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, 1998
[ ] 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, PA 16056
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
724-352-4455
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. [ ]
Aggregate market value of outstanding Common Stock, no par value,
held by non-affiliates of the Registrant at September 15, 1998,
was approximately $43,708,026, based on the closing sale price
reported on NASDAQ/NMS for September 15, 1998. 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, 1998, was 6,842,986.
Documents Incorporated by Reference
Portions of the Annual Report to Shareholders for the fiscal year
ended June 30, 1998 are incorporated by reference into Parts I,
II and IV hereof.
Portions of the Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Part 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 are located
at 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056. Its
telephone number is 724-352-4455. Reference to the "Company" or
"II-VI" in this Form 10-K, unless the context requires otherwise,
refers to II-VI Incorporated and 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. 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,
manufacture 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 1998 Annual Report (the "Annual Report")
and Note H to the Company's Consolidated Financial Statements on
page 26 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 80,000 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 (carbon dioxide) 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.
The Company 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 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 the Company 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(r) 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 continues to grow 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(r). These substrates are subsequently
processed by the Company's customers into infrared detectors using
epitaxial crystal growth and device fabrication techniques. The
Company supplies Zinc Sulfide in the form of domes and windows to
military suppliers for Forward Looking InfraRed (FLIR) systems
worldwide. A portion of the Company's infrared substrate business
involves development programs funded by various governmental
agencies.
YAG Laser Components
The power levels available from Nd:YAG (neodymium doped:Yttrium
Aluminum Garnet) 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. YAG lasers require the same optical elements as the CO2
lasers 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.
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. YLF is used in both
flashlamp pumped and diode pumped solid-state lasers. Due to high
lasing efficiency, YLF lasers are suitable for use on the
manufacturing floor for scribing, trimming and cutting of
semiconductor materials.YLF also lases at 1.313 micrometers.
That, along with the 1.047 micrometer wavelength, has 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 original
equipment manufacturers (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 marketshare, 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. The Company'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.; 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 4,000
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 apparatuses.
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.
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
The Company 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 Compound 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. The Company 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. The Company 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
has recently expanded its production capacity for this material.
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.
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 virtually
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
The Company 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 given
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 inspected and approved by the Nuclear
Regulatory Commission. This material is utilized in the Company's
thin-film coatings. 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 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 ninety-five. Eighty-eight 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; 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 together totaled approximately $1.7 million, $3.0
illion and $3.3 million during fiscal 1996, 1997 and 1998,
respectively. Contract research revenues during those respective
years totaled approximately $1.7 million, $2.7 million and $2.2
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 (Defense Advanced Research Projects Agency) 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.
The Company 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 currently aware of any 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 market for the
nuclear radiation detector materials is in its infancy and could be
affected by competing technologies.
Order Backlog
Order backlog increased 17% to $19.8 million at June 30, 1998
from $16.9 million at June 30, 1997. Manufacturing orders comprise
93% of the backlog at June 30, 1998, compared to 83% of backlog
at June 30, 1997. All of the manufacturing order backlog at June
30, 1998 is expected to be shipped in fiscal 1999.
Employees
As of June 30, 1998, the Company employed 689 persons worldwide.
Of these employees, 95 were engaged in research, development and
engineering, 440 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
The Company 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) for replacement
optics for industrial CO2 lasers; EPIREADY(registered) for low
surface damage substrates for Mercury Cadmium Telluride epitaxy;
and eV PRODUCTS(registered) 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 materials. The
failure to properly handle such materials, however, could lead to
harmful exposure to employees or the discharge of certain hazardous
waste materials, and, since the Company does not carry environmental
impairment insurance, this could have 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 external
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% of revenues during both fiscal
1996 and 1997 and 45% during fiscal 1998. 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 of 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
a material 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
approximately 64 acres of land. In fiscal 1998, the Company
completed construction of a 30,000-square-foot facility in Saxonburg
which is occupied by the eV PRODUCTS manufacturing operation and a
45,000 square-foot facility in Florida which is occupied by the
Company's VLOC subsidiary. In addition, the Company has leases for
its manufacturing and office space in Florida, Singapore, China,
U.K., and Japan totaling 39,000 square feet, and owns two facilities,
one of which is currently being held for sale, totaling 35,000
square feet in Florida.
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 56 Chairman, Chief Executive
Officer and Director
Francis J. Kramer 49 President, Chief Operating
Officer and Director
Herman E. Reedy 55 Vice President and
General Manager of
Quality and Engineering
James Martinelli 40 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 1998
First Quarter $28 $21 3/8
Second Quarter $28 1/2 $21
Third Quarter $23 3/4 $17 15/16
Fourth Quarter $20 1/2 $12 5/8
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
On September 15, 1998, the last reported sale price for the
Common Stock on the NASDAQ National Market was $8 9/16 per share.
As of such date, there were approximately 725 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 1998 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference
from pages 9 through 12 of the Company's 1998 Annual Report to
Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference
from pages 2 through 8 of the Company's 1998 Annual Report to
Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by
reference is incorporated by reference from pages 14 through
26 of the Company's 1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 1998 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 1998 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 1998 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
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Board of
Directors and Board Committees" in the Company's definitive proxy
statement for the 1998 Annual Meeting of Shareholders filed pursuant
to Regulation 14A of the Securities Exchange Act of 1934, as amended.
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, 1998 and
1997, the consolidated statements of earnings,
shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1998, and the
notes to consolidated financial statements, presented in the
Company's 1998 Annual Report to Shareholders, are
incorporated herein by reference.
The report of Deloitte & Touche LLP, dated August 7, 1998
on the 1998 and 1997 financial statements presented in the
Company's 1998 Annual Report to Shareholders, is incorporated
herein by reference.
The report of Alpern, Rosenthal & Company, dated August 12,
1996 on the consolidated statements of earnings,
shareholders' equity, and cash flows for the year ended June
30, 1996 is included herein.
(b) Financial Statement Schedule:
The financial statement schedule shown below should be read
in conjunction with the financial statements contained in the
1998 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.
The report of Deloitte & Touche LLP on Schedule II for
each of the two years ended June 30, 1998, is included
herein.
The report of Alpern, Rosenthal & Company, dated August
12, 1996 on Schedule II for the year ended June 30, 1996,
is included herein.
Schedule II - Valuation and Qualifying Accounts for each of
the three years in the period ended June 30, 1998.
(3) Exhibits.
EXHIBIT NO. REFERENCE
2.01 Merger Agreement and Plan of Incorporated herein by
Reorganization by and among reference is Exhibit 2.01
II-VI Incorporated, to the Company's Report
II-VI Lightning Optical on Form 8-K for the event
Incorporated and Lightning dated February 22, 1996.
Optical Corporation, dated
as of February 22, 1996
2.02 Registration Rights Agreement Incorporated herein by
dated February 22, 1996 by reference is Exhibit 2.02
and among certain former to the Company's Report
shareholders of Lightning on Form 8-K for the event
Optical Corporation and dated February 22, 1996.
II-VI Incorporated
2.03 Escrow Agreement dated Incorporated herein by
February 22, 1996 by and reference is Exhibit 2.03
among certain shareholders to the Company's Report
of Lightning Optical on Form 8-K for the event
Corporation and II-VI dated February 22, 1996.
Incorporated
3.01 Amended and Restated Incorporated herein by
Articles of Incorporation reference is Exhibit 3.02 to
of II-VI Incorporated Registration Statement
No. 33-16389 on Form S-1.
3.02 Amended and Restated By-Laws Incorporated herein by
of II-VI 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 Employees' Incorporated herein by
Stock Purchase Plan reference is Exhibit 10.03 to
Registration Statement
No. 33-16389 on Form S-1.
10.02 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' reference is Exhibit 10.04 to
Stock Purchase Plan Registration Statement
No. 33-16389 on Form S-1.
10.03 First Amendment II-VI Incorporated herein by
Incorporated Amended and reference is Exhibit 10.01 to
Restated Employees' Stock to the Company's Form 10-Q
Purchase Plan for the Quarter Ended
March 31, 1996.
10.04 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' reference is Exhibit 10.05 to
Profit-Sharing Plan and Registration Statement
Trust Agreement, as amended No. 33-16389 on Form S-1.
10.05 Form of Representative Incorporated herein by
Agreement between the reference is Exhibit 10.15 to
Company and its foreign Registration Statement
representatives No. 33-16389 on Form S-1.
10.06 Form of Employment Agreement* Incorporated herein by
reference is Exhibit 10.16 to
Registration Statement
No. 33-16389 on Form S-1.
10.07 Description of Management- Incorporated herein by
By-Objective Plan* reference is Exhibit 10.09 to
the Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1993.
10.08 II-VI Incorporated 1994 Incorporated herein by
Nonemployee Directors Stock reference is Exhibit A to the
Option Plan Company's Proxy Statement
dated September 30, 1994.
10.09 II-VI Incorporated Deferred Incorporated herein by
Compensation Plan* reference is Exhibit 10.12 to
Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1996.
10.10 Trust Under the II-VI Incorporated herein by
Incorporated Deferred reference is Exhibit 10.13 to
Compensation Plan* the Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1996.
10.11 Description of Bonus Incorporated herein by
Incentive Plan* reference is Exhibit 10.14 to
the Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1996.
10.12 Amended and Restated II-VI Incorporated herein by
Incorporated Deferred reference is Exhibit 10.01
Compensation Plan* to the Company's Form 10-Q
for the Quarter Ended
December 31, 1996.
10.13 Agreement by and between Incorporated herein by
PNC Bank, National reference is Exhibit 10.01
Association and II-VI to the Company's Form 10-Q
Incorporated for Committed for the Quarter Ended
Line of Credit (including March 31, 1998.
credit note) and Japanese
Yen Term Loan
10.14 Amended and Restated II-VI Filed herewith.
Incorporated 1997 Stock
Option Plan
13.01 Annual Report to Shareholders Portions of the 1998 Annual
Report are filed herewith.
21.01 List of Subsidiaries of Filed herewith.
II-VI Incorporated
23.01 Consent of Deloitte Filed herewith.
& Touche LLP
23.02 Consent of Alpern, Rosenthal Filed herewith.
& Company
27.01 Financial Data Schedule Filed herewith.
27.02 Restated Financial Data Filed herewith.
Schedule (Updated for basic
and diluted earnings per
share) for the Three and Six
Month Periods Ended
September 30, 1997
and December 31, 1997,
respectively
27.03 Restated Financial Data Filed herewith.
Schedule (Updated for basic
and diluted earnings per
share) for the Three, Six and
Nine Month Periods and the
Year Ended September 30, 1996,
December 31, 1996,
March 31, 1997 and June 30, 1997,
respectively
27.04 Restated Financial Data Filed herewith.
Schedule (Updated for basic
and diluted earnings per
share) for the Year Ended
June 30, 1996
- -----------
* 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 1998.
(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 files 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 1998 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 1998 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 22, 1998 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 22, 1998 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
and Director
September 22, 1998 By: /s/ Francis J. Kramer
Francis J. Kramer
President and Chief
Operating Officer and Director
Principal Financial and
Accounting Officer:
September 22, 1998 By: /s/ James Martinelli
James Martinelli
Treasurer and Chief Financial Officer
September 22, 1998 By: /s/ Richard W. Bohlen
Richard W. Bohlen
Director
September 22, 1998 By: /s/ Thomas E. Mistler
Thomas E. Mistler
Director
September 22, 1998 By: /s/ Duncan A. J. Morrison
Duncan A. J. Morrison
Director
September 22, 1998 By: /s/ Peter W. Sognefest
Peter W. Sognefest
Director
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
II-VI Incorporated and Subsidiaries
Saxonburg, Pennsylvania
We have audited the consolidated statements of earnings,
shareholders' equity and cash flows of II-VI Incorporated and
Subsidiaries for the year ended June 30, 1996; such consolidated
financial statements are included in the Company's 1998 Annual
Report to Shareholders and are incorporated herein by reference.
Our audit also included the financial statement schedule II,
Valuation and Qualifying Accounts of II-VI Incorporated and
Subsidiaries for the year ended June 30, 1996, 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 audit.
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 consolidated financial statements referred
to above present fairly, in all material respects, the results
of operations and cash flows of II-VI Incorporated and Subsidiaries
for the year ended June 30, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the
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/ 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 sheets of II-VI
Incorporated and subsidiaries as of June 30, 1998 and 1997 and
the related consolidated statements of earnings, shareholders'
equity and cash flows for the years then ended, and have issued
our report thereon dated August 7, 1998; such consolidated
financial statements and report are included in your 1998 Annual
Report to Shareholders and are incorporated herein by reference.
Our audits also included the consolidated financial statement
Schedule II, Valuation and Qualifying Accounts, of II-VI
Incorporated and subsidiaries for each of the two years in the
period ended June 30, 1998. The consolidated financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. 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 7, 1998
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1997, AND 1998
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Additions
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Balance at Charged Charged Deduction Balance
Beginning to to Other from At End
of Year Expense Accounts(1) Reserves(2) of Year
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<S> <C> <C> <C> <C> <C>
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
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts
& warranty returns $ 306 $ 185 $ (8) $ 55 $ 428
</TABLE>
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(1) Amounts primarily relate to businesses acquired ,warranty
returns and the effects of foreign currency translation.
(2) Uncollectible accounts written off, net of recoveries.
EXHIBIT INDEX
EXHIBIT NO. REFERENCE
2.01 Merger Agreement and Plan of Incorporated herein by
Reorganization by and among reference is Exhibit 2.01
II-VI Incorporated, to the Company's Report
II-VI Lightning Optical on Form 8-K for the event
Incorporated and Lightning dated February 22, 1996.
Optical Corporation, dated
as of February 22, 1996
2.02 Registration Rights Agreement Incorporated herein by
dated February 22, 1996 by reference is Exhibit 2.02
and among certain former to the Company's Report
shareholders of Lightning on Form 8-K for the event
Optical Corporation and dated February 22, 1996.
II-VI Incorporated
2.03 Escrow Agreement dated Incorporated herein by
February 22, 1996 by and reference is Exhibit 2.03
among certain shareholders to the Company's Report
of Lightning Optical on Form 8-K for the event
Corporation and II-VI dated February 22, 1996.
Incorporated
3.01 Amended and Restated Incorporated herein by
Articles of Incorporation reference is Exhibit 3.02 to
of II-VI Incorporated Registration Statement
No. 33-16389 on Form S-1.
3.02 Amended and Restated By-Laws Incorporated herein by
of II-VI 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 Employees' Incorporated herein by
Stock Purchase Plan reference is Exhibit 10.03 to
Registration Statement
No. 33-16389 on Form S-1.
10.02 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' reference is Exhibit 10.04 to
Stock Purchase Plan Registration Statement
No. 33-16389 on Form S-1.
10.03 First Amendment II-VI Incorporated herein by
Incorporated Amended and reference is Exhibit 10.01 to
Restated Employees' Stock to the Company's Form 10-Q
Purchase Plan for the Quarter Ended
March 31, 1996.
10.04 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' reference is Exhibit 10.05 to
Profit-Sharing Plan and Registration Statement
Trust Agreement, as amended No. 33-16389 on Form S-1.
10.05 Form of Representative Incorporated herein by
Agreement between the reference is Exhibit 10.15 to
Company and its foreign Registration Statement
representatives No. 33-16389 on Form S-1.
10.06 Form of Employment Agreement* Incorporated herein by
reference is Exhibit 10.16 to
Registration Statement
No. 33-16389 on Form S-1.
10.07 Description of Management- Incorporated herein by
By-Objective Plan* reference is Exhibit 10.09 to
the Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1993.
10.08 II-VI Incorporated 1994 Incorporated herein by
Nonemployee Directors Stock reference is Exhibit A to the
Option Plan Company's Proxy Statement
dated September 30, 1994.
10.09 II-VI Incorporated Deferred Incorporated herein by
Compensation Plan* reference is Exhibit 10.12 to
Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1996.
10.10 Trust Under the II-VI Incorporated herein by
Incorporated Deferred reference is Exhibit 10.13 to
Compensation Plan* the Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1996.
10.11 Description of Bonus Incorporated herein by
Incentive Plan* reference is Exhibit 10.14 to
the Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1996.
10.12 Amended and Restated II-VI Incorporated herein by
Incorporated Deferred reference is Exhibit 10.01
Compensation Plan* to the Company's Form 10-Q
for the Quarter Ended
December 31, 1996.
10.13 Agreement by and between Incorporated herein by
PNC Bank, National reference is Exhibit 10.01
Association and II-VI to the Company's Form 10-Q
Incorporated for Committed for the Quarter Ended
Line of Credit (including March 31, 1998.
credit note) and Japanese
Yen Term Loan
10.14 Amended and Restated II-VI Filed herewith.
Incorporated 1997 Stock
Option Plan
13.01 Annual Report to Shareholders Portions of the 1998 Annual
Report are filed herewith.
21.01 List of Subsidiaries of Filed herewith.
II-VI Incorporated
23.01 Consent of Deloitte Filed herewith.
& Touche LLP
23.02 Consent of Alpern, Rosenthal Filed herewith.
& Company
27.01 Financial Data Schedule Filed herewith.
27.02 Restated Financial Data Filed herewith.
Schedule (Updated for basic
and diluted earnings per
share) for the Three and Six
Month Periods Ended
September 30, 1997
and December 31, 1997,
respectively
27.03 Restated Financial Data Filed herewith.
Schedule (Updated for basic
and diluted earnings per
share) for the Three, Six and
Nine Month Periods and the
Year Ended September 30, 1996,
December 31, 1996,
March 31, 1997 and June 30, 1997,
respectively
27.04 Restated Financial Data Filed herewith.
Schedule (Updated for basic
and diluted earnings per
share) for the Year Ended
June 30, 1996
_______
* Denotes management contract or compensatory plan, contract
or arrangement.
[Amended as of May 30, 1998]
II-VI INCORPORATED
STOCK OPTION PLAN OF 1997
Section 1. Amendment. Upon the effective date set forth in Section
13, the II-VI Incorporated Stock Option Plan of 1990 is hereby
amended and restated as the II-VI Incorporated Stock Option Plan of
1997 (hereinafter called the "Plan"). Under the Plan, directors,
officers, key employees and consultants/independent contractors of
II-VI Incorporated (hereinafter called the "Company") and its
subsidiaries, if any, who are responsible for its continued growth
and development and future financial success of the Company may be
granted options to purchase shares of common stock of the Company in
order to secure to the Company the advantages of the incentive and
sense of proprietorship inherent in stock ownership by such persons.
Section 2. Duration. All options granted under this Plan must be
granted within ten years of August 16, 1997. Any options
outstanding after the expiration of such ten-year period may be
exercised within the periods prescribed by Section 8.
Section 3. Administration. The Plan shall be administered by the
Board of Directors of the Company or, at the election of the Board
of Directors, by a committee of the Board of Directors (the
"Administrator") constituted so as to comply with Rule 16b-3
promulgated under Section 16 of the Securities Exchange Act of 1934,
as amended, as such rule may be amended from time-to-time, or any
successor rule. In the event that the Administrator is a committee
of the Board of Directors, a majority of the committee shall
constitute a quorum and the acts of a majority of the members
present at any meeting at which a quorum is present or acts approved
in writing by a majority of the committee shall be deemed the acts
of the committee. Subject to the provisions of the Plan and to
policies determined by the Board of Directors, the Administrator is
authorized to adopt such rules and regulations and to take such
action in the administration of the Plan as it shall deem proper.
Section 4. Eligibility. Directors, officers and key employees of
the Company and its subsidiaries, if any (including officers and
employees who are directors of the Company), who, in the opinion of
the Administrator, are mainly responsible for the continued growth
and development and future financial success of the business shall
be eligible to participate in the Plan. In addition,
consultants/independent contractors shall be eligible for the grant
of Nonstatutory Stock Options only (as hereinafter defined). The
Administrator shall, in its sole discretion, from time to time,
select from such eligible persons those to whom options shall be
granted and determine the number of shares to be included in such
option. No officer or employee shall have any right to receive an
option, except as the Administrator in its discretion shall
determine. The terms "subsidiaries" and "parent" where used in the
Plan or in any stock option agreement entered into under the Plan
means a "subsidiary corporation" or a "parent corporation"
respectively as defined in Section 424 of the Internal Revenue Code
of 1986, as it may be amended from time to time (the "Code").
Section 5. Shares Subject to Plan. Inclusive of options granted
under this Plan prior to amendment hereby, options may be granted
pursuant to the Plan to purchase up to 1,560,000 shares of no par
value common stock of the Company (subject to adjustment as provided
in Section 9), which may be either authorized and unissued shares or
shares held in the treasury of the Company. To the extent that
options granted under the Plan (including options granted under the
Plan prior to amendment hereby) shall expire or terminate without
being exercised shares covered thereby shall remain available for
purposes of the Plan. Shares delivered to the Company to pay the
option price or otherwise shall also remain available for purposes
of the Plan.
Section 6. Types of Options. Options granted pursuant to the Plan
may be either options which are intended to be treated as incentive
stock options under Section 422 of the Code (hereinafter called
"Incentive Stock Options") or other options not intended to be
treated as incentive stock options under Section 422 of the Code
(hereinafter called "Nonstatutory Stock Options"). Incentive Stock
Options and Nonstatutory Stock Options shall be granted separately
hereunder. Subject to the foregoing, the Administrator shall
determine, in its sole discretion, whether and to what extent
options granted under the Plan shall be Incentive Stock Options or
Nonstatutory Stock Options.
Section 7. Authority of Administrator. The Administrator, in its
sole discretion, may permit an optionee voluntarily to surrender for
cancellation an option granted under the Plan, such surrender to be
conditioned upon the granting to such optionee of a new option under
the Plan for the same or a different number of shares as the option
surrendered, or may require such voluntary surrender as condition
precedent to the grant of a new option to such optionee. Any such
new option shall be exercisable at the price, during the period, and
in accordance with any other terms and conditions specified by the
Administrator at the time the new option is granted, all determined
in accordance with the provisions of the Plan without regard to the
price, period of exercise, or any other terms or conditions of the
option surrendered for cancellation. The grant of such new option
shall not be deemed an amendment of the Plan or the option
surrendered. For purposes of Section 5 hereof, options granted
under this Plan and subsequently surrendered for cancellation shall
be deemed to have terminated without being exercised.
Section 8. Terms of Options. Each option granted under the Plan
shall be evidenced by a stock option agreement between the Company
and the person to whom such option is granted designating the option
as either an Incentive Stock Option or a Nonstatutory Stock Option
and shall be subject to the following terms and conditions:
(a) Subject to adjustment as provided in Section 9 of this Plan,
the price at which each share covered by an option may be purchased
shall be determined in each case by the committee but shall not be
less than the fair market value thereof at the time the option is
granted. If an optionee owns (or is deemed to own under applicable
provisions of the Code and rules and regulations promulgated
thereunder) more than 10% of the combined voting power of all
classes of the stock of the Company (or any parent or subsidiary of
the Company) and an option granted to such optionee is designated as
an Incentive Stock Option, the option price shall be no less than
110% of the fair market value of the shares covered by the option on
the date the option is granted.
(b) During the lifetime of the optionee the option may be exercised
only by the optionee. The option shall not be transferable by the
optionee otherwise than by will or by the laws of descent and
distribution.
(c) An option may be exercised in whole at any time, or in part
from time to time, within such period or periods not to exceed ten
years from the granting of the option as may be determined by the
Administrator and set forth in the stock option agreement (such
period or periods being hereinafter referred to as the "option
period"), provided that all options will terminate if the optionee
shall cease to be employed by the Company or any of its subsidiaries
except as follows:
(i) if the optionee shall cease to be employed by the Company or
any of its subsidiaries because of early, normal or late retirement,
as those terms are defined in the Company's profit sharing plan, the
option may be exercised only within three years after the
termination of employment and only within the option period;
(ii) if the optionee shall cease to be employed by the Company or
any of its subsidiaries because of a total and permanent disability
as that term is defined in Section 22(e)(3) of the Code, the option
may be exercised only within twelve months after the termination and
only within the option period; and
(iii) if the optionee shall die, the option may be exercised only
within twelve months after the optionee's death and only within the
option period (and only within the period set forth in subparagraph
(i) hereof if such death follows a termination of employment other
than for a total and permanent disability; or only within the period
set forth in subparagraph (ii) hereof if such death follows a
termination of employment due to a total and permanent disability as
set forth in subparagraph (ii)) and only by the optionee's personal
representatives or persons entitled thereto under the optionee's
will or the laws of descent and distribution.
Notwithstanding the foregoing, the Board of Directors, in its sole
discretion, or the Administrator, in its sole discretion, may extend
the option period of any option (i) for any period following the
date of termination of employment (or cessation of service as a
director) not to exceed the original option period or (ii) for an
additional three years following the date of termination of
employment regardless of the original option period.
(d) The option may not be exercised for more shares (subject to
adjustment as provided in Section 9) after the termination of the
optionee's employment or the optionee's death than the optionee was
entitled to purchase thereunder at the time of the termination of
the optionee's employment or the optionee's death.
(e) If an optionee owns (or is deemed to own under applicable
provisions of the Code and rules and regulations promulgated
thereunder) more than 10% of the combined voting power of all
classes of stock of the Company (or any parent or subsidiary of the
Company) and an option granted to such optionee is designated as an
Incentive Stock Option, the option by its terms may not be
exercisable after the expiration of five years from the date such
option is granted.
(f) The option price of each share purchased pursuant to an option
shall be paid in full at the time of each exercise of the option
either (i) in cash, (ii) by delivering to the Company shares of the
common stock of the Company having an aggregate fair market value
equal to the option price of such shares being purchased; or, (iii)
by delivering a combination of the foregoing having an aggregate
fair market value equal to the option price of such shares being
purchased.
(g) Nothing contained in the Plan or in any stock option agreement
shall confer upon any optionee any right with respect to the
continuance of employment by the Company or any subsidiary or
interfere in any way with the right of the Company or any subsidiary
to terminate his employment or change his compensation at any time.
(h) If the optionee terminates his employment with the Company or a
subsidiary for any reason, and commences employment with a
Competitor of the Company or a subsidiary within twelve months of
the date the option is exercised, the optionee shall return to the
Company the shares acquired pursuant to such exercise and the
Company shall return the purchase price of such shares in cash or
certified check within thirty days after the optionee commences such
employment with a Competitor. If the optionee has sold such shares,
then he agrees to pay to the company, in cash or certified funds, an
amount equal to the proceeds received by the optionee on the sale of
such shares less the amount which the optionee paid for such shares
on the exercise of the option. Such amount shall be paid to the
Company within thirty days after the optionee commences his
employment with the Competitor. For the purpose of this Plan, a
"Competitor" shall mean any corporation, partnership, sole
proprietorship or other entity who sells, manufactures, produces or
modifies a product or products similar to, the same as or a
substitute for any product or products sold by the Company or any
subsidiary.
(i) A stock option agreement may contain such other terms and
conditions not inconsistent with the foregoing as the Administrator
shall approve for any or all options granted hereunder, including a
vesting restriction on exercise for some or all of the shares
subject to the option for certain periods of time not to exceed five
years.
Section 9. Adjustment of Number and Price of Shares.
(a) In the event that a dividend shall be declared upon the common
stock of the Company payable in shares of said stock, including any
such dividend declared prior to the effective date of this amendment
to the Plan, the number of shares of common stock covered by each
outstanding option and the number of shares available for issuance
pursuant to the Plan but not yet covered by an option shall be
adjusted by adding thereto the number of shares which would have
been distributable thereon if such shares had been outstanding on
the date fixed for determining the shareholders entitled to receive
such stock dividend.
(b) In the event that the outstanding shares of common stock of the
Company shall be changed into or exchanged for a different number or
kind of shares of stock or other securities of the Company or of
another corporation, whether through reorganization,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted for the shares of
common stock covered by each outstanding option and for the shares
available for issuance pursuant to the Plan but not yet covered by
an option, the number and kind of shares of stock or other
securities which would have been substituted therefor if such shares
had been outstanding on the date fixed for determining the
shareholders entitled to receive such changed or substituted stock
or other securities.
(c) In the event there shall be any change, other than specified
above in this Section 9, in the number or kind of outstanding shares
of common stock of the Company or of any stock or other securities
into which such common stock shall be changed or for which it shall
have been exchanged, then, if the Board of Directors shall
determine, in its discretion, that such change equitably requires an
adjustment in the number or kind of shares covered by an option,
such adjustment shall be made by the Board of Directors and shall be
effective and binding for all purposes of the Plan and on each
outstanding stock option agreement.
(d) In the event that, by reason of a corporate merger,
consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Board of Directors shall
authorize the issuance or assumption of a stock option or stock
options in a transaction to which Section 424(a) of the Code
applies, then, notwithstanding any other provision of the Plan, the
Committee may grant an option or options upon such terms and
conditions as it may deem appropriate for the purpose of assumption
of the old option, or substitution of a new option for the old
option, in conformity with the provisions of such Section 424(a) and
the regulations thereunder, as they may be amended from time to
time.
(e) No adjustment or substitution provided for in this Section 9
shall require the Company to issue or to sell a fractional share
under any stock option agreement and the total adjustment or
substitution with respect to each stock option agreement shall be
limited accordingly.
(f) In the case of any adjustment or substitution provided for in
this Section 9, the option price per share in each stock option
agreement shall be equitably adjusted by the Board of Directors to
reflect the greater or lesser number of shares of stock or other
securities into which the stock covered by the option may have been
changed or which may have been substituted therefor.
Section 10. Fair Market Value. In any determination of fair market
value under this Plan, fair market value shall be deemed to be (i)
if there quoted, the closing price on the National Association of
Securities Dealers Automated Quotation-National Market System, for
the no par value common stock of the Company for the date in
question, or if no sales were made on that date, on the next
preceding date on which sales were made, or (ii) the mean between
the bid and the asked price as quoted by the National Association of
Securities Dealers Automated Quotation System.
Section 11. Amendment and Discontinuance. The Board of Directors
may alter, amend, suspend or discontinue the Plan, provided that no
such action shall deprive any person without such person's consent
of any rights theretofore granted pursuant hereto. Except as
provided in Section 9, the Board of Directors shall submit any
amendment to the Plan to the stockholders of the Company for
approval only if (i) required by law, or (ii) considered advisable
or necessary by the Board of Directors.
Section 12. Compliance with Governmental Regulations.
(a) Notwithstanding any provision of the Plan or the terms of any
stock option agreement issued under the Plan, the Company shall not
be required to issue any shares hereunder prior to registration of
the shares subject to the Plan under the Securities Act of 1933 or
the Securities Exchange Act of 1934, if such registration shall be
necessary, or before compliance by the Company of any participant
with any other provisions of either of those acts or of regulations
or rulings of the Securities and Exchange Commission thereunder, or
before compliance with all other federal and state laws and
regulations and rulings thereunder.
(b) The Company shall use its best efforts to effect such
registrations (except as otherwise provided in paragraph (c) hereof)
and to comply with such laws, regulations and rulings forthwith upon
advice by its counsel that any such registration or compliance is
necessary.
(c) The Company may, based upon advice by counsel to the Company,
require an optionee to make such representations and warranties at
the time of exercise of a stock option granted under the Plan as
shall be necessary or convenient to cause the issuance of the shares
to such optionee to be in compliance with such laws, regulations and
rulings without registration.
Section 13. Effective Date of Amended Plan. The Plan, as amended,
is effective as of August 16, 1997, subject to approval and adoption
of the amendment to the Plan by the holders of a majority of the
votes cast at the 1997 annual meeting of stockholders.
MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Overview
Net earnings decreased 5% in fiscal 1998 to $6.8 million from $7.1
million in fiscal 1997. Revenues grew 16% to $61.3 million in
fiscal 1998 from $52.7 million last fiscal year. Bookings increased
13% to $64.2 million in fiscal 1998 from $56.7 million in fiscal
1997. Order backlog increased 17% to $19.8 million at June 30, 1998
from $16.9 million at June 30, 1997 as a result of orders outpacing
shipments in fiscal 1998. Manufacturing orders comprised 93% of the
backlog at June 30, 1998 compared to 83% of backlog at June 30, 1997.
Net Earnings
Net earnings decreased 5% in fiscal 1998 to $6.8 million, down from
$7.1 million in fiscal 1997. The major contributors to the net
earnings decrease were lower manufacturing gross margins, higher
selling, general and administrative expenses, higher internal
research and development expenses and higher other expenses. Each
of these are explained further in this section.
Bookings and Sales
Bookings increased 13% to $64.2 million in fiscal 1998 compared to
$56.7 million in fiscal 1997. Manufacturing bookings increased by
approximately $9.7 million while contract research and development
bookings decreased by approximately $2.2 million. The largest
portion of the growth in manufacturing orders was due to increased
demand for infrared optics and materials in the international
industrial markets, excluding Japan, as well as increased bookings
at the Company's VLOC subsidiary.
Revenues grew 16% to $61.3 million in fiscal 1998 compared to $52.7
million last fiscal year. All of this growth was in manufacturing
revenues, offset by a decrease in contract research and development.
Contract research and development revenues decreased 17% to $2.2
million in fiscal 1998 from $2.7 million in fiscal 1997. The Company
has decreased the amount of contract research and development
projects it undertakes in an effort to focus on internal research
and development projects and higher margin manufacturing products.
The Company expects this focus to continue in the near future.
Costs And Expenses
Manufacturing gross margin was $25.1 million or 42% of net sales in
fiscal 1998 compared to $22.5 million or 45% of net sales in fiscal
1997. The dollar increase was attributable to higher sales volume,
particularly sales of infrared optics and materials and sales of
products from the Company's VLOC subsidiary. The decrease in gross
margin as a percentage of net sales was the result of increased per
unit manufacturing costs in the eV PRODUCTS division due to slower-
than-expected revenue growth, operating inefficiencies at the
Company's VLOC subsidiary resulting from its relocation to a new
manufacturing facility, price sensitivity in the infrared optics and
material market and the strengthening of the U.S. dollar against the
Japanese yen.
Contract research and development gross margin was $516,000 or 23% of
net sales in fiscal 1998 compared to $707,000 or 27% of net sales in
fiscal 1997. The Company has decreased the amount of contract
research and development projects it undertakes in an effort to focus
on internal research and development projects and higher margin
manufacturing products. The Company expects this focus to continue
in the near future.
Company-funded internal research and development increased to $1.6
million in fiscal 1998 from $1.0 million in fiscal 1997. The
Company continues to expand its internal research and development
projects, including nuclear radiation detector development and
infrared optics and materials development.
Selling, general and administrative expenses were $14.3 million or
23% of net sales in fiscal 1998 compared to $12.7 million or 24% of
net sales in fiscal 1997. This dollar increase is attributable to
higher general and administrative expenses needed to support the
Company's growth. The decrease in selling, general and
administrative expenses as a percentage of net sales reflects
improved utilization of existing personnel and resources to support
the Company's overall growth.
9
Other expense, including interest expense, was $177,000 in fiscal
1998 compared to other income of $488,000 in fiscal 1997. The
primary reasons for the increase in other expense are the lower
investment earnings on lower cash balances compared to the previous
year and the occurrence of foreign currency losses due to the
strengthening of the U.S. dollar against the Japanese yen and the
Singapore dollar.
The effective corporate income tax rate was 29.3% in fiscal 1998
compared to 28.8% in fiscal 1997. 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
1999 will increase.
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.
Bookings and Sales
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.
10
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.
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.
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 and sales of equity.
The largest source of the $6.9 million in cash generated from
operations in fiscal 1998 was $10.6 million in net earnings before
depreciation and amortization. This cash source was partially offset
by increases in accounts receivable and inventory of $0.9 million
and $2.5 million, respectively, as well as a $0.8 million decrease
in accrued salaries, wages and bonuses. 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 decrease in accrued salaries, wages and bonuses is primarily the
result of lower earnings and related profit-driven bonus programs as
compared to the prior year.
During the year ended June 30, 1998, the Company entered into a
$10.0 million unsecured line of credit agreement and a 237 million
yen loan. Borrowings were used to support the Company's capital
expenditures and working capital requirements. During the year
ended June 30, 1998, the Company borrowed approximately $7.5 million
under these two debt instruments.
The Company invested $20.5 million in capital expenditures during
the year. These expenditures focused on the automation of processes
and facility expansions in Pennsylvania and Florida. Planned
discretionary capital expenditures for fiscal 1999 of approximately
$8.0 million will focus on continued automation of processes and
increased capacity.
The Company believes internally generated funds, existing cash
reserves and available borrowing capacity will be sufficient to fund
its working capital needs, capital expenditures and scheduled debt
payments for fiscal 1999 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 entered into a low interest
rate, 237 million yen loan with a bank in September 1997 in an
effort to minimize the foreign currency exposure in Japan.
This Management's Discussion and Analysis and the Letters to
Shareholders contained in the Annual Report to Shareholders contain
forward looking statements as defined by Section 21E of the
Securities Exchange Act of 1934, as amended, including the
statements regarding the Company's long-term and short-term
growth rate, anticipated demand for the Company's products, the
expected increase in the effective corporate income tax rate for
fiscal 1999, expected increase in production and product yields,
the Company's focus on internal research and development
11
as well as on higher margin manufacturing products, the Company's
ability to fund future working capital needs, capital expenditures
and scheduled debt payments from internally generated funds,
existing cash reserves and available borrowings and the Company's
plan to address the Year 2000 issue. Actual results could differ
from such statements if worldwide economic conditions change,
competitive conditions intensify, technology problems emerge,
and/or if suitable acquisitions of technologies or businesses
cannot be consummated. 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.
Recently Issued Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), the objective of which is
to report and disclose a measure ("comprehensive income") of all
changes in equity of a company that result from transactions and
other economic events of the period other than transactions with
owners. SFAS No. 130 is effective for financial statements issued
for periods beginning after December 15, 1997. The Company will
adopt SFAS No. 130 in fiscal 1999. The adoption of SFAS No. 130
will not have a material impact on the Company's financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related
Information," which requires the use of the "management approach"
model for segment reporting. The management approach model is based
on the way a company's management organizes segments within the
company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography,
legal structure, management structure or any other manner in which
management segregates a company. SFAS No. 131 is effective for
financial statements issued for periods beginning after December
15, 1997. The Company will adopt SFAS No. 131 in fiscal 1999. The
adoption of SFAS No. 131 will not have a material impact on the
Company's financial position or results of operations.
Other Matters
The "Year 2000" issue concerns the potential exposures related to
the automated generation of business and financial misinformation
resulting from the use of computer programs which have been written
using two digits, rather than four, to define the applicable year of
business transactions.
The Company has developed a formal plan to address the Year 2000
implications of its information technology and non-information
technology systems. The first phase of this plan is in process and
consists of an evaluation of the systems impacted by the Year 2000
issue. Until this phase of the plan is completed, the Company
cannot assess all risks related to the Year 2000 issue. This phase
is expected to be completed by October 31, 1998. The second phase of
this plan will be an evaluation of the third parties with whom the
Company has significant relations and their Year 2000 compliance.
This phase is expected to be completed by December 31, 1998. The
last phase of this plan will be the implementation of corrective
measures deemed necessary, as identified during the first two stages
of the plan. This phase is expected to be completed by June 30,
1999.
To date, the Company has spent approximately $100,000 on the
Year 2000 issue and believes that the remaining potential cost
related to the Year 2000 issue will range between $200,000 and
$300,000.
Although the Company has developed and expects to execute the
plan described above, due to the inherent uncertainty and
complexity involved with the Year 2000 issue, there can be no
assurance that the Company will address all aspects of the
Year 2000 issue. A contingency plan is expected to be developed
by June 30, 1999.
12
FIVE-YEAR FINANCIAL SUMMARY
Year Ended June 30,
<TABLE>
<CAPTION>
(000 except per share data) 1998 1997 1996 1995 1994*
<S> <C> <C> <C> <C> <C>
Statement of Earnings
Net revenues $61,340 $52,741 $37,940 $27,760 $18,681
Net earnings $ 6,780 $ 7,111 $ 4,371 $ 2,518 $ 1,135
Basic earnings per share $ 1.05 $ 1.12 $ 0.75 $ 0.50 $ 0.23
Diluted earnings per share $ 1.02 $ 1.08 $ 0.70 $ 0.48 $ 0.22
Diluted weighted average
shares outstanding 6,674 6,614 6,253 5,289 5,061
</TABLE>
Share and per share data for the fiscal years ended June 30, 1995 and
1994 were adjusted to reflect the two-for-one stock split in fiscal
1996.
* Included in net earnings is a gain of $699,000 on the sale of an
investment in a former Japanese distributor.
<TABLE>
<CAPTION>
June 30,
($000) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance Sheet
Working capital $13,420 $21,089 $16,687 $ 8,872 $ 6,648
Total assets 67,774 54,512 44,169 24,367 17,570
Total debt 8,209 1,346 1,461 1,563 263
Deferred taxes - net 622 1,185 1,324 658 562
Retained earnings 31,922 25,142 18,031 13,660 11,142
Shareholders' equity 50,063 42,522 34,403 16,998 14,237
</TABLE>
For the five-year period ended June 30, 1998, no dividends were declared.
13
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal 1998 Quarter Ended
($000 except per share data) 9/30/97 12/31/97 3/31/98 6/30/98
<S> <C> <C> <C>
Net revenues $15,519 $15,058 $16,230 $14,533
Cost of goods sold 8,776 8,322 9,483 9,159
Internal research and development 300 345 516 407
Selling, general and administrative expenses 3,450 3,652 3,727 3,439
Interest and other expense (income) - net (17) 200 (41) 35
Earnings before income taxes 3,010 2,539 2,545 1,493
Income taxes 898 755 762 392
Net earnings $ 2,112 $ 1,784 $ 1,783 $ 1,101
Basic earnings per share $ 0.33 $ 0.28 $ 0.28 $ 0.17
Diluted earnings per share $ 0.32 $ 0.27 $ 0.27 $ 0.17
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1997 Quarter Ended
($000 except per share data) 9/30/96 12/31/96 3/31/97 6/30/97
<S> <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
Basic earnings per share $ 0.26 $ 0.27 $ 0.28 $ 0.31
Diluted earnings per share $ 0.25 $ 0.25 $ 0.27 $ 0.30
</TABLE>
14
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of II-VI Incorporated
and subsidiaries:
We have audited the accompanying consolidated balance sheets of
II-VI Incorporated and subsidiaries as of June 30, 1998 and 1997,
and the related consolidated statements of earnings, shareholders'
equity and cash flows for the years 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 audits. The
consolidated statements of earnings, shareholders' equity and cash
flows of II-VI Incorporated and subsidiaries for the year 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 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 fiscal 1998 and 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, 1998 and 1997 and the results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 7, 1998
15
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
($000 except share data) 1998 1997
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 4,160 $ 10,854
Accounts receivable - less allowance for doubtful accounts
of $428 in 1998 and $306 in 1997 11,018 10,808
Inventories 10,056 8,129
Deferred income taxes 695 428
Prepaid and other current assets 1,303 563
Total Current Assets 27,232 30,782
Property, Plant & Equipment, Net 35,887 19,631
Other Assets 4,655 4,099
$ 67,774 $ 54,512
Current Liabilities
Notes payable $ 5,833 $ 590
Accounts payable 2,810 3,207
Accrued salaries, wages and bonuses 2,972 3,740
Income taxes payable - 80
Accrued profit sharing contribution 711 740
Other current liabilities 1,418 1,264
Current portion of long-term debt 68 72
Total Current Liabilities 13,812 9,693
Long-Term Debt (Less Current Portion) 2,308 684
Deferred Income Taxes 1,591 1,613
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 - 6,834,786 shares in 1998;
6,802,946 shares in 1997 18,468 18,072
Cumulative translation adjustment 435 70
Retained earnings 31,922 25,142
50,825 43,284
Less treasury stock at cost, 384,440 shares 762 762
Total Shareholders' Equity 50,063 42,522
$ 67,774 $ 54,512
</TABLE>
See notes to Consolidated Financial Statements.
16
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended June 30,
($000 except per share data) 1998 1997 1996
<S> <C> <C> <C>
Revenues
Net sales:
Domestic $ 31,705 $ 27,634 $ 19,922
International 27,429 22,450 16,344
Contract research and development 2,206 2,657 1,674
61,340 52,741 37,940
Costs, Expenses and
Other Expense (Income)
Cost of goods sold 34,049 27,580 20,588
Contract research and development 1,690 1,950 1,222
Internal research and development 1,568 1,002 514
Selling, general and
administrative expenses 14,268 12,713 9,924
Interest expense 23 56 41
Other expense (income) - net 154 (544) (369)
51,752 42,757 31,920
Earnings Before Income Taxes 9,588 9,984 6,020
Income Taxes 2,808 2,873 1,649
Net Earnings $ 6,780 $ 7,111 $ 4,371
Basic Earnings Per Share $ 1.05 $ 1.12 $ 0.75
Diluted Earnings Per Share $ 1.02 $ 1.08 $ 0.70
</TABLE>
See notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Cumulative
Translation Retained
(000) Common Stock Adjustment Earnings Treasury Stock Total
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-July 1, 1995 5,670 $ 4,485 $ (17) $ 13,660 (571) $(1,130) $16,998
Shares issued for the 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 the
stock option plans 22 71 - - - - 71
Net earnings for the year - - - 4,371 - - 4,371
Translation adjustment - - 96 - - - 96
Income 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 plans 111 285 - - - - 285
Net earnings for the year - - - 7,111 - - 7,111
Translation adjustment - - (9) - - - (9)
Income tax benefit for options exercised - 732 - - - - 732
Balance-June 30, 1997 6,803 18,072 70 25,142 (384) (762) 42,522
Shares issued under
stock option plans 32 173 - - - - 173
Net earnings for the year - - - 6,780 - - 6,780
Translation adjustment - - 365 - - - 365
Income tax benefit for options exercised - 223 - - - - 223
Balance-June 30, 1998 6,835 $18,468 $ 435 $ 31,922 (384) $ (762) $50,063
</TABLE>
See notes to Consolidated Financial Statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
($000) 1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net earnings $ 6,780 $ 7,111 $ 4,371
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 3,550 2,852 2,156
Amortization 301 333 332
Loss (gain) on foreign currency transactions 588 (104) 9
Net loss (gain) on disposal of property, plant and equipment 125 (32) -
Deferred income taxes (563) (138) (83)
Increase (decrease) in cash from changes in:
Accounts receivable (924) (2,061) (2,462)
Inventories (2,473) (2,633) (1,296)
Accounts payable 500 1,961 576
Other operating net assets (985) 1,150 211
Net cash provided by operating activities 6,899 8,439 3,814
Cash Flows From Investing Activities
Additions to property, plant and equipment (20,515) (7,432) (6,146)
Proceeds from sale of property, plant and equipment - 66 -
Net cash on purchase of subsidiaries - - (1,938)
Disposals (additions) to other assets 1 (3) (23)
Net cash used in investing activities (20,514) (7,369) (8,107)
Cash Flows From Financing Activities
Proceeds (payments) on short-term borrowings 5,345 (728) (1,095)
Proceeds from long-term borrowings 1,980 741 -
Payments on long-term borrowings (60) (53) (23)
Proceeds from sale of common stock 173 285 11,100
Net cash provided by financing activities 7,438 245 9,982
Effect of exchange rate changes on cash and cash equivalents (517) 122 (94)
Net (decrease) increase in cash and cash equivalents (6,694) 1,437 5,595
Cash and Cash Equivalents
Beginning of year 10,854 9,417 3,822
End of year $ 4,160 $10,854 $ 9,417
</TABLE>
18
See notes to Consolidated Financial Statements.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
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,
Incorporated, II-VI Delaware, Incorporated, 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
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 recorded
as a separate component of shareholders' equity.
Income Taxes
Deferred income tax assets and liabilities are determined based on
the differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
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
During fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" which
establishes standards for computing and presenting earnings per
share. This statement requires restatement of all prior period
earnings per share data presented.
The following table sets forth the computation of earnings per
share for the periods indicated:
Year Ended June 30,
(000 except per share data) 1998 1997 1996
------ ------ ------
Net earnings $6,780 $7,111 $4,371
Divided by:
Weighted average shares 6,437 6,359 5,842
------ ------ ------
Basic earnings per share $ 1.05 $ 1.12 $ 0.75
Net earnings $6,780 $7,111 $4,371
Divided by:
Weighted average shares 6,437 6,359 5,842
Diluted effect of common
stock equivalents 237 255 444
------ ------ ------
Diluted weighted average
common shares 6,674 6,614 6,286
------ ------ ------
Diluted earnings per share $ 1.02 $ 1.08 $ 0.70
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.
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.
19
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 is 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.
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
Inventories 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 $672,000 and $385,000 at June 30, 1998 and 1997, respectively.
The following unaudited pro forma financial information presents the
consolidated results of operations as if the Lightning Optical
Corporation acquisition had occurred on the first day of II-VI
Incorporated's 1996 fiscal year (July 1, 1995).
This information does not purport to present what II-VI
Incorporated's results of operations actually would have been had
the acquisition occurred on July 1, 1995, or to project the
results of operations for any future period.
Unaudited Pro Forma Results
for Year Ended June 30, 1996
($000 except per share data)
Revenues $ 41,951
Net earnings 4,976
Diluted earnings per share 0.78
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of financial instruments:
Cash and Cash Equivalents The carrying amount approximates fair
value because of the short maturity of these instruments.
20
Debt Obligations The fair values of debt obligations are
established from the market values of similar issues. The
fair value and carrying amount of the Company's debt
obligations, specifically the line of credit, Yen loan and
the PIDA loan, are approximately equivalent.
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, 1998 and 1997, the Company had contracts outstanding of
approximately $1,290,000 and $3,046,000, 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.
Concentrations of Credit Risk
Concentrations of credit risk with respect to accounts receivable
are limited due to the large number of customers. However, a
significant portion of accounts receivable are from European
distributors of the Company's products. Although the Company
does not currently foresee a credit risk associated with these
receivables, repayment is dependent upon the financial stability
of these distributors.
Recently Issued Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), the objective of which is
to report and disclose a measure ("comprehensive income") of all
changes in equity of a company that result from transactions and
other economic events of the period other than transactions with
owners. SFAS No. 130 is effective for financial statements
issued for periods beginning after December 15, 1997. The Company
will adopt SFAS No. 130 in fiscal 1999. The adoption of SFAS No.
130 will not have a material impact on the Company's financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information," which requires the use of the "management
approach" model for segment reporting. The management approach
model is based on the way a company's management organizes segments
within the company for making operating decisions and assessing
performance. Reportable segments are based on products and
services, geography, legal structure, management structure or any
other manner in which management segregates a company. SFAS No.
131 is effective for financial statements issued for periods
beginning after December 15, 1997. The Company will adopt SFAS
No. 131 in fiscal 1999. The adoption of SFAS No. 131 will not have
a material impact on the Company's financial position or results of
operations.
Note B
INVENTORIES
The components of inventories are as follows:
June 30,
($000) 1998 1997
Raw materials $ 3,220 $ 3,083
Work in process 3,633 1,992
Finished goods 3,203 3,054
-------- --------
$ 10,056 $ 8,129
Note C
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (at cost) consist of the
following:
June 30,
($000) 1998 1997
Land and land improvements $ 1,501 $ 876
Buildings and improvements 16,951 8,073
Machinery and equipment 37,980 27,893
------- -------
56,432 36,842
Less accumulated depreciation 20,545 17,211
------- -------
$35,887 $19,631
The interest capitalized associated with the construction of
buildings and improvements approximated $166,000 during the
year ended June 30, 1998. No interest was capitalized during
the years ended June 30, 1997 and 1996.
21
Note D
Debt
The components of debt are as follows:
June 30,
1998 1997
($000)
Line of credit, interest at Euro-Rate, as defined,
plus 0.75%, payable in full in December 1998 $5,500 $ -
Term note, interest at 2.125%, payable in monthly
installments through January 1999, with final
principal payment in February 1999 283 $ 590
Term note, interest at 2.125%, payable monthly
through July 1998, with final principal payment
in August 1998 50 -
------ ------
Notes Payable $5,833 $ 590
Pennsylvania Industrial Development Authority
(PIDA) term note, interest at 3%, payable in
monthly installments through October 2011 $ 671 $ 711
Term note, interest at Japanese Yen Base Rate,
as defined, plus 1.49% up to a maximum rate
of 3.74%, principal payable in full in
September 2002 1,681 -
Term note, interest at 7.5%, payable in monthly
installments through August 1999 24 45
------ ------
2,376 756
Current maturities (68) (72)
------ ------
Total long-term debt $2,308 $ 684
On December 31, 1997, the Company entered into a $10.0 million
unsecured line of credit agreement with PNC Bank which will expire
December 30, 1998. The average interest rate in effect as of
June 30, 1998 was 6.47%. The average outstanding borrowings under
this line of credit were $1.8 million during the year ended
June 30, 1998. The Company is subject to certain restrictive
covenants under this agreement. During the year ended June 30, 1998
the Company was not in compliance with one covenant relating to a
limitation on capital expenditures which was exceeded and received
a waiver from the bank dated June 11, 1998 for this covenant
violation.
In September 1997, the Company secured a 237 million Yen loan with
PNC Bank. Interest is at a rate equal to the lesser of the floating
rate or the maximum rate as defined in the loan agreement. The
floating rate is equal to the Japanese Yen Base Rate, as defined,
plus 1.49% and the maximum rate is 3.74%. On June 30, 1998, the
Japanese Yen Base Rate was 0.66% and the floating rate was 2.15%.
The Company has a line of credit facility with a Singapore bank which
permits maximum borrowings of approximately $475,000. 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, 1998 was 9.0%. At June 30, 1998 and 1997 there were no
borrowings under this facility.
The aggregate annual amounts of principal payments required on the
long-term debt are as follows:
($000) Year Ended June 30,
1999 $ 68
2000 44
2001 44
2002 45
2003 1,728
Thereafter 447
Interest payments made during the years ended June 30, 1998, 1997
and 1996 totaled $23,000, $56,000, and $41,000, respectively.
Note E
INCOME TAXES
The components of income tax expense are as follows:
Year Ended June 30,
($000) 1998 1997 1996
Current:
Federal $2,843 $2,754 $1,457
State 463 202 227
Foreign 65 55 48
------ ------ ------
3,371 3,011 1,732
Deferred (563) (138) (83)
------ ------ ------
$2,808 $2,873 $1,649
22
Principal items comprising deferred income taxes are as follows:
June 30,
($000) 1998 1997
Deferred income tax liabilities
Tax over book accumulated
depreciation $ 978 $ 910
Intangible assets 613 703
------ ------
Deferred income tax liability
- long-term $1,591 $1,613
Deferred income tax assets
Inventory capitalization $ 264 $ 126
Non-deductible accruals 431 302
------ ------
Deferred income tax asset - current $ 695 $ 428
Net operating loss carryforward $ 548 -
Valuation allowance (274) -
------ ------
Deferred income tax asset - long-term
(included in other assets) $ 274 $ -
The reconciliation of income tax expense at the statutory federal
rate to the reported income tax expense is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
($000) 1998 % 1997 % 1996 %
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate $ 3,260 34 $ 3,395 34 $ 2,047 34
Increase (decrease) in taxes resulting from:
State income taxes - net of federal benefit 306 3 133 1 150 2
Excludable Foreign Sales Corporation income (173) (2) (80) - (50) (1)
Excludable foreign income (407) (4) (503) (5) (559) (9)
Foreign taxes - - 36 - 32 1
Non-deductible expenses 26 - 20 - 29 -
Other (204) (2) (128) (1) - -
-------- --- -------- --- -------- --
$ 2,808 29 $ 2,873 29 $ 1,649 27
</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, 1998, 1997 and 1996, cash paid by
the Company for income taxes was approximately $3,665,000, $2,660,000,
and $1,772,000, respectively.
The ultimate realization of the long-term deferred tax asset depends
on the Company's ability to generate sufficient taxable income at
II-VI Japan, the source of the net operating loss carryforward.
Due to the limited operating history of II-VI Japan, the Company
provided a valuation allowance against the long-term deferred tax
asset as of June 30, 1998.
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 $2,638,000 and $2,152,000
would have been required as of June 30, 1998 and 1997, respectively.
23
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) 1998 1997 1996
Depreciation $ (22) $ (136) $ (79)
Inventory capitalization (138) (30) (18)
Net operating loss carryforward
less valuation allowance (274) - -
Other - primarily
nondeductible accruals (129) 28 14
------ ------- ------
$(563) $ (138) $ (83)
Note F
OPERATING LEASES
The Company leases certain property under operating leases that
expire at various dates through 2001. Future rental commitments
applicable to the operating leases at June 30, 1998 are approximately
$406,000, $261,000, and $35,000 for fiscal 1999, 2000 and 2001,
respectively. Rent expense was approximately $475,000, $519,000 and
$507,000 for the years ended June 30, 1998, 1997 and 1996,
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 1,560,000 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.
Generally, 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. The stock option plan
also has vesting provisions predicated upon the death, retirement
or disability of the optionee.
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.
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, 1998 is as follows:
Number of Weighted
Shares Subject Average Exercise
Options to Option Price Per Share
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 -July 1, 1997 585,534 $ 6.89
Granted 74,597 $ 20.83
Exercised (31,840) $ 3.64
Forfeited (5,800) $ 8.31
------- -------
Outstanding -June 30, 1998 622,491 $ 8.72
Exercisable -June 30, 1998 321,192 $ 6.03
24
Outstanding and exercisable options at June 30, 1998 by expiration
date are as follows:
Number of Per Share Number of
Shares Subject Exercise Shares
Expiration Date to Option Price Exercisable
May 1999 8,000 $ 3.69 8,000
May 2000 360 $ 2.69 360
August 2000 24,600 $ 1.83 24,600
February 2002 38,200 $ 2.13 38,200
June 2002 3,000 $ 2.13 3,000
April 2004 1,600 $ 1.50 800
July 2004 30,000 $ 2.00 18,000
July 2004 4,000 $ 1.97 2,400
September 2004 80,800 $ 2.69 45,600
November 2004 58,000 $ 4.00 34,000
December 2004 92,000 $ 3.94 50,800
February 2005 3,200 $ 4.94 -
June 2005 2,000 $16.13 1,200
December 2005 960 $10.63 240
February 2006 1,500 $ 9.75 600
February 2006 114,274 $ 9.88 59,452
May 2006 2,500 $15.25 1,000
August 2006 60,200 $17.50 12,600
November 2006 1,800 $22.00 360
February 2007 3,500 $30.25 700
June 2007 17,400 $22.38 3,480
June 2007 4,000 $21.00 800
August 2007 8,500 $25.25 -
September 2007 500 $26.50 -
November 2007 4,800 $24.75 -
January 2008 50,000 $20.00 15,000
February 2008 4,797 $19.25 -
May 2008 1,500 $15.25 -
June 2008 500 $15.50 -
------- -------
622,491 321,192
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 1998,
1997 and 1996 would have been reduced by $263,000, $177,000 and
$35,000 or $.04, $.03 and $.01 per diluted share, respectively.
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:
1998 1997 1996
Risk free interest rate 5.7% 6.4% 5.8%
Expected volatility 44% 68% 69%
Expected life of options 7.33 years 7.33 years 7.33 years
Expected dividends none none none
Based on the option pricing model, options granted during
1998, 1997 and 1996 had fair values of $11.69, $13.77 and $7.17
per share, respectively.
25
Note H
INTERNATIONAL AND DOMESTIC OPERATIONS AND EXPORT SALES
<TABLE>
<CAPTION>
Year Ended June 30,
($000) 1998 1997 1996
<S> <C> <C> <C>
Sales:
United States $ 58,889 $ 50,489 $ 37,244
International 25,338 21,063 13,204
-------- -------- --------
Total $ 84,227 $ 71,552 $ 50,448
Sales or transfers between geographic areas(1)
United States $ 14,499 $ 11,925 $ 7,172
International 8,388 6,886 5,336
-------- -------- --------
Total 22,887 18,811 12,508
-------- -------- --------
Net sales $ 61,340 $ 52,741 $ 37,940
Export sales from the United States(2) $ 10,479 $ 5,979 $ 6,938
Operating income:
United States $ 7,758 $ 7,822 $ 3,975
International 2,007 1,674 1,717
Other (expense) income - net (177) 488 328
-------- -------- --------
Earnings before income taxes $ 9,588 $ 9,984 $ 6,020
Identifiable assets:
United States $ 59,566 $ 46,923 $ 39,478
International 8,208 7,589 4,691
-------- -------- --------
Total assets $ 67,774 $ 54,512 $ 44,169
</TABLE>
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.
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 $711,000
in 1998, $740,000 in 1997 and $455,000 in 1996. 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, 1998, 123,645 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
approximately $67,000 in 1998, $139,000 in 1997 and did not make any
contributions in 1996.
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 7, 1998, appearing in
and incorporated by reference in this Annual Report on Form 10-K
of II-VI Incorporated for the year ended June 30, 1998.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
September 22, 1998
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, 1998.
/s/ Alpern, Rosenthal & Company
Pittsburgh, Pennsylvania
September 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> APR-01-1998 JUL-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 4,160 4,160
<SECURITIES> 0 0
<RECEIVABLES> 11,446 11,446
<ALLOWANCES> 428 428
<INVENTORY> 10,056 10,056
<CURRENT-ASSETS> 27,232 27,232
<PP&E> 56,432 56,432
<DEPRECIATION> 20,545 20,545
<TOTAL-ASSETS> 67,774 67,774
<CURRENT-LIABILITIES> 13,812 13,812
<BONDS> 2,308 2,308
0 0
0 0
<COMMON> 18,468 18,468
<OTHER-SE> 31,595 31,595
<TOTAL-LIABILITY-AND-EQUITY> 67,774 67,774
<SALES> 14,533 61,340
<TOTAL-REVENUES> 14,533 61,340
<CGS> 9,159 35,739
<TOTAL-COSTS> 9,159 35,739
<OTHER-EXPENSES> 3,949 15,990
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (68) 23
<INCOME-PRETAX> 1,493 9,588
<INCOME-TAX> 392 2,808
<INCOME-CONTINUING> 1,101 6,780
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,101 6,780
<EPS-PRIMARY> 0.17 1.05
<EPS-DILUTED> 0.17 1.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> JUL-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1997 DEC-31-1997
<CASH> 7,097 2,673
<SECURITIES> 0 0
<RECEIVABLES> 12,591 12,257
<ALLOWANCES> 319 345
<INVENTORY> 8,836 9,672
<CURRENT-ASSETS> 29,302 25,337
<PP&E> 41,767 47,754
<DEPRECIATION> 18,190 19,196
<TOTAL-ASSETS> 56,895 57,829
<CURRENT-LIABILITIES> 7,892 6,862
<BONDS> 2,651 2,637
0 0
0 0
<COMMON> 18,117 18,297
<OTHER-SE> 26,552 28,354
<TOTAL-LIABILITY-AND-EQUITY> 56,895 57,829
<SALES> 15,519 30,577
<TOTAL-REVENUES> 15,519 30,577
<CGS> 8,776 17,097
<TOTAL-COSTS> 8,776 17,097
<OTHER-EXPENSES> 3,733 7,930
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,010 5,550
<INCOME-TAX> 898 1,654
<INCOME-CONTINUING> 2,112 3,896
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,112 3,896
<EPS-PRIMARY> 0.33 0.61
<EPS-DILUTED> 0.32 0.58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997 JUN-30-1997 JUN-30-1997
<PERIOD-START> JUL-01-1996 JUL-01-1996 JUL-01-1996 JUL-01-1996
<PERIOD-END> SEP-30-1996 DEC-31-1996 MAR-31-1997 JUN-30-1997
<CASH> 8,606 9,389 8,817 10,854
<SECURITIES> 0 0 0 0
<RECEIVABLES> 9,433 8,799 10,032 10,808
<ALLOWANCES> 256 266 275 306
<INVENTORY> 6,004 6,766 7,281 8,129
<CURRENT-ASSETS> 24,936 25,803 26,942 30,782
<PP&E> 30,982 33,125 34,893 36,842
<DEPRECIATION> 15,220 15,962 16,727 17,211
<TOTAL-ASSETS> 45,051 47,292 49,234 54,512
<CURRENT-LIABILITIES> 6,436 6,668 6,421 9,693
<BONDS> 731 715 700 684
0 0 0 0
0 0 0 0
<COMMON> 17,121 17,480 17,919 18,072
<OTHER-SE> 19,010 20,732 22,508 24,450
<TOTAL-LIABILITY-AND-EQUITY> 45,051 47,292 49,234 54,512
<SALES> 12,110 24,300 37,951 52,741
<TOTAL-REVENUES> 12,110 24,300 37,951 52,741
<CGS> 6,743 13,475 21,166 29,530
<TOTAL-COSTS> 6,743 13,475 21,166 29,530
<OTHER-EXPENSES> 3,029 6,072 9,542 13,171
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 56
<INCOME-PRETAX> 2,338 4,753 7,243 9,984
<INCOME-TAX> 678 1,378 2,100 2,873
<INCOME-CONTINUING> 1,660 3,375 5,143 7,111
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,660 3,375 5,143 7,111
<EPS-PRIMARY> 0.26 0.53 0.81 1.12
<EPS-DILUTED> 0.25 0.50 0.78 1.08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 9,417
<SECURITIES> 0
<RECEIVABLES> 8,712
<ALLOWANCES> 246
<INVENTORY> 5,490
<CURRENT-ASSETS> 24,655
<PP&E> 29,575
<DEPRECIATION> 14,490
<TOTAL-ASSETS> 44,169
<CURRENT-LIABILITIES> 7,968
<BONDS> 45
0
0
<COMMON> 17,055
<OTHER-SE> 17,348
<TOTAL-LIABILITY-AND-EQUITY> 44,169
<SALES> 37,940
<TOTAL-REVENUES> 37,940
<CGS> 21,810
<TOTAL-COSTS> 21,810
<OTHER-EXPENSES> 10,069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 6,020
<INCOME-TAX> 1,649
<INCOME-CONTINUING> 4,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,371
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.70
</TABLE>
