1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended SeptemberDecember 26, 1998 or
----------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________________________________ to _____________________________________________
Commission File Number 1-12696
-------
PLANTRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0207692
------------------------------------------- --------------------- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
337 Encinal Street, P.O. Box 1802
Santa Cruz, California 95061-1802
- -------------------------------------------- --------------------organization) Identification No.)
337 Encinal Street, P.O. Box 1802
Santa Cruz, California 95061-1802
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (831) 426-5858
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 26, 1998
- ----------------------------- ---------------------------------
Common Stock, $.01 par value 16,550,563
Class Outstanding at December 26, 1998
- ---------------------------- --------------------------------
Common Stock, $.01 par value 16,714,906
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PLANTRONICS, INC.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
MARCH 28, SEPTEMBER 26,31, DECEMBER 31,
1998 1998
============= =============------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 64,901 $ 95,100119,231
Accounts receivable, net 41,550 45,06344,317
Inventory 29,741 21,93119,334
Deferred income taxes 2,130 2,1304,243
Other current assets 1,774 1,488
------------- -------------1,390
------------ ------------
Total current assets 140,096 165,712188,515
Property, plant and equipment, net 21,255 20,53119,577
Other assets 4,124 3,354
============= =============3,226
------------ ------------
Total assets $ 165,475 $ 189,597
============= =============211,318
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,327 $ 5,1717,420
Accrued liabilities 26,629 28,35133,762
Income taxes payable 6,381 9,196
------------- -------------6,003
------------ ------------
Total current liabilities 41,337 42,71847,185
Deferred tax liability 5,652 5,6529,065
Long-term debt 65,050 65,050
------------- ------------------------- ------------
Total liabilities 112,039 113,420
------------- -------------121,300
------------ ------------
Stockholders' equity:
Common stock, $0.01 par value per share;
40,000 shares authorized, 16,449
shares and 16,55116,715 shares issued and
outstanding 174 177180
Additional paid-in capital 63,816 70,68478,191
Cumulative translation adjustment (891) (891)
Retained Earnings 15,355 41,439
------------- -------------55,862
------------ ------------
78,454 111,409133,342
Less: Treasury stock
(common: 963 shares in fiscal year 1998
and 1,1211,265 shares as of September 26,December 31, 1998)
at cost (25,018) (35,232)
------------- -------------(43,324)
------------ ------------
Total stockholders' equity 53,436 76,177
------------- -------------90,018
------------ ------------
Total liabilities and stockholders' equity $ 165,475 $ 189,597
============= =============211,318
============ ============
See Notes to Unaudited Condensed Consolidated FiancialFinancial Statements
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PLANTRONICS, INC.
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED SIXNINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26,DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
================== =============== =============== ================================ ================== ==================
Net sales $ 56,53962,017 $ 71,150 $ 110,562 $ 141,21072,038 $172,579 $213,248
Cost of sales 26,003 32,192 50,959 64,089
------------------ --------------- --------------- ---------------28,464 31,002 79,423 95,091
--------- -------- -------- --------
Gross profit 30,536 38,958 59,603 77,121
------------------ --------------- --------------- ---------------33,553 41,036 93,156 118,157
--------- -------- -------- --------
Operating expense:
Research, development and engineering 4,395 4,535 8,384 9,0054,591 5,177 12,975 14,182
Selling, general and administrative 11,375 13,760 22,842 27,862
------------------ --------------- --------------- ---------------12,330 14,563 35,172 42,425
--------- -------- -------- --------
Total operating expenses 15,770 18,295 31,226 36,867
------------------ --------------- --------------- ---------------16,921 19,740 48,147 56,607
--------- -------- -------- --------
Operating income 14,766 20,663 28,377 40,25416,632 21,296 45,009 61,550
Interest expense, including
amortization of debt issuance costs 1,737 1,852 3,493
3,5881,755 1,888 5,248 5,476
Interest income and other income, net (744) (1,208) (1,102) (1,693)
------------------ --------------- --------------- ---------------(447) (1,801) (1,549) (3,494)
--------- -------- -------- --------
Income before income taxes 13,773 20,019 25,986 38,35915,324 21,209 41,310 59,568
Income tax expense 4,407 6,406 8,315 12,275
------------------ --------------- --------------- ---------------4,903 6,786 13,218 19,061
--------- -------- -------- --------
Net income 9,366 13,613 17,671 26,084
Other comprehensive income -- -- -- --
Comprehensive income $ 9,36610,421 $ 13,61314,423 $ 17,67128,092 $ 26,084
================== =============== =============== ===============40,507
========= ======== ======== ========
Basic earnings per common share $ 0.570.63 $ 0.820.87 $ 1.071.70 $ 1.58
================== =============== =============== ===============2.45
========= ======== ======== ========
Shares used in basic per share calculations 16,500 16,513 16,450 16,494
================== =============== =============== ===============16,547 16,562 16,482 16,516
========= ======== ======== ========
Diluted earnings per common share $ 0.51.57 $ 0.740.79 $ 0.981.54 $ 1.43
================== =============== =============== ===============2.22
========= ======== ======== ========
Shares used in diluted per share calculations 18,356 18,341 18,086 18,291
================== =============== =============== ===============18,383 18,246 18,200 18,268
========= ======== ======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
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PLANTRONICS, INC.
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
SIXNINE MONTHS ENDED --------------------------------------------
SEPTEMBER 27, SEPTEMBER 26,NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
==================== ======================================= =================
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from operations $ 17,67128,092 $ 26,08440,507
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 2,896 4,133
Deferred income taxes -- 1,300
Changes in assets and liabilities:
1,772 2,272
Accounts receivable (3,633) (4,164)(6,969) (3,248)
Provision for doubtful accounts 110 651379 481
Inventory (3,465) 7,810(10,532) 10,407
Other current assets 301 286(616) 384
Other assets 499 770854 898
Accounts payable 1,300 (3,156)3,161 (907)
Accrued liabilities 1,705 1,722liabilitie 5,530 7,133
Income taxes payable 565 7,744
-------------------- ----------------------(984) 10,208
----------------- -----------------
Cash provided by operating activities 16,825 40,019
-------------------- ----------------------21,811 71,296
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,946) (1,548)
-------------------- ----------------------(4,756) (2,455)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (116) (10,568)(18,716)
Proceeds from sale of treasury stock 567 769781 915
Proceeds from exercise of stock options 625 1,527
-------------------- ----------------------2,101 3,290
----------------- -----------------
Cash provided by (used for) financing activities 1,076 (8,272)
-------------------- ----------------------2,766 (14,511)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 13,955 30,19919,821 54,330
Cash and cash equivalents at beginning of period 42,262 64,901
==================== ======================----------------- -----------------
Cash and cash equivalents at end of period $ 56,217 $ 95,100
==================== ======================62,083 $119,231
================= =================
Supplemental disclosures:
Cash paid for:
Interest $ 3,2673,291 $ 3,262
Income taxes $ 8,85012,464 $ 5,7647,823
Noncash operating and financing activities:
Income tax benefit associated with stock options -- $ 4,9291,415 $ 10,586
See Notes to Unaudited Condensed Consolidated Financial Statements
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PLANTRONICS, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION. The accompanying interim condensed consolidated
financial statements of Plantronics, Inc. ("Plantronics," the "Company" or the
"Registrant") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. These financial statements have been
prepared, without audit, in conformity with generally accepted accounting
principles, consistent in all material respects with those applied in the
Company's Annual Report on Form 10-K for the year ended March 28,31, 1998. The
interim financial information is unaudited, but reflects all normal recurring
adjustments which are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The interim financial statements should be read in connection with
the financial statements in the Company's Annual Report on Form 10-K for the
fiscal year ended March 28,31, 1998.
NOTE 2. PERIODS PRESENTED. The Company's fiscal year-end is the Saturday closest
to March 31 (i.e. March 27, 1999) and the secondthird fiscal quarter-end is the last Saturday in September (i.e. September 27, 1997December.
For purposes of presentation, the Company has indicated its accounting year
ending on March 31 or September 26, 1998, as
applicable).the month-end for interim quarterly periods. Plantronics'
fiscal quarters ended September 27,December 31, 1997 and September
26,December 31, 1998 consisted of
thirteen weeks each.
NOTE 3. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS):
March 28, September 26,31, December 31,
1998 1998
=========================== =============
Inventories:
Finished goods $13,224 $ 13,224 $ 12,01010,596
Work in process 4,431 2,1521,828
Purchased parts 12,086 7,7696,910
-------------- -------------
-------------$29,741 $ 29,741 $ 21,931
=============19,334
============== =============
Property, plant and equipment:
Land $ 4,693 $ 4,693
Buildings and improvements (useful lives: 10-30 years) 9,486 9,9019,979
Machinery and equipment (useful lives: 2-10 years) 31,484 32,617
-------------33,445
-------------- -------------
45,663 47,21148,117
Less accumulated depreciation (24,408) (26,680)
============= =============(28,540)
-------------- -------------
$21,255 $ 21,255 $ 20,531
=============19,577
============== =============
NOTE 4. FOREIGN CURRENCY TRANSACTIONS. The Company's functional currency for all
operations is the U.S. dollar. Accordingly, gains and losses resulting from the
remeasurement of the financial statements of foreign subsidiaries into U.S.
dollars are included in other income in the consolidated statements of
operations. Gains and losses resulting from foreign currency transactions are
also included in other income. Aggregate exchange gains in the fiscal quarter
ended September 26,December 31, 1998 were approximately $0.2 million. There were
approximately $0.1 million inExchange gains equaled
exchange losses in the comparable periodfiscal quarter ended September 27,December 31, 1997.
NOTE 5. COMMON AND TREASURY STOCK. AsDEBT. The Company redeemed all of September 26, 1998,its 10% Senior Notes Due 2001 on
January 15, 1999. The aggregate redemption price, including accrued interest,
was approximately 10,000 shares remained$69.6 million plus expenses and was paid out of available
under the repurchase plan authorizedcash. This transaction will be reported as an extraordinary item in the thirdfourth
quarter of fiscal 1998. During the second quarter of fiscal 1999 the Company's Board of Directors approved a plan to repurchase up to 500,000 shares
of its common stock. The total shares available for repurchase under the two
plans as of September 26, 1998 was approximately 510,000 shares. From September
27, 1998 throughfiscal year financial statements.
NOTE 6. UNSECURED CREDIT FACILITY. Effective November 4,30, 1998, the Company
repurchased 105,800 shares for
approximately $5.4increased its revolving unsecured credit facility with Bank of America from
$20.0 million to $30.0 million. AsThe facility expires on November 29, 1999. The
facility includes a $10.0 million letter of November 4, 1998,credit subfacility. Combined
borrowings and commitments under both facilities cannot exceed $30.0 million.
All other terms and conditions of the total shares available
for repurchase was approximately 404,200 shares.facility remain unchanged.
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PLANTRONICS, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTION PLAN. By vote at7. COMMON STOCK. On January 8, 1999, and subsequently amended on January
13, 1999, Plantronics filed with the Annual Meeting held July 30, 1998,Securities and Exchange Commission a
Registration Statement on Form S-3 for registration of up to 1,782,500 shares of
common stock. This registration contained a prospectus for the Company's stockholders approved an increaseunderwritten
public offering of 1,300,0001,550,000 shares of common stock issuable underof Plantronics, Inc. by
Louise M. Cecil, Robert S. Cecil and Citigroup Foundation. This total includes
1,000,000 shares previously registered and held by Citigroup Foundation, 432,822
shares previously registered and exercisable by Robert S. Cecil and 117,178
shares previously registered and exercisable by Louise M. Cecil. Plantronics
will not receive any proceeds from this offering, other than approximately $0.9
million to be received upon the Company's 1993 Stock Plan (the "1993 Stock Plan"). This
bringsexercise of options to purchase 550,000 shares
of common stock to be sold by Robert S. Cecil and Louise M. Cecil in this
offering. Additionally, if the maximum aggregate number of shares which may be optionedunderwriters' over-allotment option is exercised
in full, Louise M. Cecil will exercise stock options for, and sold
under the 1993 Stock Plan to 5,459,242sell, an
additional 232,500 shares.
NOTE 7.8. COMPREHENSIVE INCOME. Effective March 29,April 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement is effective for the Company's fiscal year
ending March 27,31, 1999. The statement establishes presentation and disclosure
requirements for reporting comprehensive income. Comprehensive income includes
charges or credits to equity that are not the result of transactions with
stockholders of the Company. The Company did not have otherowners. Total comprehensive income transactions inwas the quarters ended September 26, 1998 and September 27, 1997.same as net income for all periods
presented.
NOTE 8.9. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 revisesThe statement requires the requiredCompany to report certain information regarding the reporting ofabout
operating segments.segments in its annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company will adopt SFAS 131 beginning in connection with its fiscal 1999 financial statements
and does not expect such adoption to have a material effect on the consolidated
financial statements.statement disclosures.
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PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION:
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include the statement relating
to the expected increase in diluted earnings per share due to the redemption of
the 10% Senior Notes discussed in the last sentence of the paragraph below
titled "Interest Expense" under Results of Operations and in the last sentence
of the paragraph below titled "Financing Activities" under Financial Condition;
the ability to make required interest payments set out below in the first
sentence in the last paragraph in the subsection headed "Liquidity" under
"Financial Condition"Financial Condition; the belief as to the non-material impact of the Year 2000
problem set out in the first sentence of the paragraph titled "Risks of the Year
2000 Issues;" the statements as to our Year 2000 contingency plans in the
paragraph below titled "Contingency Plans;" and the statements below under "RiskRisk
Factors Affecting Future Operating Results." In addition, the Company may from
time to time make oral forward-looking statements. These forward-looking
statements are based on current expectations and entail various risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth below under "Risk Factors Affecting Future
Operating Results." The following discussions titled "Results of Operations" and
"Financial Condition" should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes included elsewhere herein,
the Company's annual report on Form 10-K, as well as the section below entitled
"Risk Factors Affecting Future Operating Results."
RESULTS OF OPERATIONS:
The following table sets forth items from the Unaudited Condensed Consolidated
Statements of Operations as a percentage of net sales.
----------------------------------- ------------------------------------
Quarter Ended SixNine Months Ended
----------------------------------- ------------------------------------
September 27, September 26, September 27, September 26,----------------------------------
December 31, December 31, December 31, December 31,
1997 1998 1997 1998
================ ================ ================ ================
Net sales 100.0% 100.0% 100.0% 100.0%100.00% 100.00% 100.00% 100.00%
Cost of sales 45.9 43.0 46.0 45.2 46.1 45.444.6
---------------- ---------------- ---------------- ----------------
Gross profit 54.1 57.0 54.0 54.8 53.9 54.655.4
---------------- ---------------- ---------------- ----------------
Research and development 7.8 6.4 7.6 6.47.4 7.2 7.5 6.6
Selling, general and admin. 20.1 19.4 20.6 19.719.9 20.2 20.4 19.9
---------------- ---------------- ---------------- ----------------
Total operating expenses 27.3 27.4 27.9 25.8 28.2 26.126.5
---------------- ---------------- ---------------- ----------------
Operating income 26.8 29.6 26.1 29.0 25.7 28.528.9
Other (income) expense 1.8 0.92.1 0.2 2.2 1.31.0
---------------- ---------------- ---------------- ----------------
Income before income taxes 24.4 28.1 23.5 27.224.7 29.4 23.9 27.9
Income tax expense 7.8 9.0 7.5 8.77.9 9.4 7.6 8.9
---------------- ---------------- ---------------- ----------------
Net Income 16.6 19.1 16.0 18.5
Other comprehensive income -- -- -- --
---------------- ---------------- ---------------- ----------------
Comprehensive income 16.6% 19.1% 16.0% 18.5%16.8% 20.0% 16.3% 19.0%
================ ================ ================ ================
Net sales for the quarter ended September 26, 1998 were $71.2 million, an
increase of 25.8% over net sales of $56.5 million for the quarter ended
September 27, 1997. Domestic revenues grew by 30.5% to $50.6 million while
international revenues grew by 15.7% to $20.6 million, compared to the same
period of fiscal 1998. Net sales for the six months ended September 26, 1998
were $141.2 million compared to $110.6 million for the six months ended
September 27, 1997, an increase of 27.7%. Domestic sales in the first half of
fiscal 1999 were $98.6 million, an increase of 26.4% over the first half of
fiscal 1998. International sales were $42.6 million in the first half of fiscal
1999, an increase of 30.9% over the comparable period of fiscal 1998.
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PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross profit of $39.0Net Sales. Net sales for the quarter ended December 31, 1998 increased by 16.2%
to $72.0 million, compared to $62.0 million for the quarter ended September 26,December 31,
1997. Domestic sales for the quarter ended December 31, 1998 increased by $8.416.2%
to $49.9 million, overcompared to $43.0 million for the quarter ended September 27, 1997,December 31,
1997. The highest percentage growth in domestic sales occurred in the OEM and
retail distribution channels. International sales for the quarter ended
December 31, 1998 increased by 16.1% to $22.1 million, compared to $19.0
million for the quarter ended December 31, 1997. The growth in international
sales all occurred in Europe; sales in the Asia Pacific and Latin America
regions declined slightly, reflecting the uncertain economic situation in that
area.
Net sales for the nine months ended December 31, 1998 increased by 23.6% to
$213.2 million, compared to $172.6 million for the nine months ended December
31, 1997. Domestic sales for the nine months ended December 31, 1998 increased
by 22.8% to $148.5 million, compared to $121.0 million for the nine months ended
December 31, 1997. Domestic sales increased in all distribution channels, with
the highest percentage increase occurring in the OEM and retail channels.
International sales increased by 25.5% to $64.7 million for the nine months
ended December 31, 1998, compared to $51.6 million for the nine months ended
December 31, 1997. All international regions recorded sales growth, with Europe
and Canada showing the highest percentage increases. We believe that our sales
growth in fiscal 1999 may have been partially due to call centers upgrading
their automatic call distribution systems in order to be year 2000 compliant.
Since our products are sometimes bundled with new call distribution systems,
this may have accelerated some headset sales. As a 27.6% increase.result, sales growth in
future quarters may occur at a slower rate.
Gross Profit. Gross profit for the first two quartersquarter ended December 31, 1998 increased by
22.3% to $41.0 million (57.0% of fiscal 1999 was $77.1net sales), compared to $33.6 million an
increase(54.1% of
29.4% overnet sales) for the comparable periodquarter ended December 31, 1997. Gross profit for the nine
months ended December 31, 1998 increased by 26.8% to $118.2 million (55.4% of
fiscal 1998.net sales), compared to $93.2 million (54.0% of net sales) for the nine months
ended December 31, 1997. The increaseincreases in gross profit for both the quarter and
year-to-date mainly reflectsreflect the overall increaseincreases in revenues, with continuing
benefits fromnet sales. In addition, we
have been able to reduce product costs over time through design and
manufacturing efficiencies and cost reduction programs. Changes in
materialby obtaining lower costs from our suppliers.
Research, Development and labor costs, changes in distribution channels and reductions in
prices may have an adverse effect on gross profit percentage in the future. For
a description of additional risks which may impact gross profit see the section
entitled "Risk Factors Affecting Future Operating Results."Engineering. Research, development and engineering
expenses for the quarter ended September
26,December 31, 1998 were $4.5increased 12.8% to $5.2 million
(7.2% of net sales), compared to $4.4$4.6 million (7.4% of net sales) for the
quarter ended September 27,December 31, 1997. ExpensesResearch, development and engineering expenses
for the first halfnine months ended December 31, 1998 increased 9.3% to $14.2 million
(6.6% of fiscal 1999 were $9.0 millionnet sales), compared to $8.4$13.0 million (7.5% of net sales) for the first half of fiscal 1998. Increasesnine
months ended December 31, 1997. The increase in these expenses were the result of higher levels of research and development spending
onreflects
increased investment in new product development and new product technologies.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended September 26,December 31, 1998 were $13.8increased 18.1% to $14.6
million (20.2% of net sales), compared to $11.4$12.3 million (19.9% of net sales) for
the quarter ended September 27,December 31, 1997. For the first half of fiscal 1999, expenses were $27.9
million, an increase of $5.0 million over the first half of fiscal 1998. The
overall increases in selling,Selling, general and administrative
expenses for the nine months ended December 31, 1998 increased by 20.6% to $42.4
million (19.9% of net sales), compared to $35.2 million (20.4% of net sales) for
the nine months ended December 31, 1997. The overall increase in expenses in the
second
quarter and first half of fiscal 1999 werenine months ended December 31, 1998 was primarily from costs associated with
higher worldwide sales volume worldwide and related variable expenses, such as sales commissions
and employee profit sharing, as well as the expansion of sales and marketing
programs. General and administrative expenses also increased due to the addition
of an office of the President and a Vice President of Corporate Development.two senior corporate executive positions. In addition, the Companywe increased itsour
provision for doubtful accounts in light of general economic conditions,
particularly internationally.
Interest expenseinternational conditions.
Operating Income. Operating income for the quarter ended September 26,December 31, 1998
was $1.9increased 28.0% to $21.3 million (29.6% of net sales), compared to $1.7$16.6 million
(26.8% of net sales) for the quarter ended September 27,December 31, 1997. For the first
half of fiscal 1999, interest expense was $3.6 million compared to $3.5 million
for the corresponding period in fiscal 1998. The increase in interest expense is
due to an increase in amortization of deferred debt costs. Interest income and
otherOperating income
for the second quarternine months ended December 31, 1998 increased by 36.8% to $61.6 million
(28.9% of fiscal 1999 was $1.2 millionnet sales), compared to $0.7$45.0 million (26.1% of net sales) for the
second quarter of fiscal 1998. Interest income and other
income was $1.7 million for the sixnine months ended September 26, 1998 compared to
$1.1 million for the six months ended September 27,December 31, 1997. The increase in interestoperating income and other income for both the quarter and half year is primarily
attributable to interest income derived from increases in cash and cash
equivalents.
The Company's cash flows are substantially US dollar denominated. However, the
Company is exposed to certain foreign currency fluctuations, primarily in Europe
and Mexico. The source of currency risk in Europe is due to receivables
denominated in local currency, although this has been partially offset by
payables denominated in local currency. This natural hedging approach has
historically limited the Company's net exposure to the effect of currency
fluctuations and management believes additional hedging has not been merited. As
the Company's sales in Europe grow, this strategy will require review and the
Company may experience greater exposure to currency fluctuations as a
resultpercentage of its increasing international activities. Innet sales was primarily due to: (i) higher net sales, (ii) the
fourth quarterincrease in gross margin and (iii) a focused effort to limit the growth of
fiscal 1996,
the Company formed Plantronics B.V., a wholly owned subsidiary incorporated in
the Netherlands. Administrative functions, particularly with respectoperating expenses relative to the
Company's international sales were transferred to Plantronics B.V. The Company
now incurs local expenses in its Plantronics B.V. subsidiary in Dutch guilders
while recording no revenue in Dutch guilders.
The Company's peso transaction exposure at its manufacturing subsidiary in
Tijuana, Mexico is limited mostly to payroll. The favorable effects to the
Company on the devaluation of the peso in the years reported was somewhat offset
by local currency pay raises to its employees in Mexico. Because of these
factors, management does not believe the devaluation has had a material effect
on the Company.
Gains due to foreign currency fluctuations approximated $0.2 million for the
second quarter of fiscal 1999 compared to a $0.1 million loss in same period of
fiscal 1998, due primarily to strengthening of the pound sterling against the US
dollar.growth.
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PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Expense. Interest expense for the quarter ended December 31, 1998
increased 7.6% to $1.9 million, compared to $1.8 million for the quarter ended
December 31, 1997. Interest expense for the nine months ended December 31, 1998
increased by 4.3% to $5.5 million, compared to $5.2 million for the nine months
ended December 31, 1997. Interest expense for all periods reported principally
represents interest payable on our 10% Senior Notes Due 2001 (Senior Notes).
This expense will be reduced to approximately $0.4 million for our next quarter
ended March 31, 1999, and will be minimal thereafter, since we redeemed all of
our Senior Notes effective January 15, 1999. We will take a net extraordinary
charge of approximately $1.2 million, or approximately $0.07 per diluted share,
in our fourth quarter in connection with this transaction. This charge
represents an early repayment fee of approximately $1.3 million and estimated
expenses, net of taxes. Based on current interest rates and the alternative of
investing the cash, we expect the transaction to increase diluted earnings per
share by approximately $0.10 on an annual pro forma basis.
Interest and Other Income. Interest and other income for the quarter ended
December 31, 1998 increased 302.9% to $1.8 million compared to $0.4 million for
the quarter ended December 31, 1997. Interest and other income for the nine
months ended December 31, 1998 increased by 125.6% to $3.5 million, compared to
$1.5 million for the nine months ended December 31, 1997. The Company's effective tax rate was 32%increases were
primarily attributable to interest income derived from increases in the quarters ended September 26,
1998cash and
September 27, 1997.cash equivalents.
FINANCIAL CONDITION:
The Company's principal sourceLiquidity. As of liquidity in the six months ended September
26,December 31, 1998, was $40.0we had working capital of $141.3 million,
including $119.2 million of cash and cash equivalents, compared with working
capital of $98.8 million, including $64.9 million of cash and cash equivalents,
as of March 31, 1998. During the nine months ended December 31, 1998, we
generated $71.3 million of cash from operating activities, due primarily to
$26.1$40.5 million in net income, compared to $16.8decreases of $10.4 million in inventory and
increases of $10.2 million in income taxes payable and $7.1 million in accrued
liabilities. In comparison, we generated $21.8 million in cash
generated from operating
activities for the same periodnine months ended September 27,December 31, 1997, due mainly to $28.1
million in net income and increases of which $17.7$8.7 million was from net income. In the current period,
decreasesin accounts payable and
accrued liabilities, partially offset by increases of $10.5 million in inventory
and increases$7.0 million in income taxes payable, together with
depreciation and amortization expense, represented the majority of the balance
of cash provided by operating activities.
The Company hasaccounts receivable.
We have a $20.0$30.0 million revolving credit facility, including a $10.0 million
letter of credit subfacility, with a major bank.bank, both of which expire in
November 1999. Following our decision to redeem the Senior Notes, we increased
the amount available under the revolving credit facility from $20.0 million to
$30.0 million. As of September 26,December 31, 1998, the Companywe had no cash borrowings under the
revolving credit facility and $1.3$1.4 million outstanding under the letter of
credit subfacility. The amounts outstanding under the letter of credit
subfacility were principally associated with purchases of inventory. The terms
of the credit facility contain covenants whichthat materially limit the Company'sour ability to
incur debt, make capital expenditures and pay dividends, among other matters.
These covenants may adversely affect the Companyus to the extent itwe cannot comply with
them or it must
limit its ordinary coursethem.
After the redemption of activities.the Senior Notes, we believe that our current cash
balance and cash to be provided by operations, together with available borrowing
capacity under our revolving credit facility and letter of credit subfacility,
will be sufficient to fund operations for at least the next 12 months.
Investing Activities. Capital expenditures of $1.5$2.5 million in the six-month periodnine months
ended September 26,December 31, 1998 were incurred principally in tooling to expand
manufacturing capacity and investments in computer and telephone equipment.
Financing Activities. In the six-month periodnine months ended September 26,December 31, 1998, the Companywe sold 19,51022,601
shares of its Treasury Stockour treasury stock for approximately $0.8$0.9 million and repurchased
178,000325,391 shares of its Common Stockour common stock for approximately $10.6$18.7 million. As of
September 26,December 31, 1998, approximately 10,000363,000 shares remained available under the
repurchase plan authorized in the third quarter of fiscal 1998. During the second quarter of fiscal 1999 the Company's Board of Directors approved a plan to repurchase up to
500,000 shares of its common stock. The total shares available for repurchase
under the two plans as of September 26, 1998 was approximately 510,000 shares.
From September 27, 1998 through November 4, 1998, the Company repurchased
105,800 shares for approximately $5.4 million. As of November 4, 1998, the total
shares available for repurchase was approximately 404,200 shares.
The Company1999.
We received $1.5$3.3 million in proceeds from the exercise of stock options during
the sixnine months ended September 26,December 31, 1998. The Company'sIn July 1998, our stockholders approved
an increase of 1,300,000 shares of common stock issuable under
the
Company's9
10
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
our 1993 Stock Plan (the "1993 Stock Plan"). This bringsincreased the maximum
aggregate number of shares which may be optioned and sold under the 1993 Stock
Plan to 5,459,242 shares.
TheEffective January 15, 1999, we repurchased all of our 10% Senior Notes that were issued during fiscal 1994,Due 2001.
We will take a net extraordinary charge of approximately $1.2 million, or
approximately $0.07 per diluted share, in the remaining principal
amountfourth quarter of $65.1fiscal 1999 in
connection with this transaction. This charge represents an early repayment fee
of approximately $1.3 million bearand estimated expenses, net of taxes. Based on
current interest payable semiannually, at a rate of 10%
per annum and mature on January 15, 2001. The Senior Notes are redeemable, at
the Company's option, in whole or in part, any time after January 15, 1999. The
Senior Note Indenture contains certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, issue preferred stock of subsidiaries, engage in transactions with
affiliates, create liens, engage in mergers and consolidations, make certain
asset sales or make certain investments. The Senior Note Indenture also provides
that holders of the Senior Notes have the right to require the Company to
repurchase their Senior Notes in the event of a "change in control" and certain
various customary events of default.
The Company believes that its current cash balance and cash to be provided by
operations, together with available borrowing capacity under the revolving
credit facility, will be sufficient to make required interest payments under the
Senior Notes and to fund operations at least through the next 12 months. Subject
to the terms and conditions of the 10% Senior Note Indenturerates and the Company's
revolving credit facility,alternative of investing the Company may use cash, for such purposes as
repurchasing Senior Notes, repurchasingwe expect the
Company's Common Stock or acquiring
complementary businesses, products or technologies.
9
10
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONStransaction to increase diluted earnings per share by approximately $0.10 on an
annual pro forma basis.
YEAR 2000:
STATE OF READINESS:State of Readiness. Many existing electronic systems, principally including but not limited to computer
systems, use only the last two digits to refer to a year. Therefore, these
systems may recognize a date using "00" as 1900 rather than the year 2000. If
not corrected, many computer and other electronic applications and systems could
fail or create erroneous results when addressing dates on and after January 1,
2000. TheOur products manufactured and sold by the Company do not address or utilize dates in their operation, and,
there is no risk thataccordingly, our products should not fail due to the Company's products will fail based upon the Yearyear 2000 problem. However,
the
Company haswe use and depend on information technology systems (including business
information computer systems and design and manufacturing computer systems upon which the
Company is dependent)systems) and
other machinery and equipment that includesinclude embedded date sensitive technology (including manufacturing test equipment and other
similar equipment). There is risk that the Company's internal information
systems, its suppliers, or its customers may have Year 2000 compliance problems
which, if not remedied, could have a material adverse impacttechnology.
We also depend on the operationsproper functioning of the Company. The Year 2000 problems can arise at any point in the Company's
supply, manufacturing, processing, distribution and financial chains. Incomplete
or untimely resolutiondate sensitive electronic systems of
the issue by the Company, key suppliers,third parties, such as customers and other partiessuppliers. The failure of any of these
systems to appropriately interpret the year 2000 could have a material adverse
effect on the Company's results of
operations,our business, financial condition and cash flows. The Company is addressingresults of operations. We are
undertaking efforts to ensure that our business systems and those concerns. The Company hasof our
suppliers and customers are compliant with the requirements of the year 2000.
We have established a worldwide Yearyear 2000 task force, led by an Executive
Steering Committee of the Company'sour senior management, including representatives of each
of the Company'sour business segments and corporate functions, to oversee and regularly
review the status of the Company's Yearour year 2000 compliance plan. The Company, through its YearThrough our year 2000 task
force, iswe are proceeding with implementation of a formal Yearyear 2000 compliance
program. The compliance program addresses three key elements: (1) Internal Infrastructure,(i) internal
infrastructure, addressing internal hardware and software and non-information
technology systems; (2) Supplier Readiness,(ii) supplier readiness, addressing the preparedness of the Company'sour
suppliers of goods and services; and (3) Customer Readiness,(iii) customer readiness, addressing the
preparedness of the Company'sour customer support and the preparedness of theour customers of the Company to
transact business with the Company.us. In each of those compliance areas, the
Company iswe are
systematically performing a global risk assessment, conducting testing,
and upgrade,implementing upgrades, communicating with and assisting suppliers and customers
in raising awareness of the Yearyear 2000 issues and developing contingency plans to
mitigate known and unknown Yearyear 2000 risks. The status of theour compliance efforts
in those three areas is set forth below:
INTERNAL INFRASTRUCTURE: The Company isInternal Infrastructure. We are assessing all internal applications and computer
software and hardware. The Company'sOur key business information systems have been made Yearyear
2000 compliant. Resources have been assigned to address other applications, such
as product testing and product design hardware and software, based upon their criticalityour
determination of how critical each of those systems is to our business
operations and the time required to bring them into full Yearyear 2000 compliance.
The Company expectsWe currently expect that all itsour critical business information systems and other
critical applications will be fully Yearyear 2000 compliant by June 1999.
SUPPLIER READINESS:Supplier Readiness. This program focuses on minimizing the risks associated with
supplier Yearyear 2000 issues in two areas: (1)(i) the suppliers' business capability
to continue providing products and services in and after the year 2000 and (2)(ii)
the Yearyear 2000 readiness of products supplied to the Companyus for itsour use. Requests for
information and certification of compliance have been and are being sent to our
principal and critical suppliers of the Company.suppliers. The Yearyear 2000 task force is monitoring
responses from suppliers and following up where necessary and appropriate. The Company expectsWe
expect that itwe will have certification from itsour principal and critical suppliers
of goods and services by July 1999.
CUSTOMER READINESS:Customer Readiness. This program focuses on ensuring that customers are aware of
the Yearyear 2000 issues and that customers are capable of placing orders for the
Company'sour
products, receiving products ordered and paying theour invoices of the
Company for products sold
and delivered. Requests for information and certification of Yearyear 2000
compliance will behave been sent to the Company's significant
customers prior to January 1, 1999. Thereafter, the
10
11
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Yearto our major customers. The year 2000 task force will follow up with customers
where necessary and appropriate. The Company expectsWe expect that itwe will have certification from
itsour principal customers by August 1999.
COSTS TO ADDRESS YEARCosts to Address Year 2000 ISSUES:
The CompanyIssues. We currently estimatesestimate that the aggregate cost
of its Yearour year 2000 compliance efforts will be approximately $1.2 million, of which
approximately $0.4$0.5 million has been incurred to date. The costs consist
principally of (1)(i) fees paid to outside consultants and software programmers,
(2)(ii) purchase of telephone PBX systems which require upgradeupgrades to be Yearyear 2000
compliant and (3)(iii) purchase of software and software upgrades to meet the Yearyear
2000 issue. The funds expended and to be expended are being funded through
operating cash flows. Approximately $0.5 million of the total cost, related to
the purchase of fixed assets, will be capitalized, with the balance expensed as
incurred.
RISKS OF THE YEARRisks of the Year 2000 ISSUES:
The Company believesIssues. We currently believe that itsour internal Yearyear 2000
compliance efforts will be successful and there will be no material impact to the Companyus
by reason of the failure or malfunction of any Companysystems owned or operated systems. However,
because the Company's Year 2000 compliance is dependent upon keyby us
or third parties also being Yearwith whom we do business. However, our year 2000 compliant onprogram may
not be effective or we may not be able to implement it in a timely basis, there can be no guarantee thatand
cost-effective manner. Our year 2000 efforts may not, therefore, ensure against
disruptions caused by the Company's efforts will prevent a material adverse impact on its results of
operations, financial condition and cash flows. The possible consequences to the
Company by reason of itapproach or its business partners not being fully Year 2000
compliant could include temporary closing of some portion or alladvent of the Company's manufacturing plant, delays inyear 2000. The year 2000
problem is potentially very widespread, and it is not possible to determine all
the deliverypotential risks that we may face. Our inability to remedy our own year 2000
problems or the failure of finished products,
delays in the receipt of key ingredients, containersthird parties to do so may cause business
interruptions or shutdowns, financial loss, regulatory actions, harm to our
reputation and packaging supplies,
invoice and collection errors, and inventory and supply obsolescence. These
consequences could have a material adverse impact on the Company's results of
operations, financial condition and cash flows if the Company is unableexposure to conduct its business in the ordinary course. The Company believes that its
readiness program, including the contingency plans discussed below, should
significantly reduce the adverse effect any such disruptions may have.
CONTINGENCY PLANS:
The Company isliability.
Contingency Plans. We are developing contingency plans to mitigate the potential
disruptions that may result from the Yearyear 2000 issue. The Company expectsWe expect to substantially
complete itsour contingency planning by July 1999. These plans may include
identifying and securing alternate suppliers of ingredients, containers,
packaging materials and utilities, adjusting manufacturing facility production,
shutdown and start-up schedules, stockpiling of finished product inventories and
other measures considered appropriate by management. Once developed and
approved, contingency plans, and the related cost estimates, will be continually
refined as additional information becomes available.
RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
Investors or potential investors in the stock or notes of Plantronics should
carefully consider the risks described below. The business, financial condition
and results of operations of Plantronics could be materially adversely affected
if any of the risks occur. If the risks occur, the trading price of Plantronics
stock could decline and an investor could lose all or part of his or her
investment.
This report also contains certain forward-looking statements. From time to time,
Plantronics may also make oral or other written forward-looking statements. Such
forward-looking statements necessarily involve risks and uncertainties. Actual
results could differ materially from those anticipated in those forward-looking
statements as a result of many factors, including the risks faced by Plantronics
described below and elsewhere in this report.
11
12
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE BUSINESS:
HEADSETS:
The primary business ofOverview. Plantronics isintroduced the manufacturefirst lightweight communications headset in
1962. Since that time we have established ourselves as a world-leading designer,
manufacturer and salemarketer of lightweight communications headsets. Headsets generally consistheadset products. We
manufacture a broad line of headsets designed for use with substantially all of
the different telephone systems currently in use. Our products are designed to
increase the productivity, effectiveness and comfort of telephone use. We
believe our customers and end-users recognize our headsets for their sound
quality, comfort, reliability and industry-leading safety. Historically, we have
sold products primarily for use in the call center market segment, but in recent
years we have been increasingly leveraging our expertise to become a leading
headset "top" worn on
the head or ear and an amplifier "bottom" that connectssupplier to the telephone,
computer or call distribution system. Many telephonesoffice, mobile and call distribution
systemsresidential market segments. Our
products are now being equipped with headset ports, into which the headset top
can be directly plugged. Headsets used with computers mayavailable through a global network of distributors, original
equipment manufacturers, retailers and telephony service providers. We also
plug directly
into the computer sound card or other audio input.
HANDSETS:
Plantronics,manufacture and sell communications handsets through itsour Walker Equipment
Division, also manufactures and sells
communications handsets.Division. The Walker handsets are principally used as original and replacement
handsets for pay telephones, elevator phones, and other non-home telephones.
Noise-canceling handsets are manufactured and sold for use with
telephones, computers and other products in high-noise environments. Specialized
handsets for use in testing telephone lines and equipment are also manufactured
and sold under the Walker label. The Walker Equipment Division also sells specialty telephones for use by the hearing-impaired.
THE MARKET SEGMENTS:
Plantronics'11
12
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Industry background. Headsets are used in call centers, offices, cars and homes
and with various terminal devices such as wireline, cellular and cordless
telephones and computers. Specifically, headsets:
o allow people to have both hands free to use a computer, take notes,
organize files, drive a car, complete household tasks or perform other
tasks while they talk on the telephone;
o provide increased sound quality to telephone users by reducing background
noise;
o relieve the repetitive stress and discomfort associated with placing a
telephone handset between the shoulder and neck; and
o provide greater privacy than speakerphones.
The largest group of headset productsusers are employed worldwide by users in large and small
call centers. The users include telemarketing personnel, reservationcenter agents customer support personnel and telephone operators. Call centers range in size
from very small technical support groups to very large organizations with
literally thousands of users. Call center personnelwho are on the
telephone constantlythroughout their work day. The number of call center agents has grown
as companies have sought to (i) focus on customer service to provide a
competitive advantage, (ii) reduce costs through the use of real-time
centralized information exchange and customer interaction, and (iii) make
greater use of cost-effective direct distribution models. As the benefits of
call centers become more widely recognized and the system cost per agent
declines, the establishment of call centers is spreading to smaller
organizations and international firms. Agent productivity in call centers is
important in minimizing costs and reducing customer wait time, and, therefore,
the ability to effectively and simultaneously use a headsettelephone and keyboard is
generally thought of as a required piece of
equipment. Plantronics estimates thatcritical. As the call center segments accountmarket segment has grown, the benefits of headsets
have become widely recognized as an essential component of a productive and safe
workplace.
The office market segment, both corporate and small office/home office ("SOHO"),
has become an increasingly important market segment for headsets over the majoritylast
five years. The increasing and simultaneous use of Plantronicstelephones and computers by
office workers and a growing awareness of the benefits of headsets have
contributed to the growth of this market segment. Professionals who spend
significant time on the telephone have been early adopters of headset products.
These professionals include securities brokers, insurance agents, sales
today.
Plantronics also sells headsets for usersexecutives, credit controllers, and purchasing agents. We believe that the level
of headset use in the businessoffice is low, providing a long-term opportunity to
increase headset sales to office workers.
Headset demand is also emerging in the mobile, computer and home office userresidential market
segment. Telephone headset users in this segment consistsegments. Drivers increasingly seek the hands-free benefits of people whose
occupations may require intensive (but not constant)headsets, as the
use of a telephone.mobile phones in cars continues to grow worldwide. Headsets are also usedan
important interface for computerized speech recognition programs, which broaden
the application of headsets from voice to written communication by substituting
voice for keyboard entry. Finally, the availability of low-cost cordless phones
with mobile and cellular telephones, for both business
and home use. Finally, alsoheadset ports is beginning to facilitate headset adoption in the
businessresidential market segment by individuals who want the ability to perform
multiple tasks while speaking on the telephone.
DEPENDENCE ON CALL CENTER MARKET SEGMENT
We have historically derived, and home office segment, headsets
can be connectedcontinue to computers for such applications as multimedia programs,
voice recognition programs, computer games and computer telephony.
The handset products offered by the Walker Equipment division are used in many
different public telephone settings and as specialty replacement handsets for
home and business telephones. The Walker Equipment telephones for the hearing-
impaired are sold both for home and business users who benefitderive, a substantial majority of
our net sales from the special
assistance thatcall center market segment. This market segment has grown
significantly in recent years as new call centers have proliferated and existing
call centers have expanded. While we believe this market segment is continuing
to grow, in the Walker Equipment products provide.
DISTRIBUTION:
Plantronics sells its products principally through a worldwide network of
independent distributors. Those distributors resell the headsets and handsetsfuture this growth could slow or revenues from this market
segment could decline due to dealers, to government purchasers, or to end-users. Products are also sold to
retailersvarious factors. For example, technological
advances such as office supply and consumer electronics stores, mail order
catalogs, warehouse clubs and office supply distributors.automated interactive voice response systems could reduce or
eliminate the need for call center agents in certain applications. In addition,
Plantronics manufactures products under private labels for other companies, who
then sell the products under their own names. Finally, Plantronics sells
directlyconsumer resistance to certain large users, such as telephone operating companies and other
companies that employ a large number of people in telephone-intensive jobs.
COMPETITION:
COMPETITIVE PRESSURE:
Plantronics has strong competitors. Plantronics' two largest competitorstelemarketing could adversely affect growth in the call
center market segments, GN Netcomsegment. Due to our reliance on the call center market segment, we
will be affected more by changes in the rate of call center establishment and
ACS Wireless, Inc., recently mergedexpansion and the communications products that call center agents use than would
a company serving a broader market. Any decrease in the demand for call centers
and related headset products could cause a decrease in the demand for our
products, which would materially adversely affect our business, financial
condition and results of operations. We believe that our sales growth in fiscal
1999 may have been partially due to formcall centers upgrading their automatic call
distribution systems in order to be year 2000 compliant. Since our products are
sometimes bundled with new call distribution systems, this may have accelerated
some headset sales. As a single company. The effects of that merger cannot yet be determined.
However, such effects could include increased price competition, which could
adversely impact Plantronics' gross margins.result, sales growth in future quarters may occur at a
slower rate.
12
13
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Plantronics competes primarilyFAILURE OF THE OFFICE, MOBILE, COMPUTER AND RESIDENTIAL MARKET SEGMENTS TO
DEVELOP
While the call center market segment is still the most significant part of our
business, we believe that our future prospects will depend in large part on the
basisgrowth in demand for headsets in the office, mobile, computer and residential
market segments. These communications headset market segments are relatively new
and undeveloped. Moreover, we do not have extensive experience in selling
headset products to customers in these market segments. If the demand for
headsets in these market segments fails to develop, or develops more slowly than
we currently anticipate, or if we are unable to effectively market our products
to customers in these market segments, it would have a material adverse effect
on the potential demand for our products and on our business, financial
condition and results of technology, performance, price,
quality, reliability,operations.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
Our quarterly results of operations may vary significantly in the future for a
variety of reasons, including the following:
o changes in demand for our products;
o timing and size of orders from customers;
o cancellations or delays of deliveries of components and subassemblies
by our suppliers;
o variances in the timing and amount of engineering and operating
expenses;
o distribution channel volume variations;
o delays in shipments of our products;
o product returns and customer service and support. To meet
competition and makecredits;
o new product introductions by us or increase sales, Plantronics may have to invest more
heavily inour competitors;
o entrance of new technologies, reduce its prices or increase the services and
support it provides. Reductions in prices orcompetitors;
o increases in the costs of makingour components and supporting its products could reduce the margins that Plantronics makes.
This reduction in margins could, in turn, cause a reduction in net earnings and
a resulting declinesubassemblies;
o price erosion;
o changes in the marketmix of products sold by us;
o seasonal fluctuations in demand; and
o general economic conditions.
Each of the above factors is difficult to forecast and thus could have a
material adverse effect on our business, financial condition and results of
operations.
We generally ship most orders during the quarter in which they are received,
and, consequently, we do not have a significant backlog of orders. As a result,
quarterly net sales and operating results depend primarily on the volume and
timing of orders received during the quarter. It is difficult to forecast orders
for a given quarter. Since a large portion of our operating expenses, including
rent, salaries and certain manufacturing expenses, are fixed and difficult to
reduce or modify, if net sales do not meet our expectations, our business,
financial condition and results of operations could be materially adversely
affected.
13
14
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our operating results can also vary substantially in any period depending on the
mix of products sold and the distribution channels through which they are sold.
In the event that sales of lower margin products or sales through lower margin
distribution channels in any period represent a disproportionate share of total
sales during such period, our operating results would be materially adversely
affected.
We believe that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as indicative of future
operating results. In addition, our operating results in a future quarter or
quarters may fall below the expectations of securities analysts or investors,
and, as a result, the price of Plantronics stock.
POTENTIAL NEW COMPETITORS:
Plantronics anticipatesour common stock might fall.
WE MUST MATCH PRODUCTION TO DEMAND
Historically, we have seen steady increases in customer demand for our products
and have generally been able to increase production to meet that demand.
However, the demand for our products is dependent on many factors and such
demand is inherently difficult to forecast. Significant unanticipated
fluctuations in demand could cause the following operating problems, among
others:
o If demand increases beyond that forecasted, we would have to rapidly
increase production. We depend on suppliers to provide additional volumes
of components and subassemblies, and, therefore, might not be able to
increase production rapidly enough to meet unexpected demand. This could
cause us to fail to meet customer expectations. There could be short-term
losses of sales while we are trying to increase production. If customers
turn to competitive sources of supply to meet their needs, there could be a
long-term impact on our revenues.
o Rapid increases in production levels to meet unanticipated demand could
result in higher costs for components and subassemblies and higher overtime
costs and other expenses. These higher expenditures could lower our profit
margins. Further, if production is increased rapidly, there may be
decreased manufacturing yields, which may also lower our margins.
o If forecasted demand does not develop, we could have excess production or
excess capacity. Excess production could result in higher inventories of
finished products, components and subassemblies. If we were unable to sell
these inventories, we would have to write off some or all of our
inventories of obsolete products and unusable components and subassemblies.
Excess manufacturing capacity could lead to higher production costs and
lower margins.
Any of the foregoing problems could materially adversely affect our business,
financial condition and results of operations.
WE DEPEND ON OUR SUPPLIERS
We buy components and subassemblies from a variety of suppliers and assemble
them into finished products. The cost, quality, and availability of such
components are essential to the successful production and sale of our products.
Obtaining components and subassemblies entails various risks, including the
following:
o Prices of components and subassemblies may rise. If this occurs and we are
not able to pass these increases on to our customers or to achieve
operating efficiencies that would offset the increases, it would have a
material adverse effect on our business, financial condition and results of
operations.
o We obtain certain subassemblies and components from single suppliers, and
alternate sources for these items are not readily available. To date, we
have experienced only minor interruptions in the supply of these components
and subassemblies, none of which has significantly affected our results of
operations. However, an interruption in supply from any of our single
source suppliers in the future would materially adversely affect our
business, financial condition and results of operations.
14
15
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
o Most of our suppliers are not obligated to continue to provide us with
components and subassemblies. Rather, we buy most components and
subassemblies on a purchase order basis. If our suppliers experience
increased demand or shortages, it could affect deliveries to us. In turn,
this would affect our ability to manufacture and sell products that are
dependent on those components and subassemblies. This would materially
adversely affect our business, financial condition and results of
operations.
THE HEADSET MARKET IS HIGHLY COMPETITIVE
The market for our products is highly competitive. We compete with a variety of
companies in various segments of the communications headset market. In the call
center segment, the largest market segment in which we compete, our two largest
competitors, GN Netcom and ACS Wireless, Inc., recently merged to form a single
company. Although it is unclear how this merger will affect us, the merged
entity will have a broader product offering and greater marketing presence than
either of the two entities had separately. Moreover, the economies of scale that
may result from the merger could lead to increased pricing pressures in our
market.
We also anticipate that we will face additional competition from companies that
currently do not offer communications headsets. This is particularly true in the
business, home office, wireless telephonemobile, computer and computerresidential market segments. As these market
segments mature, we will face increased competition from consumer electronics
companies and other companies that currently manufacture and sell mobile phones
or computer peripheral equipment. These new competitors mayare likely to be larger,
offer broader product lines, bundle or integrate with other products
communications headset tops and bases manufactured by them or others, offer
products containing bases that are incompatible with our headset tops and have
substantially greater financial, marketing and other resources than Plantronics. Towe do.
We believe that important competitive factors for us are product reliability,
product features, customer service and support, reputation, distribution,
ability to meet delivery schedules, warranty terms, product life and price. If
we do not compete successfully with such newrespect to any of these or other factors it
could materially adversely affect our business, financial condition and results
of operations. If we do not successfully develop and market products that
compete successfully with those of our competitors Plantronics could have to reduce pricesit would materially adversely
affect our business, financial condition and offer new technologies and increased support. Thoseresults of operations.
NEW PRODUCT DEVELOPMENT IS RISKY; WE MUST RESPOND TO CHANGING CUSTOMER
REQUIREMENTS AND TECHNOLOGIES
Our product development efforts to meet
competition could negatively affect margins and earnings and result in
reductions in the market price of Plantronics stock.
NEED TO SUCCESSFULLY DEVELOP NEW PRODUCTS AND MARKETS:
MEETING CONSUMER NEEDS:
Historically, most saleshistorically have been made through independent distributors to call
center users. Whiledirected toward
enhancement of existing products and development of new products that segmentcapitalize
on our core capabilities. The success of new product introductions is dependent
on several factors, including the proper selection of new product features,
timely completion and introduction of new product designs, cost-effective
manufacture of such products, quality of new products and market is still the most significant
part of its business, Plantronics believes that the business, mobile and home
office user market segments offer substantial growth potential.acceptance. To
be successful in those segments, Plantronicsthe future, we must be able to develop new products, thatqualify these new
products, successfully introduce these products to the market on a timely basis,
and commence and sustain low-cost, volume production to meet the needs of consumers.customers' demands.
Although Plantronics has attemptedwe attempt to determine the specific needs of consumersheadset users in these newour
target market segments, there is no assurance
that Plantronics' present and future products will be accepted. If the productsbecause almost all of our sales are not accepted by consumers, Plantronicsindirect, we may not
achievealways be able to timely and accurately predict end-user requirements. As a
result, our products may not be timely developed, designed to address current or
future end-user requirements, offered at competitive prices or accepted, which
could materially adversely affect our business, financial condition and results
of operations. Moreover, we generally incur substantial research and development
costs before the revenue growth
neededtechnical feasibility and commercial viability of a new product
can be ascertained. Accordingly, revenues from new products may not be
sufficient to coverrecover the costs of developing, manufacturing and sellingassociated development costs.
Historically, the products.
Plantronics could also be left with inventories of obsolete and excess products.
Earnings would be reduced and there could be a losstechnology used in the value of Plantronics
stock.
DEMAND OF CHANGING TECHNOLOGIES:
The technology of telephonelightweight communications headsets both "tops" and "bottoms," has
traditionally
evolved slowly. ProductsNew products have generally had life cycles of three
to five years before introduction of the next generation of products. Next
generation products usually includedprimarily offered stylistic changes and
quality improvements, but were based on similarrather than significant new technologies. Plantronics believesWe anticipate
that future changesthe technology used in technologyhands-free communications devices, including our
products, will come at a faster pace. Thisbegin to evolve more rapidly in the future. We believe that this
is particularly true in headsets
for use in the business and home office market segments. The development of new
technologies requires increased spending for research and development. Those
increased expenses may reduce the profit to Plantronics and adversely impact
earnings and stock price.
RISKS RELATED TO GROSS PROFIT:
RELIANCE UPON SUPPLIERS:
Plantronics buys components and subassemblies from a variety of suppliers. Those
components and subassemblies are then assembled by Plantronics into the finished
products it sells. The cost, quality, and availability of such components are
essential to the successful production of Plantronics communications products.
o There is always the risk that prices of components and subassemblies
will rise and that those cost increases cannot be reflected in sales
price increases in the finished products of Plantronics. If costs rise
faster than sales prices, gross margins would fall and operating
results would be affected.
13
14
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
o Most components and subassemblies are obtained, or are reasonably
available, from numerous sources. However, certain subassemblies and
components are currently obtained only from single suppliers and
alternate sources are not readily available. If those components and
subassemblies were not available to Plantronics when needed,
Plantronics would not be able to manufacture its products to meet
demand. That inability to meet demand would have a negative impact on
revenue and earnings. Alternate sources for those components and
subassemblies could charge more for the materials, decreasing gross
margins and net earnings. To date, Plantronics has experienced only
minor interruptions in the supply of these components and
subassemblies, none of which has adversely affected its operations.
However, an interruption in supply from any of Plantronics' single
source suppliers in the future could temporarily result in
Plantronics' inability to deliver products on a timely basis. The
inability to deliver products would impact revenues. If the inability
to deliver continued over an extended period, there could be a
long-term impact to the competitive position of Plantronics.
o Plantronics does not have supply contracts with most of its suppliers.
Plantronics buys most components and subassemblies on a purchase order
basis. Therefore, there is no contractual requirement that obligates
those suppliers to continue to provide components and subassemblies.
Deliveries to Plantronics could be affected if those suppliers were to
experience increased demand or shortages in their supply. Until
alternate sources of the componentsoffice, mobile and subassemblies are developed,
Plantronics would be unable to manufacture and sell the products
dependent on those components and subassemblies. This would reduce
revenues and earnings. Also, the alternate sources of supply could
charge higher prices, having an impact on gross margins and earnings.
NEED TO MATCH PRODUCTION TO DEMAND:
Historically, Plantronics has seen steady increases in customer demand for its
products and has generally been able to increase production to meet that demand.
However, the demand for Plantronics' products is dependent on many factors and
such demand is inherently difficult to forecast.
o If demand increases beyond that forecasted, Plantronics would have to
work to rapidly increase its production of the products. Because
Plantronics is dependent upon suppliers providing additional volumes
of components and subassemblies, there is no certainty that
Plantronics could increase production rapidly enough to meet
unforecasted demand. Failure to meet demand could result in the
inability to meet customer expectations and adversely affect
Plantronics' operations and operating results. However, rapid
increases in production levels could require higher costs to obtain
the necessary components and subassemblies and higher costs of
production in the form of overtime and other expenses. Those high
expenditures would negatively affect gross margins. Further, if
production is increased rapidly, there may be decreased manufacturing
yields, again affecting gross margins.
o If forecasted demand does not develop, Plantronics would have excess
production. Excess production would result in the holding of higher
inventories of finished goods or components. While held on the books,
those high inventories would negatively affect earnings. If it were
unable to sell these inventories, Plantronics would have to write off
some or all of its inventories of obsolete products. Such write-offs
would have a negative impact on earnings.
DIFFERENCES IN PRODUCT MIX:
Different products sold by Plantronics have different gross profit margins.
Therefore, the gross profit percentage in any period depends on the mix of
products sold in that period. Meeting the needs of purchasers in the future may
cause the product mix to change and the gross profit percentage to fluctuate.
This could affect Plantronics' operating results.
VOLUME SALES:
Plantronics may charge a lower price on certain products to high volume
purchasers to reflect the economies of scale in such large sales and to meet
competition for those accounts. The lower price on the high volume sales results
in a lower gross profit to Plantronics, which could adversely impact earnings.
14
15
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IMPORTANCE OF PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS:
Plantronics' success will depend in part on its ability to obtain patents and
preserve other intellectual property rights covering the design and operation of
its products. Plantronics currently holds certain patents and intends to
continue to seek patents on its inventions when appropriate. The process of
seeking patent protection can be lengthy and expensive. The costs of these
patents, which Plantronics believes are important to its business, negatively
impact earnings.
There can be no assurance that patents will issue from currently pending or
future applications. There also can be no assurance that Plantronics' existing
patents or any new patents issued will be of sufficient scope or strength or
provide meaningful protection or any commercial advantage.
Plantronics may be subjected to, or may initiate, litigation or patent office
interference proceedings, which may require significant financial and management
resources. The failure to obtain necessary licenses or other rights or the
advent of litigation arising out of any such claims could have a material
adverse effect on Plantronics' operations.
RISK ASSOCIATED WITH FOREIGN OPERATIONS AND SALES:
Approximately 30.7% of Plantronics' net sales in fiscal 1998 were derived from
customers outside the United States. In addition, Plantronics conducts
substantially all of its headset assembly operations in its Mexican
manufacturing facility and obtains most of the components of its products from
various foreign suppliers. Offshore operations are subject to certain inherent
risks. There can be no assurance that the inherent risks of offshore operations,
particularly in Mexico, will not adversely affect Plantronics' business,
operating results and financial condition in the future.
GEOGRAPHIC RISK:
Given the distances, there may be geographic limitations on management controls
and reporting and potential delays in transportation of components and
subassemblies and finished products.
o It is inherently more difficult to manage foreign operations due to
the distances and time differences. Those problems could adversely
impact the conduct of business and decrease earnings.
o There may be delays in obtaining necessary components and
subassemblies due to the time required to transport the materials and
the increased potential for problems in transportation. Such delays
could impact the manufacture of Plantronics products, causing losses
in revenues from lost sales or increased costs from having to source
the components and materials from alternate sources. Similar delays in
transportation of finished products may prevent the timely supply of
Plantronics products to foreign customers, reducing revenues.
POLITICAL RISK:
There may be changes in governmental policies, import/export regulations, taxes
and tariffs.
o Changes in governmental policies may affect the ability to obtain
critical components and subassemblies or to ship finished products
into the foreign markets. Foreign governments could restrict the
export of components and/or subassemblies critical to the
manufacturing of Plantronics products. This would have an adverse
impact on revenues if there was a resulting inability to manufacture.
There would be adverse effects upon gross margins if Plantronics had
to qualify and use alternate sources for the components and
subassemblies. Foreign governments may also place restrictions on the
import of Plantronics products or require technical modifications as a
condition of sale within the foreign country. Revenues would be
adversely impacted if Plantronics cannot sell products into the
foreign country. If Plantronics must modify its products to make sales
in the country, its costs of manufacturing will increase. If the price
cannot be increased to reflect those costs, margins would be impacted.
If prices are increased to reflect the added costs of compliance,
revenues could be impacted if the higher prices discourage demand.residential
15
16
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
o Increased taxes could increase the cost of componentsmarket segments, which may require us to develop new headset technologies to
support cordless and subassemblies, reducing marginswireless operation and earnings. Similarly, increased
taxes charged to purchasers could reduce demand for Plantronics
products. This reduced demand could reduce revenue.
o Higher tariffs in the import of products into foreign countries could
adversely affect revenues. Higher tariffs raise the cost of
Plantronicsinterface with new communications
and computing devices. As a result, our success depends upon our ability to
enhance existing products, to purchasersrespond to changing market requirements, and to
develop and introduce in those countries. Those increased
costsa timely manner new products that keep pace with
technological developments. If we are unable to purchasers could reduce demand for Plantronicsdevelop and introduce enhanced
products and,
in certain cases, make Plantronics products non-competitive to other
similar products.
o Changes in import/export regulations could result in delays in
obtaining components and subassemblies. This could prevent Plantronics
from timely manufacture of its products, decreasing revenues. Delays
in obtaining components and subassemblies could require Plantronics to
turn to alternate sources, which may increase the costs of
manufacture. Similarly, delays in the importation of Plantronics
products into the foreign country can impact revenues. Purchasers may
turn to other sources if they cannot obtain Plantronicsor new products in a timely manner. If theremanner in response to changing market
conditions or customer requirements, it will materially and adversely affect our
business, financial condition and results of operations.
WE DEPEND ON OUR DISTRIBUTION CHANNELS
We sell substantially all of our products through distributors, original
equipment manufacturers ("OEMs"), retailers and telephony service providers. Our
existing relationships with these parties are significant delays due to changed
import/export regulations, Plantronics may have to provide cost
reductionsnonexclusive and can be terminated
by either party without cause. Our channel partners also sell or extend payment terms to its distributors to reflect the
increased costs to the distributors. Those cost reductions or extended
payment terms would adversely impact earnings.
CURRENCY RISK:
There may be fluctuations in currency exchange rates and Plantronics could be at
risk in both its product sales and purchase of supplies. To date Plantronics has
not been adversely affectedcan potentially
sell products offered by fluctuating currencies. Plantronics does not
currently engage in any hedging activities to mitigate exchange rate risks. This
strategy will require review and the Company may experience greater exposure to
currency fluctuations as a result of its increasing international activities.our competitors. To the extent that Plantronics isour competitors
offer our channel partners more favorable terms, such partners may decline to
carry, de-emphasize or discontinue carrying our products. In the future, we may
not be able to retain or attract a sufficient number of qualified channel
partners. Further, such partners may not recommend, or continue to recommend,
our products. The inability to establish or maintain successful in increasing its sales to foreign
customers,relationships
with distributors, OEMs, retailers and telephony service providers or to the extent that Plantronics increases its transactions in
foreign currencies, Plantronics'expand
our distribution channels could materially adversely affect our business,
financial condition or results of operations.
WE DEPEND ON S. KENNETH KANNAPPAN AND OTHER KEY PERSONNEL
Our success depends to a significant extent upon the services of a limited
number of executive officers and other key employees. On January 4, 1999, S.
Kenneth Kannappan was promoted to Chief Executive Officer of our company,
succeeding Robert S. Cecil in that capacity, and was appointed to our Board of
Directors. Mr. Kannappan joined our company in February 1995 and has held a
number of executive management positions, including President and Chief
Operating Officer. Mr. Kannappan has been assuming increasing responsibilities
for our day-to-day operations could be adversely
affected by exchange rate fluctuations.
Plantronics sells its products internationally in both US dollarssince his March 1998 appointment as President and
local
foreign currencies. Transactions conducted in US dollars are subject to foreign
exchange risk when declines in the value of local currencies relative to the US
dollar result in less competitive pricing for Plantronics product. In
transactions conducted in local foreign currencies, a decline in the valueChief Operating Officer. The unanticipated loss of the foreign currency can result in less revenue if Plantronics is unable to
increase prices.
Transactions with Plantronics' suppliers are conducted primarily in US dollars.
Declines in the valueservices of local currencies in countries from which Plantronics
purchases components and subassemblies generally result in lower prices for such
materials. However, to the extent that the currency exchange rates reflect the
underlying economic healthMr. Kannappan
or one or more of such foreign economies, there is the risk over the
longer term that such foreign suppliers may not continue in business.
Substantial increases in the values of local currencies relative to the United
States dollar could adversely affect Plantronics by causing suppliers to
increase the cost of their products. In this event, Plantronics would have to
either pass these cost increases on through higher prices to its customers,
possibly making its products less competitive,our other executive officers or accept lower margins.
RISKS ASSOCIATED WITH THE YEAR 2000:
While Plantronics is undertaking efforts to ensure that its systems and those of
its suppliers and customers are compliant with the requirements of the Year
2000, there is no assurance that such efforts will successfully ensure against
disruptions caused by the arrival of the new millennium. The possible
consequences to Plantronics by reason of it or its business partners not being
fully Year 2000 compliant could include temporary closing of some portion or all
of Plantronics' manufacturing plant, delays in the delivery of finished
products, delays in the receipt of key ingredients, containers and packaging
supplies, invoice and collection errors, and inventory and supply obsolescence.
These consequencesemployees could have a
material adverse impact on Plantronics' results
of operations,effect upon our business, financial condition and cash flows.results of
operations.
We also believe that our future success will depend in large part upon our
ability to attract and retain additional highly skilled technical, management,
sales and marketing personnel. Competition for such personnel is intense. We may
not be successful in attracting and retaining such personnel, and, our failure
to do so could have a material adverse effect on our business, operating results
or financial condition.
RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
Approximately 30.7% and 30.4% of our net sales in fiscal 1998 and the nine
months ended December 31, 1998, respectively, were derived from customers
outside the United States. In addition, we conduct substantially all of our
headset assembly operations in our manufacturing facility located in Mexico, and
we obtain most of the components and subassemblies used in our products from
various foreign suppliers. The inherent risks of international operations,
particularly in Mexico, could materially adversely affect our business,
financial condition and results of operations. The types of risks faced in
connection with international operations and sales include:
o cultural difference in the conduct of business;
o greater difficulty in accounts receivable collection;
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers;
o economic and political conditions in each country;
16
17
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPENDENCE UPON SENIOR MANAGEMENT:
Plantronics believes that it has benefited substantially fromo management and operation of an enterprise spread over various
countries; and
o burden of complying with a wide variety of foreign laws.
A significant portion of our business is conducted in currencies other than the
leadershipU.S. dollar. As a result, fluctuations in exchange rates creates risk to us in
both the sale of Robert S. Cecil,our products and our purchase of supplies. Fluctuations in the
Chairmanvalue of the Boardcurrencies in which we conduct our business relative to the U.S.
dollar have caused and Chief Executive Officerwill continue to cause currency transaction gains and
losses. Although we do not currently engage in any hedging activities to
mitigate exchange rate risks, we continually evaluate programs to reduce our
foreign currency exposure. However, there can be no assurance that we will not
continue to experience currency losses in the future, nor can we predict the
effects of Plantronics,future exchange rate fluctuations on future operating results. To the
extent that sales to our foreign customers increase or transactions in foreign
currencies increase, our business, financial condition and results of operations
could be materially adversely affected by exchange rate fluctuations. In
addition, we cannot predict the potential consequences to our business of the
adoption of the Euro as a common currency in Europe.
WE DEPEND ON OUR PRINCIPAL MANUFACTURING FACILITY
Substantially all of our manufacturing operations are currently performed in a
single facility in Tijuana, Mexico. A fire, flood or earthquake, political
unrest or other current members of senior management, and that the
loss of their servicesdisaster or condition affecting our facility could have a
material adverse effect on Plantronics'our business, financial condition and futureresults of
operations. Although Plantronics has an employment agreementWhile we have developed a disaster recovery plan and believe we are
adequately insured with Mr. Cecil,respect to this facility, we may not be able to
implement the plan effectively or on a timely basis or recover under applicable
insurance policies.
FAILURE OF ELECTRONIC SYSTEMS TO RECOGNIZE THE YEAR 2000
Many existing electronic systems, including computer systems, use only the last
two digits to refer to a year. Therefore, these systems may recognize a date
using "00" as 1900 rather than the year 2000. If not corrected, many computer
and other electronic applications and systems could fail or create erroneous
results when addressing dates on and after January 1, 2000. Our products do not
address or utilize dates in their operation, and, accordingly, our products
should not fail due to the year 2000 problem. However, we use and depend on
information technology systems (including business information computer systems
and design and manufacturing computer systems) and other machinery and equipment
that includes embedded date sensitive technology. We also depend on the proper
functioning of date sensitive electronic systems of third parties, such agreement permits himas
customers and suppliers. The failure of any of these systems to voluntarily terminate his
employment at any time.appropriately
interpret the year 2000 could have a material adverse effect on our business,
financial condition and results of operations. We are undertaking efforts to
ensure that our business systems and those of our suppliers and customers are
compliant with the requirements of the year 2000. However, our year 2000 program
may not be effective or we may not be able to implement it in a timely and
cost-effective manner. Our year 2000 efforts may not, therefore, ensure against
disruptions caused by the approach or advent of the year 2000. The year 2000
problem is potentially very widespread, and it is not possible to determine all
the potential risks that we may face. Our inability to remedy our own year 2000
problems or the failure of third parties to do so may cause business
interruptions or shutdowns, financial loss, regulatory actions, harm to our
reputation and exposure to liability.
RISKS OF INADEQUATE PROTECTION OF INTELLECTUAL PROPERTY AND INFRINGEMENT OF
RIGHTS OF OTHERS
Our success will depend in part on our ability to protect our proprietary
technology. We rely primarily on a combination of nondisclosure agreements and
other contractual provisions as well as patent, trademark, trade secret, and
copyright laws to protect our proprietary rights. We currently hold 33 United
States patents and additional foreign patents and intend to continue to seek
patents on our inventions when we believe it to be appropriate. The process of
seeking patent protection can be lengthy and expensive. Patents may not be
issued in response to our applications, and patents that are issued may be
invalidated, circumvented or challenged by others. If we are required to enforce
our patents or other proprietary rights through litigation, the costs and
diversion of management's attention could be substantial. In addition, although Mr. Cecil's agreement containsthe
rights granted under any patents may not provide us
17
18
PLANTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
competitive advantages or be adequate to safeguard and maintain our proprietary
rights. Moreover, the laws of certain countries do not protect our proprietary
rights to the same extent as do the laws of the United States. If we do not
enforce and protect our intellectual property rights, it could materially
adversely affect our business, financial condition and results of operations.
From time to time, third parties, including our competitors, may assert patent,
copyright and other intellectual property rights against us. Such claims, if
they are asserted, could result in costly litigation and diversion of
management's attention. In addition, we may not ultimately prevail in any such
litigation or be able to license any valid and infringed patents from such third
parties on commercially reasonable terms, if at all. Any infringement claim or
other litigation against us could materially adversely affect our business,
financial condition and results of operations.
PRODUCT LIABILITY EXPOSURE
The use of our products exposes us to the risk of product liability claims.
Product liability claims have in the past been, and are currently being,
asserted against us. None of the previously resolved claims have materially
affected our business, financial condition or results of operations, nor do we
believe that any of the pending claims will have such an effect. Although we
maintain product liability insurance, the coverage provided under our policies
could be unavailable or insufficient to cover the full amount of any such claim.
Therefore, successful product liability claims brought against us could have a
five-year non-compete covenant which takesmaterial adverse effect upon terminationour business, financial condition and results of
his
employment,operations.
ENVIRONMENTAL MATTERS
We are subject to various federal, state, local and foreign environmental laws
and regulation, including those governing the use, discharge and disposal of
hazardous substances in the ordinary course of our manufacturing process.
Although we believe that our current manufacturing operations comply in all
material respects with applicable environmental laws and regulations,
environmental legislation has been enacted and may in the future be enacted or
interpreted to create environmental liability with respect to our facilities or
operations. We have included in our financial statements a reserve of $1.5
million for possible environmental remediation of the site of one of our
previous businesses. While no claims have been asserted against us in connection
with this matter, such covenants are generally not enforceable under California law.claims could be asserted in the future and any liability
that might result could exceed the amount of the reserve.
CONCLUSION
Because of the foregoing factors, as well as other variables affecting or which
could affect Plantronics' operating results, past financial performance should
not be considered a reliable indicator of future performance. Investors should
not rely upon historical trends to anticipate results or trends in future
periods.
1718
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PLANTRONICS, INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The 1998 Annual Meeting of Stockholders of Plantronics, Inc. (the
"Company") was held at The Museum of Art History at the Mcpherson Center,
705 Front Street, Santa Cruz, California on July 30, 1998 (the "Annual
Meeting").
(b) At the Annual Meeting, the following seven individuals were elected to the
Company's Board of Directors, constituting all members of the Board of
Directors:
Nominee Votes Cast For Withheld or Against
------- -------------- -------------------
Robert S. Cecil 15,279,749 55,519
Robert F.B. Logan 15,279,935 55,332
M. Saleem Muqaddam 15,279,835 55,432
John Mowbray O'Mara 15,279,935 55,332
Trude C. Taylor 15,277,935 57,332
J. Sidney Webb 15,277,935 57,332
David A. Wegmann 15,279,935 55,332
(c) The following additional proposals were considered at the Annual Meeting
and were approved by the vote of the Stockholders, in accordance with the
tabulation shown below.
(1) Proposal to increase by 1,300,000 shares the number of shares of
common stock issuable under the Company's 1993 Stock Plan
Votes For Votes Against Abstain Broker Non-Vote
--------- ------------- ------- ---------------
8,253,087 5,676,981 35,442 1,369,757
(2) Proposal to ratify the appointment of PricewaterhouseCoopers LLP as
the independent public accountants of the Company for the fiscal year
ending March 27, 1999.
Votes For Votes Against Abstain
--------- ------------- -------
15,297,074 35,936 2,257
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is filed as part of this Quarterly Report
on Form 10-Q.
Exhibit
Number Description
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reportsPlantronics filed a report on Form 8-K, were filed by Registrant
duringdated January 12, 1999, relating to
financial information for Plantronics, Inc. for the fiscal quarter ended September 26, 1998.December
31, 1998, as presented in a press release of January 12, 1999.
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
1819
1920
PLANTRONICS, INC.
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 hereunto duly authorized.
PLANTRONICS, INC.
-----------------
(Registrant)
NOVEMBER 10, 1998 s\FEBRUARY 1, 1999 /s/ Barbara V. Scherer
- ----------------- ---------------------------------------------- -------------------------------
(Date) (Signature)
Barbara V. Scherer
Senior Vice President
NOVEMBER 10, 1998 s\FEBRUARY 1, 1999 /s/ Barbara V. Scherer
- ----------------- ---------------------------------------------- -------------------------------
(Date) (Signature)
Barbara V. Scherer
Senior Vice President - Finance and Administration
and Chief Financial Officer
(Principal Financial Officer)
1920
2021
PLANTRONICS, INC.
EXHIBIT INDEX
Exhibit Number
- --------------
27.1 Financial Data Schedule
2021