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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
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 September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________________________________
Commission File Number 0-18277
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 September 30, 2003.
Common Stock, $.01 par value------------------------29,984,459
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
September 30, 2003 and December 31, 2002 1
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2003 and 2002 3
Notes to Condensed Consolidated Financial
Statements 4-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 15-16
Item 4 - Controls and Procedures 16
Part II - Other Information:
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of
Security Holders 18
Item 5 - Other Information 18
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)
September 30, 2003 December 31, 2002
------------------ -----------------
Assets
Current assets:
Cash and cash equivalents $ 64,248 $ 72,120
Short-term investments 48,184 28,779
Accounts receivable, net 21,145 22,469
Inventories, net 23,005 30,325
Refundable income taxes 1,419 8,846
Deferred tax assets 7,526 8,126
Other current assets 1,993 2,399
--------- ---------
Total current assets 167,520 173,064
Property, plant and equipment, net 86,601 98,738
Other assets 6,914 6,643
--------- ---------
$ 261,035 $ 278,445
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,716 $ 5,724
Accrued compensation and benefits 4,481 3,379
Income taxes payable 5,741 6,521
Accrued liabilities 4,490 4,761
--------- ---------
Total current liabilities 20,428 20,385
Deferred income taxes 14,295 10,027
Stockholders' equity:
Preferred Stock - -
Class B Common Stock 119 119
Common Stock 372 371
Additional paid-in capital 146,298 145,704
Retained earnings 183,691 203,398
Accumulated other comprehensive income 192 239
Treasury stock, at cost (104,360) (101,798)
--------- ---------
Total stockholders' equity 226,312 248,033
--------- ---------
$ 261,035 $ 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net revenues:
Product $ 35,815 $ 39,095 $111,541 $109,785
License 62 408 769 1,169
-------- -------- -------- --------
35,877 39,503 112,310 110,954
Costs and expenses:
Cost of revenue 27,290 29,380 84,279 83,986
Selling, general and administrative 10,230 9,646 30,948 31,033
Research and development 6,046 5,089 17,213 15,324
-------- -------- -------- --------
43,566 44,115 132,440 130,343
-------- -------- -------- --------
Loss from operations (7,689) (4,612) (20,130) (19,389)
Other income (expense), net (114) 478 224 (152)
-------- -------- -------- --------
Loss before income taxes (7,803) (4,134) (19,906) (19,541)
Benefit for income taxes 683 1,509 199 7,133
-------- -------- -------- --------
Net loss $ (7,120) $ (2,625) $(19,707) $(12,408)
======== ======== ======== ========
Net loss per common share:
Basic $ (0.17) $ (0.06) $ (0.47) $ (0.29)
Diluted $ (0.17) $ (0.06) $ (0.47) $ (0.29)
Shares used to compute
net loss per share:
Basic 41,851 42,328 41,901 42,383
Diluted 41,851 42,328 41,901 42,383
See accompanying notes.
FORM 10-Q
PART I
ITEM 1
PAGE 3
VICOR CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
--------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Operating activities:
Net loss $ (19,707) $ (12,408)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 16,824 16,007
Amortization of bond premium 526 -
Other than temporary decline in investment 387 1,078
Loss on disposal of equipment 329 1,157
Proceeds from sale of investment 273 -
Loss on sale of investment 100 5
Unrealized gain on foreign currency (1) (35)
Tax benefit relating to stock option plans - 76
Change in current assets and
liabilities, net 21,424 8,028
--------- ---------
Net cash provided by operating activities 20,155 13,908
Investing activities:
Purchases of short-term investments (30,397) (34,487)
Sale and maturities of short-term investments 10,322 35,221
Additions to property, plant and equipment (4,571) (8,453)
(Increase) decrease in notes receivable (1) 7,341
Increase in other assets (1,333) (474)
--------- ---------
Net cash used in investing activities (25,980) (852)
Financing activities:
Proceeds from issuance of Common Stock 595 224
Acquisitions of treasury stock (2,562) (578)
--------- ---------
Net cash used in financing activities (1,967) (354)
Effect of foreign exchange rates on cash (80) (70)
--------- ---------
Net (decrease) increase in cash and cash equivalents (7,872) 12,632
Cash and cash equivalents at beginning of period 72,120 57,481
--------- ---------
Cash and cash equivalents at end of period $ 64,248 $ 70,113
========= =========
See accompanying notes.
FORM 10-Q
PART I
ITEM 1
PAGE 4
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
September 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
nine months ended September 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)
September 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss as reported $ (7,120) $ (2,625) $ (19,707) $ (12,408)
Stock-based employee compensation cost,
net of related tax effects (803) (1,483) (3,462) (4,359)
-------- -------- --------- ---------
Pro forma net loss $ (7,923) $ (4,108) $ (23,169) $ (16,767)
======== ======== ========= =========
Net loss per share, as reported:
Basic $ (.17) $ (.06) $ (.47) $ (.29)
Diluted $ (.17) $ (.06) $ (.47) $ (.29)
Pro forma net loss per share:
Basic $ (.19) $ (.10) $ (.55) $ (.40)
Diluted $ (.19) $ (.10) $ (.55) $ (.40)
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)
September 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 nine months ended September 30 (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net loss $ (7,120) $(2,625) $ (19,707) $ (12,408)
======== ======= ========= =========
Denominator:
Denominator for basic loss
per share-weighted average shares 41,851 42,328 41,901 42,383
Effect of dilutive securities:
Employee stock options
- - - -
-------- ------- --------- ---------
Denominator for diluted loss per
share - adjusted weighted-average shares
and assumed conversions 41,851 42,328 41,901 42,383
======== ======= ========= =========
Basic loss per share $ (0.17) $ (0.06) $ (0.47) $ (0.29)
======== ======= ========= =========
Diluted loss per share $ (0.17) $ (0.06) $ (0.47) $ (0.29)
======== ======= ========= =========
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 September 30, 2003 and December 31, 2002 (in thousands):
September 30, 2003 December 31, 2002
------------------ -----------------
Raw materials..................... $ 16,483 $ 22,320
Work-in-process................... 2,191 2,992
Finished goods.................... 4,331 5,013
-------- --------
$ 23,005 $ 30,325
======== ========
FORM 10-Q
PART I
ITEM 1
PAGE 7
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2003
(Unaudited)
5. Investment
In August 2003, the Board of Directors approved the investment by the
Company of $1,000,000 in non-voting preferred stock of Great Wall
Semiconductor Corporation ("GWS"). A director of Vicor is founder,
president and a shareholder of GWS. GWS is majority owned and
controlled by an unrelated company. In addition to the investment, the
Company and GWS have entered into a cross-license agreement and the
Company purchases certain components from GWS. These purchases have not
been significant in 2003.
The Company considered the requirements of FASB Interpretation No. 46
(FIN 46), "Consolidation of Variable Interest Entities," in accounting
for the investment in GWS, and determined that GWS is not a variable
interest entity. As a result, the Company has accounted for the
investment under Accounting Principles Board Opinion No. 18 (APB 18),
"The Equity Method for Accounting for Investments in Common Stock," as
a cost method investment since it does not have significant influence
over GWS. The investment in GWS is included in other assets in the
condensed consolidated balance sheet at September 30, 2003. The Company
will periodically evaluate whether any indicators of impairment
surrounding the GWS investment are present and, if so, consider whether
any adjustments to the carrying value of the investment in GWS should
be taken.
6. 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 nine months ended September 30, 2003
was as follows (in thousands):
Balance as of December 31, 2002 $ 1,379
Accruals for warranties for products sold in the period 507
Fulfillment of warranty obligations and revisions of
estimated obligations (628)
-------
Balance as of September 30, 2003 $ 1,258
=======
7. Income Taxes
During the third quarter, the Company revised its estimated effective
tax rate expected to be applicable for the full year 2003 to an
expected tax benefit of 1% based on the reduced impact of state and
international taxes as a result of higher anticipated losses for the
full year 2003 and the revised estimated impact of expected benefits of
certain items including foreign sales corporation tax benefits and
related items. The effect of the revision of the estimated effective
tax rate on the results for the third quarter was approximately
$1,000,000. 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
FORM 10-Q
PART I
ITEM 1
PAGE 8
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2003
(Unaudited)
7. Income Taxes (continued)
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 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 now
expects to record a small benefit for Federal and state income tax
purposes in 2003 of approximately 1%. The Company will continue to
assess its effective tax rate and the need for valuation allowances
against its deferred tax assets. The Company operates in various state
and international taxing jurisdictions and is subject to a variety of
income and related taxes.
8. Comprehensive Income (Loss)
Total comprehensive loss was ($7,144,000) and ($19,754,000) for the
three and nine months ended September 30, 2003, respectively, and
($2,693,000) and ($12,404,000) for the three and nine months ended
September 30, 2002, respectively. Other comprehensive income (loss)
consisted principally of adjustments for foreign currency translation
gains in the amounts of $35,000 and $17,000 and unrealized losses on
available for sale securities in the amount of ($59,000) and ($64,000)
for the three and nine months ended September 30, 2003, respectively.
9. 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. In accordance with FAS 146, the Company provided
$300,000 in cost of revenue during the third quarter of 2003 for
separation costs, consisting of mostly health benefits for employees
affected by the end of the general furlough program (see Part I, Item 2
- "Cost Reduction Plan").
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.
FORM 10-Q
PART I
ITEM 1
PAGE 9
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2003
(Unaudited)
9. Impact of Recently Issued Accounting Standards (continued)
In January 2003, the FASB issued Interpretation No. 46 (FIN 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 January 31, 2003. For variable interests existing prior to February
1, 2003, consolidation will be required in financial statements issued
for the first period ending after December 15, 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 adoption of FAS 150 did not have a significant impact on the
Company's financial position or results of operations.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue 00-21 (EITF 00-21), "Multiple Element
Arrangements." EITF 00-21 is effective for revenue arrangements entered
into for fiscal periods beginning after June 15, 2003. In some
instances, EITF 00-21 may require deliverables in a multi-element
transaction to be accounted for separately, whereas previously those
deliverables might have been accounted for as a single unit of
accounting. The adoption of EITF 00-21 did not have a significant
impact on the Company's financial position or results of operations.
10. Subsequent Event
On October 20, 2003, the Company announced that it has entered into a
non-exclusive license with Celestica, Inc. to manufacture and sell the
V-I Chip product family.
FORM 10-Q
PART I
ITEM 2
PAGE 10
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2003
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 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, our ability to develop and
market new products and technologies cost effectively, to leverage design wins
into increased product sales, to decrease manufacturing costs and to enter into
licensing agreements that amplify the market opportunity and accelerate market
penetration, 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 September 30, 2003 compared to three months ended September
30, 2002
Net revenues for the third quarter of 2003 were $35,877,000, a decrease of
$3,626,000 (9.2%) as compared to $39,503,000 for the same period a year ago, and
a decrease of 7.3% on a sequential basis from the second quarter of 2003. The
decrease in net revenues resulted primarily from a decrease in unit shipments of
standard and custom products of approximately $3,280,000 and by a decrease in
license revenue of $346,000. Orders during the quarter increased by 0.4%
compared with the second 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 decrease in license revenue was due to the
termination of cooperative agreements with Nagano Japan Radio Company, Ltd.
("NJRC") on March 18, 2003, effective September 18, 2003, and the expiration of
a patent which provided the basis for royalties from other licensees. Going
forward, license revenues will be less than prior periods unless and until the
Company enters
FORM 10-Q
PART I
ITEM 2
PAGE 11
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2003
(Continued)
into new license arrangements. Remaining revenues from NJRC will be recognized
as payments are received. The book-to-bill ratio for the third quarter of 2003
was 1.05 as compared to 1.01 for the third quarter of 2002.
Gross margin for the third quarter of 2003 decreased $1,536,000 (15.2%) to
$8,587,000 from $10,123,000, and decreased to 23.9% from 25.6% as a percentage
of net revenues. The primary component of the decrease in gross margin dollars
and percentage were due to the decrease in net revenues, changes in the revenue
mix and $300,000 of separation costs, consisting of mostly health benefits that
the Company will provide to those affected employees associated with the end of
the general furlough program (see Part I, Item 2 - "Cost Reduction Plan"). 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 $10,230,000 for the period, an
increase of $584,000 (6.1%) from the same period in 2002. As a percentage of net
revenues, selling, general and administrative expenses increased to 28.5% from
24.4% primarily due to the reduction in net revenues. The principal components
of the $584,000 increase were $244,000 (5.8%) of increased compensation expense,
$230,000 (47.5%) of increased costs associated with the operations of the Vicor
Integrated Architects ("VIAs") and $220,000 (108.3%) of increased legal fees.
The principal component offsetting the above increase was $180,000 (17.2%) of
decreased commission costs due to decreased product sales.
Research and development expenses increased $957,000 (18.8%) to $6,046,000 and
increased as a percentage of net revenues to 16.9% from 12.9% primarily due to
the reduction in net revenues. The principal components of the $957,000 increase
were $632,000 (93.9%) 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, $249,000 (69.4%) of increased
compensation expense due to increases in headcount at the Company's Picor
subsidiary and $166,000 (42.4%) of increased project material costs. The
principal component offsetting the above increase was a net reduction in
compensation expense of $238,000 (9.4%) in various engineering departments.
Other income (expense), net decreased $592,000 (123.8%) to ($114,000) from
$478,000 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. The decrease in
other income (expense), net was due to a write-down of obsolete equipment of
$333,000 compared with a $12,000 write-down in the third quarter of 2002, an
increase in the minority interest in the net income of two VIA subsidiaries of
$156,000 and a decrease in interest income of approximately $45,000 due to
decreases in average interest rates.
Loss before income taxes was $7,803,000 for the third quarter of 2003 compared
to a loss before income taxes of $4,134,000 for the same period in 2002.
FORM 10-Q
PART I
ITEM 2
PAGE 12
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2003
(Continued)
During the third quarter, the Company revised its estimated effective tax rate
expected to be applicable for the full year 2003 to an expected tax benefit of
1% based on the reduced impact of state and international taxes as a result of
higher anticipated losses for the full year 2003 and the revised estimated
impact of expected benefits of certain items including foreign sales corporation
tax benefits and related items. The effect of the revision of the estimated
effective tax rate on the results for the third quarter was approximately
$1,000,000. 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 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 now expects to
record a small benefit for Federal and state income tax purposes in 2003 of
approximately 1%. The Company will continue to assess its effective tax rate and
the need for valuation allowances against its deferred tax assets. 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 $(0.17) for the third quarter of 2003, compared to
diluted loss per share of $(0.06) for the third quarter of 2002.
Nine months ended September 30, 2003 compared to nine months ended September 30,
2002
Net revenues for the first nine months of 2003 were $112,310,000, an increase of
$1,356,000 (1.2%) as compared to $110,954,000 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 $1,756,000, partially
offset by a decrease in license revenue of $400,000. Orders in the first nine
months of 2003 are slightly less than orders in the last nine months of 2002,
and they are still significantly less than that of 2000 and the first half of
2001. The book-to-bill ratio remained unchanged at 1.01 for the first nine
months of 2003 compared to the same period a year ago.
Gross margin for the first nine months of 2003 increased $1,063,000 (3.9%) to
$28,031,000 from $26,968,000 and increased as a percentage of net revenues from
24.3% to 25.0%. These increases were due to an increase in net revenues, a more
favorable product mix, and lower provisions for product warranty reserves in the
first nine months of 2003 of approximately $830,000 compared to the same period
in 2002.
Selling, general and administrative expenses were $30,948,000 for the period, a
decrease of $85,000 (0.3%) over the same period in 2002. As a percentage of net
revenues, selling, general and administrative expenses decreased to 27.6% from
28.0%. The principal component of the $85,000 decrease was $2,125,000 (64.8%) of
decreased legal fees. This decrease was offset by $897,000 (7.4%) of increased
compensation expense, $495,000 (33.7%) of increased costs associated with the
operations of the VIAs, $300,000 (107.3%) in increased audit and tax fees,
$135,000 (69.5%) of increased expenses associated with the international
operations and $135,000 (19.4%) in increased transportation costs. The increase
in compensation expense was due to compensation expense increases at certain
international subsidiaries and the Company's Westcor division, and to the
completion in the
FORM 10-Q
PART I
ITEM 2
PAGE 13
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2003
(Continued)
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. The decrease in legal
expense was primarily due to significantly lower activity on the Company's
patent infringement actions (see Part II, Item 1 - "Legal Proceedings") than in
2002. In addition, during the third quarter of 2002, the Company and its primary
legal counsel for the Company's patent infringement actions 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 an agreement with the Company's patent counsel, the Company
realized approximately $442,000 in reduced legal expense during the first nine
months of 2003.
Research and development expenses increased $1,889,000 (12.3%) to $17,213,000
and increased as a percentage of net revenues to 15.3% from 13.8%. The principal
components of the $1,889,000 increase were $1,485,000 (71.5%) 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 $247,000 (19.2%) of increased project material costs. These were
offset by $120,000 (1.4%) of decreased compensation expense. There was a net
reduction in compensation expense of $866,000 in various engineering
departments, offset by a $746,000 increase at the Company's Picor subsidiary due
to increases in headcount.
Other income (expense), net increased $376,000 (247.4%) from the same period a
year ago, to $224,000. 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 $1,157,000 in 2002 compared with $329,000 of write-downs in 2003 and a loss
of $1,078,000 in the first nine months of 2002 compared to a loss of $391,000 in
the first nine 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 $639,000 decrease in interest income due to a
decrease in average interest rates, an increase in the minority interest in the
net income of two VIA subsidiaries of $351,000 and a decrease in foreign
currency gains of $216,000.
Loss before income taxes was $19,906,000 compared to a loss before income taxes
of $19,541,000 for the same period in 2002.
The effective tax rate for the nine months ended September 30, 2003 was a
benefit of 1.0% compared to a benefit of 36.5% for the same period a year ago.
(See discussion of the effective tax rate on page 12).
Diluted loss per share was $(0.47) for the nine months ended September 30, 2003,
compared to a diluted loss per share of $(0.29) for the nine months ended
September 30, 2002.
FORM 10-Q
PART I
ITEM 2
PAGE 14
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2003
(Continued)
Liquidity and Capital Resources
At September 30, 2003 the Company had $64,248,000 in cash and cash equivalents.
The ratio of current assets to current liabilities was 8.2:1 at September 30,
2003 compared to 8.5:1 at December 31, 2002. Working capital decreased
$5,587,000, from $152,679,000 at December 31, 2002 to $147,092,000 at September
30, 2003. The primary factors affecting the working capital decrease were a
decrease in cash and cash equivalents of $7,872,000, a decrease in refundable
income taxes of $7,427,000, a decrease in inventory of $7,320,000 and a decrease
in accounts receivable of $1,324,000. These decreases were offset by an increase
in short-term investments of $19,405,000. The primary source of cash for the
nine months ended September 30, 2003 was $20,155,000 from operating activities.
The primary uses of cash for the nine months ended September 30, 2003 were for
the net purchases of short-term investments of $20,075,000, acquisition of
plant, property and equipment of $4,571,000 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 below
that of 2002. The Company's automation, test and mechanical engineering groups,
which build the manufacturing equipment internally, are 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 nine months ended September 30, 2003. As of September
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 September 30, 2003, the Company had approximately
$205,000 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 15
VICOR CORPORATION
September 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. The Company had previously announced that 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 would end the general furlough program for all of
its hourly factory workers effective October 10, 2003. During the quarter,
approximately 270 hourly factory workers were notified that the Company would
not continue to employ them. Those employees that were unable to obtain other
employment will be provided with health benefits until the end of 2003. As a
result, in accordance with FAS 146, the Company provided $300,000 in separation
costs in cost of revenue during the quarter for these benefits. 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. On October 20, 2003, the Company announced that it
has entered into a non-exclusive license with Celestica, Inc. to manufacture and
sell the V-I Chip product family.
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 16
VICOR CORPORATION
September 30, 2003
The market price of the Scipher, plc stock has experienced significant
fluctuations over the past two years. At September 30, 2003 the fair value of
the investment was approximately $200,000.
The Company's exposure to market risk for fluctuations in foreign currency
exchange rates relates primarily to the operations of Vicor Japan Company, Ltd.
("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 17
VICOR CORPORATION
Part II - Other Information
September 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 February 13, 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 2-6
PAGE 18
VICOR CORPORATION
Part II - Other Information
September 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
Not applicable.
Item 5 - Other Information
Not applicable.
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 a Current Report on Form 8-K on July 8, 2003 (Items
7 and 9) and on July 16, 2003 (Items 7 and 9).
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: November 5, 2003 By:/s/ Patrizio Vinciarelli
----------------------------------
Patrizio Vinciarelli
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Date: November 5, 2003 By:/s/ Mark A. Glazer
---------------------------------
Mark A. Glazer
Chief Financial Officer
(Principal Financial Officer)