United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report pursuant Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2000
[ ] 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 0-21766
PLIANT SYSTEMS, INC.
Delaware 56-1615990
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4024 Stirrup Creek Drive, Suite 700, Durham, N.C. 27703
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(Address of principal executive offices) (Zip Code)
(919) 544-0015
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No_______
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Classes: Outstanding as of November 7, 2000:
------- -----------------------------------
Common Stock ($.01 par Value) 13,709,282
<PAGE>
PLIANT SYSTEMS, INC.
Index
<TABLE>
<CAPTION>
Page No.
-------------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Condensed Balance Sheets
September 30, 2000 and December 31, 1999 3-4
Condensed Statements of Operations
Three Months Ended September 30, 2000 and 1999 5
Condensed Statements of Operations
Nine Months Ended September 30, 2000 and 1999 6
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999 7
Notes to Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19-20
Part II - Other Information
Item 1. Legal Proceedings 20
Item 5. Other Information 20-28
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 29
</TABLE>
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Balance Sheets
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets:
Cash, cash equivalents $ 13,786,048 $ 41,481,289
Restricted cash (Note 2) -- 1,050,000
Short-term investments (Note 3) 26,852,631 21,655,887
Accounts receivable, trade, less allowances $50,000 in 2000
and $148,000 in 1999 567,911 8,284,549
Inventories (Note 4) 2,217,229 1,578,157
Prepaid expenses and other current assets 660,475 798,035
-------------------------------------------
Total current assets 44,084,294 74,847,917
Long term investments (Note 3) -- 5,296,678
Furniture, fixtures, and equipment:
Equipment 19,228,085 16,240,184
Software 5,665,475 5,554,299
Furniture and fixtures 726,570 728,341
Leasehold improvements 1,377,899 1,377,899
-------------------------------------------
26,998,029 23,900,723
Accumulated depreciation and amortization (19,834,800) (17,891,388)
-------------------------------------------
Net furniture, fixtures, and equipment 7,163,229 6,009,335
Deferred debt issuance costs (net of accumulated amortization) 469,662 1,030,287
Other noncurrent assets (Note 5) 2,334,060 2,427,580
-------------------------------------------
Total assets $ 54,051,245 $ 89,611,797
===========================================
See notes to Condensed Financial Statements.
</TABLE>
3
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 3,335,339 $ 7,738,270
Accrued expenses 7,402,346 5,570,599
Convertible debt (Note 6) 115,000,000 --
Deferred revenue 529,266 6,442,623
Accrued warranty reserve 384,158 830,852
-------------------------------------------
Total current liabilities 126,651,109 20,582,344
Long-term liabilities:
Convertible debt (Note 6) -- 115,000,000
Stockholders' deficit:
Series A preferred stock, $.01 par value; 100,000 shares
authorized; no shares issued and outstanding -- --
Convertible preferred stock, $.01 par value; 7,500,000
shares authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 65,000,000 shares
authorized; 13,684,399 and 13,605,073 shares
outstanding 136,844 136,051
Additional paid-in capital (Note 2) 156,863,076 156,573,170
Deferred compensation (Note 5) (300,000) (450,000)
Accumulated deficit (229,299,784) (202,229,768)
----------------------- --------------------
Total stockholders' deficit (72,599,864) (45,970,547)
----------------------- --------------------
Total liabilities and stockholders' deficit $ 54,051,245 $ 89,611,797
======================= ====================
See notes to Condensed Financial Statements.
</TABLE>
4
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
2000 1999
------------- ------------
<S> <C> <C>
Revenues:
Product sales and contract revenue $ 1,133,793 $ 10,593,332
Services revenue 2,728,887 1,873,272
------------------------ ----------------------
Net revenues 3,862,680 12,466,604
Costs and expenses:
Cost of sales 3,109,718 9,394,124
Research and development 7,214,668 5,430,663
Selling, general, and administrative expenses 3,336,866 2,834,650
------------------------ ----------------------
Total costs and expenses 13,661,252 17,659,437
Loss from operations (9,798,572) (5,192,833)
Other income (expense):
Interest income 700,016 938,555
Interest expense (1,623,992) (1,624,136)
------------------------ ----------------------
Total other income (expense) (923,976) (685,581)
------------------------ ----------------------
Net loss $ (10,722,548) $ (5,878,414)
======================== ======================
Net loss per share (Note 7) $ (.78) $ (.44)
======================== ======================
Average number of shares and equivalents 13,669,586 13,469,466
======================== ======================
See notes to Condensed Financial Statements.
</TABLE>
5
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
---------------- -------------
<S> <C> <C>
Revenues:
Product sales and contract revenue $ 3,979,966 $ 16,681,645
Services revenue 10,413,357 5,693,906
Nonrefundable prepayment revenue -- 2,185,000
------------------------ -------------------
Net revenues 14,393,323 24,560,551
Costs and expenses:
Cost of sales 7,807,807 15,042,380
Research and development 20,906,159 14,457,855
Selling, general, and administrative expenses 10,468,662 8,835,914
------------------------ --------------------
Total costs and expenses 39,182,628 38,336,149
Loss from operations (24,789,305) (13,775,598)
Other income (expense):
Interest income 2,590,881 3,103,897
Interest expense (4,871,592) (4,871,843)
------------------------ --------------------
Total other income (expense) (2,280,711) (1,767,946)
------------------------ --------------------
Net loss $ (27,070,016) $ (15,543,544)
======================== ====================
Net loss per share (Note 7) $ (1.99) $ (1.16)
======================== ====================
Average number of shares and equivalents 13,628,911 13,449,153
======================== ====================
See notes to Condensed Financial Statements.
</TABLE>
6
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Operating activities
Net loss $(27,070,016) $(15,543,544)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 2,345,407 2,300,566
Other noncash charges 1,305,055 711,942
Changes in operating assets 7,220,841 (3,038,136)
Changes in operating liabilities (8,931,234) (8,705,573)
-------------------------------------
Net cash used in operating activities (25,129,947) (24,274,745)
Investing activities
Acquisitions of furniture, fixtures, and equipment (3,499,302) (2,617,209)
Acquisitions of product software (506,480) (350,000)
Net decrease in investments 99,934 5,941,525
------------------------------------
Net cash (used in) provided by investing activities (3,905,848) 2,974,316
Financing activities
Issuance of common stock 290,554 91,805
Settlement of put option (Note 2) -- (7,346,370)
Decrease in restricted cash (Note 2) 1,050,000 10,380,063
-------------------------------------
Net cash provided by financing activities 1,340,554 3,125,498
Decrease in cash and cash equivalents (27,695,241) (18,174,931)
Cash and cash equivalents at beginning of period 41,481,289 45,403,692
-------------------------------------
Cash and cash equivalents at end of period $ 13,786,048 $ 27,228,761
=====================================
See notes to Condensed Financial Statements.
</TABLE>
7
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
September 30, 2000
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited Condensed Financial Statements in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. We believe that all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and nine-month periods ended September 30, 2000
and 1999 are not necessarily indicative of the results that may be expected for
a full fiscal year. For further information, refer to the financial statements
and accompanying notes for the year ended December 31, 1999 included in our Form
10-K submission.
2. RESTRICTED CASH
On December 31, 1999, we had an outstanding stand-by letter of credit in the
amount of $1.0 million, which was secured by restricted cash of the same amount.
The letter of credit expired in March 2000, and the related cash was
reclassified to unrestricted cash. On December 31, 1999, we also had $50,000
restricted cash on deposit with our primary bank as collateral for a corporate
procurement card. The collateral requirement for the bank procurement card was
removed in April 2000. As of September 30, 2000, we had no restricted cash.
In connection with a stock repurchase program authorized by the Board of
Directors, in 1997 we entered into an agreement with an investment banker. Up to
1.0 million shares of our common stock could be purchased through the use of put
and/or call option agreements. Based on the decline in the market value of our
common stock below the put option price of $9.11, we were required to reflect
the difference as restricted cash. The put option was exercised in March and
April 1999, and we paid the option holder $3.0 million in March 1999 and $4.3
million in April 1999. All payments were recorded as a reduction of paid-in
capital and a reduction in restricted cash. We have no further obligations under
the agreements.
3. CASH, CASH EQUIVALENTS, AND INVESTMENTS
We consider all highly liquid investments, with a maturity of three months or
less when purchased, to be cash equivalents. Cash equivalents consist
principally of funds in demand deposit accounts, United States Treasury
obligations, and commercial paper.
INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of our investments in debt
securities at the time of purchase. Debt securities for which we have both the
intent and ability to hold to maturity are classified as held to maturity. These
securities are carried at amortized cost. As of September 30, 2000, we had no
investments that qualified as trading or available for sale.
As of September 30, 2000 and December 31, 1999, our investments in debt
securities were classified as cash, cash equivalents, and short- and long-term
investments. We maintain these balances principally in demand deposit accounts,
United States Treasury obligations, and commercial paper with various
8
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
3. CASH, CASH EQUIVALENTS, AND INVESTMENTS (CONTINUED)
INVESTMENTS IN DEBT SECURITIES (CONTINUED)
financial institutions. These financial institutions are located in different
areas of the United States, and our policy is designed to limit exposure to any
one institution. We perform periodic evaluations of the relative standing of
those financial institutions that participate in our investment strategy.
The following is a summary of cash, cash equivalents, and both short- and
long-term investments by balance sheet classification for September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ------------
<S> <C> <C>
Cash and cash equivalents:
Demand deposit accounts $ 3,714,358 $ 29,651,381
Commercial paper 10,071,690 11,829,908
---------------------- -----------------------
$ 13,786,048 $ 41,481,289
====================== =======================
Short-term investments:
Commercial paper $ 26,852,631 $ 13,090,581
U.S. Treasury obligations -- 8,565,306
---------------------- -----------------------
$ 26,852,631 $ 21,655,887
====================== =======================
Long-term investments:
Commercial paper $ -- $ 5,296,678
====================== =======================
</TABLE>
The estimated fair value of each investment approximates the amortized cost;
therefore, there are no unrealized gains or losses as of September 30, 2000 and
December 31, 1999.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------- ----------------
<S> <C> <C>
Electronic parts and other components $ 4,227,707 $ 3,616,080
Work in process 734,471 941,399
Finished goods 1,288,119 1,086,363
---------------------- -----------------------
6,250,297 5,643,842
Inventory reserves (4,033,068) (4,065,685)
---------------------- -----------------------
$ 2,217,229 $ 1,578,157
====================== =======================
</TABLE>
9
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
5. EMPLOYMENT AGREEMENT
In connection with the hiring of our President and CEO, David E. Orr, on April
1, 1997 we entered into an employment agreement that required us to deposit $4.0
million into a rabbi trust. We were recognizing this amount as compensation
expense on a straight-line basis over the five-year employment agreement. Mr.
Orr received the interest earnings from the rabbi trust, and these earnings were
reported as compensation to him. The $4.0 million is payable to Mr. Orr on the
fifth anniversary of his employment or based upon certain triggering events as
described in the employment agreement.
In August 1999, Mr. Orr's employment agreement was amended, resulting in the
transfer of the $4.0 million from a rabbi trust to a secular trust. All other
terms of the employment agreement remained unchanged, including the term of Mr.
Orr's employment. Interest earnings from the secular trust are paid annually to
Mr. Orr. The accounting effects of transferring the $4.0 million from a rabbi
trust to a secular trust resulted in the removal of the restricted cash
classification on the balance sheet, along with the removal of the long-term
deferred compensation liability. The remaining amount of the $4.0 million that
was not charged to compensation expense at the time of this amendment has been
recorded as prepaid compensation. The balance of $1.2 million as of September
30, 2000 is included in other noncurrent assets and is being amortized to
compensation expense over the remaining term of the employment agreement.
Mr. Orr was also granted 80,000 shares of restricted common stock valued at $1.0
million. Upon issuance of this stock, we charged deferred compensation expense
equivalent to the market value at the date of grant, $1.0 million, to
stockholders' equity. We are amortizing this amount as compensation expense over
the term of the employment agreement of five years.
6. CONVERTABLE DEBT
On May 17, 1996, we issued $115.0 million of 5% convertible subordinated notes
due May 15, 2001 that entitle the holder to convert the notes into shares of our
common stock. Interest is payable on May 15 and November 15 of each year. Each
$1,000 note is convertible into 24.1080 shares of our common stock at a
conversion price of $41.48 per share. We could not redeem the notes before May
15, 1999. After that date, we may redeem the notes initially at 102% and at
decreasing prices thereafter to 100% at maturity, plus accrued interest. Costs
associated with this financing have been deferred and are being amortized on a
straight-line basis over the term of the notes. As of May 15, 2000, the
convertible subordinated notes were reclassified from long-term liabilities to
short-term liabilities because the maturity date is within one year.
7. NET LOSS PER SHARE
All loss per share amounts for all periods have been presented to conform to
Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share." Due to the cumulative net losses for the periods presented, potential
common shares are considered antidilutive and therefore did not impact the loss
per share calculation.
10
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
8. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 2000. Because of our
minimal use of derivatives, the adoption of this Statement is not expected to
have a significant effect on our earnings or our financial position.
9. BUSINESS SEGMENT INFORMATION
We are engaged in a single business segment consisting of the development,
manufacture, marketing, and service of electronic equipment for the
telecommunications industry. Regional Bell operating companies (RBOCs),
independent telephone companies, and competitive local exchange carriers are the
primary users of our products. In 1998, we entered into several agreements with
Lucent Technologies, which utilized our research and development and
manufacturing resources.
Revenues from Lucent, Marconi (formerly Bosch Telecom, Inc.), and direct sales
to RBOCs and others as a percentage of our total revenues are as follows:
September 30,
2000 1999
----------------------
Lucent 88.0% 87.0%
Marconi 9.0 5.0
RBOCs and others 3.0 8.0
----------------------
100.0% 100.0%
======================
Revenues by geographic area as a percentage of our total revenues are as
follows:
September 30,
2000 1999
----------------------
United States 92.0% 97.0%
Europe 8.0 3.0
----------------------
100.0% 100.0%
======================
The following customers' accounts receivable balances as a percentage of our
total accounts receivable as of September 30, 2000 and December 31, 1999 are as
follows:
2000 1999
-----------------------
Lucent 39.0% 92.0%
Marconi 15.0 3.0
RBOCs 19.0 3.0
Others 27.0 2.0
-----------------------
100.0% 100.0%
=======================
11
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Product Status
--------------
PRODUCT DEVELOPMENT AND CERTIFICATION
The Pliant(TM) 3000 Integrated Access Platform is our next generation access
product that we announced on December 15, 1999. The first release is our
narrowband, traditional telephony platform, which was completed during the third
quarter. During the third quarter, we also made significant progress in
completing the second release. The second release of the Pliant 3000 adds fiber
optic transmission, DSL service capability, tree and branch topology, and
additional narrowband services to the first release. The second release will be
completed in the fourth quarter of 2000. We also plan to add several features as
an upgrade to the second release during the fourth quarter; these features
include DS-3 interfaces, P-phone and ethernet services, as well as additional
DSL flexibility. The third release of our Pliant 3000 will contain a variety of
converged networking and data service enhancements. This release is planned for
the third quarter of 2001.
The Pliant 3000 has completed interoperability testing with Lucent, Nortel, and
Siemens switching equipment. This ensures Pliant's compatibility with the
industry's leading public service telephone switching platforms for our ILEC and
CLEC customers. We have also successfully performed ADSL interoperability
testing with several suppliers of DSL modems at the University of New Hampshire,
an independent testing facility.
The Pliant 3000 has also completed three critical industry safety certifications
and testings. The first, Network Equipment Building Standards Level 3
certification, verifies that the access system meets stringent physical,
environmental, and electrical standards required by our industry. The UL 1950
listing and the FCC Part 15 compliance ensure that the Pliant 3000 meets the
electrical safety and emissions standards demanded by the marketplace. These
three certifications are required for broad commercial deployment of the Pliant
3000.
FIELD TRIALS
In the third quarter and early in the fourth quarter, we announced successful
completion of three customer field trials of the Pliant 3000's first release.
Two additional narrowband trials are in process, and we expect to announce the
results in the fourth quarter. In October, we began shipping hardware in
preparation for customer field trials for the second release. Some of these are
expansions of the narrowband trials and will add broadband or fiber optic
capability. Others are with new customers. We have received initial orders from
field trial customers for the second release of the Pliant 3000, pending
successful completion of the field trials.
REVENUE STATUS
We recorded initial sales of the first release of our Pliant 3000 in September
2000. In the fourth quarter, we expect to record additional revenue from the
first release and from the second release, if those field trials are successful.
We do not expect substantial revenues from our Pliant 3000 product until after
12
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
Product Status (continued)
--------------------------
REVENUE STATUS (CONTINUED)
we successfully complete development and customer field trials for the second
release (and its subsequent enhancements) and the third release of our product.
There can be no assurance that the product development and field trials will be
on schedule or successful or that we will have additional orders for the Pliant
3000.
Appointment of New Board Member
-------------------------------
In September, we appointed Dr. John R. Sergo, Jr. to our Board of Directors. Dr.
Sergo has thirty years of executive-level marketing, technology assessment, and
technical management in telecommunications. He is currently a faculty member of
Georgia State University's Computer Information Systems Department, where he
teaches graduate and undergraduate courses in telecommunications. Previously, he
worked as the vice president of strategic planning at DSC Communications, a
manufacturer of telecommunications equipment. He also spent several years with
Northern Telecom (now Nortel Networks) as their vice president of broadband
systems and marketing transmission access. He is also a telecommunications
consultant for a large incumbent local exchange carrier and a wireless Internet
access provider.
TL 9000 Registration
--------------------
We announced in early November 2000 that we successfully achieved TL 9000
registration. We successfully completed the registration process for both
hardware and software. The TL 9000 is the new telecommunications quality system
standard established to create a consistent set of requirements for the
telecommunications industry. This registration supplements the ISO 9001
registration that we have held since 1994.
REVENUES
Third Quarter
-------------
Our net revenues in the third quarter of 2000 were $3.9 million, compared to
$12.5 million in the third quarter of 1999. This decrease was due to lower
product sales and contract revenue, partially offset by higher services revenue.
Our product sales and contract revenue decreased to $1.1 million from $10.6
million in 1999. In 2000, this revenue was primarily due to sales of our legacy
FLX products. It also included minimal product revenues from the first release
of our Pliant 3000 product. The 1999 revenue included sales of a product we
manufactured for Lucent and contract revenue from our Manufacturing Agreement
with Lucent. In late 1999, we discontinued manufacturing the Lucent product due
to decreased demand from Lucent's customer. Also, in early 2000 we agreed with
Lucent to transfer the remaining manufacturing contract
13
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
REVENUES (CONTINUED)
Third Quarter (continued)
-------------
obligation to our 1998 Research & Development Agreement with Lucent. As a
result, our product sales have decreased.
The revenue we earn from providing services increased to $2.7 million in the
third quarter of 2000, compared to $1.9 million for the same period in 1999.
This increase was due to recognition of milestones we met in providing
development services in connection with our 1998 Research & Development
Agreement with Lucent. We recognize services revenue under the
percentage-of-completion method of accounting.
Year-to-Date
------------
Our net revenues for the first nine months of 2000 were $14.4 million, compared
to $24.6 million for the same period in 1999. Our 1999 revenues included $2.2
million of nonrefundable prepayments we received from Lucent in prior years. If
we exclude this one-time revenue, our net revenues for the first nine months of
2000 were $8.0 million lower than the same period in 1999. The decrease in
revenue was due to lower product sales, partially offset by higher services
revenue. Services revenue increased to $10.4 million, compared to $5.7 million
in 1999, due to the switch from contract manufacturing to development services
under the amended Lucent agreements explained above and the achievement of
significant milestones in the research and development project for Lucent.
Product sales and services revenue decreased from $16.7 million in 1999 to $4.0
million in 2000 due to the discontinuation of the manufacturing of Lucent's
product and the transfer of contract revenues to our Research & Development
Agreement with Lucent.
Product sales for the first nine months of 2000 included $3.9 million in sales
of our FLX products, compared to $2.5 million in 1999. This increase is due to
end-of-life sales of the product. We no longer devote resources to actively
market our FLX products, and we do not expect significant future revenues from
our FLX products. In April 1999, we gave the required one-year notice to Lucent
that we would discontinue manufacturing our FLX products. In early April 2000,
Lucent placed a final order for these products under our long-term pricing
agreement. Based on our agreement with Lucent, Lucent must accept these products
for delivery by October 2000. Lucent may continue to order these products, but
we are no longer bound by the long-term pricing agreement. We do not expect
Lucent to place any additional orders for these products. We have received
little revenue from our 1998 Alliance with Marconi, and we do not expect to
receive significant future revenues from the FSAN 1.0 products Marconi has
developed.
Pliant 3000 Revenue Status
--------------------------
In September 2000 we recorded initial revenues from the first release of our
Pliant 3000. These revenues were minimal, and we anticipate that we will not
receive substantial revenues from our Pliant 3000 access product until after we
successfully complete development and customer field trials for the second and
third releases of that product. We plan to ship the second release of our Pliant
3000 in the fourth quarter
14
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
REVENUES (CONTINUED)
Pliant 3000 Revenue Status (continued)
--------------------------
of 2000, if the field trials are successful. We expect to introduce the third
release of our Pliant 3000 access product during the third quarter of 2001. (See
"Recent Developments" above.)
Part of the Pliant 3000 target market includes CLECs. A number of CLECs have
experienced financial difficulties recently, especially those with significant
debt as part of their capital structure. Although we believe most of our
targeted CLEC customers are financially stable, there is no assurance that these
customers will remain financially stable and be able to purchase the Pliant
3000.
COST OF SALES AND GROSS MARGIN
Our cost of sales for the third quarter of 2000 was $3.1 million, compared to
$9.4 million for the same period in 1999. Our cost of product revenue was $2.5
million in 2000 and $8.7 million in 1999. Our cost of services revenue was $0.6
million in 2000, compared with $0.7 million in 1999. The total gross margin of
$0.8 million for the third quarter of 2000 was 19%, compared to 25% for the same
period in 1999. The decreased gross margin percentage for the third quarter of
2000 reflects the elimination of the Lucent Manufacturing Contract revenue and
increased field trial costs related to the Pliant 3000, partially offset by
increased services revenue from the Lucent Research & Development Agreement.
Our cost of sales for the first nine months of 2000 was $7.8 million, compared
to $15.0 million for the same period in 1999. Our cost of product revenue was
$6.1 million in 2000 and $12.7 million in 1999. Our cost of services revenue was
$1.7 million in 2000, compared with $2.3 million in 1999. The gross margin of
$6.6 million was 46%, compared to 33% in 1999, excluding one-time revenues in
1999. The increased gross margin percentage reflects the increased services
revenue from the Lucent Research & Development Agreement.
Our industry is currently experiencing long lead times and shortages on certain
electronic parts. Although we have not experienced any critical problems at this
time, any significant delays with lead times on parts and/or component
availability could adversely affect our revenues, costs, and gross margins.
If our Pliant 3000 sales goals and cost reduction targets are not met, our
potential profitability will be adversely affected. We expect that customer
price competition could have an adverse impact on our gross margins. We expect
that margins will fluctuate because we cannot accurately predict the timing of
shipments of our Pliant 3000 access product that is under development and in
field trials. We expect Pliant 3000 gross margins to remain low until volumes
increase.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses for the third quarter of 2000 were
approximately $7.2 million, compared to $5.4 million for the same period in
1999. For the first nine months of 2000, our research and development expenses
were approximately $20.9 million, compared to $14.5 million for the same
15
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PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES (CONTINUED)
period in 1999. The increases of $1.8 million for the quarter and $6.4 million
for the nine months were due primarily to higher third party services expenses,
product development expenses, and personnel expenses associated with the
development of our Pliant 3000 product. The third party services expenses
consisted of charges from independent contractor and engineering development
firms and relate to required third party testing for interoperability and
industry safety certifications. Product development expenses consisted of
prototype costs and product software development charges.
We anticipate that our research and development expenses in 2000 will exceed our
1999 expenses as we continue to develop the second release of the Pliant 3000
and support our field trials. A tight labor market in the Research Triangle Park
area of North Carolina and extremely competitive engineering salaries for our
development staff are likely to increase our research and development expenses
in the fourth quarter. However, those expenses should level off in subsequent
quarters.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the third quarter of 2000 were
approximately $3.3 million, compared to $2.8 million for the same period in
1999. For the first nine months of 2000, our selling, general, and
administrative expenses were approximately $10.5 million, compared to $8.8
million for the same period in 1999. Our 2000 expenses increased by $0.5 million
for the third quarter and $1.7 million for the nine-month period because we
hired additional sales staff and incurred significant trade show and advertising
expenses to increase industry awareness of our Pliant 3000 access product. These
expenses included salaries, benefits, and related expenses for personnel engaged
in direct marketing, sales, and field service support. They also included
executive and administrative personnel, professional fees, and other general
corporate expenses.
OTHER INCOME (EXPENSES)
In the third quarter of 2000, our interest expense was $0.9 million higher than
our interest income. In the third quarter of 1999, our interest expense was
higher than our interest income by $0.7 million. Interest income is earned on
cash, cash equivalents, and both short- and long-term investment balances. We
had less cash to invest in 2000, but yields on our investments were higher than
1999 due to higher interest rates.
In the first nine months of 2000, our interest expense was $2.3 million higher
than our interest income, compared to $1.8 million in 1999. Our interest income
decreased by $0.5 million in the first nine months of 2000, compared to the same
period in 1999, because we had less cash to invest. The 2000 decrease would have
been larger, but in 1999 we realized a $0.3 million capital loss related to the
equity put option agreements exercised in March and April of 1999. The decrease
in interest income was partially offset by higher interest rates in 2000. Our
interest expense in 2000 and 1999 was due to the $115.0 million of 5%
convertible notes that we issued in May 1996. Interest expense will continue to
exceed interest income in 2000 because we will use our cash and investments to
develop and market our Pliant 3000 access product.
16
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PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET LOSS
During the third quarter of 2000, we lost $10.7 million or $(0.78) per share,
compared to our net loss of $5.9 million or $(0.44) per share for the same
period in 1999. For the first nine months of 2000, we lost $27.1 million or
$(1.99) per share, compared to our net loss of $15.5 million, or $(1.16) per
share for the same period in 1999. Excluding the one-time revenue of $2.2
million, the 1999 loss would have been $17.7 million or $(1.32) per share. Our
net losses increased in 2000 due to decreased product sales and because we
increased our research and development expenses as well as our selling, general,
and administrative expenses to support the development and introduction of our
Pliant 3000 product. These increases were partially offset by an increase in our
services revenue.
Our operating results continue to reflect a lack of demand for our older
products and the transition to our new access product, the Pliant 3000, and its
related development and marketing expenses. We have been implementing our
business strategy announced in early 1998 for nine full quarters, and we expect
to incur substantial losses in future periods. (See Part II, Item 5: Risk
Factors.)
LIQUIDITY AND CAPITAL RESOURCES
Cash and Investment Balances
----------------------------
As of September 30, 2000, we had $40.6 million of cash, cash equivalents, and
short- and long-term investments, compared to $69.5 million at the end of 1999,
including restricted cash. Restricted cash is cash that we cannot withdraw or
use without restrictions and is not available to fund our general operations.
Our 1999 restricted cash of $1.1 million consisted of $1.0 million for an
outstanding stand-by letter of credit and $50,000 for a corporate procurement
card. The letter of credit expired in March 2000. The collateral requirement for
the bank procurement card was removed in early April 2000. As of September 30,
2000, we had no restricted cash. In October 2000, we were required to restrict
$400,000 in connection with a letter of credit for a performance bond related to
a customer order for the Pliant 3000.
Change in Cash, Investments, and Key Working Capital Items
----------------------------------------------------------
Our cash and investment assets decreased by $28.9 million in the first nine
months of 2000. Our net loss of $27.1 million was the primary reason for the
decrease in cash and investments. We also acquired $3.5 million of test
equipment and software to support development of our Pliant 3000 access product,
which contributed to the decrease in our cash.
Accounts receivable decreased by $7.7 million during 2000. The 1999 balance of
$8.3 million included invoices for the Lucent product that we were manufacturing
and invoices related to the Lucent Manufacturing Agreement and Research &
Development Agreement. We have increased our net inventories to $2.2 million
from $1.6 million in order to support field trials and initial customer orders
for our Pliant 3000. Deferred revenue decreased due to our recognition of
Lucent services revenue that was included in deferred revenue at the end of
1999.
17
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Future Cash Requirements
------------------------
Based on our current projections of operations, we expect that cash, cash
equivalents, and investments as of September 30, 2000, along with cash we will
receive from our development service contract with Lucent, will be adequate to
fund our operating requirements and property and equipment expenditures at least
until our convertible notes become due on May 15, 2001. Sales of our older
products and the Pliant 3000 access product will not generate significant cash
in 2000 or in the first six months of 2001.
Convertible Debt
----------------
On May 17, 1996, we issued $115.0 million of 5% convertible subordinated notes
due on May 15, 2001. The holders may convert these notes into shares of our
common stock at a conversion rate of $41.48 per share. Interest is payable on
May 15 and November 15 of each year. Current liabilities increased by $106.1
million due to the reclassification of our $115.0 million notes from long-term
to short-term liabilities. Additional information about our convertible
subordinated notes is described in Note 6 (Convertible Debt) to our Condensed
Financial Statements. We are current on all interest payments, and we anticipate
making interest payments in the future.
Refinancing Activities
----------------------
In late 1998, we began negotiating with a committee of note holders to
restructure our $115.0 million of convertible subordinated notes. CIBC
Oppenheimer Corp., our financial advisor at that time, assisted us in these
negotiations. We were seeking to extend the maturity date of a significant
portion of the notes until after we began substantial shipments of our Pliant
3000 access product. In November 1999, we decided not to undertake a
debt-restructuring transaction at that time. Implementing a debt-restructuring
plan would have resulted in the reduction of our cash resources, dilution of our
equity, an increase in our interest payments, and/or other adverse consequences.
We will have to consider such a transaction as we attempt to raise additional
equity and/or debt financing because the existing debt terms may impede our
ability to raise capital.
Additional equity and/or debt financing will be required to repay or restructure
the $115.0 million of notes when they become due on May 15, 2001. Failure to pay
principal and interest when due would have a material adverse effect on our
company. If our business strategy fails to generate investor confidence in our
ability to earn future revenue and minimize our losses, we will be unable to
obtain the additional financing needed to repay the notes when due. Also, we may
be unable to obtain such financing on favorable terms. Besides the financing
needed to repay the notes, we will also require financing to fund our
operations, including our continued product development activities related to
future releases of the Pliant 3000.
18
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Customer Financing
------------------
Sales to some of our target customers may require us to obtain performance bonds
for the value of our contracts with these customers. To obtain the performance
bonds, we may be required to establish a letter of credit as collateral. As we
approach the May 15, 2001 due date of our $115.0 million in convertible notes,
obtaining the required performance bonds may become more difficult and/or
expensive. In addition, as our cash decreases, restricting a significant amount
of cash could have a material adverse effect on our ability to fund our
operations.
OTHER FINANCIAL INFORMATION
Backlog
-------
Our backlog includes sales orders we have received that have a scheduled
delivery date before September 30, 2001. The aggregate value of orders received
and included in backlog was approximately $3.6 million on September 30, 2000,
consisting of orders for our discontinued products and our Pliant 3000. We
believe that the orders included in the backlog are firm orders and will be
shipped before September 30, 2001. We may allow our customers to cancel or delay
orders where it is in our best interest to do so.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The following table provides information about our financial instruments,
primarily investments, which are sensitive to changes in interest rates. For
investment securities and debt obligations, the table presents principal cash
flows and related interest rates by expected maturity dates. Our investments are
classified as short-term investments and are scheduled to mature within 12
months after September 30, 2000. As of September 30, 2000, we had no long-term
investments.
EXPECTED MATURITY DATES
-----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Fair Value
(dollars in 000's) 2000 2001 2002 2003 2004 Total 9/30/00
Assets:
Short-term investments $ 26,853 -- -- -- -- $ 26,853 $ 26,853
Long-term investments -- -- -- -- -- -- --
Average interest rate 6.6% 6.6%
Liabilities:
Short-term debt -- 115,000 -- -- -- 115,000 $ 47,725
Average interest rate 5.0% 5.0%
</TABLE>
19
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
QUALITATIVE DISCLOSURES
Our investments are held for non-trading purposes and are subject to market risk
for interest rates. We maintain our investments principally in United States
Treasury obligations and commercial paper with various financial institutions.
These institutions are located in different areas of the United States, and our
policy is designed to limit exposure to any one institution, as well as credit
and maturity risks. We perform periodic evaluations of the relative standing of
those financial institutions that participate in our investment strategy. While
we cannot predict or manage future interest rates, we evaluate our investment
positions on an ongoing basis.
The short-term debt, which accrues interest at a fixed rate of 5%, is subject to
market risk for interest rates. The 5% fixed rate may no longer approximate
current market prices for such instruments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material litigation.
ITEM 5. OTHER INFORMATION
RISK FACTORS
In connection with the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document are advised that this
document contains both statements of historical facts and forward-looking
statements. Our forward-looking statements include statements related to our
customers, business partners and competitors, our previous product, our new
product, and our future financial requirements. Our forward-looking statements
also relate to our field trials, product sales, debt-restructuring and equity
financing activities, and relationships with Lucent and Marconi. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
and similar expressions are intended to identify forward-looking statements. Our
forward-looking statements are based on current expectations, estimates, and
projections about our industry, management's beliefs, and certain assumptions
made by management. These statements are not guarantees of future performance,
and actual actions or results may differ materially. Our forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated by the forward-looking
statements, including the risks and uncertainties described below. We undertake
no obligation to update publicly any forward-looking statements as a result of
new information, future events or otherwise, unless required by law.
You should carefully consider the risks described below, together with all of
the other information included in this Form 10-Q and in our Form 10-K, before
making an investment decision. The risks and uncertainties described below are
not the only ones we face. If any of the following risks actually occur, it is
likely that our business, financial condition, or operating results would be
harmed. In such case, the trading price of our common stock could decline, and
you could lose all or part of your investment.
20
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks
---------------
WE HAVE INCURRED NET LOSSES EVERY YEAR, AND WE MAY NEVER ACHIEVE PROFITABILITY.
Our net loss for the first nine months of 2000 was $27.1 million. We have never
been profitable on an annual basis and may never achieve profitability. As of
September 30, 2000, we had an accumulated deficit of approximately $229.3
million.
WE HAVE NO ESTABLISHED PRODUCT THAT GENERATES SIGNIFICANT REVENUE.
We expect sales volume for our previous product, the FLX-2500, to remain low.
The pricing terms of our contract with Lucent for our FLX-2500 product expired
on April 8, 2000. Before the expiration date, Lucent placed what we believe will
be its final order for the FLX-2500. Our initial revenues from our Pliant 3000
were minimal in September, and we expect additional revenues in the fourth
quarter of 2000. However, these revenues will not be substantial until we
complete development and field trials of the second and third releases of the
product. Except for the Lucent Research & Development contracts, we expect low
revenues in the fourth quarter of 2000 and do not expect significant revenues
from the Pliant 3000 until 2001. We must continue to invest substantial
resources to develop and market the second and third releases of our Pliant 3000
access product.
PRICE COMPETITION MAY PREVENT US FROM ACHIEVING PROFITABILITY.
We expect price competition to continue to be an important competitive factor.
Our previous contracts with Lucent for our FLX-2500 were forward priced,
requiring us to deliver these products at prices that would be profitable only
at high volumes. Potential customers for our Pliant 3000 product may also
require long-term contracts at fixed prices. If these volumes do not materialize
and if we are unable to achieve planned cost reductions, our new product may not
be profitable.
ON MAY 15, 2001, OUR CONVERTIBLE BONDS IN THE AMOUNT OF $115.0 MILLION BECOME
DUE, AND WE WILL NOT HAVE THE RESOURCES TO PAY THEM, UNLESS WE ARE ABLE TO RAISE
ADDITIONAL EQUITY OR DEBT FINANCING.
On May 17, 1996, we issued $115.0 million of 5% convertible subordinated notes
due May 15, 2001. Interest is payable on May 15 and November 15 of each year.
The holders may convert these notes into shares of our common stock at a
conversion rate of $41.48 per share. Since our current stock price is
significantly lower than $41.48, we will need additional equity and/or debt
financing to repay the notes when they become due. If our new Pliant 3000
product fails to generate investor confidence in our ability to earn future
revenue and minimize our losses, we will be unable to obtain the additional
financing needed to repay the notes when due. Also, we may be unable to obtain
such financing on favorable terms. Failure to pay principal and interest when
due would have a material adverse effect on our company.
21
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
---------------
RESTRUCTURING OUR DEBT MAY CAUSE OUR EQUITY OWNERS TO SUFFER SUBSTANTIAL
DILUTION.
In late 1998, we began negotiating with a committee of note holders to
restructure our $115.0 million of convertible subordinated notes. CIBC
Oppenheimer Corp., our financial advisor at that time, assisted us in these
negotiations. We were seeking to extend the maturity date of a significant
portion of the notes until after we begin substantial shipments of our Pliant
3000 access product. In November 1999, we decided not to undertake a
debt-restructuring transaction at that time. Implementing a debt-restructuring
plan would have resulted in the reduction of our cash resources, dilution of our
equity, an increase in our interest payments, and/or other adverse consequences.
We will have to consider such a transaction as part of an overall refinancing
plan as we attempt to raise additional equity and/or debt financing. A debt
restructuring, an equity financing, and/or a debt financing plan will result in
substantial dilution of the ownership interests of our current stockholders.
CLECS, WHICH ARE PART OF OUR OVERALL TARGETED MARKET FOR OUR PLIANT 3000, HAVE
INTENSIVE CAPITAL REQUIREMENTS AND MAY NOT PURCHASE OUR PRODUCTS UNLESS WE OFFER
VENDOR FINANCING.
The CLEC market is growing very rapidly and requires extensive capital
investments. Many of our target customers in that market require financing. Such
financing may be in the form of extended credit terms and/or equipment leasing.
Many CLECs already have substantial debt. The credit risks of these customers
may prevent us from borrowing to provide them with vendor financing. Other
vendors with whom we will be competing regularly provide vendor financing and
have the financial resources to provide financing to customers with high credit
risk. If we are unable to provide financing, these customers may not purchase
our Pliant 3000 product. If we are able to provide vendor financing but are
unable to collect from our customers, our financial condition will be adversely
affected.
SOME OF OUR TARGET CUSTOMERS MAY REQUIRE PERFORMANCE BONDS FOR THE VALUE OF OUR
CONTRACTS WITH THEM, AND OBTAINING THESE PERFORMANCE BONDS MAY BE DIFFICULT
AND/OR EXPENSIVE.
Some of our target customers may obtain financing from the Rural Utilities
Service (RUS). The RUS is an agency of the U.S. Department of Agriculture that
carries out electric and telephone loan activities authorized by law, including
the Rural Electrification Act of 1936. The RUS requires suppliers to obtain a
performance bond for the value of their contracts with these customers. In
October, we received a customer order that required us to obtain a performance
bond. The surety company that issued the bond required us to provide a letter of
credit for approximately 50% of the amount of the order as collateral, which
restricted our cash in the same amount.
Sales to other customers may also require us to obtain performance bonds and
restrict our cash further. As we approach the May 15, 2001 due date of our
$115.0 million in convertible notes, obtaining the required performance bonds
may become more difficult and/or more expensive. In addition, as our cash
decreases, restricting a significant amount of cash will have a material adverse
effect on our ability to fund our operations.
22
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
---------------
WE WILL REQUIRE ADDITIONAL FINANCING TO FUND OUR OPERATIONS.
In addition to the financing needed to repay the $115.0 million in convertible
notes that become due on May 15, 2001, we will also require financing to fund
our operations, including our product development activities related to future
releases of the Pliant 3000, and to finance sales of the Pliant 3000 to
customers. The terms of our existing debt may impede our ability to raise
capital. We cannot be certain that we will be able to obtain additional
financing or that the financing will be on favorable terms. If we are unable to
obtain sufficient financing, we will be unable to continue upgrading our product
to meet customer requirements, sell our products to customers and otherwise
compete effectively, and this would have a material adverse effect on our
company.
OUR PLIANT 3000 ACCESS PRODUCT IS OUR ONLY NEW PRODUCT UNDER DEVELOPMENT, AND IF
WE EXPERIENCE DELAYS IN DEVELOPING THE SECOND AND THIRD RELEASES OF OUR PRODUCT,
IN COMPLETING SUCCESSFUL FIELD TRIALS, OR IN OBTAINING CUSTOMER ORDERS, WE MAY
BE UNABLE TO OBTAIN FINANCING TO REPAY OUR CONVERTIBLE NOTES.
To survive, we cannot have significant delays in the development of the second
release of our Pliant 3000 access product, significant problems in our field
trials, or delays in our initial revenues. To obtain the financing that we will
need to repay or restructure our convertible notes, we expect investors will
want to confirm that the second release of our Pliant 3000 product performs as
anticipated and generates revenue. We do not expect significant revenue from
sales of our Pliant 3000 product until after the second and third releases are
completed and marketed. Any delays in completing the development of the second
release, completing successful field trials of the second release, or receiving
orders for the second release are likely to adversely affect our ability to
raise capital before our convertible notes become due on May 15, 2001.
IF WE ARE SUCCESSFUL IN DEVELOPING THE SECOND RELEASE AND MARKETING OUR PLIANT
3000 PRODUCT, WE MAY NOT BE ABLE TO GENERATE SUSTAINED REVENUE.
Our Pliant 3000 product must compete in the market on price, architecture,
features, and other factors. Our continued development of the Pliant 3000 access
product will be subject to significant technical and customer acceptance
challenges. The continued development will require us to invest substantial
money and time. We cannot be certain that we will be able to complete the
development of the second release of our product or that our product will be
attractive to customers and priced competitively with the products of our
competitors. If our Pliant 3000 product does not compete effectively, we will be
unable to generate sustained revenue. As our Pliant 3000 product is the only
product we have that we believe will generate substantial revenue in the
foreseeable future, our company will be materially and adversely affected if it
is not a competitive product.
23
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
---------------
IF WE ARE SUCCESSFUL IN DEVELOPING THE SECOND RELEASE AND MARKETING OUR PLIANT
3000 PRODUCT, WE MAY NOT BE ABLE TO GENERATE SUSTAINED REVENUE. (CONTINUED)
Even with successful development results, competitors already are selling
products to customers in the market we targeted, and competitors may develop new
competing technology and products that are more attractive to customers than our
Pliant 3000 product. Many of our competitors are larger and financially
stronger. They may be able to offer products at lower prices and finance the
purchase of those products for customers.
VARIATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE VOLATILITY IN OUR STOCK
PRICE.
Since 1997, sales of our older products have decreased each year, and we expect
the decline to continue. We are developing the second release of our Pliant 3000
access product, but shipments of this product will not generate significant
revenue until at least 2001. Our new product sales are difficult for us to
project and may fluctuate from quarter to quarter. Also, the timing of our
operating expenses may vary between quarters. These factors may cause volatility
in our stock price.
OUR STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET TO THE OVER THE
COUNTER BULLETIN BOARD, AND THIS MAY CAUSE VOLATILITY IN OR ADVERSELY AFFECT OUR
STOCK PRICE.
On February 12, 1999, the Nasdaq National Market delisted our shares of common
stock because we failed to achieve compliance with continued listing criteria.
Our shares are now traded on the Over The Counter Bulletin Board (OTCBB). The
OTCBB is a regulated quotation service that displays real-time quotes and volume
information in over-the-counter equity securities. The OTCBB does not impose
listing standards or requirements other than regular filings with the SEC. It
also does not provide automatic trade executions and does not maintain
relationships with quoted issuers. Stocks traded on the OTCBB may face a loss of
market makers and a lack of readily available bid and ask prices. These stocks
may also experience a greater spread between the bid and ask price and a general
loss of liquidity. Certain investors have policies against purchasing or holding
OTCBB securities. The delisting and subsequent trading on the OTCBB have had,
and will continue to have, a material adverse effect on both trading volume and
market value of our stock. Since delisting, our stock price has traded from a
low of $1.06 to a high of $16.06 per share, and the closing price of our stock
on November 7, 2000 was $5.75.
We have not committed to a time period to apply for Nasdaq National Market
relisting. We may apply for relisting with an attempt to raise additional
capital and/or upon advice from our investment bankers. There is no assurance
that we will be relisted on the Nasdaq National Market or maintain that listing
status.
24
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Customer Risks
--------------
MOST OF OUR PROJECTED REVENUE FOR 2000 IS FROM OUR CONTRACTS WITH LUCENT, AND
OUR FAILURE OR LUCENT'S FAILURE TO COMPLY WITH THE TERMS OF THE CONTRACT COULD
HAVE A NEGATIVE EFFECT ON OUR FINANCIAL RESULTS.
We expect that Lucent will provide more than 80% of our projected 2000 revenue.
We will remain substantially dependent upon revenue from Lucent until we
complete development and successfully market the second and third releases of
our Pliant 3000 product. Our agreements with Lucent provide that Lucent will pay
us significant fees for our development services. If Lucent fails to make the
payments as scheduled, our cash flow would be adversely affected. We have given
Lucent a one-year notice of our intention to discontinue manufacturing the
FLX-2500 product. This notice took effect on April 8, 2000. By October 2000,
Lucent must take delivery of all products ordered. Our failure or Lucent's
failure to comply with existing agreements would have a material adverse effect
on us.
Our relationship with Lucent also may adversely affect our ability to partner
with others in the telecommunications industry, due to change of control
provisions contained in our agreements with Lucent. If Lucent decides to change
its relationship with us, or if there are rumors that Lucent will change its
relationship with us, there could be an adverse effect on the market price of
our stock.
In addition, Lucent is a vendor of digital loop carrier and integrated access
products, and our Pliant 3000 product may compete with Lucent in some
circumstances. Such competition could adversely affect Lucent's cooperation with
us to the extent required under our agreements with Lucent.
OUR PRODUCT WILL HAVE TO COMPETE WITH THOSE OF LARGER AND MORE FINANCIALLY
STABLE COMPANIES IN OUR TARGET MARKET.
Even if our development results are successful, our competitors already are
selling products to customers in the market we have targeted. Most of these
competitors are larger than we are, and many are profitable. Our competitors may
develop new, competing technologies and products that are more attractive to
customers than our technologies and products. Also, our competitors may offer
their products at materially lower prices or on more favorable financing terms.
NEW PRODUCT ANNOUNCEMENTS MAY DELAY OR PREVENT SALES OF OUR PRODUCTS.
As we or our competitors announce new products to better meet the changing
requirements of customers, our customers may delay orders of existing products
until the new products are available for shipment or until small volumes of new
products are adequately field tested. Announcements by Lucent of its new digital
loop carrier product, AnyMedia, had this adverse effect on sales of our FLX-2500
product, and the same could occur in the future with respect to our Pliant 3000
product we are developing.
25
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Customer Risks (continued)
--------------
IF COMPETING TECHNOLOGIES THAT OFFER ALTERNATIVE SOLUTIONS TO OUR PLIANT 3000
PRODUCT ACHIEVE SIGNIFICANT ACCEPTANCE, THE DEMAND FOR OUR PRODUCT MAY NOT
DEVELOP.
Technologies that compete with our Pliant 3000 access product may include other
telecommunications-related wireline technologies, cable-based technologies,
fixed wireless technologies and satellite technologies. If our potential
customers choose these alternative technologies, our business, financial
condition, and results of operations could be harmed. Cable operators are
currently deploying products that will be capable of delivering voice,
high-speed data, and video services over cable. Our technology may not be able
to compete effectively against these technologies on price, performance, or
reliability.
IF WE DO NOT RESPOND QUICKLY TO CHANGING CUSTOMER NEEDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS BY OUR COMPETITORS, OUR PRODUCTS MAY BECOME OBSOLETE.
Our position in existing markets or potential markets could be eroded rapidly by
product advances. The life cycles of our products are difficult to estimate. Our
growth and future financial performance will depend in part upon our ability to
enhance existing products and to develop and introduce new products that keep
pace with the following:
o the increased use of the Internet;
o the growth in remote access by telecommuters;
o the increasingly diverse distribution sources for high-quality digital
video; and
o other industry and technological trends.
We expect that our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments. If we fail to timely and cost effectively develop new
products that respond to new technologies and customer needs, the demand for our
products may fall, and we could lose revenues.
Other Risks
-----------
OUR LIMITED BARGAINING POWER WITH CUSTOMERS AND VENDORS MAY NEGATIVELY IMPACT
OUR NEW PRODUCT SALES AND GROSS MARGINS.
As fewer large, potential customers dominate our market, we may not have
sufficient bargaining power to sell our products on favorable terms. If we
succeed in expanding our sales, growth will place significant strain on our
operational resources and systems. Because we depend on single source suppliers
for certain materials, we may experience supplier delays. Our industry is
currently experiencing long lead times and shortages on certain electronic
parts. Although we have not yet experienced any critical problems, any
significant delays with lead times on parts and/or component availability could
adversely affect our revenues, costs, and gross margins.
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Other Risks (continued)
-----------
AS WE APPROACH THE MAY 15, 2001 DUE DATE OF OUR $115.0 MILLION IN CONVERTIBLE
DEBT, VENDORS MAY NOT BE WILLING TO SHIP TO US ON CREDIT.
Our larger suppliers may become concerned whether we will be able to restructure
our $115.0 million convertible debt and raise additional equity/debt financing.
This issue could cause these suppliers to discontinue shipments to us, and this
would have a material adverse effect on our company.
OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY NEGATIVELY IMPACT OUR
FUTURE REVENUES.
Our patents and other proprietary rights may not prevent our competitors from
developing non-infringing technology and products that are more attractive to
customers than our technology and products. Our technology and products could be
determined to infringe on the patents or proprietary rights of others. If this
were to occur, we may not be able to generate future revenues.
OUR ABILITY TO ATTRACT AND RETAIN KEY DEVELOPMENT AND SALES PERSONNEL COULD
NEGATIVELY IMPACT OUR CURRENT AND FUTURE PRODUCT DEVELOPMENT AND SALES.
We began developing our Pliant 3000 product in 1998, and many challenges exist
to complete development of the second and third releases and successfully sell
the product. We will need to retain our current key engineers, as well as
attract additional engineers who have hardware and software experience in
advanced digital access technologies. We are managing multiple, concurrent
projects that will require critical program management expertise to efficiently
allocate scarce engineering resources among competing projects. We must also
continue to attract and retain experienced telecommunications equipment sales
personnel. If we are unable to restructure our $115.0 million convertible debt
and raise additional equity/debt financing, our ability to attract and retain
experienced development and sales employees could be adversely affected. There
can be no assurance we will be successful in such efforts.
The value of our stock options for management and employees may be reduced at
times due to delisting to the OTCBB. This decline in our stock option value
would be caused by lower stock prices, lower trading volume, and other financial
reasons. This could have a material adverse effect on our ability to recruit and
retain key personnel unless we provide other recruiting and retention
incentives, which will be expensive. If we fail to recruit and retain key
employees, this would have a material adverse effect on our ability to implement
our business plan, including our ability to develop and sell our Pliant 3000
access product.
A SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
We have made forward-looking statements in this document, all of which are
subject to risks and uncertainties. Forward-looking statements include
information concerning our possible or assumed
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Other Risks (continued)
-----------
A SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS. (CONTINUED)
future business success and financial results. Such forward-looking statements
include, but are not limited to, statements as to our expectations regarding:
o the future development and sales opportunities for our Pliant 3000 product;
o the future adoption of our planned products and services;
o future revenue opportunities;
o the establishment and future growth of our customer base;
o our ability to successfully develop and sell our Pliant 3000 product;
o future expense levels (including cost of revenues, research and development,
sales and marketing, and general and administrative expenses);
o future sales and marketing efforts;
o our ability to raise capital to repay or restructure our $115.0 million of
convertible notes due May 15, 2001;
o our ability to raise additional capital to fund future operations;
o the future effectiveness of our intellectual property rights; and
o the effect of any litigation in which we would become involved.
When we use words such as "believe," "expect," "anticipate," or similar words,
we are making forward-looking statements.
You should note that an investment in our common stock involves certain risks
and uncertainties that could affect our future business success or financial
results. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth in this "Risk Factors" section and elsewhere in this Form 10-Q.
We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. Before you invest in our
common stock, you should be aware that the occurrence of the events described in
this "Risk Factors" section and elsewhere in this Form 10-Q and in our Form 10-K
could materially and adversely affect our business, financial condition, and
operating results.
We undertake no obligation to update publicly any forward-looking statements as
a result of new information, future events or otherwise, unless required by law.
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PLIANT SYSTEMS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this Report of Form 10-Q to be signed on its behalf by
the undersigned, thereunto duly authorized.
November 14, 2000 /s/ John T. Autrey
-----------------------------------
John T. Autrey
Vice President and Chief Financial Officer
29
