As filed with the Securities and Exchange Commission on February 2, 2001
Registration No. 333-51560
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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IPG Photonics Corporation
(Exact name of Registrant as specified in its charter)
Delaware 3674 04-3444218
(State of other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
P.O. Box 519
660 Main Street
Sturbridge, Massachusetts 01566
(508) 347-6800
(Address, including zip code, and telephone number,
including area code of Registrant's principal executive offices)
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Dr. Valentin P. Gapontsev
Chairman of the Board and Chief Executive Officer
P.O. Box 519
660 Main Street
Sturbridge, Massachusetts 01566
(508) 347-6800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Please Send Copies of All Communications To:
Barry J. Hart, Esq. Alan L. Jakimo, Esq.
Howard M. Kleinman, Esq.
Daniel A. Ninivaggi, Esq.
Winston & Strawn Brown & Wood LLP
200 Park Avenue One World Trade Center
New York, NY 10166 New York, NY 10048
(212) 294-6700 (212) 839-5300
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Approximate Date of Commencement of Proposed Sale to the Public: As soon
as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class
of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Per Aggregate Offering Amount of
Registered Registered Share(1) Price(1) Registration Fee
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Common Stock, $0.0001
par value............. 9,375,000 $16.00 $150,000,000 $39,600(2)
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(1)Estimated solely for the purpose for computing the amount of registration
fee pursuant to Rule 457(o) under the Securities Act.
(2)An aggregate of $39,600 of the fee was paid with the initial filing of the
Registration Statement on December 8, 2000.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS PROSPECTUS
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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Explanatory Note
This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States offering (the "U.S. Prospectus") and
one to be used in a concurrent international offering (the "International
Prospectus"). The two prospectuses will be identical in all respects except for
the front and back cover pages and the sections entitled "Underwriting." Pages
to be included in the International Prospectus and not the U.S. Prospectus are
marked "Alternate Page."
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus Dated February 2, 2001
PROSPECTUS
8,200,000 Shares
[IPG LOGO]
Common Stock
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This is IPG Photonics Corporation's initial public offering of common
stock. IPG Photonics Corporation is selling all of the shares. The U.S.
underwriters are offering shares in the U.S. and Canada and the
international managers are offering shares outside the U.S. and Canada.
We expect the public offering price to be between $14.00 and $16.00 per
share. Currently, no public market exists for the shares. After pricing of this
offering, we expect that the common stock will trade on the Nasdaq National
Market under the symbol "IPGP."
Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 6 of this prospectus.
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Per Share Total
--------- -----
Public offering price..................................... $ $
Underwriting discount..................................... $ $
Proceeds, before expenses, to IPG Photonics............... $ $
The U.S. underwriters may also purchase up to an additional shares from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments. The international
managers may similarly purchase up to an additional shares from us.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery in New York, New York on or about
, 2001.
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Merrill Lynch & Co.
Robertson Stephens
CIBC World Markets
U.S. Bancorp Piper Jaffray
Wit SoundView
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The date of this prospectus is , 2001.
Inside Front Cover:
The inside front cover is a gatefold containing three pages of graphics.
Page One:
The upper left-hand corner contains a photograph of optical fiber through
which light is being transmitted.
The upper right-hand corner contains the following text, which runs along
the right-hand edge of the photograph.
IPG Photonics is a leading supplier of:
. Fiber Amplifiers
. Raman Pump Lasers
. Fiber Lasers
Along the bottom of the page is the registrant's logo which reads as
follows:
IPG Photonics
...Enabling the Optical Network
Pages Two and Three:
These two pages will have one continuous graphic designed to depict the
four types of optical networks: the "Long Haul Network," the optical fiber
network that interconnects metropolitan areas; the "Metropolitan Ring," the
optical fiber network that connects central telecommunications switching
exchanges within metropolitan areas; the "Access Network," the optical fiber
network that connects individual buildings and homes to central
telecommunications switching exchanges within metropolitan and suburban areas;
and the "Free Space Access Network," the optical fiber systems that are used
for free space optical communications between buildings in metropolitan areas.
At the upper left-hand corner of page two is the registrant's "IPG
Photonics" logo.
At the center of page two is a triangle. The legs of this triangle depict
the segments of the Long Haul Network that interconnect metropolitan areas. The
middle of the triangle contains the words "Long Haul Network". Above the top
leg of the triangle is a photograph of an IPG Photonics High Power Erbium-Doped
Fiber Amplifier, illustrating the use of this product to amplify light signals
in long haul networks. Along the lower left-hand leg of the triangle is a
photograph of an IPG Photonics Raman pump laser, illustrating the use of this
product to effect Raman amplification of light signals in long haul networks.
At each of the triangle's three corners is an identical image of five
high-rise buildings standing in an ellipse. Each ellipse depicts the
"Metropolitan Ring" in the metropolitan area in which the buildings are
located. Underneath each ellipse are the words "Metropolitan Ring." Underneath
and slightly to the right of the Metropolitan Ring at the right-hand corner of
the Long Haul Network triangle is a photograph of an IPG Photonics Utility
EDFA, illustrating the use of this product to amplify light signals in
metropolitan rings.
The top half of page three is an exploded view of three of the high-rise
buildings in the metropolitan area at the right-hand corner of the Long Haul
Network triangle on page two. One of the buildings is connected to the
metropolitan ring. There are two dotted lines connecting a point near the top
of this building to each of the other two buildings in this exploded view,
depicting free space optical communications taking place between the buildings.
Above the three buildings are the words "Free Space Access Network." Underneath
the three buildings is a photograph of an IPG Photonics Dynamic Power Free
Space Amplifier, illustrating the use of this product in free space optical
communications.
The lower half of page three is an expanded view of two of the high-rise
buildings in the metropolitan area at the right-hand corner of the Long-Haul
Network triangle on page two. The exploded view also contains images of three
homes. The central telecommunications switching exchange to which the two
buildings and three homes are connected is depicted by an ellipse in the middle
of the five structures. A straight line running from each structure to this
ellipse depicts the "fiber-to-the-curb" that connects the structure to the
central telecommunications switching exchange. Below the ellipse is a
photograph of an IPG Photonics High-Power, Multiport EDFA, illustrating the use
of this product in access networks.
At the bottom right-hand corner of page three is the registrant's
"...Enabling the Optical Network" logo.
TABLE OF CONTENTS
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 6
Forward-Looking Statements................................................ 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 19
Selected Combined Consolidated Financial Data............................. 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 33
Management................................................................ 48
Transactions with Related Parties......................................... 57
Indemnification of Directors and Executive Officers and Limitation of
Liability................................................................ 62
Principal Stockholders.................................................... 63
Description of Capital Stock.............................................. 65
Shares Eligible for Future Sale........................................... 67
Summary of Federal Income and Estate Tax Consequences of Ownership and
Disposition of Common Stock by Non-U.S. Holders.......................... 69
Underwriting.............................................................. 72
Legal Matters............................................................. 76
Experts................................................................... 76
Where You Can Find More Information....................................... 77
Index to Combined Consolidated Financial Statements....................... F-1
Unless specifically stated, the information in this prospectus:
. reflects the automatic conversion of all outstanding shares of our
Series A convertible preferred stock and Series B convertible
redeemable preferred stock into an aggregate of 12,083,333 shares of
our common stock upon the closing of this offering;
. reflects the acquisition of all of the remaining shares of IPG Laser
GmbH by us on October 4, 2000;
. a 2-for-1 stock split of our common shares to be effective upon
commencement of this offering; and
. assumes no exercise of the underwriters' overallotment option to
purchase an aggregate of 1,175,000 shares of common stock.
You should rely only on the information contained in this prospectus.
Neither we nor the underwriters have authorized any person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We and the underwriters are not making
an offer to sell these securities in any jurisdiction where the offer or sale
is not permitted. You should assume that the information appearing in this
prospectus is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations and prospects
may have changed since that date.
IPG is a trademark of IPG Photonics Corporation. This prospectus contains
product names, trade names and trademarks of IPG and other organizations.
i
PROSPECTUS SUMMARY
The summary highlights selected information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all the
information that you should consider before buying shares in this offering. You
should read the entire prospectus carefully, including our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
IPG Photonics Corporation
We design, manufacture and sell high performance fiber amplifiers, Raman
pump lasers and fiber lasers for telecommunications and industrial
applications. Our proprietary technology, materials science expertise and
vertically integrated manufacturing operations enable us to meet the demands of
our customers for cost-effective fiber amplifiers and lasers having high power
output and reliable performance. Our telecommunications products are used
throughout optical communications networks. Our largest telecommunications
customers in 2000 were Alcatel, Lucent, Marconi, Siemens and TeraBeam Networks.
Our industrial products are used for a variety of manufacturing, medical and
aerospace applications. Our largest industrial customers in 2000 were GSI
Lumonics, Purup Escofot and Sunx.
Due to rapidly increasing worldwide levels of data, voice and video
traffic, telecommunications service providers are expanding their use of fiber
optic technologies and seeking to increase the transmission capacity, or
bandwidth, of existing fiber optic networks. Fiber optic networks transmit
information as pulses of light, or optical signals, through optical fibers,
which are thin glass strands. In these networks, the distance that an optical
signal can be transmitted is limited by losses in signal strength, or
attenuation, as well as by losses to the signal as it passes through optical
components in the network, known as insertion loss. Operators of fiber optic
networks use fiber amplifiers to amplify optical signals during transmission to
overcome attenuation and insertion loss. Prior to the invention of the fiber
amplifier in 1987, this amplification could only be accomplished through the
relatively expensive and inefficient process of optical to electronic to
optical conversion. By addressing attenuation and insertion loss without the
need for this type of conversion, fiber amplifiers allow communications
networks to be deployed more cost-effectively.
Optical signals are most commonly amplified through the use of erbium-
doped fiber amplifiers, or EDFAs, and Raman pump lasers. EDFAs are placed at
specific points along an optical network to boost the optical signal in order
to assure the signal maintains its integrity throughout transmission. Ryan,
Hankin & Kent, a leading market research and consulting firm, estimates that
revenue from the sale of erbium gain modules, the component of EDFAs in which
amplification occurs, was $641 million in 1999 and will increase to $4.2
billion in 2004, representing a compound annual growth rate of 45.3%.
Raman pump lasers emit light at specific wavelengths that travels along a
transmission fiber to amplify the optical signal, a process known as Raman
amplification. Ryan, Hankin & Kent estimates that sales of Raman gain modules
will grow from approximately $18.0 million in 2000 to approximately $1.0
billion in 2004, representing a compound annual growth rate of 173.1%.
Our innovative line of customized high and low power amplifiers is
designed to meet the specific needs of our telecommunications customers. For
example:
. Our high-power fiber amplifiers enable bandwidth-enhancing technologies,
such as dense wavelength division multiplexing, or DWDM, by which
multiple wavelengths of optical signals are transmitted simultaneously
through the same fiber.
. Our high-power, multiple output fiber amplifiers enable fiber optic
technology to be used in residential areas and cable television systems.
1
. Our high-power amplifiers automatically adjust power output to overcome
atmospheric limitations, such as fog and rain, in free-space (wireless)
optical networks.
. Our low- and medium-power fiber amplifiers can be widely deployed in
metropolitan areas because of their cost-effectiveness and high
reliability.
In addition to telecommunications products, we also provide high power
fiber lasers for a variety of industrial applications. Industrial lasers enable
manufacturers to cut, mark and measure without physical contact which, in many
applications, allows for higher processing speeds. Our high power fiber lasers
offer several benefits compared to traditional industrial laser technologies,
such as gas or solid state such as higher beam quality and mobility, increased
reliability and efficiency, reduced size, maintenance-free operation and lower
operating costs.
We employ more than 30 Ph.D.'s to support our proprietary technology
platform. We produce our products using vertically integrated manufacturing
operations located in the United States, Germany and Italy, all of which we are
currently expanding. We design and manufacture a significant majority of our
critical specialty components and test and qualify all of our components,
assemblies and finished products. Our vertically integrated manufacturing
operations enable us to quickly scale our production and maintain high product
quality and reliability in order to meet the needs of our telecommunications
and industrial customers.
Our objective is to be the leading supplier of fiber amplifiers, Raman
pump lasers and fiber lasers to developers of optical communications and
industrial laser systems. Key elements of our strategy include:
. extending our existing technology leadership;
. expanding and enhancing our existing line of products;
. expanding our manufacturing capacity and reducing costs;
. expanding our sales and marketing efforts;
. providing our customers with a high degree of technical and engineering
support for customization; and
. acquiring strategic businesses and technologies consistent with our
growth strategy.
Corporate Information
Our main office is located at 660 Main Street, Sturbridge, Massachusetts
01566 and our telephone number is (508) 347-6800.
2
The Offering
Common stock offered by
IPG Photonics.......... 8,200,000 shares
Common stock to be
outstanding after this
offering............... 92,084,201 shares
Use of proceeds......... For expansion of manufacturing facilities, marketing and
distribution activities, research and development
activities and repayment of a portion of outstanding
indebtedness, working capital and other general corporate
purposes, including acquisitions.
Proposed Nasdaq National
Market symbol.......... IPGP
The number of shares that will be outstanding after this offering is
based on the number of shares outstanding as of December 31, 2000, including:
. the conversion of all outstanding Series A and Series B preferred
stock into an aggregate of 12,083,333 shares of common stock;
. 1,000,000 shares of restricted common stock issued under our 2000
stock incentive plan subsequent to December 31, 2000 at a price of
$0.50 per share;
and excluding:
. 5,126,532 shares of common stock issuable upon exercise of options
outstanding at December 31, 2000 under our 2000 stock incentive plan,
with a weighted-average exercise price of $0.99 per share, and
2,653,000 shares of common stock issuable upon exercise of options
granted subsequent to December 31, 2000 and prior to the date of this
prospectus with a weighted-average exercise price of $2.06 per share;
. 5,525,600 shares of common stock reserved for issuance under our 2000
stock incentive plan with respect to unawarded options or other grant;
and
. 3,166,117 shares of common stock issuable upon exercise of warrants
outstanding at December 31, 2000 held by owners of our Series B
convertible redeemable preferred stock, assuming an exercise price of
$7.50 per share.
3
Summary Combined Consolidated Financial Data
You should read the following Summary Combined Consolidated Financial
Data in conjunction with the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our combined
consolidated financial statements and the related notes included elsewhere in
this prospectus.
The following table sets forth our summary financial and operating data
for the periods indicated on the basis described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained
elsewhere in this prospectus. Our combined consolidated financial statements
include the accounts of IPG Laser GmbH and IPG Fibertech S.r.l. The summary
combined consolidated financial data for each of the three years in the period
ended December 31, 1999 are derived from our combined consolidated financial
statements included elsewhere in this prospectus, which have been audited by
independent auditors. The summary combined consolidated financial data as of
September 30, 2000 and for the nine months ended September 30, 1999 and 2000
are derived from our unaudited combined consolidated financial statements
included elsewhere in this prospectus. Our results of operations for the nine
month period ended September 30, 2000 are not necessarily indicative of our
results for the full fiscal year ended December 31, 2000. For purposes of
presentation of our summary combined consolidated financial statements for the
years ended December 31, 1997 and 1998, IPG Laser and IPG Laser's 80% owned
subsidiary, IPG Fibertech, are referred to as the Predecessor.
For the nine
For the year ended months ended
December 31, September 30,
----------------------- ----------------
1997 1998 1999 1999 2000
------ ------ ------- ------- -------
(in thousands, except per share data)
Predecessor
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Statement of Operations Data:
Net sales........................... $3,097 $8,263 $18,640 $14,823 $32,689
Cost of sales (1)................... 2,436 5,560 9,688 6,882 12,610
------ ------ ------- ------- -------
Gross profit (1).................... 661 2,703 8,952 7,941 20,079
------ ------ ------- ------- -------
Operating expenses:
Sales and marketing (2)............ 219 374 677 619 1,049
Research and development (3)....... 127 682 1,477 1,036 1,127
General, administrative and other
(4)............................... 276 1,000 2,712 2,006 3,946
Equity-based compensation.......... -- -- -- -- 12,035
------ ------ ------- ------- -------
Total operating expenses.......... 622 2,056 4,866 3,661 18,157
------ ------ ------- ------- -------
Operating income.................... 39 647 4,086 4,280 1,922
Interest income (expense), net...... (119) (208) (303) (231) (77)
Other income (expense), net......... 108 (47) 273 40 475
------ ------ ------- ------- -------
Income before provision for income
taxes
and minority interest.............. 28 392 4,056 4,089 2,320
Provision for income taxes.......... 22 234 2,102 2,178 5,828
Minority interest................... -- (4) (3) (5) --
------ ------ ------- ------- -------
Net income (loss)................... 6 154 1,951 1,906 (3,508)
Accretion of preferred stock........ -- -- -- -- (169)
------ ------ ------- ------- -------
Net income (loss) available to
common shareholders................ $ 6 $ 154 $ 1,951 $ 1,906 $(3,677)
====== ====== ======= ======= =======
Net income (loss) per share: (5)
Basic ............................. -- -- $ 0.03 $ 0.03 $ (0.06)
======= ======= =======
Diluted ........................... -- -- $ 0.03 $ 0.03 $ (0.06)
======= ======= =======
Pro forma net loss per share--basic
and diluted (5)................... -- -- -- -- $ (0.05)
=======
4
(1) Excludes $677 of equity-based compensation for the nine months ended
September 30, 2000.
(2) Excludes $166 of equity-based compensation for the nine months ended
September 30, 2000.
(3) Excludes $184 of equity-based compensation for the nine months ended
September 30, 2000.
(4) Excludes $11,008 of equity-based compensation for the nine months ended
September 30, 2000.
(5) The calculation of net income (loss) per share and pro forma basic and
diluted net loss per share is described in Note 3 to the combined
consolidated financial statements.
September 30, 2000
-------------------------------------
Pro Forma
Actual Pro Forma (6) As Adjusted (7)
-------- ------------- --------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.............. $ 52,999 $ 73,499 $185,869
Working capital........................ 56,994 77,494 189,864
Total assets........................... 102,977 123,477 235,847
Long-term debt, including current
portion............................... 7,299 7,299 7,299
Series B preferred stock............... 62,389 -- --
Series A preferred stock............... 4,954 -- --
Shareholders' equity................... 18,354 101,243 213,613
(6) The pro forma amounts give effect to (i) the issuance of an additional
800,000 shares of Series B preferred stock at $25.00 per share subsequent
to September 30, 2000, (ii) the issuance of 2,806,000 shares of our common
stock in connection with the acquisition of the remaining ownership of IPG
Laser on October 4, 2000, (iii) the issuance subsequent to September 30,
2000 of 1,000,000 shares of common stock for $500,000 and options to
purchase 2,000,000 shares of common stock at a price of $1.50 per share,
reflecting a compensation charge of $12.0 million and deferred compensation
charge of $22.0 million, (iv) the issuance subsequent to September 30, 2000
of options to purchase 1,607,000 shares of common stock at a weighted-
average exercise price of $3.25 per share to employees, consultants and
members of the Board of Directors, reflecting a deferred compensation
charge of $14.7 million, (v) the conversion of all outstanding shares of
Series A preferred stock into 1,000,000 shares of common stock, and (vi)
the conversion of all outstanding shares of Series B preferred stock into
11,083,333 shares of common stock.
(7) The pro forma as adjusted amounts reflect pro forma amounts, as adjusted to
reflect the sale of 8,200,000 shares of our common stock in this offering,
at an assumed initial public offering price of $15.00 per share and after
deducting the estimated underwriting discount and estimated offering
expenses, and our receipt of the net proceeds. For more information, see
"Use of Proceeds" and "Capitalization."
5
RISK FACTORS
You should carefully consider the risk factors set forth below, in
addition to the other information contained in this prospectus, before making
an investment decision. If any of the following risks actually occur, our
business could be harmed, the trading price of our common stock could decline
and you may lose all or part of your investment. You should also refer to the
other information contained in this prospectus, including our financial
statements and the related notes.
Risks Related to Our Business
We depend on a few key customers for a substantial portion of our sales revenue
and the loss of any of these customers or a significant reduction or
fluctuation in sales to these customers could significantly reduce our sales
revenue or cause our results of operations to fluctuate.
Our results of operations have historically depended, and we anticipate
will continue to depend for the foreseeable future, on sales to a relatively
small number of customers. In the nine-month period ended September 30, 2000,
TeraBeam and Marconi accounted for 40.2% and 19.6% of our net sales revenue,
respectively, with eight customers accounting for 86% of our net sales revenue.
Our net sales revenue generated from these customers, individually or in the
aggregate, may not reach or exceed historic levels in any future period. In
addition, some of these customers are also competitors.
Our net sales are dependent in part upon the ability of our customers to
develop and sell systems that incorporate our fiber amplifiers, Raman pump
lasers and fiber lasers. Adverse economic conditions, large inventory
positions, limited marketing resources and other factors affecting these
customers could have a substantial impact upon our financial results. In
addition, our customers tend to order large quantities of products on an as
needed basis. These ordering patterns may result in significant quarterly
fluctuations in our net sales revenue and results of operations. None of our
current customers have any minimum purchase obligations and may stop placing
orders with us at any time. Our customers may purchase, and in several cases
have purchased, fiber amplifiers and fiber lasers from other vendors,
regardless of any forecast they may have previously provided to us. Loss or
cancellations of orders from, or any downturn in the business of, any of these
significant customers could cause a reduction in our sales revenue. In
addition, we may not be able to reduce our dependence on a limited number of
customers if the trend toward consolidation within various segments of the
communications industry continues.
A significant portion of our sales are to a customer seeking to develop a free-
space optical telecommunications business. If this customer's business does not
develop as planned, our operating results could be materially adversely
affected.
TeraBeam has developed a free-space optical telecommunications system to
transmit data from building to building at high speeds without the use of
copper or fiber optic cables. We understand that TeraBeam plans to introduce
this system in metropolitan areas in the coming years. Free-space optical
telecommunications systems are relatively new. We cannot predict the rate or
extent to which these new telecommunications systems will be adapted or whether
they will be widely accepted. Finally, as a private company, TeraBeam does not
publish financial statements or other reports of the type required of companies
whose securities are publicly traded. Consequently, we cannot make any
statements about TeraBeam's financial condition or resources.
Our ability to sell our products would suffer if we lose members of our senior
management team or if these members are unable to work together effectively.
Our future success depends upon the continued services of members of our
senior management, particularly Dr. Valentin P. Gapontsev, our founder,
Chairman of the Board and Chief Executive Officer. The loss of Dr. Gapontsev
could hurt our business, and we do not have "key person" life insurance
policies covering Dr. Gapontsev or any of our other employees. We are currently
seeking to obtain a "key person" life insurance policy for Dr. Gapontsev as
well as other key employees. With the exception of John H. Dalton, John
6
Geagea and Angelo P. Lopresti, none of our executive officers or key employees
are bound by an employment agreement for any specific term and these
individuals may terminate their employment at any time. In addition, many of
the members of our management team have been with us only for a relatively
short period of time. For example, our President, Chief Operating Officer,
Executive Vice President of Strategic Marketing, and General Counsel joined us
within the past seven months.
If we do not successfully expand our sales and marketing organization, our
sales revenue may not increase.
The sale of our products requires long and sustained efforts targeted at
several key departments within our customers' and prospective customers'
organizations. Our sales organization is currently limited and relies
substantially upon our senior management, scientists and engineers. We will
need to grow our sales force in order to increase market awareness and sales of
our products. Competition for these individuals is intense, and we might not be
able to hire the kind and number of sales personnel and applications engineers
we need.
If we cannot reduce our manufacturing costs and introduce higher margin
products to offset anticipated continued reductions in the average selling
price of our products, we may experience reduced sales levels, reduced gross
margins and loss of market share.
We anticipate that average selling prices of fiber optic communications
products will continue to decrease in the future in response to technological
advances, to product introductions by competitors and by us, and to other
factors, including price pressures from significant customers. We cannot
predict the rate at which selling prices will decrease. Therefore, we must
continue to develop and introduce new products that incorporate features that
can be sold at higher prices and reduce our manufacturing costs.
Our dependence on single or limited source suppliers for some of our key
components and raw materials could adversely affect our results of operations.
We currently purchase some of our key components and raw materials used
in the manufacture of our products from single or limited source suppliers and
we have no contractual supply arrangements with any supplier other than SDL,
our single source supplier of laser diode chips. Although we are actively
seeking alternative sources of supply for the key components that we obtain
from single or limited source suppliers, we do not anticipate supplies being
available from other sources in commercial quantities in the near future.
Financial or other difficulties faced by our suppliers or significant changes
in demand for the components and materials we obtain from them could limit the
availability of these components and materials. Any interruption or delay in
the supply of any of these components or materials, or the inability to obtain
these components and materials from alternate sources at acceptable prices and
within a reasonable amount of time would impair our ability to meet scheduled
product deliveries to our customers and could cause customers to cancel orders.
We currently manufacture many of our critical components and will attempt to
manufacture more of them to reduce our dependence on single or limited source
suppliers, but we cannot assure you that we will succeed at these efforts in a
timely manner or at all.
Some of our competitors are also our suppliers and if our relationships with
these suppliers deteriorate, we may experience delivery problems and have less
control over product pricing and quality, which would harm our business.
Some of our component suppliers are both single source suppliers to us
and major competitors. For example, we buy some of our key components from SDL,
one of our competitors. SDL has recently announced its decision to merge with
JDS Uniphase. A change in these supply relationships in any manner adverse to
us could cause us to experience delivery problems as well as reduced control
over product pricing and quality. In addition, we could experience delays in
identifying and qualifying other suppliers in a timely manner, which could
cause production delays.
7
If we are unable to expand our manufacturing capacity in a timely manner, we
will have insufficient capacity, which could seriously harm our business
prospects.
We are currently establishing additional manufacturing and research
facilities in Oxford, Massachusetts and Burbach, Germany and plan to add
additional capacity in Milan, Italy. During this process, we could face the
inability to procure and install the necessary capital equipment, a lack of
availability of manufacturing personnel to work in our existing or new
facilities and difficulties in achieving adequate yields from new manufacturing
lines. We could also experience delays, disruptions, capacity constraints or
quality control problems in our existing or new manufacturing operations. If we
experience difficulties and disruptions in the manufacture of our products, we
may not be able to deliver our products in a timely manner, which could cause
us to lose customers or make it more difficult to attract new customers and
negatively impact our sales revenue, competitive position and reputation. An
element of our manufacturing strategy is increasing use of automation in our
manufacturing and assembly processes. We cannot assure you that we will be able
to successfully increase our use of automation. In addition, if we outgrow our
existing and new facilities in Massachusetts, Germany and Italy, we will need
to locate and obtain additional space. The commercial real estate markets in
Massachusetts and Germany are extremely competitive and we may not be able to
obtain additional needed space on reasonable terms, or at all. Our failure to
obtain additional space could adversely impact our ability to expand our
business and operations and increase our sales.
If we do not achieve acceptable manufacturing costs or sufficient product
reliability in our expanded facilities or we suffer any interruption in our
manufacturing operations, our ability to compete may be impaired and our sales
could suffer.
The manufacture of our products involves complex and precise processes,
requiring production in highly controlled clean room environments. Changes in
our manufacturing processes or those of our suppliers, or inadvertent use of
defective or contaminated materials by our suppliers or us, could significantly
reduce our manufacturing yields and product reliability. Our manufacturing
costs are relatively fixed and, thus, manufacturing yields are critical to our
results of operations. To the extent we do not achieve acceptable manufacturing
yields or experience product shipment delays, our gross margins would suffer.
In addition, we may experience manufacturing delays and reduced manufacturing
yields upon introducing new products. Furthermore, any interruption in
manufacturing resulting from shortages of parts or equipment, earthquake, fire,
equipment failures, yield fluctuations or otherwise could materially harm our
operating results and business prospects.
If we fail to predict our manufacturing requirements accurately, we could incur
additional costs or experience manufacturing delays, which could cause us to
lose orders or customers and harm our operating results.
We need to accurately predict both the demand for our products and the
lead time required to manufacture and obtain the raw materials and components
for manufacturing our products. Lead times for raw materials and components
that we order vary significantly and depend on factors such as the size of the
order, contract terms and market demand for the raw materials or components. We
currently use historical pricing, analytical reports and industry trend
analysis to determine our requirements for components and raw materials. If we
underestimate our requirements, our company may have inadequate manufacturing
capacity or inventory, which could interrupt manufacturing of our products and
result in delays in shipments and revenues. If we overestimate our
requirements, we could have excess inventory.
8
If fiber optic technology is adopted at rates slower than we expect, we may
have to significantly revise our strategy and demand for our products may
decline, which would adversely impact our operating results and business
prospects.
We have based a significant element of our business strategy on expanded
use of fiber optic technology as a means of satisfying the increasing demand
for bandwidth across communications networks, including the demand for higher
transmission rates related to Internet-based communications. While we believe
that both economic and technological factors favor the use of fiber optic
communications systems over traditional copper wire-based systems, enhancements
to copper wire-based technology, such as digital subscriber line, or DSL, could
delay or prevent the adoption of fiber optic technology. Consequently, our
sales could be adversely affected.
If we fail to manage our growth effectively, our ability to manufacture and
sell our products could be adversely affected, which could harm our operating
results.
The increase in the number of our employees and the growth in our
operations, combined with the challenges of managing geographically-dispersed
operations, has placed, and we expect will continue to place, a significant
demand on our management systems and resources. We continue to expand the scope
of our operations in the United States, Germany and Italy, and have increased
the number of our employees substantially in the past year. In addition, we
plan to hire a significant number of employees over the next few quarters. We
expect that we will need to continue to improve our financial and managerial
controls, reporting systems and procedures and continue to expand, train and
manage our work force worldwide.
Competition in the fiber amplifier and fiber laser market for
telecommunications applications is intense and could adversely affect our sales
revenue and gross margins.
Many of our competitors are large public companies that have long
operating histories, significantly greater financial, technical, marketing and
other resources, name recognition, extensive customer bases, well-developed
distribution channels and broad product offerings. These companies include ADC,
Alcatel, Corning, Corvis, Furakawa, JDS Uniphase, Lucent, Marconi, SDL and
Siemens. These competitors and others are able to devote greater resources than
we can to the development, marketing, sale and support of their products, and
they can leverage their customer bases and broader product offerings and adopt
aggressive pricing policies to gain market share. We expect to encounter
potential customers that, due to existing relationships with these and other
competitors, are committed to the products offered by them. The intensity of
competition in our business could both prevent us from increasing or
maintaining our market share and force us to reduce the prices of our products.
If we cannot increase our market share or if we are forced to reduce the prices
of our products, our sales revenue could stagnate or decline. Similarly, if we
are forced to reduce the prices of our products, our margins could decline.
Several of our competitors have large market capitalizations or cash reserves,
and are much better positioned than we are to acquire other companies in order
to increase their size or gain new technologies or products that may displace
ours. These competitors could also acquire one or more of our significant
customers, thereby leading to a decline in our sales revenue. In other
circumstances, some of our competitors could spin-out new companies in the
fiber optic components market that could as free-standing companies compete
more aggressively with us. Finally, additional competitors may enter our
market, and we are likely to compete with new companies in the future.
We do not have patents on our core technologies and, as a result, other
companies may develop similar products or services, which could seriously harm
our business.
Our success and ability to compete substantially depends on our ability
to sell products in which we may not have sufficient intellectual property
rights. We currently do not have patents on any of our core technology that
would preclude or inhibit customers from using our core technologies, and we
cannot assure you that we will be successful in protecting our technology
through patent law. Historically, we have chosen to
9
rely upon trade secrets and contractual restrictions, as opposed to patents, to
protect our rights because of our limited resources. Attempts may be made to
copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may not be able to
prevent misappropriation of our technology or deter others from developing
similar technology. Furthermore, policing the unauthorized use of our products
is difficult. Although we have applied for U.S. federal trademark protection,
we do not have any U.S. federal trademark registrations for the marks "IPG,"
"IPG Photonics" or "IPG Laser" or certain of our other marks and we may not be
able to obtain such registrations due to conflicting marks or otherwise.
Litigation may be necessary in the future to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. This litigation could result in public disclosure of our proprietary
technology, substantial costs and diversion of resources.
We may be sued by third parties for infringement of their proprietary rights
and we may incur defense costs, and possibly royalty obligations, or be
prevented from using technology important to our business.
The fiber optic components and fiber laser industries are characterized
by the existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. Several manufacturers of fiber amplifiers have recently been sued for
alleged infringement of a fiber amplifier patent. As the number of participants
and the overall level of competitiveness in our markets increase, the
possibility of an intellectual property claim against us increases. Any
intellectual property claims, with or without merit, could be time consuming
and expensive to litigate or settle and could divert management attention from
administering our business. A third party asserting infringement claims against
us or our customers with respect to our current or future products may
adversely affect us by, for example, causing us to enter into costly licenses
or incur settlement or litigation costs. We cannot assure you that third-party
licenses will be available to us on commercially reasonable terms, or at all.
The inability to obtain any third-party license required to continue the
manufacture and sale of our current products or develop new products and
product enhancements could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, either of which could
seriously harm our ability to manufacture and sell our products.
If we fail to develop and successfully introduce new and enhanced products that
meet the needs of our current and potential customers or do not comply with
evolving fiber optic technology standards, our operating results would suffer.
The fiber amplifier and fiber laser industries are characterized by rapid
technological changes, frequent new product introductions, changes in customer
requirements and evolving standards. Our failure to predict accurately the
needs of our customers and prospective customers, and to develop products or
product enhancements that address those needs and these evolving standards, may
result in the loss of current customers or the inability to convert prospective
customers into customers. While we intend to continue to invest in product and
technology development, our products could quickly become obsolete as new
technologies and standards are introduced and incorporated into new and
improved products. In addition, if laser products are not broadly accepted for
industrial applications as an alternative to current technology, we may incur
significant expenses and losses due to lack of customer demand, unusable
purchased components for these products and the diversion of our engineers from
future product development efforts. The development of new or enhanced products
is a complex and uncertain process that requires the accurate anticipation of
technological and market trends. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent the development,
introduction or marketing of new products and enhancements. The introduction of
new or enhanced products also requires that we manage the transition from older
to newer products in order to minimize disruption in customer ordering patterns
and ensure that adequate supplies of new products can be delivered to meet
anticipated customer demand. Our inability to effectively manage this
transition would cause our operating results to suffer.
10
The long sales cycles for our products may cause our revenue and operating
results to fluctuate significantly from quarter to quarter.
Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle. While any customer or prospective customer is
evaluating our products and before they place an order with us, we may incur
substantial sales and marketing and research and development expenses to
customize our products to their needs. We may also expend significant
management effort, increase manufacturing capacity and order long lead time
components or materials prior to receiving an order. Even after this evaluation
process, a customer or prospective customer may not purchase our products. Our
sales cycles typically last four to six months. However, because of the
evolving nature of the optical networking market and the customized nature of
our products, some sales and development cycles may be longer.
Operations of our affiliate in Russia subject us to risks inherent in doing
business in Russia.
Our wholly-owned subsidiary, IPG Laser, has agreed in principle to
acquire a 51% interest in NTO IRE-POLUS, a company located in Russia and one of
our affiliates. NTO IRE-POLUS conducts research and development and provides
components and test equipment to us. The results of operations, business
prospects and facilities of NTO IRE-POLUS are subject to the economic and
political environment in Russia. Russia has experienced and is continuing to
experience both political and economic instability, including, the successive
turnover of persons holding the position of prime minister and other upper
level government ministers, the devaluation of the ruble and problems relating
to the bailout of Russia's economy by the International Monetary Fund. If
Russia's federal or local governments adopt new restrictions, such as those
relating to taxation, import and export tariffs, currency regulations,
environmental regulations, land use rights, property and various other matters,
or impose stricter regulations or interpretations of existing regulations, the
supply of technology, test equipment or components to us from NTO IRE-POLUS
could be limited and our operating results and financial position could be
harmed.
We may not be successful in attracting, assimilating or retaining qualified
personnel to fulfill our current or future needs, which could adversely impact
our ability to manufacture and sell our products.
Our ability to continue to attract and retain highly skilled personnel is
critical for us. During 2000, we hired approximately 106 new employees. We will
need to increase the number, and ensure the continued quality, of our
engineering, marketing, sales and manufacturing personnel to successfully
implement our business plan. Our business requires individuals educated in
several disciplines, including physics, optics, materials sciences, chemistry
and electronics. Competition for this technical personnel is intense.
Our products are deployed in large and complex systems and may contain defects
that are not detected until after our products have been installed, which could
damage our reputation and cause us to lose customers.
Several of our products are designed to be deployed in large and complex
optical networks. Although we test both critical components and our finished
products, they can only be fully tested for reliability when deployed in
networks for long periods of time. Our customers may discover defects in our
products only after they have been fully deployed and have operated under peak
stress conditions. In addition, our products are combined with products from
other vendors. Should problems occur, it may be difficult to identify the
source of the problem. If we are unable to fix defects or other problems, we
could experience, among other things, loss of customers, damage to our brand
reputation, failure to attract new customers or achieve market acceptance,
diversion of development and engineering resources, and legal actions by our
customers.
11
Our ability to grow may be limited if we need, but are unable to raise,
additional capital to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements.
We compete in a dynamic and rapidly evolving industry and may be required
to raise substantial additional capital in the future to develop or enhance our
products, increase our manufacturing capacity or respond to future
opportunities or competitive pressures. If we are required to raise additional
funds, we may not be able to do so on favorable terms, or at all.
If we fail to successfully manage our exposure to the worldwide financial
markets and currency fluctuations, our operating results could suffer.
During the first nine months of 2000, approximately 98% of our net sales
were denominated in the U.S. dollar, with the remainder denominated in the
German mark and the Italian lira. In addition, approximately 20% of our cost of
sales and operating expenses were denominated in the German mark or the Italian
lira and approximately $4.8 million of our capital expenditures were
denominated in the German mark. We currently do not engage in any hedging
transactions. As a result, we are exposed to fluctuations in the exchange rates
between these foreign currencies and the U.S. dollar and an increase in the
value of these foreign currencies relative to the U.S. dollar could have a
material adverse effect on our operating results. To reduce the impact of
reductions in value and the volatility of future cash flows caused by changes
in foreign exchange rates, we may need to establish hedging programs, which may
not be available on commercially reasonable terms or at all.
Any acquisitions that we undertake could be difficult to integrate, disrupt our
business, dilute stockholder value and harm our operating results and financial
condition.
We expect to review opportunities from time to time to acquire or invest
in other businesses and technologies that would complement our current
products, expand the breadth of our markets or enhance our technical
capabilities, or that may otherwise offer growth opportunities. From time to
time, such acquisitions or investments may be required to remain competitive.
If we make any future acquisitions, we could issue stock that would dilute
existing stockholders' percentage ownership, incur substantial debt or assume
contingent liabilities. Our experience in acquiring other businesses and
technologies is limited. Potential acquisitions also involve numerous risks,
including:
. problems assimilating the purchased operations, technologies or
products;
. unanticipated costs associated with the acquisition;
. diversion of management's attention from our core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited
prior experience; and
. potential loss of key employees of purchased organizations.
We cannot assure you that we would be successful in overcoming problems
encountered in connection with such acquisitions, and our inability to do so
could significantly harm our business.
12
If we do not comply with various government export regulations in the countries
in which we operate and in which our products are used, we could be subject to
significant fines, penalties or other adverse consequences and our
manufacturing operations and ability to satisfy purchase orders and achieve
financial projections could be harmed.
Because our products can be used or adapted for military, weapons or
other similar uses, our products are subject to U.S., German, Italian and
Russian export control laws and regulations that regulate the export of
products, including components, and disclosure of technical information to
foreign countries and citizens. These laws and regulations may require licenses
for the export of some of our products from one or more of the countries in
which we are operating, as well as licenses for the disclosure of aspects of
our technology to our employees who are employed in, but not citizens of, those
countries. We cannot assure you that we will succeed in obtaining any of these
licenses. Depending on the outcome of any pending request, additional
applications for licenses and other approvals may be required. We cannot assure
you that any of these additional applications will be approved.
If we do not comply with various environmental and other safety regulations, we
could be subject to significant fines, penalties and forced shutdowns of our
manufacturing operations.
We are subject to a variety of national and local laws and regulations
concerning the storage, use, discharge and disposal of toxic, volatile or
otherwise hazardous or regulated chemicals or materials used in our
manufacturing and assembly processes. Further, we are subject to other safety,
labeling and training regulations as required by local, state and federal law.
We cannot assure you that the systems we have in place to monitor and maintain
compliance with these regulations will be adequate.
The failure of our customers to sell products that incorporate our products due
to industry cyclicality, adverse economic conditions, large inventory
positions, limited marketing resources and other factors could negatively
impact our net sales.
Our business is significantly dependent on capital expenditures by
manufacturers in the telecommunications as well as the industrial products
area. These areas are cyclical and have historically experienced periods of
oversupply, resulting in significantly reduced demand for capital equipment,
including the products manufactured and marketed by us. Our net sales are
dependent in part upon the ability of our customers to develop and sell systems
that incorporate our fiber amplifiers, Raman pump lasers and fiber lasers. In
addition, our customers could experience financial or other difficulties that
could adversely affect our operations and, in turn, our financial condition or
results of operations.
Risks Related to This Offering
We expect to experience volatility in our share price, which could negatively
affect your investment, and you may not be able to resell your shares at or
above the offering price.
The market price of our common stock after the offering may vary from the
offering price. If you purchase shares of common stock, you may not be able to
resell those shares at or above the offering price. We expect that our common
stock price will fluctuate significantly in the future due to:
. any deviations in our net sales revenue, gross profit or net income
or losses from levels expected by securities analysts;
. our relatively limited operating history;
. the rapid expansion of our business;
. changes in financial estimates by securities analysts;
13
. changes in market valuations of other fiber optic companies and the
high volatility of the fiber optic industry; and
. future sales of our common stock or other securities.
In addition, the Nasdaq National Market has experienced volatility that
has often been unrelated to the performance of particular companies. Future
market fluctuations may cause our stock price to fall regardless of our
performance.
We will have broad discretion to use the proceeds from this offering. If we do
not use the proceeds effectively to develop and grow our business, your
investment could suffer.
We intend to use a portion of the proceeds from this offering for the
expansion of our manufacturing facilities, marketing and distribution
activities, research and development activities and general corporate purposes.
We may use the balance of the proceeds to acquire or invest in related
businesses, products and technologies. Our management will have broad
discretion in deciding how we use the net proceeds from this offering,
including the uses for which we have provided estimated amounts in "Use of
Proceeds." You will not have the opportunity to evaluate the economic,
financial or other information on which we base our decisions regarding the use
of the net proceeds from this offering and we may spend these proceeds in ways
that do not increase our results of operations or market value.
Insiders will continue to have substantial control over us after this offering
and could delay or prevent a change in our corporate control and cause our
stock price to decline.
Upon completion of this offering and assuming no exercise of the
underwriters' over-allotment option, our executive officers, directors and our
existing principal stockholders who hold 5% or more of the outstanding common
stock and their affiliates will beneficially own approximately 90% of our
outstanding common stock based on shares outstanding as of December 31, 2000.
As a result, these stockholders will be able to continue to exercise
significant control over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
which could delay or prevent an outside party from acquiring or merging with us
and cause our stock price to decline. You should read "Principal Stockholders"
for a full presentation of the equity ownership of these stockholders.
There may be sales of a substantial amount of our common stock after this
offering that could cause our stock price to fall.
Our current stockholders hold a substantial number of shares, a
significant portion of which they will be able to sell in the public market 180
days after the date of this prospectus. Sales of a substantial number of shares
of our common stock after this offering could cause our stock price to fall. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock. You should read "Shares Eligible for
Future Sale" for a full discussion of the shares that may be sold in the public
market in the future.
Provisions of our charter documents, Delaware law and change of control
agreements may have anti-takeover effects that could prevent a change in
control, which may cause our stock price to decline.
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include authorizing our board of directors to issue
preferred stock without stockholder approval, limitations on shareholder action
by written consent, and prohibiting cumulative voting in the election of
directors. Certain provisions of Delaware law also may discourage, delay or
prevent someone from acquiring or merging with us, which may cause the market
price of our common stock to decline. You should read "Description of Capital
Stock--Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions" for
a full discussion of the charter and bylaw provisions and Delaware anti-
takeover law.
14
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," contains forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by the forward-looking statements. These risks and other factors
include those listed under "Risk Factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by words such as "may,"
"will," "should," "could," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue" or the negative of these terms
or other comparable words. In addition, these forward-looking statements
include, but are not limited to, statements regarding the following:
. the expansion of our manufacturing capacity;
. improvement of our manufacturing efficiencies;
. development and introduction of new products;
. anticipated sources of future revenues;
. the possibility of lower prices, reduced margins and loss of market
share due to increased competition;
. anticipated expenditures for research and development, sales and
marketing and general and administrative expenses; and
. the adequacy of our capital resources to fund our operations.
These statements are only predictions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable at this
time, we cannot guarantee future results, levels of activity, performance or
achievements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or future
events.
15
USE OF PROCEEDS
We estimate our net proceeds from the sale of the 8,200,000 shares of
common stock offered by us in this offering to be approximately $112.4 million,
based on an assumed initial public offering price of $15.00 per share and after
deducting the estimated underwriting discount and offering expenses. The net
proceeds are expected to be approximately $128.7 million if the underwriters'
over-allotment option is exercised in full.
We intend to use the net proceeds of this offering for:
Purpose Amount
------- ---------------
(approximately)
expansion of manufacturing facilities $80 million
sales and marketing activities $14 million
research and development activities $18 million
working capital and other general corporate purposes Remainder
If the opportunity arises, we may use a portion of the net proceeds from
this offering to acquire or invest in related businesses, joint ventures,
products and technologies. Except for the agreement in principle for IPG Laser
to acquire a 51% interest in NTO IRE-POLUS, our Russian affiliate, we currently
have no commitments or agreements for any material acquisition of, or
investment in, any third party, or creation of any joint ventures. The
estimated amounts set forth above and the timing of these expenditures will
vary depending on a number of factors, including future revenue growth, if any,
the amount of cash we generate from operations, the progress of our
manufacturing, sales and marketing expansion efforts and our international
market penetration. See "Risk Factors--We have broad discretion to use the
proceeds from this offering. If we do not use the proceeds effectively to
develop and grow our business, your investment could suffer." Pending any use
of the net proceeds for the above purposes, we intend to invest the funds in
short-term, interest-bearing, investment grade securities. For more
information, see "Business--The IPG Strategy."
DIVIDEND POLICY
We have never paid dividends on our capital stock. We currently intend to
retain future earnings to finance the growth and development of our business,
and we do not anticipate paying any dividends in the foreseeable future. Our
loan agreements include covenants which may restrict our ability to pay
dividends. In addition, certain of the loans to our German subsidiary, IPG
Laser, restrict the payment of dividends to IPG. For more information about
these loans, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
16
CAPITALIZATION
The following table sets forth our cash, debt, minority interests and
capitalization as of September 30, 2000:
. on an actual basis;
. on a pro forma basis, giving effect to:
. the issuance of 2,806,000 shares of our common stock in connection
with the acquisition of the remaining ownership of IPG Laser on
October 4, 2000;
. the issuance, subsequent to September 30, 2000, of 1,000,000
shares of common stock for $500,000 and options to purchase
2,000,000 shares of common stock at an exercise price of $1.50 per
share, reflecting a compensation charge of $12.0 million and
deferred compensation charge of $22.0 million;
. the issuance, subsequent to September 30, 2000, of options to
purchase 1,607,000 common shares at a weighted-average exercise
price of $3.25 per share to employees, consultants and members of
the Board of Directors, reflecting a deferred compensation charge
of $14.7 million.
. the conversion of all outstanding shares of Series A preferred
stock into 1,000,000 shares of common stock;
. the issuance of an additional 800,000 shares of Series B preferred
stock at $25.00 per share subsequent to September 30, 2000;
. the conversion of all outstanding shares of Series B preferred
stock into 11,083,333 shares of common stock; and
. on a pro forma as adjusted basis, giving effect to the sale of
8,200,000 shares of our common stock in this offering, at an assumed
initial public offering price of $15.00 per share and after deducting
the estimated underwriting discount and estimated offering expenses,
and our receipt and application of the net proceeds.
17
You should read this table together with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Description of Capital Stock," our combined consolidated financial statements
and the related notes and the other financial information in this prospectus.
September 30, 2000
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(In thousands, except per
share data)
Cash............................................ $52,999 $ 73,499 $185,869
======= ======== =========
Debt, including current portion................. $ 7,299 $ 7,299 $ 7,299
------- -------- ---------
Minority interest............................... 10 10 10
------- -------- ---------
Convertible redeemable preferred stock--Series
B, $0.0001 par value; 3,800,000 shares
authorized, 3,000,000 shares issued and
outstanding at September 30, 2000 actual; no
shares issued or outstanding at September 30,
2000 on a pro forma and pro forma as adjusted
basis.......................................... 62,389 -- --
-------
Shareholders' equity:
Preferred stock--$0.0001 par value; 700,000
shares authorized, no shares issued or
outstanding.................................... -- -- --
Convertible preferred stock--Series A, $0.0001
par value; 500,000 shares authorized, 500,000
shares issued and outstanding at September 30,
2000 actual; no shares issued or outstanding at
September 30, 2000 on a pro forma and pro forma
as adjusted basis.............................. 4,954 -- --
Common stock, $0.0001 par value, 100,000,000
shares authorized, 67,961,868 shares issued and
outstanding at September 30, 2000 actual;
100,000,000 shares authorized, 83,851,201
shares issued and outstanding at September 30,
2000 on pro forma basis and 500,000,000 shares
authorized, 92,051,201 issued and outstanding
at September 30, 2000 on a pro forma as
adjusted basis................................. 7 8 9
Additional paid-in capital...................... 30,934 164,120 276,489
Warrants to issue common stock.................. 12,400 15,707 15,707
Notes receivable from shareholders.............. (440) (440) (440)
Deferred compensation........................... (17,452) (54,103) (54,103)
Accumulated deficit............................. (11,362) (23,362) (23,362)
Accumulated other comprehensive income.......... (687) (687) (687)
------- -------- ---------
Total shareholders' equity...................... 18,354 101,243 213,613
------- -------- ---------
Total capitalization.......................... $88,052 $108,552 $ 220,922
======= ======== =========
--------
The information provided in the above table excludes:
. 5,126,532 shares of common stock issuable upon exercise of options
outstanding at December 31, 2000 under our 2000 stock incentive plan,
with a weighted-average exercise price of $0.99 per share, 33,000
options exercised in December 2000 and 2,653,000 shares issuable upon
exercise of options granted subsequent to December 31, 2000, with a
weighted-average exercise price of $2.06 per share;
. 5,525,600 shares reserved for future issuance under our 2000 stock
incentive plan; and
. 3,166,667 shares of common stock issuable upon exercise of warrants
outstanding at December 31, 2000 held by owners of our Series B
preferred stock, assuming an exercise price of $7.50 per share.
18
DILUTION
The pro forma net tangible book value of our common stock as of September
30, 2000 was approximately $101.1 million, or $1.21 per share. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the pro forma number of shares of
common stock outstanding after giving effect to the pro forma adjustments
described in "Capitalization." Dilution in pro forma net tangible book value
per share represents the difference between the amount per share paid by
investors in this offering and the pro forma net tangible book value per share
of our common stock immediately after the offering. After giving effect to our
sale of shares of common stock offered by this prospectus, at an assumed
initial public offering price of $15.00 per share, and after deducting the
underwriting discount and estimated offering expenses payable by us, our pro
forma net tangible book value would have been approximately $213.4 million, or
$2.32 per share. This represents an immediate increase in pro forma net
tangible book value of $1.11 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $12.68 per share to
new investors purchasing shares of common stock in this offering. The following
table illustrates this dilution.
Initial public offering price per share........................ $15.00
Pro forma net tangible book value per share as of September 30,
2000.......................................................... $1.21
Increase per share attributable to new investors............... 1.11
-----
Pro forma net tangible book value per share after this
offering...................................................... 2.32
------
Dilution per share to new investors............................ $12.68
======
The following table summarizes, on a pro forma basis after giving effect
to the pro forma adjustments described in "Capitalization," as of September 30,
2000:
. the number of shares of common stock issued by us;
. the total consideration paid to us;
. the average price per share paid by existing stockholders; and
. the average price per share paid by new investors, before deducting
the estimated underwriting discount and offering expenses payable by
us.
Total
Shares Purchased Consideration
------------------ ---------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- -------- ------- -------------
Existing stockholders......... 83,851,201 91% $ 86,416 41% $ 1.03
New investors................. 8,200,000 9% $123,000 59% $15.00
---------- --- --------
Total......................... 92,051,201 100% $209,416 100% $ 2.27
========== === ========
The information in the above tables excludes the following:
. 5,126,532 shares of common stock issuable upon exercise of options
outstanding at December 31, 2000 under our 2000 stock incentive plan
with a weighted average exercise price of $0.99 per share, options to
purchase 33,000 shares of common stock exercised in December 2000 and
2,653,000 shares of common stock issuable upon exercise of options
granted subsequent to December 31, 2000 and prior to the date of this
prospectus with a weighted average exercise price of $2.06 per share;
19
. 3,166,667 shares of common stock issuable upon exercise of warrants
outstanding at December 31, 2000 at an exercise price of $7.50 per
share held by owners of our Series B preferred stock, assuming an
initial public offering price of $15.00 per share; and
. up to 1,175,000 shares of common stock that may be issued by us
pursuant to the underwriters' over-allotment option.
Assuming exercise of all outstanding options and warrants, pro forma net
tangible book value per share at September 30, 2000 would be $1.38,
representing dilution of $12.52 per share to new investors. For more
information about dilution, see "Management--Stock Option Plan," "Description
of Capital Stock" and the notes to our combined consolidated financial
statements included in this prospectus.
20
SELECTED COMBINED CONSOLIDATED FINANCIAL DATA
We were incorporated on December 2, 1998 and at that date shared an
affiliation through common ownership with IPG Laser and IPG Fibertech,
collectively known as the IPG Group. In August 2000, the IPG Group was
reorganized, resulting in IPG Laser becoming our wholly-owned subsidiary upon
completion of the reorganization. Because IPG Laser and IPG Fibertech, the 80%
owned subsidiary of IPG Laser, have been under common managerial, operational
and shareholder control since inception, the transfers of interest are
accounted for in the financial statements as a reorganization of companies
under common control in a manner similar to a pooling of interests. Our
combined consolidated financial statements include the accounts of IPG Laser
and IPG Fibertech. All intercompany transactions and balances have been
eliminated. For purposes of presentation of the combined consolidated financial
statements for the years ended December 31, 1997 and 1998, IPG Laser and IPG
Fibertech, are referred to as the Predecessor.
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States. The selected combined
consolidated financial data presented below as of December 31, 1998 and 1999
and for each of the three years in the period ended December 31, 1999 are
derived from our audited combined consolidated financial statements included
elsewhere in this prospectus. The selected combined consolidated financial data
as of December 31, 1995, 1996 and 1997 and for the years ended December 31,
1995 and 1996 are derived from our unaudited combined consolidated financial
statements that are not included in this prospectus. The unaudited combined
consolidated financial statements have been prepared on the same basis as the
audited combined consolidated financial statements and, in the opinion of our
management, include all adjustments necessary for a fair presentation of the
information set forth in such statements. Historical results are not
necessarily indicative of results that may be expected for any future period.
The combined consolidated financial data as of September 30, 2000 and for
the nine months ended September 30, 1999 and 2000 are derived from our
unaudited combined consolidated financial statements included elsewhere in this
prospectus. We have prepared the unaudited information on the same basis as the
audited combined consolidated financial statements and have included all
adjustments that we consider necessary for a fair presentation of our financial
position and operating results for the interim periods. Our results of
operations for the nine month period ended September 30, 2000 are not
necessarily indicative of our results for the full fiscal year ended December
31, 2000.
You should read the Selected Combined Consolidated Financial Data set
forth below in conjunction with the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our combined
consolidated financial statements and the related notes included elsewhere in
this prospectus.
21
For the nine
months ended
For the year ended December 31, September 30,
--------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------- ------- -------
(in thousands, except per share data)
Predecessor
------------------------------
Statement of Operations Data:
Net sales........................................................... $1,396 $1,486 $3,097 $8,263 $18,640 $14,823 $32,689
Cost of sales (1)................................................... 628 930 2,436 5,560 9,688 6,882 12,610
------ ------ ------ ------ ------- ------- -------
Gross profit (1).................................................... 768 556 661 2,703 8,952 7,941 20,079
------ ------ ------ ------ ------- ------- -------
Operating expenses:
Sales and marketing (2)............................................ 87 51 219 374 677 619 1,049
Research and development (3)....................................... 187 305 127 682 1,477 1,036 1,127
General, administrative and other (4).............................. 270 431 276 1,000 2,712 2,006 3,946
Equity-based compensation.......................................... -- -- -- -- -- -- 12,035
------ ------ ------ ------ ------- ------- -------
Total operating expenses......................................... 544 787 622 2,056 4,866 3,661 18,157
------ ------ ------ ------ ------- ------- -------
Operating income (loss)............................................. 224 (231) 39 647 4,086 4,280 1,922
Interest income (expense), net...................................... (35) (60) (119) (208) (303) (231) (77)
Other income (expense), net......................................... (2) 106 108 (47) 273 40 475
------ ------ ------ ------ ------- ------- -------
Income (loss) before provision (benefit) for income taxes
and minority interest.............................................. 187 (185) 28 392 4,056 4,089 2,320
Provision (benefit) for income taxes................................ 72 (96) 22 234 2,102 2,178 5,828
Minority interest................................................... -- -- -- (4) (3) (5) --
------ ------ ------ ------ ------- ------- -------
Net income (loss)................................................... 115 (89) 6 154 1,951 1,906 (3,508)
Accretion of preferred stock........................................ -- -- -- -- -- -- (169)
------ ------ ------ ------ ------- ------- -------
Net income (loss) available to common shareholders.................. $ 115 $ (89) $ 6 $ 154 $ 1,951 $ 1,906 $(3,677)
====== ====== ====== ====== ======= ======= =======
Net income (loss) per share: (5)
Basic ............................................................. -- -- -- -- $ 0.03 $ 0.03 $ (0.06)
======= ======= =======
Diluted ........................................................... -- -- -- -- $ 0.03 $ 0.03 $ (0.06)
======= ======= =======
Pro forma net loss per share - basic and diluted (5)................ -- -- -- -- -- -- $ (0.05)
--------------------------------------------------
=======
--------
(1) Excludes $677 of equity-based compensation for the nine months ended
September 30, 2000.
(2) Excludes $166 of equity-based compensation for the nine months ended
September 30, 2000.
(3) Excludes $184 of equity-based compensation for the nine months ended
September 30, 2000.
(4) Excludes $11,008 of equity-based compensation for the nine months ended
September 30, 2000.
(5) The calculation of net income (loss) per share and pro forma basic and
diluted net loss per share is described in Note 3 to the combined
consolidated financial statements.
December 31,
----------------------------------- September 30,
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------- -------------
(in thousands)
Predecessor
---------------------------
Balance Sheet Data:
Cash and cash equivalents.. $ 200 $ 72 $ 222 $1,181 $ 706 $ 52,999
Working capital
(deficiency).............. 27 587 725 547 (775) 56,994
Total assets............... 1,186 2,186 3,456 8,819 12,800 102,977
Long-term debt, including
current portion........... 762 1,597 2,483 4,716 4,646 7,299
Convertible redeemable
preferred stock........... -- -- -- -- -- 62,389
Convertible preferred
stock..................... -- -- -- -- -- 4,954
Shareholders' equity....... 75 145 256 435 2,216 18,354
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ substantially from
those anticipated in these forward-looking statements as a result of many
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read together with our combined
consolidated financial statements and related notes thereto included elsewhere
in this prospectus.
Overview
We design, manufacture and sell high performance fiber amplifiers, Raman
pump lasers and fiber lasers for telecommunications and industrial
applications. Our proprietary technology, materials science expertise and
vertically integrated manufacturing operations enable us to meet the demands of
our customers for cost-effective fiber amplifiers and lasers having high power
output and reliable performance. Our telecommunications products are used in
several segments of optical communications networks. Our industrial products
are used for a variety of manufacturing, medical and aerospace applications.
Financial Statement Presentation
We were incorporated as a Delaware corporation on December 2, 1998 and
began operations in the United States in 1999. In November 1994, our founding
shareholder founded and incorporated a new company in Germany, IPG Laser GmbH.
In 1998, IPG Fibertech S.r.l. was incorporated in Italy as an 80% owned
subsidiary of IPG Laser. In August 2000, we restructured the ownership of
several affiliated companies, acquiring 100% of IPG Laser and its 80% owned
subsidiary, IPG Fibertech. For more detail regarding this restructuring, see
"Transactions with Related Parties--History of IPG and Restructuring." In
addition, IPG Laser, our wholly-owned subsidiary, expects to acquire a 51%
interest in our Russian affiliate, NTO IRE-POLUS, in the first half of 2001.
NTO IRE-POLUS began its operations in 1991.
The combined consolidated financial statements and all financial data
included throughout this prospectus include IPG Laser and IPG Fibertech. These
combined consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States. All inter-
company transactions and balances have been eliminated. The historical
financial statements of IPG Laser and IPG Fibertech have been prepared in their
local functional currencies and have been translated to U.S. dollars for
purposes of financial reporting. For purposes of the preparation of the
combined consolidated financial statements for the years ended December 31,
1997 and 1998, IPG Laser and IPG Laser's 80% owned subsidiary, IPG Fibertech,
are referred to as the Predecessor. The combination of these financial
statements, in the opinion of management, represents the results of our
operations and financial condition as if the acquisition of IPG Laser and IPG
Fibertech had been in place as of January 1, 1997. However, the results of our
operations may have been different if we had managed these entities as one
consolidated entity. As such, our historical results may not be indicative of
future operations.
We currently manage our business as two segments: U.S. and Germany. We
believe that these segments share similar economic characteristics and
similarities in product, types of customers and methods of distribution. See
Note 12 to our combined consolidated financial statements included elsewhere in
this prospectus for a further discussion of our operating segments.
Net Sales
We derive revenues from fiber amplifiers and Raman pump lasers for the
telecommunications industry, and fiber lasers for industrial applications.
Telecommunications revenue represented 76.8% of our revenue for the nine months
ended September 30, 2000.
23
During 1999 and throughout 2000, we significantly expanded our sales and
customer relationships. Customers who accounted for more than $100,000 in net
sales from us or our distributors for the eleven months ended November 30, 2000
included ADC, Agilent, Alcatel, Antares Laser Calient, Corning, Corvis, Hughes
Space and Communications, JDS Uniphase, Lucent, Marconi, MIT Lincoln Labs,
Molecular OptoElectronics, Nortel, Siemens, T.E.M. and TeraBeam in our
telecommunications product line and Baasel Scheel Lasergraphics,
DaimlerChrysler Aerospace, GSI Lumonics, Krause Danmark, Purup Escofot and Sunx
in our industrial applications product line. However, we continue to derive a
significant portion of our net sales from a limited number of companies. We had
five customers that individually comprised more than 10% of our net sales in
one or more of the periods in the three year period ended December 31, 1999 and
in the nine month period ended September 30, 2000. The composition of our net
sales to our largest customers has changed significantly during these periods
due to the commencement of our U.S. operations in 1999, the significant growth
in our net sales and the addition of new customers. We seek to continue to add
new customers and to expand our relationships with existing customers. As our
sales base grows, we anticipate that the composition of our net sales to our
significant customers will continue to change. We have provided additional
information about our dependence on a limited number of customers in "Risk
Factors--We depend on a few key customers for a substantial portion of our
sales revenue and the loss of any of these customers or a significant reduction
or fluctuation in sales to these customers could significantly reduce our sales
revenue or cause our results of operations to fluctuate."
As of September 30, 2000, we did not have any written commitments from
our customers for deliveries to be made in 2001. Our sales are made on a
purchase order basis rather than by long-term purchase commitments. As such,
our customers may cancel or defer purchase orders without penalty on short term
notice.
The average selling prices of our products generally decrease as the
products mature, especially in the telecommunications industry. These decreases
arise from factors such as increased competition, the introduction of new
products, maintenance of market share and increases in unit volumes. In
addition, we have in the past lowered our selling prices in order to establish
new markets and niches where previously it was not economically feasible for
customers to deploy our products. We cannot predict the timing and degree of
these price declines.
Gross Profits
Our cost of sales consists primarily of raw materials and components,
direct labor and an allocation of indirect labor and manufacturing overhead. We
are vertically integrated and currently manufacture a majority of the critical
components for our products. Our vertical integration lowers our cost of sales.
We currently maintain surplus inventory of key components sourced from outside
vendors to provide an adequate supply and to be able to fill orders quickly for
our customers. While we have not historically incurred any costs related to
inventory obsolescence, this higher inventory may be subject to a greater risk
of obsolete inventory in the future. Inventories which are considered obsolete
will be written off when identified and charged to cost of sales. For more
information, please refer to "Risk Factors--Our dependence on single or limited
source suppliers for some of our key components and raw materials could
adversely affect our results of operations."
Our gross profits are typically greater for high power telecommunications
products. Our overall gross profits have increased over the last three years
because of increased productivity and economies of scale. As we continue
automation of our manufacturing processes in both our new and existing
facilities and manufacture additional components in-house, we anticipate
further economies and productivity gains. We expect, however, that these
economies and productivity gains will only partially offset decreases in
average selling prices. Additionally, the increase in manufacturing capacity is
reflected in increased capital expenditures on property, plant and equipment
which will result in increased depreciation expense in future periods. For more
information, please refer to "Risk Factors--If we cannot reduce our
manufacturing costs and introduce higher margin products to offset anticipated
continued reductions in the average selling price of our products, we may
experience reduced sales levels, reduced gross margins and loss of market
share."
24
Operating Expenses
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and related personnel costs, travel expenses, expenses related to
trade shows, exhibitions and other marketing events. One of our strategies is
to expand our marketing operations significantly to increase market awareness
and acceptance of our products and build sales from these efforts. In addition,
we expect to expand our customer service and support organizations in order to
maintain and support our customers. We expect to incur additional sales and
marketing expenses in the future as we hire staff, establish an advertising
program, print and distribute promotional material and supply sample products
to potential new customers.
Research and development. Research and development expenses consist
primarily of salaries and related personnel costs, test and prototype expenses
related to the design of our products, and facilities costs. We use a common
research and development platform for both our telecommunications and
industrial products. Most costs related to product development are recorded as
research and development expenses in the period in which they are incurred.
However, the research and development costs of prototypes developed for
customer-specific solutions are reported as cost of sales if those prototypes
are sold. We expect that research and development expenses will increase
significantly as we continue to enhance our existing products and expand new
product development.
General, administrative and other. General, administrative and other
expenses consist primarily of salaries and related personnel costs, recruiting
expenses and costs associated with the infrastructure that supports our
operations. We intend to create an information technology department that will
implement and maintain an enterprise resource planning system for our worldwide
operations. We anticipate that in addition to the cost of our new information
technology department, general, administrative and other costs will also
increase to support the expansion of our infrastructure and as a result of
being a public company.
Equity-based compensation. Equity-based compensation represents the
difference between the estimated fair value of the common stock underlying the
options awarded and the exercise price of those options on the date the options
were granted to our employees and the fair value of options awarded to non-
employees. The deferred compensation charges related to options awarded to our
employees are being amortized using the straight-line method over the vesting
period of the options, which is generally four years. Deferred compensation
related to options awarded to non-employees is being amortized in accordance
with the requirements of FIN 28. In connection with the grant of stock options,
we recorded deferred compensation of approximately $29.5 million through
September 30, 2000 and equity-based compensation expense of approximately
$12.0 million for the nine months ended September 30, 2000. Given the vesting
periods of the awarded options, the $29.5 million of deferred compensation will
be recognized as follows: $16.0 million in 2000, $5.2 million in 2001, $3.9
million in 2002, $3.2 million in 2003 and $1.2 million in 2004. Certain options
awarded during 2000 require variable plan accounting, which requires that
equity-based compensation be remeasured at each reporting date. As such, our
equity-based compensation charge may increase in future periods. Subsequent to
September 30, 2000, we issued 1,000,000 shares of restricted common stock at a
price of $0.50 per share, which will result in a compensation charge of $12.0
million in 2001, and granted 3,607,000 options to purchase common stock to
employees, members of the Board of Directors and consultants which will result
in aggregate deferred compensation expense of $36.7 million, to be recognized
through 2005.
25
Results of Operations
The following table sets forth for the periods indicated the percentage
of net sales represented by the items included in our combined consolidated
statements of operations for the years ended December 31, 1997, 1998 and 1999,
and the nine month periods ended September 30, 1999 and 2000.
Nine Month
Year Ended Period Ended
December 31, September 30,
---------------------- --------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
Predecessor
--------------
Net sales............................................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales(1)........................................................................ 78.7% 67.3% 52.0% 46.4% 38.6%
------ ------ ------ ------ ------
Gross profit(2)......................................................................... 21.3% 32.7% 48.0% 53.6% 61.4%
------ ------ ------ ------ ------
Operating Expenses:
Sales and marketing(3)................................................................. 7.1% 4.5% 3.6% 4.2% 3.2%
Research and development(4)............................................................ 4.1% 8.3% 7.9% 7.0% 3.4%
General, administrative and other(5)................................................... 8.9% 12.1% 14.6% 13.5% 12.1%
Equity-based compensation(6)........................................................... 0.0% 0.0% 0.0% 0.0% 36.8%
------ ------ ------ ------ ------
Total operating expenses................................................................ 20.1% 24.9% 26.1% 24.7% 55.5%
------ ------ ------ ------ ------
Operating income ....................................................................... 1.2% 7.8% 21.9% 28.9% 5.9%
Interest income (expense), net.......................................................... (3.8%) (2.5%) (1.6%) (1.6%) (0.2%)
Other income (expense), net............................................................. 3.5% (0.6%) 1.5% 0.3% 1.4%
------ ------ ------ ------ ------
Income before provision for income taxes and minority interest.......................... 0.9% 4.7% 21.8% 27.6% 7.1%
Provision for income taxes.............................................................. 0.7% 2.8% 11.3% 14.7% 17.8%
Minority interest....................................................................... 0.0% 0.0% 0.0% 0.0% 0.0%
------ ------ ------ ------ ------
Net income (loss)....................................................................... 0.2% 1.9% 10.5% 12.9% (10.7%)
--------------------------------------------------
====== ====== ====== ====== ======
--------
(1) After allocation of $677 equity-based compensation for the nine months
ended September 30, 2000, the percentage of net sales would increase to
36.1%.
(2) After allocation of $677 equity-based compensation for the nine months
ended September 30, 2000, the percentage of net sales would decrease to
63.9%.
(3) After allocation of $166 of equity-based compensation for the nine months
ended September 30, 2000, the percentage of net sales would increase to
3.7%.
(4) After allocation of $184 of equity-based compensation for the nine months
ended September 30, 2000, the percentage of net sales would increase to
5.5%.
(5) After allocation of $11,008 of equity-based compensation for the nine
months ended September 30, 2000, the percentage of net sales would
increase to 45.7%.
(6) Percentage of net sales would be 0.0% for the nine months ended September
30, 2000 after allocation of equity-based compensation.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
Net sales. Net sales increased $17.9 million, or 120.5%, to $32.7 million
for the nine months ended September 30, 2000 from $14.8 million during the
comparable period in 1999. This increase was due primarily to new orders for
fiber amplifiers for free-space optical communications and, in part, to orders
for long-haul fiber amplifiers and Raman pump lasers and a growth in our
industrial products sales. Our telecommunications products accounted for $25.1
million, or 76.8%, of net sales for the nine months ended September 30, 2000
and $11.4 million, or 76.8%, of net sales for the nine months ended September
30, 1999. Our industrial products accounted for the remainder of our net sales
in both of these periods. We do not foresee a significant change in our product
mix in the short term. During the nine months ended September 30, 2000, 71.2%
of our net sales were in North America and 16.7% of our net sales were in
Europe. Net sales to customers in North America increased $14.0 million, or
152.3%, to $23.3 million for the nine months ended September 30, 2000 from $9.2
million during the comparable period in 1999 due to increased sales of optical
communications products and the overall expansion of our customer base in the
United States. We expect that our sales to North American customers will
continue to comprise the significant majority of our worldwide sales.
26
Gross Profits. Gross profits increased $12.1 million, or 152.9%, to $20.1
million for the nine months ended September 30, 2000 from $7.9 million during
the comparable period in 1999. This increase resulted from both an increase in
net sales and the effects of increased productivity, economies of scale and
volume component purchases.
Sales and marketing expenses. Sales and marketing expenses increased
$430,000, or 69.5%, to $1.0 million for the nine months ended September 30,
2000 from $619,000 during the comparable period in 1999. This increase in
marketing expenses resulted principally from an increase in the number of sales
and marketing personnel, resulting in an increase of approximately $200,000,
and an increase in expenditures for public relations and promotional materials
totaling $230,000.
Research and development expenses. Research and development expenses
increased $91,000, or 8.8%, to $1.1 million for the nine months ended September
30, 2000 from $1.0 million during the comparable period in 1999. This increase
resulted from the hiring of additional research and development personnel and
more research and development activities conducted by the existing staff.
General, administrative and other expenses. General, administrative and
other expenses increased $1.9 million, or 96.7%, to $3.9 million for the nine
months ended September 30, 2000 from $2.0 million during the comparable period
in 1999. The increase resulted principally from $750,000 in additional costs
related to additional hiring and higher salaries, and $675,000 for legal, tax
and accounting fees related to the reorganization in the third quarter of 2000.
Equity-based compensation expenses. During the nine months ended
September 30, 2000, we issued options to purchase approximately 2.0 million
shares of our common stock at a weighted-average exercise price of $0.60 per
share, resulting in deferred compensation of $29.5 million. This deferred
compensation will be amortized over the options' vesting periods, generally
four years, and resulted in the recognition of $12.0 million of equity-based
compensation expense during the nine month period ended September 30, 2000. Of
this amount, approximately $11.5 million was attributable to our United States
operating segment. Options to purchase our common stock issued during the
comparable period in 1999 did not result in deferred compensation.
Interest income (expense), net. Net interest expense decreased $154,000,
or 66.7%, to $77,000 for the nine months ended September 30, 2000 from $231,000
during the comparable period in 1999. The decrease in interest expense was
caused principally by the capitalization of approximately $152,000 of interest
expense during the nine months ended September 30, 2000 for construction
projects in the United States and Germany, and the effect of interest income on
the net proceeds from the private placements of Series A and Series B preferred
stock.
Other income (expense), net. Other income increased $435,000 to $475,000
in the nine months ended September 30, 2000 from $40,000 during the comparable
period in 1999. Other income is primarily comprised of transaction exchange
rate gains and losses from U.S. dollar denominated sales and cost of sales by
our German and Italian subsidiaries.
Provision for income taxes. Provision for income taxes has increased $3.7
million to $5.8 million for the nine months ended September 30, 2000 from $2.2
million during the comparable period in 1999, resulting in an effective tax
rate in excess of 100% in 2000 and 53% in 1999. The increased effective tax
rate reflects nondeductible equity based compensation which was recorded in
2000.
Net income. As a result of the foregoing factors, we had net income of
$1.9 million for the nine months ended September 30, 1999, compared to a net
loss of $3.5 million in the corresponding period in 2000. Our U.S. operations
incurred a net loss of $6.3 million, before intercompany eliminations, as
compared with net income of $3.2 million for our German operations, principally
as a result of equity-based compensation
27
expense related to U.S. employees and, to a lesser extent, costs related to
commencing operations in the United States. Excluding equity-based
compensation, our net income would have been $7.3 million in the nine months
ended September 30, 2000, compared to net income of $1.9 million in the
corresponding period in 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales. Net sales increased $10.4 million, or 125.6%, to $18.6 million
in 1999 from $8.3 million in 1998. This increase was attributable primarily to
an increase in the number of new customers and sales growth from existing
customers, with fiber amplifiers for the access segment comprising a majority
of our net sales. Our telecommunications products accounted for 77.2% of our
net sales in 1999 and 72.1% in 1998. Net sales to North American customers
accounted for approximately 61% of the increase in net sales, with the
remainder resulting from growth at our German operations.
Gross Profits. Gross profits increased $6.2 million, or 231%, to $9.0
million for 1999 from $2.7 million for 1998. This increase is principally due
to increased sales during the period and an overall increase in the gross
profit percentage from 32.7% to 48.0%. The increase in gross profit resulted
from increased productivity and economies of scale and volume component
purchases.
Sales and marketing expenses. Sales and marketing expenses increased
$303,000, or 81.0%, to $677,000 in 1999 from $374,000 in 1998. This increase
resulted principally from increased senior management time devoted to sales and
marketing efforts during 1999, and to a lesser extent, our increased attendance
at trade shows and fairs.
Research and development expenses. Research and development expenses
increased $795,000, or 116.6%, to $1.5 million in 1999 from $682,000 in 1998.
This increase resulted from the hiring of additional research and development
personnel, the continued development of our existing technology platform and
the development of new products for both telecommunications and industrial
applications.
General, administrative and other expenses. General, administrative and
other expenses increased $1.7 million, or 171.2%, to $2.7 million in 1999 from
$1.0 million in 1998. This increase resulted from start-up costs related to the
formation of IPG Photonics in the United States, and approximately $350,000
attributable to the hiring of additional management and administrative staff,
such as our controller and vice president of corporate affairs.
Interest income (expense), net. Net interest expense increased $95,000,
or 45.7%, to $303,000 in 1999 from $208,000 in 1998 due to an overall increase
in borrowings.
Other income (expense), net. Other income increased $320,000 to $273,000
in 1999 from net other expense of $47,000 in 1998, reflecting primarily foreign
currency gains arising from the appreciation of the U.S. dollar relative to the
Deutsche mark in 1999.
Provision for income taxes. Provision for income taxes increased $1.9
million to $2.1 million in 1999 from $234,000 in 1998 resulting in an effective
tax rate of 53% in 1999 and 59.7% in 1998. This decreased tax rate reflects the
contribution to total net income before taxes from our U.S. operations during
1999 where the tax rate is lower, coupled with a high statutory tax rate in
Germany.
Net income. As a result of the foregoing factors, net income increased
from $154,000 in 1998 to $2.0 million in 1999. Substantially all of this
increase was attributable to our Germany operating segment, as we only
commenced operations in the U.S. in 1999.
28
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. Net sales increased $5.2 million, or 166.8%, to $8.3 million
in 1998 from $3.1 million in 1997. This increase was primarily due to a large
order from a new customer for use of our products in low density access
networks and, to a lesser extent, increased sales of free-space optical
communication products. Our telecommunications products accounted for 72.1% of
our net sales in 1998 and 61.3% in 1997.
Gross Profits. Gross profits increased $2.0 million, or 308.9%, to $2.7
million for 1998 from $661,000 for 1997. This increase resulted from increased
sales during the period and an overall increase in the gross profit percentage
from 21.3% to 32.7%. The increase in gross profit percentage resulted from
increased productivity in manufacturing and assembly processes, the
implementation and improvement of training programs for our assembly personnel
and gains resulting from economies of scale, higher yields on component
production and the improved quality of purchased components.
Sales and marketing expenses. Sales and marketing expenses increased
$155,000, or 70.8%, to $374,000 in 1998 from $219,000 in 1997. This increase
resulted principally from increased senior management time devoted to sales and
marketing efforts.
Research and development expenses. Research and development expenses
increased $555,000, or 437.0%, to $682,000 in 1998 from $127,000 in 1997. This
increase resulted from additional resources being devoted to research and
development for the development of new products, fibers and components.
General, administrative and other. General, administrative and other
expenses increased $724,000, or 262.3%, to $1.0 million in 1998 from $276,000
in 1997. This increase resulted from the general expansion of the business,
including additions to our senior management team in Germany and hiring
additional administrative personnel.
Interest income (expense), net. Net interest expense increased $89,000,
or 74.8%, to $208,000 in 1998 from $119,000 in 1997. This increase resulted
from an increase in overall borrowings.
Other income (expense), net. Other expense increased $155,000 to $47,000
in 1998 from net other income of $108,000 in 1997, reflecting foreign currency
effects.
Provision for income taxes. Provision for income taxes increased $212,000
to $234,000 in 1998 from $22,000 in 1997, resulting in an effective tax rate of
59.7% in 1998 and 78.6% in 1997.
Net income. As a result of the foregoing factors, net income increased to
$154,000 in 1998 from $6,000 in 1997.
Liquidity and Capital Resources
From January 1, 1997 through September 30, 2000, our principal sources of
funds were $8.2 million from operations, $6.4 million from net borrowings and
$80.0 million in gross proceeds from the sale in 2000 of our Series A and
Series B preferred stock. Our working capital excluding cash was $4.0 million
and our cash on hand, net of $12.6 million in restricted cash, was $53.0
million at September 30, 2000. These amounts do not reflect the receipt of an
additional $20.0 million subsequent to September 30, 2000 as a result of the
sale of additional shares of our Series B preferred stock.
Our liquidity requirements arise principally from the need to:
. expand our manufacturing facilities;
. increase our marketing and distribution activities;
29
. increase our research and development activities; and
. fund our working capital.
As of December 31, 2000, we had approximately $83.0 million in cash and short
term money market investments, including the amounts held in a restricted cash
account pursuant to our debt agreement. We expect to raise $112.4 million from
this offering, net of underwriting discounts and commissions and offering
expenses. These funds, together with any cash from operations, will serve as
the principal sources to fund our capital expenditures and working capital
needs based upon our current business plan.
Cash Flow from Operating Activities
Net cash provided by operating activities totaled $3.1 million for the
nine months ended September 30, 1999 and $1.8 for the nine months ended
September 30, 2000. Net cash provided by operating activities totaled $191,000,
$2.0 million and $4.2 million for the years ended December 31, 1997, 1998 and
1999, respectively. Our net income before non-cash charges totaled
approximately $8.8 million in the first nine months of 2000. This amount was
largely offset by a net use of cash of approximately $7.0 million to fund
working capital, reflecting an increase in accounts receivable and inventory
that was offset by increases in accrued expenses and income taxes payable. In
December 2000, we entered into a purchase agreement with our laser diode chip
supplier requiring minimum purchases by us of approximately $66.7 million
through December 31, 2002. Depending on future production levels, this
arrangement could result in higher or lower costs for these components compared
to historical costs.
Cash Flow from Investing Activities
Cash used in investing activities totaled $3.4 million and $9.9 million
for the nine months ended September 30, 1999 and 2000, respectively. The
increase resulted from expenditures on property, plant and equipment, including
new manufacturing facilities. Cash used in investing activities totaled $1.3
million, $3.1 million and $5.2 million for the years ended December 1997, 1998
and 1999, respectively. IPG Laser expects to acquire a 51% interest in NTO IRE-
POLUS in exchange for a commitment to invest up to $5.0 million in the company.
Although we may use a portion of our cash resources to acquire additional
technology or businesses that are complementary to our business, we have no
current plans or commitments to do so. Based on our current business plan, we
expect that our capital expenditures through the end of 2002 will consist
primarily of:
. approximately $25.0 million for the acquisition of land and the
construction of buildings in the United States and Germany;
. approximately $15.0 million for the automation and improvement of our
manufacturing processes; and
. approximately $40.0 million for the acquisition of plant and
equipment to furnish and fit the new facilities in the United States,
Germany and Italy.
These amounts include $11.8 million for the construction of a new
manufacturing and administrative facility in the United States, all of which
was contractually committed at September 30, 2000.
Cash Flow from Financing Activities
Cash used in financing activities totaled $11,000 for the nine months
ended September 30, 1999, while cash provided by financing activities totaled
$60.3 million for the nine months ended September 30, 2000. Cash provided by
financing activities totaled $1.3 million, $2.0 million, and $585,000 for the
years ended December 31, 1997, 1998 and 1999, respectively. Cash generated by
financing activities in 2000 was primarily due to the gross proceeds from the
sale of shares of Series A preferred stock of $5.0 million and the gross
proceeds from
30
the sale of shares of Series B preferred stock and common stock warrants of
$75.0 million through September 30, 2000. An additional $20.0 million was
raised from the sale of Series B preferred stock subsequent to September 30,
2000. As part of the restructuring of the IPG Group, we acquired IPG Laser,
requiring the payment of approximately $9.9 million to certain stockholders. As
part of the initial restructuring transaction, we issued 2,300,000 shares of
our common stock to one stockholder. The completion of this restructuring in
October 2000 resulted in the issuance of an additional 2,806,000 shares of our
common stock.
We have several construction loans and revolving credit facilities with
banks in the United States and Germany. As of November 30, 2000, we owed $12.2
million under these loans and facilities and had additional borrowing
availability of $26.9 million. Borrowings under these loans and facilities have
been used principally to finance our expansion and for working capital
purposes. Borrowings under these loans and credit facilities mature through
2006, are secured by substantially all of our assets and bore interest at a
weighted average rate of 4.56% as of November 30, 2000. These loans and
facilities cross-default to each other and contain restrictive financial and
operating covenants, including covenants requiring us to maintain a specified
ratio of total debt to tangible capital and a debt service coverage ratio. Most
of our German loans also restrict our ability to pay dividends from IPG Laser
to IPG Photonics. Based upon our current financial condition and results of
operations, we do not expect that these financial ratios and restrictions will
materially restrict our operations. Subsequent to September 30, 2000, we placed
$12,560,000 in a restricted overnight investment account which is available to
our lender to offset our obligations under the U.S. revolving credit
facilities.
We believe that the net proceeds from this offering, along with the cash
raised in the third and fourth quarters of 2000 in private equity financings,
our cash flows from operations and borrowings available under our credit
facilities will provide us with sufficient liquidity to meet our current and
anticipated financial obligations, committed capital expenditures and other
liquidity needs through 2001. However, our future growth, including potential
acquisitions, may require additional funding. If cash generated from operations
is insufficient to satisfy our long-term liquidity requirements, we may need to
raise capital through additional equity or debt financing or additional credit
facilities. If additional funds are raised through the issuance of securities,
these securities could have rights, preferences and privileges senior to
holders of common stock, and the terms of any debt facility could impose
restrictions on our operations. The sale of additional equity or debt
securities could result in additional dilution to our stockholders, and
additional financing may not be available in amounts or on terms acceptable to
us, if at all. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned product development, marketing
efforts and facilities expansion which could harm our business, financial
condition and operating results. For further discussion of the effect of the
failure to obtain additional capital, you should read "Risk Factors--Our
ability to grow may be limited if we need, but are unable to raise, additional
capital to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements."
Qualitative and Quantitative Risk Disclosures about Market Risk
Interest Rate Sensitivity
We currently maintain our funds primarily in money market funds. We do
not have any derivative financial instruments. We plan to invest a significant
portion of our existing cash, together with net proceeds from the offering, in
interest bearing, investment grade securities, with maturities of less than
twelve months.
Our long-term indebtedness in the United States is subject to periodic
interest rate adjustments, while our debt in Germany is comprised primarily of
fixed-rate instruments. The interest accruing on some of these fixed rate loans
is lower than current market rates due to government subsidy programs.
We do not believe that our investments, future investments or our
indebtedness, in the aggregate, will have significant exposure to interest rate
risk.
31
Exchange Rate Sensitivity
Due to our international operations, we are subject to fluctuations based
upon changes in the exchange rates between the U.S. dollar and the other
currencies in which we collect revenues or pay expenses. In particular, the
value of the Deutsche mark, which has an exchange rate that is fixed to the
euro, the common currency of the European Union, affects our operating results.
Approximately 2% of our sales and approximately 20% of our cost of sales and
our operating expenses in the first nine months of 2000 were denominated in
currencies other than the U.S. dollar, principally the Deutsche mark. Our cost
of sales and operating expenses are not necessarily incurred in the currency in
which revenue is generated. As a result, we are required from time to time to
convert currencies to meet our obligations. These currency conversions are
subject to exchange rate fluctuations, and changes to the value of the Deutsche
mark or the euro relative to the U.S. dollar could adversely affect our
business and results of operations.
In addition, IPG Laser's financial statements are prepared in Deutsche
marks and translated to U.S. dollars for reporting purposes. As a result, even
when foreign currency expenses substantially offset revenues in the same
currency, our net income may be diminished, or net loss increased, when
reported in U.S. dollars in our combined consolidated financial statements. The
historical effects of foreign exchange gains and losses have been discussed
above under "--Results of Operations." We do not believe that a 10% increase or
decrease in the exchange rate of the U.S. dollar to the Deutsche mark or euro
would have a significant impact upon our financial position or results of
operations.
We have historically 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or the FASB,
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. During June 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities, Deferral of the Effective Date of FASB Statement No. 133, to defer
the effective date of SFAS No. 133. SFAS No. 133 will now be effective for IPG
Photonics beginning January 1, 2001. Because we do not utilize derivative
instruments for hedging purposes or interest rate management, we believe that
the adoption of SFAS No. 133 will not have a significant impact on our
financial condition or results of operations.
32
BUSINESS
We design, manufacture and sell high performance fiber amplifiers, Raman
pump lasers and fiber lasers for telecommunications and industrial
applications. Our proprietary technology, materials science expertise and
vertically integrated manufacturing operations enable us to meet the demands of
our customers for cost-effective fiber amplifiers and lasers with high power
output and reliable performance. Our telecommunications products are used
throughout optical communications networks. Our largest telecommunications
customers in 2000 were Alcatel, Lucent, Marconi, Siemens and TeraBeam Networks.
Our industrial products are used for a variety of manufacturing, medical and
aerospace applications. Our largest industrial customers in 2000 were GSI
Lumonics, Purup Escofot and Sunx.
Industry Background
Fiber optic technologies have advanced significantly over the last
several years. These technologies have led to the recent development of cost-
effective fiber amplifiers and fiber lasers that have enabled significant
breakthroughs in telecommunications networks and industrial applications.
Telecommunications
The rapid growth in the worldwide volume of data, voice and video traffic
is placing unprecedented stress on existing communication networks. According
to Ryan, Hankin & Kent, Internet traffic is projected to increase from
0.4 million terabytes, or trillions of bytes, per month at the end of 1999 to
over 15 million terabytes per month in 2003. With the increasing demands on
communication networks for data transmission capacity, or bandwidth,
telecommunications service providers have sought technological solutions to
upgrade and expand their networks to provide greater bandwidth at reduced
costs. Most existing communications networks were originally designed to convey
voice traffic by means of electronic signals over copper wires. In comparison
to electronic signals transmitted over copper wires, optical signals traveling
at the speed of light through thin glass fibers can carry a significantly
higher rate of data more efficiently over far greater distances.
The fiber optic communication market can be divided into three segments,
each of which requires customized equipment solutions. These are the long-haul,
metropolitan and access segments. The long-haul segment of the optical network
transmits data over large geographical areas, typically over 100 miles, and
connects major city centers or traffic hubs. The metropolitan segment of the
optical network connects telecommunications switching stations, or exchanges,
which receive, identify and route incoming signals to other exchanges within a
metropolitan area. The access segment of the optical network carries signals
from exchanges to the junction boxes at the curbside and from there to office
complexes or directly to both business and residential end-users and enables
enterprises and communication providers to interconnect various network
systems. The access segment consists of high density urban systems, low density
suburban systems and free space optical networks. Free space optical networks
typically can be used to transmit light waves from building to building over
relatively short distances, typically less than three miles, without the use of
optical fiber. The following graphic depicts the communication network market
segments:
[We will insert here a diagram that graphically shows the long-haul,
metropolitan and access segments of optical communications networks.]
Telecommunications service providers first deployed optical communication
technology in the long-haul segment, and are now deploying new fiber optic
technologies not only in this segment, but also in the metropolitan and access
segments. Although there have been significant increases in bandwidth in the
long-haul segment of the communications network, bandwidth limitations and
capacity bottlenecks still exist in the metropolitan and access segments. Until
recently, the adoption of fiber optic technologies in the metropolitan segment
has been limited in part by the lack of low cost, high performance optical
amplifiers. These amplifiers are now being offered by a number of
manufacturers.
33
In fiber optic networks, optical signals are transmitted at specified
wavelengths within specified ranges, or bands. Most fiber optic networks use
the C band of the optical spectrum. As the need for bandwidth increases,
companies in the optical communications industry are seeking to expand into new
bands for use in fiber optic communications, such as the L band and the S band,
as illustrated in the chart below.
[We will insert here a diagram that shows the useable portions of the optical
spectrum.]
In early fiber optic systems, optical signals were transmitted over each
fiber using only one wavelength. In more recent fiber optic systems, an
innovative technology, called wavelength division multiplexing, or WDM, allows
optical signals of different wavelengths to be transmitted simultaneously
through a single fiber. As signals travel through the fiber they have a
tendency to be dispersed in the fiber. To protect against multiple signals
dispersing into each other, the wavelengths used to transmit signals are
separated from each other by a minimum number of unused wavelengths, forming a
buffer in which signals are not transmitted. Technological advances, such as
dense wavelength division multiplexing, or DWDM, have led to narrower channel
widths, or spacing, thereby increasing the number of signals that can be
carried by each fiber. Further advances in this technology are expected.
Bandwidth increases can also be generated by increasing the rate at which data
is transmitted, also known as modulation speed. The increasing use of DWDM,
continued narrowing of channels and increases in modulation speeds have made
fiber optic amplification more complex and critical.
Development of the fiber amplifier has been a critical enabler of the
implementation of DWDM technology in communications networks. The distance that
an optical signal can be transmitted is limited by losses in signal strength,
or attenuation, caused by absorption and scattering of light in the fiber, as
well as by losses to the signal as it passes through optical components in the
network, or insertion loss. Prior to the invention and deployment of the fiber
amplifier in optical networks, optical signal strength could only be
regenerated by conversion of the optical signal to an electronic signal for
amplification, followed by reconversion to an optical signal. The equipment
used to convert optical signals to electronic signals, known as opto-electronic
regenerators, is expensive to procure, install and maintain. On the other hand,
fiber amplifiers with high power and high performance allow transmission of
optical signals over longer distances without conversion. A common measurement
of performance is the ratio of the strength of signals being transmitted in an
optical fiber to the amount of noise, referred to as the signal to noise ratio.
In addition, a fiber amplifier can handle a wide variety of transmission speeds
and networking protocols, allowing for upgrades of the network without
replacement of the amplifier. Fiber amplifiers are also capable of amplifying
multiple wavelengths at the same time, making them far more cost-effective for
DWDM applications. The two most common types of optical amplifiers are erbium-
doped fiber amplifiers, or EDFAs, and Raman amplifiers.
EDFAs use the light from semiconductor laser diode modules to introduce,
or pump, optical energy into doped fiber, resulting in signal amplification as
the signals pass through the doped fiber. Doped fibers are fibers in which
small quantities of rare earth ions and other elements are introduced.
Multiclad fibers consist of layers of various glass compositions, some of which
are doped with rare earth ions and other elements. Multiclad fiber is designed
to optimize the absorption and transfer of energy from laser diode modules to
the input signals. Ryan, Hankin & Kent estimates that revenue from the sale of
erbium gain modules, the component of EDFAs in which amplification is achieved,
was $641 million in 1999 and will increase to $4.2 billion in 2004,
representing a compound annual growth rate of 45.3%.
34
Two types of laser diodes that are used in EDFAs: single mode and
multimode. Compared to single mode diodes, multimode diodes have a larger
surface area from which light is emitted, resulting in higher output power with
lower power density, substantially improved reliability and longer lifetime
expectancy. Two types of fiber are used for transmission: multimode and single
mode. Multimode fiber is more efficient with a greater capacity to collect
light energy than single mode fibers, while single mode fiber generally
experiences less signal attenuation and distortion. These characteristics make
multimode fiber significantly more efficient for long distance transmission of
signals and high data transmission rates. We believe that a majority of the
fiber currently deployed in communications systems is single mode fiber.
Technological advances have made it possible to pump single mode fiber with
multimode diodes, which we believe is optimal for many applications.
In addition to EDFAs, other significant innovations are being introduced
to improve the amplification of optical signals in DWDM networks. A significant
example is the introduction of Raman pump lasers, which are used to pump
optical energy into the transmission fiber itself to amplify the optical
signal, a process called Raman amplification. By achieving amplification
throughout the transmission fiber rather than boosting the signal at one point,
Raman amplification results in greater signal integrity. Currently, Raman
technology has been deployed on a limited basis in the long-haul and ultra
long-haul systems. Ryan Hankin & Kent estimates that sales of Raman gain
modules will grow from approximately $18.0 million in 2000 to approximately
$1.0 billion in 2004 representing a compound annual growth rate of 173.1%. The
use of Raman amplification to complement EDFAs allows for greater spacing
between amplifiers resulting in greater network efficiency. However, due to
limitations in flexibility and applications, Raman amplification will continue
to be a complementary technology to EDFAs rather than a disruptive one.
Industrial
Light emitted by a laser can be harnessed for numerous industrial
applications, including marking, material processing, printing, micro-
machining, medicine, instrumentation, optical storage, inspection, measurement
and control, bar-coding and scanning. The characteristics of industrial lasers
enable manufacturers to cut, weld, etch, polish, mark and measure without
physical contact in many applications, permitting higher processing speeds,
greater precision and lower overall manufacturing costs than conventional
manufacturing processes. Consequently, manufacturers and others have
significantly increased their use of lasers for industrial and other commercial
applications. The global industrial laser market had total revenues in 1999 of
approximately $1.7 billion according to Laser Focus World, a leading industry
publication, and is growing at a rate of 30-35% per year.
Most industrial lasers in use today are based on gas or solid state
technologies. Lasers are categorized by the different modes by which they
deliver light energy. In continuous wave lasers, the laser beam has a stable
average power. In pulsed beam lasers, the laser delivers short pulses of light.
Historically, pulsed beam lasers have been used in industrial applications
where very high peak power is required. The most common conventional industrial
lasers are known as YAG lasers. Conventional lasers, however, have significant
shortcomings. Integration of conventional lasers systems into industrial
applications is complex and expensive, requiring free-standing cooling systems,
a high power electrical supply and significant installation space. The
complexity of these lasers requires specially trained personnel to operate and
maintain them. Conventional lasers are large and operate from fixed positions
requiring complex optics for beam delivery. In addition, limitations on the
lasers themselves, such as inefficient conversion of electrical power to light,
poor beam quality and limited life expectancy continue to reduce their
functionality.
Many users are replacing conventional lasers with fiber lasers in
industrial applications. They offer cost-effective alternatives to conventional
laser technologies because of their lower operating costs, smaller size, higher
reliability, greater efficiency, service-free operation and their ability to
use conventional electrical outlets. For example, fiber lasers provide
significantly better beam quality with precision micro-dot capability making
them particularly useful for marking and other applications. In addition to
these qualities, the flexible fiber delivery and portability of fiber lasers
allow for their use in applications for which conventional lasers cannot be
used, such as underwater welding and industrial cleaning.
35
Challenges Faced by our Customers
Our customers purchase optical components and modules which allow them to
focus on designing systems that satisfy the growing performance demands of
telecommunications service providers, such as AT&T, WorldCom, Deutsche Telekom,
Sprint and Bell South. In addition, specific technological complexities of the
long-haul, metropolitan and access segments require customized optical
solutions.
Our telecommunications customers have the following needs:
. Higher Power Amplifiers. In the long-haul segment, higher dense
wavelength division multiplexing, or DWDM, channel counts require
higher power. In the access segment, our customers require high power
multiple output fiber amplifiers to power networks which bring fiber
closer to the ultimate user, or fiber-to-the-curb applications, and
cable television systems which use both analog digital signals with
many end users. Emerging applications, such as free-space optical
communications require amplifiers with greater and variable power
output which can respond automatically to different weather
conditions.
. Greater Bandwidth and Transmission Rates. The high costs of building
and operating new telecommunications networks provides incentive to
maximize the data that can be sent through new networks as well as
over existing fiber networks. Telecommunications systems integrators
are continually looking for optical amplifiers that incorporate a
wider range of the useable optical spectrum, operate over more
narrowly spaced channels and at higher data transmission rates, or
modulation speeds.
. High Reliability. Telecommunications service providers seek more
reliable optical components to decrease the likelihood of system
downtime. There is a strong demand for optical amplifiers that are
designed and built to operate without maintenance for a decade or
longer under various climactic conditions and have a lower risk of
technological obsolescence.
. Superior Performance. Telecommunications networks must maintain high
signal to noise ratios as signals pass through amplifiers to increase
the distance between amplifiers and to eliminate the need to use
opto-regenerators. Some telecommunications systems integrators also
require polarization-maintaining amplifiers. If the components of an
optical signal are not kept aligned, or polarized, these components
will travel at different speeds through an optical fiber and upon
arrival the optical signal will be distorted.
. Economically-Priced Low Power Amplifiers. Telecommunications service
providers seek cost-efficient, low power amplifiers to eliminate
bandwidth bottlenecks in the metropolitan and access segments. Both
metropolitan wavelength division multiplexing, or WDM, and networks
which bring fiber inside the building to the desk of the ultimate
user, or fiber-to-the-desk applications require a large number of
fiber amplifiers driving the need for decreased amplifier costs.
. Scalable and High Capacity Production. Telecommunications systems
integrators demand that manufacturers of new customized optical
amplification products scale their production more rapidly to deliver
high volumes of quality products with shorter delivery times.
Our industrial customers have the following needs:
. Performance. Industrial customers require lasers that generate high
quality light beams at several different wavelengths and that allow
for precise control of numerous operating specifications, including
operating wavelength, power output, pulse rate, pulse duration and
beam width.
. Lower Total Cost of Ownership. Industrial customers desire high power
lasers that are less expensive to purchase and maintain, and have
longer life and greater reliability.
. Flexible Use and Ease of Integration. Industrial customers demand
lasers that can be easily and flexibly integrated into their
production processes, and that are easy to use, with no service
requirements. Additionally, industrial customers require portable
fiber lasers for new applications.
36
The IPG Solution
We design, manufacture and sell high performance fiber amplifiers and
Raman pump lasers for telecommunications applications and high power fiber
lasers for various industrial applications. Our fiber amplifiers and Raman pump
lasers cost-effectively address the needs of telecommunications customers by
enabling transmission over a broader range of the useable optical spectrum with
a higher signal to noise ratio and improved reliability at high power outputs.
We also supply high power fiber lasers with high beam quality, high efficiency
and lower device cost that can be more easily integrated into industrial
production processes than conventional lasers.
The success of our solution is based upon the following key attributes:
. Advanced Technology Platform. Our state-of-the-art products are based
on our innovative proprietary technology platform. We believe that
our design of critical specialty components, such as doped fibers and
specialty couplers, together with our innovative approach in
combining these components, allows us to cost-effectively create
fiber amplifiers and fiber lasers that operate over a broader range
of the optical spectrum, with higher power output, superior
performance and greater reliability. For example, we have developed a
pumping technology that allows us to efficiently use a greater number
of diodes in our fiber amplifiers, thereby producing higher output
power than achievable through traditional techniques. A key element
of this technology is our ability to pump our proprietary single mode
fibers with multimode diodes.
. Materials Science Expertise. Our expertise in non-radiative energy
transfer between rare earth ions in solid state materials is the
basis for the proprietary doping techniques used in manufacturing our
multiclad fibers for our fiber amplifiers and fiber lasers. Use of
these proprietary fibers facilitates our innovative pumping
technology and allows us to provide a wide variety of innovative
fiber devices in numerous customizable configurations.
. Simplified Integrated Design. The simplified integrated product
design used in our fiber amplifiers and fiber lasers employs fewer
components than the products of our competitors. Our
multi-disciplinary scientific teams design our products to decrease
the complexity and cost of manufacturing, testing time, integration
and the time needed to develop new products. It also improves yield,
increases product reliability and allows quicker ramp-up of new
production.
. Vertically Integrated Manufacturing. We design and manufacture a
significant majority of the critical specialty components and modules
used in our products. In addition, we perform all of our
manufacturing and assembly in-house, including manufacturing of
specialty fibers, the energy source for the amplifiers, called laser
diodes modules, and the components, which the amplification of the
optical signal occurs, called gain blocks. These are all critical
components to our products. Our in-house manufacturing helps us
increase the performance, facilitates and accelerates new product
development, provides us with an assured supply of the high power
fiber optic components used in our products, lowers our total cost
and increases product reliability. As a result of this vertically
integrated manufacturing, we can better meet the needs of our
telecommunications customers and industrial users by quickly
providing them with new and customized fiber optic devices.
. Quality-Driven Manufacturing. We test and qualify all of our
components and assemblies, as well as our finished products, to
assure reliability and performance. For example, we test our laser
diodes for up to 1,000 hours under high stress conditions before we
install them in our fiber amplifiers and fiber lasers and employ a
testing database for assessing the operational lifetime of principal
components. With a large in-house testing facility, we are able to
quickly scale our production output while continuing to assure high
quality for new products.
37
The IPG Strategy
Our objective is to be the leading supplier of fiber amplifiers, Raman
pump lasers and fiber lasers to our telecommunications and industrial
customers. Key elements of our strategy include:
. Extend Our Existing Technology Leadership. Dr. Valentin P. Gapontsev,
our founder, leads our scientific team, more than 30 of whom hold
Ph.D. degrees, in the development of new technologies to
differentiate our products and extend our competitive advantage. Our
multi-disciplinary technical expertise has enabled us to develop
proprietary pumping techniques and multiclad fiber designs. Our key
technological innovations have allowed us to become a leader in the
design of fiber amplifiers, Raman pump lasers and industrial fiber
lasers. For example, we believe that we are the only manufacturer of
EDFAs with power output greater than five watts and we believe we
sold the first commercially available Raman pump laser. We plan to
extend our technological leadership through continued enhancement of
our existing technologies and the development of new technologies
that enable optical networks to use higher data transmission rates
and a broader range of the optical spectrum to achieve increased
bandwidth.
. Expand and Enhance Our Existing Line of Products. We plan to expand
and enhance our broad product line. By offering a broad array of
products, we are able to serve numerous customers across all segments
of the telecommunications market. Our current development efforts are
focused on the introduction of cost-effective, low power fiber
amplifiers for the metropolitan and access markets, the extension of
our Raman technology and the introduction of fiber amplifiers that
cover a broader range of the optical spectrum. We also intend to
leverage our technological expertise in fiber lasers to extend our
product line into new industrial applications.
. Expand Our Manufacturing Capacity and Reduce Costs. We plan to
significantly increase our manufacturing capacity in the United
States, Germany and Italy over the immediate and long term. Also, we
intend to continue to invest in automation of component manufacturing
and device assembly and testing to reduce manufacturing costs and
increase product quality. Our simplified product design should allow
us to employ a higher degree of automation, thereby improving
productivity. We intend to manufacture additional critical components
that we currently purchase from third parties in order to lower
costs, ensure component quality and assure supply.
. Expand Our Sales and Marketing Efforts. We plan to expand our sales
and marketing efforts for our telecommunications and industrial
products, including the hiring of marketing executives with
significant experience in the fiber optics industry. We also plan to
open two additional sales offices in the United States in 2001, and
to increase our worldwide distributor network. We believe that we
have significant opportunities to target new customers, and to
strengthen our relationships and increase our sales to existing
customers.
. Provide Our Customers With a High Degree of Technical and Engineering
Support for Customization. Our experienced staff of multi-
disciplinary scientists and engineers works closely with our
customers at the conceptual stage of the product development cycle to
quickly customize our products or create new products that meet our
customers' specific requirements. We will continue to utilize this
knowledge and approach to respond more effectively with products that
meet our customers' needs.
. Acquire Strategic Businesses and Technologies. We intend to pursue
strategic acquisitions of businesses and technologies that can
provide us with key intellectual property, strategic products and
highly qualified personnel to rapidly increase our technological
expertise and expand the breadth of our product portfolio. Currently,
we have no commitments or agreements for any material acquisition of,
or investment in, any third party. We will explore joint ventures in
other countries, where appropriate, to take advantage of improved
cost structures and local partners who will help in developing new
markets for our products.
38
Products
Our products are classified in two major groups: high-performance fiber
amplifiers, Raman pump lasers and fiber lasers for telecommunications
applications, and high-power fiber lasers for industrial applications. These
products are based upon a common technology platform and are manufactured using
a set of substantially similar key components.
Optical Amplification Products For Telecommunications Applications
We design and manufacture a full range of fiber amplifiers and Raman pump
lasers with varying output power and wavelengths that enhance data transmission
in optical networks. We believe our line of fiber amplifiers and Raman pump
lasers offers the best commercially available output power and performance,
including wavelength range, reduced dispersion, polarization maintenance,
signal to noise ratio, reliability under high stress operating conditions and
electrical efficiency. The power output from the products in this line ranges
from 10 milliWatts to 15 Watts. Our amplifiers operate across the C and L bands
and we are testing products for the S band as well as the superwide band, which
encompasses the majority of the C and L bands. Our product line of over 80
fiber amplifiers and Raman pump lasers, for use in single channel WDM and DWDM
networks, are customized and optimized pursuant to the customers' price-
performance criteria for a variety of telecommunications applications. The
following table sets forth the various categories and specifications by which
our products are defined and compared by our customers. This table demonstrates
the breadth of our product line.
--------------------------------------------------------------------------------
Single Channel/WDM DWDM
------------------------- -------------------------
Wavelength Wavelength
Markets Served Spectral Range Range Power Range Power
-------------- -------------- ------------ ------------ ------------ ------------
EDFAs
Long-Haul C band 1528-1567 nm 10 mW-2 W 1528-1564 nm 10 mW-1 W
L band 1565-1620 nm 10 mW-2 W 1565-1605 nm 10 mW-1 W
Superwide 1530-1610 nm 100 mW-2 W 1530-1600 nm 10 mW-500 mW
band (Testing)
Metropolitan L band 1565-1620 nm 10 mW-200 mW N/A N/A
Access C band 1533-1567 nm 10 mW-1 W N/A N/A
L band 1565-1620 nm 20 mW-1 W N/A N/A
Access-Free-Space C band 1535-1567 nm 300 mW-15 W 1538-1567 nm 500 mW-10 W
Optical Communications L band 1565-1620 nm 100 mW-10 W 1565-1605 nm 100 mW-5 W
Polarization Maintaining
Amplifiers C and L bands 1528-1620 nm 10 mW-10 W 1528-1620 nm 10 mW-10 W
Raman Pump Lasers
Long-Haul 1240-1500 nm 500 mW-10 W 1240-1500 nm 500 mW-10 W
--------------------------------------------------------------------------------
Legend: nm = nanometer; mW = milliwatt; and W = Watt.
Long-Haul Networks
Our high power erbium-doped fiber amplifiers, or EDFAs, and Raman pump
lasers provide the minimal signal distortion, high power output and reliability
and the low power consumption needed for applications, such as submarine
systems and high capacity long-haul optical communications systems. We believe
that our Raman pump lasers comply with requirements established by Telcordia
Technologies (formerly Bellcore), an engineering and administrative services
consortium that establishes industry standards and specifications for the
39
telecommunications, wireless and fiber optic industries, but we have not
received qualification. The Telcordia requirements relate to the environmental,
electrical and optical testing for fiber optic transmitters and receivers, to
ensure that they offer the high reliability required for critical applications.
Our Raman pump lasers are offered in various wavelengths and output powers
which may be selected by our customers. We offer products that operate across
the current optical spectrum used for optical long-haul communication with high
power and a high signal to noise ratio. In addition, we sell EDFAs, fiber
lasers and tunable fiber lasers for designing and testing DWDM optical systems.
We also produce polarization-maintaining EDFAs that offer high signal to noise
ratios over greater distances.
Metropolitan Networks
We provide low-power EDFAs for both single channel and WDM applications
for the metropolitan market segment. This market segment is growing rapidly,
with emphasis shifting from single channel systems to WDM systems. The design
of our products in this area as well as our manufacturing flexibility should
allow us to respond to the dynamics of this market segment.
Access Networks
We offer digital WDM EDFAs, analog EDFAs with multiple outputs and EDFAs
utilizing multiple channels over multiple fibers for use in the local access
segment, including hybrid analog and digital cable networks, fiber-to-the-curb
and fiber-to-the-home networks that provide high speed data, voice and video
transmission in one cable. Our high power EDFAs with multiple outputs provide
cost-effective connectivity to a greater number of end-users reducing the
number of amplifiers previously needed to supply high bandwidth requirements in
access networks.
Free-Space Optical Networks
We provide products for building to building data transmission up to 10
gigabits per second over distances of up to three miles without the use of a
fiber optic cable connecting the buildings. We provide eye-safe high power
EDFAs, transmitters and subsystems for deployment in both point-to-point and
point-to-multipoint free-space optical networks. Our products offer a wide
range of power outputs that automatically adjust to ensure reliable signal
transmission through adverse weather conditions, such as fog and rain. In
addition, free space optical technology has potential applications for
satellite-based communications. In this regard, we have developed polarization-
maintaining fiber amplifiers that can be used in sophisticated optical
satellite networks.
40
High-Power Fiber Lasers for Industrial Applications
We design and manufacture high power, continuous wave and pulsed fiber
lasers for industrial applications. This product line includes lasers with a
high pulse repetition rate, high electrical efficiency, low cost, small size, a
mobile and flexible delivery system and reliable service-free operation. We
believe that we are the sole manufacturer of many kinds of commercially
available fiber lasers for numerous industrial applications. Our products are
customized and optimized pursuant to the customers' price/performance criteria.
The following table sets forth the various categories and specifications by
which our products are defined and compared by our customers.
--------------------------------------------------------------------------------
Pulsed/Continuous
Markets Served Product Wave (CW) Spectral Range Power
------------------- --------------------------- ----------------- --------------- -----------
Marking Ytterbium-doped fiber laser Both 1.04 um-1.15 um 5 W-50 W
High Speed Printing Ytterbium-doped fiber laser Both 1.07 um-1.10 um 10 W-20 W
Material Processing Ytterbium-doped fiber laser Both 1.06 um-1.12 um 5 W-100 W
Erbium-doped fiber laser CW 1.54 um-1.57 um 1 W-50 W
Micromachining Ytterbium-doped fiber laser Both 1.05 um-1.12 um 1 W-10 W
Erbium-doped fiber laser CW 1.54 um-1.57 um 1 W-10 W
Raman fiber lasers Pulsed 1.10 um-1.25 um 1 W-5 W
Optical Sensory/ Tunable Erbium-doped fiber CW 1.53 um-1.61 um 100 mW-10 W
Measurement laser
Tunable Yterbium-doped CW 1.04 um-1.10 um 100 mW-10 W
fiber laser
Single-frequency Ytterbium- CW 1.05 um-1.10 um 1 W-5 W
doped fiber laser
Laboratory/Medical Ytterbium-doped fiber laser Both 1.02 um-1.12 um 500 mW-50 W
Erbium-doped fiber laser Both 1.53 um-1.62 um 20 mW-10 W
Raman fiber laser CW 1.15 um-1.50 um 500 mW-10 W
Fiber-pigtailed laser diode CW 0.97 um 5 W-20 W
systems
--------------------------------------------------------------------------------
Legend: um = micrometer; W = Watt; mW = milliWatt; and MOPFA = master
oscillator power fiber amplifier.
Marking
Lasers are used to precisely mark a wide variety of surfaces at high
speed without contact by changing the surface structure of the material. We
produce high-energy pulsed ytterbium-doped fiber lasers, as well as continuous
wave fiber lasers with external modulation, that are substantially faster, more
precise, more reliable, smaller and more cost-effective than conventional gas
and solid state lasers. Our fiber lasers have high beam quality and micro-dot
marking capability that enables accurate identification and retrieval of marked
items in automated assembly lines.
41
High-Speed Printing
High-speed laser plate and film writing systems enable printers to write
high-resolution color images directly from computer files onto a printing press
plate or onto film, thus resulting in significant time and cost savings for
commercial printers. We believe our product is the first to provide operating
modulation bandwidth of up to 200 MHz. Our ytterbium-doped fiber lasers also
offer features such as high beam quality, electro-optical efficiency, compact
size, durability and ease of integration in new or existing printing systems
where the laser component can be easily replaced.
Material Processing
Lasers are used in a variety of material processing applications,
including welding, cutting, drilling, soldering and heat treating. Our fiber
lasers offer the high-power and portability necessary for complex tasks such as
diamond cutting and underwater repair of pipelines, hulls of ships or other
marine installations, and, we believe, enable several new applications.
Micromachining
Our fiber lasers are used in systems by semiconductor manufacturers to
repair defective or redundant circuits in memory chips with precise laser
pulses. Our lasers can also be used for micromachining for the precise trimming
of components in printed circuit boards and in the manufacture of
semiconductors. Our fiber lasers provide a wide range of operating wavelengths,
high levels of precision, high power and reliability needed for these
applications.
Optical Sensory and Measurement
We sell fiber lasers for light detection and ranging, known as lidar,
tunable lasers, single frequency lasers and specialty lasers for various
sensory and measurement applications. These applications include obstacle-
warning, 3-D optical radar, range finding, imaging and sensing for the aviation
industry and pollution and atmospheric data measurement, data on road traffic
flow, velocity control and security installations.
Laboratory and Medical Applications
We provide a wide range of fiber lasers and other optical products for
use in various medical applications, such as medical imaging, surgery,
microsurgery, therapy and dentistry. We believe our fiber lasers outperform
conventional lasers for medical applications, combining a wide choice of
operating wavelengths, compact size, flexible fiber delivery, precise control
and tunability. Another benefit of these lasers is ease of use by doctors and
reduced patient trauma.
Research and Development
We have assembled a team of scientists and engineers with specialized
experience and extensive knowledge in fiber optic amplifiers and fiber lasers,
and in manufacturing process design. Our research and development team includes
over 30 scientists who hold Ph.D. degrees and over 50 additional scientists and
engineers. We undertake research and development at our facilities in
Sturbridge, Massachusetts and Burbach, Germany and through a contractual
relationship with NTO IRE-POLUS in Fryazino, Russia.
We are developing new lines of fiber amplifiers using fibers doped
principally with rare earth ions other than erbium. Some of these are currently
being tested. Other products under development include Raman amplifiers, and a
variety of industrial lasers such as green lasers and picosecond lasers among
others. Our future success depends on our ability to continue to extend our
existing technological leadership and to develop new products that maintain
technological competitiveness. We work closely with our telecommunications and
42
industrial customers to monitor changes in the marketplace and to develop new
products to address their needs. For example, our fiber amplifiers and free-
space optical transmitters are the only products of their kind to be qualified
for use by Bosch Telecom and Motorola after extensive tests for Teledesic, a
global satellite project, which is currently awaiting funding. We plan to focus
our product development activities on improving our existing products,
customizing products to client specifications and developing innovative new
products. We plan to direct part of our resources to fundamental research in
related fields to maintain our technological leadership.
We have entered into an Assignment, Research and Development Agreement
with NTO IRE-POLUS to assist in the development of fiber amplifiers, fiber
lasers and other associated products. Under this agreement, NTO IRE-POLUS
performs research and development related to these products exclusively for us
and has agreed not to perform services involving the development of
intellectual property relating to the products listed in the agreement for any
other person or entity other than IPG Photonics, IPG Laser or IPG Fibertech.
NTO IRE-POLUS has a limited, non-exclusive right to use the developed products
as well as the technology and intellectual property resulting from these
products for products not involving telecommunications or products sold
exclusively to the other parties to this agreement, in the countries that
comprised the former Soviet Union. This agreement terminates upon the mutual
agreement of us and NTO IRE-POLUS. NTO IRE-POLUS is affiliated with us via
common ownership. For more information, see "--Transactions with Related
Parties--Transactions with NTO IRE-POLUS."
Customers
We sell our products to customers located in the U.S., Europe and Asia.
The following is a list of customers who have purchased more than $100,000 of
our products from us or our distributors from January 1, 2000 through November
30, 2000 broken down by telecommunications and industrial customers in
alphabetical order:
. Telecommunications: ADC, Agilent, Alcatel, Antares Laser, Calient,
Corning, Corvis, Hughes Space and Communications, JDS Uniphase,
Lucent, Marconi, MIT Lincoln Labs, Nortel, Optical Crossing, Siemens,
T.E.M. and TeraBeam.
. Industrial: Baasel Scheel Lasergraphics, DaimlerChrysler Aerospace,
GSI Lumonics, L.O.T. Oriel, Molecular OptoElectronics, Purup Escofot
and Sunx.
In 1999, Marconi and Alcatel were our only customers that accounted for
10% or more of our total net revenues, with 40% and 10%, respectively. In the
nine months ended September 30, 2000, TeraBeam Networks and Marconi were the
sole customers who accounted for more than 10% of our sales, representing
approximately 40% and 20%, respectively. From time to time, we may in the
future provide exclusivity for our products to our customers.
Manufacturing
We manufacture our products and components at our facilities in the
United States, Germany and Italy. Further, we source certain components from
NTO IRE-POLUS. Our Oxford, Massachusetts facility, due to be completed in the
first quarter of 2001, will manufacture our entire range of products. We
produce the majority of our critical specialty components internally, such as,
specialty fiber couplers, isolaters, spectral filters, polarizers, collimators
and optical terminators. Additionally, our vertically integrated manufacturing
operations include pre-form doping, specialty fiber drawing, laser diode module
production and gain block assembly. We also manufacture our own test
instruments, diode test racks, assembly tools and machines according to our own
designs.
43
Facilities
In the United States, we rent a 25,000 square foot facility that is used
for sales and administration, manufacturing and research and development and
contains 9,000 square feet of dust-free work environment. The lease is
renewable in June 2001 for a period of one year. In the first quarter of 2001
we expect to complete the first phase of our new facility in Oxford,
Massachusetts, which will consist of two buildings aggregating 72,000 square
feet located on a 76 acre campus. Within these two buildings 10,000 square feet
will be class 10,000 clean rooms and 32,000 square feet will be dust-free
manufacturing rooms. The second phase of the Oxford facility includes an
additional 120,000 square feet and we expect to commence its construction in
2001 shortly after completion of the first phase. A portion of the proceeds of
this offering will be used to fund this second phase. When completed, the
Oxford facility will become our world headquarters.
In Germany, we own a facility with approximately 23,000 square feet of
manufacturing and research and development space. We are currently expanding
the manufacturing capacity of our German facilities to add 24,000 square feet.
This facility is expected to be completed in the first quarter of 2001. We are
currently seeking land in Burbach to build additional facilities over the next
several years. A portion of the proceeds of this offering will be used to
expand this facility.
In Italy, we rent a 3,000 square foot facility used for product assembly,
manufacturing and testing and we plan to lease up to an additional 15,000
square feet of space in 2001. Our current lease for this facility expires on
December 31, 2002.
Our facilities in the United States and Germany are subject to security
interests held by our lenders. We believe that our existing facilities and
those nearing completion are adequate to meet our needs for the foreseeable
future.
Quality
We test and qualify 100% of our internally manufactured and purchased
components and finished goods and we plan to maintain this standard going
forward. We currently have in-house testing facilities that use our internally
manufactured testing equipment for assessing the operational lifetime of laser
diodes. We test each laser diode upon receipt from the manufacturer for up to
1,000 hours, under the high stress conditions of elevated temperature and
output optical power. We assign each laser diode to an appropriate application
based on its performance during the test. We maintain a database and history of
each laser diode chip and module tested. Currently, this database includes
40,000,000 real-time device hours of laser diode test data. We test all
finished products for 200 hours for various performance criteria. In addition,
we manufacture a substantial majority of our critical components in our various
facilities in order to closely monitor our quality standards. We expect that
increased automation will also contribute to an increase in the quality of our
products.
We have established a quality management system to assure that the
products we manufacture meet or exceed industry standards. This system is based
on ISO 9000 standards. Our German facility has been ISO 9001 certified since
July 2000.
Supply
Various outside suppliers provide us with raw materials and components.
For some of these raw materials and components, we depend on a single or
limited number of suppliers, but we are seeking additional suppliers in order
to prevent interruptions or delays. We cannot assure you that we will obtain
any additional sources of supply. We attempt to maintain surplus inventory to
overcome shipping delays or supply interruptions and, to date, we have
generally been able to obtain sufficient supplies in a timely manner.
44
Pursuant to a non-exclusive purchase agreement with SDL that terminates
on December 31, 2002, we have agreed to purchase $66.7 million of laser diode
chips that meet our specifications. We have agreed to pay SDL specified amounts
if we fail to purchase required amounts each quarter and over the life of the
contract to compensate SDL for its investment in equipment needed to meet our
quantity requirements for laser diode chips. Other than our agreement with SDL,
we do not have long-term agreements with our suppliers for any components.
Sales, Marketing and Technical Support
We have one U.S. and two European sales offices. We plan to increase our
sales and marketing staff and open two more offices in the U.S. and one in the
U.K. within the next twelve months. In this regard, Dr. Vincent Au-Yeung joined
us as our Executive Vice President of Strategic Marketing in January 2001. We
are continuing to seek marketing executives with significant experience in the
fiber optic industry.
In the telecommunications industry, our product specialists and engineers
work with our customers to customize our products to their needs. Because the
telecommunications industry is primarily comprised of a small number of large
companies, our senior management has been responsible for our sales and
marketing effort to these customers. Typically, these customers purchase a
small quantity of our products on a trial basis for six to nine months before
they place larger orders. Compared to orders for our telecommunications
products, orders for our industrial products tend to be smaller and the sales
cycle tends to be faster. We currently use a number of distributors worldwide
to help expand our sales and market penetration for both telecommunications and
industrial customers. In addition, we believe the high level of technical
support we offer provides us with a competitive advantage. We derive
approximately 5% of our revenue from sales made through distributors and 95%
from direct sales.
Our marketing efforts are focused on increasing awareness of our products
and our brand name through our participation in major world trade fairs,
conferences and exhibitions. We also publish papers in scientific journals and
industry publications from time to time.
Competition
Our markets are highly competitive. In the telecommunications industry,
we believe that our principal competitors are major manufacturers of fiber
amplifiers, fiber lasers and related components. These manufacturers include
Alcatel Optronics, Corning, JDS Uniphase, Lucent Microelectronics, Nortel, SDL,
MPB, and Furakawa. JDS Uniphase and SDL have recently announced their agreement
to merge. Our principal competitors in the industrial laser area include
Coherent, SDL, Spectra-Physics and Optocom.
Most of our competitors have substantially greater financial, engineering
and manufacturing resources as well as greater name recognition. Some of our
customers compete with us and some may begin to compete with us. In addition,
some of our customers have been or could be acquired by, or enter into
strategic relations with, our competitors. We anticipate that further
consolidation will occur in our industry, thereby possibly increasing
competition in our target markets.
We believe the principal competitive factors of the markets in which we
operate are:
. product price, features, functionality and reliability;
. performance characteristics;
. introduction of new and enhanced products before competitors;
. product line breadth;
. compliance with emerging industry trends and standards;
45
. service and support;
. manufacturing capacity and reliance upon outside suppliers;
. ability to respond to emerging technologies;
. brand recognition; and
. access to new customers.
We believe we compete favorably with our competitors with respect to the
foregoing factors. However, we cannot assure you that we will be able to
compete successfully in the future.
Regulatory Matters
In most countries where our products are sold, our products must comply
with the regulations of one or more governmental entities. These regulations
often are complex and vary from country to country. Depending upon the country
and the relevant product, the applicable regulations may require product
testing, approval, registration, marking, operating specifications and safety
features. All of these countries control exports of certain lasers and laser-
based items, including both physical commodities and technology. Depending upon
the technical specifications of the item and the country of destination, the
export may require the issuance of a license by the relevant government or may
be authorized without a license under general regulations.
Most of our current products can be exported to most destinations without
the need for a license. This situation may change as we develop new and more
sophisticated products or if one or more countries in which we operate alter
their export control regulations.
In particular, some of our products are subject to U.S., German, Italian
and Russian export control laws and regulations governing the export of
products and components and the disclosure of technical information to foreign
countries and citizens. These laws and regulations require licenses for the
export of some of these products to, and disclosure of our technology in, some
countries, including Russia. In addition, in some countries, including the
United States, these laws and regulations require licenses for the disclosure
of our technology to some of our employees who are not citizens of those
respective countries. We believe that we have the necessary licenses to conduct
our business as presently conducted. However, these laws and regulations could
change with little or no advance notice, such that items not now requiring
licenses could thereafter require licenses. We have determined what we believe
to be the proper classifications for all goods and technology that we export
from the United States and elsewhere and believe them to be reasonable and
proper. There always is the possibility, however, that if the U.S. government
were to review these classifications, the U.S. government could determine that
some or all are incorrect and would require export licensing for items that the
company believes not to require licenses. Such action on the part of the U.S.
government could prevent transfers of goods and technology while licenses are
applied for and obtained, in some cases prevent specified transfers altogether,
and result in penalties for past exports of misclassified items. If any or all
of our classifications were not honored by the U.S. government, our
manufacturing operations may be impaired, and we may face additional adverse
consequences due to these laws and regulations.
In addition, our fiber lasers and other optical products are sometimes
incorporated into medical devices that are subject to approval or oversight by
the Food and Drug Administration and comparable regulatory bodies in other
jurisdictions. Typically, our customer, the medical device manufacturer, has
the responsibility to obtain required FDA and similar approval.
Environmental Regulations
We are subject to a variety of national and local laws and regulations
concerning the storage, use, discharge and disposal of toxic, volatile, or
otherwise hazardous or regulated chemicals or materials used in our
46
manufacturing and assembly processes. Further, we are subject to other safety,
labeling and training regulations as required by local, state and federal law.
We believe that we are in substantial compliance with these regulatory
requirements.
Intellectual Property
We rely on a combination of trade secret law, contractual restrictions,
trademark law and copyright law to establish and protect our proprietary rights
in our technology and intellectual property. Historically, we have chosen to
rely upon trade secrets and contractual restrictions, as opposed to patents, to
protect our rights because of our limited resources. However, with the
additional resources from this offering, we intend to reevaluate our strategy
with respect to protecting our intellectual property portfolio and analyze
whether we will use our additional resources to pursue patent applications. If
we do, we believe that the related expense should not be material. We require
our key employees and consultants to execute non-disclosure and proprietary
rights agreements. These agreements acknowledge our exclusive ownership of all
intellectual property developed by the individual during the course of his or
her work with us and require that all proprietary information disclosed to the
individual remain confidential. We believe that our design and manufacturing
processes make it difficult and expensive, although not impossible, for others
to reverse engineer our products. We have applied for registration of our IPG,
IPG Photonics and IPG Laser names and marks in the Patent and Trademark Office
and will apply in trademark offices elsewhere in jurisdictions where we have
facilities. We intend, where appropriate, to enforce our intellectual property
rights if infringement or misappropriation occurs.
The steps taken by us to protect our intellectual property may not prove
sufficient to prevent misappropriation of our technology, deter independent
third-party development of similar technologies or prevent reverse engineering
of our products. In addition, we may have no legal recourse against those who
successfully reverse engineer our products without misappropriation of our
technology or violation of contractual or other legal prohibitions. The loss of
the ability to use our technology could require us to obtain the rights to use
substitute technology, which could be more expensive or offer lower quality or
performance, and therefore could harm our business. In some cases, we may not
be able to obtain such rights. Moreover, the fiber optic components and fiber
laser industries are characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement.
Third-parties could claim infringement by us with respect to current or future
technology.
Employees
As of December 31, 2000, we had 202 full-time employees. A total of 72
employees were in the U.S. and the remainder are employed in Europe. None of
our employees are represented by a labor union. We have not experienced any
work stoppages and we consider our relations with our employees to be good.
Legal Proceedings
We are not currently involved in any material legal proceedings, nor do
we know of any pending material legal proceedings in which we may be involved.
47
MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees are:
Name Age Positions with IPG
---- --- ------------------
Valentin P. Gapontsev, Ph.D. .. 61 Chairman of the Board of Directors and
Chief Executive Officer
Hon. John H. Dalton............ 58 President and Director
Eugene Shcherbakov, Ph.D. ..... 53 Managing Director of IPG Laser and
Director
Vincent Au-Yueng, Ph.D. ....... 47 Executive Vice President, Strategic
Marketing
Timothy P. V. Mammen........... 31 Chief Financial Officer and Vice President
Angelo P. Lopresti............. 37 Vice President, General Counsel and
Secretary
John Geagea.................... 46 Chief Operating Officer
Benjamin Peng-Chih Li.......... 38 Chief Technology Officer
Denis Gapontsev, Ph.D. ........ 28 Vice President, Research and Development
and Director
Dennis Leonard................. 38 Director of Manufacturing
Stefano Cecchi, Ph.D. ......... 44 Managing Director of IPG Fibertech
Peter V. Mammen................ 68 Treasurer
Paolo Sinni.................... 49 Controller
Valentin Fomine, Ph.D. ........ 45 Department Head of IPG Laser
Igor Samartsev................. 37 Director of Research and Development of
IPG Laser
Nicholai Platonov, Ph.D. ...... 44 Principal Scientist, Department Head of
IPG Photonics
Robert A. Blair................ 54 Vice Chairman of the Board of Directors
Michael C. Child............... 46 Director
William F. Krupke, Ph.D. ...... 63 Director
VALENTIN P. GAPONTSEV, Ph.D. has been our Chief Executive Officer and
Chairman of the Board of Directors since inception. Dr. Gapontsev founded the
IPG Group with the creation of NTO IRE-POLUS, and has been President and
Managing Director since its inception. Dr. Gapontsev has over thirty years of
experience in the field of non-radiative energy transfer in rare earth ions and
solid state materials and is the author of numerous scientific articles. In
1994, he founded IPG Laser, and in 1997, he founded IPG Fibertech. Dr.
Gapontsev holds a Ph.D. degree in Physics from the Moscow Institute of Physics
and Technology.
HON. JOHN H. DALTON has served as our President and as a member of our
Board of Directors since September 2000. Mr. Dalton was appointed Secretary of
the Navy by President Clinton in 1993 and served in that capacity until 1998.
He served as Chairman of the Board of Directors and Chief Executive Officer of
EPCAD Systems, a metal technology firm, from October 1999 until June 2000. He
has been a member of the Boards of Directors of Transtechnology Corporation
since April 1999; Fresh Del Monte Produce Inc. since May 1999; and Niagara
Mohawk Holdings Inc. since June 1999. Mr. Dalton graduated with distinction
from the U.S. Naval Academy and earned an M.B.A degree from the Wharton School
of the University of Pennsylvania. He holds an honorary Doctor of Laws degree
from Trinity College.
EUGENE SHCHERBAKOV, Ph.D. has served as the Managing Director of IPG
Laser since August 2000 and has been a member of our Board of Directors since
September 2000. Dr. Shcherbakov served as the Technical Director of IPG Laser
from 1995 to August 2000. From 1983 to 1995, Dr. Shcherbakov was a senior
scientist in fiber optics and head of the optical communications laboratory at
the General Physics Institute, Russian Academy of Science in Moscow. Dr.
Shcherbakov graduated from the Moscow Physics and
48
Technology Institute with an M.S. in Physics. In addition, Dr. Shcherbakov
attended the Russian Academy of Science in Moscow, where he received a Ph.D. in
Quantum Electronics from its Lebedev Physics Institute and a Dr.Sci. degree in
Laser Physics from its General Physics Institute.
VINCENT AU-YEUNG, Ph.D. has been our Vice President of Strategic
Marketing since January 2001. Prior to joining us, Dr. Au-Yeung was the Vice
President of E-Tek Dynamics Inc., a company involved in the design and
manufacture of passive components and modules for fiber optic systems, and
served as the General Manager of its E-Tek Kaifa Business Unit since August
1999. He had been the President of Kaifa Technology, Inc., a company he founded
in 1985 that focused on the production of fiber optic components, until its
acquisition by E-Tek Dynamics Inc. in 1999. Dr. Au-Yeung received his Ph.D.
degree in Engineering from Princeton University and his M.B.A. degree from the
University of Santa Clara.
TIMOTHY P. V. MAMMEN has been our Chief Financial Officer since July 2000
and a Vice President since November 2000. Previously, Mr. Mammen served as the
Group Finance Director and General Manager of UK Operations for IP Fibre
Devices Ltd. since May 1999. Mr. Mammen was Finance Director and General
Manager of United Partners Plc, a commodities trading firm, from 1995 to 1999.
Mr. Mammen received an Upper Second B.Sc. Honours degree in International Trade
and Development from the London School of Economics and Political Science and
is a Chartered Accountant and a member of the Institute of Chartered
Accountants Scotland.
ANGELO P. LOPRESTI has been our General Counsel, Secretary and one of our
Vice Presidents since January 2001. Prior to joining us, Mr. Lopresti was a
partner at Winston & Strawn, a law firm, from 1999 to 2001, where he focused
his practice in securities and technology law, and mergers and acquisitions. He
was also a partner at Hertzog, Calamari & Gleason, a law firm, from 1998 to
1999 and an associate from 1991 to 1998. Mr. Lopresti holds a B.A. in Economics
from Trinity College and a J.D. from the New York University School of Law.
JOHN GEAGEA has been our Chief Operating Officer since June 2000. From
1987 to 2000, Mr. Geagea worked for Italtel S.p.a., a telecommunications
company, in various capacities, including as Director of Russian Operations
from 1994 to 1996, Director of the Socrates Project from 1996 to 1998, Director
of International Industrial Activities from 1998 to 1999 and Director of
Contracts Management from 1999 to 2000. Mr. Geagea holds a B.S. in Computer
Engineering from the University of Illinois (Urbana-Champaign) and an M.S. in
Electrical Engineering from the Illinois Institute of Technology.
BENJAMIN PENG-CHIH LI has been our Chief Technology Officer since July
2000. From 1991 to 1999, Mr. Li served as a Section Manager at SDL, Inc., a
manufacturer of fiber optic components. He holds an M.S. in Electrical
Engineering from the State University of New York at Stony Brook.
DENIS GAPONTSEV, Ph.D. has been our Vice President of Research and
Development since August 2000 and has been a member of our Board of Directors
since September 2000. From 1994 to 1996, Dr. Gapontsev worked as a scientist at
NTO IRE-POLUS. He worked at IP Fibre Devices Ltd. from 1996 to 1998 and at IPG
Laser GmbH from 1999 to 2000. In these positions he researched fiber lasers and
Raman fiber lasers. Dr. Gapontsev holds a B.S. and an M.S. in Physics from the
Moscow Physics and Technology Institute and a Ph.D. from the University of
London.
DENNIS LEONARD has been our Director of Manufacturing since March 2000.
Mr. Leonard was the Director of Manufacturing of Specialty Optics at Lucent
Technologies (formerly SpecTran Specialty Optics Company), a corporation that
produces fibers for communication, from 1997 to 2000. From 1993 to 1997,
Mr. Leonard was the Director of Manufacturing of Laser Imaging Equipment at
Gerber Systems Corporation, a corporation that develops and manufactures laser
imaging systems. He holds a B.S. degree in Mechanical Engineering from
Worcester Polytechnic Institute and an M.B.A. degree from Rensselaer
Polytechnic Institute.
STEFANO CECCHI, Ph.D. has been the Managing Director of IPG Fibertech
since its inception in December 1997. From 1992 to 1997, Dr. Cecchi managed the
development and production of optical amplifiers
49
and conducted research projects on components for fiber optic communications at
Italtel S.p.a. He holds a Ph.D. degree in Quantum Optics from the National
Institute of Optics of the University of Florence and conducted post doctoral
scientific research on lasers and non-linear spectroscopy in Italy and abroad.
PETER V. MAMMEN has been our Treasurer since December 1998 and has been
an adviser to the IPG Group since 1996. From 1989 to 1996, Mr. Mammen was
Marketing Consultant to Francis Shaw & Company of Manchester, U.K. He holds a
B.A. in Humanities from the University of Madras.
PAOLO SINNI has been our Secretary since August 2000 and our Controller
since January 1999. He was the Controller of Technical Communications
Corporation from 1993 to 1996, of Melles Griot, Inc. from 1996 to 1997 and of
SpecTran Specialty Optics Company from 1997 to 1999. Each of these companies is
in the fiber optics industry. Mr. Sinni holds a B.S.B.A. in Accounting from
Nichols College.
VALENTIN FOMINE, Ph.D. has been a Department Head of IPG Laser since 1998
and previously as an Optical Engineer at NTO IRE-POLUS since 1990. Dr. Fomine
received his Ph.D. specializing in radiophysics from the Institute of Radio
Engineering and Electronics at the Russian Academy of Sciences. He received his
undergraduate education at the Department of General Physics of Saratov State
University, Russia.
IGOR SAMARTSEV has been the Director of Research and Development of IPG
Laser since 1997 and has been employed as a scientist with NTO IRE-POLUS since
1990. He is a graduate of Chelyabinsk Physical Mathematical School and received
a First Class degree from the Moscow Physical Technical Institute.
NICHOLAI PLATONOV, Ph.D. has been our Principal Scientist of IPG
Photonics since October 2000. Dr. Platonov served as a scientist at IPG Laser
from 1998 to 2000 and at NTO IRE-POLUS from 1996 to 1998. Dr. Platonov was a
research scientist at the Institute of Radio Engineering and Electronics of the
Russian Academy of Sciences from 1979 to 1996. He received his Ph.D. from the
Institute of Radio Engineering and Electronics of the Russian Academy of
Sciences and received his undergraduate degree from the Moscow Physical
Technical Institute.
ROBERT A. BLAIR has been Vice Chairman of our Board of Directors since
September 2000 and Chairman of our National Advisory Board since February 2000.
He is currently the President of the Blair Law Firm P.C. Mr. Blair was an
equity partner at Manatt, Phelps & Phillips, a law firm, from 1995 to 1999. He
is a trustee under Winkler Trusts, which are the primary source of equity for,
and owners of, real estate ventures developed by The Mark Winkler Company. Mr.
Blair is managing partner of several real estate partnerships and has been a
manager/principal in cellular telephone ventures. Mr. Blair holds a B.A. in
Mathematics from The College of William and Mary and a J.D. from the University
of Virginia School of Law.
MICHAEL C. CHILD has been a member of our Board of Directors since
September 2000. Mr. Child has been employed by TA Associates, Inc., a venture
capital investment firm, since July 1982 where he currently serves as a
Managing Director. In addition, he has served as a member of the Board of
Directors of Finisar Corporation, a producer of fiber optic subsystems and
network performance test systems, since November 1998 and Fargo Electronics
Inc., a developer, manufacturer and supplier of plastic card printers, since
July 2000. Mr. Child holds a B.S. in Electrical Engineering from the University
of California at Davis and an M.B.A. from the Stanford Graduate School of
Business.
WILLIAM F. KRUPKE, Ph.D. has been a member of our Board of Directors
since November 2000. Since May 2000, Dr. Krupke has been the President of
Applied Lasers, a company which provides consulting services related to laser
technology and applications, and he has served as a consultant to various
companies that concentrate in those fields. From 1972 to 1999, Dr. Krupke
served as Technical Manager for Lawrence Livermore National Laboratories, which
provides research and development for the United States Department of Energy,
and Deputy Associate Director of the laboratory's Laser Directorate. He
received a B.S. degree in Physics from Rensselaer Polytechnic Institute and
M.S. and Ph.D. degrees in Physics from the University of California at Los
Angeles.
50
Our Chief Executive Officer, President, Chief Financial Officer,
Treasurer and Secretary are elected by the Board of Directors. All other
executive officers are elected by the Board of Directors or appointed by the
Chief Executive Officer and all officers serve at the discretion of the Board
of Directors. Each of our officers and directors, other than non-employee
directors, devotes his full time to the affairs of IPG Photonics.
Our Chairman of the Board and Chief Executive Officer, Dr. Valentin P.
Gapontsev, is the father of Dr. Denis Gapontsev, our Vice President of Research
and Development and a director. Our Treasurer, Peter V. Mammen, is the father
of our Chief Financial Officer, Timothy P.V. Mammen. There are no other family
relationships among any of our directors, officers or key employees.
Composition of our Board Of Directors
Our Board of Directors is currently fixed at seven directors. Michael
Child was elected to serve on our Board of Directors pursuant to an agreement
entered into in August 2000 in connection with the sale of our Series B
preferred stock. This agreement will terminate upon the closing of this
offering. At each annual meeting of stockholders, the successors to directors
whose terms are to expire will be elected to serve from the time of election
and qualification until the next annual meeting following their election. Our
nonemployee directors devote such time to our affairs as is necessary to
discharge their duties.
Board Committee
The audit committee of our Board of Directors recommends the appointment
of our independent auditors, reviews our internal accounting procedures and
financial statements and consults with and reviews the services provided by our
independent auditors, including the results and scope of their audit. The audit
committee currently consists of Messrs. Blair and Child, and Dr. Krupke.
Compensation Committee Interlocks and Insider Participation
Our entire Board of Directors determines executive compensation. The
following directors are also executive officers and participated in
deliberations of the Board of Directors concerning executive compensation: Drs.
Valentin Gapontsev, Eugene Shcherbakov and Denis Gapontsev, and Mr. Dalton.
Dr. Valentin Gapontsev served as managing director of IP Fibre Devices and NTO
IRE-POLUS. For more information, please see "Transactions With Related
Parties--Intercompany Transactions", "--Other Transactions with NTO IRE-POLUS"
and "--Other Transactions with IP Fibre Devices."
Director Compensation
Our directors are reimbursed for expenses incurred in connection with
attending board and committee meetings but are not compensated for their
services as board or committee members. In November 2000, we granted options to
purchase 100,000 shares of common stock to each of Dr. Krupke and Mr. Child
under our 2000 stock incentive plan at an exercise price of $3.75 per share.
The options vest equally over a period of four years. For more information, see
"--Stock Option Plan."
National Advisory Board
The National Advisory Board, or NAB, of the Company is currently composed
of eight individuals. The purpose of the NAB is to provide us with advice on
our business and strategy. The NAB meets from three to four times a year.
Members of the NAB are reimbursed for travel and other expenses incurred in
attending meetings, but are not compensated for attending meetings or for
advisory services that they provide to us. Hon. John H. Dalton, Robert Blair
and Dr. William Krupke are members of the NAB, and Mr. Blair is its Chairman.
Each individual was granted options to purchase 100,000 shares of common stock
having an exercise price of $0.50 per share. Messrs. Dalton, Blair and Krupke
joined the NAB prior to becoming an officer or director of IPG Photonics, and
Messrs. Dalton and Blair exercised their options in full in 2000. Dr. Krupke
exercised his option for 30,000 shares in 2000.
51
Executive Compensation
Summary Compensation Table
The following table sets forth information regarding compensation
received during the years ended December 31, 1999 and 2000 by our Chairman of
the Board and Chief Executive Officer and each of our four other executive
officers whose total salary and bonus earned during the Company's last fiscal
year exceeded $100,000.
Annual
Compensation Long Term Compensation
-------------------- -----------------------
Securities
Underlying Other
Name and Principal Position Year Salary Bonus Options Compensation
--------------------------- ---- -------- -------- ---------- ------------
Dr. Valentin P. Gapontsev
Chairman of the Board and
Chief Executive Officer.... 2000 $397,039(1) $100,000 -- --
1999 $229,280(1) $88,023 -- --
Hon. John H. Dalton
President (2).............. 2000 $73,077 -- 800,000 $1,731(3)
Dr. Eugene Shcherbakov
Managing Director of IPG 2000 $164,068(4) -- -- --
Laser...................... 1999 $124,993 -- -- --
Timothy P. V. Mammen
Chief Financial Officer and
Vice President (5)......... 2000 $138,500 -- 100,000 --
John Geagea
Chief Operating Officer
(6)........................ 2000 $100,000 -- 800,000 $28,737(7)
--------
(1) Includes $10,000 and $5,872 paid to Dr. Gapontsev by NTO IRE-POLUS during
the years ended December 31, 2000 and 1999, respectively.
(2) Hon. John H. Dalton joined as our President in September 2000. Includes
options for 100,000 shares granted prior to Mr. Dalton's employment for
service on the National Advisory Board. For a description of the National
Advisory Board, please see "Management--National Advisory Board."
(3) Represents our contribution to Mr. Dalton's 401(k) plan account.
(4) Includes $2,900 paid to Dr. Shcherbakov by NTO IRE-POLUS during the year
ended December 31, 2000.
(5) Mr. Mammen was hired as our Chief Financial Officer in July 2000, but his
salary includes compensation paid by IP Fibre Devices Ltd. during 2000 for
services performed on behalf of our business.
(6) Mr. Geagea was hired as our Chief Operating Officer in June 2000.
(7) Represents our $2,769 contribution to Mr. Geagea's 401(k) plan account and
a relocation allowance of $25,968.
52
Option Grants in the Last Fiscal Year
The following table contains information regarding the number and value
of stock options granted during the fiscal year ended December 31, 2000 to our
five most highly compensated executive officers set forth in the Summary
Compensation Table above. Neither Dr. Gapontsev nor Dr. Shcherbakov was granted
stock options during that fiscal year.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Appreciation for
Option Term (3)
---------------------
Number of % of Total
Securities Options Granted Exercise
Underlying to Employees Price per Expiration
Name Options Granted During Period (1) Share (2) Date 5% 10%
---- --------------- ----------------- --------- ---------- ---------- ----------
Hon. John H. Dalton..... 100,000 2.05% $0.50 03/17/10 2,403,000 3,841,000
600,000 12.31% $1.00 08/01/10 14,118,000 22,746,000
100,000 2.05% $3.75 11/28/10 2,078,000 3,516,000
Timothy P. V. Mammen.... 100,000 2.05% $3.75 11/28/10 2,078,000 3,516,000
John Geagea............. 800,000 16.42% $0.50 06/18/10 19,224,000 30,728,000
--------
(1) The percentage of total options granted is based on an aggregate of
4,870,000 options granted by us during the year ended December 31, 2000.
(2) The options were granted at an exercise price equal to the fair market
value of our common stock determined in good faith by our Board of
Directors. The options granted to Messrs. Mammen and Geagea, and 100,000 of
the options granted to Mr. Dalton, fall under our 2000 incentive
compensation plan, vest 25% approximately one year from the date of grant
and 25% on each anniversary of the first vesting date thereafter. We
granted 600,000 options granted to Mr. Dalton under our 2000 incentive
compensation plan which vested 25% upon the date of grant and the remainder
vest in the following proportions on each anniversary of the date of grant,
respectively: 25%, 20%, 20% and 10%. We granted 100,000 options granted to
Mr. Dalton outside of our 2000 incentive compensation plan for his service
on the National Advisory Board which vested immediately upon the date of
grant.
(3) The potential realizable value is based on the assumption that our common
stock appreciates at specified annual rates, compounded annually, from the
date of grant until the expiration of the ten-year term. These numbers are
calculated based on Securities and Exchange Commission requirements and do
not reflect our projections or estimates of future stock price growth.
Potential realizable values are computed by:
--multiplying the number of shares of common stock underlying each option
by the assumed initial public offering price of $15.00 per share;
--assuming that the aggregate stock value derived from that calculation
compounds at the annual specified rate shown in the table until the
expiration of the options; and
--subtracting from that result the aggregate option exercise price.
Actual gains, if any, on stock option exercises and common stock holdings
are dependent on the time of such exercise and the future performance of our
common stock.
53
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End Option
Values
The following table provides summary information with respect to our five
most highly compensated executive officers set forth in the Summary
Compensation Table above and who hold stock options. As of December 31, 2000,
all options granted to such officers were granted under our 2000 incentive
compensation plan with the exception of 100,000 options granted to Hon. John H.
Dalton on March 17, 2000 for his service on the National Advisory Board.
Neither Dr. Gapontsev nor Dr. Shcherbakov hold stock options.
Number of Securities
Underlying Unexercized Value of Unexercised In-
Options/SARs at Fiscal the-Money Options/SARs at
Year-End Fiscal Year-End (1)
------------------------- -------------------------
Shares Acquired
Name Upon Exercise Value Realized (1) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------------ ----------- ------------- ----------- -------------
Hon. John H. Dalton..... 100,000 1,450,000 -- -- -- --
150,000 2,100,000 -- 450,000 -- 6,300,000
-- -- -- 100,000 -- 1,125,000
Timothy P. V. Mammen.... -- -- 25,000 575,000 362,500 8,012,500
John Geagea............. -- -- -- 800,000 -- 11,600,000
--------
(1) There was no public trading market for our common stock as of December 31,
2000. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $15.00 per share, less the
applicable exercise price.
Employment Agreements
On September 1, 1995, IPG Laser entered into an employment contract with
Dr. Valentin P. Gapontsev, our Chief Executive Officer and Chairman of the
Board of Directors. The agreement provides for Dr. Gapontsev's employment, for
no specific term, as Managing Director of IPG Laser. Under the current terms of
the agreement, Dr. Gapontsev receives annual compensation of DM 476,000, or
approximately $229,000 at December 31, 2000, as well as use of a company car
and company housing. In 2000, Dr. Gapontsev received an additional $250,000 in
compensation from IPG Photonics.
Our employment agreement with Hon. John H. Dalton provides for his
employment from September 1, 2000 to August 31, 2004 as our President at a base
annual salary of $250,000 per year, subject to an annual increase at our
discretion. The agreement provides that during his employment with us and for a
period of two years after, Mr. Dalton will not enter into any business activity
that is competitive with any of our business activities. Pursuant to his
agreement, we granted Mr. Dalton options to purchase 600,000 shares of our
common stock, at an exercise price of $1.00 per share, vesting over a four-year
period. The agreement automatically renews for successive one-year periods if
not terminated thirty days before the end of its current term. In the event of
our termination of Mr. Dalton's employment on or after September 1, 2001 other
than for cause, Mr. Dalton is entitled to the equivalent of twelve month's
salary and benefits. In the event of such a termination, all of Mr. Dalton's
options that are scheduled to vest on the next anniversary date following
notice of termination will vest upon termination.
Under the current terms of our agreement with Dr. Shcherbakov, he
receives an annual salary of DM 392,000, or approximately $189,000 at December
31, 2000. Either IPG or Dr. Shcherbakov may terminate the agreement after the
third year of the term upon six months notice.
Our employment agreement with John Geagea provides for his employment
from June 1, 2000 to June 1, 2002 as our Chief Operating Officer at a base
annual salary of $200,000 per year, subject to an annual increase at our
discretion. In addition, we granted Mr. Geagea options to purchase 800,000
shares of our
54
common stock at an exercise price of $0.50 per share, vesting over a four-year
period. The agreement automatically renews for successive one-year periods if
not terminated thirty days before the end of its current term. In the event of
our termination of Mr. Geagea's employment with less than 180 days notice,
other than for cause, Mr. Geagea is entitled to the equivalent of 180 days of
salary and benefits continuation.
In November 2000, we entered into an employment agreement with Vincent
Au-Yeung that provides for his at-will employment as our Executive Vice
President for Strategic Marketing at a base annual salary of $200,000 and an
annual bonus of up to 25% of this annual salary. Pursuant to the agreement, Dr.
Au-Yeung purchased 1,000,000 shares of our common stock at $0.50 per share. Dr.
Au-Yeung borrowed $1,157,000 from us to pay applicable taxes in connection with
his purchase of 1,000,000 shares of our common stock. The loan bears interest
at 5.6%, is full recourse to Dr. Au-Yeung and is secured by 1,000,000 shares of
common stock. The note is to be repaid with the proceeds from the sales of any
of the 1,000,000 shares purchased by him. This loan matures in January 2006 and
must be repaid sooner if he terminates employment. We have the right to
repurchase these shares if Dr. Au-Yeung terminates his employment prior to July
19, 2001. We have also granted to Dr. Au-Yeung an option to purchase 500,000
shares of our common stock at an exercise price of $1.50 per share. The option
vests on the earlier of October 1, 2001 or the date on which we first achieve
$200,000,000 of gross revenue. We have also granted Dr. Au-Yeung an additional
option for 1,500,000 shares at an exercise price of $1.50 per share, which
vests monthly in equal installments over thirty-six months and vests entirely
on the date we first achieve $400,000,000 of gross revenue. In the event of our
termination of Dr. Au-Yeung's employment with less than 180 days notice, other
than for cause, Dr. Au-Yeung is entitled to the equivalent of 180 days of
salary and benefits continuation.
Non-Competition Agreements
In connection with the sale of our Series B preferred stock in August
2000, we entered into non-competition agreements with Drs. Valentin P.
Gapontsev, Denis Gapontsev, Eugene Shcherbakov and other scientists. We intend
to execute similar non-competition agreements with our scientific personnel in
the future. The agreements prohibit the employees from engaging in any way with
or in a business that is competitive with any member of the IPG Group for one
year from termination of employment with us. The agreements also provide that
the employee may not solicit other employees from IPG Photonics, IPG Laser or
IPG Fibertech within the later of 18 months after termination of employment or
two years after signing and also provide for assignment of all inventions and
nondisclosure of proprietary information.
Stock Option Plan
Our 2000 Incentive Compensation Plan was adopted by the Board of
Directors and approved by the stockholders in April 2000. As amended in
November 2000, the plan authorizes us to issue up to 15,000,000 shares of
common stock. The Board of Directors currently administers the plan, but may
transfer its administration to the Compensation Committee. The plan allows
grants of incentive stock options to our employees, including officers and
employee directors, and employees of our "affiliates" within the meaning of
Section 424 of the Internal Revenue Code of 1986. In addition, the plan allows
grants of nonstatutory stock options, restricted stock, stock appreciation
rights, performance shares and units, and cash awards to our employees,
nonemployee directors, and independent contractors, and also to employees,
nonemployee directors and independent contractors of IPG Photonics or other
entities deemed affiliated with IPG Photonics by the Board of Directors. The
plan has a term of ten years, unless terminated sooner by the Board of
Directors.
The plan provides the exercise price of incentive stock options granted
under the plan must not be less than the fair market value of a share of the
common stock on the date of grant, and imposes certain additional statutory
requirements. In the case of nonstatutory stock options and other awards, the
exercise price (or issuance price) must generally not be less than the fair
market value of a share of the common stock on the date of grant, unless the
Board of Directors in its sole discretion and due to special circumstances
determines otherwise on the date of grant. A maximum of 4,000,000 shares of
common stock may be awarded under the
55
plan to any one individual in any calendar year. The Board of Directors has the
discretion to determine vesting schedules, exercise requirements and potential
forfeiture of all awards granted under the plan. The plan provides that in
connection with a "change in control" (as defined in the plan), the Board of
Directors may, in its sole discretion, provide that an award may be assumed by
the entity taking control or may be substituted by a similar award under such
entity's compensation plan. Alternatively, in connection with a change in
control, the plan allows the Board of Directors to accelerate the vesting of
outstanding options or other awards or to cash out outstanding options and
other awards, subject to certain limitations.
As of December 2000, nonstatutory stock options had been granted and
restricted stock issued to employees of IPG Photonics and affiliated entities
under the plan. As of December 2000 under the plan, (i) 694,868 shares of
common stock had been issued upon exercise of nonstatutory stock options, (ii)
500,000 shares of restricted common stock had been issued and (iii)
nonstatutory stock options to purchase 5,126,532 shares of common stock, with a
weighted average exercise price of $0.99, were outstanding. In November 2000,
we increased the size of the plan from 7,500,000 shares to 15,000,000 shares
and as of December 2000 5,525,600 shares of common stock remained available for
future grants.
401(k) Plan
The IPG Photonics Corporation 401(k) Retirement Plan became effective on
March 1, 1999 and covers all of our eligible employees. Our 401(k) plan is
intended to be a qualified retirement plan under the Internal Revenue Code. All
contributions to the plan by eligible employees or by us, and the investment
earnings thereon, are not taxable to such employees until withdrawn, and any
contributions we may make are expected to be deductible by us when made. Our
eligible employees may elect to reduce their current compensation and have the
amount of such reduction contributed to our plan. We make matching
contributions in an amount equal to 50% of each employee's contribution to the
401(k) plan, subject to a maximum of 6% of such employee's annual compensation.
56
TRANSACTIONS WITH RELATED PARTIES
Other than the compensation agreements and other arrangements described
in "Management," and the transactions described below, for the last three full
fiscal years there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we are or will be a
party:
. in which the amount involved exceeded or will exceed $60,000, and
. in which any director, executive officer, holder of more than 5% of
our common stock on an as-converted basis or any member of their
immediate family has or will have a direct or indirect material
interest.
We believe that each of the transactions described below are on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer will
be subject to approval by a majority of the disinterested members of our board
of directors.
History of IPG Photonics and Restructuring
In November 1994, our founding shareholder, Dr. Valentin Gapontsev,
formed a new company in Germany, IPG Laser GmbH. He also subsequently formed
IPG Fibertech S.r.l. in Italy. We were incorporated as a Delaware corporation
on December 2, 1998 and began operations in the United States in 1999. Prior to
August 2000, IPG Laser, IPG Fibertech and our company were operated under the
common control and management of Dr. Gapontsev. Fifty-percent of IPG Laser was
owned by IP Fibre Devices, an affiliate of Dr. Valentin Gapontsev, and 50% was
owned directly by Dr. Gapontsev. IPG Laser owned 80% of IPG Fibertech.
We entered into three agreements as of August 24, 2000 in connection with
the restructuring of IPG Laser and IPG Fibertech. The restructuring was
undertaken to streamline and simplify our organizational structure, to make our
operations more easily financeable and to consolidate the ownership of our
material property and technology under our direct control. The restructuring
was also a condition to the Series B preferred stock financing. As a result of
the restructuring, IPG Laser and IPG Fibertech became our subsidiaries under
our direct control.
The first agreement relating to the restructuring was between IPG
Photonics and IP Fibre Devices, in which IP Fibre Devices sold 50% of the total
issued and outstanding shares of IPG Laser to IPG Photonics in exchange for
$7.5 million in cash and 2,300,000 shares of our common stock. Dr. Gapontsev is
the Managing Director and majority shareholder of IP Fibre Devices. The second
agreement was between IPG Photonics and Dr. Gapontsev, in which Dr. Gapontsev
sold 4% of the total issued and outstanding shares of IPG Laser to IPG
Photonics in exchange for $2.4 million in cash. The third agreement was an
option agreement in which Dr. Gapontsev granted IPG Photonics the option to
purchase the remaining 46% of the total issued and outstanding share capital of
IPG Laser from Dr. Gapontsev in exchange for 2,806,000 shares of our common
stock. On October 4, 2000, we exercised this option and now own 100% of the
issued and outstanding shares of IPG Laser. We also indirectly control IPG
Laser's 80%-held subsidiary, IPG Fibertech. The remaining 20% of IPG Fibertech
is owned by Stefano Cecchi, its Managing Director.
IPG Photonics and IPG Laser, focus on the design, manufacture and sale of
high performance fiber amplifiers, Raman pump lasers and fiber lasers for
telecommunications and industrial applications. IP Fibre Devices is a holding
company with no significant operations and served as a distributor of our
products in the United Kingdom until December 31, 2000. Our operations have
remained substantially unchanged as a result of the restructuring, however, the
expansion of our U.S. operations since 1999 has helped expand our sales and
customer base.
Following the restructuring, IPG Laser reached an agreement in principle
to acquire a 51% interest in NTO IRE-POLUS, a Russian affiliate of Dr.
Gapontsev that provides us with research and development services. NTO IRE-
POLUS is expected to add to our research and development capabilities. See "--
Other Transactions with NTO IRE-POLUS."
57
Dr. Valentin Gapontsev is our Chairman of the Board and Chief Executive
Officer and, as of December 31, 2000, directly owned 45.6% of our common stock.
As of this date, IP Fibre Devices directly owned 28.1% of our common stock and
Dr. Valentin Gapontsev directly owned 53.0% of IP Fibre Devices' ordinary
shares. Based on these shareholdings, Dr. Gapontsev beneficially owned in the
aggregate 72.5% of our shares of common stock directly through his ownership of
IPG Photonics and indirectly through his control of IP Fibre Devices, excluding
shares held by his son, Dr. Denis Gapontsev. The following chart presents the
overlap in ownership of IPG Photonics, its subsidiaries and affiliated parties
by common members of management at December 31, 2000, without giving effect to
the offering, and giving effect to the closing of the proposed investment by
IPG Laser in NTO IRE-POLUS:
[FLOW CHART]
--------------------------------- ----------------------------------
Dr. Valentin Gapontsev 47.6% Dr. Valentin Gapontsev 53.0%
Dr. Denis Gapontsev 6.3% Dr. Denis Gapontsev 15.0%
Dr. Eugene Shcherbakov 0.8% Dr. Eugene Shcherbakov 8.0%
Dr. Valentin Fomine 0.8% Dr. Igor Samartsev 8.0%
Dr. Igor Samartsev 1.3% Dr. Nikolai Platonov 8.0%
Dr. Nikolai Platonov 0.8% Others 8.0%
--------------------------------- ----------------------------------
| |100.0%
|
| ------------------------- ----------
| IP Fibre Devices Ltd. Others
57.6% 28.1% 14.3%
--------------------------------------------------------------------------
-------------------------------
----------------------------- Dr. Valentin Gapontsev 27.0%
IPG Photonics Corporation Dr. Igor Samartsev 5.0%
----------------------------- Dr. Nikolai Platonov 1.0%
Others 17.0%
---------------------------------
|
49%
100% 51%
------------------------- -------------------
IPG Laser GmbH NTO IRE-PLOUS
------------------------- -------------------
80%
-------------------------
IPG Fibertech S.R.L.
-------------------------
Intercompany Transactions
Prior to the restructuring, we entered into various transactions with
other companies under the common control and management of Dr. Valentin
Gapontsev. These companies included IP Fibre Devices, IPC Inc., IP Fibre Optics
Ltd., VPG Laser Components GmbH and NTO IRE-POLUS. Historically, our
transactions with these companies occurred in the ordinary course of business
and consisted primarily of intercompany sales and purchases of raw materials
and components included in our cost of sales. The following is a table
summarizing these transactions for the years ended December 31, 1997, 1998 and
1999, and for the nine months ended September 30, 2000 (in thousands). Amounts
reported as operating expenses represent management charges from IP Fibre
Devices. Interest expense represents amounts incurred on intercompany
borrowings.
58
Years ended December 31,
---------------------------- Nine months ended
1997 1998 1999 September 30, 2000
-------- -------- -------- ------------------
Net sales............... $ 811 $ 1,103 $ 655 $ 789
Purchases............... 1,533 2,133 2,095 3,108
Operating expenses...... -- 32 106 138
Interest income
(expense), net......... (10) (10) (17) --
Other Transactions with NTO IRE-POLUS
In connection with our restructuring in August 2000, we entered into an
agreement regarding intellectual property with NTO IRE-POLUS. Pursuant to the
agreement, NTO IRE-POLUS has agreed to provide us and our subsidiaries, on an
exclusive basis, with research and development services relating to fiber
amplifiers, fiber lasers and other associated products as well as all
intellectual property incorporated in or relating to these products. Under this
agreement, we are required to pay NTO IRE-POLUS's direct and overhead costs,
plus a fee of 10%, for its research and development services. For a complete
description of this arrangement, see "Business--Research and Development."
On October 3, 2000, we agreed to loan $1,000,000 to NTO IRE-POLUS. These
funds will be used for working capital and capital expenditures to assist NTO
IRE-POLUS in providing us components and equipment. This loan bears interest at
an annual rate of 7.0% and has a term of six months from the date the money is
transferred to NTO IRE-POLUS.
IPG Laser has agreed in principle to acquire a 51% interest in NTO IRE-
POLUS in exchange for IPG's commitment to invest up to $5.0 million in NTO IRE-
POLUS, subject to and in accordance with NTO IRE-POLUS's future business plans.
The proceeds of the investment are to be used by NTO IRE-POLUS solely for
equipment purchases and the development of additional manufacturing capacity.
The transaction is subject to satisfaction of usual and customary closing
conditions, as well as the approval of the Russian Ministry for Anti-Monopoly
Policy. While we believe that these conditions will be satisfied and the
acquisition will be consummated in the first half of 2001, we cannot assure you
that the acquisition will be completed on the terms currently contemplated or
at all.
Other Transactions with IP Fibre Devices
In the past, we have sold products to IP Fibre Devices which resells
those products to its customers in the United Kingdom. Effective January 1,
2001, we terminated our distribution relationship with IP Fibre Devices and we
now sell our products directly to customers in the United Kingdom through a
wholly-owned subsidiary that was recently formed. Currently, we sublease office
space from, and share general and administrative expenses with, IP Fibre
Devices at an aggregate estimated annual expense to us of approximately
$250,000.
TeraBeam Agreements
We sell a significant amount of our products to TeraBeam. In April 1998,
IP Fibre Devices entered into an agreement with TeraBeam providing for the sale
of free-space optical point-to-multipoint fiber amplifiers with an output power
of one Watt or greater. From July 1998 to August 1998, IPG Laser sold $185,370
worth of products to TeraBeam in exchange for $135,370 in cash and 571,428
shares of TeraBeam common stock. Pursuant to a partnering agreement executed
with TeraBeam in April 1998, TeraBeam issued in August 1998 1,561,144 shares of
its common stock to IP Fibre Devices in consideration of a discount on products
sold to TeraBeam. This partnering agreement terminated in 1999. From November
1999 to February 2000, we sold an aggregate of $2.0 million of our products to
TeraBeam. TeraBeam paid us $1.6 million in cash and issued 865,924 shares of
TeraBeam common stock to IP Fibre Devices. In connection with this transaction,
IP Fibre Devices issued a note to us in the principal amount of $396,656. This
note was repaid with accrued interest, totaling $32,000, in October 2000. In
connection with the 1998 agreement with TeraBeam, TeraBeam granted
59
Dr. Valentin Gapontsev options to purchase 100,000 shares of common stock of
TeraBeam for his services on the Technical Advisory Board of TeraBeam. All of
such options have been exercised. In February 2000, Peter V. Mammen, our
treasurer, purchased 120,000 shares of TeraBeam at an aggregate purchase price
of $60,000. We and our affiliates own approximately 2.1% of the outstanding
common stock TeraBeam.
Intercompany Loans
In January 1999, we issued IP Fibre Devices a note in the principal
amount of $175,000 that accrued interest at the rate of 5% per annum. IPG
Photonics entered into an agreement with IP Fibre Devices in which IP Fibre
Devices agreed to pay an additional $18,000 to us and convert the note and
accrued interest, totaling $182,000, into 20,000,000 shares of our common
stock. The total consideration paid by IP Fibre Devices was $200,000, or
approximately $0.01 per common share. The common stock was issued to IP Fibre
Devices in January 2000. Because of the elements of common control, the shares
of common stock were not recorded at fair value and have been treated as
founders shares.
In November 1997, IPG Laser issued IP Fibre Devices a note in the
principal amount of DM 156,000, or $70,100, which accrued interest at 5% per
annum. The note and accrued interest were repaid in full to IP Fibre Devices in
March 2000.
Dr. Valentin Gapontsev
On August 13, 2000, Dr. Valentin Gapontsev borrowed DM 200,000, or
approximately $94,000, from IPG Laser, at an annual interest rate of 8%. This
loan was repaid in full on November 30, 2000. Dr. Gapontsev has personally
guaranteed $5.2 million of our outstanding obligations as of September 30,
2000. In connection with one guaranty, Dr. Gapontsev granted a security
interest in all of his securities and accounts held by one of the lenders. Dr.
Gapontsev, as our principal stockholder, provided these guarantees without any
compensation.
Dr. Denis Gapontsev
On May 30, 2000, IPG Laser agreed to purchase land and a house adjacent
to our Burbach facility from Dr. Denis Gapontsev, one of our directors and our
Vice President of Research and Development. IPG Laser assumed the mortgages on
the land having a value of DM 900,000, or $404,500, and paid Dr. Gapontsev DM
184,000, or $82,700. Prior to the sale, IPG Laser had been leasing the land and
house from Dr. Gapontsev since December 28, 1998 for DM 9,000, or $4,000, per
month.
Robert A. Blair
As of October 4, 1999, we entered into an agreement with Robert A. Blair,
our Vice Chairman of the Board of Directors, for legal services and non-legal
consulting services in connection with strategic business advice and other
matters. Pursuant to this agreement, Mr. Blair received options to purchase
400,000 shares of our common stock at an exercise price of $0.50 per share and
the right to purchase, as of March 2000, 500,000 shares of our common stock at
a price of $0.50 per share. We also entered into an agreement with Mr. Blair as
of February 3, 2000 for him to serve as Chairman of our National Advisory
Board. Pursuant to this agreement, he received options to purchase 100,000
shares of our common stock at a price of $0.50 per share. In March 2000, Mr.
Blair transferred options to purchase 20,000 shares to family members and
exercised the remainder of his 480,000 options. He subsequently also acquired
the 500,000 shares of our common stock at a purchase price of $0.50 per share.
He purchased these shares by payment of $50,000 cash and promissory notes with
face amounts totaling $440,000. The first note bears interest at an annual rate
of 6.8% and the second note bears interest at 6.01%. These notes become payable
in March 2005 and November 2005, respectively.
60
Series A and Series B Stock Purchase Agreements
On March 30, 2000, Hon. John Dalton, our President, purchased an
aggregate of 10,000 shares of our Series A preferred stock for an aggregate
purchase price of $100,000. Mr. Dalton purchased these shares prior to becoming
our president and on the same terms as other unrelated parties. Holders of
Series A preferred stock are entitled to certain registration rights. See
"Description of Capital Stock--Preferred Stock" and "Description of Capital
Stock--Registration Rights" for a description of our Series A preferred stock
and its rights and preferences. Upon completion of this offering, the 10,000
shares of Series A preferred stock held by Mr. Dalton will convert into 20,000
shares of our common stock.
On August 30, 2000 and August 31, 2000, TA Associates Inc., together with
affiliated entities, purchased an aggregate of 2,000,000 shares of our Series B
preferred stock and related warrants to purchase 1,666,667 shares of our common
stock at an exercise price of $7.50 per share the aggregate purchase price for
the warrants and shares was $50,000,000. Holders of Series B preferred stock
are entitled to elect a director to our board of directors as well as
redemption rights not enjoyed by holders of common stock or Series A preferred
stock. Mr. Child, one of our directors, is Managing Director of TA Associates,
Inc. Please see "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Registration Rights" for a description of our
Series B preferred stock and its rights. For a description of the warrants we
sold to TA Associates and its affiliates, please see "Description of Capital
Stock--Warrants." Upon completion of this offering, the 2,000,000 shares of
Series B preferred stock held by TA Associates and its affiliates will convert
into 5,833,333 shares of our common stock, assuming an offering price of $15.00
per share.
Indemnification
We have entered into indemnification agreements with each of our
directors. Such indemnification agreements require us to indemnify our
directors to the fullest extent permitted by Delaware law. For a description of
the limitation of our directors' liability and our indemnification of officers,
see "Indemnification of Directors and Executive Officers and Limitation of
Liability."
Employment Agreements
We have entered into employment arrangements, compensation arrangements
and severance arrangements with certain of our executive officers. For more
information regarding these arrangements, see "Management--Employment
Agreements" and "--Executive Compensation." For information regarding stock
options, see "Management--Stock Option Plan."
61
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
As permitted by the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation which provide that our
directors shall not be personally liable for monetary damages to IPG Photonics
or its stockholders for a breach of fiduciary duty as a director, except
liability for:
. a breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a known violation of law;
. an act related to our unlawful stock repurchase or payment of a
dividend under Section 174 of the Delaware General Corporation Law;
or
. transactions from which the director derived an improper personal
benefit.
These limitations of liability do not apply to liabilities arising under
the federal securities laws and do not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation also authorizes us to indemnify our officers, directors and
other agents to the fullest extent permitted under the Delaware General
Corporation Law.
As permitted by the Delaware General Corporation Law, our bylaws provide
that:
. we are required to indemnify our directors and officers to the
fullest extent permitted by the Delaware General Corporation Law,
subject to limited exceptions;
. we are required to advance expenses, as incurred, to our directors
and officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions; and
. the rights provided in the bylaws are not exclusive.
We have entered into separate indemnification agreements with each of
our directors which are broader than the specific indemnification provisions
contained in the Delaware General Corporation Law. These indemnification
agreements require us, among other things, to indemnify our directors against
liabilities that may arise by reason of their status or service as directors,
other than liabilities arising from willful misconduct. These indemnification
agreements also require us to advance any expenses incurred by the directors
as a result of any proceeding against them as to which they could be
indemnified and to obtain directors' and officers' insurance.
At present, there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents where indemnification by us is
sought. In addition, we are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
We intend to maintain directors' and officers' liability insurance if
available on reasonable terms.
62
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of December 31, 2000, and as
adjusted to reflect the sale of the common stock offered hereby, by:
. each stockholder who is known by us to beneficially own more than 5%
of common stock;
. our Chairman and our four other most highly compensated executive
officers;
. each of our directors; and
. all of our executive officers and directors as a group.
Percent
Beneficial Percent Owned
Ownership Prior Owned Prior After
Stockholder to Offering(1) to Offering Offering
----------- --------------- ----------- --------
Dr. Valentin P. Gapontsev (2)............ 60,106,000 73% 66%
Hon. John H. Dalton...................... 270,000 * *
Dr. Eugene Shcherbakov (3)............... 600,000 * *
Timothy P. V. Mammen (4)................. 125,500 * *
John Geagea.............................. 0 * *
Dr. Denis Gapontsev (5).................. 5,000,000 6 5
Dr. William F. Krupke (6)................ 25,000 * *
Robert A. Blair.......................... 980,000 1 1
Michael C. Child (7)..................... 13,087 * *
Vincent Au-Yeung.........................
IP Fibre Devices Ltd..................... 22,300,000 27 24
Entities affiliated with TA Associates,
Inc (8)................................. 7,499,987 9 8
All directors and executive officers as a
group (9 persons)....................... 76,619,877 90 80
--------
* represents less than 1%
(1) The number of shares beneficially owned and the percentage of share
outstanding are based on (a) 82,884,201 shares outstanding as of December
31, 2000 and assuming the conversion of 4,300,000 shares of our Series A
and Series B preferred stock based upon an assumed offering price of $15.00
and (b) 91,084,201 shares outstanding after completion of this offering,
assuming no exercise of the underwriters' over-allotment option. Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
All shares of common stock subject to options and warrants exercisable
within 60 days following December 31, 2000 are deemed to be outstanding and
beneficially owned by the person holding those options for the purpose of
computing the number of shares beneficially owned and the percentage of
ownership of that person. They are not, however, deemed to be outstanding
and beneficially owned for the purpose of computing the percentage
ownership of any other person. Except as indicated in the other footnotes
to the table and subject to applicable community property laws, based on
information provided by the persons named in the table, these persons have
sole voting and investment power with respect to all shares of the common
stock shown as beneficially owned by them. Unless otherwise noted below,
the address of each of the individuals named above is c/o IPG Photonics
Corporation, P.O. Box 519, 660 Main Street, Sturbridge, MA 01566.
(2) Excludes shares beneficially owned by Dr. Denis Gapontsev, for which Dr.
Valentin Gapontsev disclaims beneficial ownership. Includes all shares
beneficially owned by IP Fibre Devices, of which Dr. Valentin Gapontsev
owns 53% of its ordinary shares.
(3) Excludes shares beneficially owned by IP Fibre Devices of which Dr.
Shcherbakov owns 8% of its ordinary shares, for which he disclaims
beneficial ownership.
63
(4) Includes 125,000 shares of common stock issuable upon exercise of options
that are exercisable within sixty days of September 30, 2000. Excludes
shares beneficially owned by Peter Mammen, for which Timothy Mammen
disclaims beneficial ownership.
(5) Excludes shares beneficially owned by Dr. Valentin Gapontsev, for which Dr.
Denis Gapontsev disclaims beneficial ownership. Excludes shares
beneficially owned by IP Fibre Devices of which Dr. Denis Gapontsev owns
15% of its ordinary shares, for which he disclaims beneficial ownership.
(6) Includes 25,000 shares of common stock beneficially owned by Dr. Krupke
under a stock option granted to him for service as a member of our National
Advisory Board.
(7) Mr. Child disclaims beneficial ownership of all shares held by affiliates
of TA Associates, Inc. of which Mr. Child is a Managing Director, except to
the extent of 13,086 shares of common stock in which he has an ownership
interest through TA Investors LLC.
(8) Includes 2,998,326 shares held, and 856,667 shares beneficially owned under
a warrant issued to, by TA IX, L.P., 1,399,997 shares held, and 400,000
shares beneficially owned under a warrant issued to, by TA/Advent VIII
L.P., 1,296,397 shares, and 370,400 shares of common stock beneficially
owned under a warranted issued to, held by TA/Atlantic and Pacific IV L.P.,
50,633 shares held, and 14,467 shares beneficially owned under a warrant
issued to, by TA Executives Fund, LLC and 87,966 shares held, and 25,133
shares beneficially owned under a warrant issued to, by TA Investors LLC.
TA IX, L.P., TA/Advent VIII L.P., TA/Atlantic and Pacific IV L.P., TA
Executives Fund LLC and TA Investors LLC are part of an affiliated group of
investment partnerships. The general partner of TA/Advent VIII L.P. is TA
Associates VIII LLC. In such capacity, TA Associates, Inc., through an
executive committee, exercises sole voting and investment power with
respect to all shares held of record by the named investment partnerships;
individually, no stockholder, director or officer of TA Associates, Inc.,
is deemed to have or share such voting or investment power. The address of
TA Associates, Inc. is 125 High Street, High Street Tower, Suite 2500,
Boston, MA 02110.
64
DESCRIPTION OF CAPITAL STOCK
Presently we are authorized to issue 100,000,000 shares of common stock
and 5,000,000 shares of preferred stock. Upon the commencement of this
offering, we will be authorized to issue 505,000,000 shares, $0.0001 par value
per share comprised of 500,000,000 shares of common stock and 5,000,000 shares
of preferred stock.
The following description of the material terms of our capital stock is
only a summary. You should refer to our certificate of incorporation and bylaws
as in effect upon the closing of this offering, which are included as exhibits
to the registration statement of which this prospectus forms a part.
Common Stock
As of December 31, 2000, and assuming the conversion of all outstanding
shares of preferred stock into common stock, there were 82,884,201 shares of
common stock outstanding which were held of record by approximately 80
stockholders. There will be 91,084,201 shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options after September 30, 2000) after giving effect
to the sale of our common stock in this offering. We currently have reserved
15,000,000 shares of stock under our 2000 stock incentive plan of which there
were outstanding options to purchase 5,126,532 shares of common stock as of
December 31, 2000. See "Management--Stock Option Plan" for a description of our
stock plan.
The holders of our common stock are entitled to one vote per share held
of record on matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation does not provide for cumulative voting in
the election of directors. Subject to preferences that may be applicable to any
outstanding preferred stock, the holders of our common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
our board of directors out of funds legally available for that purpose. In the
event of our liquidation, holders of our common stock are entitled to share
ratably in our remaining net assets, subject to payment or provision for
payment of our debts and other liabilities and prior distribution rights of
preferred stock, if any, then outstanding. Holders of our common stock have no
preemptive or other subscription or conversion rights. There are no redemption
or sinking fund provisions applicable to our common stock. All outstanding
shares of common stock are fully paid and non-assessable and the shares of
common stock to be issued upon the completion of this offering will be fully
paid and non-assessable.
Preferred Stock
Upon the closing of this offering, all 500,000 shares of our Series A
preferred stock outstanding will be converted on a two-for-one basis into an
aggregate of 1,000,000 shares of common stock. Upon the closing of this
offering, all 3,800,000 shares of our Series B preferred stock will convert
into common stock at a conversion price based upon the initial public offering
price (after underwriting commissions and discounts) in the offering. If such
price meets or exceeds (i) $21.88 per share, in the case of an offering which
closes on or after January 1, 2001 and prior to March 31, 2001, (ii) $25.00 per
share, in the case of an offering which closes after April 1, 2001 and prior to
December 31, 2001, (iii) $28.13 per share, in the case of an offering which
closes after January 1, 2002 and prior to August 31, 2002 or (iv) $31.25 per
share in the case of an offering which closes after August 31, 2002, each share
of Series B preferred stock converts into two shares of common stock. If the
initial offering price (after underwriting commissions and discounts) is less
than the amounts specified above, then the Series B preferred stock will
convert at a conversion price equal to the initial public offering price
divided by (i) 1.75, in the case of an offering which closes on or after
January 1, 2001 and prior to March 31, 2001, (ii) 2.00, in the case of an
offering which closes after April 1, 2001 and prior to December 31, 2001, and
(iii) 2.25, in the case of an offering which closes after August 31, 2002;
provided that in no event will the conversion price be reduced to less than
$5.00 per share. Based upon an assumed offering price of $15.00 per share, the
3,800,000 shares of Series B preferred stock convert into 11,083,333 shares of
common stock.
65
Our board of directors has the authority, without action by the
stockholders, to provide for the designation and issuance of preferred stock in
one or more series, to establish the number of shares to be included in each
such series and to fix the designations, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
of each such series. The rights, preferences and privileges of each series of
preferred stock may be greater than the rights of our common stock. It is not
possible to state the actual effect of the issuance of any shares of preferred
stock upon the rights of holders of our common stock until the board of
directors determines the specific rights of the holders of any preferred stock
that may be issued. However, the effects might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; and
. delaying or preventing a change in our control without further action
by the stockholders.
We have no present plans to issue any additional shares of preferred stock.
Warrants
There are outstanding warrants to purchase an aggregate of 3,166,667
shares of common stock assuming an offering price of $15.00 per share. These
warrants were granted in August, October and December 2000 to a group of
private investors in connection with the sale of our Series B preferred stock.
These warrants entitle the holders to purchase an aggregate of $23.8 million
worth of our common stock. The exercise price will equal 50% of the public
offering price or $7.50, assuming an offering price of $15.00. They are
exercisable upon the sale of all of our assets or stock or an underwritten
initial public offering of our common stock. The warrants expire on August 30,
2007, unless earlier exercised.
Registration Rights
Under our two agreements regarding registration rights with holders of
shares of our convertible preferred stock (12,083,333 shares assuming
conversion of all outstanding shares of Series A and Series B preferred stock),
the holders of these shares are entitled to certain registration rights
regarding these shares. The registration rights provide that if we propose to
register any securities under the Securities Act of 1933, either for our own
account or for the account of other security holders exercising registration
rights, such holders are entitled to notice of the registration and are
entitled to include shares of their common stock in the registration. This
right is subject to conditions and limitations, including the right of the
underwriters in an offering to limit the number of shares included in the
registration. The holders of Series A preferred stock may require us to file
one, and holders of Series B preferred stock may require us to file up to two,
registration statements under the Securities Act at our expense with respect to
their shares. We are required to use our commercially reasonable best efforts
to effect the registrations, subject to conditions and limitations.
Furthermore, the holders of shares of our Series B preferred stock that will
convert into common stock upon completion of the offering may require us to
file additional registration statements on Form S-3, subject to conditions and
limitations.
Delaware Anti-Takeover Law And Certain Charter And Bylaw Provisions
Certain provisions of Delaware law and our amended and restated
certificate of incorporation and bylaws could make more difficult the
acquisition of our company by means of a tender offer, a proxy contest or
otherwise and the removal of incumbent officers and directors. These
provisions, summarized below, may discourage certain types of coercive takeover
practices and inadequate takeover bids and encourage persons seeking to acquire
control of our company to first negotiate with our company. We believe that the
benefits of increased protection of our company's potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure our company outweigh the disadvantages of discouraging
such
66
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We will be subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers which prohibits a Delaware corporation from
engaging in any business combination with an "interested stockholder," unless:
. prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
. the interested stockholder owned at least 85% of the voting stock of
the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding (a) shares owned by persons who are directors and also
officers, and (b) shares owned by employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
. on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
Except as otherwise specified in Section 203, an "interested stockholder"
is defined to include (a) any person that is the owner of 15% or more of the
outstanding voting securities of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within three years
immediately prior to the date of determination and (b) the affiliates and
associates of any such person.
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. The authorization of undesignated
preferred stock makes it possible for the board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of our company. These and other provisions may
have the effect of deterring hostile takeovers or delaying changes in control
or management of our company.
Transfer Agent And Registrar
The transfer agent and registrar for our common stock is Continental
Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been a public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales could adversely affect the trading
price of the common stock.
Upon completion of this offering, we will have outstanding 92,084,201
shares of common stock, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options to purchase common
stock after September 30, 2000. Of these shares, the 8,200,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by our
"affiliates," as defined in Rule 144 under the Securities Act, which would be
subject to the limitations and restrictions described below.
67
The remaining 83,884,201 shares of common stock outstanding upon
completion of this offering will be "restricted securities" as defined in Rule
144. These securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144 or 701 under
the Securities Act, which are summarized below. Sales of these restricted
securities in the public market, or the availability of these shares for sale,
could adversely affect the trading price of our common stock.
Holders of approximately of these restricted securities, including
all of our officers and directors and the entities affiliated with them and all
of our significant stockholders, have entered into lock-up agreements providing
that, subject to limited exceptions, they will not sell, directly or
indirectly, any common stock without the prior consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated for a period of 180 days from the date of
this prospectus.
All of these restricted securities will be eligible for sale in the
public market, subject in some cases to the volume limitations and other
restrictions of Rule 144, beginning 180 days after the date of this prospectus
upon expiration of the lock-up agreements described above.
Shares issued upon exercise of options granted by us prior to the date of
this prospectus will be available for sale in the public market under Rule 701
of the Securities Act. Rule 701 permits resales of these shares in reliance
upon Rule 144 but without compliance with various restrictions, including the
holding period requirement, imposed under Rule 144. In general, under Rule 144,
beginning 90 days after the date of this prospectus, a person (or persons whose
shares are aggregated) who has beneficially owned restricted securities for at
least one year would be entitled to sell within any three-month period a number
of shares not to exceed the greater of (1) one percent of the then outstanding
shares of common stock or (2) the average weekly trading volume of our common
stock during the four calendar weeks preceding the filing of a Form 144 with
respect to the sale. Sales under Rule 144 are also subject to manner of sale
and notice requirements, as well as to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have
been an affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Upon consummation of this offering, we will have reserved an aggregate of
15,000,000 shares of common stock for issuance pursuant to our 2000 stock
incentive plan. As of December 31, 2000, options to purchase an aggregate of
5,126,532 shares of common stock were outstanding under our stock option plan.
We intend to file registration statements on Form S-8 under the Securities Act
approximately 90 days after the date of this prospectus to register all of such
reserved shares of common stock issued or reserved for issuance under our stock
option plan. Such common stock issued under the foregoing plans, after the
filing of related registration statements, will be freely tradable in the
public market, subject in the case of the holders to the Rule 144 limitations
applicable to our affiliates, lock-up agreements with the underwriters and
vesting restrictions imposed by us.
68
SUMMARY OF FEDERAL INCOME AND ESTATE TAX
CONSEQUENCES OF OWNERSHIP AND DISPOSITION
OF COMMON STOCK BY NON-U.S. HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of our common stock by
non-U.S. holders. As used herein, "non-U.S. holder" means any person or entity
that holds our common stock, other than:
. an individual citizen or resident of the U.S.;
. a corporation or partnership created or organized in or under the
laws of the U.S., or of any state of the U.S. or the District of
Columbia, other than any partnership treated as foreign under U.S.
Treasury Regulations;
. an estate the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source; or
. in general, a trust if a court within the U.S. is able to exercise
primary supervision over the administration of the trust and if one
or more U.S. persons have the authority to control all substantial
decisions of the trust.
The summary is based on provisions of the U.S. Internal Revenue Code of
1986, as amended, existing, temporary and proposed U.S. Treasury Regulations
promulgated thereunder and administrative and judicial interpretations of each,
all as of the date hereof and all of which are subject to change, possibly on a
retroactive basis. This summary is for general information only. It does not
address aspects of U.S. federal taxation other than income and estate taxation.
This summary does not discuss all the tax consequences that may be relevant to
a non-U.S. holder in light of the holder's particular circumstances, for
instance, insurance companies, tax-exempt organizations, pension funds, broker-
dealers, and financial institutions. In addition, this summary does not address
any state, local, or foreign tax considerations that may be relevant to a non-
U.S. holder's decision to purchase shares of our common stock.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES, AS WELL AS
OTHER U.S. FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES, AND THE NON-U.S. TAX
CONSEQUENCES, TO THEM OF OWNING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
Income Tax
Dividends
We do not have a present intention to pay dividends on shares of our
common stock. If we were to pay dividends, however, dividends paid to a non-
U.S. holder generally will be subject to withholding of U.S. income tax at the
rate of 30% of the gross amount of the dividend, or such lower rate as may be
prescribed by an applicable income tax treaty.
If dividends we pay are effectively connected with a non-U.S. holder's
conduct of a trade or business in the U.S., the 30% withholding tax generally
will not apply, and the non-U.S. holder generally will be subject to tax on
such dividends on a net basis (the gross amount less allowable deductions) in
the same manner as holders who are U.S. persons, provided the non-U.S. holder
files appropriate IRS forms with us. If an income tax treaty applies, dividends
which are effectively connected with the holder's conduct of a U.S. trade or
business must also be attributable to such holder's U.S. permanent
establishment or fixed base in order to be taxable on a net basis. An
additional branch profits tax of 30%, or such lower rate as may be prescribed
by an applicable income tax treaty, may apply if the non-U.S. holder is a
corporation.
69
Under current U.S. Treasury Regulations, in determining whether a holder
is eligible for the benefits of an income tax treaty, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country, absent knowledge to the contrary. However, under new U.S. Treasury
Regulations generally effective for dividend payments made after December 31,
2000, a non-U.S. holder desiring to claim the benefits of an applicable tax
treaty must satisfy certification and other requirements and must provide us
with a taxpayer identification number unless an exception applies. In
addition, under these new Treasury Regulations, in the case of common stock
held by a foreign partnership, this certification requirement may be applied
to the partners, and not the partnership, and the partnership must provide
certain information, including a U.S. taxpayer identification number. These
new regulations also provide look-through rules for tiered partnerships. A
non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax
pursuant to a tax treaty may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the IRS.
Disposition of Our Common Stock
Generally, non-U.S. holders will not be subject to U.S. federal income
tax, or withholding thereof, in respect of gain recognized on a disposition of
our common stock unless:
. the gain is effectively connected with the holder's conduct of a
trade or business within the U.S., or if a tax treaty applies, is
attributable to a permanent establishment or fixed base of the holder
in the U.S.; in any such case gain will be subject to regular
graduated U.S. income tax rates and the branch profits tax described
above may also apply if the non-U.S. holder is a corporation;
. in the case of a non-U.S. holder who is a non-resident alien
individual and holds our common stock as a capital asset, the holder
is present in the U.S. for 183 or more days in the taxable year of
the sale and other conditions are met;
. we are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes and certain other
conditions are met; we do not believe we are or have been a United
States real property holding corporation and do not expect to become
one in the future; or
. the holder is subject to tax pursuant to U.S. federal income tax
provisions applicable to certain U.S. expatriates.
Estate Tax
If an individual non-U.S. holder owns, or is treated as owning, our
common stock at the time of his or her death, such stock would generally be
includable in the individual's gross estate for U.S. federal estate tax
purposes. In such case, our common stock may be subject to U.S. federal estate
tax imposed on the estates of nonresident aliens, in the absence of a contrary
provision contained in an applicable estate tax treaty.
Backup Withholding and Information Reporting
Dividends
Generally, we must report annually to the IRS and to each non-U.S.
holder the amount of dividends that we paid to a holder, and the amount of tax
that we withheld on those dividends. This information may also be made
available to the tax authorities of a country in which the non-U.S. holder
resides or is established.
Under current law, dividends paid on our common stock to a non-U.S.
holder at an address outside the U.S. are generally exempt from backup
withholding tax, imposed at a 31% rate, and U.S. information reporting
requirements, but not from regular withholding tax as discussed above. Backup
withholding tax and information reporting generally will apply to dividends
paid to a non-U.S. holder at an address in the U.S. if the holder fails to
establish an exemption or to furnish other information. Under the Treasury
Regulations that are applicable to dividends paid after December 31, 2000, a
non-U.S. person must generally provide proper
70
documentation establishing the person's non-U.S. status to a withholding agent
in order to avoid backup withholding tax.
Broker Sales
Payments of proceeds from the sale of our common stock by a non-U.S.
holder made to or through a U.S. office of a broker are generally subject to
both information reporting and backup withholding tax unless the holder
certifies its non-U.S. status under penalties of perjury or otherwise
establishes entitlement to an exemption. Payments of proceeds from the sale of
our common stock by a non-U.S. holder made to or through a non-U.S. office of a
broker generally will not be subject to information reporting or backup
withholding. However, payments made to or through certain non-U.S. offices,
including the non-U.S. offices of a U.S. broker and foreign brokers with
certain types of relationships to the U.S., are generally subject to
information reporting, but not backup withholding, unless the holder certifies
its non-U.S. status under penalties of perjury or otherwise establishes
entitlement to an exemption.
Backup withholding is not an additional tax. A non-U.S. holder may obtain
a refund of any excess amounts withheld under the backup withholding rules by
filing an appropriate claim for refund with the IRS.
Non-U.S. holders should consult their tax advisors regarding the
application of information reporting and backup withholding in their particular
situation, including the availability of an exemption from such requirements
and the procedures for obtaining such an exemption, as well as the effect of
the new Treasury Regulations generally effective for payments made after
December 31, 2000.
71
UNDERWRITING
General
We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Robertson Stephens, Inc., CIBC World
Markets Corp., U.S. Bancorp Piper Jaffray Inc. and Wit SoundView Corporation
are acting as U.S. representatives of the U.S. underwriters named below.
Subject to the terms and conditions described in a U.S. purchase agreement
among us and the U.S. underwriters, and concurrently with the sale of shares to
the international managers, we have agreed to sell to the U.S. underwriters,
and the U.S. underwriters severally have agreed to purchase from us, the number
of shares listed opposite their names below.
Number
of
U.S. Underwriters Shares
----------------- ------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................................
Robertson Stephens, Inc. ...........................................
CIBC World Markets Corp.............................................
U.S. Bancorp Piper Jaffray Inc......................................
Wit SoundView Corporation...........................................
-----
Total..........................................................
=====
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International, Robertson Stephens, Inc., CIBC World Markets
Corp., U.S. Bancorp Piper Jaffray Inc. and Wit SoundView Corporation are acting
as lead managers. Subject to the terms and conditions in the international
purchase agreement, and concurrently with the sale of shares to the U.S.
underwriters pursuant to the U.S. purchase agreement, we have agreed to sell
shares to the international managers, and the international managers severally
have agreed to purchase shares from us. The initial public offering price per
share and the total underwriting discount per share are identical under the
U.S. purchase agreement and the international purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults on
its obligations under the U.S. or international purchase agreement, the U.S.
and international purchase agreements provide that the purchase commitments of
the nondefaulting underwriters may be increased or the purchase agreements may
be terminated. The closings for the sale of shares to be purchased by the U.S.
underwriters and the international managers are conditioned on one another. We
have agreed to indemnify the U.S. underwriters and international managers
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the U.S. underwriters and international managers may
be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officer's certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The U.S. representatives have advised us that the U.S. underwriters
propose initially to offer the shares to the public at the initial public
offering price on the cover page of this prospectus and to dealers at that
price
72
less a concession not in excess of $ per share. The U.S. underwriters may
allow, and dealers may reallow, a discount not in excess of $ per share to
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the U.S. underwriters and international managers
of their over-allotment options.
Per Share Without Option With Option
--------- -------------- -----------
Public offering price............... $ $ $
Underwriting discount............... $ $ $
Proceeds, before expenses, to IPG
Photonics.......................... $ $ $
The expenses of the offering, not including the underwriting discount,
are estimated at $1,000,000 and are payable by us.
Over-Allotment Options
We have granted options to the U.S. underwriters to purchase up to
additional shares at the public offering price less the underwriting discount.
The U.S. underwriters may exercise these options for 30 days from the date of
this prospectus solely to cover any over-allotments. If the U.S. underwriters
exercise these options, each will be obligated, subject to conditions contained
in the purchase agreements, to purchase a number of additional shares
proportionate to that U.S. underwriter's initial amount reflected in the above
table.
We have also granted options to the international managers, exercisable
for 30 days from the date of this prospectus, to purchase up to additional
shares to cover any over-allotments on terms similar to those granted to the
U.S. underwriters.
Intersyndicate Agreement
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the U.S. underwriters and the
international managers may sell shares to each other for purposes of resale at
the initial public offering price, less an amount not greater than the selling
concession. Under the intersyndicate agreement, the U.S. underwriters and any
dealer to whom they sell shares will not offer to sell or sell shares to
persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, except in
the case of transactions under the intersyndicate agreement. Similarly, the
international managers and any dealer to whom they sell shares will not offer
to sell or sell shares to U.S. persons or Canadian persons or to persons they
believe intend to resell to U.S. or Canadian persons, except in the case of
transactions under the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to ten percent of the shares offered by this
prospectus for sale to some of our employees and business associates. If these
persons purchase reserved shares, this will reduce the number of shares
available for sale to the general public. Any reserved shares that are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
73
No Sales of Similar Securities
We and our executive officers and directors and all of our significant
stockholders have agreed, with exceptions, not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining
the written consent of Merrill Lynch. Specifically, we and these other
individuals have agreed not to directly or indirectly:
. offer, pledge, sell or contract to sell any common stock;
. sell any option or contract to purchase any common stock;
. purchase any option or contract to sell any common stock;
. grant any option, right or warrant for the sale of any common stock;
. lend or otherwise dispose of or transfer any common stock;
. request or demand that we file a registration statement related to
the common stock; or
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock,
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
Quotation on the Nasdaq National Market
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "IPGP."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between us and the U.S. representatives and lead managers. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are:
. the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us;
. our financial information;
. the history of, and the prospects for, our company and the industry
in which we compete;
. an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;
. the present state of our development; and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
74
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit
the underwriters and selling group members from bidding for or purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
In connection with the offering, the underwriters may make short sales of
the common stock. Short sales involve the sale by the underwriters at the time
of the offering of a greater number of shares than they are required to
purchase in the offering. Covered short sales are sales made in an amount not
greater than the over-allotment options. The U.S. representatives may close out
any covered short position by either exercising the over-allotment options or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the U.S. representatives will consider,
among other things, the price of shares available for purchase in the open
market as compared to the public offering price at which they may purchase the
shares through the over-allotment option. Naked short sales are sales in excess
of the over-allotment option. The U.S. representatives must close out any naked
short position by purchasing shares in the open market. A naked short position
is more likely to be created if the U.S. representatives are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering. Similar to other purchase transactions, the purchases by the U.S.
representatives to cover syndicate short positions may have the effect of
raising or maintaining the market price of the common stock or preventing or
retarding a decline in the market price of the common stock. As a result, the
price of the common stock may be higher than it would otherwise be in the
absence of these transactions.
The U.S. representatives may also impose a penalty bid on underwriters
and selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriters' short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters make any representation that the U.S.
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Electronic Distribution
Neither we nor the U.S. underwriters will rely on third party providers
to comply with the prospectus delivery requirements. All purchasers will
receive a printed version of the final prospectus.
Merrill Lynch will be facilitating Internet distribution for this
offering to certain of its Internet subscription clients. Merrill Lynch intends
to allocate a limited number of shares for sale to its online brokerage
clients. An electronic prospectus is available on the web site maintained by
Merrill Lynch. Other than the prospectus in electronic format, the information
on the Merrill Lynch web site relating to this offering is not a part of this
prospectus.
A prospectus in electronic format is being made available on an Internet
web site maintained by Wit SoundView Corporation's strategic partner, E*Trade
Securities, Inc. Other than the prospectus in electronic format, the
information on any U.S. underwriter's web site and any information contained in
any other web site
75
maintained by an U.S. underwriter is not part of the prospectus or the
registration statement of which this prospectus forms a part, has not been
approved or endorsed by us or any U.S. underwriter in its capacity as
underwriter and should not be relied upon by investors.
Other Relationships
Merrill Lynch KECALP L.P. 1999, KECALP Inc., KECALP Inc., as Nominee for
Merrill Lynch KECALP International L.P. 1999, ML IBK Positions, Inc. and
Merrill Lynch Taurus 2000 Fund L.P., entities which are affiliated with Merrill
Lynch, Pierce, Fenner & Smith Incorporated, one of the underwriters,
beneficially own an aggregate of 600,000 shares of Series B preferred stock,
which convert into 1,749,996 shares of common stock and warrants to purchase
500,000 shares of common stock assuming an offering price of $15.00.
Bayview 2000, L.P., an entity which is affiliated with Robertson
Stephens, one of the underwriters, beneficially owns an aggregate of 80,000
shares of Series B preferred stock, which convert into 233,333 shares of common
stock, and warrants to purchase 66,667 shares of common stock assuming an
offering price of $15.00.
LEGAL MATTERS
Selected legal matters in connection with the offering of common stock
are being passed upon for us by Winston & Strawn, New York, New York. Selected
legal matters in connection with the offering are being passed upon for the
underwriters by Brown & Wood llp, New York, New York.
EXPERTS
The combined consolidated financial statements of IPG Photonics and
related companies as of and for the year ended December 31, 1999, included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing in this prospectus and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of IPG Laser as of December 31,
1998 and for each of the two years in the period ended December 31, 1998,
included in this prospectus have been audited by Deloitte & Touche GmbH,
independent auditors, as stated in their report appearing in this prospectus
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
76
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, with respect to the shares to be sold in this offering. This
prospectus does not contain all of the information set forth in the
registration statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. For further information about us and the
shares to be sold in this offering, please refer to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to, are not necessarily complete, and in
each instance please refer to the copy of the contract, agreement or other
document filed as an exhibit to the registration statement, each statement
being qualified in all respects by this reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the SEC at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, DC 20549, and at the Regional Offices of the
SEC located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2551 and Room 1400, 13th Floor, 7 World Trade Center,
New York, New York 10048. Copies of such material are also available by mail
from the Public Reference Branch of the SEC at 450 Fifth Street, N.W.,
Washington, DC 20549 at prescribed rates.
Please call the SEC at 1-800-SEC-0330 for more information on the public
reference rooms. You can also find our SEC filings at the SEC's website at
http://www.sec.gov.
77
INDEX TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................................ F-2
Report of Independent Auditors............................................ F-3
Combined Consolidated Balance Sheets as of December 31, 1998 and 1999 and
September 2000 (unaudited)............................................... F-4
Combined Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and for the nine months ended September
30, 1999 and 2000 (unaudited)............................................ F-5
Combined Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1998 and 1999 and for the nine months ended
September 30, 2000 (unaudited)........................................... F-6
Combined Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and for the nine months ended September
30, 1999 and 2000 (unaudited)............................................ F-7
Notes to Combined Consolidated Financial Statements....................... F-8
F-1
REPORT OF INDEPENDENT AUDITORS
The accompanying combined consolidated financial statements give effect
to the completion of a 2-for-1 stock split described in the last paragraph of
Note 7 which will take place prior to the effective date of the offering. The
following report is in the form which will be furnished by Deloitte & Touche
LLP upon the completion of the stock split and assuming that no other material
events have occurred that would affect the accompanying combined consolidated
financial statements or require disclosure therein.
"To the Board of Directors and Shareholders of IPG Photonics Corporation:
We have audited the accompanying combined consolidated balance sheet of
IPG Photonics Corporation and related companies as of December 31, 1999, and
the related combined consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. The combined consolidated
financial statements include the accounts of IPG Photonics Corporation and two
related companies, IPG Laser GmbH and IPG Fibertech S.r.l. These companies are
under common ownership and common management. These financial statements are
the responsibility of the companies' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined consolidated financial position
of IPG Photonics Corporation and related companies as of December 31, 1999, and
the results of their combined consolidated operations and their combined
consolidated cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
Boston, Massachusetts
December 6, 2000 ( , 2001 as to the last paragraph of Note 7)"
Deloitte & Touche LLP
Boston, Massachusetts
January 24, 2001
F-2
REPORT OF INDEPENDENT AUDITORS
The accompanying consolidated financial statements give effect to the
completion of a 2-for-1 stock split described in the last paragraph of Note 7
which will take place prior to the effective date of the offering. The
following report is in the form which will be furnished by Deloitte & Touche
GmbH upon the completion of the stock split and assuming that no other material
events have occurred that would affect the accompanying consolidated financial
statements or require disclosure therein.
"To the Board of Directors and Shareholders of IPG Laser GmbH:
We have audited the accompanying consolidated balance sheet of IPG Laser
GmbH and subsidiary (a German corporation) as of December 31, 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IPG
Laser GmbH and subsidiary as of December 31, 1998, and the results of their
consolidated operations and their consolidated cash flows for each of the two
years in the period ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States of America.
Duesseldorf, Germany
December 6, 2000 ( , 2001 as to the last paragraph of Note 7)"
Deloitte & Touche GmbH
Duesseldorf, Germany
January 24, 2001
F-3
COMBINED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, 2000
-------------------
December 31, December 31,
1998 1999 Actual Pro forma
------------ ------------ -------- ---------
Predecessor (unaudited)
------------ -------------------
Assets:
Current assets:
Cash and cash equivalents...................................................... $1,181 $ 706 $ 52,999
Accounts receivable, net of allowances of $18, $10 and $117.................... 1,763 1,642 11,590
Due from affiliates............................................................ 463 221 753
Inventories.................................................................... 467 2,341 7,184
Deferred tax assets............................................................ -- 86 163
Prepaid expenses and other assets.............................................. 355 332 1,212
------ ------- --------
Total current assets......................................................... 4,229 5,328 73,901
Restricted cash................................................................. 12,560
Non-marketable investment securities............................................ 50 43 38
Deferred tax assets............................................................. 52 -- 1,117
Property, plant and equipment, net.............................................. 4,488 7,207 15,177
Other assets.................................................................... -- 222 184
------ ------- --------
Total assets............................................................... $8,819 $12,800 $102,977
====== ======= ========
Liabilities and shareholders' equity:
Current liabilities:
Current portion of long-term debt.............................................. $ 21 $ 225 $ 1,982
Accounts payable............................................................... 2,210 3,266 4,210
Due to affiliates.............................................................. 946 463 471
Accrued expenses and other liabilities......................................... 315 472 2,310
Income taxes payable........................................................... 145 1,677 7,934
Deferred tax liabilities....................................................... 45 -- --
------ ------- --------
Total current liabilities.................................................... 3,682 6,103 16,907
------ ------- --------
Long-term debt.................................................................. 4,695 4,421 5,317
------ ------- --------
Deferred income taxes........................................................... -- 50 --
------ ------- --------
Commitments and contingencies (See Note 9)...................................... -- -- --
Minority interest............................................................... 7 10 10
------ ------- --------
Convertible redeemable preferred stock--Series B, $0.0001 par value;
3,800,000 shares authorized, 3,000,000 shares issued and outstanding at
September 30, 2000 actual; no shares issued or outstanding at September 30,
2000 pro forma................................................................. -- -- 62,389 $ --
------ ------- -------- --------
Shareholders' equity:
Preferred stock--$0.0001 par value; 700,000 shares authorized, no shares issued
or outstanding................................................................ -- -- -- --
Convertible preferred stock--Series A, $0.0001 par value; 500,000 shares
authorized, 500,000 shares issued and outstanding at September 30, 2000
actual; no shares issued or outstanding on a pro forma basis at September 30,
2000.......................................................................... -- -- 4,954 --
Common stock, $.0001par value, 100,000,000 shares authorized, 43,600,000 shares
issued and outstanding at December 31, 1999; 67,961,868 shares issued and
outstanding at September 30, 2000 actual; 100,000,000 shares authorized,
77,711,868 shares issued and outstanding at September 30, 2000 pro forma...... -- 4 7 8
Additional paid-in capital..................................................... 312 310 30,934 98,276
Warrants to issue common stock................................................. -- -- 12,400 12,400
Notes receivable from shareholders............................................. -- -- (440) (440)
Deferred compensation.......................................................... -- -- (17,452) (17,452)
Retained earnings (accumulated deficit)........................................ 135 2,086 (11,362) (11,362)
Accumulated other comprehensive (loss)......................................... (12) (184) (687) (687)
------ ------- -------- --------
Total shareholders' equity................................................... 435 2,216 18,354 $ 80,743
------ ------- -------- ========
Total liabilities and shareholders' equity................................. $8,819 $12,800 $102,977
--------------------------------------------------
====== ======= ========
See notes to combined consolidated financial statements.
F-4
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
For the nine
months
For the year ended September
ended December 31, 30,
----------------------- ----------------
1997 1998 1999 1999 2000
------ ------ ------- ------- -------
Predecessor (unaudited)
-------------- ----------------
Net sales.......................... $3,097 $8,263 $18,640 $14,823 $32,689
Cost of sales(1)................... 2,436 5,560 9,688 6,882 12,610
------ ------ ------- ------- -------
Gross profit(1).................... 661 2,703 8,952 7,941 20,079
------ ------ ------- ------- -------
Operating expenses:
Sales and marketing(2)........... 219 374 677 619 1,049
Research and development(3)...... 127 682 1,477 1,036 1,127
General, administrative and
other(4)........................ 276 1,000 2,712 2,006 3,946
Equity-based compensation........ -- -- -- -- 12,035
------ ------ ------- ------- -------
Total operating expenses....... 622 2,056 4,866 3,661 18,157
------ ------ ------- ------- -------
Operating income................... 39 647 4,086 4,280 1,922
Interest income (expense), net..... (119) (208) (303) (231) (77)
Other income (expense), net........ 108 (47) 273 40 475
------ ------ ------- ------- -------
Income before provision for income
taxes and minority interests...... 28 392 4,056 4,089 2,320
Provision for income taxes......... 22 234 2,102 2,178 5,828
Minority interest.................. -- (4) (3) (5) --
------ ------ ------- ------- -------
Net income (loss).................. 6 154 1,951 1,906 (3,508)
Accretion of preferred stock....... -- -- -- -- (169)
------ ------ ------- ------- -------
Net income (loss) available to
common shareholders............... $ 6 $ 154 $ 1,951 $ 1,906 $(3,677)
====== ====== ======= ======= =======
Net income (loss) per share:
Basic............................ -- -- $ 0.03 $ 0.03 $ (0.06)
======= ======= =======
Diluted.......................... -- -- $ 0.03 $ 0.03 $ (0.06)
======= ======= =======
Pro forma net loss per share--basic
and diluted....................... -- -- -- -- $ (0.05)
=======
--------
(1) Excludes $677 of equity-based compensation for the nine months ended
September 30, 2000.
(2) Excludes $166 of equity-based compensation for the nine months ended
September 30, 2000.
(3) Excludes $184 of equity-based compensation for the nine months ended
September 30, 2000.
(4) Excludes $11,008 of equity-based compensation for the nine months ended
September 30, 2000.
See notes to combined consolidated financial statements.
F-5
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share and per share data)
Convertible
Preferred Stock
Series A Common Stock Warrants Notes Retained Accumulated
---------------- ---------------- Additional to Issue Receivable Earnings Other
Number of Number of Par Paid-in Common from Deferred (Accumulated Comprehensive
Shares Value Shares Value Capital Stock Shareholders Compensation Deficit) (Loss)
--------- ------ ---------- ----- ---------- -------- ------------ ------------ ------------ -------------
Balance at
January 1, 1997
(Predecessor)... -- $ -- -- $-- $ 183 $ -- $ -- $ -- $ (25) $ (13)
Contributions
from
shareholders.... -- -- -- -- 129 -- -- -- -- --
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- -- 6 --
Translation
adjustments..... -- -- -- -- -- -- -- -- -- (24)
Total
comprehensive
loss............ -- -- -- -- -- -- -- -- -- --
------- ------ ---------- ---- ------- ------- ----- -------- -------- -----
Balance at
December 31,
1997
(Predecessor)... -- -- -- -- 312 -- -- -- (19) (37)
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- -- 154 --
Translation
adjustments..... -- -- -- -- -- -- -- -- -- 25
Total
comprehensive
income ......... -- -- -- -- -- -- -- -- -- --
------- ------ ---------- ---- ------- ------- ----- -------- -------- -----
Balance at
December 31,
1998
(Predecessor)... -- -- -- -- 312 -- -- -- 135 (12)
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- -- 1,951 --
Translation
adjustments..... -- -- -- -- -- -- -- -- -- (172)
Total
comprehensive
income.......... -- -- -- -- -- -- -- -- -- --
Common stock
issued.......... -- -- 43,600,000 4 (2) -- -- -- -- --
------- ------ ---------- ---- ------- ------- ----- -------- -------- -----
Balance at
December 31,
1999............ -- -- 43,600,000 4 310 -- -- -- 2,086 (184)
Comprehensive
income:
Net loss........ -- -- -- -- -- -- -- -- (3,508) --
Translation
adjustments..... -- -- -- -- -- -- -- -- -- (503)
Total
comprehensive
loss............ -- -- -- -- -- -- -- -- -- --
Common stock
issued to IP
Fibre Devices
Ltd. In
satisfaction of
$200,000 note
payable and
accrued
interest........ -- -- 20,000,000 2 198 -- -- -- -- --
Common stock
issued for notes
receivable from
stockholders at
$0.50 per
share........... -- -- 880,000 1 439 -- (440) -- -- --
Issuance of
Series A shares
at $10.00 per
share, net of
issuance costs
totaling $63.... 500,000 4,937 -- -- -- -- -- -- -- --
Warrants to
issue common
stock attached
to Series B
preferred
stock........... -- -- -- -- -- 12,400 -- -- -- --
Accretion of
Series A
Preferred
Stock........... -- 17 -- -- (17) -- -- -- -- --
Accretion of
Series B
Preferred
Stock........... -- -- -- -- (152) -- -- -- -- --
Distributions to
shareholders.... -- -- 2,300,000 -- -- -- -- -- (9,940) --
Equity-based
compensation
awarded......... -- -- -- -- 29,487 -- -- (29,487) -- --
Amortization of
equity-based
compensation.... -- -- -- -- -- -- -- 12,035 -- --
Cash proceeds
from exercise of
stock options... -- -- 1,181,868 -- 669 -- -- -- -- --
------- ------ ---------- ---- ------- ------- ----- -------- -------- -----
Balance at
September 30,
2000
(unaudited)..... 500,000 $4,954 67,961,868 $ 7 $30,934 $12,400 $(440) $(17,452) $(11,362) $(687)
======= ====== ========== ==== ======= ======= ===== ======== ======== =====
Other
Comprehensive
Total Income (Loss)
-------- -------------
Balance at
January 1, 1997
(Predecessor)... $ 145
Contributions
from
shareholders.... 129
Comprehensive
income:
Net income...... 6 $ 6
Translation
adjustments..... (24) (24)
-------------
Total
comprehensive
loss............ -- $ (18)
-------- =============
Balance at
December 31,
1997
(Predecessor)... 256
Comprehensive
income:
Net income...... 154 $ 154
Translation
adjustments..... 25 25
-------------
Total
comprehensive
income ......... -- $ 179
-------- =============
Balance at
December 31,
1998
(Predecessor)... 435
Comprehensive
income:
Net income...... 1,951 $ 1,951
Translation
adjustments..... (172) (172)
-------------
Total
comprehensive
income.......... -- $ 1,779
=============
Common stock
issued.......... 2
--------
Balance at
December 31,
1999............ 2,216
Comprehensive
income:
Net loss........ (3,508) $ (3,508)
Translation
adjustments..... (503) (503)
-------------
Total
comprehensive
loss............ -- $ (4,011)
=============
Common stock
issued to IP
Fibre Devices
Ltd. In
satisfaction of
$200,000 note
payable and
accrued
interest........ 200
Common stock
issued for notes
receivable from
stockholders at
$0.50 per
share........... --
Issuance of
Series A shares
at $10.00 per
share, net of
issuance costs
totaling $63.... 4,937
Warrants to
issue common
stock attached
to Series B
preferred
stock........... 12,400
Accretion of
Series A
Preferred
Stock........... --
Accretion of
Series B
Preferred
Stock........... (152)
Distributions to
shareholders.... (9,940)
Equity-based
compensation
awarded......... --
Amortization of
equity-based
compensation.... 12,035
Cash proceeds
from exercise of
stock options... 669
--------
Balance at
September 30,
2000
(unaudited)..... $18,354
========
See notes to combined consolidated financial statements.
F-6
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended For the nine months
December 31, ended September 30,
------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- ------- --------- ----------
Predecessor (unaudited)
---------------- ---------------------
Cash flows from operating
activities:
Net income (loss)........... $ 6 $ 154 $ 1,951 $ 1,906 $ (3,508)
Adjustment to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization............... 250 716 1,518 1,015 1,524
Deferred income taxes....... (4) 43 (29) (27) (1,244)
Equity-based compensation... -- -- -- -- 12,035
Minority interest........... -- 4 3 5 --
Changes in assets and
liabilities that provided
(used) cash:
Accounts receivable......... (751) (852) (55) (1,025) (10,568)
Due to (from) affiliates,
net........................ 483 234 (439) (374) (346)
Inventories................. (19) (296) (1,982) (1,666) (5,427)
Prepaid expenses and other
assets..................... 83 (218) (20) (61) (1,088)
Accounts payable............ 143 1,848 1,401 677 1,592
Accrued expenses and other
liabilities................ (8) 268 211 581 1,568
Income taxes payable........ 8 109 1,645 2,096 7,219
------- ------- ------- --------- ----------
Net cash provided by
operating activities........ 191 2,010 4,204 3,127 1,757
------- ------- ------- --------- ----------
Cash flows from investing
activities:
Purchase of property, plant
and equipment.............. (1,292) (3,080) (5,135) (3,391) (9,898)
Other....................... -- 2 -- -- --
------- ------- ------- --------- ----------
Net cash used in investing
activities.................. (1,292) (3,078) (5,135) (3,391) (9,898)
------- ------- ------- --------- ----------
Cash flows from financing
activities:
Proceeds from long-term
borrowings................. 1,151 2,049 600 -- 1,822
Principal payments on
borrowings................. (13) (81) (15) (11) (832)
Cash placed into restricted
investment account......... -- -- -- -- (12,560)
Net proceeds from line of
credit agreements.......... -- -- -- -- 1,750
Capital contributions from
shareholders............... 129 -- -- -- --
Proceeds from Series A
preferred stock, net....... -- -- -- -- 4,737
Proceeds from Series B
preferred stock, net....... -- -- -- -- 74,635
Distributions to
shareholders............... -- -- -- -- (9,940)
Proceeds from exercise of
stock options.............. -- -- -- -- 669
------- ------- ------- --------- ----------
Net cash provided by (used
in) financing activities.... 1,267 1,968 585 (11) 60,281
------- ------- ------- --------- ----------
Effect of changes in exchange
rates on cash............... (16) 59 (129) (97) 153
------- ------- ------- --------- ----------
Net increase (decrease) in
cash and cash equivalents... 150 959 (475) (372) 52,293
Cash and cash equivalents,
beginning of the year....... 72 222 1,181 1,181 706
------- ------- ------- --------- ----------
Cash and cash equivalents,
end of the year............. $ 222 $ 1,181 $ 706 $ 809 $ 52,999
------- ------- ------- --------- ----------
Supplemental disclosures of
cash flow information:
Cash paid for interest, net
of amounts capitalized..... $ 122 $ 195 $ 299 $ 177 $ 125
Cash paid for taxes......... $ 3 $ 69 $ 492 $ 134 $ 372
Noncash transactions:
Conversion of payable to
Fibre for 20,000,000 shares
of common stock............ -- -- -- -- $ 200
Accounts receivable paid
with nonmarketable
securities................. -- $ 46 -- -- --
Common stock issued for
notes receivable from
shareholders............... -- -- $ 2 $ 2 $ 440
Preferred stock issued for
property, plant and
equipment.................. -- -- -- -- $ 200
Real estate acquired from
shareholder through
assumption of mortgage
payable.................... -- -- -- -- $ 345
Common stock issued to Fibre
in connection with the 2000
Reorganization, 2,300,000
shares at par value........ -- -- -- -- --
See notes to combined consolidated financial statements.
F-7
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine months ended September 30, 1999 and 2000 is
unaudited)
1. Description of Business and Basis of Presentation
IPG Photonics Corporation (the "Company") was incorporated as a Delaware
corporation in December 1998. Since inception, the Company has been affiliated
by common ownership with several entities, including NTO IRE-POLUS, Russia; IPG
Laser GmbH, Germany ("Laser"); IPG Fibertech S.r.l., Italy ("Fibertech"); and
IP Fibre Devices Ltd., United Kingdom ("Fibre"). The accompanying combined
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include the accounts of the Company, Laser and Fibertech (collectively, "IPG").
For purposes of presentation of the accompanying combined financial statements
for the years ended December 31, 1997 and 1998, Laser and Laser's 80% owned
subsidiary, Fibertech, are referred to as the "Predecessor." All intercompany
transactions and balances have been eliminated.
Since inception of the entities comprising IPG, the Company's majority
shareholder has maintained majority ownership of all these entities. During
August 2000, the ownership of the Company and several affiliated companies was
reorganized (the "2000 Reorganization"). The 2000 Reorganization was completed
through several transactions. The Company initially purchased 50% of the shares
of Laser from Fibre for $7.5 million in cash plus 2,300,000 common shares of
the Company. In addition, the Company purchased an additional 4% of the shares
of Laser from the Company's majority shareholder for $2.4 million in cash.
Concurrently with these purchases, the Company was provided an option to
purchase the remaining 46% of Laser from the Company's majority shareholder. On
October 4, 2000, the Company exercised this option and obtained the remaining
46% ownership interest in Laser in exchange for 2,806,000 common shares of the
Company. Through this series of transactions, Laser and its 80% owned
subsidiary, Fibertech, became a wholly owned subsidiary of the Company. Because
all of these entities have been under common managerial, operational and
shareholder control since inception, the transfers of interest are accounted
for in the combined consolidated financial statements as a reorganization of
companies under common control in a manner similar to a pooling of interests.
IPG has agreed in principle to invest $5.0 million in NTO IRE-POLUS for a
51% ownership interest subject to satisfaction of usual and customary closing
conditions, as well as the approval of the Russian Ministry for Anti-Monopoly
Policy. The Company anticipates that this transaction will close in the first
quarter of 2001. The proceeds of the investment are to be used by NTO IRE-POLUS
solely for equipment purchases and the development of additional manufacturing
capacity. Similar to the 2000 Reorganization, NTO IRE-POLUS and the Company are
under common control, and the transaction will be accounted for as a
reorganization of companies under common control in a manner similar to a
pooling of interests. This transaction will not have a significant impact upon
IPG's financial condition or results of operations.
IPG designs, manufactures and sells high-power fiber amplifiers, Raman
pump lasers and fiber lasers for telecommunications and industrial
applications. IPG's telecommunications products are used in the long-haul,
metropolitan and access sectors of optical communications networks. IPG's
industrial products are used for marking, printing, material processing, micro-
machining, optical sensing and measurement and laboratory and medical
equipment. IPG's administrative and manufacturing facilities in the United
States are presently located in Sturbridge, Massachusetts, and European
operations are located in Burbach, Germany, and Milan, Italy. Manufacturing
activities and research and development are conducted by NTO IRE-POLUS in
Fryazino, Russia.
Interim financial data--The interim combined consolidated financial
information at September 30, 2000 and for the nine months ended September 30,
1999 and 2000 is unaudited but, in the opinion of management, includes all
adjustments, which management considers necessary for a fair presentation of
the combined consolidated financial position and results of operations for the
interim periods. The results of operations for the nine months ended September
30, 2000 are not necessarily indicative of the results to be expected for the
full fiscal year.
F-8
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies
Use of estimates--The preparation of the combined consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the combined consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Foreign currency translation--The U.S. dollar has been adopted as the
reporting currency for all periods presented. The financial information for
entities outside the United States is measured using local currencies as the
functional currency. Assets and liabilities are translated into U.S. dollars at
the exchange rate in effect on the respective balance sheet dates. Income and
expenses are translated into U.S. dollars based on the average rate of exchange
for the corresponding period. Exchange rate differences resulting from
translation adjustments are accounted for directly as a component of
accumulated other comprehensive income. Exchange rate differences due to
transactions in foreign currencies are reflected in the consolidated statements
of operations.
Cash and cash equivalents--Cash and cash equivalents consist primarily of
highly liquid investments, such as bank deposits, with insignificant interest
rate risk and original maturities of three months or less at the date of
acquisition. Restricted cash includes cash restricted under certain Company
debt agreements (See Note 6).
Inventories--Inventories are stated at the lower of cost or market on a
first-in, first-out basis. IPG's inventories include parts and components that
may be specialized in nature and subject to rapid obsolescence. Additionally,
our quality assurance standards result in the rejection of a portion of our
purchased components without recourse to the supplier. The costs associated
with obsolescence or component rejection are charged to cost of sales as
incurred. While IPG considers obsolescence and component rejection in
estimating required allowances to reduce recorded amounts to the lower of cost
or market values, such estimates could change in the future.
Property, plant and equipment--Property, plant and equipment is stated at
cost less accumulated depreciation. Depreciation is calculated using the
straight-line method based on the estimated useful lives of the related assets.
In the case of leasehold improvements, the estimated useful lives of the
related assets do not exceed the remaining term of the corresponding lease. The
following table presents the assigned economic useful lives of IPG's property,
plant and equipment:
Category Economic useful life
-------- --------------------
Buildings........................... 30 years
Machinery and equipment............. 3-5 years
Office furniture and fixtures....... 3-5 years
Other assets........................ 3-5 years
Expenditures for maintenance and repairs are charged to operations. Cost
includes capitalized interest associated with significant capital projects. For
the years ended December 31, 1997, 1998 and 1999, IPG capitalized interest
totaling $16,000, $70,000 and $0, respectively. For the nine months ended
September 30, 1999 and 2000, IPG capitalized interest totaling $0 and $152,000,
respectively.
Revenue recognition--Revenue on product sales is recognized at the point
in time when persuasive evidence of an arrangement exists, the price is fixed
and final, delivery has occurred and there is a reasonable assurance of
collection of the sales proceeds. IPG generally obtains oral or written
purchase authorizations from its customers for a specified amount of product at
a specified price and considers delivery to have occurred at
F-9
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the point of shipment. IPG has no obligation to provide upgrades, enhancements
or customer support subsequent to the sale. IPG's products carry a warranty
against defect for a period of one or two years, depending upon the product
type. The expected cost associated with these warranty obligations is recorded
when the revenue is recognized.
Impairment of long-lived assets--Long-lived assets, which are comprised
primarily of property, plant and equipment, are reviewed by management for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. In cases where undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds the fair
value of assets. No impairment provisions have been recognized to date.
Advertising expense--The cost of advertising is expensed as incurred.
IPG conducts substantially all of its sales and marketing efforts through
trade shows and professional and technical conferences. IPG's advertising
costs for the years ended December 31, 1997, 1998, and 1999, and for the nine
months ended September 30, 1999 and 2000 were not significant.
Research and development--Internal research and development costs are
expensed as incurred.
Income taxes--IPG accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities and net operating
loss carryforwards using enacted rates. Valuation allowances are provided
against assets that are not likely to be realized.
Equity-based compensation--SFAS No. 123, Accounting for Stock-Based
Compensation, encourages but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. As permitted
by SFAS No. 123, IPG has elected to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB Opinion No. 25, and has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, for financial reporting purposes,
compensation cost for stock options is measured as the excess, if any, of the
estimated fair market value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Equity instruments
issued to nonemployees are accounted for in accordance with SFAS No. 123 and
EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services.
Concentration of credit risk--Financial instruments that potentially
subject IPG to credit risk consist primarily of cash and cash equivalents and
accounts receivable. IPG maintains substantially all of its cash in a single
financial institution, which is believed to be a high-credit, quality
financial institution. IPG grants credit to customers in the ordinary course
of business and provides a reserve for potential credit losses. Such losses
have been within management's expectations. See discussion related to
significant customers in Note 13.
Fair value of financial instruments--IPG's financial instruments consist
of accounts receivable, accounts payable, and notes payable. The current
carrying amounts of such instruments are considered reasonable estimates of
their fair market value, due to the short maturity of these instruments or as
a result of the competitive market interest rates, which have been negotiated.
The fair value ascribed to the warrants issued in connection with the Series B
Preferred Stock has been determined from an independent appraisal.
Comprehensive income--SFAS No. 130, Reporting Comprehensive Income,
established standards for reporting and displaying comprehensive income and
its components within the financial statements. Comprehensive income includes
charges and credits to equity that are not the result of transactions with
F-10
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shareholders. Included in other comprehensive income for IPG is the cumulative
translation adjustments related to the net assets of the operations in Germany
and Italy. These adjustments are accumulated within the statement of
shareholders' equity under the caption, accumulated other comprehensive income
(loss).
Segment information--SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, was adopted by IPG in 1998 and established
standards for the reporting of information about operating segments in annual
and interim financial statements. Operating segments are defined as components
of an enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision makers in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information.
Recently issued accounting standards--In June 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards requiring that
derivative instruments (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. In June 1999, the FASB issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities, Deferral of
the Effective Date of FASB Statement No. 133, to defer the effective date of
SFAS No. 133. SFAS No. 133, as amended, is effective for IPG beginning January
1, 2001. Because IPG has not utilized derivative instruments for hedging
purposes or interest rate management, management does not believe that the
adoption of this statement will have a significant impact on operations or
financial condition.
3. Net Income (Loss) Per Share and Pro Forma Financial Data
Net income (loss) per share--Basic net income (loss) per share amounts
for the year ended December 31, 1999 and for the nine months ended September
30, 1999 and 2000 are computed by dividing net income (loss) available to
common shareholders by the weighted-average common shares of the Company
outstanding during those periods. For purposes of computing net income (loss)
per share, the common stock that was issued to the founders, the common stock
issued to Fibre in satisfaction of certain liabilities and the stock issued to
Fibre in connection with the 2000 Reorganization are considered nominal
issuances and have been treated in a manner similar to a stock split or stock
dividend. Diluted net income per share reflects the potential dilution that
could occur if (i) the Series A and Series B preferred stock is converted to
common stock, and (ii) options issued under the Company's stock compensation
plan and the common stock warrants attached to the Series B preferred stock
were exercised. Due to the net loss recorded for the nine months ended
September 30, 2000, the calculation of diluted net loss per share excludes
5,597,060 common equivalent shares as their effects would be antidilutive. Net
income per share amounts for the Predecessor have not been reported for the
years ended December 31, 1997 and 1998 due to the closely held nature of these
entities, and as such, per share amounts would not be meaningful.
A summary of the weighted-average number of common shares and weighted-
average number of common shares and common equivalent shares follows:
Nine months ended
September 30,
Year ended ---------------------
December 31, 1999 1999 2000
----------------- ---------- ----------
Basic weighted-average ordinary
common shares outstanding...... 65,900,000 65,900,000 67,271,715
Weighted-average common
equivalent shares.............. 1,595,000 1,450,000 --
---------- ---------- ----------
Diluted weighted-average common
shares outstanding............. 67,495,000 67,350,000 67,271,715
========== ========== ==========
F-11
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma financial data--The Board of Directors has authorized the
filing of a registration statement with the Securities and Exchange Commission
that would permit the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering ("IPO"). If the offering is
consummated under the terms presently anticipated, the 500,000 outstanding
shares of Series A Preferred Stock and the 3,000,000 outstanding shares of
Series B Preferred Stock will automatically convert into 1,000,000 shares and
8,750,000 shares, respectively, of common stock upon the closing of the IPO.
The conversion of the preferred stock has been reflected in the accompanying
unaudited pro forma combined consolidated balance sheet. The Series B Preferred
Stock convert to the Company's common stock subject to adjustment pursuant to
the amended and restated certificate of incorporation as discussed in Note 7.
Pro forma basic and diluted net loss per share data has been calculated
assuming conversion of the Series A and Series B preferred stock into shares of
common stock from the date of original issuance of the preferred stock. In
addition, no effect is given to accretion of the preferred stock for purposes
of this computation. Shares used in computing pro forma basic and diluted net
loss per share aggregated 68,935,635 for the nine months ended September 30,
2000.
4. Inventories
Inventories consist of the following (in thousands):
December
31,
----------- September 30,
1998 1999 2000
---- ------ -------------
Components and raw materials..................... $424 $2,116 $6,523
Work in process.................................. 43 225 661
---- ------ ------
Total.......................................... $467 $2,341 $7,184
==== ====== ======
5. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
December 31,
---------------- September 30,
1998 1999 2000
------- ------- -------------
Land....................................... $ 72 $ 1,030 $ 1,184
Buildings.................................. 2,618 2,490 2,452
Machinery and equipment.................... 2,426 5,151 6,954
Office furniture and fixtures.............. 248 523 714
Construction in progress................... 295 420 7,236
------- ------- -------
5,659 9,614 18,540
Accumulated depreciation................... (1,171) (2,407) (3,363)
------- ------- -------
Total.................................... $ 4,488 $ 7,207 $15,177
======= ======= =======
F-12
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Debt
Debt consists of the following (in thousands):
December 31,
-------------- September 30,
1998 1999 2000
------ ------ -------------
U.S. demand line of credit, collaterized
by substantially all assets of the
Company and the personal guarantee of the
majority shareholder..................... $ -- $ -- $ 1,750
U.S. construction loan, collateralized by
substantially all assets of the Company.. -- -- 531
U.S. dollar mortgage note payable,
collateralized by land, 10% fixed rate,
maturing November 2001 (paid in March
2000).................................... -- 600 --
Euro credit facility, collateralized by
substantially all assets of Laser and the
personal guaranty of the majority
shareholder, 5.25% fixed rate, maturing
September 2010........................... -- -- 1,349
Deutsche mark note payable, collateralized
by guaranty of majority shareholder, 6%
adjustable not to exceed 10%, maturing
September 2006........................... 2,028 1,746 1,528
Deutsche mark note payable, collateralized
by property, plant and equipment, 4.5%
fixed rate, maturing semi-annually
through March 2008....................... 2,147 1,848 1,517
Deutsche mark notes and mortgages payable,
collateralized by property, plant and
equipment ranging from 4.7% to 6.25% at
fixed rates and variable rates, maturing
monthly through January 2019............. 443 363 624
Deutsche mark overdraft facility.......... -- -- --
Related party note payable to Fibre,
unsecured, 6.0% fixed rate, due March
2000..................................... 98 89 --
------ ------ -------
Total debt................................ 4,716 4,646 7,299
Less current portion...................... (21) (225) (1,982)
------ ------ -------
Long-term debt.......................... $4,695 $4,421 $ 5,317
====== ====== =======
Principal maturities of long-term debt as of December 31, 1999 are as
follows (in thousands):
2000................................................................ $ 225
2001................................................................ 252
2002................................................................ 254
2003................................................................ 256
2004................................................................ 258
2005 and thereafter................................................. 3,401
------
Total............................................................. $4,646
======
U.S. demand line of credit--In March 2000, the Company negotiated a
demand line of credit facility with available principal totaling $4.0 million,
expiring May 31, 2001. Outstanding principal on this facility bears interest at
a monthly adjustable rate of London Interbank Offering Rate ("LIBOR") plus
2.75% (9.4% at September 30, 2000). This facility is collateralized by
substantially all the assets of the Company, a guaranty from Fibre, and a
personal guaranty of the Company's majority shareholder.
F-13
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
U.S. construction loan--In April 2000, the Company entered into a $6.5
million construction loan facility to finance construction of new
administrative and manufacturing facilities in Massachusetts. The construction
loan has an initial term of nine months, during which time interest-only
payments are due monthly. After the construction period, principal payments are
due for five years, after which time the remaining outstanding balance is due.
During the construction period the construction loan bears interest at LIBOR
plus 3% (9.6% at September 30, 2000) and at a fixed rate equal to the Five-Year
Treasury Rate plus 3% for the five-year term following the construction period.
This facility is collateralized by substantially all the assets of the Company,
including the related real estate and building construction. Subsequent to
September 30, 2000, the Company placed $12,560,000 in a restricted overnight
investment account which is available to the bank to offset the Company's
obligations under the facilities.
The demand line of credit and the construction loans contain cross-
defaults and certain covenants, including maintenance of specific financial
ratios which are not considered restrictive to the Company's operations. The
most restrictive provisions of the Company's borrowing arrangements are as
follows: a ratio of total debt to tangible capital of no more than 3.4 to 1 at
December 31, 2000, and the debt service coverage ratio should not be below 2.0
to 1 for the year ending December 31, 2000.
Euro construction loan--During 2000, Laser entered into a financing
agreement with a syndicate of banks. The syndicate has provided available
credit of (Euro)10.0 million (or $8.8 million) to finance construction of a new
manufacturing facility in Germany and to meet the working capital needs of
Laser. Principal payments are due semiannually beginning in September 2002
through September 2010. Interest accrues at 5.25%. A portion of this loan is
personally guaranteed by IPG's majority shareholder.
Deutsche mark ("DM") overdraft facility--In March 2000, Laser negotiated
a syndicated overdraft facility with available principal of DM 4.7 million (or
$2.1 million). This facility bears interest at market rates that vary depending
upon the principal outstanding (from 9.125% to 10.5% at September 30, 2000).
The facility is payable upon demand. No principal was outstanding at September
30, 2000. This facility and the Euro construction loan are collateralized by a
common pool of the assets of Laser. A portion of this loan is partially
guaranteed by IPG's majority shareholder.
7. Shareholders' Equity
Predecessor equity
Laser has authorized capital totaling DM 500,000, all of which was
outstanding at December 31, 1998, 1999 and September 30, 2000. The equity of
the Predecessor entities has been reported as additional paid-in capital in the
combined consolidated financial statements.
Common stock
The Company was incorporated in December 1998 at which time 20,000 common
shares (par value $0.01) were authorized. On December 28, 1999, total
authorized shares were increased to 100 million and the par value was changed
to $0.0001 per share. The founding shareholders subscribed for 43,600,000
shares for total consideration of $2,000, after giving effect to the increase
in authorized shares.
In January 2000, at the direction of the majority shareholder, Fibre paid
$18,000 in cash to the Company and converted an intercompany note payable and
related accrued interest totaling $182,000 into 20,000,000 shares of common
stock.
Reserved shares
In addition to the shares of common stock reserved for issuance under the
Company's stock option plan, the Company has reserved a sufficient number of
shares of common stock for potential conversion of the Series A and Series B
preferred stock and for the exercise of outstanding common stock warrants.
F-14
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred stock
The Company has authorized 5,000,000 shares of preferred stock, par
value of $0.0001, of which 500,000 shares have been designated as Series A
convertible preferred stock (the "Series A Preferred Stock"); 3,800,000 shares
have been designated as Series B redeemable convertible preferred stock (the
"Series B Preferred Stock").
On March 31, 2000, the Company issued 500,000 shares of Series A
Preferred Stock for total consideration of $5.0 million. Issuance costs of
$63,000 are being accreted to the liquidation value of the Series A Preferred
Stock through March 31, 2002, the first conversion date.
In August 2000, the Company issued 3,000,000 shares of Series B
Preferred Stock and warrants to purchase shares of the Company's common stock
(the "Series B Warrants") for total consideration of $75.0 million. Issuance
costs totaled $363,000. The Series B warrants issued in connection with the
sale of the Series B preferred stock have been valued at $12.4 million. The
Series B Preferred Stock is being accreted to redemption value over the period
to the Series B Preferred Stock's scheduled redemption dates of August 25,
2006, 2007 and 2008.
Subsequent to September 30, 2000, the Company issued an additional
800,000 shares of Series B Preferred Stock and Series B Warrants for total
consideration of $20.0 million. The Series B Warrants have been valued at $3.3
million.
Activity with respect to the Series B Preferred Stock through September
30, 2000 is as follows:
Number of
Shares Amount
Outstanding (in thousands)
----------- --------------
Balance, January 1, 2000...................... -- --
Proceeds from sale of Series B Preferred
Stock, net of issuance costs................. 3,000,000 $62,237
Accretion related to issuance cost and Series
B Warrants................................... 152
--------- -------
Balance, September 30, 2000................... 3,000,000 $62,389
========= =======
The rights and preferences of the Series A and Series B Preferred Stock
are as follows:
Dividends--The holders of the Series A and Series B Preferred Stock are
entitled to receive cumulative dividends at the rate paid on the common
shares.
Liquidation--In the event of any voluntary or involuntary liquidation,
dissolution or merger of the Company, each holder of the Series A and Series B
Preferred Stock will be entitled to be paid, before any distributions are made
to the common shareholders, a liquidation preference. The holders of the
Series A Preferred Stock will be entitled to be paid an amount equal to the
preference value of $10.00 per share plus accrued dividends, and the holders
of the Series B Preferred Stock will be entitled to be paid an amount equal to
the preference value of $12.50 per share plus accrued dividends. After such
distributions, the holders of the Series A Preferred Stock do not participate
in any further distributions. The holders of the Series B Preferred Stock
participate in further available distributions in the amount that would have
been payable per share if the holders of the Series B Preferred Stock had been
converted to common shares. If the total payout under the investors
participation rights exceeds $50.00 per share, the preference amount declines
linearly from $12.50 per share to $0 as the participation amount payout
increases from $50.00 to $62.50. If the assets are not sufficient to generate
cash sufficient to pay in full the Series A and Series B Preferred Stock
preference values, then the holders of the Series A and Series B Preferred
Stock will be entitled to share ratably in any distribution of cash generated
by assets in accordance with the respective amounts that would have been
payable in such
F-15
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
distribution if the amounts to which the holders of the Series A and Series B
Preferred Stock are paid in full. All assets remaining after distribution to
the holders of Series A and Series B Preferred Stock are available for
distribution to the holders of the Company's common shares.
Voting Rights--The holders of the Series A Preferred Stock, except with
respect to the matters regarding the rights and preferences of their own
shares, are not entitled to vote on any matter. The holders of the Series B
Preferred Stock are entitled to a number of votes equal to the number of shares
of common stock into which such Series B Preferred Stock are then convertible,
and voting together as a separate class, are entitled to elect one director of
the Company. In addition, without approval of the majority of the Series B
shareholders, the Company is restricted from issuing convertible debt, altering
the Company's certificate of incorporation or bylaws with the effect of
altering the rights of the Series B Preferred Stock, increasing the authorized
shares of Series B Preferred Stock or, with certain exceptions, reclassifying
and declaring or paying dividends or making distributions of the Company's
property.
Redemption--At the election of the holders of the Series B Preferred
Stock, the Company is obligated to redeem up to 33.3% after August 25, 2006, up
to 66.7% after August 25, 2007 and up to 100% after August 25, 2008 of the
outstanding Series B Preferred Stock at a redemption price equal to $12.50 per
share plus accrued and unpaid dividends. In the event that the Company has
insufficient funds to redeem the shares, the Series B Preferred Stock will
accrue interest at a rate equal to the prime rate plus 3%.
Conversion--The Series A Preferred Stock has a preference value of $5.00
per share and is convertible at the option of the holder at any time subsequent
to March 31, 2002 into the number of shares of common stock of the Company as
is determined by dividing the preference value by the conversion price then in
effect. Immediately following a qualifying initial public offering or
consummation of a sale or merger of the Company, all Series A Preferred Stock
shall automatically convert into the number of common shares of the Company as
is determined by dividing the preference value by the conversion price then in
effect. For the purposes of the conversion of the Series A preferred stock, a
qualified public offering is the sale of the common stock of IPG to the public
in a firm commitment public offering that generates gross proceeds to IPG of at
least $35,000,000 at a pre-money valuation of at least $500,000,000.
The Series B Preferred Stock has a preference value of $25.00 per share
and is convertible at the option of the holder into the number of common shares
of the Company as is determined by dividing the preference value by the
conversion price then in effect. All Series B Preferred Stock automatically
converts into the number of common shares of the Company as is determined by
dividing the preference value by the conversion price then in effect upon the
completion of a qualified public offering. A qualified public offering is
defined as an offer of the Company's common stock (i) registered under the
Securities Act of 1933, as amended, (ii) with net proceeds (after underwriting
commissions and discounts) in excess of $100.0 million, (iii) in which such
common stock is listed for trading on the New York Stock Exchange or the NASDAQ
National Market, and (iv) at a specified offering price, after underwriting
commissions and discounts, which graduates from (i) $21.88 per share, in the
case of an offering which closes from January 1, 2001 to March 31, 2001, (ii)
$25.00 per share in the case of an offering which closes from April 1, 2001 to
December 31, 2001, (iii) $28.13 per share, in the case of an offering which
closes from January 1, 2002 to August 31, 2002 or (iv) $31.25 per share in the
case of an offering which closes after August 31, 2002. An offering which does
not meet the offering price targets will continue to be a qualified offering,
however, the conversion price will be adjusted downward such that the adjusted
conversion price will be equal to the initial public offering price per share
divided by a factor which increases from (i) 1.75, in the case of an offering
which closes from January 1, 2001 to March 31, 2001, (ii) 2.00, in the case of
an offering which closes from April 1, 2001 to December 31, 2001, (iii) 2.25,
in the case of an offering which closes from January 1, 2002 to August 31, 2002
or (iv) 2.50, in the case of an offering which closes after August 31, 2002;
provided that in no event will the conversion price be reduced to less than
$5.00 per share. The conversion ratio was 1 for 1 on the date the Series B
Preferred Stock was issued.
F-16
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assuming an offering price of $15.00 per common share in an offering
completed prior to March 31, 2001 each share of Series B Preferred Stock will
convert to 2.91666 shares of common stock.
The holders of Series A and Series B Preferred Stock have certain tag-
along and drag-along rights, as described in the articles of incorporation.
Registration Rights--If the Company at any time proposes to register any
of its common shares under the Securities Act of 1933, the holders of the
Series B Preferred Stock are entitled to participate in such registration. In
addition, the holders of the Series A Preferred Stock may require the Company
to file one, and the holders of the Series B Preferred Stock may require the
Company to file up to two, registration statements under the Securities Act of
1933 at the expense of the Company with respect to their shares (the "Demand
Registration Rights"). These Demand Registration Rights become effective if a
registration has not occurred prior to March 31, 2003 for the Series A
Preferred Stock or August 31, 2003 for the Series B Preferred Stock. The
holders of the Series B Preferred Stock who convert their preferred stock to
common stock in connection with an IPO may also require the Company to file
additional registration statements.
Warrants
In connection with the issuance of the Series B Preferred Stock, the
Company issued Series B Warrants to purchase, in the aggregate, $18.8 million
of the Company's common shares at an equivalent per share price of 50% of the
fair value on the date of an initial public offering of such shares. The fair
value of the Series B Warrants, approximating $12.4 million, was deducted from
the proceeds of the Series B Preferred Stock and was allocated to the Series B
Warrants. The Series B Warrants are exercisable upon the completion of an IPO
or sale of a significant portion of the Company's assets and are being accreted
to the carrying value of the Series B Preferred Stock through the scheduled
redemption dates of the Series B Preferred Stock. These warrants expire in
August 2007. In connection with the Series B Preferred Stock that was issued
subsequent to September 30, 2000, the Company issued Series B Warrants to
purchase, in the aggregate, $5.0 million of the Company's common stock at an
equivalent per share price of 50% of the fair value of such shares. The fair
value of the Series B Warrants related to the issuance of Series B Preferred
Stock subsequent to September 30, 2000 approximates $3.3 million.
Notes receivable from sales of shares
The Company has received notes from an individual who subsequently became
a Company director in connection with this individual's exercise of 380,000
nonqualified stock options in March 2000 as well as the issuance of 500,000
shares of common stock under a professional services contract. The notes
receivable have principal balances of $190,000 and $250,000 and are full
recourse promissory notes bearing interest at 6.8% and 6.0% and are
collateralized by the shares of the Company's common stock held by this
individual. Principal is due through November 2005. The notes receivable are
presented on the combined consolidated balance sheet as a reduction to
shareholders' equity.
Additionally, the Company issued 43,600,000 shares of common stock to the
founding shareholders in January 1999 in exchange for notes aggregating $2,000.
These shares were fully paid in October 2000 and have been reported as current
assets and shareholders' equity at December 31, 1999 and at September 30, 2000.
Minority interest
Minority interest reported in the accompanying combined consolidated
financial statements consists of the 20% of Fibertech held by the management of
Fibertech.
F-17
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Split
On , 2001, the Company's board of directors declared a 2-for-1 split
of the common shares of the Company. All share and per share amounts in the
accompanying combined consolidated financial statements have been retroactively
adjusted to reflect the stock split.
8. Related Party Transactions
The Company and the other members comprising IPG have entered into
certain transactions with other entities affiliated with IPG. These entities
which have not been combined or consolidated in the accompanying financial
statements include NTO IRE-POLUS, Fibre, IP Fibre Optics Ltd., IPC Inc., and
VPG Laser Components GmbH (the "Non-Group Affiliates"). The related party
transactions included in the accompanying financial statements are primarily
comprised of intercompany sales of IPG's products in which the Non-Group
Affiliates are acting as a distributor of IPG's products or IPG is purchasing
raw materials and components from the Non-Group Affiliates. Additionally,
effective January 1, 2000, the Company entered into a one year management
agreement with Fibre, under which Fibre provides accounting advice and
consulting services for a monthly fee of $7,500 plus expenses. Upon expiration,
the agreement was not renewed.
The transactions with Non-Group Affiliates are included in the combined
consolidated statements of operations as follows (in thousands):
Nine months ended
Years ended December 31, September 30,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
Net sales............... $ 811 $ 1,103 $ 655 $ 524 $ 789
Purchases included in
cost of sales.......... 1,533 2,133 2,095 1,610 3,108
Operating expenses...... -- 32 106 32 138
Interest income
(expense), net......... (10) (10) (17) (7) --
Amounts included in the combined consolidated balance sheets are as
follows (in thousands):
December
31,
--------- September 30,
1998 1999 2000
---- ---- -------------
Amounts due from Non-Group Affiliates:
IP Fibre Devices Ltd. ........................... $ 70 $221 $560
IPC Inc. ........................................ 345 -- --
NTO IRE-POLUS.................................... 48 -- 193
---- ---- ----
Total.......................................... $463 $221 $753
==== ==== ====
Amounts due to Non-Group Affiliates:
IP Fibre Devices Ltd. ........................... $-- $309 $--
IPC Inc. ........................................ 665 12 --
VPG Laser Components GmbH........................ 70 33 --
NTO IRE-POLUS.................................... 211 109 471
---- ---- ----
Total.......................................... $946 $463 $471
==== ==== ====
In May 2000, Laser entered into an agreement with a shareholder holding
more than 5% of the Company's common stock to purchase real estate located in
Burbach, Germany, in exchange for assuming the outstanding mortgage on the real
estate and a payment of approximately $84,000, which approximated the fair
market value of the real estate. Prior to purchasing the real estate, Laser had
been renting the Burbach real estate from the shareholder for approximately
$4,000 per month.
F-18
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1999, the Company awarded an individual who subsequently
became a Company director 500,000 shares of the Company's common stock for a
purchase price of $0.50 per share, its estimated fair value on the date of the
award, in exchange for future legal and advisory services. In March 2000, such
legal and advisory services had been performed and this individual purchased
500,000 shares of the Company's common stock with an estimated fair market
value of $2.00 per share in exchange for a $250,000 note receivable. The
Company has recognized $750,000 in equity-based compensation in respect of this
agreement.
This individual had also been granted options to purchase 400,000 shares
of the Company's common stock at $0.50 per share in exchange for continued
advisory services to the Company through January 1, 2002. These options have a
term of ten years and vested upon issuance. The Company is accounting for these
shares under variable plan accounting and, accordingly, recognized $3.3 million
in equity-based compensation during the nine months ended September 30, 2000.
The individual exercised the option in exchange for $10,000 in cash and a note
receivable of $190,000, discussed in Note 7. In the event of nonperformance,
these shares are subject to repurchase by the Company.
In August 2000, a shareholder holding more than 5% of IPG's common stock
borrowed approximately $90,000 from Laser, at an annual interest rate of 8%.
This loan was repaid in full on November 30, 2000. This note is reported in
other current assets at September 30, 2000.
In connection with the 2000 Reorganization, IPG entered into an agreement
with NTO IRE-POLUS regarding intellectual property. Under this agreement, NTO
IRE-POLUS provides research and development exclusively for IPG in exchange for
payment of all direct and overhead costs plus a fee of 10%. No amounts were
incurred under this agreement during the nine months ended September 30, 2000.
In October 2000, IPG agreed to loan $1.0 million to NTO IRE-POLUS. These
funds will be used for working capital and capital expenditures. This loan
bears interest at an annual rate of 7.0% and has a term of six months from the
date the money is transferred to NTO IRE-POLUS.
During 1999, IPG purchased capital equipment from NTO IRE-POLUS in the
aggregate amounts of $176,000. For the nine-month period ended September 30,
2000, NTO IRE-POLUS purchased equipment from IPG in the aggregate amount of
$187,000.
IPG sells products to Fibre which resells those products to Fibre's
customers in the United Kingdom. These sales are included in the table above.
Effective January 1, 2001, IPG plans to terminate that distribution
relationship and intends to sell directly to customers in the United Kingdom
through a wholly-owned subsidiary to be formed. Consequently, IPG plans to
sublease office space from, and share general and administrative expenses of,
Fibre at an aggregate estimated annual amount of approximately $250,000.
In 1998, Fibre entered into a supplier agreement to provide certain
products to a significant customer for a period of 36 months. Pursuant to this
agreement, the customer issued 1,561,144 shares of its common stock to Fibre in
consideration of a discount on products to be delivered under the supply
agreement. Additionally, a shareholder holding more than 5% of IPG's common
stock was granted options to purchase 100,000 shares of the customer's common
stock in exchange for serving on the customer's advisory board. All of such
options have been exercised. During 1998, Laser sold amplifiers totaling
approximately $185,000 to this customer in exchange for cash and 571,428 shares
of this customer's common stock. The fair value of these shares, estimated to
be approximately $46,000, became the cost basis of Laser's investment in these
non-marketable securities, and Laser continues to carry this investment at
cost. During 1999 and 2000, IPG sold approximately $2.0 million of products to
this customer under the terms of the supplier agreement. The customer paid IPG
approximately $1.6 million (or 75% of the invoice price) in cash and issued
865,924 shares of the customer's common stock, valued at approximately
$400,000, to Fibre. In connection with this transaction, Fibre issued a note to
IPG for approximately $400,000. This note along with accrued interest, totaling
approximately $32,000, was repaid in October 2000.
F-19
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Commitments and Contingencies
Operating leases
IPG leases its current facility in the United States under a
noncancelable operating lease agreement which expires during 2001. Rental
expense under this lease agreement for the year ended December 31, 1999, and
for the nine months ended September 30, 1999 and 2000 was approximately
$121,000, $60,000 and $172,000, respectively. Future minimum lease payments
under noncancelable leases as of December 31, 1999 are approximately $225,000
and $113,000 for the years ending December 31, 2000 and 2001, respectively.
Firm purchase commitments
In December 2000, IPG entered into a purchase agreement with a component
supplier requiring minimum purchases by IPG of approximately $66.7 million
through December 31, 2002.
IPG has a variety of commitments with suppliers for the purchase of raw
materials and components for delivery in future years at prevailing market
prices.
Capital expenditures
In 2000, the Board of Directors authorized expenditures on the
construction of a new manufacturing and administrative facility in the United
States with a total projected cost of $11.8 million, all of which has been
contractually committed at September 30, 2000. As of September 30, 2000,
approximately $3.2 million has been paid under these contracts. This project is
expected to be completed in the first quarter of 2001.
Employment agreements
IPG has entered into employment agreements with certain members of senior
management. The terms of these agreements range from one to five years and
include noncompete and nondisclosure provisions as well as provide for defined
severance payments in the event of termination.
Litigation
IPG is not currently subject to any material legal proceedings, nor does
IPG know of any pending material legal proceedings.
10. Employee Benefit Plans
Profit Sharing Plan
IPG maintains a 401(k) profit-sharing plan covering substantially all
U.S. employees. Employees are eligible for a discretionary contribution from
IPG based on each employee's total contribution, not to exceed 6% of an
employee's compensation. Compensation expense related to this plan for the
years ended December 31, 1999 and for the nine months ended September 30, 1999
and 2000 approximated $18,000, $9,000 and $46,000, respectively.
Employee Stock Option Plan
Beginning in 1999, IPG's majority shareholder and sole member of the
Board of Directors, at that time, granted stock options to certain employees,
officers and advisors. In March 2000, the shareholders approved the IPG 2000
Incentive Compensation Plan (the "Plan"). At September 30, 2000, 7,500,000
common
F-20
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares had been reserved for grant under the Plan. Subsequent to September 30,
2000, the Board of Directors increased the number of shares reserved under the
Plan to 15,000,000. At December 31, 2000, after giving effect to the increase
in the number of reserved shares an additional 5,525,600 shares were issuable
under the Plan. Options are subject to the vesting provisions associated with
each grant, generally vesting on a straight-line basis over four years. All
options expire ten years from the date of grant.
In addition to the Plan, IPG has issued 700,000 options to purchase IPG's
common stock to the members of its National Advisory Board and 400,000 options
to an IPG director for legal and advisory services. These options were issued
with an exercise price of $0.50 per share. A total of 900,000 of these options
were exercised during 2000. These options have similar terms to those options
issued under the terms of the Plan; however, these options generally vested
immediately. In accordance with SFAS No. 123 and EITF 96-18, IPG measured these
awards at fair value, using the Black-Scholes valuation model. These options
provide IPG with the right to repurchase a specified amount of any shares
acquired should the optionees not fulfill the terms of their contract. Under
EITF 96-18, this creates variable plan accounting. As such, IPG will continue
to remeasure the fair value of these options at each reporting date until a
performance commitment date has been achieved or the right to repurchase the
options has expired. The fair value of each option at September 30, 2000 was
estimated at $12.06 per share. For the nine months ended September 30, 2000,
IPG recognized approximately $8.7 million in respect of these options.
The following table presents a summary of the share option activity and
related information:
Number of Weighted-Average
Options Exercise Price
---------- ----------------
Outstanding, January 1, 1999.................. --
Granted..................................... 2,600,000 $0.50
Exercised................................... --
Forfeited................................... --
----------
Outstanding, December 31, 1999................ 2,600,000 0.50
Granted..................................... 3,918,600 0.60
Exercised................................... (1,561,868) 0.60
Forfeited................................... (1,200) 0.50
----------
Outstanding, September 30, 2000............... 4,955,532 $0.57
==========
The weighted-average minimum fair value of the options granted to
employees was $0.08 in 1999 and $2.77 in 2000.
Additional information regarding options outstanding at September 30,
2000 is as follows:
Options Outstanding Number Exercisable
----------------------------------------------------------------------------
Exercise Number Weighted-Average Remaining December 31, September 30,
Price Outstanding Contractual Life (years) 1999 2000
-------- ----------- -------------------------- ------------ -------------
$0.50 4,363,632 9.02 -- 358,100
$1.00 500,500 9.84 -- --
$1.50 91,400 9.86 -- 10,000
--------- --- -------
4,955,532 -- 368,100
========= === =======
Compensation related to options awarded during the nine months ended
September 30, 2000 (approximately $29.5 million) has been deferred for
financial reporting purposes and is generally being amortized on a straight-
line basis over the vesting period of the related options for fixed awards.
Options which
F-21
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
require variable plan accounting are being amortized using the methodologies
prescribed by FASB Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans.
IPG has adopted the disclosure requirements of SFAS 123. SFAS 123
requires that the fair value of stock-based awards to employees be calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from IPG's
stock option awards. These models also require subjective assumptions, which
greatly affect the calculated values. IPG's calculations were made using the
minimum value method with the following weighted average assumptions: expected
life, 4 years; stock volatility of 0%; risk-free interest rate of 6.5%; and no
dividend payments during the expected term. Forfeitures are recognized as they
occur.
IPG has utilized the Black-Scholes option-pricing model in determining
the fair value of the options granted to non-employees or outside of the Plan.
In addition to the aforementioned assumptions, IPG used a volatility factor of
60% in the Black-Scholes option-pricing model.
If the computed minimum values of the options awarded to employees had
been amortized to expense over the vesting period of the awards, net income and
related pro forma basic and diluted per share amounts would have been reduced
to the pro forma amounts indicated below:
For the nine
For the year ended months ended
December 31, 1999 September 30, 2000
------------------ ------------------
Net income (loss) available to
common shareholders (in
thousands):
As reported..................... $1,951 $(3,677)
Pro forma....................... 1,906 (4,174)
Basic and diluted net income
(loss) per share:
As reported..................... $ 0.03 $ (0.06)
Pro forma....................... 0.03 (0.06)
Subsequent to September 30, 2000, IPG entered into an employment
agreement which granted an employee 1,000,000 shares of common stock at the
price of $0.50 per share, subject to certain repurchase rights by IPG. IPG also
granted this employee options to purchase (i) 500,000 shares of common stock at
$1.50 per share, which will vest on the earlier of October 1, 2001 or the date
that IPG first recognizes $200.0 million of gross sales at $1.50 per share, and
(ii) 1,500,000 shares at $1.50 per share which vest monthly for thirty-six
months and will all vest immediately on the date IPG first recognizes $400.0
million of gross sales. Additionally, subsequent to September 30, 2000, IPG
issued options to purchase 1,607,000 shares of common stock to employees and
members of the Board of Directors at a weighted-average exercise price of $3.25
per share.
11. Income Taxes
Income before minority interest and income taxes consisted of (in
thousands):
Years ended
December 31,
----------------
1997 1998 1999
---- ---- ------
Domestic.................................................. $-- $-- $ 375
Foreign................................................... 28 392 3,681
---- ---- ------
Total................................................... $ 28 $392 $4,056
==== ==== ======
F-22
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
IPG's provision for income taxes consisted of the following (in
thousands):
Years ended
December 31,
-----------------
1997 1998 1999
---- ---- ------
Current:
Federal............................................... $-- $-- $ 151
State................................................. -- -- 46
Foreign............................................... 26 191 1,934
Deferred:
Federal............................................... -- -- (29)
State................................................. -- -- (9)
Foreign............................................... (4) 43 9
---- ---- ------
Total............................................... $ 22 $234 $2,102
==== ==== ======
The provision for income taxes is different from that which would be
obtained by applying the statutory federal income tax rate to income before
income taxes. The principal items causing this difference are as follows (in
thousands):
Years ended December 31, September 30,
------------------------- --------------
1997 1998 1999 1999 2000
------------------------- ------ ------
Tax expense at statutory rate.. $ 10 $ 133 $ 1,379 $1,390 $ 789
State and local taxes.......... -- -- 23 (3) 253
Differences in federal and
foreign tax rates............. 2 79 657 679 1,352
Nondeductible equity-based
compensation.................. -- -- -- -- 3,303
Tax credits.................... -- -- -- -- (58)
Nondeductible items and other.. 10 22 43 112 189
------- ------- --------- ------ ------
Total........................ $ 22 $ 234 $ 2,102 $2,178 $5,828
======= ======= ========= ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
December
31, September 30,
1998 1999 2000
---- ----- -------------
Current deferred tax assets (liabilities):
Deferred revenues........................... $(45) $ -- $ --
Allowances and accrued liabilities.......... 86 163
---- ----- ------
Net current deferred tax assets
(liabilities)................................ $(45) $ 86 $ 163
---- ----- ------
Long-term deferred tax assets (liabilities):
Property, plant and equipment............... $ 52 $ (50) $ (103)
Deferred compensation....................... 1,220
---- ----- ------
Net long-term deferred tax assets
(liabilities)................................ $ 52 $ (50) $1,117
==== ===== ======
F-23
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Geographic and Segment Information
IPG markets and sells its products throughout the world through both
direct sales and distribution channels. IPG has adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, and
applies those criteria in reporting segment information. IPG currently manages
its business as two segments: U.S.A. and Germany. The segments are considered
to share similar economic characteristics and similarities in product, types of
customers and methods of distribution. Accounting policies of the segments are
the same as those described in the Summary of Significant Accounting Policies
in Note 2. All intercompany transactions between segments have been eliminated.
The following table summarizes net sales, operating expenses, net income
(loss), identifiable assets, current liabilities and capital expenditures of
IPG in its segments (in thousands):
Intercompany
U.S.A. Germany Eliminations Total
------- ------- ------------ --------
September 30, 2000:
Net revenues.......................... $29,756 $21,149 $(18,216) $ 32,689
Operating expenses.................... 15,333 2,824 -- 18,157
Net income (loss)..................... (6,328) 3,245 (425) (3,508)
Assets................................ 87,227 18,683 (2,933) 102,977
Current liabilities................... 10,540 8,720 (2,353) 16,907
Capital expenditures.................. 4,971 4,927 -- 9,898
December 31:
1999:
Net revenues.......................... $ 9,763 $16,535 $ (7,658) $ 18,640
Operating expenses.................... 1,498 3,368 -- 4,866
Net income (loss)..................... 215 1,898 (162) 1,951
Assets................................ 6,001 10,103 (3,304) 12,800
Current liabilities................... 5,135 4,110 (3,142) 6,103
Capital expenditures.................. 2,863 2,272 -- 5,135
1998:
Net revenues.......................... $ -- $ 8,263 $ -- $ 8,263
Operating expenses.................... -- 2,056 -- 2,056
Net income............................ -- 154 -- 154
Assets................................ -- 8,819 -- 8,819
Current liabilities................... -- 3,682 -- 3,682
Capital expenditures.................. -- 3,080 -- 3,080
1997:
Net revenues.......................... $ -- $ 3,097 $ -- $ 3,097
Operating expenses.................... -- 622 -- 622
Net income............................ -- 6 -- 6
Assets................................ -- 3,456 -- 3,456
Current liabilities................... -- 801 -- 801
Capital expenditures.................. -- 1,292 -- 1,292
F-24
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The geographic sources of IPG's revenues, based on billing addresses of
IPG's customers, are as follows (in thousands):
Nine months
Years ended December ended September
31, 30,
--------------------- ---------------
1997 1998 1999 1999 2000
------ ------ ------- ------- -------
United States and other North America.... $1,581 $5,369 $11,455 $ 9,219 $23,261
Europe:
Germany................................. 260 853 3,796 2,865 3,518
United Kingdom.......................... 798 769 564 449 672
Other................................... 202 380 969 513 1,257
Asia:
Japan................................... 256 892 1,830 1,777 3,920
Other................................... -- -- 26 -- 61
------ ------ ------- ------- -------
Total.................................. $3,097 $8,263 $18,640 $14,823 $32,689
====== ====== ======= ======= =======
Through September 30, 2000, IPG has derived revenues from two product
lines: fiber amplifiers and Raman pump lasers for telecommunications
applications and fiber lasers for industrial applications. While complete
financial information for these product lines is not available, IPG has
identified its historic net sales for these product lines as follows (in
thousands):
Nine months
Years ended December ended September
31, 30,
--------------------- ---------------
1997 1998 1999 1999 2000
------ ------ ------- ------- -------
Telecommunications................... $1,898 $5,957 $14,383 $11,394 $25,106
Industrial applications.............. 1,199 2,306 4,257 3,429 7,583
------ ------ ------- ------- -------
Total.............................. $3,097 $8,263 $18,640 $14,823 $32,689
====== ====== ======= ======= =======
13. Significant Customers
IPG's largest customers are national and international telecommunications
companies. IPG has five customers that individually comprised more than 10% of
net sales. The following table presents the percentage of net sales that these
customers represent during each period:
Nine
months
ended
Years ended September
December 31, 30,
-------------- ---------
Customer 1997 1998 1999 1999 2000
-------- ---- ---- ---- ---- ----
A................................................. -- 2% 9% 2% 40%
B................................................. 15% 43% 40% 50% 20%
C................................................. 27% 2% -- -- --
D................................................. 25% 9% 2% 3% --
E................................................. -- -- 10% 12% 3%
--- --- --- --- ---
Total........................................... 67% 56% 61% 67% 63%
=== === === === ===
Accounts receivable related to these five customers totaled approximately
69% of the September 30, 2000 accounts receivable balance.
As discussed in Note 8, in September 1999, Fibre entered into a supplier
agreement with Customer A. Fibre, Laser and certain shareholders maintain an
insignificant ownership interest in Customer A.
F-25
Inside Back Cover Page:
Along the top edge of the page is the caption: "Fiber Lasers for
Industrial Applications".
Under the top edge caption and in the upper left-hand corner of the page
is a photograph of medical professionals performing surgery with the word
"Medical" above the photograph, illustrating the use of fiber lasers in medical
applications.
Under the top edge caption and in the upper right-hand corner of the page
is a photograph of [an aerospace setting] with the word "Aerospace" above the
photograph, illustrating the use of fiber lasers in aerospace applications.
In the center of the page is a photograph of several of the registrant's
fiber lasers for industrial applications.
In the lower left-hand corner of the page is a photograph of [a product
being micromachine] with the word "Micromachining" below the photograph,
illustrating the use of fiber lasers in micromachining applications.
In the lower right-hand corner of the page is a photograph of [a product
being printed] with the word "Printing" below the photograph, illustrating the
use of fiber lasers in printing applications.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
8,200,000 Shares
IPG Photonics Corporation
[LOGO]
Common Stock
---------------
PROSPECTUS
---------------
Merrill Lynch & Co.
Robertson Stevens
CIBC World Markets
U.S. Bancorp Piper Jaffray
Wit SoundView
, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE]
Subject to Completion
Preliminary Prospectus Dated February 2, 2001
PROSPECTUS
8,200,000 Shares
[IPG LOGO]
Common Stock
-----------
This is IPG Photonics Corporation's initial public offering of common
stock. IPG Photonics Corporation is selling all of the shares. The U.S.
international managers are offering shares outside the U.S. and Canada and
the U.S. underwriters are offering shares in the U.S. and Canada.
We expect the public offering price to be between $14.00 and $16.00 per
share. Currently, no public market exists for the shares. After pricing of this
offering, we expect that the common stock will trade on the Nasdaq National
Market under the symbol "IPGP."
Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 6 of this prospectus.
-----------
Per Share Total
--------- -----
Public offering price..................................... $ $
Underwriting discount..................................... $ $
Proceeds, before expenses, to IPG Photonics............... $ $
The international managers may also purchase up to an additional shares
from us at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments. The U.S.
underwriters may similarly purchase up to an additional shares from us.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery in New York, New York on or about
, 2001.
-----------
Merrill Lynch International
Robertson Stephens
CIBC World Markets
U.S. Bancorp Piper Jaffray
Wit SoundView
-----------
The date of this prospectus is , 2001.
[ALTERNATE PAGE]
UNDERWRITING
General
We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S.
underwriters. Merrill Lynch International, Robertson Stephens, Inc., CIBC World
Markets Corp., U.S. Bancorp Piper Jaffray Inc. and Wit SoundView Corporation,
are acting as lead managers for the international managers named below. Subject
to the terms and conditions described in an international purchase agreement
among us and the international managers, and concurrently with the sale of
shares to the U.S. underwriters, we have agreed to sell to the international
managers, and the international managers severally have agreed to purchase from
us, the number of shares listed opposite its name below.
International Managers Number of Shares
---------------------- ----------------
Merrill Lynch International.................................
Robertson Stephens, Inc.....................................
CIBC World Markets Corp. ...................................
U.S. Bancorp Piper Jaffray Inc. ............................
Wit SoundView Corporation...................................
Total.....................................................
We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares in the U.S. and Canada for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Robertson Stephens, Inc., CIBC
World Markets Corp., U.S. Bancorp Piper Jaffray Inc. and Wit SoundView
Corporation are acting as U.S. representatives. Subject to the terms and
conditions in the U.S. purchase agreement, and concurrently with the sale of
shares to the international managers pursuant to the international purchase
agreement, we have agreed to sell shares to the U.S. underwriters, and the U.S.
underwriters severally have agreed to purchase shares from us. The initial
public offering price per share and the total underwriting discount per share
are identical under the international purchase agreement and the U.S. purchase
agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults on
its obligations under the international or U.S. purchase agreements, the
international and U.S. purchase agreements provide that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreements may be terminated. The closings for the sale of shares to be
purchased by the international managers and the U.S. underwriters are
conditioned on one another. We have agreed to indemnify the international
managers and the U.S. underwriters against certain liabilities, including
liabilities under the Securities Act, and to contribute to payments the
international managers and U.S. underwriters may be required to make in respect
of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officer's certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering
price on the cover page of this prospectus, and to dealers at that price less a
concession not in excess of $ per share. The international managers may
allow, and the dealers may reallow, a discount not in excess of $ per share
to other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
66
[ALTERNATE PAGE]
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.
Per Share Without Option With Option
--------- -------------- -----------
Public offering price................. $ $ $
Underwriting discount................. $ $ $
Proceeds, before expenses, to IPG
Photonics............................ $ $ $
The expenses of the offering, not including the underwriting discount,
are estimated at $1,000,000 and are payable by us.
Over-Allotment Options
We have granted options to the international managers to purchase up to
additional shares at the public offering price less the underwriting
discount. The international managers may exercise these options for 30 days
from the date of this prospectus solely to cover any over-allotments. If the
international managers exercise these options, each international manager will
be obligated, subject to conditions contained in the purchase agreements, to
purchase a number of additional shares proportionate to that international
manager's initial amount reflected in the above table.
We have also granted options to the U.S. underwriters, exercisable for 30
days from the date of this prospectus, to purchase up to additional shares
to cover any over-allotments on terms similar to those granted to the
international managers.
Intersyndicate Agreement
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the international managers and
the U.S. underwriters may sell shares to each other for purposes of resale at
the initial public offering price, less an amount not greater than the selling
concession. Under the intersyndicate agreement, the international managers and
any dealer to whom they sell shares will not offer to sell or sell shares to
U.S. or Canadian persons or to persons they believe intend to resell to U.S. or
Canadian persons, except in the case of transactions under the intersyndicate
agreement. Similarly, the U.S. underwriters and any dealer to whom they sell
shares will not offer to sell or sell shares to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, except in the case of transactions under
the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered by this prospectus for
sale to some of our employees and business associates. If these persons
purchase reserved shares, this will reduce the number of shares available for
sale to the general public. Any reserved shares that are not orally confirmed
for purchase within one day of the pricing of this offering will be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus.
No Sales of Similar Securities
We and our executive officers and directors and substantially all other
stockholders have agreed, with exceptions, not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining
the written consent of Merrill Lynch. Specifically, we and these other
individuals have agreed not to directly or indirectly:
. offer, pledge, sell or contract to sell any common stock;
67
[ALTERNATE PAGE]
. sell any option or contract to purchase any common stock;
. purchase any option or contract to sell any common stock;
. grant any option, right or warrant for the sale of any common stock;
. lend or otherwise dispose of or transfer any common stock;
. request or demand that we file a registration statement related to
the common stock; or
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock,
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
Quotation on the Nasdaq National Market
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "IPGP."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between us and the U.S. representatives and the lead managers. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are:
. the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us;
. our financial information;
. the history of, and the prospects for, our company and the industry
in which we compete;
. an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;
. the present state of our development; and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit
the underwriters and selling group members from bidding for or purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
In connection with the offering, the underwriters may make short sales of
the common stock. Short sales involve the sale by the underwriters at the time
of the offering of a greater number of shares than they are
68
[ALTERNATE PAGE]
required to purchase in the offering. Covered short sales are sales made in an
amount not greater than the over-allotment options. The U.S. representatives
may close out any covered short position by either exercising the over-
allotment options or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the U.S.
representatives will consider, among other things, the price of shares
available for purchase in the open market as compared to the public offering
price at which they may purchase the shares through the over-allotment option.
Naked short sales are sales in excess of the over-allotment option. The U.S.
representatives must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
U.S. representatives are concerned that there may be downward pressure on the
price of the shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Similar to other purchase
transactions, the purchases by the U.S. representatives to cover syndicate
short positions may have the effect of raising or maintaining the market price
of the common stock or preventing or retarding a decline in the market price of
the common stock. As a result, the price of the common stock may be higher than
it would otherwise be in the absence of these transactions.
The U.S. representatives may also impose a penalty bid on underwriters
and selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriters' short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters make any representation that the U.S.
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
UK Selling Restrictions
Each international manager has agreed that
. it has not offered or sold and will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do
not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995;
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the
United Kingdom; and
. it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of common stock to a person who is kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 as amended by the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1997 or is a person to
whom such document may otherwise lawfully be issued or passed on.
[No Public Offering Outside the United States
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to our company or shares of our common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with
69
[ALTERNATE PAGE]
the shares of common stock may be distributed or published, in or from any
country or jurisdiction except in compliance with any applicable rules and
regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price on the cover page of
this prospectus.
Other Relationships
Merrill Lynch KECALP L.P. 1999, KECALP Inc., KECALP Inc., as Nominee for
Merrill Lynch KECALP International L.P. 1999, ML IBK Positions, Inc. and
Merrill Lynch Taurus 2000 Fund L.P., entities which are affiliated with Merrill
Lynch, Pierce, Fenner & Smith Incorporated, one of the underwriters,
beneficially own an aggregate of 600,000 shares of Series B preferred stock,
which convert into 1,749,999 shares of common stock, and warrants to purchase
500,000 shares of common stock assuming an offering price of $15.00.
Bayview 2000, L.P., an entity which is affiliated with Robertson
Stephens, one of the underwriters, beneficially owns an aggregate of 80,000
shares of Series B preferred stock, which convert into 233,333 shares of common
stock, and warrants to purchase 66,667 shares of common stock assuming an
offering price of $15.00 per share.
70
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[ALTERNATE PAGE]
Through and including , 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
8,200,000 Shares
IPG Photonics Corporation
[LOGO]
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
Robertson Stevens
CIBC World Markets
U.S. Bancorp Piper Jaffray
Wit SoundView
, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following are the estimated expenses to be incurred in connection
with the issuance and distribution of the securities registered under this
Registration Statement, other than underwriting discounts and commissions. All
amounts shown are estimates except the Securities and Exchange Commission
registration fee and the National Association of Securities Dealers, Inc.
filing fee. The following expenses will be borne solely by the Registrant.
Securities and Exchange Commission Registration Fees.......... $ 39,600
National Association of Securities Dealers, Inc. Filing Fee... 15,500
NASDAQ Listing Fee............................................ 95,000
Blue Sky Fees and Expenses.................................... 10,000
Printing and Engraving Expenses............................... 500,000
Legal Fees and Expenses....................................... 1,000,000
Accounting Fees and Expenses.................................. 375,000
Transfer Agent and Registrar Fees............................. 10,000
Miscellaneous................................................. 54,900
----------
Total....................................................... $2,100,000
==========
--------
* To be supplied by amendment.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Registrant's certificate of incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law. The Registrant's bylaws provide for the indemnification to the fullest
extent as required or permitted by Delaware law of officers and directors
acting on behalf of the Registrant with respect to any criminal action or
proceeding.
We have entered into an indemnification agreement with each of our
directors which requires us, among other things, to indemnify them against
certain liabilities which may arise by reason of his status or service as a
director (other than liabilities arising from willful misconduct of a culpable
nature). We also intend to maintain director and officer liability insurance,
if available on reasonable terms.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
Since incorporation, the Registrant has issued the following securities
that were not registered under the Securities Act as summarized below:
None of these transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements
II-1
of the Securities Act by virtue of Section 4(2) thereof, Rule 506 of Regulation
D promulgated thereunder or Rule 701 promulgated under from 3(b) of the
Securities Act pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients of securities in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the stock
certificates and instruments issued in such transactions. All recipients either
received adequate information or had access, through their employment or other
relationships with the Registrant, to such information about the Registrant.
For additional information regarding these equity investment transactions, see
the section entitled "Transactions with Related Parties" in the Prospectus.
(a) Issuances of Capital Stock.
1. In January 1999, the Registrant issued and sold an aggregate of
43,600,000 shares of common stock to individuals who founded
the Registrant for an aggregate purchase price of $2,180.
2. On January 15, 2000, the Registrant issued and sold 20,000,000
shares of common stock to IP Fibre Devices Ltd. in satisfaction
of $182,000 of intercompany debt and accrued interest and a
cash payment of $18,000.
3. On March 31, 2000, the Registrant issued and sold an aggregate
of 1,000,000 shares of its Series A preferred stock to a group
of private investors for an aggregate purchase price of
$5,000,000.
4. Between August 30, 2000 and December 6, 2000, the Registrant
issued and sold an aggregate of 7,600,000 shares of its Series
B preferred stock to a group of private investors for an
aggregate purchase price of $95,000,000.
5. On August 24, 2000, the Registrant issued 2,300,000 shares of
its common stock and paid $7,500,000 to IP Fibre Devices Ltd.
to purchase 51% of IPG Laser GmbH.
6. On October 4, 2000, we exercised our rights under a
Contribution and Exchange Agreement, dated August 24, 2000,
between us and Dr. Valentin P. Gapontsev, our Chairman of the
Board of Directors and Chief Executive Officer, under which we
received the remaining 46% of the total issued and outstanding
interest in IPG Laser GmbH from Dr. Valentin P. Gapontsev in
exchange for an aggregate of 2,806,000 shares of our common
stock.
7. On January 22, 2001, the Registrant issued and sold 1,000,000
shares of our common stock to an executive officer of the
Registrant for an aggregate purchase price of $500,000 in
connection with his employment agreement with the Registrant.
(b) Certain Grants of Warrants to Purchase Common Stock
1. Between August 30 and December 8, 2000, the Registrant granted
warrants to purchase an aggregate of 3,166,667 shares of its
common stock to a group of private investors in connection with
the sale of the Registrant's Series B preferred stock, assuming
an offering price of $15.00.
(c) Certain Grants and Exercises of Stock Options and Warrants
1. From incorporation through January 22, 2001, the Registrant
granted stock options to purchase 9,372,600 shares of common
stock at exercise prices ranging from $0.50 to $3.75 per share
to employees, consultants and directors pursuant to its 2000
stock incentive plan. Of such options, 694,868 have been
exercised through December 31, 2000 at prices ranging from
$0.50 to $1.00 per share.
II-2
2. On February 3, 2000, the Registrant granted options to an
individual to purchase 400,000 shares of the Registrant's
common stock at $0.50 per share. The individual exercised these
options immediately upon grant contemporaneously assigning an
aggregate of 20,000 such options to three family members.
Subsequently, the Registrant issued and sold 500,000 restricted
shares of its common stock to the same individual for an
aggregate purchase price of $250,000. In March 2000, the
Registrant issued and sold 500,000 shares of restricted common
stock to the same individual for an aggregate purchase price of
$250,000.
3. On February 3, 2000, the Registrant granted options to purchase
500,000 shares of common stock outside of its 2000 stock
incentive plan at an exercise price of $0.50 per share to
members of its National Advisory Board, and 500,000 of such
options were exercised on March 17, 2000 for an aggregate
purchase price of $250,000. Also on February 3, 2000, the
Registrant granted options to purchase 100,000 shares of common
stock under its 2000 stock incentive plan at an exercise price
of $0.50 per share to two other members of its National
Advisory Board. Of these options, 30,000 were exercised in
December 2000 for an aggregate purchase price of $15,000. On
November 28, 2000 the Registrant granted options to purchase
50,000 shares of common stock under its 2000 incentive
compensation plan at an exercise price of $3.75 per share to an
additional member of its National Advisory Board.
II-3
Item 16. Exhibits and Financial Statement Schedules.
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of the Registrant,
as amended
3.2* Bylaws of the Registrant, as amended
4.1 Specimen certificate representing the common stock
4.2* Form of Warrant to Purchase Common Stock of the Registrant
4.3* Series A Preferred Stockholders Agreement, dated as of March 31,
2000, among the Registrant and the owners of Series A Preferred
Stock of the Company listed on Schedule I attached thereto
4.4* Registration Rights Agreement, dated as of August 30, 2000, by and
between the Registrant and the Investors named therein
5.1** Form of Opinion of Winston & Strawn
10.1* 2000 Stock Incentive Plan, as amended
10.2* $6,500,000.00 Construction Loan Furnished by Family Bank, FSB to the
Registrant, Guaranteed by IP Fibre Devices Ltd. and Dr. Valentin P.
Gapontsev, dated April 28, 2000
10.3* Assignment, Research and Development Agreement, dated as of August,
30, 2000, by and among the Registrant, IPG Laser GmbH, IPG Fibertech
S.r.l and NTO IRE-POLUS
10.4* Purchase and Sales Agreement, dated October 6, 1999, by and between
the Registrant and Daniel Prouty and Melvin Glickman as trustees for
Elmar Realty Trust
10.5* Employment Agreement, entered into as of June 19, 2000, by and
between the Registrant and John Geagea
10.6* Employment Agreement, entered into as of August 9, 2000, by and
between the Registrant and Hon. John H. Dalton
10.7 Employment Contract between IPG Laser and Its Managing Director, Dr.
Valentin P. Gapontsev, dated August 25, 1995
10.8 Employment Agreement, dated November 29, 2000, by and between the
Registrant and Vincent Au-Yeung
10.9* Form of Indemnification Agreement by and between the Registrant and
its Directors
10.10* Design and Building Agreement, dated March 10, 2000, by and between
the Registrant and AHO Construction, Inc.
10.11 Contribution and Exchange Agreement, dated August 24, 2000, by and
between the Registrant and Dr. Valentin P. Gapontsev
10.12 Purchase Agreement, dated August 24, 2000, by and between the
Registrant and IP Fibre Devices U.K. (Limited)
10.13 Purchase Agreement, dated August 24, 2000, by and between the
Registrant and Dr. Valentin P. Gapontsev
10.14 Loan Agreement No. LA-201003/01, made October 3, 2000, by and
between the Registrant and NTO IRE-POLUS
10.15 Form of Non-Competition and Confirmatory Assignment Agreement
10.16 Employment Contract, effective September 18, 2000, between IPG Laser
GbmH and Dr. Eugene Shcherbakov
10.17 Agreements between Registrant and Robert A. Blair
10.18+ IPG Photonics Corporation Purchase and Sales Agreement No. 1/99,
dated May 14, 1999, between the Registrant and SDL, Inc., as amended
10.19 Stock Issuance Agreement, effective as of January 22, 2001, by and
between the Registrant and Vincent Au-Yeung
10.20 Services Agreement between IP Fibre Devices Ltd. and new IPG
Photonics (UK) Ltd., dated as of January 1, 2001
21.1* List of Subsidiaries
23.1** Consent of Winston & Strawn (See Exhibit 5.1)
23.2 Consent of Deloitte & Touche GmbH
23.3 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
--------
(*) Previously filed.
(**) To be filed by amendment.
(+) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
II-4
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described
under Item 14 of this Registration Statement or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
Prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in the form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
and
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form
of Prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at the time shall be deemed to be the initial bona
fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the
"Securities Act"), the Company certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-1 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Sturbridge, Massachusetts on
February 2, 2001.
IPG Photonics Corporation
/s/ Dr. Valentin P. Gapontsev
By: _________________________________
Name: Dr. Valentin P. Gapontsev
Title: Chairman of the Board of
Directors and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Dr. Valentin P. Gapontsev and
Hon. John H. Dalton, and each of them acting individually, as his true and
lawful attorneys-in-fact and agents, each with full power of substitution, for
him in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments or any abbreviated
registration statement and any amendments thereto filed pursuant to Rule 462(b)
increasing the number of securities for which registration is sought), and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in their capacities on the
dates indicated below.
Signature Title Date
--------- ----- ----
/s/ Dr. Valentin P. Gapontsev Chairman of the Board of February 2, 2001
______________________________________ Directors and Chief Executive
Dr. Valentin P. Gapontsev Officer
(Principal Executive Officer)
/s/ Hon. John H. Dalton President and Director February 2, 2001
______________________________________
Hon. John H. Dalton
/s/ Dr. Eugene Shcherbakov Director February 2, 2001
______________________________________
Dr. Eugene Shcherbakov
/s/ Timothy P.V. Mammen Chief Financial Officer and February 2, 2001
______________________________________ Vice President
Timothy P.V. Mammen
(Principal Accounting Officer)
II-6
Signature Title Date
--------- ----- ----
/s/ Dr. Denis Gapontsev Vice President of Research February 2, 2001
______________________________________ and Development and
Dr. Denis Gapontsev Director
/s/ Robert A. Blair Vice Chairman of the Board February 2, 2001
______________________________________ of Directors
Robert A. Blair
/s/ Michael C. Child Director February 2, 2001
______________________________________
Michael C. Child
/s/ Dr. William F. Krupke Director February 2, 2001
______________________________________
Dr. William F. Krupke
II-7
Index to Exhibits
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of the Registrant,
as amended
3.2* Bylaws of the Registrant, as amended
4.1 Specimen certificate representing the common stock
4.2* Form of Warrant to Purchase Common Stock of the Registrant
4.3* Series A Preferred Stockholders Agreement, dated as of March 31,
2000, among the Registrant and the owners of Series A Preferred
Stock of the Company listed on Schedule I attached thereto
4.4* Registration Rights Agreement, dated as of August 30, 2000, by and
between the Registrant and the Investors named therein
5.1** Form of Opinion of Winston & Strawn
10.1* 2000 Stock Incentive Plan, as amended
10.2* $6,500,000.00 Construction Loan Furnished by Family Bank, FSB to the
Registrant, Guaranteed by IP Fibre Devices Ltd. and Dr. Valentin P.
Gapontsev, dated April 28, 2000
10.3* Assignment, Research and Development Agreement, dated as of August,
30, 2000, by and among the Registrant, IPG Laser GmbH, IPG Fibertech
S.r.l and NTO IRE-POLUS
10.4* Purchase and Sales Agreement, dated October 6, 1999, by and between
the Registrant and Daniel Prouty and Melvin Glickman as trustees for
Elmar Realty Trust
10.5* Employment Agreement, entered into as of June 19, 2000, by and
between the Registrant and John Geagea
10.6* Employment Agreement, entered into as of August 9, 2000, by and
between the Registrant and Hon. John H. Dalton
10.7 Employment Contract between IPG Laser and Its Managing Director, Dr.
Valentin P. Gapontsev, dated August 25, 1995
10.8 Employment Agreement, dated November 29, 2000, by and between the
Registrant and Vincent Au-Yeung
10.9* Form of Indemnification Agreement by and between the Registrant and
its Directors
10.10* Design and Building Agreement, dated March 10, 2000, by and between
the Registrant and AHO Construction, Inc.
10.11 Contribution and Exchange Agreement, dated August 24, 2000, by and
between the Registrant and Dr. Valentin P. Gapontsev
10.12 Purchase Agreement, dated August 24, 2000, by and between the
Registrant and IP Fibre Devices U.K. (Limited)
10.13 Purchase Agreement, dated August 24, 2000, by and between the
Registrant and Dr. Valentin P. Gapontsev
10.14 Loan Agreement No. LA-201003/01, made October 3, 2000, by and
between the Registrant and NTO IRE-POLUS
10.15 Form of Non-Competition and Confirmatory Assignment Agreement
10.16 Employment Contract, effective September 18, 2000, between IPG Laser
GbmH and Dr. Eugene Shcherbakov
10.17 Agreements between the Registrant and Robert A. Blair
10.18+ IPG Photonics Corporation Purchase and Sales Agreement No. 1/99,
dated May 14, 1999, between the Registrant and SDL, Inc., as amended
10.19 Stock Issuance Agreement, effective as of January 22, 2001, by and
between the Registrant and Vincent Au-Yeung
10.20 Services Agreement between IP Fibre Devices Ltd. and new IPG
Photonics (UK) Ltd., dated as of January 1, 2001
21.1* List of Subsidiaries
23.1** Consent of Winston & Strawn (See Exhibit 5.1)
23.2 Consent of Deloitte & Touche GmbH
23.3 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
--------
(*) Previously filed.
(**) To be filed by amendment.
(+) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.