<PAGE> 1
EXHIBIT 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
Plantronics, Inc. ("Plantronics", "we" or "our"), introduced the first
lightweight communications headset in 1962. Since that time, we have become the
world leading designer, manufacturer and marketer of lightweight communications
headset products.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of financial statements and the
reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Plantronics and
its subsidiary companies. Intercompany transactions and balances have been
eliminated in consolidation.
FISCAL YEAR
Our fiscal year end is the Saturday closest to March 31. For purposes of
presentation, we have indicated our accounting year ending on March 31. Results
of operations for fiscal years 1998 and 1999 each included 52 weeks, while
fiscal year 2000 included 53 weeks.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
We consider all highly liquid investments with a maturity of ninety days or less
at the date of purchase to be cash equivalents. Investments maturing between
three and twelve months from the date of purchase are classified as marketable
securities.
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates that designation as of each balance sheet
date. As of March 31, 2000, debt securities were classified as held-to-maturity,
as we both intended to, and had the ability to, hold these securities to
maturity. Held-to-maturity securities are stated at amortized cost, which
approximates fair market value. The estimated fair values of cash equivalents
and marketable securities are based on quoted market prices. As of March 31,
2000, we had $5 million in marketable securities. Our cash and cash equivalents
consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1999 2000
------- -------
(in thousands)
<S> <C> <C>
Cash $ 7,427 $ 5,705
Cash equivalents 35,572 34,566
------- -------
Cash and cash equivalents $42,999 $40,271
======= =======
</TABLE>
INVENTORY
Inventory is stated at the lower of cost, determined on the first-in, first-out
method, or market.
1
<PAGE> 2
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property, plant and equipment are principally
calculated using the straight-line method over the estimated useful lives of the
respective assets. In connection with the acquisition of ClearVox
Communications, goodwill is amortized over ten years and intangible assets are
amortized over three to five years.
DEFERRED DEBT ISSUANCE COSTS
Debt issuance costs are assigned to the various debt instruments and amortized
over the shorter of the terms of the respective debt agreements or the estimated
period the debt will be outstanding.
REVENUE RECOGNITION
Revenue is recognized when products are shipped. We provide for estimated
potential customer returns and warranty costs at the time of shipment.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Plantronics to concentrations of
credit risk consist principally of cash equivalents, marketable securities and
trade receivables. Our cash investment policies limit investments to those that
are short-term and low risk. 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. Concentrations of credit risk with
respect to trade receivables are generally limited due to the large number of
customers that comprise our customer base, and their dispersion across different
geographic areas. We perform ongoing credit evaluations of our customers'
financial condition and generally require no collateral from our customers. We
maintain an allowance for uncollectible accounts receivable based upon expected
collectibility of all accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of our financial instruments, including cash, cash
equivalents, marketable securities, accounts receivable, accrued expenses and
liabilities, approximate fair value due to their short maturities.
INCOME TAXES
We account for income taxes under the liability method, which recognizes
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the tax basis of assets and liabilities and their
financial statement reported amounts. We account for tax credits as a reduction
of tax expense in the year in which the credits reduce taxes payable.
FOREIGN OPERATIONS AND CURRENCY TRANSLATION
We have foreign assembly and manufacturing operations in Mexico, light assembly,
research and development, sales and marketing operations in the United Kingdom,
an international finance, customer service and logistics headquarters in the
Netherlands, an international procurement office in Taiwan, and sales offices in
Canada, Asia, Europe, Australia and South America. For fiscal 1998, 1999 and
2000, the functional currency of all foreign operations was the U.S. dollar.
Accordingly, gains or losses arising from the translation of foreign currency
statements and transactions are included in determining consolidated results of
operations. Aggregate exchange losses for fiscal 1998, 1999 and 2000 were $0.2
million, $0.2 million and $0.8 million, respectively.
EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") is computed by dividing net income available to
common stockholders (numerator - computed as net income before and after
extraordinary item) by the weighted average number of common shares outstanding
(denominator) during the period. Basic EPS excludes the dilutive effect of stock
options. Diluted EPS gives effect to all dilutive potential common shares
outstanding during a period. In computing diluted EPS, the average stock price
for the period is used in determining the number of shares assumed to be
purchased from exercise of stock options.
2
<PAGE> 3
Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------
1998 1999 2000
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net income before extraordinary item $ 39,189 $ 55,253 $ 64,517
======== ======== ========
Net income after extraordinary item $ 39,189 $ 54,204 $ 64,517
======== ======== ========
Weighted average shares - basic 16,481 16,574 16,505
Effect of dilutive securities - employee stock options 1,742 1,708 1,168
-------- -------- --------
Weighted average shares - diluted 18,223 18,282 17,673
======== ======== ========
Net earnings per common share - basic
Before extraordinary item $ 2.38 $ 3.33 $ 3.91
======== ======== ========
After extraordinary item $ 2.38 $ 3.27 $ 3.91
======== ======== ========
Net earnings per common share - diluted
Before extraordinary item $ 2.15 $ 3.02 $ 3.65
======== ======== ========
After extraordinary item $ 2.15 $ 2.96 $ 3.65
======== ======== ========
</TABLE>
COMPREHENSIVE INCOME
Comprehensive income includes charges or credits to equity that are not the
result of transactions with owners. Total comprehensive income was the same as
net income for all periods presented.
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), requires that we report
certain information about operating segments in our annual financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers (see note 9).
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans based on
the fair value of options granted. We have elected to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, and to provide additional disclosures
with respect to the pro forma effects of adoption had we recorded compensation
expense as provided in SFAS 123 (see note 10).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of
SFAS 133 until fiscal years beginning after June 15, 2000. Should we determine
that such activities are economically beneficial to Plantronics, then we will
adopt SFAS 133 during our year ended March 31, 2002. We did not engage in any
derivative or hedging activities during the fiscal year ended March 31, 2000.
3
<PAGE> 4
NOTE 3 - DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1999 2000
-------- --------
(in thousands)
<S> <C> <C>
Accounts receivable:
Accounts receivable from customers $ 49,133 $ 50,625
Allowance for doubtful accounts (2,326) (2,144)
-------- --------
$ 46,807 $ 48,481
======== ========
Inventory:
Finished goods $ 9,425 $ 17,887
Work in process 1,461 1,540
Purchased parts 8,003 14,325
-------- --------
$ 18,889 $ 33,752
======== ========
Property, plant and equipment:
Land $ 4,693 $ 4,693
Buildings and improvements (useful life 10-30 years) 9,923 11,296
Machinery and equipment (useful life 2-8 years) 32,853 38,341
-------- --------
47,469 54,330
Less accumulated depreciation (27,146) (30,753)
-------- --------
$ 20,323 $ 23,577
======== ========
Accruals:
Employee benefits 15,209 15,934
Other 18,266 18,396
-------- --------
$ 33,475 $ 34,330
======== ========
</TABLE>
NOTE 4 - DEBT:
During 1999, we retired $65.1 million of 10% subordinated debentures due in
2001. We paid a premium to the holders of such debentures, and the transaction
resulted in an extraordinary loss of $1.0 million ($0.06 per diluted share), net
of income tax benefit of $0.7 million. The transaction was paid out of available
cash.
Effective November 29, 1999, we obtained a revolving credit facility with a
major bank for $100 million, including a $10 million letter-of-credit
subfacility. Both mature in November 27, 2000. Principal outstanding bears
interest at our choice of prime rate minus 1% or LIBOR plus 0.625%, depending on
the rate choice and performance level ratios. There were no borrowings
outstanding under the facility at March 31, 2000. However, at that date $0.8
million associated with inventory purchases and other matters was committed
under the letter-of-credit subfacility. The revolving credit facility includes
certain covenants that materially limit our ability to incur debt and pay
dividends, among other matters. We were in compliance with the terms of the
covenants as of March 31, 2000.
NOTE 5 - COMMON AND TREASURY STOCK:
On January 8, 1999, we filed with the Securities Exchange Commission a
Registration Statement on Form S-3 for the sale by certain stockholders in an
underwritten offering of 1,250,000 shares of Common Stock. Plantronics did not
receive any proceeds from this offering, other than approximately $0.8 million
(net of offering expenses) received upon the exercise of options to purchase
443,548 shares of Common Stock by two of the stockholders selling in the
offering. The offering increased outstanding shares by 443,548.
In July 1999, our stockholders approved an increase in the authorized shares of
Common Stock of Plantronics, Inc., to 100,000,000.
4
<PAGE> 5
During fiscal 1999, the Board of Directors authorized Plantronics to repurchase
an additional 1,000,000 shares of Common Stock. During fiscal 1999, we
repurchased 735,593 shares of Common Stock in the open market at a total cost of
$46.4 million, and through our employee benefit plans, we reissued 29,301 shares
for proceeds of $1.3 million..
During fiscal 2000, the Board of Directors authorized Plantronics to repurchase
an additional 1,000,000 shares of Common Stock. During fiscal 2000, we
repurchased 1,267,500 shares of our Common Stock in the open market at a total
cost of $72.6 million, and through our employee benefit plans, we reissued
41,097 shares for proceeds of $2.1 million. As of March 31, 2000, there were
184,907 remaining shares authorized for repurchase under all repurchase plans.
Shares repurchased in fiscal year 2000 that exceeded the additional 1,000,000
shares pertained to authorizations from prior years.
NOTE 6 - INCOME TAXES:
Income tax expense for fiscal 1998, 1999 and 2000 consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------
1998 1999 2000
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Federal
Current $ 10,109 $ 18,127 $ 29,130
Deferred 4,746 3,344 (6,493)
State 1,472 1,943 2,419
Foreign 2,116 2,587 5,305
-------- -------- --------
$ 18,443 $ 26,001 $ 30,361
======== ======== ========
</TABLE>
Pre-tax earnings of the foreign subsidiaries were $15.7 million, $24.5 million
and $28.1 million for fiscal years 1998, 1999 and 2000, respectively. Cumulative
earnings of foreign subsidiaries that have been permanently reinvested as of
March 31, 2000 totaled $45.3 million.
The following is a reconciliation between statutory federal income taxes and the
total provision for taxes on pre-tax income:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------
1998 1999 2000
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Tax expense at statutory rate $ 20,171 $ 27,847 $ 33,208
Foreign operations taxed at different rates (4,364) (3,609) (4,422)
State taxes, net of federal benefit 1,476 1,263 1,572
Other, net 1,160 500 3
-------- -------- --------
$ 18,443 $ 26,001 $ 30,361
======== ======== ========
</TABLE>
Deferred tax liabilities (assets) represent the tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and income tax purposes. Significant components of our deferred tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1999 2000
-------- --------
(in thousands)
<S> <C> <C>
Deferred gains on sales of properties $ 2,413 $ 2,350
Deferred state tax 793
Unremitted earnings of certain subsidiaries 7,249 3,357
Other deferred tax liabilities 1,200 1,773
-------- --------
Gross deferred tax liabilities 11,655 7,480
-------- --------
Accruals and other reserves (4,122) (6,182)
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C> <C>
Deferred state tax (386)
Other deferred tax assets (667) (539)
-------- --------
Gross deferred tax assets (4,789) (7,107)
-------- --------
Total net deferred tax liabilities $ 6,866 $ 373
======== ========
</TABLE>
NOTE 7 - EMPLOYEE BENEFIT PLANS:
Subject to eligibility requirements, substantially all domestic employees
participated in our qualified profit sharing and 401(k) plan. Under the plan,
participating employees received quarterly cash, annual cash and annual deferred
profit sharing payments. All other employees, with the exception of direct labor
in Mexico, participated in quarterly cash profit sharing plans. Domestic
employees also had the option of participating in a salary deferral component of
the plan, qualified under Section 401(k) of the Internal Revenue Code. The
profit sharing benefits were based on Plantronics' results of operations before
interest and taxes, adjusted for other items. The percentage of profit
distributed to employees varied by location. The profit sharing was paid in four
quarterly installments, and for qualified associates, one annual cash payment
and an annual deferred payment. Profit sharing payments were allocated to
employees based on each participating employee's base salary as a percent of all
participants' base salaries. The annual profit sharing distributions were made
up of a cash distribution and a tax deferred distribution made to individual
accounts of participants held in trust. The deferred portion was subject to a
two year vesting schedule based on an employee's date of hire. Total annual and
quarterly profit sharing contributions were $6.9 million, $9.4 million and $10.2
million for fiscal 1998, 1999 and 2000, respectively.
Effective March 26, 2000, we amended our qualified profit sharing and 401(k)
plan. In the past, this plan compensated associates through one annual cash
payment, four quarterly cash payments and one deferred payment - in fiscal 2000,
the total of these payments equaled approximately 47% of each participating
employee's base salary. For fiscal 2001 and thereafter, Plantronics will now
offer two separate compensation programs: quarterly cash profit sharing equal to
5% of quarterly profit for distribution to qualified associates, and deferred
compensation using the 3% "safe harbor" contribution under the Internal Revenue
Code Sections 401(k)(12) and 401(m)(11). We have also increased the employer
matching contribution from 25% under the prior qualified 401(k) plan to 50% of
the first 6% of pay contributed to the salary deferral plan. With this
amendment, the annual cash profit sharing payment was eliminated and replaced by
a 20% increase to our associates base pay.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
MINIMUM FUTURE RENTAL PAYMENTS
We lease certain equipment and facilities under operating leases expiring in
various years through and after 2005. Minimum future rental payments under
non-cancelable operating leases having remaining terms in excess of one year as
of March 31, 2000:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31, AMOUNT
--------------------------------------------------------------------------------
(in thousands)
<S> <C>
2001 $1,226
2002 506
2003 408
2004 408
2005 408
Thereafter $3,871
------
Total minimum future rental payments $6,827
======
</TABLE>
Rent expense for operating leases was approximately $1.0 million in fiscal 1998,
$1.1 million in fiscal 1999 and $1.1 million in fiscal 2000.
EXISTENCE OF RENEWAL OPTIONS
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<PAGE> 7
Certain operating leases provide for renewal options for periods from one to
three years. In the normal course of business, operating leases are generally
renewed or replaced by other leases.
CLAIMS AND LITIGATION
In the ordinary course of business we are subject to certain litigation,
contingent liabilities and/or claims. Management is not aware of any such
litigation, contingent liabilities or claims against Plantronics that would
materially impact our consolidated financial condition or results of operations.
NOTE 9 - SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION:
OPERATING SEGMENT
We organize the reporting segments based on geographic areas. The nature of our
products (telecommunications equipment), development, manufacturing, marketing
and servicing are similar in each geographic area. We evaluate segment
performance based on profit or loss from operations before interest expense,
foreign exchange gains and losses and income taxes. No one customer accounted
for 10% or more of total revenue from consolidated sales for fiscal year 1998,
1999 or 2000.
GEOGRAPHIC SEGMENTS
In geographical reporting, revenues are attributed to the geographical location
of the sales and service organizations. Costs directly and indirectly incurred
in generating revenues are similarly assigned.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------
1998 1999 2000
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
United States $164,074 $198,910 $209,557
International 72,038 87,351 105,455
-------- -------- --------
$236,112 $286,261 $315,012
======== ======== ========
Intersegment revenues $ 80,421 $ 92,141 $ 98,749
======== ======== ========
Operating profit:
United States $ 44,831 $ 62,942 $ 61,079
International 17,542 20,572 32,226
-------- -------- --------
$ 62,373 $ 83,514 $ 93,305
======== ======== ========
Long lived assets:
United States $ 18,301 $ 17,791 $ 15,371
International 2,954 2,532 8,206
-------- -------- --------
-------- -------- --------
$ 21,255 $ 20,323 $ 23,577
======== ======== ========
</TABLE>
The geographical reporting classification reflects the international
restructuring completed in fiscal 1997. The establishment of Plantronics B.V.
changed the ownership of inventory and the methodology of intersegment revenues.
Intersegment revenues are from Plantronics B.V. to the U.S., and are at
arms-length prices sufficient to recover a reasonable profit.
NOTE 10 - STOCK OPTION PLANS AND STOCK PURCHASE PLANS:
7
<PAGE> 8
STOCK OPTION PLAN
In September 1993, the Board of Directors approved the PI Parent Corporation
1993 Stock Plan (the "1993 Stock Plan"). Under the 1993 Stock Plan, 5,459,242
shares of Common Stock (which number is subject to adjustment in the event of
stock splits, reverse stock splits, recapitalization or certain corporate
reorganizations) are reserved cumulatively since inception for issuance to
employees and consultants of Plantronics, as approved by the Compensation
Committee of the Board of Directors and the Stock Plan Committee (comprised of
the CEO and a representative of Finance, Human Resources, and Legal). The
reserved shares include 1,300,000 shares, which were authorized by the Board of
Directors and approved by the stockholders for issuance in fiscal year 1999. The
1993 Stock Plan, which has a term of ten years, provides for incentive stock
options as well as nonqualified stock options to purchase shares of Common
Stock. The Board of Directors may terminate the 1993 Stock Plan at any time at
its discretion.
Incentive stock options may not be granted at less than 100% of the estimated
fair market value of our Common Stock at the date of grant, as determined by the
Board of Directors, and the option term may not exceed 10 years. For holders of
10% or more of the total combined voting power of all classes of our stock,
incentive stock options may not be granted at less than 110% of the estimated
fair market value of the Common Stock at the date of grant and the option term
may not exceed five years. Nonqualified stock options may be granted at less
than fair market value.
Options granted prior to June 1999 generally vest over a four year period and
those options granted subsequent to June 1999 vest over a five year period. In
July 1999, the Stock Plan Committee was authorized to make option grants
pursuant to guidelines approved by the Compensation Committee and subject to
quarterly reporting to the Compensation Committee.
DIRECTORS' STOCK OPTION PLAN
In September 1993, the Board of Directors adopted a Directors' Stock Option Plan
(the "Directors' Option Plan") and reserved 40,000 shares of Common Stock for
issuance to non-employee directors of Plantronics. The Directors' Option Plan
provides that each non-employee director shall be granted an option to purchase
4,000 shares of Common Stock on the later of the effective date of Plantronics'
initial public offering or the date on which the person becomes a new director.
Annually thereafter, each continuing non-employee director shall be
automatically granted an option to purchase 1,000 shares of Common Stock. At the
end of fiscal year 2000, options for 51,000 shares of Common Stock were
outstanding under the Directors' Option Plan. All options were granted at fair
market value and generally vest over a four year period.
Stock option activity under the 1993 Stock Plan and the Directors' Stock Option
Plan are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
SHARES WEIGHTED
AVAILABLE AVERAGE
FOR GRANT SHARES PRICE
---------- ---------- --------
<S> <C> <C> <C>
Balance at March 31, 1997 538,318 3,019,380 $ 7.46
Options Granted (654,500) 654,500 $ 27.37
Options Exercised (348,958) $ 3.49
Options Cancelled 233,010 (233,010) $ 18.53
---------- ---------- --------
Balance at March 31, 116,828 3,091,912 $ 11.29
1998
Options Authorized 1,300,000
Options Granted (666,000) 666,000 $ 55.75
Options Exercised (1,056,093) $ 4.91
Options Cancelled 184,445 (184,445) $ 18.55
---------- ---------- --------
Balance at March 31, 1999 935,273 2,517,374 $ 25.19
Options Granted (878,125) 878,125 $ 64.66
Options Exercised (726,831) $ 9.46
Options Cancelled 35,675 (35,675) $ 46.19
---------- ---------- --------
Balance at March 31, 2000 92,823 2,632,993 $ 41.64
========== ========== ========
Exercisable at March 31, 2000 1,065,457
==========
</TABLE>
8
<PAGE> 9
Significant option groups outstanding at March 31, 2000 and related weighted
average prices and lives are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
As of Remaining Average As of Average
Range of March 31, Contractual Exercise March 31, Exercise
Exercise Price 2000 Life Price 2000 Price
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.90 - $2.74s 282,289 3.77 $ 2.53 282,289 $ 2.53
3.13 - 18.44s 440,889 5.73 15.23 392,389 14.83
18.63 - 26.78s 257,096 6.99 21.46 162,413 21.38
34.50 - 60.00s 691,057 8.44 47.03 171,219 39.67
61.13 - 92.63s 961,662 9.17 66.76 57,147 61.57
--------- ---------
$0.90 - $92.63s 2,632,993 7.61 $ 41.64 1,065,457 $ 19.07
========= =========
</TABLE>
FAIR VALUE DISCLOSURES
All options in fiscal 1998, 1999 and 2000 were granted at an exercise price
equal to the fair market value of Plantronics' Common Stock at the date of
grant.
The fair value of options at date of grant was estimated using the Black-Scholes
model. The following assumptions were used for 1998: dividend yield of 0%, an
expected life of 5 years, expected volatility of 28% and risk free interest rate
of 5.6%. For 1999 the assumptions were: dividend yield of 0%, an expected life
of 5.6 years, expected volatility of 39% and risk free interest rate of 5.3%.
For 2000 the assumptions were: dividend yield of 0%, an expected life of 6
years, expected volatility of 42% and a weighted average risk free interest rate
of 5.9%. Based upon those assumptions, the weighted average fair value at date
of grant for options granted during 1998, 1999 and 2000 were $9.79, $25.25 and
$32.66 per share, respectively.
Volatility is a measure of the amount by which a price has fluctuated over an
historical period. The higher the volatility, the more the returns on the stock
can be expected to vary. The risk free interest rate is the rate on a U.S.
Treasury bill or bond that approximates the expected life of the option.
Had compensation expense for Plantronics' stock-based compensation plans been
determined based on the methods prescribed by SFAS 123, our net income and net
income per share would have been as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------------------
1998 1999 2000
---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income:
As reported $ 39,189 $ 54,204 $ 64,517
Pro forma $ 37,381 $ 51,771 $ 56,879
Net income per share:
As reported $ 2.15 $ 2.96 $ 3.65
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C> <C>
Pro forma $ 2.05 $ 2.83 $ 3.22
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
On April 23, 1996, the Board of Directors of Plantronics approved the 1996
Employee Stock Purchase Plan (the "ESPP"), which was approved by the
stockholders on August 6, 1996, to provide certain employees with an opportunity
to purchase Common Stock through payroll deductions. The plan is a qualified
plan under applicable IRS guidelines and certain highly compensated employees
are excluded from participation. Under the ESPP plan effective through August
1999, the purchase price of the Common Stock was equal to 95% of the market
price of the Common Stock immediately before the beginning of the applicable
participation period and there was a six month holding period requirement for
stock purchased. Under the ESPP plan effective beginning September 1999, the
purchase price of the Common Stock will be equal to 85% of the market price of
the Common Stock immediately before the beginning of the applicable
participation period and there is no required holding period. Each participation
period is six months long.
During fiscal 1998, 2,021 shares were issued under the plan. The fair value of
the employee's purchase rights was estimated using the Black-Scholes model with
the following assumptions: dividend yield of 0%, an expected life of six months,
expected volatility of 28%, and risk free interest rates of 5.6%. The
weighted-average fair value of these purchase rights granted in fiscal 1998 was
$4.85.
During fiscal 1999, 2,531 shares were issued under the plan. The fair value of
the employee's purchase rights was estimated using the Black-Scholes model with
the following assumptions: dividend yield of 0%, an expected life of six months,
expected volatility of 39%, and risk free interest rate of 4.6%. The
weighted-average fair value of these purchase rights granted in fiscal 1999 was
$5.92.
During fiscal 2000, 12,731 shares were issued under the plan. The fair value of
the employee's purchase rights was estimated using the Black-Scholes model with
the following assumptions: dividend yield of 0%, an expected life of six months,
expected volatility of 42%, and risk free interest rate of 6.1%. The
weighted-average fair value of these purchase rights granted in fiscal 2000 was
$11.39.
SENIOR EXECUTIVE STOCK OWNERSHIP PLAN
In November 1996, the Board of Directors approved a Senior Executive Stock
Purchase Plan, effective January 1, 1997, to encourage ownership of our Common
Stock by senior executives. This is a voluntary plan in which executives are
encouraged to participate and achieve a target ownership over a five year period
in annual increments of 20% of target or more. The target ownership is equal to
two times the Chief Executive Officer's base salary and one times the individual
Vice Presidents' base salary. To encourage participation, we will sell our
Treasury Stock to executives under this voluntary purchase program. The price
will be equal to the greater of: 95% of the price set by the Board of Directors
on an annual basis or 85% of the fair market value of the stock on the date of
transaction. The various vehicles that are available to executives to obtain
ownership of Plantronics' stock are as follows: 401(k) Plan contributions,
personal IRA account purchases, Deferred Compensation Plan contributions,
outright purchase of stock or exercising and holding vested stock options. The
discounted price is not applicable to exercising and holding of vested stock
options.
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PLANTRONICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION:
This Annual Report 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, without limitation, the
statements that (i) we expect interest expense in the next twelve months to be
minimal discussed in the last sentence of the paragraph below titled "Interest
Expense" under Annual Results of Operations; (ii) cash from operations and
available borrowings will be sufficient to fund operations for the next twelve
months discussed in the final paragraph of the section titled "Liquidity" under
Financial Condition; and (iii) we believe that our future costs associated with
Year 2000 compliance will not be material as stated in the section below titled
"Y2K". 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 under "Risk Factors Affecting
Future Operating Results" set forth in our most recent Annual Report on Form
10-K as filed with the Securities Exchange Commission. The following discussions
titled "Results of Operations" and "Financial Condition" should be read in
conjunction with those risk factors, the consolidated financial statements and
related notes included elsewhere herein, and the discussion and additional
disclosures in our Annual Report on Form 10-K.
ANNUAL RESULTS OF OPERATIONS
Net Sales. Net sales in fiscal 2000 increased 10.0% to $315.0 million compared
to $286.3 million in fiscal 1999, which in turn increased 21.2% compared to
fiscal 1998 net sales of $236.1 million. Our fiscal year ended March 31, 2000
contained 53 weeks vs. 52 weeks for fiscal years 1999 and 1998.
The 10% increase in revenue in fiscal 2000 was driven by strong growth
internationally and strong U.S. retail revenues, offset by flat U.S.
distribution sales and a decline in sales to our largest OEM.
International sales in fiscal 2000 increased 20.7% to $105.5 million compared to
$87.4 million in fiscal 1999, which in turn increased 21.3% compared to the
prior year. The growth in fiscal 2000 was experienced in each of the Europe,
Asia Pacific/Latin America and Canada regions and reflects our investment in the
international sales force as well as marketing programs. International sales
have accounted for approximately 33.5% of total net sales in fiscal 2000, up
from 30.5% of total net sales in both 1999 and 1998.
Domestic sales increased 5.4% to $209.6 million in fiscal 2000, compared to an
increase of 21.2% to $198.9 million in fiscal 1999 compared to the prior year.
U.S. retail sales grew strongly, reflecting both a broadening retail
distribution with several major new consumer electronics accounts added during
the year and an increase in demand for headsets for office applications. Retail
revenue also grew due to an increase in demand for headsets used in conjunction
with mobile, cellular and cordless phones and for computer applications.
Gross Profit. Gross profit in fiscal 2000 increased 15.5% to $185.5 million
(58.9% of net sales), compared to $160.6 million (56.1% of net sales) in fiscal
1999. Gross profit in fiscal 1999 increased 25.8% compared to gross profit of
$127.6 million (54.0% of net sales) in fiscal 1998. The increases in gross
profit as a percent of net sales mainly reflect reductions in product costs
through design and manufacturing efficiencies and by obtaining lower costs from
our suppliers.
Research, Development and Engineering. Research, development and engineering
expenses in fiscal 2000 increased 12.0% to $21.9 million (6.9% of net sales),
compared to $19.5 million (6.8% of net sales) in fiscal 1999. Research,
development and engineering expenses in fiscal 1999 increased 11.3% compared to
$17.5 million (7.4% of net sales) in fiscal 1998. The increase in these expenses
reflects continued investment in new product development and technologies.
Selling, General and Administrative. Selling, general and administrative
expenses in fiscal 2000 increased 22.2% to $70.3 million (22.3% of net sales),
compared to $57.5 million (20.1% of net sales) in
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fiscal 1999. Selling, general and administrative expenses in fiscal 1999
increased 20.6% compared to $47.7 million (20.2% of net sales) in fiscal 1998.
Retail variable selling expenses increased due to incremental retail revenue.
Marketing expenses increased substantially due to increased activities including
advertising campaigns, new product launches, international marketing and
programs for our mobile and computer divisions.
Operating Income. Operating income in fiscal 2000 increased 11.7% to $93.3
million (29.6% of net sales), compared to $83.5 million (29.2% of net sales) in
fiscal 1999. Operating income in fiscal 1999 increased 33.9% compared to $62.4
million (26.4% of net sales) in fiscal 1998. The increase in operating income
over the past two fiscal years was primarily due to higher net sales and the
increase in gross margin.
Interest Expense. Interest expense in fiscal 2000 decreased 98.5% to $.1
million, compared to $5.8 million in fiscal 1999, which in turn decreased 17.2%
from $7.0 million in fiscal 1998. Interest expense for 1999 and 1998 principally
represents interest payable on our 10% Senior Notes Due 2001 (Senior Notes),
which were redeemed on January 15, 1999. The early redemption of these Senior
Notes was the reason for the decrease in interest expense in fiscal 2000, and
management expects interest expense to be minimal in future periods. In November
1999, we entered into a credit agreement to borrow up to $100 million with a
major bank. We currently have no borrowings under this agreement.
Interest and Other Income. Interest and other income in fiscal 2000 decreased
52.9% to $1.7 million compared to $3.5 million in fiscal 1999, which in turn
increased 57.2% compared to $2.2 million in fiscal 1998. The decrease in
interest income in fiscal 2000 was primarily attributable to lower cash and cash
equivalents balances as a result of the January 15, 1999 redemption of $65
million in Senior Notes.
Income Tax Expense. In fiscal 2000, fiscal 1999 and fiscal 1998, income tax
expense was $30.4 million, $26.0 million and $18.4 million, respectively,
representing effective tax rates of 32% in all fiscal years.
FINANCIAL CONDITION:
Liquidity. As of March 31, 2000, we had working capital of $78.3 million,
including $45.3 million of cash and cash equivalents and marketable securities,
compared with working capital of $76.3 million, including $43.0 million of cash
and cash equivalents, as of March 31, 1999. During the fiscal year ended March
31, 2000, we generated $81.1 million of cash from operating activities, due
primarily to $64.5 million in net income, an increase of $11.3 million in income
taxes payable, and an income tax benefit of $15.1 million associated with the
exercise of options, offset by a $14.9 million increase in inventory. In
comparison, we generated $86.9 million in cash from operating activities for the
fiscal year ended March 31, 1999, due mainly to $54.2 million in net income,
decreases of $10.9 million in inventory and $6.8 million in accrued liabilities,
and an income tax benefit of $21.7 million associated with the exercise of
options.
We have a $100 million revolving credit facility, including a $10 million
letter-of-credit subfacility, with a major bank, both of which expire in
November 2000. As of March 31, 2000, we had no cash borrowings under the
revolving credit facility and $0.8 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, make capital expenditures and pay dividends, among other matters.
These covenants may adversely affect our financial position 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 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. During fiscal 2000, we purchased marketable securities of
$8.8 million and received proceeds from maturities of marketable securities of
$3.8 million. Expenditures for capital and other assets of $15.2 million in the
fiscal year ended March 31, 2000 were incurred principally in tooling
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for new products and to expand manufacturing capacity, investments in computer
and telephone equipment, and the acquisition of ClearVox.
Financing Activities. In the fiscal year ended March 31, 2000, we sold 41,097
shares of our treasury stock for approximately $2.1 million and repurchased
1,267,500 shares of our Common Stock for approximately $72.6 million. As of
March 31, 2000, we remained authorized to repurchase approximately 184,907
shares under all repurchase plans.
We received $6.9 million in proceeds from the exercise of stock options during
the fiscal year ended March 31, 2000.
Effective January 15, 1999, we repurchased all of our Senior Notes. The
transaction resulted in a net extraordinary charge of approximately $1.0
million, or approximately $0.06 per diluted share, in the fourth quarter of
fiscal 1999.
Y2K:
During the fiscal year ended March 31, 2000 Plantronics incurred approximately
$1 million in costs associated with Year 2000 compliance. Since year-end, we
have not incurred any material additional costs nor have we experienced any
disruption with vendors or operations. Furthermore, we believe that any future
costs associated with Year 2000 compliance efforts will not be material.
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