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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from________ to________
Commission file number 0-18277
VICOR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 04-2742817
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
25 FRONTAGE ROAD, ANDOVER, MASSACHUSETTS 01810
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (978) 470-2900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $141,024,250 as of June 28, 2002.
On February 28, 2003, there were 30,320,580 shares of Common Stock outstanding
and 11,880,100 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A and relating to the Company's 2003 annual meeting of stockholders
are incorporated by reference into Part III.
PART I
This Annual Report on Form 10-K contains 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," "intends," "estimate," "plan," "assumes,"
"may," "will" and other similar expressions identify forward-looking statements.
These statements are based upon the Company's current expectations and estimates
as to prospective events and circumstances which may or may not be within the
Company's control and as to which there can be no assurances. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth in this report. Reference is made in
particular to the discussions set forth in this 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 this report may not be exhaustive. Therefore, the
information contained in this report 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 and 8-K, which may supplement, modify,
supersede or update those risk factors.
ITEM 1 - BUSINESS
THE COMPANY
Vicor Corporation was incorporated in Delaware in 1981. Unless the
context indicates otherwise, the term "Company" means Vicor Corporation and its
consolidated subsidiaries. The Company designs, develops, manufactures and
markets modular power components and complete power systems many of which use an
innovative, high frequency electronic power conversion technology called "zero
current switching." The Company's principal product lines are covered by one or
more United States and foreign patents. Power systems, a central element in any
electronic system, convert power from a primary power source (e.g., a wall
outlet or battery source) into the stable DC voltages that are required by most
contemporary electronic circuits.
In 1987, the Company formed VLT Corporation as its licensing
subsidiary. During 2000, the Company reincorporated VLT Corporation in
California by merging it with and into VLT, Inc., a wholly owned subsidiary of
the Company. In 1990, the Company established a Technical Support Center in
Germany and a foreign sales corporation (FSC). In 1995, the Company established
Technical Support Centers in France, Italy, Hong Kong, and England. Also in
1995, the Company established Vicor Integration Architects ("VIAs"), most of
which are majority-owned subsidiaries. VIAs provide customers with local design
and manufacturing services for turnkey custom power solutions. At December 31,
2002 there were six (6) VIAs operating in the United States. In 1996, the
Company established Vicor B.V., a Netherlands company, which serves as a
European Distribution Center. In 1998, the Company acquired the principal assets
of the switching power supply businesses owned by the Japan Tobacco, Inc. group
and established a direct presence in Japan through a new subsidiary called Vicor
Japan Company, Ltd. ("VJCL"). VJCL markets and sells the Company's products and
provides customer support in Japan. In 2001, the Company established a new
subsidiary, Picor Corporation ("Picor"), which designs, develops and markets
Power Management Integrated Circuits and related products for use in a variety
of power system applications. Picor develops these products to be sold as part
of Vicor's products or to third parties for separate applications. The Company's
Common Stock became publicly traded on the NASDAQ National Market System in
April 1990. All of the above named entities are consolidated in the Company's
financial statements.
The Company maintains a website with the address www.vicr.com. We make
available free of charge through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically file
such material with, or furnish such material to, the Securities and Exchange
Commission. The information contained on our website is not a part of, or
incorporated by reference into, this Annual Report on Form 10-K.
1
THE PRODUCTS
Power systems are incorporated into virtually all electronic products,
such as computers and telecommunications equipment, to convert electric power
from a primary source, for example a wall outlet or battery source, into the
stable DC voltages required by electronic circuits. Because power systems are
configured in a myriad of application-specific configurations, the Company's
basic strategy is to exploit the density and performance advantages of its
technology by offering comprehensive families of economical, component-level
building blocks which can be applied by users to easily configure a power system
specific to their needs. In addition to component-level power converters, which
serve as modular power system building blocks, the Company also manufactures and
sells complete configurable power systems, accessory products, and custom power
solutions. The Company operates in one industry segment: the development,
manufacture and sale of power conversion components and systems. The Company's
principal product lines include:
Modular Power Converters
The Company currently offers four first-generation families of
component-level DC-DC power converters: the VI-200, VI-J00, MI-200, and MI-J00
families. Designed to be mounted directly on a printed circuit board assembly
and soldered in place using contemporary manufacturing processes, each family
comprises a comprehensive set of products which are offered in a wide range of
input voltage, output voltage and power ratings. This allows end users to select
products appropriate to their individual applications.
The product families differ in maximum power ratings, performance
characteristics, package size and, in the case of the "MI" families, in target
market. The MI families are designed specifically to meet many of the
performance and environmental requirements of the military/defense markets.
Over the past five years, the Company has introduced four families of
its second-generation of high power density, component-level DC-DC converters.
In 1998, the 48 Volt input family was introduced, which was designed for the
telecommunications market as well as for distributed power systems. The products
consist of modules with the most popular output voltages in all three of the
Company's second-generation standard packages: the full size (Maxi), the half
size (Mini) and the quarter size (Micro). Output power levels from 50 to 500
Watts are covered by these second-generation products. In 1999, this was
followed by two additional families: a 300 Volt input for off-line (rectified
115 or 230 Volt ac) and distributed power applications, and a 375 Volt input
specifically designed for use in power factor corrected systems. This latter
family increased the power available to 600 Watts. In 2001, a 24 Volt input
family was added to the standard second-generation product line to address
additional telecommunications, industrial and defense market opportunities.
The Vicor Design Assistance Computer ("VDAC") was introduced for
general use in 2000 and is a proprietary system which enables Vicor's customers
to specify on-line, and verify in real time, the performance and attributes of
second-generation DC-DC converters. Using patented technology, VDAC enables the
design of second-generation DC-DC converters with any output voltage between 2
and 48 Volts and with any input voltage from 18 to 425 Volts, with an input
voltage range of up to 2.1:1. All of the Vicor established brick standards,
full-, half- and quarter-size, are available. Output power is selectable over a
continuous range of 20 to 500 Watts per module and modules can be configured in
fault-tolerant arrays capable of delivering several kilowatts.
Configurable Products
Utilizing its standard converters as core elements, the Company has
developed several product families which provide complete power solutions
configured to a customer's specific needs. These products exploit the benefits
of the component-level approach to offer higher performance, higher power
densities, lower costs, greater flexibility and faster delivery than traditional
competitive offerings.
Most process control, information technology ("IT") and industrial
electronic products operate directly off of AC lines. "Off-line" power systems
require "front end" circuitry to convert AC line voltage into DC voltage for the
core converters. The Company's off-line AC-DC products incorporate a set of
modular front end subassemblies to offer a complete power solution from AC line
input to highly regulated DC output. The product selection includes a
low-profile modular design in various sizes and power levels, and a choice of
alternatives to
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conventional "box switchers," -- high power, off-line bulk supplies in
industry-standard packages. Voltage and power levels can be either factory or
field configurable.
Many telecommunications, defense and transportation electronic products
are powered from central DC sources (battery plants or generators). The
Company's DC-DC power system choices include a low-profile modular design
similar to the corresponding AC-DC system and a rugged, compact assembly for
chassis-mounted, bulk power applications.
In February 2001, the Company introduced the VIPAC family of power
systems, a new class of user defined, modular power solutions. VIPAC is a new
type of integrated power system leveraging the latest advances in
second-generation DC-DC converter technology and modular front ends. VIPAC
combines application specific front end units, a choice of chassis styles and,
in AC input versions, remotely located hold-up capacitors to provide fast,
flexible and highly reliable power solutions for a wide range of demanding
applications.
The web-based Vicor Computer Aided Design ("VCAD"), similar in concept
to VDAC, can be utilized by the customer to specify and verify, in real time,
that customer's desired VIPAC configuration. The VCAD system enables the design
of a custom configured VIPAC product from all available combinations of inputs,
outputs, chassis and optional features.
Accessory Power System Components
Accessory power system components, used with the Company's
component-level power converters, integrate other important functions of the
power system, facilitating the design of complete power systems by
interconnecting several modules. In general, accessory products are used to
condition the inputs and outputs of the Company's modular power components.
VI-HAMs (Harmonic Attenuator Modules) are universal-AC-input,
power-factor-correcting front ends for use with compatible power converters.
VI-AIMs (AC Input Modules) provide input filtering, transient protection and
rectification of the AC line. VI-IAMs (Input Attenuator Modules) provide the DC
input filtering and transient protection required in industrial and
telecommunications markets. VI-RAMs (Ripple Attenuator Modules) condition
converter module outputs for extremely low noise systems. In 1998, the Company
doubled the power capability of its component-level AC front end, the VI-ARM (AC
Rectifier Module). This new front end product is packaged in the same "Micro"
package and includes a microcontroller that tracks the AC line to ensure correct
operation for domestic or international line voltages. In addition, two
accessory products for the 48 Volt input second-generation family were
introduced in 1999: the FiltMod for input filtering and the IAM48 for transient
and spike protection.
In 2002, the MicroRAM (uRAM) was introduced. This product, designed by
the Company's Picor subsidiary, performs a function similar to the VI-RAM
product in a smaller package at a lower price.
Customer Specific Products
Since its inception, the Company has accepted a certain amount of
"custom" power supply business. In most cases, the customer was unable to obtain
a conventional solution that could achieve the desired level of performance in
the available space. By utilizing its component-level power products as core
elements in developing most of these products, the Company was able to meet the
customer's needs with a reliable, high power density, total solution. However,
in keeping with the Company's strategy of focusing on sales of standard families
of component-level power building blocks, custom product sales have not been
directly pursued. The Company has traditionally pursued these custom
opportunities through Value-Added-Resellers ("VARs") and a network of VIAs (see
Part I, Item 1 - "Business - The Company"). Most of the VIAs are majority owned
by the Company, while VARs are independent businesses. Both VIAs and VARs are
distributed geographically and are in close proximity to many of their
customers.
3
SALES AND MARKETING
The Company sells its products through a network of 31 independent
sales representative organizations in North and South America; internationally,
51 independent distributors are utilized. Sales activities are managed by a
staff of Regional and Strategic Sales Managers and sales personnel based at the
Company's world headquarters in Andover, Massachusetts, its Westcor division in
Sunnyvale, California, a Technical Support Center in Lombard, Illinois, in VIA
locations in Oceanside, California and Austin, Texas, and in its Technical
Support Center subsidiaries in Munich, Germany; Camberley Surrey, England;
Milan, Italy; Paris, France; Hong Kong and Tokyo, Japan.
Export sales, as a percentage of total net revenues, were approximately
34%, 36% and 32%, in 2002, 2001 and 2000, respectively.
Because of the technical nature of the Company's product lines, the
Company engages a staff of Field Applications Engineers to support the Company's
sales activities. Field Applications Engineers provide direct technical sales
support worldwide to review new applications and technical matters with existing
and potential customers. There are Field Application Engineers assigned to all
Company locations and they are supported by product specialists (Product Line
Engineers) located in Andover. The Company generally warrants its products for a
period of two years.
The Company also sells directly to customers through Vicor Express, an
in-house distribution group. Through advertising and periodic mailing of its
catalogs, Vicor Express generally offers customers rapid delivery on small
quantities of many standard products. The Company, through Vicor B.V., has
expanded its Vicor Express operation to include locations in Germany, France,
Italy and England.
CUSTOMERS AND APPLICATIONS
The Company's customer base is comprised of large Original Equipment
Manufacturers (OEMs) and smaller, lower-volume users that are broadly
distributed across several major market areas. Some examples of the diverse
applications of the Company's products are:
Telecommunications: Military / Defense:
Central Office Systems Secure Communications Equipment
Fiber Optic Systems Unmanned Airborne / Remotely Piloted
Cellular Telecommunications Vehicles
Microwave Communications Aircraft/Weapons Test Equipment
ATM Switches Ruggedized Computers
Paging Equipment Electronic Warfare Equipment
Broadcast Equipment Reconnaissance/Targeting Systems
Remote Telemetry Equipment Global Positioning Systems
Cable Head End Equipment Missile Defense Systems
Power Amplifiers Radio / Telemetry Systems
NBC Detection Equipment
Industrial:
Process Control Equipment Information Technology:
Medical Equipment RAID Systems
Seismic Equipment Parallel Processors
Test Equipment Data Storage Systems
Transportation Systems Network Servers
Agricultural Equipment Enterprise Servers
Material Handling Equipment File Servers
Marine Products Optical Switches
Commercial Avionics
For the years ended December 31, 2002, 2001 and 2000, no single
customer accounted for more than 10% of net revenues.
4
BACKLOG
As of December 31, 2002, the Company had a backlog of approximately
$31.9 million compared to $34.5 million at December 31, 2001. Backlog is
comprised of orders for products which have a scheduled shipment date within the
next 12 months. The Company believes that a substantial portion of sales in each
quarter is, and will continue to be, derived from orders booked in the same
quarter.
RESEARCH AND DEVELOPMENT
As a basic element of its long-term strategy, the Company is committed
to the continued advancement of power conversion technology and power component
product development. The Company's research and development efforts are focused
in four areas: continued enhancement of the Company's patented technology;
expansion of the Company's families of component level DC-DC converter products;
development of power management integrated circuits; and continued development
of configurable products based upon market opportunities. The Company invested
approximately $20.5 million, $20.2 million and $20.6 million in research and
development in 2002, 2001 and 2000, respectively. Investment in research and
development represented 13.4%, 10.3% and 8.0% of net revenues in 2002, 2001 and
2000, respectively. The Company plans to continue to invest a significant
percentage of revenues into research and development.
MANUFACTURING
The Company's principal manufacturing processes consist of assembly of
electronic components onto printed circuit boards, automatic testing of
components, wave, reflow and infrared soldering of assembled components,
encapsulation of converter subassemblies, final environmental stress screening
of certain products and product test using automatic test equipment.
The Company continues to pursue its strategy to minimize manual
assembly processes, reduce manufacturing costs, increase product quality and
reliability and ensure its ability to rapidly and effectively expand capacity,
as needed. The strategy is based upon the phased acquisition and/or fabrication,
qualification and integration of automated manufacturing equipment. The Company
plans to make continuing investments in manufacturing equipment, particularly
for the Company's second-generation products and FasTrak platform (see Part I,
Item I - "Business - Second-Generation Automated Manufacturing Line").
Components used in the Company's products are purchased from a variety
of vendors. Most of the components are available from multiple sources. In
instances of single source items, the Company maintains levels of inventories it
considers to be appropriate to enable it to meet delivery requirements of
customers. Incoming components, assemblies and other parts are subjected to
several levels of inspection procedures.
Compliance by the Company with applicable environmental laws has not
had a material effect on the financial condition or operations of the Company.
SECOND-GENERATION AUTOMATED MANUFACTURING LINE
While revenues of second-generation products decreased by 18% in 2002
over 2001 and unit production decreased 10%, orders increased 12%. Both first-
and second-generation products are sold to similar customers. Gross margins on
second-generation products continue to be significantly lower than those of
first-generation products. The Company has nearly completed an upgrade to its
second-generation production equipment, internally designated as FasTrak, which
the Company anticipates will help to increase production capacity and reduce
costs. Approximately $3.3 million of equipment was placed into service related
to the FasTrak program in 2002 ($6.4 million in 2001), with an additional $1.4
million in construction-in-progress at the end of the year. It will take several
quarters before these steps will be fully implemented and their effects
realized. Gross margins during 2003 will continue to be negatively impacted
unless and until the Company is able to achieve higher production volumes and
attains higher yield levels and component cost reductions on second-generation
products. The Company continues to actively work towards improving yields and
reducing the cost of components on second-generation products. There can be no
assurance that such volumes, yields or cost reductions can be attained.
5
COMPETITION
Many power supply manufacturers target markets similar to those of the
Company. Representative examples of these manufacturers are: Lambda Electronics,
a subsidiary of Invensys, plc; the former Power Systems business unit of Lucent
Technologies, now a subsidiary of Tyco International, Ltd.; Artesyn
Technologies; Astec Power, a subsidiary of Emerson Electronic Company;
Power-One, Inc.; and C&D Technologies, Inc., Power Electronics Division.
Although certain of the Company's competitors have significantly greater
financial and marketing resources and longer operating histories than the
Company, the Company believes that it has a strong competitive position,
particularly with customers who need small, high density power system solutions
requiring a variety of input-output configurations.
PATENTS
The Company believes that its patents afford advantages by erecting
fundamental and multilayered barriers to competitive encroachment upon key
features and performance benefits of its principal product families. The
Company's patents cover the fundamental conversion topologies used to achieve
the performance attributes of its converter product lines; converter array
architectures which are the basis of the products' "parallelability"; product
packaging design; product construction; high frequency magnetic structures; and
automated equipment and methods for circuit and product assembly.
On February 16, 1999, the United States Patent and Trademark Office
issued U.S. patent RE36,098 (the "Reissue Patent") as a reissue of U.S. Patent
4,441,146 (the "Reset Patent"). The Reissue Patent includes original claims 1
through 5 of the Reset Patent plus 38 additional new claims. The claims in the
Reissue Patent cover non-coincident active clamp technology in a broadly defined
class of single-ended forward converters and enable design of power converters
which are smaller and more energy efficient than conventional power supplies.
The claims cover, but are not limited to, so-called "zero-voltage switching"
technology. The Company believes that its rights under the Reset Patent and the
Reissue Patent have been infringed. The Company believes in vigorously
protecting its rights under its patents (see Part I, Item 3 - "Legal
Proceedings").
The Company has been issued 76 patents in the United States (which
expire between 2003 and 2020), 24 in Europe (which expire between 2003 and
2015), and 24 in Japan (which expire between 2003 and 2016). The Company also
has a number of patent applications pending in the United States, Europe and the
Far East. Although the Company believes that patents are an effective way of
protecting its technology, there can be no assurances that the Company's patents
will prove to be enforceable (see, e.g., Part I, Item 3 - "Legal Proceedings").
While some of the Company's patents are deemed materially important to the
Company's operations, the Company believes that no one patent is essential to
the success of the Company.
LICENSING
In addition to generating revenue, licensing is an element of the
Company's strategy for building worldwide product and technology acceptance and
market share. In granting licenses, the Company retains the right to use its
patented technologies, and manufacture and sell its products, in all licensed
geographic areas and fields of use. Licenses are granted and administered
through the Company's wholly-owned subsidiary, VLT, Inc., which owns the
Company's patents. Revenues from licensing arrangements have not exceeded 10% of
the Company's consolidated revenues in any of the last three fiscal years.
On March 28, 2001, the Company announced that its wholly-owned
subsidiaries, Vicor Hong Kong Ltd. ("VHK") and VLT, Inc. ("VLT"), had entered
into cooperative agreements with Nagano Japan Radio Company, Ltd. ("NJRC"). On
March 18, 2003, NJRC gave VHK and VLT notice of termination of the agreements,
effective September 18, 2003.
EMPLOYEES
As of December 31, 2002, the Company employed approximately 1,500 full
time and 40 part time people. The Company believes that its continued success
depends, in part, on its ability to attract and retain qualified personnel.
Although there is strong demand for qualified technical personnel, the Company
has not to date
6
experienced difficulty in attracting and retaining sufficient engineering and
technical personnel to meet its needs (see Part I, Item I - "Risk Factors").
None of the Company's employees are subject to a collective bargaining
agreement.
RISK FACTORS
This Annual Report on Form 10-K contains 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. Actual results
could differ materially from those projected in the forward-looking statements
as a result of, among other factors, the risk factors set forth below.
OUR FUTURE SUCCESS DEPENDS UPON OUR ABILITY TO DEVELOP AND MARKET LEADING-EDGE,
COST EFFECTIVE PRODUCTS.
The power supply industry and the industries in which many of our
customers operate are characterized by intense competition, rapid technological
change, product obsolescence and price erosion for mature products, each of
which could have an adverse effect on the Company's results of operations. The
failure of the Company to continue to develop and commercialize leading-edge
technologies and products that are cost effective and maintain high standards of
quality could have a material adverse affect on the Company's competitive
position and results of operations.
OUR FUTURE OPERATING RESULTS ARE DEPENDENT ON THE GROWTH IN OUR CUSTOMERS'
BUSINESSES.
The Company manufactures modular power components and power systems
that are incorporated into its customers' electronic products. The Company's
growth is therefore dependent on the growth in the sales of its customers'
products as well as the development by its customers of new products. The
failure of the Company to anticipate changes in our customers' businesses and
their changing product needs could negatively impact our financial position.
OUR CONVERSION OF SECOND-GENERATION PRODUCTS AND MANUFACTURING EQUIPMENT TO THE
FASTRAK PLATFORM MAY NOT PROGRESS AS PLANNED.
The Company is in the process of converting second-generation products
to a new FasTrak platform. This involves the installation of new automated
manufacturing equipment, which has been substantially completed, and the
qualification of all products converted over to the new platform, which is in
process. The Company believes that this conversion will ultimately result in
lower unit costs and improved manufacturing yields. There can be no assurance
that the qualification of products will be completed as scheduled or that the
expected results of the conversion to the FasTrak platform will be achieved. In
addition, the process of conversion could result in excess supplies of raw
materials that are no longer needed for the converted products. Additional
inventory reserves could be required for potentially slow moving or obsolete
inventory which could negatively impact the Company's future operating results.
Also, once the conversion is completed, certain second-generation automated
manufacturing equipment may have little or no future use. This may result in the
impairment of any remaining net book value of those assets. The Company expects
to review the remaining useful lives of any such equipment and may shorten the
period of depreciation on this equipment going forward. This would result in
higher depreciation expense on this equipment in 2003 and 2004.
OUR REVENUES MAY NOT INCREASE ENOUGH TO OFFSET THE EXPENSE OF ADDITIONAL
CAPACITY.
The Company has made significant additions to its manufacturing
equipment and capacity over the past several years, including equipment for the
new FasTrak platform. This has resulted in a significant increase in fixed costs
and overall operating expenses. If revenue levels do not increase enough to
offset the increased fixed costs, the Company's future operating results could
be adversely affected. In addition, asset values could be impaired if the
additional capacity is underutilized for an extended period of time.
7
WE RELY ON THIRD-PARTY SUPPLIERS AND SUBCONTRACTORS FOR COMPONENTS AND
ASSEMBLIES AND, THEREFORE, CANNOT CONTROL THEIR AVAILABILITY OR QUALITY.
The Company depends on third party suppliers and subcontractors to
provide components and assemblies used in our products. If suppliers or
subcontractors cannot provide their products or services on time or to our
specifications, the Company may not be able to meet the demand for its products,
or it may negatively affect delivery times. In addition, the Company cannot
directly control the quality of the products and services provided by third
parties. In order to grow, the Company may need to find new or change existing
suppliers and subcontractors. This could cause disruptions in production, delays
in the shipping of product or increases in prices paid to third-parties.
WE ARE EXPOSED TO ECONOMIC, POLITICAL AND OTHER RISKS THROUGH OUR FOREIGN SALES
AND DISTRIBUTORS.
International sales have been and are expected to be a significant
component of total sales. Dependence on foreign third parties for sales and
distribution is subject to special risks, such as foreign economic and political
instability, foreign currency controls and market fluctuations, trade barriers
and tariffs, foreign regulations and exchange rates. Sudden or unexpected
changes in the foregoing could have a material adverse effect on the Company's
results of operations.
OUR ABILITY TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY MAY BE LIMITED IF WE
DO NOT RETAIN OUR KEY PERSONNEL.
The Company's success depends on our ability to retain the services of
our executive officers. The loss of one or more members of senior management
could materially adversely affect the Company's business and financial results.
In particular, the Company is dependent on the services of Dr. Patrizio
Vinciarelli, its founder, Chairman, President and Chief Executive Officer. The
loss of the services of Dr. Vinciarelli could have a material adverse effect on
the Company's development of new products and on its results of operations. In
addition, the Company depends on highly skilled engineers and other personnel
with technical skills that are in high demand and are difficult to replace. The
Company's continued operations and growth depends on its ability to attract and
retain highly qualified employees in a very competitive employment market.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH MAY LIMIT
OUR ABILITY TO COMPETE EFFECTIVELY.
The Company operates in an industry in which the ability to compete
depends on the development or acquisition of proprietary technologies which must
be protected to preserve the exclusive use of such technologies. The Company
devotes substantial resources to establish and protect our patents and
proprietary rights, and the Company relies on patent and intellectual property
law to protect such rights. This protection, however, may not prevent
competitors from independently developing products similar or superior to the
Company's products. The Company may be unable to protect or enforce current
patents, may rely on unpatented technology that competitors could restrict, or
may be unable to acquire patents in the future, and this may have a material
adverse affect on the Company's competitive position. In addition, the
intellectual property laws of foreign countries may not protect the Company's
rights to the same extent as those of the United States. The Company has been
and may need to continue to defend or challenge patents. The Company has
incurred and expects to incur significant costs in and devote significant
resources to these efforts which, if unsuccessful, may have a material adverse
effect on its results of operations and financial position.
OUR REVENUES AND OPERATING RESULTS HAVE BEEN NEGATIVELY IMPACTED BY THE GENERAL
BUSINESS SLOWDOWN, AND OUR OUTLOOK GOING FORWARD REMAINS HIGHLY UNCERTAIN.
The Company is exposed to general economic conditions which could have
a material adverse impact on its business, operating results and financial
condition. As a result of the continued general economic slowdown in the major
electronics markets, particularly in the communications markets, the Company's
net revenues declined significantly in 2002 as compared to 2001. In response to
the decline in revenues and demand, which resulted in excess production
capacity, the Company initiated a cost reduction plan in the fourth quarter of
2001, which continued through 2002 and has continued into 2003, to mitigate the
negative effect of these trends (see Part II, Item 7 - "Cost Reduction Plan").
The Company does not currently expect any significant improvement
8
in general economic conditions in 2003, and there can be no assurance that we
will be successful in managing our expenses in light of customer demand.
ITEM 2 - PROPERTIES
The Company's corporate headquarters building, which the Company owns
and which is located in Andover, Massachusetts, provides approximately 90,000
square feet of office space for its sales, marketing, engineering and
administration personnel.
The Company also owns a building of approximately 230,000 square feet
in Andover, Massachusetts, which houses all Massachusetts manufacturing
activities.
The Company's Westcor division owns and occupies a building of
approximately 31,000 square feet in Sunnyvale, California.
ITEM 3 - 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 $2.2 million. On October 30, 2002, the
Company filed an answer denying the substantive allegations of Exar's complaint
and twelve affirmative defenses. The Company also filed a verified cross-claim,
alleging monetary damages on the basis of promissory estoppel. On November 27,
2002, Exar filed a demurrer seeking to dismiss the verified cross-claim for
failure to state a claim upon which relief may be granted and also filed for an
application for writ of attachment against the Company. On January 17, 2003, the
Company filed its first amended cross-claim against Exar alleging breach of
contract, breach of warranty, breach of implied covenant of good faith and fair
dealing, fraud and negligent misrepresentation. The Company alleges compensatory
damages in excess of $1.2 million in connection with these claims. On January
24, 2003, Exar filed a demurrer seeking to dismiss Vicor's first amended
cross-claim, to which Vicor filed an opposition dated February 10, 2003. A court
hearing was held on January 27, 2003 in which, among other actions, Exar's writ
of attachment was denied and a trial date was set for June 6, 2003. After a
hearing on February 20, 2003, the Court sustained Exar's demurrer dismissing
Vicor's first amended cross-claim with leave to amend. On March 6, 2003, Vicor
filed its second amended cross-claim alleging counts for breach of contract,
breach of express warranty, breach of implied covenant of good faith and fair
dealing, fraud and negligent misrepresentation. At a hearing on March 7, 2003,
the Superior Court vacated the trial date of June 6, 2003 and re-designated the
case for case management purposes from "Plan 4" (collection cases) to "Plan 1"
(complex commercial cases). At a hearing on March 13, 2003, the Superior Court
ordered a private mediation between the parties to occur on or before June 6,
2003. If the parties are unable to resolve the matter through mediation, the
Superior Court will set a trial date on June 27, 2003. 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 the Company's Form 10-K for the year ended
December 31, 2001 and Forms 10-Q for the fiscal quarters ended March 31, June 30
and September 30, 2002, the Company and VLT, Inc. ("VLT"), a wholly-owned
subsidiary of the Company, are pursuing Reset Patent infringement claims
directly against Artesyn Technologies, Lambda Electronics, Lucent Technologies,
Tyco Electronics Power Systems, Inc. and Power-One in the United States District
Court in Boston, Massachusetts ("the Court"). The lawsuit against Lucent was
filed in May 2000 and the lawsuits against the other defendants were filed in
February and March 2001. On April 6, 2001, Vicor and VLT moved to add Tyco
Electronics Power Systems, Inc. as a defendant in the Lucent proceeding. Tyco
Electronics Power Systems, Inc. is the entity which now operates the former
power component business of Lucent. Vicor and VLT are seeking monetary damages
in these suits. On June 29, 2001, Vicor filed a motion with the Court seeking an
attachment of certain of Lucent's property in Massachusetts. On January 17,
2002, the Court issued an order granting Vicor an attachment of certain of
Lucent's property in an amount of $20 million, unless Lucent posts a bond for
this amount. In granting its order,
9
the Court found that (1) Vicor had a reasonable likelihood of succeeding in its
claim of patent infringement against Lucent and (2) that $20 million represented
a conservative estimate of actual damages that Vicor is likely to prove at
trial. In January 2003, the Court issued a decision in each of these patent
infringement lawsuits. In its decisions, the Court denied Artesyn's claim that
claim one of the Reset Patent is invalid for indefiniteness and ruled that Vicor
is not judicially estopped from asserting its interpretation of claim one. The
Court also adopted Vicor's interpretation of several terms within claim one.
However, the Court adopted interpretations of certain patent claim terms that
are contrary to Vicor's position. Management of the Company believes that the
Court's claim construction incorrectly limits the scope of the claims of the
Reset Patent, reducing the amount of infringing power supplies subject to
damages. In response to a motion by Lucent arguing that the Court's claim
construction of the term "recycling" had limited its infringing revenues from
$400 million to $24 million, on March 14, 2003, the Court reduced the
outstanding attachment against Lucent to $2 million.
At a status conference with the parties to each of the cases, the Court
has set a schedule for a consolidated trial on validity of the Reset Patent to
begin July 28, 2003. The Court has set a schedule for a trial on infringement
and damages by Lucent Technologies and Tyco Power Systems to occur in October
2003. The Court also set a schedule for trials on infringement and damages by
Power-One, Artesyn Technologies and Lambda Electronics to occur in November
2003, December 2003 and January 2004, respectively. The Company plans to
vigorously pursue recovery of damages and to protect its position as to the full
scope of the patent claims. There can be no assurance that Vicor will ultimately
prevail in this litigation or, if it prevails, as to the amount of damages that
would be awarded.
In addition, the Company is involved in certain 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 of
such current litigation to have a material adverse impact on the Company's
financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the National Market System
of the National Association of Securities Dealers Automated Quotation ("NASDAQ")
System and is traded in the over-the-counter market under the NASDAQ symbol
"VICR." The Class B Common Stock of the Company is not traded on any market and
is subject to restrictions on transfer under the Company's Restated Certificate
of Incorporation, as amended. The following table sets forth the quarterly high
and low sales prices for the Common Stock as reported by NASDAQ for the periods
indicated:
2001 High Low
- ---- ---- ---
First Quarter $39.94 $17.63
Second Quarter 26.09 15.65
Third Quarter 22.85 13.59
Fourth Quarter 17.53 12.16
2002 High Low
- ---- ---- ---
First Quarter $18.72 $11.53
Second Quarter 17.11 6.25
Third Quarter 9.80 5.59
Fourth Quarter 9.78 5.81
10
As of February 28, 2003, there were approximately 361 holders of record
of the Company's Common Stock and approximately 22 holders of record of the
Company's Class B Common Stock. These numbers do not reflect persons or entities
that hold their stock in nominee or "street name" through various brokerage
firms.
DIVIDEND POLICY
The Company has not paid cash dividends on its common equity and it is
the Company's present intention to retain earnings to finance the expansion of
the Company's business.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002
regarding shares of Common Stock of the Company that may be issued under our
existing equity compensation plans, including the Company's Amended and Restated
2000 Stock Option and Incentive Plan, the 1998 Stock Option and Incentive Plan,
the 1993 Stock Option Plan and the 1984 Stock Option Plan.
------------------------------------------------------------------------------------
Equity Compensation Plan Information
------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding securities
Plan Category warrants and rights warrants and rights reflected in column [a])
- ------------------------------------------------------------------------------------------------------------------------
[a] [b] [c]
Equity compensation
plans approved by
security holders 4,552,749 $18.84 2,096,541
Equity compensation
plans not approved by
security holders - - -
--------- ------ ---------
Total 4,552,749 $18.84 2,096,541
========= ====== =========
11
ITEM 6 - SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's statements of operations for the years ended December 31, 2002, 2001
and 2000 and with respect to the Company's balance sheets as of December 31,
2002 and 2001 are derived from the Company's consolidated financial statements,
which appear elsewhere in this report and which have been audited by Ernst &
Young LLP, the Company's independent auditors. The following selected
consolidated financial data with respect to the Company's statements of income
for the years ended December 31, 1999 and 1998 and with respect to the Company's
balance sheets as of December 31, 2000, 1999 and 1998 are derived from the
Company's audited consolidated financial statements, which are not included
herein. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
Year Ended December 31,
-----------------------
(in thousands except per share data)
Statement of Operations Data 2002 2001 2000 1999 1998
- ---------------------------- ---- ---- ---- ---- ----
Net revenues $152,591 $195,910 $257,583 $189,887 $164,634
Income (loss) from operations (24,502) (5,017) 46,010 24,427 18,365
Net income (loss) (15,942) (559) 33,920 19,088 15,835
Net income (loss) per share-diluted (.38) (.01) .78 .45 .37
Weighted average shares-diluted 42,337 42,342 43,265 42,412 42,785
At December 31,
---------------
(in thousands)
Balance Sheet Data 2002 2001 2000 1999 1998
- ------------------ ---- ---- ---- ---- ----
Working capital $152,679 $153,159 $146,478 $123,017 $ 84,594
Total assets 278,445 289,622 294,113 268,905 249,551
Total liabilities 30,412 24,785 31,192 24,372 40,292
Stockholders' equity 248,033 264,837 262,921 244,533 209,259
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth certain items of selected consolidated
financial information as a percentage of net revenues for the periods indicated.
This table and the subsequent discussion should be read in conjunction with the
selected financial data and the Consolidated Financial Statements of the Company
contained elsewhere in this report.
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
Gross margin 24.8% 29.9% 42.6%
Selling, general and administrative expenses 27.4% 22.1% 16.8%
Research and development expenses 13.4% 10.3% 8.0%
Income (loss) before income taxes (16.5%) (0.5%) 19.3%
12
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates
and judgements, including those related to revenue recognition, allowance for
doubtful accounts, inventories, investments, intangible assets, income taxes,
impairment of long-lived assets, and contingencies and litigation. Management
bases its estimates and judgements on historical experience, knowledge of
current conditions and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgements about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the
following accounting policies involve its more significant judgements and
estimates used in the preparation of its consolidated financial statements.
ACCOUNTS RECEIVABLE
Vicor maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments, based
on assessments of customers' credit-risk profiles and payment histories. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
INVENTORIES
The Company estimates allowances for its inventory for estimated
obsolescence or unmarketable inventory based upon its known backlog and
historical usage, and assumptions about future demand and market conditions. If
actual future demand or market conditions are less favorable than those
projected by management, additional inventory reserves for existing inventories
may need to be recorded in future periods.
LONG-LIVED ASSETS
Management evaluates the recoverability of the Company's identifiable
intangible assets, goodwill and other long-lived assets in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144), which generally requires
that the recoverability of these assets be assessed when events or circumstances
indicate a potential impairment. The Company periodically assesses the remaining
use of fixed assets based upon operating results and cash flows from operations.
Equipment has been written-down as a result of these assessments as necessary. A
further decline in the Company's business could lead to such impairment
adjustments in future periods.
WARRANTY
The Company generally warrants its products for a period of two years.
Vicor maintains allowances for estimated product returns under warranty based
upon a review of known or potential product failures in the field and upon
historical patterns of product returns. If unforeseen product issues arise or
product returns increase above expected rates, additional allowances may be
required.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109),
which requires that deferred tax assets and liabilities be recognized using
enacted rates for the effect of temporary differences between the book and tax
bases of recorded assets and liabilities. FAS 109 also requires that deferred
tax assets be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be realized. At
December 31, 2002, the Company has deferred tax assets of approximately $8.1
million primarily resulting from temporary differences between the book and tax
bases of assets and liabilities. The Company has assessed the need for a
valuation allowance against these deferred tax assets and concluded that
realization of these deferred tax assets is more likely than not and that no
valuation allowance is warranted at December 31, 2002. In reaching this
conclusion, the Company evaluated all relevant criteria including the existence
of temporary differences reversing in the carryforward period, primarily
depreciation, and the ability to carryback net operating losses at December 31,
2002. Based on these assessments, the Company concluded no valuation allowance
13
was warranted at December 31, 2002. Valuation allowances against these deferred
tax assets may be required in the future based on changes in the mix of
temporary differences, changes in tax laws, and operating performance.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001:
Net revenues for fiscal 2002 were $152,591,000, a decrease of
$43,319,000 (22.1%) as compared to $195,910,000 for fiscal 2001. The decline in
net revenues resulted primarily from a net decrease in unit shipments of
standard and custom products of approximately $41,201,000 and a decrease in
license revenue of approximately $2,118,000. Management believes that the
decrease in unit shipments and net revenues is primarily due to continued
over-capacity in the major electronics markets, particularly in the
communications markets. As a result, demand for the Company's products suffered
in 2002 and 2001. While the Company experienced an increase in orders in the
first nine months of 2002 as compared with the second half of 2001, orders
declined in the fourth quarter of 2002. Orders are still significantly less than
fiscal year 2000 and the first half of 2001, and the revenue outlook going
forward remains uncertain. Both first- and second-generation products are sold
to similar customers. The decrease in license revenue was primarily due to the
recognition of the final amounts under the license agreement with Reltec
Corporation during the first quarter of 2001. The book-to-bill ratio was 0.98
for 2002 compared to 0.81 for 2001.
Gross margin decreased $20,670,000 (35.3%) in 2002 from $58,489,000 to
$37,819,000, and decreased as a percentage of net revenues from 29.9% to 24.8%.
The primary component of the decrease in gross margin dollars and gross margin
percentage was the decrease in net revenues and changes in the revenue mix, in
particular a decrease in license revenue. In addition, there was $1,462,000 of
increased compensation expense due to certain manufacturing engineering groups
being transferred in the third quarter of 2001 to operations, where they are
included in cost of sales, from research and development, and an increase in
depreciation on the second-generation automated production line, including
equipment for FasTrak, of approximately $1,315,000 in 2002. The Company expects
to review the remaining useful lives of certain equipment in connection with the
conversion of second-generation products to the FasTrak platform, and may
shorten the useful lives of such equipment, as necessary going forward. This
would result in higher depreciation expense on this equipment in 2003 and 2004.
These items were partially offset by higher provisions for inventory reserves
for potential excess raw materials during 2001 of approximately $2,725,000. The
higher provisions in 2001 were considered necessary due to higher levels of
inventory at a time when demand for the Company's products was declining. The
Company continues to refine the designs, processes, equipment and parts
associated with second-generation products. Unless and until the Company
achieves higher production volumes for both its 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 $41,838,000 for the
year, a decrease of $1,474,000 (3.4%) from fiscal 2001. As a percentage of net
revenues, selling, general and administrative expenses increased from 22.1% to
27.4% primarily due to the reduction in net revenues. The principal components
of the $1,474,000 decrease were $975,000 (19.4%) in decreased sales commission
costs, $279,000 (81.3%) of decreased personnel related expenses, principally for
employment recruiting, advertising and relocation expenses, $265,000 (12.4%) in
decreased costs associated with the operations of the Vicor Integrated
Architects ("VIAs"), $258,000 (8.5%) in decreased costs associated with the
operations of Vicor Japan Co., Ltd. ("VJCL") and a decrease of $204,000 due to
not holding a North American sales meeting in 2002. The VIAs and VJCL have
reduced headcount and expenses in response to the decline in their respective
businesses. These decreases were offset by a $763,000 (4.9%) increase in
compensation expense and $170,000 (4.6%) of increased legal 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 infringement actions
(see Part I, Item 3 - "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 recorded a non-recurring reduction in legal expense of approximately
$1,092,000 in the third quarter of 2002 for legal fees incurred prior
14
to the third quarter. In addition, the Company realized approximately $659,000
in reduced legal expense during the third and fourth quarters of 2002 based on
the agreement.
Research and development expenses increased $289,000 (1.4%) to
$20,483,000 and increased as a percentage of net revenues to 13.4% from 10.3%
due to the reduction in net revenues. The principal components of the $289,000
increase were $930,000 (274.8%) of increased development costs associated with
the automation and test engineering groups, as less of these departments'
efforts were associated with internally constructed manufacturing and test
equipment in 2002 as compared to 2001, and $323,000 (2.7%) of increased
compensation expense. Approximately $1,785,000 of the net increase in
compensation expense was due to increases in the headcount in certain
engineering groups, of which $1,060,000 was at the Company's Picor subsidiary.
This increase was partially offset by $1,462,000 of decreased compensation
expense due to certain manufacturing engineering groups being transferred to
operations in the third quarter of 2001 where they are included in cost of
sales. This was also offset by $730,000 (32.8%) in decreased project material
costs and $317,000 (68.0%) in decreased personnel related expenses, principally
related to employment recruiting, advertising and relocation expenses. The
Company has a long-term commitment to reinvesting its profits in new product
design and development in order to maintain and improve its competitive
position.
Other income (expense), net decreased $4,726,000 (114.7%) to
$(604,000). Other income (expense), net is primarily comprised of interest
income derived from invested cash and cash equivalents and short-term
investments, as well as a note receivable associated with the Company's real
estate transaction (which was repaid in May 2002 - see Note 5 to the financial
statements) and foreign currency transaction gains or losses. Other income
(expense), net decreased due to a loss of $1,985,000 in 2002 resulting from
declines in the value of the Company's investment in Scipher, plc judged to be
other than temporary. In 2001, the Company recorded a net gain of $852,000 on
this investment. In addition, the Company recorded increased write-downs of
obsolete equipment of $1,086,000 in 2002 as compared with 2001, and had a
decrease in interest income of approximately $1,582,000 due to a decrease in
average interest rates. These decreases were partially offset by an increase in
foreign currency transaction gains of $759,000.
Loss before income taxes was $25,106,000, a decrease of $24,211,000
compared to a loss before income taxes of $895,000 in 2001.
The benefit for income taxes totaled $9,164,000 in 2002, while the
benefit for income taxes totaled $336,000 in 2001. The Company's overall tax
rate was (36.5%) and (37.5%) for 2002 and 2001, respectively. Due to a law
change in 2002 which allowed temporarily for a five year carryback, the
carryback period for losses incurred in 2003 and beyond is reverting back to two
years, from the five years allowed in 2002. 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.
The Company reported a net loss in 2002 of $15,942,000, as compared
with a net loss in 2001 of $559,000. Diluted loss per share was $(.38) in 2002
and $(.01) in 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000:
Net revenues for fiscal 2001 were $195,910,000, a decrease of
$61,673,000 (23.9%) as compared to $257,583,000 for fiscal 2000. The decline in
net revenues resulted primarily from a net decrease in unit shipments of
standard and custom products of approximately $54,724,000 and a decrease in
license revenue of approximately $6,949,000. The Company experienced a reduction
in demand for its first-generation products in the fourth quarter of 2000 which
continued throughout 2001. While overall revenues of second-generation products
increased 47% in 2001 over 2000, the Company experienced a reduction in demand
for second-generation products in the second half of 2001. The decrease in
license revenue was primarily due to the recognition of the final amounts under
the license agreement with Reltec Corporation during the first quarter of 2001.
Gross margin decreased $51,263,000 (46.7%) from $109,752,000 to
$58,489,000, and decreased as a percentage of net revenues from 42.6% to 29.9%.
The primary component of the decrease in gross margin
15
dollars and gross margin percentage was the decrease in net revenues. Other
factors impacting the gross margin percentage were an increase in provisions for
inventory reserves of approximately $1,700,000 in 2001 for potential excess
materials, an increase in depreciation on the second-generation automated
production line, including equipment for FasTrak, of approximately $911,000 in
2001 and changes in the revenue mix. The primary changes in the revenue mix
affecting gross margin percentage were the decrease in license revenue and a
higher proportion of second-generation products shipped in 2001 as compared to
2000, which are at significantly lower gross margins than those of
first-generation products.
Selling, general, and administrative expenses were $43,312,000 for the
year, an increase of $133,000 (0.3%) over fiscal 2000. As a percentage of net
revenues, selling, general and administrative expenses increased from 16.8% to
22.1%. The principal components of the $133,000 increase were $1,887,000
(102.0%) of increased legal expense and $1,151,000 (8.0%) of increased
compensation expense. These were offset by a $1,741,000 (25.8%) decrease in
sales commission costs, $665,000 (85.6%) in decreased payroll tax expense
associated with the exercise of stock options and $496,000 (14.1%) in decreased
advertising costs. The increase in legal expense in 2001 was in connection with
activity related to the Company's patent infringement actions (see Part I, Item
3 - "Legal Proceedings").
Research and development expenses decreased $369,000 (1.8%) to
$20,194,000, but increased as a percentage of net revenues to 10.3% from 8.0%.
The principal component of the $369,000 decrease was $947,000 (81.4%) of
decreased research and development expense associated with the operations of
VJCL due to a realignment of their activities to applications engineering
beginning in the second quarter of 2001, which is included in selling, general
and administrative expenses. This was offset by $245,000 (20.8%) of increased
research and development costs associated with the operations of the VIAs,
$169,000 (19.2%) of increased facilities costs and $113,000 (34.4%) of increased
personnel related expenses, principally for employment recruiting, advertising
and relocation expenses.
Other income (expense), net increased $336,000 (8.9%) to $4,122,000.
Other income (expense), net is primarily comprised of interest income derived
from invested cash and cash equivalents and short-term investments, as well as a
note receivable associated with the Company's real estate transaction, as
described in Note 5 to the financial statements. Other income (expense), net
increased primarily due to a gain on the sale of an investment of $1,452,000 in
the fourth quarter of 2001. In exchange, the Company received shares of Scipher
plc, a U.K. company which is publicly traded on the London Stock Exchange. As a
result, the carrying value of this investment will be subject to fluctuations in
Scipher's share price, which is reported in a separate component of
stockholders' equity, and to fluctuations in foreign currency, which is reported
in the statement of operations. Any declines judged to be other than temporary
and any realized gains (losses) will be reported in other income (expense), net
(see Note 6 to the financial statements). This increase was offset by a decrease
in interest income due to a decrease in average interest rates.
Loss before income taxes was $895,000, a decrease of $50,691,000
(101.8%) compared to income before income taxes of $49,796,000 in 2000.
The benefit for income taxes totaled $336,000 in 2001, while the
provision for income taxes totaled $15,876,000 in 2000. The Company's overall
tax rate was (37.5%) and 31.9% for 2001 and 2000, respectively.
The Company reported a net loss in 2001 of $559,000, as compared with
net income in 2000 of $33,920,000. Diluted loss per share was $(.01) in 2001 and
diluted income per share was $.78 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had $72,120,000 in cash and cash
equivalents. Working capital decreased $480,000 during the year ended December
31, 2002. This decrease was due primarily to an increase in current liabilities
of $5,044,000, offset by a net increase in current assets of $4,564,000. The
primary factors affecting the working capital decrease were a decrease in
inventories of $10,423,000, the repayment of a note receivable of $7,500,000 and
a decrease in accounts receivable of $755,000, and an increase in accounts
payable and income taxes payable of $5,534,000. These were offset by an increase
in cash and cash equivalents of $14,639,000 and refundable income taxes of
$8,846,000.
16
Cash used in investing activities during fiscal 2002 was $1,964,000, a
decrease of $44,274,000 compared to fiscal 2001. This decrease was primarily due
to a decrease in net purchases of short-term investments of $22,800,000, a
decrease in net additions to property and equipment of $11,616,000 and a
decrease in notes receivable of $10,237,000. Cash used in financing activities
was $1,157,000 in 2002 compared to cash provided by financing activities of
$1,377,000 in 2001, a net change of $2,534,000. This change is primarily
attributed to a net increase in the acquisition cost of treasury stock of
$1,270,000 in 2002, and a decrease in the net proceeds from the issuance of
Common Stock upon the exercise of stock options of $1,264,000.
The Company's primary liquidity needs are for making continuing
investments in manufacturing equipment, much of which is built internally,
particularly for the Company's second-generation 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. While the Company expects capital spending to be higher in 2003 than
2002, it will be less than the spending levels in 2001 and 2000. The Company
anticipates that the automation and test engineering groups, which build the
manufacturing equipment internally, will be spending more time in development
and support and maintenance activities in 2003, which is expensed. The Company
has nearly completed an upgrade to its second-generation production equipment,
internally designated as FasTrak, which the Company anticipates will help to
increase production capacity and reduce manufacturing costs. In February 2001,
management approved approximately $16 million in new capital expenditures to
execute this plan. Through December 31, 2002, the Company has spent
approximately $12,500,000 under this plan, of which approximately $1,400,000 was
in construction-in-progress at December 31, 2002. It is expected that this
equipment will be completed and placed into service during the first quarter of
2003, which should complete this spending plan. The additional costs to be
incurred are expected to be less than $100,000.
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 repurchases
from time to time in the open market or through privately negotiated
transactions. The timing of this program and the amount of the stock that may be
repurchased is at the discretion of management based on its view of economic and
financial market conditions. In 2002, the Company spent $1,408,000 for the
repurchase of 230,000 shares of its Common Stock under the November 2000 Plan.
At December 31, 2002, the Company had approximately $28,593,000 remaining under
the plan. On March 5, 2003, the Company spent approximately $2,562,000 for the
repurchase of 453,400 shares of its Common Stock.
The table below summarizes the Company's contractual cash obligations
as of December 31, 2002 (in thousands):
Payments due by period
--------------------------------------------------------
Less than More than 5
Contractual Obligations Total 1 year 1 - 3 years 3 - 5 years years
- ----------------------- ----- ------ ----------- ----------- -----
Operating leases $3,448 $ 1,279 $1,822 $ 347 $ -
Nitrogen supply contract 3,300 264 792 792 1,452
------ ------- ------ ------ ------
Total $6,748 $ 1,543 $2,614 $1,139 $1,452
====== ======= ====== ====== ======
The Company believes that cash generated from operations and its cash
and cash equivalents will be sufficient to fund planned operations and capital
equipment purchases for the foreseeable future. At December 31, 2002, the
Company had approximately $100,000 of capital expenditure commitments,
principally for manufacturing equipment.
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 material during the last three fiscal
years.
17
COST REDUCTION PLAN
In October 2001, the Company announced a cost reduction plan. Under
this plan, the Company continues to require 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 need for this plan is
reviewed by senior management on a periodic basis, and the Company expects it to
continue for the foreseeable future.
ITEM 7(a) QUALITATIVE AND QUANTITATIVE DISCLOSURE 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
and government 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.
The equity price risk for the Company's investment in Scipher plc is
not material, as the balance of this investment at December 31, 2002 was
$540,000. The market price of the stock has experienced significant fluctuations
over the past year. During 2002, the Company recognized a loss of $1,985,000
resulting from declines in the value of this investment judged to be other than
temporary (see Note 6 to the financial statements).
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.
18
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Operations For the Years Ended December 31, 2002,
2001 and 2000
Consolidated Statements of Cash Flows For the Years Ended December 31, 2002,
2001 and 2000
Consolidated Statements of Stockholders' Equity For the Years Ended December 31,
2002, 2001 and 2000
Notes to the Consolidated Financial Statements
SCHEDULE (Refer to Item 15)
19
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
VICOR CORPORATION
We have audited the accompanying consolidated balance sheets of Vicor
Corporation as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Vicor Corporation at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 7 to the consolidated financial statements, in
2002 the Company changed its method of accounting for goodwill and other
intangible assets in accordance with the adoption of Statement of Financial
Accounting Standards No. 142.
/s/Ernst & Young LLP
Boston, Massachusetts
January 27, 2003,
except for the second paragraph
of Note 8, as to which the date
is March 5, 2003
20
VICOR CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
---- ----
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 72,120 $ 57,481
Short-term investments 28,779 28,808
Accounts receivable, less allowance of $648 in 2002 and 22,469 23,224
$1,460 in 2001
Refundable income taxes 8,846 -
Note receivable - 7,500
Inventories, net 30,325 40,748
Deferred tax assets 8,126 8,850
Other current assets 2,399 1,889
--------- ---------
Total current assets 173,064 168,500
Property, plant and equipment, net 98,738 110,846
Notes receivable from related parties - 2,167
Other assets 6,643 8,109
--------- ---------
$ 278,445 $ 289,622
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,724 $ 3,087
Accrued compensation and benefits 3,379 3,492
Accrued expenses 4,158 4,321
Income taxes payable 6,521 3,624
Deferred revenue 603 817
--------- ---------
Total current liabilities 20,385 15,341
Deferred income taxes 10,027 9,444
Commitments and contingencies - -
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized;
360,001 issued and none outstanding in 2002 and 2001 - -
Class B Common Stock: 10 votes per share, $.01 par value,
14,000,000 shares authorized, 11,880,100, issued and
outstanding (11,930,848 in 2001) 119 119
Common Stock: 1 vote per share, $.01 par value, 62,000,000 shares
authorized, 36,876,378 shares issued and 30,320,580 outstanding
(36,784,556 issued and 30,458,758 outstanding in 2001) 369 369
Additional paid-in capital 145,706 145,359
Retained earnings 203,398 219,340
Accumulated other comprehensive income 239 40
Treasury stock at cost: 6,555,798 shares (6,325,798 shares in 2001) (101,798) (100,390)
--------- ---------
Total stockholders' equity 248,033 264,837
--------- ---------
$ 278,445 $ 289,622
========= =========
See accompanying notes
21
VICOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
(in thousands, except per share amounts)
Net revenues $152,591 $195,910 $257,583
Costs and expenses:
Cost of revenue 114,772 137,421 147,831
Selling, general and administrative 41,838 43,312 43,179
Research and development 20,483 20,194 20,563
-------- -------- --------
177,093 200,927 211,573
-------- -------- --------
Income (loss) from operations (24,502) (5,017) 46,010
Other income (expense), net (604) 4,122 3,786
-------- -------- --------
Income (loss) before income taxes (25,106) (895) 49,796
Provision (benefit) for income taxes (9,164) (336) 15,876
-------- -------- --------
Net income (loss) $(15,942) $ (559) $ 33,920
======== ======== ========
Net income (loss) per common share:
Basic $ (.38) $ (.01) $ .80
======== ======== ========
Diluted $ (.38) $ (.01) $ .78
======== ======== ========
Shares used to compute net income (loss) per share:
Basic 42,337 42,342 42,276
======== ======== ========
Diluted 42,337 42,342 43,265
======== ======== ========
See accompanying notes
22
VICOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
(in thousands)
Operating activities:
Net income (loss) $(15,942) $ (559) $ 33,920
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 21,887 19,984 18,326
Other than temporary decline in investment 1,985 600 400
Loss on disposal of equipment 1,446 360 625
Deferred income taxes 1,167 (902) 764
Amortization of bond premium 376 - -
Distribution of investment shares (191) - -
Tax benefit relating to stock option plans 96 1,272 7,672
(Gain) loss on sale of investments 5 (1,452) -
Unrealized gain on foreign currency (26) - -
Change in current assets and liabilities, net 7,026 20,464 (22,430)
-------- -------- --------
Net cash provided by operating activities 17,829 39,767 39,277
Investing activities:
Purchase of short-term investments (37,066) (23,064) (9,600)
Sales and maturities of short-term investments 36,802 - 4,000
Additions to property, plant and equipment (10,770) (22,386) (16,783)
Decrease (increase) in notes receivable 9,636 (601) (368)
Proceeds from sale of equipment - 10 34
Increase in other assets (566) (797) (36)
-------- -------- --------
Net cash used in investing activities (1,964) (46,838) (22,753)
Financing activities:
Proceeds from exercise of stock options 251 1,515 10,460
Acquisitions of treasury stock (1,408) (138) (32,989)
-------- -------- --------
Net cash provided by (used in)
financing activities (1,157) 1,377 (22,529)
Effect of foreign exchange rates on cash (69) 259 (188)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 14,639 (5,435) (6,193)
Cash and cash equivalents at beginning of year 57,481 62,916 69,109
-------- -------- --------
Cash and cash equivalents at end of year $ 72,120 $ 57,481 $ 62,916
======== ======== ========
Continued on following page
23
VICOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
(in thousands)
Change in current assets and liabilities:
Accounts receivable $ 887 $ 24,609 $(15,927)
Inventories 10,559 3,508 (11,426)
Other current assets (9,343) 128 3
Accounts payable and other accrued items 2,233 (7,971) 1,208
Income taxes payable 2,904 (627) 3,712
Deferred revenue (214) 817 -
-------- -------- --------
$ 7,026 $ 20,464 $(22,430)
======== ======== ========
Supplemental disclosures:
Cash paid during the year for income taxes,
net of refunds $ (4,733) $ ( 937) $ 3,935
See accompanying notes
24
VICOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(in thousands)
ACCUMULATED
CLASS B ADDITIONAL OTHER TOTAL
COMMON COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME STOCK EQUITY
--------- --------- ---------- --------- ------------- -------- -------------
Balance at December 31, 1999 $ 121 $ 356 $ 124,451 $ 185,979 $ 889 $ (67,263) $ 244,533
Sales of Common Stock 10 10,450 10,460
Conversion of Class B Common
Stock to Common Stock (1) 1 -
Income tax benefit from
transactions involving stock option 7,672 7,672
Purchase of treasury stock (32,989) (32,989)
Net income for 2000 33,920 33,920
Currency translation adjustments (675) (675)
-----------
Comprehensive income 33,245
--------- --------- ---------- --------- ------------- --------- -----------
Balance at December 31, 2000 120 367 142,573 219,899 214 (100,252) 262,921
Sales of Common Stock 1 1,514 1,515
Conversion of Class B Common
Stock to Common Stock (1) 1 -
Income tax benefit from
transactions involving stock options 1,272 1,272
Purchase of treasury stock (138) (138)
Net loss for 2001 (559) (559)
Unrealized gain on investments 55 55
Currency translation adjustments (229) (229)
-----------
Comprehensive loss (733)
--------- --------- ---------- --------- ------------- --------- -----------
Balance at December 31, 2001 119 369 145,359 219,340 40 (100,390) 264,837
Sales of Common Stock 251 251
Conversion of Class B Common
Stock to Common Stock -
Income tax benefit from
transactions involving stock options 96 96
Purchase of treasury stock (1,408) (1,408)
Net loss for 2002 (15,942) (15,942)
Unrealized gain on investments 82 82
Currency translation adjustments 117 117
-----------
Comprehensive loss (15,743)
--------- --------- ---------- --------- ------------- --------- -----------
Balance at December 31, 2002 $ 119 $ 369 $ 145,706 $ 203,398 $ 239 $(101,798) $ 248,033
========= ========= ========== ========= ============= ========= ===========
See accompanying notes
25
VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Vicor Corporation (the "Company") designs, develops, manufactures and
markets modular power converters, power system components, and power systems
using a patented, high frequency power conversion technology designated "zero
current switching." The Company also licenses certain rights to its technology
in return for ongoing royalties. The principal markets for the power converters
and systems are large Original Equipment Manufacturers and smaller, lower volume
users which are broadly distributed across several major market areas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany transactions and balances have
been eliminated upon consolidation.
REVENUE RECOGNITION
Product revenue is recognized in the period when persuasive evidence of
an arrangement with a customer exists, the products are shipped and title has
transferred to the customer, the price is fixed and determinable, and collection
is considered probable. License fees are recognized ratably over the period of
exclusivity or as additional royalty payments would have been required, if
greater, or over the period in which the Company provides services. The Company
recognizes revenue on such arrangements only when the contract is signed, the
license term has begun, all obligations have been delivered to the customer, and
collection is probable.
FOREIGN CURRENCY TRANSLATION
The financial statements of Vicor Japan Company, Ltd. ("VJCL"), for
which the functional currency is the Japanese yen, have been translated into
U.S. dollars in accordance with FASB Statement No. 52, "Foreign Currency
Translation." All balance sheet accounts have been translated using the exchange
rate in effect at the balance sheet date. Income statement amounts have been
translated at the average exchange rates in effect during the year. The gains
and losses resulting from the changes in exchange rates from year to year have
been reported in other comprehensive income. Foreign currency transaction gains
(losses), included in other income (expense), net, were approximately $526,000,
($232,000) and ($75,000) in 2002, 2001 and 2000, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include funds held in checking and money
market accounts with banks, certificates of deposit and debt securities with
maturities of less than three months when purchased and money market securities.
Cash and cash equivalents are valued at cost which approximates market value.
The Company's money market securities, which are classified as cash equivalents
on the balance sheet, are purchased and redeemed at par. The estimated fair
value is equal to the cost of the securities and due to the nature of the
securities there are no unrealized gains or losses at the balance sheet dates.
As of December 31, 2002, the Company has approximately $54 million of
available-for-sale securities included in cash and cash equivalents ($47 million
as of December 31, 2001).
SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as
available-for-sale securities and are recorded at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, along with interest and realized gains and losses, are included in
other income (expense), net. The Company considers these investments, which
represent funds for current operations, to be an integral part of its cash
management activities. The Company has no trading securities or held-to-maturity
securities.
26
VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost (determined using the
first-in, first-out method) or market. The Company provides reserves for
inventories estimated to be excess, obsolete or unmarketable. The Company's
estimation process for such reserves is based upon its known backlog, projected
future demand and expected market conditions. As sales for the Company's
products decline, such as occurred during 2002 and 2001, the Company's
estimation process will cause larger inventory reserves to be recorded,
resulting in larger charges to cost of sales. This occurred during 2002 and
2001.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and cash
equivalents, short-term investments and trade accounts receivable. The Company
maintains cash and cash equivalents and certain other financial instruments with
various high credit, quality financial institutions. The Company's short-term
investments consist of highly rated corporate and government debt securities.
The Company's investment policy, approved by the Board of Directors, limits the
amount the Company may invest in any one type of investment, thereby reducing
credit risk concentrations. Concentrations of credit risk with respect to trade
accounts receivable are limited due to the number of entities comprising the
Company's customer base. Credit losses have consistently been within
management's expectations.
INTANGIBLE ASSETS
In the first quarter of 2002, the Company adopted FASB Statement No.
142, "Goodwill and Other Intangible Assets" (FAS 142), which resulted in the
elimination of goodwill amortization beginning in fiscal 2002. Values assigned
to patents are amortized using the straight-line method over periods ranging
from five to twenty years. The adoption of FAS 142 did not have a material
effect on the Company's financial position or results of operations.
LONG-LIVED ASSETS
In 2002, the Company adopted FASB Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets " (FAS 144). Long-lived assets,
such as property, plant and equipment and intangible assets, are included in
impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable. If the impairment
evaluation indicates the affected asset is not recoverable, the asset's carrying
value would be reduced to fair value. No event has occurred that would suggest
any impairment in the value of long-lived assets recorded in the accompanying
consolidated financial statements.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$2,864,000, $3,010,000, and $3,506,000 in advertising costs during 2002, 2001
and 2000, respectively.
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted income (loss) per share are calculated in accordance
with FASB Statement No. 128, "Earnings per Share."
INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement
No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109 requires that deferred
tax assets and liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted income tax rates and laws that are expected to be in effect
when the temporary differences are expected to reverse. FAS 109 also requires
that deferred tax assets be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Additionally, deferred tax assets and liabilities are separated into
current and noncurrent amounts based on the classification of the related assets
and liabilities for financial reporting purposes.
27
VICOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Pro forma information regarding net income (loss) and net income (loss)
per share is required by FAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method described in
FAS 123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2002, 2001 and 2000, respectively: risk-free interest rates of
3.6%, 4.4% and 6.1%; dividend yields of zero; volatility factor of the expected
market price of the Company's common stock of .67, .66 and .59; and a
weighted-average expected life of the option of 4.5, 4.5 and 4.4 years.
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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table sets forth a reconciliation of reported net income (loss) to pro forma net
income (loss) (in thousands except for earnings per share information):
2002 2001 2000
---- ---- ----
Net income (loss), as reported $ (15,942) $ (559) $ 33,920
Stock-based employee compensation cost,
net of related tax effects (5,657) (7,511) (5,787)
--------- -------- ---------
Pro forma net income (loss) $ (21,599) $ (8,070) $ 28,133
========= ======== =========
Net income (loss) per share, as reported:
Basic $ (.38) $ (.01) $ .80
Diluted $ (.38) $ (.01) $ .78
Pro forma net income (loss) per share:
Basic $ (.51) $ (.19) $ .67
Diluted $ (.51) $ (.19) $ .66
The effects of applying FAS 123 on pro forma disclosures are not likely
to be representative of the effects on pro forma disclosures of future years.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.