10-Q 1 d10q.txt FORM 10-Q 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 June 30, 2001 ------------- [ ] 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. -------------------- Delaware 56-1615990 -------- ---------- (State of Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4024 Stirrup Creek Drive, Suite 700, Durham, N.C. 27703 ------------------------------------------------- ------------ (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 practicable date. Classes: Outstanding as of August 13, 2001: ------- --------------------------------- Common Stock ($.01 par Value) 13,814,936 Pliant Systems, Inc. Index

Pliant Systems, Inc. Condensed Balance Sheets PART I - FINANCIAL INFORMATION Item 1. Financial Statements

See notes to Condensed Financial Statements. 3 Pliant Systems, Inc. Condensed Balance Sheets

See notes to Condensed Financial Statements. 4 Pliant Systems, Inc. Condensed Statements of Operations (Unaudited)

See notes to Condensed Financial Statements. 5 Pliant Systems, Inc. Condensed Statements of Operations (Unaudited)

See notes to Condensed Financial Statements. 6 Pliant Systems, Inc. Condensed Statements of Cash Flows (Unaudited)

See notes to Condensed Financial Statements. 7 Pliant Systems, Inc. Notes to Condensed Financial Statements June 30, 2001 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- and six- month periods ended June 30, 2001 and 2000 are not necessarily indicative of the results that may be expected for a full fiscal year. As discussed further in Note 10, we will adopt the liquidation method of accounting in third quarter as a result of our July 25, 2001 decision to liquidate our assets in an orderly fashion within the context of the pending Chapter 11 case. For further information, refer to the financial statements and accompanying footnotes for the year ended December 31, 2000 included in our Form 10-K submission, including the auditors qualified opinion and Note 18 which refers to our Financial Requirements and Liquidity. 2. Restricted Cash On June 30, 2001 and December 31, 2000, we had $400,000 of restricted cash on deposit with our primary bank in connection with an irrevocable letter of credit for a performance bond related to a customer order for the Pliant 3000. The letter of credit expired on July 1, 2001. Due to our filing of Chapter 11 under the U.S. Bankruptcy Code on May 1, 2001, we were informed by the insurance company providing the bond that they intend to draw down on the $400,000 of restricted cash unless the letter of credit was extended beyond July 1, 2001. The letter of credit was not extended beyond July 1, 2001 and the insurance company drew down $400,000 restricted cash in early July. Due to our pending liquidation approved by our Board on July 25, 2001, it is unlikely that we will be able to meet the requirements of the performance bond and the $400,000 restricted cash probably will not be returned to us. 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 June 30, 2001 and December 31, 2000, we had no investments that qualified as trading or available for sale. At June 30, 2001, our investments in debt securities were classified as cash and cash equivalents. We maintain these balances principally in demand deposit accounts and a commercial money market fund maintained by our primary bank. 8 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 short-term investments by balance sheet classification for June 30, 2001 and December 31, 2000:

The estimated fair value of each investment approximates the amortized cost; therefore, there are no unrealized gains or losses as of June 30, 2001 and December 31, 2000. 4. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventory consist of the following:

9 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 are recognizing this amount as compensation expense on a straight-line basis over the five-year employment agreement. Mr. Orr is entitled to receive the interest earnings from the rabbi trust, and these earnings are 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 to effect 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 $0.6 million as of June 30, 2001 is included in other noncurrent assets and is being amortized to compensation expense over the remaining term of the employment agreement. On July 25, 2001 our Board of Directors determined that Mr. Orr's employment with Pliant Systems, Inc. would be terminated effective July 31, 2001 due to the current financial situation and not for "cause" as set forth in the employment agreement. Based on the terms of the employment agreement and the secular trust, the $4.0 million will be transferred to Mr. Orr as set forth in the trust in mid-August. We anticipate expensing the remaining unamortized balance of $0.6 million during the third quarter of 2001. 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 five-year term of the employment agreement. Due to Mr. Orr's employment termination, discussed above, the deferred compensation balance will be charged to compensation expense during the third quarter of 2001. 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. Under the debt agreement, we were not permitted to redeem the notes until May 15, 1999. After that date, we have been able to 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. For the first six months of 2001, we incurred $1.6 million of legal and financial advisory fees and other costs in connection with our efforts to restructure the convertible subordinated notes, raise additional equity and undertake an asset sale. We charged these costs to expense due to the uncertainty of success in restructuring the debt and raising additional equity. Due to our filing of Chapter 11 on May 1, 2001, the principal and the accrued interest due on May 15, 2001 were not paid. 10 Pliant Systems, Inc. Notes to Condensed Financial Statements 7. License Agreement Revenue In late March 2001 we granted a worldwide, non-exclusive, royalty free right and license to manufacture, sell and use certain legacy products and software to a former customer. Under this agreement the former customer intends to manufacture or have a third party manufacture the legacy products and sell to their customers. This agreement was effective March 28, 2001 and terminates on January 1, 2004. Certain conditions under the agreement were not completed until early April 2001 and we received $1,600,000 from the former customer for the license at that time. The one-time revenue was earned and recognized in April 2001. 8. 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. 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. Independent telephone companies, competitive local exchange carriers, and other telecommunication equipment manufacturers are the primary users of our products and services. In 1998, we entered into several agreements with Lucent, which utilized our research and development and manufacturing resources. For the six months ended June 30, 2001 and 2000 revenues from Lucent, Marconi, Pliant 3000 customers, and others as a percentage of our total revenues, excluding the one-time license revenue, are as follows: June 30 2001 2000 -------------- Lucent 50.9% 85.0% Marconi 32.5 12.0 Pliant 3000 customers 15.5 - Others 1.1 3.0 -------------- 100.0% 100.0% ============== For the six months ended June 30, 2001 and 2000 revenues by geographic area as a percentage of our total revenues, excluding the one-time license, are as follows: June 30 2001 2000 -------------- United States 67.5% 89.0% Australia 32.3 - Europe .2 11.0 -------------- 100.0% 100.0% ============== 11 Pliant Systems, Inc. Notes to Condensed Financial Statements 9. Business Segment Information (continued) The following customers' accounts receivable balances as a percentage of our total accounts receivable as of June 30, 2001 and December 31, 2000, excluding the fully reserved Pliant 3000 customers, are as follows: 2001 2000 -------------- Lucent 11.8% 38.0% Marconi 50.8 19.0 RBOCs 3.0 16.0 Others 34.4 27.0 -------------- 100.0% 100.0% ============== 10. Sale of Assets and Liquidation under Chapter 11 of the U.S. Bankruptcy Code In late 2000, we engaged Jefferies and Company, Inc. to assist us in negotiations to restructure our $115.0 million convertible subordinated notes and to obtain new debt and/or equity financing. The current economic slowdown and significantly reduced stock valuations of telecommunication equipment companies also made the current capital markets very difficult for us to raise capital. Since late January 2001, we focused our capital raising efforts on private equity from large private equity financial investors and strategic investors in the telecommunications equipment industry and on the sale of our company. Although we approached numerous financial and strategic investors and potential buyers, we did not obtain a commitment from any investors or buyers. While we were seeking investors and buyers, we also sought to reach an agreement with the holders of our company's convertible notes, but were unable to do so. Potential investors had indicated that our company reaching an agreement with the holders of our company's convertible notes would be a condition to their giving serious consideration to making an investment offer. Our Board of Directors decided in late April, based on advice from our investment bankers and legal counsel, that it would be in the best interest of our Company and all of its constituents to significantly restructure its current operations to reduce our monthly operating expenses. We made cost reductions across all functional areas of our Company, while preserving all operating functions. This resulted in reducing the March 31, 2001 headcount of 259 to approximately 120 at the end of April. On May 1, 2001 we filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. We were seeking Chapter 11 protection in order to facilitate an orderly sale of our business and assets to a third party. In early July we reached a tentative agreement with mPhase Technologies, Inc. to sell substantially all of our assets for $3.6 million, subject to final approval by the United States Bankruptcy Court. After additional discussions with mPhase, the negotiations were discontinued and all but approximately 15 additional employees were terminated. Our Board of Directors approved a resolution on July 25, 2001 to liquidate the assets of our company and we have requested approval from the Bankruptcy Court to commence an orderly liquidation under Chapter 11 of the Bankruptcy Code. A small group of our employees will undertake this process which the Bankruptcy Court should approve by mid-August. 12 Pliant Systems, Inc. Notes to Condensed Financial Statements 10. Sale of Assets and Liquidation under Chapter 11 of the U.S. Bankruptcy Code (continued) With the pending liquidation of our company we will be required to adopt the liquidation method of accounting for assets and liabilities during the third quarter of 2001. This will likely result in significant write-downs of all assets, except cash and cash equivalents, and all pre-petition liabilities to their net realizable values. Post petition liabilities are being paid currently and will not be subject to write-downs. Due to the numerous bankruptcies and liquidations in the telecommunications industry, we are currently unable to provide an estimate of such write-downs at this time; however, we expect such write-downs to be material. We do anticipate that the sales proceeds will not be adequate to meet the obligations of our pre-petition creditors and this process will result in loss of all value for our common shareholders. 13 Pliant Systems, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Recent Developments Sale of Assets and Liquidation under Chapter 11 of the U.S. Bankruptcy Code --------------------------------------------------------------------------- In late 2000, we engaged Jefferies and Company, Inc. to assist us in negotiations to restructure our $115.0 million convertible subordinated notes and to obtain approximately $55.0 million in new debt and/or equity financing. This additional capital was to be used for development of future releases of the Pliant 3000, marketing and sales purposes, capital expenditures and general corporate purposes. We believed the amount of capital required would sustain us until we were able to achieve positive cash flow, which was more that eighteen months away under the then current business plan. The current economic slowdown and significantly reduced stock valuations of telecommunication equipment companies made the current capital markets very difficult for us to raise capital. Since late January 2001, we focused our capital raising efforts on private equity from large private equity financial investors and strategic investors in the telecommunications equipment industry and the sale of our company. Although we approached numerous financial and strategic investors and potential buyers, we did not obtain a commitment from any investor or potential buyer. While we were seeking investors and buyers, we also sought to reach an agreement with the holders of our company's convertible notes, but were unable to do so. Potential investors had indicated that our company reaching an agreement with the holders of our company's convertible notes would be a condition to their giving serious consideration to making an investment offer. In late April our Board of Directors decided, based on advice from our investment bankers and legal counsel, that it would be in the best interest of our company and all of its constituents to significantly restructure our current operations to reduce its monthly operating expenses. We made cost reductions across all functional areas of our Company, while preserving all operating functions. This resulted in reducing the March 31, 2001 headcount of 259 to 120 at the end of April. On May 1, 2001 we filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. We were seeking Chapter 11 protection in order to facilitate an orderly sale of our business and assets to a third party. In early July we reached a tentative agreement with mPhase Technologies, Inc. to sell substantially all of our assets for $3.6 million, subject to final approval by the United States Bankruptcy Court. After additional discussions with mPhase, the negotiations were discontinued and all but approximately 15 additional employees were terminated. Our Board of Directors approved a resolution on July 25, 2001 to liquidate the assets of our company and we have requested approval from the Bankruptcy Court to commence an orderly liquidation under Chapter 11 of the Bankruptcy Code. A small group of our employees will undertake this process which the Bankruptcy Court should approve by approximately mid-August. We do anticipate that the sales proceeds will not be adequate to meet the obligations of our pre-petition creditors and that this process will result in loss of all value for our common shareholders. On July 25, 2001 our Board of Directors determined that as part of the plan of liquidation our President and CEO's (David E. Orr) employment with Pliant Systems, Inc. would be terminated effective 14 Pliant Systems, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Recent Developments (continued) Sale of Assets and Liquidation under Chapter 11 of the U.S. Bankruptcy Code --------------------------------------------------------------------------- (continued) ----------- July 31,2001. His employment was terminated due to the current financial situation and not for "cause" as set forth in the employment agreement. Based on the terms of the employment agreement, the $4.0 million secular trust will be transferred to Mr. Orr as set forth in the trust agreement in mid August. (See Notes to Condensed Financial Statements, Note 5, and Employment Agreement) Revenues Second Quarter -------------- Our net revenues in the second quarter of 2001 were $5.7 million compared to $3.9 million in the second quarter of 2000. Our product sales and contract revenue increased to $2.4 million from $1.3 million in 2000. Sales of our previous products increased to $1.9 million from $1.3 million in 2000 due to an end-of-life order. Our product sales and contract revenue in 2001 also included $0.5 million in sales of our Pliant 3000 product as compared to none in 2000. The filing of Chapter 11 on May 1, 2001 adversely impacted our second quarter Pliant 3000 revenue. During the second quarter of 2001 we earned $1.6 million from a product and software-licensing agreement from a legacy product customer. Our services revenue decreased to $1.7 million in 2001 compared to $2.7 million in 2000. We provided development services to Lucent in connection with our 1998 Research & Development Agreement with Lucent. We recognized services revenue under the percentage-of-completion method of accounting. During the second quarter of 2001, we successfully completed all the remaining development work under the Lucent project letters, except one project letter. We do not believe that Lucent will require us to undertake additional projects under the R&D Agreement. Year to Date ------------ Our net revenues for the first six months of 2001 were $14.7 million, compared to $10.5 million for the same period in 2000. Excluding the one-time revenues of $1.6 million explained above, our net revenues for the first six months of 2001 were $2.5 million higher than the same period in 2000. The increase in revenue was due to higher product sales, offset by lower services revenues. Services revenue decreased to $6.6 million, compared to $7.7 million in 2000, due to the completion of all but one project letter in the Lucent research and development. Product sales and services revenue increased from $2.8 million in 2000 to $6.4 million in 2001 due to the Pliant 3000 shipments and end-of-life sales for a legacy product. Product sales for the first six months of 2001 included $4.3 million in sales of our FLX products, compared to $2.2 million in 2000. 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 will not receive any future revenues from our FLX products upon completion of this end-of-life order. Due to our pending liquidation of assets, no additional revenues will be generated upon completion of the current legacy product end-of-life sales. The estimated completion date of this order is mid-August 2001. 15 Pliant Systems, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Recent Developments (continued) Cost of Sales and Gross Margin Our cost of sales for the second quarter of 2001 was $3.2 million compared to $1.7 million for the same period in 2000. Our cost of product revenue was $3.2 million in 2001 and $1.5 million in 2000. In 2001 we had no cost of services revenue compared with $0.2 million in 2000. Excluding the one-time revenue of $1.6 million, the gross margin of $0.8 million resulting from the cost of revenues for the second quarter of 2001 was 20.5% compared to 56.7% for the same period of 2000. The decreased gross margin for the second quarter reflects the lower gross margin for Pliant 3000 revenue compared to the gross margin for our previous products. This lower Pliant 3000 gross margin primarily results from the initial customer account penetration and low manufacturing volumes. Our Chapter 11 filing and headcount reductions negatively impacted the implementation of the Pliant 3000 cost reduction efforts, which would have improved those gross margins. Our cost of sales for the first six months of 2001 was $8.1 million, compared to $4.7 million for the same period in 2000. Our cost of product revenue was $8.1 million in 2001 and $3.6 million in 2000. In 2001 we had no cost of services revenue, compared with $1.1 million in 2000. Excluding the $1.6 million of one- time license revenue, the gross margin of $5.0 million was 38.0%, compared to 55.4% in 2000. The decreased gross margin reflects the reduced services revenue from the Lucent Research & Development Agreement and the lower gross margin for Pliant 3000 revenue compared to the gross margin for our previous products. Due to the work force reduction implemented on July 23, 2001, we have approximately two employees engaged in completing the end-of-life order for a customer. Upon completion of that order in early August 2001 we will have no production personnel and cease any operational activities. Research and Development Expenses Our research and development expenses for the second quarter of 2001 were approximately $3.3 million compared to $7.5 million for the same period in 2000. This $4.2 million decrease was due primarily to the reduced headcount resulting from the workforce reductions on April 30, 2001. For the first six months of 2001, our research and development expenses were $9.8 million as compared to $13.7 million for the same period in 2000. Workforce reductions were also the primary cause of this decline. Our decision to liquidate our assets has eliminated our entire research and development function and all enhancements and cost reduction activities on the Pliant 3000 have ceased. Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the second quarter of 2001 were approximately $4.0 million compared to $3.6 million for the same period in 2000. For the first six months of 2001 selling, general and administrative expenses were approximately $7.8 million compared to $7.1 million for the same period in 2000. 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 2001 expenses for 16 Pliant Systems, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Recent Developments (continued) Selling, General and Administrative Expenses (continued) both the second quarter and six-month period increased over the prior year by $0.4 million and $0.7 million, respectively. A $1.5 million reserve established for the Pliant 3000 accounts receivable was the primary cause of these increases. This reserve was created due to the uncertainty regarding the asset sale to mPhase Technologies and the related servicing of those customers. This increase was offset by the workforce reductions on April 30, 2001. All sales, marketing, customer service and most administrative functions were terminated with our Board's decision on July 25, 2001 to liquidate our assets. Other Income (Expenses) In the second quarter of 2001, our interest expense was $ 0.7 million higher than our interest income. In the second quarter of 2000, our interest expense was higher than our interest income by $0.8 million. Interest income is earned on cash, cash equivalents, and investment balances. Our interest income decreased in the second quarter of 2001 compared to the same period in 2000 because we had less cash to invest. Our interest expense in 2001 and 2000 was due to the $115.0 million of 5% convertible notes that we issued in May 1996 and was less in 2001 due to the maturity of the bonds on May 15, 2001. Due to our recent voluntary petition under Chapter 11 we did not make the final interest payment on the convertible notes on May 15, 2001. In the first six months of 2001, our interest expense was $2.0 million higher than our interest income, compared to $1.4 million in 2000. Our interest income declined in the first six months of 2001 compared to the same period in 2000 because we had less cash to invest. Our interest expense declined due to the maturity of the bonds on May 15, 2001, which were not paid due to our filing Chapter 11 on May 1, 2001. During the second quarter we incurred $0.8 million of legal and financial advisory fees and certain other costs in connection with our efforts to restructure our convertible subordinated notes as well as the filing of Chapter 11. For this first six months of 2001 we incurred $1.6 million of such fees and costs. Net Loss During the second quarter of 2001, we lost $6.5 million or ($0.47) per share compared to our net loss of $9.6 million or ($0.71) per share for the same period in 2000. For the first six months of 2001, we lost $14.6 million or ($1.06) per share, compared to our net loss of $16.3 million or ($1.20) per share for the same period in 2000. Our 2001 net loss was better than our 2000 net loss due to the increased product sales and one-time license revenue, as well as the workforce reductions on April 30, 2001 related to our filing of Chapter 11 on May 1, 2001. 17 Pliant Systems, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Net Loss (continued) Our operating results continued 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 twelve full quarters, and we would have continued to incur losses in future periods, even after the current restructuring of our current operations and Chapter 11 filing. Due to the pending liquidation and no operating activities other than selling assets, we expect the actual losses in the third quarter will be significantly reduced. Liquidity and Capital Resources Cash and Investment Balances ---------------------------- At the end of the second quarter of 2001, we had $8.6 million of cash, cash equivalents, and short-term investments compared to $26.0 million at the end of 2000. 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 restricted cash as of June 30, 2001 and December 31, 2000 consisted of $400,000 in connection with an irrevocable letter of credit for a performance bond related to a customer order for the Pliant 3000. Due to our filing of Chapter 11 under the U.S. Bankruptcy Code on May 1, 2001, we were informed by the insurance company providing the bond that they intend to draw down on the $400,000 of restricted cash unless the letter of credit was extended beyond July 1, 2001. The letter of credit was not extended beyond July 1, 2001 and the insurance company drew down $400,000 restricted cash in early July. Due to our pending liquidation, it is unlikely that we will be able to meet the requirements of the performance bond and the $400,000 restricted cash probably will not be returned to us. Change in Cash, Investments, and Key Working Capital Items ---------------------------------------------------------- Our cash and investment assets decreased by $17.4 million in the first six months of 2001. Our net loss of $14.6 million represented most of the cash we used. Due to the imminent maturity of the $115.0 million of 5% convertible debt, we were required to accelerate payments to our largest supplier. We also acquired $1.3 million of test equipment and software to support the continued enhancement of our Pliant 3000 access product, which also contributed to the decrease in our cash. Most of these capital expenditures were in the first quarter of 2001. Accounts receivable decreased by $2.2 million during the first six months of 2001, excluding a $1.5 million reserve for the Pliant 3000 accounts receivable. The decline is due primarily to payments by Marconi and Lucent. The Pliant 3000 accounts receivable were fully reserved at the end of June due to our concerns about those customers paying if they were unable to obtain on-going service and support for the product. Our net inventories increased to $8.1 million from $4.5 million in order to support field trials and planned customer orders for our Pliant 3000 and to a lesser extent for the purchase orders for the legacy product. The inventories were higher than planned levels due to decreased demand for the Pliant 3000 after we filed for Chapter 11 on May 1, 2001. Accounts payable of $4.3 million at June 30, 2001 includes $4.1 million of pre-petition accounts payable that will not be paid until all pre-petition claims are settled under the plan of liquidation. Deferred revenue decreased due to our recognition of Lucent services revenue that was included in deferred revenue at the end of 2000. 18 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 ------------------------ As a result of the filing of a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code on May 1, 2001, our Company did not make the principal and interest payments on the $115.0 million of 5% convertible debt and cannot pay any other pre-petition obligations unless approved or required by the Court. The cost reductions and the plan of liquidation that is pending court approval will reduce our monthly operating expenses and cash burn rate significantly. We anticipate the only future cash required will be to pay minimal operating expenses to liquidate the business once the court approves the plan of liquidation. This should be approved by mid-August 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 was 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. As a result of our filing a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code on May 1, 2001, we did not make the principal and final interest payment due on May 15, 2001 on the convertible debt. We anticipate the final recovery rate for the note holders and for all pre-petition claims will be small. Customer Financing ------------------ Sales to one of our customers required us to obtain performance bonds for the value of our contracts with that customer. To obtain the performance bond we were required to establish a letter of credit as collateral. Due to our filing of Chapter 11 under the U.S. Bankruptcy Code on May 1, 2001, we were informed by the insurance company providing the bond that they intended to draw down on the $400,000 of restricted cash unless the letter of credit was extended beyond July 1, 2001. The letter of credit was not extended beyond July 1, 2001 and the insurance company drew down $400,000 restricted cash in early July. Due to our pending liquidation announced on July 23, 2001, it is unlikely that we will be able to meet the requirements of the performance bond and the $400,000 restricted cash probably will not be returned to us. Other Financial Information Backlog ------- Our backlog includes sales orders we have received that have a scheduled delivery date before June 30, 2002. The aggregate sales price of orders received and included in backlog was approximately $0.6 million on June 30, 2001. Most of the backlog is due to end-of-life orders received in the fourth quarter of 2000 for our previous products. We believe that the legacy product orders included in the backlog are firm orders and will be shipped before August 30, 2001; however the approximately $0.1 million of the Pliant 3000 may not be shipped due to our current financial situation. 19 Pliant Systems, Inc. Item 3. 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 short-term investments. All short-term investments are scheduled to mature within twelve months after June 30, 2001.

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 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 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 On May 1, 2001, we filed a voluntary petition under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Court for the Eastern District of North Carolina. The case has been assigned to Judge A. Thomas Small and designated as Case No. 01-01264-5-ATS. We continue to operate our business and manage our property as debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code; however, we have commenced the process of liquidating a majority of our assets and will be requesting the court to approve a liquidation plan of reorganization under Chapter 11. No trustee or examiner has been appointed in the case. 20 Pliant Systems, Inc. PART II - OTHER INFORMATION (continued) Item 3. Defaults Under Senior Securities We are currently in default upon the $115.0 million convertible subordinated notes as a result of the commencement of the voluntary petition for bankruptcy described above. We have provided notice to the indenture trustee as required under the documents governing the notes. 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, competitors, our previous product, our new product, our future financial requirements, continued operations, our petition under Chapter 11, our pending plan of liquidation and any possible recoveries to our creditors. 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 "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," 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, before making an investment decision, especially due to our recent decision to liquidate our assets. 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. We have restated below the risks we deem applicable to the business we have conducted in the past. However, it is unlikely that we will continue to conduct business due to our plan of liquidation pursuant to Chapter 11 as described below. Consequently, statements of such risk factors below should not be construed to mean that our business will continue. Financial Risks --------------- ON MAY 1, 2001, WE FILED A VOLUNTARY PETITION UNDER CHAPTER 11 OF TITLE 11 OF THE UNITED STATES BANKRUPTCY CODE IN ORDER TO FACILITATE AN ORDERLY SALE OF OUR BUSINESS AND OUR ASSETS. We have been unable to restructure the $115.0 million of 5% convertible debt due May 15, 2001 or raise additional debt and/or equity financing we required to continue to execute our business plan. As a result 21 Pliant Systems, Inc. Item 5. Other Information (continued) Risk Factors (continued) Financial Risks (continued) --------------- ON MAY 1, 2001, WE FILED A VOLUNTARY PETITION UNDER CHAPTER 11 OF TITLE 11 OF THE UNITED STATES BANKRUPTCY CODE IN ORDER TO FACILITATE AN ORDERLY SALE OF OUR BUSINESS AND OUR ASSETS. (CONTINUED) our Board of Directors approved the filing of a voluntary petition under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in order to facilitate an orderly sale of our business and our assets. There were no purchasers of our assets and the Board approved on July 25, 2001 the filing of a plan with the court to complete an orderly liquidation of the assets and distribute the proceeds to our creditors. It is likely that the sales proceeds will not be adequate to meet the obligations of our creditors and this process will result in the loss of all value for our common shareholders. THE SALE AND LIQUIDATION OF OUR ASSETS WILL MOST LIKELY RESULT IN OUR CEASING TO BE A PUBLIC COMPANY AND THE TOTAL LOSS OF VALUE FOR OUR CURRENT STOCKHOLDERS. The orderly sale and liquidation of our assets will commence by mid-August and a liquidation plan of reorganization will be submitted to the Court shortly. A group of approximately 15 employees is preparing to implement the expected Court order and all other ordinary business has ceased. This process will require us to liquidate our assets and distribute the proceeds to our creditors. Our stock will probably cease trading on the Over The Counter Bulletin Board in the near future and this will most likely result in total loss of value for our common shareholders. WE HAVE INCURRED NET LOSSES EVERY YEAR, AND WE WILL NEVER ACHIEVE PROFITABILITY. Our net loss for the first six months of 2001 was $14.6 million. We have never been profitable on an annual basis and may never achieve profitability. As of June 30, 2001, we have an accumulated deficit of approximately $253.6 million. Even with the cost reductions and reductions in headcount during the second quarter from 259 to approximately 15, we will not be profitable due to suspension of all operations and liquidating our assets. SOME COMPETITIVE LOCAL EXCHANGE CARRIERS (CLECS), WHICH ARE PART OF OUR OVERALL TARGET MARKET FOR OUR PLIANT 3000, HAVE SERIOUS FINANCIAL PROBLEMS AND MAY DELAY PURCHASING CAPITAL EQUIPMENT. Some CLECs have serious financial problems due to their inability to finance their own business plans and an industry wide slowdown. Due to their substantial existing debt, many CLECs have serious financial problems and are delaying the expansion of their existing and planned networks. Some have even filed for bankruptcy. We targeted certain CLECs for the Pliant 3000, but continued financial problems in the CLEC market may prevent these customers from purchasing the Pliant 3000. This could result in delays in our sales plan. Delays in our sales plan along with the filing of Chapter 11 did have an adverse effect on our attempt to reach break-even revenues and did lower the interest of prospective financial and strategic purchasers of our business and our assets. 22 Pliant Systems, Inc. Item 5. Other Information (continued) Risk Factors (continued) Financial Risks (continued) --------------- CLECS, WHICH HAVE BEEN 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. CLECs require extensive capital investments. Some of our target CLEC customers may have required financing. Such financing may be in the form of extended credit terms and/or equipment leasing. Many CLECs already have substantial debt, and some have serious financial problems. 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. It is unlikely we will be able to provide any significant vendor financing while we attempt to sell our business and assets under Chapter 11. 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. CUSTOMERS HAVE BECOME CONCERNED ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DURING OUR CHAPTER 11 ASSET SALE AND LIQUIDATION PROCESS AND MAY DECIDE NOT TO PURCHASE OUR PLIANT 3000. Our current customers and potential customers for our Pliant 3000 have become concerned about our ability to continue as a going concern due to our filing a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. They are concerned about our ability to meet the future product and service needs of their networks. These customers may delay purchasing our products until the outcome of the sale of our business and assets become more certain. We offered a few Pliant 3000 customers conditional payment terms, which would allow customers to pay only if there was a surviving entity to support our product. Since we announced our intent to liquidate our assets there will not be a surviving entity to service the Pliant 3000 customers. Some of these Pliant 3000 customers may not pay their obligations. SINCE WE HAVE FILED FOR CHAPTER 11 SOME VENDORS HAVE NOT BEEN WILLING TO SHIP TO US ON CREDIT, AND SEVERAL ARE NOW REQUESTING PAYMENT SEVERAL DAYS PRIOR TO SHIPPING US PRODUCTS OR SERVICES. Several suppliers have informed us since the May 1, 2001 filing of a voluntary petition under Chapter 11 that they will require advance payment for goods and services and in some cases will require payment several days prior to shipment or rendering of services. Other vendors are requiring us to pay upon receipt of invoice. This situation will have an adverse effect on our cash flow and financial position. It is very possible that other suppliers may take similar actions. Our relationships with our suppliers may become so damaged by events that occur during this process that it may be difficult to timely deliver product to our customers and receive the services we require to preserve all operating functions. 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 2000, we received 23 Pliant Systems, Inc. Item 5. Other Information (continued) Risk Factors (continued) Financial Risks (continued) --------------- 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. (CONTINUED) a customer order that required us to obtain a performance bond. The surety company that issued the bond required us to provide an irrevocable letter of credit for approximately 50% of the amount of the order as collateral, which restricted our cash in the same amount. Due to our filing of Chapter 11 under the U.S. Bankruptcy Code on May 1, 2001, we were informed by the insurance company providing the bond that they intend to draw down on the $400,000 of restricted cash unless the letter of credit was extended beyond July 1, 2001. The letter of credit was not extended beyond July 1, 2001 and the insurance company drew down $400,000 restricted cash in early July. Sales to other customers may also require us to obtain performance bonds and our filing on May 1, 2001 for Chapter 11 will make it difficult or impossible to obtain these performance bonds. If we are unable to obtain these performance bonds, sales to some of our target customers will be adversely affected. 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. THE CHAPTER 11 FILING AND THE PLAN OF LIQUIDATION WILL MAKE IT IMPOSSIBLE TO GENERATE SALES OF THE PLIANT 3000. Our recent cost reductions, our filing of Chapter 11 and our pending plan of liquidation will make it impossible to generate sales of the Pliant 3000. As of July 31, 2001 we have no sales, marketing and customer service and these diminished resources will make it impossible to obtain customer orders and service the existing Pliant 3000 customers. Also, future product enhancements to the Pliant 3000 will be delayed indefinitely due to the absence of a development team. These delayed product enhancements could negatively impact future sales of the Plaint 3000. EVEN IF WE ARE SUCCESSFUL IN CONTINUING TO ENHANCE AND MARKET 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. The second release of the Pliant 3000 was commercially available in January 2001 and we are continuing to add additional features and enhancements to this release. The recent reduction in headcount will result in an indefinite delay of the third release. This delay in the development of the third release of our product may impact future sales of the Pliant 3000 and negatively impact the interest of potential purchasers of our business and assets. If our Pliant 3000 product does not compete effectively, we will be 24 Pliant Systems, Inc. Item 5. Other Information (continued) Risk Factors (continued) Financial Risks (continued) --------------- EVEN IF WE ARE SUCCESSFUL IN CONTINUING TO ENHANCE AND MARKET OUR PLIANT 3000 PRODUCT, WE MAY NOT BE ABLE TO GENERATE SUSTAINED REVENUE. (CONTINUED) 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's value to potential purchasers will be affected if it is not a competitive product. Even with successful marketing and 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. Most 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. Our recent Chapter 11 filing, plan of liquidation and headcount reductions will very likely prevent customers from placing orders for our Pliant 3000. VARIATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE VOLATILITY IN OUR STOCK PRICE. Since 1997, sales of our older products have decreased, and we will complete shipment of end-of-life orders by early August of 2001. We are continuing to enhance the second release of our Pliant 3000 access product, but shipments of this product were not projected to reach breakeven revenue under our pre-filing business plan until the second half of 2002. Additional new product sales will probably not occur due to the Chapter 11 filing and pending approval of the liquidation plan. Also, the timing of our operating expenses may vary between quarters. These factors will cause volatility in our stock price. TRADING IN OUR STOCK MAY BE SUSPENDED AS A RESULT OF OUR FILING A VOLUNTARY PETITION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE AND OUR ANTICIPATED APPROVAL OF A PLAN OF LIQUIDATION WITH THE COURT BY MID AUGUST 2001. Due to our filing for Chapter 11 on May 1, 2001 and recent proposed plan to the Bankruptcy Court to liquidate our assets, trading of our stock may be suspended on the Over The Counter Bulletin Board. If this suspension is permanent it would result in the total loss of value of our common stock. Customer Risks -------------- OUR PRODUCT WILL HAVE COMPETED WITH THOSE OF LARGER AND MORE FINANCIALLY STABLE COMPANIES IN OUR TARGET MARKET. Even if our development results were successful, our competitors already are selling products to customers in the markets we have targeted. Most of these competitors are larger and more financially stable than we are. Many of these competitors 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 have lower costs for materials and components due to greater production volumes and may offer their products at materially lower prices or on more favorable financing terms. 25 Pliant Systems, Inc. Item 5. Other Information (continued) Risk Factors (continued) Customer Risks (continued) -------------- 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. For example, announcements by Lucent of its new digital loop carrier product, AnyMedia, had this adverse effect on sales of our FLX-2500 product, and a similar event could occur in the future with respect to our Pliant 3000 product. IF COMPETING TECHNOLOGIES THAT OFFER ALTERNATIVE SOLUTIONS TO OUR PLIANT 3000 PRODUCT ACHIEVE SIGNIFICANT ACCEPTANCE, 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: . the increased use of the Internet; . the growth in remote access by telecommuters; . the increasingly diverse distribution sources for high-quality digital video; and . 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 and our recent filing for Chapter 11 and plan of liquidation will make resource availability almost impossible. 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. 26 Pliant Systems, Inc. Item 5. Other Information (continued) Risk Factors (continued) Other Risks ----------- OUR LIMITED BARGAINING POWER WITH CUSTOMERS AND VENDORS MAY NEGATIVELY AFFECT OUR NEW PRODUCT SALES AND GROSS MARGINS. As fewer 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. In the past our industry has experienced long lead times and shortages on certain electronic parts. Although we have not yet experienced any critical problems with respect to parts shortages, any significant delays with lead times on parts and/or component availability could adversely affect our revenues, costs, and gross margins. Our recent filing of Chapter 11 and implementation of a liquidation plan will severely limit our ability to bargain with customers and vendors. OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY NEGATIVELY AFFECT 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 either of these events 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 AFFECT OUR CURRENT AND FUTURE PRODUCT DEVELOPMENT AND SALES. We began developing our Pliant 3000 product in 1998, and many challenges exist to continue to enhance the second release and successfully sell the product. We will need to retain our current key 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 and technical support personnel. The recent cost reductions and Chapter 11 filing and the termination of all but a few employees to implement a plan of liquidation will prevent us recruiting development, sales, and technical support employees. The value of our stock options for management and employees have been reduced and as a result of the Chapter 11 filing and pending plan to liquidate, will probably have no value. This could have a material adverse effect on our ability to retain key personnel, unless we provide other retention incentives, which will result in an additional use of our limited financial resources. Such retention incentives may require special approval by the Bankruptcy Courts. 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. 27 Pliant Systems, Inc. Item 5. Other Information (continued) Risk Factors (continued) 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 and financial results. Such forward-looking statements include, but are not limited to, statements as to our expectations regarding: . the future development and sales opportunities for our Pliant 3000 product; . the future adoption of our planned products and services; . future revenue opportunities; . the establishment and future growth of our customer base; . our ability to successfully develop and sell our Pliant 3000 product; . future expense levels (including cost of revenues, research and development, sales and marketing, and general and administrative expenses); . future sales and marketing efforts; . our ability to raise capital to repay or restructure our $115.0 million of convertible notes due on May 15, 2001; . our ability to raise additional capital to fund future operations; . the future effectiveness of our intellectual property rights; . the effect of any litigation in which we would become involved; . our ability to continue operations under Chapter 11; and . our ability to liquidate our assets under Chapter 11. 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. 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: None 28 Pliant Systems, Inc. Item 6. Exhibits and Reports on Form 8-K (continued) (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. August 13, 2001 /s/ John T. Autrey ------------------ John T. Autrey Vice President and Chief Financial Officer 29

PLIANT SYSTEMS INC 10-Q