incorporated by reference in any registration statement under the Securities
Act, any preliminary prospectus or final prospectus included therein, or any
related summary prospectus, or any amendment or supplement thereto, or any
document incorporated by reference therein, or (ii) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse such
Covered Person for any legal or any other expenses incurred by it in connection
with investigating or defending any such loss, claim, damage, liability, action
or proceeding; PROVIDED, HOWEVER, that the Company shall not be liable to any
Covered Person in any such case for any such loss, claim, damage, liability,
action or proceeding (i) to the extent that it arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement or incorporated
document, in reliance upon and in conformity with written information furnished
to the Company or on behalf of such Covered Person expressly for inclusion
therein or (ii) in the case of a sale directly by the Investors of Registrable
Securities, such untrue statement or alleged untrue statement or omission or
alleged omission was contained in a preliminary prospectus and corrected in a
final or amended prospectus and the Investors failed to deliver a copy of the
final or amended prospectus at or prior to the confirmation of the sale of the
Registrable Securities to the person asserting any such loss, claim, damage or
liability in any case in which such delivery is required by the Securities Act.
The indemnities of the Company contained in this Section 6.1 shall remain in
full force and effect regardless of any investigation made by or on behalf of
such Covered Person and shall survive any transfer of Registrable Securities.
6.2 INDEMNITIES TO THE COMPANY. In the event of any registration of
Registrable Securities under the Securities Act pursuant to Section 2 hereof,
the Investors, jointly and severally, will, and hereby do, indemnify and hold
harmless (in the same manner and to the same extent as set forth in Section 6.1
hereof) the Company, each director of the Company, each officer of the Company
who shall sign such registration statement and each other person (other than the
Investors), if any, who controls the Company within the meaning of Section 15 of
the Securities Act, with respect to any untrue statement in or omission from
such registration statement, any preliminary prospectus or final prospectus
included therein, or any amendment or supplement thereto, or any document
incorporated therein, if such statement or omission was made in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of the Investors expressly for inclusion therein, provided that the
Investors shall not be liable to the Company in any case in which such untrue
statement or alleged untrue statement or omission or alleged omission was
contained in a preliminary prospectus and corrected in a final or amended
prospectus, and the Company failed to deliver a copy of the final or amended
prospectus at or prior to the confirmation of the sale of the securities to the
person asserting any such loss, claim, damage or liability in any case in which
such delivery is required by the Securities Act. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Company or any such director, officer or controlling person and shall
survive any transfer of Registrable Securities.
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<PAGE> 7
6.3 INDEMNIFICATION PROCEDURES. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim of the type referred to in the foregoing provisions of this
Section 6, such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party, give written notice to each such
indemnifying party of the commencement of such action; PROVIDED, HOWEVER, that
the failure of any indemnified party to give notice to such indemnifying party
as provided herein shall not relieve such indemnifying party of its obligations
under the foregoing provisions of this Section 6, except and solely to the
extent that such indemnifying party is actually prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party,
each indemnifying party will be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified,
to the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to such an indemnifying party), and after notice from an
indemnifying party to such indemnified party of its election so to assume the
defense thereof, such indemnifying party will not be liable to such indemnified
party for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof; PROVIDED, HOWEVER, that (i) if the
indemnified party reasonably determines that there may be a conflict between the
positions of such indemnifying party and the indemnified party in conducting the
defense of such action or that there may be defenses available to such
indemnified party different from or in addition to those available to such
indemnifying party, then counsel for the indemnified party shall conduct the
defense to the extent reasonably determined by such counsel to be necessary to
protect the interests of the indemnified party and such indemnifying party shall
employ separate counsel for its own defense, (ii) in any event, the indemnified
party shall be entitled to have counsel chosen by such indemnified party
participate in, but not conduct, the defense and (iii) the indemnifying party
shall bear the legal expenses incurred in connection with the conduct of, and
the participation in, the defense as referred to in clauses (i) and (ii) above.
If, within a reasonable time after receipt of the notice, such indemnifying
party shall not have elected to assume the defense of the action, such
indemnifying party shall be responsible for any legal or other expenses incurred
by such indemnified party in connection with the defense of the action, suit,
investigation, inquiry or proceeding. No indemnifying party will consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
6.4 CONTRIBUTION. If the indemnification provided for in Sections 6.1
or 6.2 hereof is unavailable to a party that would have been an indemnified
party under any such Section in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each party that would have been an indemnifying party thereunder shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the
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<PAGE> 8
relative fault of such indemnifying party on the one hand and such indemnified
party on the other in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof). The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by such indemnifying party or such indemnified party, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The parties agree that it
would not be just and equitable if contribution pursuant to this Section 6.4
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to in the
preceding sentence. The amount paid or payable by a contributing party as a
result of the losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) referred to above in this Section 6.4 shall include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
6.5 LIMITATION ON LIABILITY OF HOLDERS OF REGISTRABLE SECURITIES. The
liability of the Investors in respect of any indemnification or contribution
obligation of the Investors arising under this Section 6 shall not in any event
exceed an amount equal to the net proceeds to the Investors (after deduction of
all underwriters' discounts and commissions and all other expenses paid by the
Investors in connection with the registration in question) from the disposition
of the Registrable Securities disposed of by the Investors pursuant to such
registration.
7. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Investors the benefits of Rule 144 and any other rule or
regulation of the SEC that may at any time permit the Investors to sell
securities of the Company to the public without registration, the Company agrees
to:
(a) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144;
(b) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act; and
(c) furnish to the Investors upon request (1) a written
statement by the Company as to its compliance with the reporting
requirements of Rule 144, the Securities Act and the Exchange Act, (2)
a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (3) such
other information as may be reasonably requested in availing the
Investors
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<PAGE> 9
of any rule or regulation of the SEC which permits the selling of any
such securities without registration or pursuant to Rule 144.
8. ASSIGNMENT OF REGISTRATION RIGHTS. The right to cause the Company to
register Registrable Securities pursuant to Section 2 may be assigned by the
Investors only with the consent of the Company; PROVIDED, HOWEVER, that the
Investors shall be permitted to transfer such right to one or more of their
affiliates (as such term is defined in Rule 12b-2 under the Exchange Act)
without the consent of the Company. Any transferee to whom rights under this
Agreement are transferred shall (i) as a condition to such transfer, deliver to
the Company a written instrument by which such transferee agrees to be bound by
the obligations imposed upon the Investors under this Agreement to the same
extent as the Investors is itself so bound and (ii) be deemed to be an
additional Investor hereunder.
9. NOTICES. All notices, requests, consents and demands shall be in writing and
shall be personally delivered, mailed (by first class or certified mail),
telecopied or delivered by any nationally recognized overnight delivery service
to the Company at:
Precision Optics Corporation, Inc.
22 East Broadway
Gardner, Massachusetts 01440
Attn: Jack P. Dreimiller
Fax No.: (978) 630-1487
with a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attn: Edward A. Benjamin
Fax No.: (617) 951-7050
and to the Investors at:
Special Situations Private Equity Fund, L.P.
Special Situations Technology Fund, L.P.
153 East 53rd Street, 51st Floor
New York, New York 10022
Attn: Austin Marxe
Fax No.: (212) 832-5300
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<PAGE> 10
with a copy to:
Hertzog, Calamari & Gleason
100 Park Avenue
New York, New York 10017
Attn: David B. Hertzog
Fax No. (212) 213-1199
or such other address as may be furnished in writing to the other parties
hereto. All such notices, requests, demands and other communication shall, when
mailed (registered or certified mail, return receipt requested, postage
prepaid), be effective four days after deposit in the mails, or, when personally
delivered, telecopied or delivered by any nationally recognized overnight
delivery service, be effective upon actual receipt.
10. ENTIRE AGREEMENT. This Agreement and the Subscription Agreement constitute
the entire understanding of the parties with respect to the subject matter
hereof and thereof and supersede any and all prior understandings and
agreements, whether written or oral, with respect to such subject matter.
11. AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this Agreement may be
amended, and the observance thereof may be waived, if the Company shall obtain
consent thereto in writing from the Investors.
12. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the personal representatives, successors and assigns of the
respective parties hereto. Notwithstanding the foregoing sentence, the Company
shall not have the right to assign its obligations hereunder or any interest
herein without obtaining the prior written consent of the Investors.
13. HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
14. GOVERNING LAW; CONSENT TO JURISDICTION.
14.1 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the domestic substantive laws of the State of New York,
without giving effect to any choice or conflict of law provision or rule that
would cause the application of the domestic substantive laws of any other
jurisdiction.
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<PAGE> 11
14.2 CONSENT TO JURISDICTION. Each of the parties agrees that all
actions, suits or proceedings arising out of or based upon this Agreement or the
subject matter hereof may be brought and maintained in the federal and state
courts of The State of New York. Each of the parties hereto by execution hereof:
(i) hereby irrevocably submits to the jurisdiction of the federal and state
courts in The State of New York for the purpose of any action, suit or
proceeding arising out of or based upon this Agreement or the subject matter
hereof and (ii) hereby waives to the extent not prohibited by applicable law,
and agrees not to assert, by way of motion, as a defense or otherwise, in any
such action, suit or proceeding, any claim that it is not subject personally to
the jurisdiction of the above-named courts, that it is immune from
extraterritorial injunctive relief or other injunctive relief, that its property
is exempt or immune from attachment or execution, that any such action, suit or
proceeding may not be brought or maintained in one of the above-named courts,
that any such action, suit or proceeding brought or maintained in one of the
above-named courts should be dismissed on grounds of FORUM NON CONVENIENS,
should be transferred to any court other than one of the above-named courts,
should be stayed by virtue of the pendency of any other action, suit or
proceeding in any court other than one of the above-named courts, or that this
Agreement or the subject matter hereof may not be enforced in or by any of the
above-named courts. Each of the parties hereto hereby consents to service of
process in any such suit, action or proceeding in any manner permitted by the
laws of The State of New York, agrees that service of process by registered or
certified mail, return receipt requested, at the address specified in Section 9
hereof is reasonably calculated to give actual notice and waives and agrees not
to assert by way of motion, as a defense or otherwise, in any such action, suit
or proceeding any claim that such service of process does not constitute good
and sufficient service of process.
15. SEVERABILITY. If any provision of this Agreement shall be found by any court
of competent jurisdiction to be invalid or unenforceable, the parties hereby
waive such provision to the extent that it is found to be invalid or
unenforceable. Such provision shall, to the maximum extent allowable by law, be
modified by such court so that it becomes enforceable, and, as modified, shall
be enforced as any other provision hereof, all the other provisions hereof
continuing in full force and effect.
16. COUNTERPARTS. This Agreement may be executed in counterparts, all of which
together shall constitute one and the same instrument.
[Remainder of this page is intentionally left blank]
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IN WITNESS WHEREOF, the Company, and the Investors have executed this
Agreement as of the date and year first above written.
PRECISION OPTICS CORPORATION, INC
By: /s/ Richard E. Forkey
-----------------------------
Title: President
SPECIAL SITUATIONS PRIVATE EQUITY
FUND, L.P.
By: /s/ Austin W. Marxe
-----------------------------
Title: Managing Director
SPECIAL SITUATIONS TECHNOLOGY
FUND, L.P.
By: /s/ Austin W. Marxe
-----------------------------
Title: Managing Director
[Registration Rights Agreement]
<PAGE> 1
Exhibit 10.7
EXHIBIT A
PRECISION OPTICS CORPORATION, INC.
1997 INCENTIVE PLAN
1. DEFINED TERMS
Exhibit A, which is incorporated by reference, defines the terms used
in the Plan.
2. IN GENERAL
The Plan has been established to advance the interests of the Company
by giving selected Employees, directors and other persons (including both
individuals and entities) who provide services to the Company or its Affiliates
equity-based or cash incentives through the grant of Awards.
3. ADMINISTRATION
The Administrator has discretionary authority, subject only to the
express provisions of the Plan, to interpret the Plan; determine eligibility for
and grant Awards; determine, modify or waive the terms and conditions of any
Award; prescribe forms, rules and procedures (which it may modify or waive); and
otherwise do all things necessary to carry out the purposes of the Plan. Once an
Award has been communicated in writing to a Participant, the Administrator may
not, without the Participant's consent, alter the terms of the Award so as to
affect adversely the Participant's rights under the Award, unless the
Administrator expressly reserved the right to do so in writing at the time of
such communication. In the case of any Award intended to be eligible for the
performance-based compensation exception under Section 162(m), the Administrator
shall exercise its discretion consistent with qualifying the Award for such
exception. The Administrator may delegate to senior management the authority to
grant Awards, other than Awards to the President.
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<PAGE> 2
4. SHARES SUBJECT TO THE PLAN
a. A total of 1,200,000 shares of Stock have been reserved for
issuance under the Plan. The following shares of Stock will also be available
for future grants:
(i) shares of Stock remaining under an Award that terminates
without having been exercised in full (in the case of an Award
requiring exercise by a Participant for delivery of Stock);
(ii) shares of Stock subject to an Award, where cash is delivered
to a Participant in lieu of such shares;
(iii) shares of Restricted Stock that are forfeited to the Company;
(iv) shares of Stock tendered by a Participant to the Company as
payment upon exercise of an Award; and
(v) shares of Stock held back by the Company, or tendered by a
Participant to the Company, in satisfaction of tax withholding
requirements.
Stock delivered under the Plan may be authorized but unissued Stock or
previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock will be delivered under the Plan.
b. The maximum number of shares of Stock for which Stock Options may be
granted to any person over the life of the Plan shall be 600,000. The maximum
number of shares of Stock subject to SARs granted to any person over the life of
the Plan shall be 600,000. For purposes of the preceding two sentences, the
repricing of a Stock Option or SAR shall be treated as a new grant to the extent
required under Section 162(m). The aggregate maximum number of shares of Stock
delivered to any person over the life of the Plan pursuant to Awards that are
not Stock Options or SARs shall also be 600,000. Subject to these limitations,
each person eligible to participate in the Plan shall be eligible in any year to
receive Awards covering up to the full number of shares of Stock then available
for Awards under the Plan.
5. ELIGIBILITY AND PARTICIPATION
The Administrator will select Participants from among those key
Employees, directors and other individuals or entities providing services to the
Company or its Affiliates who, in the opinion of the Administrator, are in a
position to make a significant contribution to the success
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<PAGE> 3
of the Company and its Affiliates. Eligibility for ISOs is further limited to
those individuals whose employment status would qualify them for the tax
treatment described in Sections 421 and 422 of the Code.
6. RULES APPLICABLE TO AWARDS
a. ALL AWARDS
(1) PERFORMANCE OBJECTIVES. Where rights under an Award depend
in whole or in part on attainment of performance objectives, actions by the
Company that have an effect, however material, on such performance objectives or
on the likelihood that they will be achieved will not be deemed an amendment or
alteration of the Award unless accomplished by a change in the express terms of
the Award or other action that is without substantial consequence except as it
affects the Award.
(2) ALTERNATIVE SETTLEMENT. The Company retains the right at
any time to extinguish rights under an Award in exchange for payment in cash,
Stock (subject to the limitations of Section 4) or other property on such terms
as the Administrator determines, provided the holder of the Award consents to
such exchange.
(3) TRANSFERABILITY OF AWARDS. Except as the Administrator
otherwise expressly provides, Awards (other than an Award in the form of an
outright transfer of cash or Unrestricted Stock) may not be transferred other
than by will or by the laws of descent and distribution. During a Participant's
lifetime an Award requiring exercise may be exercised only by the Participant
(or in the event of the Participant's incapacity, the person or persons legally
appointed to act on the Participant's behalf).
(4) VESTING, ETC. The Administrator may determine the time or
times at which an Award will vest (i.e., become free of forfeiture restrictions)
or become exercisable. Unless the Administrator expressly provides otherwise, an
Award requiring exercise will cease to be exercisable, and all other Awards to
the extent not already fully vested will be forfeited, immediately upon the
cessation (for any reason, including death) of the Participant's employment or
other service relationship with the Company and its Affiliates.
(5) TAXES. The Administrator will make such provision for the
withholding of taxes as it deems necessary. The Administrator may, but need not,
hold back shares of Stock from an Award or permit a Participant to tender
previously owned shares of Stock in satisfaction of tax withholding
requirements.
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<PAGE> 4
(6) DIVIDEND EQUIVALENTS, ETC. The Administrator may provide
for the payment of amounts in lieu of cash dividends or other cash distributions
with respect to Stock subject to an Award.
(7) RIGHTS LIMITED. Nothing in the Plan shall be construed as
giving any person the right to continued employment or service with the Company
or its Affiliates, or any rights as a shareholder except as to shares of Stock
actually issued under the Plan. The loss of existing or potential profit in
Awards will not constitute an element of damages in the event of termination of
employment or service for any reason, even if the termination is in violation of
an obligation of the Company or Affiliate to the Participant.
(8) SECTION 162(m). In the case of an Award intended to be
eligible for the performance-based compensation exception under Section 162(m),
the Plan and such Award shall be construed to the maximum extent permitted by
law in a manner consistent with qualifying the Award for such exception.
b. AWARDS REQUIRING EXERCISE
(1) TIME AND MANNER OF EXERCISE. Unless the Administrator
expressly provides otherwise, (a) an Award requiring exercise by the holder will
not be deemed to have been exercised until the Administrator receives a written
notice of exercise (in form acceptable to the Administrator) signed by the
appropriate person and accompanied by any payment required under the Award; and
(b) if the Award is exercised by any person other than the Participant, the
Administrator may require satisfactory evidence that the person exercising the
Award has the right to do so.
(2) PAYMENT OF EXERCISE PRICE, IF ANY. Where the exercise of
an Award is to be accompanied by payment, the Administrator may determine the
required or permitted forms of payment either at or after the time of the Award,
subject to the following: (a) unless the Administrator expressly provides
otherwise, all payments will be by cash or check acceptable to the
Administrator; and (b) where shares of Stock issued under an Award are part of
an original issue of shares, the Award shall require an exercise price equal to
at least the par value of such shares.
(3) RELOAD AWARDS. The Administrator may provide that upon the
exercise of an Award, either by payment of cash or (if permitted under Section
6.b.(2) above) through the tender of previously owned shares of Stock, the
Participant or other person exercising the Award will automatically receive a
new Award of like kind covering a number of shares of Stock equal to the number
of shares of Stock for which the first Award was exercised.
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<PAGE> 5
(4) ISOs. No ISO may be granted under the Plan after September
15, 2007, but ISOs previously granted may extend beyond that date.
c. AWARDS NOT REQUIRING EXERCISE
Awards of Restricted Stock and Unrestricted Stock may be made in return
for either (i) services determined by the Administrator to have a value not less
than the par value of the awarded shares of Stock, or (ii) cash or other
property having a value not less than the par value of the awarded shares of
Stock plus such additional amounts (if any) as the Administrator may determine
payable in such combination and type of cash, other property (of any kind) or
services as the Administrator may determine.
7. EFFECT OF CERTAIN TRANSACTIONS
a. MERGERS, ETC.
In the event of (i) a consolidation or merger in which the Company is
not the surviving corporation or which results in the acquisition of a majority
of the Company's then outstanding voting common stock by a single person or
entity or by a group of persons and/or entities acting in concert, (ii) a sale
or transfer of all or substantially all the Company's assets, or (iii) a
dissolution or liquidation of the Company (any of the foregoing, a "covered
transaction"), all outstanding Awards requiring exercise will cease to be
exercisable, and all other Awards to the extent not fully vested (including
Awards subject to performance conditions not yet satisfied or determined) will
be forfeited, as of the effective time of the covered transaction; provided,
however, that immediately prior to the consummation of such covered transaction
the vesting or exercisability of Awards shall be accelerated unless, in the case
of any Award, the Administrator provides for one or more substitute or
replacement awards from, or the assumption of the existing Award by, the
acquiring entity (if any) or its affiliates.
The Administrator may provide in the case of any Award that the
provisions of the preceding paragraph shall also apply to (i) mergers or
consolidations involving the Company that do not constitute a covered
transaction, or (ii) other transactions, not constituting a covered transaction,
that involve the acquisition of the Company's outstanding Stock.
b. CHANGES IN AND DISTRIBUTIONS WITH RESPECT TO THE
STOCK
(1) BASIC ADJUSTMENT PROVISIONS. In the event of a stock
dividend, stock split or combination of shares, recapitalization or other change
in the Company's capital structure, the Administrator will make appropriate
adjustments to the maximum number of shares that
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may be delivered under the Plan under Section 4.a. and to the maximum share
limits described in Section 4.b., and will also make appropriate adjustments to
the number and kind of shares of stock or securities subject to Awards then
outstanding or subsequently granted, any exercise prices relating to Awards and
any other provision of Awards affected by such change.
(2) CERTAIN OTHER ADJUSTMENTS. The Administrator may also make
adjustments of the type described in paragraph (1) above to take into account
distributions to common stockholders other than stock dividends or normal cash
dividends, mergers, consolidations, acquisitions, dispositions or similar
corporate transactions, or any other event, if the Administrator determines that
adjustments are appropriate to avoid distortion in the operation of the Plan and
to preserve the value of Awards made hereunder; provided, that no such
adjustment shall be made to the maximum share limits described in Section 4.b.,
or otherwise to an Award intended to be eligible for the performance-based
exception under Section 162(m), except to the extent consistent with that
exception.
(3) CONTINUING APPLICATION OF PLAN TERMS. References in the
Plan to shares of Stock shall be construed to include any stock or securities
resulting from an adjustment pursuant to Section 7.b.(1) or 7.b.(2) above.
8. CONDITIONS ON DELIVERY OF STOCK
The Company will not be obligated to deliver any shares of Stock
pursuant to the Plan or to remove any restriction from shares of Stock
previously delivered under the Plan until: the Company's counsel has approved
all legal matters in connection with the issuance and delivery of such shares;
if the outstanding Stock is at the time of delivery listed on any stock exchange
or national market system, the shares to be delivered have been listed or
authorized to be listed on such exchange or system upon official notice of
issuance; and all conditions of the Award have been satisfied or waived. If the
sale of Stock has not been registered under the Securities Act of 1933, as
amended, the Company may require, as a condition to exercise of the Award, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such Act. The Company may require that
certificates evidencing Stock issued under the Plan bear an appropriate legend
reflecting any restriction on transfer applicable to such Stock.
9. AMENDMENT AND TERMINATION
Subject to the penultimate sentence of Section 3, the Administrator may
at any time or times amend the Plan or any outstanding Award for any purpose
which may at the time be permitted by law, or may at any time terminate the Plan
as to any further grants of Awards;
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provided, that (except to the extent expressly required or permitted by the
Plan) no such amendment will, without the approval of the stockholders of the
Company, effectuate a change for which stockholder approval is required in order
for the Plan to continue to qualify under Section 422 of the Code and for Awards
to be eligible for the performance-based exception under Section 162(m).
10. NON-LIMITATION OF THE COMPANY'S RIGHTS
The existence of the Plan or the grant of any Award shall not in any
way affect the Company's right to award a person bonuses or other compensation
in addition to Awards under the Plan.
11. GOVERNING LAW
The Plan shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
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<PAGE> 8
EXHIBIT A
DEFINITION OF TERMS
The following terms, when used in the Plan, shall have the meanings and
be subject to the provisions set forth below:
"ADMINISTRATOR": The Committee, if one has been appointed; otherwise
the Board.
"AFFILIATE": Any corporation or other entity owning, directly or
indirectly, 50% or more of the outstanding Stock of the Company, or in which the
Company or any such corporation or other entity owns, directly or indirectly,
50% of the outstanding capital stock (determined by aggregate voting rights) or
other voting interests.
"AWARD": Any of the following:
(i) Options ("Stock Options") entitling the recipient to
acquire shares of Stock upon payment of the exercise price. Each Stock
Option (except as otherwise expressly provided by the Committee
consistent with continued qualification of the Stock Option as a
performance-based award for purposes of Section 162(m), or unless the
Committee expressly determines that such Stock Option is not subject to
Section 162(m) or that the Stock Option is not intended to qualify for
the performance-based exception under Section 162(m)) will have an
exercise price equal to the fair market value of the Stock subject to
the option, determined as of the date of grant, except that an ISO
granted to an Employee described in Section 422(b)(6) of the Code will
have an exercise price equal to 110% of such fair market value. The
Administrator will determine the medium in which the exercise price is
to be paid, the duration of the option, the time or times at which an
option will become exercisable, provisions for continuation (if any) of
option rights following termination of the Participant's employment
with the Company and its Affiliates, and all other terms of the Stock
Option. No Stock Option awarded under the Plan will be an ISO unless
the Administrator expressly provides for ISO treatment.
(ii) Rights ("SARs") entitling the holder upon exercise to
receive cash or Stock, as the Administrator determines, equal to a
function (determined by the Administrator using such factors as it
deems appropriate) of the amount by which the Stock has appreciated in
value since the date of the Award.
(iii) Stock subject to restrictions ("Restricted Stock") under
the Plan requiring that such Stock be redelivered to the Company if
specified conditions are not satisfied. The conditions to be satisfied
in connection with any Award of Restricted Stock, the
<PAGE> 9
terms on which such Stock must be redelivered to the Company, the
purchase price of such Stock, and all other terms shall be determined
by the Administrator.
(iv) Stock not subject to any restrictions under the Plan
("Unrestricted Stock").
(v) A promise to deliver Stock or other securities in the
future on such terms and conditions as the Administrator determines.
(vi) Securities (other than Stock Options) that are
convertible into or exchangeable for Stock on such terms and conditions
as the Administrator determines.
(vii) Cash bonuses tied to performance criteria as described
at (viii) below ("Cash Performance Awards").
(viii) Awards described in any of (i) through (vii) above
where the right to exercisability, vesting or full enjoyment of the
Award is conditioned in whole or in part on the satisfaction of
specified performance criteria ("Performance Awards"). The Committee in
its discretion may grant Performance Awards that are intended to
qualify for the performance-based compensation exception under Section
162(m) and Performance Awards that are not intended so to qualify. No
more than $2,000,000 may be paid to any individual with respect to any
Cash Performance Award. In applying the limitation of the preceding
sentence: (A) multiple Cash Performance Awards to the same individual
that are determined by reference to performance periods of one year or
less ending with or within the same fiscal year of the Company shall be
subject in the aggregate to one $2,000,000 limit, and (B) multiple Cash
Performance Awards to the same individual that are determined by
reference to one or more multi-year performance periods ending in the
same fiscal year of the Company shall be subject in the aggregate to a
separate limit of $2,000,000. With respect to any Performance Award
other than a Cash Performance Award, Stock Option or SAR, the maximum
award opportunity shall be 250,000 shares of Stock or their equivalent
value in cash, subject to the limitations of Section 4.b. For the
avoidance of doubt, any Performance Award of a type described in (i)
through (vi) above shall be treated for purposes of this paragraph as a
Performance Award that is not a Cash Performance Award, even if payment
is made in cash.
In the case of a Performance Award intended to qualify as
performance-based for the purposes of Section 162(m) (other than a
Stock Option or SAR with an exercise price at least equal to the fair
market value of the underlying Stock on the date of grant), the
Committee shall in writing preestablish a specific performance goal
(based solely on one or more qualified performance criteria or a
combination of qualified performance criteria) no later than 90 days
after the commencement of the period of
<PAGE> 10
service to which the performance relates (or at such earlier time as is
required to qualify the award as performance-based under Section
162(m)). For purposes of the Plan, a qualified performance criterion is
any of the following (determined either on a consolidated basis or, as
the context permits, on a divisional, subsidiary, line of business or
geographical basis or in combinations thereof): (i) sales; revenues;
assets; expenses; earnings before or after deduction for all or any
portion of interest, taxes, depreciation or amortization, whether or
not on a continuing operations or an aggregate or per share basis;
return on equity, investment, capital or assets; gross margin;
inventory level or turns; one or more operating ratios; borrowing
levels, leverage ratios or credit rating; market share; capital
expenditures; cash flow; stock price; stockholder return; or other
objective operating contributions; or (ii) acquisitions and
divestitures (in whole or in part); joint ventures and strategic
alliances; spin-offs, split-ups and the like; reorganizations;
recapitalizations, restructurings, financings (issuance of debt or
equity) and refinancings; or other transactions that involve a change
in the equity ownership of the Company. Prior to payment of any
Performance Award (other than a Stock Option or SAR with an exercise
price at least equal to the fair market value of the underlying Stock
on the date of grant) intended to qualify as performance-based under
Section 162(m), the Committee shall certify whether the performance
goal has been attained and such determination shall be final and
conclusive. If the performance goal with respect to any such Award is
not attained, no other Award shall be provided in substitution of the
Performance Award.
(ix) Grants of cash, or loans, made in connection with other
Awards in order to help defray in whole or in part the economic cost
(including tax cost) of the Award to the Participant. The terms of any
such grant or loan shall be determined by the Administrator.
Awards may be combined in the Administrator's discretion.
"BOARD": The Board of Directors of the Company.
"CODE": The U.S. Internal Revenue Code of 1986 as from time to time
amended and in effect, or any successor statute as from time to time in effect.
"COMMITTEE": A committee of the Board comprised solely of two or more
outside directors within the meaning of Section 162(m). The Committee may
delegate ministerial tasks to such persons (including Employees) as it deems
appropriate.
"COMPANY": Precision Optics Corporation, Inc.
"EMPLOYEE": Any person who is employed by the Company or an Affiliate.
<PAGE> 11
"ISO": A Stock Option intended to be an "incentive stock option" within
the meaning of Section 422 of the Code.
"PARTICIPANT": An Employee, director or other person providing services
to the Company or its Affiliates who is granted an Award under the Plan.
"PLAN": Precision Optics Corporation, Inc. 1997 Incentive Plan as from
time to time amended and in effect.
"SECTION 162(m)": Section 162(m) of the Code.
"STOCK": Common stock of the Company, par value $.01 per share.
<PAGE> 1
Exhibit 10.8
EXECUTION VERSION
PRECISION OPTICS CORPORATION, INC.
STOCK SUBSCRIPTION AGREEMENT
1. Special Situations Private Equity Fund, L.P., a Delaware limited
partnership, hereby subscribes for 375,000 shares (the "Shares") of the Common
Stock, $0.01 par value (the "Common Stock"), of Precision Optics Corporation,
Inc., a Massachusetts corporation (the "Company"), and Special Situations
Technology Fund, L.P., a Delaware limited partnership (collectively with Special
Situations Private Equity Fund, L.P., the "Investors"), hereby subscribes for
125,000 Shares, subject to and in reliance upon the Company's representations
and warranties to the Investors contained herein. In consideration for the
Shares, each Investor agrees to pay to the Company the amount of $2.00 per share
in full payment for the Shares. In connection with the purchase of the Shares,
the Company will issue to the Investors warrants (the "Warrants") exercisable
for an additional aggregate of 500,000 shares of Common Stock (the "Warrant
Shares"), subject to the terms and conditions set forth in the Warrants.
2. The Investors hereby agree that all of the Shares which they
acquire and any of their right, title or interest in such Shares shall be
subject to the terms and conditions of this Agreement, and that all of the
Warrant Shares which they acquire and any of their right, title or interest in
such Warrant Shares shall be subject to the terms and conditions of this
Agreement and the terms and conditions of the Warrants.
3. The Investors represent and warrant to the Company that they are
acquiring the Shares for their own accounts for investment only and not with a
view to any resale or distribution thereof, and the Investors agree that they
will not sell or otherwise dispose of the Shares in violation of the provisions
of the Securities Act of 1933, as amended (the "Securities Act"), or any
applicable state securities laws. The Investors understand that the Company is
selling the Shares to the Investors in a transaction that is exempt from the
Securities Act's registration requirements and from the registration
requirements of any applicable state securities laws and that the Investors must
hold the Shares indefinitely unless they are subsequently offered for sale and
sold in a transaction or transactions registered under the Securities Act or
such state laws or an exemption from registration (such as Rule 144) is
available. The Investors understand that, except as provided in the Registration
Rights Agreement dated as of June 30, 1998 by and among the Company and the
Investors, the Company is under no obligation to register the Shares under the
Securities Act or such state laws or to file for an exemption from registration
under the Securities Act or such state laws. The Investors further understand
that the Company is under no obligation to comply with any other exemption from
registration and that such exemptions are extremely limited and may not
<PAGE> 2
be available at such time or times as the Investors may wish to sell or
otherwise dispose of the Shares. The Investors understand that the certificate
or certificates representing the Shares will bear the following legend
restricting their transfer and that a notation restricting such transfer will be
made on the stock transfer books of the Company:
"The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of
1933, as amended (the "Act") or any applicable state securities laws
and may not be offered, sold or otherwise transferred without an
effective registration statement relating thereto or an opinion of
counsel in form and substance satisfactory to the Company that such
registration is not required under the Act or such state laws."
4. The Investors represent and warrant to the Company that (i) each
Investor is an "Accredited Investor," as that term is defined in Regulation D
under the Securities Act, (ii) each Investor possesses such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment contemplated hereby, is able to incur a
complete loss of such investment and is able to bear the economic risk of such
investment for an indefinite period of time and (iii) each Investor has
previously participated as an investor in private placement transactions exempt
from the registration requirements of the Securities Act.
5. Except as set forth in the Schedule of Exceptions attached hereto
as Exhibit A, the Company represents and warrants to the Investors as follows:
(a) ORGANIZATION AND GOOD STANDING. The Company is a corporation
duly organized, validly existing and in good standing under the laws of The
Commonwealth of Massachusetts, and has all necessary corporate power and
authority to own or lease its assets and to carry on its business as it is now
being conducted and presently proposed to be conducted. The Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which its ownership or leasing of assets, or the conduct of
its business, makes such qualification necessary. The Company has no
subsidiaries and no equity interests in any corporation, partnership, joint
venture or other entity.
(b) REQUISITE POWER AND AUTHORIZATION. The Company has all
necessary corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder, including without limitation the
issuance and delivery of the Shares and the Warrant, all corporate action of the
Company required for the execution and delivery of this Agreement and the
issuance and delivery of the Shares and the Warrant have been duly and
effectively taken and no further actions, authorizations or consents, including
without limitation any of the shareholders of the Company, are required. Each of
this Agreement and the Warrant constitutes the valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting
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<PAGE> 3
enforcement of creditor's rights and (ii) as limited by general principles of
equity that restrict the availability of equitable remedies. The Shares, when
issued and delivered in compliance with the provisions of this Agreement, will
be validly issued, fully paid and non-assessable, free and clear of any and all
liens, charges, claims or encumbrances. The Warrant Shares, if and when issued
and delivered in compliance with the provisions of this Agreement and the
Warrant, as the case may be, will be validly issued, fully paid and
non-assessable, free and clear of any and all liens, charges, claims or
encumbrances. Assuming the truth and accuracy of the representations and
warranties of the Investor contained in this Agreement at the time of each
respective issuance, each of the Shares and the Warrant Shares will be issued in
compliance with Federal and state securities laws. The Company has reserved a
sufficient number of shares of Common Stock necessary for issuance of the
Warrant Shares.
(c) SEC DOCUMENTS. Since June 30, 1997, the Company has timely
filed with the Securities and Exchange Commission (the "SEC") all reports,
statements, schedules and other documents (collectively, the "SEC Documents")
required to be filed by it pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the SEC promulgated thereunder, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements included in the SEC Documents (the
"Financial Statements") complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto. Except (i) as may be indicated in the notes to the
Financial Statements or (ii) in the case of the unaudited interim statements, as
permitted by Form 10-QSB under the Exchange Act, the Financial Statements have
been prepared in accordance with U.S. generally accepted accounting principles
consistently applied and fairly present in all material respects the financial
position of the Company as of the dates thereof and the consolidated results of
operations and consolidated cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal recurring year-end adjustments).
Other than liabilities incurred in the ordinary course of business subsequent to
the date of such Financial Statements, there are no liabilities of the Company,
whether absolute, contingent or otherwise, which have not been reflected in the
Financial Statements, which liabilities, individually or in the aggregate, are
material to the financial condition or operating results of the Company.
(d) CAPITALIZATION. The capitalization of the Company as of the
date hereof is as reflected on the Company's Form 10-QSB for the fiscal quarter
ended March 31, 1998 (except for changes resulting from the exercise of options
or warrants since such date).
(e) NO CONFLICTS. Neither the execution, delivery or performance
by the Company of this Agreement nor the consummation of the transactions
contemplated hereby has constituted or resulted in, or will constitute or result
in, a default under or breach or violation
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<PAGE> 4
of any term or provision of the Articles of Organization or bylaws of the
Company or material contracts to which the Company is a party or Federal or
state laws, rules or regulations, writs, order, judgments or decrees which are
applicable to the Company or its respective assets.
(f) CONSENTS. No approval, consent, order, authorization or
other action by, or notice to or filing with, any governmental authority or
regulatory or self-regulatory agency, or any other person or entity, and no
lapse of a waiting period, is required in connection with the execution,
delivery or performance by the Company, or enforcement against the Company, of
this Agreement, the issuance and delivery of the Shares or the Warrant Shares or
any other transactions contemplated hereby except for the filing of a Form D
with the SEC.
(g) NO MATERIAL ADVERSE CHANGE. Since March 31, 1998 and except
as reflected in a letter describing current operations of the Company previously
delivered to the Investor (the "Current Operations Letter"), the business of the
Company has been operated in the ordinary course and substantially consistent
with past practice, and there has not been any material adverse change in the
business, assets, financial condition, results of operations, affairs or
prospects of the Company (a "Material Adverse Change"). Since March 31, 1998 and
except as reflected in the Current Operations Letter, the Company has not (i)
paid any obligation or liability other than, or discharged or satisfied any
liens or encumbrances other than those securing, current liabilities, in each
case in the ordinary course of business; (ii) declared or made any payment or
distribution to its stockholders as such, or purchased or redeemed any of its
shares of capital stock or other securities, or obligated itself to do so; (iii)
mortgaged, pledged or subjected to any lien, charge, security interest or other
encumbrance any of its assets, tangible or intangible, except in the ordinary
course of business; (iv) sold, transferred or leased any of its assets except
for fair value in the ordinary course of business; (v) increased the
compensation payable to any of its officers or other employees, consultants or
representatives by greater than $50,000; (vi) canceled or compromised any debt
or claim, or waived or released any right of material value; (vii) entered into
any transaction other than in the ordinary course of business; (viii) issued or
sold any shares of capital stock or other securities (other than in connection
with the exercise of options or warrants) or granted any options, warrants or
other purchase rights with respect thereto; or (ix) agreed to do any of the
foregoing (other than pursuant this to Agreement).
(h) LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, currently threatened
against the Company, or any of their respective directors or officers in their
capacities as such, that questions the validity of this Agreement or the
issuance of the Shares, or the right of the Company to enter into this Agreement
or to consummate the transactions contemplated hereby, or that might result,
either individually or in the aggregate, in any Material Adverse Change or in
any change in the current equity ownership of the Company. The Company is not a
party to and has not had entered against it any order, writ, injunction,
judgment, stipulation or decree of any court, administrative agency, commission,
regulatory authority, other government agency or instrumentality or
self-regulatory agency.
-4-
<PAGE> 5
(i) NO DEFAULT. The Company is not in violation of or default
under any provision of its Articles of Organization or by-laws or in default
under (and no event has occurred which, with notice or lapse of time or both,
would put the Company in default under), nor has there occurred any event giving
others (with notice or lapse of time of both) any rights of termination,
amendment, acceleration or cancellation of, any contract, commitment, indenture
or instrument to which the Company is a party or by which it or its properties
or assets is bound or affected except for possible defaults or rights which
would not, individually or in the aggregate, result in a Material Adverse
Change. To the best of the Company's knowledge, no other party is in material
default under or in material breach or violation of any material contact,
commitment or instrument to which the Company is a party or by which any of its
properties or assets are bound or affected.
(j) COMPLIANCE WITH LAWS. The Company is in compliance and has
conducted its business and operations so as to comply with all applicable laws
(including, without limitation, environmental laws), ordinances, rules and
regulations, judgments, decrees or orders of any court, administrative agency,
commission, regulatory authority or other governmental or administrative body or
instrumentality, whether domestic or foreign. The Company has not during the
past three years received any notice relating to any violation or potential
violation of any applicable laws or regulations.
(k) TITLE. The Company has good and marketable title to all real
and personal property owned by it which is material to the business of the
Company free and clear of all liens, encumbrances and defects. Any property,
real or personal, held under lease by the Company is held by it under valid and
enforceable leases.
(l) INTELLECTUAL PROPERTY. The Company owns, or possesses
adequate and enforceable rights to use, all trademarks, trademark applications,
trade names, service marks, copyrights, copyright applications, licenses,
permits, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures) and
other similar rights and proprietary knowledge and, to its knowledge, all
patents and patent applications (collectively, "Intangibles") necessary for the
conduct of its business. To the knowledge of the Company, the Company has not
infringed or currently infringes or is in conflict with any right of any other
person with respect to any Intangibles that are material to the conduct of the
business of such person.
(m) REGISTRATION RIGHTS. The Company has not granted or agreed
to grant any registration rights, including piggyback rights, to any person or
entity other than the Investor. None of the registration rights disclosed on the
Schedule of Exceptions is senior in priority to the registration rights granted
in this Agreement.
(n) NASDAQ REQUIREMENTS. The Common Stock has been designated
for inclusion in the Nasdaq Small Cap Market upon prior application and meets
all applicable
-5-
<PAGE> 6
requirements of the Nasdaq Stock Market ("Nasdaq") Marketplace Rule 4300 Series
or any other applicable requirements for such listing. The issuance and sale of
the Shares will not, when issued and sold in accordance with this Agreement,
violate any applicable Rule of Nasdaq. The Company has not received
notification, written or oral, that (i) the termination of the inclusion of the
Common Stock on the Nasdaq SmallCap Market is pending or under consideration or
(ii) the Company has failed to satisfy any requirement of Nasdaq. The Company
does not reasonably anticipate that the Common Stock will be delisted form
Nasdaq in the foreseeable future.
(o) REGISTRATION STATEMENT. The Company is currently eligible to
register the resale of its Common Stock under the Securities Act under a
registration statement on Form S-3. To the best of the Company's knowledge,
there exist no facts or circumstances that would inhibit or delay the
preparation and filing of a registration statement on Form S-3 with respect to
the Shares or the Warrant Shares.
(p) NO MISREPRESENTATION. No representation or warranty by the
Company in this Agreement and no statements of the Company contained in any
document (including without limitation any SEC Document), certificate, schedule
or other information furnished or to be furnished by or on behalf of the Company
pursuant to this Agreement or in connection with the transactions contemplated
hereby contains or shall contain any untrue statement of material fact or omits
or shall omit to state a material fact required to be stated therein or
necessary in order to make such statements, in light of the circumstances under
which they were made, not misleading. The Company has delivered true and
complete copies of all documents requested by the Investor.
(q) ANTI-DILUTION AND OTHER SHARES. No shareholder of the
Company or other person or entity has any preemptive right of subscription or
purchase or contractual right of first refusal or similar right with respect to
the Shares. Issuance of the Shares will not result in the issuance of any
additional shares of Common Stock or the triggering of other anti-dilution or
similar rights contained in any options, warrants, debentures or other
agreements or commitments of the Company.
6. The Investors acknowledge receipt from the Company of the
following documents, which they have carefully considered:
(a) The investor presentation dated February 19, 1998 describing
the Company's business and recent developments concerning the Company and
identifying certain risk factors in connection with the purchase of the Shares.
(b) The Company's Form 10-KSB for the fiscal year ended June 30,
1997.
(c) The Company's Forms 10-QSB for the fiscal quarters ended
September 30, 1997, December 31, 1997 and March 31, 1998.
-6-
<PAGE> 7
(d) the Current Operations Letter.
7. All notices hereunder shall be in writing and shall be deemed to
be delivered if in writing addressed as provided below and if either (i)
actually delivered at said address or (ii) five business days shall have elapsed
after the same shall have been deposited in the United States mails (by first
class or certified mail):
To the Company at the following address:
Precision Optics Corporation, Inc.
22 East Broadway
Gardner, MA 01440
Attn: Jack P. Dreimiller, Chief Financial Officer
with a copy to:
Edward A. Benjamin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
To the Investors at the following address:
Special Situations Private Equity Fund, L.P.
Special Situations Technology Fund, L.P.
153 East 53rd Street, 51st Floor
New York, New York 10022
Attn: Austin Marxe
Fax No.: (212) 832-5300
With a copy to:
Hertzog, Calamari & Gleason
100 Park Avenue
New York, New York 10017
Attn: David B. Hertzog
Fax No.: (212) 213-1199
Any party may change the address to which notices are to be sent to
him, her or it by notifying all the other parties listed above in writing of
such address change.
8. This Agreement shall be binding on and inure to the benefit of the
Investors' successors, and permitted assigns.
-7-
<PAGE> 8
9. The representations, warranties, covenants, and agreements
contained herein shall survive the execution and delivery of this Agreement, it
being understood that the representations and warranties are only being made as
of the date hereof or as of a specific date if so indicated in such
representation or warranty.
10. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the domestic substantive laws of the State of New York,
without giving effect to any choice or conflict of law provision or rule that
would cause the application of the domestic substantive laws of any other
jurisdiction.
11. CONSENT TO JURISDICTION. Each of the parties agrees that all
actions, suits or proceedings arising out of or based upon this Agreement or the
subject matter hereof may be brought and maintained in the federal and state
courts of The State of New York. Each of the parties hereto by execution hereof:
(i) hereby irrevocably submits to the jurisdiction of the federal and state
courts in The State of New York for the purpose of any action, suit or
proceeding arising out of or based upon this Agreement or the subject matter
hereof and (ii) hereby waives to the extent not prohibited by applicable law,
and agrees not to assert, by way of motion, as a defense or otherwise, in any
such action, suit or proceeding, any claim that he or it is not subject
personally to the jurisdiction of the above-named courts, that he or it is
immune from extraterritorial injunctive relief or other injunctive relief, that
his or its property is exempt or immune from attachment or execution, that any
such action, suit or proceeding may not be brought or maintained in one of the
above-named courts, that any such action, suit or proceeding brought or
maintained in one of the above-named courts should be dismissed on grounds of
FORUM NON CONVENIENS, should be transferred to any court other than one of the
above-named courts, should be stayed by virtue of the pendency of any other
action, suit or proceeding in any court other than one of the above-named
courts, or that this Agreement or the subject matter hereof may not be enforced
in or by any of the above-named courts. Each of the parties hereto hereby
consents to service of process in any such suit, action or proceeding in any
manner permitted by the laws of The State of New York, agrees that service of
process by registered or certified mail, return receipt requested, at the
address specified in Section 7 hereof is reasonably calculated to give actual
notice and waives and agrees not to assert by way of motion, as a defense or
otherwise, in any such action, suit or proceeding any claim that such service of
process does not constitute good and sufficient service of process.
[Remainder of this page intentionally left blank.]
<PAGE> 9
Intending to be legally bound hereby, the undersigned have duly
executed this Agreement as of June 30, 1998.
SPECIAL SITUATIONS PRIVATE EQUITY
FUND, L.P.
By: /s/ Austin W. Marxe
-----------------------------
Title: Managing Director
SPECIAL SITUATIONS TECHNOLOGY
FUND, L.P.
By: /s/ AUSTIN W. MARXE
-----------------------------
Title: Managing Director
-9-
<PAGE> 10
For and in consideration of the above subscription and in reliance upon
the Investors' representations and covenants to the Company contained herein,
the Company hereby accepts the subscription of the Investors to the extent of
500,000 Shares, and promptly upon receipt in full of the aforesaid payment, the
Company will cause certificates for the Shares and the Warrants to be issued and
delivered to the Investors, free and clear of any liens, adverse claims,
charges, or other encumbrances.
PRECISION OPTICS CORPORATION
By: /s/ Richard E. Forkey
------------------------
Richard E. Forkey
President
Dated as of: June 30, 1998
<PAGE> 11
EXHIBIT A
SCHEDULE OF EXCEPTIONS
Section 5(a): Organization and Good Standing
The Company has two subsidiaries: Precise Medical, Inc., a
Massachusetts corporation, which is inactive, and Woods
Precision Optics, Ltd., a Hong Kong corporation, through which
the Company conducts sales operations in the Far East.
-11-
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
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<RECEIVABLES> 486,070
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0
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