-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UvpbI7HZAHQzJ89qPvm8W/IoKpW6UNh1zuAS2YqFMLY4uWXQgcIVlzcWlxOEbglY GOF1MzC1u6whBmdl7rTc4Q== 0000950132-95-000381.txt : 19951005 0000950132-95-000381.hdr.sgml : 19951005 ACCESSION NUMBER: 0000950132-95-000381 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19951004 SROS: NASD 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16195 FILM NUMBER: 95578602 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/A 1 10-K AMENDMENT FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 1995 [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________________ to _________________. Commission File Number: 0-16195 II-VI INCORPORATED (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1214948 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 375 Saxonburg Boulevard Saxonburg, Pennsylvania 16056 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: 412-352-4455 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of outstanding Common Stock, no par value, held by non-affiliates of the Registrant at September 12, 1995, was approximately $78,689,900, based on the closing sale price reported on NASDAQ/NMS for September 12, 1995. For purposes of this calculation only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates of the Registrant. Number of outstanding shares of Common Stock, no par value, at September 12, 1995, was 5,107,370. Documents Incorporated by Reference Portions of the Proxy Statement for the 1995 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. PART I ITEM 1. BUSINESS BUSINESS INTRODUCTION II-VI Incorporated designs, manufactures and markets optical and electro- optical components, devices and materials for precision use in infrared, near infrared, visible light and x-ray/gamma-ray instruments and applications. The Company's infrared products are used in high-power CO\\2\\ (carbon dioxide) lasers for industrial processing and for commercial and military sensing systems. The Company's near infrared and visible products are used in industrial, scientific and medical instruments and solid-state YAG (yttrium aluminum garnet) lasers. Frequency doubling and single crystal substrate materials produced by the Company are utilized as building blocks in the emerging blue light laser market segment. II-VI also is developing and marketing solid state x-ray and gamma-ray products for the nuclear radiation detection industry. The majority of the Company's revenues are attributable to the sale of optical parts and components for the laser processing industry. INDUSTRIAL PROCESSING BACKGROUND Applications for laser processing are increasing worldwide as manufacturers seek solutions to increasing demands for quality, precision, speed, throughput, flexibility, automation and cost control. High-power CO\\2\\ and YAG lasers provide these benefits in a wide variety of cutting, welding, drilling, ablation, balancing, cladding, heat treating and marking applications. For example, automobile manufacturers use lasers to facilitate rapid product changeovers, process simplification, efficient sequencing and computer control on high throughput production lines. Manufacturers of recreational vehicles, lawn mowers and garden tractors cut, trim and weld metal parts with lasers to achieve flexible, high consistency, reduced post processing, lower cost operations. For office furniture producers, lasers provide easily reconfigurable, low distortion, low cost prototyping and production capability that facilitates semi-custom manufacturing of customer specified designs. On high speed consumer product processing lines, laser marking provides automated date coding for food packaging and computer driven container identification for pharmaceuticals. Precision optics such as total reflectors, partial mirrors, beamsplitters and lenses are critical to the operation of lasers and laser systems. Many CO\\2\\ and YAG laser systems contain up to 15 optical elements either as part of the laser resonator or associated with routing of the laser beam to the work piece. To the extent that optics wear or become contaminated during operation, optics are consumables in laser processing. Thus, an aftermarket demand is generated by an estimated current worldwide installed base of 40,000 to 45,000 industrial YAG and CO\\2\\ lasers, based on a recent industry trade report. Average lifetime for industrial laser optical elements is estimated to be 1,000 to 4,000 hours. COMPANY STRATEGY The overall strategy of II-VI is to be the quality, cost and service leader in every market it serves. The Company strives to involve every employee in its efforts to achieve these goals. High Power Laser Market Leadership The Company believes that it supplies more than half of the infrared optics to industrial materials processors using high power CO\\2\\ lasers worldwide. Following on the Virgo Optics acquisition and based on the Company's experience in the high power CO\\2\\ laser optics, II-VI now has an opportunity to build a position of market leadership in the emerging high power YAG laser industry. The Company intends to expand its production of YAG laser gain components and high power mirrors, beamsplitters and related optics for use in YAG lasers and laser systems. See "Business--Industry Background--YAG Laser Components." 2 Quality Leadership The Company seeks to deliver the highest quality levels practicably attainable in its products and customer services. The Company has decreased its warranty return ratio in each of the past five years and will attempt in forward fiscal years to improve on the fiscal year 1995 record of returns being approximately 1% of net sales. The Company has made consistent quality its highest customer priority by involving employees in continuous improvement. Low Cost Producer The Company seeks to attain and maintain the low cost producer position for infrared and visible optics and materials. The Company has invested significantly in process design, process control, automated equipment, employee training, yield improvement and manufacturing management systems in order to enhance production efficiencies in each product area. Currently, facilities are being substantially expanded and upgraded in infrared optics, Zinc Selenide optical materials, YAG manufacturing and nuclear radiation detector areas. Sales and Service Another component of the Company's strategy is to provide rapid, technically complete responses to customer inquiries or field service problems, quick turnaround product quotations, short manufacturing lead-times and on-time deliveries. The Company offers the quick delivery INFRAREADY OPTICS(R) program for customers so that they may avoid production line shutdowns or inventory stockouts. Technology Leadership II-VI develops growth opportunities from a combination of internally funded and contract research and development. For example, the Company's leadership in infrared and visible thin film optical coatings has evolved from continuous Company funded thin film product and process research. The Company's globally competitive capabilities in the manufacture of Zinc Selenide and Zinc Sulfide infrared optical materials grew from internally funded research and development. II-VI's expertise in the production of Cadmium Zinc Telluride substrates for the manufacture of infrared focal plane arrays is the result of contract research sponsored by various Department of Defense agencies. The Company's Cadmium Zinc Telluride experience has been critical in the development of the eV PRODUCTS nuclear radiation detectors. The Company intends to continue a balanced program of internal and contract research and development. Launch New Products The Company invests in emerging new products including its nuclear radiation detectors and its materials and components for blue light lasers. These two new product lines share a number of characteristics: both address large potential markets; both depend on success in crystal growth technology; and both serve OEM customers that manufacture performance and productivity enhancing tools, instruments and systems for industrial, information and telecommunications, scientific and medical markets. Acquisition Strategy II-VI intends to continue to search for and acquire well matched technologies, product lines and companies that can contribute to its growth in broad segments of the global laser, optics and electro-optics industry. With the acquisitions of Virgo Optics in 1994, eV PRODUCTS hybrid electronics production capability in 1992 and high pressure Bridgman crystal growth technology in 1991, the Company has experience in the integration of additional products and capabilities with its ongoing operations. 3 PRODUCTS The Company's products include infrared, near infrared, visible and x-ray materials, optics and electro- optic components used in high power industrial lasers, scientific and military lasers, and sensors. The Company believes that its leading edge quality, delivery and customer service enhance its reputation as the supplier of choice for high power laser optics and components. The majority of the Company's revenues are attributable to the sale of optical devices and components for the laser processing industry. Infrared Optics and Materials. Reliable operation of high power (1 to 20 kW) CO\\2\\ infrared lasers requires high quality, low absorption optical elements. The CO\\2\\ laser emits infrared energy at a wavelength of 10.6 micrometers, a wavelength which is optimal for many industrial processes such as the cutting, welding, drilling and heat treating of various materials such as steel and other metals or alloys, plastics, wood, paper, cardboard, ceramics and numerous composites. This wavelength is also desirable for certain types of medical surgery and for various surveillance and sensing systems that must penetrate adverse atmospheric conditions. The Company is a broad line supplier of virtually all of the optics and optical elements used in CO\\2\\ lasers and laser systems. The Company supplies a family of standard and custom transmissive, reflective and diamond turned optical elements to high power CO\\2\\ resonator manufacturers, CO\\2\\ laser system manufacturers and to the aftermarket as replacement parts. Transmissive optical elements manufactured by the Company are predominately made from Zinc Selenide produced in-house. The Company is one of two manufacturers in the world of this optical material. The Company's Zinc Selenide capability and its low absorbing, thin film coating technology have earned II-VI a reputation as the quality leader worldwide in this marketplace. The Company provides replacement optics and refurbishing services to users of industrial CO\\2\\ lasers. The Company sells its infrared replacement optics with a 24-hour shipment guarantee under the trade name of INFRAREADY OPTICS(R). Consumable items such as focusing lens and output couplers are cost effectively refurbished for the Company's aftermarket customers. The aftermarket portion of the Company's business is growing rapidly as industrial laser applications proliferate worldwide. The Company supplies Cadmium Zinc Telluride substrates primarily to U.S. military and NATO defense suppliers under the trade name EPIREADY(R). These substrates are subsequently processed by the Company's customers into infrared detectors using epitaxial crystal growth and device fabrication techniques. The Company supplies Zinc Sulfide in the form of domes and windows to military suppliers for Forward Looking Infrared systems worldwide. A portion of the Company's infrared imaging business involves development programs funded by ARPA/DOD and other governmental agencies. YAG Laser Components. The power levels available from YAG lasers are increasing (1 to 3 kW) while the costs of such lasers are decreasing. These trends are making YAG laser processing more attractive in such high-power YAG applications as the welding of airbag sensors and inflators. Low-power YAG applications include the high speed micro-welding of multi-blade shaving razor assemblies, the welding of heart pacemakers and the precision trimming of component values in electronic assemblies. The capability to deliver the 1.06 micrometer YAG laser wavelength over a flexible, low loss fiber optic has enhanced YAG laser deployment in many applications where complex shapes require versatile beam delivery geometries. A YAG laser requires the same optical elements as the CO\\2\\ laser except that they are made to operate at the YAG laser near infrared wavelength of 1.06 micrometers. The Company supplies a family of standard and custom laser gain materials and optics for industrial, medical, scientific and research YAG lasers. The YAG laser gain materials are produced to stringent industry specifications and precisely fabricated into rods or slabs. Included in the Company's products are refurbished YAG rods sold to the Company's aftermarket customers. The Company offers waveplates, polarizers, lenses, prisms, and mirrors for visible and near 4 infrared applications. These products control and alter the polarization of visible and near infrared energy. Nuclear Radiation Detectors. The nuclear detection market has important applications in the industrial gauging, environmental monitoring, power generation, nuclear safeguards, weapons research and disarmament, nuclear non-proliferation, health physics and medical imaging fields. Solid-state Cadmium Zinc Telluride nuclear radiation detectors are attractive because of their reduced size, longer life and lower voltage requirements as compared to the historically used scintillator/photomultiplier devices. The Company's eV PRODUCTS division designs and manufactures Cadmium Zinc Telluride, room temperature, nuclear radiation detectors combined with custom designed low noise front-end electronics. The Company believes it has become the leader in room temperature, direct conversion radiation detectors which are emerging in such applications as industrial gauging and environmental monitoring. Frequency Doubling and Blue Emitter Materials. For over a decade, researchers in university, government and industry laboratories have been seeking routes to the fabrication of reliable, solid- state blue light emitters and lasers. Blue light sources are expected to be used in such applications as optical data storage, telecommunications, graphic displays and high density printers. The Company supplies frequency doubling materials which are being used in emerging laser based systems for blue light generation. The Company produces Potassium Niobate based microlaser assemblies which are used by customers to frequency double other light sources, thus producing up to 30 mW of blue or 50 mW of green light. The Company also produces single crystal Zinc Selenide, a high quality substrate which is being used by customers in the development of blue light lasers. CUSTOMERS AND MARKETS Industrial The Company's customers include leading industrial OEM's and system manufacturers worldwide in the CO\\2\\ and YAG laser machine tool industry. The Company has focused its marketing efforts on the growing high power segments of the laser components marketplace. The Company's high-power CO\\2\\ laser customers include Bystronic Laser AG, Fanuc Ltd, Matsushita Industrial Equipment Co., Inc., Mazak Nissho Iwai, Mitsubishi Electronic Corp., Rofin Sinar Laser GmbH--a division of Siemens, and Trumpf GmbH & Co. These companies' laser resonators are installed on systems that are used for cutting, drilling and marking of materials and for welding and heat treating of metals. The Company also sells optics and components to over 1,400 laser end users which require replacement optics, such as focusing lenses and beam steering mirrors. Users of industrial lasers include a broad range of industries and applications, such as automotive, electrical equipment, packaging, building products, office furniture, garment, airframe or aerospace, consumer electronics, tooling and machinery. Low power, sealed CO\\2\\ lasers are utilized for small parts manufacturing, engraving and serialization of products. These small, lightweight, low-cost systems are flexible and provide rapid response for a number of light manufacturing applications. Manufacturers of these laser sources, such as Domino Laser Inc., Synrad Inc. and Laser Machining Inc., are high volume optics customers of the Company. The Company's YAG component customers include Continuum Inc., Lumonics Corp., Spectra-Physics Lasers Inc., Excel/Quantronix Corp., Electrox Ltd. and Hughes Aircraft Company. These companies' systems are used for marking, scribing, microwelding and precision trimming. A broad range of industries use YAG systems, including medical devices, consumer products, automotive and semiconductors. The Company offers YAG customers both the YAG rod supply capability and the necessary optics for a complete laser system. The Company is using its close working relationships with its industrial CO\\2\\ customers worldwide to increase its YAG component supply market share, since both products are needed by many of the same customers. 5 Scientific and Military The scientific, research and new product development areas of the electro- optics device market are creating many opportunities for the visible, near- infrared and infrared optics and materials produced by the Company. The Company provides high end, high specification components to this group of customers which include products such as aspheric optics, prisms, parabolic reflectors and focusing element assemblies. The Company provides specialty optics and components to instrument manufacturers such as Hewlett-Packard Company, Eastman Kodak Company, Perkin-Elmer Corporation, Raytheon Company and Cincinnati Electronics Corp. II-VI's products are integrated into spectrophotometers, interferometers and distance measuring instruments; scanning mirrors for high resolution color printing; and focusing assemblies for infrared cameras. Quick response, short lead times and high quality engineering support are cornerstones of the Company's pursuit of these markets. U.S. and NATO allies are pursuing defense strategies based upon stringent budgets to improve the effectiveness of military systems through electronics upgrades, including infrared imaging systems. The Company supplies materials and optics to manufacturers of infrared sensing systems such as Texas Instruments, Inc., Loral Electro-Optical Systems Corporation, GEC- Marconi Avionics Inc., Lockheed-Martin Inc. and Hughes Aircraft Company. SALES AND DISTRIBUTION The Company markets its products in the United States through its direct sales force; in Japan through its subsidiary, II-VI Japan Incorporated; and in certain Southeast Asian markets through its subsidiary II-VI Singapore PTE LTD. European sales are effected through a distributor and sales throughout the rest of the world are made through 19 manufacturers' representatives. The Company's products are sold to over 2,400 customers in 35 countries. The Company's principal international markets are Germany and Japan. MANUFACTURING PROCESSES Infrared and Visible Optics. The manufacturing processes for optics include a number of low cost, automated high precision processes that have been developed and documented at the Company's manufacturing sites in Saxonburg, Pennsylvania, Port Richey, Florida, and Singapore. Manufacturing steps for the majority of the Company's optical products include: Grinding and Polishing. The Company rigorously tests starting materials in the optics fabrication process to assure conformity to specification for absorption, clarity, stress and purity. The manufacturing sequence typically involves grinding a part to the desired curvature and precision polishing the optic to the desired high quality surface shape and finish. The Company has developed specialized processes for fabricating visible, YAG, near infrared, and infrared optics. The Company has state-of-the-art, numerically controlled generating and grinding equipment and automated Synchrospeed optical polishing apparatus. Diamond Turning. The Company's diamond turning of metal mirrors involves state-of-the-art equipment for flycutting of flat metal reflectors and turning of contoured spherical or aspherical shapes. The ability to produce spherical and aspherical diffraction-free surfaces, due to a proprietary real-time feedback test system, provides the highest quality, high power handling copper reflecting mirrors available in the industry. The Company is currently investing in expansion of this manufacturing unit's capacity as the demand for these products has grown rapidly during the last few years. Thin Film Coating. Multilayer, thin film, visible and infrared coatings are produced by evaporating precisely controlled thicknesses of various substances from microprocessor controlled thermal or electron beam sources onto optical surfaces in custom built vacuum chambers. The know-how to control such process variables as time, pressure, gas flow and temperature are critical to achieving low-absorption, high adhesion and properly transmitting thin films. Production of zero defect coatings is a part of the proprietary knowledge of II-VI. 6 Materials. II-VI is a materials-based company. Processes used to produce these materials require long development periods, are capital intensive and involve precision process control. Yields are raised from minimal to acceptable as know-how and process consistency techniques are developed. The resulting barriers to entry limit competition. The Company's infrared components and materials primarily are made from compounds composed of elements from Groups II and VI of the Periodic Table of the Elements ("II-VI Compounds"). II-VI Compounds, a class of non-hygroscopic (do not absorb water) materials, are leading infrared transmitting materials. Their high infrared transmission efficiency, the key property needed for high- power infrared laser optics, is a result of low infrared absorption. Infrared absorption is low due to the type of bonding that exists within a II-VI crystalline structure and due to the relatively high molecular weights of the most useful II-VI Compounds. The Group II elements used by the Company are Zinc, Cadmium and Mercury and the Group VI elements used are Sulfur, Selenium and Tellurium. Materials manufactured by the Company include: Zinc Selenide. The Company manufactures fine grained polycrystalline Zinc Selenide by a proprietary chemical vapor deposition process. II-VI is one of two manufacturers of this material in the world and has earned the reputation for producing the lowest absorbing laser grade Zinc Selenide. The process involves high temperature disassociation of Hydrogen Selenide gas and a gas phase reaction with zinc vapor. Solid Zinc Selenide is deposited on graphite mandrels at high temperatures forming sheets of the material. Zinc Selenide is the principal material used in the Company's CO\\2\\ laser optics. All material is polished, inspected and laser tested for defects. Zinc Sulfide. The chemical vapor deposition process is also utilized to manufacture fine grained polycrystalline Zinc Sulfide. Some Zinc Sulfide is further processed to form Multispectral Zinc Sulfide. The Multispectral Zinc Sulfide is highly transmissive from the ultraviolet to the middle infrared wave lengths making it the material of choice for tank windows, for example, through which humans, laser range finders and guidance systems identify targets. Cadmium Zinc Telluride Substrates. II-VI utilizes vertical and horizontal Bridgman processes to grow its Cadmium Zinc Telluride single crystal substrate materials. The Bridgman processes involve direct solidification from a liquid melt with closely controlled unidirectional freezing in either a vertical or horizontal configuration. The substrates are mined from thoroughly tested Cadmium Zinc Telluride ingots utilizing precision crystal orientation techniques followed by a sequence of surface lapping and semiautomated diamond sawing. Wafers are precision sized then surfaced through a series of critical polishing and chemical etching steps. Cadmium Zinc Telluride for Nuclear Radiation Detectors. The high pressure vertical Bridgman process is used to grow Cadmium Zinc Telluride for nuclear radiation detectors. This proprietary process produces critical materials which when mated to hybrid front end electronics built by the Company are sold to industrial gauging and other equipment manufacturers. The high pressure Bridgman process yields products that are cost competitive with scintillator/photomultiplier devices. YAG Materials. Neodymium doped YAG, solid-state laser gain materials, are manufactured at the Company's Virgo Optics Division. The Company's precision process control and know-how result in consistent YAG rod products which are in high demand. The Company expects to have additional capacity for this material on-line within the next year. The Company competes in the YAG rod business on quality, price and delivery. Potassium Niobate and Single Crystal Zinc Selenide. The Company's material science expertise has developed frequency doubling Potassium Niobate in conjunction with an international laboratory. This frequency doubling material when coupled with a laser gain material and a laser pump can be used to generate blue, green or red light. Using this material, the Company offers monolithic laser assemblies to OEM's that are pursuing blue and green laser markets. Through another proprietary process the Company is producing single crystal Zinc Selenide which is used as a substrate in the production of blue light emitters and lasers. 7 Sources of Supply The major raw materials used by the Company are Zinc, Selenium, Hydrogen Selenide, Hydrogen Sulfide, Cadmium, Tellurium, Yttrium Oxide, Aluminum Oxide and Iridium. The Company produces all of its Zinc Selenide and Zinc Sulfide requirements internally, although small quantities of Zinc Selenide and Zinc Sulfide may be purchased from outside vendors from time to time. The Company also purchases Gallium Arsenide, Copper, Silicon, Germanium, Quartz, optical glass and small quantities of other materials for use as base materials for laser optics. The Company purchases Thorium Fluoride and other materials for use in optical fabrication and coating processes. There are more than two suppliers for all of the above materials, except for Zinc Selenide and Hydrogen Selenide (excluding the Company) and Thorium Fluoride, for each of which there is only one proven source of merchant supply. For most materials, the Company has entered into annual purchase arrangements whereby suppliers provide discounts for annual volume purchases in excess of specified amounts. The continued high quality of these raw materials is critical to the stability of the Company's manufacturing yields. The Company conducts testing of materials at the onset of the production process to meet evolving customer requirements. Additional research may be needed to better define future starting material specifications. The Company has not experienced significant production delays due to a shortage of materials. However, the Company does occasionally experience problems associated with vendor supplied materials not meeting contract specifications for quality or purity. A significant failure of the Company's suppliers to deliver sufficient quantities of necessary high- quality materials on a timely basis could have a materially adverse effect on the Company's results of operations. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS II-VI uses or generates certain hazardous substances in its research and manufacturing facilities. The Company believes that its handling of such substances is in material compliance with applicable local, state and federal environmental, safety and health regulations at each operating location. The Company invests substantially in proper protective equipment, process controls and specialized training to minimize risks to employees, surrounding communities and the environment due to the presence and handling of such hazardous substances. The Company annually conducts employee physical examinations and workplace air monitoring regarding such substances. When exposure problems or potential have been indicated, corrective actions have been implemented and re-occurrence has been minimal or non-existent. The Company does not carry environmental impairment insurance. Relative to its generation and use of the extremely hazardous substance Hydrogen Selenide, the Company has in place a government approved emergency response plan. Special attention has been paid to all procedures pertaining to this gaseous material to minimize the chances of its accidental release to the atmosphere. With respect to the use, storage and disposal of the low-level radioactive material Thorium Fluoride, the Company's facilities and procedures have been recently inspected and approved by the Nuclear Regulatory Commission. This material is utilized in the Company's thin film coatings. All Thorium Fluoride bearing by-products are collected and shipped as solid waste to a government approved low-level radioactive waste disposal site in Barnwell, South Carolina. The Company is a member of the Frontier Chemical Phase II PRP Group which has agreed with the Environmental Protection Agency to remove the contents of certain tanks at a site in Niagara Falls, New York. All site work has been completed and substantial progress has been made by the Group in meeting its financial obligations. Amounts currently reserved by the Company are immaterial and believed to cover its share of any remaining liabilities. The generation, use, collection, storage and disposal of all other hazardous by-products such as suspended solids containing heavy metals or airborne particulates are believed by the Company to be in material compliance with regulations. Management believes that all of the permits and licenses required for operation of the Company's business are in place. Although the Company is not aware of any material environmental, safety and health problems in its 8 properties or processes, there can be no assurance that problems will not develop in the future which would have a materially adverse effect on the Company. RESEARCH AND DEVELOPMENT The Company's research and development policy calls for the pursuit of a balanced program of internally funded and contract research and development totaling between 5 and 8 percent of product sales. From time to time the ratio of contract to internally funded activity varies significantly due to the unevenness and uncertainty associated with most government research programs. The Company is committed to accepting only funded research that ties closely to its growth plans. Company research and development activities focus on developing new proprietary products or on understanding, improving and automating crystal growth, low damage fabrication or optical thin film coating technologies. The Company performs commercial prototype and engineering work for customers and, in addition, participates in various government and university research and development consortia. The Company maintains an engineering, research and development staff of fifty. Thirty seven of the Company's employees are engineers or scientists. In addition, manufacturing personnel support or participate in research and development on an ongoing basis. Interaction between the development and manufacturing functions enhances the direction of projects, reduces costs and accelerates technology transfers. The Company is primarily engaged in ongoing research and development in the following areas: Zinc Selenide optical material production; vertical and horizontal Bridgman Cadmium Zinc Telluride crystal growth and substrate manufacturing; Zinc Selenide single crystal growth and substrate production; high pressure Bridgman Cadmium Zinc Telluride crystal growth and radiation detector manufacturing; YAG crystal production; Potassium Niobate crystal growth; automated, deterministic optical fabrication methods; optical thin film processes and products; and microlaser assemblies based on various combinations of YAG or yttrium vanadate gain materials with frequency doubling materials. Company funded research and development and contract research expenditures totaled approximately $1.1 million, $1.3 million and $1.4 million during fiscal 1993, 1994 and 1995, respectively. Contract research revenues during those respective years totaled approximately $1.1 million, $1.6 million and $1.2 million. The Company has been active in the various research and development programs including the Pennsylvania Ben Franklin Partnership program, the Federal Small Business Innovation Research programs of primarily the Department of Defense agencies and an ARPA sponsored industry team program focused on infrared materials producibility. COMPETITION The Company believes that it is a leading producer of products and services in its addressed markets. In the area of high power CO\\2\\ laser optics and materials, II-VI believes it supplies over half of the world market. The Company is a leading supplier of Cadmium Zinc Telluride substrates used for infrared imaging arrays, and believes that it is the only supplier of Cadmium Telluride electro-optic modulators to U.S. and NATO defense contractors. The Company is a significant supplier of YAG rods and YAG laser optics to the worldwide markets of scientific, research, medical and industrial laser manufacturers. The Company competes on the basis of product quality, quick delivery, strong technical support and pricing. Management believes that the Company competes favorably with respect to these factors and that its vertical integration, manufacturing facilities and equipment, experienced technical and manufacturing employees, and worldwide marketing and distribution provide competitive advantages. II-VI has a number of present and potential competitors, many of which have greater financial, selling, marketing or technical resources. The lone competitor of the Company in the production of Zinc Selenide is Morton 9 International's Advanced Materials Division. The competitors producing infrared and CO\\2\\ laser optics include Laser Power Optics and Coherent in the United States, and Sumitomo in Japan. Competing producers of YAG materials and optics include the Litton Airtron Division of Litton Industries and the Crystal Products Group of Union Carbide. The Company is not aware of any currently significant competitors for its Cadmium Zinc Telluride radiation detector product line. In addition to competitors who manufacture products similar to those of the Company, there are other technologies or materials that may compete with the Company's products. The markets for the nuclear radiation detector and the frequency doubling and blue emitter materials are in their infancy and could be affected by competing technologies. EMPLOYEES As of June 30, 1995 the Company employed 323 persons worldwide. Of these employees, 50 are engaged in research, development and engineering, 206 in direct production, and the balance in sales and marketing, administration, finance and support services. The Company's production staff includes highly skilled optical craftsmen. None of the Company's employees is covered by a collective bargaining agreement, and the Company has never experienced any work stoppages. The Company has a long-standing policy of encouraging active employee participation in selected areas of operations management. The Company believes its relations with its employees to be good. The Company rewards its employees with incentive compensation based on achievement of performance goals. PATENTS, TRADE SECRETS AND TRADEMARKS II-VI relies on its trade secrets and proprietary know-how to develop and maintain its competitive position. The Company has not pursued process patents due to the disclosures required in the patent process and the relative difficulties in successfully litigating process type patents. The Company has confidentiality and non-compete agreements with the executive officers and certain other personnel. The processes and specialized equipment utilized in crystal growth, infrared materials fabrication and infrared optical coatings as developed at the Company are complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar technology or that all aspects of the Company's proprietary technology will be protected. Others have obtained patents covering a variety of infrared optical configurations and processes, and others could obtain patents covering technology similar to the Company's. The Company may be required to obtain licenses under such patents and there can be no assurance that the Company would be able to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted which may adversely affect the Company. In addition, Company research and development contracts with agencies of the United States Government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled. The Company holds four registered trademarks: the II-VI INCORPORATED(R) name; INFRAREADY OPTICS(R) for replacement optics for industrial CO\\2\\ lasers; EPIREADY(R) for low surface damage substrates for Mercury Cadmium Telluride epitaxy; and EV PRODUCTS(R) for products manufactured by the Company's eV Products division. The trademarks are registered with the United States Patent and Trademark Office, but not with any states. The Company is not aware of any interference or opposition to these trademarks in any jurisdiction. 10 SIGNATURE In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. October 3, 1995 DATE:_____________________ II - VI INCORPORATED /s/ James Martinelli By:_______________________________ James Martinelli Treasurer and Director of Finance and Accounting -----END PRIVACY-ENHANCED MESSAGE-----