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