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 March 31, 2000
--------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period to
Commission File Number 0-21766
Pliant Systems, Inc.
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Delaware 56-1615990
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(State of 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)
Registrant's telephone number, including area code: (919) 544-0015
-----------------------------
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 feasible date.
Classes: Outstanding as of May 9, 2000:
- ------- -----------------------------
Common Stock ($.01 par Value) 13,641,210
<PAGE>
PLIANT SYSTEMS, INC.
Index
PAGE NO.
-------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets 3-4
March 31, 2000 and December 31, 1999
Condensed Statements of Operations 5
Three Months Ended March 31, 2000 and 1999
Condensed Statements of Cash Flows 6
Three Months Ended March 31, 2000 and 1999
Notes to Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16-25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 25
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Balance Sheets
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------------- ----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents $ 34,911,440 $ 41,481,289
Restricted cash (NOTE 2) 50,000 1,050,000
Short-term investments (NOTE 3) 25,111,740 21,655,887
Accounts receivable, trade, less allowances $148,000 in 2000
and 1999 3,128,976 8,284,549
Inventories (NOTE 4) 1,435,801 1,578,157
Prepaid expenses and other current assets 1,134,114 798,035
---------------------------------------
Total current assets 65,772,071 74,847,917
Long term investments (NOTE 3) 1,048,327 5,296,678
Furniture, fixtures, and equipment:
Equipment 17,079,282 16,240,184
Software 5,693,133 5,554,299
Furniture and fixtures 727,963 728,341
Leasehold improvements 1,377,899 1,377,899
---------------------------------------
24,878,277 23,900,723
Accumulated depreciation and amortization (18,614,125) (17,891,388)
---------------------------------------
Net furniture, fixtures and equipment 6,264,152 6,009,335
Deferred debt issuance costs (net of accumulated amortization) 843,412 1,030,287
Other noncurrent assets (NOTE 5) 2,227,580 2,427,580
---------------------------------------
Total assets $ 76,155,542 $ 89,611,797
=======================================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,010,180 $ 7,738,270
Accrued expenses 6,658,601 5,570,599
Deferred revenue 3,156,931 6,442,623
Accrued warranty reserve 832,261 830,852
---------------------------------------
Total current liabilities 13,657,973 20,582,344
Long-term liabilities:
Convertible debt (NOTE 6) 115,000,000 115,000,000
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; 13,637,433 and 13,605,073 shares
outstanding 136,374 136,051
Additional paid-in capital (NOTE 2) 156,693,358 156,573,170
Deferred compensation (NOTE 5) (400,000) (450,000)
Accumulated deficit (208,932,163) (202,229,768)
---------------------------------------
Total stockholders' deficit (52,502,431) (45,970,547)
---------------------------------------
Total liabilities and stockholders' deficit $ 76,155,542 $ 89,611,797
=======================================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------- ------------------
Revenues:
<S> <C> <C>
Product sales and contract revenue $ 1,557,879 $ 2,229,064
Services revenue 5,035,692 1,954,761
----------------- ------------------
Net revenues 6,593,571 4,183,825
Costs and expenses:
Cost of sales 2,991,385 1,986,518
Research and development 6,194,490 4,439,515
Selling, general and administrative expenses 3,526,686 2,886,596
----------------- ------------------
Total costs and expenses 12,712,561 9,312,629
Loss from operations (6,118,990) (5,128,804)
Other income (expense):
Interest income 1,040,394 1,359,357
Interest expense (1,623,800) (1,623,800)
----------------- ------------------
Total other income (expense) (583,406) (264,443)
----------------- ------------------
Net loss $ (6,702,396) $ (5,393,247)
================= ==================
Net loss per share (NOTE 7) $ (.49) $ (.40)
================= ==================
Average number of shares and equivalents 13,614,684 13,440,163
================= ==================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------------ -------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (6,702,396) $ (5,393,247)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 733,076 656,926
Other noncash charges 436,879 451,659
Changes in operating assets 4,961,849 (1,273,341)
Change in operating liabilities (6,924,372) 501,020
------------------------------------------
Net cash used in operating activities (7,494,964) (5,056,983)
INVESTING ACTIVITIES
Acquisitions of furniture, fixtures, and equipment (987,894) (658,753)
Net decrease (increase) in investments 792,498 (5,217,933)
------------------------------------------
Net cash used in investing activities (195,396) (5,876,686)
FINANCING ACTIVITIES
Issuance of common stock 120,511 35,366
Settlement of put option (NOTE 2) -- (3,048,482)
Decrease in restricted cash (NOTE 2) 1,000,000 572,895
------------------------------------------
Net cash provided by (used in) financing activities 1,120,511 (2,440,221)
Decrease in cash and cash equivalents (6,569,849) (13,373,890)
Cash and cash equivalents at beginning of period 41,481,289 45,403,692
------------------------------------------
Cash and cash equivalents at end of period $ 34,911,440 $ 32,029,802
==========================================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
6
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
March 31, 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 footnotes
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-month periods ended March 31, 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 footnotes for the year ended December 31, 1999 included in our Form
10-K submission.
2. RESTRICTED CASH
On March 31, 2000 and December 31, 1999, we 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 early
April 2000. On December 31, 1999, we also 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.
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 agreement.
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. At March 31, 2000, we had no
investments that qualified as trading or available for sale.
At March 31, 2000, our investments in debt securities were classified as cash,
cash equivalents and both short- and long-term investments. We maintain these
balances principally in demand deposit accounts, United States Treasury
obligations and commercial paper with various 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.
7
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
3. CASH, CASH EQUIVALENTS AND INVESTMENTS (CONTINUED)
INVESTMENTS IN DEBT SECURITIES (CONTINUED)
The following is a summary of cash, cash equivalents and both short- and
long-term investments by balance sheet classification for March 31, 2000 and
December 31, 1999:
MARCH 31, DECEMBER 31,
2000 1999
---------------------- ----------------------
Cash and cash equivalents:
Demand deposit accounts $ 3,255,310 $ 29,651,381
Commercial paper 31,656,130 11,829,908
---------------------- ----------------------
$ 34,911,440 $ 41,481,289
====================== ======================
MARCH 31, DECEMBER 31,
2000 1999
---------------------- ----------------------
Short-term investments:
Commercial paper $ 17,998,736 $ 13,090,581
U.S. Treasury obligations 7,113,004 8,565,306
---------------------- ----------------------
$ 25,111,740 $ 21,655,887
====================== ======================
Long-term investments:
Commercial paper $ 1,048,327 $ 5,296,678
====================== ======================
The estimated fair value of each investment approximates the amortized cost;
therefore, there are no unrealized gains or losses as of March 31, 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:
MARCH 31, DECEMBER 31,
2000 1999
------------------- ------------------
Electronic parts and other components $ 3,532,367 $ 3,616,080
Work in process 841,372 941,399
Finished goods 1,090,757 1,086,363
------------------- ------------------
5,464,496 5,643,842
Inventory reserves (4,028,695) (4,065,685)
------------------- ------------------
$ 1,435,801 $ 1,578,157
=================== ==================
8
<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 will be 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 $1.6 million as of March 31,
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. LONG-TERM 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.
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 require
restatement of prior periods.
9
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
8. 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, which utilized our research and development and manufacturing resources.
Revenues from Lucent, Marconi (formerly Bosch Telecom, Inc. before February 1,
2000) and direct sales to RBOCs and others as a percentage of our total revenues
are as follows:
MARCH 31
2000 1999
----------------------
Lucent 87.0% 94.0%
Marconi 11.0% 2.0%
RBOCs and others 2.0% 4.0%
----------------------
100.0% 100.0%
======================
Revenues by geographic area as a percentage of our total revenues are as
follows:
MARCH 31
2000 1999
----------------------
United States 90.0% 100.0%
Europe (primarily Spain) 10.0% --
----------------------
100.0% 100.0%
======================
The following customers' accounts receivable balances as a percentage of our
total accounts receivable as of March 31, 2000 and December 31, 1999 are as
follows:
2000 1999
----------------------
Lucent 64.0% 92.0%
Marconi 26.0% 3.0%
RBOCs 4.0% 3.0%
Others 6.0% 2.0%
----------------------
100.0% 100.0%
======================
10
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
New Product Status
- ------------------
The Pliant 3000 Integrated Access Platform is our next generation access product
that we announced on December 15, 1999. We displayed our Pliant 3000 at the
ComNet trade show in late January 2000. We had expected to complete the systems
test phase of this new product by the end of the first quarter, but this phase
has taken longer than we anticipated. We expect to complete final software
integration during the second quarter. At the end of the first quarter, we
completed site engineering and began shipping hardware in preparation for our
first customer field trials for our Pliant 3000. Field trials are expected to
begin in the second quarter, and we anticipate announcing their status by the
end of the second quarter or the beginning of the third quarter. We still expect
initial sales of the first release of our Pliant 3000 in the third quarter of
2000, if the field trials are successful.
We have continued making progress in the development of the second release of
our Pliant 3000. The second release will add ATM-based digital subscriber line
capabilities to the traditional narrowband and data and voice services that will
be available in the first release. We expect to demonstrate the ADSL capability
of the integrated Pliant 3000 TDM/ATM platform at the SuperComm Trade Show in
early June of this year. We expect to begin shipping the second release of our
Pliant 3000 in the fourth quarter of this year, if field trials are successful.
The third release of our Pliant 3000 will implement a variety of converged
networking and data service enhancements. This release is planned for the third
quarter of 2001. We do not expect substantial revenues from our Pliant 3000
product until the second and third releases are completed and demonstrated to
customers. There can be no assurance that the final software integration and/or
field trials will be on schedule or successful or that we will have orders for
the new product.
Marconi Relationship
- --------------------
In early May 2000, Marconi (formerly Bosch Telecom) notified us that it will
discontinue development of its FSAN 2.0 product. Marconi also provided us a
30-day notice, beginning May 5, 2000, of its intent to manufacture the FSAN 1.0
product at its facilities and pay us royalties under the license agreement. We
plan to begin discussions with Marconi to review the entire Alliance Agreement
and our future relationship with Marconi. There can be no assurance that we will
receive additional revenue from the Marconi Alliance.
REVENUES
Our net revenues in the first quarter of 2000 were $6.6 million, compared to
$4.2 million in the first quarter of 1999. Our product sales and contract
revenue decreased to $1.6 million from $2.2 million in 1999. Our product sales
and contract revenue for the first quarter of 2000 included $1.2 million in
sales of our previous products, compared to less than $0.5 million for the same
period in 1999. In the first quarter of 1999, our product sales and contract
revenue consisted primarily of contract revenue from our Manufacturing Agreement
with Lucent Technologies, which we and Lucent canceled in January 2000. The
remaining $9.0 million payable to us under the Manufacturing Agreement was
transferred to our Research & Development Agreement with Lucent.
11
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
REVENUES (CONTINUED)
The revenue we earn from providing services increased to $5.0 million in 2000,
compared to $2.0 million in 1999. We provide development services to Lucent in
connection with our 1998 Research & Development Agreement with Lucent. We
recognize services revenue under the percentage-of-completion method of
accounting. During the first quarter of 2000, we completed key project
milestones under the Lucent Research & Development Agreement. This resulted in
increased revenue recognition during the quarter.
We no longer devote resources to actively market our previous products. We do
not expect significant future revenues from these products. In April 1999, we
gave the required one-year notice to Lucent that we would discontinue
manufacturing of our previous generation 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.
We expect that we will not have initial revenues from the first release of our
Pliant 3000, our new access product announced in December 1999, until the third
quarter of 2000. We anticipate that we will not receive substantial revenues
from our Pliant 3000 access product until after we complete and demonstrate to
customers the second and third releases of that product. We plan to ship the
second release of that product in the fourth quarter of 2000, if 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.)
COST OF SALES AND GROSS MARGIN
Our cost of sales for the first quarter of 2000 was $3.0 million, compared to
$2.0 million for the same period in 1999. Our cost of product revenue was $2.1
million in 2000 and $1.3 million in 1999. Our cost of services revenue was $0.9
million in 2000, compared with $0.7 million in 1999. The gross margin of $3.6
million resulting from the cost of revenues for the first quarter of 2000 was
54.6%, compared to 52.5% for the same period of 1999. The increased gross margin
for the first quarter reflects the increased services revenue from the Lucent
Research & Development Agreement.
We expect that price competition could have an adverse impact on our gross
margins. If we fail to meet our cost reduction goals on our Pliant 3000 access
product, our profitability will be adversely affected. We expect that margins
will fluctuate because we cannot predict the timing of shipments of our older
products and our Pliant 3000 access product that is under development, and
because during 2000 a larger portion of our revenue will be derived from
services for Lucent.
12
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses for the first quarter of 2000 were
approximately $6.2 million, compared to $4.4 million for the same period in
1999. This $1.8 million increase was 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 consist of charges from independent contractor and engineering
development firms. Product development expenses consist 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 our new product. 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first quarter of 2000 were
approximately $3.5 million, compared to $2.9 million for the same period in
1999. These expenses include salaries, benefits and related expenses for
personnel engaged in direct marketing, sales and field service support. They
also include executive and administrative personnel, professional fees and other
general corporate expenses. Our 2000 expenses increased by $0.6 million because
we hired additional sales staff and incurred tradeshow expenses to launch our
Pliant 3000 access product.
OTHER INCOME (EXPENSES)
In the first quarter of 2000, our interest expense was $0.6 million higher than
our interest income. In the first quarter of 1999, our interest expense was
higher than our interest income by $0.3 million. Interest income is earned on
cash, cash equivalents and both short- and long-term investment balances. Our
interest income decreased in the first quarter of 2000 compared to the same
period in 1999 because we had less cash to invest. This decrease was partially
offset by higher interest rates. 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.
NET LOSS
During the first quarter of 2000, we lost $6.7 million or $0.49 per share,
compared to our net loss of $5.4 million or $0.40 per share for the same period
in 1999. Our 2000 net loss was worse than our 1999 net loss because we increased
our research and development expenses as well as our selling, general and
administrative expenses. These increases were partially offset by the increase
in our gross margin.
Our operating results continue to reflect a lack of demand for our older
products and the expenses for developing and marketing our new Pliant 3000
access product. We have been implementing our business strategy announced in
early 1998 for seven full quarters, and we expect to incur substantial losses in
future periods. (See Part II, Item 5: Risk Factors.)
13
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
At the end of the first quarter of 2000, we had $61.1 million of cash, cash
equivalents and short- and long-term investments, compared to $69.5 million at
the end of 1999. These amounts included our restricted cash as described below.
Restricted cash is cash that we cannot withdraw or use without restrictions and
is not available to fund our general operations.
Our cash and investment assets decreased by $8.4 million in the first quarter of
2000. Our net loss of $6.7 million represented most of the cash we used. We also
acquired $1.0 million of test equipment and software to support development of
our Pliant 3000 access product, which also contributed to the decrease in our
cash.
Our cash included restricted cash of $50,000 as of March 31, 2000, compared with
$1.1 million at the end of 1999. Our March 31, 2000 restricted cash balance
consisted of a deposit with our primary bank for a corporate procurement card.
The collateral requirement for the bank procurement card was removed in early
April 2000. Our 1999 restricted cash balance consisted of $1.0 million for an
outstanding stand-by letter of credit and $50,000 for a corporate procurement
card. The details of these restricted cash balances are more fully described in
Note 2 (Restricted Cash) to our Condensed Financial Statements.
Based on our current projections of operations, we expect that cash, cash
equivalents and investments at March 31, 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 our new Pliant 3000 access product will not generate significant cash in
2000.
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. Additional information about our
convertible subordinated notes is described in Note 6 (Long-Term Debt) to our
Condensed Financial Statements. We are current on all interest payments, and we
anticipate making interest payments in the future.
In late 1998, we began negotiating with a committee of note holders to
restructure our $115.0 million of convertible subordinated notes. Our financial
advisor, CIBC Oppenheimer Corp., 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 may consider such a
transaction after we begin selling our new Pliant 3000 access product.
14
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
We expect that additional equity and/or debt financing will be required to repay
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.
OTHER FINANCIAL INFORMATION
Backlog
- -------
Our backlog includes sales orders we have received that have a scheduled
delivery date before March 31, 2001. The aggregate sales price of orders
received and included in backlog was approximately $1.9 million on March 31,
2000. We believe that the orders included in the backlog are firm orders and
will be shipped before March 31, 2001. We may allow our customers to cancel or
delay orders where it is in our best interest to do so.
Year 2000 Issues
- ----------------
We did not experience any material disruptions in our operations or activities
as a result of the so-called "Y2K Problem." Nor did we incur material expenses
in correcting perceived or suspected Y2K problems. In addition, we are not aware
that any of our suppliers, customers or partners have experienced any material
disruptions in their operations or activities. We do not expect to encounter any
significant Y2K problems in the foreseeable future, although we continue to
monitor our computer operations for signs or indications of a problem.
It is possible, however, that if Y2K problems are incurred by our suppliers,
customers or partners, these problems could have a negative impact on our future
operations and financial performance. We have not been able to specifically
identify any problems among our suppliers, customers or partners. Furthermore,
the Y2K Problem may impact other entities with which we transact business, and
we cannot predict the effect of Y2K problems on our business.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
QUANTITATIVE DISCLOSURES
The following table provides information about our financial instruments,
primarily investments, that 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 both short- and long-term investments. All short-term investments
are scheduled to mature within twelve months after March 31, 2000. Our long-term
investments are scheduled to mature in 2001.
15
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER FINANCIAL INFORMATION (CONTINUED)
Quantitative and Qualitative Disclosures About Market Risk (continued)
- ----------------------------------------------------------
QUANTITATIVE DISCLOSURES (CONTINUED)
<TABLE>
<CAPTION>
EXPECTED MATURITY DATES
Fair Value
(dollars in 000's) 2000 2001 2002 2003 2004 Total 3/31/00
- ------------------------------- ------------- ------------ ------------- ------------ ------------ ------------ ---------------
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 25,112 $ -- -- -- -- $ 25,112 $ 25,112
Long-term investments -- 1,048 -- -- -- 1,048 1,048
Average interest rate 5.7% 7.1%
LIABILITIES:
Long-term debt -- 115,000 -- -- -- 115,000 $ 63,000
Average interest rate 5.0% 5.0%
</TABLE>
QUALITATIVE DISCLOSURES
Our investments are held for non-trading purposes and are subject to market risk
for interest rates. We maintain our short- and long-term investments principally
in U.S. 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 long-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
16
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
forward-looking statements. Our forward-looking statements include statements
related to our customers, business partners and competitors, our previous
product, our new product introduction and our future financial requirements. Our
forward-looking statements also relate to our field trials, discontinued
debt-restructuring activities, and relationships with Lucent, Bosch 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 subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated by the 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. These statements are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. 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, 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.
Financial Risks
- ---------------
WE HAVE INCURRED NET LOSSES EVERY YEAR AND WE MAY NEVER ACHIEVE PROFITABILITY.
Our net loss for the first quarter of 2000 was $6.7 million. We have never been
profitable on an annual basis and may never achieve profitability. As of
March 31, 2000, we have an accumulated deficit of approximately $208.9 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. Except for the R&D development contracts,
we anticipate low revenues until our Pliant 3000 access product starts to
generate sales in the third quarter of 2000. We must continue to invest
substantial resources to develop and market our Pliant 3000 access product. We
do not expect significant revenues from our new product until 2001.
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
17
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
- ---------------
PRICE COMPETITION MAY PREVENT US FROM ACHIEVING PROFITABILITY. (CONTINUED)
would be profitable only at high volumes. We believe it is unlikely that high
volume demand will ever develop for these products. 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 expect that 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.
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. Our financial
advisor, CIBC Oppenheimer Corp., 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 may consider such a
transaction as part of an overall refinancing plan after we begin selling our
new Pliant 3000 access product.
WE WILL REQUIRE ADDITIONAL FINANCING TO FUND OUR OPERATIONS.
We estimate that we will have adequate cash resources to operate our business
and develop our product at least until our convertible notes become due on
May 15, 2001. In addition to the financing needed to repay the notes, we will
require additional financing to fund our operations, primarily our product
development activities. 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 and compete effectively.
18
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
- ---------------
OUR PLIANT 3000 ACCESS PRODUCT IS OUR ONLY NEW PRODUCT UNDER DEVELOPMENT, AND IF
WE EXPERIENCE DELAYS IN ITS DEVELOPMENT 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 our Pliant
3000 access product. To obtain the financing that we will need to repay 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 release is completed and marketed. The second
release is not scheduled for shipment until the fourth quarter of 2000. Any
delays in developing the second release, in completing successful field trials
of the second release, or in 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 INITIALLY SUCCESSFUL IN DEVELOPING 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 development of our Pliant 3000 access product
will be subject to significant technical and customer acceptance challenges. The
development will require us to invest substantial money and time. We cannot be
certain that we will be able to complete the development of this access 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 the
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.
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.
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 our Pliant 3000 access product, but
shipments of this product will not generate significant revenue until at least
2001. Our previous product sales and 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.
19
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
- ---------------
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, 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 May 9, 2000 was $7.063.
We have not committed to a time period to apply for Nasdaq National Market
relisting. We may apply for relisting with the commencement of new product
revenue and 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.
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 75% of our projected 2000 revenue.
We will remain substantially dependent upon revenue from Lucent until we develop
and successfully market our Pliant 3000 product. Our agreements with Lucent
provide that Lucent will pay us significant fees for our development services.
If Lucent failed 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.
Although the relationship with Lucent has provided revenue opportunities to us,
and we believe it will continue to do so, the relationship includes certain
risks as well. As we disclosed in our prior SEC filings, our relationship
with Lucent relating to SDBAS, arising out of the November 1995
20
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Customer Risks (continued)
- --------------
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. (CONTINUED)
exclusive agreement, did not meet our expectations. This resulted in
substantially lower than expected sales volume. There can be no assurance our
current relationship with Lucent will not also fail to meet our expectations.
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 the Lucent agreements. 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.
CUSTOMERS IN OUR CLEC TARGET 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 may require financing.
Such financing may be extended credit terms and/or equipment leasing. Many CLECs
already have substantial debt. 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.
OUR RELATIONSHIP WITH MARCONI MAY NOT GENERATE SIGNIFICANT REVENUES.
We have received little revenue from the Marconi Alliance Agreement since 1998.
Total revenue from Marconi for the three months ending March 31, 2000 was $0.7
million. Due to Marconi's notification to us that it will discontinue
development of its FSAN 2.0 product and of its intent to manufacture the FSAN
1.0 product at its facilities, we are uncertain whether we will obtain
significant additional revenues from the iFLX and/or FSAN products. We are
focusing our business on sales of our Pliant 3000 access product, and our
business plan does not include iFLX or FSAN revenues after 2000. Marconi has
decided not to continue development of FSAN 2.0; therefore, we will not achieve
all the benefits intended by this Agreement.
21
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Customer Risks (continued)
- --------------
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 are 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 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.
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:
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.
22
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Customer Risks (continued)
- --------------
IF WE DO NOT RESPOND QUICKLY TO CHANGING CUSTOMER NEEDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS BY OUR COMPETITORS, OUR PRODUCTS MAY BECOME OBSOLETE. (CONTINUED)
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. If this causes delays
in filling customer orders, our customers may be dissatisfied.
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 other 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 PERSONNEL COULD NEGATIVELY
IMPACT OUR CURRENT AND FUTURE PRODUCT DEVELOPMENT.
We began developing our Pliant 3000 product in 1998, and many challenges exist
to complete the development. 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 also managing
multiple, concurrent projects that will require critical program management
expertise to efficiently allocate scarce engineering resources among competing
projects. 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 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
23
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Other Risks (continued)
- -----------
OUR ABILITY TO ATTRACT AND RETAIN KEY DEVELOPMENT PERSONNEL COULD NEGATIVELY
IMPACT OUR CURRENT AND FUTURE PRODUCT DEVELOPMENT. (CONTINUED)
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 future business success or
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 introduce 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 future capital needs;
o our ability to raise capital to repay our $115.0 million of convertible
notes due May 15, 2001;
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 could materially and
adversely affect our business, financial condition and operating results.
24
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Other Risks (continued)
- -----------
A SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS. (CONTINUED)
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.
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.
May 12, 2000 /s/ John T. Autrey
------------------
John T. Autrey
Vice-President and Chief Financial Officer
25
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 34,961,440
<SECURITIES> 26,160,067
<RECEIVABLES> 3,276,976
<ALLOWANCES> (148,000)
<INVENTORY> 1,435,801
<CURRENT-ASSETS> 65,772,071
<PP&E> 24,878,277
<DEPRECIATION> (18,614,125)
<TOTAL-ASSETS> 76,155,542
<CURRENT-LIABILITIES> 13,657,973
<BONDS> 115,000,000
0
0
<COMMON> 136,374
<OTHER-SE> 156,293,358
<TOTAL-LIABILITY-AND-EQUITY> 76,155,542
<SALES> 1,557,879
<TOTAL-REVENUES> 6,593,571
<CGS> 2,991,385
<TOTAL-COSTS> 2,991,385
<OTHER-EXPENSES> 9,721,176
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (583,406)
<INCOME-PRETAX> (6,702,396)
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<EPS-BASIC> (.49)
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