-----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, CPdfDGIVKnmEn/24KCWBTxlkMGVwzM9K+tN3umBU0Y29iyiKQSGAPeqDH9tS41vT 2OrFBF4nQeTwxRseUEiE9g== 0000950135-07-005013.txt : 20070813 0000950135-07-005013.hdr.sgml : 20070813 20070813161532 ACCESSION NUMBER: 0000950135-07-005013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070813 DATE AS OF CHANGE: 20070813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IPG PHOTONICS CORP CENTRAL INDEX KEY: 0001111928 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 043444218 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33155 FILM NUMBER: 071049229 BUSINESS ADDRESS: STREET 1: 50 OLD WEBSTER ROAD CITY: OXFORD STATE: MA ZIP: 01540 BUSINESS PHONE: 5083731100 MAIL ADDRESS: STREET 1: 50 OLD WEBSTER ROAD CITY: OXFORD STATE: MA ZIP: 01540 10-Q 1 b66175ipe10vq.htm IPG PHOTONICS CORP. e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-33155
 
IPG PHOTONICS CORPORATION
(Exact name of registrant as specified in its charter)
 
     
Delaware   04-3444218
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)
     
50 Old Webster Road, Oxford, Massachusetts   01540
(Address of principal executive offices)   (Zip code)
(508) 373-1100
(Registrant’s telephone number, including area code)
 
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ       NO o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o       Accelerated Filer o       Non-Accelerated Filer þ
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o       NO þ
     As of August 8, 2007, there were 43,338,632 shares of the registrant’s common stock issued and outstanding.
 
 

 


 

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 EX-10.1 Loan Agreement dated as of July 26, 2007
 EX-10.2 Revolving Credit Note dated July 26, 2007
 EX-31.1 Section 302 Certification of CEO
 EX-31.2 Section 302 Certification of CFO
 EX-32 Section 906 Certification of CEO & CFO

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PART I—FINANCIAL INFORMATION
Item 1. Unaudited Interim Financial Statements
IPG PHOTONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
                 
    June 30,     December 31,  
    2007     2006  
    (In thousands, except share and per
share data)
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 46,709     $ 75,667  
Accounts receivable, net
    26,726       22,353  
Inventories, net
    52,691       42,162  
Income taxes receivable
    5,881       80  
Prepaid expenses and other current assets
    7,914       6,586  
Deferred income taxes
    8,717       9,591  
 
           
 
               
Total current assets
    148,638       156,439  
 
               
DEFERRED INCOME TAXES
    3,506       3,801  
 
               
PROPERTY, PLANT AND EQUIPMENT, Net
    81,483       67,153  
 
               
OTHER ASSETS
    6,498       5,099  
 
           
 
               
TOTAL
  $ 240,125     $ 232,492  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
CURRENT LIABILITIES:
               
Revolving line-of-credit facilities
  $ 10,732     $ 2,603  
Current portion of long-term debt
          8,299  
Accounts payable
    10,788       7,640  
Accrued expenses and other liabilities
    14,380       13,940  
Income taxes payable
    1,930       8,289  
 
           
 
               
Total current liabilities
    37,830       40,771  
 
           
 
               
DEFERRED INCOME TAXES
    4,955       232  
 
           
 
               
LONG-TERM DEBT
    20,000       30,068  
 
           
 
               
COMMITMENTS AND CONTINGENCIES
               
 
               
MINORITY INTERESTS
    3,415       2,827  
 
           
 
               
STOCKHOLDERS’ EQUITY:
               
Common stock, $0.0001 par value, 175,000,000 shares authorized, 43,197,920 shares issued and outstanding at June 30, 2007; 42,901,612 shares issued and outstanding at December 31, 2006
    4       4  
Additional paid-in capital
    272,326       271,122  
Notes receivable from stockholders
          (23 )
Accumulated deficit
    (107,391 )     (120,392 )
Accumulated other comprehensive income
    8,986       7,883  
 
           
 
               
Total stockholders’ equity
    173,925       158,594  
 
           
 
               
TOTAL
  $ 240,125     $ 232,492  
 
           
See notes to consolidated financial statements.

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IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2007     2006     2007     2006  
    (In thousand, except per share data)  
NET SALES
  $ 43,952     $ 32,184     $ 85,705     $ 64,927  
 
                               
COST OF SALES
    23,633       18,841       46,055       39,119  
 
                       
 
                               
GROSS PROFIT
    20,319       13,343       39,650       25,808  
 
                       
 
                               
OPERATING EXPENSES:
                               
Sales and marketing
    2,836       1,263       4,745       2,343  
Research and development
    2,388       1,387       4,517       2,622  
General and administrative
    4,989       3,154       9,230       5,813  
 
                       
 
                               
Total operating expenses
    10,213       5,804       18,492       10,778  
 
                       
 
                               
OPERATING INCOME
    10,106       7,539       21,158       15,030  
 
                       
 
                               
OTHER INCOME (EXPENSE), NET:
                               
Interest income (expense), net
    117       (354 )     513       (709 )
Fair value adjustment to Series B Warrants
          (357 )           (2,219 )
Other (expense) income, net
    (8 )     4       36       12  
 
                       
 
                               
Total other income (expense)
    109       (707 )     549       (2,916 )
 
                       
 
                               
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
    10,215       6,832       21,707       12,114  
 
                               
PROVISION FOR INCOME TAXES
    (3,611 )     (1,939 )     (8,118 )     (3,866 )
 
                               
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
    (216 )     (110 )     (588 )     (398 )
 
                       
 
                               
NET INCOME
  $ 6,388     $ 4,783     $ 13,001     $ 7,850  
 
                       
 
                               
NET INCOME PER SHARE:
                               
Basic
  $ 0.15     $ 0.13     $ 0.30     $ 0.22  
Diluted
  $ 0.14     $ 0.12     $ 0.29     $ 0.19  
 
WEIGHTED-AVERAGE SHARES OUTSTANDING:
                               
Basic
    42,974       27,074       42,942       26,923  
Diluted
    45,631       31,156       45,616       30,908  
See notes to consolidated financial statements.

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IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    Six Months Ended  
    June 30,  
    2007     2006  
    (In thousands)  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 13,001     $ 7,850  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    5,410       3,754  
Deferred income taxes
    380       3,063  
Stock-based compensation
    509       126  
Changes related to realized and unrealized (gains)losses on foreign currency transactions
    (350 )     321  
Other
    (34 )     328  
Fair value adjustment to Series B Warrants
          2,219  
Provisions for inventory, warranty & bad debt
    2,072       298  
Minority interests in consolidated subsidiaries
    588       398  
Changes in assets and liabilities that provided (used) cash:
               
Accounts receivable
    (4,651 )     (2,474 )
Inventories
    (11,746 )     (6,389 )
Prepaid expenses and other current assets
    (2,620 )     (1,251 )
Accounts payable
    2,840       678  
Accrued expenses and other liabilities
    (273 )     976  
Income and other taxes payable
    (7,117 )     411  
 
           
 
               
Net cash (used in) provided by operating activities
    (1,991 )     10,308  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (17,859 )     (9,054 )
Proceeds from sale of property, plant and equipment
    78       20  
Employee and stockholder loans repaid
    17       1,071  
 
           
 
               
Net cash used in investing activities
    (17,764 )     (7,963 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from line-of-credit facilities
    20,298       8,517  
Payments on line-of-credit facilities
    (12,118 )     (6,325 )
Principal payments on long-term borrowings
    (18,177 )     (2,688 )
Exercise of employee stock options and related tax benefit from exercise
    851       905  
 
           
 
               
Net cash (used in) provided by financing activities
    (9,146 )     409  
 
           
 
               
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
    (57 )     167  
 
           
 
               
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (28,958 )     2,921  
 
               
CASH AND CASH EQUIVALENTS — Beginning of period
    75,667       8,361  
 
           
 
               
CASH AND CASH EQUIVALENTS — End of period
  $ 46,709     $ 11,282  
 
           
 
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid for interest
  $ 350     $ 716  
 
           
Income taxes paid
  $ 13,940     $ 781  
 
           
See notes to consolidated financial statements.

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IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
     The accompanying interim unaudited consolidated financial statements have been prepared by IPG Photonics Corporation, or “IPG”, “we”, “our”, or “the Company”. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements include our accounts and those of our subsidiaries. All intercompany balances have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in our annual report on Form 10-K for the year ended December 31, 2006.
     In the opinion of our management, the unaudited financial information for the interim periods presented reflects all adjustments necessary for a fair presentation of our financial position, results of operations and cash flows. The results reported in these consolidated financial statements are not necessarily indicative of results that may be expected for the entire year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
     In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 became effective for us beginning January 1, 2007. We identified and reviewed potential uncertainties related to taxes upon the adoption of FIN 48. We determined that the exposure to those uncertainties did not have a material impact on our results of operations or financial condition.
     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. The provisions of SFAS No. 157 are effective for us beginning after January 1, 2008. We have not yet adopted this pronouncement and we are currently evaluating the expected impact that the adoption of SFAS No. 157 will have on our consolidated financial position and results of operations.
     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure requirements relating to the use of fair values within the financial statements. The provisions of SFAS No. 159 are effective for us beginning after January 1, 2008. We have not yet adopted this pronouncement and are currently evaluating the expected impact that the adoption of SFAS No. 159 will have on our consolidated financial position and results of operations.
3. INVENTORIES
     Inventories consist of the following (in thousands):
                 
    June 30,     December 31,  
    2007     2006  
Components and raw materials
  $ 21,964     $ 19,244  
Work-in-process
    18,827       12,886  
Finished goods
    11,900       10,032  
 
           
 
               
Total
  $ 52,691     $ 42,162  
 
           
4. FINANCING ARRANGEMENTS
     The Company’s borrowings under existing financing arrangements consist of the following (in thousands):

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    June 30,     December 31,  
    2007     2006  
Revolving Line-of-Credit Facilities:
               
Euro Overdraft Facilities
  $ 3,159     $ 84  
U.S. Line of Credit
    4,300        
Japanese Line of Credit
          2,519  
Chinese Line of Credit
    3,273        
 
           
 
               
Total
  $ 10,732     $ 2,603  
 
           
 
               
Term Debt:
               
U.S. Construction Loan
  $     $ 5,589  
Subordinated Notes
    20,000       20,000  
Euro Construction Loan
          2,886  
Euro Variable Rate Loan
          6,267  
Other term debt
          3,625  
 
           
 
               
Total term debt
    20,000       38,367  
Less current portion
          (8,299 )
 
           
 
               
Long-term debt
  $ 20,000     $ 30,068  
 
           
Revolving Line-of-Credit Facilities:
     Euro Overdraft Facilities — The Company maintains a syndicated overdraft facility with available principal of Euro 4,895,500 (approximately $6,596,000 at June 30, 2007). Of the total amount, Euro 1,873,000 (approximately $2,524,000 at June 30, 2007) is available at least through June 2010 and Euro 3,022,500 (approximately $4,072,000 at June 30, 2007) is available through September 2007. This facility bears interest at market rates that vary depending upon the bank within the syndicate that advances the principal outstanding (from 6.8% to 9.0% at June 30, 2007). This facility is collateralized by a common pool of the assets of the Company’s German subsidiary, IPG Laser GmbH. At June 30, 2007, the remaining availability under the Euro Overdraft Facility totaled $3,578,000.
     The Company also maintains Euro credit lines in Italy with available principal of Euro 650,000 (approximately $876,000 as of June 30, 2007) which bear interest at rates ranging from 4.2% to 5.3%. At June 30, 2007, the remaining availability under the Euro credit lines was $735,000.
     U.S. Line of Credit — Until July 2007 the Company maintained a credit line with available principal of 80% of eligible receivables, up to $7,000,000, on a revolving basis. This facility bears interest at a variable rate of LIBOR plus 3% (8.3% at June 30, 2007). The facility was collateralized by all the assets held by the U.S. parent company. At June 30, 2007, the remaining availability under the U.S. Line of Credit totaled $1,370,000. The Company repaid all amounts outstanding under this line and terminated this facility in July 2007.
     Japanese Line of Credit — The Company maintains two credit lines with available principal of 100% of eligible receivables, up to JPY 600,000,000 (approximately $4,865,000 at June 30, 2007), on a revolving basis. These facilities bear interest at rates ranging from 2.13% to 2.25% at June 30, 2007. The facility is renewable annually and collateralized by accounts receivable and inventory in Japan. At June 30, 2007, the total and remaining availability under the Japanese Line of Credit totaled $1,674,000.
     Chinese Line of Credit — The Company maintains a credit line with available principal up to RMB 24,951,000 (approximately $3,273,000 at June 30, 2007), on a revolving basis. This facility bears interest at a floating rate of 110% of Renminbi base rate (6.7% at June 30, 2007).
     In July 2007, the Company entered into a new $20.0 million unsecured revolving line of credit expiring in July 2010. The new line of credit replaced the U.S. receivables-based, secured line of credit of up to $7.0 million. The new line of credit bears interest at a variable rate of LIBOR plus 0.8% to 1.2% depending, on the Company’s financial performance.

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     Term Debt:
     In the first quarter of 2007, we used $18.2 million of cash to repay substantially all of our bank term debt outstanding as of December 31, 2006 except for the $20.0 million subordinated, unsecured, variable-rate notes, which mature in 2009. The Company issued subordinated notes to the holders of its Series B convertible redeemable preferred stock upon conversion of their shares in December 2006. The subordinated notes bear interest at the greater of the short-term applicable Federal rate (4.97% at December 31, 2006), as published by the Internal Revenue Service, or 4% in the first year, 7% in the second year and 10% in the third year. The notes mature in December 2009 and may be prepaid without penalty.
5. NET INCOME PER SHARE
     For periods during which the Company had two classes of equity securities issued and outstanding, it followed EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128 (“EITF 03-6”), which established standards regarding the computation of net income per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company. EITF 03-6 requires earnings available to common stockholders for the period, after deduction of preferred stock accretion and deemed dividends related to beneficial conversion features, to be allocated between the common and convertible securities based on their respective rights to receive dividends. Basic net income per share is then calculated by dividing income applicable to common stockholders by the weighted- average number of shares outstanding. EITF 03-6 does not require the presentation of basic and diluted net income per share for securities other than common stock; therefore, the following per share amounts only pertain to the Company’s common stock.
     The Company calculates diluted net income per share under the if-converted method unless the conversion of the convertible preferred stock is dilutive to basic net income per share. To the extent convertible preferred stock is dilutive, the Company calculates diluted net income per share under the two-class method to include the effect of potential common shares.
     The share count used to compute basic and diluted net income per share is calculated as follows (in thousands):
                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2007     2006     2007     2006  
Weighted-average common shares outstanding used to compute basic net income per share:
                               
two classes of equity securities were outstanding for the three and six months ended June 30, 2006
          27,074             26,923  
 
                       
Weighted-average common shares outstanding used to compute basic net income per share after conversion of convertible redeemable preferred stock; one class of equity securities was outstanding for the three and six months ended June 30, 2007
    42,974             42,942        
 
                       
Weighted-average common shares outstanding
    42,974       27,074       42,942       26,923  
Add dilutive common equivalents:
                               
Stock options
    2,657       2,293       2,674       2,196  
Series A preferred stock
                       
Series B preferred stock
                       
Series D preferred stock
                       
Convertible supplier note payable
          1,789             1,789  
 
                       
 
                               
Shares used to compute diluted net income per share
    45,631       31,156       45,616       30,908  
 
                       
     The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on net income per share would have been anti-dilutive (in thousands):
                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2007     2006     2007     2006  
Actual securities excluded because they would have been anti-dilutive
                               
Stock options
    110             110        
Series A preferred stock
          328             358  
Series B preferred stock
          2,944             2,918  
Series D preferred stock
          1,789             1,789  
     The Series B Warrants were only exercisable upon the completion of an initial public offering of the Company’s common stock or the sale, liquidation, or merger of the Company and, as such, any shares that would have been issued upon the exercise of the Series B Warrants were excluded from the computations of net income per share for all applicable periods presented.

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     The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2007     2006     2007     2006  
Calculation of basic net income per share:
                               
Net income for period during which two classes of equity securites were outstanding
  $     $ 4,783     $     $ 7,850  
Accretion of series B preferred stock
          (518 )           (1,036 )
 
                       
 
                               
Net income, net of assumed stock dividends
  $     $ 4,265     $     $ 6,814  
Percent of net income allocable to common stockholders (1)
    100 %     85 %     100 %     85 %
Net income allocable to common stockholders
          3,637             5,811  
Weighted-average common shares outstanding
          27,074             26,923  
Basic net income per share for period during which two classes of equity securites were outstanding
  $     $ 0.13     $     $ 0.22  
 
                       
 
                               
Net income for period during which a single class of equity securites was outstanding
  $ 6,388     $     $ 13,001     $  
Weighted-average common shares outstanding
    42,974             42,942        
Basic net income per share for period during which a single class of equity securites was outstanding
  $ 0.15     $     $ 0.30     $  
 
                       
 
                               
Basic net income per share
  $ 0.15     $ 0.13     $ 0.30     $ 0.22  
 
                       
 
                               
Calculation of diluted net income per share:
                               
Net income allocable to common stockholders
  $ 6,388     $ 3,637     $ 13,001     $ 5,811  
Interest expense on convertible supplier note payable
          64             127  
Net income allocable to dilutive convertible preferred
                       
 
                       
Net income
    6,388       3,701       13,001       5,938  
 
                               
Weighted-average diluted shares outstanding
    45,631       31,156       45,616       30,908  
 
                               
Diluted net income per share
  $ 0.14     $ 0.12     $ 0.29     $ 0.19  
 
                       
 
(1)   Calculation of percentage of net income allocable to common stockholders:
                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2007     2006     2007     2006  
Weighted-average common shares outstanding
    42,974       27,074       42,942       26,923  
Weighted-average anti-dilutive convertible preferred stock outstanding
          5,061             5,065  
 
                       
Weighted-average common shares and preferred shares outstanding
    42,974       32,135       42,942       31,988  
 
                               
Percent of net income allocable to common stockholders
    100 %     85 %     100 %     85 %
Percent of net income allocable to dilutive convertible preferred stockholders
    0 %     0 %     0 %     0 %
6. COMPREHENSIVE INCOME
     Total comprehensive income and its components were as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2007     2006     2007     2006  
Net income
  $ 6,388     $ 4,783     $ 13,001     $ 7,850  
Other comprehensive income:
                               
Foreign currency translation adjustment
    528       1,271       1,103       1,847  
 
                       
Comprehensive income
  $ 6,916     $ 6,054     $ 14,104     $ 9,697  
 
                       
Total accumulated other comprehensive income at each balance sheet date is comprised solely of the cumulative translation adjustment related to our foreign operations.

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7. STOCK OPTIONS
A summary of option activity is presented below:
                                 
                    Weighted-Average        
                    Remaining     Aggregate Intrinsic  
    Number of     Weighted-Average     Contractual Life     Value  
    Options     Exercise Price     (in years)     (in thousands)  
Outstanding — January 1, 2007
    4,392,161     $ 2.70       7.31     $ 93,552  
Granted
    228,002       19.10                  
Exercised
    (296,308 )     1.92                  
Forfeited
    (21,702 )     14.17                  
 
                           
 
                               
Outstanding — June 30, 2007
    4,302,153     $ 3.56       7.04     $ 70,536  
 
                       
 
                               
Exercisable — June 30, 2007
    2,470,612     $ 1.90       5.85     $ 44,598  
Exercisable — January 1, 2007
    2,239,561     $ 1.57       5.87     $ 50,230  
     The weighted-average grant-date fair value of the options granted to employees in the six months ended June 30, 2007 was $13.37. The intrinsic value of the options exercised during the six months ended June 30, 2007 was $5,649,225.
     The total compensation cost related to non-vested awards not yet recorded at June 30, 2007 was $5,430,000, net of estimated forfeitures of 5%, which is expected to be recognized over 3.6 years on a weighted-average basis.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
     We develop and manufacture a broad line of high-performance fiber lasers, fiber amplifiers and diode lasers for diverse applications in numerous markets. Our diverse lines of low, mid and high-power lasers and amplifiers are used in materials processing, communications, medical and advanced applications. We sell our products globally to original equipment manufacturers, or OEMs, system integrators and end users. We market our products internationally primarily through our direct sales force and also through agreements with independent sales representatives and distributors.
     We are vertically integrated such that we design and manufacture all key components used in our finished products, from semiconductor diodes to optical fiber preforms, finished fiber lasers and amplifiers. Since our formation in 1990, we have been focused on developing and manufacturing high-power fiber lasers and amplifiers. We established manufacturing and research operations in Germany in 1994 and in the United States in 1998. In December 2006, we completed our initial public offering of 10,350,000 shares of common stock at $16.50 per share (the “IPO”), comprised of 6,241,379 primary shares and 4,108,621 shares offered by selling stockholders. In connection with the IPO, all of the outstanding shares of our preferred stock were converted into an aggregate of 9,295,558 shares of the Company’s common stock.
     In April 2007, we opened a new sales and service center in Beijing, China by acquiring certain assets and hiring certain staff from a former distributor. Also, we purchased a new 34,000 square foot facility in Beijing for the new operations in China.
Factors and Trends That Affect Our Operations and Financial Results
     In reading our financial statements, you should be aware of the following factors and trends that our management believes are important in understanding our financial performance.
     Net sales. Our net sales have historically fluctuated from quarter to quarter. The increase and decrease in sales from a prior quarter can be affected by the timing of orders received from customers, the shipment, installation and acceptance of products at our customers’ facilities, the mix of OEM orders and one-time orders for products with large purchase prices, and seasonal factors such as the purchasing patterns and levels of activity throughout the year in the regions where we operate. Historically, our net sales have been higher in the second half of the year than in the first half of the year. Furthermore, net sales can be affected by the time taken to qualify our products for use in new applications in the end markets that we serve. The adoption of our products by a new customer or qualification in a new application can lead to an increase in net sales for a period, which may then slow until we further penetrate new markets or customers.
     Gross margin. Our total gross margin in any period can be affected by total net sales in any period, product mix, that is, the percentage of our revenue in that period that is attributable to higher- or lower-power products, and by other factors, some of which are not under our control. Due to the fact that we have high fixed costs, our costs are difficult to adjust in response to changes in demand. Therefore, our manufacturing costs as a percentage of net sales are volatile and can increase or decrease depending on total net sales reported in a period. Our product mix affects our margins because the selling price per watt is higher for low and mid-power devices than for high-power devices. The overall cost of high-power lasers may be partially offset by improved absorption of fixed overhead costs associated with sales of larger volumes of higher-power products. We regularly review our inventory for items that have been rendered obsolete or determined to be excess, and any write-off of such obsolete or excess inventory affects our gross margins.
     Sales and marketing expense. We expect to continue to expand our worldwide direct sales organization, build and expand applications centers, hire additional personnel involved in marketing in our existing and new geographic locations, increase the number of units used for demonstration purposes and otherwise increase expenditures on sales and marketing activities in order to support the growth in our net sales. As such, we expect that our sales and marketing expenses will increase in the aggregate.
     Research and development expense. We plan to continue to invest in research and development to improve our existing components and products and develop new components and products. We plan to increase the personnel involved in research and development and expect to increase other research and development expenses. As such, we expect our research and development expenses will increase in the aggregate.
     General and administrative expense. We expect our general and administrative expenses to continue to increase as we expand headcount to support the growth of the Company, public company reporting obligations and regulatory compliance, incur higher insurance expenses related to directors’ and officers’ insurance and continue to invest in our financial reporting systems. Further, legal expenses are expected to increase in response to pending litigation and may increase in response to any future litigation or intellectual property matters, the timing and amount of which may vary substantially from quarter to quarter.
     Major customers. We have historically depended on a few customers for a large percentage of our annual net sales. The composition of this group can change from year to year. Net sales derived from our five largest customers as a percentage of our net sales were 23% in the six months ended June 30, 2007, and 29%, 37% and 37% for the years ended December 31, 2006, 2005 and 2004, respectively. Sales to our largest

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customer accounted for less than 10% of our net sales in the first half of 2007. We seek to add new customers and to expand our relationships with existing customers. We anticipate that the composition of our net sales to our significant customers will continue to change. If any of our significant customers were to substantially reduce their purchases from us, our results would be adversely affected.
Results of Operations for the three months ended June 30, 2007 compared to the three months ended June 30, 2006
     Net sales. Net sales increased by $11.8 million, or 36.6%, to $44.0 million for the three months ended June 30, 2007 from $32.2 million for the three months ended June 30, 2006. This increase was attributable to higher sales of fiber lasers in materials processing applications, where net sales increased by $10.8 million, or 46.6%, in medical applications, where net sales increased by $1.7 million, or 78.3%, and in advanced applications, where net sales increased by $0.4 million, or 10.9%. These increases were partially offset by a decrease in sales in communications of $1.1 million, or 36.4%. The growth in materials processing sales resulted primarily from increased market penetration for high-power fiber lasers as well as an increase in sales of pulsed fiber lasers. The growth in medical applications resulted primarily from the increased sales of low-power lasers to our major OEM customer in the United States. In the second quarter of 2007, sales of high-power lasers increased by $4.1 million, or 54.6%, to $11.6 million, sales of low-power lasers increased by $2.7 million, or 47.2%, to $8.3 million, and sales of pulsed lasers increased by $2.5 million, or 23.7%, to $13.2 million, as compared to the same period last year. The decrease in communications sales was due to lower sales of fiber amplifiers to our largest U.S. customer due to increased competition as well as completion of a project with a customer in Asia.
     Cost of sales and gross margin. Cost of sales increased by $4.8 million, or 25.5%, to $23.6 million for the three months ended June 30, 2007 from $18.8 million for the three months ended June 30, 2006, as a result of increased sales volume. Our gross margin increased to 46.2% for the three months ended June 30, 2007 from 41.5% for the three months ended June 30, 2006. The increase in gross margin compared to the same period last year is primarily the result of more favorable absorption of our fixed manufacturing costs due to higher production volumes, ongoing initiatives to improve manufacturing efficiencies and continuing decreases in the cost of our internally manufactured optical components, including improvement in high-power fiber modules and packaged diodes. These gains were partially offset by a provision for slow-moving and obsolete inventory of $1.1 million as compared to $0.2 million in the second quarter of 2006.
     Sales and marketing expense. Sales and marketing expense increased by $1.5 million, or over 100%, to $2.8 million for the three months ended June 30, 2007 from $1.3 million for the three months ended June 30, 2006, primarily as a result of an increase of $0.8 million in selling expenses related to an increase in the number of units used for demonstration purposes. To a lesser extent, the increase was due to higher personnel costs related to the expansion of our worldwide direct sales organization, including our new sales and service center in China.
     Research and development expense. Research and development expense increased by $1.0 million, or 71.4%, to $2.4 million for the three months ended June 30, 2007 from $1.4 million for the three months ended June 30, 2006. This increase is primarily due to an increase of $0.7 million in personnel costs to support increased research and development activity. Research and development activity continues to focus on enhancing the performance of our internally manufactured components, refining production processes to improve manufacturing yields and the development of new products operating at different wavelengths and at higher output powers.
     General and administrative expense. General and administrative expense increased by $1.8 million, or 56.3%, to $5.0 million for the three months ended June 30, 2007 from $3.2 million for the three months ended June 30, 2006, primarily due to an increase of $0.8 million in personnel expenses as we expanded the general and administrative function to support the growth of the business and comply with the reporting and regulatory requirements of a public company, higher stock-compensation costs and increased expenses related to our new office in China. Legal, consulting and accounting costs increased by $0.8 million primarily related to audit fees, Sarbanes-Oxley Act compliance costs, tax compliance initiatives, on-going systems implementation and patent litigation defense fees. Additionally, insurance costs increased $0.2 million.
     Interest (income) expense, net. Interest (income) expense, net decreased by $0.5 million to net interest income of $0.1 million for the three months ended June 30, 2007 from net interest expense of $0.4 million for the three months ended June 30, 2006. The change in interest (income) expense, net resulted from lower interest expense incurred after the repayment of all of our term debt in the first quarter of 2007 and higher interest income earned on the net proceeds from our IPO, partially offset by higher utilization of our line-of-credit facilities.
     Fair value adjustment to series B warrants. There was no expense related to the fair value adjustment of the series B warrants for the three months ended June 30, 2007 as compared to $0.4 million for the three months ended June 30, 2006 because we repurchased the series B warrants in December 2006. As a result, there will be no further charges to record the change in the fair value of the series B warrants.
     Provision for income taxes. Provision for income taxes increased by $1.7 million to $3.6 million for the three months ended June 30, 2007 from $1.9 million for the three months ended June 30, 2006, representing an effective tax rate of 35.3% in the three months ended June 30, 2007 as compared to 28.4% in the same period last year. The increase in the provision for income taxes resulted from higher pre-tax income and a higher effective tax rate. Excluding the fair value adjustment to series B warrants, the effective tax rate was 27.0% for the three months ended June 30, 2006. The increase in the effective tax rate in 2007 is primarily due to an effective tax rate applied to U.S.-generated income of approximately 34% in the second quarter of 2007 as compared to an effective rate of zero percent in the second quarter of 2006. The valuation allowance for U.S. federal net operating losses was released in the fourth quarter of 2006 and, accordingly, there is no benefit from the release of the valuation allowance in the second quarter of 2007 for U.S. federal net operating losses used.
     Net income. Net income increased by $1.6 million to $6.4 million for the three months ended June 30, 2007 from $4.8 million for the three months ended June 30, 2006. Net income as a percentage of our net sales decreased by 0.4 percentage points to 14.5% for the three months ended June 30, 2007 from 14.9% for the same period in 2006.

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Results of Operations for the six months ended June 30, 2007 compared to the six months ended June 30, 2006
     Net sales. Net sales increased by $20.8 million, or 32.0%, to $85.7 million for the six months ended June 30, 2007 from $64.9 million for the six months ended June 30, 2006. This increase was attributable to higher sales of fiber lasers in materials processing applications, where net sales increased by $21.8 million or 48.7%, advanced applications, where net sales increased by $2.0 million, or 28.9% and medical applications, where net sales increase by $1.0 million, or 19.8%. These increases were partially offset by a decrease in sales in communications of $4.0 million, or 48.5%. The growth in materials processing sales resulted primarily from increased market penetration for high-power fiber lasers as well as an increase in sales of pulsed and medium-power fiber lasers. In the first six months of 2007, sales of high-power lasers increased by $9.8 million, or 64.8%, to $24.9 million, sales of pulsed lasers increased by $6.4 million, or 33.9%, to $25.1 million and sales of medium-power lasers increased by $2.7 million, or 38.3%, to $9.7 million, as compared to the same period last year. The decrease in communications sales was due to lower sales of fiber amplifiers to our largest U.S. telecom customer due to increased competition as well as completion of a project with a customer in Asia.
     Cost of sales and gross margin. Cost of sales increased by $7.0 million, or 17.9%, to $46.1 million for the six months ended June 30, 2007 from $39.1 million for the six months ended June 30, 2006, as a result of increased sales volume. Our gross margin increased to 46.3% for the six months ended June 30, 2007 from 39.7% for the six months ended June 30, 2006. The increase in gross margin compared to the same period last year is primarily the result of more favorable absorption of our fixed manufacturing costs due to higher production volumes, ongoing initiatives to improve manufacturing efficiencies and continuing decreases in the cost of our internally manufactured optical components, including improvement in high-power fiber modules and packaged diodes. These gains were partially offset by a provision for slow-moving and obsolete inventory of $1.1 million as compared to $0.3 million in the six months ended June 30, 2006.
     Sales and marketing expense. Sales and marketing expense increased by $2.4 million, or over 100%, to $4.7 million for the six months ended June 30, 2007 from $2.3 million for the six months ended June 30, 2006, primarily as a result of an increase of $1.1 million in selling expenses related to an increase in the number of units used for demonstration purposes. To a lesser extent the increase was due to higher personnel costs related to the expansion of our worldwide direct sales organization, including our new sales and service center in China.
     Research and development expense. Research and development expense increased by $1.9 million, or 73.1%, to $4.5 million for the six months ended June 30, 2007 from $2.6 million for the six months ended June 30, 2006. This increase is primarily due to an increase of $1.7 million in personnel costs to support increased research and development activity. Research and development activity continues to focus on enhancing the performance of our internally manufactured components, refining production processes to improve manufacturing yields and the development of new products operating at different wavelengths and at higher output powers.
     General and administrative expense. General and administrative expense increased by $3.4 million, or 58.6%, to $9.2 million for the six months ended June 30, 2007 from $5.8 million for the six months ended June 30, 2006, primarily due to an increase of $1.5 million in personnel expenses as we expanded the general and administrative function to support the growth of the business and comply with the reporting and regulatory requirements of a public company, higher stock-compensation costs and increased expenses related to our new office in China. Legal, consulting and accounting costs increased by $1.7 million due primarily to audit fees, Sarbanes-Oxley Act compliance costs, tax compliance initiatives and patent litigation defense fees. Bad debt expense and insurance costs also increased by $0.4 million each. The increase was partially offset by realized and unrealized gains related to foreign currency of $0.5 million in the first six months of 2007 compared to a $0.1 million loss in the same period last year.
     Interest (income) expense, net. Interest (income) expense, net decreased by $1.2 million to net interest income of $0.5 million for the six months ended June 30, 2007 from net interest expense of $0.7 million for the six months ended June 30, 2006. The change in interest (income) expense, net resulted from lower interest expense incurred after the repayment of all of our term debt in the first quarter of 2007 and higher interest income earned on the net proceeds from our IPO.
     Fair value adjustment to series B warrants. There was no expense related to the fair value adjustment of the series B warrants for the six months ended June 30, 2007 as compared to $2.2 million for the six months ended June 30, 2006 because we repurchased the series B warrants in December 2006. As a result, there will be no further charges to record the change in the fair value of the series B warrants.
     Provision for income taxes. Provision for income taxes increased by $4.2 million to $8.1 million for the six months ended June 30, 2007 from $3.9 million for the six months ended June 30, 2006, representing an effective tax rate of 37.4% in the six months ended June 30, 2007 as compared to 31.9% in the same period last year. The increase in the provision for income taxes resulted from higher pre-tax income and a higher effective tax rate. Excluding the fair value adjustment to series B warrants, the effective tax rate was 27.0% for the six months ended June 30, 2006. The increase in the effective tax rate in 2007 is primarily due to an effective tax rate applied to U.S.-generated income of approximately 34% in the first six months of 2007 as compared to an effective rate of zero percent in the first six months of 2006. The valuation allowance for U.S. federal net operating losses was released in the fourth quarter of 2006 and, accordingly, there is no benefit from the release of the valuation allowance in the first six months of 2007 for U.S. federal net operating losses used.
     Net income. Net income increased by $5.2 million to $13.0 million for the six months ended June 30, 2007 from $7.8 million for the six months ended June 30, 2006. Net income as a percentage of our net sales increased by 3.2 percentage points to 15.2% for the six months ended June 30, 2007 from 12.0% for the same period in 2006.

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Liquidity and Capital Resources
     Our principal sources of liquidity as of June 30, 2007 consisted of cash and cash equivalents of $46.7 million and unused credit lines and overdraft facilities of $7.4 million and working capital (excluding cash) of $64.1 million. This compares to cash and cash equivalents of $75.7 million, unused credit lines and overdraft facilities of $13.8 million and working capital (excluding cash) of $40.0 million as of December 31, 2006. The decrease in cash and cash equivalents of $29.0 million from December 31, 2006 relates primarily to the repayment of long-term debt of $18.2 million and capital expenditures of $17.8 million, partially offset by net proceeds from our credit lines of $8.2 million.
     In the first quarter of 2007, we used $18.2 million of the proceeds from our IPO to repay substantially all of our bank term debt except for the $20.0 million subordinated, unsecured, variable-rate notes described in Note 4 to our consolidated financial statements, which mature in 2009. We expect that the remaining proceeds and our existing lines-of-credit will be sufficient to meet our liquidity and capital needs for the foreseeable future. Our future long-term capital requirements will depend on many factors including our rate of net sales growth, the timing and extent of spending to support development efforts, the expansion of our sales and marketing activities, the timing and introductions of new products, the need to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. We have made no arrangements to obtain additional financing, and there is no assurance that such additional financing, if required or desired, will be available in amounts or on terms acceptable to us, if at all.
Although we repaid substantially all our fixed-term debt in the first quarter of 2007, we intend to maintain and use availability under our lines of credit to finance our short-term working capital requirements that may arise from time to time.
     The following table details our line-of-credit facilities as of June 30, 2007:
                 
Description   Available Principal   Interest Rate   Maturity   Security
Euro Overdraft
  Euro 4.9 million   6.8% – 9.0% depending   September   Common pool of
Facilities (Germany) (1)
  ($6.6 million)   upon principal outstanding   2007 to June 2010   assets of German subsidiary
 
               
Euro Overdraft
  Euro 0.7 million   4.2% - 5.3%   December   Common pool of assets
Facilities (Italy) (1)
  ($0.9 million)       2007   of Italian subsidiary
 
               
U.S. Demand Line (2)
  80% of eligible   LIBOR plus 3.0%   June 2008   All assets held by our U.S.
 
  receivables, up to           parent company (IPG
 
  $7 million           Photonics Corporation)
 
               
Japanese Overdraft
  JPY 600 million   2.13% - 2.25%   September   Pool of assets of
Facility (1)
  ($4.9 million)       2007   Japanese subsidiary
 
               
Chinese Overdraft
  RMB 25 million   110% of RMB base rate   February   Unsecured
Facility
  ($3.3 million)       2008    
 
(1)   The Company is currently in the process of negotiating a new facility to replace these facilities.
 
(2)   This credit facility was terminated and repaid in July 2007. In July 2007, the Company entered into a new $20.0 million unsecured revolving line of credit expiring in July 2010. The new line of credit bears interest at a variable rate of LIBOR plus 0.8% to 1.2%, depending on the Company’s financial performance.
     Operating activities. Cash used in operating activities in the six months ended June 30, 2007 was $2.0 million compared to $10.3 million provided by operating activities in the six months ended June 30, 2006. The increase in cash used in operating activities in the first six months of 2007 compared to the first six months of 2006 primarily resulted from:
  A decrease in income taxes payable of $7.1 million in the first half of 2007 as compared to an increase in income taxes payable of $0.4 million in the same period last year. The decrease in income taxes payable in the first half of 2007 primarily resulted from estimated cash tax payments in Germany which increased by $12.7 million to $13.2 million in the first half of 2007 from $0.5 million for the first half of 2006. The cash taxes paid were offset by the current tax provision for each period; and
 
  An increase in inventory of $11.7 million in the first six months of 2007 as compared to $6.4 million for the first six months of 2006 primarily related to an increase in work-in-process inventory of optical components and sub-assemblies and an increase in purchased components; partially offset by
 
  An increase in net income.
     Given our vertical integration, rigorous and time-consuming testing procedures for both internally manufactured and externally purchased components and the lead time required to manufacture components used in our finished product, the rate at which we turn inventory has historically been low. We do not expect this to change significantly in the future and believe that we will maintain a relatively high level of inventory compared to our cost of sales. As a result we continue to expect to have a significant amount of working capital invested in inventory and for changes in our level of inventory to lead to an increase in cash generated from our operations when it is sold or a decrease in cash generated from our operations at times when the amount of inventory is increasing. A reduction in our level of net sales or the rate of growth of

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our net sales from their current levels would mean that the rate which we are able to convert our inventory into accounts receivable would decrease.
     Investing activities. Cash used in investing activities was $17.8 million and $8.0 million in the six months ended June 30, 2007 and 2006, respectively. The cash used in investing activities in the first six months of 2007 was related to capital expenditures on plant and machinery and equipment primarily in the United States, Germany, China and Russia. The cash used in investing activities in 2006 was related to capital expenditures on plant and machinery and equipment of $9.1 million, primarily in the United States and Germany, which was partially offset by loan repayments of $1.1 million from the stockholders. Capital expenditures in the United States, Germany, China and Russia relate to our new diode wafer growth, fiber, new sales and service center and new production facilities, respectively. We expect to continue to invest in plant and machinery and to use a significant amount of our cash generated from operations to finance capital expenditures. The timing and extent of any capital expenditures in and between periods can have a significant effect on our cash flow. Many of the capital expenditure projects that we undertake have long lead times and are difficult to cancel or defer in the event that our net sales are reduced or if our rate of growth slows, with the result that it would be difficult to defer committed capital expenditures to a later period.
     Financing activities. Cash used by financing activities was $9.1 million in the six months ended June 30, 2007 compared to cash provided by financing activities of $0.4 million in the six months ended June 30, 2006. The cash used in financing activities in the first six months of 2007 was related to repayment of our long-term bank debt, partially offset by the net proceeds from the use of our credit lines. Cash provided by financing activities in the first six months of 2006 included $0.9 million of proceeds from the exercise of stock options, partially offset by repayments of long-term debt.
Cautionary Statement Regarding Forward-Looking Statements
     This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information are forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.
     The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to accurately predict and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1, “Business” and Item 1A, “Risk Factors” of Part I of our Annual Report on Form 10-K for the period ended December 31, 2006. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to rely on such forward-looking information. We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Recent Accounting Pronouncements
     In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 became effective for us beginning January 1, 2007. We identified and reviewed potential uncertainties related to taxes upon the adoption of FIN 48. We determined that the exposure to those uncertainties did not have a material impact on our results of operations or financial condition.
     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. The provisions of SFAS No. 157 are effective for us beginning after January 1, 2008. We have not yet adopted this pronouncement and we are currently evaluating the expected impact that the adoption of SFAS No. 157 will have on our consolidated financial position and results of operations.
     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure requirements relating to the use of fair values within the financial statements. The provisions of SFAS No. 159 are effective for us beginning after January 1, 2008. We have not yet adopted this pronouncement and are currently evaluating the expected impact that the adoption of SFAS No. 159 will have on our consolidated financial position and results of operations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
     We are exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our cash and cash equivalents and our debt and foreign exchange rate risk.
     Interest rate risk. Our investments have limited exposure to interest risk. To minimize this risk, we maintain a portfolio of cash, cash equivalents and short-term investments, consisting primarily of bank deposits, money market funds and short-term government funds. The interest rates are variable and fluctuate with current market conditions. Because of the short-term nature of these instruments, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or results of operations.
     Our exposure to interest risk also relates to the increase or decrease in the amount of interest expense we must pay on our bank debt and borrowings on our bank credit facilities. The interest rate on our existing bank debt is currently fixed except for our U.S. demand line of credit. The rates on our Euro overdraft facilities in Germany and Italy and our Japanese Yen overdraft facility are fixed for twelve-month periods. Approximately 85% of our outstanding debt had a fixed rate of interest as of June 30, 2007. All of our U.S. and German term debt was repaid in the first quarter of 2007 except for the $20 million of subordinated notes issued to our series B stockholders upon completion of our IPO. We do not believe that a 10% change in market interest rates would have a material impact on our financial position or results of operations.
     Exchange rates. Due to our international operations, a significant portion of our net sales, cost of sales and operating expenses are denominated in currencies other than the U.S. dollar, principally the Euro and the Japanese Yen. As a result, our international operations give rise to transactional market risk associated with exchange rate movements of the U.S. dollar, the Euro and the Japanese Yen. Charges related to losses on foreign exchange transactions are reported as a component of general and administrative expense and totaled a $0.5 million gain and a $0.1 million loss in the six months ended June 30, 2007 and 2006, respectively.
     Historically, we have not utilized any derivative instruments or other measures to protect us against foreign currency exchange rate fluctuations. We will continue to analyze our exposure to currency exchange rate fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations. However, exchange rate fluctuations may adversely affect our financial results in the future.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
     Under the supervision of our chief executive officer and our chief financial officer, our management has evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our chief executive officer and our chief financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective.
Changes in Internal Controls
     There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
     From time to time, we are party to various legal proceedings and other disputes incidental to our business. There have been no material developments in the second quarter of 2007 with respect to those proceedings previously reported in our Annual Report on Form 10-K for the year ended December 31, 2006.
Item 1A. Risk Factors
     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results and the risk factor below. The risks described in our Annual Report on Form 10-K and below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
     The markets for our products are highly competitive and increased competition could increase our costs, reduce our sales or cause us to lose market share.
     The industries in which we operate are characterized by significant price and technological competition. Our fiber laser and amplifier products compete with conventional laser technologies and amplifier products offered by several well-established companies, some of which

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are larger and have substantially greater financial, managerial and technical resources, more extensive distribution and service networks, greater sales and marketing capacity, and larger installed customer bases than we do. Also, we compete with widely used non-laser production methods, such as resistance welding. We believe that competition will be particularly intense from makers of CO2 and YAG lasers, as these makers of traditional laser solutions may lower prices to maintain current market share and have committed significant research and development resources to pursue opportunities related to these technologies.
     We also face competition from a growing number of fiber laser makers. We also expect competition from established laser makers that may have started or may start programs to develop and sell fiber lasers or solid state laser technology alternatives to fiber lasers Several established laser makers and others have recently introduced low and high-power fiber lasers, or have announced plans to develop fiber-based lasers, that would compete with our products. Because many of the components required to develop and produce low-power fiber lasers and amplifiers are commercially available, barriers to entry are relatively low, and we expect new competitive products to be introduced. We may not be able to successfully differentiate our current and any future products from our competitors’ products and current or prospective customers may not consider our products to be superior to competitors’ products. To maintain our competitive position, we believe that we will be required to continue a high level of investment in research and development, application development and customer service and support, and to react to pricing conditions. We may not have sufficient resources to continue to make these investments and we may not be able to make the technological advances or price adjustments necessary to maintain our competitive position. We also compete against our OEM customers’ internal production of competitive laser technologies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     None.
Item 3. Defaults Upon Senior Securities
     None.
Item 4. Submission of Matters to a Vote of Security Holders
     At the annual meeting of stockholders of IPG Photonics Corporation held on June 12, 2007, the stockholders considered and voted upon proposals to (i) re-elect the nine members of our board of directors to one-year terms and (ii) ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2007. Of the 39,987,570 shares present, the following number of shares voted for, against or withheld and abstained:
  1.   Re-election of directors:
                 
Nominee   Votes For   Votes Withheld
Valentin P. Gapontsev, Ph.D.
    39,746,401       125,169  
Eugene Shcherbakov, Ph.D.
    39,736,732       134,838  
Igor Samartsev
    34,177,325       5,694,245  
Robert A. Blair
    39,611,068       260,502  
Michael C. Child
    39,814,777       56,793  
John H. Dalton
    39,732,887       138,683  
Henry E. Gauthier
    39,817,910       53,660  
William S. Hurley
    39,787,644       83,926  
William F. Krupke, Ph.D.
    39,790,277       81,293  
  2.   Ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for 2007:
         
Votes For   Votes Withheld   Abstentions
39,802,984
  39,462   29,124
Item 5. Other Information
     None.

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Item 6. Exhibits
     (a) Exhibits
     
Exhibit No.   Description
 
10.1
  Loan Agreement dated as of July 26, 2007, between IPG Photonics Corporation and Bank of America, N.A.
 
   
10.2
  Revolving Credit Note dated July 26, 2007 by IPG Photonics Corporation
 
   
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
 
   
32
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  IPG PHOTONICS CORPORATION
 
 
Date: August 10, 2007   By:   /s/ Valentin P. Gapontsev    
    Valentin P. Gapontsev   
    Chairman and Chief Executive Officer
(Principal Executive Officer) 
 
 
         
     
Date: August 10, 2007   By:   /s/ Timothy P.V. Mammen    
    Timothy P.V. Mammen   
    Vice President and Chief Financial Officer
(Principal Financial Officer) 
 
 

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EX-10.1 2 b66175ipexv10w1.htm EX-10.1 LOAN AGREEMENT DATED AS OF JULY 26, 2007 exv10w1
 

Exhibit 10.1
LOAN AGREEMENT
THIS LOAN AGREEMENT dated as of July 26, 2007, is by and between IPG PHOTONICS CORPORATION, a Delaware corporation with a principal place of business at 50 Old Webster Road, Oxford, Massachusetts 01540 (the “Borrower”) and BANK OF AMERICA, N.A., a national banking association with an office at 100 Front Street, Worcester, Massachusetts 01608 (the “Bank”).
W I T N E S S E T H:
BACKGROUND. The Borrower has requested the Bank to lend it up to the sum of $25,000,000.00 on a revolving line of credit basis, and the Bank is willing to do so upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises herein contained, and each intending to be legally bound hereby, the parties agree as follows:
ARTICLE 1.0 DEFINITIONS
As used herein:
Affiliate” means, as to any Person, each other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or under common control with, such Person.
Agreement” means this Loan Agreement (together with any and all schedules and exhibits attached from time to time hereto), as the same may from time to time be amended or supplemented in a writing signed by the parties hereto.
Automatic Payments Deposit Account” means the Borrower’s checking account established with the Bank as designated in writing from the Borrower, from which Automatic Payments may be deducted by the Bank.
Automatic Payments” means any and all interest or principal and interest installment payments due under the Note.
Bank” has the meaning ascribed to such term in the preamble of this Agreement.
Beneficiary” means a beneficiary of a Commercial Letter of Credit issued pursuant to Section 2.04 hereof.
Borrower” has the meaning ascribed to such term in the preamble of this Agreement.
Business Day” means any day other than a Saturday, Sunday or day which shall be in The Commonwealth of Massachusetts a legal holiday or day on which banking institutions are

 


 

required or authorized to close. If the Note or any payment thereunder or under this Agreement becomes due on a day which is not a Business Day, the due date of the Note or payment shall be extended to the next succeeding Business Day, and such extension of time shall be included in computing interest and fees in connection with such payment.
Cash Flow” means, for any applicable fiscal period, net income after income taxes, less income or plus loss from discontinued operations and extraordinary items, plus depreciation, depletion, amortization and other non-cash charges, plus Interest on all Obligations, less dividends, withdrawals and other distributions, less unfinanced capital expenditures in excess of $15,000,000.00 per year during each of the first two years beginning with the date of this Agreement and in excess of $0 thereafter, provided that if the Borrower shall raise additional equity from capital markets after the date of this Agreement, an amount equal to the quotient of 60% of the net proceeds of the primary shares offered by the Borrower divided by the remaining fiscal periods shall be excluded from the total of unfinanced capital expenditures. For the purposes of this definition, the terms “depreciation” and “amortization” shall have the meanings ascribed to them in accordance with GAAP.
Closing” has the meaning ascribed such term in Section 3.01.
Commercial Letter of Credit Fee” has the meaning ascribed to such term in Section 2.04(A)(3).
Commercial Letters of Credit” means any and all commercial or standby letters of credit or bank guarantees that may be issued by the Bank from time to time to third parties for the benefit of the Borrower pursuant to Section 2.04 of this Agreement.
Debt Service Coverage Ratio” means, for any applicable fiscal period, the ratio, calculated on a consolidated basis, of (A) Cash Flow divided by (B) required principal payments on long term debt, plus partial payments of Subordinated Indebtedness that are not required or scheduled to be made, plus Interest paid or to be paid for such period less payments made to fully retire Subordinated Indebtedness if paid in cash on the Borrower’s balance sheet at such time or raised through capital market transactions or financing furnished by the Bank.
EBITDA” means, for any applicable fiscal period, calculated on a consolidated basis, net income less income or plus loss from discontinued operations and extraordinary items, plus income taxes, plus Interest plus depreciation, depletion, amortization and other non-cash charges, all as determined in accordance with GAAP.
Event of Default” has the meaning provided in Section 6.01.
Facility Fee” has the meaning ascribed to such term in Section 2.07.
Financial Statements” means the financial statements described on Exhibit 1.0(A) attached to this Agreement.
Foreign Borrowers” means each and every of IPG Japan, IPG India, IPG Italy, IPG Korea and IPG China.

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Foreign Commitments” means $12,000,000.00 of credit under each and every credit facility established or to be established by the Bank or its affiliates for the benefit of the Foreign Borrowers.
Funded Debt” means the sum of all Indebtedness for borrowed money of the Borrower on a consolidated basis (including, without limitation, all Obligations) net of inter-company indebtedness.
GAAP” means, generally accepted accounting principles applied consistently, with such changes or modifications thereto as may be approved in writing by the Bank.
Guaranty” means a Continuing Guaranty in the form of Exhibit 1.0(B) attached hereto with respect to each of the Foreign Borrowers or a Subsidiary on whose behalf the Bank is issuing a Commercial Letter of Credit, such Continuing Guaranty to be executed by the Borrower and delivered to the Bank contemporaneously with the establishment of each credit facility constituting a part of the Foreign Commitments or issuance of the applicable Commercial Letter of Credit.
Indebtedness” means, as to the Borrower or any Subsidiary, all items of indebtedness, obligation or liability whether joint or several, matured or unmatured, liquidated or unliquidated, direct or contingent, including without limitation:
     (A) All indebtedness guarantied, directly or indirectly, in any manner, or endorsed (other than for collection or deposit in the ordinary course of business) or discounted with recourse;
     (B) All indebtedness in effect guarantied, directly or indirectly, through agreements, contingent or otherwise: (1) To purchase such indebtedness; or (2) to purchase, sell or lease (as lessee or lessor) property, products, materials, or supplies or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such indebtedness or to insure the owner of the indebtedness against loss; or (3) to supply funds to, or in any other manner invest in, the debtor;
     (C) All indebtedness secured by (or for which the holder of such indebtedness has a right, contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance upon property owned or acquired subject thereto, whether or not the liabilities secured thereby have been assumed; and
     (D) All indebtedness incurred as the lessee of goods or services under leases that, in accordance with GAAP, should not be reflected on the lessee’s balance sheet.
Intellectual Property” means trademarks, service marks, trade names, trade styles, logos, goodwill, trade secrets, patents, and licenses acquired under any statutory, common law or registration process in any state or nation at any time, or under any agreement executed with any person or entity at any time. The term “license” refers not only to rights granted by agreement

3


 

from the owner of patents, trade marks, service marks and the like, but also to rights granted by a franchiser under a franchise or similar agreement. The foregoing enumeration is not intended as a limitation of the meaning of the word “license.
IPG China” shall mean IPG (BEIJING) FIBER LASER TECHNOLOGY CO., LTD., a Chinese corporation with a principal place of business at A10 Long Qing St. No. 2 Building, Beijing Eco. & Tech. Zone, Beijing, China.
IPG Germany” shall mean IPG LASER GmbH, a German company with a principal place of business at Siemensstrasse 7, D-57299 Burbach, Germany.
IPG India” shall mean IPG PHOTONICS (INDIA) PVT. LTD., an Indian corporation with a principal place of business at Tirumala Tech Park, No. 27, 1st Cross, 2nd Phase, Doddanekundi Industrial Area, Mahadevapura Post, Bangalore 560 048, India.
IPG Italy” shall mean IPG FIBERTECH S.r.l., an Italian corporation with a principal place of business at Via Pisacone, 46, 20025 Legnano (MI), Italy.
IPG Japan” shall mean IPG PHOTONICS JAPAN LIMITED, a Japanese corporation with a principal place of business at 7-16, Shirokane 2-Chome, Minato-ku, Tokyo 108-0072, Japan.
IPG Korea” shall mean IPG PHOTONICS (KOREA) LTD., a Korean corporation with a principal place of business at Daega Bld. 3rd Floor, 641-11 Bongmyung-Dong, Yuseong-Gu, Daejon, Korea.
IPG Russia” shall mean IRE – POLUS CO., a Russian company with a principal place of business at Vvedenskogo Square 1, Fryazina, Moscow 1411190, Russia.
Interest” means all interest expense and letter of credit fees due during any fiscal period of the Borrower, calculated in accordance with GAAP.
Laws” means all ordinances, statutes, rules, regulations, orders, injunctions, writs or decrees of any government or political subdivision or agency thereof, or of any court or similar entity established by any thereof.
Loan” means the revolving credit loan facility evidenced by the Note.
Loan Documents” means each and every of this Agreement and the Note and each other document executed or delivered to the Bank in connection with the Loan.
Note” means the Revolving Credit Note referred to in Section 2.03, as supplemented, amended or replaced (whether pursuant to Section 2.02(B)(3) or otherwise).
Obligations” is intended to be used in its most comprehensive sense and means each and every obligation of the Borrower to the Bank of every kind and description, whether direct or indirect, absolute or contingent, primary or secondary, joint or several, due or to be come due, now

4


 

existing or hereafter arising or acquired and whether by way of loan, guaranty, discount, letter of credit, lease or otherwise, including without limitation, the following obligations:
     (A) To pay the principal of, and interest on, the Note in accordance with the terms thereof and to satisfy all other liabilities to the Bank, whether hereunder or otherwise, whether now existing or hereafter incurred, matured or unmatured, direct or contingent, joint or several, including any extensions, modifications, renewals thereof and substitutions therefor.
     (B) To repay to the Bank all amounts advanced by the Bank hereunder or otherwise on behalf of the Borrower, including, but without limitation, advances for principal or interest payments to prior secured parties, mortgagees, or lienors, or for taxes, levies, insurance, rent, or repairs to, or maintenance or storage of, any collateral;
     (C) To perform and observe all covenants, agreements and undertakings of the Borrower pursuant to the terms and conditions of this Agreement and the Note or any other agreement or instrument now or hereafter delivered to the Bank by the Borrower;
     (D) All obligations under any interest rate swap agreement, foreign exchange contract, any cap, floor or hedging agreement or other similar agreement, or other financial agreement or arrangement designed to protect the Borrower against fluctuations in any interest rate charged by the Bank under the Note or otherwise, including any obligations of the Borrower arising out of or in connection with any Automated Clearing House (“ACH”) Agreement relating to the processing of ACH transactions, together with all fees, expenses, charges and other amounts owing by or chargeable to the Borrower under any ACH Agreement;
     (E) All obligations to reimburse the Bank, on demand, in connection with overdrafts and other amounts due to the Bank under any existing or future agreements relating to cash management services; and
     (F) All obligations to reimburse the Bank, on demand, for all of the Bank’s expenses and costs, including without limitation the reasonable fees and expenses of its counsel, in connection with the preparation, administration, amendment, modification, or enforcement of this Agreement and the documents required hereunder or related hereto, including, without limitation, any proceeding brought, or threatened, to enforce payment of any of the obligations referred to in the foregoing Paragraphs (A) through (E).
Permitted International Borrowings” means up to $15,000,000.00 of credit to be extended to IPG Germany and IPG Russia under loans made outside the United States of America by foreign banking institutions.
Permitted Liens” means:
     (A) Liens for taxes, assessments or similar charges, incurred in the ordinary course of business, that are not yet due and payable;

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     (B) Pledges or deposits made in the ordinary course of business to secure payment of worker’s compensation, or to participate in any fund in connection with worker’s compensation, unemployment insurance, old-age pensions or other social security programs;
     (C) Liens of mechanics, materialmen, repairmen, warehousemen, carriers or other like liens, securing obligations incurred in the ordinary course of business that are not yet due and payable;
     (D) Good faith pledges or deposits not exceeding an aggregate amount of $500,000.00 made in the ordinary course of business to secure performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, not in excess of thirty percent (30%) of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business;
     (E) Encumbrances consisting of zoning restrictions, easements or other restrictions on the use of real property, none of which materially impairs the use of such property by the Borrowers in the operation of their business, and none of which is violated in any material respect by existing or proposed structures or land use;
     (F) Liens in favor of the Bank;
     (G) Existing liens set forth or described on Exhibit 4.01(I), attached hereto and made a part hereof;
     (H) Purchase money security interests granted to secure the purchase price of assets, the purchase of which does not violate this Agreement or any instrument required hereunder; and
     (I) Liens securing Indebtedness permitted by this Agreement; and
     (J) The following, if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings, so long as levy and execution thereon have been stayed and continue to be stayed and they do not, in the aggregate, materially detract from the value of the property of the Borrower or any Subsidiary, or materially impair the use thereof in the operation of its business:
     (1) Claims or liens for taxes, assessments or charges due and payable and subject to interest or penalty;
     (2) Claims, liens and encumbrances upon, and defects of title to, real or personal property, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits;
     (3) Claims or liens of mechanics, materialmen, warehousemen, carriers or other like liens; and

6


 

     (4) Adverse judgments on appeal.
Person” means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, joint venture, court or government, or political subdivision or agency thereof.
Records” means correspondence, memoranda, tapes, discs, papers, books and other documents, or transcribed information of any type, whether expressed in ordinary or machine readable language.
Revolving Credit Loan Commitment” means a revolving line of credit facility up to $20,000,000.00, less the Foreign Commitments, subject to increase in accordance with the provisions of and as more fully set forth in Section 2.02 of this Agreement.
Revolving Credit Outstandings” means, at any time, the sum of (i) the aggregate outstanding principal balance of the Loan at such time plus (ii) the aggregate maximum amount that Beneficiaries may draw on Commercial Letters of Credit at such time.
Revolving Credit Termination Date” means June 30, 2010 or such other date as is agreed to by the Bank in a written instrument executed by a duly authorized officer of the Bank, provided that the Borrower may elect to terminate this Agreement upon at least fifteen (15) days prior written notice to the Bank and full, final and indefeasible payment of all the then outstanding Obligations.
Subordinated Indebtedness” means all Indebtedness incurred at any time by the Borrower or any Subsidiary, the repayment of which is subordinated to the Loan in form and manner satisfactory to the Bank. All existing Subordinated Indebtedness is so specified in Exhibit 1.0(C).
Subordinated Notes” means each and every of the notes aggregating $20,000,000.00 issued to the noteholders set forth on Exhibit 1.0(C).
Subsidiary” means any Affiliate that is directly, or indirectly through one or more intermediaries, controlled by the Borrower or not less than 50% of the voting capital stock of which is owned, directly or through one or more intermediaries, by the Borrower.
$” or “dollars” denotes lawful currency of the United States of America.
Accounting. Accounting terms used and not otherwise defined in this Agreement have the meanings determined by, and all calculations with respect to accounting or financial matters unless otherwise provided herein shall be computed in accordance with, GAAP.

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ARTICLE 2.0 THE CREDIT FACILITIES
2.01 Advances on the Loan.
All advances to or for the benefit of the Borrower will be charged to loan accounts established in the name of the Borrower on the Bank’s books.
2.02 General Terms of the Loan.
     (A) Subject to the terms hereof, the Bank will lend the Borrower, from time to time until the Revolving Credit Termination Date, such sums as the Borrower may request (but in the case of LIBOR Rate Loans, at least $100,000.00) by reasonable same day notice to the Bank, received by the Bank not later than 11:00 A.M. of such day. The Borrower may borrow, repay without penalty or premium and reborrow hereunder, from the date of this Agreement until the Revolving Credit Termination Date, either the full amount of the Revolving Credit Loan Commitment or any lesser sum which is at least $100,000.00. The Revolving Credit Outstandings shall at no time exceed the Revolving Credit Loan Commitment, and if, at any time, an excess shall for any reason exist, the full amount of such excess, together with accrued and unpaid interest thereon as herein provided, shall be immediately due and payable in full.
     (B) The Borrower may elect to increase availability under the Revolving Credit Loan Commitment to $25,000,000.00 in increments of $2,500,000.00 each, upon thirty (30) days prior written notice by the Borrower to the Bank, such increase to be subject to and conditioned upon the following:
     (1) no Event of Default shall have occurred, or with the passage of time would occur, as of the date of the Borrower’s notice to the Bank pursuant to this Section 2.02(B) or as of the effective date of such increase;
     (2) the Borrower shall have provided the Bank with a compliance certificate in form and content satisfactory to the Bank; and
     (3) the Borrower shall have executed and delivered to the Bank a Revolving Credit Note in the form of Exhibit 2.03 attached hereto but in the applicable face amount in substitution for the original Note.
2.03 The Note.
The Revolving Credit Loan Commitment shall be evidenced by a Revolving Credit Note due and payable on the Revolving Credit Termination Date, in the form attached hereto as Exhibit 2.03.
2.04 Commercial Letters of Credit
     (A) From time to time prior to the Revolving Credit Termination Date, the Bank shall issue Commercial Letters of Credit on account of the Borrower or a Subsidiary subject to the following conditions:

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     (1) Any such Commercial Letters of Credit shall be issued as a trade letter of credit, standby letter of credit or bank guarantee only to (i) a supplier or to a seller of goods which purchased goods will become a part of the Inventory or other assets of the Borrower, (ii) governmental authorities or bonding companies to secure statutory obligations of the Borrower, including, without limitation, worker’s compensation, disability, unemployment compensation or environmental Laws, or (iii) a customer who is purchasing goods or services from the Borrower or a Subsidiary;
     (2) No Beneficiary shall be an Affiliate (excluding a Subsidiary);
     (3) The Borrower agrees to pay to the Bank a quarterly fee with respect to each Commercial Letter of Credit payable at the end of each calendar quarter (in each case, a “Commercial Letter of Credit Fee”) in accordance with Exhibit 2.04(A)(3) attached hereto. Whenever an Event of Default exists and is outstanding, the Commercial Letter of Credit Fee hereunder shall, at the option of the Bank, be increased to a per annum fee which is two percent (2%) per annum greater that that fee which would otherwise be applicable hereunder;
     (4) No such Commercial Letter of Credit shall have an expiration date that is later than the Revolving Credit Termination Date unless otherwise agreed to by the Bank, excepting only Commercial Letters of Credit in amounts acceptable to the Bank, which may have expiration date(s) no later than one (1) year beyond the Revolving Credit Termination Date;
     (5) Each such Commercial Letter of Credit shall be issued pursuant to such agreements and upon such terms and conditions as shall be required by the Bank;
     (6) No Event of Default shall have occurred hereunder at the time of issuance of such Commercial Letter of Credit;
     (7) The aggregate face amount of all Commercial Letters of Credit at any time outstanding shall not exceed the amount available under the Revolving Credit Loan Commitment at such time; and
     (8) In the case of a Commercial Letter of Credit issued on behalf of a Subsidiary, the Borrower has first executed and delivered to the Bank a Guaranty with respect to such Subsidiary.
     (B) The aggregate face amount of all Commercial Letters of Credit at any time outstanding shall be included in the amount of the Revolving Credit Outstandings.
2.05 Interest.
     (A) Indebtedness due under the Note shall bear interest at the rates and calculated in the manner set forth in the Note.

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     (B) All agreements between Borrower and the Bank are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to the Bank for the use or the forbearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term “applicable law” means the law in effect as of the date hereof provided, however that in the event there is a change in the law which results in a higher permissible rate of interest, then the Note shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of Borrower and Bank in the execution, delivery and acceptance of the Note to contract in strict compliance with the laws of The Commonwealth of Massachusetts from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof, of the Note or of any of the other Loan Documents at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from any circumstances whatsoever the Bank should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. This provision shall control every other provision of all agreements between the Borrower and the Bank.
2.06 Payment to the Bank.
The Bank shall periodically send the Borrower statements of all amounts due on the Loan, which statements shall be considered correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within thirty (30) days of its receipt of any statement that it deems to be incorrect. Notwithstanding the foregoing, any errors made by the Bank shall be corrected if brought to the attention of the Bank no later than ninety (90) days after termination of the Loan. At its sole discretion, the Bank may charge against any deposit or other account of the Borrower all or any part of any amount due with respect to the Obligations.
2.07 Facility Fee.
The Borrower shall pay to the Bank, quarterly in arrears, as of the last day of each and every calendar quarter, a fee calculated at an annual rate based upon a 360-day year for the actual number of days outstanding, for each quarter, based on a percentage of the average unused portion of the Revolving Credit Loan Commitment (the “Facility Fee”). Notwithstanding the foregoing, the percentage to be used in calculation of the Facility Fee shall increase or decrease based upon the ratio of Funded Debt to EBITDA, as follows:
         
Ratio of Funded Debt to EBITDA   Unused Facility Fee
less than 1.0 to 1.0
    .15 %
 
       
equal to or greater than 1.0 to 1.0, but less than 1.5 to 1.0
    .20 %
 
       
equal to or greater than 1.5 to 1.0, but less than 2.0 to 1.0
    .25 %

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ARTICLE 3.0 CONDITIONS PRECEDENT
The obligation of the Bank to make the Loan is subject to the following conditions precedent: 3.01 Documents Required for the Closing.
The Borrower shall have delivered to the Bank, prior to the initial disbursement of the Loan (the “Closing”), the following:
     (A) The Note, duly executed by the Borrower, in the form attached hereto as Exhibit 2.03;
     (B) A certificate (dated the date of the Closing) of the corporate secretary or assistant secretary, as the case may be, of the Borrower, certifying as to:
     (1) the incumbency and signatures of the officer(s) signing this Agreement, the Note, the other Loan Documents and each other document to be delivered pursuant hereto,
     (2) the resolutions of the board of directors authorizing the execution, delivery and performance of this Agreement, the Note, the other Loan Documents, and each other document to be delivered pursuant hereto,
     (3) the By-Laws;
     (C) With respect to the Borrower, certificates of tax good standing and corporate good standing and legal existence, dated as of the most recent date practicable, issued by the Delaware Department of Revenue and Secretary of State of Delaware as to the tax good standing and the legal existence and corporate good standing of the Borrower and a certificate of registration as a foreign corporation with The Commonwealth of Massachusetts;
     (D) A copy, certified as of the most recent date practicable by the Secretary of the applicable state or nation of incorporation, of the charter documents of the Borrower and all amendments thereto, together with a certificate (dated the date of the Closing) of the corporate secretary or assistant secretary, as the case may be, of the Borrower to the effect that such charter documents have not been further amended since the date of the aforesaid certification of the Secretary of the State of Delaware;
     (E) A written opinion or opinions of legal counsel for the Borrower, dated the date of the Closing and addressed to the Bank, in form satisfactory to the Bank and its counsel;

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     (F) A certificate, dated the date of the Closing, signed by the president, a vice president, the treasurer or an assistant treasurer, the chief executive officer or the chief financial officer, of the Borrower and to the effect that:
     (1) The representations and warranties set forth in Section 4.01 are true as of the date of the Closing; and
     (2) No Event of Default hereunder, and no event which, with the giving of notice or passage of time or both, would become such an Event of Default, has occurred as of such date; and
     (G) Copies of all documents evidencing the terms and conditions of any debt specified as Subordinated Indebtedness on Exhibit 1.0(C).
3.02 Documents Required for Subsequent Disbursements.
At the time of, and as a condition to, any disbursement of any part of the Loan to be made by the Bank subsequent to the Closing, the Bank may require the Borrower to deliver to the Bank a certificate, dated the date on which any such disbursement is to be made, signed by the president, a vice president, treasurer, chief executive officer, chief financial officer, or other duly authorized officer of the Borrower, or by a vice president, treasurer or other duly authorized officer of the Borrower, and to the effect that:
     (A) As of the date thereof, no Event of Default has occurred and is continuing, and no event has occurred and is continuing that, but for the giving of notice or passage of time or both, would be an Event of Default; and
     (B) Each of the representations and warranties contained in Section 4.01 is true and correct in all material respects as if made on and as of the date of such disbursement (except for such representations and warranties made as of a particular date).
3.03 Certain Events.
At the time of, and as a condition to, the Closing and each disbursement of any part of the Loan to be made by the Bank at or subsequent to the Closing:
     (A) No Event of Default shall have occurred and be continuing, and no event shall have occurred and be continuing that, with the giving of notice or passage of time or both, would be an Event of Default; and
     (B) All of the Loan Documents shall have remained in full force and effect.
3.04 Legal Matters.
At the time of the Closing, all legal matters incidental thereto shall be satisfactory to Bowditch & Dewey, LLP, legal counsel to the Bank.

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ARTICLE 4.0 REPRESENTATIONS AND WARRANTIES
4.01 Original.
To induce the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank as follows:
     (A) The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware; the Borrower has no Subsidiaries other than the Subsidiaries named in Exhibit 4.01(A); each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its state or nation of incorporation, all as set forth in Exhibit 4.01(A); the Borrower and the Subsidiaries have the lawful power to own their properties and to engage in the businesses they conduct, and each is duly qualified and in good standing as a foreign corporation in the jurisdictions wherein the nature of the business transacted by it or property owned by it makes such qualification necessary (except where failure to so qualify would not have a material adverse effect on the business, assets or financial condition of the Borrower and its Subsidiaries taken as a whole);
     (B) Neither the Borrower nor any Subsidiary is directly or indirectly controlled by, or acting on behalf of, any Person which is an “Investment Company,” within the meaning of the Investment Company Act of 1940, as amended;
     (C) Except as disclosed in Exhibit 4.01(C) attached hereto, neither the Borrower nor any Subsidiary is in default with respect to any of its existing Indebtedness in any material respect, and the making and performance of this Agreement, the Note and the other Loan Documents will not (immediately or with the passage of time, the giving of notice, or both):
     (1) Violate charter documents, or the By-Laws of the Borrower or any Subsidiary, or violate any Laws or result in a default, in any material respect, under any contract, agreement or instrument to which the Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary or its property is bound; or
     (2) Result in the creation or imposition of any security interest in, or lien or encumbrance upon, any of the assets of the Borrower or any Subsidiary except in favor of the Bank;
     (D) The Borrower has the power and authority to enter into and perform this Agreement, the Note and the other Loan Documents, and to incur the obligations herein and therein provided for, and has taken all actions necessary to authorize the execution, delivery and performance of this Agreement, the Note and the other Loan Documents;
     (E) This Agreement, the Note and the other Loan Documents are, or when delivered will be, valid, binding and enforceable under applicable law in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization or similar

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laws affecting creditors’ rights generally and by general equitable principles (regardless of whether considered in a proceeding at law or in equity);
     (F) Except as disclosed in Exhibit 4.01(F) hereto, there is no pending order, notice, claim, litigation, proceeding or investigation known to the Borrower against or affecting the Borrower or any Subsidiary, whether or not covered by insurance, that would in the aggregate involve the payment of $100,000.00 or more or would otherwise materially or adversely affect the financial condition or business prospects of the Borrower or any Subsidiary, considered as a whole, if adversely determined;
     (G) The Borrower and each Subsidiary has good and marketable title to all of its material assets, none of which is subject to any security interest, encumbrance or lien, or claim of any third Person except for Permitted Liens;
     (H) The Financial Statements, including any schedules and notes pertaining thereto, and the management prepared financial statements for the fiscal period ending March 31, 2007 have been prepared in accordance with GAAP, and fairly present the financial condition of the Borrower and the Subsidiaries at the dates thereof and the results of operations for the periods covered thereby, and there have been no material adverse changes in the financial condition or business of the Borrower and the Subsidiaries, considered as a whole, from March 31, 2007 to the date hereof;
     (I) As of the date hereof, neither the Borrower nor any of the Subsidiaries has any material Indebtedness of any nature, including, but without limitation, liabilities for taxes and any interest or penalties relating thereto except to the extent reflected (in a footnote or otherwise) and reserved against in the consolidated balance sheet dated March 31, 2007, included in the Financial Statements or as disclosed in, or permitted by, this Agreement; and the Borrower does not know or have reasonable ground to know of any basis for the assertion against any of the Borrower or any Subsidiary of any such claim or litigation based upon such Indebtedness as of the date of the Closing except as disclosed on Exhibit 4.01(I) or otherwise disclosed to the Bank in writing;
     (J) Except as otherwise permitted herein or as would not materially interfere with the conduct of the business of the Borrower and its Subsidiaries, considered as a whole, the Borrower has filed all tax returns or extensions to file tax returns in applicable jurisdictions, and other reports required by any applicable Laws to have been filed prior to the date hereof, have paid or caused to be paid all taxes, assessments and other governmental charges that are due and payable prior to the date hereof, and have made adequate provision for the payment of such taxes, assessments or other charges accruing but not yet payable; the Borrower has no knowledge of any deficiency or additional assessment in a materially important amount in connection with any taxes, assessments or charges not provided for on its books;
     (K) Except to the extent that the failure to comply would not materially interfere with the conduct of the business of the Borrower and its Subsidiaries, considered as a whole, each of the Borrower and the Subsidiaries have complied with all applicable Laws with respect to (1) any restrictions, specifications or other requirements pertaining to products that it manufactures

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or sells or to the services it performs; (2) the conduct of its business; and (3) the use, maintenance and operation of the real and personal properties owned or leased by it in the conduct of its business;
     (L) No representation or warranty by or with respect to the Borrower or any Subsidiary contained herein or in any certificate or other document furnished by the Borrower or any Subsidiary pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary to make such representation or warranty not misleading in light of the circumstances under which it was made;
     (M) Each consent, approval or authorization of, or filing, registration or qualification with, any Person required to be obtained or effected by the Borrower or any Subsidiary in connection with the execution and delivery of this Agreement, the Note and the other Loan Documents or the undertaking or performance of any obligation hereunder or thereunder, has been duly obtained or effected;
     (N) Except as set forth in Exhibit 4.01(N) and except to the extent that the failure to comply would not materially interfere with the conduct of the business of the Borrower or any Subsidiary, considered as a whole, to the best knowledge of the Borrower, neither the Borrower, nor any Person for whose conduct the Borrower is responsible, owns, occupies or operates, or has, within the fifteen (15) year period immediately preceding the date of this Agreement, owned, occupied or operated a site or vessel on which has been stored any hazardous material or oil, without compliance with all statues, regulations, ordinances, directives, and orders of every federal, state, municipal and other governmental authority which has or claims jurisdiction relative thereto (the terms “site,” “vessel” and “hazardous material,” respectively, as used herein include the definitions of those terms in Massachusetts General Laws, Ch. 21E); neither the Borrower, nor any Person for whose conduct the Borrower is responsible, has ever disposed of, transported or arranged for the transport of any hazardous material or oil without compliance with all such statutes, regulations, ordinances, directives and orders in all material respects; and neither the Borrower, nor any Person for whose conduct the Borrower is responsible, has ever been legally responsible for any releases or threat of release of any hazardous material or oil; received notification of any potential or known release or threat of release of any hazardous material or oil from any site or vessel owned, occupied or operated by the Borrower, or any Person for whose conduct the Borrower is responsible, or of the incurrence of any expense or loss in connection with the assessment, containment or removal of any release or threat of release of any hazardous material or oil from any such site or vessel;
     (O) The Borrower has not made any agreement or taken any action which may cause anyone to become entitled to a commission or finder’s fee as a result of or in connection with the making of the Loan;
     (P) The federal tax returns of the Borrower and all Subsidiaries for all years of operation, including the tax years of the Borrower and all Subsidiaries most recently ended prior to the date of this Agreement, have been filed with the Internal Revenue Service and have not been challenged or an extension for filing has been obtained; and

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     (Q) Any Employee Pension Benefit Plans, as defined in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), of the Borrower and each Subsidiary meet, as of the date hereof, the minimum funding standards of 29 U.S.C.A. 1082 (Section 302 of ERISA), and no Reportable Event or Prohibited Transaction, as defined in ERISA, has occurred with respect to any Employee Benefit Plans, as defined in ERISA, of the Borrower or any Subsidiary.
4.02 Survival.
All of the representations and warranties set forth in Section 4.01 shall survive until all Obligations are satisfied in full and there remain no outstanding commitments hereunder.
ARTICLE 5.0 COVENANTS OF THE BORROWER
5.01 Affirmative Covenants.
The Borrower does hereby covenant and agree with the Bank that, so long as any of the Obligations remain unsatisfied or any commitments hereunder remain outstanding, it will comply, or if appropriate cause the Subsidiaries to comply, at all times with the following affirmative covenants:
     (A) The Borrower will use the proceeds of the Loan only for the purposes set forth in Exhibit 5.01(A), and will furnish the Bank such evidence as it may reasonably require with respect to such use;
     (B) The Borrower will furnish or otherwise make available to the Bank:
     (1) As soon as available, but in any event within forty-five (45) days after the close of each quarterly accounting period in each fiscal year: (a) a consolidated statement of cash flows of the Borrower and the Subsidiaries for such quarter; (b) a consolidated income statement of the Borrower and the Subsidiaries for such quarters; and (c) a consolidated balance sheet of the Borrower and the Subsidiaries as of the end of such quarter-all in reasonable detail, subject to normal year-end audit adjustments and certified by the president or principal financial officer of the Borrower to have been prepared in accordance with GAAP;
     (2) As soon as available, but in any event within one hundred twenty (120) days after the close of each fiscal year: (a) a consolidated statement of stockholders’ equity; (b) a consolidated statement of changes of cash flows of the Borrower and the Subsidiaries for such fiscal year; (c) a consolidated income statement of the Borrower and the Subsidiaries for such fiscal year; and (d) a consolidated balance sheet of the Borrower and the Subsidiaries as of the end of such fiscal year-all such statements to be in reasonable detail, including all supporting schedules and comments; the consolidated statements and balance sheets to be audited by an independent registered public accountant selected by Borrower and acceptable to the Bank, and certified by such accountants to have been prepared in accordance with GAAP and to present fairly the

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financial position and results of operations of the Borrower and the Subsidiaries; the Bank shall have the right, from time to time, to discuss the affairs of the Borrower directly with such independent registered public accountants after notice to the Borrower and opportunity of the Borrower to be represented at any such discussions;
     (3) Contemporaneously with each quarterly and year-end financial report required by the foregoing paragraphs (1) and (2), a certificate of the president or principal financial officer of the Borrower stating that he has individually reviewed the provisions of this Agreement and that a review of the activities of the Borrower during such year or quarterly period, as the case may be, has been made by him or under his supervision, with a view to determining whether the Borrower has fulfilled all obligations under this Agreement, and that, to the best of his knowledge, the Borrower has observed and performed each undertaking contained in this Agreement and is not in default in the observance or performance of any of the provisions hereof or, if the Borrower shall be in default, specifying all such defaults and events of which he may have knowledge;
     (4) Promptly after the sending or making available or filing of the same, copies of all reports, proxy statements, and financial statements that the Borrower sends or make available to its stockholders and all registration statements and reports that the Borrower files with the Securities and Exchange Commission or any successor Person;
     (5) Upon the Bank’s reasonable request, copies of any and all material documents relating to the business of the Borrower;
     (C) The Borrower will maintain its material operating physical assets in good condition and repair (normal wear and tear excepted);
     (D) The Borrower and the Subsidiaries will maintain, or cause to be maintained, public liability, fire and casualty insurance that are of a character usually insured by corporations engaged in the same or similar businesses;
     (E) The Borrower and the Subsidiaries will pay or cause to be paid when due, all taxes, assessments, charges or levies imposed upon them or on any of their property or with respect to which any of them is required to withhold and pay except where contested in good faith by appropriate proceedings with adequate reserves therefor having been set aside on its books; provided, however, that the Borrower and each Subsidiary shall pay or cause to be paid all such taxes, assessments, charges or levies forthwith whenever foreclosure on any lien that may have attached (or security therefor) appears imminent;
     (F) The Borrower will maintain:
     (1) A Debt Service Coverage Ratio of at least 1.50:1.00, to be tested on a rolling four quarters basis at the end of each fiscal quarter, commencing with the fiscal quarter ending September 30, 2007; and

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     (2) A ratio of Funded Debt to EBITDA not exceeding 2.00:1.00, to be tested on a rolling four quarters basis at the end of each fiscal quarter, commencing with the fiscal quarter ending September 30, 2007;
     (G) The Borrower and the Subsidiaries will each, when requested to do so, make available for inspection during normal business hours by duly authorized representatives of the Bank any of its books and records and will furnish the Bank any information regarding its business affairs and financial condition within a reasonable time after written request thereof;
     (H) The Borrower and the Subsidiaries will each take all necessary steps to preserve its corporate existence and franchises and comply in all material respects with all present and future Laws applicable to it in the operation of its business, and all material agreements to which it is subject;
     (I) The Borrower and the Subsidiaries will each take all necessary steps to preserve Intellectual Property, and will keep accurate and complete Records of royalties, patents and trademarks in connection therewith, consistent with sound business practices;
     (J) The Borrower and the Subsidiaries will keep accurate and complete business Records consistent with sound business practices;
     (K) The Borrower and the Subsidiaries will give immediate notice to the Bank of (1) any litigation or proceeding in which any of them is a party if an adverse decision therein would require any of them to pay more than $200,000.00 or deliver assets the value of which exceeds such sum (except where the claim is covered by insurance and the insurer has acknowledged coverage); and (2) the institution of any other suit or proceeding involving any of them that could be reasonably likely to materially and adversely affect the operations, financial condition, property or business of the Borrower or any Subsidiary, considered as a whole;
     (L) Upon written request by the Bank, the Borrower will furnish the Bank with true, correct and complete copies of federal income tax returns filed by the Borrower, together with all schedules thereto;
     (M) The Borrower and the Subsidiaries will pay when due (or within applicable grace periods (or in the case of trade indebtedness, no later than ninety (90) days from the date incurred)) all of their other Indebtedness due third Persons except when the amount thereof is being contested in good faith by appropriate proceedings and with adequate reserves therefor being set aside on their books;
     (N) The Borrower and the Subsidiaries will each notify the Bank immediately if any of them becomes aware of the occurrence of any Event of Default or of any fact, condition or event that only with the giving of notice or passage of time or both, could become an Event of Default, or if any of them becomes aware of any material adverse change in financial condition (including, without limitation, proceedings in bankruptcy, insolvency, reorganization or the appointment of a receiver or trustee), or results of operations of the Borrower or a Subsidiary, or

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of the failure of the Borrower or any Subsidiary to observe any of their respective undertakings hereunder or under the other Loan Documents;
     (O) The Borrower and the Subsidiaries will notify the Bank thirty (30) days in advance of any change in the location of the Borrower’s headquarters currently located in Oxford, Massachusetts;
     (P) The Borrower and the Subsidiaries will (1) fund any Employee Pension Benefit Plans in accordance with no less than the minimum funding standards of 29 U.S.C.A. 1082 (Section 302 of ERISA); (2) furnish the Bank, upon the Bank’s written request, with copies of any reports or other statements filed with the United States Department of Labor or the Internal Revenue Service with respect to any such Plan; and (3) promptly advise the Bank of the occurrence of any Reportable Event or Prohibited Transaction with respect to any Employee Benefit Plan; and
     (Q) The Borrower will maintain its primary depository and operating accounts with the Bank at all times while any Obligations to the Bank are outstanding, it being understood that this provision shall not require the Borrower to maintain its investment account with the Bank.
5.02 Negative Covenants.
The Borrower does hereby covenant and agree with the Bank that, so long as any of the Obligations remain unsatisfied or any commitments hereunder remain outstanding, it will comply, or if appropriate cause the Subsidiaries to comply, at all times with the following negative covenants, unless the Bank shall otherwise have agreed in writing:
     (A) Neither the Borrower nor any Subsidiary will mortgage, assign as collateral security, pledge or encumber any of its assets now owned or hereafter acquired, or permit any of its assets to be encumbered in any way without the prior express written consent of the Bank, except for Permitted Liens and any lien in favor of the Bank or its affiliates;
     (B) Neither the Borrower nor any Subsidiary will change its name or enter into any merger or consolidation (other than mergers or consolidations between wholly owned subsidiaries resulting in no change in the beneficial ownership of such subsidiaries);
     (C) Neither the Borrower nor any Subsidiary will sell or otherwise dispose of, or for any reason cease operating, any of its divisions, franchises, or lines of business, in each case, comprising more than twenty percent (20%) of the assets of the Borrower and its Subsidiaries, considered as a whole, without first providing the Bank with thirty (30) days advance written notice of its intention to do so;
     (D) Neither the Borrower nor any Subsidiary will become liable, directly or indirectly, as guarantor or otherwise for any obligation of any other Person exceeding $15,000,000.00 in the aggregate at any time outstanding, without notifying the Bank in writing in advance, except for (i) the endorsement of commercial paper for deposit or collection in the

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ordinary course of business, and (ii) unsecured guarantees of obligations of foreign Subsidiaries of the Borrower;
     (E) Neither the Borrower nor any Subsidiary will incur, create, assume, or permit to exist any Indebtedness except: (1) the Loan; (2) existing Indebtedness listed on Exhibit 4.01(I) permitted to exist after the date of this Agreement; (3) trade indebtedness incurred in the ordinary course of business, (4) contingent Indebtedness permitted by Section 5.02(D); (5) Indebtedness secured by Permitted Liens; (6) Subordinated Indebtedness; (7) Permitted International Indebtedness; (8) capital leases or purchase money Indebtedness permitted by this Agreement; and (9) other Indebtedness exceeding $15,000,000.00 in the aggregate at any time outstanding;
     (F) Neither the Borrower nor any Subsidiary (other than a wholly owned Subsidiary of the Borrower) will declare or pay any dividends, or make any other payment or distribution on account of its capital stock (other than shares of stock of, or other instruments issued by, the Borrower convertible into stock of the Borrower);
     (G) Neither the Borrower nor any Subsidiary will form any subsidiary, make any investment in (including any assignment of Inventory or other property), or make any loan in the nature of an investment to, any Person, other than investments of the Borrower in the Subsidiaries listed on Exhibit 4.01(A) without first providing the Bank within fifteen (15) days advance written notice of its intention to do so;
     (H) Neither the Borrower nor any Subsidiary will make any loan or advance to any officer, shareholder, director, or employee of the Borrower or any Subsidiary, except for (i) business travel, educational or relocation and similar temporary advances in the ordinary course of business, or (ii) loans not exceeding $100,000.00 to any one such individual up to $400,000.00 in the aggregate at any one time outstanding;
     (I) The Borrower will not make any payments on the Subordinated Notes or any other Subordinated Indebtedness, except as permitted by the subordination provisions applicable thereto;
     (J) Neither the Borrower nor any Subsidiary will acquire or agree to acquire any stock in, or all or substantially all of the assets of, any Person for a cost in excess of $5,000,000.00 without first providing the Bank with fifteen (15) days advance written notice of its intention to do so;
     (K) Neither the Borrower nor any Subsidiary will furnish the Bank any certificate or other document that will contain any untrue statement of material fact or that will omit to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished; and
     (L) Neither the Borrower nor any Subsidiary will directly or indirectly apply any part of the proceeds of the Loan to the purchasing or carrying of any “margin stock” within the

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meaning of Regulation U of the Board of Governors of the Federal Reserve System, or any regulations, interpretations, or rulings thereunder.
ARTICLE 6.0 DEFAULT
6.01 Events of Default.
The occurrence of any one or more of the following events shall constitute an Event of Default hereunder:
     (A) The Borrower or the Subsidiaries shall fail to pay when due any Obligations to the Bank within ten (10) days of an applicable due date;
     (B) The Borrower or the Subsidiaries shall fail to observe or perform any other obligation to be observed or performed by it hereunder or under any of the other Loan Documents, and such failure shall continue for thirty (30) days after (1) notice of such failure from the Bank; or (2) the Bank is notified of such failure or should have been so notified pursuant to the provisions of Section 5.01(O), whichever is earlier;
     (C) The Borrower or the Subsidiaries shall fail to pay any Indebtedness other than the Obligations exceeding $250,000.00, and such failure shall continue beyond any applicable grace period (or, with respect to trade Indebtedness which is not subject to a grace period, within ninety (90) days of the date such trade Indebtedness is incurred);
     (D) Any financial statement, representation, warranty or certificate made or furnished by or with respect to the Borrower or any of the Subsidiaries to the Bank in connection with this Agreement, or as an inducement to the Bank to enter into this Agreement, or in any separate statement or document to be delivered to the Bank hereunder, shall be materially false, incorrect or incomplete when made;
     (E) The Borrower shall admit its inability to pay its debts as they mature or shall make an assignment for the benefit of itself or any of its creditors;
     (F) Proceedings in bankruptcy, or for reorganization of the Borrower or any of the Subsidiaries, or for the readjustment of any of their respective debts under the United States Bankruptcy Code, as amended, or any part thereof, or under any other Laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced against or by the Borrower or any of the Subsidiaries and, except with respect to any such proceedings instituted by the Borrower or any of the Subsidiaries, shall not be discharged within sixty (60) days of said commencement;
     (G) A receiver or trustee shall be appointed for the Borrower or any of the Subsidiaries or for any substantial part of their respective assets, or any proceedings shall be instituted for the dissolution or the full or partial liquidation of the Borrower or any of the Subsidiaries, and except with respect to any such appointments requested or instituted by the Borrower or any of the Subsidiaries, such receiver or trustee shall not be discharged within sixty

21


 

(60) days of his appointment, and except with respect to any such proceedings instituted by the Borrower or any of the Subsidiaries, such proceedings shall not be discharged within sixty (60) days of commencement, or the Borrower shall discontinue business or materially change the nature of its business;
     (H) The Borrower or any of the Subsidiaries shall suffer final judgments (which are not covered by insurance where the insurer has acknowledged coverage) for payment of money aggregating in excess of $250,000.00 and shall not discharge the same within a period of forty-five (45) days unless, pending further proceedings, execution has not been commenced or, if commenced, has been effectively stayed; or
     (I) Failure by the Borrower to pay any amount of money or to observe exceeding $250,00.00 or perform any other material covenant, condition or agreement which is the obligation of the Borrower to the Bank under any other existing or future note, mortgage or other document or instrument.
6.02 Acceleration.
At its option, and at any time, whether immediately or otherwise, the Bank may, upon the occurrence of any Event of Default, declare all Obligations of the Borrower to the Bank immediately due and payable without further action of any kind including, without limitation, notice, demand or presentment.
ARTICLE 7.0 THE BANK’S RIGHTS AND REMEDIES
7.01 The Bank’s Rights Upon Default
Upon the occurrence of an Event of Default and at any time thereafter, the Bank, without presentment, demand, notice, protest or advertisement of any kind, will have the rights set forth in this Agreement and under applicable law.
7.02 Right of Set-Off.
The Borrower hereby grants to the Bank a continuing lien, security interest and right of set-off as security for all liabilities and obligations to the Bank, whether now existing or hereafter arising, upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of the Bank or any entity under the control of Bank of America Corporation and its successors and assigns, or in transit to any of them. At any time, upon notice of an Event of Default, the Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured.
7.03 Cumulative Rights and Remedies
All rights and remedies of the Bank, whether provided for herein or in other agreements, instruments or documents or conferred by law, are cumulative and may be exercised alone or simultaneously.

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7.04 Additional Rights and Remedies
     (A) Upon the occurrence of an Event of Default, all obligations on the part of the Bank to make advances under the Note, if the Bank so elects upon written notice to the Borrower, shall cease and terminate, and, at the option of the Bank, the Note shall become immediately due and payable, but the Bank may make any advances or portions of advances under the Note, after the occurrence of any such Event of Default, without thereby waiving its right to demand payment of the Obligations and without becoming liable to make any other or further advances as hereinabove contemplated by this Agreement.
     (B) Upon the occurrence of an Event of Default, the rights, powers and privileges provided in this Section 7.04, and all other remedies available to the Bank under this Agreement or at law or in equity, may be exercised by the Bank at any time and from time to time, whether or not the Obligations shall be due and payable, and whether or not the Bank shall have instituted any foreclosure proceedings or other action for the enforcement of its rights hereunder or under the Note or any of the other Loan Documents.
ARTICLE 8.0 MISCELLANEOUS
8.01 Construction.
The provisions of this Agreement shall be in addition to those of any pledge or security agreement, note or other evidence of liability now or hereafter held by the Bank, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent the Bank from enforcing any or all other pledge or security agreements, notes or other evidences of liability in accordance with their respective terms.
8.02 Further Assurance.
From time to time, the Borrower will execute and deliver to the Bank such additional documents and will provide such additional information as the Bank may reasonably require to carry out the terms of this Agreement and be informed of the status and affairs of the Borrower.
8.03 Enforcement and Waiver by the Bank.
The Bank shall have the right at all times to enforce the provisions of this Agreement and the other Loan Documents in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of the Bank in refraining from so doing at any time or times. The failure of the Bank at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same. All rights and remedies of the Bank are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy.

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8.04 Expenses of the Bank.
The Borrower shall pay on demand all expenses of the Bank in connection with the preparation, administration, default, collection, waiver or amendment of loan terms, or in connection with the Bank’s exercise, preservation or enforcement of any of its rights, remedies or options hereunder, including, without limitation, reasonable fees of outside legal counsel, accounting, consulting, brokerage or other similar professional fees or expenses, and any fees or expenses associated with travel or other costs relating to any appraisals or examinations conducted in connection with this Agreement, the Note, the other Loan Documents or any other collateral therefor, and the amount of all such expenses shall, until paid, bear interest at the rate applicable to principal under the Note (including any default rate) and be an Obligation.
8.05 Notices.
Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, facsimile or telegraph, as follows, unless such address is changed by written notice hereunder:
         
(A)
  If to the Borrower:   IPG Photonics Corporation
 
      50 Old Webster Road
 
      Oxford, MA 01540
 
      Attention: Chief Financial Officer
 
       
 
  With a copy to:   IPG Photonics Corporation
 
      50 Old Webster Road
 
      Oxford, MA 01540
 
      Attention: General Counsel
 
       
(B)
  If to the Bank:   Bank of America, N.A.
 
      100 Front Street
 
      Worcester, MA 01608
 
      Attention: Credit Products Officer
 
       
 
  With a copy to:   George W. Tetler III, Esquire
 
      Bowditch & Dewey, LLP
 
      P.O. Box 15156
 
      311 Main Street
 
      Worcester, MA 01615-0156
Any party may change the address to which notices are to be sent to it by giving written notice of such change of address to the other party in the manner herein provided for giving notice. Any such notice, demand, request or other communication shall be deemed given when mailed as aforesaid.
8.06 Waiver and Indemnification by the Borrower.

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To the maximum extent permitted by applicable Laws, the Borrower:
     (A) Waives (1) protest of all commercial paper at any time held by the Bank for which the Borrower is in any way liable; (2) except as the same may herein be specifically granted, notice of acceleration and of intention to accelerate; and (3) notice and opportunity to be heard, after acceleration in the manner provided in Section 6.02, before exercise by the Bank of the remedies of self-help, set-off or of other summary procedures permitted by any applicable Laws or by any agreement with the Borrower, and, except where required hereby or by any applicable Laws, notice of any other action taken by the Bank; and
     (B) Indemnifies the Bank and its officers, attorneys, agents and employees from all claims for loss or damage caused by any act or omission on the part of any of them except willful misconduct or gross negligence.
8.07 Participation; Right to Sell and/or Assign.
The Bank shall have the unrestricted right at any time and from time to time, and without the consent of the Borrower, to grant to one or more banks or other financial institutions (each, a “Participant”) participating interests, in minimum amounts of $1,000,000.00 each, in the Bank’s obligation to lend hereunder and any or all of the loans held by the Bank hereunder. In the event of any such grant by the Bank of a participating interest to a Participant, whether or not upon notice to the Borrower, the Bank shall remain responsible for the performance of its obligations hereunder and the Borrower shall continue to deal solely and directly with the Bank in connection with the Bank’s rights and obligations hereunder. The Bank may furnish any information concerning the Borrower in its possession from time to time to prospective Participants, provided that the Bank shall require any such prospective Participant to agree in writing to maintain the confidentiality of such information.
The Bank shall have the unrestricted right at any time or from time to time, upon Borrower’s consent, which consent shall not be unreasonably withheld, to assign all or any portion of its rights and obligations hereunder to one or more banks or other financial institutions (each, an “Assignee”), and the Borrower agrees that it shall execute, or cause to be executed, such documents, including without limitation amendments to this Agreement and to any other documents, instruments and agreements executed in connection herewith as the Bank shall deem reasonably necessary to effect the foregoing. In addition, at the request of the Bank and any such Assignee, the Borrower shall issue one or more new promissory note(s), as applicable, to any such Assignee and, if the Bank has retained any of its rights and obligations hereunder following such assignment, to the Bank, which new promissory note(s) shall be issued in replacement of, but not in discharge of, the liability evidenced by the promissory note held by the Bank prior to such assignment and shall reflect the amount of the respective commitments and loans held by such Assignee and the Bank after giving effect to such assignment. Upon the execution and delivery of appropriate assignment documentation, amendments and any other documentation required by the Bank in connection with such assignment, and the payment by Assignee of the purchase price agreed to by the Bank and such Assignee, such Assignee shall be a party to this Agreement and shall have all of the rights and obligations of the Bank hereunder

25


 

(and under any and all other documents, instruments and agreements executed in connection herewith) to the extent that such rights and obligations have been assigned by the Bank pursuant to the assignment documentation between the Bank and such Assignee, and the Bank shall be released from its obligations hereunder and thereunder to a corresponding extent. The Bank may furnish any information concerning the Borrower in its possession from time to time to prospective Assignees, provided that the Bank shall require any such prospective Assignees to agree in writing to maintain the confidentiality of such information.
8.08 WAIVER OF JURY TRIAL.
THE BORROWER AND THE BANK MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR ANY OTHER LOAN DOCUMENTS EXECUTED OR CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE BANK RELATING TO THE ADMINISTRATION OF THE LOAN OR ANY OTHER OBLIGATIONS OR ENFORCEMENT OF THE LOAN DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, THE BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWER CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE BANK WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO THIS AGREEMENT AND MAKE THE LOAN EVIDENCED BY THE NOTE.
8.09 Applicable Law.
This Agreement, and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the laws of The Commonwealth of Massachusetts (excluding the laws applicable to conflicts or choice of law).
8.10 Binding Effect, Assignment, and Entire Agreement.
This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the Bank. This Agreement, including the Exhibits hereto, all of which are hereby incorporated herein by reference, and the

26


 

documents executed and delivered pursuant hereto, are intended by the parties as the final, complete and exclusive statement of the transaction evidenced by this Agreement. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are deemed to be superceded by this Agreement, and no party is relying on any promise, agreement or understanding not set forth in this Agreement. This Agreement may not be amended or modified except by a written instrument describing such amendment or modification executed by the Borrower and the Bank.
8.11 Severability.
If any provision of this Agreement shall be held invalid under any applicable Laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable.
8.12 Counterparts.
This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument.
8.13 Replacement Note.
     Upon receipt of (i) an affidavit of an officer of the Bank as to the loss, theft, destruction or mutilation of the Note or any other Loan Document which is not of public record, and (ii) an indemnity by the Bank in favor of the Borrower with respect to losses, claims or damage resulting therefrom and, in the case of any such loss, theft, destruction or mutilation, upon cancellation of such Note or other Loan Document, the Borrower will issue, in lieu thereof, a replacement Note or other Loan Document in the same principal amount thereof and otherwise of like tenor.
8.14 Use of Proceeds
No portion of the proceeds of the Loan shall be used, in whole or in part, for the purpose of purchasing or carrying any “margin stock” as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System.
8.15 Integration
This Agreement is intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Agreement. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are deemed to be superceded by this Agreement, and no party is relying on any promise, agreement or understanding not set forth in this Agreement. This Agreement may not be amended or modified except by a written instrument describing such amendment or modification executed by the Borrower and the Bank.

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THIS SPACE INTENTIONALLY LEFT BLANK;
SIGNATURES APPEAR ON THE FOLLOWING PAGE

28


 

     IN WITNESS WHEREOF, each of the parties hereto have duly caused this Agreement to be executed by its duly authorized representative as a sealed instrument as of the day and year first above written.
             
    IPG PHOTONICS CORPORATION    
 
           
/s/ Angelo P. Lopresti
  By:   /s/ Timothy P.V. Mammen    
 
           
Witness
      Timothy P.V. Mammen,    
 
      Vice President and Chief Financial Officer    
 
           
    BANK OF AMERICA, N. A.    
 
           
/s/ Linda M. Berthiaume
  By:   /s/ Thomas P. McGregor    
 
           
Witness
      Thomas P. McGregor, Senior Vice President    

29

EX-10.2 3 b66175ipexv10w2.htm EX-10.2 REVOLVING CREDIT NOTE DATED JULY 26, 2007 exv10w2
 

Exhibit 10.2
REVOLVING CREDIT NOTE
     
$20,000,000.00    
Worcester, Massachusetts   July 26, 2007
     FOR VALUE RECEIVED, the undersigned, IPG PHOTONICS CORPORATION, a Delaware corporation with a principal place of business at 50 Old Webster Road, Oxford, Massachusetts 01540 (the “Borrower”) hereby promises to pay to
BANK OF AMERICA, N.A.,
a national banking association organized and existing under the laws of the United States of America (the “Bank”), OR ORDER, at its office at 100 Federal Street, Boston, Massachusetts 02110, or such other place as the Bank may from time to time specify in writing, the principal sum of
TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00)
(or so much as may be outstanding from time to time) with interest on the unpaid principal until paid at the rates and in the manner hereinafter provided in lawful money of the United States of America in immediately available funds, without counterclaim or set-off and free and clear of, and without any deduction or withholding for, any taxes or other payments.
     This Revolving Credit Note is issued in conjunction with a Loan Agreement by and between the Borrower and the Bank dated as of even date herewith (as amended from time to time, the “Agreement”), all the terms and conditions of which are incorporated herein by reference. No reference to the Agreement or to any provision thereof shall affect or impair the absolute and unconditional obligation of the Borrower to pay the principal of and interest on this Revolving Credit Note as herein provided. An Event of Default under the Agreement shall also constitute an Event of Default hereunder. The occurrence of an Event of Default shall constitute a default (beyond any applicable grace or cure periods) under each of the other obligations of the Borrower to the Bank. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Agreement. “$” or “dollars” denotes lawful currency of the United States of America.
     Interest shall be calculated on the daily unpaid principal balance of the indebtedness evidenced by this Revolving Credit Note computed on the basis of the actual number of days elapsed over a year assumed to have three hundred sixty (360) days, provided that interest shall be due for the actual number of days elapsed during each period for which interest is being charged.

 


 

     The unpaid principal of this Revolving Credit Note from time to time outstanding shall bear interest at the applicable rate per annum, at the Borrower’s written election from time to time and in accordance with the provisions of this Revolving Credit Note, as follows:
     (a) LIBOR Rate plus the Applicable Margin (calculated as set forth below) (a “LIBOR Rate Loan”); or
     (b) the Bank’s Base Rate plus the Applicable Margin (calculated as set forth below), fully floating (a “Base Rate Loan”).
     The Applicable Margin will be based upon calculation by the Bank of the Funded Debt to EBITDA Ratio, as follows:
                 
Funded Debt to   Applicable Margin -   Applicable Margin
EBITDA Ratio   LIBOR Rate   Base Rate
less than 1.0 to 1.0
    .80 %     -0.50 %
 
               
equal to or greater than 1.0 to 1.0, but less than 1.5 to 1.0
    1.00 %     -0.25 %
 
               
equal to or greater than 1.5 to 1.0, but less than 2.0 to 1.0
    1.20 %     0  
     As used herein, the terms “Funded Debt” and “EBITDA” shall have the meanings ascribed to such term in the Agreement. The Funded Debt to EBITDA Ratio shall be measured as of the end of each fiscal quarter of the Borrower over a period comprised of the previous four (4) fiscal quarters of the Borrower.
     The Base Rate and the LIBOR Rate shall be adjusted as of fifteen (15) Business Days after the earlier of (x) receipt and review by the Bank of Borrower’s compliance certificate as required under Section 5.01(B)(3) of the Agreement or (y) the date on which the financial covenants set forth in Section 5.01(F) of the Agreement are tested by the Bank. Such adjustments shall apply to Base Rate Loans effective immediately and to LIBOR Rate Loans made on or after the applicable date of the adjustment.
     If the Borrower fails to select an interest rate for all or any portion of the unpaid principal balance of this Revolving Credit Note or if the applicable LIBOR Rate becomes unavailable, then the interest rate will be the Base Rate plus the Applicable Margin.
     The term “Base Rate” means the higher of (a) the Bank’s Prime Rate established from time to time by the Bank or (b) the Federal Funds Rate, fully floating. The “Prime

2


 

Rate” means that variable per annum rate of interest so designated from time to time by the Bank as its Prime Rate The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. The “Federal Funds Rate” means, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Bank from three (3) Federal Funds brokers of recognized standing selected by the Bank.
     The term “LIBOR Rate” means, as applicable to any LIBOR Rate Loan, the rate per annum as determined on the basis of the offered rates for deposits in U.S. Dollars, for a period of time comparable to such LIBOR Rate Loan which appears on the Reuters Screen LIBOR01 page (or any successor page) as of 11:00 a.m. London time on the day that is two (2) Business Days preceding the first day of such LIBOR Rate Loan (the “LIBOR Interest Period”); provided, however, if the rate described above does not appear on the Reuters Screen LIBOR01 page (or any successor page) on any applicable interest determination date, the LIBOR Rate shall be the rate (rounded upward, if necessary, to the nearest one hundred-thousandth of a percentage point), determined on the basis of the offered rates for deposits in U.S. dollars for a period of time comparable to such LIBOR Rate Loan which are offered by four major banks in the London interbank market at approximately 11:00 a.m. London time, on the day that is two (2) Business Days preceding the first day of such LIBOR Rate Loan as selected by the Bank. The principal London office of each of the four major London banks will be requested to provide a quotation of its U.S. Dollar deposit offered rate. If at least two such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for a period of time comparable to such LIBOR Rate Loan offered by major banks in New York City at approximately 11:00 a.m. New York City time, on the day that is two (2) Business Days preceding the first day of such LIBOR Rate Loan. In the event that the Bank is unable to obtain any such quotation as provided above, it will be deemed that the LIBOR Rate pursuant to a LIBOR Rate Loan cannot be determined. In the event that the Board of Governors of the Federal Reserve System shall impose a Reserve Percentage with respect to LIBOR Rate deposits of the Bank, then for any period during which such Reserve Percentage shall apply, the LIBOR Rate shall be equal to the amount determined above divided by an amount equal to one (1) minus the Reserve Percentage. “Reserve Percentage” shall mean the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed on member banks of the Federal Reserve System against “Euro-currency Liabilities” as defined in Regulation D. Each LIBOR Rate Loan shall be in an amount of integral multiples of $100,000.00. The LIBOR Interest Period must be fixed, upon request by the Borrower for a LIBOR Rate Loan, for periods of one (1) month, two (2) months, three (3), six (6), nine (9) and twelve (12) months.

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     The Following Business Day Convention shall be used to adjust any relevant date if that date would otherwise fall on a day that is not a Business Day. For the purposes herein, the term “Following Business Day Convention” shall mean that an adjustment will be made if any relevant date would otherwise fall on a day that is not a Business Day so that the date will be the first following day that is a Business Day. “Business Day” means, in respect of any date that is specified in this Revolving Credit Note to be subject to adjustment in accordance with the Following Business Day Convention, a day on which commercial banks settle payments in (i) London, if the payment obligation is calculated by reference to LIBOR, or (ii) New York, if the payment obligation is calculated by reference to the Base Rate. All payments hereunder shall be adjusted in accordance with the Following Business Day Convention.
     Interest on the Base Rate Loans shall be payable monthly in arrears on the first day of each calendar month, the first such installment of interest to be due and payable on July 1, 2007. Interest on LIBOR Rate Loans shall be payable in full at the end of the applicable LIBOR Interest Period. All principal, interest and other indebtedness due hereunder if not sooner paid, shall be due and payable on June 30, 2010 (the “Revolving Credit Termination Date”).
     The Borrower may prepay Base Rate Loans in whole or in part without penalty or premium. The Borrower may prepay a LIBOR Loan only upon at least three (3) Business Days prior written notice to the Bank (which notice shall be irrevocable). The Borrower shall pay to the Bank, upon request of the Bank, such amount or amounts as shall be sufficient (in the reasonable opinion of the Bank) to compensate it for any loss, cost, or expense incurred as a result of: (i) any payment of a LIBOR Loan on a date other than the last day of the LIBOR Interest Period for such LIBOR Loan; (ii) any failure by the Borrower to borrow a LIBOR Loan on the date specified by Borrower’s written notice; (iii) any failure by the Borrower to pay a LIBOR Loan on the date for payment specified in the Borrower’s written notice. Without limiting the foregoing, the Borrower shall pay to the Bank a “yield maintenance fee” in an amount computed as follows: The current rate for United States Treasury securities (bills on a discounted basis shall be converted to a bond equivalent) with a maturity date closest to the term chosen pursuant to the LIBOR Rate Election as to which the prepayment is made, shall be subtracted from the LIBOR Rate in effect at the time of prepayment. If the result is zero or a negative number, there shall be no yield maintenance fee. If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid. The resulting amount shall be divided by 360 and multiplied by the number of days remaining the term chosen pursuant to the LIBOR Rate Election as to which the prepayment is made. Said amount shall be reduced to present value calculated by using the above referenced United States Treasury securities rate and the number of days remaining in the term chosen pursuant to the LIBOR Rate Election as to which prepayment is made. The resulting amount shall be the yield maintenance fee due to the Bank upon the payment of a LIBOR Loan. Each reference in this paragraph to “LIBOR Rate Election” shall mean the election by the Borrower of LIBOR Rate. If by reason of an Event of Default, the Bank elects to declare this Revolving Credit Note immediately due and payable, then any

4


 

yield maintenance fee with respect to a LIBOR Loan shall become due and payable in the same manner as though the Borrower had exercised such right of prepayment.
     If the entire amount of any required principal and/or interest is not paid in full within fifteen (15) days after the same is due, the Borrower shall pay to the Bank a late fee equal to two percent (2%) of the required payment. Such late charge payments are made for the purpose of compensating the Bank for its administrative, costs and expenses in handling late payments and losses in connection therewith. This provision is not intended to provide a grace period for any payment otherwise due and payable and shall not constitute a waiver by the Bank to insist upon the strict performance of any of the Borrower’s covenants or agreements with, or obligations to, the Bank or to declare any event of default for any payment not made when it was due and payable.
     All payments shall be applied first to the payment of all fees, expenses and other amounts due to the Bank (excluding principal and interest), then to accrued interest, and the balance on account of outstanding principal; provided, however, that after an Event of Default, payments will be applied to the obligations of the Borrower to the Bank as the Bank shall determine in its sole discretion.
     Until the earlier of the Revolving Credit Termination Date or the occurrence of an Event of Default, the Borrower may borrow, repay and reborrow hereunder from time to time, provided that the aggregate principal amount at any time outstanding shall not exceed the face amount of this Revolving Credit Note.
     Upon the occurrence of an Event of Default (whether or not the Bank has accelerated payment of this Revolving Credit Note), or after the Revolving Credit Termination Date or after judgment has been rendered on this Revolving Credit Note or any other Obligations under the Agreement, the Borrower’s right to select pricing options shall cease and the unpaid principal of this Revolving Credit Note, including interest, fees or costs which are not paid when due, will, at the option of the Bank, bear interest at a rate which is three percent (3%) per annum greater than the rate of interest which would otherwise be applicable hereunder (the “Default Rate”). This may result in compounding of interest. This will not constitute a waiver of any Event of Default.
     At its option, and at any time, whether immediately or otherwise, upon the occurrence of an Event of Default, the Bank may declare this Revolving Credit Note immediately due and payable without further action of any kind including notice, further demand or presentment.
     The Borrower hereby authorizes the Bank, without liability on the Bank’s part, to debit from time to time from the Automatic Payments Deposit Account the Automatic Payments. If the funds in the Automatic Payments Deposit Account are insufficient to cover any payment, the Bank shall not be obligated to advance funds to cover the payment. At any time for any reason, the Bank may voluntarily terminate Automatic Payments. The Bank shall provide the Borrower timely notice of any debit made from the Automatic Payments Deposit Account or termination of Automatic Payments.

5


 

     The Borrower hereby grants to the Bank a continuing lien, security interest and right of set-off as security for all liabilities and obligations to the Bank, whether now existing or hereafter arising, upon and against all deposits, credits, collateral and property now or hereafter in the possession, custody, safekeeping or control of the Bank or any entity under the control of Bank of America Corporation and its successors and assigns, or in transit to any of them. Upon notice of an Event of Default, the Bank may set off the same or any part thereof and apply the same to any liability or obligation of the Borrower even though unmatured and regardless of the adequacy of any other collateral securing the loan evidenced hereby.
     The Borrower shall pay on demand all expenses of the Bank in connection with the preparation, administration, default, collection, waiver or amendment of loan terms, or in connection with the Bank’s exercise, preservation or enforcement of any of its rights, remedies or options hereunder, including, without limitation, reasonable fees of outside legal counsel, accounting, consulting, brokerage or other similar professional fees or expenses, and any fees or expenses associated with travel or other costs relating to any appraisals or examinations conducted in connection with the Loan or any collateral therefor, and the amount of all such expenses shall, until paid, bear interest at the rate applicable to principal hereunder (including any Default Rate) and be an obligation secured by any collateral.
     The Borrower and each endorser or other person now or hereafter liable for the payment of any of the indebtedness evidenced by this Revolving Credit Note, severally, agrees, by making or endorsing this Revolving Credit Note or by making any agreement to pay any of the indebtedness evidenced by this Revolving Credit Note, to waive presentment for payment, protest and demand, notice of protest, demand and of dishonor and non-payment of this Revolving Credit Note, and consents without notice or further assent: (a) to the substitution, exchange, or release of any collateral securing this Revolving Credit Note or any part thereof at any time; (b) to the acceptance by the holder or holders at any time of any additional collateral or security of this Revolving Credit Note, (c) to the modification or amendment at any time, and from time to time, of this Revolving Credit Note, the Agreement and any instrument securing this Revolving Credit Note, at the request of any person liable hereon; (d) to the granting by the holder hereof of any extension of the time for payment of this Revolving Credit Note or for the performance of the agreements, covenants and conditions contained in this Revolving Credit Note, the Agreement or any instrument securing this Revolving Credit Note, at the request of any other person liable hereon; and (e) to any and all forbearances and indulgences whatsoever; and such consent shall not alter or diminish the liability of any person.
     This Revolving Credit Note shall be governed by, and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with, the laws of The Commonwealth of Massachusetts (excluding the laws applicable to conflicts or choice of law). The Borrower agrees that any suit for the enforcement of this Revolving Credit Note or any of the other Loan Documents may be brought in the courts of The

6


 

Commonwealth of Massachusetts or any Federal Court sitting therein and consents to the non-exclusive jurisdiction of such court and to service of process in any such suit being made upon the Borrower by mail at the address specified herein. The Borrower hereby waives any objection that it may now or hereafter have to the venue of any such suit or any such court or that such suit was brought in an inconvenient court.
     THE BORROWER AND THE BANK (BY ACCEPTANCE OF THIS REVOLVING CREDIT NOTE) MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS REVOLVING CREDIT NOTE OR ANY OTHER LOAN DOCUMENTS EXECUTED OR CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATED HERETO, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE BANK RELATING TO THE ADMINISTRATION OF THE LOAN OR ENFORCEMENT OF THE LOAN DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, THE BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWER CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE BANK WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ACCEPT THIS REVOLVING CREDIT NOTE AND MAKE THE LOAN EVIDENCED BY THIS REVOLVING CREDIT NOTE.
     This Revolving Credit Note is intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Revolving Credit Note. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are deemed to be superceded by this Revolving Credit Note, and no party is relying on any promise, agreement or understanding not set forth in this Revolving Credit Note. This Revolving Credit Note may not be amended or modified except by a written instrument describing such amendment or modification executed by the Borrower and the Bank.
     No portion of the proceeds of the Loan shall be used, in whole or in part, for the purpose of purchasing or carrying any “margin stock” as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System.

7


 

     The Bank may at any time pledge or assign all or any portion of its rights under this Revolving Credit Note or the Agreement (including any portion of the Note) to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or assignment or enforcement thereof shall release the Bank from its obligations under the Note, the Agreement or any loan documents related thereto.
     Upon receipt of (i) an affidavit of an officer of the Bank as to the loss, theft, destruction or mutilation of this Revolving Credit Note or any other loan document which is not of public record, and (ii) an indemnity by the Bank in favor of the Borrower with respect to losses, claims or damages resulting therefrom, and, in the case of any such loss, theft, destruction or mutilation, upon cancellation of this Revolving Credit Note or other loan document, the Borrower will issue, in lieu thereof, a replacement Revolving Credit Note or other loan document in the same principal amount thereof and otherwise of like tenor.
     IN WITNESS WHEREOF, the Borrower has caused this Revolving Credit Note to be executed by its duly authorized representative as an instrument under seal as of the day and year first above written.
             
    IPG PHOTONICS CORPORATION    
 
           
/s/ Angelo P. Lopresti
  By:   /s/ Timothy P.V. Mammen    
 
           
Witness
      Timothy P.V. Mammen,    
 
      Vice President and Chief Financial Officer    

 

EX-31.1 4 b66175ipexv31w1.htm EX-31.1 SECTION 302 CERTIFICATION OF CEO exv31w1
 

Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a – 14(a) or Rule 15d – 14(a) of the Securities Exchange Act of 1934
I, Valentin P. Gapontsev, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of IPG Photonics Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s the board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 10, 2007
       
   
By:   /s/ VALENTIN P. GAPONTSEV    
  Valentin P. Gapontsev   
  Chairman and Chief Executive Officer
(Principal Executive Officer)
 
 

 

EX-31.2 5 b66175ipexv31w2.htm EX-31.2 SECTION 302 CERTIFICATION OF CFO exv31w2
 

Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a – 14(a) or Rule 15d – 14(a) of the Securities Exchange Act of 1934
I, Timothy P.V. Mammen, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of IPG Photonics Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s the board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 10, 2007
       
   
By:   /s/ TIMOTHY P.V. MAMMEN    
  Timothy P.V. Mammen   
  Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 

 

EX-32 6 b66175ipexv32.htm EX-32 SECTION 906 CERTIFICATION OF CEO & CFO exv32
 

Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the filing of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 (the “Report”) by IPG Photonics Corporation (the “Company”), Valentin P. Gapontsev, as the Chief Executive Officer of the Company, and Timothy P.V. Mammen as the Chief Financial Officer of the Company, each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
  1.   the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
 
  2.   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 10, 2007
         
     
  /s/ VALENTIN P. GAPONTSEV    
  Valentin P. Gapontsev   
  Chairman and Chief Executive Officer   
 
     
  /s/ TIMOTHY P.V. MAMMEN    
  Timothy P.V. Mammen   
  Vice President and Chief Financial Officer   
 
A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to IPG Photonics Corporation and will be retained by IPG Photonics Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

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