-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZ/NheoWni0Y7wUagRhqD8xEdTuhHkPXVevtmFu6Fa73Mra3r46KYEsW1Jer5rBd voF4zLFxAQi3UJtuauhv0A== 0000950135-98-005274.txt : 19980930 0000950135-98-005274.hdr.sgml : 19980930 ACCESSION NUMBER: 0000950135-98-005274 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECISION OPTICS CORPORATION INC CENTRAL INDEX KEY: 0000867840 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 042795294 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-10647 FILM NUMBER: 98717296 BUSINESS ADDRESS: STREET 1: 22 EAST BROADWAY CITY: GARDNER STATE: MA ZIP: 01440-3338 BUSINESS PHONE: 5086301800 FORMER COMPANY: FORMER CONFORMED NAME: PRECISION OPTICS CORP INC DATE OF NAME CHANGE: 19600201 10KSB 1 PRECISION OPTICS CORPORATION, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 1998 Commission File Number 001-10647 PRECISION OPTICS CORPORATION, INC. (Name of small business issuer in its charter) MASSACHUSETTS 04-279-5294 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 22 EAST BROADWAY GARDNER, MASSACHUSETTS 01440 (Address of principal executive offices) (Zip Code) Issuer's telephone number is (978) 630-1800 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ COMMON STOCK, $.01 PAR VALUE NONE Securities registered pursuant to Section 12(g) of the Act: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if no disclosure of delinquent filers to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ___ The issuer's revenues for its most recent fiscal year were $4,053,051. The aggregate market value of the voting stock, consisting solely of common stock, held by non-affiliates of the issuer computed by reference to the closing price of such stock was $4,243,961 as of August 31, 1998. The number of shares of outstanding common stock of the issuer as of August 31, 1998 was 6,677,595. DOCUMENTS INCORPORATED BY REFERENCE The issuer's Proxy Statement for the 1998 Annual Meeting of Shareholders to be held on November 10, 1998 is incorporated into Part III of this Form 10-KSB. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS BUSINESS DEVELOPMENT. Precision Optics Corporation, Inc. (the "Company") was incorporated in Massachusetts in 1982 and has been publicly owned since November 1990. References to the Company contained herein include its two wholly owned subsidiaries except where the context otherwise requires. BUSINESS OF ISSUER. The Company designs, develops, manufactures and sells specialized optical systems and components and optical thin film coatings. The Company conducts business in one industry segment only. The Company's products and services fall into the following areas: medical products for use by hospitals and physicians, advanced optical products and thin films and advanced optical system design and development services. PRINCIPAL PRODUCTS AND SERVICES AND METHODS OF DISTRIBUTION MEDICAL PRODUCTS. The Company's medical products include endoscopes and image couplers, beamsplitters and adapters, the latter of which are used as accessories to endoscopes. Since January 1991, the Company has developed and sold endoscopes using various optical technologies for use in a variety of minimally invasive surgical and diagnostic procedures throughout the human body. The Company's current line of specialized endoscopes include arthroscopes (which are used in joint surgery), laryngoscopes (which are used in the diagnosis of diseases of the larynx), laparoscopes (which are used in abdominal surgery) and stereo endoscopes (which are currently being tested for use in cardiac surgery). In addition to its existing line of endoscopes, the Company is continuing to develop different types of endoscopes that incorporate varying types of construction and technology for use in various medical specialties. In July 1998, the Company entered into a Manufacturing Services Agreement with a customer that is in the process of developing a sophisticated system for computer assisted minimally invasive cardiac surgery that employs advanced electronics and robotics and an enhanced 3-D visualization system. Under the Agreement, the Company will be this customer's primary supplier of stereo endoscopes and cameras, both of which will be used as key components in the customer's surgical system. The Company has received initial orders from this customer, with deliveries commencing later this calendar year. The Company developed and has manufactured and sold since 1985 a proprietary product line of state-of-the-art instrumentation to couple endoscopes to video cameras. Included in this product line are image couplers, which physically connect the endoscope to the video camera system and transmit the image viewed through the scope to the video camera. Another product -- the beamsplitter -- performs the same function while preserving for the viewer an eyeport for direct, simultaneous viewing -2- 3 through the endoscope. The Company has sold these devices primarily to endoscope and video camera manufacturers and suppliers for resale under its customers' names. The Company's image couplers and beamsplitters can withstand surgery-approved sterilization. The Company also offers autoclavable image couplers, which are able to withstand sterilization in superheated steam under pressure. Autoclavability is a preferred method of sterilization because of its relative speed, safety, and efficiency. The Company believes that it is the only company in the world that produces autoclavable image couplers. Included in the Company's medical products sales are sales of image couplers and beamsplitters for video-monitored examination of a variety of industrial cavities and interiors. The Company has developed, and may develop in the future, specialized borescopes for industrial applications. OPTICAL PRODUCTS AND SERVICES. The Company provides on a contract basis advanced lens design, image analysis, optical system design, structural design and analysis, prototype production and evaluation, optics testing, and optical system assembly. Some of the Company's development contracts have led to optical system production business for the Company, and the Company believes its prototype development service may lead to new product production from time to time. The Company's recent emphasis in the optical field has been in the design, development and manufacture of specialty thin film coatings for use in various optical products. The Company is aggressively pursuing sales, marketing and technology development opportunities for new optical thin films in the rapidly growing optical communications and semiconductor industries. During the last half of fiscal year 1997, the Company began development of prototype Wavelength Division Multiplexer (WDM) optical filters. WDMs are devices that allow telecommunications companies to increase the transmission capacity of fiberoptic lines. Based on development efforts to date, the Company is currently supporting product evaluations with several potential customers in the telecommunications and semiconductor industries. The Company has in the past earned significant revenue from the sale of night vision products which permit users to see in extreme low light. In recent years, the Company has had increasing difficulty competing for and winning production contracts for night vision products due to lower prices offered by foreign manufacturers, Government budget uncertainties and efforts to lower the federal budget deficit and defense spending. As a result of these factors, the Company anticipates that revenues derived from its night vision products and technology will continue to decline as the Company pursues opportunities in other business segments. COMPETITION AND MARKETS The areas in which the Company does business are highly competitive and include both foreign and domestic competitors. Many of the Company's competitors are larger and have substantially greater resources than the Company. Furthermore, other domestic or foreign companies, some with greater experience in the optics industry and greater financial resources than the Company, may seek to produce products or services that compete with those of the Company. The Company may establish or use production facilities overseas to produce key components to the Company's business, such as lenses. The Company believes that the cost savings from such production may be essential to the Company's ability to compete on a price basis in the medical products area particularly and to the -3- 4 Company's profitability generally, and that the Company's inability to establish or maintain such production facilities could materially adversely affect the Company. The Company believes that competition for sales of its products and services, which have been principally sold to OEM customers, is based on performance and other technical features, as well as other factors, such as scheduling and reliability, in addition to competitive price. The Company currently sells its image couplers, beamsplitters, and adapters to a market that consists of approximately 30 potential OEM customers. These potential customers sell video cameras, endoscopes, or video-endoscopy systems. The Company has made sales to approximately 20 of these customers. The Company estimates that it has approximately 30% of the market share in these products and anticipates growth in this area. The Company's primary competition in this area is the customers' own in-house capabilities to manufacture such products. The Company believes that these customers typically purchase products from the Company, despite their in-house capabilities, because they choose to devote their own technical resources to their primary products, such as cameras or endoscopes. The Company estimates that approximately 50% of the market demand for image couplers, beamsplitters, and adapters is met by "captive" or in-house capabilities. The Company has marketed and sold its endoscopes to OEM video camera and video endoscopy suppliers for resale under the purchaser's name. A number of domestic and foreign competitors also sell endoscopes to such OEM suppliers, and the Company's share of the endoscope market is nominal. The Company believes that, while its resources are substantially more limited than these competitors, the Company may be able to be more responsive to the needs of endoscope users. The Company offers advanced optical design and development services not related to thin film coatings to a wide range of potential customers and has numerous competitors. The ability to supply design and development services to such customers is highly dependent upon a company's and its employees' reputations and prior experience. While the potential market for thin film coatings is perceived as growing rapidly, particularly in the telecommunications and semiconductor industries, the Company's thin film coatings competitors are numerous and have deep and broad capabilities. The Company has had negligible direct export sales to date. RESEARCH AND DEVELOPMENT The Company believes that its future success depends to a large degree on its ability to continue to conceive and to develop new optical products and services and to enhance the performance characteristics and methods of manufacture of existing products. Accordingly, it expects to continue to seek to obtain product-related design and development contracts with customers and to invest its own funds on its research and development. The Company received approximately $988,000 and $1,410,000 for the fiscal years ended June 30, 1998 and 1997, respectively, from customers for customer-sponsored design and development projects. Levels of customer contract funded research and development can fluctuate greatly in any given period depending upon the mix between design efforts and hardware development, which is -4- 5 generally more expensive and time consuming than the design phases. In addition to customer-sponsored research and development, the Company spent approximately $897,000 and $428,000 of its own funds during fiscal years 1998 and 1997, respectively, on the Company's own research and development. The Company expects to continue making significant Company-funded expenditures for research and development, particularly in the thin film coatings area. RAW MATERIALS AND PRINCIPAL SUPPLIERS For all of the Company's products, except for thin film coatings, the basic raw material is precision grade optical glass, which the Company obtains from several major suppliers. Outside vendors grind and polish most of the Company's lenses and prisms. For optical thin film coatings, the basic raw materials are metals and dielectric compounds, which the Company obtains from a variety of chemical suppliers. The Company believes that its demand for these raw materials and services is small relative to the total supply and that materials and services required for the production of its products are currently available in sufficient production quantities and will be available for fiscal year 1999. The Company believes, however, that there are relatively few suppliers of the high quality lenses and prisms which its endoscopes may require. The Company has therefore established an in-house optical shop for producing ultra-high quality prisms, micro-optics and other specialized optics for a variety of medical and industrial applications. Depending upon the market acceptance of the Company's endoscopes, the Company may seek to assure itself of a timely supply of lenses, prisms, or other key materials or components through the acquisition of an outside supplier or expanded in-house manufacturing facilities. PATENTS AND TRADEMARKS The Company relies, in part, upon patents, trade secrets, and proprietary knowledge as well as personnel policies and employee confidentiality agreements concerning inventions and other creative efforts to develop and to maintain its competitive position. The Company does not believe that its business is dependent upon any patent, patent pending, or license, although it believes that trade secrets and confidential know-how may be important to the Company's scientific and commercial success. The Company plans to file for patents, copyrights, and trademarks in the United States and in appropriate countries to protect its intellectual property rights to the extent practicable. The Company holds the rights to several United States and foreign patents and has several patent applications pending. The Company knows of no infringements of its patents. Although the Company plans to protect any patents it has from infringement, it may not be able to pursue such protection for economic reasons. While the Company believes that its pending applications relate to patentable devices or concepts, there can be no assurance that patents will be issued or that any patents issued can be successfully defended or will effectively limit the development of competitive products and services. Although the Company seeks to protect its proprietary information, there can be no assurance that others will not either develop independently the same or similar information or gain access to the Company's proprietary information or that disputes will not arise as to proprietary rights to such information. -5- 6 The Company's products may now or in the future infringe upon others' patents or proprietary technology. The Company's defense of any such claims could have a material, adverse effect on the Company. EMPLOYEES As of June 30, 1998, the Company had forty-four full-time employees and two part-time employees. CUSTOMERS Sales to the Company's three largest customers, in terms of total sales during fiscal year 1998, were approximately 22%, 14% and 10%. Sales to the Company's two largest customers, in terms of total sales during fiscal year 1997, were approximately 38% and 23%. ENVIRONMENTAL PROTECTION AND THE EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON THE BUSINESS The Company's operations are subject to a variety of federal, state, and local laws and regulations relating to the discharge of materials into the environment or otherwise relative to the protection of the environment. From time to time the Company uses a small amount of hazardous materials in its operations. Although the Company believes that it complies with all applicable environmental laws and regulations, any failure to comply with such laws and regulations could have a material, adverse effect on its capital expenditures, earnings, and competitive position. NEED FOR GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES AND EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON THE BUSINESS The Company currently sells and markets several medical products, the marketing of which may require the permission of the United States Food and Drug Administration ("FDA"). Pursuant to the Company's notification to the FDA of its intent to market its laparoscope, additional types of endoscopes which it has developed and is developing, image coupler, beamsplitter, and adapters, the FDA has determined that each such device is substantially equivalent to a device marketed in interstate commerce and that the Company may market such devices, subject to the general controls provisions of the Food, Drug and Cosmetic Act. Furthermore, the Company plans to market additional endoscopes and related medical products that may require the FDA's permission to market such products. The Company may also develop additional products or seek to sell some of its current or future medical products in a manner that requires the Company to obtain the permission of the FDA to market such products, as well as the regulatory approval or license of other federal, state, and local agencies or similar agencies in other countries. There can be no assurance that the Company will be able to maintain the FDA's permission to market its current products or to obtain such regulatory permission, approvals, or licenses for any of its other products. Furthermore, potential adverse FDA regulation affecting the Company which might arise from future legislation or administrative action cannot be predicted. In addition, FDA regulations may be established that could prevent or delay regulatory clearances or approval of the Company's products. The inability of the Company to secure any necessary licenses or regulatory approvals or permission from the FDA could have a material adverse effect on its business. The FDA has authority to conduct detailed inspections of manufacturing plants -6- 7 in order to assure that "good manufacturing practices" are being followed in the manufacture of medical devices, to require periodic reporting of product defects to the FDA, and to prohibit the exploitation of devices which do not comply with law. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory clearances or approvals, product recalls, operating restrictions, and criminal prosecution. ITEM 2. DESCRIPTION OF PROPERTY The Company conducts its domestic operations at two facilities in Gardner and Fitchburg, Massachusetts. The Gardner facility is leased from a corporation owned by an officer-shareholder-director of the Company, and the Company's lease expires in December 1999. The Fitchburg facility is under a three year lease which commenced on November 1, 1995. The Company rents office space in Hong Kong for sales, marketing and supplier quality control and liaison activities of its Hong Kong subsidiary. The Company believes these facilities are adequate for its current operations. Significant increases in production or the addition of significant equipment additions or manufacturing capabilities in connection with the production of the Company's line of endoscopes, optical thin films, and other products may, however, require the acquisition or lease of additional facilities. The Company may establish production facilities domestically or overseas to produce key assemblies or components, such as lenses, for the Company's products. Overseas facilities may subject the Company to the political and economic risks associated with overseas operations. The loss of or inability to establish or maintain such additional domestic or overseas facilities could materially adversely affect the Company's competitive position and profitability. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries and their property are not party or subject to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal year 1998. -7- 8 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The Company's executive officers and directors are as follows: Position with the Company Name or Principal Occupation - ---- ------------------------- Richard E. Forkey President, Treasurer and Director Jack P. Dreimiller Senior Vice President, Finance, Chief Financial Officer and Clerk Kumar M. Khajurivala Vice President, Operations Edward A. Benjamin Director. Member of Audit Committee. Mr. Benjamin is a partner in the law firm of Ropes & Gray, Boston, Massachusetts. H. Angus Macleod Director. Dr. Macleod is President of the Thin Film Center, Inc. of Tucson, Arizona, which provides software consulting and courses for design and analysis of thin film optical coatings and filters. Austin W. Marxe Director. Mr. Marxe was appointed to the Board of Directors in August 1998. Mr. Marxe is Managing General Partner of Special Situations Fund III, L.P., a registered investment company based in New York City, and several other affiliated investment funds. Joel R. Pitlor Director. Member of Audit Committee. Mr. Pitlor is president of J.R. Pitlor, a management consulting firm based in Cambridge, Massachusetts. Robert R. Shannon Director. Member of Audit Committee. Mr. Shannon is a professor at the Optical Sciences Center of the University of Arizona in Tuscon, Arizona. -8- 9 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:
1997 1998 ----------------------- ------------------------- Quarter High Low High Low ----------------------- ------------------------- First $ 1 3/4 $ 7/8 $3 15/16 $2 11/16 Second $ 1 3/4 $ 1 1/8 $ 4 3/4 $ 3 1/2 Third $1 15/16 $1 1/16 $ 4 1/8 $ 2 5/8 Fourth $3 11/16 $ 1 1/8 $ 3 1/8 $1 47/64
As of August 31, 1998, there were 92 holders of record of the Company's common stock. On June 30, 1998, the Company issued pursuant to Section 4(2) of the Securities Act of 1933 an aggregate of 500,000 shares of its common stock and warrants exercisable for an additional aggregate of 500,000 shares of its common stock to Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P., two affiliated private investment funds based in New York City (the "Special Situations Funds") in exchange for aggregate cash consideration of $1,000,000. The terms of the warrants issued to the Special Situations Funds provide that the warrants may be exercised at any time at a price per share of $4.00, subject to adjustment pursuant to customary anti-dilution provisions triggered by any future below-market issuances of Company common stock. The warrants provide that they will terminate if not exercised within 10 days of the Special Situations Funds' receipt of a notice from the Company which may be delivered at the Company's option in the event that the last sale price of the Company's common stock on the NASDAQ SmallCap Market equals or exceeds $6.00 on each of any 20 consecutive trading days. In connection with the issuance of common stock and warrants to the Special Situations Funds, the Company agreed to file with the Securities and Exchange Commission a registration statement covering the resale of shares of common stock issued to, or issuable upon the exercise of warrants issued to, the Special Situations Funds. Pursuant to a Registration Rights Agreement dated June 30, 1998 among the parties, the Company would be obligated to issue additional shares of common stock -9- 10 and additional warrants to the Special Situations Funds for no additional consideration in the event such registration statement is not declared effective on or prior to December 31, 1998. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS When used in this discussion, the words "believes", "anticipates", "intends to", and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. See "Important Factors Regarding Forward-Looking Statements" attached hereto as Exhibit 99 and incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward- looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revision to these forward-looking statements which may be made reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 1998, the Company's cash and cash equivalents decreased by approximately $288,000 to $2,060,000. The decrease in cash and cash equivalents was due to cash used by operating activities of approximately $961,000, capital expenditures of approximately $269,000, increases in other assets, primarily patents, of approximately $117,000 and repayment of a capital lease obligation of approximately $104,000, partially offset by proceeds received from a private placement of Common Stock (approximately $931,000), sale of marketable securities (approximately $187,000) and exercise of stock options and warrants (approximately $45,000). During the quarter ending December 31, 1997, the Company entered into a five-year capital lease obligation for the acquisition of manufacturing equipment totaling approximately $140,000. The Company intends to continue devoting significant resources to internally funded research and development spending on both new products and the improvement of existing products. The Company also intends to devote resources to the marketing and product support of its medical and optical thin film product lines, and the development of new methods of distribution. These investments may temporarily result in negative cash flow, but the Company anticipates that the results of these efforts will translate into increased revenues and profits. Furthermore, depending upon the market acceptance of the Company's products, the Company believes that it may be obligated to acquire new facilities, add additional manufacturing or research and development equipment, or acquire a business that manufactures or sells to the Company components, materials, supplies, or services used in the manufacture, marketing, distribution or servicing of the Company's new products, as well as the Company's existing products. The Company continues to maintain a secured line of credit of $500,000 available with a bank at 1/4% over the prime rate. Under the terms of the line of credit, the Company is required to maintain certain ratios under specified financial covenants (Debt Service Coverage, Leverage, Current Ratio), and must maintain a minimum cash liquidity of $1,000,000. The Company was in compliance with all -10- 11 such covenants as of June 30, 1998, except with respect to the Debt Service Coverage ratio (for which a waiver or forbearance agreement is currently being negotiated). There can be no assurance that the Company will be able to comply with all of such terms. As of June 30, 1998, there were no borrowings outstanding under the line of credit. The Company has no material unused sources of liquidity other than its cash and cash equivalents, accounts receivable and available lines of credit. If these liquidity sources, along with revenues from operations, are not sufficient to fund operations or growth, the Company will require additional financing. The timing and amount of additional financing requirements depend on a number of factors, including the status of development and commercialization efforts, the cost of equipment and personnel to support manufacturing of new and existing products, and the amount of working capital necessary to start up and maintain operations supporting new products. The Company may seek additional funds through public or private equity or debt financing. There can be no assurance that such funds will be available on satisfactory terms, if at all. Lack of necessary funds may require the Company to delay, scale back, or eliminate some or all of its development efforts. However, the Company believes its sources of liquidity are sufficient to support working capital and investment needs for the foreseeable future. FISCAL YEAR 1998 RESULTS OF OPERATIONS Total revenues for fiscal year 1998 were approximately $4,053,000, a decrease of approximately $3,319,000, or 45%, from fiscal year 1997. The revenue decrease from the prior year was due to lower sales of night vision products (down 67%), medical products (down 31%), and industrial and thin film products (down 27%). The reduction in night vision sales was due to successful completion during the prior fiscal year of two government development subcontracts, and lower shipments on two government production subcontracts. The reduction in medical products sales was due to lower shipments of endocouplers, partially offset by higher sales of endoscopes. The higher shipments of endocouplers in the prior year were mainly attributable to sales to one customer representing approximately 23% of total Company revenues for fiscal 1997. No sales were made to this customer in fiscal 1998. The reduction in industrial and thin film sales was due to lower sales of industrial lenses. Revenues for the Company's three largest customers were approximately 22%, 14% and 10%, respectively, of total revenues for the year ended June 30, 1998. Revenues from the Company's two largest customers were approximately 38% and 23%, respectively, for the year ended June 30, 1997. For the fiscal years ended June 30, 1998, 1997 and 1996, approximately 25%, 38% and 44% of the Company's total revenues, respectively, were derived from production and development contracts and subcontracts involving the Government and its agencies. The Company's current Government business is substantially comprised of one fixed-price production subcontract with one customer for night-vision lens systems with deliveries scheduled approximately through July 1998. The Government may terminate a government contract at any time, with or without cause. After expiration of the current subcontracts, there can be no assurance that the Government will award future contracts or subcontracts to the Company. -11- 12 Gross profit decreased by approximately $1,305,000 in fiscal 1998, and as a percentage of revenues decreased from 23.9% to 11.3% compared to the previous year. The decrease in gross profit was due primarily to lower sales volume as discussed above. Selling, general and administrative expenses increased by approximately $309,000 or 13.5% in fiscal year 1998 compared to fiscal 1997. The major reason for the increase was higher research and development spending on new products, which increased by approximately $469,000, or 110%, partially offset by lower professional services and employee benefits expenses. Interest expense relates primarily to capital lease obligations incurred in fiscal years 1994, 1996 and 1998. Interest income decreased by approximately $34,000 in fiscal year 1998 due to the lower investment base of cash equivalents. The provision for income taxes in fiscal 1998 represents an adjustment of the net deferred tax asset to an amount the Company believes is more likely than not to be realized. FISCAL YEAR 1997 RESULTS OF OPERATIONS Total revenues for fiscal 1997 were approximately $7,372,000, a decrease of approximately $683,000, or 8.5%, from fiscal 1996. The revenue decrease was due to lower sales of non-medical products (down 29%), partially offset by higher sales of medical products (up 22%). The increase in sales of medical products was attributable to higher sales in all major product categories. The reduction in non-medical sales was due primarily to (1) lower sales of night-vision products due to completion of two government production subcontracts and one government development subcontract and (2) lower sales of industrial products due to discontinued sales to a significant customer, both partially offset by higher sales of optical thin films. Gross profit decreased by approximately $701,000 in fiscal 1997, and as a percentage of revenues decreased from 30.6% to 23.9% compared to the previous year. The decrease in gross profit was due primarily to the lower sales volume and higher occupancy and depreciation expenses related to equipment and manufacturing facilities additions. Selling, general and administrative expenses increased by approximately $169,000 or 7.9% in fiscal 1997 compared to fiscal 1996. The increase was due primarily to higher spending on advertising and bid and proposal expenses targeted at the industrial and thin films marketplace, and higher legal, consulting and employee recruiting expenses. Interest expense relates primarily to capital lease obligations incurred in the third quarter of fiscal years 1994 and 1996. Interest income decreased by approximately $20,000 in fiscal 1997 due to the lower investment base of cash equivalents. -12- 13 The benefit for income taxes as a percentage of the pre-tax loss in fiscal year 1997 was lower than the federal statutory income tax rate primarily due to the Company's inability to recognize the full amount of deferred tax assets to offset prior years' taxable income. Such tax benefits will be recognized in future years if sufficient future taxable income is generated. OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS The Company continues to aggressively pursue sales, marketing, and technology development efforts for new optical thin films in the rapidly growing telecommunications and semi-conductor industries. Significant progress has been achieved in the Company's development efforts for Wavelength Division Multiplexer (WDM) optical filters, which are used in telecommunication systems. These successful development efforts have resulted in prototypes of a 10-nanometer bandwidth WDM filter and several narrow (under 1-nanometer) bandwidth filters. The Company is currently supporting product evaluation tests with several potential optical thin film filter and coating customers for applications in the telecommunications and semiconductor industries. The Company believes that these efforts should lead to significant future thin film sales. Based on a recent preliminary assessment, the Company has determined that it is required to modify portions of its hardware and software so that its computer systems and other date-sensitive equipment will properly utilize data beyond December 31, 1999. The Company believes that with upgrades or modifications to existing software and hardware, the impact of Year 2000 issues can be mitigated. However, if such upgrades or modifications are not made, or are not made in a timely manner, Year 2000 issues could have a material adverse impact on the Company's operations and financial condition. The Company will utilize primarily external resources to test and/or replace hardware and software for Year 2000 compliance. The Company plans to complete the Year 2000 project not later than December 31, 1998, and believes the costs of the project will not be material to the Company's operating results or financial condition. As the Company's ongoing assessment of its Year 2000 compliance status progresses, the Company will establish such contingency plans as it deems necessary to address any residual Year 2000 risks. The Company currently is not aware of any material risks to its business and operations presented by the Year 2000 compliance status of its customers, suppliers and service providers. ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated Financial Statements are filed on pages 14 through 29 of this Form 10-KSB. -13- 14 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 TOGETHER WITH AUDITORS' REPORT -14- 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Precision Optics Corporation, Inc.: We have audited the accompanying consolidated balance sheets of Precision Optics Corporation, Inc. (a Massachusetts corporation) and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Precision Optics Corporation, Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Boston, Massachusetts July 23, 1998 -15- 16 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--JUNE 30, 1998 AND 1997
ASSETS 1998 1997 ----------- ---------- CURRENT ASSETS: Cash and cash equivalents $ 2,060,146 $2,348,382 Marketable securities -- 30,000 Accounts receivable (net of allowance for doubtful accounts of approximately $42,000 and $69,000 in 1998 and 1997, respectively) 486,070 466,811 Inventories 949,993 1,576,967 Deferred tax asset 145,000 157,300 Prepaid expenses 44,870 40,273 Refundable income taxes -- 52,970 ----------- ---------- Total current assets 3,686,079 4,672,703 ----------- ---------- PROPERTY AND EQUIPMENT, AT COST: Machinery and equipment 2,848,555 2,474,478 Leasehold improvements 468,724 433,832 Furniture and fixtures 109,568 109,568 Vehicles 44,742 44,742 ----------- ---------- 3,471,589 3,062,620 Less--Accumulated depreciation and amortization 2,318,380 1,927,578 ----------- ---------- 1,153,209 1,135,042 ----------- ---------- OTHER ASSETS: Cash surrender value of life insurance policies 50,156 51,871 Patents, net 238,034 155,986 ----------- ---------- Total other assets 288,190 207,857 ----------- ---------- $ 5,127,478 $6,015,602 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ----------- ---------- CURRENT LIABILITIES: Accounts payable $ 124,566 $ 271,911 Accrued payroll 121,262 81,122 Accrued profit sharing and bonuses 28,798 30,000 Accrued professional services 80,140 85,556 Accrued vacation 88,514 64,903 Accrued warranty expense 50,000 50,000 Accrued income taxes 4,924 18,946 Other accrued liabilities 91,372 42,164 Customer advances 116,841 -- Current portion of capital lease obligation 105,349 89,532 ----------- ---------- Total current liabilities 811,766 734,134 ----------- ---------- CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION 208,684 189,413 ----------- ---------- COMMITMENTS (Note 4) STOCKHOLDERS' EQUITY: Common stock, $.01 par value- Authorized--10,000,000 shares Issued and outstanding--6,618,619 and 6,021,502 shares at June 30, 1998 and 1997, respectively 66,186 60,215 Additional paid-in capital 6,172,349 5,202,558 Accumulated deficit (2,131,507) (170,718) ----------- ---------- Total stockholders' equity 4,107,028 5,092,055 ----------- ---------- $ 5,127,478 $6,015,602 =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. -16- 17 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 REVENUES $ 4,053,052 $7,372,310 $8,055,271 COST OF GOODS SOLD 3,595,756 5,610,438 5,592,871 ----------- ---------- ---------- Gross profit 457,296 1,761,872 2,462,400 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,606,079 2,296,687 2,128,155 ----------- ---------- ---------- Operating (loss) income (2,148,783) (534,815) 334,245 GAIN ON SALE OF MARKETABLE SECURITIES 157,417 -- -- INTEREST INCOME 70,131 104,423 124,104 INTEREST EXPENSE (26,254) (27,241) (16,639) ----------- ---------- ---------- (Loss) income before provision for income taxes (1,947,489) (457,633) 441,710 PROVISION (BENEFIT) FOR INCOME TAXES 13,300 (15,000) 36,000 ----------- ---------- ---------- Net (loss) income $(1,960,789) $ (442,633) $ 405,710 =========== ========== ========== BASIC (LOSS) EARNINGS PER SHARE $ (.32) $ (.07) $ .07 =========== ========== ========== DILUTED (LOSS) EARNINGS PER SHARE $ (.32) $ (.07) $ .07 =========== ========== ========== COMMON SHARES OUTSTANDING 6,099,347 5,982,210 5,980,502 =========== ========== ========== COMMON SHARES OUTSTANDING ASSUMING DILUTION 6,099,347 5,982,210 6,116,569 =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. -17- 18 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
NUMBER OF COMMON ADDITIONAL RETAINED TOTAL SHARES STOCK PAID-IN EARNINGS STOCKHOLDERS' CAPITAL (DEFICIT) EQUITY BALANCE, JUNE 30, 1995 5,980,502 $59,805 $5,145,655 $ (133,795) $ 5,071,665 Net income -- -- -- 405,710 405,710 --------- ------- ---------- ----------- ----------- BALANCE, JUNE 30, 1996 5,980,502 59,805 5,145,655 271,915 5,477,375 Proceeds from exercise of options to purchase common stock 41,000 410 56,903 -- 57,313 Net loss -- -- -- (442,633) (442,633) --------- ------- ---------- ----------- ----------- BALANCE, JUNE 30, 1997 6,021,502 60,215 5,202,558 (170,718) 5,092,055 Proceeds from exercise of options and warrants to purchase common stock 97,117 971 44,121 -- 45,092 Net proceeds from private placement of common stock 500,000 5,000 925,670 -- 930,670 Net loss -- -- -- (1,960,789) (1,960,789) --------- ------- ---------- ----------- ----------- BALANCE, JUNE 30, 1998 6,618,619 $66,186 $6,172,349 $(2,131,507) $ 4,107,028 ========= ======= ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -18- 19 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(1,960,789) $ (442,633) $ 405,710 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities- Depreciation and amortization 426,976 428,054 308,275 Deferred income taxes 12,300 (38,300) (67,000) Gain on sale of marketable securities (157,417) -- -- Changes in assets and liabilities- Accounts receivable (19,259) 672,993 276,567 Inventories 626,974 286,727 (395,215) Prepaid expenses (4,597) 4,411 (21,810) Refundable income taxes 52,970 (22,694) (30,276) Accounts payable (147,345) (557,517) 361,467 Customer advances 116,841 -- -- Accrued expenses 92,319 (41,409) (21,041) ----------- ---------- ---------- Net cash (used in) provided by operating activities (961,027) 289,542 816,677 ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities -- (30,000) -- Proceeds from the sale of marketable securities 187,417 -- -- Purchases of property and equipment (269,402) (444,914) (615,798) Increase in other assets (116,507) (58,690) (59,844) ----------- ---------- ---------- Net cash used in investing activities (198,492) (533,604) (675,642) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of capital lease obligation (104,479) (82,682) (51,068) Net proceeds from private placement of common stock 930,670 -- -- Proceeds from exercise of stock options and warrants 45,092 57,313 -- ----------- ---------- ---------- Net cash provided by (used in) financing activities 871,283 (25,369) (51,068) ----------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (288,236) (269,431) 89,967 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,348,382 2,617,813 2,527,846 ----------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,060,146 $2,348,382 $2,617,813 =========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for- Interest $ 26,254 $ 27,241 $ 16,639 =========== ========== ========== Income taxes $ -- $ 101,461 $ 151,325 =========== ========== ========== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENT ACTIVITIES: Capital lease obligation $ 139,567 $ -- $ 299,180 =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. -19- 20 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Business Precision Optics Corporation, Inc. (the Company) designs, manufactures and sells optical systems, components and thin-film coatings. The Company conducts business in one industry segment only and its customers are primarily domestic. The Company's products and services fall into two principal areas: (i) medical products for use by hospitals and physicians and (ii) advanced optical system design and development services and products. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its two wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Revenues Revenues for industrial and medical products sold in the normal course of business are recognized upon shipment. Contract revenues are recognized under the percentage-of-completion method. The percentage of completion is determined by computing the percentage of the actual cost of work performed to the anticipated total contract costs, or on the basis of units shipped. When the estimate on a contract indicates a loss, the Company's policy is to record the entire loss in the current period. (d) Cash and Cash Equivalents The Company includes in cash equivalents all highly liquid investments with original maturities of three months or less at the time of acquisition. There were no cash equivalents at June 30, 1998. Cash equivalents at June 30, 1997 included approximately $1,529,000 of United States Treasury bills. (e) Marketable Securities The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company's investments in marketable securities are classified as available-for-sale. Marketable securities had a cost and market value of $30,000 at June 30, 1997. During fiscal 1998, the Company sold these securities and realized a gain of approximately $157,000. -20- 21 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) (f) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. The components of inventories are as follows at June 30, 1998 and 1997:
1998 1997 Raw material $588,727 $1,075,294 Work-in-progress 246,264 272,980 Finished goods 118,502 228,693 -------- ---------- $949,993 $1,576,967 ======== ==========
(g) Depreciation and Amortization The Company provides for depreciation and amortization by charges to operations, using the straight-line and declining-balance methods, which allocate the cost of property and equipment over the following estimated useful lives: ESTIMATED ASSET CLASSIFICATION USEFUL LIFE Machinery and equipment 5-7 years Leasehold improvements Life of lease Furniture and fixtures 5 years Vehicles 3 years (h) Significant Customers and Concentration of Credit Risk Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance sheet and credit risk concentrations. Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company places its investments in highly rated financial institutions. The Company has not experienced any losses on these investments to date. At June 30, 1998 and 1997, receivables from the Company's largest customer were approximately 36% and 29% of the total accounts receivable, respectively. The Company has not experienced any material losses related to accounts receivable from individual customers. -21- 22 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) Revenues from the Company's three largest customers were approximately 22%, 14% and 10%, respectively, of total revenues for the year ended June 30, 1998. Revenues from the Company's two largest customers were approximately 38% and 23%, respectively, of total revenues for the year ended June 30, 1997. Revenues from the Company's three largest customers were approximately 42%, 14% and 12% of total revenues for the year ended June 30, 1996. No other customers accounted for more than 10% of the Company's revenues in any of the three years ended June 30, 1998. Approximately 25%, 38% and 44% of the Company's revenues for the years ended June 30, 1998, 1997 and 1996, respectively, were derived from sales to agencies of the U.S. government or customers that supply agencies of the U.S. government. (i) Research and Development Research and development costs, which are charged to operations as incurred, are included in selling, general and administrative expenses and include direct costs plus overhead. Such costs totaled approximately $897,000, $428,000 and $433,000 for the years ended June 30, 1998, 1997 and 1996, respectively. (j) (Loss) Earnings per Share Basic (loss) earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share for the year ended June 30, 1996 includes the effect of outstanding stock options of 136,067 shares computed in accordance with the treasury stock method. For the years ended June 30, 1998 and 1997, the effect of stock options was antidilutive; therefore, they were not included in the computation of diluted (loss) earnings per share. The Company has adopted SFAS No. 128, Earnings per Share, effective December 15, 1997. As a result, the Company's reported earnings per share for fiscal 1997 and 1996 were restated; however, this had no effect on previously reported earnings per share data. The number of shares that were excluded from the computation as their effect would be antidilutive were 1,864,500, 1,045,617 and 94,000, during fiscal 1998, 1997 and 1996, respectively. The calculations of basic and diluted weighted average shares outstanding are as follows:
1998 1997 1996 Basic weighted average shares outstanding 6,099,347 5,982,210 5,980,502 Dilutive shares -- -- 136,067 --------- --------- --------- Diluted weighted average shares outstanding 6,099,347 5,982,210 6,116,569 ========= ========= =========
-22- 23 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) (k) Stock-Based Compensation The Company accounts for its stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes a fair-value-based method of accounting for stock-based compensation plans. The Company has adopted the disclosure-only alternative under SFAS No. 123, which required the disclosure of the pro forma effects on earnings and earnings per share as if the accounting prescribed by SFAS No. 123 had been adopted, as well as certain other information. (l) Foreign Currency Translation The Company translates certain accounts and financial statements of its foreign subsidiary in accordance with SFAS No. 52, Foreign Currency Translation. The functional currency of the Company's foreign subsidiary is the United States dollar. Accordingly, translation gains or losses are reflected in the accompanying consolidated statements of operations and have not been significant. (m) Other Assets Patents are carried at cost, less accumulated amortization of approximately $107,000 and $71,000 at June 30, 1998 and 1997, respectively. Such costs are amortized using the straight-line method over the shorter of their legal or estimated useful lives, generally five to ten years. (n) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) LINE OF CREDIT At June 30, 1998, the Company had available a demand line of credit of $500,000 at an interest rate equal to the bank's prime rate (8.5% at June 30, 1998) plus 0.25%. Under the line of credit agreement, the Company is required to maintain certain financial ratios (Debt Service Coverage, Leverage, and Current Ratio) and must maintain a minimum cash liquidity of $1,000,000. The Company is in compliance with all such financial covenants at June 30, 1998, except the Debt Service Coverage Ratio for which a waiver or forbearance agreement is currently being negotiated. At June 30, 1998, there were no borrowings outstanding under this -23- 24 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) line of credit. Borrowings under this line of credit are secured by all assets of the Company. The line of credit expires on November 30, 1998. (3) CAPITAL LEASE OBLIGATION At June 30, 1998, future minimum lease payments under capital lease obligations are as follows:
FISCAL YEAR AMOUNT 1999 $ 128,283 2000 107,171 2001 76,834 2002 34,363 2003 15,524 --------- Total minimum lease payments 362,175 Amount representing interest (48,142) --------- Present value of minimum lease payments 314,033 Less-Current portion 105,349 --------- $ 208,684 =========
Capital leases are secured by all assets of the Company under a security agreement subordinate to the Company's demand line of credit. (4) COMMITMENTS (a) Related Party Transactions The Company leases one of its facilities from a corporation owned by an officer of the Company. The lease terminates in December 1999 and requires lease payments of $9,000 per month. The Company may terminate the lease as of the end of any calendar year during the term by providing written notice to the lessor by June 30 of such year. The Company paid fees to a director of approximately $60,000 during each of fiscal 1998, 1997 and 1996 for consulting services. Another director is a partner in a law firm that has performed legal services for the Company during fiscal 1998, 1997 and 1996. -24- 25 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) (b) Operating Lease Commitments Total future minimum rental payments under all operating leases for fiscal 1999 are $116,000 and $6,000 thereafter. Rent expense on operating leases was approximately $217,000, $213,000 and $187,000 for the years ended June 30, 1998, 1997 and 1996, respectively. (5) STOCKHOLDERS' EQUITY (a) Warrants In conjunction with previous equity offerings, the Company issued warrants to acquire a total of 320,000 shares of common stock, of which warrants for a total of 100,000 shares expired during fiscal 1997 and 1996. Warrants for 2,000 shares were exercised during fiscal 1998. Warrants for 218,000 shares expire in approximately equal amounts on August 21, 1998 and October 23, 1998 and have an exercise price of $1.375 per share. As of June 30, 1998, all of these warrants were exercisable. During fiscal 1998, the Company completed a private placement of 500,000 shares of common stock with gross proceeds of $1,000,000. In conjunction with this offering, the purchasers were issued warrants to acquire 500,000 shares of common stock at an exercise price of $4.00 per share. The warrants are immediately exercisable and expire on June 25, 2003. (b) Stock Options During 1989, the stockholders approved a stock option plan (the 1989 Plan) for key employees. The Plan, as amended, authorizes the grant of options to purchase up to 1,110,000 shares of the Company's common stock at an exercise price not less than 100% of the fair market value per share at the date of grant. Options granted are exercisable for a period determined by the Board of Directors, not to exceed 10 years from the date of grant. During fiscal 1998, the stockholders approved an incentive plan (the 1997 Incentive Plan), which provides eligible participants (certain employees, directors, consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. A total of 1,200,000 shares of common stock have been reserved for issuance under the 1997 Incentive Plan. Upon the adoption of the 1997 Incentive Plan, no new awards will be granted under the 1989 Plan. At June 30, 1998, 794,000 shares of common stock were available for future grants under the 1997 Incentive Plan. -25- 26 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) The following is a summary of transactions in the Plans for the three years ended June 30, 1998:
WEIGHTED AVERAGE NUMBER OPTION PRICE EXERCISE OF SHARES PER SHARE PRICE Options outstanding, June 30, 1995 395,000 $ 1.375 $1.38 Granted 60,000 1.375-1.50 1.40 -------- -------------- ----- Options outstanding, June 30, 1996 455,000 1.375-1.50 1.38 Granted 190,000 1.5625-2.1875 1.89 Exercised (41,000) 1.375-1.5625 1.40 -------- -------------- ----- Options outstanding, June 30, 1997 604,000 1.375-2.1875 1.54 Granted 416,000 2.75-3.844 3.72 Exercised (27,500) 1.375 1.38 -------- -------------- ----- Options outstanding, June 30, 1998 992,500 1.375-3.844 2.46 -------- -------------- ----- Options exercisable, June 30, 1998 377,500 $ 1.375-3.844 $2.04 ======= ============== =====
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:
NUMBER OF OPTION PRICE WEIGHTED SHARES PER SHARE AVERAGE EXERCISE PRICE Options outstanding, June 30, 1995 161,617 $.07-$5.69 $ .91 Granted 60,000 1.30 1.30 ------- ---------- ----- Options outstanding, June 30, 1996 221,617 .07-5.69 1.02 Granted -- -- -- ------- ---------- ----- Options outstanding, June 30, 1997 221,617 .07-5.69 1.02 Exercised (67,617) .07 .07 ------- ---------- ----- Options outstanding, June 30, 1998 154,000 .50-5.69 1.43 ------- ---------- ----- Options exercisable, June 30, 1998 130,000 $.50-$5.69 $1.46 ======= ========== =====
-26- 27 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) The Company has computed the pro forma disclosures required under SFAS No. 123 for all stock options granted in fiscal 1998, 1997 and 1996 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The assumptions used and the weighted average information for the years ended June 30, 1998, 1997 and 1996 are as follows:
YEARS ENDED 1998 1997 1996 Risk-free interest rates 6.06% 6.95% 6.83% Expected dividend yield -- -- -- Expected lives 7 years 7 years 7 years Expected volatility 90% 87% 87% Weighted average fair value of grants $3.02 $1.52 $1.12 Weighted average remaining contractual life of options outstanding 8.33 years 8.16 years 8.57 years The effect of applying SFAS No. 123 would be as follows: 1998 1997 1996 Net (loss) income $(1,960,789) $(442,633) $405,710 As reported Pro forma (2,340,964) (520,373) 391,610 Net (loss) income per share As reported, basic and diluted $ (.32) $ (.07) $ .07 Pro forma, basic and diluted (.38) (.09) .06
(6) INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, whereby a deferred tax asset or liability is measured by currently enacted tax rates applied to any temporary differences between the financial statement and tax bases of assets and liabilities. -27- 28 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) The provision (benefit) for income taxes in the accompanying consolidated statements of operations consists of the following for the three years ended June 30, 1998: 1998 1997 1996 Current-- Federal $ -- $ 26,300 $ 67,000 State 1,000 1,000 3,000 Foreign -- (4,000) 33,000 ------- -------- -------- 1,000 23,300 103,000 ------- -------- -------- Deferred-- Federal 10,500 (34,300) (57,000) State 1,800 (4,000) (10,000) ------- -------- -------- 12,300 (38,300) (67,000) ------- -------- -------- $13,300 $(15,000) $ 36,000 ======= ======== ======== A reconciliation of the federal statutory rate to the Company's effective tax rate for the three years ended June 30, 1998 is as follows:
1998 1997 1996 Income tax (benefit) provision at federal statutory rate (34.0)% (34.0)% 34.0% Increase (decrease) in tax resulting from- Temporary items with no tax benefit 2.2 6.1 7.3 Tax credits utilized -- -- (4.1) Change in valuation allowance 32.5 22.9 (35.5) Effect of state taxes -- (4.6) -- Prior year tax adjustments -- 5.2 5.0 Other -- 1.1 1.5 ----- ----- ----- Effective tax rate 0.7% (3.3)% 8.2% ===== ===== =====
-28- 29 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Continued) The components of the net deferred tax asset at June 30, 1998 and 1997 are approximately as follows:
1998 1997 Net operating loss carryforward $622,000 $ -- Reserves and accruals not yet deducted for tax purposes 316,000 311,000 Other temporary differences 18,000 24,000 -------- --------- 956,000 335,000 Valuation allowance (811,000) (178,000) -------- --------- Net deferred tax asset $145,000 $ 157,000 ======== =========
The Company has provided a valuation allowance to reduce the net deferred tax asset to an amount the Company believes it is "more likely than not" to be realized. The valuation allowance increased in fiscal 1998 due to the generation of a net operating loss carryforward. The net deferred tax asset represents the amount that can be carried back to offset the prior years' tax liabilities, if necessary. As of June 30, 1998, the Company has a net operating loss carryforward for U.S. federal income taxes of approximately $1,800,000, which expires in 2013. (7) PROFIT SHARING PLAN The Company has a defined contribution profit sharing plan that covers all eligible employees. The Company has accrued and charged to operations an employer contribution to this plan of $50,000 in fiscal 1996. No employer contributions were made in fiscal 1998 or 1997. -29- 30 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: The Company will furnish to the Securities and Exchange Commission a definitive Proxy Statement (the "Proxy Statement") not later than 120 days after the close of its fiscal year ended June 30, 1998. The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 10. EXECUTIVE COMPENSATION: The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K: (a) EXHIBITS. The exhibits listed below are filed with or incorporated by reference in this report. 3.1 Articles of Organization of the Company(1) 3.2 By-laws of Precision Optics Corporation, Inc.(2) 4.1 Specimen common stock certificate(1) 4.2 Private Placement Selling Agent Common Stock Warrant No. 4 dated April 28, 1992 issued to James L. Davis and Schedule 1 of Omitted Documents(3) 4.3 Initial Public Offering Common Stock Purchase Warrant No. 3 dated July 10, 1992 issued to John C. Michalak and Schedule 2 of Omitted Documents(3) 4.4 Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted Documents(3) 4.5 Promissory Note dated December 5, 1991 between the Company and The First National Bank of Boston(4) 4.6 Agreement Restricting Sale of Stock dated January 15, 1992 by and among Richard E. Forkey, the Company, Kennedy, Mathews, Landis, Healy & Pecora Incorporated, and Equity Securities Trading Co., Inc.(3) 4.7 Common Stock Purchase Warrant dated June 30, 1998 issued to Special Situations Private Equity Fund, L.P. 4.8 Common Stock Purchase Warrant dated June 30, 1998 issued to Special Situations Technology Fund, L.P. 4.9 Registration Rights Agreement dated as of June 30, 1998 by and among the Company, Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. 10.1 Lease dated June 29, 1984 between the Company and Equity, First Amendment to Commercial Lease dated June 25, 1990, and letter agreement dated June 25, 1990 renewing such lease(1) 10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date (the "Plan")(5) 10.3 Three separate life insurance policies on the life of Richard E. Forkey(1) -30- 31 10.4 Master Lease Finance Agreement dated November 3, 1993 between the Company and BancBoston Leasing(5) 10.5 Second Amendment to Commercial Lease between the Company and Equity dated December 9, 1994(6) 10.6 Lease dated November 1, 1995 between the Company and Janice M. Bouchard, Trustee of Authority Drive Realty Trust(6) 10.7 Precision Optics Corporation, Inc. 1997 Incentive Plan 10.8 Stock Subscription Agreement dated as of June 30, 1998 by and among the Company, Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. 21 Subsidiaries of Precision Optics Corporation, Inc.(6) 27 Financial Data Schedule 99 Important Factors Regarding Forward-Looking Statements(7) (1) Incorporated herein by reference to the Company's Registration Statement on Form S-18 (No. 33-36710-B). (2) Incorporated herein by reference to the Company's 1991 Annual Report on Form 10-KSB. (3) Incorporated herein by reference to the Company's 1992 Annual Report on Form 10-KSB. (4) Incorporated herein by reference to the Company's Registration Statement on Form S-1 (No. 33-43929). (5) Incorporated herein by reference to the Company's 1994 Annual Report on Form 10-KSB. (6) Incorporated herein by reference to the Company's 1996 Annual Report on Form 10-KSB. (7) Incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. (b) REPORTS ON FORM 8-K. None. -31- 32 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 18, 1998 PRECISION OPTICS CORPORATION, INC. By: /s/ Richard E. Forkey ------------------------------ Richard E. Forkey Chairman of the Board, Chief Executive Officer, President and Treasurer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Richard E. Forkey By: /s/ Jack P. Dreimiller ----------------------------- ------------------------------ Richard E. Forkey Jack P. Dreimiller President, Treasurer and Senior Vice President, Finance, Director (principal Chief Financial Officer and executive officer) Clerk (principal financial and accounting officer) September 18, 1998 September 18, 1998 - --------------------------------- ---------------------------------- Date Date By: /s/ Joel R. Pitlor By: /s/ Edward A. Benjamin ----------------------------- ------------------------------ Joel R. Pitlor Edward A. Benjamin Director Director September 18, 1998 September 18, 1998 - --------------------------------- ---------------------------------- Date Date By: /s/ Robert R. Shannon By: /s/ H. Angus Macleod ----------------------------- ------------------------------ Robert R. Shannon H. Angus Macleod Director Director September 18, 1998 September 18, 1998 - --------------------------------- ---------------------------------- Date Date By: /s/ Austin W. Marxe ----------------------------- Austin W. Marxe Director September 18, 1998 - --------------------------------- Date -32- 33 INDEX TO EXHIBITS 3.1 Articles of Organization of the Company(1) 3.2 By-laws of Precision Optics Corporation, Inc.(2) 4.1 Specimen common stock certificate(1) 4.2 Private Placement Selling Agent Common Stock Warrant No. 4 dated April 28, 1992 issued to James L. Davis and Schedule 1 of Omitted Documents(3) 4.3 Initial Public Offering Common Stock Purchase Warrant No. 3 dated July 10, 1992 issued to John C. Michalak and Schedule 2 of Omitted Documents(3) 4.4 Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted Documents(3) 4.5 Promissory Note dated December 5, 1991 between the Company and The First National Bank of Boston(4) 4.6 Agreement Restricting Sale of Stock dated January 15, 1992 by and among Richard E. Forkey, the Company, Kennedy, Mathews, Landis, Healy & Pecora Incorporated, and Equity Securities Trading Co., Inc.(3) 4.7 Common Stock Purchase Warrant dated June 30, 1998 issued to Special Situations Private Equity Fund, L.P. 4.8 Common Stock Purchase Warrant dated June 30, 1998 issued to Special Situations Technology Fund, L.P. 4.9 Registration Rights Agreement dated as of June 30, 1998 by and among the Company, Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. 10.1 Lease dated June 29, 1984 between the Company and Equity, First Amendment to Commercial Lease dated June 25, 1990, and letter agreement dated June 25, 1990 renewing such lease(1) 10.2 Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date (the "Plan")(5) 10.3 Three separate life insurance policies on the life of Richard E. Forkey(1) 10.4 Master Lease Finance Agreement dated November 3, 1993 between the Company and BancBoston Leasing(5) 10.5 Second Amendment to Commercial Lease between the Company and Equity dated December 9, 1994(6) 10.6 Lease dated November 1, 1995 between the Company and Janice M. Bouchard, Trustee of Authority Drive Realty Trust(6) 10.7 Precision Optics Corporation, Inc. 1997 Incentive Plan 10.8 Stock Subscription Agreement dated as of June 30, 1998 by and among the Company, Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. 21 Subsidiaries of Precision Optics Corporation, Inc.(6) 27 Financial Data Schedule 99 Important Factors Regarding Forward-Looking Statements(7) (1) Incorporated herein by reference to the Company's Registration Statement on Form S-18 (No. 33-36710-B). (2) Incorporated herein by reference to the Company's 1991 Annual Report on Form 10-KSB. (3) Incorporated herein by reference to the Company's 1992 Annual Report on Form 10-KSB. (4) Incorporated herein by reference to the Company's Registration Statement on Form S-1 (No. 33-43929). (5) Incorporated herein by reference to the Company's 1994 Annual Report on Form 10-KSB. (6) Incorporated herein by reference to the Company's 1996 Annual Report on Form 10-KSB. (7) Incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. -33- EX-4.7 2 COMMON STOCK PURCHASE WARRANT 1 Exhibit 4.7 PRECISION OPTICS CORPORATION, INC. SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. COMMON STOCK PURCHASE WARRANT Precision Optics Corporation, Inc., a Massachusetts corporation (the "COMPANY"), hereby agrees that, for value received, Special Situations Private Equity Fund, L.P., a Delaware limited partnership, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after June 30, 1998, and before 5:00 p.m., Boston, Massachusetts time, on June 30, 2003, in whole or in part, an aggregate of 375,000 shares (the "WARRANT SHARES") of the common stock of the Company, $0.01 par value per share (the "COMMON STOCK"), at a price per share of $4.00 (the "INITIAL WARRANT PRICE"). 1. EXERCISE OF WARRANT. The purchase rights exercised by this Warrant shall be exercised by the holder surrendering this Warrant to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, of the Warrant Price (as defined in Section 3.a) payable in respect of the Warrant Shares being purchased, along with the exercise form attached hereto duly executed by such holder. If less than all of the Warrant Shares are purchased, the Company will, upon such exercise, execute and deliver to the holder hereof a new Warrant (dated the date thereof) evidencing the number of Warrant Shares not so purchased. Two business days after the exercise of this Warrant and payment of the Warrant Price, the Company will cause to be issued in the name of and delivered to the holder hereof, or as such holder may direct, a certificate or certificates representing the shares purchased. The Company may require that such certificate or certificates contain on the face thereof legends substantially as follows: "The shares represented by this certificate have been acquired for investment and have not been registered under the Securities Act of 1933, as amended (the "Act") or any applicable state securities laws and may not be offered, sold or otherwise transferred without an effective registration statement relating thereto or an opinion of counsel in form and substance satisfactory to the Company that such registration is not required under the Act or such state laws." 2. NEGOTIABILITY. This Warrant is issued upon the following terms, to which each taker or owner hereof consents and agrees: 2 a. This Warrant may be sold, assigned or transferred by endorsement (by the holder hereof executing the form of assignment attached hereto) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. b. Subject to the next paragraph, any person in possession of this Warrant, properly endorsed, is authorized to represent himself or herself as absolute owner hereof and is granted power to transfer absolute title hereto by endorsement and delivery hereof to a holder in due course. Each prior taker or owner waives and renounces all of his, her or its equities or rights in this Warrant in favor of every such holder in due course, and every such holder in the due course shall acquire absolute title hereto and to all rights represented hereby. c. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder of this Warrant as absolute owner hereof for all purposes without being affected by any notice to the contrary. 3. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE. a. General; Number of Shares; Warrant Price. The number of shares of Common Stock which the holder of this Warrant shall be entitled to receive upon each exercise hereof shall be determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this Section 3) be issuable upon such exercise, as designated by the holder of this Warrant pursuant to Section 1 hereof, by the fraction of which (a) the numerator is the Initial Warrant Price and (b) the denominator is the Warrant Price in effect on the date of such exercise. The "WARRANT PRICE" shall initially be the Initial Warrant Price, shall be adjusted and readjusted from time to time as provided in this Section 3 and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this Section 3. b. Issuance of Additional Shares of Common Stock. In case the Company at any time or from time to time after the date hereof shall issue or sell Additional Shares of Common Stock (as defined below) without consideration or for a consideration per share less than the Current Market Price in effect immediately prior to such issue or sale, then, and in each such case, subject to Section 3.g hereof, such Warrant Price shall be reduced, concurrently with such issue or sale, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Warrant Price by a fraction: i. the numerator of which shall be (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale plus (ii) the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued or sold would purchase at such Current Market Price; and -2- 3 ii. the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issue or sale. For purposes of this Warrant, (i) the term "ADDITIONAL SHARES OF COMMON STOCK" means all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Section 3.c or 3.d hereof, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than the shares of Common Stock issued upon the exercise of this Warrant and (ii) the term "CURRENT MARKET PRICE" means, on any date specified herein, the average closing bid price, for the ten most recent trading days, of the Common Stock on the Nasdaq Small Cap Market or, if the Common Stock shall not then be quoted on the Nasdaq Small Cap Market but shall otherwise be traded in the over-the-counter market, on such over-the-counter market. If at any time the Common Stock shall not be quoted on the Nasdaq Small Cap Market or otherwise traded in the over-the-counter market, the "Current Market Price" of a share of Common Stock shall be deemed to be the fair value thereof (as determined in good faith by the Board of Directors) as of a date which shall be within 15 days of the date of determination. c. Treatment of Options and Convertible Securities. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume any Options or Convertible Securities (both as defined below), then, and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number the purpose of which is to protect against dilution) at any time issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption; provided, however, that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 3.e hereof) of such shares would be less than the Current Market Price in effect on the date of and immediately prior to such issue, sale, grant or assumption, as the case may be; and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued: i. no further adjustment of the Warrant Price shall be made upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consequent issue or sale of Convertible Securities or shares of Common Stock; ii. if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of Additional Shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Warrant Price computed upon the original issue, sale, grant or assumption thereof, and any subsequent -3- 4 adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; iii. upon the expiration (or purchase by the Company and cancellation or retirement) of any such Options which shall not have been exercised, or the expiration of any rights of conversion or exchange under any such Convertible Securities which (or purchase by the Company and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which) shall not have been exercised, the Warrant Price computed upon the original issue, sale, grant or assumption thereof, and any subsequent adjustments based thereon, shall, upon (and effective as of) such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (A) in the case of Options or Convertible Securities, the only Additional Shares of Common Stock issued or sold were the Additional Shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (B) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to Section 3.e hereof) upon the issue or sale of such Convertible Securities with respect to which such Options were actually exercised; -4- 5 For purposes of this Warrant, (i) the term "OPTIONS" means rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities and (ii) the term "CONVERTIBLE SECURITIES" means all evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. d. Treatment of Stock Dividends, Stock Splits, etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (i) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend or (ii) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. e. Computation of Consideration. For the purposes of this Section 3: i. the consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration: (A) insofar as it consists of cash, be computed at the amount of cash actually received by the Company, without deducting any expenses paid or incurred by the Company or any commissions or compensations paid or concessions or discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale; (B) insofar as it consists of property (including securities) other than cash actually received by the Company, or of consideration other than cash or of other property, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company; (C) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (A) and (B) above, allocable to such Additional Shares of Common Stock, all as determined in good faith by the Board of Directors of the Company; -5- 6 ii. Additional Shares of Common Stock deemed to have been issued pursuant to Section 2.c hereof shall be deemed to have been issued for a consideration per share determined by dividing: (A) the total amount of cash and other property, if any, received and receivable by the Company as direct consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration the purpose of which is to protect against dilution) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in Section 3.e.i., by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number the purpose of which is to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and iii. Additional Shares of Common Stock deemed to have been issued pursuant to Section 3.d hereof shall be deemed to have been issued for no consideration. f. Adjustments for Combinations, etc. In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Warrant Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. g. Minimum Adjustment of Warrant Price. If the amount of any adjustment of the Warrant Price required pursuant to this Section 3 would be less than one percent (1%) of the Warrant Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate at least one percent (1%) of such Warrant Price. -6- 7 h. Shares Deemed Outstanding. For all purposes of the computations to be made pursuant to this Section 3: (i) immediately after any Additional Shares of Common Stock are deemed to have been issued pursuant to Section 3.c or 3.d hereof, such Additional Shares shall be deemed to be outstanding, (ii) treasury shares shall not be deemed to be outstanding, (iii) no adjustment shall be made in the Warrant Price upon the issuance of Common Stock, Options and Convertible Securities to employees, directors of and consultants to the Company pursuant to the Company's 1997 Incentive Plan (under which a total of 1,200,000 shares of Common Stock have been reserved for issuance) in respect of services rendered to the Company by such persons and (iv) no adjustment shall be made in the Warrant Price upon the issuance of shares of Common Stock pursuant to Options and Convertible Securities outstanding on the date hereof, including without limitation the Warrants, but this Section 3.h shall not prevent other adjustments in the Warrant Price arising by virtue of such outstanding Options or Convertible Securities pursuant to the provisions of Section 3.c hereof. 4. MERGER; REORGANIZATION. In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or in the case of any consolidation with or merger of the Company into or with another corporation or the sale of all or substantially all of its assets to another corporation effected in such a manner that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the holder of the Warrant shall have the right thereafter to receive, upon the exercise hereof, the kind and amount of shares of stock or other securities or property which the holder would have been entitled to receive if, immediately before such reorganization, reclassification, consolidation or merger, the holder had held the number of shares of Common Stock which were then purchasable upon the exercise of the Warrant had the Warrant been exercised. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the holder of the Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the exercise price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. 5. REPORT AS TO ADJUSTMENTS. When any adjustment is required to be made in the Warrant Price, the Company shall forthwith determine the new Warrant Price; and a. Prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new Warrant Price; and b. Cause a copy of such statement to be mailed to the holder of this Warrant as of a date within ten days after the date when the circumstances giving rise to the adjustment occurred. -7- 8 6. INVESTMENT INTENT. The Warrant Shares are subject to the Registration Rights Agreement dated as of June 30, 1998 between the Company, Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. However, as of the date hereof, neither this Warrant nor the Warrant Shares have been registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"). The Warrant is issued to the holder on the condition that this Warrant and any Common Stock purchased upon exercise of this Warrant are or will be purchased for investment purposes and not with an intent to distribute the same. Before making any disposition of this Warrant or of any Common Stock purchased upon exercise of this Warrant, the holder will give written notice to the Company describing briefly the manner of any such proposed disposition. 7. COMPANY CALL. If, prior to the exercise or earlier expiration of this Warrant pursuant to the terms hereof, the last sale price of the Common Stock on the Nasdaq Small Cap Market equals or exceeds $6.00 on each of any 20 consecutive trading days, the Company shall be entitled, within 10 trading days of the last of such 20 consecutive trading days, at its option, to issue a notice (a "CALL NOTICE") to the holder of this Warrant to the effect that the Company is exercising its rights pursuant to this Section 7. Upon receipt of a Call Notice (which receipt will be deemed to occur on the one business day following the dispatch of such Call Notice by the Company by a nationally recognized overnight courier), the holder shall have until 5.00 p.m., Boston, Massachusetts time, on the tenth business day following receipt of the Call Notice to exercise the Warrant in accordance with Section 1 hereof. Upon the expiration of such ten day period, if not sooner exercised, this Warrant will terminate and the holder's and the Company's rights and obligations hereunder will cease without payment of consideration. Notwithstanding the foregoing provisions of this Section 7, the Company may not issue a Call Notice unless and until a registration statement is effective, or no longer required, with respect to the resale of the Warrant Shares. 8. NOTICES. The Company shall mail to the registered holder of this Warrant, at his or her last address appearing on the books of the Company, not less than 20 days prior to the date on which (a) a record will be taken for the purpose of determining the holders of Common Stock entitled to dividends (other than cash dividends) or subscription right, or (b) a record will be taken (or in lieu thereof, the transfer books will be closed) for the purpose of determining the holders of Common Stock entitled to notice of and to vote at a meeting of stockholders at which any capital reorganization, reclassification of shares of Common Stock, consolidation, merger, dissolution, liquidation, winding up or sale of substantially all of the Company's assets shall be considered and acted upon. Notwithstanding such notice requirements, until exercise and payment therefor, any holder of this Warrant shall not be deemed a shareholder of the Company with respect to shares of Common Stock underlying the Warrant. -8- 9 9. RESERVATION OF COMMON STOCK. A number of shares of Common Stock sufficient to provide for the exercise of this Warrant on the terms and conditions herein set forth shall at all times be reserved for the exercise of such Warrant. 10. MISCELLANEOUS. Whenever reference is made herein to the issuance or sale of shares of Common Stock, the term "Common Stock" shall include any stock of any class of the Company other than preferred stock with a fixed limit on dividends and a fixed amount payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company. The Company will not, by amendment of its Articles of Organization or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company, but will, at all times in good faith, assist, insofar as it is able, in the carrying out of all provisions hereof and in the taking of all other action which may be necessary in order to protect the rights of the holder hereof against dilution. The representations, warranties and agreements herein contained shall survive the exercise of this Warrant. References to the "holder of" include the immediate holder of Warrant Shares purchased on the exercise of this Warrant and the holder of any new Warrants issued pursuant to Section 1 upon the purchase of less than all of the Common Stock purchasable under this Warrant, and the word "holder" shall include the plural thereof. All shares of Common Stock or other securities issued upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable, and the Company will pay all taxes in respect of the issuance thereof. [Remainder of this page intentionally left blank.] -9- 10 IN WITNESS WHEREOF, this Warrant has been duly executed by Precision Optics Corporation, Inc. this 30th day of June, 1998. PRECISION OPTICS CORPORATION, INC. By: /s/ Richard E. Forkey ------------------------------ President [Warrant] 11 EXERCISE FORM (TO BE SIGNED ONLY UPON EXERCISE OF WARRANT) To Precision Optics Corporation, Inc.: The undersigned, the holder of the within warrant, hereby irrevocably elects to exercise the purchase right represented by such warrant for, and to purchase thereunder *________________ shares of the Common Stock of Precision Optics Corporation, Inc., and herewith makes payment of $______ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to the undersigned. Dated: _______________ SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. By: __________________________ Title: [Address] *Insert here all or such portion of the number of shares called for on the face of the within warrant in 10,000 or more share increments with respect to which the holder desires to exercise the purchase right represented thereby, without adjustment for any other or additional stock, other securities, property or cash which may be deliverable on such exercise. 12 ASSIGNMENT FORM (TO BE SIGNED ONLY UPON TRANSFER OF THE WARRANT) For value received, the undersigned hereby sells, assigns and transfers unto _______________________ the right represented by the within warrant to purchase _________________ of the shares of Common Stock of Precision Optics Corporation, Inc. to which the within warrant relates and appoints _____________________ attorney to transfer said right on the books of Precision Optics Corporation, Inc., with full power of substitution in the premises. Dated:________________ SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. By: ________________________________ Title: EX-4.8 3 COMMON STOCK PURCHASE WARRANT 1 Exhibit 4.8 PRECISION OPTICS CORPORATION, INC. SPECIAL SITUATIONS TECHNOLOGY FUND, L.P. COMMON STOCK PURCHASE WARRANT Precision Optics Corporation, Inc., a Massachusetts corporation (the "COMPANY"), hereby agrees that, for value received, Special Situations Technology Fund, L.P., a Delaware limited partnership, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after June 30, 1998, and before 5:00 p.m., Boston, Massachusetts time, on June 30, 2003, in whole or in part, an aggregate of 125,000 shares (the "WARRANT SHARES") of the common stock of the Company, $0.01 par value per share (the "COMMON STOCK"), at a price per share of $4.00 (the "INITIAL WARRANT PRICE"). 1. EXERCISE OF WARRANT. The purchase rights exercised by this Warrant shall be exercised by the holder surrendering this Warrant to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, of the Warrant Price (as defined in Section 3.a) payable in respect of the Warrant Shares being purchased, along with the exercise form attached hereto duly executed by such holder. If less than all of the Warrant Shares are purchased, the Company will, upon such exercise, execute and deliver to the holder hereof a new Warrant (dated the date thereof) evidencing the number of Warrant Shares not so purchased. Two business days after the exercise of this Warrant and payment of the Warrant Price, the Company will cause to be issued in the name of and delivered to the holder hereof, or as such holder may direct, a certificate or certificates representing the shares purchased. The Company may require that such certificate or certificates contain on the face thereof legends substantially as follows: "The shares represented by this certificate have been acquired for investment and have not been registered under the Securities Act of 1933, as amended (the "Act") or any applicable state securities laws and may not be offered, sold or otherwise transferred without an effective registration statement relating thereto or an opinion of counsel in form and substance satisfactory to the Company that such registration is not required under the Act or such state laws." 2. NEGOTIABILITY. This Warrant is issued upon the following terms, to which each taker or owner hereof consents and agrees: 2 a. This Warrant may be sold, assigned or transferred by endorsement (by the holder hereof executing the form of assignment attached hereto) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. b. Subject to the next paragraph, any person in possession of this Warrant, properly endorsed, is authorized to represent himself or herself as absolute owner hereof and is granted power to transfer absolute title hereto by endorsement and delivery hereof to a holder in due course. Each prior taker or owner waives and renounces all of his, her or its equities or rights in this Warrant in favor of every such holder in due course, and every such holder in the due course shall acquire absolute title hereto and to all rights represented hereby. c. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder of this Warrant as absolute owner hereof for all purposes without being affected by any notice to the contrary. 3. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE. a. General; Number of Shares; Warrant Price. The number of shares of Common Stock which the holder of this Warrant shall be entitled to receive upon each exercise hereof shall be determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this Section 3) be issuable upon such exercise, as designated by the holder of this Warrant pursuant to Section 1 hereof, by the fraction of which (a) the numerator is the Initial Warrant Price and (b) the denominator is the Warrant Price in effect on the date of such exercise. The "WARRANT PRICE" shall initially be the Initial Warrant Price, shall be adjusted and readjusted from time to time as provided in this Section 3 and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this Section 3. b. Issuance of Additional Shares of Common Stock. In case the Company at any time or from time to time after the date hereof shall issue or sell Additional Shares of Common Stock (as defined below) without consideration or for a consideration per share less than the Current Market Price in effect immediately prior to such issue or sale, then, and in each such case, subject to Section 3.g hereof, such Warrant Price shall be reduced, concurrently with such issue or sale, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Warrant Price by a fraction: i. the numerator of which shall be (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale plus (ii) the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued or sold would purchase at such Current Market Price; and -2- 3 ii. the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issue or sale. For purposes of this Warrant, (i) the term "ADDITIONAL SHARES OF COMMON STOCK" means all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Section 3.c or 3.d hereof, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than the shares of Common Stock issued upon the exercise of this Warrant and (ii) the term "CURRENT MARKET PRICE" means, on any date specified herein, the average closing bid price, for the ten most recent trading days, of the Common Stock on the Nasdaq Small Cap Market or, if the Common Stock shall not then be quoted on the Nasdaq Small Cap Market but shall otherwise be traded in the over-the-counter market, on such over-the-counter market. If at any time the Common Stock shall not be quoted on the Nasdaq Small Cap Market or otherwise traded in the over-the-counter market, the "Current Market Price" of a share of Common Stock shall be deemed to be the fair value thereof (as determined in good faith by the Board of Directors) as of a date which shall be within 15 days of the date of determination. c. Treatment of Options and Convertible Securities. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume any Options or Convertible Securities (both as defined below), then, and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number the purpose of which is to protect against dilution) at any time issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption; provided, however, that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 3.e hereof) of such shares would be less than the Current Market Price in effect on the date of and immediately prior to such issue, sale, grant or assumption, as the case may be; and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued: i. no further adjustment of the Warrant Price shall be made upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consequent issue or sale of Convertible Securities or shares of Common Stock; ii. if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of Additional Shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Warrant Price computed upon the original issue, sale, grant or assumption thereof, and any subsequent -3- 4 adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; iii. upon the expiration (or purchase by the Company and cancellation or retirement) of any such Options which shall not have been exercised, or the expiration of any rights of conversion or exchange under any such Convertible Securities which (or purchase by the Company and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which) shall not have been exercised, the Warrant Price computed upon the original issue, sale, grant or assumption thereof, and any subsequent adjustments based thereon, shall, upon (and effective as of) such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (A) in the case of Options or Convertible Securities, the only Additional Shares of Common Stock issued or sold were the Additional Shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (B) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to Section 3.e hereof) upon the issue or sale of such Convertible Securities with respect to which such Options were actually exercised; -4- 5 For purposes of this Warrant, (i) the term "OPTIONS" means rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities and (ii) the term "CONVERTIBLE SECURITIES" means all evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. d. Treatment of Stock Dividends, Stock Splits, etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (i) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend or (ii) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. e. Computation of Consideration. For the purposes of this Section 3: i. the consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration: (A) insofar as it consists of cash, be computed at the amount of cash actually received by the Company, without deducting any expenses paid or incurred by the Company or any commissions or compensations paid or concessions or discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale; (B) insofar as it consists of property (including securities) other than cash actually received by the Company, or of consideration other than cash or of other property, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company; (C) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (A) and (B) above, allocable to such Additional Shares of Common Stock, all as determined in good faith by the Board of Directors of the Company; -5- 6 ii. Additional Shares of Common Stock deemed to have been issued pursuant to Section 2.c hereof shall be deemed to have been issued for a consideration per share determined by dividing: (A) the total amount of cash and other property, if any, received and receivable by the Company as direct consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration the purpose of which is to protect against dilution) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in Section 3.e.i., by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number the purpose of which is to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and iii. Additional Shares of Common Stock deemed to have been issued pursuant to Section 3.d hereof shall be deemed to have been issued for no consideration. f. Adjustments for Combinations, etc. In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Warrant Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. g. Minimum Adjustment of Warrant Price. If the amount of any adjustment of the Warrant Price required pursuant to this Section 3 would be less than one percent (1%) of the Warrant Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate at least one percent (1%) of such Warrant Price. -6- 7 h. Shares Deemed Outstanding. For all purposes of the computations to be made pursuant to this Section 3: (i) immediately after any Additional Shares of Common Stock are deemed to have been issued pursuant to Section 3.c or 3.d hereof, such Additional Shares shall be deemed to be outstanding, (ii) treasury shares shall not be deemed to be outstanding, (iii) no adjustment shall be made in the Warrant Price upon the issuance of Common Stock, Options and Convertible Securities to employees, directors of and consultants to the Company pursuant to the Company's 1997 Incentive Plan (under which a total of 1,200,000 shares of Common Stock have been reserved for issuance) in respect of services rendered to the Company by such persons and (iv) no adjustment shall be made in the Warrant Price upon the issuance of shares of Common Stock pursuant to Options and Convertible Securities outstanding on the date hereof, including without limitation the Warrants, but this Section 3.h shall not prevent other adjustments in the Warrant Price arising by virtue of such outstanding Options or Convertible Securities pursuant to the provisions of Section 3.c hereof. 4. MERGER; REORGANIZATION. In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or in the case of any consolidation with or merger of the Company into or with another corporation or the sale of all or substantially all of its assets to another corporation effected in such a manner that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the holder of the Warrant shall have the right thereafter to receive, upon the exercise hereof, the kind and amount of shares of stock or other securities or property which the holder would have been entitled to receive if, immediately before such reorganization, reclassification, consolidation or merger, the holder had held the number of shares of Common Stock which were then purchasable upon the exercise of the Warrant had the Warrant been exercised. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the holder of the Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the exercise price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. 5. REPORT AS TO ADJUSTMENTS. When any adjustment is required to be made in the Warrant Price, the Company shall forthwith determine the new Warrant Price; and a. Prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new Warrant Price; and b. Cause a copy of such statement to be mailed to the holder of this Warrant as of a date within ten days after the date when the circumstances giving rise to the adjustment occurred. -7- 8 6. INVESTMENT INTENT. The Warrant Shares are subject to the Registration Rights Agreement dated as of June 30, 1998 by and among the Company, Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. However, as of the date hereof, neither this Warrant nor the Warrant Shares have been registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"). The Warrant is issued to the holder on the condition that this Warrant and any Common Stock purchased upon exercise of this Warrant are or will be purchased for investment purposes and not with an intent to distribute the same. Before making any disposition of this Warrant or of any Common Stock purchased upon exercise of this Warrant, the holder will give written notice to the Company describing briefly the manner of any such proposed disposition. 7. COMPANY CALL. If, prior to the exercise or earlier expiration of this Warrant pursuant to the terms hereof, the last sale price of the Common Stock on the Nasdaq Small Cap Market equals or exceeds $6.00 on each of any 20 consecutive trading days, the Company shall be entitled, within 10 trading days of the last of such 20 consecutive trading days, at its option, to issue a notice (a "CALL NOTICE") to the holder of this Warrant to the effect that the Company is exercising its rights pursuant to this Section 7. Upon receipt of a Call Notice (which receipt will be deemed to occur on the one business day following the dispatch of such Call Notice by the Company by a nationally recognized overnight courier), the holder shall have until 5.00 p.m., Boston, Massachusetts time, on the tenth business day following receipt of the Call Notice to exercise the Warrant in accordance with Section 1 hereof. Upon the expiration of such ten day period, if not sooner exercised, this Warrant will terminate and the holder's and the Company's rights and obligations hereunder will cease without payment of consideration. Notwithstanding the foregoing provisions of this Section 7, the Company may not issue a Call Notice unless and until a registration statement is effective, or no longer required, with respect to the resale of the Warrant Shares. 8. NOTICES. The Company shall mail to the registered holder of this Warrant, at his or her last address appearing on the books of the Company, not less than 20 days prior to the date on which (a) a record will be taken for the purpose of determining the holders of Common Stock entitled to dividends (other than cash dividends) or subscription right, or (b) a record will be taken (or in lieu thereof, the transfer books will be closed) for the purpose of determining the holders of Common Stock entitled to notice of and to vote at a meeting of stockholders at which any capital reorganization, reclassification of shares of Common Stock, consolidation, merger, dissolution, liquidation, winding up or sale of substantially all of the Company's assets shall be considered and acted upon. Notwithstanding such notice requirements, until exercise and payment therefor, any holder of this Warrant shall not be deemed a shareholder of the Company with respect to shares of Common Stock underlying the Warrant. -8- 9 9. RESERVATION OF COMMON STOCK. A number of shares of Common Stock sufficient to provide for the exercise of this Warrant on the terms and conditions herein set forth shall at all times be reserved for the exercise of such Warrant. 10. MISCELLANEOUS. Whenever reference is made herein to the issuance or sale of shares of Common Stock, the term "Common Stock" shall include any stock of any class of the Company other than preferred stock with a fixed limit on dividends and a fixed amount payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company. The Company will not, by amendment of its Articles of Organization or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company, but will, at all times in good faith, assist, insofar as it is able, in the carrying out of all provisions hereof and in the taking of all other action which may be necessary in order to protect the rights of the holder hereof against dilution. The representations, warranties and agreements herein contained shall survive the exercise of this Warrant. References to the "holder of" include the immediate holder of Warrant Shares purchased on the exercise of this Warrant and the holder of any new Warrants issued pursuant to Section 1 upon the purchase of less than all of the Common Stock purchasable under this Warrant, and the word "holder" shall include the plural thereof. All shares of Common Stock or other securities issued upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable, and the Company will pay all taxes in respect of the issuance thereof. [Remainder of this page intentionally left blank.] -9- 10 IN WITNESS WHEREOF, this Warrant has been duly executed by Precision Optics Corporation, Inc. this 30th day of June, 1998. PRECISION OPTICS CORPORATION, INC. By: /s/ Richard E. Forkey ------------------------------ President [Warrant] 11 EXERCISE FORM (TO BE SIGNED ONLY UPON EXERCISE OF WARRANT) To Precision Optics Corporation, Inc.: The undersigned, the holder of the within warrant, hereby irrevocably elects to exercise the purchase right represented by such warrant for, and to purchase thereunder *________________ shares of the Common Stock of Precision Optics Corporation, Inc., and herewith makes payment of $______ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to the undersigned. Dated: _______________ SPECIAL SITUATIONS TECHNOLOGY FUND, L.P. By: __________________________ Title: [Address] *Insert here all or such portion of the number of shares called for on the face of the within warrant in 10,000 or more share increments with respect to which the holder desires to exercise the purchase right represented thereby, without adjustment for any other or additional stock, other securities, property or cash which may be deliverable on such exercise. 12 ASSIGNMENT FORM (TO BE SIGNED ONLY UPON TRANSFER OF THE WARRANT) For value received, the undersigned hereby sells, assigns and transfers unto _______________________ the right represented by the within warrant to purchase _________________ of the shares of Common Stock of Precision Optics Corporation, Inc. to which the within warrant relates and appoints _____________________ attorney to transfer said right on the books of Precision Optics Corporation, Inc., with full power of substitution in the premises. Dated:________________ SPECIAL SITUATIONS TECHNOLOGY FUND, L.P. By: ________________________________ Title: EX-4.9 4 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 4.9 EXECUTION VERSION REGISTRATION RIGHTS AGREEMENT This Agreement (the "AGREEMENT") is made as of June 30, 1998 by and among Precision Optics Corporation, Inc. a Massachusetts corporation (the "COMPANY") and Special Situations Private Equity Fund, L.P., a Delaware limited partnership, and Special Situations Technology Fund, L.P., a Delaware limited partnership (collectively, the "INVESTORS"). WHEREAS, pursuant to a Stock Subscription Agreement dated as of June 30, 1998 by and among the Company and the Investors (the "SUBSCRIPTION AGREEMENT"), the Investors have purchased from the Company an aggregate of 500,000 shares (the "SHARES") of the common stock, $0.01 par value per share, of the Company (the "COMMON STOCK") and warrants (the "WARRANTS") exercisable for an additional aggregate of 500,000 shares (the "WARRANT SHARES") of Common Stock; and WHEREAS, the Company and the Investors wish to provide certain arrangements with respect to the registration of the Shares and the Warrant Shares under the Securities Act; NOW, THEREFORE, in consideration of the mutual promises and obligations contained herein, the parties agree as follows: 1. DEFINITIONS. "COMMISSION" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act or the Exchange Act. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, and any successor to such statute or such rules and regulations. "FORM S-3", "FORM S-4" and "FORM S-8" mean respective forms under the Securities Act and any successor registration forms. "REGISTER", "REGISTERED", and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act and the automatic effectiveness or the declaration or ordering of effectiveness of such registration statement or document. "REGISTRABLE SECURITIES" means (i) the Shares and the Warrant Shares and (ii) any common stock or other securities issued or issuable with respect to any Registrable Securities by way of stock dividend or stock split or in connection with a combination of shares, 2 recapitalization, merger, consolidation or other reorganization or otherwise. Registrable Securities shall cease to be Registrable Securities (i) when a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement or (ii) if earlier, on the second anniversary of the exercise in full or earlier termination of the Warrant. For purposes of this Agreement, the number of shares of Registrable Securities outstanding at any time shall be determined by adding the number of Shares outstanding which are, and the maximum number of Warrant Shares which upon issuance would be, Registrable Securities. "REGISTRATION EXPENSES" means all expenses incident to performance of or compliance with Sections 2 and 3 hereof by the Company, including without limitation all registration and filing fees, all listing fees, all fees and expenses of complying with securities or blue sky laws, all printing and automated document preparation expenses, all messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits required by or incident to such performance and compliance, and the fees and disbursements of counsel for the Investors, but excluding applicable transfer taxes, if any, which shall be borne by the sellers of the Registrable Securities in all cases. "RULE 144" means Rule 144 promulgated under the Securities Act, as amended, and any successor rule or regulation thereto. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, and any successor to such statute or such rules and regulations. 2. REQUIRED REGISTRATION. 2.1 REGISTRATION OF SHARES AND WARRANT SHARES. Upon the issuance to the Investors of the Shares in accordance with the terms and conditions of the Subscription Agreement, the Company will use its best efforts to effect, prior to December 31, 1998 but in no event earlier than October 23, 1998, the registration under the Securities Act of such Shares and the Warrant Shares. 2.2 POSTPONEMENT. The Company may postpone for a period of up to 60 days the filing of any registration required pursuant to Section 2.1 (regardless of whether such 60 day period ends after December 31, 1998) if the Board of Directors of the Company in good faith determines that such registration is likely to have an adverse effect on any plan, proposal or agreement by the Company with respect to any financing, acquisition, recapitalization, reorganization or other material transaction or development. 2.3 PAYMENT OF EXPENSES. The Company hereby agrees to pay all Registration Expenses in connection with all registrations effected pursuant to this Section 2. However, the -2- 3 Company shall not be required to pay for any expenses of such registration proceeding if the registration request is withdrawn at any time at the request of the Investors (in which case the Investors shall bear such expenses). 3. REGISTRATION PROCEDURES. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Section 2 hereof, the Company will as expeditiously as reasonably possible: 3.1 REGISTRATION STATEMENT. Prepare and file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective. Each registration requested pursuant to Section 2 shall be effected by the filing of a registration statement on Form S-3 (or such other form as the Company may be eligible to file in the event it is not eligible to effect the registration of the resale of its securities on Form S-3), unless the use of a different form has been agreed to in writing by the Company and the Investors. Such registration statement shall be for an offering to be made on a continuous or delayed basis (a so-called "shelf registration statement"). 3.2 AMENDMENTS AND SUPPLEMENTS TO REGISTRATION STATEMENT. Prepare and file with the Commission such amendments and supplements to such registration statements and the prospectuses used in connection therewith as may be necessary to keep such registration statements effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities and other securities, if any, covered by such registration statements until the earlier of (i) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investors set forth in such registration statement or (ii) the second anniversary of the exercise in full or earlier termination of the Warrant. 3.3 COOPERATION. Use its best efforts to cooperate with the Investors in the disposition of the Common Stock covered by such registration statement. 3.4 FURNISHING OF COPIES OF REGISTRATION STATEMENTS AND OTHER DOCUMENTS. Furnish to the Investors such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits, except that the Company shall not be obligated to furnish the Investors with more than two copies of such exhibits other than incorporated documents), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), each in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus and such other documents as the Investors may reasonably request in order to facilitate the disposition of their Registrable Securities covered by such registration statement. 3.5 STATE SECURITIES LAWS. Use its best efforts to register or qualify such Registrable Securities under such securities or blue sky laws of such jurisdictions as the Investors shall -3- 4 reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Investors to consummate the disposition in such jurisdictions of their Registrable Securities covered by such registration statement; PROVIDED, HOWEVER, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or subject the Company to taxation in any jurisdiction in which it is not so qualified. 3.6 NOTICE OF PROSPECTUS DEFECTS. Immediately notify the Investors when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of the Investors prepare and furnish to them a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 3.7 GENERAL COMPLIANCE WITH FEDERAL SECURITIES LAWS. Otherwise use its best efforts to comply with the Securities Act, the Exchange Act and any other applicable rules and regulations of the Commission, and make available to its securities holders, as soon as reasonably practicable, an earning statement covering the period of at least 12 months after the effective date of such registration statement, which earning statement shall satisfy Section 11(a) of the Securities Act and any applicable regulations thereunder, including Rule 158. 3.8 EXCHANGE LISTING. Use its best efforts to list such Registrable Securities on the Nasdaq Small Cap Market, if such Registrable Securities are not already so listed. 3.9 TRANSFER AGENT. Provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement. 3.10 SELLER INFORMATION. The Company may require the Investors to furnish the Company such information regarding the Investors and the distribution of the Registrable Securities as the Company may from time to time reasonably request in writing and which shall be required by the Securities Act (or similar state laws) or by the Commission in connection therewith. 4. ADDITIONAL ISSUANCE. In the event that the registration statement filed pursuant to Section 3.1 is not declared effective on or prior to December 31, 1998 (the "DEFAULT DATE"), the Company will issue and deliver, free of charge and without cost, to the Investors (i) within 10 business days of the Default Date, (x) certificates representing a number of fully paid, nonassessable shares of Common Stock equal to the aggregate of 2.0% of the Shares and (y) a -4- 5 warrant exercisable (on the same terms and conditions as are then applicable to the Warrant) for a number of fully paid, nonassessable shares of Common Stock equal to the aggregate of 2.0% of the Warrant Shares and (ii) within 10 business days of the last date of each additional 30-day period in which such registration statement shall not have been declared effective, (x) additional certificates representing a number of fully paid, non-assessable shares of Common Stock equal to the aggregate of 2.0% of the Shares and (y) an additional warrant exercisable (on the same terms and conditions as are then applicable to the Warrant) for a number of fully paid, nonassessable shares of Common Stock equal to the aggregate of 2.0% of the Warrant Shares. Shares and warrants issued pursuant to this Section 4 shall be allocated to the Investors pro rata based on the number of Shares purchased by each pursuant to the Subscription Agreement. Any and all shares of Common Stock issued, and any and all shares of Common Stock issuable upon exercise of warrants issued, pursuant to this Section 4 shall constitute "Registrable Securities," and the Company shall be required to register them under the Securities Act in accordance with the provisions of this Agreement. The remedies set forth in this Section 4 shall be in addition to, and not in limitation of, any other rights and remedies available to the Investors under this Agreement and applicable law. 5. BLACKOUT PERIOD. Upon written notice by the Company while any registration statement filed pursuant to Section 2 is effective, if it is determined in good faith by the Company's Board of Directors that in its reasonable judgment the obligation of the Company to comply with the disclosure requirements of the Securities Act would interfere with any financing, acquisition, corporate reorganization or other material transaction involving the Company or would require premature disclosure thereof, the Investors will not for a period of 60 days (a "BLACKOUT PERIOD") or, if shorter, until the Company notifies the Investors in writing that the Blackout Period is terminated, sell any Registrable Securities pursuant to any such registration statement. Each notice given pursuant to this Section 5 shall contain an approximation of the anticipated length of the Blackout Period, which shall not be longer than is reasonably required and in any event not longer than 60 days. Promptly upon the Company's determination that a Blackout Period is no longer necessary, the Company will notify the Investors in writing that the Blackout Period has terminated. In no event shall the Company give notice of a Blackout Period more than once in any 180-day period. 6. INDEMNIFICATION AND CONTRIBUTION. 6.1 INDEMNITIES TO THE INVESTORS. In the event of any registration of any Registrable Securities under the Securities Act pursuant to Section 2 hereof, the Company will, and hereby does, indemnify and hold harmless the Investors, its partners, directors and officers, and each other person, if any, who controls the Investors within the meaning of Section 15 of the Securities Act (each such Person being referred to herein as a "COVERED PERSON"), against any losses, claims, damages or liabilities, joint or several, to which such Covered Person may be or become subject under the Securities Act, the Exchange Act, any other securities or other law of any jurisdiction, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any -5- 6 untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in any registration statement under the Securities Act, any preliminary prospectus or final prospectus included therein, or any related summary prospectus, or any amendment or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse such Covered Person for any legal or any other expenses incurred by it in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; PROVIDED, HOWEVER, that the Company shall not be liable to any Covered Person in any such case for any such loss, claim, damage, liability, action or proceeding (i) to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement or incorporated document, in reliance upon and in conformity with written information furnished to the Company or on behalf of such Covered Person expressly for inclusion therein or (ii) in the case of a sale directly by the Investors of Registrable Securities, such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus and the Investors failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Securities to the person asserting any such loss, claim, damage or liability in any case in which such delivery is required by the Securities Act. The indemnities of the Company contained in this Section 6.1 shall remain in full force and effect regardless of any investigation made by or on behalf of such Covered Person and shall survive any transfer of Registrable Securities. 6.2 INDEMNITIES TO THE COMPANY. In the event of any registration of Registrable Securities under the Securities Act pursuant to Section 2 hereof, the Investors, jointly and severally, will, and hereby do, indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 6.1 hereof) the Company, each director of the Company, each officer of the Company who shall sign such registration statement and each other person (other than the Investors), if any, who controls the Company within the meaning of Section 15 of the Securities Act, with respect to any untrue statement in or omission from such registration statement, any preliminary prospectus or final prospectus included therein, or any amendment or supplement thereto, or any document incorporated therein, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Investors expressly for inclusion therein, provided that the Investors shall not be liable to the Company in any case in which such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and the Company failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the securities to the person asserting any such loss, claim, damage or liability in any case in which such delivery is required by the Securities Act. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive any transfer of Registrable Securities. -6- 7 6.3 INDEMNIFICATION PROCEDURES. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim of the type referred to in the foregoing provisions of this Section 6, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give written notice to each such indemnifying party of the commencement of such action; PROVIDED, HOWEVER, that the failure of any indemnified party to give notice to such indemnifying party as provided herein shall not relieve such indemnifying party of its obligations under the foregoing provisions of this Section 6, except and solely to the extent that such indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, each indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to such an indemnifying party), and after notice from an indemnifying party to such indemnified party of its election so to assume the defense thereof, such indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof; PROVIDED, HOWEVER, that (i) if the indemnified party reasonably determines that there may be a conflict between the positions of such indemnifying party and the indemnified party in conducting the defense of such action or that there may be defenses available to such indemnified party different from or in addition to those available to such indemnifying party, then counsel for the indemnified party shall conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party and such indemnifying party shall employ separate counsel for its own defense, (ii) in any event, the indemnified party shall be entitled to have counsel chosen by such indemnified party participate in, but not conduct, the defense and (iii) the indemnifying party shall bear the legal expenses incurred in connection with the conduct of, and the participation in, the defense as referred to in clauses (i) and (ii) above. If, within a reasonable time after receipt of the notice, such indemnifying party shall not have elected to assume the defense of the action, such indemnifying party shall be responsible for any legal or other expenses incurred by such indemnified party in connection with the defense of the action, suit, investigation, inquiry or proceeding. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 6.4 CONTRIBUTION. If the indemnification provided for in Sections 6.1 or 6.2 hereof is unavailable to a party that would have been an indemnified party under any such Section in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each party that would have been an indemnifying party thereunder shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the -7- 8 relative fault of such indemnifying party on the one hand and such indemnified party on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or such indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contribution pursuant to this Section 6.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the preceding sentence. The amount paid or payable by a contributing party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 6.4 shall include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 6.5 LIMITATION ON LIABILITY OF HOLDERS OF REGISTRABLE SECURITIES. The liability of the Investors in respect of any indemnification or contribution obligation of the Investors arising under this Section 6 shall not in any event exceed an amount equal to the net proceeds to the Investors (after deduction of all underwriters' discounts and commissions and all other expenses paid by the Investors in connection with the registration in question) from the disposition of the Registrable Securities disposed of by the Investors pursuant to such registration. 7. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Investors the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration, the Company agrees to: (a) use its best efforts to make and keep public information available, as those terms are understood and defined in Rule 144; (b) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to the Investors upon request (1) a written statement by the Company as to its compliance with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (2) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (3) such other information as may be reasonably requested in availing the Investors -8- 9 of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to Rule 144. 8. ASSIGNMENT OF REGISTRATION RIGHTS. The right to cause the Company to register Registrable Securities pursuant to Section 2 may be assigned by the Investors only with the consent of the Company; PROVIDED, HOWEVER, that the Investors shall be permitted to transfer such right to one or more of their affiliates (as such term is defined in Rule 12b-2 under the Exchange Act) without the consent of the Company. Any transferee to whom rights under this Agreement are transferred shall (i) as a condition to such transfer, deliver to the Company a written instrument by which such transferee agrees to be bound by the obligations imposed upon the Investors under this Agreement to the same extent as the Investors is itself so bound and (ii) be deemed to be an additional Investor hereunder. 9. NOTICES. All notices, requests, consents and demands shall be in writing and shall be personally delivered, mailed (by first class or certified mail), telecopied or delivered by any nationally recognized overnight delivery service to the Company at: Precision Optics Corporation, Inc. 22 East Broadway Gardner, Massachusetts 01440 Attn: Jack P. Dreimiller Fax No.: (978) 630-1487 with a copy to: Ropes & Gray One International Place Boston, Massachusetts 02110 Attn: Edward A. Benjamin Fax No.: (617) 951-7050 and to the Investors at: Special Situations Private Equity Fund, L.P. Special Situations Technology Fund, L.P. 153 East 53rd Street, 51st Floor New York, New York 10022 Attn: Austin Marxe Fax No.: (212) 832-5300 -9- 10 with a copy to: Hertzog, Calamari & Gleason 100 Park Avenue New York, New York 10017 Attn: David B. Hertzog Fax No. (212) 213-1199 or such other address as may be furnished in writing to the other parties hereto. All such notices, requests, demands and other communication shall, when mailed (registered or certified mail, return receipt requested, postage prepaid), be effective four days after deposit in the mails, or, when personally delivered, telecopied or delivered by any nationally recognized overnight delivery service, be effective upon actual receipt. 10. ENTIRE AGREEMENT. This Agreement and the Subscription Agreement constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede any and all prior understandings and agreements, whether written or oral, with respect to such subject matter. 11. AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this Agreement may be amended, and the observance thereof may be waived, if the Company shall obtain consent thereto in writing from the Investors. 12. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the personal representatives, successors and assigns of the respective parties hereto. Notwithstanding the foregoing sentence, the Company shall not have the right to assign its obligations hereunder or any interest herein without obtaining the prior written consent of the Investors. 13. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 14. GOVERNING LAW; CONSENT TO JURISDICTION. 14.1 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of New York, without giving effect to any choice or conflict of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. -10- 11 14.2 CONSENT TO JURISDICTION. Each of the parties agrees that all actions, suits or proceedings arising out of or based upon this Agreement or the subject matter hereof may be brought and maintained in the federal and state courts of The State of New York. Each of the parties hereto by execution hereof: (i) hereby irrevocably submits to the jurisdiction of the federal and state courts in The State of New York for the purpose of any action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that it is immune from extraterritorial injunctive relief or other injunctive relief, that its property is exempt or immune from attachment or execution, that any such action, suit or proceeding may not be brought or maintained in one of the above-named courts, that any such action, suit or proceeding brought or maintained in one of the above-named courts should be dismissed on grounds of FORUM NON CONVENIENS, should be transferred to any court other than one of the above-named courts, should be stayed by virtue of the pendency of any other action, suit or proceeding in any court other than one of the above-named courts, or that this Agreement or the subject matter hereof may not be enforced in or by any of the above-named courts. Each of the parties hereto hereby consents to service of process in any such suit, action or proceeding in any manner permitted by the laws of The State of New York, agrees that service of process by registered or certified mail, return receipt requested, at the address specified in Section 9 hereof is reasonably calculated to give actual notice and waives and agrees not to assert by way of motion, as a defense or otherwise, in any such action, suit or proceeding any claim that such service of process does not constitute good and sufficient service of process. 15. SEVERABILITY. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable, the parties hereby waive such provision to the extent that it is found to be invalid or unenforceable. Such provision shall, to the maximum extent allowable by law, be modified by such court so that it becomes enforceable, and, as modified, shall be enforced as any other provision hereof, all the other provisions hereof continuing in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in counterparts, all of which together shall constitute one and the same instrument. [Remainder of this page is intentionally left blank] -11- 12 IN WITNESS WHEREOF, the Company, and the Investors have executed this Agreement as of the date and year first above written. PRECISION OPTICS CORPORATION, INC By: /s/ Richard E. Forkey ----------------------------- Title: President SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. By: /s/ Austin W. Marxe ----------------------------- Title: Managing Director SPECIAL SITUATIONS TECHNOLOGY FUND, L.P. By: /s/ Austin W. Marxe ----------------------------- Title: Managing Director [Registration Rights Agreement] EX-10.7 5 1997 INCENTIVE PLAN 1 Exhibit 10.7 EXHIBIT A PRECISION OPTICS CORPORATION, INC. 1997 INCENTIVE PLAN 1. DEFINED TERMS Exhibit A, which is incorporated by reference, defines the terms used in the Plan. 2. IN GENERAL The Plan has been established to advance the interests of the Company by giving selected Employees, directors and other persons (including both individuals and entities) who provide services to the Company or its Affiliates equity-based or cash incentives through the grant of Awards. 3. ADMINISTRATION The Administrator has discretionary authority, subject only to the express provisions of the Plan, to interpret the Plan; determine eligibility for and grant Awards; determine, modify or waive the terms and conditions of any Award; prescribe forms, rules and procedures (which it may modify or waive); and otherwise do all things necessary to carry out the purposes of the Plan. Once an Award has been communicated in writing to a Participant, the Administrator may not, without the Participant's consent, alter the terms of the Award so as to affect adversely the Participant's rights under the Award, unless the Administrator expressly reserved the right to do so in writing at the time of such communication. In the case of any Award intended to be eligible for the performance-based compensation exception under Section 162(m), the Administrator shall exercise its discretion consistent with qualifying the Award for such exception. The Administrator may delegate to senior management the authority to grant Awards, other than Awards to the President. -1- 2 4. SHARES SUBJECT TO THE PLAN a. A total of 1,200,000 shares of Stock have been reserved for issuance under the Plan. The following shares of Stock will also be available for future grants: (i) shares of Stock remaining under an Award that terminates without having been exercised in full (in the case of an Award requiring exercise by a Participant for delivery of Stock); (ii) shares of Stock subject to an Award, where cash is delivered to a Participant in lieu of such shares; (iii) shares of Restricted Stock that are forfeited to the Company; (iv) shares of Stock tendered by a Participant to the Company as payment upon exercise of an Award; and (v) shares of Stock held back by the Company, or tendered by a Participant to the Company, in satisfaction of tax withholding requirements. Stock delivered under the Plan may be authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. b. The maximum number of shares of Stock for which Stock Options may be granted to any person over the life of the Plan shall be 600,000. The maximum number of shares of Stock subject to SARs granted to any person over the life of the Plan shall be 600,000. For purposes of the preceding two sentences, the repricing of a Stock Option or SAR shall be treated as a new grant to the extent required under Section 162(m). The aggregate maximum number of shares of Stock delivered to any person over the life of the Plan pursuant to Awards that are not Stock Options or SARs shall also be 600,000. Subject to these limitations, each person eligible to participate in the Plan shall be eligible in any year to receive Awards covering up to the full number of shares of Stock then available for Awards under the Plan. 5. ELIGIBILITY AND PARTICIPATION The Administrator will select Participants from among those key Employees, directors and other individuals or entities providing services to the Company or its Affiliates who, in the opinion of the Administrator, are in a position to make a significant contribution to the success -2- 3 of the Company and its Affiliates. Eligibility for ISOs is further limited to those individuals whose employment status would qualify them for the tax treatment described in Sections 421 and 422 of the Code. 6. RULES APPLICABLE TO AWARDS a. ALL AWARDS (1) PERFORMANCE OBJECTIVES. Where rights under an Award depend in whole or in part on attainment of performance objectives, actions by the Company that have an effect, however material, on such performance objectives or on the likelihood that they will be achieved will not be deemed an amendment or alteration of the Award unless accomplished by a change in the express terms of the Award or other action that is without substantial consequence except as it affects the Award. (2) ALTERNATIVE SETTLEMENT. The Company retains the right at any time to extinguish rights under an Award in exchange for payment in cash, Stock (subject to the limitations of Section 4) or other property on such terms as the Administrator determines, provided the holder of the Award consents to such exchange. (3) TRANSFERABILITY OF AWARDS. Except as the Administrator otherwise expressly provides, Awards (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may not be transferred other than by will or by the laws of descent and distribution. During a Participant's lifetime an Award requiring exercise may be exercised only by the Participant (or in the event of the Participant's incapacity, the person or persons legally appointed to act on the Participant's behalf). (4) VESTING, ETC. The Administrator may determine the time or times at which an Award will vest (i.e., become free of forfeiture restrictions) or become exercisable. Unless the Administrator expressly provides otherwise, an Award requiring exercise will cease to be exercisable, and all other Awards to the extent not already fully vested will be forfeited, immediately upon the cessation (for any reason, including death) of the Participant's employment or other service relationship with the Company and its Affiliates. (5) TAXES. The Administrator will make such provision for the withholding of taxes as it deems necessary. The Administrator may, but need not, hold back shares of Stock from an Award or permit a Participant to tender previously owned shares of Stock in satisfaction of tax withholding requirements. -3- 4 (6) DIVIDEND EQUIVALENTS, ETC. The Administrator may provide for the payment of amounts in lieu of cash dividends or other cash distributions with respect to Stock subject to an Award. (7) RIGHTS LIMITED. Nothing in the Plan shall be construed as giving any person the right to continued employment or service with the Company or its Affiliates, or any rights as a shareholder except as to shares of Stock actually issued under the Plan. The loss of existing or potential profit in Awards will not constitute an element of damages in the event of termination of employment or service for any reason, even if the termination is in violation of an obligation of the Company or Affiliate to the Participant. (8) SECTION 162(m). In the case of an Award intended to be eligible for the performance-based compensation exception under Section 162(m), the Plan and such Award shall be construed to the maximum extent permitted by law in a manner consistent with qualifying the Award for such exception. b. AWARDS REQUIRING EXERCISE (1) TIME AND MANNER OF EXERCISE. Unless the Administrator expressly provides otherwise, (a) an Award requiring exercise by the holder will not be deemed to have been exercised until the Administrator receives a written notice of exercise (in form acceptable to the Administrator) signed by the appropriate person and accompanied by any payment required under the Award; and (b) if the Award is exercised by any person other than the Participant, the Administrator may require satisfactory evidence that the person exercising the Award has the right to do so. (2) PAYMENT OF EXERCISE PRICE, IF ANY. Where the exercise of an Award is to be accompanied by payment, the Administrator may determine the required or permitted forms of payment either at or after the time of the Award, subject to the following: (a) unless the Administrator expressly provides otherwise, all payments will be by cash or check acceptable to the Administrator; and (b) where shares of Stock issued under an Award are part of an original issue of shares, the Award shall require an exercise price equal to at least the par value of such shares. (3) RELOAD AWARDS. The Administrator may provide that upon the exercise of an Award, either by payment of cash or (if permitted under Section 6.b.(2) above) through the tender of previously owned shares of Stock, the Participant or other person exercising the Award will automatically receive a new Award of like kind covering a number of shares of Stock equal to the number of shares of Stock for which the first Award was exercised. -4- 5 (4) ISOs. No ISO may be granted under the Plan after September 15, 2007, but ISOs previously granted may extend beyond that date. c. AWARDS NOT REQUIRING EXERCISE Awards of Restricted Stock and Unrestricted Stock may be made in return for either (i) services determined by the Administrator to have a value not less than the par value of the awarded shares of Stock, or (ii) cash or other property having a value not less than the par value of the awarded shares of Stock plus such additional amounts (if any) as the Administrator may determine payable in such combination and type of cash, other property (of any kind) or services as the Administrator may determine. 7. EFFECT OF CERTAIN TRANSACTIONS a. MERGERS, ETC. In the event of (i) a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of a majority of the Company's then outstanding voting common stock by a single person or entity or by a group of persons and/or entities acting in concert, (ii) a sale or transfer of all or substantially all the Company's assets, or (iii) a dissolution or liquidation of the Company (any of the foregoing, a "covered transaction"), all outstanding Awards requiring exercise will cease to be exercisable, and all other Awards to the extent not fully vested (including Awards subject to performance conditions not yet satisfied or determined) will be forfeited, as of the effective time of the covered transaction; provided, however, that immediately prior to the consummation of such covered transaction the vesting or exercisability of Awards shall be accelerated unless, in the case of any Award, the Administrator provides for one or more substitute or replacement awards from, or the assumption of the existing Award by, the acquiring entity (if any) or its affiliates. The Administrator may provide in the case of any Award that the provisions of the preceding paragraph shall also apply to (i) mergers or consolidations involving the Company that do not constitute a covered transaction, or (ii) other transactions, not constituting a covered transaction, that involve the acquisition of the Company's outstanding Stock. b. CHANGES IN AND DISTRIBUTIONS WITH RESPECT TO THE STOCK (1) BASIC ADJUSTMENT PROVISIONS. In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capital structure, the Administrator will make appropriate adjustments to the maximum number of shares that -5- 6 may be delivered under the Plan under Section 4.a. and to the maximum share limits described in Section 4.b., and will also make appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change. (2) CERTAIN OTHER ADJUSTMENTS. The Administrator may also make adjustments of the type described in paragraph (1) above to take into account distributions to common stockholders other than stock dividends or normal cash dividends, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if the Administrator determines that adjustments are appropriate to avoid distortion in the operation of the Plan and to preserve the value of Awards made hereunder; provided, that no such adjustment shall be made to the maximum share limits described in Section 4.b., or otherwise to an Award intended to be eligible for the performance-based exception under Section 162(m), except to the extent consistent with that exception. (3) CONTINUING APPLICATION OF PLAN TERMS. References in the Plan to shares of Stock shall be construed to include any stock or securities resulting from an adjustment pursuant to Section 7.b.(1) or 7.b.(2) above. 8. CONDITIONS ON DELIVERY OF STOCK The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove any restriction from shares of Stock previously delivered under the Plan until: the Company's counsel has approved all legal matters in connection with the issuance and delivery of such shares; if the outstanding Stock is at the time of delivery listed on any stock exchange or national market system, the shares to be delivered have been listed or authorized to be listed on such exchange or system upon official notice of issuance; and all conditions of the Award have been satisfied or waived. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act. The Company may require that certificates evidencing Stock issued under the Plan bear an appropriate legend reflecting any restriction on transfer applicable to such Stock. 9. AMENDMENT AND TERMINATION Subject to the penultimate sentence of Section 3, the Administrator may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards; -6- 7 provided, that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify under Section 422 of the Code and for Awards to be eligible for the performance-based exception under Section 162(m). 10. NON-LIMITATION OF THE COMPANY'S RIGHTS The existence of the Plan or the grant of any Award shall not in any way affect the Company's right to award a person bonuses or other compensation in addition to Awards under the Plan. 11. GOVERNING LAW The Plan shall be construed in accordance with the laws of the Commonwealth of Massachusetts. -7- 8 EXHIBIT A DEFINITION OF TERMS The following terms, when used in the Plan, shall have the meanings and be subject to the provisions set forth below: "ADMINISTRATOR": The Committee, if one has been appointed; otherwise the Board. "AFFILIATE": Any corporation or other entity owning, directly or indirectly, 50% or more of the outstanding Stock of the Company, or in which the Company or any such corporation or other entity owns, directly or indirectly, 50% of the outstanding capital stock (determined by aggregate voting rights) or other voting interests. "AWARD": Any of the following: (i) Options ("Stock Options") entitling the recipient to acquire shares of Stock upon payment of the exercise price. Each Stock Option (except as otherwise expressly provided by the Committee consistent with continued qualification of the Stock Option as a performance-based award for purposes of Section 162(m), or unless the Committee expressly determines that such Stock Option is not subject to Section 162(m) or that the Stock Option is not intended to qualify for the performance-based exception under Section 162(m)) will have an exercise price equal to the fair market value of the Stock subject to the option, determined as of the date of grant, except that an ISO granted to an Employee described in Section 422(b)(6) of the Code will have an exercise price equal to 110% of such fair market value. The Administrator will determine the medium in which the exercise price is to be paid, the duration of the option, the time or times at which an option will become exercisable, provisions for continuation (if any) of option rights following termination of the Participant's employment with the Company and its Affiliates, and all other terms of the Stock Option. No Stock Option awarded under the Plan will be an ISO unless the Administrator expressly provides for ISO treatment. (ii) Rights ("SARs") entitling the holder upon exercise to receive cash or Stock, as the Administrator determines, equal to a function (determined by the Administrator using such factors as it deems appropriate) of the amount by which the Stock has appreciated in value since the date of the Award. (iii) Stock subject to restrictions ("Restricted Stock") under the Plan requiring that such Stock be redelivered to the Company if specified conditions are not satisfied. The conditions to be satisfied in connection with any Award of Restricted Stock, the 9 terms on which such Stock must be redelivered to the Company, the purchase price of such Stock, and all other terms shall be determined by the Administrator. (iv) Stock not subject to any restrictions under the Plan ("Unrestricted Stock"). (v) A promise to deliver Stock or other securities in the future on such terms and conditions as the Administrator determines. (vi) Securities (other than Stock Options) that are convertible into or exchangeable for Stock on such terms and conditions as the Administrator determines. (vii) Cash bonuses tied to performance criteria as described at (viii) below ("Cash Performance Awards"). (viii) Awards described in any of (i) through (vii) above where the right to exercisability, vesting or full enjoyment of the Award is conditioned in whole or in part on the satisfaction of specified performance criteria ("Performance Awards"). The Committee in its discretion may grant Performance Awards that are intended to qualify for the performance-based compensation exception under Section 162(m) and Performance Awards that are not intended so to qualify. No more than $2,000,000 may be paid to any individual with respect to any Cash Performance Award. In applying the limitation of the preceding sentence: (A) multiple Cash Performance Awards to the same individual that are determined by reference to performance periods of one year or less ending with or within the same fiscal year of the Company shall be subject in the aggregate to one $2,000,000 limit, and (B) multiple Cash Performance Awards to the same individual that are determined by reference to one or more multi-year performance periods ending in the same fiscal year of the Company shall be subject in the aggregate to a separate limit of $2,000,000. With respect to any Performance Award other than a Cash Performance Award, Stock Option or SAR, the maximum award opportunity shall be 250,000 shares of Stock or their equivalent value in cash, subject to the limitations of Section 4.b. For the avoidance of doubt, any Performance Award of a type described in (i) through (vi) above shall be treated for purposes of this paragraph as a Performance Award that is not a Cash Performance Award, even if payment is made in cash. In the case of a Performance Award intended to qualify as performance-based for the purposes of Section 162(m) (other than a Stock Option or SAR with an exercise price at least equal to the fair market value of the underlying Stock on the date of grant), the Committee shall in writing preestablish a specific performance goal (based solely on one or more qualified performance criteria or a combination of qualified performance criteria) no later than 90 days after the commencement of the period of 10 service to which the performance relates (or at such earlier time as is required to qualify the award as performance-based under Section 162(m)). For purposes of the Plan, a qualified performance criterion is any of the following (determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business or geographical basis or in combinations thereof): (i) sales; revenues; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation or amortization, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital or assets; gross margin; inventory level or turns; one or more operating ratios; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; or other objective operating contributions; or (ii) acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) and refinancings; or other transactions that involve a change in the equity ownership of the Company. Prior to payment of any Performance Award (other than a Stock Option or SAR with an exercise price at least equal to the fair market value of the underlying Stock on the date of grant) intended to qualify as performance-based under Section 162(m), the Committee shall certify whether the performance goal has been attained and such determination shall be final and conclusive. If the performance goal with respect to any such Award is not attained, no other Award shall be provided in substitution of the Performance Award. (ix) Grants of cash, or loans, made in connection with other Awards in order to help defray in whole or in part the economic cost (including tax cost) of the Award to the Participant. The terms of any such grant or loan shall be determined by the Administrator. Awards may be combined in the Administrator's discretion. "BOARD": The Board of Directors of the Company. "CODE": The U.S. Internal Revenue Code of 1986 as from time to time amended and in effect, or any successor statute as from time to time in effect. "COMMITTEE": A committee of the Board comprised solely of two or more outside directors within the meaning of Section 162(m). The Committee may delegate ministerial tasks to such persons (including Employees) as it deems appropriate. "COMPANY": Precision Optics Corporation, Inc. "EMPLOYEE": Any person who is employed by the Company or an Affiliate. 11 "ISO": A Stock Option intended to be an "incentive stock option" within the meaning of Section 422 of the Code. "PARTICIPANT": An Employee, director or other person providing services to the Company or its Affiliates who is granted an Award under the Plan. "PLAN": Precision Optics Corporation, Inc. 1997 Incentive Plan as from time to time amended and in effect. "SECTION 162(m)": Section 162(m) of the Code. "STOCK": Common stock of the Company, par value $.01 per share. EX-10.8 6 STOCK SUBSCRIPTION AGREEMENT 1 Exhibit 10.8 EXECUTION VERSION PRECISION OPTICS CORPORATION, INC. STOCK SUBSCRIPTION AGREEMENT 1. Special Situations Private Equity Fund, L.P., a Delaware limited partnership, hereby subscribes for 375,000 shares (the "Shares") of the Common Stock, $0.01 par value (the "Common Stock"), of Precision Optics Corporation, Inc., a Massachusetts corporation (the "Company"), and Special Situations Technology Fund, L.P., a Delaware limited partnership (collectively with Special Situations Private Equity Fund, L.P., the "Investors"), hereby subscribes for 125,000 Shares, subject to and in reliance upon the Company's representations and warranties to the Investors contained herein. In consideration for the Shares, each Investor agrees to pay to the Company the amount of $2.00 per share in full payment for the Shares. In connection with the purchase of the Shares, the Company will issue to the Investors warrants (the "Warrants") exercisable for an additional aggregate of 500,000 shares of Common Stock (the "Warrant Shares"), subject to the terms and conditions set forth in the Warrants. 2. The Investors hereby agree that all of the Shares which they acquire and any of their right, title or interest in such Shares shall be subject to the terms and conditions of this Agreement, and that all of the Warrant Shares which they acquire and any of their right, title or interest in such Warrant Shares shall be subject to the terms and conditions of this Agreement and the terms and conditions of the Warrants. 3. The Investors represent and warrant to the Company that they are acquiring the Shares for their own accounts for investment only and not with a view to any resale or distribution thereof, and the Investors agree that they will not sell or otherwise dispose of the Shares in violation of the provisions of the Securities Act of 1933, as amended (the "Securities Act"), or any applicable state securities laws. The Investors understand that the Company is selling the Shares to the Investors in a transaction that is exempt from the Securities Act's registration requirements and from the registration requirements of any applicable state securities laws and that the Investors must hold the Shares indefinitely unless they are subsequently offered for sale and sold in a transaction or transactions registered under the Securities Act or such state laws or an exemption from registration (such as Rule 144) is available. The Investors understand that, except as provided in the Registration Rights Agreement dated as of June 30, 1998 by and among the Company and the Investors, the Company is under no obligation to register the Shares under the Securities Act or such state laws or to file for an exemption from registration under the Securities Act or such state laws. The Investors further understand that the Company is under no obligation to comply with any other exemption from registration and that such exemptions are extremely limited and may not 2 be available at such time or times as the Investors may wish to sell or otherwise dispose of the Shares. The Investors understand that the certificate or certificates representing the Shares will bear the following legend restricting their transfer and that a notation restricting such transfer will be made on the stock transfer books of the Company: "The shares represented by this certificate have been acquired for investment and have not been registered under the Securities Act of 1933, as amended (the "Act") or any applicable state securities laws and may not be offered, sold or otherwise transferred without an effective registration statement relating thereto or an opinion of counsel in form and substance satisfactory to the Company that such registration is not required under the Act or such state laws." 4. The Investors represent and warrant to the Company that (i) each Investor is an "Accredited Investor," as that term is defined in Regulation D under the Securities Act, (ii) each Investor possesses such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated hereby, is able to incur a complete loss of such investment and is able to bear the economic risk of such investment for an indefinite period of time and (iii) each Investor has previously participated as an investor in private placement transactions exempt from the registration requirements of the Securities Act. 5. Except as set forth in the Schedule of Exceptions attached hereto as Exhibit A, the Company represents and warrants to the Investors as follows: (a) ORGANIZATION AND GOOD STANDING. The Company is a corporation duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts, and has all necessary corporate power and authority to own or lease its assets and to carry on its business as it is now being conducted and presently proposed to be conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which its ownership or leasing of assets, or the conduct of its business, makes such qualification necessary. The Company has no subsidiaries and no equity interests in any corporation, partnership, joint venture or other entity. (b) REQUISITE POWER AND AUTHORIZATION. The Company has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, including without limitation the issuance and delivery of the Shares and the Warrant, all corporate action of the Company required for the execution and delivery of this Agreement and the issuance and delivery of the Shares and the Warrant have been duly and effectively taken and no further actions, authorizations or consents, including without limitation any of the shareholders of the Company, are required. Each of this Agreement and the Warrant constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting -2- 3 enforcement of creditor's rights and (ii) as limited by general principles of equity that restrict the availability of equitable remedies. The Shares, when issued and delivered in compliance with the provisions of this Agreement, will be validly issued, fully paid and non-assessable, free and clear of any and all liens, charges, claims or encumbrances. The Warrant Shares, if and when issued and delivered in compliance with the provisions of this Agreement and the Warrant, as the case may be, will be validly issued, fully paid and non-assessable, free and clear of any and all liens, charges, claims or encumbrances. Assuming the truth and accuracy of the representations and warranties of the Investor contained in this Agreement at the time of each respective issuance, each of the Shares and the Warrant Shares will be issued in compliance with Federal and state securities laws. The Company has reserved a sufficient number of shares of Common Stock necessary for issuance of the Warrant Shares. (c) SEC DOCUMENTS. Since June 30, 1997, the Company has timely filed with the Securities and Exchange Commission (the "SEC") all reports, statements, schedules and other documents (collectively, the "SEC Documents") required to be filed by it pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements included in the SEC Documents (the "Financial Statements") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Except (i) as may be indicated in the notes to the Financial Statements or (ii) in the case of the unaudited interim statements, as permitted by Form 10-QSB under the Exchange Act, the Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles consistently applied and fairly present in all material respects the financial position of the Company as of the dates thereof and the consolidated results of operations and consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal recurring year-end adjustments). Other than liabilities incurred in the ordinary course of business subsequent to the date of such Financial Statements, there are no liabilities of the Company, whether absolute, contingent or otherwise, which have not been reflected in the Financial Statements, which liabilities, individually or in the aggregate, are material to the financial condition or operating results of the Company. (d) CAPITALIZATION. The capitalization of the Company as of the date hereof is as reflected on the Company's Form 10-QSB for the fiscal quarter ended March 31, 1998 (except for changes resulting from the exercise of options or warrants since such date). (e) NO CONFLICTS. Neither the execution, delivery or performance by the Company of this Agreement nor the consummation of the transactions contemplated hereby has constituted or resulted in, or will constitute or result in, a default under or breach or violation -3- 4 of any term or provision of the Articles of Organization or bylaws of the Company or material contracts to which the Company is a party or Federal or state laws, rules or regulations, writs, order, judgments or decrees which are applicable to the Company or its respective assets. (f) CONSENTS. No approval, consent, order, authorization or other action by, or notice to or filing with, any governmental authority or regulatory or self-regulatory agency, or any other person or entity, and no lapse of a waiting period, is required in connection with the execution, delivery or performance by the Company, or enforcement against the Company, of this Agreement, the issuance and delivery of the Shares or the Warrant Shares or any other transactions contemplated hereby except for the filing of a Form D with the SEC. (g) NO MATERIAL ADVERSE CHANGE. Since March 31, 1998 and except as reflected in a letter describing current operations of the Company previously delivered to the Investor (the "Current Operations Letter"), the business of the Company has been operated in the ordinary course and substantially consistent with past practice, and there has not been any material adverse change in the business, assets, financial condition, results of operations, affairs or prospects of the Company (a "Material Adverse Change"). Since March 31, 1998 and except as reflected in the Current Operations Letter, the Company has not (i) paid any obligation or liability other than, or discharged or satisfied any liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (ii) declared or made any payment or distribution to its stockholders as such, or purchased or redeemed any of its shares of capital stock or other securities, or obligated itself to do so; (iii) mortgaged, pledged or subjected to any lien, charge, security interest or other encumbrance any of its assets, tangible or intangible, except in the ordinary course of business; (iv) sold, transferred or leased any of its assets except for fair value in the ordinary course of business; (v) increased the compensation payable to any of its officers or other employees, consultants or representatives by greater than $50,000; (vi) canceled or compromised any debt or claim, or waived or released any right of material value; (vii) entered into any transaction other than in the ordinary course of business; (viii) issued or sold any shares of capital stock or other securities (other than in connection with the exercise of options or warrants) or granted any options, warrants or other purchase rights with respect thereto; or (ix) agreed to do any of the foregoing (other than pursuant this to Agreement). (h) LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company, or any of their respective directors or officers in their capacities as such, that questions the validity of this Agreement or the issuance of the Shares, or the right of the Company to enter into this Agreement or to consummate the transactions contemplated hereby, or that might result, either individually or in the aggregate, in any Material Adverse Change or in any change in the current equity ownership of the Company. The Company is not a party to and has not had entered against it any order, writ, injunction, judgment, stipulation or decree of any court, administrative agency, commission, regulatory authority, other government agency or instrumentality or self-regulatory agency. -4- 5 (i) NO DEFAULT. The Company is not in violation of or default under any provision of its Articles of Organization or by-laws or in default under (and no event has occurred which, with notice or lapse of time or both, would put the Company in default under), nor has there occurred any event giving others (with notice or lapse of time of both) any rights of termination, amendment, acceleration or cancellation of, any contract, commitment, indenture or instrument to which the Company is a party or by which it or its properties or assets is bound or affected except for possible defaults or rights which would not, individually or in the aggregate, result in a Material Adverse Change. To the best of the Company's knowledge, no other party is in material default under or in material breach or violation of any material contact, commitment or instrument to which the Company is a party or by which any of its properties or assets are bound or affected. (j) COMPLIANCE WITH LAWS. The Company is in compliance and has conducted its business and operations so as to comply with all applicable laws (including, without limitation, environmental laws), ordinances, rules and regulations, judgments, decrees or orders of any court, administrative agency, commission, regulatory authority or other governmental or administrative body or instrumentality, whether domestic or foreign. The Company has not during the past three years received any notice relating to any violation or potential violation of any applicable laws or regulations. (k) TITLE. The Company has good and marketable title to all real and personal property owned by it which is material to the business of the Company free and clear of all liens, encumbrances and defects. Any property, real or personal, held under lease by the Company is held by it under valid and enforceable leases. (l) INTELLECTUAL PROPERTY. The Company owns, or possesses adequate and enforceable rights to use, all trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, permits, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge and, to its knowledge, all patents and patent applications (collectively, "Intangibles") necessary for the conduct of its business. To the knowledge of the Company, the Company has not infringed or currently infringes or is in conflict with any right of any other person with respect to any Intangibles that are material to the conduct of the business of such person. (m) REGISTRATION RIGHTS. The Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity other than the Investor. None of the registration rights disclosed on the Schedule of Exceptions is senior in priority to the registration rights granted in this Agreement. (n) NASDAQ REQUIREMENTS. The Common Stock has been designated for inclusion in the Nasdaq Small Cap Market upon prior application and meets all applicable -5- 6 requirements of the Nasdaq Stock Market ("Nasdaq") Marketplace Rule 4300 Series or any other applicable requirements for such listing. The issuance and sale of the Shares will not, when issued and sold in accordance with this Agreement, violate any applicable Rule of Nasdaq. The Company has not received notification, written or oral, that (i) the termination of the inclusion of the Common Stock on the Nasdaq SmallCap Market is pending or under consideration or (ii) the Company has failed to satisfy any requirement of Nasdaq. The Company does not reasonably anticipate that the Common Stock will be delisted form Nasdaq in the foreseeable future. (o) REGISTRATION STATEMENT. The Company is currently eligible to register the resale of its Common Stock under the Securities Act under a registration statement on Form S-3. To the best of the Company's knowledge, there exist no facts or circumstances that would inhibit or delay the preparation and filing of a registration statement on Form S-3 with respect to the Shares or the Warrant Shares. (p) NO MISREPRESENTATION. No representation or warranty by the Company in this Agreement and no statements of the Company contained in any document (including without limitation any SEC Document), certificate, schedule or other information furnished or to be furnished by or on behalf of the Company pursuant to this Agreement or in connection with the transactions contemplated hereby contains or shall contain any untrue statement of material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading. The Company has delivered true and complete copies of all documents requested by the Investor. (q) ANTI-DILUTION AND OTHER SHARES. No shareholder of the Company or other person or entity has any preemptive right of subscription or purchase or contractual right of first refusal or similar right with respect to the Shares. Issuance of the Shares will not result in the issuance of any additional shares of Common Stock or the triggering of other anti-dilution or similar rights contained in any options, warrants, debentures or other agreements or commitments of the Company. 6. The Investors acknowledge receipt from the Company of the following documents, which they have carefully considered: (a) The investor presentation dated February 19, 1998 describing the Company's business and recent developments concerning the Company and identifying certain risk factors in connection with the purchase of the Shares. (b) The Company's Form 10-KSB for the fiscal year ended June 30, 1997. (c) The Company's Forms 10-QSB for the fiscal quarters ended September 30, 1997, December 31, 1997 and March 31, 1998. -6- 7 (d) the Current Operations Letter. 7. All notices hereunder shall be in writing and shall be deemed to be delivered if in writing addressed as provided below and if either (i) actually delivered at said address or (ii) five business days shall have elapsed after the same shall have been deposited in the United States mails (by first class or certified mail): To the Company at the following address: Precision Optics Corporation, Inc. 22 East Broadway Gardner, MA 01440 Attn: Jack P. Dreimiller, Chief Financial Officer with a copy to: Edward A. Benjamin, Esq. Ropes & Gray One International Place Boston, Massachusetts 02110-2624 To the Investors at the following address: Special Situations Private Equity Fund, L.P. Special Situations Technology Fund, L.P. 153 East 53rd Street, 51st Floor New York, New York 10022 Attn: Austin Marxe Fax No.: (212) 832-5300 With a copy to: Hertzog, Calamari & Gleason 100 Park Avenue New York, New York 10017 Attn: David B. Hertzog Fax No.: (212) 213-1199 Any party may change the address to which notices are to be sent to him, her or it by notifying all the other parties listed above in writing of such address change. 8. This Agreement shall be binding on and inure to the benefit of the Investors' successors, and permitted assigns. -7- 8 9. The representations, warranties, covenants, and agreements contained herein shall survive the execution and delivery of this Agreement, it being understood that the representations and warranties are only being made as of the date hereof or as of a specific date if so indicated in such representation or warranty. 10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of New York, without giving effect to any choice or conflict of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. 11. CONSENT TO JURISDICTION. Each of the parties agrees that all actions, suits or proceedings arising out of or based upon this Agreement or the subject matter hereof may be brought and maintained in the federal and state courts of The State of New York. Each of the parties hereto by execution hereof: (i) hereby irrevocably submits to the jurisdiction of the federal and state courts in The State of New York for the purpose of any action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that he or it is not subject personally to the jurisdiction of the above-named courts, that he or it is immune from extraterritorial injunctive relief or other injunctive relief, that his or its property is exempt or immune from attachment or execution, that any such action, suit or proceeding may not be brought or maintained in one of the above-named courts, that any such action, suit or proceeding brought or maintained in one of the above-named courts should be dismissed on grounds of FORUM NON CONVENIENS, should be transferred to any court other than one of the above-named courts, should be stayed by virtue of the pendency of any other action, suit or proceeding in any court other than one of the above-named courts, or that this Agreement or the subject matter hereof may not be enforced in or by any of the above-named courts. Each of the parties hereto hereby consents to service of process in any such suit, action or proceeding in any manner permitted by the laws of The State of New York, agrees that service of process by registered or certified mail, return receipt requested, at the address specified in Section 7 hereof is reasonably calculated to give actual notice and waives and agrees not to assert by way of motion, as a defense or otherwise, in any such action, suit or proceeding any claim that such service of process does not constitute good and sufficient service of process. [Remainder of this page intentionally left blank.] 9 Intending to be legally bound hereby, the undersigned have duly executed this Agreement as of June 30, 1998. SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. By: /s/ Austin W. Marxe ----------------------------- Title: Managing Director SPECIAL SITUATIONS TECHNOLOGY FUND, L.P. By: /s/ AUSTIN W. MARXE ----------------------------- Title: Managing Director -9- 10 For and in consideration of the above subscription and in reliance upon the Investors' representations and covenants to the Company contained herein, the Company hereby accepts the subscription of the Investors to the extent of 500,000 Shares, and promptly upon receipt in full of the aforesaid payment, the Company will cause certificates for the Shares and the Warrants to be issued and delivered to the Investors, free and clear of any liens, adverse claims, charges, or other encumbrances. PRECISION OPTICS CORPORATION By: /s/ Richard E. Forkey ------------------------ Richard E. Forkey President Dated as of: June 30, 1998 11 EXHIBIT A SCHEDULE OF EXCEPTIONS Section 5(a): Organization and Good Standing The Company has two subsidiaries: Precise Medical, Inc., a Massachusetts corporation, which is inactive, and Woods Precision Optics, Ltd., a Hong Kong corporation, through which the Company conducts sales operations in the Far East. -11- EX-27 7 FINANCIAL DATA SCHEDULE
5 1 12-MOS JUN-30-1998 JUN-30-1998 2,060,146 0 486,070 0 949,993 3,686,079 3,471,589 2,318,380 5,127,478 811,766 208,684 0 0 66,186 4,040,842 5,127,478 4,053,052 4,053,052 3,595,756 3,595,756 2,606,079 0 26,254 (1,947,489) 13,300 (1,960,789) 0 0 0 (1,960,789) (.32) (.32)
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