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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
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 under 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 under 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 $3,028,600.
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 $3,648,314 as of August 31, 1999.
The number of shares of outstanding common stock of the issuer as of
August 31, 1999 was 7,687,595.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held on November 9, 1999 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 production orders from
this customer, with deliveries beginning in the quarter ending December 31, 1998
and scheduled through April 2000.
The Company developed and has manufactured and sold since 1985 a
proprietary product line of state-of-the-art instrumentation to couple
endoscopes to video cameras. Included in this product line are image couplers,
which physically connect the endoscope to the video camera system and transmit
the image viewed through the scope to the video camera. Another product -- the
beamsplitter -- performs the same function while preserving for the viewer an
eyeport for direct, simultaneous viewing through the
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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. The Company has received initial production orders for 100 GHz
and 200 GHz WDM optical filters, and began producing and shipping the 200 GHz
filter during the four months ending June 30, 1999. 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 be relatively insignificant
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
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ability to compete on a price basis in the medical products area particularly
and to the 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. 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 $434,000 and $649,000 for the fiscal
years ended June 30, 1999 and 1998, 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
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depending upon the mix between design efforts and hardware development, which is
generally more expensive and time consuming than the design phases. In addition
to customer-sponsored research and development, the Company spent approximately
$941,000 and $897,000 of its own funds during fiscal years 1999 and 1998,
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 2000. 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, 1999, the Company had forty full-time employees and two
part-time employees. There were 23 employees in manufacturing, 9 in engineering,
4 in sales and marketing, and 6 in finance and administration.
CUSTOMERS
Sales to the Company's largest customer, in terms of total sales during
fiscal year 1999, were approximately 37%. Sales to the Company's three largest
customers, in terms of total sales during fiscal year 1998, were approximately
22%, 14% and 10%.
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
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has authority to conduct detailed inspections of manufacturing plants in order
to assure that "good manufacturing practices" are being followed in the
manufacture of medical devices, to require periodic reporting of product defects
to the FDA, and to prohibit the exploitation of devices which do not comply with
law. Failure to comply with applicable regulatory 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, Massachusetts. The main 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 other Gardner facility is under a five year lease
which commenced on March 1, 1999. 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 1999.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
Position with the Company
Name Age or Principal Occupation
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<S> <C> <C>
Richard E. Forkey 59 President, Treasurer and
Director
Jack P. Dreimiller 51 Senior Vice President,
Finance, Chief Financial
Officer and Clerk
Kumar M. Khajurivala 49 Vice President, Operations
Edward A. Benjamin 61 Director. Member of Audit Committee. Mr.
Benjamin is a retired partner in the law firm
of Ropes & Gray, Boston, Massachusetts.
H. Angus Macleod 66 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 59 Director. Mr. Marxe was appointed
to the Board of Directors in August
1998. Mr. Marxe is Managing
Director 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 60 Director. Member of Audit Committee. Mr.
Pitlor is president of J.R. Pitlor, a management
consulting firm based in Cambridge,
Massachusetts.
Robert R. Shannon 67 Director. Member of Audit Committee. Mr.
Shannon is a professor at the Optical Sciences
Center of the University of Arizona in Tuscon,
Arizona.
</TABLE>
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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:
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<CAPTION>
1998 1999
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Quarter High Low High Low
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<S> <C> <C> <C> <C>
First $3 15/16 $2 11/16 $2 1/4 $1
Second $4 3/4 $3 1/2 $1 3/8 $5/8
Third $4 1/8 $2 5/8 $1 9/16 $5/8
Fourth $3 1/8 $1 47/64 $1 3/4 $1
</TABLE>
As of August 31, 1999, there were approximately 100 holders of record
of the Company's common stock.
In August 1999, the Company issued pursuant to Section 4(2) of the
Securities Act of 1933 an aggregate of 1,000,000 shares of its common stock and
warrants exercisable for an additional aggregate of 1,000,000 shares of its
common stock to Special Situations Cayman Fund, L.P., Special Situations Fund
III, Special Situations Private Equity Fund, L.P. and Special Situations
Technology Fund, L.P., four affiliated private investment funds based in New
York City (the "Special Situations Funds") in exchange for aggregate cash
consideration of $1,062,500.
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
$1.125, 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 $2.25 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
August 5, 1999
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among the parties, the Company would be obligated to issue additional shares of
common stock and additional warrants to the Special Situations Funds for no
additional consideration in the event such registration statement is not filed
on or before September 30, 1999 or is not declared effective on or prior to
December 31, 1999. The Company has not declared any dividends during the last
two fiscal years. At present, the Company intends to retain its earnings, if
any, to finance research and development and expansion of its business.
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. These
risks and uncertainties, many of which are not within the Company's control,
include, but are not limited to, the uncertainty and timing of the successful
development of the Company's new products, particularly in the optical thin
films area; the risks associated with reliance on a few key customers; the
Company's ability to attract and retain personnel with the necessary scientific
and technical skills; the timing and completion of significant orders; the
timing and amount of the Company's research and development expenditures; the
timing and level of market acceptance of customers' products for which the
Company supplies components; the level of market acceptance of competitors'
products; the ability of the Company to control costs associated with
performance under fixed price contracts; and the continued availability to the
Company of essential supplies, materials and services. 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 to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 1999, the Company's cash and cash
equivalents decreased by approximately $1,579,000 to $481,000. The decrease in
cash and cash equivalents was due to cash used by operating activities of
approximately $1,074,000, capital expenditures of approximately $379,000,
repayment of debt of approximately $115,000, costs of approximately $54,000
associated with a private placement of common stock in fiscal year 1998, and an
increase in other assets (primarily patents) of $39,000, partially offset by
proceeds received from exercise of stock options and warrants of approximately
$82,000.
During the year ending June 30, 1999, the Company entered into two
five-year lease obligations for the acquisition of manufacturing equipment
totaling approximately $73,000.
Subsequent to June 30, 1999, the Company completed a private placement
of 1,000,000 shares of common stock with gross proceeds of approximately
$1,062,000. In conjunction with this offering, the purchasers were issued
warrants to acquire 1,000,000 shares of common stock at an exercise price of
$1.125 per share.
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The Company's working capital was approximately $4,488,000, $3,939,000
and $2,874,000 at June 30, 1996, 1997 and 1998, respectively, and decreased
further to approximately $1,103,000 at June 30, 1999. This trend is primarily
the result of losses being generated beginning in fiscal 1997, due primarily to
a reduction in night vision products revenues occurring over the last three
years ending June 1999 and significant investments in internal research and
development and capital expenditures in order to transition the Company into
more profitable business areas such as medical products and optical thin films.
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 films
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 need to acquire new facilities, add
additional manufacturing or research and development equipment, or acquire a
business that has complementary products or manufactures or sells to the Company
components, materials, supplies, or services used in the manufacture, marketing,
distribution, or servicing of the Company's 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. As of June 30,
1999, there were no borrowings outstanding under the line of credit. As a
condition to borrowing under 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 not in compliance with all such
covenants as of June 30, 1999, and there can be no assurance that the Company
will be able to achieve and/or maintain compliance with all of such terms.
The Company currently has no material unused sources of liquidity other
than its cash and cash equivalents and accounts receivable. 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 and undertake other cost reduction measures.
However, the Company believes its sources of liquidity are sufficient
to support working capital and investment needs for the foreseeable future.
FISCAL YEAR 1999 RESULTS OF OPERATIONS
Total revenues for fiscal year 1999 were approximately $3,029,000, a
decrease of approximately $1,024,000, or 25.3% from fiscal year 1998.
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The revenue decrease from the prior year was due to lower sales of
medical products (down 10%) and non-medical products (down 57%). The decrease in
sales of medical products was due primarily to lower sales of non-stereo
endoscopes and endocouplers, partially offset by higher sales of stereo
endoscopes and cameras resulting from initial shipments of these products
beginning in the second quarter of fiscal year 1999. The reduction in
non-medical sales was due to lower sales of night vision products due to
successful completion during the prior fiscal year of several government
contracts, partially offset by initial sales of Wavelength Division Multiplexer
(WDM) optical filters, which began in March 1999.
Included in total revenues are sales for customer-funded research and
development projects totaling approximately $434,000 and $649,000 for the year
ending June 30, 1999 and 1998, respectively. Levels of customer-funded research
and development can fluctuate greatly in any given period depending upon the
level of customer demand during such period. All other product sales totaled
approximately $2,595,000 and $3,404,000 for the year ending June 30, 1999 and
1998, respectively.
Revenue from the Company's largest customer were approximately 37% of
total revenues for the year ended June 30, 1999. 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. No other customers accounted for more
than 10% of the Company's revenues in any of the three years ended June 30,
1999. Approximately 2%, 25% and 38% of the Company's revenues for the years
ended June 30, 1999, 1998 and 1997, respectively, were derived from sales to
agencies of the U.S. government or customers that supply agencies of the U.S.
government. The Company's current government business is substantially complete
and there can be no assurance that the government will award future contracts or
subcontracts to the Company.
Gross profit increased by approximately $416,000 in fiscal 1999, and as
a percentage of revenue increased from 11.3% to 28.8% compared to the previous
year. The increase in the gross profit percentage was due primarily to shipments
with a significantly more favorable product mix in the current year and the
benefits of on-going cost reduction efforts, which resulted in proportionately
lower manufacturing costs.
Research and development expenses increased by approximately $44,000 or
4.9% during fiscal year 1999 compared to the previous year. During both years,
internal research and development expenses consisted primarily of development
efforts related to WDM optical filters used in telecommunications systems that
are discussed further below.
Selling, general and administrative expenses decreased by approximately
$100,000 or 5.9% in fiscal year 1999 compared to fiscal 1998. The decrease was
due primarily to lower sales and marketing expenses.
During fiscal year 1998, the Company sold marketable securities and
realized a gain of approximately $157,000. No such sales were made in fiscal
year 1999.
Interest income decreased by approximately $30,000 in fiscal year 1999
due to the lower base of cash equivalents.
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<PAGE>
Interest expense relates primarily to capital lease obligations, and
increased by approximately $1,000 in fiscal year 1999 due to the addition of two
new capital leases during the latter part of the current year.
The income tax provision of approximately $6,000 in fiscal year 1999 is
due primarily to prior year tax adjustments.
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.
Included in total revenues are sales for customer-funded research and
development projects totaling approximately $649,000 and $1,186,000 for the year
ending June 30, 1998 and 1997, respectively. Levels of customer-funded research
and development can fluctuate greatly in any given period depending upon the
level of customer demand during such period. All other product sales totaled
approximately $3,404,000 and $6,186,000 for the year ending June 30, 1998 and
1997, respectively.
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.
Research and development expenses increased by approximately $469,000
or 109.4% in fiscal year 1998 compared to the previous year due primarily to
development efforts related to WDM optical filters used in telecommunications
systems.
Selling, general and administrative expenses decreased by approximately
$159,000, or 8.5%, due primarily to lower professional services and employee
benefits expenses.
Interest expense relates primarily to capital lease obligations.
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.
-13-
<PAGE>
YEAR 2000 READINESS
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 estimated completion
date for implementation of the hardware and software replacements necessitated
by the Year 2000 project is September 30, 1999, with ongoing testing to continue
through December 31, 1999. The Company believes the costs of becoming Year 2000
compliant will not exceed $40,000 (which includes approximately $26,000 for
capital equipment upgrades). These costs do not include time spent by internal
personnel, which is not material. 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 or service providers.
TRENDS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
The Company continues to aggressively pursue sales, marketing, and
technology development efforts for optical thin films in the rapidly growing
telecommunications industry. The success of these products depends upon a number
of factors, including the Company's timely completion of development efforts,
ability to meet a set of rigorous customer specifications, and ability to
reliably manufacture such products in sufficient quantity at acceptable yields
to meet anticipated demand. The Company is currently supporting product
evaluation tests with several potential customers. While the Company believes
that these efforts should lead to significant future thin film sales, it remains
uncertain exactly when the Company's manufacturing processes for such products
will satisfy all customer requirements. The emphasis of the Company's
development efforts during the last several quarters has been on addressing
specific product requirements for various environmental properties (such as the
ability to withstand temperature and humidity changes), certain production
specifics (including cutting and packaging), and the quality control procedures
and measurement processes necessary to meet customer requirements in large scale
production. Close customer interaction is continuing regarding all of these
issues.
In March 1999, the Company announced that it had received orders
totaling over $1.9 million from several customers for 100GHz and 200GHz channel
separation WDM optical filters used in telecommunications systems. Deliveries on
these contracts were approximately $300,000 for the year ending June 30, 1999,
and are scheduled through March 2000. Future deliveries on the remainder of
these new orders are contingent upon the Company's satisfying all customer
requirements.
During the quarter ending December 31, 1998, the Company commenced
deliveries of stereo endoscopes and cameras to a customer who has developed a
computer-enhanced surgery system. Revenues from this customer were approximately
37% of total revenues for the year ended June 30, 1999. In the fourth quarter of
fiscal year 1999, the Company received a follow-on order from this customer of
approximately $900,000, with deliveries beginning in July 1999. The Company
anticipates
-14-
<PAGE>
additional follow-on orders from this customer, but the magnitude of such future
business depends upon a number of factors, such as the customer's own success in
marketing its computer-enhanced surgery system and the customer's continued
acceptance of the Company's price, performance and product reliability
parameters.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated Financial
Statements are filed on pages 16 through 32 of this Form 10-KSB.
-15-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND 1998
TOGETHER WITH AUDITORS' REPORT
-16-
<PAGE>
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,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
July 27, 1999 (except with respect
to matters discussed in Note 9, as
to which the date is August 5, 1999)
-17-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 480,732 $ 2,060,146
Accounts receivable (net of allowance for doubtful
accounts of approximately $85,000 and $42,000 in
1999 and 1998, respectively) 210,079 486,070
Inventories 979,284 949,993
Deferred tax assets -- 145,000
Prepaid expenses 47,996 44,870
----------- -----------
Total current assets 1,718,091 3,686,079
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment 3,100,760 2,848,555
Leasehold improvements 510,625 468,724
Furniture and fixtures 94,346 109,568
Vehicles 44,742 44,742
----------- -----------
3,750,473 3,471,589
Less--Accumulated depreciation and amortization 2,496,949 2,318,380
----------- -----------
1,253,524 1,153,209
----------- -----------
OTHER ASSETS:
Cash surrender value of life insurance policies 45,589 50,156
Patents, net 237,291 238,034
----------- -----------
Total other assets 282,880 288,190
----------- -----------
$ 3,254,495 $ 5,127,478
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES:
Accounts payable $ 194,619 $ 124,566
Accrued payroll 75,644 121,262
Accrued profit sharing and bonuses 25,000 28,798
Accrued professional services 50,283 80,140
Accrued vacation 78,056 88,514
Accrued warranty expense 50,000 50,000
Accrued income taxes 912 4,924
Other accrued liabilities 35,392 91,372
Customer advances -- 116,841
Current portion of capital lease obligation 105,542 105,349
----------- -----------
Total current liabilities 615,448 811,766
----------- -----------
CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION 166,312 208,684
----------- -----------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
Authorized--10,000,000 shares
Issued and outstanding--6,687,595 and 6,618,619 66,876 66,186
shares at June 30, 1999 and 1998, respectively
Additional paid-in capital 6,206,411 6,172,349
Accumulated deficit (3,800,552) (2,131,507)
----------- -----------
Total stockholders' equity 2,472,735 4,107,028
----------- -----------
$ 3,254,495 $ 5,127,478
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
-18-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
REVENUES $ 3,028,600 $ 4,053,052 $ 7,372,310
COST OF GOODS SOLD 2,155,070 3,595,756 5,610,438
----------- ----------- -----------
Gross profit 873,530 457,296 1,761,872
RESEARCH AND DEVELOPMENT EXPENSES 941,234 897,215 428,419
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,608,696 1,708,864 1,868,268
----------- ----------- -----------
Total operating expenses 2,549,930 2,606,079 2,296,687
Operating loss (1,676,400) (2,148,783) (534,815)
GAIN ON SALE OF MARKETABLE SECURITIES -- 157,417 --
INTEREST INCOME 40,151 70,131 104,423
INTEREST EXPENSE (27,154) (26,254) (27,241)
----------- ----------- -----------
Loss before provision (benefit) from
income taxes (1,663,403) (1,947,489) (457,633)
PROVISION (BENEFIT) FOR INCOME TAXES 5,642 13,300 (15,000)
----------- ----------- -----------
Net loss $(1,669,045) $(1,960,789) $ (442,633)
----------- ----------- -----------
----------- ----------- -----------
BASIC AND DILUTED LOSS PER SHARE $ (.25) $ (.32) $ (.07)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,670,308 6,099,347 5,982,210
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
-19-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
NUMBER COMMON ADDITIONAL RETAINED TOTAL
OF SHARES STOCK PAID-IN EARNINGS STOCKHOLDERS'
CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 5,980,502 $ 59,805 $ 5,145,655 $ 271,915 $ 5,477,375
Proceeds from exercise of options 41,000 410 56,903 -- 57,313
to purchase common stock
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 97,117 971 44,121 -- 45,092
and warrants to purchase common
stock
Net proceeds from private 500,000 5,000 925,670 -- 930,670
placement of common stock
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
Proceeds from exercise of options 65,760 658 81,012 -- 81,670
and warrants to purchase common
stock
Common stock issued for 3,216 32 7,468 -- 7,500
payment of royalties
Costs associated with private -- -- (54,418) -- (54,418)
placement of common stock
Net loss -- -- -- (1,669,045) (1,669,045)
--------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1999 6,687,595 $ 66,876 $ 6,206,411 $(3,800,552) $ 2,472,735
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
-20-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,669,045) $(1,960,789) $ (442,633)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
Depreciation and amortization 395,829 426,976 428,054
Deferred income taxes 145,000 12,300 (38,300)
Gain on sales of marketable securities -- (157,417) --
Changes in assets and liabilities-
Accounts receivable 275,991 (19,259) 672,993
Inventories (29,291) 626,974 286,727
Prepaid expenses 4,374 (4,597) 4,411
Refundable income taxes -- 52,970 (22,694)
Accounts payable 70,053 (147,345) (557,517)
Customer advances (116,841) 116,841 --
Accrued expenses (149,723) 92,319 (41,499)
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,073,653) (961,027) 289,542
----------- ----------- -----------
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 (379,266) (269,402) (444,914)
Increase in other assets (38,770) (116,507) (58,690)
----------- ----------- -----------
Net cash used in investing activities (418,036) (198,492) (533,604)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligation (114,977) (104,479) (82,682)
Net (costs) proceeds from private placement of common (54,418) 930,670 --
stock
Proceeds from exercise of stock options and warrants 81,670 45,092 57,313
----------- ----------- -----------
Net cash (used in) provided by financing activities (87,725) 871,283 (25,369)
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,579,414) (288,236) (269,431)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,060,146 2,348,382 2,617,813
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 480,732 $ 2,060,146 $ 2,348,382
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 27,154 $ 26,254 $ 27,241
----------- ----------- -----------
----------- ----------- -----------
Income taxes $ 842 $ -- $ 101,461
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligation $ 72,798 $ 139,567 $ --
Common stock issued for payment of royalties $ 7,500 $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
-21-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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.
The Company has incurred significant operating losses during the
last three fiscal years. This trend was primarily the result of
the loss of two significant customers and the completion of
several large nonrecurring government contracts. In fiscal 1998,
the Company began making significant investments in research and
development and capital purchases for new products. During fiscal
1999, the Company began commercial shipments of the new optical
filters used in telecommunications systems. In August 1999, the
Company raised approximately $1 million of additional cash through
the issuance of common stock (see Note 9). The Company believes,
based on its operating and strategic plans along with the cash
generated from the recent equity financing, that it will have
sufficient funds to conduct operations through at least the next
fiscal year.
(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, including revenues from customer-sponsored research and
development contracts, 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. Amounts recorded as revenue under customer-sponsored
research and development contracts are not refundable if the
research effort is not successful, and such contracts do not
include future performance obligations.
(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. Cash equivalents consist primarily of
overnight repurchase agreements.
-22-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
(e) 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, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw material $ 589,762 $ 585,227
Work-in-progress 248,085 246,264
Finished goods 141,437 118,502
--------- ---------
$ 979,284 $ 949,993
--------- ---------
--------- ---------
</TABLE>
(f) 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:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
<S> <C>
Machinery and equipment 5-7 years
Leasehold improvements Life of lease
Furniture and fixtures 5 years
Vehicles 3 years
</TABLE>
(g) 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, 1999 and 1998,
receivables from the Company's largest customer were approximately
22% and 36% of the total accounts receivable, respectively. The
Company has not experienced any material losses related to
accounts receivable from individual customers.
Revenues from the Company's largest customer were approximately
37% of total revenues for the year ended June 30, 1999. 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. No other customers accounted
-23-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
for more than 10% of the Company's revenues in any of the three
years ended June 30, 1999. Approximately 2%, 25% and 38% of the
Company's revenues for the years ended June 30, 1999, 1998 and
1997, respectively, were derived from sales to agencies of the
U.S. government or customers that supply agencies of the U.S.
government.
(h) LOSS PER SHARE
The Company has adopted SFAS No. 128, EARNINGS PER SHARE,
effective December 15, 1997. 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.
For each of the three the years in the period ended June 30, 1999,
the effect of stock options and warrants was antidilutive;
therefore, they were not included in the computation of diluted
(loss) earnings per share. The number of shares that were excluded
from the computation, as their effect would be antidilutive, were
1,605,500, 1,864,500 and 1,045,617, during fiscal 1999, 1998 and
1997, respectively.
(i) RESEARCH AND DEVELOPMENT
Research and development costs, which are charged to operations as
incurred, include direct costs plus overhead. The Company
currently has no research and development funding commitments.
(j) 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 Financial Accounting
Standards Board (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 requires 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.
(k) 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.
(l) OTHER ASSETS
Patents are carried at cost, less accumulated amortization of
approximately $151,000 and
-24-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
$107,000 at June 30, 1999 and 1998, 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.
(m) FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, requires disclosures about the fair value of
financial instruments. Financial instruments consist principally
of accounts receivable, accounts payable, and capital lease
obligations. The estimated fair value of these financial
instruments approximates their carrying value.
(n) LONG-LIVED ASSETS
In accordance with the provisions of SFAS No. 121, ACCOUNTING FOR
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, the Company evaluates the realizability of its
long-lived assets at each reporting period based on projected
future cash flows. As of June 30, 1999 and 1998, the Company has
determined that no material adjustment to the carrying value of
its long-lived assets was required.
(o) WARRANTY COSTS
The Company does not incur future performance obligations in the
normal course of business other than providing a standard one-year
warranty on materials and workmanship to its customers. The
Company provides for estimated warranty costs at the time product
revenue is recognized. No separately priced extended warranty
product maintenance contracts are offered to customers.
(p) NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from nonowners sources. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The
Company adopted SFAS No. 130, effective July 1, 1998. The
Company's comprehensive loss for the years ended June 30, 1999,
1998 and 1997 was equal to its net loss for the same periods.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. This new standard is not
anticipated to have significant impact on the Company's
consolidated financial statements based on its current structure
and operations.
-25-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
(q) 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, 1999, the Company had available a demand line of
credit of $500,000 at an interest rate equal to the bank's prime
rate (7.75% at June 30, 1999) 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 not in compliance with all such financial covenants at June 30,
1999. At June 30, 1999, there were no borrowings outstanding under
this line of credit. Borrowings under this line of credit are
secured by all assets of the Company. The line of credit expires
on November 30, 1999.
(3) CAPITAL LEASE OBLIGATION
At June 30, 1999, future minimum lease payments under capital
lease obligations are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
<S> <C>
2000 $ 124,700
2001 94,364
2002 51,892
2003 33,028
2004 4,859
----------
Total minimum lease payments 308,843
Amount representing interest (36,989)
----------
Present value of minimum lease payments 271,854
Less--Current portion 105,542
----------
$ 166,312
----------
----------
</TABLE>
Capital leases are secured by all assets of the Company under a security
agreement subordinate to the Company's demand line of credit.
-26-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
(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 1999, 1998 and 1997 for consulting services.
Another director is a former partner in a law firm that has
performed legal services for the Company during fiscal 1999, 1998
and 1997.
(b) OPERATING LEASE COMMITMENTS
Total future minimum rental payments under all operating leases
for fiscal 2000 are $103,000 and $66,000 thereafter.
Rent expense on operating leases was approximately $188,000,
$217,000 and $213,000 for the years ended June 30, 1999, 1998 and
1997, 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 218,000 at an exercise price of
$1.375 per share were outstanding as of June 30, 1998. Warrants
for 55,760 shares were exercised during fiscal 1999. Warrants for
162,240 shares expired in approximately equal amounts on August
21, 1998 and October 23, 1998.
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.
-27-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
(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, 1999, 825,000 shares of common stock were
available for future grants under the 1997 Incentive Plan.
The following is a summary of transactions in the plans for the three
years ended June 30, 1999:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE WEIGHTED
OF PER SHARE AVERAGE
SHARES EXERCISE
PRICE
<S> <C> <C> <C>
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
Granted 25,000 1.312 1.31
Canceled (56,000) 3.00-3.844 3.09
------- ------------- -----
Options outstanding, June 30, 1999 961,500 $ 1.312-$3.844 $2.39
------- ------------- -----
------- ------------- -----
Options exercisable, June 30, 1999 663,000 $1.312-$3.844 $2.11
------- ------------- -----
------- ------------- -----
</TABLE>
-28-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
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 WEIGHTED
SHARES PRICE PER AVERAGE
SHARE EXERCISE
PRICE
<S> <C> <C> <C>
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
Exercised (10,000) .50 .50
------- ----------- -----------
Options outstanding, June 30, 1999 144,000 $.50 - 5.69 $ 1.50
------- ----------- -----------
------- ----------- -----------
Options exercisable, June 30, 1999 132,000 $.50 - 5.69 $ 1.52
------- ----------- -----------
------- ----------- -----------
</TABLE>
For each of the three years ended June 30, 1999, the Company has
recognized no compensation expense in the accompanying consolidated
statements of operations, as there were no stock option grants to
recipients other than employees and directors during such periods.
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options granted in fiscal 1999, 1998 and 1997 using
the Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used and the weighted average information for each of the
three years in the period ended June 30, 1999 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rates 4.54% 6.06% 6.95%
Expected dividend yield - - -
Expected lives 7 years 7 years 7 years
Expected volatility 99% 90% 87%
Weighted average fair value of grants $1.10 $3.02 $1.52
Weighted-average remaining
contractual life of options outstanding 7.28 years 8.33 years 8.16 years
</TABLE>
-29-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
The effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net loss-
As reported $(1,669,045) $ (1,960,789) $(442,633)
Pro forma (2,068,728) (2,340,964) (520,373)
Net loss per share-
As reported, basic and diluted $ (.25) $(.32) $ (.07)
Pro forma, basic and diluted (.31) (.38) (.09)
</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.
The provision (benefit) for income taxes in the accompanying consolidated
statements of operations consists of the following for the three years
ended June 30, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current-
Federal $(136,346) $ -- $ 26,300
State 912 1,000 1,000
Foreign (3,924) -- (4,000)
--------- --------- ---------
(139,358) 1,000 23,300
--------- --------- ---------
Deferred-
Federal 123,000 10,500 (34,300)
State 22,000 1,800 (4,000)
--------- --------- ---------
145,000 12,300 (38,300)
--------- --------- ---------
$ 5,642 $ 13,300 $ (15,000)
--------- --------- ---------
--------- --------- ---------
</TABLE>
-30-
<PAGE>
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Continued)
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the three years ended June 30, 1999 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income tax benefit at federal statutory rate (34.0)% (34.0)% (34.0)%
Increase (decrease) in tax resulting from-
Temporary items with no tax benefit 3.1 2.2 6.1
Change in valuation allowance -- 32.5 22.9
Effect of state taxes 34.7 -- (4.6)
Prior year tax adjustments (3.4) -- 5.2
Other (.1) -- 1.1
--- --- ----
Effective tax rate 0.3% 0.7% (3.3)%
--- --- ----
--- --- ----
</TABLE>
The components of the net deferred tax asset at June 30, 1999 and 1998
are approximately as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net operating loss carryforward $ 1,034,000 $ 622,000
Reserves and accruals not yet deducted for tax purposes 376,000 316,000
Other temporary differences (22,000) 18,000
----------- -----------
1,388,000 956,000
Valuation allowance (1,388,000) (811,000)
----------- -----------
Net deferred tax asset $ -- $ 145,000
----------- -----------
----------- -----------
</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 1999
primarily due to the generation of a net operating loss carryforward. As
of June 30, 1999, the Company has net operating loss carryforwards for
U.S. federal income taxes of approximately $3,000,000, of which
approximately $85,000 expires in 2012, approximately $1,500,000 expires
in 2013, and approximately $1,415,000 expires in 2019.
-31-
<PAGE>
(7) PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan that covers
all eligible employees. No employer contributions were made in fiscal
1999, 1998 or 1997.
(8) SEGMENT REPORTING
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in the fiscal year ended June 30,
1999. SFAS No. 131 establishes standards for reporting information
regarding operating segments in annual financial statements and requires
selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or
decision making group, in making decisions about how to allocate
resources and assess performance. The Company's chief decision-maker, as
defined under SFAS No. 131, is the Chief Executive Officer. To date, the
Company has viewed its operations and manages its business as principally
one segment. For all periods presented, over 90% of the Company's sales
have been to customers in the United States.
(9) SUBSEQUENT EVENT
In August 1999, the Company completed a private placement of 1,000,000
shares of common stock with gross proceeds of $1,062,500. In conjunction
with this offering, the purchasers were issued warrants to acquire
1,000,000 shares of common stock at an exercise price of $1.125 per
share. The warrants are immediately exercisable and expire in August
2004.
-32-
<PAGE>
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, 1999. 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 Promissory Note dated December 5, 1991 between the Company and
The First National Bank of Boston(3)
4.3 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.(4)
4.4 Common Stock Purchase Warrant dated June 30, 1998 issued to
Special Situations Private Equity Fund, L.P.(5)
4.5 Common Stock Purchase Warrant dated June 30, 1998 issued to
Special Situations Technology Fund, L.P.(5)
4.6 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.(5)
4.7 Registration Rights Agreement dated as of August 5, 1999 by
and among the Company, Special Situations Cayman Funds, L.P.,
Special Situations Fund III, L.P., Special Situations Private
Equity Fund, L.P. and Special Situations Technology Fund, L.P.
4.8 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Cayman Fund, L.P.
4.9 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Fund III, L.P.
4.10 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Private Equity Fund, L.P.
4.11 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Technology Fund, L.P.
-33-
<PAGE>
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")(6)
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(6)
10.5 Second Amendment to Commercial Lease between the Company and
Equity dated December 9, 1994(7)
10.6 Lease dated March 1, 1999, between the Company and Philip A.
Wood, as executor of the Estate of Alma L. Wood and as devisee
under the Will of Alma L. Wood; Martha A. Mount, devisee under
the Will of Alma L. Wood; and Nancy E. Popinchalk, devisee
under the Will of Alma L. Wood for 21 Pleasant Street,
Gardner, Massachusetts.
10.7 Precision Optics Corporation, Inc. 1997 Incentive Plan.(5)
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.(5)
10.9 Stock Subscription Agreement dated as of August 5, 1999 by and
among the Company, Special Situations Cayman Funds, L.P.,
Special Situations Fund III, L.P., Special Situations Private
Equity Fund, L.P. and Special Situations Technology Fund, L.P.
21 Subsidiaries of Precision Optics Corporation, Inc.(7)
27 Financial Data Schedule.
99 Important Factors Regarding Forward-Looking Statements(8)
(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 No. 001-10647.
(3) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 33-43929).
(4) Incorporated herein by reference to the Company's 1992 Annual Report on
Form 10-KSB No. 001-10647.
(5) Incorporated herein by reference to the Company's 1998 Annual Report on
Form 10-KSB No. 001-10647.
(6) Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-KSB No. 001-10647.
(7) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-KSB No. 001-10647.
(8) Incorporated herein by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1996 No. 001-10647.
(b) REPORTS ON FORM 8-K.
None.
-34-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: September 28, 1999 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 Clerk
executive officer) (principal financial and
accounting officer)
Date: September 28, 1999 Date: September 28, 1999
By: /s/ Joel R. Pitlor By: /s/ Edward A. Benjamin
---------------------------- -----------------------------------
Joel R. Pitlor Edward A. Benjamin
Director Director
Date: September 28, 1999 Date: September 28, 1999
By: /s/ Robert R. Shannon By: /s/ H. Angus Macleod
---------------------------- -----------------------------------
Robert R. Shannon H. Angus Macleod
Director Director
Date: September 28, 1999 Date: September 28, 1999
By: /s/ Austin W. Marxe
----------------------------
Austin W. Marxe
Director
Date: September 28, 1999
-35-
<PAGE>
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 Promissory Note dated December 5, 1991 between the Company and The
First National Bank of Boston(3)
4.3 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.(4)
4.4 Common Stock Purchase Warrant dated June 30, 1998 issued to
Special Situations Private Equity Fund, L.P.(5)
4.5 Common Stock Purchase Warrant dated June 30, 1998 issued to
Special Situations Technology Fund, L.P.(5)
4.6 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.(5)
4.7 Registration Rights Agreement dated as of August 5, 1999 by and
among the Company, Special Situations Cayman Funds, L.P., Special
Situations Fund III, L.P., Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.
4.8 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Cayman Fund, L.P.
4.9 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Fund III, L.P.
4.10 Common Stock Purchase Warrant dated August 5, 1999 issued to
Special Situations Private Equity Fund, L.P.
4.11 Common Stock Purchase Warrant dated August 5, 1999 issued to
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")(6)
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(6)
10.5 Second Amendment to Commercial Lease between the Company and
Equity dated December 9, 1994(7)
10.6 Lease dated March 1, 1999, between the Company and Philip A. Wood,
as executor of the Estate of Alma L. Wood and as devisee under the
Will of Alma L. Wood; Martha A. Mount, devisee under the Will of
Alma L. Wood; and Nancy E. Popinchalk, devisee under the Will of
Alma L. Wood for 21 Pleasant Street, Gardner, Massachusetts.
10.7 Precision Optics Corporation, Inc. 1997 Incentive Plan.(5)
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.(5)
10.9 Stock Subscription Agreement dated as of August 5, 1999 by and
among the Company, Special Situations Cayman Funds, L.P., Special
Situations Fund III, L.P., Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.
21 Subsidiaries of Precision Optics Corporation, Inc.(7)
27 Financial Data Schedule.
99 Important Factors Regarding Forward-Looking Statements(8)
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-18
-36-
<PAGE>
(No. 33-36710-B).
(2) Incorporated herein by reference to the Company's 1991 Annual Report on
Form 10-KSB No. 001-10647.
(3) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 33-43929).
(4) Incorporated herein by reference to the Company's 1992 Annual Report on
Form 10-KSB No. 001-10647.
(5) Incorporated herein by reference to the Company's 1998 Annual Report on
Form 10-KSB No. 001-10647.
(6) Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-KSB No. 001-10647.
(7) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-KSB No. 001-10647.
(8) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1996 No. 001-10647.
-37-
<PAGE>
EXHIBIT 4.7
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
This Agreement (the "AGREEMENT") is made as of August 5, 1999 by and
among Precision Optics Corporation, Inc. a Massachusetts corporation (the
"COMPANY") and Special Situations Cayman Fund, L.P., Special Situations Fund
III, L.P., Special Situations Private Equity Fund, L.P. and Special Situations
Technology Fund, L.P., each a Delaware limited partnership (collectively, the
"INVESTORS").
WHEREAS, pursuant to a Stock Subscription Agreement dated as of
August 5, 1999 by and among the Company and the Investors (the "SUBSCRIPTION
AGREEMENT"), the Investors have purchased from the Company an aggregate of
1,000,000 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 1,000,000 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.
<PAGE>
"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, 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 file a
registration statement under the Securities Act in respect of the Shares and the
Warrant Shares not later than September 30, 1999, and to cause such registration
to be effective not later than December 31, 1999.
2.2 POSTPONEMENT. The Company may postpone for a period of up to 30
days the filing of any registration required pursuant to Section 2.1 (regardless
of whether such 30 day period ends after September 30, 1999) 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-
<PAGE>
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 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.
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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 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.
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<PAGE>
4. ADDITIONAL ISSUANCE. In the event that any registration statement required to
be filed pursuant to Section 3.1 is not filed on or prior to September 30, 1999,
the Company will issue and deliver, free of charge and without cost, to the
Investors on or prior to October 15, 1999, (i) certificates representing, in the
aggregate, a number of fully paid, nonassessable shares of Common Stock equal to
2.0% of the Shares and (ii) warrants exercisable (on the same terms and
conditions as are then applicable to the Warrants), in the aggregate, for a
number of fully paid, nonassessable shares of Common Stock equal to 2.0% of the
Warrant Shares. In the event that any registration statement filed pursuant to
Section 3.1 is not declared effective on or prior to December 31, 1999 (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, in the aggregate, a number of fully paid,
nonassessable shares of Common Stock equal to 2.0% of the Shares and (y)
warrants exercisable (on the same terms and conditions as are then applicable to
the Warrants), in the aggregate, for a number of fully paid, nonassessable
shares of Common Stock equal to 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, in the aggregate, a number of fully paid,
non-assessable shares of Common Stock equal to 2.0% of the Shares and (y)
additional warrants exercisable (on the same terms and conditions as are then
applicable to the Warrants), in the aggregate, for a number of fully paid,
nonassessable shares of Common Stock equal to 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 30
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 30 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.
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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 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:
-8-
<PAGE>
(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 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, Chief Financial Officer
Fax No.: (978) 630-1487
with a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attn: Patrick O'Brien, Esq.
Fax No.: (617) 951-7050
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<PAGE>
and to the Investors at:
Special Situations Cayman Fund, L.P.
Special Situations Fund III, L.P.
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: Steve Becker
Fax No.: (212) 832-6141
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>
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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<PAGE>
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 CAYMAN FUND, L.P.
By: /S/AUSTIN W. MARXE
---------------------------------
Title: Managing Director
SPECIAL SITUATIONS FUND III, L.P.
By: /S/AUSTIN W. MARXE
---------------------------------
Title: Managing Director
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]
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<PAGE>
EXHIBIT 4.8
EXECUTION COPY
PRECISION OPTICS CORPORATION, INC.
SPECIAL SITUATIONS CAYMAN FUND, L.P.
COMMON STOCK PURCHASE WARRANT
Precision Optics Corporation, Inc., a Massachusetts corporation (the
"COMPANY"), hereby agrees that, for value received, Special Situations Cayman
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 August 5, 1999, and before 5:00 p.m., Boston, Massachusetts time, on
August 5, 2004, 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 $1.125 (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>
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 greater of the Current Market Price
or the Warrant 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 the greater of such Current
Market Price and such Warrant Price; and
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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 greater of the Current Market Price or the Warrant 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
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<PAGE>
upon the original issue, sale, grant or assumption thereof,
and any subsequent 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
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<PAGE>
Convertible Securities with respect to which such
Options were actually exercised;
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
-5-
<PAGE>
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;
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
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<PAGE>
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.
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
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<PAGE>
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.
6. INVESTMENT INTENT. The Warrant Shares are subject to the
Registration Rights Agreement dated as of August 5, 1999 between the Company,
Special Situations Cayman Fund, L.P., Special Situations Fund III, L.P., 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 $2.25 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.
-8-
<PAGE>
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.
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 be reserved at all times 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>
IN WITNESS WHEREOF, this Warrant has been duly executed by Precision
Optics Corporation, Inc. this 5th day of August, 1999.
PRECISION OPTICS CORPORATION, INC.
By: /s/ Richard E. Forkey
-----------------------------
President
[Special Situations Cayman Fund, L.P.]
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<PAGE>
[Warrant]
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 CAYMAN
----------------------- 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>
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 CAYMAN FUND, L.P.
-----------------------
By:
----------------------------------
Title:
<PAGE>
EXHIBIT 4.9
EXECUTION COPY
PRECISION OPTICS CORPORATION, INC.
SPECIAL SITUATIONS FUND III, L.P.
COMMON STOCK PURCHASE WARRANT
Precision Optics Corporation, Inc., a Massachusetts corporation (the
"COMPANY"), hereby agrees that, for value received, Special Situations Fund III,
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
August 5, 1999, and before 5:00 p.m., Boston, Massachusetts time, on August 5,
2004, 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 $1.125 (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>
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 greater of the Current Market Price
or the Warrant 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 the greater of such Current Market
Price and such Warrant Price; and
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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 greater of the Current Market Price or the Warrant 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
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<PAGE>
upon the original issue, sale, grant or assumption thereof,
and any subsequent 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
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<PAGE>
Convertible Securities with respect to which such
Options were actually exercised;
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
-5-
<PAGE>
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;
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
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<PAGE>
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.
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
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<PAGE>
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.
6. INVESTMENT INTENT. The Warrant Shares are subject to the
Registration Rights Agreement dated as of August 5, 1999 between the Company,
Special Situations Cayman Fund, L.P., Special Situations Fund III, L.P., 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 $2.25 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.
-8-
<PAGE>
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.
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 be reserved at all times 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>
IN WITNESS WHEREOF, this Warrant has been duly executed by Precision
Optics Corporation, Inc. this 5th day of August, 1999.
PRECISION OPTICS CORPORATION, INC.
By: /s/ Richard E. Forkey
------------------------------
President
[Special Situations Fund III, L.P.]
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<PAGE>
[Warrant]
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 FUND III, 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>
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 FUND III, L.P.
--------------------
By:
-------------------------------
Title:
<PAGE>
EXHIBIT 4.10
EXECUTION COPY
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 August 5, 1999, and before 5:00 p.m., Boston, Massachusetts time, on
August 5, 2004, in whole or in part, an aggregate of 350,000 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 $1.125 (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>
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 greater of the Current Market Price
or the Warrant 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 the greater of such Current Market
Price and such Warrant Price; and
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<PAGE>
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 greater of the Current Market Price or the Warrant 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
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<PAGE>
upon the original issue, sale, grant or assumption
thereof, and any subsequent 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
-4-
<PAGE>
Convertible Securities with respect to which
such Options were actually exercised;
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
-5-
<PAGE>
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;
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
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<PAGE>
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.
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
-7-
<PAGE>
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.
6. INVESTMENT INTENT. The Warrant Shares are subject to the
Registration Rights Agreement dated as of August 5, 1999 between the Company,
Special Situations Cayman Fund, L.P., Special Situations Fund III, L.P., 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 $2.25 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.
-8-
<PAGE>
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.
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 be reserved at all times 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>
IN WITNESS WHEREOF, this Warrant has been duly executed by Precision
Optics Corporation, Inc. this 5th day of August, 1999.
PRECISION OPTICS CORPORATION, INC.
By: /S/Richard E. Forkey
-------------------------------
President
[Special Situations Private Equity Fund, L.P.]
-10-
<PAGE>
[Warrant]
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>
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>
EXHIBIT 4.10
EXECUTION COPY
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 August 5, 1999, and before 5:00 p.m., Boston, Massachusetts time, on
August 5, 2004, in whole or in part, an aggregate of 350,000 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 $1.125 (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>
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 greater of the Current Market Price
or the Warrant 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 the greater of such Current Market
Price and such Warrant Price; and
-2-
<PAGE>
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 greater of the Current Market Price or the Warrant 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
-3-
<PAGE>
upon the original issue, sale, grant or assumption
thereof, and any subsequent 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
-4-
<PAGE>
Convertible Securities with respect to which
such Options were actually exercised;
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
-5-
<PAGE>
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;
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
-6-
<PAGE>
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.
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
-7-
<PAGE>
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.
6. INVESTMENT INTENT. The Warrant Shares are subject to the
Registration Rights Agreement dated as of August 5, 1999 between the Company,
Special Situations Cayman Fund, L.P., Special Situations Fund III, L.P., 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 $2.25 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.
-8-
<PAGE>
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.
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 be reserved at all times 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>
IN WITNESS WHEREOF, this Warrant has been duly executed by Precision
Optics Corporation, Inc. this 5th day of August, 1999.
PRECISION OPTICS CORPORATION, INC.
By: /s/ Richard E. Forkey
-----------------------------
President
[Special Situations Private Equity Fund, L.P.]
-10-
<PAGE>
[Warrant]
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>
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>
EXHIBIT 10.6
EXECUTION COPY
LEASE
PHILIP A. WOOD, Executor and Devisee
MARTHA A. MOUNT, Devisee
NANCY E. POPINCHALK, Devisee
TO
PRECISION OPTICS CORPORATION, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. IDENTIFICATIONS................................................................... 1
2. LEASE; THE PREMISES............................................................... 1
3. TERM.............................................................................. 1
4. USE OF THE PREMISES; LICENSES AND PERMITS......................................... 1
5. BASIC RENT; ADDITIONAL RENT....................................................... 1
6. TAXES............................................................................. 2
7. INSURANCE; WAIVER OF SUBROGATION.................................................. 3
8. UTILITIES......................................................................... 4
9. REPAIRS AND MAINTENANCE........................................................... 5
10. COMPLIANCE WITH LAWS AND REGULATIONS.............................................. 5
11. ALTERATIONS BY TENANT............................................................. 6
12. LANDLORD'S ACCESS................................................................. 6
13. INTENTIONALLY OMITTED............................................................. 6
</TABLE>
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<TABLE>
<S> <C> <C>
14. CASUALTY DAMAGE................................................................... 7
15. CONDEMNATION...................................................................... 8
16. LANDLORD'S COVENANT OF QUIET ENJOYMENT; REPRESENTATIONS AND WARRANTIES............ 9
17. TENANT'S OBLIGATION TO QUIT....................................................... 10
18. TRANSFERS OF TENANT'S INTEREST.................................................... 11
19. TRANSFERS OF LANDLORD'S INTEREST.................................................. 11
20. LANDLORD'S ACCESS................................................................. 11
21. INDEMNITIES....................................................................... 12
22. PERMITTED MORTGAGEES' RIGHTS...................................................... 13
23. TENANT'S DEFAULT; LANDLORD'S REMEDIES............................................. 13
24. REMEDIES CUMULATIVE; WAIVERS...................................................... 15
26. EXTENSIONS OF TERM; BROKER........................................................ 16
27. PURCHASE OPTION................................................................... 17
28. NOTICES........................................................................... 18
29. RECORDING......................................................................... 18
30. ESTOPPEL CERTIFICATES............................................................. 18
31. BIND AND INURE; LIMITED LIABILITY OF LANDLORD..................................... 19
32. CAPTIONS.......................................................................... 19
33. INTEGRATION....................................................................... 19
34. SEVERABILITY; CHOICE OF LAW....................................................... 20
</TABLE>
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LEASE
1. IDENTIFICATIONS.
This LEASE made as of the 1st day of March, 1999, by PHILIP A. WOOD, in
his capacity as executor of the Estate of Alma L. Wood, Worcester Probate
99PR0206EP1, and also devisee of the Premises (as hereinafter defined) under the
Will of Alma L. Wood ("Wood"), MARTHA A. MOUNT, devisee of the Premises under
the Will of Alma L. Wood ("Mount") and NANCY E. POPINCHALK, devisee of the
Premises under the Will of Alma L. Wood ("Popinchalk"; and together with Wood
and Mount, the "Landlord"), having an address at c/o Henri L. Sans, Jr., Esq.,
LeBlanc & Sans, 21 Pleasant Street, Gardner, Massachusetts 01440, and PRECISION
OPTICS CORPORATION, INC. (the "Tenant"), a Massachusetts corporation having an
address at 22 East Broadway, Gardner, Massachusetts 01440.
2. LEASE; THE PREMISES.
In consideration of the Basic Rent, Additional Rent, and other payments
and covenants of Tenant hereinafter set forth, and upon the following terms and
conditions, Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord that certain parcel of land (the "Property") known and numbered as 21
Summer Street, Gardner, Massachusetts, said parcel containing approximately 0.57
acres as more particularly described in Exhibit A attached hereto, together with
that certain building containing approximately four thousand (4,000) square feet
of floor area (together with any replacements thereof, the "Building") and the
other improvements constructed on the Property (collectively, the Building and
such other improvements, the "Improvements"). The Property, the Improvements and
any other improvements hereafter constructed on the Property are hereafter
collectively referred to as the "Premises".
3. TERM.
The "Term" of this Lease shall commence at 12:00 A.M. on March 1, 1999
and shall expire, unless earlier terminated or extended in accordance with the
terms hereof, at 11:59 P.M. on February 29, 2004.
4. USE OF THE PREMISES; LICENSES AND PERMITS.
Tenant shall use the Premises for offices, research and development,
light manufacturing, other uses incidental thereto and any other use.
<PAGE>
5. BASIC RENT; ADDITIONAL RENT.
During the first five (5) years of the Term, Tenant shall pay Basic
Rent to Landlord at a rate equal to Eighteen Thousand Dollars ($18,000.00) per
annum.
Basic Rent shall be payable in advance on the first day of each month
in equal installments ($1,500.00) (or the appropriate pro rata proportion
thereof for any portion of a month at the beginning or end of the Term) to
Landlord at the address set forth above or such other address as Landlord may
hereafter specify by notice to Tenant.
In addition to Tenant's obligations with respect to real estate taxes
(Section 6), insurance premiums (Section 7), utilities costs (Section 8), costs
of certain repairs and maintenance (Section 9) and other costs as specifically
set forth herein, Tenant agrees to pay to Landlord upon demand as Additional
Rent, in the same manner as Basic Rent, reasonable attorneys' fees and
disbursements incurred in the enforcement of rights where Landlord prevails,
review of any sublease documents and pursuit of the remedies of Landlord under
this Lease where Landlord prevails. Landlord shall in each case, at the time of
demand for payment, provide Tenant with evidence of payment of or liability for
such charges, costs, and expenses.
6. TAXES.
Tenant shall pay or cause to be paid to Landlord (or, where
appropriate, directly to the authority by which the same are assessed or
imposed, with evidence of such payment to Landlord) as Additional Rent not later
than ten (10) days prior to the date the same are due or twenty-one (21) days
after written notice thereof to Tenant, whichever is later, all personal
property taxes, real estate taxes, betterments and special assessments or
amounts in lieu or in the nature thereof and any other taxes, levies, water
rents, sewer use charges and other charges, excises, franchises, imposts and
charges, general and special, public and private, (including interest, penalties
and costs resulting from delayed payment thereof but only where such delay is
the fault of Tenant) of whatever name and nature, and whether or not now within
the contemplation of the parties hereto, which may now or hereafter be levied,
assessed or imposed by the United States of America, The Commonwealth of
Massachusetts, the Town of Gardner or any other authority, or otherwise become a
lien, upon all or any part of the Premises, or upon the use or occupation
thereof, or upon the equipment or personal property there located, or upon the
owner or occupants thereof in respect thereof, or upon the basis of rentals
thereof or therefrom, or the estate hereby created, or upon Landlord by reason
of ownership of the reversion. Tenant may pay any such betterments and
assessments in the minimum installments and over the longest period permitted by
law, provided such installments or deferred payments can be made without being
subject to interest or penalty for late payment, and shall be liable only for
those installments falling due during the Term. Notwithstanding anything to the
contrary in this Section, Tenant shall not be liable for any
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<PAGE>
franchise, capital stock or similar tax imposed upon Landlord or any excise,
income or excess profits tax of Landlord determined on the basis of Landlord's
income or revenues.
Tenant shall have the right in its own name or in the name of Landlord
to contest or review by legal proceedings or otherwise any such tax, levy,
charge or assessment. In such event Tenant shall either pay such tax, levy,
charge or assessment (under protest) or shall, if requested, deposit with an
escrow agent mutually agreed upon by Landlord and Tenant in trust (or provide an
indemnity bond in) an amount sufficient to cover the contested item. Landlord,
at the request of Tenant, will join or otherwise cooperate in any such
proceedings. When any such contested item shall have been settled or paid, the
balance of any sums deposited with the escrow agent in trust shall be repaid to
Tenant. Tenant shall be entitled to any refund which may be made of any tax,
levy, charge or assessment which has been paid by Tenant.
7. INSURANCE; WAIVER OF SUBROGATION.
Tenant shall, at its sole cost and expense, obtain prior to the
commencement of the Term and throughout the Term shall maintain, with companies
qualified to do business in Massachusetts insurance for the benefit as named
insureds or loss payee, as applicable, of Landlord, Landlord's Permitted
Mortgagees (as hereinafter defined) and Tenant, as their respective interests
may appear, as follows:
(a) comprehensive general liability insurance against claims for
bodily injury, death or property damage occurring to, upon or
about the Premises, in per occurrence limits of $1,000,000 for
bodily injury or death and $500,000 for property damage; and
(b) such other insurance coverages and such additional coverage
amounts as Tenant chooses to obtain.
At the commencement of the Term and thereafter not less than ten (10)
days prior to the expiration dates of the policies theretofore furnished,
certificates issued by the insurers evidencing the insurance required hereby,
shall be delivered to Landlord.
Landlord shall, at its sole cost and expense, obtain prior to the
comment of the Term and throughout the Term shall maintain, with companies
qualified to do business in Massachusetts, insurance for the benefit as named
insureds or loss payee, as applicable, of Landlord, Landlord's Permitted
Mortgagees and Tenant, as their respective interests may appear, as follows:
(a) in reasonable amounts, boiler and machinery insurance on any
steam boilers, pressure vessels and pressure piping, rotating
electrical machines, and miscellaneous electrical apparatus,
engines, pumps, and compressors, fans and blowers, with
so-called "standard blanket coverage" (15 HP and over); and
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<PAGE>
(b) so-called "all-risk casualty" insurance against loss or damage
to the Improvements and to any other buildings, structures and
improvements from time to time constituting a part of the
Premises, including, without limitation, any improvements or
fixtures constructed or installed by Tenant and of a type
customarily covered under such insurance, such as may result
from fire, vandalism, malicious mischief and such other
casualties as are normally covered by an "extended coverage"
endorsement, such casualty insurance to be with a deductible
of not more than $1,000.00 and in an amount equal to the full
replacement cost of the Improvements and any other buildings,
structures or improvements constituting part of the Premises
and in any event in an amount sufficient to preclude any claim
on the part of the insurer for coinsurance under the terms of
applicable policies. The term "replacement cost" shall mean
the actual costs of restoration of the insured Premises to as
nearly as practicable their condition immediately prior to the
casualty, and shall be redetermined by such insurer every two
years or at such more frequent intervals as Landlord or any
Permitted Mortgagee may from time to time reasonably
determine.
At the commencement of the Term and thereafter not less than ten (10)
days prior to the expiration dates of the policies theretofore furnished,
certificates issued by the insurers evidencing the insurance required hereby,
shall be delivered to Tenant.
Neither Landlord nor Tenant shall be liable to the other for any loss
or damage to the Premises or other property occurring on the Premises or in any
manner growing out of or connected with Tenant's use and occupation of the
Premises or the condition thereof, whether or not caused by the negligence or
other fault of Landlord, Tenant or their respective agents, employees,
subtenants, licensees, invitees or assignees; provided, however, that this
release (i) shall apply only to the extent that such loss or damage to the
Premises or other property or injury to or death of persons is covered by
insurance required to be carried hereunder which protects Landlord or Tenant or
both of them as the case may be; (ii) shall not be construed to impose any other
or greater liability upon either Landlord or Tenant than would have existed in
the absence hereof; and (iii) shall be in effect only so long as the applicable
insurance policy contains a clause to the effect that this release shall not
affect the right of the insureds to recover under such policies, which clauses
shall be obtained by the parties hereto whenever available. All property of
Tenant in the Premises shall be at Tenant's sole risk, and Tenant shall be
responsible for insuring the same.
8. UTILITIES.
Tenant shall, at its own cost and expense, arrange and pay for all
services and utilities provided to the Premises during the Term, including
without limitation, water, electricity, gas, fuel, steam, heat, air
conditioning, sewer service, telephone service, security and fire protection,
cleaning and trash removal, and snow and ice removal.
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<PAGE>
9. REPAIRS AND MAINTENANCE.
During the Term, Landlord shall, at its own cost and expense, make all
repairs necessary to keep the roof of the Building leak-free and shall keep the
structural support elements of the Building in structurally good condition,
order and repair, excepting only damage resulting from (i) any act or any
omissions of Tenant or its agents, contractors and employees, or (ii) fire or
other casualty. Except to the extent not practicable or feasible, Landlord shall
not, in performing its obligations under this paragraph, make any improvement to
the Premises that would be characterized (and Landlord intends to treat) as a
capital improvement in accordance with generally accepted accounting principles.
Except in the case of emergency, Landlord shall give Tenant at least 30 days
notice of any improvement to be made by Landlord under this Section 9 that would
be characterized as a capital improvement in accordance with generally accepted
accounting principles. In performing such maintenance and making such repairs to
the roof and structural elements of the Building, Landlord shall comply with all
laws, orders, ordinances, by-laws, rules and regulations and insurance
requirements applicable to performing such maintenance and making such repairs
to the roof and structural elements of the Building.
During the Term, Tenant shall, at its own cost and expense: make all
repairs, replacements and renewals, exterior and interior, as may be necessary
to keep the Premises, including the Improvements and all electrical, plumbing,
mechanical, heating, ventilating and air conditioning systems and all other
building systems constituting a part of the Premises in as good condition, order
and repair as the same are at the commencement of the Term or thereafter may be
put, reasonable wear and use, damage by fire or other casualty, and repairs
which are the obligation of Landlord only excepted; keep and maintain all
portions of the Premises in a clean and orderly condition, free of accumulation
of dirt, rubbish, and other debris; keep all driveways, walkways and parking
areas constituting part of the Premises free of snow and ice and sanded as
appropriate; and keep all lawns and landscaped areas constituting part of the
Premises watered, fertilized and trimmed to a degree consistent with that
generally obtaining throughout the area of which the Premises form a part.
10. COMPLIANCE WITH LAWS AND REGULATIONS.
Except to the extent such compliance is the obligation of Landlord
pursuant to Section 9 hereof, during the Term, Tenant shall, in performing its
obligations under Section 9 and Section 11 hereof, comply, at its own cost and
expense, with: all applicable laws, by-laws, ordinances, codes, rules,
regulations, orders, and other lawful requirements of the governmental bodies
having jurisdiction whether or not foreseeable, and whether or not they involve
any changes in governmental policy, which may be applicable to the Premises, the
fixtures and equipment thereof in the performance of such obligations; the
orders, rules and regulations of the National Board of Fire Underwriters, or any
other body hereafter constituted exercising similar functions, which may be
applicable to the Premises, the fixtures and equipment thereof in the
performance of such obligations; and the requirements of all policies
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<PAGE>
of public liability, fire and all other types of insurance at any time in force
with respect to the Premises and the fixtures and equipment thereon.
Tenant covenants not to dump, flush, or in any way introduce any
hazardous substances or any other toxic substances into the sewage or other
waste disposal system serving the Premises not to generate, or store or dispose
of hazardous substances in or on the Premises or disclose of hazardous
substances from the Promises to any other location except only in compliance
with applicable environmental laws, including, but not limited to, the Resource
Conservation and Recovery Act of 1976, as amended, 42 U.S.C. (6901 et seq. and
the Massachusetts Hazardous Waste Management Act, M.G.L. c. 21C, as amended, to
notify Landlord of any incident which would require the filing of a notice under
Chapter 232 of the Acts of 1982).
11. ALTERATIONS BY TENANT.
Without Landlord's consent, Tenant shall have the right to erect signs
on the Building and the Premises and to make non-structural alterations,
additions or improvements, including, but not limited to penetrations of the
roof and walls of the building which do not adversely affect the structure of
the Improvements or the rights of Landlord under any bonds, guarantees, or
warranties of the roof and are consistent with good construction practice to the
Premises. Landlord agrees that its consent shall not be unreasonably withheld
for structural alterations, additions and improvements consistent with the use
of the Premises as contemplated hereby.
Tenant shall indemnify and hold harmless Landlord from and against all
costs (including reasonable attorneys' fees and costs of suit), losses,
liabilities, or causes of action arising out of or relating to injury to or
death of any person or persons or damage to property arising out of or caused by
the construction or making of any alterations, additions or improvements to the
Premises by Tenant, including but not limited to any mechanics' or materialmen's
liens asserted in connection therewith.
12. LANDLORD'S ACCESS.
Tenant agrees to permit Landlord or any Permitted Mortgagee or its or
their authorized representatives to enter the Premises at all reasonable times
during Tenant's usual business hours after reasonable notice for the purposes of
inspecting the same, making any repair or performing any maintenance required or
permitted hereunder, exercising such other rights as it may have hereunder, and
exhibiting the same to other prospective purchasers and (within a period
commencing nine (9) months prior to the expiration of the Term) tenants, and in
the event of emergency, at any time and without notice.
13. INTENTIONALLY OMITTED.
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<PAGE>
14. CASUALTY DAMAGE.
Except as otherwise provided below, in the event of partial destruction
of the Improvements and any other buildings, structures and improvements from
time to time constituting a part of the Premises during the Term by fire or
other casualty, Landlord shall, after receipt of any insurance proceeds
available as a result of such casualty, as promptly as practicable repair,
reconstruct or replace the portions of the Premises destroyed to as nearly as
possible their condition prior to such destruction, except that in no event
shall Landlord be obligated to expend more for such repair, reconstruction or
replacement than the amounts of any such insurance proceeds actually received.
During the period of such repair, reconstruction and replacement there shall be
an equitable abatement of Rent hereunder in proportion to the nature and extent
of the destruction.
Notwithstanding the foregoing, if the Improvements are totally
destroyed or so extensively destroyed by fire or other casualty that the
Improvements are not susceptible of repair, reconstruction or replacement within
nine (9) months from the date of such destruction, as reasonably determined by
Landlord, if such destruction resulted from causes or risks not required to be
insured against by Landlord hereunder, or if the insurance proceeds are
insufficient to restore the Premises as reasonably determined by Landlord's
architect or general contractor, then Landlord or Tenant may terminate this
Lease by giving written notice to Landlord within ninety (90) days after the
date of such destruction or receipt of such determination from Landlord's
architect or general contractor, whichever is later, unless, within ten (10)
days after receipt of any such notice by Landlord, Landlord gives notice to
Tenant that Landlord will make the necessary additional funds available for such
repair, reconstruction or replacement and complete such repair, reconstruction
or replacement within twelve (12) months from the date of such destruction. In
the event of termination as aforesaid, (i) Landlord shall pay over to Tenant
that portion of the aggregate insurance proceeds received by Landlord
attributable to or paid in respect of improvements made by Tenant to the
Premises and (ii) this Lease shall terminate as of, and Basic Rent and
Additional Rent shall be appropriately apportioned through and abated from and
after, the date of such destruction. Landlord's obligations pursuant to clause
(i) of the immediately preceding sentence shall survive the termination of this
Lease.
15. CONDEMNATION.
If, during the Term, more than twenty-five percent (25%) of the useable
floor area of the Building shall be taken by eminent domain or otherwise
appropriated by public authority, Landlord or Tenant may terminate this Lease by
giving written notice to the other within thirty (30) days after such taking or
appropriation. In the event of such a termination, this Lease shall terminate as
of the date Tenant must surrender possession or, if later, the date Tenant
actually surrenders possession, and the Basic Rent and Additional Rent reserved
shall be apportioned and paid to and as of such date.
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<PAGE>
If a part only of the Premises is taken or appropriated by public
authority as aforesaid and this Lease is not terminated as set forth above,
Landlord shall apply any such damages and compensation awarded (net of the costs
and expenses, including reasonable attorneys' fees, incurred by Landlord in
obtaining the same) to secure and close so much of the Improvements and other
buildings, structures and improvements constituting a part of the Premises as
remain and shall, to the extent possible, replace any part so taken or
appropriated by a suitable structure or parking area or addition of similar size
and design to that portion so taken or appropriated, except that in no event
shall Landlord be obligated to expend more for such replacement than the net
amount of any such damages, compensation or award which Landlord may have
received as damages in respect of such Improvements or other buildings,
structures and improvements constituting part of the Premises as they existed
immediately prior to such taking or appropriation; in such event there shall be
an equitable abatement of Basic Rent in proportion to the loss of useable floor
area in the Premises after giving effect to such replacement, from and after the
date Tenant must surrender possession or, if later, the date Tenant actually
surrenders possession.
Landlord hereby reserves, and Tenant hereby assigns to Landlord, any
and all interest in and claims to the entirety of any damages or other
compensation by way of damages which may be awarded in connection with any
taking or appropriation of all or any portion of the Premises, except so much of
such damages or award as is specifically and expressly awarded in respect of
trade fixtures or moving expenses of Tenant.
16. LANDLORD'S COVENANT OF QUIET ENJOYMENT; FURTHER ASSURANCES.
Landlord covenants that Tenant, upon paying the Basic Rent and
Additional Rent and performing and observing all of the other covenants and
provisions hereof, may peaceably and quietly hold and enjoy the Premises for the
Term as aforesaid, subject, however, to all of the terms and provisions of this
Lease and to the title matters set forth or referred to in Exhibit B.
As reasonably requested by Tenant, Landlord shall cooperate fully with
Tenant in any efforts by Tenant to obtain any variances, by-law changes, permits
or licenses necessary or appropriate for Tenant's use of the Premises as
contemplated hereunder.
17. TENANT'S OBLIGATION TO QUIT.
Upon the expiration or other termination of this Lease, all
improvements or alterations to the Property made by Tenant (whether made prior
to or during the Term hereof) shall belong to Landlord; provided, however, that
Tenant shall retain ownership of its trade fixtures and equipment, furniture and
other personal property (whether or not affixed to the Premises). Tenant shall,
upon expiration of the Term or other termination of this Lease, leave and
peaceably and quietly surrender and deliver to Landlord the Premises and all
improvements, buildings, equipment and fixtures thereon or constituting a part
thereof and any replacements
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<PAGE>
or renewals thereof in as good condition, order and repair as the same were at
the commencement of the Term or thereafter may have been put, reasonable wear
and use and damage by fire or other casualty only excepted; except that Tenant
shall first remove its trade fixtures and equipment, furniture and other
personal property and repair any damage to the Premises caused by such removal.
18. TRANSFERS OF TENANT'S INTEREST.
Tenant shall not assign or sublease or otherwise encumber all or any
part of its interest in this Lease, the Premises, or the estate hereby created,
nor shall it grant any licenses, concessions or the like, without in each case
first obtaining the prior written consent of Landlord, which consent Landlord
agrees shall not be unreasonably withhold or delayed.
Notwithstanding the foregoing, no consent of Landlord shall be required
for any assignment of Tenant's interest to any successor to Tenant by reason of
any merger, consolidation or sale of its assets or for any sublease or
assignment of such interest to any wholly-owned subsidiary of or any corporation
or other entity controlled by or under common control with Tenant. Any attempted
sublease or assignment without the required consent of Landlord shall be void.
In all events the tenant originally named herein as Tenant under this
Lease shall remain primarily liable for, and any sublessee or assignee shall in
writing assume, the obligations of Tenant under this Lease.
19. TRANSFERS OF LANDLORD'S INTEREST.
Until the Option Termination Date (as hereinafter defined) or, if
later, the date on which the Premises are sold to Tenant pursuant to the
exercise of Tenant's purchase option granted in Section 27 hereof, Landlord
shall not, without the prior written consent of Tenant, which consent may be
withheld in Tenant's sole discretion, sell or mortgage its interest in the
Premises (or any portion thereof), assign its interest in this Lease, or assign
the whole or any portion of the Basic Rent, Additional Rent or other sums and
charges at any time paid or payable hereunder by Tenant; PROVIDED, HOWEVER, that
Landlord shall be permitted so to sell its interest in the Premises or grant one
or more such mortgages or make one or more such assignments so long as (i) the
aggregate amount of any and all monetary liens encumbering the title to the
Premises, whether granted by Landlord or any successor, assignee or transferee
of Landlord, does not exceed $75,000.00 (including the amount of any applicable
prepayment penalties or premiums that would be required to be paid in order to
discharge such lien if Tenant were to exercise its purchase option hereunder)
and (ii) any such transferee, purchaser, mortgagee or assignee, as applicable,
in one or more writings reasonably acceptable to Tenant executed and delivered
to Tenant prior to such transfer, shall: (A) acknowledge Tenant's option to
purchase the Premises pursuant to Section 27 hereof and (B) agree that, upon
exercise of such purchase option and the payment of the purchase price set forth
in Section 27 hereof, it
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shall, as applicable, discharge and release any such mortgage or assignment,
convey title to the Premises to Tenant as provided in Section 27 hereof and
release the Premises and Tenant from any liability for any obligation of
Landlord.
If Tenant has not exercised its option to purchase the Premises as
provided hereunder, then from and after the Option Termination Date, Landlord
shall, except as provided below, have the right to transfer its interest in the
Premises without the consent of Tenant.
Tenant agrees to pay to any permitted mortgagee or any other transferee
of Landlord's interest permitted hereunder, in either case designated by
Landlord in a duly recorded instrument, if notice of such instrument is sent to
Tenant, the Basic Rent, Additional Rent and such other sums and charges so
assigned, subject to the terms of the Lease, upon demand to such permitted
mortgagee or other permitted transferee at the address mentioned in any such
notice. Landlord further agrees that any amounts paid to any permitted mortgagee
or permitted transferee pursuant to such a notice shall be deemed to be payments
of Rent hereunder and Tenant shall not be liable to Landlord for any such amount
so paid.
Notwithstanding anything herein to the contrary, without the prior
written consent of Tenant, which consent may be withheld in Tenant's sole
discretion, Landlord shall not allow or permit the filing of any lien against
the title to the Premises, including, but not limited to, any judgment liens or
mechanics' or materialmen's liens. Landlord shall indemnify and hold harmless
Tenant from and against all costs (including reasonable attorneys' fees and
costs of suit), losses or liabilities caused by any mechanic's or materialmen's
liens or any other lien or encumbrance asserted, filed or recorded against the
Premises in breach of this Section 19.
20. LANDLORD'S ACCESS.
Tenant agrees to permit Landlord or any Permitted Mortgagee or its or
their authorized representatives to enter the Premises at all reasonable times
during usual business hours after reasonable notice for the purposes of
inspecting the same, making any repair or performing any maintenance required or
permitted hereunder, exercising such other rights as it or may have hereunder,
and exhibiting the same to other prospective purchasers and (within a period
commencing nine (9) months prior to the expiration of the Term) tenants, and in
the event of emergency, at any time and without notice.
21. INDEMNITIES.
Tenant shall and does hereby agree to protect, defend, indemnify and
save Landlord harmless from and against any and all claims (other than claims
arising from any omission, fault, negligence or other misconduct of Landlord or
its agents, contractors or employees of Landlord in or about the Premises)
arising from any injury to or death of persons, damage to property occurring
during the Term in or about the Premises but only to the extent caused by: (i)
the conduct or management of or from any work or thing whatsoever done in or
about the
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Premises during the Term by Tenant or anyone for whom Tenant is legally
responsible; and (ii) any breach or default on the part of Tenant in the
performance of its obligations under the second grammatical paragraph of Section
10 hereof or (iii) any negligent act or omission on the part of Tenant or any of
its agents, employees, subtenants, licensees, invitees or assignees. Tenant
further agrees to indemnify Landlord from and against all costs and expenses,
including reasonable attorneys' fees, incurred in connection with any such
indemnified claim or action or proceeding brought thereon, any and all of which
costs and expenses, if reasonably suffered, paid or incurred by Landlord, Tenant
shall repay upon demand to Landlord as Additional Rent. The foregoing
indemnities and agreements shall survive the expiration or termination of the
Term of this Lease.
Landlord shall and does hereby agree to protect, defend, indemnify and
save Tenant harmless from and against any and all claims (other than claims
arising from any omission, fault, negligence or other misconduct of Tenant, its
agents, contractors or employees of Tenant in or about the Premises) arising
from any injury to or death of any person or persons or damage to property
occurring during the Term in or about the Premises but only to the extent caused
by: (i) the conduct or management of or from any work or thing whatsoever done
in or about the Premises during the Term by Landlord or anyone for whom Landlord
is legally responsible; and (ii) any negligent act or omission on the part of
Landlord or any of its agents, employees, subtenants, licensees, invitees or
assignees. In addition, Landlord hereby agrees to indemnify Tenant and hold
Tenant harmless from any and all losses, costs, damages or claims related to or
arising from breach of Landlord's covenant to sell the Premises to Tenant
pursuant to Section 27 hereof. Landlord further agrees to indemnify Tenant from
and against all costs and expenses, including reasonable attorneys' fees,
incurred in connection with any such indemnified claim or action or proceeding
brought thereon, any and all of which costs and expenses, if reasonably
suffered, paid or incurred by Tenant, Landlord shall repay upon demand to
Tenant. The foregoing indemnities and agreements shall survive the expiration or
termination of the Term of this Lease
22. PERMITTED MORTGAGEES' RIGHTS.
This Lease shall be subject and subordinate to any mortgage (and to any
amendments, extensions, increases, refinancings or restructurings thereof) of
the Premises, whether such mortgage is recorded prior or subsequent to the
recording of notice of this Lease so long as (i) such mortgage is permitted or
consented to by Tenant pursuant to Section 19 hereof and (ii) either the holder
of such mortgage agrees in writing, or the subject mortgage expressly provides,
that, for so long as Tenant is not in default under this Lease after the
expiration of any applicable notice and cure periods, such mortgagee and, its
successors, assigns and nominees, will not, in foreclosing against or taking
possession of the Premises or otherwise taking title to the Premises by
acceptance of a deed or assignment in lieu of foreclosure or otherwise
exercising its rights under such mortgage, disturb Tenant's possession of the
Premises and that, upon the occurrence of any such event, such mortgagee agrees
to be prospectively bound to Tenant as Landlord under all of the terms,
conditions and covenants of
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<PAGE>
the Lease including, without limitation, Landlord's consent to sell the Premises
to Tenant pursuant to Section 27 hereof. The holder from time to time of any
mortgage so permitted or consented to by Tenant pursuant to Section 19 hereof is
hereinafter referred to as a "Permitted Mortgagee". Tenant hereby agrees to
execute, acknowledge, and deliver in recordable form such instruments evidencing
this subordination as Landlord or any such Permitted Mortgagee may from time to
time reasonably require.
Tenant shall and does hereby agree, upon default by Landlord under any
mortgage, to attorn to and recognize such Permitted Mortgagee or any successor
claiming under such mortgage, including a purchaser at a foreclosure sale, to
execute, acknowledge, and deliver such evidence of this attornment, which shall
nevertheless be self-operative, and to make payments of Basic Rent and
Additional Rent hereunder directly to such Permitted Mortgagee or any such
successor as the case may be, upon request. Any Permitted Mortgagee may, at any
time, by giving written notice to, and without any further consent from Tenant,
subordinate its mortgage to this Lease, and thereupon the interest of Tenant
under this Lease shall automatically be deemed to be prior to the lien of such
mortgage without regard to the relative dates of execution, delivery or
recording thereof or otherwise.
23. TENANT'S DEFAULT; LANDLORD'S REMEDIES.
If Tenant shall default in the payment of any Basic Rent and such
default shall continue for ten (10) business days after written notice to Tenant
from Landlord of such default; or if Tenant shall default in the payment of any
Additional Rent or in the performance or observance of any of the other
covenants contained in this Lease and on Tenant's part to be performed or
observed and shall fail, within thirty (30) days after written notice to Tenant
from Landlord of such default, to cure such default (or, if such default is not
susceptible of cure within thirty (30) days, to commence such cure promptly and
thereafter to pursue such cure to completion); or if the estate hereby created
shall be taken on execution, or by other process of law; or if Tenant shall be
involved in financial difficulties as evidenced:
(i) by its commencement of a voluntary case under Title
11 of the United States Code as from time to time in
effect, or by its authorizing, by appropriate
proceedings of trustees or other governing body the
commencement of such a voluntary case,
(ii) by its filing an answer or other pleading admitting
or failing to deny the material allegations of a
petition filed against it commencing an involuntary
case under said Title 11, or seeking, consenting to
or acquiescing in the relief therein provided, or by
its failing to controvert timely the material
allegations of any such petition,
(iii) by the entry of an order for relief in any
involuntary case commenced under said Title 11,
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(iv) by its seeking relief as a debtor under any
applicable law, other than said Title 11, of any
jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or
alteration of the rights of creditors, or by its
consenting to or acquiescing in such relief,
(v) by entry of an order by a court of competent
jurisdiction (A) finding it to be bankrupt or
insolvent, (B) ordering or approving its liquidation,
reorganization or modification or alteration of the
rights of its creditors, or (C) assuming custody of,
or appointing a receiver or other custodian for, all
or a substantial part of its property, or
(vi) by its making an assignment for the benefit of, or
entering into a composition with, its creditors, or
appointing or consenting to the appointment of a
receiver or other custodian for all or a substantial
part of its property;
then and in any of said cases, Landlord may, to the extent permitted by law,
immediately, or at any time thereafter either: (a) terminate this Lease by
notice to Tenant or (b) without demand or notice, enter into and upon the
Premises, or any part thereof in the name of the whole, and repossess the same
as of Landlord's former estate, and expel Tenant and those claiming through or
under Tenant and remove its effects without being deemed guilty of any manner of
trespass, and without prejudice to any remedies which might otherwise be used
for arrears of rent or preceding breach of covenant, and upon entry as aforesaid
this Lease shall terminate.
No termination or repossession provided for in this Section 23 shall
relieve Tenant of its liabilities and obligations under this Lease, all of which
shall survive any such termination or repossession. In the event of any such
termination or repossession, Tenant shall pay to Landlord either (x) in advance
on the first day of each month, for what would have been the entire balance of
the Term, one-twelfth (1/12) (and a pro rata portion thereof for any fraction of
a month) of the Basic Rent, Additional Rent and all other amounts for which
Tenant is annually obligated hereunder, less, in each case, the actual net
receipts by Landlord by reason of any good faith reletting of the Premises after
deducting Landlord's reasonable expenses in connection with such reletting,
including without limitation removal, storage, and repair costs and reasonable
brokers' and attorneys' fees, or (y) at the election of Landlord, as liquidated
damages, the amount by which the present value of the sum of the Basic Rent and
the Additional Rent reasonably estimated to be payable for the balance of the
Term after the date of such election exceeds the present value of fair net
rental value of the Premises on the terms of this Lease over such period
determined as of such date plus the reasonable costs of Landlord in reletting
the premises and all other sums then due and owing from Tenant to Landlord
hereunder. Present value shall be calculated for this purpose at a
capitalization rate equal to the "base" interest rate of The First National Bank
of Boston on the date of such termination.
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Without thereby affecting any other right or remedy of Landlord
hereunder, Landlord may, at its option, cure for Tenant's account any default by
Tenant hereunder which remains uncured after said thirty (30) days' notice of
default from Landlord to Tenant and the cost to Landlord of such cure shall be
deemed to be Additional Rent and shall be paid to Landlord by Tenant with the
installment of Basic Rent next accruing.
24. REMEDIES CUMULATIVE; WAIVERS.
The specific remedies to which Landlord may resort under the terms of
this Lease are cumulative and are not intended to be exclusive of any other
remedies or means of redress to which Landlord may be lawfully entitled in any
provision of this Lease. The failure of Landlord to insist in any one or more
cases upon the strict performance of any of the covenants of this Lease, or to
exercise any option herein contained, shall not be construed as a waiver or
relinquishment for the future of such covenant or option. A receipt by Landlord,
of Basic Rent or Additional Rent with knowledge of the breach of any covenant of
Tenant hereunder shall not be deemed a waiver of such breach, and no waiver
change, modification or discharge by Landlord of any provision in this Lease
shall be deemed to have been made or shall be effective unless expressed in
writing and signed by Landlord. In addition to the other remedies in this Lease
provided, Landlord shall be entitled to the restraint by injunction of the
covenants, conditions or provisions of Tenant under this Lease, and to a decree
compelling performance of or compliance with any of such covenants, conditions
or provisions.
25. LANDLORD'S DEFAULT; TENANT'S REMEDIES.
If Landlord shall be in default under any of its obligations hereunder,
Tenant, in addition to any other remedy it may have at law or in equity, may
upon notice to Landlord of such default, but shall not be obligated to, expend
such sums (including reasonable attorneys' fees) and to take such actions to
enforce its rights hereunder or to cure such default of Landlord. Tenant shall
be entitled to reimbursement for any such amounts (including reasonable
attorneys' fees) upon demand. In the alternative, Tenant shall be entitled, at
its election, to offset against any subsequent installment or installments of
Basic Rent hereunder the aggregate cost and expense of enforcing such remedies
curing any such defaults of Landlord.
In addition, if Landlord shall default in its obligations under Section
19 or 27 hereof, Tenant may, at any time thereafter, terminate this Lease upon
notice to Landlord.
26. EXTENSIONS OF TERM; BROKER.
Tenant shall have the right, at its sole option, by giving notice
thereof to Landlord at least six (6) months prior to the expiration of the
initial five-year Term, to extend the Term of this Lease for one (1) additional
successive extension period of three (3) years (to a maximum of the initial
five-year Term plus three years) on the same terms and conditions, except Basic
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Rent, as herein set forth except that it is understood and agreed that such
extension shall be exercisable only if at the time of exercise there exists no
default on the part of Tenant under this Lease which has not been cured within
the time provided for cure hereunder. The word "Term" as used elsewhere in this
Lease shall, unless otherwise expressly provided herein, include the initial
five-year Term and the extension period if Tenant shall have given timely and
proper notice of exercise.
The annual rate of Basic Rent payable during the extension period shall
be equal to the fair market net rental value for the Premises for a period of
three years on the terms of this Lease, estimated as of the date of commencement
of such extension period. If Landlord and Tenant are unable to agree upon the
annual rate of Basic Rent which would apply to the extension period within
thirty (30) days after such request from Tenant, the annual rate of Basic Rent
shall be that specified by Landlord unless Tenant shall give notice to Landlord
within thirty (30) days thereafter indicating its desire to have the annual rate
of Basic Rent for such period be determined by an Appraiser (as that term is
hereinafter qualified and defined) mutually acceptable to Landlord and Tenant or
by three Appraisers as hereinafter provided. If Landlord and Tenant shall not
have agreed upon an Appraiser thirty (30) days after such notice from Tenant,
immediately thereafter Landlord and Tenant shall arrange to mail or exchange
simultaneously written notices, each setting forth a "best offer" for such
annual rate of Basic Rent and designating an Appraiser; the two Appraisers so
designated shall, within twenty (20) days after their designation, select a
third Appraiser and give notice to both Landlord and Tenant identifying the
third Appraiser. The Appraiser or the three Appraisers shall within thirty (30)
days after his or their selection submit a report to Landlord and Tenant, in
writing, informing them of the annual rate of Basic Rent determined by any two
of such Appraisers to be payable by Tenant to Landlord for the extension period
in accordance with the terms hereof, which determination shall be conclusive and
binding upon Landlord and Tenant for all purposes of this Lease if extended. If
such annual rate of Basic Rent is to be determined by three Appraisers and no
two of them are able to agree, the highest and lowest determinations shall be
disregarded and the other shall control. Such report shall be accompanied by an
explanation of the method used to arrive at the value or values assigned and the
pertinent data (or a summary thereof) considered by the Appraiser or Appraisers
in reaching his or their decision. The parties agree not to disclose to the
Appraisers the "best offer" of either party. If Landlord and Tenant agreed to a
single Appraiser, the Appraisers' fees shall be divided equally between the
parties. Otherwise all Appraisers' fees shall be payable by the party whose
"best offer" set forth in the notice as above provided varied the most from the
annual rate of Basic Rent established in the Appraisers' report, except that if
any Appraiser is unwilling or unable to certify that he was unaware of both
parties' "best offers" at the time he made his determination, all Appraiser's
fees shall be divided equally between the parties. An "Appraiser" shall be an
individual who has an "MAI" (Member of the Appraisal Institute) designation, is
independent of Landlord and Tenant, and has at least eight (8) years' experience
in appraising commercial and industrial real estate in Gardner and vicinity.
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Landlord and Tenant each represent and warrant to the other that it has
not contacted any real estate broker in connection with this Lease and was not
directed to the other as a result of any services or facilities of any broker.
Landlord agrees to indemnify Tenant against and to hold Tenant harmless from any
claim, loss, damage, costs or liabilities for any brokerage commission or
finder's fee which may be asserted against Tenant in connection with this Lease
arising out of any contacts by Landlord with any broker. Tenant agrees to
indemnify Landlord against and to hold Landlord harmless from any claim, loss,
damage, costs or liabilities for any brokerage commission or finder's fee which
may be asserted against Landlord in connection with this Lease arising out of
any contacts by Tenant with any broker.
27. PURCHASE OPTION.
Landlord for itself and for its successors, heirs and assigns hereby
grants to Tenant an option to purchase the Premises as set forth in this Section
27. Tenant may exercise its option to purchase the Premises by giving notice
thereof to Landlord ("Tenant's Exercise Notice") at any time prior to 5:00 p.m.
(Gardner time) on February 28, 2002 (the "Option Termination Date"). Tenant's
Exercise Notice shall state the date for the closing of the purchase and sale of
the Premises which shall be a business day not less than fifteen (15) business
days and not more than thirty (30) business days from the date of such notice.
The closing of the purchase and sale of the Premises shall take place on the
date specified in Tenant's Exercise Notice at 12:00 P.M. at the Worcester
District Registry of Deeds, or at such other time and at such other place as is
mutually agreed upon by Landlord and Tenant; PROVIDED, HOWEVER that Landlord
shall have the option to extend the closing date to the day which is sixty (60)
days after the date of Tenant's Exercise Notice by delivering notice thereof to
Tenant prior to the execution of the purchase and sale agreement as provided
below. The purchase price for the Premises shall be $100,000 MINUS the
outstanding amount on and as of the closing date of any sums owed to Tenant by
Landlord for breach of Landlord's obligations hereunder PLUS the outstanding
amount on and as of the closing date of any sums owed to Landlord by Tenant
hereunder PLUS, Landlord's aggregate Unamortized Capital Costs. "Unamortized
Capital Costs" shall mean, with respect to any improvement made by Landlord in
accordance with the first paragraph of Section 9 hereof that is characterized as
a capital improvement in accordance with generally accepted accounting
principles, the cost of such capital improvement multiplied by a fraction, the
numerator of which is the remaining useful life of such capital improvement as
of the closing date and the denominator of which is the useful life of such
capital improvement. In addition to the foregoing, the purchase and sale of the
Premises shall be on the terms and conditions set forth on Exhibit C hereto.
Within five (5) business days after the giving of Tenant's Exercise Notice
Landlord and Tenant shall execute a purchase and sale agreement in the form of
Exhibit C with such changes as are necessary to conform Exhibit C with the
foregoing.
Prior to the Option Termination Date, Tenant shall be allowed to
perform and complete title examinations, due diligence examinations, reviews and
inspections of all matters pertaining to the acquisition of the Premises
including the right to conduct or cause to be
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conducted with companies selected by Tenant and at Tenant's cost and expense,
(i) such audits, assessments, reviews, surveys, investigations, inspections,
examinations, tests and studies of the Premises, including without limitation,
physical inspections, engineering reviews, environmental site assessments
(including testing for asbestos, lead paint, lead in the water supply and soils
and ground water testing), (ii) such review of property information in the
possession or control of Landlord, (iii) such marketing and feasibility studies
and analyses, and (iv) such other diligence as Tenant deems necessary or
desirable with respect to the Property (collectively, "Investigations"). Tenant
and its agent, employees, contractors, consultants, other representatives and
anyone else acting on behalf of Tenant (collectively, "Tenant's
Representatives") shall have with complete access to the Premises and to
Landlord's records of the property in the conduct of Tenant's Investigations.
Tenant shall at all times conduct its Investigations on the Premises
and Improvements in a manner so as to not cause liability, damage, loss, cost or
expense to Landlord or the Premises, and Transferee will indemnify, defend, and
hold Landlord harmless from and against any such liability, damage, loss, cost
or expense (but excluding from any such defense and indemnification obligations
any pre-existing damage, deterioration or contamination of the Premises
uncovered by any Investigation and any liability, damage, loss, cost or expense
caused by Landlord's negligence or willful misconduct). The foregoing
indemnification obligation shall survive any termination of this Lease.
Notwithstanding Section 24 hereof to the contrary, if Tenant fails to
fulfill its obligations under Section 27 hereof after delivering Tenant's
Exercise Notice or fails to fulfill its obligations under the purchase and sale
agreement executed by Landlord and Tenant pursuant thereto, (1) this Lease shall
continue in full force and effect, (2) Tenant shall, on demand, pay to Landlord
as additional rent hereunder all costs and expenses (including reasonable
attorneys' fees) incurred by Landlord in fulfilling Landlord's obligations under
said purchase and sale agreement, (3) Landlord may terminate Tenant's option to
extend the term hereof pursuant to Section 26 hereof by giving notice of such
election to Tenant within 180 days after such failure and (4) the foregoing
remedies described in clauses (2) and (3) above shall be Landlord's sole remedy
hereunder, under said purchase and sale agreement, at law or in equity for such
failure of Tenant.
28. NOTICES.
Any notices, approvals, specifications, or consents required or
permitted hereunder shall be in writing and mailed, postage prepaid, by
registered or certified mail, return receipt requested, if to Landlord or Tenant
to the address set forth above for or to such other address as either of them
may from time to time specify by like notice to the others. Any such notice
shall be deemed given when received or, if earlier, when postal records indicate
delivery was first attempted.
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29. RECORDING.
Landlord and Tenant hereby agree, each at the request of the other
promptly to execute, acknowledge, and deliver in recordable form short forms or
notices of lease containing the date of commencement of the Term and such other
information as may from time to time be necessary under G.L. (Ter. ed.) Chapter
183, Section 4 or under similar additional or successor statutes for the
protection of any interest of Landlord, Tenant or any Mortgagee in the Premises
or this Lease.
30. ESTOPPEL CERTIFICATES.
Landlord and Tenant hereby agree from time to time, each after not less
than ten (10) days' prior written notice from the other to execute, acknowledge
and deliver, without charge, to the other party or any other person designated
by the other party, a statement in writing certifying: that this Lease is
unmodified and in full force and effect (or if there have been modifications,
identifying the same by the date thereof and specifying the nature thereof);
that to the knowledge of such party there exist no defaults (or if there be any
defaults, specifying the same); the amount of the Basic Rent, the dates to which
the Basic Rent, Additional Rent and other sums and charges payable hereunder
have been paid; that such party to its knowledge has no claims against the other
party hereunder except for the continuing obligations under this Lease (or if
such party has any such claims, specifying the same); and such other matters as
the requesting party may reasonably request in connection with any sale,
financing or refinancing related to the Premises or the business of Tenant.
31. BIND AND INURE; LIMITED LIABILITY OF LANDLORD.
All of the covenants, agreements, stipulations, provisions, conditions
and obligations herein expressed and set forth shall be considered as running
with the land and shall extend to, bind and inure to the benefit of, Landlord
and Tenant, which terms as used in this Lease shall include their respective
successors, and assigns where the context hereof so admits.
Landlord shall not have any individual or personal liability for the
fulfillment of the covenants, agreements and obligations of Landlord hereunder,
Tenant's recourse and Landlord's liability hereunder being limited to the
Premises and any proceeds thereof. The term "Landlord" as used in this Lease
shall refer only to the owner or owners from time to time of the Premises, it
being understood that no such owner shall have any liability hereunder from and
after the date such owner ceases to have any interest in the Premises. In no
event shall Landlord or Tenant be liable to the other party hereto for any
special, consequential or indirect damages suffered by such other party by
reason of a default by such person under any provisions of this Lease.
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32. CAPTIONS.
The captions for the numbered Sections of this Lease are provided for
reference only and they do not constitute a part of this agreement or any
indication of the intentions of the parties hereto.
33. INTEGRATION.
The parties acknowledge that all prior written and oral agreements
between them and all prior representations made by either party to the other
have been incorporated in this instrument or otherwise satisfied prior to the
execution hereof.
34. SEVERABILITY; CHOICE OF LAW.
If any provision of this Lease shall be declared to be void or
unenforceable either by law or by a court of competent jurisdiction, the
validity or enforceability of remaining provisions shall not thereby be
affected.
This Lease is made under, and shall be construed in accordance with,
the laws of The Commonwealth of Massachusetts.
35. COUNTERPARTS.
This Lease may be executed in one or more counterparts, each of which
shall be deemed an original but all of which, taken together, shall constitute
one and the same instrument.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed in duplicate under seal as of the date first above written.
LANDLORD:
/s/ PHILIP A. WOOD
-------------------------------------------
PHILIP A. WOOD, as Executor of
the Estate of Alma L. Wood and individually
/s/ MARTHA A. MOUNT
-------------------------------------------
MARTHA A. MOUNT, individually
/s/ NANCY E. POPINCHALK
-------------------------------------------
NANCY E. POPINCHALK, individually
TENANT:
PRECISION OPTICS CORPORATION, INC.
By: /s/ JACK P. DREIMILLER
-------------------------------------------
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EXHIBIT A
Legal Description of Premises
PARCEL A
A certain tract of land situated on the westerly side of Chelsea
Street, in Gardner, Worcester County, Commonwealth of Massachusetts, containing
78 square rods, more or less, with the buildings and other improvements located
thereon, and bounded and described as follows, to wit:
Beginning at a point in the book near the junction of said Chelsea
Street and Summer Street; thence North 10 degrees 30' East by said Summer
Street, and on a wall by land now or formerly of the heirs of S.K. Pierce, 9
rods to the land now or formerly of Sidney Fairbanks; thence South 72 degrees
East on the wall by land or said Fairbanks 7 rods to the line of Chelsea Street;
thence on said Chelsea Street South 17 degrees 40' West 19 links; thence South
32 3/4 degrees West 2 rods and 1 link; thence South 57 degrees 45' West 8 rods
and 2 links, all on said Chelsea Street to the place of beginning.
PARCEL B
That certain tract of land with buildings thereon situated on the east
side of Summer Street, in said Gardner, Worcester County, Massachusetts, bounded
and described as follows, to wit: Beginning at the northwesterly corner thereof
in the easterly line of said Summer Street, thence south 85 degrees E 8 rods, 2
3/4 links to a drill hole in a rock; thence 8, 30 degrees 15' W, 11 rods, 19
links to said street; thence N. 5 degrees E. 11 rods, 8 1/4 links by said street
to the place of beginning. Containing 17.8 rods, more or less.
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EXHIBIT B
Title Encumbrances
1. Title to and rights of others in those portions of the premises lying
within the bounds of adjacent streets and ways.
2. Riparian rights and rights of others in brook crossing the premises.
3. Sewer rights of the City of Gardner referred to in deed recorded in
Book 2350, Page 577.
4. Easements, well rights, covenants, reservations and drain rights set
forth in deed recorded in Book 2124, Page 336 and Book 1740, Page 306.
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EXHIBIT C
Form of Purchase and Sale Contract
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<TABLE>
<S> <C>
EXHIBIT C
TO LEASE DATED AS OF MARCH 1, 1999 FOR
21 SUMMER STREET, GARDNER, MASSACHUSETTS
STANDARD FORM
PURCHASE AND SALE AGREEMENT
This day of 19
------ ---------------- --
1. PARTIES
AND MAILING hereinafter called the SELLER, agrees to SELL and
ADDRESSES
hereinafter called the BUYER or PURCHASER, agrees
(FILL IN) to BUY, upon the terms hereinafter set forth, the
following described premises:
Attach Exhibit A from Lease
2. DESCRIPTION
(FILL IN AND INCLUDE
TITLE REFERENCE)
3. BUILDINGS, Included in the sale as a part of said premises
STRUCTURES, are the buildings, structures, and improvements
IMPROVEMENTS, now thereon, and the fixtures used in connection
FIXTURES therewith including, if any, all wall-to-wall
carpeting, drapery rods, automatic garage door
openers, venetian blinds, window shades, screens,
screen doors, storm windows and doors, awnings,
shutters, furnaces, heaters, heating equipment,
stoves, ranges, oil and gas burners and fixtures
appurtenant thereto, hot water heaters, plumbing
and bathroom fixtures, garbage disposers, electric
and other lighting fixtures, mantels, outside
television antennas, fences, gates, trees, shrubs,
plants, and refrigerators, air conditioning
equipment, ventilators, dishwashers, washing
machines and dryers; and
but excluding
</TABLE>
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<TABLE>
<S> <C>
4. TITLE DEED Said premises are to be conveyed by a good and
(FILL IN) sufficient quitclaim deed running to the BUYER, or
*INCLUDE HERE BY SPECIFIC to the nominee designated by the BUYER by written
REFERENCE ANY RESTRICTIONS, notice to the SELLER at least seven days before
EASEMENTS, RIGHTS the deed is to be delivered as herein provided,
AND OBLIGATIONS IN PARTY and said deed shall convey a good and clear record
WALLS NOT INCLUDED IN (B), and marketable title thereto, free from
LEASES, MUNICIPAL AND encumbrances, except
OTHER LIENS, OTHER (a) Provisions of existing building and zoning
ENCUMBRANCES, AND MAKE laws;
PROVISION TO PROTECT (b) Existing rights and obligations in party
SELLER AGAINST BUYER'S walls which are not the subject of written
BREACH OF SELLER'S agreement;
COVENANTS IN LEASES, (c) Such taxes for the then current year as are
WHERE NECESSARY. not due and payable on the date of the
delivery of such deed;
(d) Any liens for municipal betterments assessed
after the date of this agreement;
(e) Attach Exhibit B from Lease.
See also Exhibit A.
5. PLANS If said deed refers to a plan necessary to be
recorded therewith the SELLER shall deliver such
plan with the deed in form adequate for recording
or registration.
6. REGISTERED TITLE In addition to the foregoing, if the title to said
premises is registered, said deed shall be in form
sufficient to entitle the BUYER to a Certificate
of Title of said premises, and the SELLER shall
deliver with said deed all instruments, if any,
necessary to enable the BUYER to obtain such
Certificate of Title.
7. PURCHASE PRICE The agreed purchase price for said premises
(FILL IN); SPACE IS is dollars, of which
ALLOWED TO WRITE --------
OUT THE AMOUNTS
IF DESIRED $
----------
$ * are to be paid at the time of delivery of
------ the deed in cash, or by certified,
cashier's, treasurer's or bank
check(s).
$
----------
$ TOTAL
----------
* To be calculated in accordance with Lease.
</TABLE>
COPYRIGHT (C) 1979, 1984, 1986, 1987, 1988, 1991
All rights reserved. This form may not be copied or reproduced in whole or in
part in any manner whatsoever GREATER BOSTON REAL ESTATE BOARD without the prior
express written consent of the Greater Boston Real Estate Board.
<PAGE>
<TABLE>
<S> <C>
8. TIME FOR Such deed is to be delivered at 12:00 o'clock P.M.
PERFORMANCE; on the ___ day of _________ 199_, at the Worcester
DELIVERY OF DEED District Registry of Deeds, unless otherwise
(FILL IN) agreed upon in writing. It is agreed that time is
of the essence of this agreement.
9. POSSESSION AND Full possession of said premises free of all
CONDITION OF tenants and occupants other than BUYER, except as
PREMISE. herein provided, is to be delivered at the time of
(ATTACH A LIST OF the delivery of the deed, said premises to be then
EXCEPTIONS, IF ANY) (a) in the same condition as they now are,
reasonable use and wear thereof excepted, (b) not
in violation of said building and zoning laws, and
(c) in compliance with provisions of any
instrument referred to in clause 4 hereof. The
BUYER shall be entitled personally to inspect said
premises prior to the delivery of the deed in
order to determine whether the condition thereof
complies with the terms of this clause.
10. EXTENSION TO If the SELLER shall be unable to give title or to
PERFECT TITLE make conveyance, or to deliver possession of the
OR MAKE premises, all as herein stipulated, or if at the
PREMISES time of the delivery of the deed the premises do
CONFORM not conform with the provisions hereof, the SELLER
(CHANGE PERIOD OF shall use reasonable efforts to remove any defects
TIME IF DESIRED). in title, or to deliver possession as provided
herein, or to make the said premises conform to
the provisions hereof, as the case may be, and the
time for performance hereof shall be extended for
a period of up to thirty days, but not beyond
BUYER's mortgage.
11. FAILURE TO If at the expiration of the extended time the
PERFECT TITLE SELLER shall have failed so to remove any defects
OR MAKE in title, deliver possession, or make the premises
PREMISES conform, as the case may be, all as herein agreed,
CONFORM, etc. or if at any time during the period of this
agreement or any extension thereof, the holder of
a mortgage on said premises shall refuse to permit
the insurance proceeds, if any, to be used for
such purposes, then any payments made under this
agreement shall be forthwith refunded and all
other obligations of the parties hereto shall
cease and this agreement shall be void without
recourse to the parties hereto.
12. BUYER's The BUYER shall have the election, at either the
ELECTION TO original or any extended time for performance, to
ACCEPT TITLE accept such title as the SELLER can deliver to the
said premises in their then condition and to pay
therefore the purchase price without deduction, in
which case the SELLER shall convey such title,
except that in the event of such conveyance in
accord with the provisions of this clause, if the
said premises shall have been damaged by fire or
casualty insured against, then the SELLER shall,
unless the SELLER has previously restored the
premises to their former condition, either
(a) pay over or assign to the BUYER, on delivery
of the deed, all amounts recovered or
recoverable on account of such insurance,
less any amounts reasonably expended by the
SELLER for any partial restoration, or
(b) if a holder of a mortgage on said premises
shall not permit the insurance proceeds or
a part thereof to be used to restore the
said premises to their former condition or
to be so paid over or assigned, give to the
BUYER a credit against the purchase price,
on delivery of the deed, equal to said
amounts so recovered or recoverable and
retained by the holder of the said mortgage
less any amounts reasonably expended by the
SELLER for any partial restoration.
13. ACCEPTANCE The acceptance of a deed by the BUYER or his
OF DEED nominee as the case may be, shall be deemed to be
a full performance and discharge of every
agreement and obligation herein contained or
expressed, except such as are, by the terms
hereof, to be performed after the delivery of said
deed.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
14. USE OF To enable the SELLER to make conveyance as herein
MONEY TO provided, the SELLER may, at the time of delivery
CLEAR TITLE of the deed, use the purchase money or any portion
thereof to clear the title of any or all
encumbrances or interests, provided that all
instruments so procured are recorded
simultaneously with the delivery of said deed.
15. INSURANCE Until the delivery of the deed, the SELLER shall
*INSERT AMOUNT maintain insurance on said premises as follows:
(LIST ADDITIONAL TYPE OF INSURANCE AMOUNT OF COVERAGE
TYPES OF INSURANCE (a) Fire and Extended $___ As currently
AND AMOUNTS AS Coverage maintained
AGREED) (b)
16. OMIT *commitment deadline or termination of the
initially committed interest rate and/or other
loan terms.
SEE , ALSO Exhibit A attached.
--- ----
17. ADJUSTMENT If the amount of said taxes is not known at the
OF UNASSESSED time of the delivery of the deed, they shall be
AND ABATED apportioned on the basis of the taxes assessed for
TAXES the preceding fiscal year, with a reapportionment
as soon as the new tax rate and valuation can be
ascertained; and, if the taxes which are to be
apportioned shall thereafter be reduced by
abatement, the amount of such abatement, less the
reasonable cost of obtaining the same, shall be
apportioned between the parties, provided that
neither party shall be obligated to institute or
prosecute proceedings for an abatement unless
herein otherwise agreed.
18. OMIT
19. OMIT OR BROKER(S) The Broker(s) named herein
WARRANTY warrant(s) that the Broker(s) is(are) duly
(FILL IN NAME) licensed as such by the Commonwealth of
Massachusetts.
20. OMIT
21. OMIT
22. RELEASE The Devisee of Alma L. Wood hereby agrees
to join in said deed and to release and convey all
statutory and other rights and interests in said
premises.
24. LIABILITY OF If the SELLER or BUYER executes this agreement in
TRUSTEE, a representative or fiduciary capacity, only the
SHAREHOLDER, principal or the estate represented shall be
BENEFICIARY, etc. bound, and neither the SELLER or BUYER so
executing, nor any shareholder or beneficiary of
any trust, shall be personally liable for any
obligation, express or implied, hereunder.
25. WARRANTIES AND The BUYER acknowledges that the BUYER has not been
REPRESENTATIONS influenced to enter into this transaction nor has
(FILL IN); IF NONE, he relied upon any warranties or representations
STATE "NONE"; IF not set forth or incorporated in this agreement or
ANY LISTED, INDICATE pre-viously made in writing, except for the
BY WHOM EACH WARR- following additional warranties and
ANTY OR REPRESEN- representations, if any, made by either the SELLER
TATION WAS MADE or the Brokers(s): None.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
26. MORTGAGE
CONTINGENCY
CLAUSE
(OMIT IF NOT
PROVIDED FOR
IN OFFER TO
PURCHASE)
27. CONSTRUCTION This instrument, executed in multiple
OF AGREEMENT counterparts, is to be construed as a
Massachusetts contract, is to take effect as a
sealed instrument, sets forth the entire contract
between the parties, is binding upon and enures to
the benefit of the parties hereto and their
respective heirs, devisees, executors,
administrators, successors and assigns, and may be
canceled, modified or amended only by a written
instrument executed by both the SELLER and the
BUYER. If two or more persons are named herein as
BUYER their obligations hereunder shall be joint
and several. The captions and marginal notes are
used only as a matter of convenience and are not
to be considered a part of this agreement or to be
used in determining the intent of the parties to
it.
28. LEAD PAINT The parties acknowledge that, under Massachusetts
LAW law, whenever a child or children under six years
of age resides in any residential premises in
which any paint, plaster or other accessible
material contains dangerous levels of lead, the
owner of said premises must remove or cover said
paint, plaster or other material so as to make it
inaccessible to children under six years of age.
29. SMOKE The SELLER shall, at the time of the delivery of
DETECTORS the deed, deliver a certificate from the fire
department of the city or town in which said
premises are located stating that said premises
have been equipped with approved smoke detectors
in conformity with applicable law.
30. ADDITIONAL Exhibit A attached hereto, is incorporated herein
PROVISIONS by reference.
</TABLE>
FOR RESIDENTIAL PROPERTY CONSTRUCTED PRIOR TO 1978,
BUYER MUST ALSO HAVE SIGNED LEAD
PAINT "PROPERTY TRANSFER NOTIFICATION CERTIFICATION"
NOTICE: This is a legal document that creates binding obligations. If not
understood, consult an attorney.
- -------------------------------- -----------------------------------
SELLER SELLER
- -------------------------------- -----------------------------------
BUYER BUYER
By: BY:
- -------------------------------- -----------------------------------
Broker(s)
*ADD DEVISEES AS SIGNATORIES
<PAGE>
EXTENSION OF TIME FOR PERFORMANCE
Date
The time for the performance of the foregoing agreement is extended until
_____ o'clock _M. on the _____ day of __________ 19__, time still being of the
essence of this agreement as extended.
This extension, executed in multiple counterparts, is intended to take
effect as a sealed instrument.
- ----------------------------- ---------------------------------
SELLER (or spouse) SELLER
- ----------------------------- ---------------------------------
BUYER BUYER
- ----------------------------- ---------------------------------
Broker(s)
<PAGE>
Exhibit A to Purchase and Sale Agreement
21 Summer Street Gardner, Massachusetts
1. NO BROKER
The BUYER and SELLER each represent and warrant to the other that it has
not contacted any real estate broker in connection with this transaction
and was not directed to the other as a result of any services or facilities
of any real estate broker. Each agrees to indemnify the other against and
to hold the other harmless from any claim, loss, damage, costs or
liabilities for any brokerage commission or fee which may be asserted
against the other in connection with this transaction arising out of its
contacts with any real estate brokers. The provisions of this paragraph
shall survive delivery of the deed.
2. NOTICES
All notices required hereunder shall be deemed to have been duly given if
in writing and delivered by hand, sent by telefax or mailed by registered
or certified mail, return receipt requested, all charges prepaid, addressed
to BUYER or SELLER at their respective addresses designated above, and in
the case of notices addressed to SELLER, a copy thereof to ; and in the
case of BUYER, a copy thereof to
3. DEED [If conveyed by Executor]
SELLER shall convey the property to BUYER by a Fiduciary Deed executed by
of the , in accordance with the
Power of Sale contained in Article of said without obtaining a License to
Sell from the Probate Court.
4. ESTATE TAX [If conveyed by Executor]
The SELLER's obligations under this Agreement shall be subject to the
SELLER, on or before the closing date, obtaining from The Commonwealth of
Massachusetts and, if applicable, from the IRS a Certificate Releasing the
Estate Tax Lien or Closing Letters for the Estate of Alma L. Wood or
otherwise providing such affidavits or other evidence with respect to such
matters acceptable to BUYER's title company to insure marketable title in
BUYER without exception for the claims of any creditors of SELLER or said
estate.
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<PAGE>
5. INSPECTION
The BUYER acknowledges that it has inspected the premises, including all
improvements thereon, or has caused the same to be inspected and that the
BUYER is fully satisfied with the conditions thereof. The premises are to
be conveyed in their present "as is" condition, reasonable wear and tear
excepted, and the BUYER further acknowledges that it is not relying upon
any statement or representation by the SELLER or by the brokers with
respect to the physical condition of the premises, it being the
understanding of the parties hereto that the entire agreement of the
parties is fully set forth herein. The provisions of this Paragraph shall
survive delivery of the deed.
6. DESTRUCTION
Notwithstanding anything herein to the contrary, in the event of damage to
or destruction of the Premises by fire, vandalism or other casualty, or in
the event of a taking of all or a part of the Premises by eminent domain,
then at BUYER's option, this Agreement may be terminated.
7. CHANGE OF CLOSING LOCATION
Notwithstanding the provisions of Paragraph 8 of this Agreement, the place
for the delivery of the SELLER's deed may be designated to another location
in the Greater Gardner area in a written notice from the BUYER to the
SELLER given at least seven (7) days before the date specified in Paragraph
8 of this Agreement as either (i) the place of business of the mortgage
lender granting mortgage financing for the BUYER's acquisition of the
premises or (ii) the office of said mortgage lender's attorney.
8. TITLE
Notwithstanding anything herein contained, the premises shall not be
considered to be in compliance with the provisions of this Agreement with
respect to title unless:
(a) all structures and improvements, including but not limited to any
driveway(s), garage(s), and any septic system(s), cesspool(s) or
leaching field(s) and all means of access to the premises shall be
wholly within the boundary lines of the premises and shall not
encroach upon or under any property not within such boundary lines;
- 31 -
<PAGE>
(b) the premises abut a public way, duly laid out or accepted as such by
the town or city in which the premises are located; or a private way
to which the BUYER shall have both pedestrian and vehicular access,
such private way having satisfactory access to a public way;
(c) no building, structure, improvement, property, right of way or
easement of any kind belonging to any other person or entity
encroaches upon or under the premises from other premises that
materially interferes with the current use of said premises; and,
(d) title to the premises is insurable, for the benefit of the BUYER, by a
title insurance company, in a fee owner's policy of title insurance at
normal premium rates, in the American Land Title Association form
currently in use.
9. FIRPTA
SELLER agrees at the closing to execute a statement under oath to the
effect that SELLER is not a foreign person subject to the withholding
provisions of the Internal Revenue Code of 1986, as amended.
10. FORM 1099
The SELLER's attorney agrees to cause to be prepared and filed in a timely
fashion a 1099 Form for the within transaction.
11. TITLE INSURANCE
SELLER agrees at the closing to execute a statement under oath to any title
insurance company issuing a policy to BUYER and/or BUYER's mortgagee and/or
the BUYER individually to the effect that: (1) there are no tenants,
lessees or parties in possession of the premises other than BUYER, (2)
SELLER has no knowledge of any work having been done to the premises by or
on behalf of SELLER which would entitle anyone now or hereafter to claim a
mechanics' or materialmen's lien on the premises; and SELLER agrees to
indemnify and hold harmless the title insurance company for any loss,
costs, or damages sustained as a result of issuing a policy without
exceptions covered by such representations; and (3) that SELLER is not a
foreign person subject to the withholding provisions of the Internal
Revenue Code of 1986, as amended (FIRPTA). SELLER hereby makes such
representations to the BUYER as of the closing and this paragraph shall
survive the closing.
- 32 -
<PAGE>
12. FIRST MORTGAGE FINANCING
This Agreement is contingent upon the BUYER'S ability to obtain a first
mortgage from an institutional lender in the amount of at least $ for a
term of years at then current rates of interest and on terms and conditions
satisfactory to BUYER. The BUYER shall have until to obtain said financing.
In the event that the BUYER is unable to obtain said financing on or before
, BUYER shall so notify the SELLER by , whereupon all deposits made
hereunder shall be forthwith refunded to the BUYER and this Agreement shall
become null, void and of no effect. BUYER shall be deemed to have used
diligent efforts to obtain said financing by virtue of making a loan
application to one institutional lender.
13. TIME FOR PERFORMANCE
Notwithstanding the provisions of Paragraph 8 of this Agreement, in the
event the attorney for the BUYER's Lender is unable to close the BUYER's
loan transaction at the time for performance hereof, SELLER agrees that (a)
the time for performance may be extended to a time and date designated by
the BUYER's Mortgagee's bank attorney but in no event later than the fifth
business day after the original time for performance, and (b) such attorney
may change the place for delivery to his office.
14. SEWER SERVICE
SELLER warrants and represents that the premises are served by municipal
sewer. The provisions of this Paragraph shall survive delivery of the deed.
15. BUYER'S DEFAULT
If BUYER shall fail to fulfill the BUYER's Agreements herein, SELLER's sole
remedy at law or in equity against the BUYER shall be those remedies set
forth in that certain Lease, dated as of February 27, 1999, between SELLER,
as landlord, and BUYER, as tenant.
16. EXTENSION OF TIME FOR SELLER'S PERFORMANCE
For the purposes of Paragraph 10 of this Agreement, SELLER shall not be
required to incur or spend more than One Thousand Dollars ($1,000.00) to
remove any defects in title, other than any such defects that (i) were
voluntarily placed on the title to the Premises by SELLER or anyone
claiming title to said premises by through or under SELLER, including, but
not limited to, the persons to whom said premises
- 33 -
<PAGE>
have been devised pursuant to the will of Alma L. Wood, or (ii) secure an
obligation of SELLER, the estate of Alma L. Wood or any of the persons to
whom said premises have been devised pursuant to the will of Alma L. Wood
to pay money, including, but not limited to Mortgages, deeds of trust,
assignments of leases and rents, ground leases, so-called medicare or
medicaid liens, mechanic's or materialmen's liens, judgment liens or tax
liens.
- 34 -
<PAGE>
EXHIBIT 10.9
EXECUTION COPY
PRECISION OPTICS CORPORATION, INC.
STOCK SUBSCRIPTION AGREEMENT
1. Special Situations Cayman Fund, L.P., a Delaware limited
partnership, hereby subscribes for 125,000 shares (the "Shares") of the Common
Stock, $0.01 par value (the "Common Stock"), of Precision Optics Corporation,
Inc., a Massachusetts corporation (the "Company"); Special Situations Fund III,
L.P., a Delaware limited partnership, hereby subscribes for 375,000 Shares;
Special Situations Private Equity Fund, L.P., a Delaware limited partnership,
hereby subscribes for 350,000 Shares; and Special Situations Technology Fund,
L.P., a Delaware limited partnership (collectively with Special Situations
Cayman Fund, L.P., Special Situations Fund III, L.P., and Special Situations
Private Equity Fund, L.P., the "Investors"), hereby subscribes for 150,000
Shares, in each case 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 $1.0625 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 1,000,000 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 August 5, 1999 by and among the Company and the
Investors, the
<PAGE>
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 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 Warrants, 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 Warrants have been duly and
effectively taken and no further actions, authorizations or consents, including
without
-2-
<PAGE>
limitation by any of the shareholders of the Company, are required. Each of this
Agreement and the Warrants 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 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 Warrants, 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 Investors 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, 1998, 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, 1999 (except for changes resulting from the exercise of
options or warrants since such date).
-3-
<PAGE>
(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 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, orders, 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.
(g) NO MATERIAL ADVERSE CHANGE. Since March 31, 1999, 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, 1999, 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,
-4-
<PAGE>
administrative agency, commission, regulatory authority, other government agency
or instrumentality or self-regulatory agency.
(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 Investors.
-5-
<PAGE>
(n) NASDAQ REQUIREMENTS. The Common Stock has been designated
for inclusion in the Nasdaq Small Cap Market upon prior application and meets
all applicable 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 from 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.
6. The Investors acknowledge receipt from the Company of the following
documents, which they have carefully considered:
(a) The Company's Form 10-KSB for the fiscal year ended June
30, 1998.
(b) The Company's Forms 10-QSB for the fiscal quarters ended
September 30, 1998, December 31, 1998 and March 31, 1999.
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):
-6-
<PAGE>
To the Company at the following address:
Precision Optics Corporation, Inc.
22 East Broadway
Gardner, MA 01440
Attn: Jack P. Dreimiller, Chief Financial Officer
Fax No.: (978) 630-1487
with a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
Attn: Patrick O'Brien, Esq.
Fax No.: (617) 951-7050
To the Investors at the following address:
Special Situations Cayman Fund, L.P.
Special Situations Fund III, L.P.
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: Steve Becker
Fax No.: (212) 832-6141
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.
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. 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.
-7-
<PAGE>
11. 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.]
-8-
<PAGE>
Intending to be legally bound hereby, the undersigned have duly
executed this Agreement as of August 5, 1999.
SPECIAL SITUATIONS CAYMAN FUND, L.P.
By: /S/Austin W. Marxe
---------------------------------
Title: Managing Director
SPECIAL SITUATIONS FUND III, L.P.
By: /S/Austin W. Marxe
---------------------------------
Title: Managing Director
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
[Stock Subscription Agreement]
-9-
<PAGE>
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
1,000,000 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: August 5, 1999
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 480,732
<SECURITIES> 0
<RECEIVABLES> 210,079
<ALLOWANCES> 0
<INVENTORY> 979,284
<CURRENT-ASSETS> 1,718,091
<PP&E> 3,750,473
<DEPRECIATION> 2,496,949
<TOTAL-ASSETS> 3,254,495
<CURRENT-LIABILITIES> 615,448
<BONDS> 166,312
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<COMMON> 66,876
<OTHER-SE> 2,405,859
<TOTAL-LIABILITY-AND-EQUITY> 3,254,495
<SALES> 3,028,600
<TOTAL-REVENUES> 3,028,600
<CGS> 2,155,070
<TOTAL-COSTS> 2,155,070
<OTHER-EXPENSES> 2,549,930
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