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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, 1995
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________________ to
_________________.
Commission File Number: 0-16195
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1214948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
375 Saxonburg Boulevard
Saxonburg, Pennsylvania 16056
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 412-352-4455
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of outstanding Common Stock, no par value, held by
non-affiliates of the Registrant at September 12, 1995, was approximately
$78,689,900, based on the closing sale price reported on NASDAQ/NMS for
September 12, 1995. For purposes of this calculation only, directors and
executive officers of the Registrant and their spouses are deemed to be
affiliates of the Registrant.
Number of outstanding shares of Common Stock, no par value, at September 12,
1995, was 5,107,370.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 1995 Annual Meeting of Shareholders
are incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
BUSINESS
INTRODUCTION
II-VI Incorporated designs, manufactures and markets optical and electro-
optical components, devices and materials for precision use in infrared, near
infrared, visible light and x-ray/gamma-ray instruments and applications. The
Company's infrared products are used in high-power CO\\2\\ (carbon dioxide)
lasers for industrial processing and for commercial and military sensing
systems. The Company's near infrared and visible products are used in
industrial, scientific and medical instruments and solid-state YAG (yttrium
aluminum garnet) lasers. Frequency doubling and single crystal substrate
materials produced by the Company are utilized as building blocks in the
emerging blue light laser market segment. II-VI also is developing and
marketing solid state x-ray and gamma-ray products for the nuclear radiation
detection industry. The majority of the Company's revenues are attributable to
the sale of optical parts and components for the laser processing industry.
INDUSTRIAL PROCESSING BACKGROUND
Applications for laser processing are increasing worldwide as manufacturers
seek solutions to increasing demands for quality, precision, speed, throughput,
flexibility, automation and cost control. High-power CO\\2\\ and YAG lasers
provide these benefits in a wide variety of cutting, welding, drilling,
ablation, balancing, cladding, heat treating and marking applications. For
example, automobile manufacturers use lasers to facilitate rapid product
changeovers, process simplification, efficient sequencing and computer control
on high throughput production lines. Manufacturers of recreational vehicles,
lawn mowers and garden tractors cut, trim and weld metal parts with lasers to
achieve flexible, high consistency, reduced post processing, lower cost
operations. For office furniture producers, lasers provide easily
reconfigurable, low distortion, low cost prototyping and production capability
that facilitates semi-custom manufacturing of customer specified designs. On
high speed consumer product processing lines, laser marking provides automated
date coding for food packaging and computer driven container identification
for pharmaceuticals.
Precision optics such as total reflectors, partial mirrors, beamsplitters
and lenses are critical to the operation of lasers and laser systems. Many
CO\\2\\ and YAG laser systems contain up to 15 optical elements either as part
of the laser resonator or associated with routing of the laser beam to the
work piece. To the extent that optics wear or become contaminated during
operation, optics are consumables in laser processing. Thus, an aftermarket
demand is generated by an estimated current worldwide installed base of 15,000
to 20,000 industrial YAG and CO\\2\\ lasers. Average lifetime for industrial
laser optical elements is estimated to be 1,000 to 4,000 hours.
COMPANY STRATEGY
The overall strategy of II-VI is to be the quality, cost and service leader
in every market it serves. The Company strives to involve every employee in
its efforts to achieve these goals.
High Power Laser Market Leadership
The Company believes that it supplies more than half of the infrared optics
to industrial materials processors using high power CO\\2\\ lasers worldwide.
Following on the Virgo Optics acquisition and based on the Company's
experience in the high power CO\\2\\ laser optics, II-VI now has an opportunity
to build a position of market leadership in the emerging high power YAG laser
industry. The Company intends to expand its production of YAG laser gain
components and high power mirrors, beamsplitters and related optics for use in
YAG lasers and laser systems. See "Business--Industry Background--YAG Laser
Components."
2
Quality Leadership
The Company seeks to deliver the highest quality levels practicably
attainable in its products and customer services. The Company has decreased
its warranty return ratio in each of the past five years and will attempt in
forward fiscal years to improve on the fiscal year 1995 record of returns
being approximately 1% of net sales. The Company has made consistent
quality its highest customer priority by involving employees in continuous
improvement.
Low Cost Producer
The Company seeks to attain and maintain the low cost producer position for
infrared and visible optics and materials. The Company has invested
significantly in process design, process control, automated equipment,
employee training, yield improvement and manufacturing management systems in
order to enhance production efficiencies in each product area. Currently,
facilities are being substantially expanded and upgraded in infrared optics,
Zinc Selenide optical materials, YAG manufacturing and nuclear radiation
detector areas.
Sales and Service
Another component of the Company's strategy is to provide rapid, technically
complete responses to customer inquiries or field service problems, quick
turnaround product quotations, short manufacturing lead-times and on-time
deliveries. The Company offers the quick delivery INFRAREADY OPTICS(R) program
for customers so that they may avoid production line shutdowns or inventory
stockouts.
Technology Leadership
II-VI develops growth opportunities from a combination of internally funded
and contract research and development. For example, the Company's leadership
in infrared and visible thin film optical coatings has evolved from continuous
Company funded thin film product and process research. The Company's globally
competitive capabilities in the manufacture of Zinc Selenide and Zinc Sulfide
infrared optical materials grew from internally funded research and
development. II-VI's expertise in the production of Cadmium Zinc Telluride
substrates for the manufacture of infrared focal plane arrays is the result of
contract research sponsored by various Department of Defense agencies. The
Company's Cadmium Zinc Telluride experience has been critical in the
development of the eV PRODUCTS nuclear radiation detectors. The Company
intends to continue a balanced program of internal and contract research and
development.
Launch New Products
The Company invests in emerging new products including its nuclear radiation
detectors and its materials and components for blue light lasers. These two
new product lines share a number of characteristics: both address large
potential markets; both depend on success in crystal growth technology; and
both serve OEM customers that manufacture performance and productivity
enhancing tools, instruments and systems for industrial, information and
telecommunications, scientific and medical markets.
Acquisition Strategy
II-VI intends to continue to search for and acquire well matched
technologies, product lines and companies that can contribute to its growth in
broad segments of the global laser, optics and electro-optics industry. With
the acquisitions of Virgo Optics in 1994, eV PRODUCTS hybrid electronics
production capability in 1992 and high pressure Bridgman crystal growth
technology in 1991, the Company has experience in the integration of
additional products and capabilities with its ongoing operations.
3
PRODUCTS
The Company's products include infrared, near infrared, visible and x-ray
materials, optics and electro- optic components used in high power industrial
lasers, scientific and military lasers, and sensors. The Company believes that
its leading edge quality, delivery and customer service enhance its reputation
as the supplier of choice for high power laser optics and components. The
majority of the Company's revenues are attributable to the sale of optical
devices and components for the laser processing industry.
Infrared Optics and Materials.
Reliable operation of high power (1 to 20 kW) CO\\2\\ infrared lasers requires
high quality, low absorption optical elements. The CO\\2\\ laser emits infrared
energy at a wavelength of 10.6 micrometers, a wavelength which is optimal for
many industrial processes such as the cutting, welding, drilling and heat
treating of various materials such as steel and other metals or alloys,
plastics, wood, paper, cardboard, ceramics and numerous composites. This
wavelength is also desirable for certain types of medical surgery and for
various surveillance and sensing systems that must penetrate adverse
atmospheric conditions.
The Company is a broad line supplier of virtually all of the optics and
optical elements used in CO\\2\\ lasers and laser systems. The Company supplies
a family of standard and custom transmissive, reflective and diamond turned
optical elements to high power CO\\2\\ resonator manufacturers, CO\\2\\ laser
system manufacturers and to the aftermarket as replacement parts. Transmissive
optical elements manufactured by the Company are predominately made from Zinc
Selenide produced in-house. The Company is one of two manufacturers in the
world of this optical material. The Company's Zinc Selenide capability and its
low absorbing, thin film coating technology have earned II-VI a reputation as
the quality leader worldwide in this marketplace.
The Company provides replacement optics and refurbishing services to users
of industrial CO\\2\\ lasers. The Company sells its infrared replacement optics
with a 24-hour shipment guarantee under the trade name of INFRAREADY
OPTICS(R). Consumable items such as focusing lens and output couplers are cost
effectively refurbished for the Company's aftermarket customers. The
aftermarket portion of the Company's business is growing rapidly as industrial
laser applications proliferate worldwide.
The Company supplies Cadmium Zinc Telluride substrates primarily to U.S.
military and NATO defense suppliers under the trade name EPIREADY(R). These
substrates are subsequently processed by the Company's customers into infrared
detectors using epitaxial crystal growth and device fabrication techniques.
The Company supplies Zinc Sulfide in the form of domes and windows to military
suppliers for Forward Looking Infrared systems worldwide. A portion of the
Company's infrared imaging business involves development programs funded by
ARPA/DOD and other governmental agencies.
YAG Laser Components.
The power levels available from YAG lasers are increasing (1 to 3 kW) while
the costs of such lasers are decreasing. These trends are making YAG laser
processing more attractive in such high-power YAG applications as the welding
of airbag sensors and inflators. Low-power YAG applications include the high
speed micro-welding of multi-blade shaving razor assemblies, the welding of
heart pacemakers and the precision trimming of component values in electronic
assemblies. The capability to deliver the 1.06 micrometer YAG laser wavelength
over a flexible, low loss fiber optic has enhanced YAG laser deployment in
many applications where complex shapes require versatile beam delivery
geometries. A YAG laser requires the same optical elements as the CO\\2\\ laser
except that they are made to operate at the YAG laser near infrared wavelength
of 1.06 micrometers.
The Company supplies a family of standard and custom laser gain materials and
optics for industrial, medical, scientific and research YAG lasers. The YAG
laser gain materials are produced to stringent industry specifications and
precisely fabricated into rods or slabs. Included in the Company's products are
refurbished YAG rods sold to the Company's aftermarket customers. The Company
offers waveplates, polarizers, lenses, prisms, and mirrors for visible and near
4
infrared applications. These products control and alter the polarization of
visible and near infrared energy.
Nuclear Radiation Detectors.
The nuclear detection market has important applications in the industrial
gauging, environmental monitoring, power generation, nuclear safeguards,
weapons research and disarmament, nuclear non-proliferation, health physics
and medical imaging fields. Solid-state Cadmium Zinc Telluride nuclear
radiation detectors are attractive because of their reduced size, longer life
and lower voltage requirements as compared to the historically used
scintillator/photomultiplier devices. The Company's eV PRODUCTS division
designs and manufactures Cadmium Zinc Telluride, room temperature, nuclear
radiation detectors combined with custom designed low noise front-end
electronics. The Company believes it has become the leader in room
temperature, direct conversion radiation detectors which are emerging in such
applications as industrial gauging and environmental monitoring.
Frequency Doubling and Blue Emitter Materials.
For over a decade, researchers in university, government and industry
laboratories have been seeking routes to the fabrication of reliable, solid-
state blue light emitters and lasers. Blue light sources are expected to be
used in such applications as optical data storage, telecommunications, graphic
displays and high density printers. The Company supplies frequency doubling
materials which are being used in emerging laser based systems for blue light
generation. The Company produces Potassium Niobate based microlaser assemblies
which are used by customers to frequency double other light sources, thus
producing up to 30 mW of blue or 50 mW of green light. The Company also
produces single crystal Zinc Selenide, a high quality substrate which is being
used by customers in the development of blue light lasers.
CUSTOMERS AND MARKETS
Industrial
The Company's customers include leading industrial OEM's and system
manufacturers worldwide in the CO\\2\\ and YAG laser machine tool industry. The
Company has focused its marketing efforts on the growing high power segments
of the laser components marketplace.
The Company's high-power CO\\2\\ laser customers include Bystronic Laser AG,
Fanuc Ltd, Matsushita Industrial Equipment Co., Inc., Mazak Nissho Iwai,
Mitsubishi Electronic Corp., Rofin Sinar Laser GmbH--a division of Siemens, and
Trumpf GmbH & Co. These companies' laser resonators are installed on systems
that are used for cutting, drilling and marking of materials and for welding and
heat treating of metals. The Company also sells optics and components to over
1,400 laser end users which require replacement optics, such as focusing lenses
and beam steering mirrors. Users of industrial lasers include a broad range of
industries and applications, such as automotive, electrical equipment,
packaging, building products, office furniture, garment, airframe or aerospace,
consumer electronics, tooling and machinery.
Low power, sealed CO\\2\\ lasers are utilized for small parts manufacturing,
engraving and serialization of products. These small, lightweight, low-cost
systems are flexible and provide rapid response for a number of light
manufacturing applications. Manufacturers of these laser sources, such as
Domino Laser Inc., Synrad Inc. and Laser Machining Inc., are high volume optics
customers of the Company.
The Company's YAG component customers include Continuum Inc., Lumonics Corp.,
Spectra-Physics Lasers Inc., Excel/Quantronix Corp., Electrox Ltd. and Hughes
Aircraft Company. These companies' systems are used for marking, scribing,
microwelding and precision trimming. A broad range of industries use YAG
systems, including medical devices, consumer products, automotive and
semiconductors. The Company offers YAG customers both the YAG rod supply
capability and the necessary optics for a complete laser system. The Company is
using its close working relationships with its industrial CO\\2\\ customers
worldwide to increase its YAG component supply market share, since both products
are needed by many of the same customers.
5
Scientific and Military
The scientific, research and new product development areas of the electro-
optics device market are creating many opportunities for the visible, near-
infrared and infrared optics and materials produced by the Company. The
Company provides high end, high specification components to this group of
customers which include products such as aspheric optics, prisms, parabolic
reflectors and focusing element assemblies. The Company provides specialty
optics and components to instrument manufacturers such as Hewlett-Packard
Company, Eastman Kodak Company, Perkin-Elmer Corporation, Raytheon Company and
Cincinnati Electronics Corp. II-VI's products are integrated into
spectrophotometers, interferometers and distance measuring instruments;
scanning mirrors for high resolution color printing; and focusing assemblies
for infrared cameras. Quick response, short lead times and high quality
engineering support are cornerstones of the Company's pursuit of these
markets.
U.S. and NATO allies are pursuing defense strategies based upon stringent
budgets to improve the effectiveness of military systems through electronics
upgrades, including infrared imaging systems. The Company supplies materials
and optics to manufacturers of infrared sensing systems such as Texas
Instruments, Inc., Loral Electro-Optical Systems Corporation, GEC-
Marconi Avionics Inc., Lockheed-Martin Inc. and Hughes Aircraft Company.
SALES AND DISTRIBUTION
The Company markets its products in the United States through its direct
sales force; in Japan through its subsidiary, II-VI Japan Incorporated; and in
certain Southeast Asian markets through its subsidiary II-VI Singapore PTE
LTD. European sales are effected through a distributor and sales throughout
the rest of the world are made through 19 manufacturers' representatives. The
Company's products are sold to over 2,400 customers in 35 countries. The
Company's principal international markets are Germany and Japan.
MANUFACTURING PROCESSES
Infrared and Visible Optics.
The manufacturing processes for optics include a number of low cost,
automated high precision processes that have been developed and documented at
the Company's manufacturing sites in Saxonburg, Pennsylvania, Port Richey,
Florida, and Singapore. Manufacturing steps for the majority of the Company's
optical products include:
Grinding and Polishing. The Company rigorously tests starting materials in
the optics fabrication process to assure conformity to specification for
absorption, clarity, stress and purity. The manufacturing sequence typically
involves grinding a part to the desired curvature and precision polishing the
optic to the desired high quality surface shape and finish. The Company has
developed specialized processes for fabricating visible, YAG, near infrared,
and infrared optics. The Company has state-of-the-art, numerically controlled
generating and grinding equipment and automated Synchrospeed optical polishing
apparatus.
Diamond Turning. The Company's diamond turning of metal mirrors involves
state-of-the-art equipment for flycutting of flat metal reflectors and turning
of contoured spherical or aspherical shapes. The ability to produce spherical
and aspherical diffraction-free surfaces, due to a proprietary real-time
feedback test system, provides the highest quality, high power handling copper
reflecting mirrors available in the industry. The Company is currently
investing in expansion of this manufacturing unit's capacity as the demand for
these products has grown rapidly during the last few years.
Thin Film Coating. Multilayer, thin film, visible and infrared coatings are
produced by evaporating precisely controlled thicknesses of various substances
from microprocessor controlled thermal or electron beam sources onto optical
surfaces in custom built vacuum chambers. The know-how to control such process
variables as time, pressure, gas flow and temperature are critical to
achieving low-absorption, high adhesion and properly transmitting thin films.
Production of zero defect coatings is a part of the proprietary knowledge of
II-VI.
6
Materials.
II-VI is a materials-based company. Processes used to produce these
materials require long development periods, are capital intensive and involve
precision process control. Yields are raised from minimal to acceptable as
know-how and process consistency techniques are developed. The resulting
barriers to entry limit competition.
The Company's infrared components and materials primarily are made from
compounds composed of elements from Groups II and VI of the Periodic Table of
the Elements ("II-VI Compounds"). II-VI Compounds, a class of non-hygroscopic
(do not absorb water) materials, are leading infrared transmitting materials.
Their high infrared transmission efficiency, the key property needed for high-
power infrared laser optics, is a result of low infrared absorption. Infrared
absorption is low due to the type of bonding that exists within a II-VI
crystalline structure and due to the relatively high molecular weights of the
most useful II-VI Compounds. The Group II elements used by the Company are
Zinc, Cadmium and Mercury and the Group VI elements used are Sulfur, Selenium
and Tellurium.
Materials manufactured by the Company include:
Zinc Selenide. The Company manufactures fine grained polycrystalline Zinc
Selenide by a proprietary chemical vapor deposition process. II-VI is one of
two manufacturers of this material in the world and has earned the reputation
for producing the lowest absorbing laser grade Zinc Selenide. The process
involves high temperature disassociation of Hydrogen Selenide gas and a gas
phase reaction with zinc vapor. Solid Zinc Selenide is deposited on graphite
mandrels at high temperatures forming sheets of the material. Zinc Selenide is
the principal material used in the Company's CO\\2\\ laser optics. All material
is polished, inspected and laser tested for defects.
Zinc Sulfide. The chemical vapor deposition process is also utilized to
manufacture fine grained polycrystalline Zinc Sulfide. Some Zinc Sulfide is
further processed to form Multispectral Zinc Sulfide. The Multispectral Zinc
Sulfide is highly transmissive from the ultraviolet to the middle infrared
wave lengths making it the material of choice for tank windows, for example,
through which humans, laser range finders and guidance systems identify
targets.
Cadmium Zinc Telluride Substrates. II-VI utilizes vertical and horizontal
Bridgman processes to grow its Cadmium Zinc Telluride single crystal substrate
materials. The Bridgman processes involve direct solidification from a liquid
melt with closely controlled unidirectional freezing in either a vertical or
horizontal configuration. The substrates are mined from thoroughly tested
Cadmium Zinc Telluride ingots utilizing precision crystal orientation
techniques followed by a sequence of surface lapping and semiautomated diamond
sawing. Wafers are precision sized then surfaced through a series of critical
polishing and chemical etching steps.
Cadmium Zinc Telluride for Nuclear Radiation Detectors. The high pressure
vertical Bridgman process is used to grow Cadmium Zinc Telluride for nuclear
radiation detectors. This proprietary process produces critical materials
which when mated to hybrid front end electronics built by the Company are sold
to industrial gauging and other equipment manufacturers. The high pressure
Bridgman process yields products that are cost competitive with
scintillator/photomultiplier devices.
YAG Materials. Neodymium doped YAG, solid-state laser gain materials, are
manufactured at the Company's Virgo Optics Division. The Company's precision
process control and know-how result in consistent YAG rod products which are
in high demand. The Company expects to have additional capacity for this
material on-line within the next year. The Company competes in the YAG rod
business on quality, price and delivery.
Potassium Niobate and Single Crystal Zinc Selenide. The Company's material
science expertise has developed frequency doubling Potassium Niobate in
conjunction with an international laboratory. This frequency doubling material
when coupled with a laser gain material and a laser pump can be used to
generate blue, green or red light. Using this material, the Company offers
monolithic laser assemblies to OEM's that are pursuing blue and green laser
markets. Through another proprietary process the Company is producing single
crystal Zinc Selenide which is used as a substrate in the production of blue
light emitters and lasers.
7
Sources of Supply
The major raw materials used by the Company are Zinc, Selenium, Hydrogen
Selenide, Hydrogen Sulfide, Cadmium, Tellurium, Yttrium Oxide, Aluminum Oxide
and Iridium. The Company produces all of its Zinc Selenide and Zinc Sulfide
requirements internally, although small quantities of Zinc Selenide and Zinc
Sulfide may be purchased from outside vendors from time to time. The Company
also purchases Gallium Arsenide, Copper, Silicon, Germanium, Quartz, optical
glass and small quantities of other materials for use as base materials for
laser optics. The Company purchases Thorium Fluoride and other materials for
use in optical fabrication and coating processes. There are more than two
suppliers for all of the above materials, except for Zinc Selenide and
Hydrogen Selenide (excluding the Company) and Thorium Fluoride, for each of
which there is only one proven source of merchant supply. For most materials,
the Company has entered into annual purchase arrangements whereby suppliers
provide discounts for annual volume purchases in excess of specified amounts.
The continued high quality of these raw materials is critical to the
stability of the Company's manufacturing yields. The Company conducts testing
of materials at the onset of the production process to meet evolving customer
requirements. Additional research may be needed to better define future
starting material specifications. The Company has not experienced significant
production delays due to a shortage of materials. However, the Company does
occasionally experience problems associated with vendor supplied materials not
meeting contract specifications for quality or purity. A significant failure
of the Company's suppliers to deliver sufficient quantities of necessary high-
quality materials on a timely basis could have a materially adverse effect on
the Company's results of operations.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
II-VI uses or generates certain hazardous substances in its research and
manufacturing facilities. The Company believes that its handling of such
substances is in material compliance with applicable local, state and federal
environmental, safety and health regulations at each operating location. The
Company invests substantially in proper protective equipment, process controls
and specialized training to minimize risks to employees, surrounding
communities and the environment due to the presence and handling of such
hazardous substances. The Company annually conducts employee physical
examinations and workplace air monitoring regarding such substances. When
exposure problems or potential have been indicated, corrective actions have
been implemented and re-occurrence has been minimal or non-existent. The
Company does not carry environmental impairment insurance.
Relative to its generation and use of the extremely hazardous substance
Hydrogen Selenide, the Company has in place a government approved emergency
response plan. Special attention has been paid to all procedures pertaining to
this gaseous material to minimize the chances of its accidental release to the
atmosphere.
With respect to the use, storage and disposal of the low-level radioactive
material Thorium Fluoride, the Company's facilities and procedures have been
recently inspected and approved by the Nuclear Regulatory Commission. This
material is utilized in the Company's thin film coatings. All Thorium Fluoride
bearing by-products are collected and shipped as solid waste to a government
approved low-level radioactive waste disposal site in Barnwell, South
Carolina.
The Company is a member of the Frontier Chemical Phase II PRP Group which
has agreed with the Environmental Protection Agency to remove the contents of
certain tanks at a site in Niagara Falls, New York. All site work has been
completed and substantial progress has been made by the Group in meeting its
financial obligations. Amounts currently reserved by the Company are
immaterial and believed to cover its share of any remaining liabilities.
The generation, use, collection, storage and disposal of all other hazardous
by-products such as suspended solids containing heavy metals or airborne
particulates are believed by the Company to be in material compliance with
regulations. Management believes that all of the permits and licenses required
for operation of the Company's business are in place. Although the Company is
not aware of any material environmental, safety and health problems in its
8
properties or processes, there can be no assurance that problems will not
develop in the future which would have a materially adverse effect on the
Company.
RESEARCH AND DEVELOPMENT
The Company's research and development policy calls for the pursuit of a
balanced program of internally funded and contract research and development
totaling between 5 and 8 percent of product sales. From time to time the ratio
of contract to internally funded activity varies significantly due to the
unevenness and uncertainty associated with most government research programs.
The Company is committed to accepting only funded research that ties closely
to its growth plans.
Company research and development activities focus on developing new
proprietary products or on understanding, improving and automating crystal
growth, low damage fabrication or optical thin film coating technologies. The
Company performs commercial prototype and engineering work for customers and,
in addition, participates in various government and university research and
development consortia. The Company maintains an engineering, research and
development staff of fifty. Thirty seven of the Company's employees are
engineers or scientists. In addition, manufacturing personnel support or
participate in research and development on an ongoing basis. Interaction
between the development and manufacturing functions enhances the direction of
projects, reduces costs and accelerates technology transfers.
The Company is primarily engaged in ongoing research and development in the
following areas: Zinc Selenide optical material production; vertical and
horizontal Bridgman Cadmium Zinc Telluride crystal growth and substrate
manufacturing; Zinc Selenide single crystal growth and substrate production;
high pressure Bridgman Cadmium Zinc Telluride crystal growth and radiation
detector manufacturing; YAG crystal production; Potassium Niobate crystal
growth; automated, deterministic optical fabrication methods; optical thin
film processes and products; and microlaser assemblies based on various
combinations of YAG or yttrium vanadate gain materials with frequency doubling
materials.
Company funded research and development and contract research expenditures
totaled approximately $1.1 million, $1.3 million and $1.4 million during
fiscal 1993, 1994 and 1995, respectively. Contract research revenues during
those respective years totaled approximately $1.1 million, $1.6 million and
$1.2 million. The Company has been active in the various research and
development programs including the Pennsylvania Ben Franklin Partnership
program, the Federal Small Business Innovation Research programs of primarily
the Department of Defense agencies and an ARPA sponsored industry team program
focused on infrared materials producibility.
COMPETITION
The Company believes that it is a leading producer of products and services
in its addressed markets. In the area of high power CO\\2\\ laser optics and
materials, II-VI believes it supplies over half of the world market. The
Company is a leading supplier of Cadmium Zinc Telluride substrates used for
infrared imaging arrays, and believes that it is the only supplier of Cadmium
Telluride electro-optic modulators to U.S. and NATO defense contractors. The
Company is a significant supplier of YAG rods and YAG laser optics to the
worldwide markets of scientific, research, medical and industrial laser
manufacturers.
The Company competes on the basis of product quality, quick delivery, strong
technical support and pricing. Management believes that the Company competes
favorably with respect to these factors and that its vertical integration,
manufacturing facilities and equipment, experienced technical and
manufacturing employees, and worldwide marketing and distribution provide
competitive advantages.
II-VI has a number of present and potential competitors, many of which have
greater financial, selling, marketing or technical resources. The lone
competitor of the Company in the production of Zinc Selenide is Morton
9
International's Advanced Materials Division. The competitors producing infrared
and CO\\2\\ laser optics include Laser Power Optics and Coherent in the United
States, and Sumitomo in Japan. Competing producers of YAG materials and optics
include the Litton Airtron Division of Litton Industries and the Crystal
Products Group of Union Carbide. The Company is not aware of any currently
significant competitors for its Cadmium Zinc Telluride radiation detector
product line.
In addition to competitors who manufacture products similar to those of the
Company, there are other technologies or materials that may compete with the
Company's products. The markets for the nuclear radiation detector and the
frequency doubling and blue emitter materials are in their infancy and could
be affected by competing technologies.
EMPLOYEES
As of June 30, 1995 the Company employed 323 persons worldwide. Of these
employees, 50 are engaged in research, development and engineering, 206 in
direct production, and the balance in sales and marketing, administration,
finance and support services. The Company's production staff includes highly
skilled optical craftsmen. None of the Company's employees is covered by a
collective bargaining agreement, and the Company has never experienced any
work stoppages. The Company has a long-standing policy of encouraging active
employee participation in selected areas of operations management. The Company
believes its relations with its employees to be good. The Company rewards its
employees with incentive compensation based on achievement of performance
goals.
PATENTS, TRADE SECRETS AND TRADEMARKS
II-VI relies on its trade secrets and proprietary know-how to develop and
maintain its competitive position. The Company has not pursued process patents
due to the disclosures required in the patent process and the relative
difficulties in successfully litigating process type patents. The Company has
confidentiality and non-compete agreements with the executive officers and
certain other personnel.
The processes and specialized equipment utilized in crystal growth, infrared
materials fabrication and infrared optical coatings as developed at the
Company are complex and difficult to duplicate. However, there can be no
assurance that others will not develop or patent similar technology or that
all aspects of the Company's proprietary technology will be protected. Others
have obtained patents covering a variety of infrared optical configurations
and processes, and others could obtain patents covering technology similar to
the Company's. The Company may be required to obtain licenses under such
patents and there can be no assurance that the Company would be able to obtain
such licenses, if required, on commercially reasonable terms, or that claims
regarding rights to technology will not be asserted which may adversely affect
the Company. In addition, Company research and development contracts with
agencies of the United States Government present a risk that project-specific
technology could be disclosed to competitors as contract reporting
requirements are fulfilled.
The Company holds four registered trademarks: the II-VI INCORPORATED(R)
name; INFRAREADY OPTICS(R) for replacement optics for industrial CO\\2\\ lasers;
EPIREADY(R) for low surface damage substrates for Mercury Cadmium Telluride
epitaxy; and EV PRODUCTS(R) for products manufactured by the Company's eV
Products division. The trademarks are registered with the United States Patent
and Trademark Office, but not with any states. The Company is not aware of any
interference or opposition to these trademarks in any jurisdiction.
ITEM 2. PROPERTIES
FACILITIES
The Company's headquarters are located in Saxonburg, Pennsylvania,
25 miles north of Pittsburgh, in a 55,000 square foot facility, on 41 acres
of land, which was purchased in 1976. In addition the company has leases
for its manufacturing and office space in Florida, Singapore, and Japan
totaling 50,000 square feet.
II-IV recently commenced construction of a new 20,000 square foot
addition to its Saxonburg, Pennsylvania plant. This new facility will allow
expansion of the Company's manufacturing operations.
10
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation which could have a material
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 53 Chairman, Chief Executive Officer and Director
Francis J. Kramer 46 President, Chief Operating Officer and Director
Herman E. Reedy 52 Vice President and General Manager of Quality and Engineering
James Martinelli 37 Treasurer and Director of Finance and Accounting
Carl J. Johnson, a co-founder of the Company in 1971, serves as
Chairman, Chief Executive Officer and a Director of the Company. He served as
President of the Company from 1971 until 1985 and has been a Director since its
founding and Chairman since 1985. From 1966 to 1971, Dr. Johnson was Director of
Research & Development for Essex International, Inc., an automotive electrical
and power distribution products manufacturer, now a subsidiary of United
Technologies Corporation. From 1964 to 1966, Dr. Johnson worked at Bell
Telephone Laboratories as a member of the technical staff. Dr. Johnson completed
his Ph.D. in Electrical Engineering at the University of Illinois in 1969. He
holds the B.S. and M.S. degrees in Electrical Engineering from Purdue University
and Massachusetts Institute of Technology (MIT), respectively.
Francis J. Kramer has been employed by the Company since 1983, has been
its President and Chief Operating Officer since 1985 and was elected to the
Board of Directors on September 26, 1989. Mr. Kramer joined the Company as Vice
President and General Manager of Manufacturing, and was named Executive Vice
President and General Manager of Manufacturing in 1984. Prior to his employment
by the Company, Mr. Kramer was the
11
Director of Operations for the Utility Communications Systems Group of Rockwell
International Corporation. Mr. Kramer graduated from the University of
Pittsburgh in 1971 with a B.S. in Industrial Engineering and from Purdue
University in 1975 with an M.S. in Industrial Administration.
Herman E. Reedy has been with the Company since 1977 and is Vice
President and General Manager of Quality and Engineering. Previously, Mr. Reedy
held positions at II-VI as General Manager of Quality and Engineering, Manager
of Quality and Manager of Components. From 1973 until joining the Company, Mr.
Reedy was employed by Essex International, Inc., now a subsidiary of United
Technologies Corporation, serving last as Manager, MOS Wafer Process
Engineering. Prior to 1973, he was employed by Carnegie-Mellon University and
previously held positions with Semi-Elements, Inc., and Westinghouse Electric
Corporation. Mr. Reedy is a 1975 graduate of the University of Pittsburgh with a
B.S. degree in Electrical Engineering.
James Martinelli has been employed by the Company since 1986 and has
served as Treasurer, Director of Finance and Accounting and Assistant Secretary
since May of 1994. Mr. Martinelli joined the Company as Accounting Manager and
was named Controller in 1990. Prior to his employment by the Company,
Mr. Martinelli was Accounting Manager at Tippins Incorporated and Pennsylvania
Engineering Corporation from 1980 to 1985. Mr. Martinelli graduated from
Indiana University of Pennsylvania with a B.S. degree in Accounting and is a
member of the Pennsylvania Institute of Certified Public Accountants.
12
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 1994
First Quarter............................................. $ 1 5/8 $ 7/8
Second Quarter............................................ $ 1 11/16 $ 1 3/8
Third Quarter............................................. $ 1 7/8 $ 1 9/16
Fourth Quarter............................................ $ 2 $ 1 1/2
FISCAL 1995
First Quarter............................................. $ 3 1/4 $ 1 13/16
Second Quarter............................................ $ 4 3/8 $ 3 7/16
Third Quarter............................................. $ 7 5/16 $ 3 9/16
Fourth Quarter............................................ $13 7/8 $ 6 5/16
On September 12, 1995, the last reported sale price for the Common Stock on
the Nasdaq National Market was $23.00 per share. As of such date, there were
approximately 548 holders of record of the Common Stock.
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, the consolidated
financial statements, related notes and other financial information included
elsewhere in this Form 10-K and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected consolidated
financial data set forth for each of the three fiscal years ended June 30,
1995, are derived from the consolidated financial statements of the Company
included elsewhere and incorporated by reference in this Form 10-K. The
selected consolidated financial data for each of the two fiscal years ended
June 30, 1995, are derived from financial statements of the Company which have
been audited by Alpern, Rosenthal & Company, independent auditors, and are
included herein.
YEAR ENDED JUNE 30,
-----------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF EARNINGS
DATA:
REVENUES:
Net sales.............. $14,942 $15,869 $16,067 $17,088 $26,598
Contract research and
development.......... 88 731 1,102 1,593 1,162
------- ------- ------- ------- -------
15,030 16,600 17,169 18,681 27,760
COSTS, EXPENSES AND
OTHER INCOME:
Cost of goods sold..... 9,366 10,316 11,421 11,313 15,765
Contract research and
development.......... 74 517 820 1,040 923
Internal research and
development.......... 877 424 266 251 447
Selling, general and
administrative
expenses............. 4,137 4,085 4,455 5,159 7,324
Gain on sale of
investment........... -- -- -- (699)(1) --
Other (income)/expense. 31 226 94 (87) (86)
------- ------- ------- ------- -------
14,485 15,568 17,056 16,977 24,373
------- ------- ------- ------- -------
EARNINGS BEFORE INCOME
TAXES................. 545 1,032 113 1,704 3,387
INCOME TAXES............ 140 294 38 569 869
------- ------- ------- ------- -------
NET EARNINGS............ $ 405 $ 738 $ 75 $ 1,135(1)$ 2,518
======= ======= ======= ======= =======
EARNINGS PER SHARE (2).. $ 0.08 $ 0.14 $ 0.01 $ 0.22(1)$ 0.48
======= ======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING (2)....... 5,274 5,293 5,255 5,061 5,289
JUNE 30,
---------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......... $ 5,987 $ 6,603 $ 6,009 $ 6,648 $ 8,872
Total assets............ 16,661 17,186 17,265 17,570 24,367
Total long-term debt,
less current portion.. 1,508 765 257 0 1,190
Retained earnings....... 9,194 9,932 10,007 11,142 13,660
Shareholders' equity.... 12,554 13,359 13,217 14,237 16,998
--------
(1) Earnings for fiscal 1994 included a $699,000 pre-tax gain on the sale of
the Company's investment in its former Japanese distributor resulting in
an after tax gain of $461,000 or $0.09 per share. See Note E of Notes to
Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Earnings per share are calculated using the weighted average number of
shares outstanding and assuming dilutive stock options outstanding were
exercised at the beginning of the year or at the date of issuance, if
later. See Note A of Notes to Consolidated Financial Statements. No cash
dividends on the Common Stock were declared by the Company during any of
the periods presented.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
The Company designs, manufactures and markets optical and electro-optical
components, devices and materials for precision use in infrared, near
infrared, visible light and x-ray/gamma-ray instruments and applications. The
Company's customers include leading industrial OEM and system manufacturers
worldwide in the CO\\2\\ and YAG laser machine tool industry. The Company also
generates revenues from the performance of research and development contracts
for third parties, primarily prime contractors for the Department of Defense.
Sales to customers in countries other than the United States accounted for
approximately 47% of revenues in each of the last three fiscal years. In all
fiscal years since 1972, the Company has been profitable and has consistently
increased revenues. In October 1987, the Company received $3.3 million of net
proceeds from its initial public offering of Common Stock. A portion of such
net proceeds was used to expand its worldwide manufacturing facilities. Since
1987, growth has been funded primarily by operating activities. The Company
acquired Virgo Optics on December 29, 1994. The Company's financial statements
include the results of Virgo Optics from such date.
The following table sets forth, for the periods indicated, the percentage
relationship to revenues of certain sales, expense and income items. The table
and the subsequent discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in
this Form 10-K.
YEAR ENDED JUNE 30, (1)
---------------------------------
1991 1992 1993 1994 1995
----- ----- ----- ----- -----
Revenues:
Net sales................................. 99.4% 95.6% 93.6% 91.5% 95.8%
Contract research and development......... 0.6 4.4 6.4 8.5 4.2
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of goods sold (2).................... 62.7 65.0 71.1 66.2 59.3
Contract research and development (3)..... 84.1 70.7 74.4 65.3 79.4
Internal research and development......... 5.8 2.6 1.5 1.3 1.6
Selling, general and administrative....... 27.5 24.6 25.9 27.6 26.4
Operating costs and expenses................ 96.2 92.4 98.8 95.1 88.1
Income from operations...................... 3.8 7.6 1.2 4.9 11.9
Gain on sale of investment.................. -- -- -- 3.7 --
Other (income)/expense...................... 0.2 1.4 0.5 (0.5) (0.3)
Earnings before income taxes................ 3.6 6.2 0.7 9.1 12.2
Income taxes................................ 0.9 1.8 0.2 3.0 3.1
Net earnings................................ 2.7% 4.4% 0.4% 6.1% 9.1%
--------
(1) Due to method of calculation, percentages may not total 100%.
(2) Calculated as a percentage of net sales.
(3) Calculated as a percentage of contract research and development revenues.
Cost of goods sold as a percentage of net sales increased from fiscal 1991
through fiscal 1993 due to increased expenses relating to the start-up of the
eV PRODUCTS Division and costs associated with expanding production capacity
in order to position the Company for future growth. Also during this period
the Company successfully employed an aggressive pricing strategy to gain
market share. Cost of goods sold as a percentage of net sales decreased in
fiscal 1994 and fiscal 1995 due to lower per unit operating costs associated
with increased production volume. Volume increased as a result of market share
gains and improved worldwide economies.
Net earnings as a percentage of sales for fiscal year 1994 was favorably
affected by a gain on the sale of ownership in the Company's former Japanese
distributor, but was adversely affected, to a lesser extent, by costs
15
associated with the establishment of the Company's direct sales office in
Japan. Exclusive of this gain, net earnings as a percentage of sales would have
been 3.6%. Net earnings as a percentage of sales for fiscal 1995 was favorably
affected by the establishment of the Japanese direct sales office.
RESULTS OF OPERATIONS
Fiscal 1995 Compared to Fiscal 1994
Overview. Net earnings increased 122% to $2.5 million in fiscal 1995 from
$1.1 million in fiscal 1994. Fiscal 1994 earnings included a $461,000 after-
tax gain on the sale of the Company's investment in its former Japanese
distributor. Revenues increased 49% to $27.8 million in fiscal 1995 from $18.7
million in fiscal 1994. This increase is attributable to increased sales in all
of the Company's markets and, to a lesser extent, the acquisition of Virgo
Optics in December 1994. Bookings increased 52% to $28.4 million in fiscal 1995
from $18.7 million in fiscal 1994. Order backlog increased 30% to $6.9 million
at June 30, 1995, from $5.3 million at June 30, 1994. Manufacturing orders
comprised 96% of backlog at June 30, 1995, compared to 77% at June 30, 1994.
Net Earnings. Net earnings increased 122% to $2.5 million in fiscal 1995
from $1.1 million in fiscal 1994. The major contributors to the increase in
net earnings were higher manufacturing production volume, increased price
realization in Japan, and, to a lesser extent, the acquisition of Virgo
Optics. The increase in manufacturing order volume resulted in additional
profits from improved capacity utilization and efficiency in the Saxonburg and
Singapore manufacturing plants.
Sales and Markets. Bookings increased 52% to $28.4 million in fiscal 1995
from $18.7 million in fiscal 1994. The largest portion of the increase is
attributable to the domestic industrial market. Bookings also increased in the
Japanese and European industrial markets and, to a lesser extent, the
military/aerospace and medical markets. Orders for manufactured products
accounted for the entire increase in bookings in fiscal 1995. Contract
research and development bookings remained constant at $300,000 from fiscal
1994.
Revenues increased 49% to $27.8 million in fiscal 1995 from $18.7 million in
fiscal 1994. This increase is attributable to increased sales in all of the
Company's markets and, to a lesser extent, the acquisition of Virgo Optics in
December 1994. Contract research and development revenues decreased 27% to $1.2
million in fiscal 1995 from $1.6 million in fiscal 1994. This decrease is
attributable to customer-imposed delays in the performance of a significant
government contract. The Company has submitted several subcontract proposals
relating to federal government contracts expected to be awarded in fiscal 1996.
Costs and Expenses. Manufacturing gross margin was $10.8 million or 41% of
net sales in fiscal 1995 compared to $5.8 million or 34% in fiscal 1994. This
increase is attributable to improved capacity utilization, efficiencies
resulting from additional production volume and, to a lesser extent, higher
price realization from the Japanese market.
Contract research and development gross margin was $239,000 or 21% of
contract research and development revenues in fiscal 1995, compared to
$553,000 or 35% in fiscal 1994. This decrease is attributable to a reduction
in reimbursable costs allocable to government contracts.
Company-funded internal research and development costs increased to $447,000
in fiscal 1995 from $251,000 in fiscal 1994. The majority of this increase is
attributable to nuclear radiation detector development.
Selling, general and administrative expenses were $7.3 million or 26% of
revenues in fiscal 1995 compared to $5.2 million or 28% in fiscal 1994. The
increase is attributable to higher compensation expense associated with the
Company's worldwide profit-driven bonus programs and increased sales and
marketing expenses.
The effective corporate income tax rate was 26% in fiscal 1995 compared to 33%
in fiscal 1994. This is attributable to lower non-deductible expenses and
increased profit of the foreign subsidiaries. The Company's current and future
16
effective tax rates will continue to be impacted by the level of profit or loss
generated by the foreign subsidiaries. The Company expects that its effective
corporate income tax rate for fiscal 1996 will increase as a result of
increased earnings attributable to domestic operations as a percentage of total
corporate earnings.
Fiscal 1994 Compared to Fiscal 1993
Overview. Net earnings were $1.1 million in fiscal 1994 compared to $75,000
in fiscal 1993. Fiscal 1994 earnings included a $461,000 after-tax gain on the
sale of the Company's investment in its former Japanese distributor. Revenues
increased 9% to $18.7 million in fiscal 1994 from $17.2 million in fiscal
1993. Such increase was attributable to increased price realization in Japan,
higher contract research and development revenues and increased U.S. sales.
Bookings decreased 1% to $18.7 million in fiscal 1994 from $18.9 million in
fiscal 1993. Backlog at the end of each period was $5.3 million, although the
mix of manufacturing and contract research and development orders in backlog
was significantly different as manufacturing backlog increased 41% to $4.1
million at June 30, 1994, from $2.9 million at June 30, 1993, and contract
research and development backlog decreased 50% to $1.2 million at June 30,
1994, from $2.4 million at June 30, 1993.
Net Earnings. Net earnings were $1.1 million in fiscal 1994 compared to
$75,000 in fiscal 1993. The increase in net earnings, exclusive of the gain on
the sale of the investment, was attributable to the improvement in the
domestic and European markets during the second half of fiscal 1994, increased
revenues from contract research and development, and higher demand for nuclear
detection products and services. The increase in manufacturing production
volume from the domestic and European markets enabled the Company to recognize
increased profits resulting from improved capacity utilization and
efficiencies in both the Singapore and Saxonburg optics manufacturing plants.
Additionally, revenues from contract research and development increased 45% to
$1.6 million in fiscal 1994 from $1.1 million in fiscal 1993 as the Company
continued work on a $2.0 million Advanced Research Projects Agency (ARPA)
contract extension awarded during fiscal 1993. Also, as compared to fiscal
1993, eV PRODUCTS division earnings improved as a result of higher revenue.
Sales and Markets. Although total bookings decreased 1% in fiscal 1994 from
fiscal 1993, the make-up of these bookings changed significantly. Contract
research and development bookings decreased 87% to $300,000 in fiscal 1994
from $2.3 million in fiscal 1993. This decline was expected as fiscal 1993
bookings were high due to the award of the $2.0 million, two year ARPA
contract extension. Manufacturing bookings were strong and increased 11% to
$18.4 million in fiscal 1994 from $16.6 million in fiscal 1993. Approximately
one-half of the increase in manufacturing bookings was attributable to
increased orders from the European market. The remaining increase was driven
by domestic orders in the industrial markets and, to a lesser extent, in the
eV PRODUCTS division.
Revenues increased 9% to $18.7 million in fiscal 1994 from $17.2 million in
fiscal 1993. The increase was attributable to increased price realization in
Japan, higher contract research and development revenues and increased
domestic sales.
Costs and Expenses. Manufacturing gross margin was $5.8 million or 34% of
net sales in fiscal 1994 compared to $4.6 million or 29% in fiscal 1993. This
increase was attributable to improved capacity utilization and efficiencies in
the Saxonburg and Singapore manufacturing plants, and higher gross margin
realization on sales to the Japanese market. Additional gross margin from
increased revenues was also realized in the eV PRODUCTS division.
Contract research and development gross margin was $553,000 or 35% of
contract research and development revenues in fiscal 1994 compared to $282,000
or 26% in fiscal 1993. A portion of contract revenue recognized in fiscal 1993
was associated with contracts awarded at lower profit margins. Several of the
lower profit margin contracts were completed in fiscal 1993.
Company-funded internal research and development costs for fiscal 1994 have
remained consistent with fiscal 1993 at approximately $250,000. The majority
of these expenses were directed toward the eV PRODUCTS division.
17
Selling, general and administrative expenses increased 16% to $5.2 million
or 28% of net sales in fiscal 1994 from $4.5 million or 26% of net sales in
fiscal 1993. The increase was attributable to the additional cost associated
with the Company's direct sales effort in Japan and increased compensation
expense associated with the Company's worldwide profit-driven bonus programs
and retirement plans. Although additional selling expenses were incurred from
the Japanese operation, the Company has recognized increased gross margin from
this operation.
The effective corporate income tax rate remained consistent at 33% for
fiscal years 1994 and 1993. Effective July 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109). The cumulative effect of adopting SFAS 109 on the Company's
financial statements was not material.
18
QUARTERLY RESULTS
The following table presents certain unaudited consolidated quarterly
financial information for fiscal 1994 and fiscal 1995. In the opinion of the
Company's management, this information has been prepared on the same basis as
the audited consolidated financial statements incorporated by reference or
appearing elsewhere in this Form 10-K and includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the unaudited quarterly results set forth herein. Operating results for any
quarter are not necessarily indicative of results for any future period or for
a full fiscal year.
QUARTER ENDED (UNAUDITED)
----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1993 1993 1994 1994 1994 1994 1995 1995
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
REVENUES:
Net sales.............. $3,840 $4,004 $4,507 $4,737 $5,161 $5,670 $7,655 $8,112
Contract research and
development.......... 344 365 455 429 285 234 373 270
------ ------ ------ ------ ------ ------ ------ ------
$4,184 $4,369 $4,962 $5,166 $5,446 $5,904 $8,028 $8,382
COST, EXPENSES AND OTHER
INCOME:
Cost of goods sold..... 2,532 2,738 3,067 2,976 3,064 3,295 4,663 4,743
Contract research and
development.......... 236 224 279 301 198 253 261 211
Internal research and
development.......... 82 75 64 30 132 120 85 110
Selling, general and
administrative
expenses............. 1,233 1,198 1,289 1,439 1,472 1,598 1,989 2,265
Gain on sale of
investment........... (699)(1) -- -- -- -- -- -- --
Other (income)/expense. (4) 40 (62) (61) 11 (15) (62) (20)
------ ------ ------ ------ ------ ------ ------ ------
3,380 4,275 4,637 4,685 4,877 5,251 6,936 7,309
------ ------ ------ ------ ------ ------ ------ ------
EARNINGS BEFORE INCOME
TAXES.................. 804 94 325 481 569 653 1,092 1,073
INCOME TAXES............ 269 28 122 150 173 144 312 240
------ ------ ------ ------ ------ ------ ------ ------
NET EARNINGS............ $ 535 $ 66 $ 203 $ 331 $ 396 $ 509 $ 780 $ 833
====== ====== ====== ====== ====== ====== ====== ======
PERCENTAGE OF REVENUES (UNAUDITED) (2)
----------------------------------------------------------------------------
Revenues:
Net sales.............. 91.8% 91.7% 90.8% 91.7% 94.8% 96.0% 95.4% 96.8%
Contract research and
development.......... 8.2 8.3 9.2 8.3 5.2 4.0 4.6 3.2
------ ------ ------ ------ ------ ------ ------ ------
100 100 100 100 100 100 100 100
Costs and expenses:
Cost of goods sold (3). 65.9 68.4 68.1 62.8 59.4 58.1 60.9 58.4
Contract cost of goods
sold (4)............. 68.6 61.4 61.3 70.2 69.5 108.1 70.0 78.2
Internal research and
development.......... 2.0 1.7 1.3 0.6 2.4 2.0 1.1 1.3
Selling, general and
administrative ...... 29.5 27.4 26.0 27.9 27.0 27.1 24.8 27.0
Operating costs and
expenses............... 97.6 96.9 94.7 91.9 89.4 89.2 87.2 87.4
Income from operations.. 2.4 3.1 5.3 8.1 10.6 10.8 12.8 12.6
Gain on sale of
investment............ (16.7) -- -- -- -- -- -- --
Other (income)/expenses. -- 0.9 (1.3) (1.2) 0.2 (0.2) (0.8) 0.2
Earnings before income
taxes ................. 19.2 2.2 6.6 9.3 10.5 11.0 13.6 12.8
Income taxes............ 6.4 0.7 2.5 2.9 3.2 2.4 3.9 2.9
Net earnings............ 12.8% 1.5% 4.1% 6.4% 6.7% 8.6% 9.1% 9.9%
--------
(1) See Note 1 of Selected Consolidated Financial Data.
(2) Due to method of calculation, percentages may not total 100%.
(3) Calculated as a percentage of net sales.
(4) Calculated as a percentage of contract research and development revenues.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its working capital needs, capital
expenditures and growth from cash flow from operations and, to a lesser
extent, borrowings.
The two major components of the $5.4 million in cash generated from
operations in fiscal 1995 were net earnings before depreciation of $4.5
million and a decrease in other operating net assets of $1.9 million. The
decrease in other operating net assets is attributable to increases in accrued
compensation costs due to the Company's worldwide profit-driven bonus program
and higher income taxes payable. These cash sources were partially offset by
increases in receivables of $800,000 and inventory of $400,000 that were
generated as a result of increased revenue volume.
The Company purchased for $2.4 million in cash the net assets of Virgo
Optics in December 1994. The Company also invested $2.4 million in capital
improvements during the year. These expenditures focused on process automation
and manufacturing facility expansion. Planned, discretionary capital
expenditures for fiscal 1996 of approximately $6.0 million will continue to
focus on these areas. Approximately $600,000 of the Saxonburg facility
expansion will be financed by a low interest Pennsylvania Industrial
Development Authority loan. In August 1994, the Company's Japanese subsidiary
borrowed $1.5 million from a Japanese bank.
The Company believes internally generated funds along with existing cash
reserves will be sufficient to fund its working capital needs, capital
expenditures and scheduled debt payments in Japan and Singapore for fiscal
1996.
The impact of inflation on the Company's business has not been material.
In the normal course of business, the Company enters into foreign currency
forward exchange contracts with its banks. The purpose of these contracts is
as a hedge, to reduce the impact of foreign currency fluctuations on committed
or anticipated foreign currency positions. The Company monitors its positions
and the credit ratings of the parties to these contracts. While the Company
may be exposed to potential losses due to credit risk in the event of non-
performance by the counterparties to these financial instruments, it does not
anticipate such losses.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
II-VI INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
II-VI INCORPORATED
Independent Auditors' Report
Consolidated Balance Sheets at June 30, 1994 and 1995
Consolidated Statements of Earnings for the years ended June 30, 1993,
1994 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1993, 1994 and 1995
Consolidated Statements of Cash Flows for the years ended June 30, 1993,
1994 and 1995
Notes to Consolidated Financial Statements
Incorporated herein by reference is "Quarterly Results" set forth in
Item 7 of this Form 10-K
21
INDEPENDENT AUDITORS' REPORT
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, 1994 and 1995, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the two years in the period ended June 30, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of II-VI
Incorporated and Subsidiaries as of June 30, 1993 were audited by other auditors
whose report dated August 11, 1993, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 1994 and 1995 and the results of
their operations and their cash flows for each of the two years in the period
ended June 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, effective
July 1, 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
Alpern, Rosenthal & Company
Pittsburgh, Pennsylvania
August 19, 1995
22
II-VI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30,
---------------
($000) EXCEPT SHARE DATA 1994 1995
------------------------ ------- -------
CURRENT ASSETS
Cash and equivalents.......................................... $ 1,734 $ 3,822
Accounts receivable--less allowance for doubtful accounts of
$125 in 1994 and $261 in 1995................................ 3,683 5,412
Inventories................................................... 3,204 4,165
Deferred income taxes......................................... 269 309
Prepaid and other current assets.............................. 260 376
------- -------
Total Current Assets.......................................... 9,150 14,084
PROPERTY, PLANT & EQUIPMENT, NET.............................. 8,093 9,892
OTHER ASSETS.................................................. 327 391
------- -------
TOTAL ASSETS.................................................. $17,570 $24,367
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................. $ 444 $ 835
Accrued salaries, wages and bonuses........................... 737 2,114
Income taxes payable.......................................... 375 585
Accrued profit sharing contribution........................... 70 278
Other current liabilities..................................... 613 1,027
Current portion of long-term debt............................. 263 373
------- -------
Total Current Liabilities..................................... 2,502 5,212
LONG-TERM DEBT (LESS CURRENT PORTION)......................... -- 1,190
DEFERRED INCOME TAXES......................................... 831 967
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--5,585,607 shares in 1994; 5,669,987 in 1995.......... 4,184 4,485
Cumulative translation adjustment............................. 10 (17)
Retained earnings............................................. 11,142 13,660
------- -------
15,336 18,128
Less treasury stock at cost................................... 1,099 1,130
------- -------
Total Shareholders' Equity.................................... 14,237 16,998
------- -------
$17,570 $24,367
======= =======
See notes to consolidated financial statements.
23
II-VI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED JUNE 30,
------------------------
($000 EXCEPT PER SHARE DATA) 1993 1994 1995
---------------------------- ------- ------- -------
REVENUES
Net sales:
Domestic............................................ $ 7,860 $ 8,301 $13,697
International....................................... 8,207 8,787 12,901
Contract research and development..................... 1,102 1,593 1,162
------- ------- -------
17,169 18,681 27,760
------- ------- -------
COSTS, EXPENSES AND OTHER INCOME
Cost of goods sold.................................... 11,421 11,313 15,765
Contract research and development..................... 820 1,040 923
Internal research and development..................... 266 251 447
Selling, general and administrative expenses.......... 4,455 5,159 7,324
Interest expense...................................... 75 36 57
Gain on sale of investment............................ -- (699) --
Other expense (income)--net........................... 19 (123) (143)
------- ------- -------
17,056 16,977 24,373
------- ------- -------
EARNINGS BEFORE INCOME TAXES.......................... 113 1,704 3,387
INCOME TAXES.......................................... 38 569 869
------- ------- -------
NET EARNINGS.......................................... $ 75 $ 1,135 $ 2,518
------- ------- -------
EARNINGS PER SHARE.................................... $ 0.01 $ 0.22 $ 0.48
======= ======= =======
See notes to consolidated financial statements.
24
II-VI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
COMMON STOCK CUMULATIVE TREASURY STOCK
------------- TRANSLATION RETAINED --------------
(000) SHARES AMOUNT ADJUSTMENT EARNINGS SHARES AMOUNT TOTAL
----- ------ ------ ----------- -------- ------ ------- -------
BALANCE--JULY 1, 1992... 5,550 $4,145 $ -- $ 9,932 (422) $ (718) $13,359
Purchase of treasury
stock.................. -- -- -- -- (93) (217) (217)
Net earnings for the
year................... -- -- -- 75 -- -- 75
----- ------ ---- ------- ---- ------- -------
BALANCE--JUNE 30, 1993.. 5,550 4,145 -- 10,007 (515) (935) 13,217
Shares issued under the
stock option plan...... 36 39 -- -- -- -- 39
Purchase of treasury
stock.................. -- -- -- -- (51) (164) (164)
Net earnings for the
year................... -- -- -- 1,135 -- -- 1,135
Translation adjustment.. -- -- 10 -- -- -- 10
----- ------ ---- ------- ---- ------- -------
BALANCE--JUNE 30, 1994.. 5,586 4,184 10 11,142 (566) (1,099) 14,237
Shares issued under the
stock option plan...... 84 131 -- -- -- -- 131
Purchase of treasury
stock.................. -- -- -- -- (5) (31) (31)
Net earnings for the
year................... -- -- -- 2,518 -- -- 2,518
Translation adjustment.. -- -- (27) -- -- -- (27)
Tax benefit for options
exercised.............. -- 170 -- -- -- -- 170
----- ------ ---- ------- ---- ------- -------
BALANCE--JUNE 30, 1995.. 5,670 $4,485 $(17) $13,660 (571) $(1,130) $16,998
===== ====== ==== ======= ==== ======= =======
See notes to consolidated financial statements.
25
II-VI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-------------------------
($000) 1993 1994 1995
------ ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................................... $ 75 $ 1,135 $ 2,518
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 1,754 1,835 2,006
Gain on sale of investment........................... -- (699) --
Loss (gain) on foreign currency transactions......... 24 (140) (171)
Net loss on disposal of property and
equipment........................................... 103 61 19
Deferred income taxes................................ (207) (17) 96
Increase (decrease) in cash from changes in:
Accounts receivable................................ (1,054) (245) (826)
Inventories........................................ (97) (263) (384)
Accounts payable................................... 343 (300) 196
Other operating net assets......................... (148) 1,015 1,917
------- ------- -------
Net cash provided by operating activities.............. 793 2,382 5,371
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant & equipment............... (1,932) (1,643) (2,384)
Proceeds from sale of property, plant & equipment...... 53 6 --
Proceeds from sale of investment....................... 740 -- --
Proceeds on note receivable............................ 90 -- --
Net cash on purchase of Virgo Optics................... -- -- (2,353)
Additions to other assets.............................. (10) (247) (115)
------- ------- -------
Net cash used in investing activities.................. (1,059) (1,884) (4,852)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) proceeds on short-term borrowings........... (109) -- 1,472
Proceeds from long-term borrowings..................... -- -- 108
Payments on long-term borrowings....................... (610) (501) (281)
Proceeds from sale of common stock..................... -- 39 301
Purchase of treasury stock............................. (217) (164) (31)
------- ------- -------
Net cash provided by (used in) financing activities.... (936) (626) 1,569
------- ------- -------
Net increase (decrease) in cash and equivalents........ (1,202) (128) 2,088
------- ------- -------
CASH AND EQUIVALENTS:
Beginning of year...................................... 3,064 1,862 1,734
------- ------- -------
End of year............................................ $ 1,862 $ 1,734 $ 3,822
======= ======= =======
See notes to consolidated financial statements.
26
II-VI INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
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, Inc.,
II-VI Delaware, Inc., II-VI Japan Incorporated, II-VI Virgo Incorporated and
its 97.5%-owned subsidiary, II-VI Singapore Pte., Ltd. All significant
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.
Depreciation Depreciation for financial reporting purposes is computed
primarily by the straight-line method over the estimated useful lives of the
assets.
Foreign Currency Translation For II-VI Japan Incorporated, the local
currency is the functional currency for purposes of translating the local
currency asset and liability accounts at current exchange rates. The resulting
translation adjustments are accumulated as a separate component of
Shareholders' Equity. For other foreign operations, the U.S. dollar is the
functional currency. Gains and losses resulting from translating asset and
liability accounts that are denominated in currencies other than the
functional currency are included in income.
Income Taxes Effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109). The cumulative effect of adopting SFAS 109 on the Company's financial
statements was not material.
Under SFAS 109, deferred taxes are determined based on the differences
between financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the assets or liabilities
are expected to be settled. A valuation allowance is established for any
deferred tax asset for which realization is not considered likely. No deferred
taxes have been provided for the income tax which would be incurred on
repatriation of the undistributed earnings of the Company's foreign
subsidiaries because the Company intends to indefinitely reinvest the earnings
outside the United States.
Revenue Recognition Revenue, other than on long-term U.S. Government sales
contracts and subcontracts, is recognized from sales when a product is
shipped. Revenue on long-term U.S. Government sales contracts and subcontracts
is accounted for using the percentage-of-completion method, whereby revenue
and profits are recognized throughout the performance period of the contract.
Losses on contracts are recorded in full when identified.
Earnings Per Share Earnings per share is calculated using the weighted
average number of shares outstanding giving retroactive effect to the two-for-
one stock split (see Note M) and assuming dilutive stock options outstanding
were exercised at the beginning of the year or at the date of issuance, if
later. Weighted average shares outstanding for 1993, 1994 and 1995 used in the
earnings per share calculation were 5,254,752, 5,061,376 and 5,289,072,
respectively. (See Note M)
Cash For purposes of the statement of cash flows, the Company considers
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents. The majority of cash and cash equivalents are on
deposit at the parent's U.S. bank. Sufficient cash to fund foreign subsidiary
current operations is on deposit at Japan and Singapore banks.
Nature of Business The Company designs, manufactures and markets optical and
electro-optical components, devices and materials for precision use in
infrared, near infrared, visible light and x-ray instruments and applications.
The Company's products are used in lasers for industrial processing and
27
commercial and military sensing systems. The Company markets its products in
the United States through its direct sales force and worldwide through its
wholly-owned sales subsidiary, II-VI Japan, and manufacturers' representatives.
The Company uses certain uncommon materials and compounds to manufacture its
products. Some of these materials are available from only one proven outside
source. The continued high quality of these raw 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 signficant 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.
Acquisition On December 29, 1994, the Company acquired the net assets of
Virgo Optics Division of Sandoz Chemicals Corporation ("Virgo Optics"). The
acquisition was accounted for as a purchase and included inventory, accounts
receivable, machinery and equipment and certain current liabilities. The
purchase price was allocated as follows:
Accounts receivable........................................... $ 720,000
Inventory..................................................... 400,000
Machinery and equipment....................................... 1,387,000
Other assets.................................................. 3,000
----------
2,510,000
Current liabilities........................................... (157,000)
----------
Cash purchase price........................................... $2,353,000
==========
The following pro forma financial information is based upon the historical
financial statements of II-VI Incorporated and Virgo Optics, adjusted to give
effect to the acquisition of substantially all of the assets and the
assumption of certain liabilities of Virgo Optics and the integration of the
activities of II-VI Incorporated and Virgo Optics. This information assumes
that such events occurred on the first day of II-VI Incorporated's 1994 fiscal
year (July 1, 1993).
This information does not purport to present what II-VI Incorporated's
results of operations actually would have been had the acquisition occurred on
July 1, 1993, or to project the actual results of operations for any future
period.
PRO FORMA RESULTS
FOR THE
YEAR ENDED JUNE 30,
-------------------
($000) except share data 1994 1995
------------------------ --------- ---------
Revenues.............................................. $22,806 $30,164
Net Earnings.......................................... 1,098 2,856
Earnings Per Share.................................... 0.22 0.54
28
NOTE B
INVENTORIES
The components of inventories are as follows:
JUNE 30,
-------------
($000) 1994 1995
------ ------ ------
Raw materials............................................... $1,753 $1,750
Work in process............................................. 730 1,348
Finished goods.............................................. 721 1,067
------ ------
Total....................................................... $3,204 $4,165
====== ======
NOTE C
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (at cost) consist of the following:
JUNE 30,
---------------
($000) 1994 1995
------ ------- -------
Land and land improvements............................... $ 307 $ 307
Buildings and improvements............................... 3,743 4,258
Machinery and equipment.................................. 14,305 17,486
------- -------
18,355 22,051
Less accumulated depreciation............................ 10,262 12,159
------- -------
Total.................................................... $ 8,093 $ 9,892
======= =======
NOTE D
NOTE PAYABLE
The Company has a line of credit (cash overdraft) facility with a Singapore
bank which permits maximum borrowings of approximately $572,000. 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, 1995
was 7.5%. At June 30, 1995 there were no borrowings under this facility.
NOTE E
DEFERRED GAIN ON SALE OF INVESTMENT
In fiscal 1994, the Company recognized $699,000 of gain resulting from the
sale, in 1993, of its ownership in its former Japanese distributor. The gain
had been deferred in order to match it with the final negotiated costs, if
any, of terminating the agency agreement with the distributor. Final
termination of the agency agreement took place in fiscal 1994.
NOTE F
LONG-TERM DEBT
Long-term debt at June 30, 1994, consisted of borrowings on a term loan due
to a Singapore bank. Principal payments were being made in seven equal semi-
annual installments, with the final installment being paid in September 1994.
The loan was collateralized by all assets of II-VI Singapore Pte., Ltd. and
was guaranteed by a standby letter of credit.
Long-term debt at June 30, 1995 consists of an installment loan in the amount
of $91,000 at the Company's Singapore location due to mature in August 2000
with equal monthly payments due on this loan including interest calculated at
an annual interest rate of 7.5%, and a note payable in the amount of $1,472,000
at the Company's Japan location. At June 30, 1995, the terms of the note
payable called for monthly principal payments plus interest charged at the rate
of .5% above the bank's prevailing prime lending rate for a five year period.
29
The bank was to review the borrowing agreement annually and at that time had
the option of calling the loan. The interest rate at June 30, 1995 was 2.875%.
These borrowings are guaranteed by the Parent Company.
Subsequent to June 30, 1995, the callable feature of the note payable was
amended to December 1996. Based upon this amendment, $1,190,000 has been
recorded in the accompanying balance sheet as long-term debt.
The Company has entered into foreign currency forward contracts in order to
hedge its currency exposure in Japan. Gains and losses on those contracts are
recognized as they occur. At June 30, 1995, the Company had contracts
outstanding of approximately $735,000. The counterparties to these financial
instruments consist of large financial institutions, and the Company does not
believe that it is subject to any significant credit risk associated with
these contracts.
Interest payments made during the years ended June 30, 1993, 1994 and 1995
totaled $82,000, $41,000 and $48,000 respectively.
NOTE G
INCOME TAXES
The components of income tax expense are as follows:
YEAR ENDED JUNE 30,
-----------------------
($000) 1993 1994 1995
------ ------- ------ ------
Current:
Federal......................................... $ 207 $ 491 $ 534
State........................................... -- 54 174
Foreign......................................... 38 41 65
Deferred.......................................... (207) (17) 96
------- ------ ------
Total............................................. $ 38 $ 569 $ 869
======= ====== ======
Deferred income taxes reflect the net effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Principal items comprising net
deferred income tax liabilities are as follows:
JUNE 30,
--------------
($000) 1994 1995
------ ------ ------
DEFERRED TAX LIABILITIES
Tax over book accumulated depreciation.................... $1,106 $1,008
------ ------
DEFERRED TAX ASSETS
Alternative minimum tax carryforward...................... $ 275 $ --
Inventory capitalization.................................. 121 134
Non-deductible accruals................................... 148 175
Net operating loss carryforwards - state.................. 47 41
------ ------
Gross deferred tax asset.................................. 591 350
Allowance for deferred tax assets......................... (47) --
------ ------
Net deferred tax assets................................... 544 350
------ ------
Net deferred tax liabilities.............................. $ 562 $ 658
====== ======
The Company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely
reinvested in foreign operations. If the earnings of such foreign subsidiaries
were not indefinitely reinvested, a deferred tax liability of approximately
$950,000 would have been required.
30
The source of differences resulting in deferred income tax expense (credit)
and the related tax effect of each were as follows:
YEAR ENDED JUNE 30,
----------------------
($000) 1993 1994 1995
------ ------ ------ ------
Depreciation...................................... $ 94 $ (58) $ (98)
Inventory capitalization.......................... (2) (13) (13)
Alternative minimum tax carryforward.............. (96) (34) 275
Gain on sale of investment........................ (238) 238 --
Other--Primarily non-deductible accruals.......... 35 (150) (68)
------ ------ -----
Total............................................. $ (207) $ (17) $ 96
====== ====== =====
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) 1993 % 1994 % 1995 %
------ ----- --- ----- --- ------ ---
Taxes at statutory rate............. $ 38 34 $ 579 34 $1,152 34
Increase (decrease) in taxes
resulting from:
State income taxes--net of federal
benefit........................ -- -- 35 2 88 3
Excludable FSC income............. -- -- -- -- (45) (1)
Excludable foreign income......... (103) (91) (164) (10) (376) (11)
Foreign taxes..................... 38 34 27 2 43 1
Non-deductible expenses........... 65 57 92 5 7 0
----- --- ----- --- ------ ---
Total............................... $ 38 34 $ 569 33 $ 869 26
===== === ===== === ====== ===
One of the Company's foreign subsidiaries operates under a tax holiday and
does not pay income taxes. The tax holiday expires in March 1997.
During the years ended June 30, 1993, 1994 and 1995, cash paid by the
Company for income taxes was approximately $245,000, $125,000 and $379,000,
respectively.
NOTE H
OPERATING LEASES
The Company leases certain property under operating leases that expire at
various dates through 1997. Future rental commitments applicable to the
operating leases at June 30, 1995 are approximately $372,000 and $200,000 for
1996 and 1997, respectively. Rent expense was approximately $109,000, $303,000
and $462,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
NOTE I
STOCK OPTION PLANS
The Company has a stock option plan under which stock options have been
granted by the Board of Directors to certain officers and key employees, with
1,240,000 shares of common stock reserved for use under this plan. All stock
options granted to-date have been at market price at the date of grant. Twenty
to twenty-five percent of the options granted may be exercised one year from
the date of grant with comparable annual increases on a cumulative basis each
year thereafter.
31
Stock option activity relating to the plan in each of the three years ended
June 30, 1995 is as follows:
NUMBER OF SHARES PER SHARE
OPTIONS SUBJECT TO OPTION PRICE RANGE
------- ----------------- -------------
Outstanding--July 1, 1992................. 398,440 $1.11 - $3.94
Granted................................... 3,000 $1.25
Exercised................................. (440) $1.11
Forfeited................................. (46,600) $1.11 - $3.69
------- -------------
Outstanding--June 30, 1993................ 354,400 $1.11 - $3.94
Granted................................... 34,000 $1.32 - $1.50
Exercised................................. (35,000) $1.11
Forfeited................................. (25,600) $1.83 - $3.64
------- -------------
Outstanding--June 30, 1994................ 327,800 $1.11 - $3.94
Granted................................... 254,000 $1.97 - $4.94
Exercised................................. (84,380) $1.11 - $2.69
Forfeited................................. (54,900) $1.25 - $3.94
------- -------------
Outstanding--June 30, 1995................ 442,520 $1.11 - $4.94
======= =============
Outstanding options at June 30, 1995, by expiration date are as follows:
NUMBER OF SHARES PER SHARE
---------------- ---------
May 1996....................................... 1,240 $2.69
May 1997....................................... 26,400 $1.11
May 1999....................................... 8,000 $3.69
August 2000.................................... 62,700 $1.83
February 2002.................................. 53,980 $2.13
June 2002...................................... 3,000 $2.13
February 2003.................................. 30,000 $1.32
April 2004..................................... 3,200 $1.50
July 2004...................................... 30,000 $2.00
July 2004...................................... 4,000 $1.97
September 2004................................. 100,000 $2.69
December 2004.................................. 112,000 $3.94
February 2005.................................. 8,000 $4.94
-------
Total.......................................... 442,520
=======
The Company added a nonemployee directors stock option plan in 1995, with
120,000 shares of common stock reserved for use under this plan. All stock
options granted to-date have been at market price on the date of grant. 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 number of shares subject to option for options granted in 1995 was
60,000 at an option price of $4.00 per share. The outstanding shares subject
to option at June 30, 1995 was 60,000 and as of that date none were
exercisable.
NOTE J
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 $13,000 in 1993, $70,000 in 1994 and
$259,000 in 1995.
32
The Company has an employee stock purchase plan for all employees who have
six months of continuous employment with the Company. The employee may
purchase the common stock at 5% below the prevailing market price. The amount
of shares which may be bought by an employee is limited to 10% of the
employee's base pay for each fiscal year. The plan, as amended, limits the
number of shares of common stock available for purchase to 200,000 shares. At
June 30, 1995, 133,878 shares of common stock were available for purchase
under the plan.
The Company has no program for postretirement health and welfare and
postemployment benefits.
NOTE K
INTERNATIONAL AND DOMESTIC OPERATIONS AND EXPORT SALES
YEAR ENDED JUNE 30,
------------------------
($000) 1993 1994 1995
------ ------- ------- -------
Sales:
United States....................................... $17,191 $18,640 $26,644
International....................................... 3,787 6,070 11,158
------- ------- -------
Total................................................. $20,978 $24,710 $37,802
------- ------- -------
Sales or transfers between geographic areas
United States....................................... $ 1,003 $ 3,126 $ 5,847
International....................................... 2,806 2,903 4,195
------- ------- -------
Total................................................. 3,809 6,029 10,042
------- ------- -------
Net sales............................................. $17,169 $18,681 $27,760
======= ======= =======
Operating income (loss):
United States....................................... $ (597) $ 135 $ 1,860
International....................................... 804 783 1,440
------- ------- -------
Total operating income................................ $ 207 $ 918 $ 3,300
======= ======= =======
Identifiable assets:
United States....................................... $15,488 $14,521 $20,633
International....................................... 1,777 3,049 3,734
------- ------- -------
Total assets.......................................... $17,265 $17,570 $24,367
======= ======= =======
--------
Sales to Western Europe and Asia comprised 87% of total export sales from the
United States in 1995, 91% in 1994 and 88% in 1993.
NOTE L
CONTINGENCY
The Company is a member of the Frontier Chemical Phase II PRP Group which
has agreed with the Environmental Protection Agency to remove the contents of
certain tanks at a site in Niagara Falls, New York. All site work has been
completed and substantial progress has been made by the Group in meeting its
financial obligations. Based on the information available, the Company has
recorded $26,000 as its best estimate of its share of the remaining liability
as of June 30, 1995.
NOTE M
SUBSEQUENT EVENTS
On August 16, 1995, the Board of Directors declared a two-for-one split of
II-VI's common stock to be distributed to shareholders of record on August 30,
1995, effective at the close of business September 6, 1995. Weighted average
shares outstanding and all per share amounts included in the consolidated
financial statements and notes are based on the increased number of shares
giving retroactive effect to the stock split, unless otherwise noted.
33
On August 19, 1995 the Board of Directors approved the filing of a
registration statement with the Securities and Exchange Commission covering
a proposed public offering of 1,000,000 shares of newly issued common stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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"; the information set forth under the caption
"Election of Directors - Nominees for Election as Class Three Directors Whose
Terms Expire 1997"; the information set forth under the caption "Election of
Directors - Class One Directors Whose Terms Expire 1998"; the information set
forth under the caption "Election of Directors - Class Two Directors Whose
Terms Expire 1996"; and the information set forth under the caption "Other
Matters - Section 16(a) Reporting Delinquencies" in the Company's definitive
proxy statement for the 1995 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 1995 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 "Beneficial Ownership
of Voting Securities" in the Company's definitive proxy statement for the 1995
Annual Meeting of Shareholders filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial statements, financial statement schedules and exhibits not
listed have been omitted where the required information is included in the
consolidated financial statements or notes thereto, or is not applicable or
required.
(a) (1) A listing of the consolidated financial statements, notes and
independent auditors' report required hereunder is set forth in
Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules:
The following are included in this Report:
Report of Alpern, Rosenthal & Company on Schedules
Schedule II - Valuation and Qualifying Accounts
Report of Predecessor Independent Auditors
(3) Exhibits.
EXHIBIT NO. REFERENCE
----------- ---------
2.01 Asset Purchase and Sale Agreement Incorporated hereinby reference is
among II-VI Incorporated, II-VI Exhibit 2.01 to the Company's Report
Optics Incorporated and Sandoz on Form 8-K for the event dated
Chemicals Corporation USA December 29, 1994.
3.01 Amended and Restated Articles of Incorporated herein by reference is
Incorporation of II-VI Incorporated Exhibit 3.02 to Registration Statement
No. 33-16389 on Form S-1.
3.02 Amended and Restated By-Laws of II-VI Incorporated herein by reference is
Incorporated Exhibit 3.02 to the Company's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1991.
5.01 Opinion of Buchanan Ingersoll Filed herewith.
Professional Corporation
10.01 II-VI Incorporated 1982 Incentive Incorporated herein by reference is
Stock Option Plan* Exhibit 10.01 to Registration
Statement No. 33-16389 on Form S-1.
10.02 II-VI Incorporated Stock Option Plan Incorporated herein by reference is
of 1990* Exhibit 10.02 to the Company's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1991.
10.03 II-VI Incorporated Employees' Stock Incorporated herein by reference is
Purchase Plan Exhibit 10.03 to Registration
Statement No. 33-16389 on Form S-1.
10.04 II-VI Incorporated Amended and Incorporated herein by reference is
Restated Employees' Stock Purchase Exhibit 10.04 to Registration
Plan Statement No. 33-16389 on Form S-1.
10.05 II-VI Incorporated Amended and Incorporated herein by reference is
Restated Employees' Profit Sharing Exhibit 10.05 to Registration
Plan and Trust Agreement, as amended Statement No. 33-16389 on Form S-1.
10.06 Form of Representative Agreement Incorporated herein by reference is
between the Company and its foreign Exhibit 10.15 to Registration
representatives Statement No. 33-16389 on Form S-1.
10.07 Form of Employment Agreement* Incorporated herein by reference is
Exhibit 10.16 to Registration
Statement No. 33-16389 on Form S-1.
10.08 Description of Management-By-Objective Incorporated herein by reference is
Plan* Exhibit 10.09 to the Company's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1993.
10.09 II-VI Incorporated 1994 Nonemployee Incorporated herein by reference is
Directors Stock Option Plan Exhibit A to the Company's Proxy
Statement dated September 30, 1994.
21.01 List of Subsidiaries of II-VI Incorporated herein by reference is
Incorporated Exhibit 21.01 to the Company's Form
10-Q for the quarter ended December
31, 1994.
23.01 Consent of Alpern, Rosenthal & Company Filed herewith.
23.02 Consent of Deloitte & Touche LLP Filed herewith.
27.01 Financial Data Schedule Filed herewith.
--------
* Denotes management contract or compensatory plan, contract or arrangement.
35
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) During the quarter ended June 30, 1995, the Company filed no reports on
Form 8-K.
(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 financial statement schedule to this Form
10-K the financial statement schedules set forth in Item 14(a)(2) hereof.
36
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 INCOPORATED
/s/ Carl J. Johnson
September __, 1995 By:______________________________________
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:
/s/ Carl J. Johnson
September __, 1995 By:______________________________________
Carl J. Johnson
Chairman and Chief Executive Officer
and Director
/s/ Francis J. Kramer
September __, 1995 By:______________________________________
Francis J. Kramer
President and Chief
Operating Officer and Director
Principal Financial and Accounting Officer:
/s/ James Martinelli
September __, 1995 By:______________________________________
James Martinelli
Treasurer and Director of
Finance and Accounting
/s/ Richard B. Bohlen
September __, 1995 By:______________________________________
Richard B. Bohlen
Director
/s/ Thomas E. Mistler
September __, 1995 By:______________________________________
Thomas E. Mistler
Director
/s/ Duncan A. J. Morrison
September __, 1995 ___________________________________________
Duncan A. J. Morrison
Director
/s/ Peter W. Sognefest
September __, 1995 ___________________________________________
Peter W. Sognefest
Director
37
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders of
II-VI Incorporated:
We have audited the consolidated financial statements of II-VI Incorporated
and subsidiaries as of June 30, 1995 and 1994, and for the year then ended, and
have issued our report thereon dated August 19, 1995; such financial statements
and report are included in your 1995 Form 10-K. Our audits also included a
financial statement schedule for 1995 and 1994 of II-VI Incorporated and
subsidiaries, listed in Item 14. This 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, the financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Alpern, Rosenthal & Company
Pittsburgh, Pennsylvania
August 19, 1995
38
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1993, 1994, AND 1995
(IN THOUSANDS OF DOLLARS)
ADDITIONS
---------------------
BALANCE AT CHARGED TO DEDUCTION BALANCE AT
BEGINNING CHARGED TO OTHER FROM END OF
OF YEAR EXPENSE ACCOUNTS RESERVES YEAR
---------- ---------- ---------- --------- ----------
(1)
YEAR ENDED JUNE 30, 1993:
Allowance for doubtful
accounts................ $125 $18 $-- $18 $125
YEAR ENDED JUNE 30, 1994:
Allowance for doubtful
accounts................ $125 $44 $-- $44 $125
YEAR ENDED JUNE 30, 1995:
Allowance for doubtful
accounts................ $125 $49 $79 $(8) $261
--------
(1)Uncollectible accounts written off (recovered).
39
INDEPENDENT AUDITORS' REPORTS
To the Board of Directors and Stockholders of
II-VI Incorporated
Saxonburg, Pennsylvania
We have audited the accompanying consolidated statements of earnings,
stockholders' equity, and cash flows of II-VI Incorporated and subsidiaries for
the year ended June 30, 1993. Our audit also included the financial statement
schedule for the year ended June 30, 1993, listed in the Index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of II-VI
Incorporated and subsidiaries for the year ended June 30, 1993, in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basis
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
August 11, 1993
40
EXHIBIT INDEX
-------------
EXHIBIT NO. REFERENCE
----------- ---------
2.01 Asset Purchase and Sale Agreement Incorporated hereinby reference is
among II-VI Incorporated, II-VI Exhibit 2.01 to the Company's Report
Optics Incorporated and Sandoz on Form 8-K for the event dated
Chemicals Corporation USA December 29, 1994.
3.01 Amended and Restated Articles of Incorporated herein by reference is
Incorporation of II-VI Incorporated Exhibit 3.02 to Registration Statement
No. 33-16389 on Form S-1.
3.02 Amended and Restated By-Laws of II-VI Incorporated herein by reference is
Incorporated Exhibit 3.02 to the Company's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1991.
10.01 II-VI Incorporated 1982 Incentive Incorporated herein by reference is
Stock Option Plan* Exhibit 10.01 to Registration
Statement No. 33-16389 on Form S-1.
10.02 II-VI Incorporated Stock Option Plan Incorporated herein by reference is
of 1990* Exhibit 10.02 to the Company's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1991.
10.03 II-VI Incorporated Employees' Stock Incorporated herein by reference is
Purchase Plan Exhibit 10.03 to Registration
Statement No. 33-16389 on Form S-1.
10.04 II-VI Incorporated Amended and Incorporated herein by reference is
Restated Employees' Stock Purchase Exhibit 10.04 to Registration
Plan Statement No. 33-16389 on Form S-1.
10.05 II-VI Incorporated Amended and Incorporated herein by reference is
Restated Employees' Profit Sharing Exhibit 10.05 to Registration
Plan and Trust Agreement, as amended Statement No. 33-16389 on Form S-1.
10.06 Form of Representative Agreement Incorporated herein by reference is
between the Company and its foreign Exhibit 10.15 to Registration
representatives Statement No. 33-16389 on Form S-1.
10.07 Form of Employment Agreement* Incorporated herein by reference is
Exhibit 10.16 to Registration
Statement No. 33-16389 on Form S-1.
10.08 Description of Management-By-Objective Incorporated herein by reference is
Plan* Exhibit 10.09 to the Company's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1993.
10.09 II-VI Incorporated 1994 Nonemployee Incorporated herein by reference is
Directors Stock Option Plan Exhibit A to the Company's Proxy
Statement dated September 30, 1994.
21.01 List of Subsidiaries of II-VI Incorporated herein by reference is
Incorporated Exhibit 21.01 to the Company's Form
10-Q for the quarter ended December
31, 1994.
23.01 Consent of Alpern, Rosenthal & Company Filed herewith.
23.02 Consent of Deloitte & Touche LLP Filed herewith.
27.01 Financial Data Schedule Filed herewith.
--------
* Denotes management contract or compensatory plan, contract or arrangement.
II-1