FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 1999 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . ----------- ------------ Commission File Number: 0-16195 II-VI INCORPORATED (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1214948 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 375 Saxonburg Boulevard Saxonburg, PA 16056 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: 724-352-4455 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] Aggregate market value of outstanding Common Stock, no par value, held by non-affiliates of the Registrant at September 15, 1999, was approximately $57,885,385, based on the closing sale price reported on NASDAQ/NMS for September 15, 1999. For purposes of this calculation only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates of the Registrant. Number of outstanding shares of Common Stock, no par value, at September 15, 1999, was 6,348,826. Documents Incorporated by Reference ----------------------------------- Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 1999 are incorporated by reference into Parts I, II and IV hereof. Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. 1 PART I ITEM 1. BUSINESS Introduction II-VI Incorporated ("II-VI" or the "Company") was incorporated in Pennsylvania in 1971. The Company's executive offices are located at 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056. Its telephone number is 724-352-4455. Reference to the "Company" or "II-VI" in this Form 10-K, unless the context requires otherwise, refers to II-VI Incorporated and its wholly-owned subsidiaries, II-VI Worldwide, Incorporated, II-VI Delaware, Incorporated, II-VI Japan Incorporated, II-VI Singapore Pte., Ltd., VLOC Incorporated, II-VI Optics (Suzhou) Co. Ltd., and II-VI U.K. Limited, as a consolidated operation. eV PRODUCTS operates as a division of II-VI Incorporated. The Company's name is pronounced "Two-Six Incorporated." II-VI Incorporated designs, manufactures and markets optical and electro-optical components, devices and materials for infrared, near-infrared, visible-light, x-ray and gamma-ray instrumentation. The Company's infrared products are used primarily in high-power CO2 (carbon dioxide) lasers. These lasers are used for industrial processing throughout the world. The Company's VLOC subsidiary manufactures near-infrared and visible light products for industrial, scientific and medical applications and solid-state (such as YAG and YLF) lasers. The Company's eV PRODUCTS division manufactures and markets solid-state x-ray and gamma-ray detector products for the nuclear radiation detection industry. The majority of the Company's revenues are attributable to the sale of optical components for the industrial laser processing industry. Information Regarding Market Segments and Foreign Operations The Company's business comprises two segments, the design, manufacture and marketing of optical and electro-optical components, devices and materials for infrared, near-infrared and visible-light instrumentation and the manufacture and marketing of x-ray and gamma-ray instrumentation. Financial data regarding the Company's revenues, results of operations, industry segments and international sales for the Company's last three fiscal years is set forth in, and incorporated herein by reference to, the Company's Consolidated Statements of Earnings on page 17 of the II-VI Incorporated 1999 Annual Report (the "Annual Report") and Note H to the Company's Consolidated Financial Statements on pages 27 and 28 of the Annual Report. Industrial Processing Background Applications for laser processing are increasing worldwide as manufacturers seek solutions to increasing demands for quality, precision, speed, throughput, flexibility, automation and cost control. High-power CO2 and YAG lasers provide these benefits in a wide variety of cutting, welding, drilling, ablation, balancing, cladding, heat-treating and marking applications. For example, automobile manufacturers use lasers to facilitate rapid product changeovers, process simplification, efficient sequencing and computer control on high-throughput production lines. Manufacturers of recreational vehicles, lawn mowers and garden tractors cut, trim and weld metal parts with lasers to achieve flexible, high- consistency, reduced post-processing, lower-cost operations. For office furniture producers, lasers provide easily reconfigurable, low-distortion, low-cost prototyping and production capability that facilitates semi-custom manufacturing of customer-specified designs. On high-speed consumer product processing lines, laser marking provides automated date coding for food packaging and computer driven container identification for pharmaceuticals. Precision optics such as total reflectors, partial mirrors, beamsplitters and lenses are critical to the operation of lasers and laser systems. Many CO2 and YAG laser systems contain up to 15 optical elements either as part of the laser resonator or associated with routing of the laser beam to the work piece. To the extent that optics wear or become contaminated during operation, optics are consumables in laser processing. Thus, an aftermarket demand is generated by an estimated current worldwide installed base of approximately 90,000 industrial YAG and CO2 lasers. Products The Company's products include optical and electro-optical components, devices and materials for infrared, near-infrared, visible light, x-ray and gamma-ray instrumentation. The Company's infrared products are used in high power CO2 (carbon dioxide) lasers. These lasers are used for industrial processing throughout the world. The Company's VLOC 2 subsidiary manufactures near-infrared and visible light products for industrial, scientific and medical applications and solid-state (such as YAG and YLF) lasers. The Company's eV PRODUCTS division manufactures and markets solid-state x-ray and gamma-ray detector products for the nuclear detection industry. The majority of the Company's revenues are attributable to the sale of optical components for the industrial laser processing industry. Infrared Optics and Materials Reliable operation of CO2 lasers requires high quality, low absorption optical components. The CO2 laser emits infrared energy at a wavelength of 10.6 micrometers. This wavelength is optimal for many industrial processes including cutting, welding, drilling and heat treating materials such as steel alloys, non-ferrous metals, plastics, wood, paper, fiberboard, ceramics and composites. The CO2 laser is also used for cosmetic and invasive medical procedures because of its efficient absorption in human tissue. The Company's infrared optics and materials are incorporated into surveillance and imaging systems because of the effectiveness of the 10.6 micrometer wavelength to penetrate atmospheric conditions. The Company is a broad line supplier of the optical elements used in CO2 lasers and laser systems. Conventionally polished and precision diamond turned transmissive and reflective optics are supplied to laser manufacturers, laser system builders and end users for replacement parts. Transmissive optics manufactured by the Company are predominately made from Zinc Selenide. The Company is the largest manufacturer in the world for this optical material. The Company's Zinc Selenide production capability and its proprietary, thin film coating technology have earned the Company a reputation as the quality leader in the world market. The Company supplies replacement optics and refurbishing services to end users of industrial CO2 lasers. The Company sells its infrared replacement optics under the trade name of INFRAREADY(r) optics. Consumable items such as focusing lenses and output couplers can be cost effectively refurbished for the Company's aftermarket customers. The aftermarket portion of the Company's business continues to grow as industrial laser applications proliferate worldwide. The Company produces and supplies Zinc Sulfide in the form of domes and windows to military suppliers for Forward Looking InfraRed (FLIR) systems. YAG Laser Components The power levels available from Nd:YAG lasers (neodymium doped:Yttrium Aluminum Garnet) are increasing while the costs of such lasers are decreasing. These trends are making YAG laser processing more attractive in such high-power YAG applications as the welding of airbag sensors and inflators. Low-power YAG applications include the high speed micro-welding of multi-blade razor assemblies, the welding of heart pacemakers, the precision trimming of resistors in electronic assemblies, and marking or labeling of integrated circuits. The capability to deliver the 1.06 micrometer YAG laser wavelength over flexible, low loss optical fibers has enhanced YAG laser deployment in many applications where complex shapes require versatile beam delivery geometries. YAG lasers require the same optical elements as the CO2 laser except that they are made of different materials to operate at the YAG laser near-infrared wavelength of 1.06 micrometers. The Company supplies a family of standard and custom laser gain materials and optics for industrial, medical, scientific and research YAG lasers. The YAG laser gain materials are produced to stringent industry specifications and precisely fabricated into rods or slabs. Included in the Company's products are refurbished YAG rods sold to the Company's aftermarket customers. The Company offers waveplates, polarizers, lenses, prisms and mirrors for visible and near-infrared applications. These products control and alter the visible and near-infrared energy and its polarization. The Company offers cavities for use in flashlamp pumped lasers. These cavities are primarily made of samarium doped glass which improves the laser performance. Fluoride Materials Nd:YLF (neodymium doped:Yttrium Lithium Fluoride) displays exceptional qualities as a laser material for solid-state lasers. The crystal offers high power laser operation at 1.047 micrometers and 1.053 micrometers with low beam divergence leading to good Q-switched and single-mode laser operation. YLF is used in both flashlamp and diode pumped solid-state lasers. Due to high lasing efficiency, YLF lasers are suitable for scribing, trimming and cutting of semiconductor materials. YLF also lases at 1.313 micrometers. This wavelength, along with the 1.047 micrometer wavelength, has attractive applications for use in cable television and other telecommunication applications which require devices with high data rates. 3 Nuclear Radiation Detectors New and expanding applications for nuclear radiation in industry, medicine and research is fueling increased demand for nuclear radiation detectors. Solid-state CdZnTe nuclear radiation detectors are attractive because of their reduced size, improved tolerance of environmental conditions and lower voltage/current requirements compared to the more traditional scintillator/photomultiplier or cryogenically cooled Germanium devices. The market is composed of industrial process control, nuclear medicine, x-ray imaging, environmental monitoring, nuclear safeguards and nonproliferation, and health physics segments. The use of CdZnTe hand-held probes in the medical field allows the introduction of new cancer location techniques, based on the injection of a radio-labeled antibody that binds to the cancer cells. This allows the surgeon to accurately identify and remove cancerous tissue. CdZnTe-based imaging arrays can be used in both the nuclear medical (internal gamma-ray emission) and radiographic (external x-ray source) fields. In nuclear medicine, CdZnTe allows the manufacture of a new generation of gamma cameras, offering much improved position sensitivity and the ability to produce images using lower doses of injected radioactivity. In the radiographic field, higher density CdZnTe provides much improved sensitivity to the higher energy x-rays used in some of the newer diagnostic techniques. It also allows the possibility of direct-readout digital radiography, which allows the physician to see the relevant part of the body in real time, thus reducing the time delay between x-ray imaging and diagnosis. The Company designs and manufactures CdZnTe room-temperature, nuclear radiation detectors combined with custom designed low noise front-end electronics. The Company believes it has become the leader in room-temperature, direct conversion radiation detectors. Customers and Markets Industrial The Company's customers include leading original equipment manufacturers (OEMs) and system integrators worldwide in the CO2 and YAG laser machine tool industry. The Company has targeted both the high power and low power segments of the laser optics market. High power CO2 lasers manufactured by the Company's customers are used for cutting, drilling, welding and heat treating. The Company also sells directly to laser end users who require replacement optics such as focusing lenses and beam steering mirrors. Industrial lasers are used in a wide variety of industries and applications including automotive, electrical equipment, packaging, building products, office furniture, garment, airframe or aerospace, consumer electronics, tooling and machinery. Low power CO2 lasers are utilized for both medical and industrial applications. Engraving and marking are two of the more popular markets for low power CO2 lasers. Manufacturers of low power CO2 laser systems are high volume consumers of optics. The Company's YAG component customers' systems are used for marking, scribing, microwelding and precision trimming. A broad range of industries use YAG systems, including medical devices, consumer products, automotive and semiconductors. The Company offers YAG laser manufacturers both the YAG laser rod and the necessary optics for a complete laser system. The Company's customers are developing products incorporating fluoride materials for use in telecommunications, material processing and environmental monitoring. The Company is using its close working relationships with its industrial CO2 customers worldwide to increase its YAG component supply market share, since both products are needed by many of the same customers. Scientific and Military The scientific and research and development markets are creating many opportunities for the Company's visible, near-infrared and infrared optics and materials. The Company supplies components with demanding specifications to these market 4 segments. Examples of such products include aspheric optics, prisms, parabolic reflectors and multi-focusing element optical assemblies. The Company's products are also integrated into spectrophotometers, interferometers and distance measuring instruments; scanning mirrors for marking and engraving applications; and focusing assemblies for infrared cameras. Timely response, high quality products and dedicated engineering support are the cornerstones of the Company's pursuit of these markets. The Company supplies materials and optics to manufacturers of infrared imaging systems used in military systems. The U.S. military and their allies are developing advanced infrared imaging systems for state-of-the-art weapon systems. Sales and Distribution The Company markets its products in the United States through its direct sales force; in Japan through its subsidiary, II-VI Japan Incorporated; in Southeast Asia and China through its subsidiaries, II-VI Singapore Pte., Ltd. and II-VI Optics (Suzhou) Co. Ltd.; and in the United Kingdom through its subsidiary, II-VI U.K. Limited. Europe and other major markets are addressed through distributors and agents. The Company's products are sold to more than 4,000 customers worldwide. Manufacturing Processes Infrared and Visible Optics The manufacturing processes for optics include a number of low- cost, automated, high-precision processes that have been developed and documented at the Company's manufacturing sites in Pennsylvania, Florida, Singapore and China. Manufacturing steps for the majority of the Company's optical products include: Grinding and Polishing. The Company rigorously tests starting materials in the optics fabrication process to assure conformity to specifications for absorption, clarity, stress and purity. The manufacturing sequence typically involves grinding a part to the desired curvature and precision polishing the optic to the desired high-quality surface shape and finish. The Company has developed specialized processes for fabricating visible, near-infrared, and infrared optics. The Company has state-of-the-art, numerically controlled generating and grinding equipment and automated synchrospeed optical polishing apparatuses. Diamond Turning. The Company's diamond turning of metal mirrors involves state-of-the-art equipment for cutting of flat metal reflectors and turning of contoured spherical or aspherical shapes. The ability to produce spherical and aspherical diffraction-free surfaces, due to a proprietary real-time feedback test system, provides the highest-quality high-power-handling copper reflecting mirrors available in the industry. Thin-Film Coating. Multilayer, thin-film, visible-light and infrared coatings are produced by evaporating precisely controlled thicknesses of various substances from microprocessor-controlled thermal or electron-beam sources onto optical surfaces in custom- built vacuum chambers. The know-how to control such process variables as time, pressure, gas flow and temperature are critical to achieving low-absorption, high-adhesion and properly transmitting thin films. Production of zero-defect coatings is a part of the proprietary knowledge of II-VI. Materials The Company is a materials-based company. Processes used to produce these materials require long development periods, are capital intensive and involve precision process control. Yields are raised from minimal to acceptable as know-how and process- consistency techniques are developed. The Company's infrared components and materials are made from compounds composed primarily of elements from Groups II and VI of the Periodic Table of the Elements ("II-VI Compounds"). II-VI Compounds, a class of non-hygroscopic (do not absorb water) materials, are leading infrared transmitting materials. Their high infrared transmission efficiency, the key property needed for high- power infrared laser optics, is a result of low infrared absorption. Infrared absorption is low due to the type of bonding that exists within a II-VI Compound crystalline structure and due to the relatively high molecular weights of the most useful II-VI Compounds. The Group II elements used by the Company are Zinc, Cadmium and Mercury, and the Group VI elements used are Sulfur, Selenium and Tellurium. 5 Materials manufactured by the Company include: Zinc Selenide. The Company manufactures fine-grained polycrystalline Zinc Selenide by a proprietary chemical vapor deposition process. The Company is one of two dominant manufacturers of this material in the world and has earned the reputation for producing the lowest-absorbing laser-grade Zinc Selenide. The process involves high-temperature disassociation of Hydrogen Selenide gas and a gas phase reaction with Zinc vapor. Solid Zinc Selenide is deposited on graphite mandrels at high temperatures, forming sheets of the material. Zinc Selenide is the principal material used in the Company's CO2 laser optics. All material is polished, inspected and laser-tested for defects. Zinc Sulfide. The chemical vapor deposition process is also utilized to manufacture fine-grained polycrystalline Zinc Sulfide. Some Zinc Sulfide is further processed to form Multispectral Zinc Sulfide. The Multispectral Zinc Sulfide is highly transmissive from the ultraviolet to the middle infrared wave lengths, making it the material of choice for tank windows, for example, through which humans, laser range-finders and guidance systems identify targets. Cadmium Zinc Telluride Substrates. The Company utilizes vertical and horizontal Bridgman processes to grow its Cadmium Zinc Telluride single-crystal substrate materials. The Bridgman processes involve direct solidification from a liquid melt with closely controlled unidirectional freezing in either a vertical or horizontal configuration. The substrates are mined from thoroughly tested Cadmium Zinc Telluride ingots utilizing precision crystal- orientation techniques followed by a sequence of surface lapping and semiautomated diamond sawing. Wafers are precision sized, then surfaced through a series of critical polishing and chemical etching steps. Cadmium Zinc Telluride for Nuclear Radiation Detectors. The high-pressure vertical Bridgman process is used to grow Cadmium Zinc Telluride for nuclear radiation detectors. This proprietary process produces critical materials which, when mated to hybrid front-end electronics built by the Company, are sold to industrial gauging and other equipment manufacturers. The high-pressure Bridgman process yields products that are cost-competitive with scintillator/photomultiplier devices. YAG Materials. Neodymium-doped YAG solid-state laser gain materials are manufactured at the Company's Florida operations. The Company's precision process control and know-how result in consistent YAG rod products which are in high demand. The Company has recently expanded its production capacity for this material. YLF and LiSAF Materials. Neodymium-doped YLF and chromium- doped LiSAF solid-state laser gain materials are manufactured at the Company's Florida operations. The Company utilizes a top-seeded Czochralski technique with precision computer-aided diameter control techniques to produce the high-quality YLF and LiSAF crystals required for the high-demand laser rod products. The Company is the industry leader in the LiSAF market and competes in the YLF rod and slab business on price, quality and delivery. Sources of Supply The major raw materials used by the Company are Zinc, Selenium, Hydrogen Selenide, Hydrogen Sulfide, Cadmium, Tellurium, Yttrium Oxide, Aluminum Oxide and Iridium. The Company produces virtually all of its Zinc Selenide and Zinc Sulfide requirements internally, although small quantities of Zinc Selenide and Zinc Sulfide may be purchased from outside vendors from time to time. The Company also purchases Gallium Arsenide, Copper, Silicon, Germanium, Quartz, optical glass and small quantities of other materials for use as base materials for laser optics. The Company purchases Thorium Fluoride and other materials for use in optical fabrication and coating processes. There are more than two suppliers for all of the above materials except for Zinc Selenide, Hydrogen Selenide and Thorium Fluoride (excluding the Company), for each of which there is only one proven source of merchant supply. For most materials, the Company has entered into annual purchase arrangements whereby suppliers provide discounts for annual volume purchases in excess of specified amounts. The continued high quality of these materials is critical to the stability of the Company's manufacturing yields. The Company conducts testing of materials at the onset of the production process to meet evolving customer requirements. Additional research may be needed to better define future starting material specifications. The Company has not experienced significant production delays due to shortages of materials. However, the Company does occasionally experience problems associated with vendor supplied materials not meeting contract specifications for quality or purity. A significant failure of the Company's suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a materially adverse effect on the Company's results of operations. 6 Environmental, Health and Safety Matters The Company uses or generates certain hazardous substances in its research and manufacturing facilities. The Company believes that its handling of such substances is in material compliance with applicable local, state and federal environmental, safety and health regulations at each operating location. The Company invests substantially in proper protective equipment, process controls and specialized training to minimize risks to employees, surrounding communities and the environment due to the presence and handling of such hazardous substances. The Company annually conducts employee physical examinations and workplace air monitoring regarding such substances. When exposure problems or potential exposure problems have been indicated, corrective actions have been implemented and re-occurrence has been minimal or non-existent. The Company does not carry environmental impairment insurance. Relative to its generation and use of the extremely hazardous substance Hydrogen Selenide, the Company has in place a government- approved emergency response plan. Special attention has been given to all procedures pertaining to this gaseous material to minimize the chances of its accidental release to the atmosphere. With respect to the production, use, storage and disposal of the low-level radioactive material Thorium Fluoride, the Company's facilities and procedures have been inspected and approved by the Nuclear Regulatory Commission. This material is utilized in the Company's thin-film coatings. Thorium Fluoride bearing by-products are collected and shipped as solid waste to a government-approved low-level radioactive waste disposal site in Barnwell, South Carolina. The generation, use, collection, storage and disposal of all other hazardous by-products, such as suspended solids containing heavy metals or airborne particulates, are believed by the Company to be in material compliance with regulations. Management believes that all of the permits and licenses required for operation of the Company's business are in place. Although the Company is not aware of any material environmental, safety or health problems in its properties or processes, there can be no assurance that problems will not develop in the future which would have a materially adverse effect on the Company. Research and Development The Company's research and development policy calls for the pursuit of a program of internally funded and contract research and development totaling between 5 and 8 percent of product sales. From time to time the ratio of contract to internally funded activity varies significantly due to the unevenness and uncertainty associated with most government research programs. The Company is committed to accepting only funded research that ties closely to its growth plans. Company research and development activities focus on developing new proprietary products or on understanding, improving and automating crystal growth, low-damage fabrication or optical thin- film coating technologies. The Company performs commercial prototype and engineering work for customers and, in addition, participates in various government and university research and development consortia. The Company maintains an engineering, research and development staff of one hundred eight. Seventy-eight of the Company's employees are engineers or scientists. In addition, manufacturing personnel support or participate in research and development on an ongoing basis. Interaction between the development and manufacturing functions enhances the direction of projects, reduces costs and accelerates technology transfers. The Company is primarily engaged in ongoing research and development in the following areas: Zinc Selenide optical material production; YAG crystal production; YLF and other fluorides production; automated, deterministic optical fabrication methods; and optical thin-film processes and products. Company-funded research and development and contract research expenditures together totaled approximately $3.0 million, $3.3 million and $3.4 million during fiscal 1997, 1998 and 1999, respectively. Contract research revenues during those respective years totaled approximately $2.7 million, $2.2 million and $1.4 million. The Company has been active in various research and development programs at the federal and state levels. Competition The Company believes that it is a leading producer of products and services in its addressed markets. In the area of commercial infrared laser optics and materials, the Company believes it is an industry leader. The Company is a leading supplier of Cadmium Zinc Telluride substrates used for infrared imaging arrays, and believes that it is the only supplier of Cadmium Telluride electro-optic modulators to U.S. and NATO defense contractors. The Company is a significant supplier of YAG rods and YAG laser optics to the worldwide markets of scientific, research, medical and industrial laser manufacturers. 7 The Company competes on the basis of product quality, delivery time, strong technical support and pricing. Management believes that the Company competes favorably with respect to these factors and that its vertical integration, manufacturing facilities and equipment, experienced technical and manufacturing employees, and worldwide marketing and distribution provide competitive advantages. The Company has a number of present and potential competitors, many of which have greater financial, selling, marketing or technical resources. The significant competitor of the Company in the production of Zinc Selenide is a division of Rohm and Haas Co. The competitors producing infrared and CO2 laser optics include Laser Power Corporation and Coherent in the United States and Sumitomo in Japan, as well as several companies producing limited quantities of infrared and CO2 laser optics. Competing producers of YAG materials and optics include the Litton Airtron Division of Litton Industries and a division of Saint-Gobain. The Company is not currently aware of any significant competitors for its Cadmium Zinc Telluride radiation detector product line. In addition to competitors who manufacture products similar to those of the Company, there are other technologies or materials that may compete with the Company's products. The market for the nuclear radiation detector materials is in its infancy and could be affected by competing technologies. Order Backlog Order backlog decreased 9% to $18.0 million at June 30, 1999 from $19.8 million at June 30, 1998. Manufacturing orders comprise 97% of the backlog at June 30, 1999, compared to 93% of backlog at June 30, 1998. All of the manufacturing order backlog at June 30, 1999 is expected to be shipped in fiscal 2000. Employees As of June 30, 1999, the Company employed 625 persons worldwide. Of these employees, 108 were engaged in research, development and engineering, 391 in direct production and the balance in sales and marketing, administration, finance and support services. The Company's production staff includes highly skilled optical craftsmen. None of the Company's employees are covered by a collective bargaining agreement, and the Company has never experienced any work stoppages. The Company has a long standing policy of encouraging active employee participation in selected areas of operations management. The Company believes its relations with its employees to be good. The Company rewards its employees with incentive compensation based on achievement of performance goals. Patents, Trade Secrets And Trademarks The Company relies on its trade secrets and proprietary know- how to develop and maintain its competitive position. The Company has not pursued process patents due to the disclosures required in the patent process and the relative difficulties in successfully litigating process-type patents. The Company has confidentiality and noncompetition agreements with its executive officers and certain other personnel. The processes and specialized equipment utilized in crystal growth, infrared materials fabrication and infrared optical coatings as developed at the Company are complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar technology or that all aspects of the Company's proprietary technology will be protected. Others have obtained patents covering a variety of infrared optical configurations and processes, and others could obtain patents covering technology similar to the Company's. The Company may be required to obtain licenses under such patents, and there can be no assurance that the Company would be able to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted which may adversely affect the Company. In addition, Company research and development contracts with agencies of the United States Government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled. The Company holds four registered trademarks: the II-VI INCORPORATED (registered) name; INFRAREADY OPTICS (registered)( for replacement optics for industrial CO2 lasers; EPIREADY (registered) for low surface damage substrates for Mercury Cadmium Telluride epitaxy; and eV PRODUCTS (registered) for products manufactured by the Company's eV PRODUCTS division. The trademarks are registered with the United States Patent and Trademark Office, but not with any states. The Company is not aware of any interference or opposition to these trademarks in any jurisdiction. 8 Risk Factors Environmental Concerns The Company is subject to a variety of federal, state and local governmental regulations related to the storage, use and disposal of environmentally hazardous materials. Both the governmental regulations and the costs associated with complying with such regulations are subject to change in the future. There can be no assurance that any such change will not have a material adverse effect on the Company. The Company manufactures and utilizes Hydrogen Selenide gas, an extremely hazardous material, in the production of Zinc Selenide. In its processes, the Company also produces and uses waste containing Thorium Fluoride, a low-level radioactive material, and generates other hazardous by-products such as suspended solids containing heavy metals and airborne particulates. The Company has made and continues to make substantial investments in protective equipment, process controls, manufacturing procedures and training in order to minimize the risks to employees, surrounding communities and the environment due to the presence and handling of such extremely hazardous materials. The failure to properly handle such materials, however, could lead to harmful exposure to employees or the discharge of certain hazardous waste materials, and, since the Company does not carry environmental impairment insurance, this could have a material adverse effect on the financial condition or results of operations of the Company. Although the Company has not encountered material environmental problems in its properties or processes to date, there can be no assurance that problems will not develop in the future which would have a material adverse effect on the business, results of operations or financial condition of the Company. Manufacturing and Sources of Supply The Company utilizes high quality, optical grade Zinc Selenide in the production of a majority of its products. The Company is a leading producer of Zinc Selenide for its internal use and for external sale. The production of Zinc Selenide is a complex process requiring production in a highly controlled environment. A number of factors, including defective or contaminated materials, could adversely affect the Company's ability to achieve acceptable manufacturing yields of high quality Zinc Selenide. Zinc Selenide is available from only one outside source and quantity and qualities may be limited. The unavailability of necessary amounts of high quality Zinc Selenide would have a material adverse effect upon the Company. In addition, in fiscal 1992 and 1993, the Company experienced fluctuations in its manufacturing yields which affected the Company's results of operations. There can be no assurance that the Company will not experience manufacturing yield inefficiencies which could have a material adverse effect on the business, results of operations or financial condition of the Company. The Company produces the Hydrogen Selenide gas used in its production of Zinc Selenide. There are risks inherent in the production and handling of such material. The inability of the Company to effectively handle Hydrogen Selenide could result in the Company being required to curtail its production of Hydrogen Selenide. Hydrogen Selenide can be obtained from one external source, and the Company has previously purchased, and to supplement its internal production, currently purchases such material from this source. The cost of purchasing such material is significantly greater than the cost of internal production. As a result, if the Company purchased a substantial portion of such material from its outside source, it would significantly increase the Company's production costs of Zinc Selenide. Therefore, the Company's inability to internally produce Hydrogen Selenide could have a material adverse effect on the business, results of operations or financial condition of the Company. In addition, the Company requires other high purity, relatively uncommon materials and compounds to manufacture its products. Failure of the Company's suppliers to deliver sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on the business, results of operations or financial condition of the Company. Competition The Company has a number of present and potential competitors, many of which have greater financial resources than the Company. The markets for many of the Company's products can be subject to competitive pricing in order to gain or retain market share. The Company may also face competition from competitors who manufacture products similar to those of the Company, and whose technologies or materials may compete with the Company's products. Such competitive pressures could affect the Company's pricing and adversely affect the business, results of operations or financial condition of the Company. International Sales and Operations Sales to customers in countries other than the United States accounted for approximately 43%, 45% and 47% of revenues during fiscal 1997, 1998 and 1999, respectively. The Company anticipates that international sales will continue to account for a significant portion of revenues for the foreseeable future. In addition, the Company manufactures products in Singapore and China, and maintains direct sales offices in Japan and the United Kingdom. Sales and operations outside of the 9 United States are subject to certain inherent risks, including fluctuations in the value of the U.S. dollar relative to foreign currencies, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations and potentially adverse tax consequences. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition or results of operations. In particular, although the Company's international sales, other than in Japan and the United Kingdom, are denominated in U.S. dollars, currency exchange fluctuations in countries where the Company does business could have a material adverse affect on the Company's business, financial condition or results of operations, by rendering the Company less price- competitive than foreign manufacturers. The Company's sales in Japan and the United Kingdom are denominated in the local currency and, accordingly, are affected by fluctuations in exchange rates. The Company generally reduces its exposure in Japan to such fluctuations through foreign currency forward exchange contracts. The Company does not engage in the speculative trading of financial derivatives. There can be no assurance, however, that the Company's practices will eliminate the risk of fluctuation in the currency exchange rates. Acquisitions The Company's business strategy includes expanding its product lines and markets through internal product development and acquisitions. Any acquisition may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, and amortization expense related to intangible assets acquired, any of which could have material adverse affect on the Company's business, financial condition or results of operations. In addition, acquired businesses may be experiencing operating losses. Any acquisition will involve numerous risks, including difficulties in the assimilation of the acquired company's operations and products, uncertainties associated with operating in new markets and working with new customers, and the potential loss of the acquired company's key employees. Dependence on New Products and Processes In order to meet its strategic objectives, the Company must continue to develop, manufacture and market new products, develop new processes and improve existing processes. As a result, the Company expects to continue to make significant investments in research and development and to continue to consider from time to time the strategic acquisition of businesses, products, or technologies complementary to the Company's business. The success of the Company in developing, introducing and selling new and enhanced products depends upon a variety of factors including product selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly processes, effective sales and marketing, and product performance in the field. There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a manner which satisfies customer needs or achieves market acceptance. The failure to do so could have a material adverse affect on the Company's ability to grow its business. Dependence on Key Personnel The Company is highly dependent upon the experience and continuing services of certain scientists, engineers and production and management personnel. Competition for the services of these personnel is intense, and there can be no assurance that the Company will be able to retain or attract the personnel necessary for the Company's success. The loss of the services of the Company's key personnel could have a material adverse affect on the business, results of operations or financial condition of the Company. Proprietary Technology Claims The Company does not currently hold any material patents applicable to its processes and relies on a combination of trade secret, copyright and trademark laws and employee non-compete and nondisclosure agreements to protect its intellectual property rights. There can be no assurance that the steps taken by the Company to protect its rights will be adequate to prevent misappropriation of the Company's technology. Furthermore, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company. Asserting the Company's rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting the business, results of operations or financial condition of the Company. In the event a third party was successful in a claim that one of the Company's processes infringed its proprietary rights, the Company may have to pay substantial damages or royalties, or expend substantial amounts in order to obtain a license or modify the process so that it no longer infringes such proprietary rights, any of which could have a material adverse effect on the business, results of operations or financial condition of the Company. 10 Recent Events On September 21, 1999, the Company purchased 1,250,000 shares of Laser Power Corporation common stock for a total purchase price of approximately $2.8 million. Based on information available to the Company, this purchase represents approximately 14.7% of the outstanding common stock of Laser Power Corporation. Laser Power Corporation is a competitor of the Company which produces infrared and CO2 laser optics. ITEM 2. PROPERTIES Facilities The Company's headquarters are located in Saxonburg, Pennsylvania, 25 miles north of Pittsburgh, in a 90,000-square-foot facility, on approximately 64 acres of land. In fiscal 1998, the Company completed construction of a 30,000-square-foot facility in Saxonburg which is occupied by the eV PRODUCTS division manufacturing operation and a 45,000 square-foot facility in Florida which is occupied by the Company's VLOC subsidiary. In addition, the Company has leases for its manufacturing and office space in Florida, Singapore, China, U.K., and Japan totaling 39,000 square feet, and owns two facilities, one of which is currently being held for sale, totaling 35,000 square feet in Florida. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any litigation which could have a materially adverse effect on the Company or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Form 10-K. Executive Officers of the Registrant The executive officers of the Company and their respective ages and positions are as follows: Name Age Position Carl J. Johnson 57 Chairman, Chief Executive Officer and Director Francis J. Kramer 50 President, Chief Operating Officer and Director Herman E. Reedy 56 Vice President and General Manager of Quality and Engineering James Martinelli 41 Treasurer and Chief Financial Officer Carl J. Johnson, a co-founder of the Company in 1971, serves as Chairman, Chief Executive Officer and a Director of the Company. He served as President of the Company from 1971 until 1985 and has been a Director since its founding and Chairman since 1985. From 1966 to 1971, Dr. Johnson was Director of Research & Development for Essex International, Inc., an automotive electrical and power distribution products manufacturer. From 1964 to 1966, Dr. Johnson worked at Bell Telephone Laboratories as a member of the technical staff. Dr. Johnson completed his Ph.D. in Electrical Engineering at the University of Illinois in 1969. He holds B.S. and M.S. degrees in Electrical Engineering from Purdue University and Massachusetts Institute of Technology (MIT), respectively. Dr. Johnson serves as a director of Xymox Technology, Inc., Armstrong Laser Technology, Inc. and Applied Electro-Optics Corporation. 11 Francis J. Kramer has served as a Director of the Company since 1989. Mr. Kramer has been employed by the Company since 1983 and has been its President and Chief Operating Officer since 1985. Mr. Kramer joined the Company as Vice President and General Manager of Manufacturing and was named Executive Vice President and General Manager of Manufacturing in 1984. Prior to his employment by the Company, Mr. Kramer was the Director of Operations for the Utility Communications Systems Group of Rockwell International Corp. Mr. Kramer graduated from the University of Pittsburgh in 1971 with a B.S. degree in Industrial Engineering and from Purdue University in 1975 with an M.S. degree in Industrial Administration. Herman E. Reedy has been with the Company since 1977 and is Vice President and General Manager of Quality and Engineering. Previously, Mr. Reedy held positions at the Company as General Manager of Quality and Engineering, Manager of Quality and Manager of Components. From 1973 until joining the Company, Mr. Reedy was employed by Essex International, Inc., serving last as Manager, MOS Wafer Process Engineering. Prior to 1973, he was employed by Carnegie Mellon University and previously held positions with Semi- Elements, Inc. and Westinghouse Electric Corporation. Mr. Reedy is a 1975 graduate of the University of Pittsburgh with a B.S. degree in Electrical Engineering. James Martinelli has been employed by the Company since 1986 and has served as Treasurer and Chief Financial Officer and Assistant Secretary since May of 1994. Mr. Martinelli joined the Company as Accounting Manager and was named Controller in 1990. Prior to his employment by the Company, Mr. Martinelli was Accounting Manager at Tippins Incorporated and Pennsylvania Engineering Corporation from 1980 to 1985. Mr. Martinelli graduated from Indiana University of Pennsylvania in 1980 with a B.S. degree in Accounting and is a member of the Pennsylvania Institute of Certified Public Accountants. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the National Association of Securities Dealers, Inc. Automated Quotations ("NASDAQ") National Market under the symbol "IIVI." The following table sets forth the range of high and low closing sale prices per share of the Company's Common Stock for the fiscal periods indicated, as reported by the NASDAQ National Market. High Low Fiscal 1999 First Quarter $14 1/4 $7 1/4 Second Quarter $9 $5 7/8 Third Quarter $10 3/16 $7 1/4 Fourth Quarter $7 1/4 $9 1/2 Fiscal 1998 First Quarter $28 $21 3/8 Second Quarter $28 1/2 $21 Third Quarter $23 3/4 $17 15/16 Fourth Quarter $20 1/2 $12 5/8 On September 15, 1999, the last reported sale price for the Common Stock on the NASDAQ National Market was $12 5/8 per share. As of such date, there were approximately 750 holders of record of the Common Stock. The Company has not historically paid cash dividends and does not anticipate paying cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference from page 13 of the Company's 1999 Annual Report to Shareholders. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference from pages 9 through 12 of the Company's 1999 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference from pages 2 through 8 of the Company's 1999 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference from pages 14 through 29 of the Company's 1999 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth above in Part I under the caption "Executive Officers of the Registrant" is incorporated herein by reference. The other information required by this item is incorporated herein by reference to the information set forth under the captions "Election of Directors" and "Board of Directors and Board Committees", and the information set forth under the caption "Other Matters - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the information set forth in the second paragraph under the caption "Board of Directors and Board Committees" and the information set forth under the caption "Executive Compensation and Other Information" in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the information set forth under the caption "Principal Shareholders" in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the information set forth under the caption "Board of Directors and Board Committees" in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial statements, financial statement schedules and exhibits not listed have been omitted where the required information is included in the consolidated financial statements or notes thereto, or is not applicable or required. 13 (a) (1) The consolidated balance sheets as of June 30, 1999 and 1998, the consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1999, and the notes to consolidated financial statements, presented in the Company's 1999 Annual Report to Shareholders, are incorporated herein by reference. The report of Deloitte & Touche LLP, dated August 6, 1999 on the 1999, 1998 and 1997 financial statements presented in the Company's 1999 Annual Report to Shareholders, is incorporated herein by reference. (2) Financial Statement Schedule: The financial statement schedule shown below should be read in conjunction with the financial statements contained in the 1999 Annual Report to Shareholders. Other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. The report of Deloitte & Touche LLP on Schedule II for each of the three years ended June 30, 1999, is included herein. Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended June 30, 1999. (3) Exhibits. EXHIBIT NO. REFERENCE 3.01 Amended and Restated Incorporated herein by Articles of Incorporation reference is Exhibit 3.02 to of II-VI Incorporated Registration Statement No. 33-16389 on Form S-1. 3.02 Amended and Restated By-Laws Incorporated herein by of II-VI Incorporated reference is Exhibit 3.02 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (file number 0-16195 and docketed on September 30, 1991). 10.01 II-VI Incorporated Employees' Incorporated herein by Stock Purchase Plan reference is Exhibit 10.03 to Registration Statement No. 33-16389 on Form S-1. 10.02 II-VI Incorporated Amended Incorporated herein by and Restated Employees' reference is Exhibit 10.04 to Stock Purchase Plan Registration Statement No. 33-16389 on Form S-1. 10.03 First Amendment II-VI Incorporated herein by Incorporated Amended and reference is Exhibit 10.01 to Restated Employees' Stock to the Company's Form 10-Q Purchase Plan for the Quarter Ended March 31, 1996. 10.04 II-VI Incorporated Amended Incorporated herein by and Restated Employees' reference is Exhibit 10.05 to Profit-Sharing Plan and Registration Statement Trust Agreement, as amended No. 33-16389 on Form S-1. 10.05 Form of Representative Incorporated herein by Agreement between the reference is Exhibit 10.15 to Company and its foreign Registration Statement representatives No. 33-16389 on Form S-1. 10.06 Form of Employment Agreement* Incorporated herein by reference is Exhibit 10.16 to Registration Statement No. 33-16389 on Form S-1. 14 10.07 Description of Management- Incorporated herein by By-Objective Plan* reference is Exhibit 10.09 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. 10.08 II-VI Incorporated 1994 Incorporated herein by Nonemployee Directors Stock reference is Exhibit A to the Option Plan* Company's Proxy Statement dated September 30, 1994. 10.09 II-VI Incorporated Deferred Incorporated herein by Compensation Plan* reference is Exhibit 10.12 to Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.10 Trust Under the II-VI Incorporated herein by Incorporated Deferred reference is Exhibit 10.13 to Compensation Plan* the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.11 Description of Bonus Incorporated herein by Incentive Plan* reference is Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.12 Amended and Restated II-VI Incorporated herein by Incorporated Deferred reference is Exhibit 10.01 Compensation Plan* to the Company's Form 10-Q for the Quarter Ended December 31, 1996. 10.13 Amended and Restated II-VI Incorporated herein by Incorporated 1997 Stock reference is Exhibit 10.04 Option Plan* to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998. 10.14 Agreement by and between Incorporated herein by PNC Bank, National reference is Exhibit 10.01 Association and to the Company's Form 10-Q II-VI Incorporated for for the Quarter Ended Amended and Restated March 31, 1999. Letter Agreement for Committed Line of Credit and Japanese Yen Term Loan 13.01 Annual Report to Shareholders Portions of the 1999 Annual Report are filed herewith. 21.01 List of Subsidiaries of Filed herewith. II-VI Incorporated 23.01 Consent of Deloitte Filed herewith. & Touche LLP 27.01 Financial Data Schedule Filed herewith. - ----------- * Denotes management contract or compensatory plan, contract or arrangement. The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance of long-term obligations of Registrant not in excess of 10% of the Registrant's total assets on a consolidated basis. (b) No reports on Form 8-K have been filed during the fourth quarter of fiscal year 1999. 15 (c) The Company hereby files as exhibits to this Form 10-K the exhibits set forth in Items 14(a)(3) hereof which are not incorporated by reference. (d) The Company hereby files as a financial statement schedule to this Form 10-K the financial statement schedule set forth in Item 14(a)(2) hereof. With the exception of the information incorporated by reference to the Company's 1999 Annual Report to Shareholders in Item 1 of Part I, Items 6, 7 and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Company's 1999 Annual Report to Shareholders is not deemed filed as a part of this Report. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. II-VI INCORPORATED September 27, 1999 By: /s/ Carl J. Johnson Carl J. Johnson, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer: September 27, 1999 By: /s/ Carl J. Johnson Carl J. Johnson Chairman and Chief Executive Officer and Director September 27, 1999 By: /s/ Francis J. Kramer Francis J. Kramer President and Chief Operating Officer and Director Principal Financial and Accounting Officer: September 27, 1999 By: /s/ James Martinelli James Martinelli Treasurer and Chief Financial Officer September 27, 1999 By: /s/ Richard W. Bohlen Richard W. Bohlen Director September 27, 1999 By: /s/ Thomas E. Mistler Thomas E. Mistler Director September 27, 1999 By: /s/ Duncan A. J. Morrison Duncan A. J. Morrison Director September 27, 1999 By: /s/ Peter W. Sognefest Peter W. Sognefest Director 17 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of II-VI Incorporated and subsidiaries: We have audited the consolidated balance sheets of II-VI Incorporated and subsidiaries as of June 30, 1999 and 1998 and the related consolidated statements of earnings, shareholders' equity, comprehensive income and cash flows for the three years ended, and have issued our report thereon dated August 6, 1999; such consolidated financial statements and report are included in your 1999 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement Schedule II, Valuation and Qualifying Accounts, of II-VI Incorporated and subsidiaries for each of the three years in the period ended June 30, 1999. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania August 6, 1999 18 SCHEDULE II II-VI INCORPORATED AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1997, 1998, AND 1999 (IN THOUSANDS OF DOLLARS) Additions --------------------- Balance at Charged Charged Deduction Balance Beginning to to Other from At End of Year Expense Accounts(1) Reserves(2) of Year ------------------------------------------------------------------ YEAR ENDED JUNE 30, 1997: Allowance for doubtful accounts & warranty returns $ 246 $ 45 $ 35 $ 20 $ 306 YEAR ENDED JUNE 30, 1998: Allowance for doubtful accounts & warranty returns $ 306 $ 185 $ (8) $ 55 $ 428 YEAR ENDED JUNE 30, 1999: Allowance for doubtful accounts & warranty returns $ 428 $ 245 $ 3 $ 219 $ 457 - -------- (1) Amounts primarily relate to businesses acquired, warranty returns and the effects of foreign currency translation. (2) Uncollectible accounts written off, net of recoveries. 19 EXHIBIT INDEX EXHIBIT NO. REFERENCE 3.01 Amended and Restated Incorporated herein by Articles of Incorporation reference is Exhibit 3.02 to of II-VI Incorporated Registration Statement No. 33-16389 on Form S-1. 3.02 Amended and Restated By-Laws Incorporated herein by of II-VI Incorporated reference is Exhibit 3.02 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (file number 0-16195 and docketed on September 30, 1991). 10.01 II-VI Incorporated Employees' Incorporated herein by Stock Purchase Plan reference is Exhibit 10.03 to Registration Statement No. 33-16389 on Form S-1. 10.02 II-VI Incorporated Amended Incorporated herein by and Restated Employees' reference is Exhibit 10.04 to Stock Purchase Plan Registration Statement No. 33-16389 on Form S-1. 10.03 First Amendment II-VI Incorporated herein by Incorporated Amended and reference is Exhibit 10.01 to Restated Employees' Stock to the Company's Form 10-Q Purchase Plan for the Quarter Ended March 31, 1996. 10.04 II-VI Incorporated Amended Incorporated herein by and Restated Employees' reference is Exhibit 10.05 to Profit-Sharing Plan and Registration Statement Trust Agreement, as amended No. 33-16389 on Form S-1. 10.05 Form of Representative Incorporated herein by Agreement between the reference is Exhibit 10.15 to Company and its foreign Registration Statement representatives No. 33-16389 on Form S-1. 10.06 Form of Employment Agreement* Incorporated herein by reference is Exhibit 10.16 to Registration Statement No. 33-16389 on Form S-1. 10.07 Description of Management- Incorporated herein by By-Objective Plan* reference is Exhibit 10.09 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. 10.08 II-VI Incorporated 1994 Incorporated herein by Nonemployee Directors Stock reference is Exhibit A to the Option Plan* Company's Proxy Statement dated September 30, 1994. 10.09 II-VI Incorporated Deferred Incorporated herein by Compensation Plan* reference is Exhibit 10.12 to Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.10 Trust Under the II-VI Incorporated herein by Incorporated Deferred reference is Exhibit 10.13 to Compensation Plan* the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 20 10.11 Description of Bonus Incorporated herein by Incentive Plan* reference is Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.12 Amended and Restated II-VI Incorporated herein by Incorporated Deferred reference is Exhibit 10.01 Compensation Plan* to the Company's Form 10-Q for the Quarter Ended December 31, 1996. 10.13 Amended and Restated II-VI Incorporated herein by Incorporated 1997 Stock reference is Exhibit 10.04 Option Plan* to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998. 10.14 Agreement by and between Incorporated herein by PNC Bank, National reference is Exhibit 10.01 Association and to the Company's Form 10-Q II-VI Incorporated for for the Quarter Ended Amended and Restated March 31, 1999. Letter Agreement for Committed Line of Credit and Japanese Yen Term Loan 13.01 Annual Report to Shareholders Portions of the 1999 Annual Report are filed herewith. 21.01 List of Subsidiaries of Filed herewith. II-VI Incorporated 23.01 Consent of Deloitte Filed herewith. & Touche LLP 27.01 Financial Data Schedule Filed herewith. - ----------- * Denotes management contract or compensatory plan, contract or arrangement. 21