**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                           |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                   |
|       |   | **For the quarterly period ended March 31,  2004**                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                   |
|       |   | **OR**                                                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                   |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                   |
|       |   | **For the transition period from                     to                   ** |
|       |   |                                                                                                                                                                                                                                                   |
|       |   | **Commission file number 333-40067**                                                                                                                                                                                                                   |

 

**PLIANTCORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Utah**                                                        |   | **87-0496065**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**1475Woodfield Road, Suite 700**

**Schaumburg,IL 60173**

**(847)969-3300**

(Address ofprincipal executive offices and telephone number)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý  No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  o  No ý

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.  On May 14, 2004, there were571,711 outstanding shares of the registrant’s Common Stock.

 

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

**TABLE OF CONTENTS**

** **
| PART I. FINANCIAL INFORMATION |                                                                                                 |
|-------------------------------|------------------------------------------------------------------------------------------------------|
|                          |                                                                                                 |   |   |
|                          | ITEM 1. FINANCIAL STATEMENTS                                                                         |   |
|                          |                                                                                                 |   |   |
|                          |                                                                                                 | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF  MARCH 31,  2004 AND DECEMBER 31, 2003 |   |
|                          |                                                                                                 |   |   |
|                          |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF  OPERATIONS FOR  THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 |   |
|                          |                                                                                                 |   |   |
|                          |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF CASH  FLOWS FOR  THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 |   |
|                          |                                                                                                 |   |   |
|                          |                                                                                                 | CONDENSED CONSOLIDATED STATEMENT OF  STOCKHOLDERS’  DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2004 |   |
|                          |                                                                                                 |   |   |
|                          |                                                                                                 | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |   |
|                          |                                                                                                 |   |   |
|                          | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS  OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
|                          |                                                                                                 |   |   |
|                          | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                   |   |
|                          |                                                                                                 |   |   |
|                          | ITEM 4. CONTROLS AND PROCEDURES                                                                      |   |
|                          |                                                                                                 |   |   |
| PART II. OTHER INFORMATION    |                                                                                                 |
|                          |                                                                                                 |
|                          | ITEM 1. LEGAL PROCEEDINGS                                                                            |   |
|                          |                                                                                                 |   |   |
|                          | ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND  ISSUER PURCHASES OF EQUITY SECURITIES            |   |
|                          |                                                                                                 |   |   |
|                          | ITEM 3.  DEFAULTS UPON SENIOR  SECURITIES                                                       |   |
|                          |                                                                                                 |   |   |
|                          | ITEM 4. SUBMISSION OF MATTERS TO A  VOTE OF SECURITYHOLDERS                                     |   |
|                          |                                                                                                 |   |   |
|                          | ITEM 5. OTHER INFORMATION                                                                            |   |
|                          |                                                                                                 |   |   |
|                          | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                             |   |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**PLIANT CORPORATION AND SUBSIDIARIES**

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2004 ANDDECEMBER 31, 2003 (DOLLARS IN THOUSANDS) (UNAUDITED)

 
|                                                                                                                                                                                                                                                                                                  |   | **March 31,  2004** |    | **December  31, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
| **ASSETS**                                                                                                                                                                                                                                                                                            |   |                |    |                   |   |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                       |   |                |    |                   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                             |   | $                   | 3,346   |                   | $      | 3,308 |   |
| Receivables, net of allowances of $5,530  and $5,776 respectively                                                                                                                                                                                                                                     |   | 123,209             |    | 111,942                |   |
| Inventories                                                                                                                                                                                                                                                                                           |   | 90,568              |    | 95,219                 |   |
| Prepaid expenses and other                                                                                                                                                                                                                                                                            |   | 3,076               |    | 3,809                  |   |
| Income taxes receivable, net                                                                                                                                                                                                                                                                          |   | 794                 |    | 1,436                  |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                 |   | 9,362               |    | 9,417                  |   |
| Total current  assets                                                                                                                                                                                                                                                                                 |   | 230,355             |    | 225,131                |   |
|                                                                                                                                                                                                                                                                                                  |   |                |    |                   |   |
| PLANT AND EQUIPMENT, net                                                                                                                                                                                                                                                                              |   | 311,394             |    | 319,569                |   |
| GOODWILL                                                                                                                                                                                                                                                                                              |   | 182,158             |    | 182,162                |   |
| INTANGIBLE ASSETS, net                                                                                                                                                                                                                                                                                |   | 19,227              |    | 19,752                 |   |
| OTHER ASSETS                                                                                                                                                                                                                                                                                          |   | 40,283              |    | 40,172                 |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                          |   | $                   | 783,417 |                   | $      | 786,786 |   |
|                                                                                                                                                                                                                                                                                                  |   |                |    |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                                                                                        |   |                |    |                   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                  |   |                |    |                   |   |
| Trade accounts payable                                                                                                                                                                                                                                                                                |   | $                   | 88,031  |                   | $      | 89,800 |   |
| Accrued liabilities:                                                                                                                                                                                                                                                                                  |   |                |    |                   |   |
| Interest payable                                                                                                                                                                                                                                                                                      |   | 18,624              |    | 19,775                 |   |
| Customer rebates                                                                                                                                                                                                                                                                                      |   | 5,698               |    | 7,924                  |   |
| Other                                                                                                                                                                                                                                                                                                 |   | 40,207              |    | 35,947                 |   |
| Current portion of long-term debt                                                                                                                                                                                                                                                                     |   | 412                 |    | 1,033                  |   |
| Total current liabilities                                                                                                                                                                                                                                                                             |   | 152,972             |    | 154,479                |   |
| LONG-TERM DEBT, net of current portion                                                                                                                                                                                                                                                                |   | 799,905             |    | 782,624                |   |
| OTHER LIABILITIES                                                                                                                                                                                                                                                                                     |   | 28,497              |    | 27,493                 |   |
| DEFERRED INCOME TAXES                                                                                                                                                                                                                                                                                 |   | 28,645              |    | 27,792                 |   |
| SHARES SUBJECT TO MANDATORY REDEMPTION  (Note 9)                                                                                                                                                                                                                                                      |   | 202,953             |    | —                 |   |
| Total Liabilities                                                                                                                                                                                                                                                                                     |   | 1,212,972           |    | 992,388                |   |
| Minority   Interest                                                                                                                                                                                                                                                                              |   | 232                 |    | 291                    |   |
| REDEEMABLE PREFERRED STOCK – 200,000 shares  authorized, designated as Series A, no par value, with a redemption and  liquidation value of $1,000 per share; 140,973 shares outstanding at December  31, 2003                                                                                    |   | —              |    | 188,223                |   |
| REDEEMABLE COMMON STOCK – no par value;  60,000 shares authorized; 10,873 shares outstanding as of March 31, 2004 and  29,073 shares outstanding as of December 31, 2003, net of related  stockholders’ notes receivable of  $1,827  at March 31, 2004 and $4,258 at December 31, 2003 |   | 6,645               |    | 13,008                 |   |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                                                                                                                                           |   |                |    |                   |   |
| Common stock – no par value; 10,000,000  shares authorized, 542,638  shares  outstanding at March 31, 2004 and December 31, 2003                                                                                                                                                            |   | 103,376             |    | 103,376                |   |
| Warrants to purchase common stock                                                                                                                                                                                                                                                                     |   | 39,133              |    | 39,133                 |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                   |   | (567,811            | )       | (537,052               | )      |
| Stockholders’ notes receivable                                                                                                                                                                                                                                                                   |   | (660                | )       | (660                   | )      |
| Accumulated other comprehensive income  (loss)                                                                                                                                                                                                                                                        |   | (10,470             | )       | (11,921                | )      |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                      |   | (436,432            | )       | (407,124               | )      |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                                                      |   | $                   | 783,417 |                   | $      | 786,786 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND2003 (IN THOUSANDS) (UNAUDITED)

 
|                                                                             |   | **2004** |       | **2003** |       |
|----------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
|                                                                             |   |     | ** ** |     | ** ** |
| NET SALES                                                                        |   | $        | 244,167    |     | $          | 240,511 |   |
|                                                                             |   |     | ** ** |     | ** ** |
| COST OF SALES                                                                    |   | 207,375  |       | 197,714  |       |
|                                                                             |   |     | ** ** |     | ** ** |
| Gross profit                                                                     |   | 36,792   |       | 42,797   |       |
|                                                                             |   |     | ** ** |     | ** ** |
| OPERATING EXPENSES:                                                              |   |     | ** ** |     | ** ** |
| Sales, General and Administrative                                                |   | 20,983   |       | 21,316   |       |
| Research and Development                                                         |   | 1,832    |       | 1,377    |       |
| Restructuring and Other Costs                                                    |   | —   |       | 6,064    |       |
|                                                                             |   |     | ** ** |     | ** ** |
| Total operating expenses                                                         |   | 22,815   |       | 28,757   |       |
|                                                                             |   |     | ** ** |     | ** ** |
| OPERATING INCOME                                                                 |   | 13,977   |       | 14,040   |       |
|                                                                             |   |     | ** ** |     | ** ** |
| INTEREST EXPENSE-Current and Long-term debt  (note 4, 9)                         |   | (34,599  | )          | (19,856  | )          |
|                                                                             |   |     | ** ** |     | ** ** |
| INTEREST EXPENSE-Dividends and accretion on  Redeemable Preferred Stock (note 9) |   | (8,367   | )          | —   |       |
| OTHER INCOME(EXPENSE) – Net                                                 |   | (118     | )          | 496      |       |
|                                                                             |   |     | ** ** |     | ** ** |
| INCOME(LOSS) BEFORE INCOME TAXES                                                 |   | (29,107  | )          | (5,320   | )          |
|                                                                             |   |     | ** ** |     | ** ** |
| INCOME TAX EXPENSE                                                               |   | 1,652    |       | 2,023    |       |
|                                                                             |   |     | ** ** |     | ** ** |
| NET LOSS                                                                         |   | $        | (30,759    | )        | $          | (7,343 | ) |

 

See notes to condensed consolidated financialstatements.

 

4

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

FOR THE THREE MONTHS ENDEDMARCH 31, 2004 AND 2003 (IN THOUSANDS) (UNAUDITED)

 
|                                                                                                 |   | **2004** |       | **2003** |       |
|------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                |   |     | ** ** |     | ** ** |
| Net   income (loss)                                                                             |   | $        | (30,759    | )        | $          | (7,343 | ) |
| Adjustments to reconcile net income (loss)  to net cash (used in)/ provided by operating activities: |   |     |       |     |       |
| Depreciation and amortization                                                                        |   | 11,362   |       | 11,156   |       |
| Amortization of deferred financing costs  and accretion of debt discount                             |   | 12,227   |       | 1,408    |       |
| Deferred dividends and accretion on  preferred shares                                                |   | 8,367    |       | —   |       |
| Deferred income taxes                                                                                |   | 715      |       | (657     | )          |
| Provision for losses on accounts receivable                                                          |   | (246     | )          | (479     | )          |
| Non-cash plant closing costs                                                                         |   | —   |       | 3,260    |       |
| Gain or loss on disposal of assets                                                                   |   | 48       |       | 96       |       |
| Changes in assets and liabilities:                                                                   |   |     |       |     |       |
| Receivables                                                                                          |   | (11,132  | )          | (15,417  | )          |
| Inventories                                                                                          |   | 4,950    |       | (5,744   | )          |
| Prepaid expenses and other                                                                           |   | 738      |       | (654     | )          |
| Income taxes payable/receivable                                                                      |   | 767      |       | 1,141    |       |
| Other assets                                                                                         |   | (532     | )          | (259     | )          |
| Trade accounts payable                                                                               |   | (1,812   | )          | 4,807    |       |
| Accrued liabilities                                                                                  |   | 3,157    |       | 5,982    |       |
| Other liabilities                                                                                    |   | 1,005    |       | 1,329    |       |
| Other                                                                                                |   | (59      | )          | (146     | )          |
| Net cash (used in) / provided by operating  activities                                               |   | (1,204   | )          | (1,520   | )          |
|                                                                                                 |   |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                |   |     |       |     |       |
| Capital expenditures for plant and  equipment                                                        |   | (3,114   | )          | (3,622   | )          |
|                                                                                                 |   |     |       |     |       |
| Net cash used in investing activities                                                                |   | (3,114   | )          | (3,622   | )          |
|                                                                                                 |   |     |       |     |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                |   |     |       |     |       |
| Net proceeds from issuance of preferred  stock                                                       |   | —   |       | 9,988    |       |
| Net proceeds from issuance of senior  secured discount notes                                         |   | 225,299  |       | —   |       |
| Payment of financing fees                                                                            |   | (8,664   | )          | (2,200   | )          |
| Repayments/Payments of term debt and  revolver                                                       |   | (219,575 | )          | (10,000  | )          |
| Repayment of Capital Leases and other, net                                                           |   | (470     | )          | (1,783   | )          |
| Proceeds from revolving debt - net                                                                   |   | 8,300    |       | 11,700   |       |
|                                                                                                 |   |     |       |     |       |
| Net cash provided by (used in)  financing activities                                            |   | 4,890    |       | 7,705    |       |
|                                                                                                 |   |     |       |     |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS                                        |   | (534     | )          | 281      |       |
|                                                                                                 |   |     |       |     |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                |   | 38       |       | 2,844    |       |
|                                                                                                 |   |     |       |     |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE  PERIOD                                                  |   | 3,308    |       | 1,635    |       |
| CASH AND CASH EQUIVALENTS, END OF THE  PERIOD                                                        |   | $        | 3,346      |     | $          | 4,479 |   |
|                                                                                                 |   |     |       |     |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                                                  |   |     |       |     |       |
| Cash paid (received) during the period for:                                                          |   |     |       |     |       |
| Interest                                                                                             |   | $        | 20,854     |     | $          | 6,401 |   |
| Income taxes                                                                                         |   | 819      |       | 1,802    |       |
| Other non-cash disclosure:                                                                           |   |     |       |     |       |
| Preferred Stock dividends accrued but not  paid                                                      |   | $        | 7,922      |     | $          | 6,321 |   |

 

See notes to condensed consolidated financialstatements.

 

5

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

**FOR THE THREEMONTHS ENDED MARCH 31, 2004   (INTHOUSANDS) (UNAUDITED)**

 
|                                                                                                  |   |       |   |   |    | **Warrants  To Purchase  Common Stock** |   | **Accumulated  Deficit** |   | **Stockholders’  Notes  Receivable** |     | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------|--------|--------|---------|-----------------------------------------|--------|--------------------------|--------|-------------------------------------------|----------|------------------------------------------------------|--------|-----------|--------|
| **Common  Stock**                                                                                     |
| **Shares**                                                                                            |   | **Amount** |
|                                                                                                  |   |       |   |   |    |                                    |   |                     |   |                                      |     |                                                 |   |      |   |
| BALANCE, DECEMBER 31, 2003                                                                            |   | 543        |   | $      | 103,376 |                                    | $      | 39,133                   |   | $                                         | (537,052 | )                                                    | $      | (660      | )      | $ | (11,921 | ) | $ | (407,124 | ) |
|                                                                                                  |   |       |   |   |    |                                    |   |                     |   |                                      |     |                                                 |   |      |   |
| Net loss                                                                                              |   |       |   |   |    |                                    |   | (30,759                  | )      |                                      |     |                                                 |   | (30,759   | )      |
| Accumulated fair value change in interest rate derivatives charged to  interest expense, net of taxes |   |       |   |   |    |                                    |   |                     |   |                                      |     | 2,220                                                |   | 2,220     |   |
| Foreign currency translation adjustment                                                               |   |       |   |   |    |                                    |   |                     |   |                                      |     | (769                                                 | )      | (769      | )      |
|                                                                                                  |   |       |   |   |    |                                    |   |                     |   |                                      |     |                                                 |   |      |   |
| BALANCE, MARCH 31, 2004                                                                               |   | 543        |   | $      | 103,376 |                                    | $      | 39,133                   |   | $                                         | (567,811 | )                                                    | $      | (660      | )      | $ | (10,470 | ) | $ | (436,432 | ) |

 

See notesto condensed consolidated financial statements.

 

6

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**PLIANTCORPORATION AND SUBSIDIARIES**

 

**NOTESTO CONDENSED CONSOLIDATED****FINANCIAL STATEMENTS (UNAUDITED)**

 

**1.**                    BASIS OF PRESENTATION

 

The accompanying condensed consolidated financial statements have beenprepared, without audit, in accordance with U.S. generally accepted accountingprinciples and pursuant to the rules and regulations of the Securities andExchange Commission. The information reflects all normal recurring adjustmentsthat, in the opinion of management, are necessary for a fair presentation ofthe financial position, results of operations and cash flows of PliantCorporation and its subsidiaries (“Pliant,” the “Company” or “we”) as of thedates and for the periods presented. Results of operations for the period endedMarch 31, 2004 are not necessarily indicative of results of operations to beexpected for the full fiscal year.

 

Certain information in footnote disclosures normally included infinancial statements presented in accordance with U.S. generally acceptedaccounting principles has been condensed or omitted in accordance with therules and regulations of the Securities and Exchange Commission. Thesestatements should be read in conjunction with the Company’s Annual Report onForm 10-K for the year ended December 31, 2003 and the Company’s RegistrationStatement on Form S-4 (File No 333-114608). Certain reclassifications have beenmade to the condensed consolidated financial statements for the quarter endedMarch 31, 2003 for comparative purposes.

** **

**2.       INVENTORIES**

 

Inventoriesare valued at the lower of cost (using the first-in, first-out method) ormarket value. Inventories as of March 31, 2004 and December 31, 2003 consistedof the following (in thousands):

 
|            |   | **March 31,  2004** |   | **December  31, 2003** |   |
|-----------------|--------|---------------------|--------|------------------------|--------|
|            |   |                |   |                   |   |
| Finished goods  |   | $                   | 52,908 |                   | $      | 55,858 |   |
| Raw materials   |   | 27,741              |   | 28,551                 |   |
| Work-in-process |   | 9,919               |   | 10,810                 |   |
|            |   |                |   |                   |   |
| Total           |   | $                   | 90,568 |                   | $      | 95,219 |   |

 

**3. RESTRUCTURING AND OTHER COSTS**

 

Restructuringand other costs include plant closing costs (including costs related torelocation of manufacturing equipment), office closing costs and other costsrelated to workforce reductions.

 

The followingtable summarizes restructuring and other costs for the three months ended March31 (in thousands):

 
|                                              |   | **2004** |   | **2003** |   |
|---------------------------------------------------|--------|----------|--------|----------|--------|
| **Plant closing costs:**                          |   |     |   |     |   |
| Severance                                         |   | $        | — |     | $      | 300 |   |
| Relocation of production lines                    |   | —   |   | 1,294    |   |
| Other plant closure costs                         |   | —   |   | 1,200    |   |
|                                              |   | —   |   | 2,794    |   |
| **Office closing and workforce reduction costs:** |   |     |   |     |   |
| Severance                                         |   | —   |   | 10       |   |
| Leases                                            |   | —   |   | 3,260    |   |
|                                              |   | —   |   | 3,270    |   |
|                                              |   | $        | — |     | $      | 6,064 |   |

 

7

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***2003 Accruals:***

 

***Plant Closing Costs*–**During the firstquarter of 2003, we continued to incur costs related to the closure of ourfacilities in Merced, California and Shelbyville, Indiana; production rationalizationsin Toronto, Canada; and the relocation of certain lines from our Merced plantand Fort Edward plant to our other facilities.

*** ***

***Office Closing and Workforce Reduction Costs –***During the first quarter of 2003, we accrued the present value of future leasepayments on two  buildings that we donot currently occupy.  In connectionwith the 2001 restructuring plan, we vacated and subleased these facilities in2001.  During the first quarter of 2003,the sublessees defaulted on the subleases.

 

The followingtable summarizes the roll-forward of the reserve from December 31, 2003 toMarch 31, 2004:

 
|                                                 |         |                 |                         |   |                 | **Accruals for the   Quarter ended March 31, 2004** |   |          |   |                             |   |
|------------------------------------------------------|--------------|----------------------|------------------------------|--------|----------------------|---------------------------------------------------------------|--------|---------------|--------|----------------------------------|--------|
|                                                 |         |                 |                         |   |                 | **Additional  Employees**                                     |   | **Severance** |   | **Relocated  Production  Lines** |   | **Leases** |   | **Other  Plant  Closure  Costs** |   | **Total** |   | **Payments /  Charges** |   |   |   |
| **12/31/2003**                                       | **3/31/ 04** |                 |
| **#  Employees  Terminated**                         |         | **Accrual  Balance** | **#  Employees  Terminated** |   | **Accrual  Balance** |                                                          |
| ***Plant Closing  Costs:***                          |         |                 |                         |   |                 |                                                          |   |          |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |         |                 |                         |   |                 |                                                          |   |          |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Merced                                               |         | 54                   |                         | $      | 1,235                |                                                          | — |          |   | —                           |   |   | — |   |   | — |   |   | — |   | $ | —- |   | $ | (115 | ) | 54 |   | $ | 1,120 |   |
| Shelbyville                                          |         | 8                    |                         | — |                 | —                                                        |   | —        |   | —                           |   | — |   | — |   | — |   | — |   | 8 |   | — |   |
| Toronto                                              |         | 4                    |                         | — |                 | —                                                        |   | —        |   | —                           |   | — |   | — |   | — |   | — |   | 4 |   | — |   |
| Pliant Solutions                                     |         | 148                  |                         | 541    |                 | —                                                        |   | —        |   | —                           |   | — |   | — |   | — |   | (50 | ) | 165 |   | 491 |   |
| Mexico                                               |         | 17                   |                         | — |                 | —                                                        |   | —        |   | —                           |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Leases                                               |         | —               |                         | 2,004  |                 | —                                                        |   | —        |   | —                           |   | — |   | — |   | — |   | (58 | ) | — |   | 1,946 |   |
|                                                 |         | 231                  |                         | $      | 3,780                |                                                          | — |          |   | —                           |   |   | — |   |   | — |   |   | — |   | $ | — |   | $ | (223 | ) | 231 |   | $ | 3,557 |   |
|                                                 |         |                 |                         |   |                 |                                                          |   |          |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ***Office Closing  and Workforce Reduction Costs:*** |         |                 | *** ***                 |   | *** ***         |                                                          |   |          |   |                             |   |   |   |   |   |   |   |   | *** *** |   |   |   |   |
| Leases                                               |         | —               |                         | $      | 1,129                |                                                          | — |          |   | —                           |   |   | — |   |   | — |   |   | — |   | $ | — |   | $ | (134 | ) | — |   | $ | 995 |   |
| Severance                                            |         | 114                  |                         | 237    |                 | —                                                        |   | —        |   | —                           |   | — |   | — |   | — |   | (119 | ) | 114 |   | 118 |   |
| Singapore                                            |         | —               |                         | 152    |                 | —                                                        |   | —        |   | —                           |   | — |   | — |   | — |   | (4 | ) | — |   | 148 |   |
|                                                 |         | 114                  |                         | $      | 1,518                |                                                          | — |          |   | —                           |   |   | — |   |   | — |   |   | — |   | $ | — |   | $ | (257 | ) | 114 |   |   | 1,261 |   |
|                                                 |         |                 |                         |   |                 |                                                          |   |          |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **TOTAL**                                            |         | **345**              | ** **                   | **$**  | **5,298**            | ** **                                                    | — |          |   | —                           |   |   | — |   |   | — |   |   | — |   | $ | — |   | $ | **(480** | **)** | **345** |   | $ | **4,818** |   |
|                                                      |              |                      |                              |        |                      |                                                               |        |               |        |                                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Plant Closing Costs and Office Closing and WorkforceReduction Costs***

 

*** 2004 accruals*–**There were no accruals made in 2004. The only activity during the quarter related to payments charged to theaccrual.

 

8

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**4.       INTEREST EXPENSE – Current and Long-term debt**

 

Interest expense – current and long-term debtin the statement of operations for the quarters ended March 31, 2004 and 2003are as follows:

 
|                                                                                              |   | **2004** |   | **2003** |   |
|---------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Interest expense accrued, net                                                                     |   | $        | 23,333 |     | 18,448 |   |
| Recurring amortization of financing fees                                                          |   | 1,148    |   | 1,408    |   |
| Write-off of previously capitalized  financing fees and interest rate   derivatives costs(a) |   | 10,118   |   | —   |   |
|                                                                                              |   |     |   |     |   |
| TOTAL                                                                                             |   | $        | 34,599 |     | $      | 19,856 |   |
|                                                                                                   |        |          |        |          |        |  |  |

 

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(a) This write-off resulted from therepayment of the old credit facilities in February 2004, from the net proceedsfrom the issuance of the senior secured discount notes and borrowings under thenew revolving credit facility.

 

 

**5.       STOCK OPTION PLANS**

 

During the three months ended March 31, 2004, options to purchase 4,365shares of our common stock were cancelled in connection with employeeterminations.

 

Weapply Accounting Principles Board Opinion No. 25 and related interpretations inaccounting for stock-based compensation 

plansas they relate to employees and directors. We did not have compensation expense related to stock options for thethree month periods ended March 31, 2004 and March 31, 2003.  Had the compensation cost for all theoutstanding options been determined in accordance with SFAS No. 123,“Accounting for Stock-Based Compensation,” our net income (loss) for thequarters ended March 31, 2004 and 2003 would have been the following pro formaamounts (in thousands):

 
|                                 |   | **2004** |    | **2003** |   |
|--------------------------------------|--------|----------|---------|----------|--------|
|                                 |   |     |    |     |   |
| As reported                          |   | $        | (30,759 | )        | $      | (7,343 | ) |
| Pro forma stock compensation expense |   | (200     | )       | (188     | )      |
| Pro forma                            |   | $        | (30,959 | )        | $      | (7,531 | ) |

 

**5.****                    INCOMETAXES**

 

Income tax expense for the three months ended March 31, 2004 was $1.7million on pretax losses of $29.1 million as compared to $2.0 million on pretaxlosses of $5.3 million for the same period in 2003. Income tax benefits relatedto net operating losses in the United States are offset by a valuation allowanceas the realization of these tax benefits are not certain. Therefore, the incometax expense in the statements of operations primarily reflects foreign incometaxes.

** **

**6.****                    COMPREHENSIVEINCOME/(LOSS)**

 

Other comprehensive income (loss) for the three months ended March 31,2004 and 2003 was ($29.3) million and ($7.5) million, respectively. Thecomponents of other comprehensive income/(loss) are net income (loss), thechange in cumulative unrealized losses on derivatives recorded in accordancewith Statement of Financial Accounting Standards No. 133 and foreign currencytranslation.

 

9

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**7.****                    NEWREVOLVING CREDIT FACILITY AND ISSUANCE OF SENIOR SECURED DISCOUNT NOTES DUE2009**

 

Long-term debt as of March 31, 2004 and December 31, 2003 consistsof the following (in thousands):

 
|                                                                                                                         |   | **March 31,  2004** |    | **December  31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
| Credit Facilities:                                                                                                           |   |                |    |                    |   |
| New revolving credit facility                                                                                                |   | $                   | 8,300   |                    | $      | — |   |
| Tranche A and B term loans under old credit  facilities                                                                      |   | —              |    | 219,575                 |   |
| Senior secured discount notes at 11 1/8%                                                                                     |   | 228,405             |    | —                  |   |
| Senior secured notes, interest at 11 1/8%                                                                                    |   | 250,000             |    | 250,000                 |   |
| Senior subordinated notes, interest at  13.0% (net of unamortized issue discount, premium and discount related to  warrants) |   | 312,596             |    | 312,402                 |   |
| Obligations under capital leases                                                                                             |   | 809                 |    | 856                     |   |
| Insurance financing                                                                                                          |   | 207                 |    | 824                     |   |
| Total                                                                                                                        |   | 800,317             |    | 783,657                 |   |
| Less current portion                                                                                                         |   | (412                | )       | (1,033                  | )      |
| Long-term portion                                                                                                            |   | $                   | 799,905 |                    | $      | 782,624 |   |

 

On February 17, 2004 we repaid the balance outstanding on the existingcredit facilities that existed on that date from the proceeds from the issuanceof Senior Secured Discount Notes (discussed below) and the New Revolving CreditFacility (discussed below).

 

New Revolving Credit Facility

 

On February 17, 2004, we entered into a new revolving creditfacility providing up to $100 million (subject to a borrowing base).  The new revolving credit facility includes a$15 million letter of credit sub-facility, with letters of credit reducingavailability under the revolving credit facility.

 

The new revolving credit facility is secured by a first prioritysecurity interest in substantially all inventory, receivables, depositaccounts, 100% of capital stock of, or other equity interests in existing andfuture domestic subsidiaries and foreign subsidiaries that are note guarantors,and 65% of the capital stock of, or other equity interests in existing andfuture first-tier foreign subsidiaries, investment property and certain otherassets of the Company and the note guarantors (the “Second PriorityCollateral”).

 

The new revolving credit facility matures on February 17,2009.  The Company is subject toperiodic reporting of a borrowing base consisting of eligible accountsreceivable and eligible inventory.  Theinterest rates will be at LIBOR plus 2.5% to 2.75% or ABR plus 1.5% -1.75%.  The commitment fee for theunused portion of the new revolving credit facility is 0.50% per annum.

 

The borrowings under the new revolving credit facility may be limitedto 75% of the lesser of the total commitment at such time and the borrowingbase in effect at such time if the fixed coverage ratio defined in the newrevolving credit facility is less than or equal to 1.10 to 1.00.  In addition, we were unable to borrow morethan $45 million as of March 31, 2004 until we put in place certain depositcontrol agreements.  These depositcontrol agreements were put in place in April 2004.

 

Issuance of 11 1/8% Senior Secured Discount Notes due 2009

 

On February 17, 2004 we completed the sale of $306 million ($225.3million of proceeds) principal amount at maturity of 11 1/8% Senior SecuredDiscount Notes due 2009.  The proceedsof this offering and the borrowing under the new revolving credit facility(discussed above) were used to repay and terminate the credit facilities thatexisted at December 31, 2003.

 

10

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The Senior Secured Discount Notes are secured by a first prioritysecurity interest in substantially all of our real property, fixtures,equipment, intellectual property and other assets other than theSecond-Priority Collateral (the “First-Priority Collateral”).

 

Unless we elect to pay cash interest as described below, and exceptunder certain limited circumstances, the notes will accrete from the date ofissuance at the rate of 11 1/8% until December 15, 2006, compoundedsemiannually on each June 15 and December 15 commencing June 15,2004, to an aggregate principal amount of $1,000 per note ($306.0 million inthe aggregate assuming no redemption or other repayments).  Commencing on December 15, 2006,interest on the notes will accrue at the rate of 11 1/8% per annum and will bepayable in cash semiannually on June 15 and December 15, commencingon June 15, 2007.

 

On any interest payment date prior to December 15, 2006, we mayelect to commence paying cash interest (from and after such interest paymentdate) in which case (i) we will be obligated to pay cash interest on eachsubsequent interest payment date, (ii) the notes will cease to accrete aftersuch interest payment date and (iii) the outstanding principal amount at thestated maturity of each note will equal the accreted value of such note as ofsuch interest payment date.

 

On or after June 15, 2007, we may redeem some or all of the notesat the following redemption prices (expressed as a percentage of principalamount), plus accrued and unpaid interest: 105.563% if redeemed prior toJune 15, 2008; 102.781% if redeemed prior to June 15, 2009; and 100%if redeemed on or after June 15, 2009. Prior to such date, we may not redeem the notes except as described inthe following paragraph.

 

At any time prior to June 15, 2007, we may redeem up to 35% of theaccreted value of the notes with the net cash proceeds of certain equityofferings by us at a redemption price equal to 111.125% of the accreted valuethereof plus accrued interest, so long as (i) at least 65% of the accretedvalue of the notes remains outstanding after such redemption and (ii) any suchredemption by us is made within 120 days after such equity offering.

 

**8.       OPERATING  SEGMENTS**

 

Operating segments are components of our business forwhich separate financial information is available that is evaluated regularlyby our chief operating decision maker in deciding how to allocate resources andin assessing performance.  Thisinformation is reported on the basis that it is used internally for evaluatingsegment performance.

 

We have four operating segments: Pliant U.S., Pliant FlexiblePackaging, Pliant International and Pliant Solutions.   Sales and transfers between our segments are eliminated inconsolidation.  We evaluate theperformance of our operating segments based on net sales (excluding inter-company sales) andsegment profit.  The segment profitreflects income before interest expense, income taxes, depreciation,amortization, restructuring costs and other non-cash charges and netadjustments for certain unusual items. Our reportable segments are managed separately with separate managementteams, because each segment has differing products, customer requirements,technology and marketing strategies.

 

Segmentprofit and segment assets as of and for the periods ended March 31, 2004 and2003 are presented in the following table (in thousands). Certainreclassifications have been made to the prior year amounts to be consistentwith the 2004 presentation.

 
|                          |   | **Pliant  U.S.** |    | **Pliant  Flexible  Packaging** |   | **Pliant  International** |   | **Pliant  Solutions** |   | **Corporate/  Other** |   | **Total** |   |
|-------------------------------|--------|------------------|---------|---------------------------------|--------|---------------------------|--------|-----------------------|--------|-----------------------|--------|-----------|--------|
| **2004**                      |   |             |    |                            |   |                      |   |                  |   |                  |   |      |   |
| Net sales to customers        |   | $                | 154,092 |                            | $      | 56,383                    |   | $                     | 26,431 |                  | $      | 7,261     |   | $ | — |   | $ | 244,167 |   |
| Intersegment sales            |   | 3,248            |    | 572                             |   | 1,542                     |   | 107                   |   | (5,469                | )      | —    |   |
| Total net sales               |   | 157,340          |    | 56,955                          |   | 27,973                    |   | 7,368                 |   | (5,469                | )      | 244,167   |   |
| Depreciation and amortization |   | 7,155            |    | 1,899                           |   | 1,902                     |   | 327                   |   | 79                    |   | 11,362    |   |
| Interest expense              |   | —           |    | 19                              |   | 921                       |   | 5                     |   | 42,021                |   | 42,966    |   |
| Segment profit                |   | 22,998           |    | 8,604                           |   | 1,074                     |   | (2,274                | )      | (5,181                | )      | 25,221    |   |
| Segment total assets          |   | 459,408          |    | 139,594                         |   | 88,778                    |   | 17,445                |   | 78,192                |   | 783,417   |   |
| Capital expenditures          |   | 1,497            |    | 143                             |   | 1,260                     |   | 35                    |   | 179                   |   | (3,114    | )      |
|                          |   |             |    |                            |   |                      |   |                  |   |                  |   |      |   |
| **2003**                      |   |             |    |                            |   |                      |   |                  |   |                  |   |      |   |
| Net sales to customers        |   | $                | 151,929 |                            | $      | 51,757                    |   | $                     | 28,036 |                  | $      | 8,789     |   | $ | — |   | $ | 240,511 |   |
| Intersegment sales            |   | 3,155            |    | 881                             |   | 2,771                     |   | —                |   | (6,807                | )      | —    |   |
| Total net sales               |   | 155,084          |    | 52,638                          |   | 30,807                    |   | 8,789                 |   | (6,807                | )      | 240,511   |   |
| Depreciation and amortization |   | 6,557            |    | 1,977                           |   | 1,739                     |   | 305                   |   | 578                   |   | 11,156    |   |
| Interest expense              |   | (2               | )       | 13                              |   | 577                       |   | 5                     |   | 19,263                |   | 19,856    |   |
| Segment profit                |   | 26,761           |    | 7,675                           |   | 2,880                     |   | (901                  | )      | (4,356                | )      | 32,059    |   |
| Segment total assets          |   | 533,907          |    | 137,488                         |   | 99,695                    |   | 33,860                |   | 65,095                |   | 870,045   |   |
| Capital expenditures          |   | 1,129            |    | 703                             |   | 1,406                     |   | —                |   | 384                   |   | 3,622     |   |

 

11

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A reconciliation of the totals reported forthe operating segments to the totals reported in the consolidated financialstatements as of and for the three months ended March 31 is as follows (inthousands):

 

|                                                                                                         |   | **2004** |    | **2003** |   |
|--------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                                                                         |   |     |    |     |   |
| **Profit or Loss**                                                                                           |   |     |    |     |   |
| Total segment profit                                                                                         |   | $        | 25,221  |     | $      | 32,059 |   |
| Depreciation and amortization                                                                                |   | (11,362  | )       | (11,156  | )      |
| Restructuring and other costs                                                                                |   | —   |    | (6,064   | )      |
| Interest expense                                                                                             |   | (42,966  | )       | (19,856  | )      |
|                                                                                                         |   |     |    |     |   |
| Other expenses and adjustments for non-cash  charges and certain adjustments defined by our credit agreement |   | —   |    | (303     | )      |
| Income (loss) before taxes                                                                                   |   | $        | (29,107 | )        | $      | (5,320 | ) |
|                                                                                                         |   |     |    |     |   |
| **Assets**                                                                                                   |   |     |    |     |   |
| Total assets for reportable segments                                                                         |   | $        | 705,225 |     | $      | 804,950 |   |
| Other unallocated assets                                                                                     |   | 78,192   |    | 65,095   |   |
| Total consolidated assets                                                                                    |   | $        | 783,417 |     | $      | 870,045 |   |

 

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**9.  SHARES SUBJECT TO MANDATORY REDEMPTION**

 

TheCompany adopted Statement of Financial Accounting Standard No. 150 ( “SFAS150”) Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity, effective January 1, 2004. As a result, the RedeemablePreferred Stock of the Company that contains an unconditional mandatoryredemption feature was recorded as a liability on the date of adoption at fairmarket value. Fair market value was determined using the value of thesecurities on the date of issuance plus accretion of discount from the date ofissuance through December 31,2003 and the unpaid dividends at the end of eachquarter from the date of issuance through December 31, 2003. In addition,effective January 1, 2004 the dividends and accretion on the preferred sharesare included as a part of interest expense in the statement of operations.

 

In addition, as aresult of adopting SFAS 150, the Company’s redeemable common shares that havebeen put for redemption by the shareholder were recorded as a liability at fairvalue. The fair value was computed using the agreed upon price of theredemption times the number of shares put by the shareholder. As required bySFAS 150 prior periods were not restated.

 

The shares subjectto mandatory redemption are as follow (in thousands):

 
|                                                                                                                                                                                                                    |   | **As of  January 1,  2004** |    | **As of  March 31,  2004** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|
| Redeemable Preferred Shares 200,000 shares  authorized, 140,973 shares outstanding as of March 31, 2004, designated as  Series A, no par value with a redemption value of $1,000 per share plus  accumulated dividends. |   | $                           | 188,223 |                       | $      | 196,591 |   |
|                                                                                                                                                                                                                    |   |                        |    |                       |   |
| 18,200 Redeemable Common Shares that have  been put for redemption by a shareholder, net of a shareholder note of $2,431                                                                                                |   | 6,362                       |    | 6,362                      |   |
| Total shares subject to mandatory  redemption                                                                                                                                                                           |   | $                           | 194,585 |                       | $      | 202,953 |   |

 

The cashsettlement at the redemption date (assuming no cash dividends are paid throughthe redemption date) is  $ 680.6 millionfor the redeemable preferred shares and $ 6.4 million ( net of the notereceivable of $ 2.4 million) for the redeemable common shares that have beenput for redemption by the shareholder.

 

**10.****            ****DEFINED BENEFIT PLANS**

 

We sponsor three noncontributory defined benefit pension plans (the“United States Plans”) covering domestic employees with 1,000 or more hours ofservice. We fund our plans in amounts to fulfill the funding requirements ofthe Employee Retirement Income Security Act of 1974. Contributions are intendedto not only provide for benefits attributed to service to date but also forthose expected to be earned in the future. We also sponsor a defined benefitplan in Germany (the “Germany Plan”). For information on the Germany Planplease refer to the Company’s Form 10-K for the year ended December 31,2003.

 

The consolidated accrued net pension expense for the quarters endedMarch 31, 2004 and 2003 includes the following components (in thousands):

 
|                                            |   | **2004** |   | **2003** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|
| **United States Plans**                         |   |     |   |     |   |
| Service cost-benefits earned during the  period |   | $        | 1,189  |     | $      | 1,119 |   |
| Interest cost on projected benefit  obligation  |   | 1,374    |   | 1,289    |   |
| Expected return on assets                       |   | (1,105   | )      | (869     | )      |
| Other                                           |   | 184      |   | 130      |   |
| Total accrued pension expense                   |   | $        | 1,642  |     | $      | 1,669 |   |
|                                            |   |     |   |     |   |
| **Employer Contributions (a)**                  |   |     |   |     |   |
| 2004 Expected to plan trusts                    |   | $        | 7,261  |     |   |   |

 

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(a)     Disclosed due to the change from Form 10-K for theyear ended December 31, 2003 as a result of the minimum funding changes madeunder the Pension Funding Equity Act.

 

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**11.****            ****CONTINGENCIES**

 

*Environmental Contingencies*  Our operations are subject to extensiveenvironmental laws and regulations concerning emissions to the air, dischargesto surface and subsurface waters, and the generation, handling, storage,transportation, treatment, and disposal of waste materials, as adopted by variousgovernmental authorities in the jurisdictions in which we operate. We believewe make every reasonable effort to remain in full compliance with existinggovernmental laws and regulations concerning the environment.

 

*Litigation* On November 19, 2001, S.C. Johnson & Son, Inc.and S.C. Johnson Home Storage, Inc. (collectively, “S.C. Johnson”) filed acomplaint against us in the U.S. District Court for the District of Michigan,Northern Division (Case No. 01-CV-10343-BC). The complaint allegesmisappropriation of proprietary trade secret information relating to certaincomponentry used in the manufacture of reclosable “slider” bags. Wecounterclaimed alleging that S.C. Johnson misappropriated certain of our tradesecrets relating to the extrusion of flange zipper and unitizing robotics. Boththe S.C. Johnson complaint and our counterclaim seek damages and injunctive anddeclaratory relief. The S.C. Johnson complaint and our counterclaim have beenvoluntarily submitted to non-binding mediation for the purpose of potentialsettlement. The mediation took place on February 20, 2004.  Negotiations are still ongoing. We areunable to predict whether the case can be settled as a result of the mediation.Any amount we may agree to pay as a result of the mediation and any settlement,if any, we may agree to may be significant, but is not anticipated to have amaterial adverse effect on our financial condition or results of operations. Ifthe case cannot be settled on a basis acceptable to us, we intend to continueresisting S.C. Johnson’s claims and to pursue our counterclaim vigorously.

 

On February 26, 2003, former employees of our Fort Edward, NYmanufacturing facility, which we acquired as part of the Decora acquisition,named us as defendants in a complaint filed in the Supreme Court of the Stateof New York, County of Washington (Index No. 4417E). We received serviceof this complaint on April 2, 2003, and successfully removed the case tothe United States District Court for the Northern District of New York (CaseNo. 1:03cv00533). The complaint alleges claims against us for conspiracyto defraud and breach of contract arising out of our court-approved purchase ofthe assets of Decora Industries, Inc. and Decora, Incorporated.Plaintiffs’ complaint seeks compensatory and punitive damages and a declaratoryjudgment nullifying severance agreements for lack of consideration and economicduress. We intend to resist the plaintiffs’ claims vigorously. We do notbelieve this proceeding will have a material adverse affect on our financialcondition or results of operations.

 

We are involved in other litigation matters from time to time in theordinary course of our business. In our opinion, none of such litigation ismaterial to our financial condition or results of operations.

 

In the fourth quarter of 2003, we accrued $7.2 million for theestimated costs of certain litigation matters. This accrual as of March 31,2004 was $ 7.1 million.

 

**12.****            ****CONDENSED CONSOLIDATING FINANCIAL  STATEMENTS**

 

Thefollowing condensed consolidating financial statements present, in separatecolumns, financial information for (i) Pliant Corporation (on a parent onlybasis) with its investment in its subsidiaries recorded under the equitymethod, (ii) guarantor subsidiaries (as specified in the Indenture dated May31, 2000 (the “2000 Indenture”) relating to Pliant Corporation’s $220 millionsenior subordinated notes due 2010 (the “2000 Notes”), the Indenture datedApril 10, 2002 (the “2002 Indenture”) relating to Pliant’s $100 million seniorsubordinated notes due 2010 (the “2002 Notes”), the Indenture dated May 30,2003 ( the “ 2003 Indenture”) relating to Pliant’s $ 250 millionsenior secured notes due 2009 (the “2003 Notes”) and Indenture dated February17, 2004 ( the “2004 Indenture” and, together with the 2000 Indenture, the 2002Indenture and the 2003 Indenture, the “Indentures”)  relating to Pliant’s $ 306 million senior secured discount notesdue 2009 ( “ 2004 Notes” and, together with the 2000 Notes, the 2002 Notes andthe 2003 Notes, the “Notes”) on a combined basis, with any investments innon-guarantor subsidiaries specified in the Indentures recorded under theequity method, (iii) direct and indirect non-guarantor subsidiaries on acombined basis, (iv) the eliminations necessary to arrive at the informationfor Pliant Corporation and its subsidiaries on a consolidated basis, and (v)Pliant Corporation on a consolidated basis, in each case as of March 31, 2004and December 31, 2003 and for the three months ended March 31, 2004 and 2003.  The Notes are fully and unconditionallyguaranteed on a joint and several basis by each guarantor subsidiary and eachguarantor subsidiary is wholly owned, directly or indirectly, by PliantCorporation.  There are no contractualrestrictions limiting transfers of cash from guarantor and non-guarantorsubsidiaries to Pliant Corporation except from our Alliant joint venture.  Alliant is a joint venture between us andSupreme Plastics Ltd., a company based in the United Kingdom.  We own a fifty-percent interest in Alliant.  The limited

 

14

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liabilitycompany agreement governing the joint venture prohibits distributions to themembers of the joint venture before July 27, 2004, other than annualdistributions sufficient to pay taxes imposed upon the members as a result ofthe attribution to the members of income of the joint venture.  The condensed consolidating financialstatements are presented herein, rather than separate financial statements foreach of the guarantor subsidiaries, because management believes that separatefinancial statements relating to the guarantor subsidiaries are not material toinvestors.

 

In2004, one of our subsidiaries in Canada, Uniplast Industries Co. became aguarantor subsidiary. As a result, all periods presented include UniplastIndustries Co. as a guarantor subsidiary.

 

15

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**PLIANTCORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2004 (IN THOUSANDS) (UNAUDITED)

 
|                                                       |   | **Pliant  Corporation  (Parent Only)** |       | **Combined  Guarantor  Subsidiaries** |       | **Combined  Non-Guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Pliant  Corporation** |       |
|------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
|                                                       |   |                                   | ** ** |                                  | ** ** |                                      | ** ** |             | ** ** |                                  | ** ** |
| **ASSETS**                                                 |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CURRENT ASSETS:                                            |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Cash and cash equivalents                                  |   | $                                      | —     |                                  | $          | 227                                       |       | $                | 3,119      |                                  | $          | — |   | $ | 3,346 |   |
| Receivables – net                                     |   | 89,103                                 |       | 16,270                                |       | 17,836                                    |       | —           |       | 123,209                               |       |
| Inventories                                                |   | 61,315                                 |       | 16,809                                |       | 12,444                                    |       | —           |       | 90,568                                |       |
| Prepaid expenses and other                                 |   | 2,058                                  |       | 390                                   |       | 628                                       |       |             |       | 3,076                                 |       |
| Income taxes receivable                                    |   | 217                                    |       | 262                                   |       | 315                                       |       | —           |       | 794                                   |       |
| Deferred income taxes                                      |   | 10,366                                 |       | (1,505                                | )          | 501                                       |       | —           |       | 9,362                                 |       |
| Total  current  assets                                |   | 163,059                                |       | 32,453                                |       | 34,843                                    |       | —           |       | 230,355                               |       |
| PLANT AND EQUIPMENT – Net                             |   | 246,878                                |       | 23,750                                |       | 40,766                                    |       | —           |       | 311,394                               |       |
| INTANGIBLE  ASSETS – Net                              |   | 173,975                                |       | 26,098                                |       | 1,312                                     |       | —           |       | 201,385                               |       |
| INVESTMENT IN SUBSIDIARIES                                 |   | (4,520                                 | )          | (1,062                                | )          | 1,062                                     |       | 4,520            |       | —                                |       |
| OTHER ASSETS                                               |   | 36,278                                 |       | —                                |       | 4,005                                     |       | —           |       | 40,283                                |       |
| TOTAL ASSETS                                               |   | $                                      | 615,670    |                                  | $          | 81,239                                    |       | $                | 81,988     |                                  | $          | 4,520 |   | 783,417 |   |
|                                                       |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**    |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CURRENT LIABILITIES:                                       |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Current portion of long-term debt                          |   | $                                      | 412        |                                  | $          | —                                    |       | $                | —     |                                  | $          | — |   | $ | 412 |   |
| Trade accounts payable                                     |   | 67,871                                 |       | 7,928                                 |       | 12,232                                    |       | —           |       | 88,031                                |       |
| Accrued liabilities                                        |   | 54,678                                 |       | 5,018                                 |       | 4,833                                     |       | —           |       | 64,529                                |       |
| Due to (from) affiliates                                   |   | (128,685                               | )          | 80,747                                |       | 47,938                                    |       | —           |       | —                                |       |
| Total current liabilities                                  |   | (5,724                                 | )          | 93,693                                |       | 65,003                                    |       | —           |       | 152,972                               |       |
| LONG-TERM DEBT – Net of current portion               |   | 799,905                                |       | —                                |       | —                                    |       | —           |       | 799,905                               |       |
| OTHER LIABILITIES                                          |   | 25,791                                 |       | —                                |       | 2,706                                     |       | —           |       | 28,497                                |       |
| DEFERRED INCOME TAXES                                      |   | 22,532                                 |       | 2,539                                 |       | 3,574                                     |       | —           |       | 28,645                                |       |
| SHARES SUBJECT TO MANDATORY REDEMPTION                     |   | 202,953                                |       | —                                |       | —                                    |       | —           |       | 202,953                               |       |
| Total Liabilities                                          |   | 1,045,457                              |       | 96,232                                |       | 71,283                                    |       | —           |       | 1,212,972                             |       |
| MINORITY INTEREST                                          |   | —                                 |       | —                                |       | 232                                       |       | —           |       | 232                                   |       |
| REDEEMABLE COMMON STOCK                                    |   | 6,645                                  |       | —                                |       | —                                    |       | —           |       | 6,645                                 |       |
| STOCKHOLDERS’ EQUITY (DEFICIT):                       |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Common stock                                               |   | 103,376                                |       | —                                |       | 9,650                                     |       | (9,650           | )          | 103,376                               |       |
| Additional paid-in capital                                 |   | —                                 |       | 14,020                                |       | 19,652                                    |       | (33,672          | )          | —                                |       |
| Warrants                                                   |   | 39,133                                 |       | —                                |       | —                                    |       | —           |       | 39,133                                |       |
| Retained earnings accumulated (deficit)                    |   | (567,811                               | )          | (29,032                               | )          | (12,240                                   | )          | 41,272           |       | (567,811                              | )          |
| Stockholders’ note receivable                         |   | (660                                   | )          | —                                |       | —                                    |       | —           |       | (660                                  | )          |
| Accumulated other comprehensive loss                       |   | (10,470                                | )          | 19                                    |       | (6,589                                    | )          | 6,570            |       | (10,470                               | )          |
| Total stockholders’ equity (deficit)                  |   | (436,432                               | )          | (14,993                               | )          | 10,473                                    |       | 4,520            |       | (436,432                              | )          |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT) |   | $                                      | 615,670    |                                  | $          | 81,239                                    |       | $                | 81,988     |                                  | $          | 4,520 |   | $ | 783,417 |   |

 

16

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**PLIANT CORPORATIONAND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OFDECEMBER 31, 2003 (IN THOUSANDS) (UNAUDITED)

 
|                                                           |   | **Pliant  Corporation  Parent Only** |    | **Combined  Guarantors** |   | **Combined  Non-Guarantors** |   | **Eliminations** |   | **Consolidated  Pliant  Corporation** |   |
|----------------------------------------------------------------|--------|--------------------------------------|---------|--------------------------|--------|------------------------------|--------|------------------|--------|---------------------------------------|--------|
| **ASSETS**                                                     |   |                                 |    |                     |   |                         |   |             |   |                                  |   |
| CURRENT ASSETS:                                                |   |                                 |    |                     |   |                         |   |             |   |                                  |   |
| Cash and cash equivalents                                      |   | $                                    | —  |                     | $      | 1,192                        |   | $                | 2,116  |                                  | $      | — |   | $ | 3,308 |   |
| Receivables                                                    |   | 79,685                               |    | 14,071                   |   | 18,186                       |   | —           |   | 111,942                               |   |
| Inventories                                                    |   | 63,954                               |    | 19,567                   |   | 11,698                       |   | —           |   | 95,219                                |   |
| Prepaid expenses and other                                     |   | 2,626                                |    | 460                      |   | 723                          |   | —           |   | 3,809                                 |   |
| Income taxes receivable                                        |   | 167                                  |    | 806                      |   | 463                          |   | —           |   | 1,436                                 |   |
| Deferred income taxes                                          |   | 10,934                               |    | (1,521                   | )      | 4                            |   | —           |   | 9,417                                 |   |
| Total current assets                                           |   | 157,366                              |    | 34,575                   |   | 33,190                       |   | —           |   | 225,131                               |   |
| PLANT AND EQUIPMENT, Net                                       |   | 253,601                              |    | 24,576                   |   | 41,392                       |   | —           |   | 319,569                               |   |
| GOODWILL                                                       |   | 182,162                              |    | —                   |   | —                       |   | —           |   | 182,162                               |   |
| INTANGIBLE ASSETS, Net                                         |   | 19,752                               |    | —                   |   | —                       |   | —           |   | 19,752                                |   |
| INVESTMENT IN SUBSIDIARIES                                     |   | (916                                 | )       | (1,062                   | )      | 1,062                        |   | 916              |   | —                                |   |
| OTHER ASSETS                                                   |   | 36,125                               |    | —                   |   | 4,047                        |   | —           |   | 40,172                                |   |
| TOTAL ASSETS                                                   |   | $                                    | 648,090 |                     | $      | 58,089                       |   | $                | 79,691 |                                  | $      | 916 |   | $ | 786,786 |   |
|                                                           |   |                                 |    |                     |   |                         |   |             |   |                                  |   |
| **LIABILITIES AND  STOCKHOLDERS’  EQUITY (DEFICIT)** |   |                                 |    |                     |   |                         |   |             |   |                                  |   |
| CURRENT LIABILITIES:                                           |   |                                 |    |                     |   |                         |   |             |   |                                  |   |
|                                                           |   |                                 |    |                     |   |                         |   |             |   |                                  |   |
| Trade accounts payable                                         |   | $                                    | 66,839  |                     | $      | 8,520                        |   | $                | 14,441 |                                  | $      | — |   | $ | 89,800 |   |
| Accrued liabilities                                            |   | 53,714                               |    | 4,790                    |   | 5,142                        |   | —           |   | 63,646                                |   |
| Current portion of long-term debt                              |   | 1,033                                |    | —                   |   | —                       |   | —           |   | 1,033                                 |   |
| Due to (from) affiliates                                       |   | (72,692                              | )       | 56,423                   |   | 16,269                       |   | —           |   |                                  |   |
| Total current liabilities                                      |   | 48,894                               |    | 69,733                   |   | 35,852                       |   | —           |   | 154,479                               |   |
| LONG-TERM DEBT, Net of current portion                         |   | 758,461                              |    | —                   |   | 24,163                       |   | —           |   | 782,624                               |   |
| OTHER LIABILITIES                                              |   | 24,952                               |    | —                   |   | 2,541                        |   | —           |   | 27,493                                |   |
| DEFERRED INCOME TAXES                                          |   | 21,676                               |    | 2,502                    |   | 3,614                        |   | —           |   | 27,792                                |   |
| Total liabilities                                              |   | 853,983                              |    | 72,235                   |   | 66,170                       |   | —           |   | 992,388                               |   |
| MINORITY INTEREST                                              |   | —                               |    | —                   |   | 291                          |   | —           |   | 291                                   |   |
| REDEEMABLE STOCK:                                              |   |                                 |    |                     |   |                         |   |             |   |                                  |   |
| Preferred stock                                                |   | 188,223                              |    | —                   |   | —                       |   | —           |   | 188,223                               |   |
| Common stock                                                   |   | 13,008                               |    | —                   |   | —                       |   | —           |   | 13,008                                |   |
| Total redeemable stock                                         |   | 201,231                              |    | —                   |   | —                       |   | —           |   | 201,231                               |   |
| STOCKHOLDERS’ (DEFICIT):                                  |   |                                 |    |                     |   |                         |   |             |   |                                  |   |
| Common stock                                                   |   | 103,376                              |    | 14,020                   |   | 29,302                       |   | (43,322          | )      | 103,376                               |   |
| Warrants to purchase common stock                              |   | 39,133                               |    | —                   |   | —                       |   | —           |   | 39,133                                |   |
| Retained earnings (deficit)                                    |   | (537,052                             | )       | (28,155                  | )      | (9,845                       | )      | 38,000           |   | (537,052                              | )      |
| Stockholders’ notes receivable                            |   | (660                                 | )       | —                   |   | —                       |   | —           |   | (660                                  | )      |
| Accumulated other comprehensive loss                           |   | (11,921                              | )       | (11                      | )      | (6,227                       | )      | 6,238            |   | (11,921                               | )      |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)                      |   | (407,124                             | )       | (14,146                  | )      | 13,230                       |   | 916              |   | (407,124                              | )      |
| Total liabilities and stockholders’  (deficit)            |   | $                                    | 648,090 |                     | $      | 58,089                       |   | $                | 79,691 |                                  | $      | 916 |   | $ | 786,786 |   |

 

17

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**PLIANTCORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING INCOME STATEMENT

FOR THE THREE MONTHS ENDED MARCH 31,2004 (IN THOUSANDS) (UNAUDITED)

 
|                                  |   | **Pliant  Corporation  (Parent Only)** |       | **Combined  Guarantor  Subsidiaries** |       | **Combined  Non-Guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Pliant  Corporation** |       |
|---------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
|                                  |   |                                   | ** ** |                                  | ** ** |                                      | ** ** |             | ** ** |                                  | ** ** |
| SALES , Net                           |   | $                                      | 194,065    |                                  | $          | 27,345                                    |       | $                | 28,226     |                                  | $          | (5,469 | ) | $ | 244,167 |   |
| COST OF SALES                         |   | 160,059                                |       | 25,942                                |       | 26,843                                    |       | (5,469           | )          | 207,375                               |       |
|                                  |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| GROSS PROFIT                          |   | 34,006                                 |       | 1,403                                 |       | 1,383                                     |       | —           |       | 36,792                                |       |
| OPERATING EXPENSES                    |   | 19,034                                 |       | 1,364                                 |       | 2,417                                     |       | —           |       | 22,815                                |       |
|                                  |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| OPERATING INCOME                      |   | 14,972                                 |       | 39                                    |       | (1,034                                    | )          | —           |       | 13,977                                |       |
| INTEREST EXPENSE                      |   | (42,025                                | )          | (163                                  | )          | (778                                      | )          | —           |       | (42,966                               | )          |
| EQUITY IN EARNINGS OF SUBSIDIARIES    |   | (3,272                                 | )          | —                                |       | —                                    |       | 3,272            |       | —                                |       |
| OTHER INCOME  (EXPENSE), Net     |   | (305                                   | )          | 26                                    |       | 161                                       |       | —           |       | (118                                  | )          |
|                                  |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCOME (LOSS) BEFORE INCOME TAXES |   | (30,630                                | )          | (98                                   | )          | (1,651                                    | )          | 3,272            |       | (29,107                               | )          |
| INCOME TAX PROVISION                  |   | 129                                    |       | 779                                   |       | 744                                       |       | —           |       | 1,652                                 |       |
| NET INOME (LOSS)                      |   | $                                      | (30,759    | )                                     | $          | (877                                      | )          | $                | (2,395     | )                                     | $          | 3,272 |   | $ | (30,759 | ) |

 

18

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**PLIANT CORPORATIONAND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING INCOME STATEMENT

FOR THE THREE MONTHS ENDED MARCH 31,2003 (IN THOUSANDS) (UNAUDITED)

 
|                               |   | **Pliant  Corporation  (Parent Only)** |    | **Combined  Guarantor  Subsidiaries** |   | **Combined  Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated  Pliant  Corporation** |   |
|------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|-------------------------------------------|--------|------------------|--------|---------------------------------------|--------|
|                               |   |                                   |    |                                  |   |                                      |   |             |   |                                  |   |
| SALES , Net                        |   | $                                      | 190,855 |                                  | $      | 29,394                                    |   | $                | 27,069 |                                  | $      | (6,807 | ) | $ | 240,511 |   |
| COST OF SALES                      |   | 155,514                                |    | 25,249                                |   | 23,758                                    |   | (6,807           | )      | 197,714                               |   |
| GROSS PROFIT                       |   | 35,341                                 |    | 4,145                                 |   | 3,311                                     |   | —           |   | 42,797                                |   |
| OPERATING EXPENSES                 |   | 23,561                                 |    | 2,284                                 |   | 2,912                                     |   | —           |   | 28,757                                |   |
|                               |   |                                   |    |                                  |   |                                      |   |             |   |                                  |   |
| OPERATING INCOME                   |   | 11,780                                 |    | 1,861                                 |   | 399                                       |   | —           |   | 14,040                                |   |
| INTEREST EXPENSE                   |   | (19,269                                | )       | (143                                  | )      | (444                                      | )      | —           |   | (19,856                               | )      |
| EQUITY IN EARNINGS OF SUBSIDIARIES |   | 1,063                                  |    | —                                |   | —                                    |   | (1,063           | )      | —                                |   |
| OTHER INCOME  (EXPENSE), Net  |   | (129                                   | )       | (52                                   | )      | 677                                       |   | —           |   | 496                                   |   |
|                               |   |                                   |    |                                  |   |                                      |   |             |   |                                  |   |
| INCOME (LOSS) BEFORE INCOME TAXES  |   | (6,555                                 | )       | 1,666                                 |   | 632                                       |   | (1,063           | )      | (5,320                                | )      |
| INCOME TAX PROVISION (BENEFIT)     |   | 788                                    |    | 555                                   |   | 680                                       |   | —           |   | 2,023                                 |   |
| NET INCOME (LOSS)                  |   | $                                      | (7,343  | )                                     | $      | 1, 111                                    |   | $                | (48    | )                                     | $      | (1,063 | ) | $ | (7,343 | ) |

 

19

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**PLIANTCORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS

FOR THE THREE MONTHS ENDED MARCH 31,2004 (IN THOUSANDS) (UNAUDITED)

 
|                                                          |   | **Pliant  Corporation  (Parent Only)** |       | **Combined  Guarantor  Subsidiaries** |       | **Combined  Non-Guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Pliant  Corporation** |       |
|---------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
|                                                          |   |                                   | ** ** |                                  | ** ** |                                      | ** ** |             | ** ** |                                  | ** ** |
| CASH FLOWS PROVIDED BY (USED IN) OPERATING  ACTIVITIES        |   | $                                      | (27,096    | )                                     | $          | (439                                      | )          | $                | 26,331     |                                  | $          | — |   | $ | (1,204 | ) |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                         |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Capital expenditures for plant and  equipment                 |   | (1,705                                 | )          | (63                                   | )          | (1,346                                    | )          | —           |       | (3,114                                | )          |
| Net cash used in investing activities                         |   | (1,705                                 | )          | (63                                   | )          | (1,346                                    | )          | —           |       | (3,114                                | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                         |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Net proceeds from issuance of senior  secured discount notes  |   | 225,299                                |       |                                  |       |                                      |       |             |       | 225,299                               |       |
| Payment of financing fees                                     |   | (8,664                                 | )          |                                  |       |                                      |       |             |       | (8,664                                | )          |
| Repayment of term debt and revolver                           |   | (195,412                               | )          | —                                |       | (24,163                                   | )          | —           |       | (219,575                              | )          |
| Repayment of capital leases and other, net                    |   | (470                                   | )          | —                                |       | —                                    |       | —           |       | (470                                  | )          |
| Proceeds from revolving debt, net                             |   | 8,300                                  |       | —                                |       | —                                    |       | —           |       | 8,300                                 |       |
| Net cash used in financing activities                         |   | 29,053                                 |       | —                                |       | (24,163                                   | )          | —           |       | 4,890                                 |       |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS |   | (252                                   | )          | (50                                   | )          | (232                                      | )          | —           |       | (534                                  | )          |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS         |   | —                                 |       | (552                                  | )          | 590                                       |       | —           |       | 38                                    |       |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  THE PERIOD         |   | —                                 |       | 552                                   |       | 2,756                                     |       | —           |       | 3,308                                 |       |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                |   | $                                      | —     |                                  | $          | —                                    |       | $                | 3,346      |                                  | $          | — |   | $ | 3,346 |   |

 

20

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**PLIANT CORPORATIONAND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS

FOR THE THREE MONTHS ENDED MARCH 31,2003 (IN THOUSANDS) (UNAUDITED)

 
|                                                          |   | **Pliant  Corporation  (Parent Only)** |       | **Combined  Guarantor  Subsidiaries** |       | **Combined  Non-Guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Pliant  Corporation** |       |
|---------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
|                                                          |   |                                   | ** ** |                                  | ** ** |                                      | ** ** |             | ** ** |                                  | ** ** |
| CASH FLOWS PROVIDED BY (USED IN) OPERATING  ACTIVITIES        |   | $                                      | (4,225     | )                                     | $          | 3,730                                     |       | $                | (1,025     | )                                     | $          | — |   | $ | (1,520 | ) |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                         |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Capital expenditures for plant and  equipment                 |   | (1,333                                 | )          | (2,289                                | )          | —                                    |       | —           |       | (3,622                                | )          |
| Net cash used in investing activities                         |   | (1,333                                 | )          | (2,289                                | )          | —                                    |       | —           |       | (3,622                                | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                         |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Net proceeds from issuance of preferred  stock                |   | 9,988                                  |       | —                                |       | —                                    |       | —           |       | 9,988                                 |       |
| Payment of financing fees                                     |   | (2,200                                 | )          | —                                |       | —                                    |       | —           |       | (2,200                                | )          |
| Principal payments on long-term debt, net                     |   | 546                                    |       | —                                |       | (629                                      | )          | —           |       | (83                                   | )          |
| Net cash used in financing  activities                   |   | 8,334                                  |       | —                                |       | (629                                      | )          | —           |       | 7,705                                 |       |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS |   | 430                                    |       | (1,142                                | )          | 993                                       |       | —           |       | 281                                   |       |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS         |   | 3,206                                  |       | 299                                   |       | (661                                      | )          | —           |       | 2,844                                 |       |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  THE PERIOD         |   | —                                 |       | (21                                   | )          | 1,656                                     |       | —           |       | 1,635                                 |       |
|                                                          |   |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND CASH EQUIVALENTS AT END OF THE  PERIOD               |   | $                                      | 3,206      |                                  | $          | 278                                       |       | $                | 995        |                                  | $          | — |   | $ | 4,479 |   |

 

21

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**ITEM 2.****                                                     MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The purpose ofthis section is to discuss and analyze our consolidated financialcondition, liquidity and capital resources and results of operations. Thisanalysis should be read in conjunction with Management’s Discussion andAnalysis of Financial Condition and Results of Operations contained in ourAnnual Report on Form 10-K for the year ended December 31, 2003 (the “200310-K”) and our Registration Statement on Form S-4 (file No. 333-114608). Thissection contains certain forward-looking statements within the meaning offederal securities laws that involve risks and uncertainties, includingstatements regarding our plans, objectives, goals, strategies and financialperformance. Our actual results could differ materially from the resultsanticipated in these forward-looking statements as a result of factors setforth under “Cautionary Statement for Forward-Looking Information” below andelsewhere in this report.

 

**General**

 

We generate our revenues, earnings and cash flows from the sale of filmand flexible packaging products throughout the world. We manufacture theseproducts at 25 facilities located in the United States, Australia, Canada,Germany and Mexico. Our sales have grown primarily as a result of strategicacquisitions made over the past several years, increased levels of productionat acquired facilities, return on capital expenditures and the overall growthin the markets for film and flexible packaging products.

 

**Resultsof Operations**

 

The following table sets forth net sales, operating expenses, andoperating income, and such amounts as a percentage of net sales, for the threemonths ended March 31, 2004 and 2003 (dollars in millions).

 
|                                                     |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------------------|--------|----------------------------------------|--------|
|                                                     |   | **2004**                               |   | **2003** |   |
|                                                     |   | **$**                                  |   | **% of  Sales** |   | **$** |   | **% of  Sales** |   |
|                                                     |   |                                   |   |   |   |   |   |   |   |
| Net sales                                                |   | $                                      | 244.2  |   | 100.0 | % | $ | 240.5 |   | 100.0 | % |
| Cost of sales                                            |   | 207.4                                  |   | 84.9 |   | 197.7 |   | 82.2 |   |
| Gross profit                                             |   | 36.8                                   |   | 15.1 |   | 42.8 |   | 17.8 |   |
| Operating expenses before restructuring and  other costs |   | 22.8                                   |   | 9.4 |   | 22.7 |   | 9.5 |   |
| Restructuring and other costs                            |   | —                                 |   | — |   | 6.1 |   | 2.5 |   |
| Total operating expenses                                 |   | 22.8                                   |   | 9.4 |   | 28.8 |   | 12.0 |   |
| Operating income                                         |   | $                                      | 14.0   |   | 5.7 | % | $ | 14.0 |   | 5.8 | % |

 

**ThreeMonths Ended March 31, 2004 Compared with the Three Months EndedMarch 31, 2003**

 

*Net Sales*

 

Net sales increased by $3.7 million, or 1.5%, to $244.2 million for thefirst quarter of 2004 from $240.5 million for the three months endedMarch 31, 2003. The increase was primarily due to a 3.9% increase in ouraverage selling price resulting primarily from the pass through of increases inour raw material prices partially offset by a 2.2% decrease in salesvolume.  See “Operating Segment Review”below for a detailed discussion of sales volumes and selling prices by segmentand division.

 

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*Gross Profit*

 

Gross profit decreased by $6.0 million, or 14%, to $36.8 million forthe first quarter of 2004, from $42.8 million for the three months endedMarch 31, 2003. This decrease was primarily due to the effect of lowersales volumes. See “Operating Segment Review” below for a detailed discussionof the margin variances by segment.

 

*Total Operating Expenses before Restructuring and Other Costs*

 

Total operating expenses before restructuring and other costs increased$0.1 million, to $22.8 million for the first quarter of 2004 from $22.7 millionfor the first quarter of 2003.

 

# *Restructuring and Other Costs*

 

Restructuring and other costs decreased by $6.1 million since therewere no restructuring expenses incurred in the first quarter of 2004.

 

*Operating Income*

 

Operating income remained at $14.0 million for the three months endedMarch 31, 2004 as compared to the three months ended March 31, 2003,due to the factors discussed above.

 

*Interest Expense*

 

Interest expense on current and long-term debt increased by $14.7million, or 73.9%, to $34.6 million for the three months ended March 31,2004 from $19.9 million for the three months ended March 31, 2003. Thisincrease was principally due to the higher interest costs resulting from theissuance of an additional $250 million of senior secured notes in May 2003 andthe additional $ 225.3 million of senior secured discount notes in February 2004.The proceeds from the issuance of these notes were used to repay bank debt thatcarried a lower interest rate. In addition, the first quarter 2004 interestexpense included a charge for the write-off of previously capitalized financingfees and losses related to interest rate derivatives totaling $ 10.1 million.

 

Interest expense on preferred stock reflects the dividends andaccretion on the redeemable preferred stock of the Company that is classifiedas interest expense after adoption of SFAS 150, effective January 1, 2004.

 

*Other Income(Expense)*

 

Other expense was $0.1 million for the three months endedMarch 31, 2004, as compared to other income of $ 0.5 million for the threemonths ended March 31, 2003. The other income for the three months endedMarch 31, 2003 included primarily net proceeds from the realization ofcertain insurance policies.

 

*Income Tax Expense(Benefit)*

 

Income tax expense for the three months endedMarch 31, 2004 was $1.7 million on pretax losses of $29.1 million ascompared to $2.0 million on pretax losses of $5.3 million for the same periodin 2003. Income tax benefits related to net operating losses in the UnitedStates were offset by a valuation allowance as the realization of these taxbenefits is not certain. Therefore, the income tax expense in the statements ofoperations primarily reflect foreign income taxes.

 

**Operating Segment Review**

 

*General*

 

Operating segmentsare components of our business for which separate financial information isavailable that is evaluated regularly by our chief operating decision maker indeciding how to allocate resources and in assessing performance.  We evaluate the performance of our operatingsegments based on net sales(excluding inter-company

 

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sales) and segmentprofit.  The segment profit reflectsincome before interest expense, income taxes, depreciation, amortization,restructuring and other costs and other non-cash charges and net adjustmentsfor certain unusual items.  For moreinformation on our operating segments, including a reconciliation of segmentprofit to income beforetaxes, see Note 8 to the consolidated financial statementsincluded elsewhere in this report.

 

We have  four reportingsegments: Pliant U.S., Pliant Flexible Packaging, Pliant International andPliant Solutions.

 

Summary of segmentinformation (in millions of dollars):

 
|                                   |   | **Pliant  U.S.** |   | **Pliant  Flexible  Packaging** |   | **Pliant  International** |   | **Pliant  Solutions** |   | **Unallocated  Corporate  Expenses** |   | **Total** |   |
|----------------------------------------|--------|------------------|--------|---------------------------------|--------|---------------------------|--------|-----------------------|--------|--------------------------------------|--------|-----------|--------|
| **Quarter ended  March 31, 2004** |   |             |   |                            |   |                      |   |                  |   |                                 |   |      |   |
| Net sales                              |   | $                | 154.1  |                            | $      | 56.4                      |   | $                     | 26.4   |                                 | $      | 7.3       |   | $ | — |   | $ | 244.2 |   |
| Segment profit (loss)                  |   | $                | 23.0   |                            | $      | 8.6                       |   | $                     | 1.1    |                                 | $      | (2.3      | )      | $ | (5.2 | ) | $ | 25.2 |   |
|                                   |   |             |   |                            |   |                      |   |                  |   |                                 |   |      |   |
| **Quarter ended  March 31, 2003** |   |             |   |                            |   |                      |   |                  |   |                                 |   |      |   |
| Net sales                              |   | $                | 151.9  |                            | $      | 51.8                      |   | $                     | 28.0   |                                 | $      | 8.8       |   | $ | — |   | $ | 240.5 |   |
| Segment profit (loss)                  |   | $                | 26.8   |                            | $      | 7.7                       |   | $                     | 2.9    |                                 | $      | (0.9      | )      | $ | (4.4 | ) | $ | 32.1 |   |

 

**Three Months Ended March 31,2004 Compared with the Three Months Ended March 31, 2003**

 

Pliant U.S.

 

*Net sales. *The net sales of our Pliant U.S. segmentincreased $2.2 million, or 1.4%, to $154.1 million for the first quarter of2004 from $151.9 million for the first quarter of 2003.  This increase was primarily due to anincrease in our average selling prices of 3.3 cents per pound or 3.6% partiallyoffset by a 2.1% decrease in sales volumes. The decrease in sales volumes is discussedfor each Pliant U.S. division below. Theincrease in our average selling prices was principally due to the increase inraw material prices that were partially passed on to our customers.

 

Net sales in ourIndustrial Filmsdivision increased $0.8 million, or 1.6%, to $48.2 million for the firstquarter of 2004 from $47.4 million for the first quarter of 2003.  This increase was principally due to anincrease in our average selling prices of 6.6 cents per pound or 8.5% partiallyoffset by a decrease in sales volumes of 3.9 million pounds, or 6.4%. Thedecrease in sales volume was primarily the result of the effects of down-gauging resultingfrom the introduction of new generation products, some customer rationalizationand the timing of large shipments.  Netsales in our Specialty Filmsdivision increased $0.8 million, or 1.8%, to $48.9 million for the firstquarter of 2004 from $48.1 million for the first quarter of 2003.  This increase was principally due to anincrease in our sales volume of 1.1 million pounds, partially offset by adecrease in our average selling prices of 0.7 cents per pound, or 0.7%. Theincrease in sales volume was primarily the result of higher sales from ourpersonal care business.  Net sales inour Converter Filmsdivision increased $0.6 million, or 1.0%, to $57.0 million for the firstquarter of 2004 from $56.4 million for the first quarter of 2003.  This increase was principally due to an increasein our average selling prices of 2.0 cents per pound or 2.0% partially offsetby the effect of lower sales volumes which decreased 1.0%.

 

*Segment profit*.  The Pliant U.S. segment profit decreased $ 3.8 million to $23.0million for the first quarter of 2004 as compared to $26.8 million for the firstquarter of 2003 principally due to the decreases in sales volumes discussedabove and lower gross margins. The decrease in gross margins was principallydue to the fact that the higher selling prices discussed above were notsufficient to offset the increase in raw material prices, principally in thespecialty and converter divisions.

 

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Pliant FlexiblePackaging

 

*Net sales.*The net sales of our Pliant Flexible Packagingsegment increased $4.6 million, or 8.9%, to $56.4 million for the first quarterof 2004 from $51.8 million for the first quarter of 2003.  This increase was principally due to anincrease in our sales volumes of 2.0 million pounds, or 5.6%, and an increasein our average selling prices of 4.7 cents per pound, or 3.2%.  The sales volume increased principally dueto additional sales to existing customers and sales from our new ten colorpress in Langley.

 

*Segment profit*.  The Pliant Flexible Packaging segment profit increased $0.9million to $8.6 million for the first quarter of 2004 from$7.7 million for the first quarter of 2003.  This increasein segment profit was primarily due to an increase in gross margins and theeffect of higher sales volumes discussed above partially offset by the effectof higher conversion costs. The increase in gross margins was principallydue to the fact that selling prices increased at a rate higher than theincrease in raw material prices in the first quarter of 2004. In addition,there is a delay in implementing price increases and decreases in this segmentdue to contracts with certain customers. Therefore, the margins for thisquarter benefited from substantial increases in raw material prices in priorquarters.

 

## **Pliant International**

 

*Net sales.*The net sales of our PliantInternational segment decreased $1.6 million, or 5.7%, to $26.4 million for thefirst quarter of 2004 from $28.0 million for the first quarter of 2003.  This decrease was principally due to a 11.5%decrease in our sales volume, partially offset by an increase in our averageselling prices of 6.2 cents per pound, or 6.5%. Among other factors, our sales volumes were adversely affected by areduction in sales at our plant in Mexico due to the loss of certain customersand products as a result of operating issues discussed below.

 

*Segment profit*.  The Pliant International segment profit decreased $1.8 million to$1.1 million for the first quarter of 2004 from $2.9 million for the first quarter of 2003.  The decrease was due principally to theoperating losses in our plant in Mexico. Our plant in Mexico was affected byoperating issues and the resulting loss of customers and products. Managementchanges have been made at this location and increases in sales volume andimproved operating results are expected.

 

## **Pliant Solutions**

 

*Net sales.*The net sales of our PliantSolutions segment decreased $1.5 million, or 17.0%, to $7.3 million for thefirst quarter of 2004 from $8.8 million for the first quarter of 2003.  This decrease was principally due to a 11.9%decrease in our sales volume and a decrease in our average selling prices of15.4 cents per pound,or 6.2%.  The decrease in sales volumewas primarily due to several promotional programs in the first quarter of 2003that were not repeated by our customers in the first quarter of 2004 and areduction in sales to a major customer due to the closing of several stores.Average selling prices decreased due to a change in the sales mix.

 

*Segment profit*.  The Pliant Solutions segment profit decreased $1.4 million, to aloss of $(2.3) million for the first quarter of 2004 from a loss of $(0.9) million for the firstquarter of 2003.  The decrease was due principally to thedecrease in sales volumes and a decrease in gross margins due to a change inthe sales mix.

 

UnallocatedCorporate Expenses

 

Unallocatedcorporate expenses increased $0.8 million to $5.2 million for the first quarterof 2004 as compared to $ 4.4 million for the first quarter of 2003. The increasewas principally due to an adjustment for $0.4 million related to employeebenefits for an acquisition made in prior years, increase in legal fees andincreases in labor costs.

 

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**Liquidity and CapitalResources**

 

*Sources of capital*

 

Our principal sources of funds are cashgenerated by our operations and borrowings under our new revolving creditfacility. In addition, we have raised funds through the issuance of our 13%Senior Subordinated Notes due 2010, 11 1/8% Senior Secured Notes due 2009, 111/8% Senior Secured Discount Notes due 2009 and the sale of shares of ourpreferred stock.

 

All of the term debt and revolver under thecredit facilities that existed at December 31, 2003 had been at variablerates of interest, so payment of the term loans with the proceeds of our 111/8% Senior Secured Discount Notes and borrowings under our new revolvingcredit facility substantially reduced our exposure to interest rate risk.Although our new $100 million revolving credit facility is at a variablerate of interest, there are substantially fewer financial covenants than ourcredit facilities that existed at December 31, 2003, which willsubstantially reduce our exposure to covenant default risk. While the effectiveinterest rate on the Senior Secured Discount Notes is higher than the termloans retired from the proceeds of the February 2004 offering, we willrealize greater short-term liquidity and flexibility in our debt structureresulting from the elimination of a number of the financial and other covenantsin our then existing credit facilities and the deferral of cash interest on theSenior Secured Discount Notes during the period in which they accrete.

 

*Prior credit facilities*

 

As of December 31, 2003, our credit facilities consisted of:tranche A term loans in an aggregate principal amount of $9.6 millionoutstanding; Mexico term loans in an aggregate principal amount of$24.2 million outstanding; tranche B term loans in an aggregate principalamount of $185.8 million outstanding; and a revolving credit facility inan aggregate principal amount of up to $100 million (excluding$6.7 million of outstanding letters of credit).

 

New Revolving Credit Facility

 

On February 17, 2004, we paid off andterminated our then existing credit facilities and entered into a new revolvingcredit facility providing up to $100.0 million (subject to a borrowingbase).  The new revolving creditfacility includes a $15.0 million letter of credit sub-facility, with lettersof credit reducing availability under our revolving credit facility.

 

The new revolving credit facility is securedby a first-priority security interest in substantially all inventory,receivables, deposit accounts, 100% of capital stock of, or other equityinterests in existing and future domestic subsidiaries and foreign subsidiariesthat are guarantors of the Senior Secured Discount Notes, and 65% of thecapital stock of, or other equity interests in existing and future first-tierforeign subsidiaries, investment property and certain other assets of theCompany and the note guarantors (the “Second-Priority Collateral”), and asecond-priority security interest in our real property, fixtures, equipment,intellectual property and other assets (the “First-Priority Collateral”).

 

The new revolving credit facility matures onFebruary 17, 2009.  The Company issubject to periodic reporting of a borrowing base consisting of eligibleaccounts receivable and eligible inventory. The interest rates will be at LIBOR plus 2.5% to 2.75 % or ABR plus 1.5%- 1.75%.

 

The borrowings under the new revolving creditfacility may be limited at any given time to 75% of the lesser of the totalcommitment at such time and the borrowing base in effect at such time if thefixed coverage ratio defined in the new revolving credit facility is less thanor equal to 1.10 to 1.00.

 

Issuance of 11 1/8% Senior Secured DiscountNotes due 2009

 

On February 17, 2004 we completed thesale of $306.0 million principal amount at maturity (gross proceeds of $225.3million) of 11 1/8% Senior Secured Discount Notes due 2009.  The proceeds of the offering and

 

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borrowings under the new revolving creditfacility (discussed above) were used to repay and terminate the creditfacilities that existed at December 31, 2003.

 

The Senior Secured Discount Notes are securedby a first-priority security interest in the First-Priority Collateral and asecond-priority security interest in the Second-Priority Collateral.  The Senior Secured Discount Notes areguaranteed by our existing and future domestic restricted subsidiaries andcertain foreign subsidiaries.

 

Unless we elect to pay cash interest asdescribed below, and except under certain limited circumstances the SeniorSecured Discount Notes will accrete from the date of issuance at the rate of 111/8% until December 15, 2006, compounded semiannually on each June 15and December 15 commencing June 15, 2004, to an aggregate principalamount of $1,000 per note ($306.0 million in the aggregate assuming noredemption or other repayments). Commencing on December 15, 2006, interest on the Senior SecuredDiscount Notes will accrue at the rate of 11 1/8% per annum and will be payablein cash semiannually on June 15 and December 15, commencing onJune 15, 2007.

 

On any interest payment date prior toDecember 15, 2006, we may elect to commence paying cash interest (from andafter such interest payment date) in which case (i) we will be obligated to paycash interest on each subsequent interest payment date, (ii) the notes willcease to accrete after such interest payment date and (iii) the outstandingprincipal amount at the stated maturity of each note will equal the accretedvalue of such note as of such interest payment date.

 

On or after June 15, 2007, we may redeemsome of all of the Senior Secured Discount Notes at the following redemptionprices (expressed as a percentage of principal amount), plus accrued and unpaidinterest: 105.563% if redeemed prior to June 15, 2008; 102.781% if redeemedprior to June 15, 2009; and 100% if redeemed on or after June 15,2009.   Prior to such date, we may notredeem the notes except as described in the following paragraph.

 

At any time prior to June 15, 2007, wemay redeem up to 35% of the accreted value of the Senior Secured Discount Noteswith the net cash proceeds of certain equity offerings by us at a redemptionprice equal to 111.125% of the accreted value thereof plus accrued interest, solong as (i) at least 65% of the accreted value of the notes remains outstandingafter such redemption and (ii) any such redemption by us is made within 120days after such equity offering.

 

*11 1/8% Senior Secured Notes due 2009*

 

On May 30, 2003, we completed the saleof $250 million aggregate principal amount of our 11 1/8% Senior Secured Notes due 2009. The 11 1/8% Senior Secured Notes due 2009mature on September 1, 2009, and interest is payable on March 1 andSeptember 1 of each year. The net proceeds from the sale of the 11 1/8% Senior Secured Notes due 2009were used to repay borrowings under our then existing credit facilities inaccordance with an amendment to our then existing credit facilities. The 11 1/8% Senior Secured Notes due 2009rank equally with our existing and future senior debt and rank senior to ourexisting and future subordinated indebtedness, including the 13% SeniorSubordinated Notes due 2010. The 111/8% Senior Secured Notes due 2009 are secured, on a second-prioritylien basis, by a substantial portion of our assets. Due to this second-prioritystatus, the 11 1/8% SeniorSecured Notes due 2009 effectively rank junior to our obligations secured by afirst-priority lien on the collateral securing the 11 1/8% Senior Secured Notes due 2009 to the extent of the valueof such collateral. These obligations secured by first-priority liens includeour new revolving credit facility with respect to Second-Priority Collateraland the Senior Secured Discount Notes due 2009 with respect to First-PriorityCollateral. In addition, the 11 1/8%Senior Secured Notes due 2009 effectively rank junior to any of our obligationsthat are secured by a lien on assets that are not part of the collateralsecuring the 11 1/8% Senior Secured Notes due 2009, to the extent of the valueof such assets. The 11 1/8%Senior Secured Notes due 2009 are guaranteed by some of our subsidiaries.

 

Prior to June 1, 2007, we may, on one ormore occasions, redeem up to a maximum of 35% of the original aggregateprincipal amount of the 11 1/8%Senior Secured Notes due 2009 with the net cash proceeds of one or more equityofferings by us at a redemption price equal to 111.125% of the principal amountthereof, plus accrued

 

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and unpaid interest. Otherwise, we may not redeem the 11 1/8% Senior Secured Notes due 2009prior to June 1, 2007. On or after that date, we may redeem some or all ofthe 11 1/8% Senior SecuredNotes due 2009 at the following redemption prices (expressed as a percentage ofprincipal amount), plus accrued and unpaid interest: 105.563% if redeemed priorto June 1, 2008; 102.781% if redeemed prior to June 1, 2009; and 100%if redeemed on or after June 1, 2009.

 

*13% Senior Subordinated Notes due 2010*

 

In 2000, we issued $220 millionaggregate principal amount of 13% Senior Subordinated Notes due 2010. In 2002,we issued an additional $100 million of 13% Senior Subordinated Notes due2010. The 13% Senior Subordinated Notes due 2010 mature on June 1, 2010,and interest on the 13% Senior Subordinated Notes due 2010 is payable onJune 1 and December 1 of each year. The 13% Senior Subordinated Notesdue 2010 are subordinated to all of our existing and future senior debt, rankequally with any future senior subordinated debt, and rank senior to any futuresubordinated debt. The 13% Senior Subordinated Notes due 2010 are guaranteed bysome of our subsidiaries. The 13% Senior Subordinated Notes due 2010 areunsecured. We may not redeem the 13% Senior Subordinated Notes due 2010 priorto June 1, 2005. On or after that date, we may redeem the 13% SeniorSubordinated Notes due 2010, in whole or in part, at the following redemptionprices (expressed as percentages of principal amount), plus accrued and unpaidinterest: 106.5% if redeemed prior to June 1, 2006; 104.333% if redeemed priorto June 1, 2007; 102.167% if redeemed prior to June 1, 2008; and 100%if redeemed on or after June 1, 2008.

 

*Preferred stock*

 

We have approximately $196.6 million ofSeries A Cumulative Exchangeable Redeemable Preferred Stock outstanding.The Series A preferred stock accrues dividends at the rate of 14% perannum; however, our board of directors has never declared or paid any dividendson the Series A preferred stock. Unpaid dividends accumulate and are addedto the liquidation amount of the Series A preferred stock. AfterMay 31, 2005 the annual dividend rate increases to 16% unless we paydividends in cash. The dividend rate also increases to 16% if we fail to complywith certain of our obligations or upon certain events of bankruptcy. TheSeries A preferred stock is mandatorily redeemable on May 31, 2011.

 

*Net Cash Used in Operating Activities*

 

Netcash used in operating activities was $1.2 million for the three months endedMarch 31, 2004, a decrease of $0.3 million, as compared to net cash usedin operating activities of $1.5 million for the same period in 2003.  This decrease was largely due to changes inworking capital items.

 

*Net Cash Used in Investing Activities*

 

Netcash used in investing activities decreased $0.5 million to $3.1 million forthe three months ended March 31, 2004, from $3.6 million for the threemonths ended March 31, 2003.  Thesecash outflows were for capital expenditures for maintenance projects.

 

*Net Cash Provided by Financing Activities*

 

Netcash provided by financing activities was $4.9 million for the three monthsended March 31, 2004, as compared to net cash provided by financingactivities of $7.7 million for the three months ended March 31, 2003. Theactivity for the first quarter of 2004 includes the net proceeds from the issuanceof senior secured discount notes for $225.3 million net of financing fees paidof $ 8.7 million and the repayment of the old credit facilities of $ 219.6million. In addition we borrowed $ 8.3 million net of repayments under the newcredit facility for operations and paid $0.5 million for capital leases.  The transactions in the first quarter of2003 included the issuance of $ 10 million of

 

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redeemablepreferred shares, net of issue costs, repayment of term debt and a part of therevolving debt under the old credit facility and borrowings under the revolvingdebt under the old credit facility for operations.

 

*Liquidity*

 

As ofMarch 31, 2004, we had approximately $77.4 million of workingcapital.  We were unable to borrow morethan $45.0 million under our new revolving credit facility as of March 31,2004 until we put in place certain deposit control agreements.  These deposit control agreements were put inplace in April 2004.  If thesedeposit control agreements had been in place as of March 31, 2004, subjectto the next sentence, we would have had on a pro forma basis approximately$80.3 million available for borrowings under our new $100.0 million revolvingcredit facility, with outstanding borrowings of approximately $ 8.3 million andapproximately $6.1 million of letters of credit issued under our revolvingcredit facility. The borrowings under the new revolving creditfacility may be limited at any given time to 75% of the lesser of the totalcommitment at such time and the borrowing base in effect at such time if thefixed coverage ratio defined in the new revolving credit facility is less thanor equal to 1.10 to 1.00.  Our outstanding borrowings under ourrevolving credit facility fluctuate significantly during each quarter as aresult of the timing of payments for raw materials, capital and interest, aswell as the timing of customer collections.

 

As ofMarch 31, 2004, we had approximately $3.3 million in cash and cashequivalents.  A portion of this amountwas held by our foreign subsidiaries. Repatriation tax rates may limit our ability to access cash and cashequivalents generated by our foreign operations for use in our U.S. operations,including to pay principal and interest on outstanding borrowings.

 

We expect that ourtotal capital expenditures will be approximately $20-$30 million in each of2004 and 2005.  These expenditures willconsist primarily of ongoing maintenance capital expenditures and limitedcapacity additions.

 

Our revolving creditfacility and the indentures relating to our outstanding notes impose certainrestrictions on us, including restrictions on our ability to incurindebtedness, pay dividends, make investments, grant liens, sell our assets andengage in certain other activities.

 

**Cautionary Statementfor Forward-Looking Information**

 

Certaininformation set forth in this report contains “forward-looking statements”within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans,objectives, goals, strategies, future events, future revenues or performance,capital expenditures, financing needs, plans or intentions relating toacquisitions, business trends, and other information that is not historicalinformation.  When used in this report,the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,”“intends,” “believes” and variations of such words or similar expressions areintended to identify forward-looking statements.  We may also make additional forward-looking statements from timeto time.  All such subsequentforward-looking statements, whether written or oral, by us or on our behalf,are also expressly qualified by these cautionary statements.

 

Allforward-looking statements, including, without limitation, management’sexamination of historical operating trends, are based upon our currentexpectations and various assumptions. Our expectations, beliefs and projections are expressed in good faithand we believe there is a reasonable basis for them.  But, there can be no assurance that management’s expectations,beliefs and projections will result or be achieved.  All forward-looking statements apply only as of the datemade.  We undertake no obligation topublicly update or revise forward-looking statements which may be made toreflect events or circumstances after the date made or to reflect theoccurrence of unanticipated events.

 

There are a number ofrisks and uncertainties that could cause our actual results to differmaterially from the forward-looking statements contained in or contemplated bythis report. These risks include, but are not limited to: general economic andbusiness conditions, particularly an economic downturn; industry trends;increases in our leverage; interest rate increases; changes in our ownershipstructure; raw material costs and availability, particularly resin;competition; the loss of any of our significant customers; changes in thedemand for our products; new technologies; changes in distribution channels orcompetitive conditions in the markets or countries in which we

 

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operate; costs ofintegrating any future acquisitions; loss of our intellectual property rights;foreign currency fluctuations and devaluations and political instability in ourforeign markets; changes in our business strategy or development plans;availability, terms and deployment of capital; availability of qualifiedpersonnel; and increases in the cost of compliance with laws and regulations,including environmental laws and regulations. Each of these risks and certainother uncertainties are discussed in more detail in the 2003 Form 10-K and inour Registration Statement on Form S-4 (file no. 333-114608), as amended, filedwith the Securities and Exchange Commission. There may be other factors,including those discussed elsewhere in this report that may cause our actualresults to differ materially from the forward-looking statements.  Any forward-looking statements should beconsidered in light of these factors.

 

#### **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We are exposed to resin price risks that arise in thenormal course of business.  Significantincreases in the price of resins could adversely affect our operating margins,results of operations and ability to service our indebtedness.

 

Since the repayment of $219.6 million of variable rate termdebt with the proceeds of our Senior Secured Discount Notes and borrowingsunder our new revolving credit facility on February 17, 2004 our interestrate risk has decreased substantially.

 

Our new revolving credit facility is at a variable rate ofinterest.  An increase of 1% in interestrates would result in an additional $100,000 of annual interest expense foreach $10.0 million in borrowings under our new revolving credit facility.  We will thus be exposed to interest raterisk to the extent of our borrowings under the new revolving credit facility.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

**Evaluation ofDisclosure Controls and Procedures**

 

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our filings under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the periods specified in the rules and forms of the Securities andExchange Commission.  This informationis accumulated and communicated to our management, including our principalexecutive officer and our principal financial officer, as appropriate, to allowtimely decisions regarding required disclosure.  Our management, including our principal executive officer and ourprincipal financial officer, recognizes that any set of controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives.

 

Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of our disclosure controls and procedures as of the endof the period covered by this report. Based on this evaluation, our principal executive officer and principalfinancial officer concluded that our disclosure controls and procedures areeffective in alerting them on a timely basis to material information requiredto be disclosed in our periodic filings.

 

**Changes in InternalControls**

 

There were no significant changes in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation referenced in the foregoing paragraph.

 

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**PARTII****.  OTHER INFORMATION**

 

**ITEM 1****. LEGALPROCEEDINGS**

 

There were no material developments duringthe quarter ended March 31, 2004 in the litigation described in Note 11 tothe Consolidated Condensed Financial Statements contained in Item 1 of thisreport.

 

**ITEM 2****. CHANGES INSECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

On February 17, 2004, we issued $306million in principal amount at maturity of our 11 1/8%Senior Secured Discount Notes due 2009. The Senior Secured Discount Notes are secured by a first-prioritysecurity interest in the First-Priority Collateral and a second-prioritysecurity interest in the Second-Priority Collateral.  Due to the issuance of the Senior Secured Discount Notes, theright of payment of the holders of our 11 1/8% SeniorSecured Notes due 2009 is effectively subordinated to the first-prioritysecurity interest of the Senior Secured Discount Notes in the First-PriorityCollateral, to the extent of the value of that collateral.

 

**ITEM 3****. DEFAULTSUPON SENIOR SECURITIES**

 

The Company received a waiver from theholders of its credit facilities in existence as of December 31, 2003 withrespect to certain covenant defaults by the Company under those creditfacilities.

 

**ITEM4. SUBMISSION****OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM5.****OTHER INFORMATION**

 

None

 

**ITEM6****. EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                                  The followingexhibits are filed with this report.

 

31.1                           Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2                           Certification of ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1                           Certificationof Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2                           Certificationof Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**(b)**                                  Reports on Form 8-K

 

We filed / furnished aCurrent Report on Form 8-K, dated January 29, 2004, under Items 5, 7 and 9 ofsuch form, announcing our intention to offer the Senior Secured Discount Notes,terminate our then existing credit facilities and enter into a new revolvingcredit facility.  The informationincluded in Item 9 of this Current Report was furnished and shall not be deemedto be filed.

 

We furnished a CurrentReport on Form 8-K, dated January 30, 2004, under Items 7 and 9 of such form,estimating the financial outlook for 2004. The information included in Item 9 of this Current Report was furnishedand shall not be deemed to be filed.

 

We filed a Current Reporton Form 8-K, dated February 17, 2004, under Items 5 and 7 of such form,announcing the completion of the sale of our Senior Secured Discount Notes andthe execution of our $100 million new revolving credit facility.

 

We furnished a CurrentReport on Form 8-K, dated March 25, 2004, under Items 9 and 12 of such form,reporting the scheduling of our earnings conference call and to provide certaininformation required by Regulation G. The information included in Items 9 and 12 of this Current Report wasfurnished and shall not be deemed to be filed.

 

We furnished a CurrentReport on Form 8-K, dated March 26, 2004, under Item 9 of such form, announcingthe Company’s position for growth in 2004 and beyond as stated in a letter fromHarold Bevis, President and Chief Executive Officer of Pliant, to ourcustomers, investors and employees.  Theinformation included in Item 9 of this Current Report was furnished and shallnot be deemed to be filed.

 

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**SIGNATURES**

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | PLIANT CORPORATION                          |
|--------|---------------------------------------------|
|   |                                        |
|   |                                        |
|   | /s/ BRIAN E. JOHNSON                        |   |
|   | BRIAN E. JOHNSON                            |
|   | Executive Vice President and                |
|   | Chief Financial Officer                     |
|   | (Authorized Signatory and                   |
|   | Principal Financial and Accounting Officer) |
|   |                                        |
|   |                                        |
| Date:  | May 14, 2004                                |   |
|        |                                             |  |  |

 

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**INDEX TO EXHIBITS**

 

| **Exhibits** |   |                                                                                                                                                                     |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                     |
| 31.1         |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                |
|         |   |                                                                                                                                                                     |
| 31.2         |   | Certification of Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                |
|         |   |                                                                                                                                                                     |
| 32.1         |   | Certification of Chief Executive Officer furnished pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|         |   |                                                                                                                                                                     |
| 32.2         |   | Certification of Chief Financial Officer furnished pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |

 

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