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, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition
period from to .
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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. [ x ]
Aggregate market value of outstanding Common Stock, no par value,
held by non-affiliates of the Registrant at September 15, 1999, was
approximately $57,885,385, based on the closing sale price reported
on NASDAQ/NMS for September 15, 1999. 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, 1999, was 6,348,826.
Documents Incorporated by Reference
-----------------------------------
Portions of the Annual Report to Shareholders for the fiscal year
ended June 30, 1999 are incorporated by reference into Parts I, II
and IV hereof.
Portions of the Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
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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., 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 infrared,
near-infrared, visible-light, x-ray and gamma-ray instrumentation.
The Company's infrared products are used primarily in high-power CO2
(carbon dioxide) lasers. These lasers are used for industrial
processing throughout the world. The Company's VLOC subsidiary
manufactures near-infrared and visible light products for
industrial, scientific and medical applications and solid-state
(such as YAG and YLF) lasers. The Company's eV PRODUCTS division
manufactures and markets solid-state x-ray and gamma-ray detector
products for the nuclear radiation detection industry. The majority
of the Company's revenues are attributable to the sale of optical
components for the industrial laser processing industry.
Information Regarding Market Segments and Foreign Operations
The Company's business comprises two segments, the design,
manufacture and marketing of optical and electro-optical components,
devices and materials for infrared, near-infrared and visible-light
instrumentation and the manufacture and marketing of x-ray and
gamma-ray instrumentation.
Financial data regarding the Company's revenues, results of
operations, industry segments and international 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 1999 Annual Report
(the "Annual Report") and Note H to the Company's Consolidated
Financial Statements on pages 27 and 28 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 90,000 industrial YAG and CO2 lasers.
Products
The Company's products include optical and electro-optical
components, devices and materials for infrared, near-infrared,
visible light, x-ray and gamma-ray instrumentation. The Company's
infrared products are used in high power CO2 (carbon dioxide)
lasers. These lasers are used for industrial processing throughout
the world. The Company's VLOC
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subsidiary manufactures near-infrared and visible light products
for industrial, scientific and medical applications and solid-state
(such as YAG and YLF) lasers. The Company's eV PRODUCTS division
manufactures and markets solid-state x-ray and gamma-ray detector
products for the nuclear detection industry. The majority of the
Company's revenues are attributable to the sale of optical components
for the industrial laser processing industry.
Infrared Optics and Materials
Reliable operation of CO2 lasers requires high quality, low
absorption optical components. The CO2 laser emits infrared energy
at a wavelength of 10.6 micrometers. This wavelength is optimal for
many industrial processes including cutting, welding, drilling and
heat treating materials such as steel alloys, non-ferrous metals,
plastics, wood, paper, fiberboard, ceramics and composites. The CO2
laser is also used for cosmetic and invasive medical procedures
because of its efficient absorption in human tissue. The Company's
infrared optics and materials are incorporated into surveillance and
imaging systems because of the effectiveness of the 10.6 micrometer
wavelength to penetrate atmospheric conditions.
The Company is a broad line supplier of the optical elements
used in CO2 lasers and laser systems. Conventionally polished and
precision diamond turned transmissive and reflective optics are
supplied to laser manufacturers, laser system builders and end users
for replacement parts. Transmissive optics manufactured by the
Company are predominately made from Zinc Selenide. The Company is
the largest manufacturer in the world for this optical material. The
Company's Zinc Selenide production capability and its proprietary,
thin film coating technology have earned the Company a reputation as
the quality leader in the world market.
The Company supplies replacement optics and refurbishing
services to end users of industrial CO2 lasers. The Company sells
its infrared replacement optics under the trade name of
INFRAREADY(r) optics. Consumable items such as focusing lenses and
output couplers can be 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 produces and supplies Zinc Sulfide in the form of
domes and windows to military suppliers for Forward Looking InfraRed
(FLIR) systems.
YAG Laser Components
The power levels available from Nd:YAG lasers (neodymium
doped:Yttrium Aluminum Garnet) 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
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 laser except
that they are made of different materials to operate at the YAG
laser near-infrared wavelength of 1.06 micrometers.
The Company supplies a family of standard and custom laser gain
materials and optics for industrial, medical, scientific and
research YAG lasers. The YAG laser gain materials are produced to
stringent industry specifications and precisely fabricated into rods
or slabs. Included in the Company's products are refurbished YAG
rods sold to the Company's aftermarket customers. The Company offers
waveplates, polarizers, lenses, prisms and mirrors for visible and
near-infrared applications. These products control and alter the
visible and near-infrared energy and its polarization. The Company
offers cavities for use in flashlamp pumped lasers. These cavities
are primarily made of samarium doped glass which improves the laser
performance.
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 and diode pumped solid-state lasers. Due to high lasing
efficiency, YLF lasers are suitable for scribing, trimming and
cutting of semiconductor materials.
YLF also lases at 1.313 micrometers. This wavelength, 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.
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Nuclear Radiation Detectors
New and expanding applications for nuclear radiation in industry,
medicine and research is fueling increased demand for nuclear
radiation detectors. 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 market is composed of
industrial process control, nuclear medicine, x-ray imaging,
environmental monitoring, nuclear safeguards and nonproliferation,
and health physics segments.
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, CdZnTe allows the
manufacture of a new generation of gamma cameras, offering much
improved position sensitivity and the ability to produce images
using lower doses of injected radioactivity. In the radiographic
field, higher density CdZnTe provides 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 physician to see the relevant part of
the body in real time, thus reducing the time delay between x-ray
imaging 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.
Customers and Markets
Industrial
The Company's customers include leading original equipment
manufacturers (OEMs) and system integrators worldwide in the CO2 and
YAG laser machine tool industry. The Company has targeted both the
high power and low power segments of the laser optics market.
High power CO2 lasers manufactured by the Company's customers
are used for cutting, drilling, welding and heat treating. The
Company also sells directly to laser end users who require
replacement optics such as focusing lenses and beam steering
mirrors. Industrial lasers are used in a wide variety of industries
and applications including automotive, electrical equipment,
packaging, building products, office furniture, garment, airframe or
aerospace, consumer electronics, tooling and machinery.
Low power CO2 lasers are utilized for both medical and
industrial applications. Engraving and marking are two of the more
popular markets for low power CO2 lasers. Manufacturers of low power
CO2 laser systems are high volume consumers of optics.
The Company's YAG component customers' systems are used for
marking, scribing, microwelding and precision trimming. A broad
range of industries use YAG systems, including medical devices,
consumer products, automotive and semiconductors. The Company offers
YAG laser manufacturers both the YAG laser rod and the necessary
optics for a complete laser system.
The Company's customers are developing products incorporating
fluoride materials for use in telecommunications, material
processing and environmental monitoring.
The Company is using its close working relationships with its
industrial CO2 customers worldwide to increase its YAG component
supply market share, since both products are needed by many of the
same customers.
Scientific and Military
The scientific and research and development markets are
creating many opportunities for the Company's visible, near-infrared
and infrared optics and materials. The Company supplies components
with demanding specifications to these market
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segments. Examples of such products include aspheric optics, prisms,
parabolic reflectors and multi-focusing element optical assemblies.
The Company's products are also integrated into spectrophotometers,
interferometers and distance measuring instruments; scanning mirrors
for marking and engraving applications; and focusing assemblies for
infrared cameras. Timely response, high quality products and
dedicated engineering support are the cornerstones of the Company's
pursuit of these markets.
The Company supplies materials and optics to manufacturers of
infrared imaging systems used in military systems. The U.S. military
and their allies are developing advanced infrared imaging systems
for state-of-the-art weapon 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 Southeast Asia and China through its subsidiaries,
II-VI Singapore Pte., Ltd. and II-VI Optics (Suzhou) Co. Ltd.; and
in the United Kingdom through its subsidiary, II-VI U.K. Limited.
Europe and other major markets are addressed through distributors
and agents. The Company's products are sold to more than 4,000
customers worldwide.
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.
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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, Hydrogen Selenide and
Thorium Fluoride (excluding the Company), 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 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 not
meeting contract specifications for quality or purity. A significant
failure of the Company's suppliers to deliver sufficient quantities
of necessary high-quality materials on a timely basis could have a
materially adverse effect on the Company's results of operations.
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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 production, 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 one hundred eight. Seventy-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; YAG crystal production; YLF and other fluorides
production; automated, deterministic optical fabrication methods;
and optical thin-film processes and products.
Company-funded research and development and contract research
expenditures together totaled approximately $3.0 million, $3.3
million and $3.4 million during fiscal 1997, 1998 and 1999,
respectively. Contract research revenues during those respective
years totaled approximately $2.7 million, $2.2 million and $1.4
million. The Company has been active in various research and
development programs at the federal and state levels.
Competition
The Company believes that it is a leading producer of products
and services in its addressed markets. In the area of commercial
infrared laser optics and materials, the Company believes it is an
industry leader. 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.
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The Company competes on the basis of product quality, delivery
time, 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 a division of Rohm and Haas Co.
The competitors producing infrared and CO2 laser optics include
Laser Power Corporation and Coherent in the United States and
Sumitomo in Japan, as well as several companies producing limited
quantities of infrared and CO2 laser optics. Competing producers
of YAG materials and optics include the Litton Airtron Division of
Litton Industries and a division of Saint-Gobain. 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 decreased 9% to $18.0 million at June 30, 1999
from $19.8 million at June 30, 1998. Manufacturing orders comprise
97% of the backlog at June 30, 1999, compared to 93% of backlog at
June 30, 1998. All of the manufacturing order backlog at June 30,
1999 is expected to be shipped in fiscal 2000.
Employees
As of June 30, 1999, the Company employed 625 persons
worldwide. Of these employees, 108 were engaged in research,
development and engineering, 391 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.
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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
produces and uses waste containing Thorium Fluoride, a low-level
radioactive material, and generates 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. The
Company may also face competition from competitors who manufacture
products similar to those of the Company, and whose technologies or
materials may compete with the Company's products. 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%, 45% and 47% of revenues during
fiscal 1997, 1998 and 1999, respectively. 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
9
<PAGE>
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 local currency
and, accordingly, are affected by fluctuations in exchange rates.
The Company generally reduces its exposure in Japan to such
fluctuations through foreign currency forward exchange contracts.
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.
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 was 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.
10
<PAGE>
Recent Events
On September 21, 1999, the Company purchased 1,250,000
shares of Laser Power Corporation common stock for a total purchase
price of approximately $2.8 million. Based on information available
to the Company, this purchase represents approximately 14.7% of the
outstanding common stock of Laser Power Corporation. Laser Power
Corporation is a competitor of the Company which produces infrared
and CO2 laser optics.
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 division
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 57 Chairman, Chief Executive
Officer and Director
Francis J. Kramer 50 President, Chief Operating
Officer and Director
Herman E. Reedy 56 Vice President and
General Manager of
Quality and Engineering
James Martinelli 41 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. From 1964 to 1966, Dr. Johnson worked at
Bell Telephone Laboratories as a member of the technical staff.
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. Dr. Johnson serves as
a director of Xymox Technology, Inc., Armstrong Laser Technology, Inc.
and Applied Electro-Optics Corporation.
11
<PAGE>
Francis J. Kramer has served as a Director of the Company since
1989. Mr. Kramer has been employed by the Company since 1983 and
has been its President and Chief Operating Officer since 1985.
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 Corp.
Mr. Kramer graduated from the University of Pittsburgh in 1971 with
a B.S. degree in Industrial Engineering and from Purdue University
in 1975 with an M.S. degree 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 the Company 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., 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 in 1980 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 1999
First Quarter $14 1/4 $7 1/4
Second Quarter $9 $5 7/8
Third Quarter $10 3/16 $7 1/4
Fourth Quarter $7 1/4 $9 1/2
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
On September 15, 1999, the last reported sale price for the
Common Stock on the NASDAQ National Market was $12 5/8 per share.
As of such date, there were approximately 750 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 1999 Annual Report to
Shareholders.
12
<PAGE>
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 1999 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 1999 Annual Report
to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by
reference from pages 14 through 29 of the Company's 1999 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 1999
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 1999 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
1999 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 1999 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.
13
<PAGE>
(a) (1) The consolidated balance sheets as of June 30, 1999 and
1998, the consolidated statements of earnings,
shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999, and the
notes to consolidated financial statements, presented in
the Company's 1999 Annual Report to Shareholders, are
incorporated herein by reference.
The report of Deloitte & Touche LLP, dated August 6,
1999 on the 1999, 1998 and 1997 financial statements
presented in the Company's 1999 Annual Report to
Shareholders, is incorporated herein by reference.
(2) Financial Statement Schedule:
The financial statement schedule shown below should be
read in conjunction with the financial statements
contained in the 1999 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 three years ended June 30, 1999, is included
herein.
Schedule II - Valuation and Qualifying Accounts for
each of the three years in the period ended June 30,
1999.
(3) Exhibits.
EXHIBIT NO. REFERENCE
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.
14
<PAGE>
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 Amended and Restated II-VI Incorporated herein by
Incorporated 1997 Stock reference is Exhibit 10.04
Option Plan* to the Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 1998.
10.14 Agreement by and between Incorporated herein by
PNC Bank, National reference is Exhibit 10.01
Association and to the Company's Form 10-Q
II-VI Incorporated for for the Quarter Ended
Amended and Restated March 31, 1999.
Letter Agreement for
Committed Line of Credit
and Japanese Yen Term Loan
13.01 Annual Report to Shareholders Portions of the 1999 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
27.01 Financial Data Schedule Filed herewith.
- -----------
* Denotes management contract or compensatory plan, contract or
arrangement.
The Registrant will furnish to the Commission upon request
copies of any instruments not filed herewith which authorize
the issuance of long-term obligations of Registrant not in
excess of 10% of the Registrant's total assets on a
consolidated basis.
(b) No reports on Form 8-K have been filed during the fourth
quarter of fiscal year 1999.
15
<PAGE>
(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 1999 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 1999 Annual Report
to Shareholders is not deemed filed as a part of this Report.
16
<PAGE>
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 27, 1999 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 27, 1999 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
and Director
September 27, 1999 By: /s/ Francis J. Kramer
Francis J. Kramer
President and Chief
Operating Officer and Director
Principal Financial and
Accounting Officer:
September 27, 1999 By: /s/ James Martinelli
James Martinelli
Treasurer and Chief Financial Officer
September 27, 1999 By: /s/ Richard W. Bohlen
Richard W. Bohlen
Director
September 27, 1999 By: /s/ Thomas E. Mistler
Thomas E. Mistler
Director
September 27, 1999 By: /s/ Duncan A. J. Morrison
Duncan A. J. Morrison
Director
September 27, 1999 By: /s/ Peter W. Sognefest
Peter W. Sognefest
Director
17
<PAGE>
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, 1999 and 1998 and the
related consolidated statements of earnings, shareholders' equity,
comprehensive income and cash flows for the three years ended, and
have issued our report thereon dated August 6, 1999; such
consolidated financial statements and report are included in your
1999 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 three years in the
period ended June 30, 1999. 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 6, 1999
18
<PAGE>
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1997, 1998, AND 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged Charged Deduction Balance
Beginning to to Other from At End
of Year Expense Accounts(1) Reserves(2) of Year
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
YEAR ENDED JUNE 30, 1999:
Allowance for doubtful accounts
& warranty returns $ 428 $ 245 $ 3 $ 219 $ 457
</TABLE>
- --------
(1) Amounts primarily relate to businesses acquired, warranty
returns and the effects of foreign currency translation.
(2) Uncollectible accounts written off, net of recoveries.
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. REFERENCE
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.
20
<PAGE>
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 Amended and Restated II-VI Incorporated herein by
Incorporated 1997 Stock reference is Exhibit 10.04
Option Plan* to the Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 1998.
10.14 Agreement by and between Incorporated herein by
PNC Bank, National reference is Exhibit 10.01
Association and to the Company's Form 10-Q
II-VI Incorporated for for the Quarter Ended
Amended and Restated March 31, 1999.
Letter Agreement for
Committed Line of Credit
and Japanese Yen Term Loan
13.01 Annual Report to Shareholders Portions of the 1999 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
27.01 Financial Data Schedule Filed herewith.
- -----------
* Denotes management contract or compensatory plan, contract or
arrangement.
21
MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
Fiscal 1999 Compared to Fiscal 1998
OVERVIEW Net earnings decreased 19% in fiscal 1999 to $5.5 million
from $6.8 million in fiscal 1998. Revenues grew 1% to $61.8 million
in fiscal 1999 compared to $61.3 million last fiscal year. Bookings
decreased 7% to $60.0 million in fiscal 1999 compared to $64.2
million in fiscal 1998. Order backlog decreased 9% to $18.0 million
at June 30, 1999 from $19.8 million at June 30, 1998 as a result of
shipments exceeding bookings in fiscal 1999. Manufacturing orders
comprised 97% of the backlog at June 30, 1999, compared to 93% of
backlog at June 30, 1998.
NET EARNINGS Net earnings decreased 19% in fiscal 1999 to $5.5
million from $6.8 million in fiscal 1998. The major contributors to
the net earnings decrease were lower manufacturing gross margins,
higher internal research and development expenses and a higher
effective tax rate. Each of these are explained further in this
section.
BOOKINGS AND REVENUES Bookings decreased 7% to $60.0 million in
fiscal 1999 compared to $64.2 million in fiscal 1998. Bookings of
the Company's VLOC subsidiary and infrared optics and material
products decreased by a total of approximately 10% while bookings of
the eV PRODUCTS division increased by approximately 10%.
REVENUES grew 1% to $61.8 million in fiscal 1999 compared to $61.3
million last fiscal year. Revenues from contract research and
development decreased to $1.4 million in fiscal 1999 from $2.2
million in fiscal 1998. Revenues of the eV PRODUCTS division
increased approximately 30%, revenues from the Company's VLOC
subsidiary decreased approximately 10% and revenues from infrared
optics and material products remained consistent as compared to last
fiscal year.
COSTS AND EXPENSES Manufacturing gross margin was $23.7 million or
39% of manufacturing revenues in fiscal 1999 compared to $25.1
million or 42% of manufacturing revenues in fiscal 1998. The
decrease in the gross margin percentage reflects higher per unit
costs at the Company's VLOC subsidiary and continued price
sensitivity in the infrared optics and materials market.
Contract research and development gross margin was $395,000 or 28%
of contract research and development revenues in fiscal 1999
compared to $516,000 or 23% of contract research and development
revenues in fiscal 1998. 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 $2.3
million in fiscal 1999 from $1.6 million in fiscal 1998. The
increased expense is the result of internally funded projects
associated with the development of new materials to improve and
expand product offerings, as well as continued efforts to improve
material growth yields.
Selling, general and administrative expenses were $13.6 million or
22% of revenues in fiscal 1999 compared to $14.3 million or 23% of
revenues in fiscal 1998. The dollar and percentage decreases reflect
planned discretionary cost reductions, decreased expense associated
with the Company's worldwide profit-driven bonus program and
improved utilization of existing personnel and resources.
Other expense, including interest expense, increased to $201,000 in
fiscal 1999 from $177,000 in fiscal 1998. Interest expense increased
to $415,000 in fiscal 1999 from $23,000 in fiscal 1998. The primary
9
<PAGE>
reasons for the increase in interest expense are increased
borrowings on the Company's line of credit facility and the abscense
of the capitalization of interest during fiscal 1999. During fiscal
1999, the Company wrote down certain assets held for sale. These
expenses were partially offset by the occurrence of foreign currency
gains due to the strengthening of the Japanese Yen against the U.S.
dollar.
The effective corporate income tax rate was 32% in fiscal 1999
compared to 29% in fiscal 1998. The increase in the effective
corporate income tax rate was partially attributable to a change in
the level of profit generated by the Company's 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.
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 bookings
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 REVENUES 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.
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 contract research and development revenues in fiscal 1998
compared to $707,000 or 27% of contract research and development
revenues 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.
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.
10
<PAGE>
Selling, general and administrative expenses were $14.3 million or
23% of revenues in fiscal 1998 compared to $12.7 million or 24% of
revenues 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 revenues reflects
improved utilization of existing personnel and resources to support
the Company's overall growth.
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% in fiscal 1998
compared to 29% in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its working capital needs,
capital expenditures and growth from cash flow from operations and,
to a lesser extent, borrowings.
The largest sources of the $9.8 million in cash generated from
operations in fiscal 1999 was $10.1 million in net earnings before
depreciation and amortization, a decrease in inventory of $1.1
million and a decrease in other operating net assets of $1.3
million. This increase in cash was partially offset by an increase
in accounts receivable of $1.7 million and a decrease in accounts
payable of $1.5 million. The decrease in inventory was the result of
a focus on increasing inventory turns and decreasing on-hand
inventory quantities. The increase in accounts receivable was
attributable to the increased revenue volume experienced by the
Company in the fourth quarter of fiscal 1999 as compared to the
fourth quarter of fiscal 1998. The decrease in accounts payable is
primarily the result of lower capital expenditures during fiscal
1999 as compared to fiscal 1998.
The Company invested $5.4 million in capital expenditures during
fiscal 1999. These expenditures focused on automation of processes
and facility improvements. Planned discretionary capital
expenditures for fiscal 2000 of approximately $7.0 million will
focus on continued automation of processes and expansion of
facilities and equipment for internal research and design.
During fiscal 1999, the Company purchased 150,000 shares of its
common stock for a total purchase price of $1.1 million.
The Company has a $15.0 million unsecured line of credit with PNC
Bank that expires on March 25, 2000. At June 30, 1999, $11.0 million
was available under this facility. The line of credit may be
extended upon mutual agreement of the Company and PNC Bank for an
additional two years.
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 at least fiscal 2000.
The impact of inflation on the Company's business has not been
material.
MARKET RISKS The Company is exposed to market risks arising from
adverse changes in interest rates and foreign currency exchange
rates. In the normal course of business, the Company uses a variety
of techniques and instruments as part of its overall risk management
strategy.
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
11
<PAGE>
not anticipate such losses. The Company entered into a low interest
rate, 237 million Yen loan with PNC 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 projected growth rates, Asian markets, product
development, financial position, capital expenditures, foreign
currency hedging and the impact of the Year 2000. Forward-looking
statements are also identified by words such as "expects,"
"anticipates," "intends," "plans," "projects" or similar
expressions.
Actual results could materially differ from such statements due to
the following factors: materially adverse changes in economic or
industry conditions generally (including capital markets) or in the
markets served by the Company, the development and use of new
technology, the actions of competitors.
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 1998, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires that
an entity recognize all derivatives as either assets or liabilities
on the balance sheet at fair value. This statement is effective for
fiscal years beginning after June 15, 2000. The Company is currently
evaluating the impact that SFAS No. 133 will have on its financial
position and its 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 noninformation
technology systems, which consisted of three phases. The first phase
of this plan is complete and consisted of an evaluation of the
systems impacted by the Year 2000 issue. The second phase is
complete and consisted of an evaluation of the third parties with
whom the Company has significant relationships and their Year 2000
compliance. The last phase of this plan is substantially complete
and consisted of the implementation of corrective measures deemed
necessary, as identified during the first two phases of the plan.
Based upon the information obtained during execution of the plan,
the Company does not believe its information technology and
noninformation technology systems will experience significant Year
2000 problems. However, there can be no assurance that the third
parties with whom the Company has significant relationships will not
experience disruptions in their business that could have a material
adverse effect on the Company. An example of a worst case scenario
caused by the Year 2000 issue would be the failure in the accounting
systems of a significant number of the Company's key customers which
resulted in a delay in the payment of invoices issued by the
Company.
To date, the Company has spent approximately $160,000 on the Year
2000 issue and believes that the remaining potential cost related to
the Year 2000 issue will be insignificant.
Although the Company has developed and executed 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. The Company is in the
process of developing its contingency plan.
12
<PAGE>
<TABLE>
FIVE-YEAR FINANCIAL SUMMARY
<CAPTION>
Year Ended June 30,
(000 except per share data) 1999 1998 1997 1996 1995
- --------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
Net revenues $61,750 $61,340 $52,741 $37,940 $27,760
Net earnings $ 5,463 $ 6,780 $ 7,111 $ 4,371 $ 2,518
Basic earnings per share $ 0.86 $ 1.05 $ 1.12 $ 0.75 $ 0.50
Diluted earnings per share $ 0.84 $ 1.02 $ 1.08 $ 0.70 $ 0.48
Diluted weighted average
shares outstanding 6,490 6,674 6,614 6,253 5,289
- --------------------------- ------- ------- ------- ------- -------
<FN>
Share and per share data for the fiscal year ended June 30, 1995 was adjusted to reflect
the two-for-one stock split in fiscal 1996.
</FN>
</TABLE>
<TABLE>
<CAPTION>
June 30,
($000) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------- ------- ------- ------- ------- -------
BALANCE SHEET
Working capital $17,590 $13,420 $21,089 $16,687 $ 8,872
Total assets 70,843 67,774 54,512 44,169 24,367
Total debt 6,674 8,209 1,346 1,461 1,563
Deferred taxes - net 1,161 622 1,185 1,324 658
Retained earnings 37,385 31,922 25,142 18,031 13,660
Shareholders' equity 54,493 50,063 42,522 34,403 16,998
- --------------------------- ------- ------- ------- ------- -------
<FN>
For the five-year period ended June 30, 1999, no dividends were declared.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
FISCAL 1999 QUARTER ENDED
($000 except per share data) 9/30/98 12/31/98 3/31/99 6/30/99
- ----------------------------------------- ------- -------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $13,793 $15,210 $15,538 $17,209
Cost of goods sold 9,204 9,382 8,938 10,107
Internal research and development 578 574 617 548
Selling, general and administrative 3,007 3,436 3,592 3,528
Interest and other expense (income) - net 107 (107) 168 33
- ----------------------------------------- ------- -------- ------- -------
Earnings before income taxes 897 1,925 2,223 2,993
Income taxes 268 623 725 959
- ----------------------------------------- ------- -------- ------- -------
Net earnings 629 1,302 1,498 2,034
- ----------------------------------------- ------- -------- ------- -------
Basic earnings per share $ 0.10 $ 0.21 $ 0.24 $ 0.32
- ----------------------------------------- ------- -------- ------- -------
Diluted earnings per share $ 0.10 $ 0.20 $ 0.23 $ 0.31
========================================= ======= ======== ======= =======
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> <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 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>
14
<PAGE>
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, 1999 and 1998, and
the related consolidated statements of earnings, shareholders'
equity, comprehensive income and cash flows for each of the three
years in the period ended June 30, 1999. 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.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of II-VI Incorporated and subsidiaries as of June 30, 1999
and 1998 and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 6, 1999
15
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30,
($000 except share data) 1999 1998
- ----------------------------------------------------------- ------- -------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,558 $ 4,160
Accounts receivable - less allowance for doubtful accounts
of $457 at June 30, 1999 and $428 at June 30, 1998 13,070 11,018
Inventories 9,096 10,056
Deferred income taxes 722 695
Prepaid and other current assets 567 1,303
- ----------------------------------------------------------- ------- -------
Total Current Assets 29,013 27,232
PROPERTY, PLANT & EQUIPMENT, NET 36,955 35,887
OTHER ASSETS 4,875 4,655
- ----------------------------------------------------------- ------- -------
$70,843 $67,774
=========================================================== ======= =======
CURRENT LIABILITIES
Notes payable $ 4,082 $ 5,833
Accounts payable 1,934 2,810
Accrued salaries, wages and bonuses 2,836 2,972
Income taxes payable 367 -
Accrued profit sharing contribution 580 711
Other current liabilities 1,581 1,418
Current portion of long-term debt 43 68
- ----------------------------------------------------------- ------- -------
Total Current Liabilities 11,423 13,812
LONG-TERM DEBT 2,549 2,308
OTHER LIABILITIES, PRIMARILY DEFERRED INCOME TAXES 2,378 1,591
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 - 6,875,766 shares at June 30, 1999;
6,834,786 shares at June 30, 1998 18,746 18,468
Accumulated other comprehensive income 272 435
Retained earnings 37,385 31,922
- ----------------------------------------------------------- ------- -------
56,403 50,825
Less treasury stock at cost, 534,440 shares at June 30, 1999
384,440 shares at June 30, 1998 1,910 762
- ----------------------------------------------------------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 54,493 50,063
- ----------------------------------------------------------- ------- -------
$70,843 $67,774
=========================================================== ======= =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
16
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
<CAPTION>
Year Ended June 30,
($000 except per share data) 1999 1998 1997
- ----------------------------------- ------- ------- -------
<S> <C> <C> <C>
REVENUES
Net sales:
Domestic $31,495 $31,705 $27,634
International 28,819 27,429 22,450
Contract research and development 1,436 2,206 2,657
- ----------------------------------- ------- ------- -------
61,750 61,340 52,741
- ----------------------------------- ------- ------- -------
COSTS, EXPENSES AND
OTHER EXPENSE (INCOME)
Cost of goods sold 36,590 34,049 27,580
Contract research and development 1,041 1,690 1,950
Internal research and development 2,317 1,568 1,002
Selling, general and administrative 13,563 14,268 12,713
Interest expense 415 23 56
Other (income) expense - net (214) 154 (544)
- ----------------------------------- ------- ------- -------
53,712 51,752 42,757
- ----------------------------------- ------- ------- -------
EARNINGS BEFORE INCOME TAXES 8,038 9,588 9,984
INCOME TAXES 2,575 2,808 2,873
- ----------------------------------- ------- ------- -------
NET EARNINGS $ 5,463 $ 6,780 $ 7,111
- ----------------------------------- ------- ------- -------
BASIC EARNINGS PER SHARE $ 0.86 $ 1.05 $ 1.12
- ----------------------------------- ------- ------- -------
DILUTED EARNINGS PER SHARE $ 0.84 $ 1.02 $ 1.08
=================================== ======= ======= =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
17
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<CAPTION>
SHAREHOLDERS' EQUITY Accumulated
Other
Comprehensive Retained
(000) Common Stock Income Earnings Treasury Stock Total
- ------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
------ ------- ------ ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JULY 1, 1996 6,692 $17,055 $ 79 $18,031 (384) $ (762) $34,403
Shares issued under
stock option plans 111 285 - - - - 285
Net earnings - - - 7,111 - - 7,111
Other comprehensive loss - - (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 - - - 6,780 - - 6,780
Other comprehensive gain - - 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
Shares issued under
stock option plans 41 203 - - - - 203
Net earnings - - - 5,463 - - 5,463
Other comprehensive loss - - (163) - - - (163)
Income tax benefit for
options exercised - 75 - - - - 75
Purchase of treasury stock - - - - (150) (1,148) (1,148)
- -------------------------- ------ ------- ------ ------- ------ -------- -------
BALANCE - JUNE 30, 1999 6,876 $18,746 $ 272 $37,385 (534) $(1,910) $54,493
========================== ====== ======= ====== ======= ====== ======== =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
COMPREHENSIVE INCOME
Year Ended June 30,
($000) 1999 1998 1997
- ---------------------------------------------------------------------
Net earnings $5,463 $6,780 $7,111
Other comprehensive (loss) gain (163) 365 (9)
- ---------------------------------------------------------------------
COMPREHENSIVE INCOME $5,300 $7,145 $7,102
=====================================================================
See Notes to Consolidated Financial Statements.
18
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<CAPTION>
Year Ended June 30,
($000) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 5,463 $ 6,780 $ 7,111
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 4,343 3,550 2,852
Amortization 326 301 333
(Gain) loss on foreign currency transactions (167) 588 (104)
Net loss (gain) on disposal or writedown of
property, plant and equipment 203 125 (32)
Deferred income taxes 347 (563) (138)
Increase (decrease) in cash from changes in:
Accounts receivable (1,679) (924) (2,061)
Inventories 1,145 (2,473) (2,633)
Accounts payable (1,522) 500 1,961
Other operating net assets 1,297 (985) 1,150
- ---------------------------------------------------- ------- ------- -------
Net cash provided by operating activities 9,756 6,899 8,439
- ---------------------------------------------------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (5,420) (20,515) (7,432)
Proceeds from sale of property, plant and equipment - - 66
(Additions) disposals of other assets (600) 1 (3)
- ---------------------------------------------------- ------- ------- -------
Net cash used in investing activities (6,020) (20,514) (7,369)
- ---------------------------------------------------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) proceeds on short-term borrowings (1,790) 5,345 (728)
Proceeds from long-term borrowings - 1,980 741
Payments on long-term borrowings (61) (60) (53)
Proceeds from sale of common stock 203 173 285
Purchases of treasury stock (1,148) - -
- ---------------------------------------------------- ------- ------- -------
Net cash (used in) provided by financing activities (2,796) 7,438 245
- ---------------------------------------------------- ------- ------- -------
Effect of exchange rate changes on cash and cash equivalents 458 (517) 122
- ---------------------------------------------------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,398 (6,694) 1,437
CASH AND CASH EQUIVALENTS
Beginning of year 4,160 10,854 9,417
- ---------------------------------------------------- ------- ------- -------
End of year $ 5,558 $ 4,160 $10,854
==================================================== ======= ======= =======
<F>
See Notes to Consolidated Financial Statements.
</F>
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include II-VI Incorporated and its wholly-owned subsidiaries II-VI
Worldwide, Incorporated, II-VI Delaware, Incorporated, II-VI Japan
Incorporated, VLOC Incorporated, II-VI U.K. Limited, II-VI Singapore
Pte., Ltd and II-VI Optics (Suzhou) Co. Ltd. (collectively the
"Company"). All intercompany transactions and balances have been
eliminated.
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.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are
carried at cost. Major improvements are capitalized, while
maintenance and repairs are generally expensed as incurred.
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 3 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 period-end
exchange rates; income and expenses are translated using the average
exchange rates for the reporting period. Translation adjustments are
recorded as accumulated other comprehensive income within
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 contracts, is
recognized when a product is shipped. Revenue on long-term contracts
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 The following table sets forth the computation
of earnings per share for the periods indicated:
Year Ended June 30,
(000 except per share data) 1999 1998 1997
- -----------------------------------------------------------------
Net earnings $5,463 $6,780 $7,111
Divided by:
Weighted average common
shares outstanding 6,360 6,437 6,359
- -----------------------------------------------------------------
Basic earnings per share $ 0.86 $ 1.05 $ 1.12
Net earnings $5,463 6,780 $7,111
Divided by:
Weighted average common
shares outstanding 6,360 6,437 6,359
Dilutive effect of common
stock equivalents 130 237 255
- -----------------------------------------------------------------
Dilutive weighted average common
shares outstanding 6,490 6,674 6,614
- -----------------------------------------------------------------
Diluted earnings per share $ 0.84 $ 1.02 $ 1.08
=================================================================
20
<PAGE>
CASH AND CASH EQUIVALENTS 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. 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
infrared, near-infrared, visible light, x-ray and gamma-ray
instrumentation. The Company markets its products in the United
States through its direct sales force and worldwide through its
wholly-owned subsidiaries, distributors and agents.
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.
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.
DEBT OBLIGATIONS The fair values of debt obligations are
established based upon market values of similar issues. The fair
values and carrying amounts 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, 1999 and 1998, the Company had foreign currency forward exchange
contracts outstanding of approximately $1,430,000 and $1,290,000,
respectively. The counterparties to these foreign currency forward
exchange contracts are 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 Company's
large number of customers. However, a significant portion of
accounts receivable is 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.
21
<PAGE>
COMPREHENSIVE INCOME During fiscal 1999, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" which requires the Company to report and
disclose a measure ("comprehensive income") of all changes in
shareholders' equity that result from transactions and other
economic events of the period other than transactions with owners.
Accumulated other comprehensive income consists solely of cumulative
translation adjustments. The Company has presented accumulated other
comprehensive income as a component of the statement of
shareholders' equity.
Note B INVENTORIES
The components of inventories are as follows:
June 30,
($000) 1999 1998
- -----------------------------------------
Raw materials $3,014 $ 3,220
Work in process 3,731 3,633
Finished goods 2,351 3,203
- -----------------------------------------
$9,096 $10,056
=========================================
Note C PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (at cost) consists of the following:
June 30,
($000) 1999 1998
- -------------------------------------------------------
Land and land improvements $ 1,501 $ 1,501
Buildings and improvements 19,559 16,951
Machinery and equipment 40,758 37,980
- -------------------------------------------------------
61,818 56,432
Less accumulated depreciation 24,863 20,545
- -------------------------------------------------------
$36,955 $35,887
=======================================================
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, 1999 and 1997.
22
<PAGE>
Note D DEBT
The components of debt are as follows:
June 30,
($000) 1999 1998
- -----------------------------------------------------------------------
Line of credit, interest at the Euro-Rate, as defined,
plus 0.75%, payable in full in March 2000 $4,000 $5,500
Term note, interest at 1.70%, payable in monthly
installments through October 1999 82 283
Term note, interest at 2.125%, payable in monthly
installments through July 1998, with a final
principal payment made in August 1998 - 50
- -----------------------------------------------------------------------
Notes payable 4,082 5,833
Pennsylvania Industrial Development Authority
(PIDA) term note, interest at 3%, payable in
monthly installments through October 2011 632 671
Term note, interest at the Japanese Yen Base Rate,
as defined, plus 1.49% up to a maximum rate of
3.74%, principal payable in full in September 2002 1,957 1,681
Term note, interest at 7.5%, payable in monthly
installments through August 1999 3 24
- -----------------------------------------------------------------------
2,592 2,376
Current maturities (43) (68)
- -----------------------------------------------------------------------
Long-term debt $2,549 $2,308
=======================================================================
On December 31, 1997, the Company entered into a $10.0 million
unsecured line of credit agreement with PNC Bank, which was
scheduled to expire December 30, 1998. The Company received an
extension of the expiration date from PNC Bank to March 31, 1999. On
March 26, 1999, the Company replaced its $10.0 million unsecured
line of credit agreement with a $15.0 million unsecured line of
credit agreement with PNC Bank that expires on March 25, 2000. This
line of credit may be extended upon mutual agreement of the Company
and PNC Bank for an additional two years . The average interest rate
in effect as of June 30, 1999 was 5.86%. The average outstanding
borrowings under this line of credit were $5.7 million and $1.8
million during the year ended June 30, 1999 and 1998, respectively.
The Company is subject to certain restrictive covenants under this
agreement.
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, 1999, the
Japanese Yen Base Rate was 0.18% and the floating rate was 1.67%.
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, 1999 was 6.5%. At June 30, 1999 and 1998
there were no outstanding borrowings under this facility.
23
<PAGE>
The aggregate annual amounts of principal payments required on the
long-term debt are as follows:
($000) Year Ended June 30,
- ----------------------------------------------
2000 $ 43
2001 44
2002 45
2003 2,004
2004 49
Thereafter 407
==============================================
Interest payments made during the years ended June 30, 1999, 1998
and 1997 totaled approximately $450,000, $23,000, and $56,000,
respectively.
Note E INCOME TAXES
The components of income tax expense are as follows:
Year Ended June 30,
($000) 1999 1998 1997
- ----------------------------------------------------
Current:
Federal $2,033 $2,843 $2,754
State 121 463 202
Foreign 74 65 55
- ----------------------------------------------------
2,228 3,371 3,011
Deferred 347 (563) (138)
- ----------------------------------------------------
$2,575 $2,808 $2,873
====================================================
Principal items comprising deferred income taxes are as follows:
June 30,
($000) 1999 1998
- --------------------------------------------------------------------
Deferred income tax liabilities
Tax over book accumulated depreciation $1,496 $ 978
Intangible assets 532 613
- --------------------------------------------------------------------
Deferred income tax liability - long-term $2,028 $1,591
====================================================================
Deferred income tax assets
Inventory capitalization $ 266 $ 264
Non-deductible accruals 456 431
- --------------------------------------------------------------------
Deferred income tax asset - current $ 722 $ 695
====================================================================
Net operating loss carryforward $ 193 $ 548
Valuation allowance (48) (274)
- --------------------------------------------------------------------
Deferred income tax asset - long-term
(included in other assets) $ 145 $ 274
====================================================================
24
<PAGE>
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) 1999 % 1998 % 1997 %
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate $2,733 34 $3,260 34 $ 3,395 34
Increase (decrease) in taxes resulting from:
State income taxes - net of federal benefit 112 1 306 3 133 1
Excludable Foreign Sales Corporation income (106) (1) (173) (2) (80) -
Excludable foreign income (617) (7) (407) (4) (503) (5)
Foreign taxes - - - - 36 -
Non-deductible expenses 14 - 26 - 20 -
Other 439 5 (204) (2) (128) (1)
- -------------------------------------------- ------- --- -------- --- -------- ---
$2,575 32 $2,808 29 $ 2,873 29
============================================ ======= === ======== === ======== ===
</TABLE>
One of the Company's foreign subsidiaries operates under a tax
holiday and does not pay income taxes. The tax holiday expires in
March 2000.
During the years ended June 30, 1999, 1998 and 1997, cash paid by
the Company for income taxes was approximately $1,134,000,
$3,665,000, and $2,660,000, 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, 1999 and 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 $3,541,000 and $2,638,000 would have
been required as of June 30, 1999 and 1998, respectively.
The sources of differences resulting in deferred income tax expense
(credit) and the related tax effect of each were as follows:
Year Ended June 30,
($000) 1999 1998 1997
- ------------------------------------------------------------------
Depreciation and amortization $241 $ (22) $(136)
Inventory capitalization 24 (138) (30)
Net operating loss carryforward
less valuation allowance 129 (274) -
Other - primarily
nondeductible accruals (47) (129) 28
- ------------------------------------------------------------------
$347 $(563) $(138)
==================================================================
Note F OPERATING LEASES
The Company leases certain property under operating leases that
expire at various dates through fiscal 2001. Future rental
commitments applicable to the operating leases at June 30, 1999 are
approximately $360,000 and $36,000 for fiscal 2000 and 2001,
respectively. Rent expense was approximately $397,000, $475,000 and
$519,000 for the years ended June 30, 1999, 1998 and 1997,
respectively.
25
<PAGE>
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 amount available for future grants
under the stock option plan was 314,169 as of June 30, 1999.
The Company has a nonemployee directors stock option plan 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. The amount available for future grants
under the nonemployee directors stock option plan was 60,000 as of
June 30, 1999.
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, 1999 is as follows:
Number of Weighted
Shares Subject Average Exercise
Options to Option Price Per Share
- -------------------------------------------------------------
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
- -------------------------------------------------------------
Outstanding - July 1, 1998 622,491 $ 8.72
Granted 88,414 $10.68
Exercised (40,980) $ 4.94
Forfeited (30,930) $14.00
=============================================================
Outstanding - June 30, 1999 638,995 $ 8.98
Exercisable - June 30, 1999 364,475 $ 6.66
=============================================================
26
<PAGE>
Outstanding and exercisable options at June 30, 1999 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- -------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number of Life Exercise Number of Exercise
Prices Shares (Years) Price Shares Price
- ------------- ------- ----------- --------- ------- --------
$1.50 - $2.69 170,380 4.02 $ 2.30 145,980 $ 2.27
$3.94 - $4.94 142,800 5.38 $ 3.99 108,600 $ 3.98
$8.50 - $11.00 173,518 7.98 $10.29 48,476 $ 9.88
$15.25 - $19.25 66,297 7.24 $17.42 27,579 $17.32
$20.00 - $25.25 86,000 8.34 $21.33 33,840 $20.96
- ---------------------------------------------------------------------
638,995 6.32 $ 8.98 364,475 $ 6.66
=====================================================================
The Company uses the intrinsic value approach specified in
Accounting Principles Board Opinion No. 25 in accounting for stock
options. Had the Company determined compensation costs based upon
the fair value of the options at the grant dates in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," its net
earnings for 1999, 1998 and 1997 would have been reduced by
$350,000, $263,000 and $177,000 or $.05, $.04 and $.03 per diluted
share, respectively.
The pro forma adjustments were calculated using the Black-Scholes
option pricing model under the following weighted-average
assumptions in each fiscal year:
1999 1998 1997
- -------------------------------------------------------------------------
Risk free interest rate 6.0% 5.7% 6.4%
Expected volatility 64% 44% 68%
Expected life of options 5.95 years 7.33 years 7.33 years
Expected dividends none none none
=========================================================================
Based on the option pricing model, options granted during fiscal
1999, 1998 and 1997 had fair values of $6.83, $11.69 and $13.77 per
share, respectively.
Note H SEGMENT AND GEOGRAPHIC REPORTING
Effective in fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS No. 131), 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.
The Company's reportable segments offer similar products to
different target markets. The segments are managed separately due to
the production requirements and facilities that are unique to each
segment. The Company has two reportable segments: Optical
Components, which is an aggregation of the Company's infrared optics
and material products business and the Company's VLOC subsidiary
under the guidelines of SFAS No. 131, and Radiation Detectors.
The Optical Components segment is divided into the geographic
locations within the United States, Singapore, China, Japan and the
United Kingdom. Each geographic location is directed by a managing
director and is further divided into production and administrative
units that are directed by managers. The Optical Components segment
designs, manufactures and markets optical and electro-optical
components, devices and materials for precision use in infrared,
near infrared and visible light instrumentation. The Optical
Components segment includes certain general corporate management and
administrative
27
<PAGE>
activities of the Company which are not allocated to
the other segment, certain research and development activities of
the Company not necessarily specific to the Optical Components
segment and other unallocated charges.
The Radiation Detectors segment is located in the United States and
is a division of the Company. The Radiation Detectors segment is
directed by a managing director. The Radiation Detectors segment is
further divided into production and administrative units that are
directed by managers. The Radiation Detectors segment develops and
markets solid-state x-ray and gamma-ray products for the nuclear
radiation detection industry.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies.
Substantially all of the Company's corporate expenses are allocated
to the segments. The Company evaluates segment performance based
upon reported segment profit or loss from operations. Inter-segment
sales and transfers are insignificant.
Net revenues from external customers attributable to the Company's
foreign operations, primarily II-VI Japan and II-VI Singapore Pte.,
Ltd. were $14,535,000, $16,950,000 and $14,177,000 in fiscal 1999,
1998 and 1997, respectively. Identifiable assets of the Company's
foreign operations, primarily II-VI Singapore Pte., Ltd. are
$10,131,000, $8,208,000 and $7,589,000 as of June 30, 1999, 1998 and
1997, respectively.
Optical Radiation
(000's) Components Detectors Totals
- ---------------------------------------------------------------------
1999
Net revenues $56,127 $ 5,623 $61,750
Income (loss) from operations 9,375 (1,136) 8,239
Interest expense - - 415
Other income, net - - (214)
Earnings before income taxes - - 8,038
Depreciation 3,635 708 4,343
Segment assets 62,390 8,453 70,843
Expenditures for property,
plant and equipment 4,925 495 5,420
- ---------------------------------------------------------------------
1998
Net revenues $57,100 $ 4,240 $61,340
Income (loss) from operations 12,223 (2,458) 9,765
Interest expense - - 23
Other expense, net - - 154
Earnings before income taxes - - 9,588
Depreciation 2,971 579 3,550
Segment assets 59,069 8,705 67,774
Expenditures for property,
plant and equipment 14,922 5,593 20,515
- ---------------------------------------------------------------------
1997
Net revenues $48,440 $ 4,301 $52,741
Income (loss) from operations 10,216 (720) 9,496
Interest expense - - 56
Other income, net - - (544)
Earnings before income taxes - - 9,984
Depreciation 2,510 342 2,852
Segment assets 51,512 3,000 54,512
Expenditures for property,
plant and equipment 6,723 709 7,432
=====================================================================
28
<PAGE>
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 $579,000, $711,000 and $740,000 in 1999, 1998 and
1997, respectively.
The Company has an employee stock purchase plan for employees who
have completed 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,
1999, 114,632 shares of common stock were available for purchase
under the plan.
The Company has no program for postretirement health and welfare and
postemployment benefits.
The II-VI Incorporated Deferred Compensation 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. Employees of the Company made
contributions to the Plan in the amount of approximately $30,000,
$67,000 and $139,000 in 1999, 1998 and 1997, respectively.
29
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
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 6, 1999, appearing in and
incorporated by reference in this Annual Report on Form 10-K of II-
VI Incorporated for the year ended June 30, 1999.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-START> APR-01-1999 JUL-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 5,558 5,558
<SECURITIES> 0 0
<RECEIVABLES> 13,527 13,527
<ALLOWANCES> 457 457
<INVENTORY> 9,096 9,096
<CURRENT-ASSETS> 29,013 29,013
<PP&E> 61,818 61,818
<DEPRECIATION> 24,863 24,863
<TOTAL-ASSETS> 70,843 70,843
<CURRENT-LIABILITIES> 11,423 11,423
<BONDS> 2,549 2,549
0 0
0 0
<COMMON> 18,746 18,746
<OTHER-SE> 35,747 35,747
<TOTAL-LIABILITY-AND-EQUITY> 70,843 70,843
<SALES> 17,209 61,750
<TOTAL-REVENUES> 17,209 61,750
<CGS> 10,107 37,631
<TOTAL-COSTS> 10,107 37,631
<OTHER-EXPENSES> 4,035 15,666
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 74 415
<INCOME-PRETAX> 2,993 8,038
<INCOME-TAX> 959 2,575
<INCOME-CONTINUING> 2,034 5,463
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,034 5,463
<EPS-BASIC> 0.32 0.86
<EPS-DILUTED> 0.31 0.84
</TABLE>
