Plantronics 2006 Annual Report Download - page 38

(‘‘FASB’’) issued SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), which replaces
SFAS No. 123, ‘‘Accounting for Stock-Based Compensation’’ (‘‘SFAS 123’’) and supersedes APB 25.
SFAS 123R requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values, beginning with the first annual
period after June 15, 2005, with early adoption encouraged. On March 29, 2005, the SEC issued
SAB 107, which provides the SEC Staff’s views regarding interactions between FAS 123R and certain
SEC rules and regulations, and provides interpretations of the valuation of share-based payments for
public companies.
We have completed an assessment of the impact of the adoption of SFAS 123R and SAB 107 and have
determined the fair value method to measure compensation expense, the appropriate assumptions to
include in the fair value model, and the transition method to use upon adoption. The Board of Directors
approved our conclusions during the fourth quarter of fiscal 2006 and we will implement the policy
change in fiscal 2007. We expect the impact of the adoption of SFAS 123R to have a material adverse
effect on our results of operations.
We have significant foreign operations, and there are inherent risks in operating abroad.
During our fourth quarter of fiscal year 2006, approximately 32% of our net revenues was derived from
customers outside the United States. In addition, we conduct the majority of our Audio Communications
Group headset assembly operations in our manufacturing facility located in Tijuana, Mexico, and we
obtain most of the components and subassemblies used in our products from various foreign suppliers.
We have just completed construction of a factory and design center in Suzhou, China and are also
purchasing a growing number of turnkey products directly from Asia. If we are unable to effectively
transition outsourced production into our new Suzhou facility, we may be unable to meet demand for
these products, and our margins on these products may decrease. There are risks in operating the Suzhou
factory and expanding our competency in a rapidly evolving economy because, among other reasons, we
may be unable to attract sufficient qualified personnel, intellectual property rights may not be enforced as
we expect, power may not be available as contemplated or the like. Should any of these risks occur, we
may be unable to maximize the output from the facility and our financial results may decrease from our
anticipated levels. Further, the majority of our Audio Entertainment products are manufactured either in
our Dongguan, China, manufacturing plant or manufactured by foreign vendors, primarily in China. 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, among others:
)cultural differences in the conduct of business;
)fluctuations in foreign exchange rates, particularly with the re-valuation of the Chinese Yuan;
)greater difficulty in accounts receivable collection and longer collection periods;
)impact of recessions in economies outside of the United States;
)reduced protection for intellectual property rights in some countries;
)unexpected changes in regulatory requirements;
)tariffs and other trade barriers;
)political conditions in each country;
)management and operation of an enterprise spread over various countries; and
)the burden and administrative costs of complying with a wide variety of foreign laws.
32 ⯗Plantronics