0000820318-01-500018.txt : 20011009 0000820318-01-500018.hdr.sgml : 20011009 ACCESSION NUMBER: 0000820318-01-500018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: II-VI INC CENTRAL INDEX KEY: 0000820318 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 251214948 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16195 FILM NUMBER: 1746404 BUSINESS ADDRESS: STREET 1: 375 SAXONBURG BLVD CITY: SAXONBURG STATE: PA ZIP: 16056 BUSINESS PHONE: 4123524455 MAIL ADDRESS: STREET 1: 375 SAXONBURG BLVD CITY: SAXONBURG STATE: PA ZIP: 16056 10-K 1 r10k-2001.txt FORM 10-K United States 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, 2001 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . --------- --------- Commission File Number: 0-16195 II-VI INCORPORATED (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1214948 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 375 Saxonburg Boulevard Saxonburg, PA 16056 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code: 724-352-4455 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value. Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] Aggregate market value of outstanding Common Stock, no par value, held by non-affiliates of the Registrant at September 10, 2001, was approximately $201,000,000 based on the closing sale price reported on the Nasdaq National Market for September 10, 2001. For purposes of this calculation only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates of the Registrant. Number of outstanding shares of Common Stock, no par value, at September 12, 2001, was 13,914,283. All share and per share information included in this Form 10-K reflects the two-for-one stock split effected on September 20, 2000. Documents Incorporated by Reference Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 2001 are incorporated by reference into Parts I, II and IV hereof. Portions of the Proxy Statement for the 2001 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. Our executive offices are located at 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056. Our telephone number is 724-352-4455. Reference to the "Company" or "II-VI" in this Form 10-K, unless the context requires otherwise, refers to II-VI Incorporated and its wholly-owned subsidiaries, II-VI Worldwide, Incorporated, II-VI Delaware, Incorporated, II-VI Japan Incorporated, II-VI Singapore Pte., Ltd., VLOC Incorporated, II-VI Optics (Suzhou) Co. Ltd., II-VI International Pte., Ltd., II-VI U.K. Limited, and Laser Power Corporation and its wholly-owned subsidiaries EMI Acquisition Corporation; Exotic Materials, Incorporated; Exotic Electro-Optics; Laser Power Optics de Mexico S.A. de C.V.; Laser Power Europe N.V.; and Laser Power FSC, Ltd.. eV PRODUCTS operates as a division of II-VI Incorporated. The Company's name is pronounced "Two-Six Incorporated." II-VI develops, manufactures and markets high technology materials and derivative products for precision use in industrial, medical, telecommunications, military and aerospace applications. We use advanced material growth technologies coupled with proprietary high precision fabrication, micro-assembly, and thin-film coating production processes. The resulting optical and optoelectronic devices are supplied to manufacturers and users of a wide variety of laser, detection, military and telecommunication components and systems. A key strategy is to develop and manufacture complex materials from elements of chemistry's periodic table. We focus on providing critical products to the heart of our customer's assembly lines for products such as high power laser material processing systems, fiber-optic telecommunication transmitters and receivers, military fire control and missile guidance, and advanced medical x-ray systems. We believe we are a market leader for high power carbon dioxide (CO2) and Yttrium Aluminum Garnet (YAG) laser optical elements, military infrared optical components, and x-ray and gamma-ray instrumentation for the nuclear radiation industry. The majority of our revenues are attributable to the sale of optical components for the industrial laser processing industry. Information Regarding Market Segments and Foreign Operations Our business comprises three segments: (i) the design, manufacture and marketing of optical and electro-optical components, devices and materials for infrared, near-infrared and visible-light instrumentation, (ii) the manufacture and marketing of x-ray and gamma- ray instrumentation and (iii) the Company's Laser Power Corporation subsidiary acquired in fiscal 2001. Financial data regarding our revenues, results of operations, industry segments and international sales for our last three fiscal years is set forth in, and incorporated herein by reference to, our Consolidated Statements of Earnings on page 23 of the II-VI Incorporated 2001 Annual Report (the "Annual Report") and Note J to the Company's Consolidated Financial Statements on pages 36 and 37 of the Annual Report. General Description of Business We develop, manufacture and market high technology materials and derivative products for precision use in industrial, medical, telecommunications, military and aerospace applications. We use advanced material growth technologies coupled with proprietary high precision fabrication, micro-assembly, and thin-film coating production processes. The resulting optical and optoelectronic devices are supplied to manufacturers and users of a wide variety of laser, detection, military and telecommunication components and systems. A key strategy is to develop and manufacture complex materials from elements of chemistry's periodic table. We focus on providing critical products to the heart of our customer's assembly lines for products such as high power laser material processing systems, fiber-optic telecommunication transmitters and receivers, military fire control and missile guidance and advanced medical x-ray systems. We believe we are a market leader for high power (CO2) and YAG laser optical elements, military infrared optical components, and x-ray and gamma-ray detectors for the nuclear radiation industry. Our United States production operations are located in Pennsylvania, Florida and California and our international production operations are based in Singapore, China, Mexico and Belgium. In addition to sales offices at each of our manufacturing sites, as well as, in Iowa, California and Massachusetts, we have sales and marketing subsidiaries in Japan and the United Kingdom. Approximately 37% of our revenues are for product sales outside of the United States. Our products are key optical and optoelectronic components used in the laser, military, nuclear radiation detection, and telecommunication industries. - Our laser-related products include laser gain materials for solid-state lasers and many of the high precision optical elements used to focus and direct laser beams to target or work surfaces. The majority of our laser products require advanced optical materials that are internally produced. Our vertical integration from material growth, through fabrication and thin- film coating provides us with a significant competitive advantage. - Our military infrared products include, targeting and navigation systems that utilize advance optical materials. The vertical integration of our manufacturing processes for these military applications provide us with a significant competitive advantage. - Nuclear radiation detector products are based on the semiconductor material Cadmium Zinc Telluride (CdZnTe). These detectors are attractive to customers due to the increased performance, reduced size, improved ruggedness and lower voltage requirements as compared to traditional technologies. - New products have been recently introduced for the telecommunications industry. These products, which are building blocks for next generation optical networks, demand the high precision and rigid metrology core competencies that have been developed for our laser product lines. We are at the forefront of advanced material growth research, development and high volume production. Over the past four years we have expanded our material growth development to include single crystal Silicon Carbide (SiC) for use in blue and green Light Emitting Diodes (LEDs), diode lasers and high performance electronics. Significant progress has been made in this relatively short development period and at the present time we are working closely with potential customers to qualify and further develop our products. Our Markets Our business is comprised of five markets: 1) Design, manufacture and marketing of optical and electro- optical components, devices and materials for infrared, near infrared and visible light lasers and instrumentation by our II-VI business units and VLOC subsidiary. 2) Manufacture and marketing of x-ray and gamma-ray solid-state radiation detectors and components for medical, industrial, environmental and scientific instruments by our eV PRODUCTS division. 3) Design, manufacture and marketing of infrared products for military applications and optical and electro-optical component devices for infrared lasers by our Laser Power Corporation subsidiary acquired in fiscal 2001. 4) Production of micro-fabricated and micro-assembled devices for telecommunications. 5) Development of single crystal growth and fabrication of Silicon Carbide (SiC) substrates for use in the manufacture of high temperature electronics and blue and green high brightness LEDs. Our reportable segments, in accordance with Statement of Financial Accounting Standards No. 131, ''Disclosures About Segments of an Enterprise and Related Information,'' currently are optical components (which encompasses markets 1, 4 and 5 above), radiation detectors (which is market 2 above) and the Company's Laser Power Corporation subsidiary (which is market 3 above). Laser Components Market. In recent years, increases in laser component consumption have been driven by continued worldwide proliferation of laser processing applications. Manufacturers are seeking solutions to increasingly complex 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 prototyping, production simplification, efficient sequencing, and computer control on high throughput production lines. Manufacturers of recreation vehicles, motorcycles, lawn mowers and garden tractors cut, trim and weld metal parts with lasers to achieve flexibility, high consistency, reduced post processing and lower costs. Furniture manufacturers utilize lasers to provide easily reconfigurable, low-distortion, low-cost prototyping and production capabilities that facilitate the manufacturing of customer specified designs. On high-speed processing lines, laser marking provides automated date coding for food packaging and computer driven container identification for pharmaceuticals. We provide optical elements and components for both CO2 and YAG laser systems. In addition to use by original equipment manufacturers (OEMs), a replacement part aftermarket exists in support of an estimated current worldwide installed base of over 100,000 industrial YAG and CO2 lasers. Solid-State Radiation Detection Market. Solid-state radiation detectors and components are sold primarily to companies engaged in the manufacture of medical diagnostic, medical imaging or industrial gauging equipment. In an increasing number of applications, the use of gamma- or x-ray radiation enables more rapid and accurate measurement of medical conditions or industrial quality than can be observed by other methods. Solid-state detectors based on CdZnTe are making inroads against older, more established technologies such as cryogenically cooled germanium detectors or sodium iodide scintillators coupled to photomultiplier tubes. CdZnTe detectors have already been substituted for the older technologies in applications where increased accuracy, simpler operation, portability and lower cost are required. CdZnTe is beginning to enable new medical and industrial applications not feasible with the older technologies and is used routinely in cancer probes, bone densitometry systems and process control instruments. We believe the annual market for all solid-state radiation detectors is currently over $250 million and growing at 10% per year. Digital radiography (the recording of digital x-ray images) represents the largest market segment followed in order by nuclear medicine (the detection or imaging of radioactively tagged materials in the body), industrial gauging, radiation monitoring and nuclear safeguards/non- proliferation. Presently, we believe that the CdZnTe addressable market has grown to over $50 million of the over $250 million solid- state radiation detector market. During the next several years, the performance of CdZnTe and other solid-state detectors will be improved through additional research and development, creating the potential for digital imaging to replace x- ray film in a myriad of traditional radiography applications. We believe that the market for CdZnTe detectors and imagers will grow faster than the overall market rate of 10% because of several factors, including: - the strong migration toward ''film-less'' detection methods that enable the direct recording of digital images or videos which can be stored, recalled and transmitted via the Internet; - the desire for lower radiation dosage; - the desire for simpler and safer operation at room temperature; - the increasing requirement that equipment be ''intrinsically safe'' in environments where a spark might start a fire; - the general trend towards equipment miniaturization; and - the need to inspect, document and control quality at additional points within the manufacturing process in a wide range of industries; for example, the measurement and control of film thickness during the painting of automobile bodies. Equipment manufacturers increasingly desire to procure fully tested, packaged components rather than devices that must be qualified and assembled. We believe that this trend will require leading suppliers to provide products containing ever-higher levels of signal processing and, as a result, the market will place high value on suppliers having strong applications engineering capabilities and a focus on customer relationships. Military Infrared Optics Market. The military infrared optics market is comprised of a demand for several critical products primarily windows, window assemblies and domes. Windows and window assemblies are utilized in thermal imaging systems that provide night vision, targeting, and navigation systems. These systems are installed in various platforms, including ground vehicles, helicopters and fixed- wing aircraft. Domes are utilized as a protective cover for infrared guided missiles. Missile sizes range from small, man-portable designs to larger designs mounted on ground vehicles, helicopters and fixed- wing aircraft. These infrared optics products are sold primarily to the U.S. government and its prime contractors for use in night vision, thermal imaging and guidance systems. Currently, the demand for military optics is being driven by upgrades to existing platforms such as the F-16 and F-18 fighter aircraft and the introduction of high performance/lower cost mid-wave infrared sensors. This complements the current market of long-wave infrared optical products that we have traditionally produced while providing additional growth. Demand for mid-wave infrared optical components from materials such as sapphire, ALON and Spinel will likewise increase to meet this demand. The U.S. government is directing several research and development programs to field defensive anti-missile systems using laser technology. These programs include the Air Borne Laser (ABL) and Space Borne Laser (SBL) programs. These programs require high performance coatings that must withstand extremely high laser energies and must be reliably coated onto large aperture optics including windows, domes and mirrors. Funding for these programs is increasing and is likely to play a much larger role in the defense budget in coming years. Soon ground- based laser energy projection systems will receive additional funding to further the development of the Starfire Optical Range (SOR) and the Nd:YAG lasers used in those systems. Telecommunications Components. In recent years increases in demand for multimedia information, entertainment, and voice and data communications have resulted in a corresponding increase for greater bandwidth. This has resulted in an increase in fiber-optic network deployment, which subsequently has created increased demand for precision telecommunication optical components. Optical and opto-electronic materials are fabricated into telecommunication elements such as: - Waveplates - Air Gap Etalons - Prisms - Mirror Blocks - Filter Taps - Polarization Rotators In telecommunication systems certain optical components help lock the laser output wavelength to the proper channel on the telecommunication system's grid. Other optical components function as an isolator, which is a device that ensures that laser light in a fiber optic is not directed back into the source of transmission. Another component such as a prism functions as an optical multiplexer. Silicon Carbide Electronic Materials Market. Silicon carbide is a wide band gap semiconductor material that offers high-temperature, high-power and high-frequency capabilities in applications that are rapidly emerging at the high-performance end of the optoelectronic, telecommunication, power distribution and transportation markets. Silicon carbide has certain inherent physical and electronic advantages over competing materials such as silicon and gallium arsenide, including the ability to operate at up to 400 degrees Centigrade (750 degrees Fahrenheit) and the capability to conduct heat away from operating devices up to twice as fast. Typically, either silicon carbide or gallium nitride layers are deposited on a silicon carbide or alternative substrate and desired optoelectronic or electronic devices are fabricated in the resulting material structure. Silicon carbide based structures are being developed and deployed for the manufacture of a wide variety of microwave and power switching devices while gallium nitride based structures are already standard in the manufacture of blue and green light emitting diodes and blue laser diodes. We believe that wide band gap semiconductor devices incorporating silicon carbide materials technology will penetrate a wide range of applications in the optoelectronic, telecommunication, power distribution and transportation markets during the next decade. For instance, blue and green LEDs built on silicon carbide substrates offer the promise of higher output power than devices currently built on less expensive but thermally insulating sapphire substrates. The realization of this promise will establish silicon carbide substrates as an important building block in high brightness computer driven signs or displays, in high brightness automotive lighting and in the replacement of incandescent and eventually fluorescent lighting by high power, high efficiency solid-state lamps. High power, high frequency silicon carbide microwave devices promise to rival gallium arsenide devices in telecommunication base station transmitters and silicon devices in both commercial and military air traffic radar applications. Silicon carbide high power, high-speed switching devices promise to improve the performance and reliability of motor controls in a wide variety of applications and could play a key role in the evolution of the electric car. Our Strategy Our strategy is to build businesses with world-class, high technology materials capabilities at their core. The following current business activities follow this model: CO2 and infrared optics based on Zinc Selenide (ZnSe) and Zinc Sulfide (ZnS), near infrared and visible laser components based on YAG and Yttrium Lithium Fluoride (YLF), and solid-state radiation detectors based on CdZnTe. Consistent with this strategy, our initiative to enter the optoelectronic and electronic substrates business is predicated on the establishment of Silicon Carbide (SiC) capabilities. In every case, we subsequently manufacture precision parts and components from these materials using established but evolving expertise in low damage surfacing and micro fabrication, thin-film coating, and exacting metrology. A substantial portion of our business is based on long-term contracts with market leaders, which enables substantial forward planning and production efficiencies. In addition, industry leading product quality and delivery performance allows us to achieve comparatively high operating margins in major segments of our business. We intend to capitalize on the execution of this proven model and continually gain market share for laser optics and components, telecommunication devices, solid-state radiation detectors, and optoelectronic/electronic materials and substrates. - Continue Investment to Gain CO2 and YAG Market Share Worldwide. We continually invest in our manufacturing operations worldwide to increase production capacity. - Enhance Our Reputation as a Worldwide Quality and Customer Service Leader. We are committed to understanding our customers' needs and exceeding their expectations. We have established ourselves as a consistent high quality supplier of components into our customers' assembly lines. In many cases we deliver on a just in time (JIT) basis. We believe our on-time delivery record and product return rates are the best in the industries we serve. Our quality mission statement is, ''We pledge to exceed our internal and external customer requirements through employee dedication to continuous improvement.'' - Pursue Strategic Acquisitions and Alliances. Some of the markets we participate in remain fragmented and we expect consolidation to occur over the next several years. We will pursue strategic acquisitions and alliances with companies whose products or technologies compliment our current products, expand our market coverage, increase our addressed market or create synergies with our current capabilities. We intend to identify acquisition opportunities that accelerate our access to emerging high growth segments of the markets we serve. - Pursue Military Infrared Systems Programs. We believe our Laser Power Corporation subsidiary is a leading supplier of optics for military infrared systems. The Exotic Electro-Optics (EEO) subsidiary of Laser Power Corporation is committed to capturing new military contracts and currently has significant contracts in place with every major military prime contractor. The recent completion of our Large Optics Coating Facility (LOCF) will enable us to pursue the increased U.S. government defense funding for programs directed towards defensive anti- missile systems using laser technology. This facility is unique in the industry placing itself as one of the few coating laboratories to provide high performance coatings that must withstand extremely high laser energies. Laser Power has several proprietary coatings that are the enabling technology for these systems. - Continue Extension of Technology Leadership in the Gamma- and X- ray Detector Field. We believe our eV PRODUCTS division is the leader in the manufacture of solid-state gamma- and x-ray detector devices and components. Cadmium Zinc Telluride (CdZnTe) handheld probes in the medical field allow the introduction of new cancer location techniques. CdZnTe based imaging arrays are being introduced in nuclear medicine. CdZnTe is being developed for direct read digital radiography, which will allow a physician to view relevant parts of the body in real time using a fraction of the x-ray dose required with film. Our eV PRODUCTS division is working on these medical applications with market leaders worldwide. The high pressure Bridgman growth process for producing CdZnTe is a materials expertise unique to the Company. - Utilize Proven Materials Growth Expertise to Perfect Silicon Carbide (SiC). We are a proven provider of hard to grow materials and opto-electronic crystals. We intend to leverage our skills and experiences in commercially producing ZnSe, ZnS, CdZnTe, YAG and YLF to move rapidly forward with our SiC development program. We intend to gain market share and become the reliable second source of SiC substrates to the worldwide marketplace in the next three years. We will utilize our low damage fabrication experience and exacting metrology in achieving this position. - Extend Proven Fabrication, Thin-Film Coating, Assembly and Exacting Metrology Capabilities to Telecommunications Components. We are a respected supplier of waveplates, etalons, frequency doublers and other highly precise components to the YAG laser and related markets. We have recently extended our high accuracy fabrication, thin-film coating, assembly and exacting metrology expertise to the manufacture of the passive components such as: micro-waveplates, miniature air-gap etalons and micro-prisms that are critical to the performance of the receivers, transmitters and add-drop modules being deployed in the rapid expansion of fiber optic networks. We have established a stand-alone facility in Florida for the production of telecommunications products and will closely monitor market place demand positioning ourselves to enable us to respond quickly to changes in market place demand. Our Products Our products include optical, optoelectronic and electronic materials, devices and components for use in laser, detection, military telecommunication and advanced electronic and optoelectronic applications. These products are sold to laser system manufacturers and end-users, military laser system and defense suppliers manufacturers of nuclear radiation detection systems and component suppliers to the telecommunications, optoelectronic and electronic industries. Laser Components. We supply a broad line of precision optical components such as lenses, waveplates, and mirrors to the CO2 laser market. CO2 lasers are used in a wide variety of industrial processes including cutting, welding, drilling, marking and heat treating of materials such as steel alloys, non-ferrous metals, plastics, wood, paper, fiberboard, ceramics and composites. CO2 lasers are also used in cosmetic and invasive medical surgery. Our precision optical components are used to regulate the amount of laser energy, enhance the properties of the laser beam, and focus and direct laser beams to a target work surface. The optical components include both reflective and transmissive optics and are made from materials such as ZnSe, Copper, Silicon and Germanium. Transmissive optics used with CO2 lasers are predominately made from ZnSe. We are the largest manufacturer in the world of ZnSe providing us with a significant cost advantage. We believe our ZnSe production capability, high precision fabrication operations and proprietary thin-film coating technology has earned us a reputation as the quality leader in this world market. Additionally, we supply replacement optics (under the trade name of INFRAREADY) (trademark) and refurbishing services to end users of CO2 lasers. Over time optics may become contaminated and must be replaced to maintain efficient laser operations. This aftermarket portion of our business continues to grow as laser applications proliferate worldwide. Key materials and precision optical components for YAG and other solid-state laser systems are part of our product offering. The increasing power levels and reduced operating costs of evolving YAG laser systems are enabling this technology to address new applications. YAG lasers are now used in high power application such as cutting, welding, marking and date coding. Additionally, YAG laser energy can be delivered through optical fibers, which provides high flexibility beam delivery systems. We supply a family of standard and custom laser gain materials and optics for industrial, medical, scientific and research YAG lasers. Our YAG laser gain materials are produced to stringent industry specifications and precisely fabricated into rods or slabs. We also refurbish YAG rods for YAG laser end users. Additionally, we offer waveplates, polarizers, lenses, prisms and mirrors for visible and near-infrared applications which are used to control or alter visible or near-infrared energy and its polarization. Solid-State Radiation Detectors. We design, manufacture and market CdZnTe room temperature, solid-state radiation detectors combined with custom designed low noise front-end electronics. New and expanding applications in industry, medicine and research are fueling increased demand for our products. Our solid-state CdZnTe nuclear radiation detectors are attractive because of their reduced size, improved ruggedness, and lower voltage requirements as compared to traditional detectors based on scintillator/photomultiplier or cooled germanium technologies. CdZnTe-based imaging arrays can be used in both nuclear medicine (internally emitted gamma-rays) and radiography (x-rays from an external source). In nuclear medicine, CdZnTe makes feasible a new generation of gamma cameras, offering much improved position sensitivity and the ability to produce images using lower doses of injected radioactivity. In radiography, higher density CdZnTe can provide much improved sensitivity to the higher x-ray energies used in some of the newer diagnostic techniques. Direct-read digital radiography cameras are being developed which, if successful, will allow the physician to view the relevant part of the body in real time, reducing the time required for diagnosis. Military Infrared Optics. We produce optics for military infrared systems including thermal imaging, night vision, targeting, and navigation systems. These optics comprise missile domes, electro- optical windows and assemblies and imaging lenses and filters. Our precision optical products utilize optical materials consisting of zinc selenide, zinc sulfide, germanium, silicon, sapphire, AMTIR, ALON, and Spinel. The vertical integration of our manufacturing gives us a unique capability to design, fabricate, coat, and assemble these complex systems in-house. These products are currently utilized on the M1 tank, Bradley fighting vehicle, Apache Helicopter, F-14, F-16, A-6 military aircraft, and others as well as future platforms including the Comanche Helicopter and Joint Strike Fighter (JSF). Research, Development and Engineering Our research and development policy calls for the pursuit of a program of internally funded and contract research and development totaling between 5 and 8 percent of product sales. From time to time the ratio of contract to internally funded activity varies significantly due to the unevenness and uncertainty associated with most government research programs. We are committed to accepting only funded research that ties closely to our growth plans. We devote significant resources to research, development and engineering programs directed at the continuous improvement of existing products and processes and to the timely development of new technologies, materials and products. We believe that our research, development and engineering activities are essential to our ability to establish and maintain a leadership position in each of the markets that we serve. As of June 30, 2001 we employed 142 people in research, development and engineering functions. Ninety-two of our 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. During the past year, we have made focused investments in: - Silicon Carbide Substrate Technology: We presently have several crystal growth furnaces producing silicon carbide ingots at our Pennsylvania manufacturing facility. In addition, ingot slicing and substrate polishing facilities are in place and qualification products are being sampled to key customers. - Large Diameter YAG Manufacturing: Our research and development activities in this area are focused on producing materials that will accelerate the evolution of kilowatt-class YAG lasers. Achievements in process control and reliability are rapidly transferred into production at our New Port Richey, Florida manufacturing facility, largely due to effective teamwork and crossover between our development and manufacturing personnel. - Telecommunication Device Development: We have developed microfabrication, thin-film coating and metrology techniques to enable the manufacture of several new devices of high interest to telecommunication customers. - High Performance CdZnTe Materials: The marketplace success of eV PRODUCTS depends on our capability and capacity to produce radiation detectors with ever-higher sensitivity, resolution and efficiency at lower cost. Key advancements have been achieved and will continue to be sought in the production of larger single crystal ingots as well as in the fabrication techniques for the manufacture of monolithic arrays of closely spaced detectors. As improved performance is indicated, new applications and market potential are opened to CdZnTe products. The development of our products and processes is largely based on proprietary technical know-how and expertise. We rely on a combination of contract provisions and trade secret laws to protect our proprietary rights. We intend, however, to protect our rights when they are, in our view, infringed. Research, development and engineering expenditures were $8,118,000, $4,040,000 and $3,358,000 for the fiscal years ended June 30, 2001, 2000 and 1999, respectively. For these same periods, the customer and government funded portions of these expenditures were $5,083,000, $1,651,000 and $1,436,000. Marketing and Sales We market our products through a direct sales force in North America, Japan, Southeast Asia, Belgium and the UK, and through representatives and distributors elsewhere in Europe, Asia, and South America. Our market strategy is focused on building market awareness and acceptance of our products. New products are constantly being produced and sold to our established customers in the laser component market places. Each of our product lines is responsible for their own worldwide marketing and sales functions, as follows: 1) The laser component businesses share many common customers and sell through our subsidiaries II-VI Japan and II-VI UK as well as through a common distributor in most of Europe. 2) The Laser Power Corporation subsidiary marketing and sales responsibility is handled through a direct sales force in the United States and Belgium as well as through its distributors primarily in Japan and Europe. 3) The eV PRODUCTS marketing and sales initiative is handled through a direct sales force in the US coupled with manufacturers' representatives. An array of distributors and representatives are used throughout the rest of the world. 4) The telecommunications business unit shares its marketing with our VLOC subsidiary. 5) The management and technical staff work closely with potential customers providing samples and deliverable products from our wide band gap wafer materials activities in SiC. Our sales force develops close relationships with our OEM customers worldwide. All divisions actively market their products through targeted mailings, telemarketing, select advertising and attendance at trade shows. Our sales force includes a highly trained team of application engineers to assist customers in designing, testing and qualifying our parts as key components of our customers' systems. As of June 30, 2001, we employed 64 individuals in sales, marketing and support. Manufacturing Technology and Processes A majority of the products we produce depend on our ability to manufacture difficult optical, opto-electronic or electronic materials. The table below shows these key materials and the processes used to produce them. Product Line Materials Produced Growth Process Utilized -------------------- ------------------ -------------------------- - Laser Components ZnSe and ZnS Chemical Vapor Deposition - Laser Components YAG and YLF Czochralski - SolidState Detectors CdZnTe High Pressure Bridgman and Conventional Bridgman - SiC Substrates SiC Physical Vapor Transport and Axial Gradient Transport The ability to produce these difficult materials and to control the quality and yields is an expertise of II-VI. Processing of these materials into finished products is difficult to accomplish; yet the quality and reproducibility of these products are critical to the performance of our customer's instruments and systems. In the markets we serve there are a limited number of suppliers of many of the components we manufacture. The network of our worldwide manufacturing sites allows products to be produced in the most cost-effective area of the world. We believe our cost to produce our infrared and near infrared components are the lowest among all competitors. We employ numerous advanced manufacturing technologies and systems in all product-manufacturing facilities. These include automated CNC optical fabrication, high throughput thin-film coaters, micro precision metrology and custom- engineered automated furnace controls for the crystal growth processes. Producing products for use across the electromagnetic spectrum requires the capabilities to repeatedly produce products with high yields to tolerances in the nanometer range. We embody a technology and quality mindset that gives our customers the confidence to utilize our products in a just in time basis straight into the heart of their production lines. Sources of Supply The major raw materials we use are Zinc, Selenium, Hydrogen Selenide, Hydrogen Sulfide, Cadmium, Tellurium, Yttrium Oxide, Aluminum Oxide and Iridium. We produce virtually all of our Zinc Selenide requirements internally, although small quantities of Zinc Selenide may be purchased from outside vendors from time to time. We also purchase Zinc Sulfide, Gallium Arsenide, Copper, Silicon, Germanium, Quartz, optical glass and small quantities of other materials for use as base materials for laser optics. We purchase Thorium Fluoride and other materials for use in optical fabrication and coating processes. There are more than two external suppliers for all of the above materials except for Zinc Selenide, Zinc Sulfide, Hydrogen Selenide and Thorium Fluoride, for each of which there is only one proven source of merchant supply. For most materials, we have entered into annual purchase arrangements whereby suppliers provide discounts for annual volume purchases in excess of specified amounts. The continued high quality of these materials is critical to the stability of our manufacturing yields. We conduct 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. We have not experienced significant production delays due to shortages of materials. However, we do occasionally experience problems associated with vendor supplied materials not meeting contract specifications for quality or purity. A significant failure of our suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a materially adverse effect on our results of operations. Customers Our customer base for our laser component products consists of over 5,000 customers worldwide. The three main groups of customers for our laser component products are as follows: - Leading original equipment manufactures and system integrators of high power industrial, medical and military laser systems, - Laser end users who require replacement optics for their existing laser systems, and - Scientific and military customers, including the U.S. military and its allies, for use in advanced targeting, navigation and infrared imaging systems. For our solid-state radiation detector products, our customers are manufacturers of equipment and devices for industrial process control, nuclear medicine, x-ray imaging, environmental monitoring, nuclear safeguards and nonproliferation, and health physics. We are currently dependent on a limited number of key customers for this product line. For our telecommunications component products, our customers are telecommunication companies who utilize our products as discrete optical elements for active and passive components for frequency stabilization, DWDM (dense wavelength division multiplexing) applications and optical networking. We are currently dependent on a limited number of key customers for this product line. Our silicon carbide electronic materials product sales to date have been limited and we do not have an established customer base for this product line. Competition We believe that we are a leading producer of products and services in our addressed markets. In the area of commercial infrared laser optics and materials, we believe we are an industry leader. We are a leading supplier of infrared optics used in complex military assemblies for targeting, navigation and thermal imaging systems to every major military prime contractor. We are a leading supplier of CdZnTe substrates and devices for x-ray and gamma-ray detectors and components. We are a significant supplier of YAG rods and YAG laser optics to the worldwide markets of scientific, research, medical and industrial laser manufacturers. We compete on the basis of product quality, delivery time, strong technical support and pricing. Management believes that we compete favorably with respect to these factors and that our vertical integration, manufacturing facilities and equipment, experienced technical and manufacturing employees, and worldwide marketing and distribution provide competitive advantages. We have a number of present and potential competitors, many of which have greater financial, selling, marketing or technical resources. A competitor of our production of ZnSe is a division of Rohm and Haas Co. The competitors producing infrared and CO2 laser optics include Coherent in the United States and Sumitomo in Japan, as well as several companies producing limited quantities of infrared and CO2 laser optics. Competing producers of YAG materials and optics include the Litton Airtron Division of Litton Industries and a division of Saint-Gobain. Competing producers of infrared optics for military applications are in-house fabrication and thin film coating capabilities of major military prime contractors, such as Raytheon Corporation. Competing producers of CdZnTe and CdZnTe detectors include Acrorad in Japan and Imarad in Israel. In addition to competitors who manufacture products similar to those we produce, there are other technologies or materials that may compete with our products. The market for the nuclear radiation detector materials is in its infancy and could be affected by competing technologies. Bookings and Backlog We define our bookings during a fiscal period as incoming orders believed to be deliverable to customers in the next twelve months net of any order cancellations. Certain long-term research and development contracts exceeding twelve-month may be booked in their entirety, but in no event would exceed twenty-four months. For the year ended June 30, 2001, our bookings were $132.7 million compared to bookings of $83.0 million for the year ended June 30, 2000. We believe that the increase in bookings reflects continued acceptance of our products over competing technologies and vendors and shows that our customers desire our high quality products delivered in a timely manner and the acquisition of Laser Power Corporation. We define our backlog as customer orders available for shipment in the next twelve months and certain long-term research and development contracts not exceeding twenty-four months as of the end of the fiscal period. As of June 30, 2001, our backlog was $44.7 million compared to $27.2 million at June 30, 2000. The increase in backlog is primarily reflective of higher bookings during fiscal year 2001 and the acquisition of Laser Power Corporation. Employees As of June 30, 2001, we employed 1,158 persons worldwide. Of these employees, 142 were engaged in research, development and engineering, 800 in direct production and the balance in sales and marketing, administration, finance and support services. Our production staff includes highly skilled optical craftsmen. None of our employees are covered by a collective bargaining agreement, and we have never experienced any work stoppages. We have a long-standing policy of encouraging active employee participation in selected areas of operations management. We believe our relations with our employees to be good. We reward our employees with incentive compensation based on achievement of performance goals. Patents, Trade Secrets and Trademarks We rely on our trade secrets and proprietary know-how to develop and maintain our competitive position. We have not pursued process patents due to the disclosures required in the patent process and the relative difficulties in successfully litigating process-type patents. We have confidentiality and noncompetition agreements with our executive officers and certain other personnel. The processes and specialized equipment utilized in crystal growth, infrared materials fabrication and infrared optical coatings as developed by us 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 our 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 our technology. We may be required to obtain licenses under such patents, and there can be no assurance that we 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 our results of operations. In addition, our 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. We hold six registered trademarks: the II-VI INCORPORATED (trademark) name; INFRAREADY OPTICS (trademark) for replacement optics for industrial CO2 lasers; EPIREADY (trademark) for low surface damage substrates for Mercury Cadmium Telluride epitaxy; and eV PRODUCTS (trademark) for products manufactured by our eV PRODUCTS division; LASER POWER CORPORATION (trademark) name; MP-5 (trademark) for low absorption coating technology. The trademarks are registered with the United States Patent and Trademark Office, but not with any states. We are not aware of any interference or opposition to these trademarks in any jurisdiction. RISK FACTORS We Depend on Highly Complex Manufacturing Processes Which Require Products from Limited Sources of Supply We utilize high quality, optical grade ZnSe in the production of a majority of our products. We are a leading producer of ZnSe for our internal use and for external sale. The production of ZnSe is a complex process requiring production in a highly controlled environment. A number of factors, including defective or contaminated materials, could adversely affect our ability to achieve acceptable manufacturing yields of high quality ZnSe. ZnSe is available from only one outside source where quantity and qualities may be limited. The unavailability of necessary amounts of high quality Zinc Selenide would have a material adverse effect upon us. In addition, in fiscal 1992 and 1993, we experienced fluctuations in our manufacturing yields which affected our results of operations. There can be no assurance that we will not experience manufacturing yield inefficiencies which could have a material adverse effect on our business, results of operations or financial condition. We produce Hydrogen Selenide gas which is used in our production of Zinc Selenide. There are risks inherent in the production and handling of such material. Our inability to effectively handle Hydrogen Selenide could require us to curtail our production of Hydrogen Selenide. Hydrogen Selenide can be obtained from one outside source. The cost of purchasing such material is significantly greater than the cost of internal production. As a result, purchasing a substantial portion of such material from the outside source would significantly increase our production costs of Zinc Selenide. Therefore, our inability to internally produce Hydrogen Selenide could have a material adverse effect on our business, results of operations or financial condition. In addition, we utilize other high purity, relatively uncommon materials and compounds to manufacture our products. Failure of our suppliers to deliver sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on our business, results of operations or financial condition. Our Business is Dependent on Other Cyclical Industries Our business is significantly dependent on the demand for products produced by end users of industrial lasers. Many of these end users are in industries that historically have experienced a highly cyclical demand for their products. Therefore, as a result, demand for our products and our results of operations are subject to cyclical fluctuations. Our Revenues are Subject to Potential Seasonal Fluctuations Due to our customers' buying patterns, particularly in Europe, revenues for our first fiscal quarter ending in September could be below those in the preceding quarter. Our first fiscal quarter results often are dependent upon the sales made in the last month of the quarter. We May Encounter Substantial Competition We may encounter substantial competition from other companies in the same market, including established companies with substantial resources. Some of our competitors may have financial, technical, marketing or other capabilities more extensive than ours and may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not be able to compete successfully against our present or future competitors, and competition may adversely affect our business, financial condition or operating results. International Sales Account for a Significant Portion of Our Revenues Sales to customers in countries other than the United States accounted for approximately 37%, 49% and 47% of revenues during the years ended June 30, 2001, 2000 and 1999, respectively. We anticipate that international sales will continue to account for a significant portion of our revenues for the foreseeable future. In addition, we manufacture products in Singapore and China and maintain direct sales offices in Japan, the UK and Belgium. 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 our business, financial condition or results of operations. In particular, although our international sales, other than in Japan, Belgium and the UK, are denominated in U.S. dollars, currency exchange fluctuations in countries where we do business could have a material adverse affect on our business, financial condition or results of operations, by rendering us less price-competitive than foreign manufacturers. Our sales in Japan are denominated in yen and, accordingly, are affected by fluctuations in the dollar/yen currency exchange rates. We generally reduce our exposure to such fluctuations through forward exchange agreements. We do not engage in the speculative trading of financial derivatives. There can be no assurance, however, that our practices will reduce or eliminate the risk of fluctuation in the dollar/yen currency exchange rate. Our Revenues May Suffer if General Economic Conditions Worsen Our revenues and earnings may be affected by general economic factors, such as excessive inflation, currency fluctuations and employment levels, resulting in a temporary or longer-term overall decline in demand for our products. Therefore, any significant downturn or recession in the United States or other countries could have a material adverse effect on our business, financial condition and results of operations. We May Expand Product Lines and Markets by Acquiring Other Businesses Our business strategy includes expanding our 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 a material adverse affect on our 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. In fiscal 1995 we acquired the Virgo Optics Division of Sandoz Chemicals Corporation. In fiscal 1996 we acquired Lightening Optical Corporation. Subsequently, these acquisitions were combined to form our VLOC subsidiary. In fiscal 2001 we acquired Laser Power Corporation. Our Success Depends on New Products and Processes In order to meet our strategic objectives, we must continue to develop, manufacture and market new products, develop new processes and improve existing processes. As a result, we expect 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 our business. Our success 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 we will be able to develop and introduce new products or enhancements to our 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 our ability to grow our business. Failure to Keep Pace with Industry Developments May Adversely Affect Our Operations We are engaged in industries which will be affected by future developments. The introduction of products or processes utilizing new developments could render existing products or processes obsolete or unmarketable. Our continued success will depend upon our ability to develop and introduce on a timely and cost-effective basis new products, processes and applications that keep pace with developments and address increasingly sophisticated customer requirements. There can be no assurance that we will be successful in identifying, developing and marketing new products, applications and processes and product or process enhancements, that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of product or process enhancements or new products, applications or processes, or that our products, applications or processes will adequately meet the requirements of the marketplace and achieve market acceptance. Our business, results of operations and financial condition could be materially and adversely affected if we were to incur delays in developing new products, applications or processes or product or process enhancements or if we did not gain market acceptance. Exposure to Government Markets With the acquisition of Laser Power Corporation, sales to customers in the defense industry have increased. These customers in turn generally contract with a governmental entity, typically the U.S. government. Most governmental programs are subject to funding approval and can be modified or terminated with no warning upon the determination of a legislative or administrative body. The loss or failure to obtain certain contracts or a loss of a major government customer could have a material adverse effect on our business, financial condition and results of operations. Our Success Depends on the Ability to Retain Key Personnel We are highly dependent upon the experience and continuing services of certain scientists, engineers, production and management personnel. Competition for the services of these personnel is intense, and there can be no assurance that we will be able to retain or attract the personnel necessary for our success. The loss of the services of our key personnel could have a material adverse affect on our business, results of operations or financial condition. There Are Limitations on the Protection of Our Intellectual Property We do not currently hold any material patents applicable to our processes and rely on a combination of trade secret, copyright and trademark laws and employee non-competition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps taken by us will be adequate to prevent misappropriation of our technology. Furthermore, there can be no assurance that, in the future, third parties will not assert infringement claims against us. Asserting our rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting our business, results of operations or financial condition. In the event a third party were successful in a claim that one of our processes infringed its proprietary rights, we 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 our business, results of operations or financial condition. Our European Sales Rely On A Single Distributor A significant portion of our European sales not made by our subsidiaries in the UK and Belgium have been made through a European distributor. This distributor also provides service and support to the end users of our products. Thus, a reduction in the sales efforts of this distributor could adversely affect our European sales and our ability to support the end users of our products. There can be no assurance that this distributor will continue to distribute, or to distribute successfully, our products and, in such an event, our business, results of operations and financial earnings could be materially and adversely affected. Our Stock Price May Fluctuate Future announcements concerning us, our competitors or customers, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by us or our competitors, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding our industries in the financial press or investment advisory publications, among other factors, could cause the market price of our stock to fluctuate substantially. In addition, stock prices may fluctuate widely for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military conflicts or market or market- sector declines, may materially and adversely affect the market price of our common stock. In addition, any information concerning us, including projections of future operating results, appearing in investment advisory publications or on-line bulletin boards or otherwise emanating from a source other than us could in the future contribute to volatility in the market price of our common stock. We Have Adopted Antitakeover Devices Which May Limit the Price that Certain Investors May be Willing to Pay in the Future for Shares of Our Common Stock Our articles of incorporation, by-laws and shareholder rights plan contain provisions which could make us a less attractive target for a hostile takeover or make it more difficult or discourage a merger proposal, a tender offer or a proxy contest. This could limit the price that certain investors might be willing to pay in the future for shares of our common stock. The provisions include: - classification of the board of directors into three classes; - a procedure which requires shareholders or the board of directors to nominate directors in advance of a meeting to elect such directors; - the ability of the board of directors to issue additional shares of common stock or preferred stock without shareholder approval; and - certain provisions requiring supermajority approval (at least two-thirds of the votes cast by all shareholders entitled to vote thereon, voting together as a single class). - a formal shareholder rights plan designed to protect all corporate interests in the event the Company's Board of Directors and shareholders are confronted with an abusive or unfair takeover attempt. In addition, the Pennsylvania Business Corporation Law contains provisions which may have the effect of delaying or preventing a change in our control. We Are Subject to Stringent Environmental Regulation We use or generate certain hazardous substances in our research and manufacturing facilities. We believe that our handling of such substances is in material compliance with applicable local, state and federal environmental, safety and health regulations at each operating location. We invest 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. We annually conduct 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. We do not carry environmental impairment insurance. Relative to its generation and use of the extremely hazardous substance Hydrogen Selenide, we have in place an emergency response plan. Special attention has been given to all procedures pertaining to this gaseous material to minimize the chances of its accidental release to the atmosphere. With respect to the production, use, storage and disposal of the low-level radioactive material Thorium Fluoride, our facilities and procedures have been inspected and licensed by the Nuclear Regulatory Commission. This material is utilized in our thin-film coatings. Thorium bearing by-products are collected and shipped as solid waste to a government-approved low-level radioactive waste disposal site in Clive, Utah. 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 us to be in material compliance with regulations. We believe that all of the permits and licenses required for operation of our business are in place. Although we do not know 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 us. Some Laser Systems Are Complex in Design and May Contain Defects that Are Not Detected Until Deployed Which Could Increase Our Costs and/or Reduce Our Revenues Laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of lasers, laser products and systems involves a highly complex and precise process. As a result of the technical complexity of our products, changes in our or our suppliers' manufacturing processes or in the use of defective or contaminated materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve such yields or product reliability, our business, operating results, financial condition and customer relationships could be adversely affected. Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other vendors, which may contain defects. Should problems occur, it may be difficult to identify the source of the problem. If we are unable to fix defects or other problems, we could experience, among other things: - loss of customers; - increased costs of product returns and warranty expenses; - damage to our brand reputation; - failure to attract new customers or achieve market acceptance; - diversion of development and engineering resources; and - legal action by our customers. The occurrence of any one or more of the foregoing factors could seriously harm our business or financial condition. ITEM 2. PROPERTIES Facilities Our headquarters are located in Saxonburg, Pennsylvania, 25 miles north of Pittsburgh, on approximately 64 acres of land. This location contains several manufacturing facilities totaling 151,000 square feet. Our VLOC subsidiary maintains three manufacturing facilities in Florida, northwest of Tampa. These locations total 80,000 square feet. In addition, we lease manufacturing and office space in California, Mexico, Singapore, China, Japan, U.K. and Belgium totaling 172,000 square feet. ITEM 3. LEGAL PROCEEDINGS None. 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 59 Chairman, Chief Executive Officer and Director Francis J. Kramer 52 President, Chief Operating Officer and Director Herman E. Reedy 58 Vice President and General Manager of Quality and Engineering James Martinelli 43 General Manager of Laser Power Corporation and Chief Financial Officer of II-VI Incorporated Craig A. Creaturo 31 Treasurer Carl J. Johnson, a co-founder of II-VI in 1971, serves as Chairman, Chief Executive Officer, and Director of II-VI. He served as President of II-VI from 1971 until 1985 and has been a Director since its founding and Chairman since 1985. From 1966 to 1971, Dr. Johnson was Director of Research & Development for Essex International, Inc., an automotive electrical and power distribution products manufacturer. From 1964 to 1966, Dr. Johnson worked at Bell Telephone Laboratories as a member of the technical staff. Dr. Johnson completed his Ph.D. in Electrical Engineering at the University of Illinois in 1969. He holds B.S. and M.S. degrees in Electrical Engineering from Purdue University and Massachusetts Institute of Technology (MIT), respectively. Dr. Johnson serves as a director of Xymox Technology, Inc., and Armstrong Laser Technology, Inc. Francis J. Kramer has served as a Director of II-VI since 1989. Mr. Kramer has been employed by II-VI since 1983 and has been its President and Chief Operating Officer since 1985. Mr. Kramer joined II-VI 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 II-VI, Mr. Kramer was the Director of Operations for the Utility Communications Systems Group of Rockwell International Corp. Mr. Kramer graduated from the University of Pittsburgh in 1971 with a B.S. degree in Industrial Engineering and from Purdue University in 1975 with an M.S. degree in Industrial Administration. Herman E. Reedy has been with II-VI 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 II-VI, Mr. Reedy was employed by Essex International, Inc., serving last as Manager, MOS Wafer Process Engineering. Prior to 1973, he was employed by Carnegie Mellon University and previously held positions with SemiElements, 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 II-VI since 1986. He has served as General Manager of Laser Power Corporation since July 2000 and Chief Financial Officer of II-VI Incorporated since 1994. Mr. Martinelli joined the Company as Accounting Manager, was named Controller in 1990 and named Chief Financial Officer and Treasurer in 1994. Prior to his employment by II-VI, Mr. Martinelli was Accounting Manager at Tippins Incorporated and Pennsylvania Engineering Corporation from 1980 to 1985. Mr. Martinelli graduated from Indiana University of Pennsylvania in 1980 with a B.S. degree in Accounting and is a member of the Pennsylvania Institute of Certified Public Accountants. Craig A. Creaturo has served as Treasurer and Director of Finance, Accounting and Information Systems since July 2000. Mr. Creaturo has been employed by the Company since 1998 when he joined the Company as Corporate Controller. Prior to his employment by the Company, Mr. Creaturo was employed by Arthur Andersen LLP from 1992 to 1998 and served in the audit and attestation division with a final position as Audit Manager. Mr. Creaturo graduated from Grove City College in 1992 with a B.S. degree in Accounting. Mr. Creaturo is a Certified Public Accountant in the Commonwealth of Pennsylvania and is a member of the American Institute of Certified Public Accountants and 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 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 Nasdaq. High Low ------ ------ Fiscal 2001 First Quarter $28.50 $13.31 Second Quarter $23.38 $13.89 Third Quarter $17.69 $11.00 Fourth Quarter $17.50 $11.88 Fiscal 2000 First Quarter $ 7.38 $ 4.84 Second Quarter $11.00 $ 5.38 Third Quarter $35.75 $ 9.31 Fourth Quarter $26.75 $14.94 On September 10, 2001, the last reported sale price for the Common Stock was $14.44 per share. As of such date, there were approximately 750 holders of record of the Common Stock. The Company historically has not 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 19 of the Company's 2001 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference from pages 15 through 19 of the Company's 2001 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference from pages 6 through 19 of the Company's 2001 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference from pages 20 through 38 of the Company's 2001 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth above in Part I under the caption "Executive Officers of the Registrant" is incorporated herein by reference. The other information required by this item is incorporated herein by reference to the information set forth under the captions "Election of Directors", "Board of Directors and Board Committees" and "Other Matters - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the 2001 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 2001 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 2001 Annual Meeting of Shareholders filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the information set forth under the caption "Board of Directors and Board Committees" in the Company's definitive proxy statement for the 2001 Annual Meeting of Shareholders filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial statements, financial statement schedules and exhibits not listed have been omitted where the required information is included in the consolidated financial statements or notes thereto, or is not applicable or required. (a) (1) The consolidated balance sheets as of June 30, 2001 and 2000 the consolidated statements of earnings, shareholders' equity, comprehensive income and cash flow for each of the three years in the period ended June 30, 2001, and the notes to consolidated financial statements, presented in the Company's 2001 Annual Report to Shareholders, are incorporated herein by reference. The report of Deloitte & Touche LLP, dated August 8, 2001 on the 2001, 2000 and 1999 financial statements presented in the Company's 2001 Annual Report to Shareholders, is incorporated herein by reference. (2) Financial Statement Schedule: The financial statement schedule set forth in item 14(d) below should be read in conjunction with the financial statements contained in the 2001 Annual Report to Shareholders. Other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. The report of Deloitte & Touche LLP on Schedule II for each of the three years ended June 30, 2001, is included herein. Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended June 30, 2001. (3) Exhibits. Exhibit Number Description of Exhibit -------------- ---------------------- 2.01 Agreement and Plan of Merger Incorporated herein by dated as of June 28, 2000, reference is Exhibit 2.01 among II-VI Incorporated, to the Company's Laser Power Corporation Registration Statement No. and II-VI Acquisition Corp. 333-41314 on Form S-4. 2.02 First Amendment to Agreement Incorporated herein by and Plan of Merger dated reference is Exhibit 2.02 as of August 1, 2000, among to the Company's II-VI Incorporated, II-VI Registration Statement No. Acquisition Corp. and Laser 333-41314 on Form S-4. Power Corporation 3.01 Amended and Restated Articles of Incorporated herein by Incorporation of II-VI reference is Exhibit 3.02 Incorporated to Registration Statement No. 33-16389 on Form S-1. 3.02 Amended and Restated By-Laws of Incorporated herein by II-VI Incorporated reference is Exhibit 3.02 to II-VI'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). 4.01 Rights Agreement dated as of Incorporated herein by August 11, 2001 reference is Exhibit 1 to the Company's Exchange Act Registration Statement on Form 8-A (file number 0-16195) filed on August 28, 2001. 10.01 II-VI Incorporated Employees' Incorporated herein by Stock Purchase Plan reference is Exhibit 10.03 to Registration Statement No. 33-16389 on Form S-1. 10.02 II-VI Incorporated and Amended Incorporated herein by and Restated Employees' Stock reference is Exhibit 10.04 Purchase Plan to Registration Statement No. 33-16389 on Form S-1. 10.03 First Amendment to the Incorporated herein by II-VI Incorporated Employees' reference is Exhibit 10.01 Stock Purchase Plan to II-VI's Form 10-Q for the Quarter Ended March 31, 1996. 10.04 II-VI Incorporated Amended and Incorporated herein by Restated Employees' reference is Exhibit 10.05 Profit-Sharing Plan and to Registration Statement Trust Agreement, as amended No. 33-16389 on Form S-1. 10.05 Form of Representative Agreement Incorporated herein by between II-VI and its foreign reference is Exhibit 10.15 representatives to Registration Statement No. 33-16389 on Form S-1. 10.06 Form of Employment Agreement* Incorporated herein by reference is Exhibit 10.16 to Registration Statement 33-16389 on Form S-1. 10.07 Description of Management-By- Incorporated herein by Objective Plan* reference is Exhibit 10.09 to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. 10.08 II-VI Incorporated 1994 Incorporated herein by Nonemployee Directors Stock reference is Exhibit A to Option Plan* II-VI's Proxy Statement dated September 30, 1994. 10.09 II-VI Incorporated Deferred Incorporated herein by Compensation Plan* reference is Exhibit 10.12 to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.10 Trust Under the II-VI Incorporated herein by Incorporated Deferred reference is Exhibit 10.13 Compensation Plan* to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.11 Description of Bonus Incorporated herein by Incentive Plan* reference is Exhibit 10.14 to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.12 Amended and Restated II-VI Incorporated herein by Incorporated Deferred reference is Exhibit 10.01 Compensation Plan* to II-VI's Form 10-Q for the Quarter Ended December 31, 1996. 10.13 Amended and Restated II-VI Incorporated herein by Incorporated 1997 Stock Option reference is Exhibit 10.04 Plan* to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1998. 10.14 Agreement by and between PNC Bank, Incorporated herein by National Association and II-VI reference is Exhibit 10.01 Incorporated for Amended and to II-VI's Form 10-Q for Restated Letter Agreement for the Quarter Ended Committed Line of Credit March 31, 1999. and Japanese Yen Term Loan 10.15 Credit Agreement by and among Incorporated herein by II-VI Incorporated, reference is Exhibit its subsidiary guarantors, (b)(1) to Amendment No. 3 various lenders and PNC Bank, to the Company's Tender National Association dated Offer Statement on as of August 14, 2000 Schedule TO filed on August 24, 2000. 13.01 Annual Report to Shareholders Portions of the 2001 Annual Report are filed herewith. 21.01 List of Subsidiaries of Filed herewith. II-VI Incorporated 23.01 Consent of Deloitte & Touche LLP Filed herewith. _______ * Denotes management contract or compensatory plan, contract or arrangement. The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance of long-term obligations of Registrant not in excess of 10% of the Registrant's total assets on a consolidated basis. (b) No reports on Form 8-K have been filed during the fourth quarter of fiscal year 2001. (c) The Company hereby files as exhibits to this Form 10-K the exhibits set forth in Items 14(a)(3) hereof which are not incorporated by reference. (d) The Company hereby files as a financial statement schedule to this Form 10-K the financial statement schedule listed in Item 14(a)(2) above. With the exception of the information incorporated by reference to the Company's 2001 Annual Report to Shareholders in Item 1 of Part I, Items 6, 7, 7A and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Company's 2001 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 27, 2001 By: /s/ Carl J. Johnson Carl J. Johnson, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer: September 27, 2001 By: /s/ Carl J. Johnson Carl J. Johnson, Chairman Chief Executive Officer and Director Principal Financial and Accounting Officer: September 27, 2001 By: /s/ Craig A. Creaturo Craig A. Creaturo Treasurer September 27, 2001 By: /s/ Francis J. Kramer Francis J. Kramer President, Chief Operating Officer and Director September 27, 2001 By: /s/ Vincent D. Mattera, Jr. Vincent D. Mattera, Jr. Director September 27, 2001 By: /s/ Thomas E. Mistler Thomas E. Mistler Director September 27, 2001 By: /s/ Duncan A. J. Morrison Duncan A. J. Morrison Director September 27, 2001 By: /s/ Peter W. Sognefest Peter W. Sognefest Director EXHIBIT INDEX Exhibit Number Description of Exhibit -------------- ---------------------- 2.01 Agreement and Plan of Merger Incorporated herein by dated as of June 28, 2000, reference is Exhibit 2.01 among II-VI Incorporated, to the Company's Laser Power Corporation Registration Statement No. and II-VI Acquisition Corp. 333-41314 on Form S-4. 2.02 First Amendment to Agreement Incorporated herein by and Plan of Merger dated reference is Exhibit 2.02 as of August 1, 2000, among to the Company's II-VI Incorporated, II-VI Registration Statement No. Acquisition Corp. and Laser 333-41314 on Form S-4. Power Corporation 3.01 Amended and Restated Articles of Incorporated herein by Incorporation of II-VI reference is Exhibit 3.02 Incorporated to Registration Statement No. 33-16389 on Form S-1. 3.02 Amended and Restated By-Laws of Incorporated herein by II-VI Incorporated reference is Exhibit 3.02 to II-VI'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). 4.01 Rights Agreement dated as of Incorporated herein by August 11, 2001 reference is Exhibit 1 to the Company's Exchange Act Registration Statement on Form 8-A (file number 0-16195) filed on August 28, 2001. 10.01 II-VI Incorporated Employees' Incorporated herein by Stock Purchase Plan reference is Exhibit 10.03 to Registration Statement No. 33-16389 on Form S-1. 10.02 II-VI Incorporated and Amended Incorporated herein by and Restated Employees' Stock reference is Exhibit 10.04 Purchase Plan to Registration Statement No. 33-16389 on Form S-1. 10.03 First Amendment to the Incorporated herein by II-VI Incorporated Employees' reference is Exhibit 10.01 Stock Purchase Plan to II-VI's Form 10-Q for the Quarter Ended March 31, 1996. 10.04 II-VI Incorporated Amended and Incorporated herein by Restated Employees' reference is Exhibit 10.05 Profit-Sharing Plan and to Registration Statement Trust Agreement, as amended No. 33-16389 on Form S-1. 10.05 Form of Representative Agreement Incorporated herein by between II-VI and its foreign reference is Exhibit 10.15 representatives to Registration Statement No. 33-16389 on Form S-1. 10.06 Form of Employment Agreement* Incorporated herein by reference is Exhibit 10.16 to Registration Statement 33-16389 on Form S-1. 10.07 Description of Management-By- Incorporated herein by Objective Plan* reference is Exhibit 10.09 to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. 10.08 II-VI Incorporated 1994 Incorporated herein by Nonemployee Directors Stock reference is Exhibit A to Option Plan* II-VI's Proxy Statement dated September 30, 1994. 10.09 II-VI Incorporated Deferred Incorporated herein by Compensation Plan* reference is Exhibit 10.12 to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.10 Trust Under the II-VI Incorporated herein by Incorporated Deferred reference is Exhibit 10.13 Compensation Plan* to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.11 Description of Bonus Incorporated herein by Incentive Plan* reference is Exhibit 10.14 to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.12 Amended and Restated II-VI Incorporated herein by Incorporated Deferred reference is Exhibit 10.01 Compensation Plan* to II-VI's Form 10-Q for the Quarter Ended December 31, 1996. 10.13 Amended and Restated II-VI Incorporated herein by Incorporated 1997 Stock Option reference is Exhibit 10.04 Plan* to II-VI's Annual Report on Form 10-K for the fiscal year ended June 30, 1998. 10.14 Agreement by and between PNC Bank, Incorporated herein by National Association and II-VI reference is Exhibit 10.01 Incorporated for Amended and to II-VI's Form 10-Q for Restated Letter Agreement for the Quarter Ended Committed Line of Credit March 31, 1999. and Japanese Yen Term Loan 10.15 Credit Agreement by and among Incorporated herein by II-VI Incorporated, reference is Exhibit its subsidiary guarantors, (b)(1) to Amendment No. 3 various lenders and PNC Bank, to the Company's Tender National Association dated Offer Statement on as of August 14, 2000 Schedule TO filed on August 24, 2000. 13.01 Annual Report to Shareholders Portions of the 2001 Annual Report are filed herewith. 21.01 List of Subsidiaries of Filed herewith. II-VI Incorporated 23.01 Consent of Deloitte & Touche LLP Filed herewith. _______ * Denotes management contract or compensatory plan, contract or arrangement. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of II-VI Incorporated and subsidiaries: We have audited the consolidated financial statements of II-VI Incorporated and subsidiaries as of June 30, 2001 and 2000 and for each of the three years in the period ended June 30, 2001, and have issued our report thereon dated August 8, 2001; such consolidated financial statements and report are included in your 2001 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement Schedule II, Valuation and Qualifying Accounts, of II-VI Incorporated and subsidiaries. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania August 8, 2001 SCHEDULE II II-VI INCORPORATED AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1999, 2000, AND 2001 (IN THOUSANDS OF DOLLARS) Additions 1 ----------------- Balance at Charged Charged Deduction Balance Beginning to to Other from at End of Year Expense Accounts Reserves 2 of Year ---------- ------- -------- ---------- ------- YEAR ENDED JUNE 30, 1999: Allowance for doubtful accounts & warranty returns $ 428 $ 245 $ 3 $ 219 $ 457 YEAR ENDED JUNE 30, 2000: Allowance for doubtful accounts & warranty returns $ 457 $ 213 $ 7 $ 102 $ 575 YEAR ENDED JUNE 30, 2001: Allowance for doubtful accounts & warranty returns $ 575 $ 232 $ 94 $ 152 $ 749 _________ 1 Amounts primarily relate to businesses acquired, warranty returns and the effects of foreign currency translation. 2 Uncollectible accounts written off, net of recovery EX-13 4 ex1301.txt MANAGEMENT'S DISCUSSION & ANALYSIS OVERVIEW During the year ended June 30, 2001 (fiscal 2001), II-VI Incorporated and its subsidiaries (the "Company") had revenue growth of 66% to $123.3 million from $74.1 million in fiscal year 2000 as a result of a combination of internal growth and acquisitions. Growth of existing businesses, primarily in the laser optics and component product lines, added more than $18 million in fiscal 2001 revenues as compared to the prior fiscal year. Also, the Company acquired Laser Power Corporation effective August 2000, and as a result added additional $31 million to revenues for fiscal 2001. In the fiscal 2001 first quarter, the Company declared a two-for-one stock split of the Company's common stock in the form of a 100% common stock dividend. The record date was September 5, 2000 and the distribution date was September 20, 2000. Also, in the fiscal 2001 first quarter, the Company replaced its $15.0 million unsecured line of credit agreement with a $45.0 million secured credit agreement in connection with the Company's acquisition of Laser Power Corporation. The Company expects cash flow from operations to continue to fund working capital needs, capital expenditures and internal growth. During fiscal 2001, the Company reinvested $16.7 million into capital projects. RESULTS OF OPERATIONS Fiscal 2001 Compared to Fiscal 2000 NET EARNINGS Net earnings increased 30% in fiscal 2001 to $9.5 million from $7.3 million in fiscal 2000. The major contributor to the net earnings increase were higher revenues. Each contributor is explained further in this section. BOOKINGS Bookings increased 60% to $132.7 million in fiscal 2001 compared to $83.0 million in fiscal 2000. Order backlog increased 64% to $44.7 million at June 30, 2001 from $27.2 million at June 30, 2000 as a result of bookings outpacing shipments in fiscal 2001 and the addition of Laser Power Corporation. Manufacturing orders comprised 96% of the backlog at June 30, 2001. Manufacturing bookings increased by approximately $50.3 million, of which $39.0 million was attributable to Laser Power Corporation, while contract research and development bookings decreased by approximately $0.2 million. Bookings for laser optics and component products increased approximately 15% and bookings for the eV PRODUCTS division increased approximately 15%. These increases were attributable to strong demand for the Company's laser optics and component products and continued acceptance of products of the eV PRODUCTS division. REVENUES Revenues grew 66% to $123.3 million in fiscal 2001 compared to $74.1 million last fiscal year. Revenues for laser optics and component products increased approximately 20% due to continued strong demand for infrared optics products, revenues from the eV PRODUCTS division increased approximately 53% due to successful market launches and other new product acceptance in the marketplace, and the Company recorded revenues from Laser Power Corporation of approximately $31.1 million. COSTS AND EXPENSES Manufacturing gross margin was $46.1 million or 39% of net revenues in fiscal 2001 compared to $30.9 million or 43% of net revenues in fiscal 2000. The dollar increase was attributable to higher sales volume at all three of the Company's segments. Increased sales included infrared optics and materials, detector products at the eV PRODUCTS division, and sales from Laser Power Corporation. The decrease in gross margin as a percentage of net sales reflects the addition of Laser Power Corporation which has historically lower gross margins than the Company. Contract research and development gross margin was $1.5 million or 29% of contract research and development revenues in fiscal 2001 compared to $0.5 million or 28% of contract research and development revenues in fiscal 2000. The Company has increased the amount of contract research and development projects it undertakes and plans to increase this amount over the foreseeable future. Company-funded internal research and development increased to $4.5 million in fiscal 2001 from $2.8 million in fiscal 2000. The Company continues to expand its internal research and development projects, including projects associated with developing nuclear radiation detectors at the eV PRODUCTS division, infrared optics and materials, and silicon carbide at the Company's optical components businesses. Selling, general and administrative expenses were $24.8 million or 20% of revenues in fiscal 2001 compared to $18.2 million or 25% of revenues in fiscal 2000. This dollar increase is attributable to the addition of the selling, general and administrative expenses of the Company's Laser Power Corporation subsidiary, increased employment costs associated with new employees, increased payroll expense attributable to the Company's worldwide profit-driven bonus programs, and increased sales and marketing efforts. The decrease in selling, general and administrative expenses as a percentage of net revenues reflect the addition of Laser Power Corporation and revenue improvements from the eV PRODUCTS division and the Company's VLOC subsidiary with limited corresponding increases to selling, general and administrative expenses. Other expense, was $1.4 million in fiscal 2001 compared to other expense of $0.2 million in fiscal 2000. The increase in other expense was primarily attributable to the amortization of goodwill related to the purchase of Laser Power Corporation. Interest expense was $2.3 million in fiscal 2001 compared to $0.3 million in fiscal 2000. The increase in interest expense was the direct result of additional borrowings in connection with the purchase of Laser Power Corporation. The effective corporate income tax rate was 35% in fiscal 2001 compared to 25% in fiscal 2000. The increase in the effective income tax rate reflects the completion of several international related tax opportunities during fiscal 2000 and the non-deductible amortization of goodwill resulting from the acquisition of Laser Power Corporation. Fiscal 2000 Compared to Fiscal 1999 OVERVIEW Net earnings increased 34% in fiscal 2000 to $7.3 million from $5.5 million in fiscal 1999. Revenues grew 20% to $74.1 million in fiscal 2000 from $62.0 million last fiscal year. Bookings increased 38% to $83.0 million in fiscal 2000 from $60.0 million in fiscal 1999. Order backlog increased 51% to $27.2 million at June 30, 2000 from $18.0 million at June 30, 1999 as a result of bookings outpacing shipments in fiscal 2000. Manufacturing orders comprised 99% of the backlog at June 30, 2000, compared to 97% of the backlog at June 30, 1999. NET EARNINGS Net earnings increased 34% in fiscal 2000 to $7.3 million from $5.5 million in fiscal 1999. The major contributors to the net earnings increase were higher revenues and higher gross margins. Each of these are explained further in this section. BOOKINGS Bookings increased 38% to $83.0 million in fiscal 2000 compared to $60.0 million in fiscal 1999. Manufacturing bookings increased by approximately $22.3 million while contract research and development bookings increased by approximately $0.7 million. Bookings for laser optics and component products increased approximately 35% and bookings for the eV PRODUCTS division increased approximately 60%. The increase was attributable to strong demand for the Company's laser optics and component products and continued acceptance of products of the eV PRODUCTS division. REVENUES Revenues grew 20% to $74.1 million in fiscal 2000 compared to $62.0 million last fiscal year. Revenues for laser optics and component products increased approximately 20% while revenues from the eV PRODUCTS division were consistent with the previous year. The increase was attributable to strong demand for the Company's laser optics and component products. COSTS AND EXPENSES Manufacturing gross margin was $30.9 million or 43% of net sales in fiscal 2000 compared to $24.0 million or 40% of net sales in fiscal 1999. The dollar increase was attributable to higher sales volume, particularly sales of infrared optics and materials. The increase in gross margin as a percentage of net sales reflects productivity gains and cost control programs, lower per unit cost associated with higher production volume for laser optics and component products and a strengthened Japanese Yen. Contract research and development gross margin was $0.5 million or 28% of contract research and development revenues in fiscal 2000 compared to $0.4 million or 28% of contract research and development revenues in fiscal 1999. Company-funded internal research and development increased to $2.8 million in fiscal 2000 from $2.3 million in fiscal 1999. The Company continues to expand its internal research and development projects, including projects associated with developing nuclear radiation detectors, infrared optics and materials and silicon carbide. Selling, general and administrative expenses were $18.2 million or 25% of revenues in fiscal 2000 compared to $13.8 million or 22% of revenues in fiscal 1999. This dollar increase is attributable to higher general and administrative expenses needed to support the Company's growth. The increase in selling, general and administrative expenses as a percentage of net revenues is attributable to increased compensation expense associated with the Company's worldwide profit-driven bonus programs and increased professional service expenses. Other expense, including interest expense, was $0.6 million in fiscal 2000 compared to other expense of $0.2 million in fiscal 1999. The primary reason for the increase in other expense is due to foreign currency losses as a result of the fluctuations of foreign currencies relative to the U.S. dollar as compared to foreign currency gains in the prior year. The effective corporate income tax rate was 25% in fiscal 2000 compared to 32% in fiscal 1999. The decrease in the effective income tax rate is primarily attributable to an increase in the utilization of the tax savings available to the Company from its foreign sales corporation. LIQUIDITY AND CAPITAL RESOURCES In fiscal 2001, cash generated from operations was $15.5 million. Proceeds from the net increase in borrowings of $29.3 million in addition to the cash generated from operations were used primarily to finance the cash portion of the Company's acquisition of Laser Power Corporation for $27.7 million, and to purchase $16.7 million of property, plant and equipment. Cash transactions for fiscal 2001, cash on hand at the beginning of the fiscal year, and cash acquired as a result of the acquisition of Laser Power Corporation resulted in a cash position of $8.1 million at June 30, 2001. The largest sources of the $15.5 million in cash generated from operations in fiscal 2001 was $21.2 million in net earnings before depreciation, amortization, loss on foreign currency transactions, and an increase in deferred income taxes. This increase in cash was partially offset by an increase in accounts receivable and inventory of $5.4 million, and a decrease in accounts payable of $0.5 million. On August 14, 2000, the Company replaced its $15.0 million unsecured line of credit agreement with a $45.0 million secured credit agreement in connection with the acquisition of Laser Power Corporation. This facility has a five-year life and contains term and line of credit borrowing options. This facility is secured by certain assets of the Company and is subject to certain restrictive covenants (see Note F). This facility has an interest rate range of LIBOR plus 0.88% to LIBOR plus 1.50%. The average interest rate in effect as of June 30, 2001 was 5.30%. As of June 30, 2001, the total borrowings under this line of credit of $34.5 million consisted of $25.0 million under the term loan option and $9.5 million under the line of credit option, leaving available a remaining unused line of credit of $10.5 million. On August 23, 2000, the Board of Directors declared a two-for-one stock split of the Company's common stock in the form of a 100% common stock dividend. The record date was September 5, 2000 and the distribution date was September 20, 2000. All share and per share amounts included in the Company's consolidated financial statements have been restated to reflect the stock split for all periods presented. The Company believes that internally generated funds, current cash on hand and available borrowing capacity will be adequate to meet foreseeable needs. The impact of inflation on the Company's business has not been material. MARKET RISKS The Company is exposed to market risks arising from adverse changes in foreign currency exchange rates and interest rates. In the normal course of business, the Company uses a variety of techniques and derivative financial instruments as part of its overall risk management strategy. Foreign Exchange Risks - In the normal course of business, the Company enters into foreign currency forward exchange contracts with its banks. The purpose of these contracts is to hedge ordinary business risks regarding foreign currencies on product sales. Foreign currency exchange contracts are used to limit transactional exposure to changes in currency rates. The Company enters into foreign currency forward contracts that permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts provide the Company with an economic hedge in which settlement will occur in future periods and which otherwise would expose the Company to foreign currency risk. 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 risk in the event of non-performance by the counterparties to these financial instruments, it does not anticipate such losses. The Company entered into a low interest rate, 237 million Yen loan with PNC Bank in September 1997 in an effort to minimize the foreign currency exposure in Japan. A change in the interest rate of 1% for this Yen loan would have changed the interest expense by approximately $20,000 and a 10% change in the Yen to dollar exchange rate would have changed revenues by approximately $1,200,000 for the year ended June 30, 2001. Interest Rate Risks - The Company entered into an interest rate collar with a notional amount of $12.5 million as required under the terms of its current credit agreement in order to limit interest rate exposure on one-half of the $25.0 million term loan. A change in the Company's overall interest rate of 1% would have changed the interest expense by approximately $290,000 for the year ended June 30, 2001. This Management's Discussion and Analysis and the Letters to Shareholders contained in the Annual Report to Shareholders contain forward looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including the statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency hedging. Forward- looking statements are also identified by words such as "expects," "anticipates," "intends," "plans," "projects" or similar expressions. Actual results could materially differ from such statements due to the following factors: materially adverse changes in economic or industry conditions generally (including capital markets) or in the markets served by the Company, the development and use of new technology and the actions of competitors. There are additional risk factors that could affect the Company's business, results of operations or financial condition. Investors are encouraged to review the risk factors set forth in the Company's most recent Form 10-K as filed with the Securities and Exchange Commission. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the effective date of SFAS No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", were effective for the Company as of July 1, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 141: In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations". SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. SFAS No. 142: In June 2001, the FASB issued SFAS 142 "Goodwill and Other Intangible Assets". SFAS 142 will require that goodwill no longer be amortized, but instead tested for impairment at least annually. SFAS 142 will also require recognized intangible assets be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead tested for impairment in accordance with the Standard until its life is determined to no longer be indefinite. As of June 30, 2001, the Company had goodwill and other intangible assets, net of accumulated amortization, of approximately $29.2 million and $4.1 million, respectively, which would be subject to the transitional assessment provisions of SFAS 142. The Company is permitted to adopt this Statement effective July 1, 2001 or defer adoption until July 1, 2002. Once adopted, goodwill amortization of approximately $1.5 million on an annualized basis will cease. The Company has not yet determined if any impairment charges will result from the adoption of this Statement. At this time, the Company anticipates adopting this standard effective as of July 1, 2001. FASB No. 143: In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations". SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact that this Statement will have on the Company's financial statements.
FIVE-YEAR FINANCIAL SUMMARY Year Ended June 30, (000 except per share data) 2001 2000 1999 1998 1997 ---------------------------- ------- ------- ------- ------- ------- Statement of Earnings Net revenues $123,334 $74,092 $62,014 $61,340 $52,741 Net earnings 9,491 7,311 5,463 6,780 7,111 Basic earnings per share 0.69 0.57 0.43 0.53 0.56 Diluted earnings per share 0.67 0.55 0.42 0.51 0.54 Diluted weighted average shares outstanding 14,160 13,176 12,980 13,348 13,228 ============================ ======== ======= ======= ======= =======
Share and per share data was adjusted to reflect the two-for-one stock split in fiscal 2001.
June 30, ($000) 2001 2000 1999 1998 1997 --------------------------- ------- ------- ------- ------- ------- Balance Sheet Working capital $ 33,976 $24,335 $17,590 $13,420 $21,089 Total assets 148,173 84,102 70,843 67,774 54,512 Total debt 37,006 5,585 6,674 8,209 1,346 Retained earnings 54,187 44,696 37,385 31,922 25,142 Shareholders' equity 89,413 63,426 54,493 50,063 42,522 ============================ ======== ======= ======= ======= =======
For the five-year period ended June 30, 2001, no dividends were declared.
QUARTERLY FINANCIAL DATA FISCAL 2001 QUARTER ENDED ($000 except per share data) 9/30/00 12/31/00 3/31/01 6/30/01 ----------------------------------------- ------- -------- ------- ------- Net revenues $26,713 $31,738 $32,531 $32,352 Cost of goods sold 16,180 19,364 20,847 19,409 Internal research and development 992 1,166 1,088 1,253 Selling, general and administrative 6,268 6,239 6,083 6,177 Interest expense 337 837 657 499 Other expense (income) - net 67 543 180 592 ----------------------------------------- ------- -------- ------- ------- Earnings before income taxes 2,869 3,589 3,676 4,422 Income taxes 909 1,246 1,241 1,669 ----------------------------------------- ------- -------- ------- ------- Net earnings 1,960 2,343 2,435 2,753 ----------------------------------------- ------- -------- ------- ------- Basic earnings per share $ 0.15 $ 0.17 $ 0.18 $ 0.20 ----------------------------------------- ------- -------- ------- ------- Diluted earnings per share $ 0.14 $ 0.16 $ 0.17 $ 0.19 ========================================= ======= ======== ======= =======
Fiscal 2001 results reflect the August 2000 acquisition of Laser Power Corporation.
FISCAL 2000 QUARTER ENDED ($000 except per share data) 9/30/99 12/31/99 3/31/00 6/30/00 ----------------------------------------- ------- -------- ------- ------- Net revenues $16,198 $16,874 $19,781 $21,239 Cost of goods sold 9,286 9,644 11,315 12,501 Internal research and development 623 602 744 875 Selling, general and administrative 3,806 4,208 4,933 5,224 Interest expense 85 94 79 91 Other expense (income) - net (72) (59) 85 272 ----------------------------------------- ------- -------- ------- ------- Earnings before income taxes 2,470 2,385 2,625 2,276 Income taxes 731 715 574 425 ----------------------------------------- ------- -------- ------- ------- Net earnings 1,739 1,670 2,051 1,851 ----------------------------------------- ------- -------- ------- ------- Basic earnings per share $ 0.14 $ 0.13 $ 0.16 $ 0.14 ----------------------------------------- ------- -------- ------- ------- Diluted earnings per share $ 0.13 $ 0.13 $ 0.15 $ 0.14 ========================================= ======= ======== ======= =======
Share and per share data was adjusted to reflect the two-for-one stock split in fiscal 2001. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF II-VI INCORPORATED AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of II-VI Incorporated and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of earnings, shareholders' equity, comprehensive income and cash flow for each of the three years in the period ended June 30, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania August 8, 2001
CONSOLIDATED BALANCE SHEETS June 30, ($000) 2001 2000 ----------------------------------------------------------- -------- -------- Current Assets Cash and cash equivalents $ 8,093 $ 6,330 Accounts receivable - less allowance for doubtful accounts of $749 at June 30, 2001 and $575 at June 30, 2000 21,884 14,202 Inventories 20,782 13,738 Deferred income taxes 3,304 896 Prepaid and other current assets 1,644 1,184 ----------------------------------------------------------- -------- -------- Total Current Assets 55,707 36,350 Property, Plant & Equipment, net 58,031 40,883 Goodwill, net 29,236 1,792 Other Intangible Assets, net 4,086 1,516 Other Assets 1,113 3,585 ----------------------------------------------------------- -------- -------- $148,173 $ 84,126 =========================================================== ======== ======== Current Liabilities Accounts payable $ 5,714 $ 3,726 Accrued salaries, wages and bonuses 7,086 4,685 Income taxes payable 2,158 222 Accrued profit sharing contribution 1,122 812 Other accrued liabilities 1,817 2,526 Current portion of long-term debt 3,834 44 ----------------------------------------------------------- -------- -------- Total Current Liabilities 21,731 12,015 Long-Term Debt 33,172 5,541 Other Liabilities, Primarily Deferred Income Taxes 3,857 3,120 ----------------------------------------------------------- -------- -------- Total Liabilities 58,760 20,676 Shareholders' Equity Preferred stock, no par value; authorized - 5,000,000 shares; none issued - - Common stock, no par value; authorized - 30,000,000 shares; issued - 14,981,163 shares at June 30, 2001; 13,976,102 shares at June 30, 2000 37,045 20,454 Accumulated other comprehensive income 91 210 Retained earnings 54,187 44,696 ----------------------------------------------------------- -------- -------- 91,323 65,360 Less treasury stock at cost, 1,068,880 shares 1,910 1,910 ----------------------------------------------------------- -------- -------- Total Shareholders' Equity 89,413 63,450 ----------------------------------------------------------- -------- -------- $148,173 $ 84,126 =========================================================== ======== ======== See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF EARNINGS Year Ended June 30, ($000 except per share data) 2001 2000 1999 ----------------------------------- -------- -------- -------- Revenues Net sales: Domestic $ 73,075 $ 36,265 $ 31,759 International 45,176 36,176 28,819 Contract research and development 5,083 1,651 1,436 ----------------------------------- -------- -------- -------- 123,334 74,092 62,014 ----------------------------------- -------- -------- -------- Costs, Expenses and Other Expense (Income) Cost of goods sold 72,181 41,550 36,590 Contract research and development 3,619 1,196 1,041 Internal research and development 4,499 2,844 2,317 Selling, general and administrative 24,767 18,171 13,827 Interest expense 2,330 349 415 Other expense (income) - net 1,382 226 (214) ----------------------------------- -------- -------- -------- 108,778 64,336 53,976 ----------------------------------- -------- -------- -------- Earnings Before Income Taxes 14,556 9,756 8,038 Income Taxes 5,065 2,445 2,575 ----------------------------------- -------- -------- -------- Net Earnings $ 9,491 $ 7,311 $ 5,463 ----------------------------------- -------- -------- -------- Basic Earnings Per Share $ 0.69 $ 0.57 $ 0.43 ----------------------------------- -------- -------- -------- Diluted Earnings Per Share $ 0.67 $ 0.55 $ 0.42 =================================== ======== ======== ========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Common Stock Other Treasury Stock -------------- Comprehensive Retained --------------- Shares Amount Income Earnings Shares Amount Total ------ ------- ------ -------- ------ -------- ------- (000) BALANCE - JUNE 30, 1998 13,670 $18,468 $ 435 $31,922 (769) $ (762) $50,063 Shares issued under stock option plans 82 203 - - - - 203 Net earnings - - - 5,463 - - 5,463 Other comprehensive loss, net of tax - - (163) - - - (163) Income tax benefit for options exercised - 75 - - - - 75 Purchase of treasury stock - - - - (300) (1,148) (1,148) -------------------------- ------ ------- ------ ------- ------ -------- ------- BALANCE - JUNE 30, 1999 13,752 18,746 272 37,385 (1,069) (1,910) 54,493 Shares issued under stock option plans 224 681 - - - - 681 Net earnings - - - 7,311 - - 7,311 Other comprehensive loss, net of tax - - (62) - - - (62) Income tax benefit for options exercised - 1,027 - - - - 1,027 ------------------------ ------ ------- ------ ------- ------ -------- ------- BALANCE - JUNE 30, 2000 13,976 20,454 210 44,696 (1,069) (1,910) 63,450 Shares issued under stock option plans 128 466 - - - - 466 Shares issued to acquire Laser Power Corporation 877 15,474 - - - - 15,474 Net earnings - - - 9,491 - - 9,491 Other comprehensive loss, net of tax - - (119) - - - (119) Income tax benefit for options exercised - 651 - - - - 651 ------------------------ ------ ------- ------ ------- ------ -------- ------- BALANCE - JUNE 30, 2001 14,981 $37,045 $ 91 $54,187 (1,069) $(1,910) $89,413 ========================== ====== ======= ====== ======= ====== ======== =======
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended June 30, 2001 2000 1999 ------------------------------------------- ------ ------ ------ ($000) Net earnings $9,491 $7,311 $5,463 Other comprehensive loss: Foreign currency translation adjustments (119) (62) (163) ------------------------------------------- ------ ------ ------ COMPREHENSIVE INCOME $9,372 $7,249 $5,300 =========================================== ====== ====== ======
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOW Year Ended June 30, ($000) 2001 2000 1999 ------------------------------------------------- ------- ------- ------- Cash Flows from Operating Activities Net earnings $ 9,491 $ 7,311 $ 5,463 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 6,838 4,693 4,343 Amortization 1,866 326 326 (Gain) loss on foreign currency transactions 1,445 (368) (167) Net loss on disposal or writedown of property, plant and equipment 237 - 203 Deferred income taxes 1,518 662 347 Increase (decrease) in cash from changes in: Accounts receivable (3,702) (576) (1,679) Inventories (1,745) (4,478) 1,145 Accounts payable (484) 1,674 (1,522) Other operating net assets 40 3,292 1,297 ---------------------------------------------------- ------- ------- ------- Net cash provided by operating activities 15,504 12,536 9,756 ---------------------------------------------------- ------- ------- ------- Cash Flows from Investing Activities Purchases of businesses (27,726) (2,894) - Additions to property, plant and equipment (16,699) (8,877) (5,420) Disposals (additions) of other assets 259 786 (600) ---------------------------------------------------- ------- ------- ------- Net cash used in investing activities (44,166) (10,985) (6,020) ---------------------------------------------------- ------- ------- ------- Cash Flows from Financing Activities Proceeds (payments) on short-term borrowings 4,308 (1,344) (1,790) Proceeds from long-term borrowings 25,000 - - Payments on long-term borrowings (44) (46) (61) Proceeds from sale of common stock 466 681 203 Purchases of treasury stock - - (1,148) ---------------------------------------------------- ------- ------- ------- Net cash provided by (used in) financing activities 29,730 (709) (2,796) ---------------------------------------------------- ------- ------- ------- Effect of exchange rate changes on cash and cash equivalents 695 (70) 458 ---------------------------------------------------- ------- ------- ------- Net increase in cash and cash equivalents 1,763 772 1,398 Cash and Cash Equivalents Beginning of year 6,330 5,558 4,160 ---------------------------------------------------- ------- ------- ------- End of year $ 8,093 $ 6,330 $ 5,558 ==================================================== ======= ======= ======= Non-cash transactions: net assets acquired for fair value of common stock $15,474 - - See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ PRINCIPLES OF CONSOLIDATION The consolidated financial statements include II-VI Incorporated and its wholly-owned subsidiaries: II-VI Worldwide, Incorporated; II-VI Delaware, Incorporated; II-VI Japan Incorporated; VLOC Incorporated; II-VI U.K. Limited; II-VI Singapore Pte., Ltd; II-VI Optics (Suzhou) Co. Ltd.; II-VI International Pte., Ltd; and Laser Power Corporation and its wholly-owned subsidiaries: EMI Acquisitions Corporation; Exotic Materials, Incorporated; Exotic Electro-Optics; Laser Power Optics de Mexico S.A. de C.V.; Laser Power Europe N.V.; and Laser Power FSC, Ltd. (collectively the "Company"). All intercompany transactions and balances have been eliminated. INVENTORIES Inventories are valued at the lower of cost or market, with cost determined on the first-in, first-out basis. Inventory costs include material, labor and manufacturing overhead. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost or valuation. Major improvements are capitalized, while maintenance and repairs are generally expensed as incurred. DEPRECIATION Depreciation for financial reporting purposes is computed primarily by the straight-line method over the estimated useful lives of the assets. Depreciable useful lives range from 3 to 20 years. Depreciation expense was $6.8 million, $4.7 million ad $4.3 million in 2001, 2000 1999 respectively. GOODWILL The excess purchase price over the net assets of businesses acquired is reported as goodwill in the accompanying Consolidated Balance Sheets. This cost is being amortized on a straight-line basis over periods not exceeding 25 years. Goodwill amortization expense was $1,473,000, $87,000 and $87,000 in 2001, 2000 and 1999, respectively. Accumulated amortization was $1,850,000 and $377,000 at June 30, 2001 and 2000, respectively. INTANGIBLES Intangible assets are carried at cost or valuation. Amortization for financial reporting purposes is computed using the straight-line method over the estimated useful lives of the assets ranging from 7 to 20 years. Amortization expense was $393,000, $239,000 and $239,000 in 2001, 2000 and 1999, respectively. Accumulated amortization was $1,278,000 and $885,000 at June 30, 2001 and 2000, respectively. FOREIGN CURRENCY TRANSLATION For II-VI Singapore Pte., Ltd. and its subsidiaries, and for Laser Power Optics de Mexico S.A. de C.V., the functional currency is the U.S. dollar. Gains and losses on the remeasurement of the local currency financial statements are included in net earnings. Foreign currency translation losses were $459,000, $75,000 and $43,000 in 2001, 2000 and 1999, respectively. For all other subsidiaries, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated other comprehensive income within shareholders' equity. INCOME TAXES Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. REVENUE RECOGNITION Revenue, other than on long-term contracts, is recognized when a product is shipped. Revenue on long-term contracts is accounted for using the percentage-of-completion method, whereby revenue and profits are recognized throughout the performance period of the contract. Percentage-of-completion is determined by relating the actual cost of work performed to date to the estimated total cost for each contract. Losses on contracts are recorded in full when identified. In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued EITF 00-10: "Accounting for Shipping and Handling Fees and Costs" which requires shipping costs billed to customers be recognized as revenues. These guidelines were effective for the Company as of March 30, 2001. The effect on earnings from operations was an increase to both revenue and selling, general and administrative expenses by $344,000, $282,000 and $264,000 for the years ended 2001, 2000 and 1999, respectively. Total shipping and handling costs included in selling, general, and administrative expenses were $310,000, $248,000 and $240,000 for the years ended 2001, 2000 and 1999, respectively. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. Costs related to customer and/or government funded research and development contracts are charged to costs and expenses as the related sales are recorded. EARNINGS PER SHARE The following table sets forth the computation of earnings per share for the periods indicated: Year Ended June 30, (000 except per share data) 2001 2000 1999 --------------------------------------------------------------------- Net earnings $ 9,491 $ 7,311 $ 5,463 Divided by: Weighted average common shares outstanding 13,737 12,756 12,720 --------------------------------------------------------------------- Basic earnings per share $ 0.69 $ 0.57 $ 0.43 Net earnings $ 9,491 $ 7,311 $ 5,463 Divided by: Weighted average common shares outstanding 13,737 12,756 12,720 Dilutive effect of common stock equivalents 423 420 260 --------------------------------------------------------------------- Dilutive weighted average common shares outstanding 14,160 13,176 12,980 --------------------------------------------------------------------- Diluted earnings per share $ 0.67 $ 0.55 $ 0.42 ===================================================================== CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. The majority of cash and cash equivalents is invested in investment grade money market type instruments. Cash of foreign subsidiaries is on deposit at banks in Japan, Singapore, China, Belgium,and the United Kingdom. NATURE OF BUSINESS The Company designs, manufactures and markets optical and electro-optical components, devices and materials for infrared, near-infrared, visible light, x-ray and gamma-ray, and telecommunication instrumentation and applications. The Company markets its products in the United States through its direct sales force and worldwide through its wholly-owned subsidiaries, distributors and agents. The Company uses certain uncommon materials and compounds to manufacture its products. Some of these materials are available from only one proven outside source. The continued high quality of these materials is critical to the stability of the Company's manufacturing yields. The Company has not experienced significant production delays due to a shortage of materials. However, the Company does occasionally experience problems associated with vendor supplied materials not meeting specifications for quality or purity. A significant failure of the Company's suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a material adverse effect on the Company's results of operations. ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and Cash Equivalents The carrying amount approximates fair value because of their short maturities. Debt Obligations The fair values of debt obligations are estimated based upon market values of similar issues. The fair values and carrying amounts of the Company's debt obligations, specifically the line of credit, Yen loan and the PIDA loan, are approximately equivalent. CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk with respect to accounts receivable are limited due to the Company's large number of customers. However, a significant portion of accounts receivable is from European distributors. Although the Company does not currently foresee a risk associated with these receivables, repayment is dependent upon the financial stability of these distributors. COMPREHENSIVE INCOME Comprehensive income is a measure of all changes in shareholders' equity that result from transactions and other economic events of the period other than transactions with owners. The Company has presented accumulated other comprehensive income as a component of shareholders' equity and consists of foreign currency translation adjustments of $91,000 and $186,000 as of June 30, 2001 and 2000, respectively. DERIVATIVE INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the effective date of SFAS No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", were effective for the Company as of July 1, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company was not required to record any transition adjustments as a result of adopting these standards. The Company from time to time purchases foreign currency forward exchange contracts, primarily in Japanese Yen, that permit it to sell specified amounts of these foreign currencies expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on a basis of its aggregate net cash flows in respective currencies, to foreign currency risk. The Company recorded the fair value of contracts with a notional amount of approximately $1.7 million as of June 30, 2001 on the statement of financial position. The Company does not account for these contracts as hedges as defined by SFAS No. 133, and records the change in the fair value of these contracts in the results of operations as they occur. The change in the fair value of these contracts increased net earnings by $0.2 million for the year ended June 30, 2001. To satisfy certain provisions of its line of credit facility, on March 5, 2001 the Company entered into an interest rate collar with a notional amount of $12.5 million. The floating rate option is the one- month LIBOR rate with the cap strike rate of 7.00% and the floor strike rate of 4.02%. The agreement expires March 5, 2002. At June 30, 2001 the one-month LIBOR rate was 3.86%. This agreement was entered into to limit interest rate exposure on one-half of the $25 million term loan. The Company does not account for this agreement as a hedge as defined by SFAS No. 133, and records the unrealized change in the fair value of this collar as an increase or decrease in interest expense in the results of operations. The effect of the interest rate collar on net earnings for the year ended June 30, 2001 was immaterial. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS SFAS No. 141: In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 ("SFAS 141"), "Business Combinations". SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. SFAS No. 142: In June 2001, the FASB issued SFAS 142 "Goodwill and Other Intangible Assets". SFAS 142 will require that goodwill no longer be amortized, but instead tested for impairment at least annually. SFAS 142 will also require recognized intangible assets be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead tested for impairment in accordance with the Standard until its life is determined to no longer be indefinite. As of June 30, 2001, the Company had goodwill and other intangible assets, net of accumulated amortization, of approximately $29.2 million and $4.1 million, respectively, which would be subject to the transitional assessment provisions of SFAS 142. The Company is permitted to adopt this Statement effective July 1, 2001 or defer adoption until July 1, 2002. Once adopted, goodwill amortization of approximately $1.5 million on an annualized basis will cease. The Company has not yet determined if any impairment charges will result from the adoption of this Statement. At this time, the Company anticipates adopting this standard as of July 1, 2001. SFAS No. 143: In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement Obligations". SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact that this Statement will have on the Company's financial statements. RECLASSIFICATIONS Certain amounts from prior years have been reclassified to conform with the 2001 presentation. Note B - STOCK SPLIT ----------- On August 23, 2000, the board of directors declared a two-for-one stock split of the Company's common stock in the form of a 100% common stock dividend. The record date was September 5, 2000 and the distribution date was September 20, 2000. All share and per share amounts included in the Company's consolidated financial statements have been restated to reflect the stock split for all periods presented. Note C - ACQUISITION OF LASER POWER CORPORATION -------------------------------------- On September 21, 1999, the Company purchased 1,250,000 shares of Laser Power Corporation common stock, representing an ownership interest in the Company of approximately 13%, for a total purchase price of approximately $2.8 million. Laser Power Corporation designs, manufactures, and markets high performance optics for the industrial, medical and military applications. Laser Power's infrared products are sold under the Laser Power brand name. Infrared products manufactured for military applications are sold under the Exotic Electro-Optics brand name. On August 14, 2000, the Company increased its ownership in Laser Power Corporation to approximately 88%, giving the Company a controlling interest. This additional ownership was acquired for a total consideration of approximately $23.8 million in cash and the issuance of approximately 739,000 shares of the Company's common stock for a total cost of $37.1 million. On October 24, 2000, the Company completed its acquisition of Laser Power Corporation for a total consideration of approximately $3.9 million in cash and the issuance of approximately 132,000 shares of the Company's common stock for a total cost of $6.3 million. This transaction has been accounted for as a purchase. The goodwill acquired of $29.2 million is being amortized over 20 years on a straight- line basis. The results of Laser Power Corporation for eleven months ended June 30, 2001 are included in the Company's consolidated financial statements. Pro forma results, as if the acquisition of Laser Power Corporation had occurred at the beginning of fiscal year 2000, are as follows: Year Ended June 30, 2001 2000 ----------------------------------------------------- (000 except per share data) Net revenues $125,483 $107,569 Income from continuing operations 9,019 4,801 Net income 9,019 3,573 Basic earnings per share: Income from continuing operations $ 0.66 $ 0.35 Loss from discontinued operations - (0.09) ----------------------------------------------------- Net income $ 0.66 $ 0.26 Diluted earnings per share: Income from continuing operations $ 0.64 $ 0.34 Loss from discontinued operations - (0.09) ----------------------------------------------------- Net income $ 0.64 $ 0.25 ===================================================== The pro forma results are not necessarily indicative of what actually would have occurred if the transaction had taken place at the beginning of the period, are not intended to be a projection of future results and do not reflect any cost savings that might be achieved from the combined operations. The loss from discontinued operations related to the activities of Laser Power Corporation in prior periods. Prior year financial statements reflect the adoption of the equity method of accounting in a manner consistent with the accounting for a step-by-step acquisition of Laser Power Corporation. The effect of the restatement was to reclassify all of the Company's investment in Laser Power common stock at June 30, 2000 from an investment accounted for as an available for sale security to an investment accounted for under the equity method. The effect of the restatement on income for the year ended June 30, 2001 was a charge to net income of $129,000. Note D INVENTORIES ----------- The components of inventories are as follows: June 30, ($000) 2001 2000 ---------------- ------- ------- Raw materials $ 6,173 $ 3,947 Work in process 8,680 5,518 Finished goods 5,929 4,273 ---------------- ------- ------- $20,782 $13,738 ======= ======= Note E PROPERTY, PLANT AND EQUIPMENT ----------------------------- Property, plant and equipment (at cost or valuation) consists of the following: June 30, ($000) 2001 2000 ------------------------------ ------- ------- Land and land improvements $ 1,715 $ 1,528 Buildings and improvements 24,426 21,333 Machinery and equipment 68,217 47,578 ------------------------------ ------- ------- 94,358 70,439 Less accumulated depreciation 36,327 29,556 ------------------------------ ------- ------- $58,031 $40,883 ======= ======= The interest capitalized associated with the construction of buildings and improvements approximated $119,000 during the year ended June 30, 2001. No interest was capitalized during the years ended June 30, 2000 and 1999. Note F DEBT ---- The components of debt are as follows: June 30, ($000) 2001 2000 ------------------------------------------------------------------------ Line of credit, interest at the LIBOR Rate, as defined, plus 1.25% and 0.75%, respectively $ 9,500 $2,750 Term loan, interest at the LIBOR Rate, as defined, plus 1.25% payable in quarterly installments through August 2005 25,000 - Pennsylvania Industrial Development Authority (PIDA) term note, interest at 3%, payable in monthly installments through October 2011 546 589 Term note, interest at the Japanese Yen Base Rate, as defined, plus 1.49%, principal payable in full in September 2002 1,902 2,246 Other 58 - ------------------------------------------------------------------------ Total debt 37,006 5,585 Current portion of long-term debt (3,834) (44) ------------------------------------------------------------------------ Long-term debt $33,172 $5,541 ======================================================================== The Company had a $15.0 million unsecured line of credit agreement with PNC Bank that expired on March 25, 2000. This line of credit was extended for one year until March 24, 2001 upon mutual agreement of the Company and PNC Bank. The weighted average interest rate in effect as of June 30, 2000 was 7.47%. The average outstanding borrowings under this line of credit were $4.6 million during the year ended June 30, 2000. The Company was subject to certain restrictive covenants under this agreement. On August 14, 2000, the Company replaced its $15.0 million unsecured line of credit agreement with a $45.0 million secured credit agreement in connection with the Company's acquisition of Laser Power Corporation (see Note C). This facility has a five-year life and contains term and line of credit borrowing options. This facility is secured by the Company's accounts receivables and inventory, a pledge of all of the capital stock of each of the Company's existing direct and indirect domestic subsidiaries, and a pledge of 65% of the stock of the Company's foreign subsidiaries. Additionally, this facility is subject to certain restrictive covenants, including those related to minimum net worth, leverage and interest coverage. This facility has an interest rate range of LIBOR plus 0.88% to LIBOR plus 1.50%. The weighted average interest rate of borrowings under the credit agreements was 5.31% at June 30, 2001. The average outstanding borrowings under this line of credit were $28.9 million during the year ended June 30, 2001. In September 1997, the Company obtained a 237 million Yen loan with PNC Bank. Interest is at a rate equal to the lesser of the floating rate or the maximum rate as defined in the loan agreement. The floating rate is equal to the Japanese Yen Base Rate, as defined, plus 1.49% and the maximum rate is 3.74%. On June 30, 2001, the Japanese Yen Base Rate was 0.13% and the floating rate was 1.62%. The Company has a line of credit facility with a Singapore bank which permits maximum borrowings of approximately $385,000. Borrowings are payable upon demand with interest being charged at the rate of 1.00% above the bank's prevailing prime lending rate. The interest rate at June 30, 2001 was 6.00%. At June 30, 2001 and 2000 there were no outstanding borrowings under this facility. The aggregate annual amounts of principal payments required on the long-term debt are as follows: ($000) Year Ended June 30, ---------------------------------------------- 2002 $ 3,834 2003 6,968 2004 6,923 2005 7,550 2006 11,426 Thereafter 305 ============================================== Interest and commitment fees paid during the years ended June 30, 2001, 2000 and 1999 totaled approximately $2,266,000, $369,000 and $450,000, respectively. Note G INCOME TAXES ------------ The components of income tax expense are as follows: Year Ended June 30, 2001 2000 1999 ------ ------ ------ ($000) Current: Federal $2,387 $1,094 $2,033 State 387 53 121 Foreign 939 667 74 ---------- ------ ------ ------ Total 3,713 1,814 2,228 ====== ====== ====== Deferred: Federal $1,119 $ 528 $ 300 State 118 60 47 Foreign 195 43 - ---------- ------ ------ ------ Total 1,352 631 347 ========== ====== ====== ====== Provision for Income Taxes $5,065 $2,445 $2,575 ========================== ====== ====== ====== Principal items comprising deferred income taxes are as follows: June 30, 2001 2000 ------ ------ ($000) Deferred income tax liabilities Tax over book accumulated depreciation $ 3,476 $ 2,276 Intangible assets 1,474 443 Available for sale securities - 1,227 ------ ------ Deferred income tax liability - long-term $ 4,950 $ 3,946 ====== ====== Deferred income tax assets Inventory capitalization $ 1,256 $ 385 Non-deductible accruals 1,248 511 Net-operating loss carryforward - current portion 800 - ------ ------ Deferred income tax asset - current $ 3,304 $ 896 ====== ====== Net operating loss carryforward $ 2,334 $ 134 Valuation allowance (317) (134) ------ ------ Deferred income tax asset - long-term $ 2,017 $ - ====== ====== Net deferred income tax asset (liability) $ 371 $(3,050) ====== ====== 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) 2001 % 2000 % 1999 % ---------------------------------------------------------------------------------------- Taxes at statutory rate $4,949 34 $3,317 34 $2,733 34 Increase (decrease) in taxes resulting from: State income taxes - net of federal benefit 358 3 69 - 112 1 Excludable Foreign Sales Corporation income (378) (3) (628) (6) (106) (1) Excludable foreign income (124) (1) (728) (7) (617) (7) Foreign taxes 126 1 181 2 - - Non-deductible goodwill amortization 500 3 30 - 30 - Other (366) (2) 204 2 423 5 -------------------------------------------- ------- --- ------- --- ------- --- $5,065 35 $2,445 25 $2,575 32 ============================================ ======= === ======= === ======= ===
During the years ended June 30, 2001, 2000 and 1999, cash paid by the Company for income taxes was approximately $1.7 million, $1.6 million and $1.1 million, respectively. The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested outside the United States. If the earnings of such foreign subsidiaries were not indefinitely reinvested, a deferred tax liability of approximately $5.6 million and $4.5 million would have been required as of June 30, 2001 and 2000, respectively. The sources of differences resulting in deferred income tax expense (credit) and the related tax effect of each were as follows: Year Ended June 30, ($000) 2001 2000 1999 -------------------------------------------------------------------- Depreciation and amortization $2,232 $691 $241 Inventory capitalization (872) (119) 24 Net operating loss carryforward 729 145 129 Other - primarily nondeductible accruals (737) (86) (47) -------------------------------- ------- ----- ----- $1,352 $631 $347 ======= ===== ===== As of June 30, 2001, net operating loss carryforwards totaled $7.6 million. Of that amount, $4.9 million expire over the next 10 years; the remaining $2.7 million expire over the next 17 years. Note H OPERATING LEASES ---------------- The Company leases certain property under operating leases that expire at various dates through fiscal 2007. Future rental commitments applicable to the operating leases at June 30, 2001 are approximately $1,099,000, $936,000, $661,000, $541,000, $530,000 and $255,000 for fiscal 2002, 2003, 2004, 2005, 2006 and thereafter, respectively. Rent expense was approximately $1,010,183, $452,000 and $397,000 for the years ended June 30, 2001, 2000 and 1999, 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 3,120,000 shares of common stock reserved for use under this plan. All options to purchase shares of common stock granted to- date have been at market price at the date of grant. Generally, twenty percent of the options granted may be exercised one year from the date of grant with comparable annual increases on a cumulative basis each year thereafter. The stock option plan also has vesting provisions predicated upon the death, retirement or disability of the optionee. The amount available for future grants under the stock option plan was 379,007 as of June 30, 2001. The Company has a nonemployee directors stock option plan with 240,000 shares of common stock reserved for use under this plan. The plan provides for the automatic grant of options to purchase 30,000 shares to each nonemployee director at the fair value on the date of shareholder approval of the plan and a similar grant for each nonemployee director that joins the Board prior to October 1999. Twenty percent of the options granted may be exercised one year from the date of grant with comparable annual increases on a cumulative basis each year thereafter. The amount available for future grants under the nonemployee directors stock option plan was 120,000 as of June 30, 2001. All stock options expire 10 years after the grant date. Stock option activity relating to the plans in each of the three years in the period ended June 30, 2001 is as follows: Number of Weighted Shares Subject Average Exercise Options to Option Price Per Share -------------------------------------------------------------- Outstanding - July 1, 1998 1,244,982 $ 4.36 Granted 176,828 $ 5.34 Exercised (81,960) $ 2.47 Forfeited (61,860) $ 7.00 -------------------------------------------------------------- Outstanding - July 1, 1999 1,277,990 $ 4.49 Granted 80,300 $ 9.38 Exercised (224,570) $ 3.00 Forfeited (26,994) $ 8.30 -------------------------------------------------------------- Outstanding - June 30, 2000 1,106,726 $ 5.04 Granted 225,775 $17.27 Exercised (128,460) $ 3.63 Forfeited (29,750) $ 7.55 -------------------------------------------------------------- Outstanding - June 30, 2001 1,174,291 $ 7.47 Exercisable - June 30, 2001 737,569 $ 4.41 ============================================================== Outstanding and exercisable options at June 30, 2001 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------- ------------------- Weighted Average Remaining Weighted Weighted Range of Contractual Average Average Exercise Number of Life Exercise Number of Exercise Prices Shares (Years) Price Shares Price --------------- ---------- ----------- --------- ------- -------- $ 1.00 - $ 2.00 383,740 2.92 $ 1.53 383,740 $ 1.53 $ 4.25 - $ 5.50 272,986 6.22 $ 5.18 171,689 $ 5.09 $ 6.09 - $10.00 208,140 6.14 $ 8.95 137,620 $ 9.19 $10.50 - $15.39 96,500 7.35 $12.17 42,720 $11.44 $16.00 - $23.38 212,925 9.16 $17.57 1,800 $20.00 --------------- --------- ----------- --------- ------- -------- 1,174,291 5.75 $ 7.47 737,569 $ 4.41 =============== ========= =========== ========= ======= ========
The Company uses the intrinsic value approach specified in Accounting Principles Board Opinion No. 25 in accounting for stock options. Had the Company determined compensation costs based upon the fair value of the options at the grant dates in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", its net earnings for the years ended June 30, 2001, 2000 and 1999 would have been reduced by $635,000, $390,000 and $350,000, or $.04, $.03 and $.03 per diluted share, respectively. The pro forma adjustments were calculated using the Black-Scholes option pricing model under the following weighted-average assumptions in each fiscal year: 2001 2000 1999 ------------------------------------------------------------------------- Risk free interest rate 6.1% 6.5% 6.0% Expected volatility 92% 81% 64% Expected life of options 6.40 years 5.95 years 5.95 years Expected dividends none none none ========================================================================= Based on the option pricing model, options granted during the years ended June 30, 2001, 2000 and 1999 had fair values at the date of grant of $13.81, $6.90 and $3.42 per share, respectively. Note J SEGMENT AND GEOGRAPHIC REPORTING -------------------------------- The Company reports its segments using the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure or any other manner in which management segregates a company. The Company's reportable segments offer similar products to different target markets. The segments are managed separately due to the production requirements and facilities that are unique to each segment. The Company has three reportable segments: Optical Components, which is an aggregation of the Company's infrared optics and material products business and the Company's VLOC subsidiary, Radiation Detectors, which is the Company's eV PRODUCTS division, and the Company's Laser Power Corporation subsidiary acquired in fiscal 2001. The Optical Components segment is divided into the geographic locations within the United States, Singapore, China, Japan and the United Kingdom. Each geographic location is directed by a general manager and is further divided into production and administrative units that are directed by managers. The Optical Components segment designs, manufactures and markets optical and electro-optical components, devices and materials for precision use in infrared, near infrared and visible light instrumentation. The Optical Components segment includes certain general corporate management and administrative activities of the Company which are not allocated to the other segments, certain research and development activities of the Company not necessarily specific to the Optical Components segment and other unallocated charges. The Radiation Detectors segment is located in the United States and is a division of the Company. The Radiation Detectors segment is directed by a general manager. The Radiation Detectors segment is further divided into production and administrative units that are directed by managers. The Radiation Detectors segment develops and markets solid- state x-ray and gamma-ray products for the nuclear radiation detection industry. The Laser Power Corporation segment is located primarily in the United States. Laser Power Corporation is directed by a general manager. The Laser Power Corporation segment is further divided into production and administrative units that are directed by managers. The Laser Power Corporation segment designs, manufactures and markets high performance optics for military, industrial and medical applications. Laser Power's infrared products are sold under the Laser Power brand name. Infrared products manufactured for military applications are sold under the Exotic Electro-Optics brand name. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. Substantially all of the Company's corporate expenses are allocated to the segments. The Company evaluates segment performance based upon reported segment profit or loss from operations. Inter-segment sales and transfers have been eliminated. Net revenues from external customers attributable to the Company's foreign operations, primarily II-VI Japan and II-VI Singapore Pte., Ltd. were $25.6 million, $18.6 million and $14.5 million for the years ended June 30, 2001, 2000 and 1999, respectively. Identifiable assets of the Company's foreign operations, primarily II-VI Singapore Pte., Ltd. and II-VI Japan are $20.3 million, $15.4 million and $10.1 million as of June 30, 2001, 2000 and 1999, respectively.
Optical Radiation Laser Power (000's) Components Detectors Corporation Totals -------------------------------------------------------------------------------------- 2001 Net revenues $ 83,345 $ 8,863 $ 31,126 $123,334 Income (loss) from operations 15,036 (992) 4,224 18,268 Interest expense - - - 2,330 Other expense, net - - - 1,382 Earnings before income taxes - - - 14,556 Depreciation and amortization 5,208 685 2,811 8,704 Segment assets 84,642 8,173 55,358 148,173 Expenditures for property, plant and equipment 14,956 490 1,295 16,741 Goodwill 1,698 - 27,538 29,236 ------------------------------ ------- ------- ------ ------- 2000 Net revenues $68,302 $ 5,790 - $74,092 Income (loss) from operations 12,427 (2,096) - 10,331 Interest expense - - - 349 Other expense, net - - - 226 Earnings before income taxes - - - 9,756 Depreciation and amortization 4,352 667 - 5,019 Segment assets 76,476 7,650 - 84,126 Expenditures for property, plant and equipment 8,501 376 - 8,877 Goodwill 1,792 - - 1,792 ------------------------------ ------- ------- ------ ------- 1999 Net revenues $56,354 $ 5,660 - $62,014 Income (loss) from operations 9,375 (1,136) - 8,239 Interest expense - - - 415 Other income, net - - - (214) Earnings before income taxes - - - 8,038 Depreciation and amortization 3,961 708 - 4,669 Segment assets 62,390 8,453 - 70,843 Expenditures for property, plant and equipment 4,925 495 - 5,420 Goodwill 1,879 - - 1,879 ------------------------------ ------- ------- ------ -------
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 $1,122,000, $812,000, and $579,000 for the years ended June 30, 2001, 2000 and 1999, respectively. The Company has an employee stock purchase plan for employees who have completed six months of continuous employment with the Company. The employee may purchase the common stock at 5% below the prevailing market price. The amount of shares which may be bought by an employee is limited to 10% of the employee's base pay for each fiscal year. This plan, as amended, limits the number of shares of common stock available for purchase to 400,000 shares. At June 30, 2001, 215,313 shares of common stock are available for purchase under the plan. The Company has no program for postretirement health and welfare and postemployment benefits. The II-VI Incorporated Deferred Compensation Plan (the "Plan") is designed to allow officers and key employees of the Company to defer receipt of compensation into a trust fund for retirement purposes. The Plan is a nonqualified, defined contribution employees' retirement plan. At the Company's discretion, the Plan may be funded by the Company making contributions based on compensation deferrals, matching contributions and discretionary contributions. Compensation deferrals will be based on an election by the participant to defer a percentage of compensation under the Plan. All assets in the Plan are subject to claims of the Company's creditors until such amounts are paid to the Plan participants. Employees of the Company made contributions to the Plan in the amount of approximately $354,000, $248,000, and $30,000 for the years ended June 30, 2001, 2000 and 1999, respectively. EX-21 5 ex2101.txt LIST OF SUBSIDIARIES OF II-VI INCORPORATED Subsidiary Jurisdiction of Incorporation ---------- ----------------------------- II-VI Delaware, Incorporated Delaware II-VI Singapore Pte., Ltd. Singapore II-VI International Pte., Ltd. Singapore II-VI Worldwide, Incorporated Barbados II-VI Japan Incorporated Japan VLOC Incorporated Pennsylvania II-VI U.K. Limited United Kingdom II-VI Optics (Suzhou) Co. Ltd. China Laser Power Corporation Delaware EMI Acquisition Corporation California Exotic Materials, Incorporated California Laser Power Optics de Mexico S.A. de C.V. Mexico Laser Power Europe N.V. Belgium Laser Power FSC, Ltd. Barbados EX-23 6 ex2301.txt INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-19511, No. 33-38019, No. 33-19510, No. 33-63739, No. 33-67121 and No. 333-12737 on Form S-8 of II-VI Incorporated and subsidiaries of our reports dated August 8, 2001, appearing in and incorporated by reference in this Annual Report on Form 10-K of II-VI Incorporated and subsidiaries for the year ended June 30, 2001. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania September 27, 2001