e10vq
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
     
X
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
         
For the quarterly period ended
  June 30, 2008    
     
     
     
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
  EXCHANGE ACT OF 1934
     
For the transition period from
   
 
   
 
   
Commission File Number
                       0-18277
 
   
VICOR CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   04-2742817
(State of Incorporation)   (I.R.S. Employer Identification No.)
25 Frontage Road, Andover, Massachusetts 01810
(Address of Principal Executive Office)
(978) 470-2900
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No            o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o    Accelerated filer þ    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller Reporting Company o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of each of the issuer’s classes of common stock as of July 31, 2008 was:
                 
 
  Common Stock, $.01 par value     29,885,746      
 
  Class B Common Stock, $.01 par value     11,767,052      
 

 


 

VICOR CORPORATION
INDEX TO FORM 10-Q
         
    Page  
 
       
 
       
Part I – Financial Information:
       
 
       
       
 
       
    1  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    20  
 
       
    33  
 
       
    33  
 
       
       
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    37  
 
       
    37  
 
       
    37  
 
       
    38  
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 1
Item 1 – Financial Statements
VICOR CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
                 
Assets   June 30, 2008 December 31, 2007
 
               
Current assets:
               
 
               
Cash and cash equivalents
  $ 33,000     $ 20,017  
Short-term investments
    2,663       57,490  
Accounts receivable, less allowance of
$296 in 2008 and $398 in 2007
    27,181       32,054  
Inventories, net
    26,025       23,078  
Deferred tax assets
    741       741  
Other current assets
    3,121       2,539  
 
           
Total current assets
    92,731       135,919  
 
               
Restricted cash and cash equivalents
    919       952  
Long-term investments, net
    36,250        
Property, plant and equipment, net
    49,322       50,257  
Other assets
    5,397       5,330  
 
           
 
  $ 184,619     $ 192,458  
 
           
Liabilities and Stockholders’ Equity
               
 
               
Current liabilities:
               
 
               
Accounts payable
  $ 8,260     $ 10,062  
Accrued compensation and benefits
    7,082       6,003  
Accrued expenses
    2,925       3,471  
Accrual for litigation settlement
    162       240  
Income taxes payable
    696       278  
Deferred revenue
    534       941  
 
           
Total current liabilities
    19,659       20,995  
 
               
Long-term deferred revenue
    924       42  
Long-term income taxes payable
    1,399       1,344  
Deferred income taxes
    1,649       1,597  
Minority interests
    4,991       4,040  
 
               
Stockholders’ equity:
               
 
               
Class B Common Stock
    118       118  
Common Stock
    384       384  
Additional paid-in capital
    160,013       159,332  
Retained earnings
    119,315       126,263  
Accumulated other comprehensive (loss) income
    (2,006 )     170  
Treasury stock, at cost
    (121,827 )     (121,827 )
 
           
Total stockholders’ equity
    155,997       164,440  
 
           
 
  $ 184,619     $ 192,458  
 
           
See accompanying notes.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 2
VICOR CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2008     2007     2008     2007  
 
                               
Net revenues
  $ 49,297     $ 47,206     $ 102,766     $ 94,187  
Cost of revenues
    28,184       27,607       59,193       54,361  
 
                       
Gross margin
    21,113       19,599       43,573       39,826  
 
                               
Operating expenses:
                               
Selling, general and administrative
    13,975       12,163       28,027       24,176  
Research and development
    8,080       7,667       15,591       15,067  
Gain from litigation-related settlements, net
    (177 )     (1,353 )     (177 )     (1,353 )
 
                       
Total operating expenses
    21,878       18,477       43,441       37,890  
 
                       
 
                               
Income (loss) from operations
    (765 )     1,122       132       1,936  
 
                               
Other income (expense), net
    (36 )     906       719       2,483  
 
                       
 
                               
Income (loss) before income taxes
    (801 )     2,028       851       4,419  
 
                               
Provision for income taxes
    350       298       592       287  
 
                               
Loss from equity method investment, net of tax
    172       756       962       837  
 
                       
 
                               
Net income (loss)
  $ (1,323 )   $ 974     $ (703 )   $ 3,295  
 
                       
 
                               
Net income (loss) per common share:
                               
Basic
  $ (0.03 )   $ 0.02     $ (0.02 )   $ 0.08  
Diluted
  $ (0.03 )   $ 0.02     $ (0.02 )   $ 0.08  
 
                               
Shares used to compute net income (loss) per share:
                               
Basic
    41,643       41,576       41,640       41,570  
Diluted
    41,643       41,641       41,640       41,628  
 
                               
Cash dividends per share
  $ 0.00     $ 0.00     $ 0.15     $ 0.15  
See accompanying notes.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 3
VICOR CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
                 
    Six Months Ended
    June 30, 2008   June 30, 2007
 
               
Operating activities:
               
Net income (loss)
  $ (703 )   $ 3,295  
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
               
Depreciation and amortization
    5,211       6,185  
Loss from equity method investment, net of tax
    962       837  
Minority interest in net income of subsidiaries
    951       89  
Long-term deferred revenue
    882       87  
Stock compensation expense
    588       321  
Amortization of bond premium
          (321 )
Gain on disposal of equipment
    (22 )     (23 )
Change in current assets and liabilities, net
    233       (36,440 )
 
           
 
               
Net cash provided by (used in) operating activities
    8,102       (25,970 )
 
               
Investing activities:
               
Purchases of investments
    (9,812 )     (72,408 )
Sales and maturities of investments
    26,139       103,030  
Additions to property, plant and equipment
    (4,169 )     (3,140 )
Purchase of equity method investment
    (1,000 )     (1,000 )
Proceeds from sale of equipment
    22       23  
Change in restricted cash and cash equivalents
    33        
Increase in other assets
    (119 )     (58 )
 
           
 
               
Net cash provided by investing activities
    11,094       26,447  
 
               
Financing activities:
               
Proceeds from issuance of Common Stock
    93       227  
Common Stock dividends paid
    (6,245 )     (6,327 )
 
           
 
               
Net cash used in financing activities
    (6,152 )     (6,100 )
 
Effect of foreign exchange rates on cash
    (61 )     12  
 
           
 
Net increase (decrease) in cash and cash equivalents
    12,983       (5,611 )
 
               
Cash and cash equivalents at beginning of period
    20,017       35,860  
 
           
Cash and cash equivalents at end of period
  $ 33,000     $ 30,249  
 
           
See accompanying notes.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 4
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2008
(Unaudited)
1.   Basis of Presentation
 
    The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
 
    In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2008. Operating results for the six months ended June 30, 2008 includes compensation-related accruals of $320,000 for certain of the Company’s international subsidiaries and additional stock compensation expense of $90,000 identified and recorded in the first quarter of 2008. Management has concluded the impact of accounting for these previously unidentified accruals in the first quarter of 2008 is not material for the first quarter or the six months ended June 30, 2008, the Company’s estimated 2008 financial results, or prior periods. Certain amounts in the 2007 condensed consolidated financial statements have been reclassified to conform to the 2008 presentation. The balance sheet at December 31, 2007, presented herein has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, (File No. 0-18277) filed by the Company with the Securities and Exchange Commission.
 
2.   Short-Term and Long-Term Investments
 
    The Company’s principal sources of liquidity are its existing balances of cash, cash equivalents and short-term investments, as well as cash generated from operations. Consistent with the Company’s investment policy guidelines, the Company can and has historically invested its substantial cash balances in demand deposit accounts, money market funds meeting certain quality criteria, and highly-liquid auction rate securities meeting certain quality criteria. All of the Company’s investments are subject to credit, liquidity, market, and interest rate risk.
 
    As of June 30, 2008, the Company held $38,500,000 of auction rate securities, consisting of debt obligations of municipal and corporate issuers. The interest rates for these securities are reset at auction at regular intervals ranging from seven to 90 days. The auction rate securities held by the Company have historically traded at par and are callable at par at the option of the issuer. At June 30, 2008, the majority of the auction rate securities held by the Company were AAA/Aaa rated by the major credit rating agencies, with most collateralized by student loans guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 5
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
2.   Short-Term and Long-Term Investments (continued)
 
    Until February 2008, the auction rate securities market was highly liquid. Starting the week of February 11, 2008, a substantial number of auctions failed, meaning there was not enough demand to sell all of the securities that holders offered for sale. The consequences of a failed auction are (a) an investor must hold the specific security until the next scheduled auction (unless that investor chooses to sell the security to a third party outside of the auction process) and (b) the interest rate on the security generally resets to an interest rate set forth in the security’s indenture. The principal associated with these failed auctions will not be accessible to the Company until a successful auction occurs, a buyer is found outside of the auction process, the security is called by the issuer, or the underlying securities have matured. As of June 30, 2008, the Company held auction rate securities that had experienced failed auctions totaling $38,500,000 at par value (the “Failed Auction Securities”).
 
    Management is not aware of any reason to believe any of the issuers of the Failed Auction Securities held by the Company are presently at risk of default. Through June 30, 2008, the Company has continued to receive interest payments on the Failed Auction Securities in accordance with their terms. Management believes the Company ultimately should be able to liquidate all of its auction rate security investments without significant loss primarily due to the collateral securing the substantial majority of the underlying obligations. However, current conditions in the auction rate securities market have lead management to conclude the recovery period for the Failed Auction Securities exceeds 12 months. As a result, the Company continued to classify the Failed Auction Securities as long-term as of June 30, 2008, having classified them as long-term as of March 31, 2008.
 
    Based on the fair value measurements described in Note 3, the fair value of the Failed Auction Securities at June 30, 2008, was estimated by the Company to be approximately $36,250,000, compared with a par value of $38,500,000. Management considers this $2,250,000 difference to be temporary and has recorded this amount as an unrealized loss, net of taxes, in “Accumulated other comprehensive (loss) income” on the consolidated balance sheet. In making this determination, management considered the financial condition and near-term prospects of the issuers, the magnitude of the losses compared to the investments’ cost, the length of time the investments have been in an unrealized loss position, the assumed low probability that the Company will be unable to collect all amounts due according to the contractual terms of the security, whether the security has been downgraded by a rating agency, and the Company’s ability and intent to hold these investments until the anticipated recovery in market value occurs. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit rating of the security issuers deteriorates, or the anticipated recovery in the market values does not occur, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the consolidated statement of operations, and any such impairment adjustments may be material.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 6
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
2.   Short-Term and Long-Term Investments (continued)
 
    Based on the Company’s ability to access cash and other short-term investments and its expected operating cash flows, management does not anticipate the current lack of liquidity will affect the Company’s ability to execute its current operating plan.
 
3.   Fair Value Measurements
 
    The Company purchases marketable securities that have been designated as “available-for-sale” in accordance with Statement of Financial Accounting Standards (“SFAS”) 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS 115 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. Consistent with SFAS 115, such available-for-sale securities are carried at fair value, with unrealized gains and losses reported in “Accumulated other comprehensive (loss) income,” a component of stockholders’ equity.
 
    In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, Fair Value Measurements, expanding upon SFAS 115 and providing guidance on how to measure assets and liabilities recorded at “fair” value. SFAS 157 does not expand the use of fair value to any new circumstances, but does require additional disclosures in both annual and quarterly reports. The Company adopted SFAS 157 and its related amendments for financial assets and liabilities effective as of January 1, 2008. In accordance with FASB Staff Position No. FAS 157-2 (“FSP FAS 157-2”), SFAS 157 will be effective for non-financial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2008. FSP FAS 157-2 will impact the disclosures related to the Company’s investment in Great Wall Semiconductor Corporation (“GWS”) and goodwill related to the operations of one of the Company’s subsidiaries, Vicor Japan Company, Ltd.
 
    SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. SFAS 157 establishes a three-level hierarchy for disclosure to show the extent and level of judgment used to estimate fair value measurements:
  Level 1    Inputs used to measure fair value are unadjusted quoted prices available in active markets for the identical assets or liabilities as of the reporting date.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 7
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
3.   Fair Value Measurements (continued)
  Level 2    Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets. Level 2 also includes assets and liabilities valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
 
  Level 3    Inputs used to measure fair value are unobservable inputs supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
    As of June 30, 2008, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Securities. As such, the Company’s investments in Failed Auction Securities were deemed to require valuation using Level 3 inputs. Consistent with SFAS 157, management, after consulting with outside experts, valued the Failed Auction Securities using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of these securities as of June 30, 2008. The assumptions used in preparing the DCF model included estimates for the amount and timing of future interest, principal payments and the rate of return required by investors to own these securities in the current environment, and the estimated timeframe during which successful auctions for these securities will occur. In making these assumptions, management considered relevant factors including: the formula applicable to each security defining the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans, guarantees by other third parties, and additional credit enhancements provided through other means; and publicly available pricing data for recently issued student loan asset-backed securities not subject to auctions. The estimate of the rate of return required by investors to own these securities also considered the currently reduced liquidity for auction-rate securities. An increase or decrease in the liquidity risk premium (i.e., the discount rate) of 100 basis points as used in the model would decrease or increase, respectively, the fair value of the Failed Auction Securities by approximately $600,000.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 8
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
3.   Fair Value Measurements (continued)
 
    Assets measured at fair value on a recurring basis, consistent with SFAS 157, include the following as of June 30, 2008 (in thousands):
                                 
    Fair Value Measurements at June 30, 2008        
    Using        
            Significant        
    Quoted Prices   Other   Significant    
    in Active   Observable   Unobservable   Total Fair
    Markets   Inputs   Inputs   Value as of
    (Level 1)   (Level 2)   (Level 3)   June 30, 2008
Cash equivalents:
                               
Money market funds
  $   20,913     $       $       $   20,913  
Short term investments
    2,663                   2,663  
Auction rate securities:
                               
Long term investments
                36,250       36,250  
    The following table summarizes the change in the fair values for those assets valued on a recurring basis utilizing Level 3 inputs for the six months ended June 30, 2008 (in thousands):
         
    Level 3
 
       
Balance at the beginning of the period (1)
  $  
Transfers into Level 3 categorization:
    38,500  
Unrealized loss included in Accumulated
other comprehensive (loss) income
    (2,250 )
 
     
Balance at the end of the period
  $ 36,250  
 
     
(1) The Company adopted SFAS 157 in January 2008 and, as such, had no beginning balance of such assets.
    All short-term and long-term investments measured at fair value are classified as available-for-sale securities, consistent with SFAS 115. Adjustments to fair value of these investments are recorded as an increase or decrease, net of taxes, in “Accumulated other comprehensive (loss) income”, except when losses are considered to be other-than-temporary, in which case the losses are recorded in “Other income (expense), net”.
 
    Effective January 1, 2008, the Company adopted SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect the fair value option as set forth by SFAS 159.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 9
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
4.   Stock-Based Compensation
 
    The Company accounts for stock-based compensation in accordance with SFAS 123 (revised 2004), Share-Based Payment. Stock compensation expense for the three and six months ended June 30 was as follows (in thousands):
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2008   2007   2008   2007
 
                               
Cost of revenues
  $ 30     $ 14     $ 45     $ 24  
Selling, general and administrative (1)
    206       46       431       164  
Research and development
    50       67       112       133  
 
                       
 
                               
Total stock based compensation
  $ 286     $ 127     $ 588     $ 321  
 
                       
(1)   The increase in selling, general and administrative stock-based compensation expense is primarily the result of acceleration of the service periods used to amortize the cost of V*I Chip stock options granted to the Company’s Chief Executive Officer in 2007.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 10
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
5.   Net Income (Loss) per Share
 
    The following table sets forth the computation of basic and diluted income per share for the three and six months ended June 30 (in thousands, except per share amounts):
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                 
    2008   2007   2008   2007
 
                               
Numerator:
                               
Net income (loss)
    ($  1,323 )     $     974       ($   703 )     $  3,295  
 
                               
 
                               
Denominator:
                               
Denominator for basic income (loss)
per share (weighted average shares)
    41,643       41,576       41,640       41,570  
 
                               
Effect of dilutive securities:
                               
Employee stock options (1)
    -       65       -       58  
 
                               
 
                               
Denominator for diluted income (loss) per share (adjusted weighted-average shares and assumed conversions) (2)
    41,643       41,641       41,640       41,628  
 
                               
 
                               
Basic income (loss) per share
    $   (0.03 )     $   0.02       $  (0.02 )     $   0.08  
 
                               
 
                               
Diluted income (loss) per share
    $   (0.03 )     $   0.02       $  (0.02 )     $   0.08  
 
                               
(1)   Options to purchase 1,236,256 and 1,302,434 shares of Common Stock were outstanding for the three and six months ended June 30, 2007, respectively, but were not included in the computation of diluted income per share because the options’ exercise prices were greater than the average market price of the Common Stock and, therefore, the effect would have been antidilutive.
 
(2)   Options to purchase 1,007,761 and 1,044,879 shares of Common Stock for the three and six months ended June 30, 2008, respectively, were not included in the calculation of net loss per share as the effect would have been antidilutive.
6.   Inventories
 
    Inventories are valued at the lower of cost (determined using the first-in, first-out method) or market and presented in the accompanying consolidated balance sheets net of 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. If the Company’s estimated demand and / or market expectation were to change or if product sales were to decline, the Company’s estimation process may cause larger inventory reserves to be recorded, resulting in larger charges to cost of revenues.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 11
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
6.   Inventories (continued)
 
    “Inventories, net” as of June 30, 2008 and December 31, 2007 (in thousands) were as follows:
                 
    June 30, 2008   December 31, 2007
 
               
Raw materials
    $ 25,479        $ 23,711  
Work-in-process
    3,158       2,656  
Finished goods
    4,480       4,357  
 
               
 
    33,117       30,724  
Inventory reserves
    (7,092 )     (7,646 )
 
               
Inventories, net
   $ 26,025       $ 23,078  
 
               
7.   Investments
 
    In May 2007, the Company invested $1,000,000 in non-voting convertible preferred stock of GWS. The Company made an additional $1,000,000 investment in February 2008, increasing its ownership in GWS to approximately 30%. The Company’s total gross investment in GWS was $5,000,000 as of June 30, 2008, and $4,000,000 as of December 31, 2007. GWS designs, develops and manufactures high performance power semiconductors. A director of the Company is the founder, Chairman of the Board, President and Chief Executive Officer, as well as the majority voting shareholder, of GWS. The Company and GWS are parties to an intellectual property cross-licensing agreement, and the Company purchases certain components from GWS. Purchases from GWS totaled approximately $970,000 for the six months ended June 30, 2008.
 
    As previously disclosed, the Company, due to the additional investment in GWS in May 2007, changed its method of accounting for its investment in GWS from the cost method to the equity method of accounting. As a result, the Company’s financial statements for the years ended December 31, 2003, 2004, 2005, and 2006 were restated to reflect the equity method of accounting, in accordance with Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (“APB 18”).
 
    In accordance with APB 18, each investment in GWS has been accounted for as a step acquisition using the purchase method of accounting, in accordance with SFAS 141, Business Combinations. The allocation of the purchase price included acquired intangible assets, including core and developed technology as well as in-process research and development (“IPR&D”). The excess of the purchase price over the fair value allocated to the net assets is goodwill. The core and developed technology is being amortized over three years. The amounts allocated to IPR&D were charged to expense in accordance with SFAS 141, which specifies that the amount assigned to the acquired intangible assets to be used in a particular research and development project that have no alternative future use shall be charged to expense at the acquisition date.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 12
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
7.   Investments (continued)
 
    The amounts included in “Other assets” in the accompanying consolidated balance sheets related to the net GWS investment were $726,000 and $687,000 as of June 30, 2008, and December 31, 2007, respectively, as follows (in thousands):
                 
  June 30,       December 31,  
  2008     2007
 
               
Equity method goodwill
    $ 606       $ 634  
Intangible assets, net of amortization
    120       53  
 
           
 
    $ 726       $ 687  
 
           
    “Loss from equity method investment, net of tax” presented in the accompanying condensed consolidated statements of operations for the three and six months ended June 30 consists of the following (in thousands):
                                 
    Three Months Ended   Six Months Ended
    June 30   June 30
    2008   2007   2008   2007
 
                               
Allocation of losses from equity method investment, net of tax
    $145       $  61       $174       $  83  
Amortization of intangible assets and other, net of tax
    27       75       82       134  
Other than temporary decline in investment
    -       620       706       620  
 
                               
 
                               
Loss from equity method investment, net of tax
    $172       $756       $962       $837  
 
                               
    The Company periodically evaluates the investment in GWS to determine if there are any events or circumstances likely to have a significant adverse effect on the fair value of the investment, including the net book value of acquired intangible assets and goodwill. Examples of such impairment indicators include, but are not limited to: GWS’ actual results of operations; actual results of operations compared to forecast; working capital requirements; additional third-party equity investment, if any; and other considerations. If an impairment indicator is identified, the fair value of the investment is estimated and compared it to its carrying value. If the fair value of the investment is less than its carrying

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 13
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
7.   Investments (continued)
 
    value, the investment is impaired and a determination is made as to whether the impairment is other-than-temporary. For other-than-temporary impairments, an impairment loss equal to the difference between an investment’s carrying value and its fair value is recognized. In the first quarter of 2008, the investment was adjusted for a decline in value judged to be other than temporary of $706,000. Deterioration or changes in GWS’ business in the future could lead to impairment adjustments in future periods and such impairment adjustments may be material.
 
    Summary financial information for GWS is as follows (in thousands):
                 
    As of
    June 30,    December 31, 
     2008     2007 
    (unaudited)  
 
               
Current assets
    $1,913       $2,322  
Noncurrent assets
    3,064       3,110  
Total assets
    4,977       5,432  
Current liabilities
    1,812       1,743  
Noncurrent liabilities
    400       1,354  
Minority interests
    3,638       3,614  
Total stockholders’ equity (deficit)
    (873 )     (1,280 )
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    (unaudited)
                 
    2008   2007   2008   2007
                 
Net revenue
  $ 712     $ 300     $ 2,444     $ 682  
Gross margin
    321       54       815       188  
Net income (loss)
    (485 )     (278 )     (596 )     (402 )

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 14
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
8.   Product Warranties
The Company generally offers a two-year warranty for all of its products. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty returns, and the cost per return. The Company periodically assesses the adequacy of the warranty reserves and adjusts the amounts as necessary. Warranty obligations are included in accrued expenses in the accompanying condensed consolidated balance sheets.
Product warranty activity for the three and six months ended June 30, 2008 and 2007 was as follows (in thousands):
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2008   2007   2008   2007
 
                               
Balance at the beginning of the period
  $ 693     $ 1,011     $ 679     $ 1,046  
Accruals for warranties for products sold in the period
    209       164       269       190  
Fulfillment of warranty obligations
    (19 )     (90 )     (71 )     (126 )
Revisions of estimated obligations
    (77 )     (207 )     (71 )     (232 )
                         
Balance at the end of the period
  $ 806     $ 878     $ 806     $ 878  
                       
The Company accounts for extended warranty provisions in accordance with FASB Technical Bulletin 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts”.
9.   Income Taxes
In 2008, the tax provision is based on the estimated annual effective tax rate for 2008, which includes estimated federal, state and foreign income taxes on the Company’s projected annual pre-tax income and estimated federal and state income taxes for certain minority-owned subsidiaries that are not part of the Company’s consolidated income tax returns, offset by the expected utilization of federal and foreign net operating loss carryforwards. The 2008 tax provision also includes discrete items, principally for increases in accrued interest for potential liabilities and expense associated with a reduction in state income tax refunds receivable. In 2007, the tax provision is based on an estimated annual effective tax rate for 2007, which included estimated federal, state and foreign income taxes on the Company’s projected annual pre-tax income, estimated federal and state income taxes for certain minority-owned subsidiaries that are not part of the Company’s consolidated income tax returns, and increases in accrued interest for potential liabilities, offset by the expected utilization of foreign net operating loss carryforwards and the release of certain valuation allowances related to temporary book versus tax differences. The expense was offset by discrete items representing a reduction in tax reserves in the second quarter of 2007 and refunds of interest received and recorded as a benefit during the first quarter

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 15
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
9.   Income Taxes (continued)
of 2007 as final settlement related to the audit of the Company’s federal tax returns for the tax years 1994 through 2002 by the Internal Revenue Service.
The provision for income taxes and the effective income tax rate for the three and six months ended June 30, 2008 and 2007 were as follows (dollars in thousands):
                                 
    Three Months Ended   Six Months Ended
    June 30   June 30
 
                               
    2008   2007   2008   2007
 
                               
Provision for income taxes
  $ 350     $ 298     $ 592     $ 287  
 
                               
Effective income tax rate
    43.7 %     14.7 %     69.6 %     6.5 %
The increase in the effective tax rates for the three and six months ended June 30, 2008 compared to the comparable periods in 2007 is principally due to the higher projected annual pre-tax income and therefore, higher estimated federal and state income taxes for the minority — owned subsidiaries that are not part of the Company’s consolidated income tax return. In addition, the Company reversed approximately $300,000 of excess tax reserves in the second quarter of 2007 and recorded a discrete item of $169,000 representing refunds of interest received and recorded as a benefit during the first quarter of 2007 in connection with the Internal Revenue Service audit noted above.
10.   Comprehensive (Loss) Income
The following table sets forth the computation of “Comprehensive (loss) income” for the three and six months ended June 30 (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
 
                               
    2008     2007     2008     2007  
 
                               
Net income (loss)
    $ (1,323     $ 974       $ (703     $ 3,295  
Foreign currency translation (loss) gain
    (109     (44     74       (30
Unrealized (losses) gains, net of tax, on available for sale securities
    (250     -       (2,250     6  
                         
Comprehensive (loss) income
    $ (1,682     $ 930       $ (2,879     $ 3,271  
                       

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 16
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
10.   Comprehensive (Loss) Income (continued):
As of June 30 and March 31, 2008, the Company performed a valuation of its Failed Auction Securities (see Note 3.). Based on those valuations, the Company recorded a reduction in the aggregate value of these investments of $250,000 and $2,000,000, respectively, which the Company believes represents a temporary decline in value.
11.   Legal Proceedings
As previously disclosed, the Company received total payments of $1,770,000 in the second quarter of 2007 in full settlement of patent infringement litigation against Artesyn Technologies, Inc., Lucent Technologies Inc., and the Tyco Power Systems unit of Tyco International Ltd. (which had acquired the Power Systems business of Lucent Technologies). The full amount of the payments, net of a $177,000 contingency fee accrued by the Company for its litigation counsel, was included in the second quarter of 2007 in “Gain from litigation related settlements, net” in the accompanying condensed consolidated statement of operations. The Company was informed by its litigation counsel that the full amount of the contingency fee was waived and, therefore, the related accrual of $177,000 was reversed in the second quarter of 2008.
On February 22, 2007, the Company announced it had reached an agreement in principle with Ericsson, Inc., the U.S. affiliate of LM Ericsson, to settle a lawsuit brought by Ericsson against the Company in California state court. Under the terms of the settlement agreement entered into on March 29, 2007, after a Court ordered mediation, the Company paid $50.0 million to Ericsson, of which $12.8 million was reimbursed by the Company’s insurance carriers. Accordingly, the Company recorded a net loss of $37.2 million from the litigation-related settlements in the fourth quarter of 2006. The Company is seeking further reimbursement from its insurance carriers. The Company’s decision to enter into the settlement followed an adverse ruling by the Court in January 2007 in connection with a settlement between Ericsson and co-defendants Exar Corporation (“Exar”) and Rohm Device USA, LLC (“Rohm”), two of the Company’s component suppliers prior to 2002. The Company’s writ of mandate appeal of this ruling was denied in April, 2007. In September 2007, the Company filed a notice of appeal of the Court’s decision upholding the Ericsson-Exar-Rohm settlement, which is pending. In December 2007, the Court awarded Exar and Rohm amounts for certain statutory and discovery costs associated with this ruling. Since this matter was outstanding as of June 30, 2007, the Company accrued $240,000 in the second quarter of 2007, included in “Gain from litigation-related settlements, net” in the accompanying condensed consolidated statement of operations as a result of the Court’s decision, of which $78,000 of the award was paid in the second quarter of 2008.
In addition, the Company is involved in certain other litigation and claims incidental to the conduct of its business. While the outcome of lawsuits and claims against the Company cannot be predicted with certainty, management does not expect any current litigation or claims to have a material adverse impact on the Company’s financial position or results of operations.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 17
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
12.   Segment Information
The Company has organized its business segments according to its key product lines. The Brick Business Unit segment (“BBU”) designs, develops, manufactures and markets the Company’s modular power converters and configurable products. The V*I Chip segment consists of V*I Chip Corporation, a wholly owned subsidiary that designs, develops, manufactures and markets the Company’s Factorized Power Architecture products. The Picor segment consists of Picor Corporation, a majority-owned subsidiary of the Company that designs, develops, manufactures 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 the Company’s products or to third parties for separate applications.
The following table provides segment financial data as of and for the three months ended June 30, 2008 and 2007 (in thousands):
                                                 
    BBU   V*I Chip   Picor   Corporate   Eliminations   Total
2008:
                                               
Net revenues
  $ 45,963     $ 3,195     $ 1,192     $ -     $ (1,053 )   $ 49,297  
Income (loss) from operations
    6,220       (6,614 )     (542 )     39       132       (765 )
Total assets
    161,878       16,084       7,757       102,813       (103,913 )     184,619  
Depreciation and amortization
    1,469       674       94       388       -       2,625  
 
                                               
2007:
                                               
Net revenues
  $ 45,601     $ 1,422     $ 1,124     $ -     $ (941 )   $ 47,206  
Income (loss) from operations
    6,228       (5,769 )     (709 )     1,207       165       1,122  
Total assets
    127,786       10,020       7,367       117,020       (64,822 )     197,371  
Depreciation and amortization
    2,076       502       97       377       -       3,052  
The following table provides segment financial data as of and for the six months ended June 30, 2008 and 2007 (in thousands):
                                                 
    BBU   V*I Chip   Picor   Corporate   Eliminations   Total
2008:
                                               
Net revenues
  $ 94,975     $ 7,508     $ 2,335     $ -     $ (2,052 )   $ 102,766  
Income (loss) from operations
    13,797       (12,757 )     (1,223 )     (109 )     424       132  
Total assets
    161,878       16,084       7,757       102,813       (103,913 )     184,619  
Depreciation and amortization
    3,010       1,249       191       761       -       5,211  
 
                                               
2007:
                                               
Net revenues
  $ 91,476     $ 2,393     $ 2,277     $ -     $ (1,959 )   $ 94,187  
Income (loss) from operations
    13,766       (11,637 )     (1,298 )     817       288       1,936  
Total assets
    127,786       10,020       7,367       117,020       (64,822 )     197,371  
Depreciation and amortization
    4,027       988       212       958       -       6,185  

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 18
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
12.   Segment Information (continued)
The elimination for total assets is principally related to inter-segment receivables due to the BBU segment for the funding of V*I Chip segment operations and for the purchase of equipment for both V*I Chip and Picor segments.
13.   Dividends
On March 14, 2008, the Company’s Board of Directors approved a cash dividend of $0.15 per share of the Company’s stock. The total dividend of approximately $6,245,000 was paid on April 18, 2008, to shareholders of record at the close of business on April 2, 2008.
On August 7, 2008, the Company’s Board of Directors approved a cash dividend of $.15 per share of the Company’s stock. The total dividend of approximately $6,248,000 will be paid on September 10, 2008 to shareholders of record at the close of business on August 25, 2008. Dividends are declared at the discretion of the Company’s Board of Directors and depend on actual cash from operations, the Company’s financial condition and capital requirements and any other factors the Company’s Board of Directors may consider relevant. The Board of Directors anticipates reviewing its dividend policy on a semi-annual basis.
14.   Impact of Recently Issued Accounting Standards
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R changes accounting for acquisitions that close beginning in 2009. More transactions and events will qualify as business combinations and will be accounted for at fair value under the new standard. SFAS 141R promotes greater use of fair values in financial reporting. Some of the changes will introduce more volatility into earnings. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. The Company has not determined the impact, if any, SFAS 141R will have on its financial position or results of operations.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“SFAS 160”). SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. The Company has not determined the impact, if any, SFAS 160 will have on its financial position or results of operations.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 19
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2008
(Unaudited)
14.   Impact of Recently Issued Accounting Standards (continued)
In April 2008, the FASB issued FASB Statement of Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”), which amends factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. The standard is expected to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure its fair value. FSP FAS 142-3 is effective for fiscal periods beginning on or after December 15, 2008. The Company has not determined the impact, if any, FSP FAS 142-3 will have on its financial position or results of operations.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 1
 
  PAGE 20
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
 Item 2 - - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except for historical information contained herein, some matters discussed in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any statement in this report that is not a statement of historical fact is a forward-looking statement, and, the words “believes,” “expects,” “anticipates,” “intend,” “estimate,” “plans,” “assumes,” “may,” “will,” “would,” “should,” “continue,” “prospective,” “project,” and other similar expressions identify forward-looking statements. Forward-looking statements also include statements regarding bookings, shipments, revenue, the pace of new design wins with early adopters and gaining broader product acceptance within the Company’s target markets, and plans to expand capacity with incremental investments in equipment. These statements are based upon the Company’s current expectations and estimates as to the prospective events and circumstances that may or may not be within the Company’s control and as to which there can be no assurance. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including those economic, business, operational and financial considerations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, under Part I, Item I — “Business,” “—Competition,” “—Patents,” and “—Licensing,” under Part I, Item 1A — “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, 8-K and 10-K, which may supplement, modify, supersede or update those risk factors. The Company does not undertake any obligation to update any forward-looking statements as a result of future events or developments.
Critical Accounting Policies and Estimates
Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for a complete summary of the critical accounting policies and estimates.
Fair Value Measurements
In September 2006, FASB issued SFAS 157, Fair Value Measurements, which provides guidance on how to measure assets and liabilities that are recorded at fair value. SFAS 157 does not expand the use of fair value to any new circumstances, but does require additional disclosures in both annual and quarterly reports. The Company adopted SFAS 157 and its related amendments for financial assets and liabilities effective as of January 1, 2008. SFAS 157 will be effective for non-financial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2008. The primary impact of adopting SFAS 157 was on the fair value measurement and disclosures related to the Company’s investments in auction rate securities, discussed below.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 21
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
Results of Operations
Three months ended June 30, 2008, compared to three months ended June 30, 2007
Net revenues for the second quarter of 2008 were $49,297,000, an increase of $2,091,000 or 4.4%, as compared to $47,206,000 for the same period a year ago, and a decrease of 7.8% on a sequential basis from the first quarter of 2008. The increase in net revenues from the second quarter of 2007 resulted primarily from an increase in V*I Chip revenues of $1,764,000 as well as an increase in shipments of standard and custom products in the BBU Segment of $362,000. Orders during the second quarter of 2008 decreased by 6.4%, compared to the first quarter of 2008. The book-to-bill ratio, calculated by the dollar amount of orders placed with scheduled delivery dates within one year divided by the net revenues in the respective period, was 1.01:1 for the second quarter of 2008 as compared to 1.09:1 for the second quarter of 2007 and 0.99:1 in the first quarter of 2008.
Gross margin for the second quarter of 2008 increased $1,514,000, or 7.7%, to $21,113,000 from $19,599,000 for the second quarter of 2007, and increased to 42.8% from 41.5% as a percentage of net revenues. The primary component of the change in gross margin dollars and gross margin percentages was an increase in net revenues, improved product mix and pricing, and improved BBU manufacturing efficiency, offset by increased costs of V*I Chip manufacturing.
Selling, general and administrative expenses were $13,975,000 for the period, an increase of $1,812,000, or 14.9%, as compared to $12,163,000 for the same period in 2007. As a percentage of net revenues, selling, general and administrative expenses increased to 28.3% from 25.8%.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 22
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
The principal components of the $1,812,000 increase were as follows (in thousands):
                     
    Increase (decrease)      
                     
Compensation expenses
    $   970   18.5%       (1)  
Vicor Integration Architects (“VIA”) related expenses
    443   77.5%       (2)  
Audit and tax fees
    255   92.9%       (3)  
Vicor Japan related expenses
    218   29.1%       (4)  
Training, consultants & computer expense
    142   49.4%          
Travel expense
    133   26.4%          
Advertising expense
    104   16.7%          
Bad debt expense
    (168 (99.7% )        
Legal fees
    (434 (46.8% )     (5)  
Other, net
    149   5.3%          
 
                   
 
    $ 1,812   14.9%          
 
                   
(1)   Increase primarily attributed to annual compensation adjustments in May 2008, an increase in stock compensation expense and increases in headcount.
 
(2)   Increase primarily attributed to $262,000 in increased compensation expense, $68,000 in increased employee benefit costs and $27,000 of increased bad debt expense.
 
(3)   Increase primarily attributed to the late filings of the Company’s 2007 Forms 10-Q and additional work related to accounting for the Company’s investment in GWS.
 
(4)   Increase primarily attributed to annual compensation adjustments in May 2008, increases in headcount and increased transportation costs.
 
(5)   Decrease primarily attributed to less legal activity related to the Ericsson matter that settled in the first quarter of 2007 (see Note 11. Legal Proceedings in the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 - Financial Statements) and to litigation against Concurrent Computer Corporation settled in the third quarter of 2007.
Research and development expenses were $8,080,000 for the period, an increase of $413,000, or 5.4%, as compared to $7,667,000 for the same period in 2007. As a percentage of net revenues, research and development increased from 16.4% to 16.2%.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 23
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
The principal components of the $413,000 increase were as follows (in thousands):
                         
    Increase (decrease)          
                         
Compensation
    $ 326       6.4%       (1)  
Project materials
    225       27.2%       (2)  
Picor non-recurring engineering charges
    (65 )     (51.5% )     (3)  
Other, net
    (73 )     (3.9% )        
 
               
 
    $ 413       5.4%          
 
               
(1)   Increase primarily attributed to annual compensation adjustments in May 2008.
 
(2)   Increase primarily attributed to the re-engineering of certain V*I Chip materials and processes.
 
(3)   Decrease primarily attributed to more costs being allocated to cost of revenues.
In the second quarter of 2007, the Company received total payments of $1,770,000 in full settlement of the Company’s patent infringement litigation against Artesyn Technologies, Inc., Lucent Technologies Inc., and the Tyco Power Systems unit of Tyco International Ltd. (which had acquired the Power Systems business of Lucent Technologies). The full amount of the payments, net of a $177,000 contingency fee accrued by the Company for its litigation counsel, has been included in “Gain from litigation-related settlements, net” in the accompanying condensed consolidated statement of operations. The Company was informed by its litigation counsel that the full amount of the contingency fee was waived and, therefore, the related accrual of $177,000 was reversed in the second quarter of 2008.
On February 22, 2007, the Company announced it had reached an agreement in principle with Ericsson, Inc., the U.S. affiliate of LM Ericsson, to settle a lawsuit brought by Ericsson against the Company in California state court. Under the terms of the settlement agreement entered into on March 29, 2007, after a Court ordered mediation, the Company paid $50.0 million to Ericsson, of which $12.8 million was reimbursed by the Company’s insurance carriers. Accordingly, the Company recorded a net loss of $37.2 million from the litigation-related settlements in the fourth quarter of 2006. The Company is seeking further reimbursement from its insurance carriers. The Company’s decision to enter into the settlement followed an adverse ruling by the Court in January 2007 in connection with a settlement between Ericsson and co-defendants Exar Corporation (“Exar”) and Rohm Device USA, LLC (“Rohm”), two of the Company’s component suppliers prior to 2002. The Company’s writ of mandate appeal of this ruling was denied in April, 2007. In September 2007, the Company filed a notice of appeal of the Court’s decision upholding the Ericsson-Exar-Rohm settlement, which is pending. In December 2007, the Court awarded Exar and Rohm amounts for certain statutory and discovery costs associated with this ruling. Since this matter was outstanding as of June 30, 2007, the Company accrued $240,000 in the second quarter of 2007, included in “Gain from litigation-related settlements, net” in the accompanying condensed consolidated statement of operations as a result of the Court’s decision, of which $78,000 of the award was paid in the second quarter of 2008.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 24
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
The major changes in the components of the “Other income (expense), net” were as follows (in thousands):
                         
                    Increase  
    2008     2007     (decrease)  
                         
Interest income
  $ 520     $ 973     $ (453 )
Minority interest in net income of subsidiaries
    (506 )     (77 )     (429 )
Foreign currency losses
    (59 )     (77 )     18  
Other
    9       87       (78 )
 
                 
 
                       
 
  $ (36 )   $ 906     $ (942 )
 
                 
The decrease in interest income is due to lower average balances on the Company’s cash equivalents and short and long-term investments principally due to the $37,200,000 net payment to Ericsson made at the end of March 2007 (see Note 11. Legal Proceedings in the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 - Financial Statements), as well as a decrease in interest rates. The decrease in “Minority interest in net income of subsidiaries” is due to higher income at certain entities in which the Company holds a minority interest.
“Income (loss) before income taxes” was ($801,000) for the second quarter of 2008 compared to $2,028,000 for the same period in 2007.
The provision for income taxes and the effective income tax rate for the three months ended June 30, 2008 and 2007 were as follows (dollars in thousands):
                 
    Three Months Ended
    June 30,
    2008   2007
 
Provision for income taxes
  $ 350     $ 298  
 
               
Effective income tax rate
    43.7 %     14.7 %
The increase in the effective tax rate for the three months ended June 30, 2008 compared to the comparable periods in 2007 is principally due to the higher projected annual pre-tax income and therefore, higher estimated federal and state income taxes for the minority — owned subsidiaries that are not part of the Company’s consolidated income tax return. In addition, the Company reversed approximately $300,000 of excess tax reserves in the second quarter of 2007.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 25
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
“Loss from equity method investment, net of tax” decreased $584,000 to $172,000 from $756,000 for the same period in 2007. This was principally due to the equity method investment in GWS being adjusted for a decline in value judged to be other than temporary of $620,000 in the second quarter of 2007.
Basic and diluted “Net income (loss) per common share” was $(0.03) for the second quarter of 2008 compared to $0.02 for the second quarter of 2007.
Six months ended June 30, 2008 compared to six months ended June 30, 2007
Net revenues for the first six months of 2008 were $102,766,000, an increase of $8,579,000, or 9.1%, as compared to $94,187,000 for the same period a year ago. The increase in net revenues from the prior year resulted from increases in V*I Chip revenue of $5,128,000 and increases in standard and custom product revenue for the BBU segment of $3,496,000. Orders during the period decreased by 4.7% sequentially, compared with the second half of 2007. The book-to-bill ratio for the first six months of 2008 was 1.00:1 as compared to 1.05:1 for the same period a year ago, and 1.06:1 for the second half of 2007.
Gross margin for the first six months of 2008 increased $3,747,000, or 9.4%, to $43,573,000 from $39,826,000, and increased to 42.4% from 42.3% as a percentage of net revenues for the same period a year ago. The primary component of the change in gross margin dollars was the increase in net revenues from the sale of both BBU and V*I Chip products. The slight change in gross margin percentage was due to the increase in net revenues and improved BBU manufacturing efficiency, offset by increased costs of V*I Chip manufacturing and a shift in product mix.
Selling, general and administrative expenses were $28,027,000 for the first six months of 2008, an increase of $3,851,000, or 15.9%, over the same period in 2007. As a percentage of net revenues, selling, general and administrative expenses increased to 27.3% from 25.7%.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 26
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
The principal components of the $3,851,000 increase were as follows (in thousands):
                         
    Increase (decrease)          
                         
Compensation expense
    $ 1,875       18.3%       (1)  
VIA related expenses
    744       56.3%       (2)  
Audit and tax fees
    607       81.7%       (3)  
Vicor Japan related expenses
    362       24.4%       (4)  
Advertising expense
    244       21.6%          
Training, consultants and computer expense
    196       33.5%          
Travel expense
    189       20.0%          
Legal fees
    (169 )     (10.4% )     (5)  
Bad debt expense
    (182 )     (95.5% )        
Depreciation and amortization
    (223 )     (11.6% )     (6)  
Other, net
    208       5.3%          
 
               
 
    $ 3,851       15.9%          
 
               
(1)   Increase primarily attributed to annual compensation adjustments in May 2008 and increases in headcount. The increase in compensation expense included previously unidentified compensation-related accruals of $320,000 for certain of the Company’s international subsidiaries and additional stock compensation expense of $90,000 identified and recorded in the first quarter of 2008. The impact on the first quarter of 2008, as well as on prior periods, was not material.
 
(2)   Increase primarily attributed to $446,000 of increased commission expense, $163,000 of increased employee benefit costs and $78,000 of increased indirect labor.
 
(3)   Increase primarily attributed to the late filings of the Company’s 2007 Forms 10-Q and additional work related to accounting for the Company’s investment in GWS.
 
(4)   Increase primarily attributed to annual compensation adjustments in May 2008, increases in headcount and increased transportation costs.
 
(5)   Decrease primarily attributed to less legal activity related to the Ericsson matter that settled in the first quarter of 2007 (see Note 11. Legal Proceedings in the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 - Financial Statements) and to litigation against Concurrent Computer Corporation settled in the third quarter of 2007.
 
(6)   Decrease primarily attributed to a decrease in patent amortization expense.
Research and development expenses increased $524,000, or 3.5%, to $15,591,000 from $15,067,000. As a percentage of net revenues, research and development expenses decreased to 15.2% from 16.0%.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 27
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
The principal components of the $524,000 increase were as follows (in thousands):
                         
    Increase (decrease)          
                         
Compensation
    $ 415       4.1%       (1)  
Project materials
    224       14.1%       (2)  
Picor non-recurring engineering charges
    (152 )     (57.3% )     (3)  
Other, net
    37       1.0%          
 
               
 
    $ 524       3.5%          
 
               
(1)   The increase primarily attributed to annual compensation adjustments in May 2008.
 
(2)   Increase primarily attributed to the re-engineering of certain V*I Chip materials and processes.
 
(3)   Decrease primarily attributed to more costs being allocated to cost of revenues.
In the second quarter of 2007, the Company received total payments of $1,770,000 in full settlement of the Company’s patent infringement litigation against Artesyn Technologies, Inc., Lucent Technologies Inc., and the Tyco Power Systems unit of Tyco International Ltd. (which had acquired the Power Systems business of Lucent Technologies). The full amount of the payments, net of a $177,000 contingency fee accrued by the Company for its litigation counsel, has been included in “Gain from litigation-related settlements, net” in the accompanying condensed consolidated statement of operations. The Company was informed by its litigation counsel that the full amount of the contingency fee was waived and, therefore, the related accrual of $177,000 was reversed in the second quarter of 2008.
On February 22, 2007, the Company announced that it had reached an agreement in principle with Ericsson, Inc., the U.S. affiliate of LM Ericsson, to settle a lawsuit brought by Ericsson against the Company in California state court. Under the terms of the settlement agreement entered into on March 29, 2007, after a Court ordered mediation, the Company paid $50.0 million to Ericsson, of which $12.8 million was reimbursed by the Company’s insurance carriers. Accordingly, the Company recorded a net loss of $37.2 million from the litigation-related settlements in the fourth quarter of 2006. The Company is seeking further reimbursement from its insurance carriers. The Company’s decision to enter into the settlement followed an adverse ruling by the Court in January 2007 in connection with a settlement between Ericsson and co-defendants Exar Corporation (“Exar”) and Rohm Device USA, LLC (“Rohm”), two of the Company’s component suppliers prior to 2002. The Company’s writ of mandate appeal of this ruling was denied in April, 2007. In September 2007, the Company filed a notice of appeal of the Court’s decision upholding the Ericsson-Exar-Rohm settlement, which is pending. In December 2007, the Court awarded Exar and Rohm amounts for certain statutory and discovery costs associated with this ruling. Since this matter was outstanding as of June 30, 2007, the Company accrued $240,000 in the second quarter of 2007, included in “Gain from litigation-related settlements, net” in the accompanying condensed consolidated statement of operations as a result of the Court’s decision, of which $78,000 of the award was paid in the second quarter of 2008.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 28
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
The major changes in the components of “Other income (expense)” for the six months ended June 30, net were as follows (in thousands):
                         
                    Increase  
    2008     2007     (decrease)  
                         
Interest income
  $ 1,424     $ 2,512     $ (1,088 )
Minority interest in net income of subsidiaries
    (951 )     (89 )     (862 )
Foreign currency gains (losses)
    203       (36 )     239  
Other
    43       96       (53 )
 
                 
 
                       
 
  $ 719     $ 2,483     $ (1,764 )
 
                 
The decrease in interest income is due to lower average balances on the Company’s cash equivalents and short and long-term investments, principally due to the $37,200,000 net payment to Ericsson made at the end of March 2007 (see Note 11. Legal Proceedings in the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 - Financial Statements), as well as a decrease in interest rates. The decrease in “Minority interest in net income of subsidiaries” is due to higher income at certain entities in which the Company holds a minority interest. The increase in foreign currency gains is due to favorable exchange rates in 2008 as compared to 2007. The Company’s exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of Vicor Japan Co. Ltd. (“VJCL”) and changes in the dollar/yen exchange rate. The functional currency of the Company’s subsidiaries in Europe and Hong Kong is in the U.S. dollar.
“Income before income taxes” was $851,000 for the first six months of 2008 compared to $4,419,000 for the same period in 2007.
The provision for income taxes and the effective income tax rate for the six months ended June 30, 2008 and 2007 were as follows (dollars in thousands):
                 
    Six Months Ended  
    June 30
    2008   2007
 
               
Provision for income taxes
    $ 592       $ 287  
 
               
Effective income tax rate
    69.6 %     6.5 %
The increase in the effective tax rates for the six months ended June 30, 2008 compared to the comparable periods in 2007 is principally due to the higher projected annual pre-tax income and therefore, higher estimated

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 29
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
federal and state income taxes for the minority — owned subsidiaries that are not part of the Company’s consolidated income tax return. In addition, the Company reversed approximately $300,000 of excess tax reserves in the second quarter of 2007 and recorded a discrete item of $169,000 representing refunds of interest received and recorded as a benefit during the first quarter of 2007 in connection with the Internal Revenue Service audit noted above.
“Loss from equity method investment, net of tax” increased $125,000 to $962,000 from $837,000 for the same period in 2007.
Basic and diluted “Net income (loss) per common share” was ($0.02) for the first six months of 2008, compared to $0.08 for the first six months of 2007.
As discussed in Note 3 to the condensed consolidated financial statements presented herein, the Company adopted SFAS 157 for measuring and reporting the “fair value” of financial assets and liabilities as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As discussed in Note 3 to the condensed consolidated financial statements presented herein, SFAS 157 provides guidance on how to measure fair value in the absence of quoted market prices or other observable data. SFAS 157 defines “Level 3 Inputs” as unobservable inputs supported by little or no market activity. Such inputs, reflecting the use of significant management judgment, are utilized to develop analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set).
As of June 30, 2008, the Company held $38,500,000 in auction rate securities, consisting of debt obligations of municipal and corporate issuers. The interest rates for these securities are reset at auction at regular intervals ranging from seven to 90 days. The auction rate securities held by the Company have historically traded at par and are callable at par at the option of the issuer. At June 30, 2008, the majority of the auction rate securities held by the Company were AAA/Aaa rated by the major credit rating agencies, with most collateralized by student loans guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program.
Until February 2008, the auction rate securities market was highly liquid. Starting the week of February 11, 2008, a substantial number of auctions failed, meaning that there was not enough demand to sell all of the securities that holders offered for sale. The consequences of a failed auction are (a) an investor must hold the specific security until the next scheduled auction (unless that investor chooses to sell the security to a third party outside of the auction process) and (b) the interest rate on the security generally resets to an interest rate set forth in the security’s indenture. The principal associated with these failed auctions will not be accessible to the Company until a successful auction occurs, a buyer is found outside of the auction process, the security is called, or the underlying securities have matured. As of June 30, 2008, the Company held auction rate securities that had experienced failed auctions totaling $38,500,000 at par value (the “Failed Auction Securities”).

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 30
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
Management is not aware of any reason to believe any of the issuers of the Failed Auction Securities held by the Company are presently at risk of default. Through June 30, 2008, the Company has continued to receive interest payments on the Failed Auction Securities in accordance with their terms. Management believes the Company ultimately should be able to liquidate all of its auction rate security investments without significant loss primarily due to the collateral securing the substantial majority of the underlying obligations. However, current conditions in the auction rate securities market have lead management to conclude the recovery period for the Failed Auction Securities exceeds 12 months. As a result, the Company continued to classify the Failed Auction Securities as long-term as of June 30, 2008, having classified them as long-term as of March 31, 2008.
Based on the fair value measurements described in Note 3 to the condensed consolidated financial statements presented herein, the fair value of the Failed Auction Securities at June 30, 2008, was estimated by the Company to be approximately $36,250,000, compared to a par value of $38,500,000. Management considers this $2,250,000 difference to be temporary and has recorded this amount as an unrealized loss, net of taxes, in “Accumulated other comprehensive (loss) income” on the consolidated balance sheet. In making this determination, management considered the financial condition and near-term prospects of the issuers, the magnitude of the losses compared to the investments’ cost, the length of time the investments have been in an unrealized loss position, the assumed low probability that the Company will be unable to collect all amounts due according to the contractual terms of the security, whether the security has been downgraded by a rating agency, and the Company’s ability and intent to hold these investments until the anticipated recovery in market value occurs. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses in other comprehensive income. If the credit rating of the security issuers deteriorates, or the anticipated recovery in the market values does not occur, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the consolidated statement of operations, and any such impairment adjustments may be material.
As of June 30, 2008, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Securities. As such, the Company’s investments in Failed Auction Securities were deemed to require valuation using Level 3 inputs. Consistent with SFAS 157, management, after consulting with outside experts, valued the Failed Auction Securities using analyses and pricing models similar to those used by market participants. Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of these securities as of June 30, 2008. The assumptions used in preparing the DCF model included estimates for the amount and timing of future interest, principal payments and the rate of return required by investors to own these securities in the current environment, and the estimated timeframe during which successful auctions for these securities might occur. In making these assumptions, management considered relevant factors including: the formula applicable to each security which defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans, guarantees by other third parties, and additional credit enhancements provided through other means; and publicly available pricing data for recently issued student loan asset-backed securities which are not subject to auctions. The estimate of the rate of return required by investors to own these securities also considered the currently reduced liquidity for auction-rate securities. An increase or decrease in the liquidity risk premium (i.e., the discount rate)

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 31
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
of 100 basis points as used in the model would decrease or increase, respectively, the fair value of the Failed Auction Securities by approximately $600,000.
Liquidity and Capital Resources
At June 30, 2008, the Company had $33,000,000 in cash and cash equivalents. The ratio of current assets to current liabilities was 4.7:1 at June 30, 2008 compared to 6.5:1 at December 31, 2007. Working capital decreased $41,852,000 from $114,924,000 at December 31, 2007 to $73,072,000 at June 30, 2008. The primary factors affecting the working capital decrease was due to the reclassification of $38,500,000 of short-term investments to long-term investments, an additional decrease in short-term investments of $16,327,000 and a decrease in accounts receivable of $4,873,000. These decreases were partially offset by an increase in cash and cash equivalents of $12,983,000 and an increase in inventories of $2,947,000. The primary source of cash for the six months ended June 30, 2008 was $16,327,000 in net sales of short-term investments and cash provided by operating activities of $8,102,000. The primary uses of cash for the six months ended June 30, 2008, were for the payment of Common Stock dividends of $6,245,000, $4,169,000 for the purchase of equipment, and an additional investment of $1,000,000 in GWS made by the Company during February 2008.
In November 2000, the Board of Directors of the Company authorized the repurchase of up to $30,000,000 of the Company’s Common Stock (the “November 2000 Plan”). The November 2000 Plan authorizes the Company to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing and amounts of stock repurchases are at the discretion of management based on its view of economic and financial market conditions. The Company did not repurchase shares of Common Stock during the six months ended June 30, 2008. As of June 30, 2008, the Company had approximately $8,541,000 remaining under the November 2000 Plan.
On March 14, 2008, the Company’s Board of Directors approved a cash dividend of $0.15 per share of the Company’s stock. The total dividend of approximately $6,245,000 was paid on April 18, 2008 to shareholders of record at the close of business on April 2, 2008.
On August 7, 2008, the Company’s Board of Directors approved a cash dividend of $.15 per share of the Company’s stock. The total dividend of approximately $6,248,000 will be paid on September 10, 2008 to shareholders of record at the close of business on August 25, 2008. The Board of Directors anticipates reviewing its dividend policy on a semi-annual basis.
The Company’s primary liquidity needs are for making continuing investments in manufacturing equipment, particularly equipment for the Company’s new Factored Power Architecture products and upgrade of manufacturing equipment utilized by the BBU. The Company believes cash generated from operations and the total of its cash and cash equivalents and short-term investments will be sufficient to fund planned operations and capital equipment purchases for the foreseeable future. Additionally, the Company had approximately $755,000 of contractual commitments for future capital expenditures, as of June 30, 2008.
As of August 11, 2008, the Company held a total of $38,500,000 (at par value) of Failed Auction Securities. The funds associated with Failed Auction Securities may not be accessible until a successful auction occurs, a buyer

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 2
 
  PAGE 32
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2008
(Continued)
is found outside of the auction process, the security is called, or the underlying securities have matured. Based on the Company’s ability to access cash and other short-term investments and expected operating cash flows, management does not anticipate the current lack of liquidity will affect the Company’s ability to execute its current operating plan.
The Company does not consider the impact of inflation and changing prices on its business activities or fluctuations in the exchange rates for foreign currency transactions to have been significant during the last three fiscal years.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEMS 3-4
 
  PAGE 33
VICOR CORPORATION
June 30, 2008
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of market risks, including changes in interest rates affecting the return on its cash and cash equivalents and short-term and long-term investments 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, management believes the Company’s exposure to market risk on interest rate fluctuations for these investments is not significant. The Company’s short-term and long-term investments consist mainly of municipal and corporate debt securities, in which a significant portion are invested in auction rate securities, the majority of which are collateralized by student loans. These auction rate securities have interest rates reset at auction at regular intervals. As of August 11, 2008, the Company was holding a total of $38,500,000 (at par value) in Failed Auction Securities. While those debt securities are all highly rated investments, generally with AAA/Aaa ratings, continued failure to sell at their reset dates could negatively impact the carrying value of the investments that could lead to impairment charges in future periods, should a decline in the value of these securities be other than temporary, in which case the losses are recorded in “Other income (expense), net”. Management does not believe there was an other-than-temporary decline in value in these securities as of June 30, 2008.
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 functional currency of the Company’s subsidiaries in Europe and Hong Kong is the U.S. dollar. Therefore, management believes that market risk is mitigated since these operations are not materially exposed to foreign exchange fluctuations.
Item 4 – Controls and Procedures
(a) Disclosure regarding controls and procedures.
As required by Rule 13a-15 under the Exchange Act, the Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter (i.e., June 30, 2008). Management had previously conducted an evaluation of its internal controls over financial reporting as of December 31, 2007 and concluded that a material weakness existed in the Company’s internal controls in that the Company’s financial statement close process was not effective as of December 31, 2007 as it relates to evaluating and accounting for complex and judgmental accounting, tax and financial reporting matters. For further information, refer to the Item 9A contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, (File No. 0-18277) filed by the Company with the Securities and Exchange Commission.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 4
 
  PAGE 34
VICOR CORPORATION
June 30, 2008
In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, management, including the Company’s CEO and CFO, has concluded the Company’s disclosure controls and procedures as of June 30, 2008, were not effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms because of the material weakness in internal control over financial reporting as described above. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management intends to continue to review and document the Company’s disclosure controls and procedures, including internal controls over financial reporting, and may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that the Company’s systems evolve with its business.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Accordingly, management, including the CEO and CFO, recognizes the Company’s disclosure controls or its internal control over financial reporting may not prevent or detect all errors and all fraud. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any control’s effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
(b) Changes in internal control over financial reporting.
Other than the items noted below, there was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2008, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART I
 
  ITEM 4
 
  PAGE 35
VICOR CORPORATION
June 30, 2008
Remediation of the Company’s Material Weakness
Management’s remediation efforts related to the material weakness that existed as of December 31, 2007, and noted in Item 9A(b) of the Company’s 2007 Annual Report on Form 10-K filed on March 19, 2008, were not complete as of August 11, 2008. Efforts to remediate the material weakness will continue during 2008. An update as to the status of management’s efforts is listed below:
    The Company has hired a new Chief Financial Officer with the appointment of James A. Simms, effective April 14, 2008.
 
    The Company has reorganized its Accounting Department, in the process redefining certain duties and responsibilities in order to address specific weaknesses and deficiencies identified. The Company also is assessing on an ongoing basis the staffing requirements for the Accounting Department so that it has the resources and expertise to evaluate complex and judgmental accounting, tax and financial reporting issues.
 
    The Company is amending and expanding its disclosure controls and procedures, including the implementation of a Disclosure Committee with responsibility for oversight of implementation and execution of the disclosure controls and procedures.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART II
 
  ITEMS 1-3
 
  PAGE 36
VICOR CORPORATION
Part II - Other Information
June 30, 2008
Item 1 - Legal Proceedings
See Note 11. Legal Proceedings in the Notes to Condensed Consolidated Financial Statements in Part I – Item 1 – Financial Statements.
Item 1A - Risk Factors
There have been no material changes in the risk factors described in Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
                                 
                            Maximum Number
                            (or Approximate
                    Total Number of   Dollar Value) of
                    Shares (or Units)   Shares (or Units)
    Total Number           Purchased as Part   that May Yet Be
    of Shares (or           of Publicly   Purchased Under
    Units)   Average Price Paid   Announced Plans or   the Plans or
Period   Purchased   per Share (or Unit)   Programs   Programs
April 1 — 30, 2008
    -       -       -       $ 8,541,000  
May 1 — 31, 2008
    -       -       -       $ 8,541,000  
June 1 — 30, 2008
    -       -       -       $ 8,541,000  
 
                         
Total
    -     $ -       -       $ 8,541,000  
 
                         
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.
Item 3 - Defaults Upon Senior Securities
Not applicable.

 


Table of Contents

     
 
  FORM 10-Q
 
  PART II
 
  ITEMS 4-6
 
  PAGE 37
VICOR CORPORATION
Part II- Other Information
June 30, 2008
Item 4 - Submission of Matters to a Vote of Security Holders
The 2008 Annual Meeting of Stockholders of the company was held on June 26, 2008. Under the Company’s charter, each share of the Company’s Common Stock entitles the holder thereof to one vote per share, and each share of the Company’s Class B Common Stock entitles the holder thereof to ten votes per share.
The only matter submitted to a vote of security holders at the 2008 Annual Meeting of Stockholders was the election of directors to the Board of Directors of the Company. All nominees of the Board of Directors of the Company were re-elected for a one year term. Votes were cast in the election of the directors as follows:
                 
Nominee   Votes For     Votes Withheld  
 
Patrizio Vinciarelli
    139,765,965       4,316,917  
Estia J. Eichten
    142,980,664       1,102,218  
Barry Kelleher
    139,706,014       4,376,868  
David T. Riddiford
    142,981,449       1,101,433  
Samuel Anderson
    138,853,805       5,229,077  
James A. Simms
    139,653,537       4,429,345  
Claudio Tuozzolo
    139,722,514       4,360,368  
There were 0 broker non-votes and 0 abstentions on this proposal.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits
             
    Exhibit Number   Description
 
           
 
  31.1       Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
           
 
  31.2       Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
           
 
  32.1       Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
           
 
  32.2       Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 


Table of Contents

     
 
  Form 10-Q
 
  PART II
 
  PAGE 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  VICOR CORPORATION
 
 
Date: August 11, 2008 
By:   /s/ Patrizio Vinciarelli    
    Patrizio Vinciarelli   
    President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer) 
 
 
     
Date: August 11, 2008 
By:   /s/ James A. Simms    
    James A. Simms   
    Vice President, Chief Financial Officer
(Principal Financial Officer) 
 
 

 

exv31w1
Exhibit 31.1
CERTIFICATIONS
I, Patrizio Vinciarelli, certify:
  1.   I have reviewed this quarterly report on Form 10-Q of Vicor Corporation;
 
  2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
       
   
Dated: August 11, 2008  /s/ Patrizio Vinciarelli  
  Patrizio Vinciarelli 
  Chief Executive Officer 

 

exv31w2
         
Exhibit 31.2
CERTIFICATIONS
I, James A. Simms, certify:
  1.   I have reviewed this quarterly report on Form 10-Q of Vicor Corporation;
 
  2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
       
   
Dated: August 11, 2008  /s/ James A. Simms  
  James A. Simms 
  Vice President, Chief Financial Officer 

 

exv32w1
         
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Vicor Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrizio Vinciarelli, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
  (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Patrizio Vinciarelli
Patrizio Vinciarelli
President, Chairman of the Board and
Chief Executive Officer
August 11, 2008
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Vicor Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James A. Simms, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
  (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ James A. Simms
James A. Simms
Vice President, Chief Financial Officer
August 11, 2008
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.