<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the fiscal year ended June 30, 1995
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________________ to
_________________.
Commission File Number: 0-16195
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1214948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
375 Saxonburg Boulevard
Saxonburg, Pennsylvania 16056
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 412-352-4455
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of outstanding Common Stock, no par value, held by
non-affiliates of the Registrant at September 12, 1995, was approximately
$78,689,900, based on the closing sale price reported on NASDAQ/NMS for
September 12, 1995. For purposes of this calculation only, directors and
executive officers of the Registrant and their spouses are deemed to be
affiliates of the Registrant.
Number of outstanding shares of Common Stock, no par value, at September 12,
1995, was 5,107,370.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 1995 Annual Meeting of Shareholders
are incorporated by reference into Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
BUSINESS
INTRODUCTION
II-VI Incorporated designs, manufactures and markets optical and electro-
optical components, devices and materials for precision use in infrared, near
infrared, visible light and x-ray/gamma-ray instruments and applications. The
Company's infrared products are used in high-power CO\\2\\ (carbon dioxide)
lasers for industrial processing and for commercial and military sensing
systems. The Company's near infrared and visible products are used in
industrial, scientific and medical instruments and solid-state YAG (yttrium
aluminum garnet) lasers. Frequency doubling and single crystal substrate
materials produced by the Company are utilized as building blocks in the
emerging blue light laser market segment. II-VI also is developing and
marketing solid state x-ray and gamma-ray products for the nuclear radiation
detection industry. The majority of the Company's revenues are attributable to
the sale of optical parts and components for the laser processing industry.
INDUSTRIAL PROCESSING BACKGROUND
Applications for laser processing are increasing worldwide as manufacturers
seek solutions to increasing demands for quality, precision, speed, throughput,
flexibility, automation and cost control. High-power CO\\2\\ and YAG lasers
provide these benefits in a wide variety of cutting, welding, drilling,
ablation, balancing, cladding, heat treating and marking applications. For
example, automobile manufacturers use lasers to facilitate rapid product
changeovers, process simplification, efficient sequencing and computer control
on high throughput production lines. Manufacturers of recreational vehicles,
lawn mowers and garden tractors cut, trim and weld metal parts with lasers to
achieve flexible, high consistency, reduced post processing, lower cost
operations. For office furniture producers, lasers provide easily
reconfigurable, low distortion, low cost prototyping and production capability
that facilitates semi-custom manufacturing of customer specified designs. On
high speed consumer product processing lines, laser marking provides automated
date coding for food packaging and computer driven container identification
for pharmaceuticals.
Precision optics such as total reflectors, partial mirrors, beamsplitters
and lenses are critical to the operation of lasers and laser systems. Many
CO\\2\\ and YAG laser systems contain up to 15 optical elements either as part
of the laser resonator or associated with routing of the laser beam to the
work piece. To the extent that optics wear or become contaminated during
operation, optics are consumables in laser processing. Thus, an aftermarket
demand is generated by an estimated current worldwide installed base of 40,000
to 45,000 industrial YAG and CO\\2\\ lasers, based on a recent industry trade
report. Average lifetime for industrial laser optical elements is estimated to
be 1,000 to 4,000 hours.
COMPANY STRATEGY
The overall strategy of II-VI is to be the quality, cost and service leader
in every market it serves. The Company strives to involve every employee in
its efforts to achieve these goals.
High Power Laser Market Leadership
The Company believes that it supplies more than half of the infrared optics
to industrial materials processors using high power CO\\2\\ lasers worldwide.
Following on the Virgo Optics acquisition and based on the Company's
experience in the high power CO\\2\\ laser optics, II-VI now has an opportunity
to build a position of market leadership in the emerging high power YAG laser
industry. The Company intends to expand its production of YAG laser gain
components and high power mirrors, beamsplitters and related optics for use in
YAG lasers and laser systems. See "Business--Industry Background--YAG Laser
Components."
2
<PAGE>
Quality Leadership
The Company seeks to deliver the highest quality levels practicably
attainable in its products and customer services. The Company has decreased
its warranty return ratio in each of the past five years and will attempt in
forward fiscal years to improve on the fiscal year 1995 record of returns
being approximately 1% of net sales. The Company has made consistent
quality its highest customer priority by involving employees in continuous
improvement.
Low Cost Producer
The Company seeks to attain and maintain the low cost producer position for
infrared and visible optics and materials. The Company has invested
significantly in process design, process control, automated equipment,
employee training, yield improvement and manufacturing management systems in
order to enhance production efficiencies in each product area. Currently,
facilities are being substantially expanded and upgraded in infrared optics,
Zinc Selenide optical materials, YAG manufacturing and nuclear radiation
detector areas.
Sales and Service
Another component of the Company's strategy is to provide rapid, technically
complete responses to customer inquiries or field service problems, quick
turnaround product quotations, short manufacturing lead-times and on-time
deliveries. The Company offers the quick delivery INFRAREADY OPTICS(R) program
for customers so that they may avoid production line shutdowns or inventory
stockouts.
Technology Leadership
II-VI develops growth opportunities from a combination of internally funded
and contract research and development. For example, the Company's leadership
in infrared and visible thin film optical coatings has evolved from continuous
Company funded thin film product and process research. The Company's globally
competitive capabilities in the manufacture of Zinc Selenide and Zinc Sulfide
infrared optical materials grew from internally funded research and
development. II-VI's expertise in the production of Cadmium Zinc Telluride
substrates for the manufacture of infrared focal plane arrays is the result of
contract research sponsored by various Department of Defense agencies. The
Company's Cadmium Zinc Telluride experience has been critical in the
development of the eV PRODUCTS nuclear radiation detectors. The Company
intends to continue a balanced program of internal and contract research and
development.
Launch New Products
The Company invests in emerging new products including its nuclear radiation
detectors and its materials and components for blue light lasers. These two
new product lines share a number of characteristics: both address large
potential markets; both depend on success in crystal growth technology; and
both serve OEM customers that manufacture performance and productivity
enhancing tools, instruments and systems for industrial, information and
telecommunications, scientific and medical markets.
Acquisition Strategy
II-VI intends to continue to search for and acquire well matched
technologies, product lines and companies that can contribute to its growth in
broad segments of the global laser, optics and electro-optics industry. With
the acquisitions of Virgo Optics in 1994, eV PRODUCTS hybrid electronics
production capability in 1992 and high pressure Bridgman crystal growth
technology in 1991, the Company has experience in the integration of
additional products and capabilities with its ongoing operations.
3
<PAGE>
PRODUCTS
The Company's products include infrared, near infrared, visible and x-ray
materials, optics and electro- optic components used in high power industrial
lasers, scientific and military lasers, and sensors. The Company believes that
its leading edge quality, delivery and customer service enhance its reputation
as the supplier of choice for high power laser optics and components. The
majority of the Company's revenues are attributable to the sale of optical
devices and components for the laser processing industry.
Infrared Optics and Materials.
Reliable operation of high power (1 to 20 kW) CO\\2\\ infrared lasers requires
high quality, low absorption optical elements. The CO\\2\\ laser emits infrared
energy at a wavelength of 10.6 micrometers, a wavelength which is optimal for
many industrial processes such as the cutting, welding, drilling and heat
treating of various materials such as steel and other metals or alloys,
plastics, wood, paper, cardboard, ceramics and numerous composites. This
wavelength is also desirable for certain types of medical surgery and for
various surveillance and sensing systems that must penetrate adverse
atmospheric conditions.
The Company is a broad line supplier of virtually all of the optics and
optical elements used in CO\\2\\ lasers and laser systems. The Company supplies
a family of standard and custom transmissive, reflective and diamond turned
optical elements to high power CO\\2\\ resonator manufacturers, CO\\2\\ laser
system manufacturers and to the aftermarket as replacement parts. Transmissive
optical elements manufactured by the Company are predominately made from Zinc
Selenide produced in-house. The Company is one of two manufacturers in the
world of this optical material. The Company's Zinc Selenide capability and its
low absorbing, thin film coating technology have earned II-VI a reputation as
the quality leader worldwide in this marketplace.
The Company provides replacement optics and refurbishing services to users
of industrial CO\\2\\ lasers. The Company sells its infrared replacement optics
with a 24-hour shipment guarantee under the trade name of INFRAREADY
OPTICS(R). Consumable items such as focusing lens and output couplers are cost
effectively refurbished for the Company's aftermarket customers. The
aftermarket portion of the Company's business is growing rapidly as industrial
laser applications proliferate worldwide.
The Company supplies Cadmium Zinc Telluride substrates primarily to U.S.
military and NATO defense suppliers under the trade name EPIREADY(R). These
substrates are subsequently processed by the Company's customers into infrared
detectors using epitaxial crystal growth and device fabrication techniques.
The Company supplies Zinc Sulfide in the form of domes and windows to military
suppliers for Forward Looking Infrared systems worldwide. A portion of the
Company's infrared imaging business involves development programs funded by
ARPA/DOD and other governmental agencies.
YAG Laser Components.
The power levels available from YAG lasers are increasing (1 to 3 kW) while
the costs of such lasers are decreasing. These trends are making YAG laser
processing more attractive in such high-power YAG applications as the welding
of airbag sensors and inflators. Low-power YAG applications include the high
speed micro-welding of multi-blade shaving razor assemblies, the welding of
heart pacemakers and the precision trimming of component values in electronic
assemblies. The capability to deliver the 1.06 micrometer YAG laser wavelength
over a flexible, low loss fiber optic has enhanced YAG laser deployment in
many applications where complex shapes require versatile beam delivery
geometries. A YAG laser requires the same optical elements as the CO\\2\\ laser
except that they are made to operate at the YAG laser near infrared wavelength
of 1.06 micrometers.
The Company supplies a family of standard and custom laser gain materials and
optics for industrial, medical, scientific and research YAG lasers. The YAG
laser gain materials are produced to stringent industry specifications and
precisely fabricated into rods or slabs. Included in the Company's products are
refurbished YAG rods sold to the Company's aftermarket customers. The Company
offers waveplates, polarizers, lenses, prisms, and mirrors for visible and near
4
<PAGE>
infrared applications. These products control and alter the polarization of
visible and near infrared energy.
Nuclear Radiation Detectors.
The nuclear detection market has important applications in the industrial
gauging, environmental monitoring, power generation, nuclear safeguards,
weapons research and disarmament, nuclear non-proliferation, health physics
and medical imaging fields. Solid-state Cadmium Zinc Telluride nuclear
radiation detectors are attractive because of their reduced size, longer life
and lower voltage requirements as compared to the historically used
scintillator/photomultiplier devices. The Company's eV PRODUCTS division
designs and manufactures Cadmium Zinc Telluride, room temperature, nuclear
radiation detectors combined with custom designed low noise front-end
electronics. The Company believes it has become the leader in room
temperature, direct conversion radiation detectors which are emerging in such
applications as industrial gauging and environmental monitoring.
Frequency Doubling and Blue Emitter Materials.
For over a decade, researchers in university, government and industry
laboratories have been seeking routes to the fabrication of reliable, solid-
state blue light emitters and lasers. Blue light sources are expected to be
used in such applications as optical data storage, telecommunications, graphic
displays and high density printers. The Company supplies frequency doubling
materials which are being used in emerging laser based systems for blue light
generation. The Company produces Potassium Niobate based microlaser assemblies
which are used by customers to frequency double other light sources, thus
producing up to 30 mW of blue or 50 mW of green light. The Company also
produces single crystal Zinc Selenide, a high quality substrate which is being
used by customers in the development of blue light lasers.
CUSTOMERS AND MARKETS
Industrial
The Company's customers include leading industrial OEM's and system
manufacturers worldwide in the CO\\2\\ and YAG laser machine tool industry. The
Company has focused its marketing efforts on the growing high power segments
of the laser components marketplace.
The Company's high-power CO\\2\\ laser customers include Bystronic Laser AG,
Fanuc Ltd, Matsushita Industrial Equipment Co., Inc., Mazak Nissho Iwai,
Mitsubishi Electronic Corp., Rofin Sinar Laser GmbH--a division of Siemens, and
Trumpf GmbH & Co. These companies' laser resonators are installed on systems
that are used for cutting, drilling and marking of materials and for welding and
heat treating of metals. The Company also sells optics and components to over
1,400 laser end users which require replacement optics, such as focusing lenses
and beam steering mirrors. Users of industrial lasers include a broad range of
industries and applications, such as automotive, electrical equipment,
packaging, building products, office furniture, garment, airframe or aerospace,
consumer electronics, tooling and machinery.
Low power, sealed CO\\2\\ lasers are utilized for small parts manufacturing,
engraving and serialization of products. These small, lightweight, low-cost
systems are flexible and provide rapid response for a number of light
manufacturing applications. Manufacturers of these laser sources, such as
Domino Laser Inc., Synrad Inc. and Laser Machining Inc., are high volume optics
customers of the Company.
The Company's YAG component customers include Continuum Inc., Lumonics Corp.,
Spectra-Physics Lasers Inc., Excel/Quantronix Corp., Electrox Ltd. and Hughes
Aircraft Company. These companies' systems are used for marking, scribing,
microwelding and precision trimming. A broad range of industries use YAG
systems, including medical devices, consumer products, automotive and
semiconductors. The Company offers YAG customers both the YAG rod supply
capability and the necessary optics for a complete laser system. The Company is
using its close working relationships with its industrial CO\\2\\ customers
worldwide to increase its YAG component supply market share, since both products
are needed by many of the same customers.
5
<PAGE>
Scientific and Military
The scientific, research and new product development areas of the electro-
optics device market are creating many opportunities for the visible, near-
infrared and infrared optics and materials produced by the Company. The
Company provides high end, high specification components to this group of
customers which include products such as aspheric optics, prisms, parabolic
reflectors and focusing element assemblies. The Company provides specialty
optics and components to instrument manufacturers such as Hewlett-Packard
Company, Eastman Kodak Company, Perkin-Elmer Corporation, Raytheon Company and
Cincinnati Electronics Corp. II-VI's products are integrated into
spectrophotometers, interferometers and distance measuring instruments;
scanning mirrors for high resolution color printing; and focusing assemblies
for infrared cameras. Quick response, short lead times and high quality
engineering support are cornerstones of the Company's pursuit of these
markets.
U.S. and NATO allies are pursuing defense strategies based upon stringent
budgets to improve the effectiveness of military systems through electronics
upgrades, including infrared imaging systems. The Company supplies materials
and optics to manufacturers of infrared sensing systems such as Texas
Instruments, Inc., Loral Electro-Optical Systems Corporation, GEC-
Marconi Avionics Inc., Lockheed-Martin Inc. and Hughes Aircraft Company.
SALES AND DISTRIBUTION
The Company markets its products in the United States through its direct
sales force; in Japan through its subsidiary, II-VI Japan Incorporated; and in
certain Southeast Asian markets through its subsidiary II-VI Singapore PTE
LTD. European sales are effected through a distributor and sales throughout
the rest of the world are made through 19 manufacturers' representatives. The
Company's products are sold to over 2,400 customers in 35 countries. The
Company's principal international markets are Germany and Japan.
MANUFACTURING PROCESSES
Infrared and Visible Optics.
The manufacturing processes for optics include a number of low cost,
automated high precision processes that have been developed and documented at
the Company's manufacturing sites in Saxonburg, Pennsylvania, Port Richey,
Florida, and Singapore. Manufacturing steps for the majority of the Company's
optical products include:
Grinding and Polishing. The Company rigorously tests starting materials in
the optics fabrication process to assure conformity to specification for
absorption, clarity, stress and purity. The manufacturing sequence typically
involves grinding a part to the desired curvature and precision polishing the
optic to the desired high quality surface shape and finish. The Company has
developed specialized processes for fabricating visible, YAG, near infrared,
and infrared optics. The Company has state-of-the-art, numerically controlled
generating and grinding equipment and automated Synchrospeed optical polishing
apparatus.
Diamond Turning. The Company's diamond turning of metal mirrors involves
state-of-the-art equipment for flycutting of flat metal reflectors and turning
of contoured spherical or aspherical shapes. The ability to produce spherical
and aspherical diffraction-free surfaces, due to a proprietary real-time
feedback test system, provides the highest quality, high power handling copper
reflecting mirrors available in the industry. The Company is currently
investing in expansion of this manufacturing unit's capacity as the demand for
these products has grown rapidly during the last few years.
Thin Film Coating. Multilayer, thin film, visible and infrared coatings are
produced by evaporating precisely controlled thicknesses of various substances
from microprocessor controlled thermal or electron beam sources onto optical
surfaces in custom built vacuum chambers. The know-how to control such process
variables as time, pressure, gas flow and temperature are critical to
achieving low-absorption, high adhesion and properly transmitting thin films.
Production of zero defect coatings is a part of the proprietary knowledge of
II-VI.
6
<PAGE>
Materials.
II-VI is a materials-based company. Processes used to produce these
materials require long development periods, are capital intensive and involve
precision process control. Yields are raised from minimal to acceptable as
know-how and process consistency techniques are developed. The resulting
barriers to entry limit competition.
The Company's infrared components and materials primarily are made from
compounds composed of elements from Groups II and VI of the Periodic Table of
the Elements ("II-VI Compounds"). II-VI Compounds, a class of non-hygroscopic
(do not absorb water) materials, are leading infrared transmitting materials.
Their high infrared transmission efficiency, the key property needed for high-
power infrared laser optics, is a result of low infrared absorption. Infrared
absorption is low due to the type of bonding that exists within a II-VI
crystalline structure and due to the relatively high molecular weights of the
most useful II-VI Compounds. The Group II elements used by the Company are
Zinc, Cadmium and Mercury and the Group VI elements used are Sulfur, Selenium
and Tellurium.
Materials manufactured by the Company include:
Zinc Selenide. The Company manufactures fine grained polycrystalline Zinc
Selenide by a proprietary chemical vapor deposition process. II-VI is one of
two manufacturers of this material in the world and has earned the reputation
for producing the lowest absorbing laser grade Zinc Selenide. The process
involves high temperature disassociation of Hydrogen Selenide gas and a gas
phase reaction with zinc vapor. Solid Zinc Selenide is deposited on graphite
mandrels at high temperatures forming sheets of the material. Zinc Selenide is
the principal material used in the Company's CO\\2\\ laser optics. All material
is polished, inspected and laser tested for defects.
Zinc Sulfide. The chemical vapor deposition process is also utilized to
manufacture fine grained polycrystalline Zinc Sulfide. Some Zinc Sulfide is
further processed to form Multispectral Zinc Sulfide. The Multispectral Zinc
Sulfide is highly transmissive from the ultraviolet to the middle infrared
wave lengths making it the material of choice for tank windows, for example,
through which humans, laser range finders and guidance systems identify
targets.
Cadmium Zinc Telluride Substrates. II-VI utilizes vertical and horizontal
Bridgman processes to grow its Cadmium Zinc Telluride single crystal substrate
materials. The Bridgman processes involve direct solidification from a liquid
melt with closely controlled unidirectional freezing in either a vertical or
horizontal configuration. The substrates are mined from thoroughly tested
Cadmium Zinc Telluride ingots utilizing precision crystal orientation
techniques followed by a sequence of surface lapping and semiautomated diamond
sawing. Wafers are precision sized then surfaced through a series of critical
polishing and chemical etching steps.
Cadmium Zinc Telluride for Nuclear Radiation Detectors. The high pressure
vertical Bridgman process is used to grow Cadmium Zinc Telluride for nuclear
radiation detectors. This proprietary process produces critical materials
which when mated to hybrid front end electronics built by the Company are sold
to industrial gauging and other equipment manufacturers. The high pressure
Bridgman process yields products that are cost competitive with
scintillator/photomultiplier devices.
YAG Materials. Neodymium doped YAG, solid-state laser gain materials, are
manufactured at the Company's Virgo Optics Division. The Company's precision
process control and know-how result in consistent YAG rod products which are
in high demand. The Company expects to have additional capacity for this
material on-line within the next year. The Company competes in the YAG rod
business on quality, price and delivery.
Potassium Niobate and Single Crystal Zinc Selenide. The Company's material
science expertise has developed frequency doubling Potassium Niobate in
conjunction with an international laboratory. This frequency doubling material
when coupled with a laser gain material and a laser pump can be used to
generate blue, green or red light. Using this material, the Company offers
monolithic laser assemblies to OEM's that are pursuing blue and green laser
markets. Through another proprietary process the Company is producing single
crystal Zinc Selenide which is used as a substrate in the production of blue
light emitters and lasers.
7
<PAGE>
Sources of Supply
The major raw materials used by the Company are Zinc, Selenium, Hydrogen
Selenide, Hydrogen Sulfide, Cadmium, Tellurium, Yttrium Oxide, Aluminum Oxide
and Iridium. The Company produces all of its Zinc Selenide and Zinc Sulfide
requirements internally, although small quantities of Zinc Selenide and Zinc
Sulfide may be purchased from outside vendors from time to time. The Company
also purchases Gallium Arsenide, Copper, Silicon, Germanium, Quartz, optical
glass and small quantities of other materials for use as base materials for
laser optics. The Company purchases Thorium Fluoride and other materials for
use in optical fabrication and coating processes. There are more than two
suppliers for all of the above materials, except for Zinc Selenide and
Hydrogen Selenide (excluding the Company) and Thorium Fluoride, for each of
which there is only one proven source of merchant supply. For most materials,
the Company has entered into annual purchase arrangements whereby suppliers
provide discounts for annual volume purchases in excess of specified amounts.
The continued high quality of these raw materials is critical to the
stability of the Company's manufacturing yields. The Company conducts testing
of materials at the onset of the production process to meet evolving customer
requirements. Additional research may be needed to better define future
starting material specifications. The Company has not experienced significant
production delays due to a shortage of materials. However, the Company does
occasionally experience problems associated with vendor supplied materials not
meeting contract specifications for quality or purity. A significant failure
of the Company's suppliers to deliver sufficient quantities of necessary high-
quality materials on a timely basis could have a materially adverse effect on
the Company's results of operations.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
II-VI uses or generates certain hazardous substances in its research and
manufacturing facilities. The Company believes that its handling of such
substances is in material compliance with applicable local, state and federal
environmental, safety and health regulations at each operating location. The
Company invests substantially in proper protective equipment, process controls
and specialized training to minimize risks to employees, surrounding
communities and the environment due to the presence and handling of such
hazardous substances. The Company annually conducts employee physical
examinations and workplace air monitoring regarding such substances. When
exposure problems or potential have been indicated, corrective actions have
been implemented and re-occurrence has been minimal or non-existent. The
Company does not carry environmental impairment insurance.
Relative to its generation and use of the extremely hazardous substance
Hydrogen Selenide, the Company has in place a government approved emergency
response plan. Special attention has been paid to all procedures pertaining to
this gaseous material to minimize the chances of its accidental release to the
atmosphere.
With respect to the use, storage and disposal of the low-level radioactive
material Thorium Fluoride, the Company's facilities and procedures have been
recently inspected and approved by the Nuclear Regulatory Commission. This
material is utilized in the Company's thin film coatings. All Thorium Fluoride
bearing by-products are collected and shipped as solid waste to a government
approved low-level radioactive waste disposal site in Barnwell, South
Carolina.
The Company is a member of the Frontier Chemical Phase II PRP Group which
has agreed with the Environmental Protection Agency to remove the contents of
certain tanks at a site in Niagara Falls, New York. All site work has been
completed and substantial progress has been made by the Group in meeting its
financial obligations. Amounts currently reserved by the Company are
immaterial and believed to cover its share of any remaining liabilities.
The generation, use, collection, storage and disposal of all other hazardous
by-products such as suspended solids containing heavy metals or airborne
particulates are believed by the Company to be in material compliance with
regulations. Management believes that all of the permits and licenses required
for operation of the Company's business are in place. Although the Company is
not aware of any material environmental, safety and health problems in its
8
<PAGE>
properties or processes, there can be no assurance that problems will not
develop in the future which would have a materially adverse effect on the
Company.
RESEARCH AND DEVELOPMENT
The Company's research and development policy calls for the pursuit of a
balanced program of internally funded and contract research and development
totaling between 5 and 8 percent of product sales. From time to time the ratio
of contract to internally funded activity varies significantly due to the
unevenness and uncertainty associated with most government research programs.
The Company is committed to accepting only funded research that ties closely
to its growth plans.
Company research and development activities focus on developing new
proprietary products or on understanding, improving and automating crystal
growth, low damage fabrication or optical thin film coating technologies. The
Company performs commercial prototype and engineering work for customers and,
in addition, participates in various government and university research and
development consortia. The Company maintains an engineering, research and
development staff of fifty. Thirty seven of the Company's employees are
engineers or scientists. In addition, manufacturing personnel support or
participate in research and development on an ongoing basis. Interaction
between the development and manufacturing functions enhances the direction of
projects, reduces costs and accelerates technology transfers.
The Company is primarily engaged in ongoing research and development in the
following areas: Zinc Selenide optical material production; vertical and
horizontal Bridgman Cadmium Zinc Telluride crystal growth and substrate
manufacturing; Zinc Selenide single crystal growth and substrate production;
high pressure Bridgman Cadmium Zinc Telluride crystal growth and radiation
detector manufacturing; YAG crystal production; Potassium Niobate crystal
growth; automated, deterministic optical fabrication methods; optical thin
film processes and products; and microlaser assemblies based on various
combinations of YAG or yttrium vanadate gain materials with frequency doubling
materials.
Company funded research and development and contract research expenditures
totaled approximately $1.1 million, $1.3 million and $1.4 million during
fiscal 1993, 1994 and 1995, respectively. Contract research revenues during
those respective years totaled approximately $1.1 million, $1.6 million and
$1.2 million. The Company has been active in the various research and
development programs including the Pennsylvania Ben Franklin Partnership
program, the Federal Small Business Innovation Research programs of primarily
the Department of Defense agencies and an ARPA sponsored industry team program
focused on infrared materials producibility.
COMPETITION
The Company believes that it is a leading producer of products and services
in its addressed markets. In the area of high power CO\\2\\ laser optics and
materials, II-VI believes it supplies over half of the world market. The
Company is a leading supplier of Cadmium Zinc Telluride substrates used for
infrared imaging arrays, and believes that it is the only supplier of Cadmium
Telluride electro-optic modulators to U.S. and NATO defense contractors. The
Company is a significant supplier of YAG rods and YAG laser optics to the
worldwide markets of scientific, research, medical and industrial laser
manufacturers.
The Company competes on the basis of product quality, quick delivery, strong
technical support and pricing. Management believes that the Company competes
favorably with respect to these factors and that its vertical integration,
manufacturing facilities and equipment, experienced technical and
manufacturing employees, and worldwide marketing and distribution provide
competitive advantages.
II-VI has a number of present and potential competitors, many of which have
greater financial, selling, marketing or technical resources. The lone
competitor of the Company in the production of Zinc Selenide is Morton
9
<PAGE>
International's Advanced Materials Division. The competitors producing infrared
and CO\\2\\ laser optics include Laser Power Optics and Coherent in the United
States, and Sumitomo in Japan. Competing producers of YAG materials and optics
include the Litton Airtron Division of Litton Industries and the Crystal
Products Group of Union Carbide. The Company is not aware of any currently
significant competitors for its Cadmium Zinc Telluride radiation detector
product line.
In addition to competitors who manufacture products similar to those of the
Company, there are other technologies or materials that may compete with the
Company's products. The markets for the nuclear radiation detector and the
frequency doubling and blue emitter materials are in their infancy and could
be affected by competing technologies.
EMPLOYEES
As of June 30, 1995 the Company employed 323 persons worldwide. Of these
employees, 50 are engaged in research, development and engineering, 206 in
direct production, and the balance in sales and marketing, administration,
finance and support services. The Company's production staff includes highly
skilled optical craftsmen. None of the Company's employees is covered by a
collective bargaining agreement, and the Company has never experienced any
work stoppages. The Company has a long-standing policy of encouraging active
employee participation in selected areas of operations management. The Company
believes its relations with its employees to be good. The Company rewards its
employees with incentive compensation based on achievement of performance
goals.
PATENTS, TRADE SECRETS AND TRADEMARKS
II-VI relies on its trade secrets and proprietary know-how to develop and
maintain its competitive position. The Company has not pursued process patents
due to the disclosures required in the patent process and the relative
difficulties in successfully litigating process type patents. The Company has
confidentiality and non-compete agreements with the executive officers and
certain other personnel.
The processes and specialized equipment utilized in crystal growth, infrared
materials fabrication and infrared optical coatings as developed at the
Company are complex and difficult to duplicate. However, there can be no
assurance that others will not develop or patent similar technology or that
all aspects of the Company's proprietary technology will be protected. Others
have obtained patents covering a variety of infrared optical configurations
and processes, and others could obtain patents covering technology similar to
the Company's. The Company may be required to obtain licenses under such
patents and there can be no assurance that the Company would be able to obtain
such licenses, if required, on commercially reasonable terms, or that claims
regarding rights to technology will not be asserted which may adversely affect
the Company. In addition, Company research and development contracts with
agencies of the United States Government present a risk that project-specific
technology could be disclosed to competitors as contract reporting
requirements are fulfilled.
The Company holds four registered trademarks: the II-VI INCORPORATED(R)
name; INFRAREADY OPTICS(R) for replacement optics for industrial CO\\2\\ lasers;
EPIREADY(R) for low surface damage substrates for Mercury Cadmium Telluride
epitaxy; and EV PRODUCTS(R) for products manufactured by the Company's eV
Products division. The trademarks are registered with the United States Patent
and Trademark Office, but not with any states. The Company is not aware of any
interference or opposition to these trademarks in any jurisdiction.
10
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
October 3, 1995
DATE:_____________________ II - VI INCORPORATED
/s/ James Martinelli
By:_______________________________
James Martinelli
Treasurer and
Director of Finance and Accounting
