-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A0rBa73X0Tf23zAhLGRyvaL42mbZx3CHIXE+n8IOH27R5TBd/hv6dnj6Ddh3aLtE wpa06oR09md1tUApjg+4Bg== 0000820318-99-000010.txt : 19991227 0000820318-99-000010.hdr.sgml : 19991227 ACCESSION NUMBER: 0000820318-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: II-VI INC CENTRAL INDEX KEY: 0000820318 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 251214948 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16195 FILM NUMBER: 99718853 BUSINESS ADDRESS: STREET 1: 375 SAXONBURG BLVD CITY: SAXONBURG STATE: PA ZIP: 16056 BUSINESS PHONE: 4123524455 MAIL ADDRESS: STREET 1: 375 SAXONBURG BLVD CITY: SAXONBURG STATE: PA ZIP: 16056 10-K 1 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 . ----------- ------------ 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. 1 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 2 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. 3 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 4 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. 5 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. 6 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. 7 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. 8 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 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 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 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 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 (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 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 (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 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 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 SCHEDULE II II-VI INCORPORATED AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1997, 1998, AND 1999 (IN THOUSANDS OF DOLLARS)
Additions --------------------- Balance at Charged Charged Deduction Balance Beginning to to Other from At End of Year Expense Accounts(1) Reserves(2) of Year ------------------------------------------------------------------ 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
- -------- (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 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 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 EX-13 2 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 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 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 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 FIVE-YEAR FINANCIAL SUMMARY
Year Ended June 30, (000 except per share data) 1999 1998 1997 1996 1995 - --------------------------- ------- ------- ------- ------- ------- 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 - --------------------------- ------- ------- ------- ------- ------- 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.
June 30, ($000) 1999 1998 1997 1996 1995 - --------------------------- ------- ------- ------- ------- ------- 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 - --------------------------- ------- ------- ------- ------- ------- For the five-year period ended June 30, 1999, no dividends were declared.
13
QUARTERLY FINANCIAL DATA FISCAL 1999 QUARTER ENDED ($000 except per share data) 9/30/98 12/31/98 3/31/99 6/30/99 - ----------------------------------------- ------- -------- ------- ------- 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 - ----------------------------------------- ------- -------- ------- ------- 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 ========================================= ======= ======== ======= =======
14 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF II-VI INCORPORATED AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of II- VI Incorporated and subsidiaries as of June 30, 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 CONSOLIDATED BALANCE SHEETS
June 30, ($000 except share data) 1999 1998 - ----------------------------------------------------------- ------- ------- 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 =========================================================== ======= ======= See Notes to Consolidated Financial Statements.
16 CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended June 30, ($000 except per share data) 1999 1998 1997 - ----------------------------------- ------- ------- ------- 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 =================================== ======= ======= ======= See Notes to Consolidated Financial Statements.
17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
SHAREHOLDERS' EQUITY Accumulated Other Comprehensive Retained (000) Common Stock Income Earnings Treasury Stock Total - ------------------------------------------------------------------------------------------------------------ Shares Amount Shares Amount ------ ------- ------ ------- ------ -------- ------- 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 ========================== ====== ======= ====== ======= ====== ======== ======= See Notes to Consolidated Financial Statements.
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 CONSOLIDATED STATEMENTS OF CASH FLOW
Year Ended June 30, ($000) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ 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 ==================================================== ======= ======= ======= See Notes to Consolidated Financial Statements.
19 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 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 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 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 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 The reconciliation of income tax expense at the statutory federal rate to the reported income tax expense is as follows:
Year Ended June 30, ($000) 1999 % 1998 % 1997 % - ---------------------------------------------------------------------------------------- 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 ============================================ ======= === ======== === ======== ===
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 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 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 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 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 EX-21 3 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 EX-23 4 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 EX-27 5
5 3-MOS 12-MOS JUN-30-1999 JUN-30-1999 APR-01-1999 JUL-01-1998 JUN-30-1999 JUN-30-1999 5,558 5,558 0 0 13,527 13,527 457 457 9,096 9,096 29,013 29,013 61,818 61,818 24,863 24,863 70,843 70,843 11,423 11,423 2,549 2,549 0 0 0 0 18,746 18,746 35,747 35,747 70,843 70,843 17,209 61,750 17,209 61,750 10,107 37,631 10,107 37,631 4,035 15,666 0 0 74 415 2,993 8,038 959 2,575 2,034 5,463 0 0 0 0 0 0 2,034 5,463 0.32 0.86 0.31 0.84
-----END PRIVACY-ENHANCED MESSAGE-----