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, 1996
[ ] 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.
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 10, 1996, was approximately $88,598,398, based on the closing sale price reported on NASDAQ/NMS for September 10, 1996. 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 10, 1996, was 6,331,738.
Documents Incorporated by Reference
Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 1996 are incorporated by reference into Parts I, II and IV hereof.
Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
Introduction
II-VI Incorporated ("II-VI" or the "Company") was incorporated in
Pennsylvania in 1971. The Company's executive offices and
manufacturing facilities are located at 375 Saxonburg Boulevard,
Saxonburg, Pennsylvania 16056. Its telephone number is 412-352-4455.
Reference to the "Company" or "II-VI" in this Form 10-K, unless the
context requires otherwise, refers to II-VI Incorporated, its wholly-
owned subsidiaries, II-VI Worldwide, Incorporated, II-VI Delaware,
Inc., II-VI Japan Incorporated, II-VI Singapore Pte., Ltd., II-VI
Virgo Incorporated, II-VI Lightning Optical Incorporated, II-VI
Optics (Suzhou) Co. Ltd., and II-VI U.K. Limited, as a consolidated
operation. eV PRODUCTS operates as a division of II-VI Incorporated.
The Company's name is pronounced "Two-Six Incorporated."
II-VI Incorporated designs, manufactures and markets optical and electro-optical components, devices and materials for precision use in infrared, near-infrared, visible-light and x-ray/gamma-ray instruments and applications. The Company's infrared products are used in high-power CO2 (carbon dioxide) lasers for industrial processing and for commercial and military sensing systems. The Company's near-infrared and visible-light products are used in industrial, scientific and medical instruments and solid-state 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.
Information Regarding Market Segments and Foreign Operations
The Company's business comprises one segment, the design, manufacturer and marketing of optical and electro-optical components, devices and materials for precision use in infrared, near-infrared, visible-light and x-ray/gamma-ray instruments and applications.
Financial data regarding the Company's revenues, results of operation and export sales for the Company's last three fiscal years is set forth in, and incorporated herein by reference to, the Company's Consolidated Statements of Earnings on page 17 of the II-VI Incorporated 1996 Annual Report (the "Annual Report") and Note J to the Company's Consolidated Financial Statements on page 25 of the Annual Report.
Industrial Processing Background
Applications for laser processing are increasing worldwide as manufacturers seek solutions to increasing demands for quality, precision, speed, throughput, flexibility, automation and cost control. High-power CO2 and YAG lasers provide these benefits in a wide variety of cutting, welding, drilling, ablation, balancing, cladding, heat- treating and marking applications. For example, automobile manufacturers use lasers to facilitate rapid product changeovers, process simplification, efficient sequencing and computer control on high-throughput production lines. Manufacturers of recreational vehicles, lawn mowers and garden tractors cut, trim and weld metal parts with lasers to achieve flexible, high-consistency, reduced post- processing, lower-cost operations. For office furniture producers, lasers provide easily reconfigurable, low-distortion, low-cost prototyping and production capability that facilitates semi-custom manufacturing of customer-specified designs. On high-speed consumer product processing lines, laser marking provides automated date coding for food packaging and computer driven container identification for pharmaceuticals.
Precision optics such as total reflectors, partial mirrors, beamsplitters and lenses are critical to the operation of lasers and laser systems. Many CO2 and YAG laser systems contain up to 15 optical elements either as part of the laser resonator or associated with routing of the laser beam to the work piece. To the extent that optics wear or become contaminated during operation, optics are consumables in laser processing. Thus, an aftermarket demand is generated by an estimated current worldwide installed base of 47,000 to 52,000 industrial YAG and CO2 lasers, based on recent industry trade reports. The average lifetime for industrial laser optical elements is estimated to be 1,000 to 4,000 hours.
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, medical, 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 and technically advanced 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) CO2 infrared lasers requires high quality, low absorption optical elements. The CO2 laser emits infrared energy at a wavelength of 10.6 micrometers, a wavelength which is optimal for many industrial processes 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 CO2 lasers and laser systems. The Company supplies a family of standard and custom transmissive, reflective and precision diamond turned optical elements to high power CO2 resonator manufacturers, CO2 laser system manufacturers and to the aftermarket as replacement parts. Transmissive optical elements manufactured by the Company are predominately made from Zinc Selenide produced in-house. The Company is one of the two dominant manufacturers in the world of this optical material. The Company's Zinc Selenide capability and its low absorbing, thin film coating technology have earned II-VI a reputation as the quality leader worldwide in this marketplace. The majority of II-VI's business is derived from the CO2 laser optics market.
The Company provides replacement optics and refurbishing services to users of industrial CO2 lasers. The Company sells its infrared replacement optics with a 24-hour shipment guarantee under the trade name of INFRAREADY optics. Consumable items such as focusing lenses and output couplers are cost effectively refurbished for the Company's aftermarket customers. The aftermarket portion of the Company's business is growing rapidly as industrial laser applications proliferate worldwide.
The Company supplies Cadmium Zinc Telluride substrates primarily to U.S. military and NATO defense suppliers under the trade name EPIReady. 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 DARPA/DOD and other governmental agencies.
YAG Laser Components
The power levels available from YAG lasers (1 to 3 kW) are increasing while the costs of such lasers are decreasing. These trends are making YAG laser processing more attractive in such high-power YAG applications as the welding of airbag sensors and inflators. Low-power YAG applications include the high speed micro-welding of multi-blade shaving razor assemblies, the welding of heart pacemakers, the precision trimming of component values in electronic assemblies, and marking or labeling of integrated circuits. The capability to deliver the 1.06 micrometer YAG laser wavelength over flexible, low loss optical fibers has enhanced YAG laser deployment in many applications where complex shapes require versatile beam delivery geometries. A YAG laser requires the same type of optical elements as the CO2 laser except that they are made of different materials to operate at the YAG laser near infrared wavelength of 1.06 micrometers.
The Company supplies a family of standard and custom laser gain materials and optics for industrial, medical, scientific and research YAG lasers. The YAG laser gain materials are produced to stringent industry specifications and precisely fabricated into rods or slabs. Included in the Company's products are refurbished YAG rods sold to the Company's aftermarket customers. The Company offers waveplates, polarizers, lenses, prisms, and mirrors for visible and near infrared applications. These products control and alter the visible and near infrared energy and its polarization. The Company offers cavities for use in flash lamp pumped lasers. These cavities are made of a samarium doped glass which improves the laser performance.
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 nuclear radiation detectors.
Frequency Doubling and Blue Emitter Materials
For over a decade, researchers in university, government and industry laboratories have been seeking routes to the fabrication of reliable, solid-state blue light emitters and lasers. Blue light sources are expected to be used in such applications as optical data storage, telecommunications, graphic displays and high density printers. The Company supplies frequency doubling materials which are being used in emerging laser based systems for blue light generation. The Company produces Potassium Niobate based microlaser assemblies which are used by customers to frequency double other light sources, thus producing up to 30 mW of blue light or 50 mW of green light. The Company also produces single crystal Zinc Selenide, a high quality substrate which is being used by customers in the development of blue light lasers.
Fluoride Materials
Nd:YLF (neodymium doped yttrium lithium fluoride) displays exceptional qualities as a laser material for solid state lasers. The crystal offers high power laser operation at 1.047 micrometers and 1.053 micrometers with low beam divergence leading to good Q-switched and single mode laser operation. Nd:YLF is used in both flashlamp pumped and diode pumped solid state lasers. Due to high lasing efficiency, Nd:YLF lasers are suitable for use on the manufacturing floor for scribing, trimming and cutting of semiconductor materials.
Nd:YLF also lases at 1.313 micrometers. That, along with the 1.047 micrometer wavelength have attractive applications for use in cable television and other telecommunication applications which require devises with high data rates.
Customers and Markets
Industrial
The Company's customers include leading industrial OEMs and system manufacturers worldwide in the CO2 and YAG laser machine tool industry. The Company has focused its marketing efforts on the growing high power segments of the laser components marketplace.
High power CO2 resonators manufactured by the Company's customers 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 laser end users which require replacement optics, such as focusing lenses and beam steering mirrors. Users of industrial lasers include a broad range of industries and applications, such as automotive, electrical equipment, packaging, building products, office furniture, garment, airframe or aerospace, consumer electronics, tooling and machinery.
Low power, sealed CO2 lasers are utilized for 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 are high volume optics customers of the Company.
The Company's YAG component customers' systems are used for marking, scribing, microwelding and precision trimming. A broad range of industries use YAG systems, including medical devices, consumer products, automotive and semiconductors. The Company offers YAG customers both the YAG rod supply capability and the necessary optics for a complete laser system.
The Company's customers are developing products incorporating fluoride materials for use in telecommunications, material processing, and environmental monitoring.
The Company is using its close working relationships with its industrial CO2 customers worldwide to increase its YAG component supply market share, since both products are needed by many of the same customers.
Scientific and Military
The scientific, research and new product development areas of the electro-optics device market are creating many opportunities for the visible, near-infrared and infrared optics and materials produced by the Company. The Company provides high end, high specification components to this group of customers which include products such as aspheric optics, prisms, parabolic reflectors and focusing element assemblies. The Company provides specialty optics and components to instrument manufacturers. II-VI's products are integrated into spectrophotometers, interferometers and distance measuring instruments; scanning mirrors for high resolution color printing; and focusing assemblies for infrared cameras. Quick response, short lead times 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.
Sales and Distribution
The Company markets its products in the United States through its direct sales force; in Japan through its subsidiary, II-VI Japan Incorporated; in certain Southeast Asian markets through its subsidiary, II-VI Singapore Pte. Ltd.; and in the United Kingdom through its subsidiary, II-VI U.K. Limited. For the remainder of Europe, sales are effected through distributors, and sales throughout the rest of the world are made through manufacturers' representatives. The Company's products are sold to over 3,000 customers throughout the world. The Company's principal international markets are Germany and Japan.
Manufacturing Processes
Infrared and Visible Optics
The manufacturing processes for optics include a number of low-cost, automated, high-precision processes that have been developed and documented at the Company's manufacturing sites in Pennsylvania, Florida 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 specifications for absorption, clarity, stress and purity. The manufacturing sequence typically involves grinding a part to the desired curvature and precision polishing the optic to the desired high-quality surface shape and finish. The Company has developed specialized processes for fabricating visible, 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 fly cutting of flat metal reflectors and turning of contoured spherical or aspherical shapes. The ability to produce spherical and aspherical diffraction-free surfaces, due to a proprietary real-time feedback test system, provides the highest-quality high-power-handling copper reflecting mirrors available in the industry. The Company is currently investing in expansion of this manufacturing unit's capacity as the demand for these products has grown rapidly during the last few years.
Thin-Film Coating. Multilayer, thin-film, visible-light and infrared coatings are produced by evaporating precisely controlled thicknesses of various substances from microprocessor-controlled thermal or electron- beam sources onto optical surfaces in custom-built vacuum chambers. The know-how to control such process variables as time, pressure, gas flow and temperature are critical to achieving low-absorption, high-adhesion and properly transmitting thin films. Production of zero-defect coatings is a part of the proprietary knowledge of II-VI.
Materials
II-VI is a materials-based company. Processes used to produce these materials require long development periods, are capital intensive and involve precision process control. Yields are raised from minimal to acceptable as know-how and process-consistency techniques are developed.
The Company's infrared components and materials 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 dominant manufacturers of this material in the world and has earned the reputation for producing the lowest-absorbing laser-grade Zinc Selenide. The process involves high-temperature disassociation of Hydrogen Selenide gas and a gas phase reaction with zinc vapor. Solid Zinc Selenide is deposited on graphite mandrels at high temperatures, forming sheets of the material. Zinc Selenide is the principal material used in the Company's CO2 laser optics. All material is polished, inspected and laser-tested for defects.
Zinc Sulfide. The chemical vapor deposition process is also utilized to manufacture fine-grained polycrystalline Zinc Sulfide. Some Zinc Sulfide is further processed to form Multispectral Zinc Sulfide. The Multispectral Zinc Sulfide is highly transmissive from the ultraviolet to the middle infrared wave lengths, making it the material of choice for tank windows, for example, through which humans, laser range-finders and guidance systems identify targets.
Cadmium Zinc Telluride Substrates. II-VI utilizes vertical and horizontal Bridgman processes to grow its Cadmium Zinc Telluride single- crystal substrate materials. The Bridgman processes involve direct solidification from a liquid melt with closely controlled unidirectional freezing in either a vertical or horizontal configuration. The substrates are mined from thoroughly tested Cadmium Zinc Telluride ingots utilizing precision crystal-orientation techniques followed by a sequence of surface lapping and semiautomated diamond sawing. Wafers are precision sized, then surfaced through a series of critical polishing and chemical etching steps.
Cadmium Zinc Telluride for Nuclear Radiation Detectors. The high- pressure vertical Bridgman process is used to grow Cadmium Zinc Telluride for nuclear radiation detectors. This proprietary process produces critical materials which, when mated to hybrid front-end electronics built by the Company, are sold to industrial gauging and other equipment manufacturers. The high-pressure Bridgman process yields products that are cost-competitive with scintillator/photomultiplier devices.
YAG Materials. Neodymium-doped YAG, solid-state laser gain materials are manufactured at the Company's Florida operations. The Company's precision process control and know-how result in consistent YAG rod products which are in high demand. The Company expects to have additional capacity for this material on-line within the next several months.
YLF and LiSAF Materials. Neodymium-doped YLF and chromium-doped LiSAF solid-state laser gain materials are manufactured at the Company's Florida operations. The Company utilizes a top-seeded Czochralski technique with precision computer-aided diameter control techniques to produce the high-quality YLF and LiSAF crystals required for the high- demand laser rod products. The Company is the industry leader in the LiSAF market and competes in the YLF rod and slab business on price, quality and delivery.
Potassium Niobate and Single Crystal Zinc Selenide. The Company's material science expertise has developed frequency-doubling Potassium Niobate in conjunction with an international laboratory. This frequency-doubling material, when coupled with a laser gain material and a laser pump, can be used to generate blue, green or red light. Using this material, the Company offers monolithic laser assemblies to OEMs that are pursuing blue and green laser markets. Through another proprietary process the Company is producing single-crystal Zinc Selenide, which is used as a substrate in the production of blue-light emitters and lasers.
Sources of Supply
The major raw materials used by the Company are Zinc, Selenium, Hydrogen Selenide, Hydrogen Sulfide, Cadmium, Tellurium, Yttrium Oxide, Aluminum Oxide and Iridium. The Company produces all of its Zinc Selenide and Zinc Sulfide requirements internally, although small quantities of Zinc Selenide and Zinc Sulfide may be purchased from outside vendors from time to time. The Company also purchases Gallium Arsenide, Copper, Silicon, Germanium, Quartz, optical glass and small quantities of other materials for use as base materials for laser optics. The Company purchases Thorium Fluoride and other materials for use in optical fabrication and coating processes. There are more than two suppliers for all of the above materials except for Zinc Selenide and Hydrogen Selenide (excluding the Company) and Thorium Fluoride, for each of which there is only one proven source of merchant supply. For most materials, the Company has entered into annual purchase arrangements whereby suppliers provide discounts for annual volume purchases in excess of specified amounts.
The continued high quality of these raw materials is critical to the stability of the Company's manufacturing yields. The Company conducts testing of materials at the onset of the production process to meet evolving customer requirements. Additional research may be needed to better define future starting material specifications. The Company has not experienced significant production delays due to shortages of materials. However, the Company does occasionally experience problems associated with vendor-supplied materials that do not meet contract specifications for quality or purity. A significant failure of the Company's suppliers to deliver sufficient quantities of necessary high- quality materials on a timely basis could have a materially adverse effect on the Company's results of operations.
Environmental, Health and Safety Matters
II-VI uses or generates certain hazardous substances in its research and manufacturing facilities. The Company believes that its handling of such substances is in material compliance with applicable local, state and federal environmental, safety and health regulations at each operating location. The Company invests substantially in proper protective equipment, process controls and specialized training to minimize risks to employees, surrounding communities and the environment due to the presence and handling of such hazardous substances. The Company annually conducts employee physical examinations and workplace air monitoring regarding such substances. When exposure problems or potential exposure problems have been indicated, corrective actions have been implemented and re-occurrence has been minimal or non-existent. The Company does not carry environmental impairment insurance.
Relative to its generation and use of the extremely hazardous substance Hydrogen Selenide, the Company has in place a government-approved emergency response plan. Special attention has been paid to all procedures pertaining to this gaseous material to minimize the chances of its accidental release to the atmosphere.
With respect to the use, storage and disposal of the low-level radioactive material Thorium Fluoride, the Company's facilities and procedures have been recently inspected and approved by the Nuclear Regulatory Commission. This material is utilized in the Company's thin- film coatings. All Thorium Fluoride bearing by-products are collected and shipped as solid waste to a government-approved low-level radioactive waste disposal site in Barnwell, South Carolina.
The generation, use, collection, storage and disposal of all other hazardous by-products, such as suspended solids containing heavy metals or airborne particulates, are believed by the Company to be in material compliance with regulations. Management believes that all of the permits and licenses required for operation of the Company's business are in place. Although the Company is not aware of any material environmental, safety or health problems in its properties or processes, there can be no assurance that problems will not develop in the future which would have a materially adverse effect on the Company.
Research and Development
The Company's research and development policy calls for the pursuit of a balanced program of internally funded and contract research and development totaling between 5 and 8 percent of product sales. From time to time the ratio of contract to internally funded activity varies significantly due to the unevenness and uncertainty associated with most government research programs. The Company is committed to accepting only funded research that ties closely to its growth plans.
Company research and development activities focus on developing new proprietary products or on understanding, improving and automating crystal growth, low-damage fabrication or optical thin-film coating technologies. The Company performs commercial prototype and engineering work for customers and, in addition, participates in various government and university research and development consortia. The Company maintains an engineering, research and development staff of seventy. Forty-five of the Company's employees are engineers or scientists. In addition, manufacturing personnel support or participate in research and development on an ongoing basis. Interaction between the development and manufacturing functions enhances the direction of projects, reduces costs and accelerates technology transfers.
The Company is primarily engaged in ongoing research and development in the following areas: Zinc Selenide optical material production; vertical and horizontal Bridgman Cadmium Zinc Telluride crystal growth and substrate manufacturing; Zinc Selenide single-crystal growth and substrate production; high-pressure Bridgman Cadmium Zinc Telluride crystal growth and radiation detector manufacturing; YAG crystal production; YLF and other fluorides production; Potassium Niobate crystal growth; automated, deterministic optical fabrication methods; optical thin-film processes and products; and microlaser assemblies based on various combinations of YAG or yttrium vanadate gain materials with frequency-doubling materials.
Company-funded research and development and contract research expenditures totaled approximately $1.3 million, $1.4 million and $1.7 million during fiscal 1994, 1995 and 1996, respectively. Contract research revenues during those respective years totaled approximately $1.6 million, $1.2 million and $1.7 million. The Company has been active in various research and development programs, including the Pennsylvania Ben Franklin Partnership program, the Federal Small Business Innovation Research programs of primarily the Department of Defense agencies and a DARPA-sponsored industry team program focused on infrared materials producibility.
Competition
The Company believes that it is a leading producer of products and services in its addressed markets. In the area of high-power CO2 laser optics and materials, II-VI believes it supplies over half of the world market. The Company is a leading supplier of Cadmium Zinc Telluride substrates used for infrared imaging arrays, and believes that it is the only supplier of Cadmium Telluride electro-optic modulators to U.S. and NATO defense contractors. The Company is a significant supplier of YAG rods and YAG laser optics to the worldwide markets of scientific, research, medical and industrial laser manufacturers.
The Company competes on the basis of product quality, quick delivery, strong technical support and pricing. Management believes that the Company competes favorably with respect to these factors and that its vertical integration, manufacturing facilities and equipment, experienced technical and manufacturing employees, and worldwide marketing and distribution provide competitive advantages.
II-VI has a number of present and potential competitors, many of which have greater financial, selling, marketing or technical resources. The significant competitor of the Company in the production of Zinc Selenide is Morton International's Advanced Materials Division. The competitors producing infrared and CO2 laser optics include Laser Power 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.
Order Backlog
Order backlog increased 87% to $12.9 million at June 30, 1996 from $6.9 million at June 30, 1995. Manufacturing orders comprise 82% of the backlog at June 30, 1996, compared to 96% of backlog at June 30, 1995. All of the manufacturing order backlog at June 30, 1996 is expected to be shipped in fiscal 1997. The increase in contract research and development backlog is a result of a $2.3 million, two-year DARPA contract award.
Employees
As of June 30, 1996, the Company employed 415 persons worldwide. Of these employees, 70 are engaged in research, development and engineering, 253 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 noncompetition agreements with its executive officers and certain other personnel.
The processes and specialized equipment utilized in crystal growth, infrared materials fabrication and infrared optical coatings as developed at the Company are complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar technology or that all aspects of the Company's proprietary technology will be protected. Others have obtained patents covering a variety of infrared optical configurations and processes, and others could obtain patents covering technology similar to the Company's. The Company may be required to obtain licenses under such patents, and there can be no assurance that the Company would be able to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted which may adversely affect the Company. In addition, Company research and development contracts with agencies of the United States Government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled.
The Company holds four registered trademarks: the II-VI INCORPORATED( name; INFRAREADY OPTICS( for replacement optics for industrial CO2 lasers; EPIREADY( for low surface damage substrates for Mercury Cadmium Telluride epitaxy; and eV PRODUCTS( for products manufactured by the Company's eV PRODUCTS division. The trademarks are registered with the United States Patent and Trademark Office, but not with any states. The Company is not aware of any interference or opposition to these trademarks in any jurisdiction.
Risk Factors
Environmental Concerns
The Company is subject to a variety of federal, state and local governmental regulations related to the storage, use and disposal of environmentally hazardous materials. Both the governmental regulations and the costs associated with complying with such regulations are subject to change in the future. There can be no assurance that any such change will not have a material adverse effect on the Company. The Company manufactures and utilizes Hydrogen Selenide gas, an extremely hazardous material, in the production of Zinc Selenide. In its processes, the Company also generates waste containing Thorium Fluoride, a low-level radioactive material, and other hazardous by-products such as suspended solids containing heavy metals and airborne particulates. The Company has made and continues to make substantial investments in protective equipment, process controls, manufacturing procedures and training in order to minimize the risks to employees, surrounding communities and the environment due to the presence and handling of such extremely hazardous and hazardous materials. The failure to properly handle such materials, however, could lead to harmful exposure to employees or to discharge of certain hazardous waste materials, and, since the Company does not carry environmental impairment insurance, to a material adverse effect on the financial condition or results of operations of the Company. Although the Company has not encountered material environmental problems in its properties or processes to date, there can be no assurance that problems will not develop in the future which would have a material adverse effect on the business, results of operations or financial condition of the Company.
Manufacturing and Sources of Supply
The Company utilizes high quality, optical grade Zinc Selenide in the production of a majority of its products. The Company is a leading producer of Zinc Selenide for its internal use and for external sale. The production of Zinc Selenide is a complex process requiring production in a highly controlled environment. A number of factors, including defective or contaminated materials, could adversely affect the Company's ability to achieve acceptable manufacturing yields of high quality Zinc Selenide. Zinc Selenide is available from only one outside source and quantity and qualities may be limited. The unavailability of necessary amounts of high quality Zinc Selenide would have a material adverse effect upon the Company. In addition, in fiscal 1992 and 1993, the Company experienced fluctuations in its manufacturing yields which affected the Company's results of operations. There can be no assurance that the Company will not experience manufacturing yield inefficiencies which could have a material adverse effect on the business, results of operations or financial condition of the Company.
The Company produces the Hydrogen Selenide gas used in its production of Zinc Selenide. There are risks inherent in the production and handling of such material. The inability of the Company to effectively handle Hydrogen Selenide could result in the Company being required to curtail its production of Hydrogen Selenide. Hydrogen Selenide can be obtained from one source, and the Company has previously purchased and, to supplement its internal production, currently purchases such material from this source. The cost of purchasing such material is significantly greater than the cost of internal production. As a result, if the Company purchased a substantial portion of such material from its outside source, it would significantly increase the Company's production costs of Zinc Selenide. Therefore, the Company's inability to internally produce Hydrogen Selenide could have a material adverse effect on the business, results of operations or financial condition of the Company.
In addition, the Company requires other high purity, relatively uncommon materials and compounds to manufacture its products. Failure of the Company's suppliers to deliver sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on the business, results of operations or financial condition of the Company.
Competition
The Company has a number of present and potential competitors, many of which have greater financial resources than the Company. The markets for many of the Company's products can be subject to competitive pricing in order to gain or retain market share. Such competitive pressures could affect the Company's pricing and adversely affect the business, results of operations or financial condition of the Company.
International Sales and Operations
Sales to customers in countries other than the United States accounted for approximately 43% to 47% of revenues in each of the last three fiscal years. The Company anticipates that international sales will continue to account for a significant portion of revenues for the foreseeable future. In addition, the Company manufactures products in Singapore, anticipates the start-up of manufacturing operations in China in fiscal 1997 and maintains direct sales offices in Japan and the United Kingdom. Sales and operations outside of the United States are subject to certain inherent risks, including fluctuations in the value of the U.S. dollar relative to foreign currencies, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations and potentially adverse tax consequences. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition or results of operations. In particular, although the Company's international sales, other than in Japan and the United Kingdom, are denominated in U.S. dollars, currency exchange fluctuations in countries where the Company does business could have a material adverse affect on the Company's business, financial condition or results of operations, by rendering the Company less price-competitive than foreign manufacturers. The Company's sales in Japan and the United Kingdom are denominated in the foreign currency and, accordingly, area affected by fluctuations in exchange rates. The Company generally reduces its exposure to such fluctuations through forward exchange agreements. The Company does not engage in the speculative trading of financial derivatives. There can be no assurance, however, that the Company's practices will eliminate the risk of fluctuation in the currency exchange rates.
Acquisitions
The Company's business strategy includes expanding its product lines and markets through internal product development and acquisitions. Any acquisition may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, and amortization expense related to intangible assets acquired, any of which could have material adverse affect on the Company's business, financial condition or results of operations. In addition, acquired businesses may be experiencing operating losses. Any acquisition will involve numerous risks, including difficulties in the assimilation of the acquired company's operations and products, uncertainties associated with operating in new markets and working with new customers, and the potential loss of the acquired company's key employees.
Sustaining and Managing Growth
The Company is currently undergoing a period of growth and there can be no assurance that such growth can be sustained or managed successfully. This expansion has resulted in a higher fixed cost structure which will require increased revenue in order to maintain historical gross margin and operating margins. There can be no assurance that the Company will obtain the increased orders necessary to generate increased revenue sufficient to cover this higher cost structure. Failure by the Company to manage growth successfully or have the systems and capacities necessary to sustain its growth could have a material adverse affect on the Company's business, results of operations or financial condition. In addition, in connection with any future acquisitions, the Company expects that it will hire additional senior management with experience in the new markets acquired by the Company. There can be no assurance that the Company will be able effectively to achieve growth, including in such new markets, integrate such new personnel or manage any such growth, and failure to do so could have a material adverse effect on the business, results of operations or financial condition of the Company.
Dependence on New Products and Processes
In order to meet its strategic objectives, the Company must continue to develop, manufacture and market new products, develop new processes and improve existing processes. As a result, the Company expects to continue to make significant investments in research and development and to continue to consider from time to time the strategic acquisition of businesses, products, or technologies complementary to the Company's business. The success of the Company in developing, introducing and selling new and enhanced products depends upon a variety of factors including product selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly processes, effective sales and marketing, and product performance in the field. There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a manner which satisfies customer needs or achieves market acceptance. The failure to do so could have a material adverse affect on the Company's ability to grow its business.
Dependence on Key Personnel
The Company is highly dependent upon the experience and continuing services of certain scientists, engineers and production and management personnel. Competition for the services of these personnel is intense, and there can be no assurance that the Company will be able to retain or attract the personnel necessary for the Company's success. The loss of the services of the Company's key personnel could have a material adverse affect on the business, results operations or financial condition of the Company.
Proprietary Technology Claims
The Company does not currently hold any material patents applicable to its processes and relies on a combination of trade secret, copyright and trademark laws and employee non-compete and nondisclosure agreements to protect its intellectual property rights. There can be no assurance that the steps taken by the Company to protect its rights will be adequate to prevent misappropriation of the Company's technology. Furthermore, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company. Asserting the Company's rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting the business, results of operations or financial condition of the Company. In the event a third party were successful in a claim that one of the Company's processes infringed its proprietary rights, the Company may have to pay substantial damages or royalties, or expend substantial amounts in order to obtain a license or modify the process so that it no longer infringes such proprietary rights, any of which could have an adverse effect on the business, results of operations or financial condition of the Company.
ITEM 2. PROPERTIES
Facilities
The Company's headquarters are located in Saxonburg, Pennsylvania, 25 miles north of Pittsburgh, in a 77,000-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 55,000 square feet, and owns a 13,000-square-foot facility in Florida.
In fiscal 1997, the Company plans to start construction of a manufacturing facility in Florida that will combine the operations of Virgo Optics and Lightning Optical.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation which could have a materially adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Form 10-K.
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and positions are as follows:
Name Age Position
Carl J. Johnson 54 Chairman,
Chief Executive Officer and
Director
Francis J. Kramer 47 President,
Chief Operating Officer and Director
Herman E. Reedy 53 Vice President and General Manager of
Quality and Engineering
James Martinelli 38 Treasurer and Chief Financial Officer
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Carl J. Johnson, a co-founder of the Company in 1971, serves as Chairman, Chief Executive Officer and a Director of the Company. He served as President of the Company from 1971 until 1985 and has been a Director since its founding and Chairman since 1985. From 1966 to 1971, Dr. Johnson was Director of Research & Development for Essex International, Inc., an automotive electrical and power distribution products manufacturer, now a subsidiary of United Technologies Corporation. From 1964 to 1966, Dr. Johnson worked at Bell Telephone Laboratories as a member of the technical staff. In August 1996, he was selected as a director of Xymox Technology, Inc. Dr. Johnson completed his Ph.D. in Electrical Engineering at the University of Illinois in 1969. He holds B.S. and M.S. degrees in Electrical Engineering from Purdue University and Massachusetts Institute of Technology (MIT), respectively.
Francis J. Kramer has been employed by the Company since 1983, has been its President and Chief Operating Officer since 1985 and was elected to the Board of Directors in 1989. Mr. Kramer joined the Company as Vice President and General Manager of Manufacturing and was named Executive Vice President and General Manager of Manufacturing in 1984. Prior to his employment by the Company, Mr. Kramer was the Director of Operations for the Utility Communications Systems Group of Rockwell International Corporation. Mr. Kramer graduated from the University of Pittsburgh in 1971 with a B.S. in Industrial Engineering and from Purdue University in 1975 with an M.S. in Industrial Administration.
Herman E. Reedy has been with the Company since 1977 and is Vice President and General Manager of Quality and Engineering. Previously, Mr. Reedy held positions at II-VI as General Manager of Quality and Engineering, Manager of Quality and Manager of Components. From 1973 until joining the Company, Mr. Reedy was employed by Essex International, Inc., now a subsidiary of United Technologies Corporation, serving last as Manager, MOS Wafer Process Engineering. Prior to 1973, he was employed by Carnegie Mellon University and previously held positions with Semi-Elements, Inc. and Westinghouse Electric Corporation. Mr. Reedy is a 1975 graduate of the University of Pittsburgh with a B.S. degree in Electrical Engineering.
James Martinelli has been employed by the Company since 1986 and has served as Treasurer and Chief Financial Officer and Assistant Secretary since May of 1994. Mr. Martinelli joined the Company as Accounting Manager and was named Controller in 1990. Prior to his employment by the Company, Mr. Martinelli was Accounting Manager at Tippins Incorporated and Pennsylvania Engineering Corporation from 1980 to 1985. Mr. Martinelli graduated from Indiana University of Pennsylvania with a B.S. degree in Accounting and is a member of the Pennsylvania Institute of Certified Public Accountants.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the National Association of Securities Dealers, Inc. Automated Quotations ("NASDAQ") National Market under the symbol "IIVI." The following table sets forth the range of high and low closing sale prices per share of the Company's Common Stock for the fiscal periods indicated, as reported by the NASDAQ National Market.
High Low
Fiscal 1996
First Quarter $23 $12 7/8
Second Quarter $18 $ 9 1/2
Third Quarter $12 5/8 $ 9 3/4
Fourth Quarter $16 7/8 $11 5/8
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
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On September 10, 1996, the last reported sale price for the Common Stock on the NASDAQ National Market was $19.125 per share. As of such date, there were approximately 700 holders of record of the Common Stock. The Company has not historically paid cash dividends and does not anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from page 13 of the Company's 1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The information required by this item is incorporated by reference from pages 9 through 12 of the Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from pages 14 through 26 of the Company's 1996 Annual Report to Shareholders.
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", and the information set forth under the caption "Other Matters - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the 1996 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 1996 Annual Meeting of Shareholders filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the information set forth under the caption "Principal Shareholders" in the Company's definitive proxy statement for the 1996 Annual Meeting of Shareholders filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial statements, financial statement schedules and exhibits not
listed have been omitted where the required information is included in
the consolidated financial statements or notes thereto, or is not
applicable or required.
(a) (1) The consolidated balance sheets as of June 30, 1996 and 1995,
the consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended
June 30, 1996, and the notes to consolidated financial
statements, together with the report thereon of Alpern,
Rosenthal & Company dated August 12, 1996 presented in the
Company's 1996 Annual Report to Shareholders, are incorporated
herein by reference.
(2) Financial Statement Schedules:
The financial statement schedules shown below should be read
in conjunction with the financial statements contained in the
1996 Annual Report to Shareholders. Other schedules are
omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts for the Three
Years Ended June 30, 1996
(3) Exhibits.
EXHIBIT NO. REFERENCE
2.01 Asset Purchase and Sale Agreement Incorporated herein
among II-VI Incorporated, II-VI Optics by reference is
Incorporated and Sandoz Chemicals Exhibit 2.01 to the
Corporation USA, dated as of Company's Report
December 29, 1994. on Form 8-K for the
event dated
December 29, 1994
2.02 Merger Agreement and Plan of Incorporated herein by
Reorganization by and among reference is
II-VI Incorporated, II-VI Lightning Exhibit 2.01 to the
Optical Incorporated and Lightning Company's Report
Optical Corporation, dated as of on Form 8-K for the
February 22, 1996 event dated
February 22, 1996.
2.03 Registration Rights Agreement dated Incorporated herein by
February 22, 1996 by and among certain reference is
former shareholders of Lightning Optical Exhibit 2.02 to the
Corporation and II-VI Incorporated Company's Report
on Form 8-K for the
event dated
February 22, 1996.
2.04 Escrow Agreement dated Incorporated herein by
February 22, 1996 by and among certain reference is
former shareholders of Lightning Optical Exhibit 2.03 to the
Corporation and II-VI Incorporated Company's Report
on Form 8-K for the
event dated
February 22, 1996.
3.01 Amended and Restated Articles of Incorporated herein by
Incorporation of II-VI Incorporated reference is
Exhibit 3.02 to
Registration Statement
No. 33-16389 on Form
S-1.
3.02 Amended and Restated By-Laws of II-VI Incorporated herein by
Incorporated reference is
Exhibit 3.02 to the
Company's Annual
Report on Form 10-K for
the fiscal year ended
June 30, 1991 (file
number 0-16195 and
docketed on
September 30, 1991).
10.01 II-VI Incorporated 1982 Incentive Incorporated herein by
Stock Option Plan* reference is
Exhibit 10.01 to
Registration
Statement No. 33-16389
on Form S-1.
10.02 II-VI Incorporated Stock Option Plan Incorporated herein by
of 1987* reference is
Exhibit 10.02 to
Registration Statement
No. 33-16389 on Form
S-1.
10.03 II-VI Incorporated Stock Option Plan Incorporated herein by
of 1990* reference is Exhibit
10.02 to the Company's
Annual Report on
Form 10-K for the fiscal
year ended
June 30, 1991(file
number 0-16195 and
docketed on
September 30, 1991).
10.04 II-VI Incorporated Employees' Stock Incorporated herein by
Purchase Plan reference is
Exhibit 10.03 to
Registration Statement
No. 33-16389 on Form
S-1.
10.05 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' reference is
Stock Purchase Plan Exhibit 10.04 to
Registration Statement
No. 33-16389 on Form
S-1.
10.06 First Amendment II-VI Incorporated Incorporated herein by
Amended and Restated Employees' reference is
Stock Purchase Plan Exhibit 10.01 to the
Company's Form 10-Q for
the Quarter Ended
March 31, 1996.
10.07 II-VI Incorporated Amended and Incorporated herein by
Restated Employees' Profit-Sharing reference is
Plan and Trust Agreement, as amended Exhibit 10.05 to
Registration
Statement No. 33-16389
on Form S-1.
10.08 Form of Representative Agreement Incorporated herein by
between the Company and its foreign reference is
representatives Exhibit 10.15 to
Registration
Statement No. 33-16389
on Form S-1.
10.09 Form of Employment Agreement* Incorporated herein by
reference is
Exhibit 10.16 to
Registration
Statement No. 33-16389
on Form S-1.
10.10 Description of Management-By-Objective Incorporated herein by
Plan* reference is
Exhibit 10.09 to the
Company's Annual
Report on Form 10-K for
the fiscal year ended
June 30, 1993.
10.11 II-VI Incorporated 1994 Nonemployee Incorporated herein by
Directors Stock Option Plan reference is
Exhibit A to the
Company's Proxy
Statement dated
September 30, 1994.
10.12 II-VI Incorporated Deferred Filed herewith.
Compensation Plan*
10.13 Trust Under the II-VI Incorporated Filed herewith.
Deferred Compensation Plan*
10.14 Description of Bonus Incentive Plan* Filed herewith.
13.01 Annual Report to Shareholders Portions of the 1996
Annual Report are
filed herewith.
21.01 List of Subsidiaries of II-VI Filed herewith.
Incorporated
23.01 Consent of Alpern, Rosenthal & Filed herewith.
Company
27.01 Financial Data Schedule Filed herewith.
_______
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* Denotes management contract or compensatory plan, contract or arrangement.
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance of long-term obligations of Registrant not in excess of 10% of the Registrant's total assets on a consolidated basis.
(b) On May 7, 1996, the Registrant filed a report on Form 8-K/A for
the event dated February 22, 1996, covering Items 2
and 7 thereof.
(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.
With the exception of the information incorporated by reference to the Company's 1996 Annual Report to Shareholders in Item 1 of Part I, Items 6, 7 and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Company's 1996 Annual Report to Shareholders is not deemed filed as a part of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
II-VI INCORPORATED
September 23, 1996 By: /s/ Carl J. Johnson
Carl J. Johnson, Chairman and
Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Principal Executive Officer:
September 23, 1996 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
and Director
September 23, 1996 By: /s/ Francis J. Kramer
Francis J. Kramer
President and Chief
Operating Officer and Director
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Principal Financial and Accounting Officer:
September 23, 1996 By: /s/ James Martinelli
James Martinelli
Treasurer and Chief Financial Officer
September 23, 1996 By: /s/ Richard B. Bohlen
Richard B. Bohlen
Director
September 23, 1996 By: /s/ Thomas E. Mistler
Thomas E. Mistler
Director
September 23, 1996 By: /s/ Duncan A. J. Morrison
Duncan A. J. Morrison
Director
September 23, 1996 By: /s/ Peter W. Sognefest
Peter W. Sognefest
Director
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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, 1996 and 1995, and for each of the three years in the period ended June 30, 1996, and have issued our report thereon dated August 12, 1996; such financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included a financial statement schedule for 1996, 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.
/s/ Alpern, Rosenthal & Company Pittsburgh, Pennsylvania August 12, 1996 |
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1994, 1995, AND 1996
(IN THOUSANDS OF DOLLARS)
Additions
------------------------
Balance at Charged Deduction
Beginning Charged to to Other from Balance at
of Year Expense Accounts Reserves <F1> End of Year
--------- ---------- -------- ---------- -----------
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
YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts $261 $86 $16 $117 $246
_________
<F1>
Uncollectible accounts written off (recovered).
</F1>
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EXHIBIT INDEX
EXHIBIT NO. REFERENCE
2.01 Asset Purchase and Sale Agreement Incorporated herein
among II-VI Incorporated, II-VI Optics by reference is
Incorporated and Sandoz Chemicals Exhibit 2.01 to the
Corporation USA, dated as of Company's Report
December 29, 1994. on Form 8-K for the
event dated
December 29, 1994
2.02 Merger Agreement and Plan of Incorporated herein by
Reorganization by and among reference is
II-VI Incorporated, II-VI Lightning Exhibit 2.01 to the
Optical Incorporated and Lightning Company's Report
Optical Corporation, dated as of on Form 8-K for the
February 22, 1996 event dated
February 22, 1996.
2.03 Registration Rights Agreement dated Incorporated herein by
February 22, 1996 by and among certain reference is
former shareholders of Lightning Optical Exhibit 2.02 to the
Corporation and II-VI Incorporated Company's Report
on Form 8-K for the
event dated
February 22, 1996.
2.04 Escrow Agreement dated Incorporated herein by
February 22, 1996 by and among certain reference is
former shareholders of Lightning Optical Exhibit 2.03 to the
Corporation and II-VI Incorporated Company's Report
on Form 8-K for the
event dated
February 22, 1996.
3.01 Amended and Restated Articles of Incorporated herein by
Incorporation of II-VI Incorporated reference is
Exhibit 3.02 to
Registration Statement
No. 33-16389 on Form
S-1.
3.02 Amended and Restated By-Laws of II-VI Incorporated herein by
Incorporated reference is
Exhibit 3.02 to the
Company's Annual
Report on Form 10-K for
the fiscal year ended
June 30, 1991 (file
number 0-16195 and
docketed on
September 30, 1991).
10.01 II-VI Incorporated 1982 Incentive Incorporated herein by
Stock Option Plan* reference is
Exhibit 10.01 to
Registration
Statement No. 33-16389
on Form S-1.
10.02 II-VI Incorporated Stock Option Plan Incorporated herein by
of 1987* reference is
Exhibit 10.02 to
Registration Statement
No. 33-16389 on Form
S-1.
10.03 II-VI Incorporated Stock Option Plan Incorporated herein by
of 1990* reference is Exhibit
10.02 to the Company's
Annual Report on
Form 10-K for the fiscal
year ended
June 30, 1991(file
number 0-16195 and
docketed on
September 30, 1991).
10.04 II-VI Incorporated Employees' Stock Incorporated herein by
Purchase Plan reference is
Exhibit 10.03 to
Registration Statement
No. 33-16389 on Form
S-1.
10.05 II-VI Incorporated Amended Incorporated herein by
and Restated Employees' reference is
Stock Purchase Plan Exhibit 10.04 to
Registration Statement
No. 33-16389 on Form
S-1.
10.06 First Amendment II-VI Incorporated Incorporated herein by
Amended and Restated Employees' reference is
Stock Purchase Plan Exhibit 10.01 to the
Company's Form 10-Q for
the Quarter Ended
March 31, 1996.
10.07 II-VI Incorporated Amended and Incorporated herein by
Restated Employees' Profit-Sharing reference is
Plan and Trust Agreement, as amended Exhibit 10.05 to
Registration
Statement No. 33-16389
on Form S-1.
10.08 Form of Representative Agreement Incorporated herein by
between the Company and its foreign reference is
representatives Exhibit 10.15 to
Registration
Statement No. 33-16389
on Form S-1.
10.09 Form of Employment Agreement* Incorporated herein by
reference is
Exhibit 10.16 to
Registration
Statement No. 33-16389
on Form S-1.
10.10 Description of Management-By-Objective Incorporated herein by
Plan* reference is
Exhibit 10.09 to the
Company's Annual
Report on Form 10-K for
the fiscal year ended
June 30, 1993.
10.11 II-VI Incorporated 1994 Nonemployee Incorporated herein by
Directors Stock Option Plan reference is
Exhibit A to the
Company's Proxy
Statement dated
September 30, 1994.
10.12 II-VI Incorporated Deferred Filed herewith.
Compensation Plan*
10.13 Trust Under the II-VI Incorporated Filed herewith.
Deferred Compensation Plan*
10.14 Description of Bonus Incentive Plan* Filed herewith.
13.01 Annual Report to Shareholders Portions of the 1996
Annual Report are
filed herewith.
21.01 List of Subsidiaries of II-VI Filed herewith.
Incorporated
23.01 Consent of Alpern, Rosenthal & Filed herewith.
Company
27.01 Financial Data Schedule Filed herewith.
_______
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* Denotes management contract or compensatory plan, contract or arrangement.
II-VI INCORPORATED
DEFERRED COMPENSATION PLAN
Nonqualified Retirement Plan 7.5A
Effective June 30, 1996
TABLE OF CONTENTS
INTRODUCTION
ARTICLE I DEFINITIONS
ARTICLE II PARTICIPATION
ARTICLE III CONTRIBUTIONS
Section 3.01 ----- Employer Contributions
Section 3.02 ----- Allocation
ARTICLE IV INVESTMENT OF CONTRIBUTIONS
ARTICLE V BENEFITS
Section 5.01 ----- Retirement Benefits
Section 5.02 ----- Death Benefits
Section 5.03 ----- Disability Benefits
Section 5.04 ----- Termination Benefits
Section 5.05 ----- Withdrawal Privileges
ARTICLE VI DISTRIBUTION OF BENEFITS
Section 6.01 ----- Automatic Forms of Distribution
ARTICLE VII GENERAL PROVISIONS
Section 7.01 ----- Amendments
Section 7.02 ----- Provisions Relating to the Insurer
and Other Parties
Section 7.03 ----- Employment Status
Section 7.04 ----- Rights to Plan Assets
Section 7.05 ----- Nonalienation of Benefits
Section 7.06 ----- Construction
Section 7.07 ----- Legal Actions
Section 7.08 ----- Word Usage
PLAN EXECUTION
INTRODUCTION
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The Employer is establishing a nonqualified, defined contribution employees' retirement plan which has been designed as, and is intended to be, an unfunded plan for purposes of the Employee Retirement Income Security Act of 1974, as amended, and a nonqualified plan under the Internal Revenue Code of 1986, including any later amendments to the Code. The Employer agrees to operate the plan according to the terms, provisions and conditions set forth in this document.
Any funds accumulated for purposes of providing benefits under this plan are fully available to satisfy the claims of the Employer's creditors. Participants have no greater rights with regard to such fund than any other general creditor of the Employer.
ARTICLE I
DEFINITIONS
ACCOUNT means, for a Participant, a bookkeeping account that reflects the amount available for benefits under this Plan. Separate accounting records are kept for those parts of his Account that result from:
(a) Salary Deferral Contributions.
(b) Matching Contributions.
(c) Discretionary Contributions.
A Participant's Account shall be reduced by any distribution of his Account. A Participant's Account will participate in the earnings credited, expenses charged and any appreciation or depreciation of the Investment Fund. His Account is subject to any minimum guarantees applicable under the Group Contract or other investment arrangement.
BENEFICIARY means the person or persons named by a Participant to receive any benefits under this Plan upon the Participant's death.
BENEFIT DATE means, for a Participant, the first day of the first period for which an amount of benefit is payable to him under this Plan. See Article V - BENEFITS.
CODE means the Internal Revenue Code of 1986, as amended.
COMPENSATION means the total earnings paid or made available to an Employee by the Employer during any specified period.
CONTRIBUTIONS means
Salary Deferral Contributions
Matching Contributions
Discretionary Contributions
as set out in Article III, unless the context clearly indicates otherwise.
ELIGIBLE EMPLOYEE means any Employee of the Employer who is invited to participate in the Plan and who represents a select group of highly- compensated or management employees, as determined by the Employer.
EMPLOYEE means an individual who is employed by the Employer.
EMPLOYER means II-VI INCORPORATED or any subsidiary corporations.
ENTRY DATE means the date an Employee first enters the Plan as an Active Participant. See Article II - PARTICIPATION.
ERISA means the Employee Retirement Income Security Act of 1974, as amended.
FISCAL YEAR means the Employer's taxable year. The last day of the Fiscal Year is June 30.
GROUP CONTRACT means the group annuity contract or contracts into which the Trustee enters with the Insurer for the investment of Contributions and the payment of benefits under this Plan. The term Group Contract as it is used in this Plan is deemed to include the plural unless the context clearly indicates otherwise.
Any funds accumulated under the Group Contract are available to the general creditors of the Employer.
INSURER means Principal Mutual Life Insurance Company and any other insurance company or companies named by the Trustee or Employer.
INVESTMENT FUND means the total assets held for the purpose of providing benefits for Participants. These funds result from Contributions made under the Plan.
The Investment Fund is not held for the exclusive benefit of Participants or their Beneficiaries.
MONTHLY DATE means each Yearly Date and the same day of each following month during the Plan Year beginning on such Yearly Date.
PARTICIPANT means an Eligible Employee who is actively participating in the Plan.
PLAN means the nonqualified retirement plan of the Employer set forth in this document, including any later amendments to it.
PLAN ADMINISTRATOR means the person or persons who administer the Plan. The Plan Administrator is the Employer.
PLAN YEAR means a period beginning on a Yearly Date and ending on the day before the next Yearly Date.
QUALIFIED PLAN means The II-VI Incorporated Employees Profit Sharing Plan.
REENTRY DATE means the date a former Participant reenters the Plan. See
Article II - PARTICIPATION.
RETIREMENT DATE means his retirement date under the Qualified Plan.
TOTALLY AND PERMANENTLY DISABLED means that a Participant is disabled to the extent he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or be of long-continued and indefinite duration, pursuant to Code Section 72(m)(7).
TRUST means an agreement of trust between the Employer and Trustee established for the purpose of holding and distributing the Trust Fund under the provisions of the Plan. The Trust may provide for the investment of all or any portion of the Trust Fund in the Group Contract.
TRUST FUND means the total funds held under the Trust for the purpose of providing benefits for Participants. These funds result from Contributions made under the Plan which are forwarded to the Trustee to be deposited in the Trust Fund.
TRUSTEE means the trustee or trustees under the Trust. The term Trustee as it is used in this Plan is deemed to include the plural unless the context clearly indicates otherwise.
YEARLY DATE means June 30, 1996, and each following July 1.
ARTICLE II
PARTICIPATION
An Employee shall first become a Participant (begin active participation in the Plan) on the earliest Yearly Date on or after June 30, 1996, on which he is an Eligible Employee. This date is his Entry Date.
A former Participant shall again become a Participant (resume active participation in the Plan) on the date he again performs an hour of service as an Eligible Employee. This date is his Reentry Date.
A Participant shall cease to be a Participant on the date he is no longer an Eligible Employee and the value of his Account is zero.
ARTICLE III
CONTRIBUTIONS
SECTION 3.01--EMPLOYER CONTRIBUTIONS.
Employer Contributions for each Plan Year will be equal to the Employer Contributions as described below.
(a) Salary Deferral Contributions. The amount of each Salary Deferral Contribution for a Participant shall be equal to any percentage of his Compensation for the pay period as elected in his or her deferral agreement. An Employee who is eligible to participate in the Plan may file a deferral agreement with the Employer. The deferral agreement to start Salary Deferral Contributions may be effective on a Participant's Entry Date (Reentry Date, if applicable) or any following Yearly Date. The Participant shall make any change or terminate the deferral agreement by filing a new deferral agreement. A Participant's deferral agreement making a change may be effective on any date a deferral agreement to start Salary Deferral Contributions could be effective. A Participant's deferral agreement to stop Salary Deferral Contributions may be effective on any date.
The deferral agreement must be in writing and effective before the beginning of the pay period in which Salary Deferral Contributions are to start, change or stop.
Salary Deferral Contributions may include contributions the Employee would have made to the Qualified Plan of the Employer under its contribution formula but for the additional restrictions imposed by such plan to meet the qualification requirements of the Internal Revenue Code.
(b) Matching Contributions. The amount of each Matching Contribution made by the Employer for a Participant shall be equal to a percentage as determined by the Employer, of the Participant's Salary Deferral Contributions for the pay period.
However, Salary Deferral Contributions in excess of the percentage of Compensation as provided in the Qualified Plan will not be matched.
(c) Discretionary Contributions. The amount of each Discretionary Contribution made by the Employer for the Participant shall be determined by the Employer.
The Employer Contribution determined above for each person shall be credited to his Account.
SECTION 3.02--ALLOCATION.
The following Contributions for each Plan Year shall be allocated among all eligible persons:
Discretionary Contributions
The eligible persons are all Participants who the Employer determines are eligible for an allocation for the Plan Year. The amount allocated to such a person shall be determined below.
The following Contributions for each Plan Year shall be allocated to each Participant for whom such Contributions were made under the EMPLOYER CONTRIBUTIONS SECTION of Article III:
Salary Deferral Contributions
Matching Contributions
These Contributions shall be allocated when made and credited to the Participant's Account.
Discretionary Contributions are allocated in a manner determined by the Employer.
ARTICLE IV
INVESTMENT OF CONTRIBUTIONS
All Contributions are forwarded by the Employer to the Trustee to be deposited in the Trust Fund.
Investment of Contributions is governed by the provisions of the Trust, the Group Contract and any other funding arrangement in which the Trust Fund is or may be invested. To the extent permitted by the Trust, Group Contract or other funding arrangement, the Participant, with the consent of the Trustee, shall direct the Contributions to any of the accounts available under the Trust or Group Contract and may request the transfer of assets resulting from those Contributions between such accounts. A Participant may not direct the Trustee to invest the Participant's Account in collectibles. To the extent that a Participant does not direct the investment of his Account, such Account shall be invested ratably in the accounts available under the Trust or Group Contract in the same manner as the undirected Accounts of all other Participants. The Accounts of all inactive Participants may be segregated and invested separately from the Accounts of all other Participants.
The Trust Fund shall be valued at current fair market value as of the last day of the last calendar month ending in the Plan Year and, at the discretion of the Trustee, may be valued more frequently. The valuation shall take into consideration investment earnings credited, expenses charged, payments made and changes in the value of the assets held in the Trust Fund. The Account of a Participant shall be credited with its share of the gains and losses of the Trust Fund. That part of a Participant's Account invested in a funding arrangement which establishes an account or accounts for such Participant thereunder shall be credited with the gain or loss from such account or accounts. That part of a Participant's Account which is invested in other funding arrangements shall be credited with a proportionate share of the gain or loss of such investments. The share shall be determined by multiplying the gain or loss of the investment by the ratio of the part of the Participant's Account invested in such funding arrangement to the total of the Trust Fund invested in such funding arrangement.
ARTICLE V
BENEFITS
SECTION 5.01--RETIREMENT BENEFITS.
On a Participant's Retirement Date, his Account shall be distributed to him according to the distribution of benefits provisions of Article VI. This date shall be a Participant's Benefit Date.
SECTION 5.02--DEATH BENEFITS.
If a Participant dies before his Retirement Date, his Account shall be distributed according to the distribution of benefits provisions of Article VI. This date shall be a Participant's Benefit Date.
SECTION 5.03--DISABILITY BENEFITS.
If a Participant becomes Totally and Permanently Disabled before his Retirement Date, his Account shall be distributed according to the distribution of benefits provisions of Article VI. This date shall be a Participant's Benefit Date.
SECTION 5.04--TERMINATION BENEFITS.
A Participant will receive a distribution of his Account if he ceases to be an Employee before his Retirement Date, provided he has not again become an Employee. This date shall be a Participant's Benefit Date.
SECTION 5.05--WITHDRAWAL PRIVILEGES.
Before he ceases to be an Employee, a Participant may withdraw up to 90% of the value of his Account in the event of an unforeseeable emergency. The Participant's request for a withdrawal shall include his statement that such an unforeseeable emergency exists and explain its nature. To qualify as an unforeseeable emergency withdrawal, it must be determined that the amount of the withdrawal is to meet a severe financial hardship to the Participant and the amount of the withdrawal is not reasonably available from other resources of the Participant. Examples of severe financial hardship may include a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The Plan Administrator will establish uniform, nondiscriminatory guidelines to use in determining if such a condition of undue financial hardship exists. The Plan Administrator's determination shall be final. The Participant has no legal or equitable right to such a withdrawal.
A request for withdrawal shall be in writing on a form furnished for that purpose and delivered to the Plan Administrator before the withdrawal is to occur.
Any Participant who chooses to exercise this option shall not be allowed to make Salary Deferral Contributions to this Plan for a period of one year from the time such withdrawal is received by the Participant.
ARTICLE VI
DISTRIBUTION OF BENEFITS
SECTION 6.01--AUTOMATIC FORMS OF DISTRIBUTION.
The automatic form of benefit payable to or on behalf of a Participant is determined as follows:
(a) The automatic form of benefit shall be a series of installments for any period of whole months which is not less than 24 nor more than 360 as chosen by the Participant to begin at any time on or after his Benefit Date, provided that beginning with the year in which the Participant turns age 70 1/2, a minimum payment each year shall apply. The minimum payment will be based on a period equal to the joint and last survivor expectancy of the Participant and the Participant's spouse, if any, where the joint and last survivor expectancy is recalculated. The balance of the Participant's Account, if any, will be payable on the Participant's death to his Beneficiary in a single sum. The election must be made prior to the Participant's Benefit Date.
(b) The automatic form of death benefit shall be a single sum payment to the Participant's Beneficiary.
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.01--AMENDMENTS.
The Employer may amend this Plan at any time, including any remedial retroactive changes (within the specified period of time as may be determined by Internal Revenue Service regulations) to comply with the requirements of any law or regulation issued by any governmental agency to which the Employer is subject.
SECTION 7.02--PROVISIONS RELATING TO THE INSURER AND OTHER PARTIES.
The obligations of an Insurer shall be governed solely by the provisions of the Group Contract. The Insurer shall not be required to perform any act not provided in or contrary to the provisions of the Group Contract. See the CONSTRUCTION SECTION of this article.
Any issuer or distributor of investment contracts or securities is governed solely by the terms of its policies, written investment contract, prospectuses, security instruments, and any other written agreements entered into with the Trustee.
Such Insurer, issuer or distributor is not a party to the Plan, nor bound in any way by the Plan provisions. Such parties shall not be required to look to the terms of this Plan, nor to determine whether the Employer, the Plan Administrator or the Trustee have the authority to act in any particular manner or to make any contract or agreement.
Until notice of any amendment or termination of this Plan or a change in Trustee has been received by the Insurer at its home office or an issuer or distributor at their principal address, they are and shall be fully protected in assuming that the Plan has not been amended or terminated and in dealing with any party acting as Trustee according to the latest information which they have received at their home office or principal address.
SECTION 7.03--EMPLOYMENT STATUS.
Nothing contained in this Plan gives an Employee the right to be retained in the Employer's employ or to interfere with the Employer's right to discharge any Employee.
SECTION 7.04--RIGHTS TO PLAN ASSETS.
No Employee shall have any right to or interest in any assets of the Plan upon termination of his employment or otherwise except as specifically provided under this Plan, and then only to the extent of the benefits payable to such Employee in accordance with Plan provisions.
Any final payment or distribution to a Participant or his legal representative or to any Beneficiaries or spouse of such Participant under the Plan provisions shall be in full satisfaction of all claims against the Plan, the Plan Administrator, the Trustee, the Insurer, and the Employer arising under or by virtue of the Plan.
SECTION 7.05--NONALIENATION OF BENEFITS.
Benefits payable under the Plan are not subject to the claims of any creditor of any Participant, Beneficiary or spouse. A Participant, Beneficiary or spouse does not have any rights to alienate, anticipate, commute, pledge, encumber or assign any of such benefits. The preceding sentences shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant according to a domestic relations order, unless such order is determined by the Plan Administrator to be a qualified domestic relations order, as defined in ERISA Act Section 206(d), or any domestic relations order entered before January 1, 1985.
SECTION 7.06--CONSTRUCTION.
The validity of the Plan or any of its provisions is determined under and construed according to Federal law and, to the extent permissible, according to the laws of the state in which the Employer has its principal office. In case any provision of this Plan is held illegal or invalid for any reason, such determination shall not affect the remaining provisions of this Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included.
In the event of any conflict between the provisions of the Plan and the terms of any contract or policy issued hereunder, the provisions of the Plan control the operation and administration of the Plan.
SECTION 7.07--LEGAL ACTIONS.
The Plan, the Plan Administrator and the Trustee are the necessary parties to any action or proceeding involving the assets held with respect to the Plan or administration of the Plan or Trust. No person employed by the Employer, no Participant, former Participant or their Beneficiaries or any other person having or claiming to have an interest in the Plan is entitled to any notice of process. A final judgment entered in any such action or proceeding shall be binding and conclusive on all persons having or claiming to have an interest in the Plan.
SECTION 7.08--WORD USAGE.
The masculine gender, where used in this Plan, shall include the feminine gender and the singular words as used in this Plan may include the plural, unless the context indicates otherwise.
By executing this Plan, the Primary Employer acknowledges having counseled to the extent necessary with selected legal and tax advisors regarding the Plan's legal and tax implications.
Executed this 29th day of June, 1996.
II-VI INCORPORATED
By: /s/ Francis J. Kramer President & Chief Operating Officer |
TRUST UNDER THE II-VI INCORPORATED
DEFERRED COMPENSATION PLAN
THIS AGREEMENT made and entered into this 25th day of June, 1996
BY AND BETWEEN
II-VI INCORPORATED, a Pennsylvania corporation, ("Company") and BANKERS TRUST COMPANY (Trustee);
WHEREAS, Company has adopted the II-VI Incorporated Deferred Compensation Plan, which is a nonqualified deferred compensation plan ("Plan");
WHEREAS, Company has incurred or expects to incur liability under the terms of the Plan with respect to the individuals participating in the Plan;
WHEREAS, Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan;
WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974;
WHEREAS, it is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust
(a) Company hereby deposits with Trustee in trust One Dollar and NO/100 ($1.00), which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement.
(b) The Trust shall become irrevocable five (5) days following the issuance of a favorable private letter ruling regarding the Trust from the Internal Revenue Service.
(c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used
exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their beneficiaries
shall have no preferred claim on, or any beneficial ownership interest
in, any assets of the Trust. Any rights created under the Plan and this
Trust Agreement shall be mere unsecured contractual rights of Plan
participants and their beneficiaries against Company. Any assets held by
the Trust will be subject to the claims of Company's general creditors
under federal and state law in the event of Insolvency, as defined in
Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits.
(f) Upon a Change of Control, Company shall, as soon as possible, but in no event longer than thirty (30) days following the Change of Control, as defined herein, make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Plan participant or beneficiary the benefits to which Plan participants or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) Company shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company.
(b) The entitlement of a Plan participant (or his or her beneficiaries) to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient.
Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When Company Is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of Company under federal and
state law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance.
Section 4. Payments to Company.
Except as provided in Section 3 hereof, after the Trust has become irrevocable, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payments of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan.
Section 5. Investment Authority.
(a) The Trustee shall, as directed by the Company, invest and reinvest the principal and income of the Trust and keep said principal and income invested in the following:
1. Shares of an investment company registered under the Investment Company Act of 1940, whose shares are registered under the Securities Act of 1933;
2. Annuity or insurance contracts applied for by either the Company or the Trustee, registered in the name of the Trustee and issued by an insurance and annuity company organized under the laws of any state, district or commonwealth of the United States of America; or
3. Securities (including stock or rights to acquire stock) or obligations issued by Company (hereinafter, "Company Securities"). All rights associated with Company Securities shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with Plan participants, except that voting rights with respect to Company Securities will be exercised by Company, and, except that dividend rights with respect to Company Securities will rest with Company.
(b)The Trustee, when specifically directed by the Company, shall have the following additional powers and authority with respect to the property constituting a part of the Trust, and in no event shall such additional powers and authority rest with Plan participants:
1. To invest in bonds, notes, bills, or other obligations insured or guaranteed as to principal and interest by the United States of America or an agency thereof.
2. To invest in time deposits, certificates of deposit, commercial paper, bankers' acceptances of banking institutions organized under the laws of any state, district or commonwealth of the United States of America.
3. To invest in collective investment funds maintained by the Trustee.
4. To sell, exchange or transfer any such property at public or private sale for cash or on credit.
5. To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to any such property, and to consent to or oppose any such plan or any action thereunder, or any contract, lease, mortgage, purchase, sale or other action by any corporation or other entity.
6. To deposit any such property with any protective, reorganization or similar committee; to delegate discretionary power to any such committee; and to pay part of the expenses and compensation of any such committee and any assessments levied with respect to any property so deposited.
7. To exercise any conversation privilege or subscription right available in connection with any such property; to oppose or to consent to the reorganization, consolidation, merger or readjustment of the finances of any corporation, company or association, the sale, mortgage, pledge or lease of the property of any of the securities of which may at any time be held in the Trust Fund and to do any act with reference thereto, including the exercise of options, the making of agreements or subscriptions and the payment of expenses assessments or subscriptions, which may be deemed necessary to advisable in connection therewith, and to hold and retain any securities or other property which it may so acquire.
8. To commence or defend suits or legal proceedings and to represent the Trust in all suits or legal proceedings; to settle, compromise or submit to arbitration, any claims, debts or damages due or owing to or from the Trust.
9. To register any securities held by it in its own name or in the name of any custodian of such property or of its nominee, including the nominee of any system for the central handling of securities, with or without the addition of words indicating that such securities are held in a fiduciary capacity; to deposit or arrange for the deposit of any such securities with such a system and to hold any securities in bearer form.
10. To make, execute and deliver, as Trustee, any and all deeds, leases, notes, bonds, guarantees, mortgages, conveyances, contracts, waivers, releases or other instruments, in writing necessary or proper for the accomplishment of any of the foregoing powers.
11. To exercise, personally or by general or by limited power of attorney, any right, including the right to vote, appurtenant to any securities or other property held by it any time.
12. To employ suitable agents and counsel and to pay their reasonable expenses and compensation.
13. To exercise, generally, and of the powers which an individual owner might exercise in connection with property either real, personal or mixed held by the Trust Fund, and to do all other acts that the Trustee may deem necessary or proper to carry out any of the powers set forth herein or otherwise in the best interests of the Trust Fund.
(c) Company shall have the right at anytime, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity.
Section 6. Disposition of Income.
During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested.
Section 7. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be.
Section 8. Responsibility of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by Company. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy.
(f) However, notwithstanding the provisions of Section 8(e) above, Trustee may loan to Company the proceeds of any borrowing against an insurance policy held as an asset of the Trust.
(g) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code.
Section 9. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust.
Section 10. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company, which shall be effective thirty (30) days after receipt of such notice unless Company and Trustee agree otherwise.
(b) Trustee may be removed by Company on thirty (30) days notice or upon shorter notice accepted by Trustee.
(c) Upon a Change of Control, as defined herein, Trustee may not be removed by Company for one (1) year.
(d) If Trustee resigns within one (1) year after a Change of Control, as defined herein, Company shall apply to a court of competent jurisdiction for the appointment of a successor Trustee or for instructions.
(e) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit.
(f) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraphs (a) or (b) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.
Section 11. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 10(a) or
(b) hereof, Company may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers
under state law, as a successor to replace Trustee upon resignation or
removal. The appointment shall be effective when accepted in writing by
the new Trustee, who shall have all of the rights and powers of the
former Trustee, including ownership rights in the Trust assets. The
former Trustee shall execute any instrument necessary or reasonably
requested by Company or the successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan or shall make the
Trust revocable after it has become irrevocable in accordance with
Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan , unless sooner revoked in accordance with Section 1(b) hereof. Upon termination of the Trust any assets remaining in the Trust shall be returned to Company.
(c) Upon written approval of participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan, Company may terminate this Trust prior to the time all benefit payments under the Plan have been made. All assets in the Trust at termination shall be returned to Company.
(d) Sections 1, 2 and 3 of this Trust Agreement may not be amended by Company for two (2) years following a Change of Control, as defined herein.
Section 13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
(d) For purposes of this Trust, Change of Control shall mean: "the purchase or other acquisition by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of Company or of the sale of all or substantially all of Company's assets".
Section 14. Effective Date.
The effective date of this Trust Agreement shall be July 1, 1996.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
ATTEST: II-VI INCORPORATED /s/ Robert D. German By: /s/ Francis J. Kramer Robert D. German, Secretary Francis J. Kramer, President |
(Corporate Seal)
BANKERS TRUST COMPANY
By: /s/ Niki Green
Niki Green, Trust Officer
(Corporate Seal)
|
Description of Bonus Incentive Plan
The Company has a Bonus Incentive Plan. Under the Bonus Incentive Plan, each full-time employee will become eligible to participate in the Bonus Incentive Plan (B.I.P.) upon completion of one year of employment provided the employee has worked a minimum of 1960 hours at straight time. An employee who has completed one year of full-time employment, with less than 1960 hours at straight time, will become eligible to participate upon completion of 1960 hours work at straight time.
Each part-time employee will be come eligible to participate upon completion of 2600 hours work at straight time.
Each participant will receive a bonus equal to a percentage of his/her gross wage for the fiscal year. The formula for determining this percentage is established each fiscal year by the Board of Directors and is based on the pre-tax profit margin of the Company. The formula may change from year to year, depending on variables such as the general economic climate, the competitive position of II-VI in its markets, and/or the Company's budget plans for the coming years.
II-VI Incorporated & Subsidiaries
Management's Discussion and Analysis
Fiscal 1996, 1995 & 1994 Results of Operations Fiscal 1996 Compared to Fiscal 1995
Overview
Net earnings rose 74% in fiscal 1996 to $4.4 million, up from $2.5
million in fiscal 1995. Revenues grew 37% to $37.9 million in fiscal
1996 compared to $27.8 million last fiscal year. This growth is
attributed to the acquisitions of the Virgo Optics Division of Sandoz
Chemicals Corporation and Lightning Optical (the "Acquisitions"), along
with improved CO2 laser optics sales throughout the world. Bookings
increased 48% to $42.1 million in fiscal 1996 compared to $28.4 million
in fiscal 1995. Order backlog increased 87% to $12.9 million at June
30, 1996 from $6.9 million at June 30, 1995 as a result of orders
outpacing shipments in fiscal 1996 and, to a lesser extent, the
acquisition of Lightning Optical. Manufacturing orders comprise 82% of
the backlog at June 30, 1996, compared to 96% of backlog at June 30,
1995. The increase in contract research and development backlog is a
result of the $2.3 million, two-year DARPA contract award.
Net Earnings
Net earnings rose 74% in fiscal 1996 to $4.4 million, up from $2.5 million in fiscal 1995. The major contributors to the net earnings growth were improved CO2 laser optics sales volume, the Acquisitions, and additional interest income as a result of increased cash levels. These contributors more than offset increased selling, general and administrative expenses that were needed to support the Company's growth, and a slight increase in the effective corporate income tax rate.
Sales and Markets
Bookings increased 48% to $42.1 million in fiscal 1996 compared to $28.4 million in fiscal 1995. Manufacturing orders comprised nearly 80% of this growth. The largest portion of the growth in manufacturing orders is from the Acquisitions, followed by higher demand in the international industrial markets and the military/ aerospace and medical markets. The increase in contract research and development bookings is predominantly from the $2.3 million DARPA contract and a $400,000 U.S.-Israel Science and Technology commission award.
Revenues grew 37% to $37.9 million in fiscal 1996 compared to $27.8 million last fiscal year. Approximately 95% of this growth is in manufacturing revenues. This growth is lead by the Acquisitions, followed by increased demand in the international industrial markets, the military/aerospace and medical markets, and the domestic industrial market. Contract research and development revenues increased 44% to $1.7 million in fiscal 1996 from $1.2 million in fiscal 1995. This increase is attributable to work being performed on several additional government contract awards in fiscal 1996.
Costs and Expenses
Manufacturing gross margin is $15.7 million or 43% of net sales in fiscal 1996 compared to $10.8 million or 41% of net sales in fiscal 1995. This increase is attributable to higher sales volume in the CO2 laser optics market and the Acquisitions. The increase in gross margin as a percentage of net sales is driven by lower per unit operating costs associated with increased production volume.
Contract research and development gross margin is $452,000 or 27% of net sales in fiscal 1996 compared to $239,000 or 21% of net sales in fiscal 1995. The increase is attributable to work being performed on the additional government contract awards mentioned above and an increase in reimbursable costs allocable to government contracts.
Company-funded internal research and development increased to $514,000 in fiscal 1996 from $447,000 in fiscal 1995. The majority of this increase is in the crystal growth research area.
Selling, general and administrative expenses were $9.9 million or 26% of net sales in fiscal 1996 compared to $7.3 million or 26% of net sales in fiscal 1995. This increase is attributable to expenses incurred in the operation of the Acquisitions, increased compensation expense associated with the Company's world-wide profit-driven bonus programs and increased payroll and other general administrative expenses needed to support the Company's growth.
Other income increased to $369,000 in fiscal 1996 from $143,000 in fiscal 1995 as a result of investment earnings on increased cash balances. The increase in cash is attributable to the October 1995 public stock offering.
The effective corporate income tax rate is 27% in fiscal 1996 compared to 26% in fiscal 1995. This increase is attributable to the proportion of the Company's earnings that are generated by foreign subsidiaries. The Company's future effective tax rates will continue to be effected by the level of profit or loss generated by the foreign subsidiaries. The Company anticipates that its effective corporate income tax rate for fiscal 1997 will increase as a result of in-creased earnings attributable to domestic operations as a percentage of total corporate earnings.
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 was 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 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 was 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 was attributable to increased sales in the Japanese and European industrial markets, the domestic industrial market and, to a lesser extent, the military/aerospace and medical markets. Contract research and development revenues decreased 27% to $1.2 million in fiscal 1995 from $1.6 million in fiscal 1994. This decrease was attributable to customer-imposed delays in the performance of a significant government contract.
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 was 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 was 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 was 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 majority of this increase was 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 was attributable to lower non-deductible expenses and increased profit of the foreign subsidiaries.
Liquidity and Capital Resources
The Company historically has funded its working capital needs, capital expenditures and growth from cash flow from operations and, to a lesser extent, borrowings. In fiscal 1996, in addition to the cash generated from operations, the Company completed a second public stock offering that generated $10.9 million in net proceeds and the Company's Japan subsidiary borrowed $800,000 from a Japanese bank.
The two largest sources of the $3.7 million in cash generated from operations in fiscal 1996 were $6.9 million in net earnings before depreciation and a $600,000 increase in accounts payable. These cash sources were partially offset by increases in receivables and inventory of $2.5 million and $1.3 million, respectively. One half of the increase in receivables is attributed to the timing of revenues and payments relating to government contracts, while the remainder of the increase is a result of increased manufacturing revenue volume. The increase in inventory was necessary to keep pace with customer demand for the Company's products.
The Company invested $6.1 million in capital expenditures during fiscal 1996. These expenditures focused on the automation of processes and facility expansions in the Saxonburg and Virgo Optics plants. The Company anticipates a $700,000 low interest rate loan agreement with the Pennsylvania Industrial Development Authority to be completed by September 30, 1996 that will finance a portion of the Saxonburg expansion. Planned, discretionary capital expenditures for fiscal 1997 of approximately $7.0 million will focus on automation of processes, improved capacity, opportunities for synergy at the two Florida locations and the start-up of the Company's China subsidiary. The Company anticipates the China subsidiary will begin infrared small- optics manufacturing in the third quarter of fiscal 1997.
The Company also purchased 100% of the outstanding stock of Lightning Optical Corporation in February 1996 for $1.9 million in cash, net of cash acquired, and 186,183 shares of II-VI Incorporated common stock (market value of $1.8 million at the time of purchase) and immediately paid off $1.4 million of outstanding notes payable that were acquired in the purchase. The purchase of Lightning Optical Corporation resulted in goodwill being recorded of $2.2 million. The recoverability of this goodwill is evaluated based on the projection of future cash flows.
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.
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.
This Management's Discussion and Analysis, along with the preceding
Letter to Shareholders, contain forward looking statements as defined by
Section 21E of the Securities Exchange Act of 1934, including the
statements regarding the Company's long-term growth rate, anticipated
higher demand for the Company's products, the expected increase in the
effective corporate income tax rate for fiscal 1997 and the Company's
ability to fund future working capital needs, capital expenditures and
scheduled debt payments from internally generated funds and existing
cash reserves. The Company's long-term growth rate, projections for
higher demand for our products and ability to fund future capital needs
from internally generated funds and existing cash reserves could differ
from our statements if worldwide economic conditions change, competitive
conditions intensify, technology problems emerge, and/or if suitable
acquisitions of technologies or businesses cannot be consummated. The
Company's anticipated increase in the effective corporate income tax
rate may not occur if there is a material change in worldwide economic
conditions that causes a difference in the anticipated proportion of
foreign earnings to total earnings. There are additional risk factors
that could affect the Company's business, results of operations or
financial condition. Investors are encouraged to review the risk
factors set forth in the Company's prospectus dated October 20, 1995.
II-VI Incorporated & Subsidiaries
Five-Year Financial Summary
Year Ended June 30,
($000 except per share data) 1996 1995 1994* 1993 1992
- -----------------------------------------------------------------------------------------------------
Statement of Earnings
Net revenues $37,940 $27,760 $18,681 $17,169 $16,600
Net earnings $ 4,371 $ 2,518 $ 1,135 $ 75 $ 738
Earnings per share $ .70 $ .48 $ .22 $ .01 $ .14
Weighted average shares outstanding 6,253 5,289 5,061 5,255 5,293
All share data adjusted to reflect two-for-one stock split - See Note A of the Notes to Consolidated
Financial Statements.
* Included in the results is a gain on sale of an investment. See Note E of the Notes to Consolidated
Financial Statements.
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June 30,
($000) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
Balance Sheet
Working capital $16,687 $ 8,872 $ 6,648 $ 6,009 $ 6,603
Total assets 44,169 24,367 17,570 17,265 17,186
Total debt 1,461 1,563 263 765 1,365
Deferred taxes 1,324 658 562 579 786
Retained earnings 18,031 13,660 11,142 10,007 9,932
Shareholders' equity 34,403 16,998 14,237 13,217 13,359
For the five year period ended June 30, 1996, no dividends were declared.
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II-VI Incorporated & Subsidiaries Quarterly Financial Data Fiscal 1996 Quarter Ended ($000 except per share data) 9/30/1995 12/31/1995 3/31/1996 6/30/1996 - ----------------------------------------------------------------------------------------------------- Net revenues $ 8,088 $ 7,954 $ 10,072 $ 11,826 Cost of goods sold 4,657 4,638 5,765 6,750 Internal research and development 148 138 154 74 Selling, general and administrative expense 2,131 2,152 2,610 3,031 Interest and other expense (income) - net 16 (139) (83) (122) Earnings before income taxes 1,136 1,165 1,626 2,093 Income taxes 330 331 417 571 Net earnings $ 806 $ 834 $ 1,209 $ 1,522 Earnings per share $ .15 $ .14 $ .18 $ .23 All share data adjusted to reflect two-for-one stock split -- See Note A of the Notes to Consolidated Financial Statements. |
Fiscal 1995 Quarter Ended ($000 except per share data) 9/30/1994 12/31/1994 3/31/1995 6/30/1995 - ----------------------------------------------------------------------------------------------------- Net revenues $ 5,446 $ 5,904 $ 8,028 $ 8,382 Cost of goods sold 3,262 3,548 4,924 4,954 Internal research and development 132 120 85 110 Selling, general and administrative expense 1,472 1,598 1,989 2,265 Interest and other expense (income) - net 11 (15) (62) (20) Earnings before income taxes 569 653 1,092 1,073 Income taxes 173 144 312 240 Net earnings $ 396 $ 509 $ 780 $ 833 Earnings per share $ .08 $ .10 $ .15 $ .15 All share data adjusted to reflect two-for-one stock split -- See Note A of the Notes to Consolidated Financial Statements. |
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, 1996 and 1995, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of II- VI Incorporated and Subsidiaries as of June 30, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
/s/ Alpern, Rosenthal & Company Pittsburgh, Pennsylvania August 12, 1996 |
II-VI Incorporated & Subsidiaries
Consolidated Balance Sheets
June 30,
($000 except share data) 1996 1995
- -----------------------------------------------------------------------------------------------------
Current Assets
Cash and equivalents $ 9,417 $ 3,822
Accounts receivable -- less allowance for doubtful accounts
of $246 in 1996 and $261 in 1995 8,712 5,412
Inventories 5,490 4,165
Deferred income taxes 429 309
Prepaid and other current assets 607 376
Total Current Assets 24,655 14,084
Property, Plant & Equipment, Net 15,085 9,892
Other Assets 4,429 391
$ 44,169 $ 24,367
Current Liabilities
Notes payable $ 1,393 $ -
Accounts payable 1,260 835
Accrued salaries, wages and bonuses 3,105 2,114
Income taxes payable 607 585
Accrued profit sharing contribution 556 278
Other current liabilities 1,024 1,027
Current portion of long-term debt 23 373
Total Current Liabilities 7,968 5,212
Long-Term Debt (Less Current Portion) 45 1,190
Deferred Income Taxes 1,753 967
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 - 6,691,718 shares in 1996; 5,669,987 shares in 1995 17,055 4,485
Cumulative translation adjustment 79 (17)
Retained earnings 18,031 13,660
35,165 18,128
Less treasury stock at cost 762 1,130
Total Shareholders' Equity 34,403 16,998
$ 44,169 $ 24,367
See notes to consolidated financial statements.
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II-VI Incorporated & Subsidiaries
Consolidated Statements of Earnings & Shareholders' Equity
Earnings Year Ended June 30,
($000 except per share data) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Revenues
Net sales:
Domestic $ 19,922 $ 13,697 $ 8,301
International 16,344 12,901 8,787
Contract research and development 1,674 1,162 1,593
37,940 27,760 18,681
Costs, Expenses and Other Income
Cost of goods sold 20,588 15,765 11,313
Contract research and development 1,222 923 1,040
Internal research and development 514 447 251
Selling, general and administrative expenses 9,924 7,324 5,159
Interest expense 41 57 36
Gain on sale of investment - - (699)
Other expense (income) net (369) (143) (123)
31,920 24,373 16,977
Earnings Before Income Taxes 6,020 3,387 1,704
Income Taxes 1,649 869 569
Net Earnings $ 4,371 $ 2,518 $ 1,135
Earnings Per Share $ .70 $ .48 $ .22
See notes to consolidated financial statements.
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Cumulative
Translation Retained
Shareholders' Equity Common Stock Adjustment Earnings Treasury Stock
(000) Shares Amount Shares Amount Total
- ----------------------------------------------------------------------------------------------------------
Balance-July 1, 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
Shares issued for purchase
of Lightning Optical - 1,470 - - 187 368 1,838
Net proceeds from stock offering 1,000 10,929 - - - - 10,929
Shares issued under stock option plan 22 71 - - - - 71
Net earnings for the year - - - 4,371 - - 4,371
Translation adjustment - - 96 - - - 96
Tax benefit for options exercised - 100 - - - - 100
Balance-June 30, 1996 6,692 $17,055 $ 79 $ 18,031 (384) $ (762) $34,403
See notes to consolidated financial statements.
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II-VI Incorporated & Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
($000) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net earnings $ 4,371 $ 2,518 $ 1,135
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,488 2,006 1,835
Gain on sale of investment - - (699)
Gain on foreign currency transactions (85) (171) (140)
Net loss on disposal of property and equipment - 19 61
Deferred income taxes (83) 96 (17)
Increase (decrease) in cash from changes in:
Accounts receivable (2,462) (826) (245)
Inventories (1,296) (384) (263)
Accounts payable 576 196 (300)
Other operating net assets 211 1,917 1,015
Net cash provided by operating activities 3,720 5,371 2,382
Cash Flows From Investing Activities
Additions to property, plant & equipment (6,146) (2,384) (1,643)
Proceeds from sale of property, plant & equipment - - 6
Net cash on purchase of subsidiaries (1,938) (2,353) -
Additions to other assets (23) (115) (247)
Net cash used in investing activities (8,107) (4,852) (1,884)
Cash Flows From Financing Activities
(Payments) proceeds on short-term borrowings (1,095) 1,472 -
Proceeds from long-term borrowings - 108 -
Payments on long-term borrowings (23) (281) (501)
Proceeds from sale of common stock 11,100 301 39
Purchase of treasury stock - (31) (164)
Net cash provided by (used in) financing activities 9,982 1,569 (626)
Net increase (decrease) in cash and equivalents 5,595 2,088 (128)
Cash and Equivalents
Beginning of year 3,822 1,734 1,862
End of year $ 9,417 $ 3,822 $ 1,734
See notes to consolidated financial statements.
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II-VI Incorporated & Subsidiaries
Notes to Consolidated Financial Statements
Note A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include II-VI Incorporated and its
wholly owned subsidiaries II-VI Worldwide, Inc., II-VI Delaware, Inc.,
II-VI Japan Incorporated, II-VI Virgo Incorporated, II-VI U.K. Limited,
II-VI Lightning Optical Incorporated, and II-VI Singapore Pte., Ltd.
All significant intercompany transactions and balances have been
eliminated.
The Company has formed a subsidiary in China that will manufacture infrared small optics. The subsidiary is expected to commence operations in fiscal 1997.
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 and II-VI U.K. Limited, 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
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 a two-for-one stock split 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 1996, 1995 and 1994 used in the earnings per share calculation were 6,252,523, 5,289,072 and 5,061,376, respectively.
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.
On October 20, 1995, a registration statement on Form S-3 covering the public offering of 1,000,000 shares was declared effective by the Securities and Exchange Commission, with the shares sold to the public at $12.00 per share.
Cash
For purposes of the statement of cash flows, the Company considers highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. The majority of cash and cash equivalents are invested in investment grade money market type instruments. Sufficient cash to fund foreign subsidiary current operations is on deposit at Japan, Singapore, and United Kingdom banks.
Nature of Business
The Company designs, manufactures and markets optical and electro- optical components and materials for precision use in infrared devices. The Company's infrared products are used in high-power lasers 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 subsidiaries, II-VI Japan Incorporated and II-VI U.K. Limited, and manufacturing representatives.
The Company uses certain uncommon materials and compounds to manufacture its products. Some of these materials are available from only one proven outside source. The continued high quality of these materials is critical to the stability of the Company's manufacturing yields. The Company has not experienced significant production delays due to a shortage of materials. However, the Company does occasionally experience problems associated with vendor supplied materials not meeting contract specifications for quality or purity. A significant failure of the Company's suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a materially adverse effect on the Company's results of operations.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Acquisitions
On February 22, 1996, Lightning Optical Corporation, a Florida corporation, located in Tarpon Springs, Florida (Lightning Optical), merged with and into II-VI Lightning Optical Incorporated (II-VI Lightning), a newly-formed wholly-owned subsidiary of II-VI Incorporated. As a result of the merger, II-VI Lightning acquired substantially all of the assets and assumed certain liabilities of Lightning Optical. The aggregate purchase price paid to the shareholders of Lightning Optical (the Sellers) consisted of $2.4 million in cash and 186,183 shares of the Common Stock, no par value, of II-VI Incorporated. The acquisition was accounted for as a purchase. A portion of the cash proceeds is being held in escrow for potential post- closing adjustments. The purchase price was allocated as follows:
($000)
- ----------------------------------------------------
Accounts receivable $ 1,125
Inventory 227
Property, plant and equipment 1,381
Goodwill 2,169
Other intangible assets 2,000
Other assets 47
- ----------------------------------------------------
6,949
Current liabilities (2,059)
Long-term debt (320)
Deferred income taxes - non current (794)
- ----------------------------------------------------
Purchase price, net of cash acquired $ 3,776
- ----------------------------------------------------
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The other intangible assets acquired, including technology and sales and marketing expertise, are being amortized over a 10 year period, while the goodwill generated by the purchase is being amortized over a 25 year period. Accumulated amortization amounted to $101,000 at June 30,1996.
On December 29, 1994, a newly formed subsidiary of the Company acquired the net assets of the Virgo Optics Division of Sandoz Chemicals Corporation (Virgo). 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:
($000)
- ----------------------------------------------------
Accounts receivable $ 720
Inventory 400
Machinery and equipment 1,387
Other assets 3
- ----------------------------------------------------
2,510
Current liabilities (157)
- ----------------------------------------------------
Cash purchase price $ 2,353
- ----------------------------------------------------
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The following pro forma financial information is based upon the historical financial statements of II-VI Incorporated, Lightning Optical and Virgo adjusted to give effect to the acquisition of substantially all of the assets and the assumption of certain liabilities of Lightning Optical and Virgo and the integration of the activities of II-VI Incorporated, Lightning Optical and Virgo. This information assumes that such events occurred on the first day of II-VI Incorporated's 1995 fiscal year (July 1, 1994).
This information does not purport to present what II-VI Incorporated's results of operations actually would have been had the acquisitions occurred on July 1, 1994, or to project the results of operations for any future period.
Unaudited Pro Forma Results
for Year Ended June 30,
($000 except per share data) 1996 1995
- ----------------------------------------------------
Revenues $ 41,951 $ 35,117
Net Earnings 4,976 3,212
Earnings Per Share .78 .59
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Fair Values of Financial Instruments
The Company has several financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at June 30, 1996 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The fair value amounts have been estimated by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary in interpreting market data to develop the estimates of fair value and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which established financial accounting and reporting standards for stock-based employee compensation plans. Companies are encouraged, rather than required, to adopt a new method that accounts for stock compensation awards based on their fair value using an option pricing model. Companies that do not adopt this new method will be required to make pro forma footnote disclosures of net income as if the fair value-based method of accounting required by SFAS No. 123 had been applied. The Company is required to adopt SFAS No. 123 beginning in fiscal 1997. Adoption of this pronouncement is not expected to have a material impact on the Company's financial position or results of operations because the Company intends to make pro forma footnote disclosures instead of adopting the new accounting method.
Note B
INVENTORIES
The components of inventories are as follows:
June 30,
($000) 1996 1995
- ----------------------------------------------------
Raw materials $ 2,279 $ 1,750
Work in process 1,427 1,348
Finished goods 1,784 1,067
- ----------------------------------------------------
$ 5,490 $ 4,165
- ----------------------------------------------------
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Note C
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (at cost) consist of the following:
June 30,
($000) 1996 1995
- ----------------------------------------------------
Land and land improvements $ 539 $ 307
Buildings and improvements 6,952 4,258
Machinery and equipment 22,084 17,486
- ----------------------------------------------------
29,575 22,051
Less accumulated depreciation 14,490 12,159
- ----------------------------------------------------
$15,085 $ 9,892
- ----------------------------------------------------
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Note D
NOTES PAYABLE
Notes payable at June 30, 1996 consist of two notes payable at the Company's Japan location. Both notes are guaranteed by the Parent Company.
The first note, for $891,000, calls for monthly principal payments plus interest for a five year period. The interest rate at June 30, 1996 was 2.125%. The bank has the option of calling this loan in December of each year. The second note, for $502,000, calls for equal monthly principal payments plus interest through May 1997. The interest rate at June 30, 1996 was 2.125%.
The Company has a line of credit (cash overdraft) facility with a Singapore bank which permits maximum borrowings of approximately $567,000. 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, 1996 was 7.0%. At June 30, 1996 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 was 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, 1996 consists of an installment loan in the amount of $68,000 at the Company's Singapore location due to mature in August 2000 with equal monthly payments due on this loan including interest at an annual rate of 7.5%.
Long-term debt at June 30, 1995 consisted 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. 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 were 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 had been recorded in the accompanying balance sheet as long-term debt.
The Company has entered into foreign currency forward exchange contracts in order to hedge its currency exposure in Japan. Gains and losses on those contracts are recognized as they occur. At June 30, 1996, the Company had contracts outstanding of approximately $1,415,000. 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, 1996, 1995 and 1994 totaled $41,000, $48,000 and $41,000, respectively.
Note G
INCOME TAXES
The components of income tax expense are as follows:
Year Ended June 30,
($000) 1996 1995 1994
- ----------------------------------------------------
Current:
Federal $ 1,457 $ 534 $ 491
State 227 174 54
Foreign 48 65 41
Deferred (83) 96 (17)
- ----------------------------------------------------
$ 1,649 $ 869 $ 569
- ----------------------------------------------------
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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) 1996 1995
- ----------------------------------------------------
Deferred tax liabilities
Tax over book accumulated
depreciation $ 970 $ 1,008
Intangible assets 783 -
- ----------------------------------------------------
Deferred tax liability 1,753 1,008
Deferred tax assets
Inventory capitalization 156 134
Non-deductible accruals 273 175
Net operating loss
carryforwards-state - 41
- ----------------------------------------------------
Gross deferred tax asset 429 350
Allowance for deferred tax assets - -
- ----------------------------------------------------
Net deferred tax assets 429 350
- ----------------------------------------------------
Net deferred tax liabilities $ 1,324 $ 658
- ----------------------------------------------------
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One of the Company's foreign subsidiaries operates under a tax holiday and does not pay income taxes. The tax holiday is scheduled to expire in March 1997, however the Company anticipates it will be extended to March 2000.
During the years ended June 30, 1996, 1995 and 1994, cash paid by the Company for income taxes was approximately $1,772,000, $379,000 and $125,000, respectively.
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 $1,473,000 would have been required.
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) 1996 1995 1994
- ----------------------------------------------------
Depreciation $ (79) $ (98) $ (58)
Inventory capitalization (18) (13) (13)
Alternative minimum
tax carryforward - 275 (34)
Gain on sale of investment - - 238
Other - Primarily
non-deductible accruals 14 (68) (150)
- ----------------------------------------------------
$ (83) $ 96 $ (17)
- ----------------------------------------------------
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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) 1996 % 1995 % 1994 %
- ---------------------------------------------------------------------------------------------
Taxes at statutory rate $ 2,047 34 $ 1,152 34 $ 579 34
Increase (decrease) in taxes resulting from:
State income taxes - net of federal benefit 150 2 88 3 35 2
Excludable FSC income (50) (1) (45) (1) - -
Excludable foreign income (559) (9) (376) (11) (164) (10)
Foreign taxes 32 1 43 1 27 2
Non-deductible expenses 29 0 7 0 92 5
$ 1,649 27 $ 869 26 $ 569 33
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Note H
OPERATING LEASES
The Company leases certain property under operating leases that expire at various dates through 1998. Future rental commitments applicable to the operating leases at June 30, 1996 are approximately $465,000 and $97,000 for 1997 and 1998, respectively. Rent expense was approximately $507,000, $462,000 and $303,000 for the years ended June 30, 1996, 1995 and 1994, 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.
The Company added a nonemployee directors stock option plan in 1995, with 120,000 shares of common stock reserved for use under this plan. The Plan provides for the automatic grant of options to purchase 15,000 shares to each nonemployee director at the fair value on the date of shareholder approval of the plan and a similar grant for each nonemployee director that joins the Board prior to October 1999. Twenty percent of the options granted may be exercised one year from the date of grant with comparable annual increases on a cumulative basis each year thereafter.
Stock option activity relating to the plans in each of the three years ended June 30, 1996 is as follows:
Number of Shares Per Share
Options Subject to Option Price Range
- -------------------------------------------------------------
Outstanding - July 1, 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 314,000 $1.97-$4.94
Exercised (84,380) $1.11-$2.69
Forfeited (54,900) $1.25-$3.94
- -------------------------------------------------------------
Outstanding - June 30, 1995 502,520 $1.11-$4.94
Granted 132,200 $9.75-$16.13
Exercised (19,640) $1.11-$3.94
Forfeited (5,200) $3.94
- -------------------------------------------------------------
Outstanding - June 30, 1996 609,880 $1.11-$16.13
- -------------------------------------------------------------
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Outstanding options at June 30, 1996, by expiration date are as follows:
Number of Shares Per Share
Expiration Dates Subject to Option Price Range
- -------------------------------------------------------------
May 1997 15,000 $ 1.11
May 1999 8,000 $ 3.69
May 2000 1,240 $ 2.69
August 2000 59,280 $ 1.83
February 2002 52,160 $ 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
August 2004 98,800 $ 2.69
November 2004 60,000 $ 4.00
December 2004 106,000 $ 3.94
February 2005 8,000 $ 4.94
June 2005 2,000 $16.13
December 2005 1,200 $10.63
February 2006 125,500 $ 9.88
May 2006 2,500 $15.25
- -------------------------------------------------------------
609,880
- -------------------------------------------------------------
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At June 30, 1996, options for 220,688 shares of common stock were exercisable.
Note J
INTERNATIONAL AND DOMESTIC OPERATIONS AND EXPORT SALES
Year Ended June 30,
($000) 1996 1995 1994
- ---------------------------------------------------------------------------------------------
Sales:
United States $ 37,244 $ 26,644 $ 18,640
International 13,204 11,158 6,070
Total $ 50,448 $ 37,802 $ 24,710
Sales or transfers between geographic areas:
United States $ 7,172 $ 5,847 $ 3,126
International 5,336 4,195 2,903
Total 12,508 10,042 6,029
Net sales $ 37,940 $ 27,760 $ 18,681
Operating income:
United States $ 3,975 $ 1,860 $ 135
International 1,717 1,440 783
Total operating income $ 5,692 $ 3,300 $ 918
Identifiable assets:
United States $ 39,478 $ 20,633 $ 14,521
International 4,691 3,734 3,049
Total assets $ 44,169 $ 24,367 $ 17,570
Sales to western Europe and Asia comprised the majority of total export
sales from the United States in 1996, 1995 and in 1994.
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Note K
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 $455,000 in 1996, $259,000 in 1995 and $70,000 in 1994. 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, 1996, 130,518 shares of common stock were available for purchase under the plan.
The Company has no program for postretirement health and welfare and postemployment benefits.
On June 21, 1996, the Board of Directors of the Company approved the II- VI Incorporated Deferred Compensation Plan (the "Plan"). The Plan is designed to allow officers and key employees of the Company to defer receipt of compensation into a trust fund for retirement purposes. The Plan is a nonqualified, defined contribution employees' retirement plan. At the Company's discretion, the Plan may be funded by the Company making contributions based on compensation deferrals, matching contributions and discretionary contributions. Compensation deferrals will be based on an election by the participant to defer a percentage of compensation under the Plan. All assets in the Plan are subject to claims of the Company's creditors until such amounts are paid to the Plan participants. There were no Company contributions to the Plan in fiscal 1996.
Note L
QUARTERLY STOCK INFORMATION (UNAUDITED)
II-VI Incorporated common stock high and low closing sales price as reported on the Nasdaq National Market:
1996 1995
High Low High Low
- --------------------------------------------------------------
First Quarter $ 23 $ 12 7/8 $ 3 1/4 $ 1 13/16
Second Quarter 18 9 1/2 4 3/8 3 7/16
Third Quarter 12 5/8 9 3/4 7 5/16 3 9/16
Fourth Quarter 16 7/8 11 5/8 13 7/8 6 5/16
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LIST OF SUBSIDIARIES OF II-VI INCORPORATED
II-VI Delaware, Inc. Delaware
II-VI Singapore Pte., Ltd. Singapore
II-VI Worldwide, Incorporated Barbados
II-VI Japan Incorporated Japan
II-VI Virgo Incorporated Pennsylvania
II-VI Lightning Optical Incorporated Pennsylvania
II-VI U.K. Limited United Kingdom
II-VI Optics (Suzhou) Co. Ltd. China
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CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in Registration Statements No. 33-19511, No. 33-38019, No. 33-19510 and No. 33-63739 on Form S-8 of our report dated August 12, 1996, appearing in this Annual Report on Form 10-K of II-VI Incorporated for the year ended June 30, 1996.
/s/ Alpern, Rosenthal & Company Pittsburgh, Pennsylvania September 23, 1996 |
| ARTICLE 5 |
| PERIOD TYPE | 12 MOS | 12 MOS |
| FISCAL YEAR END | JUN 30 1995 | JUN 30 1996 |
| PERIOD START | JUL 01 1994 | JUL 01 1995 |
| PERIOD END | JUN 30 1995 | JUN 30 1996 |
| CASH | 3,822 | 9,417 |
| SECURITIES | 0 | 0 |
| RECEIVABLES | 5,673 | 8,712 |
| ALLOWANCES | 261 | 246 |
| INVENTORY | 4,165 | 5,490 |
| CURRENT ASSETS | 14,084 | 24,655 |
| PP&E | 22,051 | 29,575 |
| DEPRECIATION | 12,159 | 14,490 |
| TOTAL ASSETS | 24,367 | 44,169 |
| CURRENT LIABILITIES | 5,212 | 7,968 |
| BONDS | 1,190 | 45 |
| PREFERRED MANDATORY | 0 | 0 |
| PREFERRED | 0 | 0 |
| COMMON | 4,485 | 17,055 |
| OTHER SE | 12,513 | 17,348 |
| TOTAL LIABILITY AND EQUITY | 24,367 | 44,169 |
| SALES | 27,760 | 37,940 |
| TOTAL REVENUES | 27,760 | 37,940 |
| CGS | 16,688 | 21,810 |
| TOTAL COSTS | 16,688 | 21,810 |
| OTHER EXPENSES | 7,628 | 10,069 |
| LOSS PROVISION | 0 | 0 |
| INTEREST EXPENSE | 57 | 41 |
| INCOME PRETAX | 3,387 | 6,020 |
| INCOME TAX | 869 | 1,649 |
| INCOME CONTINUING | 2,518 | 4,371 |
| DISCONTINUED | 0 | 0 |
| EXTRAORDINARY | 0 | 0 |
| CHANGES | 0 | 0 |
| NET INCOME | 2,518 | 4,371 |
| EPS PRIMARY | .48 | .70 |
| EPS DILUTED | 0 | 0 |