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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
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.
345 Encinal Street
(831) 426-5858
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 reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [X]
The number of shares outstanding of registrant's common stock as of February 8,
2002 was 46,374,134.
Plantronics, Inc.
Part I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
PLANTRONICS, INC.
See Notes to Unaudited Condensed Consolidated Financial Statements
PLANTRONICS, INC.
See Notes to Unaudited Condensed Consolidated Financial Statements
PLANTRONICS, INC.
See Notes to Unaudited Condensed Consolidated Financial Statements
PLANTRONICS, INC.
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial
statements of Plantronics, Inc. ("Plantronics," "we", "our", or the
"Registrant") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. These financial statements have been
prepared in conformity with generally accepted accounting principles, consistent
in all material respects with those applied in our Annual Report on Form 10-K
for the year ended March 31, 2001. 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. Certain prior
period balances have been reclassified to conform to the current period
presentation. The interim financial statements should be read in connection with
the financial statements in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2001. 2. PERIODS PRESENTED
Our fiscal year-end is the Saturday closest to March 31 and
the third fiscal quarter-end is the last Saturday in December. For purposes of
presentation, we have indicated our accounting year ending on March 31, or the
month-end for interim quarterly periods. Our fiscal quarters ended December 31,
2000, and December 31, 2001, consisted of thirteen weeks each. 3. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS)
4. FOREIGN CURRENCY TRANSACTIONS
The functional currency of our foreign sales and marketing
and research and development operations is the local currency of the respective
operations. The functional currency of the Mexican manufacturing operations and
European sales and logistics headquarters is the U.S. dollar. Accordingly all
revenues and cost of sales related to foreign operations are recorded using the
U.S. dollar as functional currency. The assets and liabilities of the
subsidiaries whose functional currencies are other than the U.S. dollar are
translated into U.S. dollars at the current exchange rate in effect at the
balance sheet date. Income and expense items are translated using the average
exchange rate for the period. Cumulative translation adjustments are included in
accumulated other comprehensive income (loss), which is reflected as a separate
component of stockholders' equity. Foreign currency transaction gains and losses
are included in the results of operations. Beginning in the first quarter of fiscal year 2002, we
entered into foreign currency forward-exchange contracts, which typically mature
in one month, to hedge the exposure to foreign currency fluctuations of expected
foreign currency-denominated receivables, payables and cash balances. We record
on the balance sheet at each reporting period the fair value of our forward-exchange
contracts and record any fair value adjustments in results of
operations. Gains and losses associated with currency rate changes on the
contracts are recorded in results of operations, as other income (expense),
offsetting transaction gains and losses on the related assets and
liabilities. During the first quarter of fiscal year 2002, we adopted SFAS
No. 133 (Accounting for Derivative Instruments and Hedging Activities), as
amended by SFAS No. 138 (Accounting for Certain Derivative Instruments and
Certain Hedging Activities), which did not have a material impact on our
financial position. As of December 31, 2001, we had approximately $1.8 million
of foreign currency forward-exchange contracts outstanding, denominated in the
Euro, as a hedge against our forecasted foreign currency-denominated
receivables, payables and cash balances. The following table summarizes our net
currency position, and approximate U.S. dollar equivalent (in thousands), at
December 31, 2001: Foreign currency transactions, net of the effect of hedging activity,
resulted in a net loss of $0.2 million for the fiscal quarter ended December 31,
2001, included in other income (expense) in the results of operations, compared
to net gains of approximately $0.1 million in the quarter ended December 31,
2000. 5. COMPUTATION OF EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist only of stock
options. In computing diluted earnings per common share, the average
stock price for the period is used in determining the number of shares assumed
to be purchased from exercise of stock options. Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS: 6. COMPREHENSIVE INCOME
Comprehensive income includes charges or credits to equity
that are not the result of transactions with owners. The components of
comprehensive income, net of tax, are as follows (in thousands): 7. SEGMENTS AND ENTERPRISE-WIDE DISCLOSURES
SEGMENTS. We are engaged in the design, manufacture,
marketing and sales of telecommunications equipment including headsets,
telephone headset systems, and other specialty telecommunications products. We
consider ourselves to operate in one business segment. We have organized our
operations to focus on three principal markets: call center and office products,
mobile and computer products, and other specialty products. The following table
presents net revenue by market (in thousands): MAJOR CUSTOMERS. No one customer accounted for 10% or more of
total revenue from consolidated sales for the quarters ended December 31, 2000
and 2001. GEOGRAPHIC INFORMATION. In geographical reporting, revenues
are attributed to the geographical location of the sales and service
organizations. The following table presents net revenues and long lived assets
by geographic area (in thousands): 8. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 141
("SFAS 141"), "Business Combinations." SFAS 141 requires the
purchase method of accounting for business combinations initiated after June 30,
2001, eliminates the pooling-of-interests method, and changes the criteria to
recognize intangible assets apart from goodwill. The adoption of SFAS 141 did not
have a significant impact on our financial position and results of
operations. In July 2001, the FASB issued SFAS No. 142, "Goodwill
and Other Intangible Assets". SFAS 142 requires, among other things, the
discontinuance of goodwill amortization and the testing for impairment of
goodwill at least annually. The adoption of SFAS 142 in the first quarter of
the year ending March 30, 2002 did not have a material effect on our financial
position and results of operations. In April 2001, the FASB's Emerging Issues Task Force released
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products" ("EITF 00-25"), which will apply to us
beginning in our fourth fiscal quarter. EITF 00-25 requires that consideration
paid by a vendor to a reseller should be classified on the vendor's income
statement as a reduction of revenue unless a separate identifiable benefit is
received by the vendor, the fair value of the benefit can be reasonably
estimated and the consideration does not exceed such value. We typically give
various promotional consideration to our retailers and distributors, which we
currently classify as sales and marketing expense. Because we are unable to
clearly separate the benefits received from most of the promotional
consideration we pay to our distributors and retailers, the majority of such
consideration will be reclassified as a reduction of revenue, and financial
statements for prior periods presented for comparative purposes will be
reclassified to comply with the new requirements. For our fourth fiscal
quarter we estimate that the effect on revenues will be approximately $2.4
million offset by an equivalent reduction in selling, general and administrative
expense. On a year-to-date basis through the end of our third fiscal quarter of
2002, we estimate the effects on revenue to be a reduction of $7.3 million
offset by the same reduction in selling, general and administrative expense.
There is no impact on operating margin, net income or EPS for this
accounting change. On October 3, 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30, "Reporting Results of Operations Reporting the Effects of
Disposal of a Segment of a Business". SFAS 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. Additionally, SFAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. We do not expect the adoption of SFAS
144 to have a significant impact on its financial statements. 9. GOODWILL AND INTANGIBLES
During the first quarter of fiscal year 2002, we early-adopted
Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". In accordance with
SFAS 142, we discontinued goodwill amortization and tested goodwill for
impairment as of April 1, 2001. No impairment loss appeared necessary. We will
continue to test goodwill for impairment at least annually. Other intangible
assets continue to be amortized over their expected useful life of three to five
years. The following table presents net income on a comparable
basis, after adjustment for goodwill amortization (in thousands): 10. SUBSEQUENT EVENTS Subsequent to the end of the quarter we acquired
Ameriphone, a leading supplier of amplified telephones and other solutions to
address the needs of individuals with hearing impairment and other special
needs. The sum of net assets, including goodwill and intangibles, less cash
acquired was approximately $10.5 million, and was fully paid in cash. We have
not yet finalized the allocation of purchase price. 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 may
generally be identified by the use of such words as "expect,"
"anticipate," "believe," "intend,"
"plan," "will," or "shall," and include, but are
not necessarily limited to, all of the statements marked below with an asterisk
("*"). In addition, we 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. Our 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,
our annual report on Form 10-K, as well as the section below entitled "Risk
Factors Affecting Future Operating Results." We disclaim any obligation to
update any forward-looking statements as a result of developments occurring
after the date of this Quarterly Report. RESULTS OF OPERATIONS:
The following table sets forth items from the Unaudited
Condensed Consolidated Statements of Operations as a percentage of net sales.
Net Sales. Net sales for the quarter ended December 31, 2001, decreased by
23% to $82.2 million, compared to $106.7 million for the quarter ended December
31, 2000. Net sales for the nine months ended December 31, 2001 were $239.8
million compared to $311.0 million for the nine months ended December 31, 2000,
a decrease of 23%. Compared to the prior year, quarterly revenues declined in
all major geographies and channels, with the exception of our OEM and Mobile
businesses. The growth in our Mobile business was the result of a strong
seasonal effect, media publicity associated with carrier safety campaigns, and
strong orders from carriers. We believe, however, that the level of orders from
our carriers was higher than the level of underlying demand, and that our fourth
quarter mobile revenues will therefore be down sequentially. The overall
decrease in quarterly revenues versus a year ago was driven by the continuing
recession in the U.S. and the general economic slowdown in other countries in
which we do business. Our business continues to be impacted by a slowdown in global
telecom and IT spending. We are also concerned that the recession that began in
March of 2001 will continue or last longer than originally anticipated and may
continue to adversely affect product demand. The December 2001, sales level
reported by our distributors declined more steeply than is typical and now
represents the lowest single month in the last several years. In addition to the
lagging economy, we anticipate that our fourth quarter revenues will be affected
by a number of factors, including the effect of an accounting change mandated by
the Emerging Issues Task Force of the Financial Accounting Standards Board,
"EITF 00-25" (Note 8), the acquisition of Ameriphone (Note 10), and
the timing of certain orders that may have benefited us in our third quarter.
We currently believe that our revenues and earnings in the fourth fiscal quarter
of 2002 are likely to be lower than the third fiscal quarter. Gross Profit. Gross profit for the quarter ended December
31, 2001, decreased 33% to $39.6 million (48.2% of net sales), compared to $59.4
million (55.7% of net sales) for the quarter ended December 31, 2000. Gross
profit for the first three quarters of fiscal 2002 was $116.5 million, a
decrease of 33% over the comparable period of fiscal 2001. The decline in gross margin percent
from the prior year was due to a combination of factors. The largest factor was our
product mix as we sold more of products that have lower gross margins than the
corporate average, particularly our mobile products. Fixed overhead spending as
a percent of revenue increased, driven by lower sales compared to the prior
year's quarter. As a percent of total revenues, our retail channel has grown,
especially revenues for mobile products. Warranty costs are higher in this
sales channel due to the typically higher returns from consumers in particular.
We anticipate that gross margins will continue to be affected by these factors
in the fourth quarter. Research, Development and Engineering. Research,
development and engineering expenses for the quarter ended December 31, 2001,
decreased 3% to $6.9 million (8.4% of net sales), compared to $7.1 million (6.7%
of net sales) for the quarter ended December 31, 2000. Expenses for nine months
ended December 31, 2001, were $22.8 million compared to $19.5 million for the
nine months ended December 31, 2000. We have focused on broadening our product
lines and continuing our investment in Bluetooth™ and other wireless
technologies. Selling, General and Administrative. Selling, general and
administrative expenses for the quarter ended December 31, 2001, decreased 3% to
$22.1 million (26.8% of net sales), compared to $22.7 million (21.2% of net
sales) for the quarter ended December 31, 2000. For the nine months ended
December 31, 2001, expenses were $63.4 million, a decrease of $3.4 million over
the nine months ended December 31, 2000. The overall dollar decrease in the
level of spending between years was due to a number of factors. Marketing
spending increased compared to the prior year's quarter for marketing campaigns
designed to help increase the sales of cellular headsets given the hands-free
legislation which went into effect in New York in December, as well as other
marketing campaigns organized around driver safety primarily in the U.S. This
increase was offset by a decrease in sales spending, primarily as a result of
lower revenues. General and administrative expenses increased as a percentage
of net sales from the year ago quarter, mainly driven by the decline in
revenues. Operating Income. Operating income for the quarter ended
December 31, 2001, decreased 64% to $10.7 million (13.0% of net sales), compared
to $29.6 million (27.8% of net sales) for the quarter ended December 31, 2000.
For the nine months ended December 31, 2001, operating income was $30.3 million
compared to $88.4 million for the nine months ended December 31, 2000. The
decrease was primarily driven by a decrease in revenues and gross margin.
Management decided to hold operating expenses at approximately the same levels
as they had been to focus on expanding our wireless product portfolio in anticipation
of demand for these products when the economy recovers.
This led to higher operating expenses as a percent of revenue,
which contributed to lower operating margins and profit. Interest and Other Income, Net. Interest and other income
for the quarter ended December 31, 2001, was $0.4 million in income compared to
$0.8 million in income for the quarter ended December 31, 2000. The net $0.4
million decrease in income was primarily due to reductions in interest income of
$0.3 million and foreign exchange losses due to declining foreign exchange
rates. Interest and other income for the nine months ended December 31, 2001,
was $1.5 million in income compared to $0.4 million in income for the nine
months ended December 31, 2000. The net $1.1 million increase in income was
primarily due to a $0.8 million reduction of foreign exchange loss due to
implementation of a hedging program in fiscal 2002 and to a $0.4 million expense
in the prior year in connection with a secondary offering of stock by one of our
stockholders. Interest expense for fiscal 2002 is expected to be minimal.*
In November 1999, we entered into a credit agreement with a major bank. In
November 2001, we renewed this agreement at $75 million with a new expiration
date of January 15, 2003. We currently have no borrowings under this agreement.
Income Tax Expense. Income tax expense for the quarter ended
December 31, 2001, was $0.5 million compared to $9.1 million for the quarter
ended December 31, 2000. During our third fiscal quarter of 2002, we
successfully completed a routine state tax audit which resulted in a favorable
tax adjustment. Excluding this favorable tax adjustment, our overall tax rate
decreased from 30% to 28% due to declining profits in higher tax
jurisdictions. FINANCIAL CONDITION:
Operating Activities. During the nine months ended
December 31, 2001, we generated $63.6 million of cash from operating activities,
due primarily to $25.5 million in net income, decreases of $14.6 and $10.2
million in accounts receivable and inventory, respectively, increases of $2.8
and $3.3 million in accounts payable and accrued liabilities, respectively, and
an increase of $2.0 million in income taxes payable. In comparison, we
generated $43.3 million in cash from operating activities for the nine months
ended December 31, 2000, due primarily to $62.2 million in net income, a tax
benefit on stock options exercised of $10.1 million and an increase in income
taxes payable of $6.3 million, offset by increases of $19.7 and $16.6 million in
accounts receivable and inventory, respectively, and decreases of $2.5 and $2.0
million in accounts payable and accrued liabilities, respectively. Investing Activities. During the nine months ended December
31, 2001, we purchased marketable securities of $14.5 million and received
proceeds from maturities of marketable securities of $19.1 million. Capital
expenditures of $8.4 million in the nine months ended December 31, 2001, were
incurred principally in tooling and equipment for new products, furniture and
fixtures and leasehold improvements for facilities expansion. Financing Activities. In the nine months ended December 31,
2001, we repurchased 2,482,621 shares of our common stock for $48.4 million and
reissued through employee benefit plans 66,269 shares of our treasury stock for
$1.3 million. As of December 31, 2001, 239,000 shares remained under the
repurchase plan authorized during the quarter. We received $0.9 million in
proceeds from the exercise of stock options during the nine months ended
December 31, 2001. Subsequent to the end of the quarter, we completed the
repurchase of all remaining shares under the plan. On January 25, 2002, we
announced a new 1,000,000 share stock repurchase program. Liquidity. As of December 31, 2001, we had working capital
of $113.7 million, including $82.7 million of cash and cash equivalents and
marketable securities, compared with working capital of $136.8 million,
including $73.9 million of cash and cash equivalents and marketable securities,
at March 31, 2001. Subsequent to the end of the quarter, we purchased
Ameriphone, a leading supplier of amplified telephones and other solutions to
address the needs of individuals with hearing impairment and other special
needs. The sum of net assets, including goodwill and intangibles, less cash
acquired was approximately $10.5 million. The consideration net of cash
acquired, was fully paid in cash. We believe this acquisition will not have a
material impact on our liquidity. In November 2001, we renewed our revolving credit facility
with a major bank at $75 million, including a letter of credit subfacility. The
renewed facility and subfacility both expire on January 15, 2003. As of
February 8, 2002, we have no cash borrowings under the revolving credit facility
and $0.7 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 that materially limit our ability to incur debt and pay
dividends, among other matters. These covenants may adversely affect us to the
extent we cannot comply with them. We are currently in compliance with the
covenants under this agreement. We believe that our current cash balance and cash 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 twelve months.* RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
Investors or potential investors in our stock should
carefully consider the risks described below. The performance of our stock will
reflect the performance of our business relative to, among other things, our
competition, general economic and market conditions, and industry conditions.
You should carefully consider the following factors in connection with any
investment in our stock. Our business, financial condition and results of
operations could be materially adversely affected if any of the risks occur.
Should any or all of the following risks materialize, the trading price of our
stock could decline and an investor could lose all or part of his or her
investment. THE CONTINUING GLOBAL ECONOMIC SLOWDOWN COULD RESULT IN A
FURTHER REDUCTION IN OVERALL DEMAND FOR OUR PRODUCTS AND POTENTIAL UNCOLLECTABLE CUSTOMER
RECEIVABLES, BOTH OF WHICH WOULD MATERIALLY ADVERSELY AFFECT OUR RESULTS. While our markets have not exhibited highly cyclical
behavior historically, our sales are affected by overall economic activity. If
these trends are worse or longer than presently anticipated, this could cause us
not to meet the levels of sales required to achieve our projected financial
results, which could in turn materially adversely affect the market price of our
stock. Also, if the overall economy continues to slow further this could affect
the financial health of certain purchasers of our products, potentially
resulting in the failure of such purchasers to pay amounts that they owe to us.
Due to the current slowdown in the economy, the credit risks relating to these
resellers/customers have increased. We are in the process of implementing
programs to assist us in monitoring and mitigating these risks,
but there can be no assurance that such programs will be effective in
reducing our credit risks. We also continue to monitor credit exposures from
weakened financial conditions in certain geographic regions and the impact that
such conditions may have on the worldwide economy. We have recently experienced some losses
due to customers failing to meet their obligations. Although these losses have
not been significant, future payment defaults by customers could harm our business and
have a material adverse effect on our operating results and financial
condition. A SUBSTANTIAL PORTION OF OUR SALES COME FROM THE CALL
CENTER MARKET AND A DECREASE OF DEMAND IN THAT MARKET COULD MATERIALLY ADVERSELY
AFFECT OUR RESULTS. We have historically derived, and continue to derive, a
substantial portion of our net sales from the call center market. This market
has grown significantly in recent years as new call centers have proliferated
and existing call centers have expanded. In the third quarter of fiscal 2002,
our sales in the call center market were below the level of sales in that market
in comparable prior year periods. We do not believe that our decreasing sales
are a result of market share gains by our competitors but, instead, believe that
the sales slowdown is due to reduction in the level of overall market demand.
While we believe that the call center market will grow in future periods, this
growth could slow or revenues from this market could continue to decline in
response to various factors. For example, consumer resistance to telemarketing
could materially adversely affect growth in the call center market. A continued
deterioration in general economic conditions could result in a reduction in the
establishment of new call centers and in capital investments to expand or
upgrade existing centers, and we believe this is in fact negatively affecting
our business. Because of our reliance on the call center market, we will be
affected more by changes in the rate of call center establishment and expansion
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 ARE COUNTING ON THE OFFICE, MOBILE, COMPUTER AND
RESIDENTIAL MARKETS TO DEVELOP, AND WE COULD BE MATERIALLY ADVERSELY AFFECTED IF
THEY DO NOT DEVELOP AS WE EXPECT. While the call center market is still a substantial
portion of our business, we believe that our future prospects will depend in
large part on the growth in demand for headsets in the office, mobile, computer
and residential markets. These communications headset markets are relatively
new and undeveloped. Moreover, we do not have extensive experience in selling
headset products to customers in these markets. If the demand for headsets in
these markets 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 markets, it would have a material adverse effect on the potential
demand for our products and on our business, financial condition and results of
operations. These headset markets are also subject to general economic
conditions and if there is a continued slowing of national or international
economic growth and the recession continues longer than we anticipated, these
markets may not materialize to the levels we require to achieve our anticipated
financial results, which could in turn materially adversely affect the market
price of our stock. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY DUE TO A NUMBER OF CAUSES OUTSIDE OUR CONTROL. Our quarterly results of operations may vary
significantly in the future for a variety of reasons, including the following:
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. 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 our Common Stock might
fall. IF WE DO NOT MATCH PRODUCTION TO DEMAND WE WILL BE AT RISK
OF LOSING BUSINESS OR OUR GROSS MARGINS COULD BE MATERIALLY ADVERSELY AFFECTED.
Historically, we have generally been able to increase
production to meet increasing demand. However, the demand for our products is
dependent on many factors and such demand is inherently difficult to forecast.
We have experienced sharp fluctuations in demand, especially for headsets for
wireless and cellular phones. In addition, current global events, such as the
war in Afghanistan, the terrorist scare in the U.S., and the anthrax concerns
may cause the economy to be more volatile, making it more difficult to match
supply and demand in the marketplace.
Significant unanticipated fluctuations in demand could cause
the following operating problems, among others:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Exact name of Registrant as Specified in its Charter)
Santa Cruz, California 95060
(Address of Principal Executive Offices including Zip Code)
(Registrant's Telephone Number, Including Area Code)
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
(unaudited):
Balance Sheets as of March 31, 2001
and December 31, 2001
Statements of Operations for the Three and
Nine Months Ended December 31, 2000 and 2001
Statements of Cash Flows for the Nine
Months Ended December 31, 2000 and 2001
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2001 2001
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ASSETS
Current assets:
Cash and cash equivalents ......................... $ 60,544 $ 74,109
Marketable securities ............................. 13,385 8,582
Accounts receivable, net .......................... 60,203 45,569
Inventory, net .................................... 48,235 37,995
Deferred income taxes ............................. 7,110 5,827
Other current assets .............................. 1,449 3,897
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Total current assets .......................... 190,926 175,979
Property, plant and equipment, net ..................... 32,683 34,814
Goodwill, net .......................................... 6,292 6,292
Intangibles, net ....................................... 579 331
Other assets, net ...................................... 2,792 2,739
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Total assets .................................. $ 233,272 $ 220,155
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 10,836 $ 13,654
Accrued liabilities ............................... 30,793 34,123
Income taxes payable .............................. 12,519 14,506
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Total current liabilities ..................... 54,148 62,283
Deferred tax liability ................................. 6,077 5,071
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Total liabilities ........................... 60,225 67,354
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Stockholders' equity:
Common stock, $0.01 par value per share; 100,000
shares authorized, 59,098 and 59,204 shares
issued and outstanding at March 31, 2001 and
December 31, 2001, respectively.................. 591 592
Additional paid-in capital ........................ 148,188 150,399
Accumulated other comprehensive income ............ (1,172) (1,072)
Retained earnings ................................. 207,626 233,079
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355,233 382,998
Less: Treasury stock (common: 9,919 and 12,336
shares outstanding at March 31, 2001 and
December 31, 2001, respectively) at cost ........ (182,186) (230,197)
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Total stockholders' equity .................... 173,047 152,801
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Total liabilities and stockholders' equity .... $ 233,272 $ 220,155
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
2000 2001 2000 2001
--------- --------- --------- ---------
Net sales ...................................... $ 106,718 $ 82,211 $ 311,010 $ 239,840
Cost of sales .................................. 47,277 42,610 136,250 123,304
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Gross profit ............................... 59,441 39,601 174,760 116,536
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Operating expenses:
Research, development and engineering ...... 7,097 6,895 19,544 22,839
Selling, general and administrative ........ 22,729 22,052 66,787 63,427
--------- --------- --------- ---------
Total operating expenses ............ 29,826 28,947 86,331 86,266
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Operating income ............................... 29,615 10,654 88,429 30,270
Interest and other income, net ................. 825 354 360 1,496
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Income before income taxes ..................... 30,440 11,008 88,789 31,766
Income tax expense ............................. 9,132 501 26,637 6,313
--------- --------- --------- ---------
Net income ..................................... $ 21,308 $ 10,507 $ 62,152 $ 25,453
========= ========= ========= =========
Basic earnings per common share (Note 5) ....... $ 0.43 $ 0.22 $ 1.27 $ 0.53
========= ========= ========= =========
Shares used in basic per share calculations..... 49,233 46,897 49,098 47,650
========= ========= ========= =========
Diluted earnings per common share (Note 5) ..... $ 0.40 $ 0.21 $ 1.17 $ 0.51
========= ========= ========= =========
Shares used in diluted per share calculations... 53,357 49,120 53,272 49,554
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
December 31,
----------------------
2000 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 62,152 $ 25,453
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 5,958 6,505
Deferred income taxes .............................. (605) 277
Income tax benefit associated with stock options ... 10,129 422
Loss on disposal of fixed assets ..................... 35 135
Changes in assets and liabilities:
Accounts receivable, net ........................... (19,722) 14,634
Inventory, net ..................................... (16,620) 10,240
Other current assets ............................... 309 (2,197)
Other assets ....................................... (266) (28)
Accounts payable ................................... (2,477) 2,817
Accrued liabilities ................................ (1,956) 3,330
Income taxes payable ............................... 6,335 1,987
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Cash provided by operating activities ......................... 43,272 63,575
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities ....... 12,750 19,053
Purchase of marketable securities ....................... (15,550) (14,500)
Capital expenditures .................................... (11,861) (8,442)
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Cash used for investing activities ............................ (14,661) (3,889)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock .............................. (25,549) (48,412)
Proceeds from sale of treasury stock .................... 2,260 1,303
Proceeds from exercise of stock options ................. 8,044 887
Other ................................................... -- 101
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Cash used for financing activities ............................ (15,245) (46,121)
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Net increase in cash and cash equivalents ..................... 13,366 13,565
Cash and cash equivalents at beginning of period .............. 40,271 60,544
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Cash and cash equivalents at end of period .................... $ 53,637 $ 74,109
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Supplemental disclosures of cash flow information:
Cash paid for:
Interest ........................................... $ 68 $ 79
Income taxes ....................................... $ 12,716 $ 10,172
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, December 31,
2001 2001
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Accounts receivable, net:
Accounts receivable from customers .................. $ 62,876 $ 48,433
Less: allowance for doubtful accounts ............... (2,673) (2,864)
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$ 60,203 $ 45,569
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Inventory, net:
Finished goods ...................................... $ 27,040 $ 19,959
Work in process ..................................... 1,280 999
Purchased parts ..................................... 19,915 17,037
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$ 48,235 $ 37,995
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Property, plant and equipment, net:
Land ................................................ $ 4,693 $ 4,693
Buildings and improvements (useful lives: 7-30 years) 14,692 15,805
Machinery and equipment (useful lives: 2-10 years) .. 49,891 52,072
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69,276 72,570
Less: accumulated depreciation ...................... (36,593) (37,756)
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$ 32,683 $ 34,814
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Accrued liabilities:
Employee benefits ................................... $ 9,730 $ 11,262
Accrued advertising and sales and marketing ......... 5,836 5,995
Warranty accrual .................................... 6,619 6,748
Accrued other ....................................... 8,608 10,118
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$ 30,793 $ 34,123
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Local Currency Equivalent Position
---------------- ------------ -----------
EUR 2,042 $ 1,800 Sell
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
(In thousands, except earnings per share) 2000 2001 2000 2001
--------- --------- --------- ---------
Net income...................................... $ 21,308 $ 10,507 $ 62,152 $ 25,453
========= ========= ========= =========
Weighted average shares - basic................. 49,233 46,897 49,098 47,650
Effect of dilutive securities - employee
stock options................................ 4,124 2,223 4,174 1,904
--------- --------- --------- ---------
Weighted average shares - diluted............... 53,357 49,120 53,272 49,554
========= ========= ========= =========
Net earnings per common share - basic........... $ 0.43 $ 0.22 $ 1.27 $ 0.53
========= ========= ========= =========
Net earnings per common share - diluted......... $ 0.40 $ 0.21 $ 1.17 $ 0.51
========= ========= ========= =========
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
2000 2001 2000 2001
--------- --------- --------- ---------
Net income...................................... $ 21,308 $ 10,507 $ 62,152 $ 25,453
Other comprehensive income (loss):
Change in accumulated translation adjustments. -- (191) -- 100
--------- --------- --------- ---------
Total........................................... $ 21,308 $ 10,316 $ 62,152 $ 25,553
========= ========= ========= =========
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
2000 2001 2000 2001
--------- --------- --------- ---------
Net revenues from unaffiliated customers:
Call center and office....................... $ 83,542 $ 56,009 $ 250,818 $ 180,009
Mobile and computer.......................... 19,381 23,058 48,258 52,576
Other specialty products..................... 3,795 3,144 11,934 7,255
--------- --------- --------- ---------
$ 106,718 $ 82,211 $ 311,010 $ 239,840
========= ========= ========= =========
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ -----------------------
2000 2001 2000 2001
----------- ----------- ---------- -----------
Net revenues from unaffiliated
customers:
United States.................. $ 75,801 $ 58,413 $ 214,768 $ 165,765
International.................. 30,917 23,798 96,242 74,075
----------- ----------- ---------- -----------
$ 106,718 $ 82,211 $ 311,010 $ 239,840
=========== =========== ========== ===========
March 31, December 31,
2001 2001
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Long lived assets:
United States.................. $ 19,980 $ 22,336
International.................. 12,703 12,478
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$ 32,683 $ 34,814
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Three Months Ended Nine Months Ended
December 31, December 31,
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2000 2001 2000 2001
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Reported net income............... $ 21,308 $ 10,507 $ 62,152 $ 25,453
Add back : goodwill amortization. 174 -- 521 --
----------- ----------- ---------- -----------
Adjusted net income.............. $ 21,482 $ 10,507 $ 62,673 $ 25,453
=========== =========== ========== ===========
Basic earnings per share:
As reported...................... $ 0.43 $ 0.22 $ 1.27 $ 0.53
As adjusted...................... $ 0.44 $ 0.22 $ 1.28 $ 0.53
Diluted earnings per share:
As reported...................... $ 0.40 $ 0.21 $ 1.17 $ 0.51
As adjusted...................... $ 0.40 $ 0.21 $ 1.18 $ 0.51
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
2000 2001 2000 2001
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Net sales ...................................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales .................................. 44.3 51.8 43.8 51.4
--------- --------- --------- ---------
Gross profit ............................... 55.7 48.2 56.2 48.6
--------- --------- --------- ---------
Operating expenses:
Research, development and engineering ...... 6.7 8.4 6.3 9.5
Selling, general and administrative ........ 21.2 26.8 21.5 26.5
--------- --------- --------- ---------
Total operating expenses ............ 27.9 35.2 27.8 36.0
--------- --------- --------- ---------
Operating income ............................... 27.8 13.0 28.4 12.6
Interest and other income, net ................. 0.7 0.4 0.1 0.6
--------- --------- --------- ---------
Income before income taxes ..................... 28.5 13.4 28.5 13.2
Income tax expense ............................. 8.5 0.6 8.5 2.6
--------- --------- --------- ---------
Net income ..................................... 20.0 % 12.8 % 20.0 % 10.6 %
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Any of the foregoing problems could materially adversely affect our business, financial condition and results of operations.
WE DEPEND ON OUR SUPPLIERS AND FAILURE OF OUR SUPPLIERS TO PROVIDE QUALITY COMPONENTS OR SERVICES IN A TIMELY MANNER COULD ADVERSELY AFFECT OUR RESULTS.
Our growth and ability to meet customer demands depend in part on our capability to obtain timely deliveries of raw materials, components, subassemblies and products from our suppliers. We buy raw materials, components and subassemblies from a variety of suppliers and assemble them into finished products. We also have certain of our products manufactured for us by third party suppliers. The cost, quality, and availability of such goods are essential to the successful production and sale of our products. Obtaining raw materials, components, subassemblies and finished products entails various risks, including the following:
WE SELL OUR PRODUCTS THROUGH VARIOUS CHANNELS OF DISTRIBUTION AND A FAILURE OF THOSE CHANNELS TO OPERATE AS WE EXPECT COULD DECREASE OUR REVENUES.
We sell substantially all of our products through distributors, retailers, OEMs and telephony service providers. Our existing relationships with these parties are not exclusive and can be terminated by either party without cause. Our channel partners also sell or can potentially sell products offered by our competitors. To the extent that our 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. In the future, our OEM customers or potential OEM customers may elect to manufacture their own products, similar to those we currently sell to them. The inability to establish or maintain successful relationships with distributors, OEMs, retailers and telephony service providers or to expand our distribution channels could materially adversely affect our business, financial condition or results of operations.
Our distribution channels generally hold inventories of our products, determined in their own business judgment to be sufficient to meet their customer's delivery requirements. Such inventory levels are subject to market conditions, business judgment by the reseller and our ability to meet their time-to-ship needs. Rapid reductions by our distributors, OEMs, retailers and other customers in the levels of inventories held in our products could materially adversely affect our business, financial condition or results of operations.
We generally offer our customers certain credit terms, allowing them to pay for products purchased from us between thirty and sixty days or more after we ship the products. Our receipt of payment for our products depends on the financial liquidity of those customers. If significant customers or a significant number of customers experience liquidity problems, this could affect our ability to collect our accounts receivable, which could materially adversely affect our business, financial condition or results of operations.
WE HAVE STRONG COMPETITORS AND WILL LIKELY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The markets for our products are highly competitive. We compete with a variety of companies in the various markets for communications headsets. Our single largest competitor is GN Netcom, a subsidiary of GN Great Nordic Ltd., a Danish telecommunications conglomerate. GN Great Nordic reported revenues of 1.68 billion Danish Krone (approximately U.S. $200 million) in the quarter ending September 30, 2001, while GN Netcom's revenues for the same period were 471 million Danish Krone (approximately U.S. $56 million). GN Netcom has made several acquisitions over the years. We believe the acquisitions of Hello Direct and Jabra have provided GN Netcom with a broader mobile product line and greater marketing presence than they had prior to these acquisitions.
We currently operate principally in a multilevel distribution model - we sell most of our products to distributors who, in turn, resell to dealers or end-customers. GN Netcom's acquisitions indicate it may be moving towards a direct sales model. While we believe that our business and our customers benefit from our current distribution structure, if GN Netcom or other competitors sell directly, they may offer lower prices which could materially adversely affect our business and results of operations. In the face of current economic downturn, we are seeing lower prices from our competitors, particularly GN Netcom.
Logitech International S.A., a manufacturer and seller of computer accessory products, acquired Labtec Inc., a Vancouver, Washington-based provider of, among other products, headsets for use with computers, in March 2001. Following this acquisition, Labtec gained greater resources with which to compete with us than it had prior to its being acquired by Logitech.
We anticipate that we will face additional competition from companies that currently do not offer communications headsets. This is particularly true in the office, mobile computer and residential markets. In fact, on September 11, 2001, Sony Corporation and Telefonaktiebolaget LM Ericsson announced that their respective boards approved the merger of their mobile business worldwide including telephone accessories such as telephone headsets and adapters. Recently, this Joint Venture announced the launch of its first product, a BluetoothÔ communications device which shipped in November 2001. We anticipate other competition from consumer electronics companies that currently manufacture and sell mobile phones or computer peripheral equipment. These new competitors are 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 we do.
We anticipate that we will also face additional competition from companies, principally located in the Far East, which offer very low cost headset products, including products which are modeled on or direct copies of our products. These new competitors are likely to offer very low cost products which may result in price pressure in the market. If market prices are substantially reduced by such new entrants into the headset market, our business, financial condition or results of operations could be materially adversely affected.
We believe that the market for lightweight communication headsets is showing some signs of commoditization. In particular, we believe that our competitors, especially GN Netcom, are increasingly choosing to compete on price. While this has long been true of competitors from the Far East, we think the trend is accelerating and that customers are also more receptive to lower cost products, even when the quality, service or total value of the offer may be notably lower as well.
Historically, our expertise in acoustics and design has allowed us to design, develop and manufacture products with the levels of sound quality enabling us to meet the needs of our customers. Due to technological advances, including but not limited to better digital signal processing, our current and future competitors may be able to develop products with the same or better audio quality at lower costs. These technological advances may allow current and future competitors to compete more effectively in terms of product quality or price that could materially adversely affect our business and results of operations.
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 respect to any of these or other factors it could materially adversely affect our business, financial condition and results of operations. Further, if we do not successfully develop and market products that compete successfully with those of our competitors, it would materially adversely affect our business, financial condition and results of operations.
NEW PRODUCT DEVELOPMENT IS RISKY AND WE WILL BE MATERIALLY ADVERSELY AFFECTED IF WE DO NOT RESPOND TO CHANGING CUSTOMER REQUIREMENTS AND NEW TECHNOLOGIES.
Our product development efforts historically have been directed toward enhancement of existing products and development of new products that capitalize on our core capabilities. The success of new product introductions is dependent on a number of 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 acceptance. To be successful in the future, we must develop new products, qualify these new products, successfully introduce these products to the market on a timely basis, and commence and sustain low-cost, volume production to meet customers' demands. Although we attempt to determine the specific needs of headset users in our target markets, because almost all of our sales are indirect, we may not always 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 technical feasibility and commercial viability of a new product can be ascertained. Accordingly, revenues from new products may not be sufficient to recover the associated development costs.
Historically, the technology used in lightweight communications headsets has evolved slowly. New products have primarily offered stylistic changes and quality improvements, rather than significant new technologies. The technology used in hands free communications devices, including our products, is evolving more rapidly now than it has historically and we anticipate that this trend may accelerate. We believe this is particularly true for our newer emerging technology products especially in the mobile, computer markets, residential and certain parts of the office market. We believe products designed to serve these markets generally exhibit shorter lifecycles and are increasingly based on open standards and protocols. The end markets served are much larger than the traditional call center market. This combination of factors may lead to increased commoditization, as a greater number of competitors attempt to introduce products, or reverse engineer our products and offer similar but lower quality products at lower price points.
Our success depends upon our ability to enhance existing products, to respond to changing market requirements, and to develop and introduce in a timely manner new products that keep pace with technological developments. If we are unable to develop and introduce enhanced products or new products in a timely manner in response to changing market conditions or customer requirements, it will materially adversely affect our business, financial condition and results of operations.
Due to the historically slow evolution of our products, we have generally been able to phase out obsolete products without significant impact to our operating margins. However, as we develop new generations of products more quickly, we expect that the pace of product obsolescence will increase concurrently. The disposition of inventories of obsolete products may result in reductions to our operating margins and materially adversely affect our earnings and results of operations.
CHANGES IN REGULATORY REQUIREMENTS MAY ADVERSELY IMPACT OUR GROSS MARGINS AS WE COMPLY WITH SUCH CHANGES OR REDUCE OUR ABILITY TO GENERATE REVENUES IF WE ARE UNABLE TO COMPLY.
Our products must meet the requirements set by regulatory authorities in the numerous jurisdictions in which we sell them. As regulations and local laws change, we must modify our products to address those changes. Regulatory restrictions may increase the costs to design and manufacture our products, resulting in a decrease in demand for our products if the costs are passed along or a decrease in our margins. Compliance with regulatory restrictions may impact the technical quality and capabilities of our products, reducing their marketability.
WE HAVE SIGNIFICANT FOREIGN OPERATIONS AND THERE ARE INHERENT RISKS IN OPERATING ABROAD.
In the first nine months of fiscal 2002, approximately 30.9% of our net sales were derived from customers outside the United States. Approximately 31.2% of our net sales in fiscal 2001 were derived from customers outside the United States, compared with approximately 33.5% of our net sales in fiscal 2000. In addition, we conduct the majority 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. We also purchase a growing number of turn-key products directly from Asia. The inherent risks of international operations, either in Mexico or in Asia, 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:
OUR FOREIGN OPERATIONS PUT US AT RISK OF LOSS IF THERE ARE MATERIAL CHANGES IN CURRENCY VALUES AS COMPARED TO THE U.S. DOLLAR.
A significant portion of our business is conducted in currencies other than the U.S. dollar. Substantially all of our sales throughout Europe are transacted in local currencies. We are therefore exposed to risks associated with fluctuations in exchange rates that can affect our revenue and gross margins and can also generate currency transaction gains and losses. In our prior fiscal year, the value of major European currencies dropped against the U.S. dollar, which adversely impacted our revenue and gross margin and also resulted in currency transaction losses. To date, we have partially but not fully reflected that change in currency value in our selling prices. In order to maintain a competitive price for our products in Europe, we expect to reduce our current prices further, resulting in a lower margin on products sold in Europe. Continued change in the values of European currencies or changes in the values of other foreign currencies could have a material adverse effect on our business, financial condition and results of operations.
In our current fiscal year we have introduced programs designed to reduce our foreign currency net asset exposure and have successfully reduced transaction gains and losses that are accounted for in other income/expense. However, there can be no assurance that our hedging policy will be effective in continuing to reduce transaction gains and losses. Moreover, our economic exposure to foreign currency fluctuations has not changed and revenues and margins can be adversely impacted by such fluctuations. There can be no assurance that we will not continue to experience currency losses in the future, nor can we predict the effects of 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.
THE TERRORIST ATTACKS ON NEW YORK CITY ON SEPTEMBER 11, 2001 MARKED A TURNING POINT IN CURRENT U.S. POLITICAL, MILITARY AND SECURITY STRATEGIES WHICH WE BELIEVE HAS AND MAY CONTINUE TO ADVERSELY IMPACT OUR BUSINESS, BOTH DIRECTLY AND INDIRECTLY.
The events of September 11th and the U.S. military efforts in Afghanistan have contributed to a further slowing in the economy with additional layoffs in other industries resulting in a negative effect on our business. We believe that one direct impact of the attacks is the reduction of call center agents in the travel and leisure industries. We are indirectly affected by the continuing concern on future terrorist attacks on U.S. soil, as well as concerns of the anthrax infection on the American and international public. We are unable to estimate the impact these events and their consequences have on our business, however, given the magnitude of these unprecedented events and the possible subsequent effects, we expect that there has been and may continue to be an adverse impact to our financial condition, our operations and our prospects as these events adversely affect the global economy in general.
IF THERE ARE PROBLEMS THAT AFFECT OUR PRINCIPAL MANUFACTURING FACILITY IN MEXICO, WE COULD FACE LOSSES IN REVENUES OR MATERIAL INCREASES IN COSTS OF OUR OPERATIONS.
The majority of our manufacturing operations are currently performed in a single facility in Tijuana, Mexico. A fire, flood or earthquake, political unrest or other disaster or condition affecting our facility could have a material adverse effect on our business, financial condition and results of operations. While we have developed a disaster recovery plan and believe we are adequately insured with 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.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR BUSINESS OPERATIONS AND ANOTHER ENERGY CRISIS IN CALIFORNIA COULD DISRUPT OR MAKE SUBSTANTIALLY MORE EXPENSIVE THE OPERATIONS AT OUR HEADQUARTERS FACILITY.
In the event of an acute power shortage, California has, on some occasions, implemented, and may in the future continue to implement, rolling blackouts throughout the state. We have emergency back-up generators which keep our business information systems in operation but we do not have sufficient back-up generating capacity or alternate sources of power to keep our headquarters in full operation in the event of a blackout. If blackouts interrupt our power supply, we would be temporarily unable to continue full operations at our headquarters.
Our operations are also vulnerable to interruption by fire, earthquake, telecommunications failure and other events beyond our control. Our corporate headquarters are located near major earthquake faults. We do not carry business interruption insurance or carry financial reserves against business interruptions arising from electrical blackouts, although we do carry it for other causes. Any such interruption could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations.
WE HAVE INTELLECTUAL PROPERTY RIGHTS THAT COULD BE INFRINGED BY OTHERS AND WE ARE POTENTIALLY AT RISK OF INFRINGEMENT OF THE INTELLECTUAL PROPERTY 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 thirty-three United States patents and additional foreign patents and will 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, the rights granted under any patents may not provide us 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.
WE ARE EXPOSED TO POTENTIAL LAWSUITS ALLEGING DEFECTS IN OUR PRODUCTS.
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 material adverse effect upon our business, financial condition and results of operations.
Our mobile headsets are used with mobile telephones. There has been continuing public controversy over whether the radio frequency emissions from mobile telephones are harmful to users of mobile phones. We believe that there is no conclusive proof of any health hazard from the use of mobile telephones but that research in this area is incomplete. We have tested our headsets through independent laboratories and have found that use of our headsets reduces radio frequency emissions at the user's head to virtually zero. However, if research was to establish a health hazard from the use of mobile telephones or public controversy grows even in the absence of conclusive research findings, there could be an adverse impact on the demand for our mobile headsets.
There is also continuing and increasing public controversy over the use of mobile telephones by operators of motor vehicles. While we believe that our products enhance driver safety by permitting a motor vehicle operator to generally be able to keep both hands free to operate the vehicle, there is no certainty that this is the case and we may be subject to claims arising from allegations that use of a mobile telephone and headset contributed to a motor vehicle accident. We maintain product liability insurance and general liability insurance that we believe would cover any such claims. However, 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 material adverse effect upon our business, financial condition and results of operations.
WHILE WE BELIEVE WE COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS, WE ARE STILL EXPOSED TO POTENTIAL RISKS FROM ENVIRONMENTAL MATTERS.
We are subject to various federal, state, local and foreign environmental laws and regulations, 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 claims could be asserted in the future and any liability that might result could exceed the amount of the reserve.
WE HAVE ACQUIRED A COMPANY AND EXPECT TO MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE MATERIAL RISKS
On January 2, 2002, we acquired Ameriphone, Inc., a California corporation, in a cash transaction. We may in the future, in order to address the need to develop new products and technologies, and enter new markets, acquire other companies. There are inherent risks in the acquisition of another company that could materially adversely affect our business, financial condition and results of operations. The types of risks faced in connection with acquisitions include:
Mergers and acquisitions, particularly those of high-technology companies, are inherently risky, and no assurance can be given that the Ameriphone or future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. We must also manage any such growth effectively. Failure to manage growth effectively and successfully integrate acquisitions made by us could materially harm our business and operating results.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED IF WE LOSE THE BENEFIT OF THE SERVICES OF KEN KANNAPPAN OR OTHER KEY PERSONNEL.
Our success depends to a significant extent upon the services of a limited number of executive officers and other key employees. The unanticipated loss of the services of our president and chief executive officer, Mr. Kannappan, or one or more of our other executive officers or key employees could have a material adverse effect upon our business, financial condition and 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.
OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN PLANTRONICS STOCK COULD BE LOST.
The market price for our Common Stock may continue to be affected by a number of factors, including the announcement of new products or product enhancements by us or our competitors, the loss of services of one or more of our executive officers or other key employees, quarterly variations in our or our competitors' results of operations, changes in our published forecasts of future results of operations, changes in earnings estimates or recommendations by securities analysts, developments in our industry, sales of substantial numbers of shares of our Common Stock in the public market, general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. Stock prices for many companies, particularly in the technology sector, have experienced wide fluctuations that have often been unrelated to the operating performances of such companies. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, could materially adversely affect the market price of our Common Stock.
ANTI-TAKEOVER PROVISIONS IN OUR CURRENT BY-LAWS OR WHICH COULD BE PUT INTO PLACE BY OUR BOARD OF DIRECTORS COULD AFFECT MARKET PRICES OF OUR STOCK.
Our board of directors has the authority to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of those shares without any further vote or action by the stockholders. The issuance of our preferred stock could have the effect of making it more difficult for a third party to acquire us. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which could also have the effect of delaying or preventing our acquisition by a third party. Further, certain provisions of our Certificate of Incorporation and bylaws could delay or make more difficult a merger, tender offer or proxy contest, which could adversely affect the market price of our Common Stock.
CITICORP VENTURE CAPITAL HAS SIGNIFICANT CONTROL OVER OUR BUSINESS.
Our largest stockholder, Citicorp Venture Capital, Ltd. ("CVC"), beneficially owns 5,454,257 shares of our Common Stock (excluding any shares that may be owned by employees of CVC or its affiliates), which represents approximately 11.6% of our outstanding Common Stock as of December 31, 2001. We also have an agreement with CVC under which it is entitled to have up to three of its designees serve on our Board of Directors, depending on the level of CVC's continuing stock ownership. Based on its current ownership of our outstanding Common Stock, CVC is entitled to designate two nominees. Messrs. M. Saleem Muqaddam and John M. O'Mara are currently serving as CVC's designees pursuant to that agreement.
WE HAVE SEVERAL SIGNIFICANT STOCKHOLDERS AND, GIVEN THE LOW TRADING VOLUME OF OUR STOCK, IF THEY SELL THEIR SHARES IN A SHORT PERIOD OF TIME, WE COULD SEE AN ADVERSE EFFECT ON THE MARKET PRICES OF OUR STOCK.
As of February 8, 2002, we had 46,374,134 shares of Common Stock outstanding and in the public market. All of these shares are freely tradable except for approximately 9,080,064 shares held by affiliates of Plantronics (including CVC and the directors and officers of Plantronics). These approximately 9,080,064 shares may be sold in reliance on Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), or pursuant to an effective registration statement filed with the Securities and Exchange Commission.
Some of our current stockholders, including CVC and certain of our directors, also have certain contractual rights to require us to register their shares for public sale. Approximately 9,694,924 additional shares are subject to outstanding stock options as of February 8, 2002. As of February 8, 2002, Ms. Louise Cecil, the widow of our former CEO and Chairman, Robert S. Cecil, held options on approximately 433,000 shares of our Common Stock, transferred to her by Mr. Cecil during his life. She has registered those shares for resale and can sell any or all of those shares at any time.
Our stock is not heavily traded. The average daily trading volume of our stock in the third quarter of fiscal 2002 was approximately 277,255 shares per day with a median volume in that period of 222,800 shares per day. Sales of a substantial number of shares of our Common Stock in the public market by CVC or any of our officers, directors or other stockholders could adversely affect the prevailing market price of our Common Stock and impair our ability to raise capital through the sale of equity securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in "Risk Factors Affecting Future Operating Results".
INTEREST RATE RISK
At December 31, 2001, we had cash and cash equivalents totaling $74.1 million, compared to $60.5 million at March 31, 2001. At December 31, 2001, we had marketable securities totaling $8.6 million compared to $13.4 million at March 31, 2001. Cash equivalents have an original maturity of ninety days or less; marketable securities have an original maturity of greater than ninety days, but less than one year. We believe we are not currently exposed to significant interest rate risk as the majority of our combined cash and marketable securities balances were invested in securities or interest bearing accounts with maturities of less than ninety days. The average maturity period for our investments at December 31, 2001, was less than two months. The interest rates locked in on those investments ranged from 2.1% to 4.8%. Our investment policy requires that we only invest in deposit accounts, certificates of deposit or commercial paper with minimum ratings of A1/P1 and money market mutual funds with minimum ratings of AAA.
In November 2001, we renewed our revolving credit facility, including a letter of credit subfacility, with a major bank at $75 million. The renewed facility and subfacility both expire on January 15, 2003. As of February 8, 2002, we have no cash borrowings under the current revolving credit facility. If we choose to borrow under this facility in the future, and market interest rates rise, then our interest payments would increase accordingly.
FOREIGN CURRENCY EXCHANGE RATE RISK
In the first nine months of fiscal 2002, approximately 30.9% of our net sales were derived from customers outside the United States, with approximately 19% of total revenues denominated in foreign currencies, predominately the Great British Pound and the Euro. Beginning in the first quarter of fiscal 2002, we entered into foreign currency forward exchange contracts to hedge the foreign exchange exposure of certain forecasted receivables, payables and cash balances denominated in Great British Pounds and Euros. Gains and losses associated with currency rate changes on the contracts are recorded in results of operations, as other income (expenses), offsetting gains and losses on the related assets and liabilities. The success of the hedging program depends on forecasts of transaction activity in the various currencies. We have no assurance that exchange rate fluctuations will not materially adversely affect our business in the future.
At December 31, 2001, we had $1.8 million of forward-exchange contracts outstanding, denominated in Euros, as a hedge against forecasted foreign currency-denominated receivables, payables and cash balances.
PART II. -- OTHER INFORMATION
ITEM 1. NONE.
ITEM 2. NONE.
ITEM 3. NONE.
ITEM 4. NONE.
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit Number | Description |
3.1 | Amended and Restated By-Laws |
10.15 | Second Amendment dated November 1, 2001 to Credit Agreement dated as of November 29, 1999 between Registrant and Wells Fargo Bank N.A., as amended by the First Amendment to the Credit Agreement dated as of November 27, 2000. |
(b) Reports on Form 8-K. No reports on Form 8-K were filed by Registrant
during the fiscal quarter ended December 31, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PLANTRONICS, INC. |
(Registrant) |
By: | /s/ Barbara V. Scherer |
| |
Barbara V. Scherer | |
Senior Vice President - Finance and
Administration and Chief Financial
Officer
(Principal Financial Officer and Duly Authorized Officer of the Registrant) |
EXHIBIT INDEX
Exhibit Number | Description |
3.1 | Amended and Restated By-Laws |
10.15 | Second Amendment dated November 1, 2001 to Credit Agreement dated as of November 29, 1999 between Registrant and Wells Fargo Bank N.A., as amended by the First Amendment to the Credit Agreement dated as of November 27, 2000. |
AMENDED AND RESTATED
BY-LAWS
OF
PLANTRONICS, INC.
a Delaware corporation
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of November 1, 2001, is entered into between PLANTRONICS, INC., a Delaware corporation (the "Company"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, the Company and the Bank have previously entered into that certain Credit Agreement, dated as of November 29, 1999 (as amended by that certain First Amendment to Credit Agreement, dated as of November 27, 2000, the "Credit Agreement"), pursuant to the terms of which the Bank has made various financial accommodations available to the Company; and
WHEREAS, the Company and the Bank have agreed to amend the Credit Agreement on the terms and conditions contained herein;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
"Applicable Commitment Fee Percentage" means, on any date, one hundred seventy-five thousandths of one percent (0.175%) per annum.
"Revolving Termination Date" means the earlier to occur of: (a) January 15, 2003; and (b) the date on which the Commitment terminates in accordance with the provisions of this Agreement.
"Consolidated Current Liabilities" means, as of any date of determination, for the Company and its Subsidiaries on a consolidated basis, the amount of all liabilities which have been or properly should be classified as current liabilities in accordance with GAAP.
"Quick Ratio" means, as of any date of determination for any period, the ratio of (a) the sum of all cash, marketable securities and trade accounts receivable of the Company and its Subsidiaries on such date of determination (the foregoing determined on a consolidated basis in accordance with GAAP) to (b) Consolidated Current Liabilities.
if such Acquisition involves a dollar amount of $10,000,000 or more, the Company has obtained the Bank's express prior written consent prior to the consummation of such Acquisition;
8.07 Use of Proceeds.
The Company shall not, and shall not suffer or permit any of its Subsidiaries to, use: (a) any portion of the proceeds of any Loan or Letter of Credit, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock or (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock; or (b) more than $350,000,000 of proceeds of Loans or Letters of Credit to pay cash dividends to its common stock shareholders or to repurchase or redeem its common stock, in each case to the extent otherwise permitted under Section 8.09(c).
(c) declare or pay cash dividends to its common stock shareholders or repurchase or redeem its common stock; provided that the aggregate amount of all such dividends declared or paid and common stock repurchased or redeemed in any four consecutive fiscal quarter period (including the quarter in which any such cash dividends are declared or paid or any such common is repurchased or redeemed) shall not exceed: (i) if the date of any declaration or payment of any such cash dividends or the repurchase or redemption of any such common stock (any such date, a "Threshold Date") occurs during the Company's fiscal year ending 2002, $75,000,000; and (ii) if any Threshold Date occurs thereafter, 50% of the amount of the cumulative consolidated net income of the Company and its Subsidiaries (net of cumulative losses) reported in the eight consecutive fiscal quarter period ending with the fiscal quarter immediately preceding such Threshold Date;
8.11 Net Funded Debt to EBITDA Ratio.
The Company shall not permit as of the last day of any fiscal quarter the Net Funded Debt to EBITDA Ratio to be greater than 1.25 to 1.00.
8.12 Interest Coverage Ratio; Quick Ratio.
(a) The Company shall not permit as of the last day of any fiscal quarter the Interest Coverage Ratio to be less than 6.00 to 1.00.
(b) The Company shall not permit as of the last day of any fiscal quarter the Quick Ratio to be less than 1.00 to 1.00.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.
PLANTRONICS, INC.
a Delaware corporation
By: /s/ Barbara V. Scherer
Barbara V. Scherer
Title: Chief Financial Officer and
Senior Vice President, Finance
By: /s/ Richard R. Pickard
Title: General Counsel and
Vice President, Legal
WELLS FARGO BANK, NATIONAL
ASSOCIATION
/s/ R, Steve Seldomridge
R. Steve Seldomridge
Title: Vice President
SCHEDULE 2.01
To Credit Agreement
Commitment
Wells Fargo Bank, National Association
Commitment: $75,000,000.00
Applicable Percentage: 100%