FORM 10-K
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, 1997
[ ] 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 15, 1997, was approximately $129,985,825, based on
the closing sale price reported on NASDAQ/NMS for
September 15, 1997. 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 15, 1997, was 6,899,261.
Documents Incorporated by Reference
Portions of the Annual Report to Shareholders for the fiscal
year ended June 30, 1997 are incorporated by reference into
Parts I, II and IV hereof.
Portions of the Proxy Statement for the 1997 Annual Meeting
of Shareholders are incorporated by reference into Parts II
and III hereof.
PART I
ITEM 1. BUSINESS
Introduction
II-VI Incorporated ("II-VI" or the "Company") was
incorporated in Pennsylvania in 1971. The Company's
executive offices and manufacturing facilities are located
at 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056.
Its telephone number is 412-352-4455. Reference to the
"Company" or "II-VI" in this Form 10-K, unless the context
requires otherwise, refers to II-VI Incorporated, its wholly-
owned subsidiaries, II-VI Worldwide, Incorporated, II-VI
Delaware, Incorporated, II-VI Japan Incorporated, II-VI
Singapore Pte., Ltd., II-VI VLOC Incorporated, II-VI Optics
(Suzhou) Co. Ltd., and II-VI U.K. Limited, as a consolidated
operation. eV PRODUCTS operates as a division of
II-VI Incorporated. The Company's name is pronounced
"Two-Six Incorporated."
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 CO2 (carbon dioxide)
lasers for industrial processing and for commercial and
military sensing systems. The Company's near-infrared and
visible-light products are used in industrial, scientific and
medical instruments and solid-state (such as YAG and YLF)
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.
Information Regarding Market Segments and Foreign Operations
The Company's business comprises one segment, the design,
manufacturer and marketing of 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.
Financial data regarding the Company's revenues, results
of operations and export sales for the Company's last three
fiscal years is set forth in, and incorporated herein by
reference to, the Company's Consolidated Statements of
Earnings on page 17 of the II-VI Incorporated 1997 Annual
Report (the "Annual Report") and Note H to the Company's
Consolidated Financial Statements on page 25 of the Annual
Report.
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 CO2
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 CO2 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 approximately 55,000 industrial
YAG and CO2 lasers.
Products
The Company's products include optical and electro-optical
components, devices and materials for precision use in infrared,
near-infrared, visible light, X-ray and gamma-ray instruments,
and their applications. The Company's infrared products are
used in high power CO2 lasers for industrial processing
worldwide. The Company's VLOC subsidiary manufactures near-
infrared and visible light products used in industrial,
scientific and medical instruments and solid-state (such as
YAG and YLF) lasers. II-VI is also developing and marketing
solid-state X-ray and gamma-ray detector products for the
nuclear radiation detection industry through its eV PRODUCTS
division. The majority of the Company's revenues are
attributable to the sale of optics or optical elements and
components for the industrial laser processing industry.
Infrared Optics and Materials
Reliable operation of high power (1 to 20 kW) CO2
infrared lasers requires high quality, low absorption optical
elements. The CO2 laser emits infrared energy at a wavelength
of 10.6 micrometers, a wavelength which is optimal for many
industrial processes including 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 CO2 lasers and
laser systems. The Company supplies a family of standard
and custom transmissive, reflective and precision diamond
turned optical elements to high power CO2 laser
manufacturers, CO2 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 the two dominant 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 CO2 lasers. The Company sells
its infrared replacement optics with a 24-hour shipment
guarantee under the trade name of INFRAREADY(registered
trademark) optics. Consumable items such as focusing lenses
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 (CdZnTe)
substrates primarily to U.S. military and NATO defense suppliers
under the trade name EPIReady(registered trademark). 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 (FLIR) systems worldwide. A portion
of the Company's infrared substrate business involves development
programs funded by the Defense Advanced Research Projects Agency
(DARPA), Department of Defense (DOD) and other governmental
agencies.
YAG Laser Components
The power levels available from YAG lasers (1 to 3 kW)
are increasing 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, the precision
trimming of resistors in electronic assemblies, and marking
or labeling of integrated circuits. The capability to deliver
the 1.06 micrometer YAG laser wavelength over flexible, low
loss optical fibers 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 CO2 laser except that they are made of
different materials 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-infrared applications. These products control and
alter the visible and near-infrared energy and its
polarization. The Company offers cavities for use in
flashlamp pumped lasers. These cavities are made primarily
of samarium doped glass which improves the laser performance.
Nuclear Radiation Detectors
The nuclear radiation detection market is composed
of medical probe and imaging, industrial gauging, environmental
monitoring, nuclear safeguards and nonproliferation, and
health physics segments. Solid-state CdZnTe nuclear radiation
detectors are attractive because of their reduced size, improved
tolerance of environmental conditions and lower voltage/current
requirements compared to the more traditional
scintillator/photomultiplier or cryogenically cooled Germanium
devices.
The use of CdZnTe hand-held probes in the medical field
allows the introduction of new cancer location techniques, based
on the injection of a radio-labeled antibody that binds to the
cancer cells. This allows the surgeon to accurately identify
and remove cancerous tissue.
CdZnTe-based imaging arrays can be used in both the
nuclear medical (internal gamma-ray emission) and Radiographic
(external X-ray source) fields. In nuclear medicine, the
material is patterned with up to 2mm x 2mm pixels and
allows the manufacture of a new generation of gamma cameras,
offering a much improved position sensitivity and the potential
to produce images using lower doses of injected radioactivity.
In the Radiographic field, the material is processed into much
smaller pixels (<100(m x 100(m) and provides a much improved
sensitivity to the higher energy X-rays used in some of the
newer diagnostic techniques. It also allows the possibility
of direct-readout digital radiography, which allows the doctor
to see the relevant part of the body in real time, thus
reducing the time delay between X-ray and diagnosis.
The Company designs and manufactures CdZnTe 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.
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 both laser gain and 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 light 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.
Fluoride Materials
Nd:YLF (neodymium doped yttrium lithium fluoride)
displays exceptional qualities as a laser material for
solid-state lasers. The crystal offers high power laser
operation at 1.047 micrometers and 1.053 micrometers with
low beam divergence leading to good Q-switched and single
mode laser operation. Nd:YLF is used in both flashlamp pumped
and diode pumped solid-state lasers. Due to high lasing
efficiency, Nd:YLF lasers are suitable for use on the
manufacturing floor for scribing, trimming and cutting of
semiconductor materials.
Nd:YLF also lases at 1.313 micrometers. That, along with
the 1.047 micrometer wavelength, have attractive applications
for use in cable television and other telecommunication
applications which require devices with high data rates.
Customers and Markets
Industrial
The Company's customers include leading industrial OEMs
and system manufacturers worldwide in the CO2 and YAG laser
machine tool industry. The Company has focused its marketing
efforts on growing both high and low power segments of the
laser optics marketplace.
High power CO2 lasers manufactured by the Company's
customers are installed on systems that are used for cutting,
drilling, welding and marking of materials and heat treating
of metals. The Company also sells their products to 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 CO2 lasers are utilized for both
medical and small parts manufacturing, engraving and
serialization of products. These small, lightweight, low-
cost systems are flexible and provide rapid response for a
number of medical and light manufacturing applications.
Manufacturers of these laser sources are high volume optics
customers of the Company.
The Company's YAG component customers' 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 laser manufacturers both the YAG laser
rod and the necessary optics for a complete laser system.
The Company's customers are developing products
incorporating fluoride materials for use in telecommunications,
material processing and environmental monitoring.
The Company is using its close working relationships
with its industrial CO2 customers worldwide to increase its
YAG component supply market share, since both products are
needed by many of the same customers.
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. 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, high
quality products and 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.
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; in certain Southeast
Asian markets through its subsidiary, II-VI Singapore Pte. Ltd.;
and in the United Kingdom through its subsidiary, II-VI U.K.
Limited. For the remainder of Europe, sales are effected
through distributors, and sales throughout the rest of the
world are made through manufacturers' representatives. The
Company's products are sold to over 3,000 customers throughout
the world. 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 Pennsylvania, Florida, Singapore and China.
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 specifications 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, 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 cutting 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-light 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.
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 Company's infrared components and materials are made
from compounds composed primarily 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 dominant 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 CO2
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 Florida operations.
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 several months.
YLF and LiSAF Materials. Neodymium-doped YLF and chromium-
doped LiSAF solid-state laser gain materials are manufactured
at the Company's Florida operations. The Company utilizes a
top-seeded Czochralski technique with precision computer-aided
diameter control techniques to produce the high-quality YLF
and LiSAF crystals required for the high-demand laser rod
products. The Company is the industry leader in the LiSAF
market and competes in the YLF rod and slab business on price,
quality 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 OEMs 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.
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
shortages of materials. However, the Company does
occasionally experience problems associated with vendor-
supplied materials that do not meet 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 exposure problems 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 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 or health problems in its 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 eighty-three. Fifty-six 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; YLF
and other fluorides 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 $1.4 million,
$1.7 million and $3.0 million during fiscal 1995, 1996
and 1997, respectively. Contract research revenues during
those respective years totaled approximately $1.2 million,
$1.7 million and $2.7 million. The Company has been active in
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 a DARPA-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 CO2 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 significant competitor of the
Company in the production of Zinc Selenide is Morton
International's Advanced Materials Division. The competitors
producing infrared and CO2 laser optics include Laser Power
Corporation 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.
Order Backlog
Order backlog increased 30% to $16.9 million at
June 30, 1997 from $12.9 million at June 30, 1996.
Manufacturing orders comprise 83% of the backlog at
June 30, 1997, compared to 82% of backlog at June 30, 1996.
All of the manufacturing order backlog at June 30, 1997 is
expected to be shipped in fiscal 1998.
Employees
As of June 30, 1997, the Company employed 568 persons
worldwide. Of these employees, 83 were engaged in research,
development and engineering, 354 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 are 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 noncompetition agreements with its
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 (registered) name; INFRAREADY OPTICS (registered
trademark) for replacement optics for industrial CO2 lasers;
EPIREADY (registered trademark) for low surface damage
substrates for Mercury Cadmium Telluride epitaxy; and
eV PRODUCTS (registered trademark) 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.
Risk Factors
Environmental Concerns
The Company is subject to a variety of federal, state
and local governmental regulations related to the storage,
use and disposal of environmentally hazardous materials.
Both the governmental regulations and the costs associated
with complying with such regulations are subject to change
in the future. There can be no assurance that any such change
will not have a material adverse effect on the Company. The
Company manufactures and utilizes Hydrogen Selenide gas, an
extremely hazardous material, in the production of Zinc
Selenide. In its processes, the Company also generates waste
containing Thorium Fluoride, a low-level radioactive material,
and other hazardous by-products such as suspended solids
containing heavy metals and airborne particulates. The Company
has made and continues to make substantial investments in
protective equipment, process controls, manufacturing
procedures and training in order to minimize the risks to
employees, surrounding communities and the environment due to
the presence and handling of such extremely hazardous and
hazardous materials. The failure to properly handle such
materials, however, could lead to harmful exposure to
employees or to discharge of certain hazardous waste
materials, and, since the Company does not carry
environmental impairment insurance, to a material adverse
effect on the financial condition or results of operations
of the Company. Although the Company has not encountered
material environmental problems in its properties or processes
to date, there can be no assurance that problems will not
develop in the future which would have a material adverse
effect on the business, results of operations or financial
condition of the Company.
Manufacturing and Sources of Supply
The Company utilizes high quality, optical grade Zinc
Selenide in the production of a majority of its products.
The Company is a leading producer of Zinc Selenide for its
internal use and for external sale. The production of Zinc
Selenide is a complex process requiring production in a
highly controlled environment. A number of factors, including
defective or contaminated materials, could adversely affect
the Company's ability to achieve acceptable manufacturing
yields of high quality Zinc Selenide. Zinc Selenide is
available from only one outside source and quantity and
qualities may be limited. The unavailability of necessary
amounts of high quality Zinc Selenide would have a material
adverse effect upon the Company. In addition, in fiscal 1992
and 1993, the Company experienced fluctuations in its
manufacturing yields which affected the Company's results of
operations. There can be no assurance that the Company will
not experience manufacturing yield inefficiencies which could
have a material adverse effect on the business, results of
operations or financial condition of the Company.
The Company produces the Hydrogen Selenide gas used in
its production of Zinc Selenide. There are risks inherent in
the production and handling of such material. The inability
of the Company to effectively handle Hydrogen Selenide could
result in the Company being required to curtail its production
of Hydrogen Selenide. Hydrogen Selenide can be obtained from
one source, and the Company has previously purchased and, to
supplement its internal production, currently purchases such
material from this source. The cost of purchasing such
material is significantly greater than the cost of internal
production. As a result, if the Company purchased a
substantial portion of such material from its outside source,
it would significantly increase the Company's production costs
of Zinc Selenide. Therefore, the Company's inability to
internally produce Hydrogen Selenide could have a material
adverse effect on the business, results of operations or
financial condition of the Company.
In addition, the Company requires other high purity,
relatively uncommon materials and compounds to manufacture
its products. Failure of the Company's suppliers to deliver
sufficient quantities of these necessary materials on a
timely basis could have a material adverse effect on the
business, results of operations or financial condition of the
Company.
Competition
The Company has a number of present and potential
competitors, many of which have greater financial resources
than the Company. The markets for many of the Company's
products can be subject to competitive pricing in order to
gain or retain market share. Such competitive pressures could
affect the Company's pricing and adversely affect the business,
results of operations or financial condition of the Company.
International Sales and Operations
Sales to customers in countries other than the United
States accounted for approximately 43% to 47% of revenues in
each of the last three fiscal years. The Company anticipates
that international sales will continue to account for a
significant portion of revenues for the foreseeable future.
In addition, the Company manufactures products in Singapore and
China, and maintains direct sales offices in Japan and the
United Kingdom. Sales and operations outside of the United
States are subject to certain inherent risks, including
fluctuations in the value of the U.S. dollar relative to
foreign currencies, tariffs, quotas, taxes and other market
barriers, political and economic instability, restrictions on
the export or import of technology, potentially limited
intellectual property protection, difficulties in staffing
and managing international operations and potentially adverse
tax consequences. There can be no assurance that any of these
factors will not have a material adverse effect on the
Company's business, financial condition or results of
operations. In particular, although the Company's
international sales, other than in Japan and the
United Kingdom, are denominated in U.S. dollars, currency
exchange fluctuations in countries where the Company does
business could have a material adverse affect on the Company's
business, financial condition or results of operations, by
rendering the Company less price-competitive than foreign
manufacturers. The Company's sales in Japan and the United
Kingdom are denominated in the foreign currency and,
accordingly, are affected by fluctuations in exchange rates.
The Company generally reduces its exposure in Japan to such
fluctuations through forward exchange agreements. The
Company does not engage in the speculative trading of
financial derivatives. There can be no assurance, however,
that the Company's practices will eliminate the risk of
fluctuation in the currency exchange rates.
Acquisitions
The Company's business strategy includes expanding its
product lines and markets through internal product development
and acquisitions. Any acquisition may result in potentially
dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities, and amortization expense related
to intangible assets acquired, any of which could have material
adverse affect on the Company's business, financial condition
or results of operations. In addition, acquired businesses may
be experiencing operating losses. Any acquisition will involve
numerous risks, including difficulties in the assimilation of
the acquired company's operations and products, uncertainties
associated with operating in new markets and working with new
customers, and the potential loss of the acquired company's key
employees.
Sustaining and Managing Growth
The Company is currently undergoing a period of growth
and there can be no assurance that such growth can be sustained
or managed successfully. This expansion has resulted in a
higher fixed cost structure which will require increased
revenue in order to maintain historical gross margin and
operating margins. There can be no assurance that the
Company will obtain the increased orders necessary to generate
increased revenue sufficient to cover this higher cost
structure. Failure by the Company to manage growth
successfully or have the systems and capacities necessary
to sustain its growth could have a material adverse affect
on the Company's business, results of operations or financial
condition. In addition, in connection with any future
acquisitions, the Company expects that it will hire additional
senior management. There can be no assurance that the Company
will be able effectively to achieve growth, including in such
new markets, integrate such new personnel or manage any such
growth, and failure to do so could have a material adverse
effect on the business, results of operations or financial
condition of the Company.
Dependence on New Products and Processes
In order to meet its strategic objectives, the Company
must continue to develop, manufacture and market new products,
develop new processes and improve existing processes. As a
result, the Company expects to continue to make significant
investments in research and development and to continue to
consider from time to time the strategic acquisition of
businesses, products, or technologies complementary to the
Company's business. The success of the Company in developing,
introducing and selling new and enhanced products depends upon
a variety of factors including product selection, timely and
efficient completion of product design and development, timely
and efficient implementation of manufacturing and assembly
processes, effective sales and marketing, and product
performance in the field. There can be no assurance that the
Company will be able to develop and introduce new products or
enhancements to its existing products and processes in a manner
which satisfies customer needs or achieves market acceptance.
The failure to do so could have a material adverse affect on
the Company's ability to grow its business.
Dependence on Key Personnel
The Company is highly dependent upon the experience and
continuing services of certain scientists, engineers and
production and management personnel. Competition for the
services of these personnel is intense, and there can be no
assurance that the Company will be able to retain or attract
the personnel necessary for the Company's success. The loss
of the services of the Company's key personnel could have a
material adverse affect on the business, results operations or
financial condition of the Company.
Proprietary Technology Claims
The Company does not currently hold any material patents
applicable to its processes and relies on a combination of
trade secret, copyright and trademark laws and employee non-
compete and nondisclosure agreements to protect its
intellectual property rights. There can be no assurance that
the steps taken by the Company to protect its rights will be
adequate to prevent misappropriation of the Company's
technology. Furthermore, there can be no assurance that, in
the future, third parties will not assert infringement claims
against the Company. Asserting the Company's rights or
defending against third-party claims could involve substantial
expense, thus materially and adversely affecting the business,
results of operations or financial condition of the Company.
In the event a third party were successful in a claim that one
of the Company's processes infringed its proprietary rights,
the Company may have to pay substantial damages or royalties,
or expend substantial amounts in order to obtain a license or
modify the process so that it no longer infringes such
proprietary rights, any of which could have an adverse effect
on the business, results of operations or financial condition
of the Company.
ITEM 2. PROPERTIES
Facilities
The Company's headquarters are located in Saxonburg,
Pennsylvania, 25 miles north of Pittsburgh, in a 90,000-square-
foot facility, on 41 acres of land, which was purchased in 1976.
In addition, the Company has leases for its manufacturing and
office space in Florida, Singapore, China, U.K., and Japan
totaling 62,000 square feet, and owns a 13,000-square-foot
facility in Florida.
During fiscal 1997, the Company began construction of a
manufacturing facility in Florida that will combine most of the
operations of its VLOC subsidiary. This facility is expected
to be completed in December of 1997. Additionally, the Company
plans to purchase a facility which is currently being leased
for the YAG material growth operations. This facility is
approximately 18,000 square feet and is expected to be
purchased by October 30, 1997.
The Company has also started construction on a 30,000-
square-foot facility in Pennsylvania. This facility, which
is located on Company-owned property at its corporate office
in Saxonburg, will be used by its eV PRODUCTS manufacturing
operation.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation which
could have a materially adverse effect on the Company or its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
Form 10-K.
Executive Officers of the Registrant
The executive officers of the Company and their
respective ages and positions are as follows:
Name Age Position
Carl J. Johnson 55 Chairman, Chief Executive
Officer and Director
Francis J. Kramer 48 President, Chief Operating
Officer and Director
Herman E. Reedy 54 Vice President and
General Manager of
Quality and Engineering
James Martinelli 39 Treasurer and
Chief Financial Officer
Carl J. Johnson, a co-founder of the Company in 1971,
serves as Chairman, Chief Executive Officer and a Director
of the Company. He served as President of the Company from
1971 until 1985 and has been a Director since its founding
and Chairman since 1985. From 1966 to 1971, Dr. Johnson was
Director of Research & Development for Essex International,
Inc., an automotive electrical and power distribution products
manufacturer, now a subsidiary of United Technologies
Corporation. From 1964 to 1966, Dr. Johnson worked at Bell
Telephone Laboratories as a member of the technical staff.
In August 1996, he was selected as a director of Xymox
Technology, Inc. Dr. Johnson completed his Ph.D. in Electrical
Engineering at the University of Illinois in 1969. He holds
B.S. and M.S. degrees in Electrical Engineering from Purdue
University and Massachusetts Institute of Technology (MIT),
respectively.
Francis J. Kramer has been employed by the Company
since 1983, has been its President and Chief Operating Officer
since 1985 and was elected to the Board of Directors in 1989.
Mr. Kramer joined the Company as Vice President and General
Manager of Manufacturing and was named Executive Vice President
and General Manager of Manufacturing in 1984. Prior to his
employment by the Company, Mr. Kramer was the Director of
Operations for the Utility Communications Systems Group of
Rockwell International Corporation. Mr. Kramer graduated from
the University of Pittsburgh in 1971 with a B.S. in Industrial
Engineering and from Purdue University in 1975 with an M.S. in
Industrial Administration.
Herman E. Reedy has been with the Company since 1977 and
is Vice President and General Manager of Quality and
Engineering. Previously, Mr. Reedy held positions at II-VI as
General Manager of Quality and Engineering, Manager of Quality
and Manager of Components. From 1973 until joining the
Company, Mr. Reedy was employed by Essex International, Inc.,
now a subsidiary of United Technologies Corporation, serving
last as Manager, MOS Wafer Process Engineering. Prior to
1973, he was employed by Carnegie Mellon University and
previously held positions with Semi-Elements, Inc. and
Westinghouse Electric Corporation. Mr. Reedy is a 1975
graduate of the University of Pittsburgh with a B.S. degree
in Electrical Engineering.
James Martinelli has been employed by the Company since
1986 and has served as Treasurer and Chief Financial Officer
and Assistant Secretary since May of 1994. Mr. Martinelli
joined the Company as Accounting Manager and was named
Controller in 1990. Prior to his employment by the Company,
Mr. Martinelli was Accounting Manager at Tippins Incorporated
and Pennsylvania Engineering Corporation from 1980 to 1985.
Mr. Martinelli graduated from Indiana University of
Pennsylvania with a B.S. degree in Accounting and is a member
of the Pennsylvania Institute of Certified Public Accountants.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the National
Association of Securities Dealers, Inc. Automated Quotations
("NASDAQ") National Market under the symbol "IIVI." The
following table sets forth the range of high and low closing
sale prices per share of the Company's Common Stock for the
fiscal periods indicated, as reported by the NASDAQ National
Market.
High Low
Fiscal 1997
First Quarter $23 $12 3/4
Second Quarter $27 1/8 $19 1/2
Third Quarter $31 3/4 $22 1/8
Fourth Quarter $25 1/4 $16 3/32
Fiscal 1996
First Quarter $23 $12 7/8
Second Quarter $18 $ 9 1/2
Third Quarter $12 5/8 $ 9 3/4
Fourth Quarter $16 7/8 $11 5/8
On September 15, 1997, the last reported sale price for
the Common Stock on the NASDAQ National Market was $25 per
share. As of such date, there were approximately 700 holders
of record of the Common Stock. The Company has not
historically paid cash dividends and does not anticipate
paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated
by reference from page 13 of the Company's 1997 Annual Report
to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The information required by this item is incorporated
by reference from pages 9 through 12 of the Company's 1997
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated
by reference from pages 14 through 26 of the Company's 1997
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by this item is incorporated
by reference to the information set forth on page 13 in the
first, second, and third paragraph under the caption "Change
in Certifying Accountant" in the Company's definitive proxy
statement for the 1997 Annual Meeting of Shareholders filed
pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth above in Part I under the
caption "Executive Officers of the Registrant" is incorporated
herein by reference. The other information required by this
item is incorporated herein by reference to the information
set forth under the captions "Election of Directors" and
"Board of Directors and Board Committees", and the information
set forth under the caption "Other Matters - Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for the 1997 Annual Meeting of
Shareholders filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated
herein by reference to the information set forth in the second
paragraph under the caption "Board of Directors and Board
Committees" and the information set forth under the caption
"Executive Compensation and Other Information" in the
Company's definitive proxy statement for the 1997 Annual
Meeting of Shareholders filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is incorporated
herein by reference to the information set forth under the
caption "Principal Shareholders" in the Company's definitive
proxy statement for the 1997 Annual Meeting of Shareholders
filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
Financial statements, financial statement schedules and
exhibits not listed have been omitted where the required
information is included in the consolidated financial
statements or notes thereto, or is not applicable or required.
(a) (1) The consolidated balance sheets as of June 30, 1997
and 1996, the consolidated statements of earnings,
shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997,
and the notes to consolidated financial statements,
presented in the Company's 1997 Annual Report to
Shareholders, are incorporated herein by reference.
The report of Deloitte & Touche LLP, dated August 12,
1997 on the 1997 financial statements presented in
the Company's 1997 Annual Report to Shareholders,
is incorporated herein by reference.
The report of Alpern, Rosenthal & Company, dated
August 12, 1996 on the balance sheet as of
June 30, 1996 and the consolidated statements of
earnings, shareholders' equity, and cash flows for
each of the two years in the period ended
June 30, 1996, is included herein.
(2) Financial Statement Schedule:
The financial statement schedule shown below
should be read in conjunction with the financial
statements contained in the 1997 Annual Report to
Shareholders. Other schedules are omitted because
they are not applicable or the required information
is shown in the financial statements or notes
thereto.
Independent Auditors' Report on Schedule II for
the year ended June 30, 1997.
The report of Alpern, Rosenthal & Company, dated
August 12, 1996 on Schedule II for each of the
two years in the period June 30, 1996, is included
herein.
Schedule II - Valuation and Qualifying Accounts
for each of the three years in the period ended
June 30, 1997
(3) Exhibits.
EXHIBIT NO. REFERENCE
2.01 Merger Agreement and Plan of Incorporated herein by
Reorganization by and among reference is
II-VI Incorporated, II-VI Lightning Exhibit 2.01 to the
Optical Incorporated and Lightning Company's Report
Optical Corporation, dated as of on Form 8-K for the
February 22, 1996 event dated
February 22, 1996.
2.02 Registration Rights Agreement dated Incorporated herein by
February 22, 1996 by and among certain reference is
former shareholders of Lightning Optical Exhibit 2.02 to the
Corporation and II-VI Incorporated Company's Report
on Form 8-K for the
event dated
February 22, 1996.
2.03 Escrow Agreement dated Incorporated herein by
February 22, 1996 by and among certain reference is
former shareholders of Lightning Optical Exhibit 2.03 to the
Corporation and II-VI Incorporated Company's Report
on Form 8-K for the
event dated
February 22, 1996.
3.01 Amended and Restated Articles of Incorporated herein by
Incorporation of II-VI Incorporated reference is
Exhibit 3.02 to
Registration Statement
No. 33-16389 on Form
S-1.
3.02 Amended and Restated By-Laws of II-VI Incorporated herein by
Incorporated reference is
Exhibit 3.02 to the
Company's Annual
Report on Form 10-K for
the fiscal year ended
June 30, 1991 (file
number 0-16195 and
docketed on
September 30, 1991).
10.01 II-VI Incorporated 1982 Incentive Incorporated herein by
Stock Option Plan* reference is
Exhibit 10.01 to
Registration
Statement No. 33-16389
on Form S-1.
10.02 II-VI Incorporated Stock Option Plan Incorporated herein by
of 1987* reference is
Exhibit 10.02 to
Registration Statement
No. 33-16389 on Form
S-1.
10.03 II-VI Incorporated Stock Option Plan Incorporated herein by
of 1990* reference is Exhibit
10.02 to the Company's
Annual Report on
Form 10-K for the fiscal
year ended
June 30, 1991(file
number 0-16195 and
docketed on
September 30, 1991).
10.04 II-VI Incorporated Employees' Stock Incorporated herein by
Purchase Plan reference is
Exhibit 10.03 to
Registration Statement
No. 33-16389 on Form
S-1.
10.05 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' reference is
Stock Purchase Plan Exhibit 10.04 to
Registration Statement
No. 33-16389 on Form
S-1.
10.06 First Amendment II-VI Incorporated Incorporated herein by
Amended and Restated Employees' reference is
Stock Purchase Plan Exhibit 10.01 to the
Company's Form 10-Q for
the Quarter Ended
March 31, 1996.
10.07 II-VI Incorporated Amended and Incorporated herein by
Restated Employees' Profit-Sharing reference is
Plan and Trust Agreement, as amended Exhibit 10.05 to
Registration
Statement No. 33-16389
on Form S-1.
10.08 Form of Representative Agreement Incorporated herein by
between the Company and its foreign reference is
representatives Exhibit 10.15 to
Registration
Statement No. 33-16389
on Form S-1.
10.09 Form of Employment Agreement* Incorporated herein by
reference is
Exhibit 10.16 to
Registration
Statement No. 33-16389
on Form S-1.
10.10 Description of Management-By-Objective Incorporated herein by
Plan* reference is
Exhibit 10.09 to the
Company's Annual
Report on Form 10-K for
the fiscal year ended
June 30, 1993.
10.11 II-VI Incorporated 1994 Nonemployee Incorporated herein by
Directors Stock Option Plan reference is
Exhibit A to the
Company's Proxy
Statement dated
September 30, 1994.
10.12 II-VI Incorporated Deferred Incorporated herein by.
Compensation Plan* reference is
Exhibit 10.12 to the
Company's Annual Report
on Form 10-K for the
fiscal year ended
June 30, 1996.
10.13 Trust Under the II-VI Incorporated Incorporated herein by
Deferred Compensation Plan* reference is
Exhibit 10.13 to the
Company's Annual Report
on Form 10-K for the
fiscal year ended
June 30, 1996.
10.14 Description of Bonus Incentive Plan* Incorporated herein by
reference is
Exhibit 10.14 to the
Company's Annual Report
on Form 10-K for the
fiscal year ended
June 30, 1996.
10.15 Amended and Restated II-VI Incorporated Incorporated herein by
Deferred Compensation Plan* reference is
Exhibit 10.01 to the
Company's Form 10-Q
for the Quarter Ended
December 31, 1996.
10.16 Amended and Restated II-VI Incorporated Incorporated herein by
Stock Option Plan of 1990* reference is
Exhibit 10.01 to the
Company's Form 10-Q
for the Quarter Ended
September 30, 1996.
11.01 Statement of Computation of Filed herewith.
Earnings Per Share
13.01 Annual Report to Shareholders Portions of the 1997
Annual Report are
filed herewith.
21.01 List of Subsidiaries of II-VI Filed herewith.
Incorporated
23.01 Consent of Deloitte & Touche LLP Filed herewith.
23.02 Consent of Alpern, Rosenthal & Filed herewith.
Company
27.01 Financial Data Schedule Filed herewith.
_______
* Denotes management contract or compensatory plan, contract or
arrangement.
The Registrant will furnish to the Commission upon
request copies of any instruments not filed herewith
which authorize the issuance of long-term obligations
of Registrant not in excess of 10% of the Registrant's
total assets on a consolidated basis.
(b) No reports on Form 8-K have been filed during the
. fourth quarter of fiscal year 1997.
(c) The Company hereby files as exhibits to this Form
10-K the exhibits set forth in Items 14(a)(3) hereof
which are not incorporated by reference.
(d) The Company hereby filed as a financial statement
schedule to this Form 10-K the financial statement
schedule set forth in Item 14(a)(2) hereof.
With the exception of the information incorporated by
reference to the Company's 1997 Annual Report to
Shareholders in Item 1 of Part I, Items 6, 7 and 8 of
Part II and Item 14 of Part IV of this Form 10-K, the
Company's 1997 Annual Report to Shareholders is not deemed
filed as a part of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
II-VI INCORPORATED
September 26, 1997 By: /s/ Carl J. Johnson
Carl J. Johnson, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the dates indicated.
Principal Executive Officer:
September 26, 1997 By: /s/ Carl J. Johnson
Carl J. Johnson, Chairman and
Chief Executive Officer
and Director
September 26, 1997 By: /s/ Francis J. Kramer
Francis J. Kramer
President and Chief
Operating Officer and Director
Principal Financial
and Accounting Officer:
September 26, 1997 By: /s/ James Martinelli
James Martinelli
Treasurer and
Chief Financial Officer
September 26, 1997 By: /s/ Richard B. Bohlen
Richard B. Bohlen
Director
September 26, 1997 By: /s/ Thomas E. Mistler
Thomas E. Mistler
Director
September 26, 1997 By: /s/ Duncan A. J. Morrison
Duncan A. J. Morrison
Director
September 26, 1997 By: /s/ Peter W. Sognefest
Peter W. Sognefest
Director
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
II-VI Incorporated and Subsidiaries
Saxonburg, Pennsylvania
We have audited the consolidated balance sheet of II-VI
Incorporated and Subsidiaries as of June 30, 1996, and the
related consolidated statements of earnings, shareholders'
equity and cash flows for each of the two years in the period
ended June 30, 1996; such consolidated financial statements are
included in the Company's 1997 Annual Report to Shareholders and
are incorporated herein by reference. Our audits also included
the financial statement schedule II, Valuation and Qualifying
Accounts of II-VI Incorporated and Subsidiaries for the years
ended June 30, 1996 and 1995, listed in Part IV at Item 14.
These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated 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 consolidated financial statements and
financial statement schedule referred to above present fairly,
in all material respects, the financial position of II-VI
Incorporated and Subsidiaries as of June 30, 1996 and the
results of their operations and their cash flows for each of
the two years in the period ended June 30, 1996, in conformity
with generally accepted accounting principles. Also, in our
opinion, such financial statements schedule, when considered
in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects,
the information set forth therein.
/s/ Alpern, Rosenthal & Company
Pittsburgh, Pennsylvania
August 12, 1996
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
II-VI Incorporated and Subsidiaries:
We have audited the consolidated balance sheet of
II-VI Incorporated and subsidiaries as of June 30, 1997
and the related consolidated statements of earnings,
shareholders' equity and cash flows for the year then ended,
and have issued our report thereon dated August 12, 1997;
such consolidated financial statements and report are included
in your 1997 Annual Report to Shareholders and are
incorporated herein by reference. Our audit also included
the consolidated financial statement Schedule II, Valuation
and Qualifying Accounts, of II-VI Incorporated and subsidiaries
for the year ended June 30, 1997. The consolidated financial
statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based
on our audit. In our opinion, such financial statement
schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 12, 1997
<TABLE>
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1995, 1996, AND 1997
(IN THOUSANDS OF DOLLARS)
<CAPTION>
Additions
------------------------
Balance at Charged Deduction
Beginning Charged to to Other from Balance at
of Year Expense Accounts 1 Reserves 2 End of Year
--------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995:
Allowance for doubtful accounts
& warranty returns $125 $49 $79 $ (8) $261
YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts
& warranty returns $261 $86 $16 $117 $246
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts
& warranty returns $246 $45 $35 $ 20 $306
_________
1 Amounts primarily relate to businesses acquired and warranty returns.
2 Uncollectible accounts written off (recovered), net.
</TABLE>
EXHIBIT NO. REFERENCE
2.01 Merger Agreement and Plan of Incorporated herein by
Reorganization by and among reference is
II-VI Incorporated, II-VI Lightning Exhibit 2.01 to the
Optical Incorporated and Lightning Company's Report
Optical Corporation, dated as of on Form 8-K for the
February 22, 1996 event dated
February 22, 1996.
2.02 Registration Rights Agreement dated Incorporated herein by
February 22, 1996 by and among certain reference is
former shareholders of Lightning Optical Exhibit 2.02 to the
Corporation and II-VI Incorporated Company's Report
on Form 8-K for the
event dated
February 22, 1996.
2.03 Escrow Agreement dated Incorporated herein by
February 22, 1996 by and among certain reference is
former shareholders of Lightning Optical Exhibit 2.03 to the
Corporation and II-VI Incorporated Company's Report
on Form 8-K for the
event dated
February 22, 1996.
3.01 Amended and Restated Articles of Incorporated herein by
Incorporation of II-VI Incorporated reference is
Exhibit 3.02 to
Registration Statement
No. 33-16389 on Form
S-1.
3.02 Amended and Restated By-Laws of II-VI Incorporated herein by
Incorporated reference is
Exhibit 3.02 to the
Company's Annual
Report on Form 10-K for
the fiscal year ended
June 30, 1991 (file
number 0-16195 and
docketed on
September 30, 1991).
10.01 II-VI Incorporated 1982 Incentive Incorporated herein by
Stock Option Plan* reference is
Exhibit 10.01 to
Registration
Statement No. 33-16389
on Form S-1.
10.02 II-VI Incorporated Stock Option Plan Incorporated herein by
of 1987* reference is
Exhibit 10.02 to
Registration Statement
No. 33-16389 on Form
S-1.
10.03 II-VI Incorporated Stock Option Plan Incorporated herein by
of 1990* reference is Exhibit
10.02 to the Company's
Annual Report on
Form 10-K for the fiscal
year ended
June 30, 1991(file
number 0-16195 and
docketed on
September 30, 1991).
10.04 II-VI Incorporated Employees' Stock Incorporated herein by
Purchase Plan reference is
Exhibit 10.03 to
Registration Statement
No. 33-16389 on Form
S-1.
10.05 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' reference is
Stock Purchase Plan Exhibit 10.04 to
Registration Statement
No. 33-16389 on Form
S-1.
10.06 First Amendment II-VI Incorporated Incorporated herein by
Amended and Restated Employees' reference is
Stock Purchase Plan Exhibit 10.01 to the
Company's Form 10-Q for
the Quarter Ended
March 31, 1996.
10.07 II-VI Incorporated Amended and Incorporated herein by
Restated Employees' Profit-Sharing reference is
Plan and Trust Agreement, as amended Exhibit 10.05 to
Registration
Statement No. 33-16389
on Form S-1.
10.08 Form of Representative Agreement Incorporated herein by
between the Company and its foreign reference is
representatives Exhibit 10.15 to
Registration
Statement No. 33-16389
on Form S-1.
10.09 Form of Employment Agreement* Incorporated herein by
reference is
Exhibit 10.16 to
Registration
Statement No. 33-16389
on Form S-1.
10.10 Description of Management-By-Objective Incorporated herein by
Plan* reference is
Exhibit 10.09 to the
Company's Annual
Report on Form 10-K for
the fiscal year ended
June 30, 1993.
10.11 II-VI Incorporated 1994 Nonemployee Incorporated herein by
Directors Stock Option Plan reference is
Exhibit A to the
Company's Proxy
Statement dated
September 30, 1994.
10.12 II-VI Incorporated Deferred Incorporated herein by.
Compensation Plan* reference is
Exhibit 10.12 to the
Company's Annual Report
on Form 10-K for the
fiscal year ended
June 30, 1996.
10.13 Trust Under the II-VI Incorporated Incorporated herein by
Deferred Compensation Plan* reference is
Exhibit 10.13 to the
Company's Annual Report
on Form 10-K for the
fiscal year ended
June 30, 1996.
10.14 Description of Bonus Incentive Plan* Incorporated herein by
reference is
Exhibit 10.14 to the
Company's Annual Report
on Form 10-K for the
fiscal year ended
June 30, 1996.
10.15 Amended and Restated II-VI Incorporated Incorporated herein by
Deferred Compensation Plan* reference is
Exhibit 10.01 to the
Company's Form 10-Q
for the Quarter Ended
December 31, 1996.
10.16 Amended and Restated II-VI Incorporated Incorporated herein by
Stock Option Plan of 1990* reference is
Exhibit 10.01 to the
Company's Form 10-Q
for the Quarter Ended
September 30, 1996.
11.01 Statement of Computation of Filed herewith.
Earnings Per Share
13.01 Annual Report to Shareholders Portions of the 1997
Annual Report are
filed herewith.
21.01 List of Subsidiaries of II-VI Filed herewith.
Incorporated
23.01 Consent of Deloitte & Touche LLP Filed herewith.
23.02 Consent of Alpern, Rosenthal & Filed herewith.
Company
27.01 Financial Data Schedule Filed herewith.
_______
* Denotes management contract or compensatory plan, contract or arrangement.
<TABLE>
II-VI INCORPORATED AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Year Ended June 30,
($000'S except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $ 7,111 $ 4,371 $ 2,518
======= ======= =======
Common stock 6,359 5,842 5,045
Outstanding options 255 411 244
------- ------- -------
Primary weighted average shares outstanding 6,614 6,253 5,289
======= ======= =======
Common stock 6,359 5,842 5,045
Outstanding options 255 444 402
------- ------- -------
Fully diluted weighted average shares outstanding 6,614 6,286 5,447
======= ======= =======
Primary earnings per share $ 1.08 $ 0.70 $ 0.48
======= ======= =======
Fully diluted earnings per share $ 1.08 $ 0.70 $ 0.46
======= ======= =======
Notes:
The 1995 calculation is adjusted to reflect the two-for-one stock split in fiscal 1996.
The common stock equivalents consist of the shares reserved for issuance under II-VI's stock option plan and
deferred under II-VI's deferred compensation, earnings growth, deferred compensation plan for directors and
directors' common stock plan.
The fully diluted earnings per share calculations are submitted in accordance with Regulation S-K item
601(b) (11).
</TABLE>
Management's Discussion & Analysis
Fiscal 1997, 1996 & 1995 - Results of Operations
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Overview
Net earnings rose 63% in fiscal 1997 to $7.1 million, up
from $4.4 million in fiscal 1996. Revenues grew 39% to $52.7
million in fiscal 1997 compared to $37.9 million last fiscal
year. This growth was attributed to improved CO2 laser
optics sales throughout the world along with the results of
operations of Lightning Optical Corporation, which was
acquired during February 1996, being included for a full
fiscal year (the "Acquisition"). Bookings increased 35% to
$56.7 million in fiscal 1997 compared to $42.1 million in
fiscal 1996. Order backlog increased 30% to $16.9 million at
June 30, 1997 from $12.9 million at June 30, 1996 as a
result of orders outpacing shipments in fiscal 1997 and, to
a lesser extent, the Acquisition. Manufacturing orders
comprised 83% of the backlog at June 30, 1997, compared to
82% of backlog at June 30, 1996.
Net Earnings
Net earnings rose 63% in fiscal 1997 to $7.1 million, up
from $4.4 million in fiscal 1996. The major contributors to
the net earnings growth were improved CO2 laser optics sales
volume, the Acquisition, and additional other income as a
result of higher interest income from increased cash levels
and a foreign currency gain. These contributors more than
offset both the increased selling, general and
administrative expenses that were needed to support the
Company's growth, and a slight increase in the effective
corporate income tax rate.
Sales and Markets
Bookings increased 35% to $56.7 million in fiscal 1997
compared to $42.1 million in fiscal 1996. Orders for
manufactured products accounted for the entire increase in
bookings. Contract research and development bookings
decreased slightly from fiscal year 1996. The largest
portion of the growth in manufacturing orders was driven by
increased demand in the international industrial markets,
including Japan, and the Acquisition.
Revenues grew 39% to $52.7 million in fiscal 1997 compared
to $37.9 million last fiscal year. Approximately 93% of this
growth was in manufacturing revenues. This growth was led by
increased demand in the international industrial markets and
the Acquisition. Contract research and development revenues
increased 59% to $2.7 million in fiscal 1997 from $1.7
million in fiscal 1996. This increase was attributable to
work being performed on several additional government
contract awards in fiscal 1997.
Costs and Expenses
Manufacturing gross margin was $22.5 million or 45% of net
sales in fiscal 1997 compared to $15.7 million or 43% of net
sales in fiscal 1996. This increase was attributable to
higher sales volume in the CO2 laser optics market and the
Acquisition. The increase in gross margin as a percentage of
net sales was driven by lower per unit operating costs
associated with increased production volume and improved
manufacturing efficiencies.
Contract research and development gross margin was $707,000
or 27% of net contract sales in fiscal 1997 compared to
$452,000 or 27% of net contract sales in fiscal 1996. The
increase was attributable to work being performed on the
additional government contract awards mentioned above.
Company-funded internal research and development increased
to $1.0 million in fiscal 1997 from $514,000 in fiscal 1996.
The majority of this increase was attributable to nuclear
radiation detector development.
Selling, general and administrative expenses were $12.7
million or 24% of net sales in fiscal 1997 compared to $9.9
million or 26% of net sales in fiscal 1996. This increase
was attributable to the Acquisition, increased compensation
expense associated with the Company's worldwide profit-
driven bonus programs and increased payroll and other
general administrative expenses needed to support the
Company's growth.
9
Other income increased to $544,000 in fiscal 1997 from
$369,000 in fiscal 1996 as a result of investment earnings
on increased cash balances and a foreign currency gain
driven by the favorable position of the U.S. dollar against
the Japanese yen experienced for the majority of the year.
The effective corporate income tax rate was 29% in fiscal
1997 compared to 27% in fiscal 1996. This increase was
attributable to the lower proportion of the Company's
earnings that were generated by foreign subsidiaries. The
Company's future effective tax rates will continue to be
affected by the level of profit or loss generated by the
foreign subsidiaries. The Company anticipates that its
effective corporate income tax rate for fiscal 1998 will
increase as a result of increased earnings attributable
to domestic operations as a percentage of total corporate
earnings.
Fiscal 1996 Compared to Fiscal 1995
Overview
Net earnings rose 74% in fiscal 1996 to $4.4 million, up
from $2.5 million in fiscal 1995. Revenues grew 37% to $37.9
million in fiscal 1996 compared to $27.8 million last fiscal
year. This growth was attributed to the acquisition of Virgo
Optics and Lightning Optical Corporation ("VLOC") and
improved CO2 laser optics sales throughout the world.
Bookings increased 48% to $42.1 million in fiscal 1996
compared to $28.4 million in fiscal 1995. Order backlog
increased 87% to $12.9 million at June 30, 1996 from $6.9
million at June 30, 1995 as a result of orders outpacing
shipments in fiscal 1996 and, to a lesser extent, the
Acquisition. Manufacturing orders comprised 82% of the
backlog at June 30, 1996, compared to 96% of backlog at June
30, 1995. The increase in the contract research and
development backlog was a result of a $2.3 million, two-year
DARPA contract award.
Net Earnings
Net earnings rose 74% in fiscal 1996 to $4.4 million, up
from $2.5 million in fiscal 1995. The major contributors to
the net earnings growth were improved CO2 laser optics sales
volume, the acquisition of VLOC, and additional interest
income as a result of increased cash levels. These
contributors more than offset both the increased selling,
general and administrative expenses that were needed to
support the Company's growth and a slight increase in the
effective corporate income tax rate.
Sales and Markets
Bookings increased 48% to $42.1 million in fiscal 1996
compared to $28.4 million in fiscal 1995. Manufacturing
orders comprised nearly 80% of this growth. The largest
portion of the growth in manufacturing orders was from the
acquisition of VLOC, followed by increases in the
international industrial markets and the military/aerospace
and medical markets. The increase in contract research and
development bookings was predominantly from the $2.3 million
DARPA contract and a $400,000 U.S.-Israel Science and
Technology commission award.
Revenues grew 37% to $37.9 million in fiscal 1996 compared
to $27.8 million last fiscal year. Approximately 95% of this
growth was in manufacturing revenues. This growth was led by
the acquisition of VLOC, followed by increases in the
international industrial markets, the military/aerospace
and medical markets, and the domestic industrial market.
Contract research and development revenues increased 44%
to $1.7 million in fiscal 1996 from $1.2 million in fiscal
1995. This increase was attributable to work being performed
on several additional government contract awards in
fiscal 1996.
10
Costs and Expenses
Manufacturing gross margin was $15.7 million or 43% of net
sales in fiscal 1996 compared to $10.8 million or 41% of net
sales in fiscal 1995. This increase was attributable to
higher sales volume in the CO2 laser optics market and the
acquisition of VLOC. The increase in gross margin as a
percentage of net sales was driven by lower per unit
operating costs associated with increased production volume.
Contract research and development gross margin was
$452,000 or 27% of net sales in fiscal 1996 compared to
$239,000 or 21% of net sales in fiscal 1995. The increase
was attributable to work being performed on the additional
government contract awards mentioned above and an increase
in reimbursable costs allocable to government contracts.
Company-funded internal research and development increased
to $514,000 in fiscal 1996 from $447,000 in fiscal 1995. The
majority of this increase was in the crystal growth research
area.
Selling, general and administrative expenses were $9.9
million or 26% of net sales in fiscal 1996 compared to $7.3
million or 26% of net sales in fiscal 1995. This increase
was attributable to expenses incurred in the operation of
VLOC, increased compensation expense associated with the
Company's worldwide profit-driven bonus programs and
increased payroll and other general administrative expenses
needed to support the Company's growth.
Other income increased to $369,000 in fiscal 1996 from
$143,000 in fiscal 1995 as a result of investment earnings
on increased cash reserves. The increased cash reserves were
attributable to the Company's October 1995 public stock
offering.
The effective corporate income tax rate was 27% in fiscal
1996 compared to 26% in fiscal 1995. This increase was
attributable to the proportion of the Company's earnings
that were generated by foreign subsidiaries. The Company's
future effective tax rates will continue to be affected by
the level of profit or loss generated by the foreign
subsidiaries.
Liquidity and Capital Resources
The Company historically has funded its working capital
needs, capital expenditures and growth from cash flow from
operations and, to a lesser extent, borrowings.
The two largest sources of the $8.4 million in cash
generated from operations in fiscal 1997 were $10.3 million
in net earnings before depreciation and amortization and a
$2.0 million increase in accounts payable. These cash
sources were partially offset by increases in accounts
receivable and inventory of $2.1 million and $2.6 million,
respectively. The increase in accounts receivable was
attributed mainly to the increased revenue volume. The
increase in inventory was necessary to keep pace with
customer demand for the Company's products and to increase
customer service with shorter lead times as well as to
improve on-time deliveries.
The Company invested $7.4 million in capital expenditures
during the year. These expenditures focused on the
automation of processes and facility expansions in Saxonburg
and the VLOC locations. A $741,000 low interest rate loan
agreement with the Pennsylvania Industrial Development
Authority was completed during fiscal 1997 to finance a
portion of the Saxonburg expansion. Planned discretionary
capital expenditures for fiscal 1998 of approximately $15.2
million will focus on automation of processes, improved
capacity and continued opportunities for synergy from the
merger of the two VLOC locations.
11
The Company believes internally generated funds along with
existing cash reserves will be sufficient to fund its
working capital needs, capital expenditures and scheduled
debt payments for fiscal 1998 and the foreseeable future.
The impact of inflation on the Company's business has not
been material.
In the normal course of business, the Company enters into
foreign currency forward exchange contracts with its banks.
The purpose of these contracts is to hedge the impact of
foreign currency fluctuations on committed or anticipated
foreign currency positions. The Company monitors its
positions and the credit ratings of the parties to these
contracts. While the Company may be exposed to potential
losses due to credit risk in the event of non-performance by
the counterparties to these financial instruments, it does
not anticipate such losses. The Company anticipates a low
interest rate, $2.0 million equivalent, yen loan with PNC
Bank to be entered into by September 30, 1997 in an effort
to minimize the foreign currency exposure.
This Management's Discussion and Analysis, along with the
preceding Letters to Shareholders, contain forward looking
statements as defined by Section 21E of the Securities
Exchange Act of 1934, including the statements regarding the
Company's long-term growth rate, anticipated higher demand
for the Company's products, the expected increase in the
effective corporate income tax rate for fiscal 1998 and the
Company's ability to fund future working capital needs,
capital expenditures and scheduled debt payments from
internally generated funds and existing cash reserves. The
Company's long-term growth rate, projections for higher
product demand and ability to fund future capital needs from
internally generated funds and existing cash reserves could
differ from these statements if worldwide economic
conditions change, competitive conditions intensify,
technology problems emerge, and/or if suitable acquisitions
of technologies or businesses cannot be consummated. The
Company's anticipated increase in the effective corporate
income tax rate may not occur if there is a material change
in worldwide economic conditions that causes a difference in
the anticipated proportion of foreign earnings to total
earnings. There are additional risk factors that could
affect the Company's business, results of operations or
financial condition. Investors are encouraged to review the
risk factors set forth in the Company's most recent Form 10-
K as filed with the Securities and Exchange Commission.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings per Share, which establishes standards for
computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common
stock. This Statement will be effective beginning with the
Company's financial statements for the quarter ending March
31, 1998. This Statement requires restatement of all prior-
period earnings per share data presented. Basic earnings per
share as defined by SFAS No. 128 for fiscal years 1997, 1996
and 1995 would be $1.12, $.75 and $.50, respectively.
Diluted earnings per share as defined by SFAS No. 128
approximates the historically presented earnings per share
for the fiscal years 1997, 1996 and 1995.
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which redefines how
operating segments are determined and requires disclosure of
certain financial and descriptive information about a
Company's operating segments. The Company is required to
adopt this pronouncement beginning in fiscal 1999. The
Company has not yet completed its analysis of which
operating segments under this standard it will be required
to report on.
12
<TABLE>
II-VI Incorporated & Subsidiaries
Five-Year Financial Summary
<CAPTION>
Year Ended June 30,
(000 except per share data) 1997 1996 1995 1994* 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Earnings
Net revenues $52,741 $37,940 $27,760 $18,681 $17,169
Net earnings $ 7,111 $ 4,371 $ 2,518 $ 1,135 $ 75
Earnings per share $ 1.08 $ 0.70 $ 0.48 $ 0.22 $ .01
Weighted average shares outstanding 6,614 6,253 5,289 5,061 5,255
- -----------------------------------------------------------------------------------------------------
Share and per share data for the fiscal years ended June 30, 1995, 1994, and 1993
were adjusted to reflect the two-for-one stock split in fiscal 1996 - See Note A of
the Notes to Consolidated Financial Statements.
*Included in net earnings is a gain of $699,000 on the sale of an investment in a former
Japanese distributor.
<CAPTION>
June 30,
($000) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Working capital $21,089 $16,687 $ 8,872 $ 6,648 $ 6,009
Total assets 54,512 44,169 24,367 17,570 17,265
Total debt 1,346 1,461 1,563 263 765
Deferred taxes - net 1,185 1,324 658 562 579
Retained earnings 25,142 18,031 13,660 11,142 10,007
Shareholders' equity 42,522 34,403 16,998 14,237 13,217
- -----------------------------------------------------------------------------------------------------
For the five year period ended June 30, 1997, no dividends were declared.
13
II-VI Incorporated & Subsidiaries
Quarterly Financial Data
<CAPTION>
Fiscal 1997 Quarter Ended
($000 except per share data) 9/30/1996 12/31/1996 3/31/1997 6/30/1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $12,110 $12,190 $ 13,651 $ 14,790
Cost of goods sold 6,743 6,732 7,691 8,364
Internal research and development 124 260 312 306
Selling, general and administrative expenses 3,030 2,951 3,210 3,522
Interest and other expense (income) - net (125) (168) (52) (143)
- -----------------------------------------------------------------------------------------------------
Earnings before income taxes 2,338 2,415 2,490 2,741
Income taxes 678 700 722 773
- -----------------------------------------------------------------------------------------------------
Net earnings $ 1,660 $ 1,715 $ 1,768 $ 1,968
- -----------------------------------------------------------------------------------------------------
Earnings per share $ 0.25 $ 0.25 $ 0.27 $ 0.30
=====================================================================================================
<CAPTION>
Fiscal 1996 Quarter Ended
($000 except per share data) 9/30/1995 12/31/1995 3/31/1996 6/30/1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 8,088 $ 7,954 $ 10,072 $ 11,826
Cost of goods sold 4,657 4,638 5,765 6,750
Internal research and development 148 138 154 74
Selling, general and administrative expenses 2,131 2,152 2,610 3,031
Interest and other expense (income) - net 16 (139) (83) (122)
- -----------------------------------------------------------------------------------------------------
Earnings before income taxes 1,136 1,165 1,626 2,093
Income taxes 330 331 417 571
- -----------------------------------------------------------------------------------------------------
Net earnings $ 806 $ 834 $ 1,209 $ 1,522
- -----------------------------------------------------------------------------------------------------
Earnings per share $ 0.15 $ 0.14 $ 0.18 $ 0.23
=====================================================================================================
</TABLE>
14
Independent Auditors' Report
The Board of Directors and Shareholders of II-VI
Incorporated and Subsidiaries:
We have audited the accompanying consolidated balance sheet
of II-VI Incorporated and subsidiaries as of June 30, 1997,
and the related consolidated statements of earnings,
shareholders' equity and cash flows for the year then ended.
These consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements based on our audit. The
consolidated balance sheet of II-VI Incorporated and
subsidiaries as of June 30, 1996 and the related
consolidated statements of earnings, shareholders' equity
and cash flows for each of the two years in the period ended
June 30, 1996, were audited by other auditors whose report
dated August 12, 1996, expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated 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 fiscal 1997 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of II-VI Incorporated and
subsidiaries as of June 30, 1997 and the results of their
operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 12, 1997
15
<TABLE>
II-VI Incorporated & Subsidiaries
Consolidated Balance Sheets
<CAPTION>
June 30,
($000 except share data) 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 10,854 $ 9,417
Accounts receivable -- less allowance for doubtful accounts
of $306 in 1997 and $246 in 1996 10,808 8,712
Inventories 8,129 5,490
Deferred income taxes 428 429
Prepaid and other current assets 563 607
- -----------------------------------------------------------------------------------------------------
Total Current Assets 30,782 24,655
Property, Plant & Equipment, Net 19,631 15,085
Other Assets 4,099 4,429
- -----------------------------------------------------------------------------------------------------
$ 54,512 $ 44,169
=====================================================================================================
Current Liabilities
Notes payable $ 590 $ 1,393
Accounts payable 3,207 1,260
Accrued salaries, wages and bonuses 3,740 3,105
Income taxes payable 80 607
Accrued profit sharing contribution 740 556
Other current liabilities 1,264 1,024
Current portion of long-term debt 72 23
- -----------------------------------------------------------------------------------------------------
Total Current Liabilities 9,693 7,968
Long-Term Debt (Less Current Portion) 684 45
Deferred Income Taxes 1,613 1,753
Commitments & Contingencies
- -
Shareholders' Equity
Preferred stock, no par value; authorized - 5,000,000 shares; unissued - -
Common stock, no par value; authorized - 30,000,000 shares;
issued - 6,802,946 shares in 1997; 6,691,718 shares in 1996 18,072 17,055
Cumulative translation adjustment 70 79
Retained earnings 25,142 18,031
- -----------------------------------------------------------------------------------------------------
43,284 35,165
Less treasury stock at cost 762 762
- -----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 42,522 34,403
- -----------------------------------------------------------------------------------------------------
$ 54,512 $ 44,169
=====================================================================================================
See notes to Consolidated Financial Statements.
16
II-VI Incorporated & Subsidiaries
Consolidated Statements of Earnings & Shareholders' Equity
<CAPTION>
Earnings Year Ended June 30,
($000 except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net sales:
Domestic $ 27,634 $ 19,922 $ 13,697
International 22,450 16,344 12,901
Contract research and development 2,657 1,674 1,162
- ---------------------------------------------------------------------------------------
52,741 37,940 27,760
- ---------------------------------------------------------------------------------------
Costs, Expenses and Other Income
Cost of goods sold 27,580 20,588 15,765
Contract research and development 1,950 1,222 923
Internal research and development 1,002 514 447
Selling, general and administrative expenses 12,713 9,924 7,324
Interest expense 56 41 57
Other income - net (544) (369) (143)
- ---------------------------------------------------------------------------------------
42,757 31,920 24,373
- ---------------------------------------------------------------------------------------
Earnings Before Income Taxes 9,984 6,020 3,387
Income Taxes 2,873 1,649 869
- ---------------------------------------------------------------------------------------
Net Earnings $ 7,111 $ 4,371 $ 2,518
- ---------------------------------------------------------------------------------------
Earnings Per Share $ 1.08 $ 0.70 $ 0.48
=======================================================================================
See notes to Consolidated Financial Statements.
<CAPTION>
Cumulative
Translation Retained
Shareholders' Equity Common Stock Adjustment Earnings Treasury Stock
- ------------------------------------------------------------------------------------------------------------
(000) Shares Amount Shares Amount Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-July 1, 1994 5,586 $ 4,184 $ 10 $ 11,142 (566) $(1,099) $ 14,237
Shares issued under the stock option plan 84 131 - - - - 131
Purchase of treasury stock - - - - (5) (31) (31)
Net earnings for the year - - - 2,518 - - 2,518
Translation adjustment - - (27) - - - (27)
Tax benefit for options exercised - 170 - - - - 170
- ------------------------------------------------------------------------------------------------------------
Balance-June 30, 1995 5,670 4,485 (17) 13,660 (571) (1,130) 16,998
Shares issued for purchase
of Lightning Optical Corporation - 1,470 - - 187 368 1,838
Net proceeds from stock offering 1,000 10,929 - - - - 10,929
Shares issued under stock option plan 22 71 - - - - 71
Net earnings for the year - - - 4,371 - - 4,371
Translation adjustment - - 96 - - - 96
Tax benefit for options exercised - 100 - - - - 100
- ------------------------------------------------------------------------------------------------------------
Balance-June 30, 1996 6,692 17,055 79 18,031 (384) (762) 34,403
Shares issued under stock option plan 111 285 - - - - 285
Net earnings for the year - - - 7,111 - - 7,111
Translation adjustment - - (9) - - - (9)
Tax benefit for options exercised - 732 - - - - 732
- ------------------------------------------------------------------------------------------------------------
Balance-June 30, 1997 6,803 $18,072 $ 70 $ 25,142 (384) $ (762) $42,522
============================================================================================================
See notes to Consolidated Financial Statements.
17
II-VI Incorporated & Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended June 30,
($000) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net earnings $ 7,111 $ 4,371 $ 2,518
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 2,852 2,156 1,956
Amortization 333 332 50
(Gain) loss on foreign currency transactions (104) 9 (76)
Net (gain) loss on disposal of property and equipment (32) - 19
Deferred income taxes (138) (83) 96
Increase (decrease) in cash from changes in:
Accounts receivable (2,061) (2,462) (826)
Inventories (2,633) (1,296) (384)
Accounts payable 1,961 576 196
Other operating net assets 1,150 211 1,917
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 8,439 3,814 5,466
- ----------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to property, plant & equipment (7,432) (6,146) (2,384)
Proceeds from sale of property, plant & equipment 66 - -
Net cash on purchase of subsidiaries - (1,938) (2,353)
Additions to other assets (3) (23) (115)
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (7,369) (8,107) (4,852)
- ----------------------------------------------------------------------------------------
Cash Flows From Financing Activities
(Payments) proceeds on short-term borrowings (728) (1,095) 1,472
Proceeds from long-term borrowings 741 - 108
Payments on long-term borrowings (53) (23) (281)
Proceeds from sale of common stock 285 11,100 301
Purchase of treasury stock - - (31)
- ----------------------------------------------------------------------------------------
Net cash provided by financing activities 245 9,982 1,569
- ----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 122 (94) (95)
- ----------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,437 5,595 2,088
Cash and Cash Equivalents
Beginning of year 9,417 3,822 1,734
- ----------------------------------------------------------------------------------------
End of year $10,854 $ 9,417 $ 3,822
========================================================================================
See notes to Consolidated Financial Statements.
</TABLE>
18
Note A
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include II-VI
Incorporated (the "Company") and its wholly-owned
subsidiaries II-VI Worldwide, Inc., II-VI Delaware, Inc.,
II-VI Japan Incorporated, II-VI VLOC Incorporated, II-VI
U.K. Limited, and II-VI Singapore Pte., Ltd. All significant
intercompany transactions and balances have been eliminated.
During fiscal 1996 the Company formed II-VI Optics (Suzhou)
Co. Ltd., a wholly-owned subsidiary located in China that
manufactures small infrared optics. The subsidiary began
operations in fiscal 1997 and is consolidated as part of
II-VI Singapore Pte., Ltd.
Inventories
Inventories are valued at the lower of cost or
market, with cost determined on the first-in, first-out
basis. Inventory costs include material, labor and
manufacturing overhead.
Depreciation
Depreciation for financial reporting purposes
is computed primarily by the straight-line method over the
estimated useful lives of the assets which range from 5 to
20 years.
Foreign Currency Translation
For II-VI Singapore Pte., Ltd., the functional currency is
the U.S. dollar. Gains and losses on the remeasurement of
the local currency financial statements are included in net
earnings.
For II-VI Japan Incorporated and II-VI U.K. Limited, the
functional currency is the local currency. Assets and
liabilities of those operations are translated into U.S.
dollars using year-end exchange rates; income and expenses
are translated using the average exchange rates for the
reporting period. Translation adjustments are deferred as a
separate component of shareholders' equity.
Income Taxes
Deferred income taxes are determined based on
the differences between financial statement and tax basis of
assets and liabilities using enacted tax rates in effect in
the years in which the assets or liabilities are expected to
be settled.
Revenue Recognition
Revenue, other than on long-term U.S. Government sales
contracts and subcontracts, is recognized when a product is
shipped. Revenue on long-term U.S. Government sales
contracts and subcontracts is accounted for using the
percentage-of-completion method, whereby revenue and profits
are recognized throughout the performance period of the
contract. Percentage of completion is determined by relating
the actual cost of work performed to date to the estimated
total cost for each contract. Losses on contracts are
recorded in full when identified.
Earnings Per Share
Earnings per share is calculated using the weighted average
number of shares outstanding giving retroactive effect in
fiscal 1995 to a two-for-one stock split during fiscal 1996
and assuming dilutive stock options outstanding were
exercised at the beginning of the fiscal year or at the date
of issuance, if later. Weighted average shares outstanding
for fiscal 1997, 1996 and 1995 used in the earnings per
share calculation were 6,614,420, 6,252,523, and 5,289,072,
respectively.
On August 16, 1995, the Board of Directors declared a two-
for-one split of the Company's common stock to be
distributed to shareholders of record on August 30, 1995,
effective at the close of business September 6, 1995.
Weighted average shares outstanding and all per share
amounts for fiscal 1995 included in the consolidated
financial statements and notes are based on the increased
number of shares giving retroactive effect to the stock
split, unless otherwise noted.
On October 20, 1995, a registration statement on Form S-3
covering the public offering of 1,000,000 shares was
declared effective by the Securities and Exchange
Commission, with the shares sold to the public at $12.00 per
share.
Cash
For purposes of the statement of cash flows, the
Company considers highly liquid debt instruments with an
original maturity of three months or less to be cash
equivalents. The majority of cash and cash equivalents are
invested in investment grade money market type instruments.
Sufficient cash to fund current operations of foreign
subsidiaries is on deposit at banks in Japan, Singapore,
China and the United Kingdom.
19
Nature of Business
The Company designs, manufactures and markets optical and
electro-optical components, devices and materials for
precision use in infrared, near-infrared, visible light, X-
ray and gamma-ray instruments, and their applications. The
Company markets its products in the United States through
its direct sales force and worldwide through its wholly-
owned sales subsidiaries, II-VI Japan Incorporated and II-VI
U.K. Limited and manufacturers' representatives.
The Company uses certain uncommon materials and compounds to
manufacture its products. Some of these materials are
available from only one proven outside source. The continued
high quality of these materials is critical to the stability
of the Company's manufacturing yields. 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 material adverse
effect on the Company's results of operations.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Acquisitions
On February 22, 1996, the Company acquired substantially all
of the assets and assumed certain liabilities of Lightning
Optical Corporation, a Florida Corporation, located in
Tarpon Springs, Florida.
The aggregate purchase price paid to the shareholders of
Lightning Optical Corporation consisted of $2.4 million in
cash and 186,183 shares of the Common Stock, no par value,
of the Company. The acquisition was accounted for as a
purchase. The purchase price was allocated as follows:
($000)
- ----------------------------------------------------
Accounts receivable $ 1,125
Inventory 227
Property, plant and equipment 1,381
Goodwill 2,169
Other intangible assets 2,000
Other assets 47
- ----------------------------------------------------
6,949
Current liabilities (2,059)
Long-term debt (320)
Deferred income taxes - noncurrent (794)
- ----------------------------------------------------
Purchase price, net of cash acquired $ 3,776
====================================================
The other intangible assets acquired, including technology
and sales and marketing expertise, are being amortized on a
straight-line basis over a 10 year period, while goodwill is
being amortized on a straight-line basis over a 25 year
period. Accumulated amortization amounted to $385,000 and
$101,000 at June 30, 1997 and 1996, respectively.
On December 29, 1994, the Company acquired the net
assets of the Virgo Optics Division of Sandoz Chemicals
Corporation. The acquisition was accounted for as a
purchase and included inventories, accounts receivable,
machinery and equipment and certain current liabilities.
The purchase price was allocated as follows:
($000)
- ----------------------------------------------------
Accounts receivable $ 720
Inventories 400
Property, plant and equipment 1,387
Other assets 3
- ----------------------------------------------------
2,510
Current liabilities (157)
- ----------------------------------------------------
Cash purchase price $ 2,353
====================================================
20
The following unaudited pro forma financial information
presents the consolidated results of operations as if the
Lightning Optical Corporation and the Virgo Optics division
acquisitions had occurred on the first day of II-VI
Incorporated's 1995 fiscal year (July 1, 1994).
This information does not purport to present what II-VI
Incorporated's results of operations actually would have
been had the acquisitions occurred on July 1, 1994, or to
project the results of operations for any future period.
Unaudited Pro Forma Results
for Year Ended June 30,
($000 except per share data) 1996 1995
- ----------------------------------------------------
Revenues $ 41,951 $ 35,117
Net earnings 4,976 3,212
Earnings per share .78 .59
Fair Values of Financial Instruments
The Company's financial instruments recorded on the balance
sheet as of June 30, 1997 and 1996 include cash and cash
equivalents, and short and long-term debt. The carrying
amount of those financial instruments approximates fair
value. Off balance sheet financial instruments at June 30,
1997 and 1996 relate to foreign currency forward contracts.
The fair value of these instruments is immaterial. The fair
value amounts have been estimated by the Company using
available market information and appropriate valuation
methodologies. Considerable judgment is necessary in
interpreting market data to develop the estimates of fair
value and, accordingly, the estimates are not necessarily
indicative of the amounts that the Company could realize in
a current market exchange.
The Company has entered into foreign currency forward
exchange contracts in order to hedge its currency exposure
in Japan. Gains and losses on those contracts are recognized
as they occur. At June 30, 1997 and 1996, the Company had
contracts outstanding of approximately $3,046,000 and
$1,415,000, respectively. The counterparties to these
financial instruments consist of large financial
institutions, and the Company does not believe that it is
subject to any significant credit risk associated with these
contracts.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings per Share, which establishes standards for
computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common
stock. This Statement will be effective beginning with the
Company's financial statements for the quarter ending March
31, 1998. This Statement requires restatement of all prior-
period earnings per share data presented. Basic earnings per
share as defined by SFAS No. 128 for fiscal years 1997, 1996
and 1995 would be $1.12, $.75 and $.50, respectively.
Diluted earnings per share as defined by SFAS No. 128
approximates the historically presented earnings per share
for fiscal years 1997, 1996 and 1995.
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which redefines how
operating segments are determined and requires disclosure of
certain financial and descriptive information about a
Company's operating segments. The Company is required to
adopt this pronouncement beginning in fiscal 1999. The
Company has not yet completed its analysis of which
operating segments under this standard it will be required
to report on.
Note B
INVENTORIES
The components of inventories are as follows:
June 30,
($000) 1997 1996
- ----------------------------------------------------
Raw materials $ 3,083 $ 2,279
Work in process 1,992 1,427
Finished goods 3,054 1,784
- ----------------------------------------------------
$ 8,129 $ 5,490
====================================================
21
Note C
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (at cost) consist of the
following:
June 30,
($000) 1997 1996
- ----------------------------------------------------
Land and land improvements $ 876 $ 539
Buildings and improvements 8,073 6,952
Machinery and equipment 27,893 22,084
- ----------------------------------------------------
36,842 29,575
Less accumulated depreciation 17,211 14,490
- ----------------------------------------------------
$19,631 $15,085
====================================================
Note D
INDEBTEDNESS
Notes payable consist of one note at June 30, 1997 and
two notes at June 30, 1996 at the Company's Japan location. All
notes are guaranteed by the parent company.
The $590,000 note at June 30, 1997, which had an
outstanding balance at June 30, 1996 of $891,000, calls
for monthly principal payments plus interest for a five
year period ending September 1999. The interest rate at
June 30, 1997 was 2.125%. The bank has the option of
calling this loan in December of each year. The second
note, which was outstanding at June 30, 1996 for $502,000
and had an interest rate of 2.125%, was repaid during
fiscal 1997.
The Company has a line of credit (cash overdraft) facility
with a Singapore bank which permits maximum borrowings of
approximately $560,000. Borrowings are payable upon demand
with interest being charged at the rate of 1.5% above the
bank's prevailing prime lending rate. The interest rate at
June 30, 1997 was 7.5%. At June 30, 1997 and 1996 there were
no borrowings under this facility.
Included in long-term debt at June 30, 1997 and 1996 is
an installment loan in the amount of $45,000 and $68,000,
respectively, at the Company's Singapore location which
matures in August of fiscal year 2000, and is payable in
equal monthly payments including interest at an annual
interest rate of 7.5%. During fiscal 1997, the Company
obtained a low interest rate loan in the amount of $741,000
from the Pennsylvania Industrial Development Authority
(PIDA), of which $711,000 is outstanding at June 30, 1997,
to finance a portion of a facility expansion. The terms of
the PIDA loan call for equal monthly payments over a fifteen
year period, including interest at 3%.
The aggregate annual amounts of principal payments
required on the long-term debt are as follows:
($000) Year ending June 30, Amount
- -------------------------------------------
1998 $ 72
1999 69
2000 53
2001 49
2002 49
Thereafter 464
- -------------------------------------------
$ 756
===========================================
Interest payments made during the years ended
June 30, 1997, 1996 and 1995 totaled $56,000, $41,000
and $48,000, respectively.
Note E
INCOME TAXES
The components of income tax expense are as follows:
Year Ended June 30,
($000) 1997 1996 1995
- ----------------------------------------------------
Current:
Federal $ 2,754 $ 1,457 $ 534
State 202 227 174
Foreign 55 48 65
- ----------------------------------------------------
3,011 1,732 773
Deferred (138) (83) 96
- ----------------------------------------------------
$ 2,873 $ 1,649 $ 869
====================================================
Principal items comprising deferred income taxes are as
follows:
June 30,
($000) 1997 1996
- ----------------------------------------------------
Deferred income tax liabilities
Tax over book accumulated
depreciation $ 910 $ 970
Intangible assets 703 783
- ----------------------------------------------------
Deferred income tax liability
-long-term $ 1,613 $ 1,753
====================================================
Deferred income tax assets
Inventory capitalization $ 126 $ 156
Nondeductible accruals 302 273
- ----------------------------------------------------
Deferred income tax asset
- current $ 428 $ 429
====================================================
22
<TABLE>
<CAPTION>
The reconciliation of income tax expense at the statutory
federal rate to the reported income tax expense is as follows:
Year Ended June 30,
($000) 1997 % 1996 % 1995 %
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate $ 3,395 34 $ 2,047 34 $ 1,152 34
Increase (decrease) in taxes resulting from:
State income taxes - net of federal benefit 133 1 150 2 88 3
Excludable Foreign Sales Corporation income (80) - (50) (1) (45) (1)
Excludable foreign income (503) (5) (559) (9) (376) (11)
Foreign taxes 36 - 32 1 43 1
Nondeductible expenses 20 - 29 - 7 -
Other (128) (1) - - - -
- ---------------------------------------------------------------------------------------------
$ 2,873 29 $ 1,649 27 $ 869 26
=============================================================================================
</TABLE>
One of the Company's foreign subsidiaries operates under a
tax holiday and does not pay income taxes. The tax holiday
has been extended to March 2000.
During the years ended June 30, 1997, 1996 and 1995, cash
paid by the Company for income taxes was approximately
$2,660,000, $1,772,000 and $379,000, respectively.
The Company has not recorded deferred income taxes
applicable to undistributed earnings of foreign subsidiaries
that are indefinitely reinvested outside the United States.
If the earnings of such foreign subsidiaries were not
indefinitely reinvested, a deferred tax liability of
approximately $2,152,000 and $1,473,000 would have been
required as of June 30, 1997 and 1996, respectively.
The sources of differences resulting in deferred income
tax expense (credit) and the related tax effect of each were
as follows:
Year Ended June 30,
($000) 1997 1996 1995
- ----------------------------------------------------
Depreciation $(136) $ (79) $ (98)
Inventory capitalization (30) (18) (13)
Alternative minimum
tax carryforward - - 275
Other - primarily
nondeductible accruals 28 14 (68)
- ----------------------------------------------------
$(138) $(83) $ 96
====================================================
Note F
OPERATING LEASES
The Company leases certain property under operating
leases that expire at various dates through 2000. Future
rental commitments applicable to the operating leases at
June 30, 1997 are approximately $453,000, $253,000, and
$218,000 for 1998, 1999 and 2000, respectively. Rent expense
was approximately $519,000, $507,000 and $462,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
Note G
STOCK OPTION PLANS
The Company has a stock option plan under which stock
options have been granted by the Board of Directors to
certain officers and key employees, with 1,240,000 shares of
common stock reserved for use under this plan. All options
to purchase shares of common stock granted to-date have been
at market price at the date of grant. Twenty to twenty-five
percent of the options granted may be exercised one year
from the date of grant with comparable annual increases on a
cumulative basis each year thereafter.
The Company added a nonemployee directors stock option plan
in 1995, with 120,000 shares of common stock reserved for
use under this plan. The Plan provides for the automatic
grant of options to purchase 15,000 shares to each
nonemployee director at the fair value on the date of
shareholder approval of the plan and a similar grant for
each nonemployee director that joins the Board prior to October
1999. Twenty percent of the options granted may be exercised
one year from the date of grant with comparable annual
increases on a cumulative basis each year thereafter.
23
All stock options expire 10 years after the grant date.
Stock option activity relating to the plans in each of
the three years in the period ended June 30, 1997 is as follows:
Number of Weighted
Shares Average
Subject to Exercise
Options Option Price Per Share
- -------------------------------------------------------------
Outstanding - July 1, 1994 327,800 $ 2.03
Granted 314,000 $ 3.37
Exercised (84,380) $ 1.55
Forfeited (54,900) $ 3.59
- -------------------------------------------------------------
Outstanding - June 30, 1995 502,520 $ 2.79
Exercisable - June 30, 1995 110,600 $ 1.88
- -------------------------------------------------------------
Outstanding - July 1, 1995 502,520 $ 2.79
Granted 132,200 $10.03
Exercised (19,640) $ 1.68
Forfeited (5,200) $ 3.94
- -------------------------------------------------------------
Outstanding - June 30, 1996 609,880 $ 4.38
Exercisable - June 30, 1996 185,440 $ 2.45
- -------------------------------------------------------------
Outstanding - July 1, 1996 609,880 $ 4.38
Granted 86,100 $19.10
Exercised (109,246) $ 2.37
Forfeited (1,200) $17.50
=============================================================
Outstanding - June 30, 1997 585,534 $ 6.89
Exercisable - June 30, 1997 209,074 $ 3.53
=============================================================
Outstanding and exercisable options at June 30, 1997 by
expiration date are as follows:
Number of Number of
Shares Subject Per Share Shares
Expiration Dates to Option Price Exercisable
- -------------------------------------------------------------
May 1999 8,000 $ 3.69 8,000
May 2000 360 $ 2.69 360
August 2000 31,180 $ 1.83 31,180
February 2002 44,660 $ 2.13 44,660
June 2002 3,000 $ 2.13 3,000
April 2004 2,400 $ 1.50 800
July 2004 30,000 $ 2.00 12,000
July 2004 4,000 $ 1.97 1,600
August 2004 89,600 $ 2.69 29,600
November 2004 58,000 $ 4.00 22,000
December 2004 96,400 $ 3.94 32,200
February 2005 8,000 $ 4.94 3,200
June 2005 2,000 $16.13 800
December 2005 960 $10.63 -
February 2006 116,574 $ 9.88 18,574
May 2006 2,500 $15.25 600
February 2006 3,000 $ 9.75 500
August 2006 62,200 $17.50 -
November 2006 1,800 $22.00 -
February 2007 3,500 $30.25 -
June 2007 17,400 $22.38 -
- -------------------------------------------------------------
585,534 209,074
=============================================================
24
In 1997, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 provides that
companies may choose to change their methods of accounting
for stock options to a fair value method using an option
pricing model. The Company uses the intrinsic value approach
specified in Accounting Principles Board Opinion No. 25 in
accounting for stock options and did not change from this
method upon adoption of the new standard. Had the Company
changed its accounting method, its net income for 1997 would
have been reduced by $177,000 or $.03 per share. Net income
for 1996 would have been reduced by $35,000 or $.01 per
share. The pro forma adjustments were calculated using the
Black-Scholes option pricing model to value all stock
options granted since July 1, 1995 under the following
assumptions in each year:
- ----------------------------------------------------
1997 1996
- ----------------------------------------------------
Risk free interest rate 5.8% 6.4%
Expected volatility 69% 68%
Expected life of options 7.33 years 7.33 years
Expected dividends none none
- ----------------------------------------------------
Based on the option pricing model, options granted during
1997 and 1996 had fair values of $13.77 and $7.17 per share,
respectively.
Note H
<TABLE>
INTERNATIONAL AND DOMESTIC OPERATIONS AND EXPORT SALES
<CAPTION>
Year Ended June 30,
($000) 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
United States $ 50,489 $ 37,244 $ 26,644
International 21,063 13,204 11,158
- ---------------------------------------------------------------------------------------------
Total $ 71,552 $ 50,448 $ 37,802
- ---------------------------------------------------------------------------------------------
Sales or transfers between geographic areas: 1
United States $ 11,925 $ 7,172 $ 5,847
International 6,886 5,336 4,195
- ---------------------------------------------------------------------------------------------
Total 18,811 12,508 10,042
- ---------------------------------------------------------------------------------------------
Net sales $ 52,741 $ 37,940 $ 27,760
=============================================================================================
Export sales from the United States 2 $ 5,979 $ 6,938 $ 5,509
=============================================================================================
Operating income:
United States $ 7,822 $ 3,975 $ 1,860
International 1,674 1,717 1,441
Other - net 488 328 86
- ---------------------------------------------------------------------------------------------
Earnings before income taxes $ 9,984 $ 6,020 $ 3,387
=============================================================================================
Identifiable assets:
United States $ 46,923 $ 39,478 $ 20,633
International 7,589 4,691 3,734
- ---------------------------------------------------------------------------------------------
Total assets $ 54,512 $ 44,169 $ 24,367
=============================================================================================
Amounts for International operations in the above table primarily relate to the Company's operations in Asia.
1 Intersegment sales are made at established transfer prices.
2 Export sales are primarily made to western Europe.
</TABLE>
25
Note I
EMPLOYEE BENEFIT PLANS
Eligible employees of the Company participate in a profit
sharing retirement plan. Contributions to the plan are made
at the discretion of the Company's Board of Directors and
were approximately $740,000 in 1997, $455,000 in 1996 and
$259,000 in 1995. The Company has an employee stock purchase
plan for all employees who have six months of continuous
employment with the Company. The employee may purchase the
common stock at 5% below the prevailing market price. The
amount of shares which may be bought by an employee is
limited to 10% of the employee's base pay for each fiscal
year. The plan, as amended, limits the number of shares of
common stock available for purchase to 200,000 shares. At
June 30, 1997, 127,535 shares of common stock were available
for purchase under the plan.
The Company has no program for postretirement health and
welfare and postemployment benefits.
On June 21, 1996, the Board of Directors of the Company
approved the II-VI Incorporated Deferred Compensation Plan
(the "Plan"). The Plan is designed to allow officers and key
employees of the Company to defer receipt of compensation
into a trust fund for retirement purposes. The Plan is a
nonqualified, defined contribution employees' retirement
plan. At the Company's discretion, the Plan may be funded by
the Company making contributions based on compensation
deferrals, matching contributions and discretionary
contributions. Compensation deferrals will be based on an
election by the participant to defer a percentage of
compensation under the Plan. All assets in the Plan are
subject to claims of the Company's creditors until such
amounts are paid to the Plan participants. The Company made
contributions to the Plan in the amount of $139,000 in 1997
and did not make any contributions in 1996.
Note J
QUARTERLY STOCK INFORMATION (UNAUDITED)
II-VI Incorporated common stock high and low closing
sales price as reported on the Nasdaq National Market:
1997 1996
High Low High Low
- --------------------------------------------------------------
First Quarter $ 23 $ 12 3/4 $ 23 $ 12 7/8
Second Quarter 27 1/8 19 1/2 18 9 1/2
Third Quarter 31 3/4 22 1/8 12 5/8 9 3/4
Fourth Quarter 25 1/4 16 3/32 16 7/8 11 5/8
The Company estimates that as of September 15, 1997 there
were approximately 700 record holders of common stock.
26
LIST OF SUBSIDIARIES OF II-VI INCORPORATED
Jurisdiction of
Subsidiary Incorporation
- -------------- ---------------
II-VI Delaware, Incorporated Delaware
II-VI Singapore Pte., Ltd. Singapore
II-VI Worldwide, Incorporated Barbados
II-VI Japan Incorporated Japan
II-VI VLOC Incorporated Pennsylvania
II-VI U.K. Limited United Kingdom
II-VI Optics (Suzhou) Co. Ltd. China
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in
Registration Statements No. 33-19511, No. 33-38019, No. 33-
19510, No. 33-63739 and No. 333-12737 on Form S-8 and No.
333-04531 on Form S-3 of II-VI Incorporated of our reports
dated August 12, 1997, appearing in and incorporated by
reference in this Annual Report on Form 10-K of II-VI
Incorporated for the year ended June 30, 1997.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
September 26, 1997
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in
Registration Statements No. 33-19511, No. 33-38019,
No. 33-19510, No. 33-63739 and 333-12737 on Form S-8
and No. 333-04531 on Form S-3 of II-VI Incorporated
of our report dated August 12, 1996, appearing in this
Annual Report on Form 10-K of II-VI Incorporated for
the year ended June 30, 1997.
/s/ Alpern, Rosenthal & Company
Pittsburgh, Pennsylvania
September 26, 1997
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