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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the transition period from
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Commission File Number 0-18277
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VICOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2742817
(State of Incorporation) (IRS Employer Identification Number)
25 Frontage Road, Andover, Massachusetts 01810
(Address of registrant's principal executive office)
(978) 470-2900
(Registrant's telephone number)
-------------------------------------
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of June 30, 2003.
Common Stock, $.01 par value ----------------29,925,089
Class B Common Stock,$.01 par value -------- 11,880,100
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VICOR CORPORATION
INDEX TO FORM 10-Q
Page
----
Part I - Financial Information:
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at 1
June 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations 2
for the three and six months ended June 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows 3
for the six months ended June 30, 2003 and 2002
Notes to Condensed Consolidated Financial 4-8
Statements
Item 2 - Management's Discussion and Analysis of 9-14
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14-15
Item 4 - Controls and Procedures 15
Part II - Other Information:
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of 17
Security Holders
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 18
Signature(s) 19
FORM 10-Q
PART 1
ITEM 1
Item 1 - Financial Statements PAGE 1
VICOR CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
Assets June 30, 2003 December 31, 2002
------ ------------- -----------------
Current assets:
Cash and cash equivalents $ 76,132 $ 72,120
Short-term investments 34,746 28,779
Accounts receivable, net 24,092 22,469
Inventories, net 24,192 30,325
Refundable income taxes 2,004 8,846
Deferred tax assets 7,526 8,126
Other current assets 2,246 2,399
--------- ---------
Total current assets 170,938 173,064
Property, plant and equipment, net 91,012 98,738
Other assets 5,935 6,643
--------- ---------
$ 267,885 $ 278,445
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 5,906 $ 5,724
Accrued compensation and benefits 3,833 3,379
Income taxes payable 6,520 6,521
Accrued liabilities 4,237 4,761
--------- ---------
Total current liabilities 20,496 20,385
Deferred income taxes 14,312 10,027
Stockholders' equity:
Preferred Stock -- --
Class B Common Stock 119 119
Common Stock 371 371
Additional paid-in capital 145,920 145,704
Retained earnings 190,811 203,398
Accumulated other comprehensive income 216 239
Treasury stock, at cost (104,360) (101,798)
--------- ---------
Total stockholders' equity 233,077 248,033
--------- ---------
$ 267,885 $ 278,445
========= =========
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
FORM 10-Q
PART I
ITEM 1
PAGE 2
VICOR CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net revenues:
Product $ 38,121 $ 36,610 $ 75,726 $ 70,690
License 572 221 707 761
-------- -------- -------- --------
38,693 36,831 76,433 71,451
Costs and expenses:
Cost of revenue 28,156 28,148 56,989 54,606
Selling, general and administrative 10,394 11,134 20,718 21,387
Research and development 5,833 5,128 11,167 10,235
-------- -------- -------- --------
44,383 44,410 88,874 86,228
-------- -------- -------- --------
Loss from operations (5,690) (7,579) (12,441) (14,777)
Other income (expense), net (39) (63) 338 (630)
-------- -------- -------- --------
Loss before income taxes (5,729) (7,642) (12,103) (15,407)
Benefit (provision) for income taxes (229) 2,790 (484) 5,624
-------- -------- -------- --------
Net loss $ (5,958) $ (4,852) $(12,587) $ (9,783)
======== ======== ======== ========
Net loss per common share:
Basic $ (0.14) $ (0.11) $ (0.30) $ (0.23)
Diluted $ (0.14) $ (0.11) $ (0.30) $ (0.23)
Shares used to compute net loss per share:
Basic 41,799 42,416 41,926 42,410
Diluted 41,799 42,416 41,926 42,410
See accompanying notes.
FORM 10-Q
PART I
ITEM 1
PAGE 3
VICOR CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
------------------------------
June 30, 2003 June 30, 2002
------------- -------------
Operating activities:
Net loss $(12,587) $ (9,783)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 11,294 10,642
Other than temporary decline in investment 387 1,078
Amortization of bond premium 342 --
Proceeds from sale of investment 273 17
(Gain) on sale of investment (8) --
(Gain)/loss on disposal of equipment (4) 1,145
Unrealized (gain) loss on foreign currency 4 (73)
Tax benefit relating to stock option plans -- 71
Change in current assets and
liabilities, net 16,500 4,299
-------- --------
Net cash provided by operating activities 16,201 7,396
Investing activities:
Purchases of short-term investments (11,405) (28,946)
Sale and maturities of short-term investments 5,095 31,864
Additions to property, plant and equipment (3,259) (6,173)
Decrease in notes receivable 2 7,461
Increase in other assets (283) (286)
-------- --------
Net cash provided by (used in)
investing activities (9,850) 3,920
Financing activities:
Proceeds from issuance of Common Stock 216 218
Acquisitions of treasury stock (2,562) --
-------- --------
Net cash provided by (used in)
financing activities (2,346) 218
Effect of foreign exchange rates on cash 7 (58)
-------- --------
Net increase in cash and cash equivalents 4,012 11,476
Cash and cash equivalents at beginning of period 72,120 57,481
-------- --------
Cash and cash equivalents at end of period $ 76,132 $ 68,957
======== ========
See accompanying notes.
FORM 10-Q
PART I
ITEM 1
PAGE 4
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June
30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. For further information,
refer to the consolidated financial statements and notes thereto included
in the Company's audited financial statements for the year ended December
31, 2002, contained in the Company's annual report filed on Form 10-K
(File No. 0-18277) with the Securities and Exchange Commission.
FORM 10-Q
PART I
ITEM 1
PAGE 5
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2003
(Unaudited)
2. Stock-Based Compensation
The Company uses the intrinsic value method in accounting for its employee
stock options in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations, as permitted under FASB Statement No. 123, "Accounting
for Stock-Based Compensation" (FAS 123) and FASB Statement No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS
148). Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized. Had expense been
recognized using the fair value method described in FAS 123, using the
Black-Scholes option pricing model, the following pro forma results of
operations would have been reported (in thousands except for per share
information):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss as reported $ (5,958) $ (4,852) $ (12,587) $ (9,783)
Stock-based employee compensation cost,
net of related tax effects (1,260) (1,409) (2,793) (2,876)
---------- ---------- ---------- ----------
Pro forma net loss $ (7,218) $ (6,261) $ (15,380) $ (12,659)
========== ========== ========== ==========
Net loss per share, as reported:
Basic $ (.14) $ (.11) $ (.30) $ (.23)
Diluted $ (.14) $ (.11) $ (.30) $ (.23)
Pro forma net loss per share:
Basic $ (.17) $ (.15) $ (.37) $ (.30)
Diluted $ (.17) $ (.15) $ (.37) $ (.30)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair values of its
employee stock options.
FORM 10-Q
PART I
ITEM 1
PAGE 6
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2003
(Unaudited)
3. Net Loss per Share
The following table sets forth the computation of basic and diluted loss
per share for the three and six months ended June 30 (in thousands, except
per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Numerator:
Net loss $ (5,958) $ (4,852) $(12,587) $ (9,783)
======== ======== ======== ========
Denominator:
Denominator for basic loss
per share-weighted average shares 41,799 42,416 41,926 42,410
Effect of dilutive securities:
Employee stock options -- -- -- --
-------- -------- -------- --------
Denominator for diluted loss per
share - adjusted weighted-average shares
and assumed conversions 41,799 42,416 41,926 42,410
======== ======== ======== ========
Basic loss per share $ (0.14) $ (0.11) $ (0.30) $ (0.23)
======== ======== ======== ========
Diluted loss per share $ (0.14) $ (0.11) $ (0.30) $ (0.23)
======== ======== ======== ========
4. Inventories
Inventories are valued at the lower of cost (determined using the
first-in, first-out method) or market. Inventories were as follows as of
June 30, 2003 and December 31, 2002 (in thousands):
June 30, 2003 December 31, 2002
------------- -----------------
Raw materials ........................................................ $17,813 $22,320
Work-in-process ...................................................... 2,193 2,992
Finished goods ....................................................... 4,186 5,013
------- -------
$24,192 $30,325
======= =======
FORM 10-Q
PART I
ITEM 1
PAGE 7
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2003
(Unaudited)
5. Product Warranties
The Company generally offers a two-year warranty for all of its products.
The Company provides for the estimated cost of product warranties at the
time product revenue is recognized. Factors that affect the Company's
warranty reserves include the number of units sold, historical and
anticipated rates of warranty returns and the cost per return. The Company
periodically assesses the adequacy of the warranty reserves and adjusts
the amounts as necessary. Warranty obligations are included in "Accrued
liabilities" on the Condensed Consolidated Balance Sheets.
Product warranty activity for the six months ended June 30, 2003 was as
follows (in thousands):
Balance as of December 31, 2002 $ 1,379
Accruals for warranties for products sold in the period 280
Decrease to pre-existing warranties (220)
Fulfillment of warranty obligations (150)
-------
Balance as of June 30, 2003 $ 1,289
=======
6. Comprehensive Income (Loss)
Total comprehensive loss was ($5,969,000) and ($12,610,000) for the three
and six months ended June 30, 2003, respectively, and ($4,125,000) and
($9,711,000) for the three and six months ended June 30, 2002,
respectively. Other comprehensive loss consisted principally of
adjustments for foreign currency translation (losses) in the amounts of
($28,000) and ($18,000) and unrealized gains (losses) on available for
sale securities in the amount of $17,000 and ($5,000) for the three and
six months ended June 30, 2003, respectively.
7. Impact of Recently Issued Accounting Standards
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities." The statement requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Costs
covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, plant
closing or other exit or disposal activity. This statement is effective
for exit or disposal activities initiated after December 31, 2002. FAS 146
will affect the accounting required in the third quarter of 2003 for
providing health benefits for employees affected by the end of the general
furlough program (see Part I, Item 2 - "Cost Reduction Plan"). The
Company, though, has not yet determined what the impact will be on the
Company's financial position or results of operations.
FORM 10-Q
PART I
ITEM 1
PAGE 8
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2003
(Unaudited)
7. Impact of Recently Issued Accounting Standards (continued)
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
that upon issuance of a guarantee, the guarantor must disclose and
recognize a liability for the fair value of the obligation it assumes
under that guarantee. The initial recognition and measurement requirement
of FIN 45 is effective for guarantees issued or modified after December
31, 2002. The Company adopted FIN 45 in the first quarter of 2003. The
adoption of FIN 45 did not have a significant impact on the Company's
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which requires the consolidation of a
variable interest entity, as defined, by its primary beneficiary. Primary
beneficiaries are those companies that are subject to a majority of the
risk of loss or entitled to receive a majority of the entity's residual
returns, or both. In determining whether it is the primary beneficiary of
a variable interest entity, an entity with a variable interest shall treat
variable interests in that same entity held by its related parties as its
own interests. The Interpretation is effective prospectively for all
variable interests obtained subsequent to December 31, 2002. For variable
interests existing prior to December 31, 2002, consolidation will be
required beginning July 1, 2003. The Company is currently evaluating the
impact of adopting the Interpretation, but has not yet determined what
effect, if any, the adoption of FIN 46 will have on the Company's
financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (FAS 150) "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." The statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some cases), whereas many of those
instruments were previously classified as equity. FAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the statement
will have a material effect on its financial position or results of
operations.
FORM 10-Q
PART I
ITEM 2
PAGE 9
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2003
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2003
Except for historical information contained herein, some matters discussed in
this report constitute forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The words "believes," "expects,"
"anticipates," "intend," "estimate," "plans," "assumes," "may," "will," "would,"
"continue," "prospective," "project," and other similar expressions identify
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of various factors,
including unanticipated delays in introducing additional Factorized Power
products or in market acceptance of such products, and those factors described
in the risk factors set forth in this report and in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002. Reference is made in
particular to the discussions set forth below in this report under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
set forth in the Annual Report on Form 10-K under Part I, Item 1 -- "Business --
Second-Generation Automated Manufacturing Line," "--Competition," "--Patents,"
"--Licensing," and "--Risk Factors," under Part I, Item 3 -- "Legal
Proceedings," and under Part II, Item 7 -- "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The risk factors contained in
the Annual Report on Form 10-K may not be exhaustive. Therefore, the information
contained in that Form 10-K should be read together with other reports and
documents that the Company files with the Securities and Exchange Commission
from time to time, including Forms 10-Q, 8-K and 10-K, which may supplement,
modify, supersede or update those risk factors. The Company does not undertake
any obligation to update any forward-looking statements as a result of future
events or developments.
Results of Operations
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Net revenues for the second quarter of 2003 were $38,693,000, an increase of
$1,862,000 (5.1%) as compared to $36,831,000 for the same period a year ago, and
an increase of 2.5% on a sequential basis from the first quarter of 2003. The
increase in net revenues resulted primarily from an increase in unit shipments
of standard and custom products of approximately $1,511,000 and by an increase
in license revenue of $351,000. Orders during the quarter decreased by 2.7%
compared with the first quarter of 2003, and are still significantly less than
fiscal year 2000 and the first half of 2001. The Company does not anticipate a
return to historic demand levels for its first- and second-generation products
during the remainder of 2003. The increase in license revenue was due to the
receipt of two payments under the cooperative agreements with Nagano Japan Radio
Company, Ltd. ("NJRC") during the second quarter of 2003. NJRC terminated these
agreements with the Company on March 18, 2003, effective September 18, 2003. Due
to the termination, remaining revenues from NJRC are recognized only as payments
are received. The book-to-bill ratio for the second quarter of 2003 was 0.98 as
compared to 1.01 for the second quarter of 2002.
FORM 10-Q
PART I
ITEM 2
PAGE 10
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2003
(Continued)
Gross margin for the second quarter of 2003 increased $1,854,000 (21.4%) to
$10,537,000 from $8,683,000, and increased to 27.2% from 23.6% as a percentage
of net revenues. The primary component of the increase in gross margin dollars
was the increase in net revenues and changes in the revenue mix. The improvement
in the gross margin percentage was due to a more favorable product mix and to
unit cost reductions due to productivity improvements. Gross margins on
second-generation products continue to be significantly lower than those of
first-generation products. The Company continues to refine the design,
processes, equipment and parts associated with second-generation products.
Unless and until the Company achieves higher production volumes for both the
first- and second-generation products and attains higher yield levels and
component cost reductions on second-generation products, gross margins will
continue to be adversely affected.
Selling, general and administrative expenses were $10,394,000 for the period, a
decrease of $740,000 (6.6%) from the same period in 2002. As a percentage of net
revenues, selling, general and administrative expenses decreased to 26.9% from
30.2%. The principal component of the $740,000 decrease was $1,406,000 (84.0%)
of decreased legal fees. The principal components offsetting the above decrease
were $343,000 (8.4%) of increased compensation expense, $187,000 (35.9%) of
increased costs associated with the operations of the Vicor Integrated
Architects ("VIAs") and $78,000 (84.0%) in increased audit and tax fees. During
the third quarter of 2002, the Company and its primary legal counsel for the
Company's patent infringement actions (see Part II, Item 1 - "Legal
Proceedings") reached an agreement on legal fees providing for a reduction in
the fees to be paid by the Company from January 1, 2002 until final resolution
of each action. As a result of this agreement, the Company realized
approximately $72,000 in reduced legal expense during the second quarter of
2003. In addition, activity on these matters was significantly lower during the
second quarter of 2003 as compared to the second quarter of 2002. During the
second quarter of 2003, the Company and its patent counsel reached a similar
agreement on legal fees providing for a reduction in fees to be paid by the
Company from January 1, 2003 to March 31, 2004. As a result of the agreement,
the Company realized approximately $221,000 in reduced legal expense during the
second quarter of 2003.
Research and development expenses increased $705,000 (13.7%) to $5,833,000 and
increased as a percentage of net revenues to 15.1% from 13.9%. The principal
components of the $705,000 increase were $486,000 (64.3%) in increased
development costs associated with the automation, test and mechanical
engineering groups, as less of these departments' efforts were associated with
internally constructed manufacturing and test equipment in 2003 as compared to
2002, and $224,000 (63.9%) of increased project material costs. The principal
component offsetting the above increase was $73,000 (2.6%) of decreased
compensation expense. There was a net reduction in compensation expense of
$302,000 in various engineering departments, offset by a $229,000 increase at
the Company's Picor subsidiary due to increases in headcount.
Other income (expense), net increased $24,000 (38.1%) to ($39,000) from
($63,000) for the same period a year ago. Other income (expense) is primarily
comprised of interest income derived from invested cash and cash equivalents,
short-term investments and foreign currency gains and losses, as well as a note
receivable associated with the Company's real estate transaction which was
repaid in May 2002. The increase in other income
FORM 10-Q
PART I
ITEM 2
PAGE 11
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2003
(Continued)
(expense), net was due to a loss of $387,000 in the second quarter of 2003
resulting from a decline in the value of the Company's investment in Scipher,
plc judged to be other than temporary, compared to a loss of $1,078,000 in the
second quarter of 2002. This was offset by decreases in interest income of
approximately $255,000 due to decreases in average interest rates and foreign
currency losses of approximately $277,000.
Loss before income taxes was $5,729,000 for the second quarter of 2003 compared
to a loss before income taxes of $7,642,000 for the same period in 2002.
The effective tax rate for the second quarter of 2003 was a provision of (4.0%),
compared to a benefit of 36.5% for the same period in 2002. During 2002, the
Company recorded a tax benefit of 36.5% reducing pre-tax losses due to a
five-year carry-back provision allowed by a temporary change in the tax laws.
Beginning in 2003, with tax rules reverting to a two-year carry-back provision,
any losses incurred will be available only to offset future taxable income.
Although any losses incurred in future periods will be available to offset
future taxable income, due to the inherent uncertainty surrounding estimating
future taxable income, if any, the Company does not expect to record a benefit
for Federal and state income tax purposes in 2003. The Company will continue to
assess its effective tax rate and the need for valuation allowances against its
deferred tax assets. A provision in 2003 is required as the Company operates in
various state and international taxing jurisdictions and is subject to a variety
of income and related taxes.
Diluted loss per share was $(0.14) for the second quarter of 2003, compared to
diluted loss per share of $(0.11) for the second quarter of 2002.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Net revenues for the first six months of 2003 were $76,433,000, an increase of
$4,982,000 (7.0%) as compared to $71,451,000 for the same period a year ago. The
increase in net revenues resulted primarily from an increase in unit shipments
of standard and custom products of approximately $5,036,000, partially offset by
a decrease in license revenue of $54,000. Orders in the first half of 2003 are
less than orders in the second half of 2002, and they are still significantly
less than that of 2000 and the first half of 2001. The book-to-bill ratio was
1.00 for the first six months of 2003 compared to 1.01 for the same period a
year ago.
Gross margin for the first half of 2003 increased $2,599,000 (15.4%) to
$19,444,000 from $16,845,000 and increased as a percentage of net revenues from
23.6% to 25.4%. These increases were due to an increase in net revenues, a more
favorable product mix, and lower provisions for product warranty reserves and
inventory reserves for potential excess raw materials in the first six months of
2003 of approximately $600,000.
Selling, general and administrative expenses were $20,718,000 for the period, a
decrease of $669,000 (3.1%) over the same period in 2002. As a percentage of net
revenues, selling, general and administrative expenses decreased to 27.1% from
29.9%. The principal component of the $669,000 decrease was $2,346,000 (76.3%)
of decreased
FORM 10-Q
PART I
ITEM 2
PAGE 12
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2003
(Continued)
legal fees. This decrease was offset by $653,000 (8.2%) of increased
compensation expense, $265,000 (26.9%) of increased costs associated with the
operations of the VIAs, $222,000 (119.1%) in increased audit and tax fees and
$155,000 (11.6%) in increased advertising costs. The increase in compensation
expense was partially due to the completion in the first quarter of 2002 of the
internally developed software project of the Company's new Enterprise Resource
Planning System. In accordance with Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," certain
costs associated with the project were capitalized, and capitalization ceased
upon completion. During the third quarter of 2002, the Company and its primary
legal counsel for the Company's patent infringement actions (see Part II, Item 1
- - "Legal Proceedings") reached an agreement on legal fees providing for a
reduction in the fees to be paid by the Company from January 1, 2002 until final
resolution of each action. As a result of this agreement and the agreement with
the Company's patent counsel, the Company realized approximately $378,000 in
reduced legal expense during the first half of 2003. In addition, activity on
these matters was significantly lower during the first half of 2003 as compared
to the first half of 2002.
Research and development expenses increased $932,000 (9.1%) to $11,167,000 and
increased slightly as a percentage of net revenues to 14.6% from 14.3%. The
principal components of the $932,000 increase were $853,000 (60.8%) of increased
development costs associated with the automation, test and mechanical
engineering groups, as less of these departments' efforts were associated with
internally constructed manufacturing and test equipment in 2003 as compared to
2002, and $81,000 (9.0%) of increased project material costs. These were offset
by $131,000 (2.3%) of decreased compensation expense. There was a net reduction
in compensation expense of $628,000 in various engineering departments, offset
by a $497,000 increase at the Company's Picor subsidiary due to increases in
headcount.
Other income (expense), net increased $968,000 (153.7%) from the same period a
year ago, to $338,000. Other income is primarily comprised of interest income
derived from invested cash and cash equivalents, short-term investments and
foreign currency gains or losses, as well as a note receivable associated with
the Company's real estate transaction which was repaid in May 2002. The increase
in other income (expense), net was due to the write-down of obsolete equipment
of $1,159,000 in 2002 with no such write-down in 2003 and a loss of $1,078,000
in the first six months of 2002 versus a loss of $387,000 in the first six
months of 2003 resulting from a decline in the value of the Company's investment
in Scipher, plc judged to be other than temporary. These increases were offset
by a $596,000 decrease in interest income due to a decrease in average interest
rates and a decrease in foreign currency gains of $201,000.
Loss before income taxes was $12,103,000 compared to a loss before income taxes
of $15,407,000 for the same period in 2002.
The effective tax rate for the six months ended June 30, 2003 was a provision of
(4.0%) compared to a benefit of 36.5% for the same period a year ago.
FORM 10-Q
PART I
ITEM 2
PAGE 13
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2003
(Continued)
Diluted loss per share was $(0.30) for the six months ended June 30, 2003,
compared to a diluted loss per share of $(0.23) for the six months ended June
30, 2002.
Liquidity and Capital Resources
At June 30, 2003 the Company had $76,132,000 in cash and cash equivalents. The
ratio of current assets to current liabilities was 8.3:1 at June 30, 2003
compared to 8.5:1 at December 31, 2002. Working capital decreased $2,237,000,
from $152,679,000 at December 31, 2002 to $150,442,000 at June 30, 2003. The
primary factors affecting the working capital decrease were a decrease in
refundable income taxes of $6,842,000 and a decrease in inventory of $6,133,000.
These were offset by an increase in short-term investments of $5,967,000 and an
increase in cash and cash equivalents of $4,012,000. The primary source of cash
for the six months ended June 30, 2003 was $16,201,000 from operating
activities. The primary uses of cash for the six months ended June 30, 2003 were
for the net purchases of short-term investments of $6,310,000, acquisition of
plant, property and equipment of $3,259,000 and the acquisition of treasury
stock of $2,562,000.
The Company's primary liquidity needs are for making continuing investments in
manufacturing equipment, much of which is built internally, particularly
equipment for the FasTrak platform and for the Company's new products. The
internal construction of manufacturing machinery, in order to provide for
additional manufacturing capacity, is a practice which the Company expects to
continue in the future. The Company expects capital spending in 2003 to be
slightly below that of 2002. The Company anticipates that the automation, test
and mechanical engineering groups, which build the manufacturing equipment
internally, will be spending more time in development and support and
maintenance activities in 2003, the costs of which are expensed.
In November 2000, the Board of Directors of the Company authorized the
repurchase of up to $30,000,000 of the Company's Common Stock (the "November
2000 Plan"). The November 2000 Plan authorizes the Company to make such
repurchases from time to time in the open market or through privately negotiated
transactions. The timing and amounts of stock repurchases are at the discretion
of management based on its view of economic and financial market conditions. The
Company spent approximately $2,562,000 for the repurchase of 453,400 shares of
Common Stock during the six months ended June 30, 2003. As of June 30, 2003, the
Company had approximately $26,000,000 remaining under the plan.
The Company believes that cash generated from operations and the total of its
cash and cash equivalents, together with other sources of liquidity, will be
sufficient to fund planned operations and capital equipment purchases for the
foreseeable future. At June 30, 2003, the Company had approximately $190,000 of
capital expenditure commitments.
The Company does not consider the impact of inflation and changing prices on its
business activities or fluctuations in the exchange rates for foreign currency
transactions to have been significant during the last three fiscal years.
FORM 10-Q
PART I
ITEM 3
PAGE 14
VICOR CORPORATION
June 30, 2003
Cost Reduction Plan
In October 2001, the Company announced a cost reduction plan. Under this plan,
the Company required a reduced work schedule for direct factory employees as
required by production demands, and mandatory use of certain accrued personal
time by all other employees. In consideration of an excess in factory capacity
that has persisted, the potential for further improvements in productivity and
the prospective lower labor content of its V-I Chips, the Company will end
the general furlough program for all of its hourly factory workers effective
October 10, 2003. As of this date, approximately 74% of factory workers will
return to full time, productive employment. Approximately 26% of the factory
workers will be notified that the Company will not continue to employ them after
October 10, 2003. Affected employees that are unable to obtain other employment
will be provided with health benefits until the end of 2003. Mandatory use of
certain accrued personal time by all other employees is still in effect under
the cost reduction plan. The need for this plan is reviewed by senior management
on a periodic basis, and the Company expects the amended plan to continue for
the foreseeable future.
New Power System Architecture Introduced
On April 29, 2003, the Company announced the introduction of a new power system
architecture based on an array of proprietary power conversion technologies. The
Company believes the new architecture, called Factorized Power Architecture
("FPA"), will provide power system designers with enhanced performance at a
lower cost than attained with conventional Distributed Power Architecture
("DPA"). FPA is enabled by power conversion components called V-I Chips or VICs.
The first V-I Chip product offerings were introduced on May 12, 2003 and July 7,
2003 and the Company expects to introduce additional Factorized Power products
over the next several months.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of market risks, including changes in
interest rates affecting the return on its cash and cash equivalents and
short-term investments, changes in the equity price of the Company's investment
in Scipher, plc, a U.K. company, and fluctuations in foreign currency exchange
rates.
As the Company's cash and cash equivalents consist principally of money market
securities, which are short-term in nature, the Company's exposure to market
risk on interest rate fluctuations for these investments is not significant. The
Company's short-term investments consist mainly of corporate debt securities, a
major portion of which have maturities of less than one year. These debt
securities are all highly rated investments, in which a significant portion have
interest rates reset at auction at regular intervals. As a result, the Company
believes there is minimal market risk to these investments.
FORM 10-Q
PART I
ITEM 4
PAGE 15
VICOR CORPORATION
June 30, 2003
The market price of the Scipher, plc stock has experienced significant
fluctuations over the past two years. At June 30, 2003, the Company recorded a
loss of $387,000 in the investment in Scipher, plc, for a decline in value of
the investment judged to be other than temporary. At June 30, 2003 the fair
value of the investment was approximately $153,000.
The Company's exposure to market risk for fluctuations in foreign currency
exchange rates relates primarily to the operations of VJCL and changes in the
dollar/yen exchange rate. The Company believes that this market risk is
currently not material due to the relatively small size of VJCL's operations.
Item 4 - Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's management conducted an evaluation with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, regarding the effectiveness of the Company's disclosure controls and
procedures, as of the end of the last fiscal quarter. In designing and
evaluating the Company's disclosure controls and procedures, the Company and its
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only a reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating and implementing possible controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that they believe the Company's disclosure controls and procedures are
reasonably effective to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. We intend to continue to
review and document our disclosure controls and procedures, including our
internal controls and procedures for financial reporting, and we may from time
to time make changes to the disclosure controls and procedures to enhance their
effectiveness and to ensure that our systems evolve with our business.
(b) Change in internal controls
There were no changes in the Company's internal control over financial reporting
identified in connection with the Company's evaluation of its disclosure
controls and procedures that occurred during the Company's last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
FORM 10-Q
PART II
ITEM 1
PAGE 16
VICOR CORPORATION
Part II - Other Information
June 30, 2003
Item 1 - Legal Proceedings
On September 13, 2002, Exar Corporation ("Exar"), a vendor for the Company,
filed a complaint against the Company in the Superior Court of the State of
California, County of Alameda (the "Superior Court"). The complaint alleges
breach of contract and breach of implied covenant of good faith and fair dealing
in connection with the alleged purchase, under a "last time buy" arrangement, by
the Company of certain quantities of integrated circuits manufactured and
contained on silicon wafers from Exar. Exar alleges compensatory damages of
approximately $2,200,000. The Company filed an answer denying the substantive
allegations of Exar's complaint and several cross-complaints. A private
mediation between the parties was held on June 2, 2003, but the parties were
unable to resolve the matter through mediation. As a result, the Superior Court
set a trial date for January 23, 2004. Management of the Company does not expect
that the ultimate resolution of the California lawsuit, including Exar's
complaint and Vicor's cross-complaints will have a material adverse impact on
the Company's financial position.
As previously disclosed in Vicor's Form 10-K for the year ended December 31,
2002, Vicor and VLT, Inc. ("VLT"), a wholly owned subsidiary of the Company,
were pursuing Reset Patent infringement claims directly against Artesyn
Technologies, Lambda Electronics, Lucent Technologies, Tyco Electronics Power
Systems, Inc. and Power-One. Proceedings in the United States District Court in
Boston, Massachusetts are currently stayed while the parties appeal various
issues concerning the District Court's interpretations of certain patent claim
terms to the Court of Appeals for the Federal Circuit. There can be no assurance
that Vicor and VLT will ultimately prevail with respect to any of these claims
or, if they prevail, as to the amount of damages that would be awarded.
In addition, the Company is involved in certain other litigation incidental to
the conduct of its business. While the outcome of lawsuits against the Company
cannot be predicted with certainty, management does not expect any current
litigation to have a material adverse impact on the Company's financial
position.
FORM 10-Q
PART II
ITEM 2-5
PAGE 17
VICOR CORPORATION
Part II - Other Information
June 30, 2003
(Continued)
Item 2 - Changes in Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
The 2003 Annual Meeting of Stockholders of the Company was held on June
26, 2003. Under the Company's charter, each share of the Company's Common
Stock entitles the holder thereof to one vote per share, and each share of
the Company's Class B Common Stock entitles the holder thereof to ten
votes per share.
All nominees of the Board of Directors of the Company were re-elected for
a one year term. Votes were cast in the election of the directors as follows:
Nominee Votes For Votes Withheld
- ------- --------- --------------
Patrizio Vinciarelli 133,516,243 2,754,161
Estia J. Eichten 133,246,858 3,023,546
Barry Kelleher 133,512,912 2,757,492
Jay M. Prager 133,513,027 2,757,377
David T. Riddiford 136,077,578 192,826
M. Michael Ansour 136,078,878 191,526
Samuel Anderson 136,078,878 191,526
There were 0 broker non-votes and 0 abstentions on this proposal.
Item 5 - Other Information
Not applicable.
FORM 10-Q
PART II
ITEM 6
PAGE 18
VICOR CORPORATION
Part II - Other Information
June 30, 2003
(Continued)
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit Number Description
31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act
of 1934
31.2 Certification of Chief Financial Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act
of 1934
32.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
The Company filed Current Reports on Form 8-K on April 17, 2003, April 29, 2003
and May 12, 2003.
FORM 10-Q
PART II
PAGE 19
SIGNATURES
Pursuant to the requirements 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.
VICOR CORPORATION
Date: August 6, 2003 By:/s/ Patrizio Vinciarelli
------------------------
Patrizio Vinciarelli
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Date: August 6, 2003 By:/s/ Mark A. Glazer
------------------
Mark A. Glazer
Chief Financial Officer
(Principal Financial Officer)