**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 June 30,  2005**                                                                                                                                                                                                 |
|                                 |                                                                                                                                                                                                                                                   |
| **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 of registrant as specified in itscharter)

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

 

**1475 Woodfield Road, Suite 700Schaumburg, IL 60173(847) 969-3300**

(Address of principal executive offices andtelephone number)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý  No  o

 

Indicate by check mark whether the registrant is 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 of each of the issuer’sclasses of common stock, as of the latest practicable date.  On August 9, 2005, 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  JUNE 30, 2005 AND DECEMBER 31, 2004 |   |
|                          |                                                                                                |   |   |
|                          |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF  OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 |   |
|                          |                                                                                                |   |   |
|                          |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH  FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 |   |
|                          |                                                                                                |   |   |
|                          |                                                                                                | CONDENSED CONSOLIDATED STATEMENT OF  STOCKHOLDERS’ DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2005 |   |
|                          |                                                                                                |   |   |
|                          |                                                                                                | 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  SECURITY HOLDERS                                        |   |
|                          |                                                                                                |   |   |
|                          | ITEM 5. OTHER INFORMATION                                                                           |   |
|                          |                                                                                                |   |   |
|                          | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                            |   |
|                               |                                                                                                     |  |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**PLIANT CORPORATION AND SUBSIDIARIES**

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2005 AND DECEMBER 31, 2004 (DOLLARS INTHOUSANDS)

 
| ** **                                                                                                                                                                                                                                                          | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                          |       | **(UNAUDITED)**        |       |                       |       |
| **ASSETS**                                                                                                                                                                                                                                                          |       |                   |       |                       |       |
| CURRENT ASSETS:                                                                                                                                                                                                                                                     |       |                   |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                                                           |       | $                      | 4,261      |                       | $          | 5,580 |   |
| Receivables, net of allowances of $6,137  and $4,489, respectively                                                                                                                                                                                                  |       | 125,168                |       | 125,395                    |       |
| Inventories                                                                                                                                                                                                                                                         |       | 86,008                 |       | 94,300                     |       |
| Prepaid expenses and other                                                                                                                                                                                                                                          |       | 3,402                  |       | 4,032                      |       |
| Income taxes receivable, net                                                                                                                                                                                                                                        |       | 584                    |       | 361                        |       |
| Deferred income taxes                                                                                                                                                                                                                                               |       | 9,482                  |       | 11,961                     |       |
| Total  current assets                                                                                                                                                                                                                                               |       | 228,905                |       | 241,629                    |       |
|                                                                                                                                                                                                                                                                |       |                   |       |                       |       |
| PLANT AND EQUIPMENT, net                                                                                                                                                                                                                                            |       | 291,946                |       | 297,145                    |       |
| GOODWILL                                                                                                                                                                                                                                                            |       | 182,209                |       | 182,237                    |       |
| INTANGIBLE ASSETS, net                                                                                                                                                                                                                                              |       | 15,749                 |       | 17,076                     |       |
| OTHER ASSETS                                                                                                                                                                                                                                                        |       | 40,979                 |       | 39,005                     |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                        |       | $                      | 759,788    |                       | $          | 777,092 |   |
|                                                                                                                                                                                                                                                                |       |                   |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                                                     |       |                   |       |                       |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                |       |                   |       |                       |       |
| Trade accounts payable                                                                                                                                                                                                                                              |       | $                      | 90,440     |                       | $          | 96,282 |   |
| Accrued liabilities:                                                                                                                                                                                                                                                |       |                   |       |                       |       |
| Interest payable                                                                                                                                                                                                                                                    |       | 14,183                 |       | 12,985                     |       |
| Customer rebates                                                                                                                                                                                                                                                    |       | 7,530                  |       | 8,391                      |       |
| Other                                                                                                                                                                                                                                                               |       | 39,281                 |       | 43,462                     |       |
| Current portion of long-term debt                                                                                                                                                                                                                                   |       | 1,327                  |       | 1,994                      |       |
| Total current liabilities                                                                                                                                                                                                                                           |       | 152,761                |       | 163,114                    |       |
| LONG-TERM DEBT, net of current portion                                                                                                                                                                                                                              |       | 868,851                |       | 840,354                    |       |
| OTHER LIABILITIES                                                                                                                                                                                                                                                   |       | 28,724                 |       | 26,454                     |       |
| DEFERRED INCOME TAXES                                                                                                                                                                                                                                               |       | 29,270                 |       | 31,433                     |       |
| SHARES SUBJECT TO MANDATORY REDEMPTION  (Note 11)                                                                                                                                                                                                                   |       | 248,867                |       | 229,910                    |       |
| Total Liabilities                                                                                                                                                                                                                                                   |       | 1,328,473              |       | 1,291,265                  |       |
| MINORITY INTEREST                                                                                                                                                                                                                                                   |       | —                 |       | 33                         |       |
| REDEEMABLE PREFERRED STOCK – Series B – 720  shares authorized, no par value, 640 and 720 shares outstanding as of June 30,  2005 and December 31, 2004, respectively                                                                           |       | 104                    |       | 117                        |       |
| REDEEMABLE COMMON STOCK – no par value; 60,000  shares authorized; 10,873 shares outstanding at June 30, 2005 and December 31,  2004, net of related stockholders’ notes receivable of $1,827 at June 30,  2005 and December 31, 2004 |       | 6,645                  |       | 6,645                      |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                                                                                                         |       |                   |       |                       |       |
| Common stock – no par value; 10,000,000  shares authorized, 542,638 shares outstanding at June 30, 2005 and December 31,  2004                                                                                                                       |       | 103,376                |       | 103,376                    |       |
| Warrants to purchase common stock                                                                                                                                                                                                                                   |       | 39,133                 |       | 39,133                     |       |
| Accumulated deficit                                                                                                                                                                                                                                                 |       | (702,533               | )          | (650,974                   | )          |
| Stockholders’ notes receivable                                                                                                                                                                                                                                 |       | (660                   | )          | (660                       | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                |       | (14,750                | )          | (11,843                    | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                                    |       | (575,434               | )          | (520,968                   | )          |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                    |       | $                      | 759,788    |                       | $          | 777,092 |   |
|                                                                                                                                                                                                                                                                     |            |                        |            |                            |            |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

3

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (INTHOUSANDS) (UNAUDITED)

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                               | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| NET SALES                                                |       | $                      | 259,246    |                 | $          | 235,185 |   | $ | 522,134 |   | $ | 471,984 |   |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| COST OF SALES                                            |       | 226,311                |       | 197,858              |       | 455,249 |   | 396,324 |   |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross profit                                             |       | 32,935                 |       | 37,327               |       | 66,885 |   | 75,660 |   |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| OPERATING EXPENSES:                                      | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales, General and Administrative                        |       | 19,474                 |       | 20,481               |       | 39,589 |   | 40,384 |   |
| Research and Development                                 |       | 2,222                  |       | 1,432                |       | 4,232 |   | 3,264 |   |
| Restructuring and Other Costs                            |       | 1,950                  |       | —               |       | 2,082 |   | — |   |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total operating expenses                                 |       | 23,646                 |       | 21,913               |       | 45,903 |   | 43,648 |   |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| OPERATING INCOME                                         |       | 9,289                  |       | 15,414               |       | 20,982 |   | 32,012 |   |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| INTEREST EXPENSE-Current and Long-term debt  (note 5, 9) |       | (29,244                | )          | (24,569              | )          | (55,628 | ) | (59,163 | ) |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| INTEREST EXPENSE-Redeemable Preferred Stock  (note 11)   |       | (9,651                 | )          | (8,666               | )          | (18,957 | ) | (17,033 | ) |
| OTHER INCOME(EXPENSE) – Net                         |       | 4,145                  |       | 87                   |       | 3,939 |   | (51 | ) |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| LOSS FROM CONTINUING OPERATIONS BEFORE  INCOME TAXES     |       | (25,461                | )          | (17,734              | )          | (49,664 | ) | (44,235 | ) |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| INCOME TAX EXPENSE                                       |       | 448                    |       | 708                  |       | 1,335 |   | 2,360 |   |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS                          |       | (25,909                | )          | (18,442              | )          | (50,999 | ) | (46,595 | ) |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| LOSS FROM DISCONTINUED OPERATIONS                        |       | (222                   | )          | (2,927               | )          | (560 | ) | (5,533 | ) |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| NET LOSS                                                 |       | $                      | (26,131    | )                    | $          | (21,369 | ) | $ | (51,559 | ) | $ | (52,128 | ) |

 

See notes to condensed consolidated financial statements.

 

4

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS)(UNAUDITED)

 
| ** **                                                                                             | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| CASH FLOWS FROM CONTINUING OPERATING  ACTIVITIES:                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                               |       | $          | (51,559    | )          | $          | (52,128 | ) |
| Adjustments to reconcile net loss to net  cash (used in)/ provided by continuing operating activities: |       |       |       |       |       |
| Depreciation and amortization                                                                          |       | 19,961     |       | 21,229     |       |
| Amortization of deferred financing costs  and accretion of debt discount                               |       | 18,879     |       | 19,599     |       |
| Deferred dividends and accretion on  preferred shares                                                  |       | 18,957     |       | 17,033     |       |
| Deferred income taxes                                                                                  |       | 224        |       | 820        |       |
| Loss from discontinued operations                                                                      |       | 560        |       | 5,533      |       |
| Gain on disposal of assets                                                                             |       | (4,161     | )          | (11        | )          |
| Changes in assets and liabilities:                                                                     |       |       |       |       |       |
| Receivables                                                                                            |       | (696       | )          | (15,758    | )          |
| Inventories                                                                                            |       | 8,082      |       | 3,426      |       |
| Prepaid expenses and other                                                                             |       | 627        |       | (89        | )          |
| Income taxes payable/receivable                                                                        |       | (209       | )          | 1,773      |       |
| Other assets                                                                                           |       | 1,107      |       | 1,149      |       |
| Trade accounts payable                                                                                 |       | (5,901     | )          | 5,415      |       |
| Accrued liabilities                                                                                    |       | (3,809     | )          | (5,219     | )          |
| Other liabilities                                                                                      |       | 2,538      |       | (3,152     | )          |
| Other                                                                                                  |       | (33        | )          | (93        | )          |
| Net cash (used in) / provided by continuing  operating activities                                      |       | 4,567      |       | (473       | )          |
|                                                                                                   |       |       |       |       |       |
| CASH FLOWS FROM CONTINUING INVESTING  ACTIVITIES:                                                      |       |       |       |       |       |
| Proceeds from sale of assets                                                                           |       | 5,170      |       | —     |       |
| Capital expenditures for plant and  equipment                                                          |       | (16,627    | )          | (10,910    | )          |
|                                                                                                   |       |       |       |       |       |
| Net cash used in continuing investing  activities                                                      |       | (11,457    | )          | (10,910    | )          |
|                                                                                                   |       |       |       |       |       |
| CASH FLOWS FROM CONTINUING FINANCING  ACTIVITIES:                                                      |       |       |       |       |       |
| Repurchase of preferred stock                                                                          |       | (10        | )          | —     |       |
| Issuance of senior secured notes                                                                       |       | 250,607    |       | —     |       |
| Repayment/Net proceeds from issuance of  senior secured discount notes                                 |       | (250,607   | )          | 225,299    |       |
| Payment of financing fees                                                                              |       | (7,507     | )          | (9,327     | )          |
| Repayments of term debt and revolver                                                                   |       | —     |       | (219,575   | )          |
| Repayment of capital leases and other, net                                                             |       | (1,374     | )          | (1,077     | )          |
| Proceeds from revolving debt – net                                                                |       | 14,800     |       | 16,000     |       |
|                                                                                                   |       |       |       |       |       |
| Net cash provided by/(used in) continuing  financing activities                                        |       | 5,909      |       | 11,320     |       |
|                                                                                                   |       |       |       |       |       |
| CASH USED IN DISCONTINUED OPERATIONS                                                                   |       | (195       | )          | (1,618     | )          |
|                                                                                                   |       |       |       |       |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS                                          |       | (143       | )          | 2,057      |       |
|                                                                                                   |       |       |       |       |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                  |       | (1,319     | )          | 376        |       |
|                                                                                                   |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE  PERIOD                                                    |       | 5,580      |       | 3,308      |       |
| CASH AND CASH EQUIVALENTS, END OF THE  PERIOD                                                          |       | $          | 4,261      |       | $          | 3,684 |   |
|                                                                                                   |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                                                    |       |       |       |       |       |
| Cash paid during the period for:                                                                       |       |       |       |       |       |
| Interest                                                                                               |       | $          | 43,242     |       | $          | 43,170 |   |
| Income taxes                                                                                           |       | 1,624      |       | 2,090      |       |
| Other non-cash disclosure:                                                                             |       |       |       |       |       |
| Preferred Stock dividends accrued but not  paid                                                        |       | $          | 17,848     |       | $          | 16,112 |   |

 

See notes to condensed consolidated financial statements.

 

5

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

**FOR THE SIXMONTHS ENDED JUNE 30, 2005 (IN THOUSANDS) (UNAUDITED)**

 
| ** **                              | ** ** | ** **       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **             | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------------|------------|-----------------|------------|------------------|------------|-------------|------------|------------------------|------------|-----------------|------------|------------|------------|
| ** **                              | ** ** | ** **       | ** ** | ** **      | ** ** | **Warrants**     | ** ** | ** **  | ** ** | **Stockholders’** | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Common Stock** | ** ** | **To Purchase** | ** ** | **Accumulated**  | ** ** | **Notes**   | ** ** | **Comprehensive**      | ** ** | ** **      | ** ** |
| ** **                              | ** ** | **Shares**       | ** ** | **Amount**      | ** ** | **Common Stock** | ** ** | **Deficit** | ** ** | **Receivable**         | ** ** | **Loss**        | ** ** | **Total**  | ** ** |
|                                    |       |             |       |            |       |             |       |        |       |                   |       |            |       |       |       |
| BALANCE, DECEMBER 31, 2004         |       | 543              |       | $               | 103,376    |             | $          | 39,133      |       | $                      | (650,974   | )               | $          | (660       | )          | $ | (11,843 | ) | $ | (520,968 | ) |
|                                    |       |             |       |            |       |             |       |        |       |                   |       |            |       |       |       |
| Net loss                                |       |             |       |            |       |             |       | (51,559     | )          |                   |       |            |       | (51,559    | )          |
|                                    |       |             |       |            |       |             |       |        |       |                   |       |            |       |       |       |
| Foreign currency translation adjustment |       |             |       |            |       |             |       |        |       |                   |       | (2,907          | )          | (2,907     | )          |
|                                    |       |             |       |            |       |             |       |        |       |                   |       |            |       |       |       |
| BALANCE, JUNE 30, 2005             |       | 543              |       | $               | 103,376    |             | $          | 39,133      |       | $                      | (702,533   | )               | $          | (660       | )          | $ | (14,750 | ) | $ | (575,434 | ) |

 

See notes to condensed consolidated financial statements.

 

6

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**PLIANT CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (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 periodsended June 30, 2005 are not necessarily indicative of results ofoperations to be expected 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, 2004. Certain reclassificationshave been made to the condensed consolidated financial statements for theperiods ended June 30, 2004 for comparative purposes.

 

**2.**                  INVENTORIES

 

Inventories are valued at the lower of cost (using the first-in,first-out method) or market value. Inventories as of June 30, 2005 and December 31,2004 consisted of the following (in thousands):

 
| ** **      | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------|------------|------------------------|------------|----------------------------|------------|
|            |       |                   |       |                       |       |
| Finished goods  |       | $                      | 48,012     |                       | $          | 47,259 |   |
| Raw materials   |       | 29,211                 |       | 37,595                     |       |
| Work-in-process |       | 8,785                  |       | 9,446                      |       |
|            |       |                   |       |                       |       |
| Total           |       | $                      | 86,008     |                       | $          | 94,300 |   |

 

**3.****                    RESTRUCTURINGAND OTHER COSTS**

 

Restructuring and other costs include plant closingcosts (including costs related to relocation of manufacturing equipment),office closing costs and other costs related to workforce reductions.

 

Thefollowing table summarizes restructuring and other costs for the three and sixmonths ended June 30 (in thousands):

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                         | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Plant  closing costs:**                          |       |                   |       |                 |       |   |   |   |   |
| Severance                                          |       | $                      | 292        |                 | $          | — |   | $ | 359 |   | $ | — |   |
| Relocation of production lines                     |       | —                 |       | —               |       | — |   | — |   |
| Other plant closure costs                          |       | 1,869                  |       | —               |       | 1,934 |   | — |   |
|                                               |       | 2,161                  |       | —               |       | 2,293 |   | — |   |
| **Office  closing and workforce reduction costs:** |       |                   |       |                 |       |   |   |   |   |
| Severance                                          |       | (84                    | )          | —               |       | (84 | ) | — |   |
| Leases                                             |       | (127                   | )          | —               |       | (127 | ) | — |   |
|                                               |       | (211                   | )          | —               |       | (211 | ) | — |   |
|                                               |       | $                      | 1,950      |                 | $          | — |   | $ | 2,082 |   | $ | — |   |

 

7

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Thefollowing table summarizes the roll-forward of the reserve from December 31,2004 to June 30, 2005:

 
| ** **                                           | ** **   | ** **                 | ** **   | ** **   | ** **   | **Accruals for the six months ended  June 30, 2005** | ** **   | ** **    | ** **   | ** **   | ** **   | ** **   | ** **   |
|------------------------------------------------------|--------------|----------------------------|--------------|--------------|--------------|-----------------------------------------------------------|--------------|---------------|--------------|--------------|--------------|--------------|--------------|
| ** **                                           | ** **   | **December 31, 2004** | ** **   | ** **   | ** **   | ** **                                                | ** **   | ** **    | ** **   | ** **   | ** **   | **Payments** | ** **   | **June 30, 2005** | ** ** |
| ** **                                           | ** **   | **# Employees**            | ** **   | **Accrual**  | ** **   | **Additional**                                            | ** **   | ** **    | ** **   | ** **   | ** **   | ** **   | ** **   | **/** | ** ** | **# Employees** | ** ** | **Accrual** | ** ** |
| ** **                                           | ** **   | **Terminated**             | ** **   | **Balance**  | ** **   | **Employees**                                             | ** **   | **Severance** | ** **   | **Other**    | ** **   | **Total**    | ** **   | **Charges** | ** ** | **Terminated** | ** ** | **Balance** | ** ** |
| ***Plant Closing Costs:***                           |         |                       |         |         |         |                                                      |         |          |         |         |         |         |         |   |   |   |   |   |   |
|                                                 |         |                       |         |         |         |                                                      |         |          |         |         |         |         |         |   |   |   |   |   |   |
| Merced                                               |         | 54                         |         | $            | 1,000        |                                                      | —       |          | —       |         | —       |         | $            | —— |   | $ | — |   | 54 |   | $ | 1,000 |   |
| Shelbyville                                          |         | 8                          |         | 1,087        |         | —                                                    |         | —        |         | 1,869        |         | 1,869        |         | (799 | ) | 8 |   | 2,157 |   |
| Leases                                               |         | —                     |         | 1,614        |         | —                                                    |         | —        |         | —       |         | —       |         | (316 | ) | — |   | 1,298 |   |
| Rhode Island                                         |         | 49                         |         | 14           |         | —                                                    |         | 139           |         | 65           |         | 204          |         | (194 | ) | 49 |   | 24 |   |
| Alliant                                              |         | —                     |         | —       |         | 19                                                        |         | 220           |         | —       |         | 220          |         | (220 | ) | 19 |   | — |   |
|                                                 |         | 111                        |         | $            | 3,715        |                                                      | 19           |          | 359          |         | 1,934        |         | $            | 2,293 |   | $ | (1,529 | ) | 130 |   | $ | 4,479 |   |
|                                                 |         |                       |         |         |         |                                                      |         |          |         |         |         |         |         |   |   |   |   |   |   |
| ***Office Closing and Workforce  Reduction Costs:*** | *** *** | *** ***               | *** *** | *** *** | *** *** | *** ***                                              | *** *** | *** ***  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Leases                                               |         | —                     |         | $            | 610          |                                                      | —       |          | —       |         | —       |         | $            | — |   | $ | (184 | ) | — |   | $ | 426 |   |
| Severance                                            |         | 114                        |         | 84           |         | —                                                    |         | (84           | )            | —       |         | (84          | )            | — |   | 114 |   | — |   |
| Singapore                                            |         | —                     |         | 127          |         | —                                                    |         | —        |         | (127         | )            | (127         | )            | — |   | — |   |   |   |
|                                                 |         | 114                        |         | $            | 821          |                                                      | —       |          | (84          | )            | (127         | )            | $            | (211 | ) | $ | (184 | ) | 114 |   | 426 |   |
|                                                 |         |                       |         |         |         |                                                      |         |          |         |         |         |         |         |   |   |   |   |   |   |
| **Total  Plant & Office closing**                |         | 225                        |         | $            | 4,536        |                                                      | 19           |          | 275          |         | 1,807        |         | $            | 2,082 |   | $ | (1,713 | ) | 244 |   | $ | 4,905 |   |

 

***Plant Closing Costs***

 

***2005 –***Duringthe first half of 2005, we accrued $1.9 million for the net costs to terminatethe remaining equipment lease agreements associated with our Shelbyville,Indiana facility as a result of the sale of our Alliant reclosibles business, incurred$0.2 million of security, severance and other plant closure costs associatedwith our Harrisville, Rhode Island facility and incurred $0.2 million inseverance costs associated with the sale of our Alliant business in the secondquarter. The Shelbyville, Indiana and Alliant related restructuring costs areattributable to our Specialty Products Group and the Harrisville, Rhode Islandcosts are attributable to our Engineered Films segment.

 

***2004*–**During the third quarter of 2004, weclosed our Harrisville, Rhode Island facility and moved its production to moremodern and efficient facilities. This restructuring plan resulted in aworkforce reduction of 49 positions. All restructuring plan costs areattributable to our Engineered Films segment and are anticipated to total $2.7million, consisting primarily of fixed asset impairment of $1.4 million,equipment relocation costs of $0.4 million, severance and other personnelrelated costs of $ 0.3 million and other costs of $0.6 million.

 

***2003 –*** During 2003, we accrued the present valueof future lease payments on three buildings we no longer occupied.  As of June 30, 2005 $1.3 million ofthese accruals are remaining.

 

***Office Closing and Workforce Reduction Costs***

 

***2002 –*** During 2002, we implemented four workforcereduction programs whereby 111 employees were terminated.  Total severance costs including benefits, forthese terminations were included as part of restructuring and other costs inour consolidated statement of operations for 2002.  As of June 30, 2005, no further costswill be incurred in connection with the workforce reduction program.  As such, the accrual remaining at December 31,2004 of $0.1 million was credited to income as a reduction to restructuring andother costs in our consolidated statement of operations for the second quarterof 2005.

 

8

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**4.**                  DISCONTINUEDOPERATIONS

 

On September 30, 2004, we sold substantially all of the assets ofour wholly-owned subsidiary, Pliant Solutions Corporation.  Pliant Solutions, previously reported as aseparate operating segment, manufactured decorative and surface coveringsthrough the conversion of various films into consumer packaged goods.  These products were sold through retailers toconsumers for a wide range of applications, including shelf-lining, decorativeaccents, glass coverings, surface repair, resurfacing and arts and craftsprojects.

 

In accordance with Statement of Financial Accounting Standards (SFAS)No. 144, “*Accounting for the Impairment of Long-Lived Assets,”*Pliant Solutions is being accounted for as a discontinued operation and,accordingly, its operating results are segmented and reported as discontinuedoperations in the accompanying condensed consolidated statement of operations.Net sales for the three and six month periods ended June 30, 2004 were$7.5 million and $14.9 million, respectively. No tax benefits were recorded onthe losses from discontinued operations or the loss on sale of discontinuedoperations as realization of these tax benefits is not certain.

 

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

 

Interest expense – current and long-term debt in the statement ofoperations for the three and six month periods ended June 30, 2005 and2004 are as follows:

 
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                 | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                 | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest expense accrued, net                                                              |       | $                      | 25,476     |                 | $          | 23,488 |   | $ | 50,681 |   | $ | 46,816 |   |
| Current and amortized financing fees                                                       |       | 3,768                  |       | 1,081                |       | 4,947 |   | 2,229 |   |
| Write-off of previously capitalized  financing fees and interest rate derivatives costs(a) |       | —                 |       | —               |       | — |   | 10,118 |   |
|                                                                                       |       |                   |       |                 |       |   |   |   |   |
| TOTAL                                                                                      |       | $                      | 29,244     |                 | $          | 24,569 |   | $ | 55,628 |   | $ | 59,163 |   |
| Cash interest payments(b)                                                                  |       | $                      | 29,092     |                 | $          | 22,316 |   | $ | 43,242 |   | $ | 43,170 |   |

 

----

(a) This write-off resulted from the repayment of the old creditfacilities in February 2004, from the net proceeds from the issuance ofthe senior secured discount notes and borrowings under our revolving creditfacility.

 

(b) The three month period ended June 30, 2005 include $4.9million of consent fees paid in connection with our Amended 2004 Notes (seefootnote 9 for details) which have been capitalized and will be amortizedthrough June 2009.  In addition,$2.6 million of associated underwriter, legal and accountants fees were paid incash and expensed on a current basis.

 

**6.**                    EQUITY

 

*Stock Option Plans*

 

During the three and six months ended June 30, 2005, options topurchase 1,018 and 2,853 shares respectively of our common stock were cancelledin connection with employee terminations.

 

Weapply Accounting Principles Board (APB) Opinion No. 25, *“Accountingfor Stock Issued to Employees,”* and related interpretations inaccounting for stock-based compensation plans as they relate to employees anddirectors.  We did not have compensationexpense related to stock options for the three and six month periods ended June 30,2005 and June 30, 2004.  Had thecompensation cost for all the outstanding options been determined in accordancewith SFAS No. 123, *“Accounting forStock-Based Compensation,”* our net loss for the three and six monthperiods ended June 30, 2005 and 2004 would have been the following proforma amounts (in thousands):

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                           | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| As reported                          |       | $                      | (26,131    | )                    | $          | (21,369 | ) | $ | (51,559 | ) | $ | (52,128 | ) |
| Pro forma stock compensation expense |       | (251                   | )          | (200                 | )          | (500 | ) | (400 | ) |
| Pro forma                            |       | $                      | (26,382    | )                    | $          | (21,569 | ) | $ | (52,059 | ) | $ | (52,528 | ) |

 

9

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In December 2004, the FASB issued SFAS No. 123(R) (revised December 2004),*“Share-Based Payment,”* which is arevision of SFAS No. 123, *“Accounting forStock-Based Compensation,”* and supersedes APB Opinion No. 25.  This statement requires that the fair valueat the grant date resulting from all share-based payment transactions berecognized in the financial statements. Further, SFAS No. 123(R) requires entities to apply a fair-value basedmeasurement method in accounting for these transactions.  The minimum value method currently used bythe Company is not allowed and the Company will be required to adopt the prospectivemethod as proscribed by SFAS No. 123(R). This value is recorded over the service period, which typically is thevesting period.  This statement iseffective no later than the beginning of the first fiscal year beginning after June 15,2005.  We are currently evaluating theprovisions of SFAS No. 123(R), and the impact on our consolidated financialposition and results of operations.

 

*Restricted Stock*

 

On September 24, 2004, we adopted a 2004 Restricted StockIncentive Plan, pursuant to which we sold shares of a newly-created, non-votingSeries B Redeemable Preferred Stock for a cash purchase price of $162 per shareto our President and Chief Executive Officer and selected additional officersof the Company.  The purchase price wasconsidered to approximate fair value. These shares were issued in privatetransactions with officers of the Company and therefore were exempt from theregistration requirements of the Securities Act of 1933.  The Series B Preferred Stock will beautomatically converted into common equity of the Company upon the consummationof a Qualified Public Offering, defined as a sale in an underwritten publicoffering registered under the Securities Act of 1933 of shares of capital stockof the Company resulting in aggregate proceeds (net of underwriters discountsand commissions) to the Company of not less than $100 million.  During the first and second quarters of 2005,48 and 28 shares, respectively, of the total 720 shares issued to management in2004 were repurchased for $162 per share.

 

**7.****                    INCOME TAXES**

 

For the three months ended June 30, 2005, incometax expense was $0.4 million on pretax loss from continuing operations of $25.5million as compared to income tax expense of $0.7 million on pretax loss fromcontinuing operations of $17.7 million for the three months ended June 30,2004.  For the six months ended June 30,2005, income tax expense was $1.3 million on pretax loss from continuingoperations of $49.7 million compared to income tax expense of $2.4 million onpretax loss from continuing operations of $44.2 million for the six monthsended June 30, 2004.  Income taxbenefits related to net operating losses in the United States are offset by avaluation allowance as the realization of these tax benefits is notcertain.  Therefore, the income taxexpense in the statements of operations primarily reflects foreign incometaxes.

 

**8.****                    COMPREHENSIVEINCOME/(LOSS)**

 

Other comprehensive income (loss) for the three months ended June 30,2005 and 2004 was ($26.4) million and ($22.1) million, respectively. Othercomprehensive income (loss) for the six months ended June 30, 2005 and2004 was ($54.5) million and ($51.4) million, respectively. The components ofother comprehensive income (loss) are net income (loss), the change incumulative unrealized losses on derivatives recorded in accordance with SFASNo. 133 *“Accounting for Derivative Instruments and HedgingActivities”* and foreign currency translation.

 

10

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**9.****                    LONG-TERM DEBT**

 

Long-term debt as of June 30, 2005 and December 31, 2004consists of the following (in thousands):

 
| ** **                                                                                                                   | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Credit Facilities:                                                                                                           |       |                    |       |                        |       |
| Revolving credit facility                                                                                                    |       | $                       | 38,800     |                        | $          | 24,000 |   |
| Senior secured notes, interest at 11 5/8%                                                                                    |       | 254,935                 |       | —                      |       |
| Senior secured discount notes at 11 1/8%,  net of unamortized issue discount                                                 |       | 6,663                   |       | 247,641                     |       |
| 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) |       | 313,661                 |       | 313,214                     |       |
| Obligations under capital leases                                                                                             |       | 6,119                   |       | 6,778                       |       |
| Insurance financing                                                                                                          |       | —                  |       | 715                         |       |
| Total                                                                                                                        |       | 870,178                 |       | 842,348                     |       |
| Less current portion                                                                                                         |       | (1,327                  | )          | (1,994                      | )          |
| Long-term portion                                                                                                            |       | $                       | 868,851    |                        | $          | 840,354 |   |

 

*Revolving Credit Facility*

 

The Company maintains a revolving credit facility which provides up to$100 million of borrowings (subject to the borrowing base and other limitationsdescribed below).  The revolving creditfacility includes a $15 million letter of credit sub-facility, with letters ofcredit reducing availability under the revolving credit facility.

 

The revolving credit facility is secured by a first priority securityinterest in substantially all our inventory, receivables and deposit accounts,100% of the capital stock of, or other equity interests in existing and futuredomestic subsidiaries and foreign subsidiaries that are note guarantors, 65% ofthe capital stock of, or other equity interests in existing and futurefirst-tier foreign subsidiaries, investment property and certain other assetsof the Company and the note guarantors (the “Second-Priority Collateral”) and asecond-priority security interest in our real property, fixtures, equipment,intellectual property and other assets (“First-Priority Collateral”).

 

The revolving credit facility matures on February 17, 2009.  The interest rates are at LIBOR plus 2.5% to3.0% or ABR plus 1.5% to 2.0%.  Theaverage rate on borrowings outstanding during the second quarter of 2005 was7.42%.  The commitment fee for the unusedportion of the revolving credit facility is 0.50% per annum.

 

The borrowings under the revolving credit facility may be limited to areduced availability.  ReducedAvailability (RA) is defined as: if the borrowing base is less than $110,000,000and the Fixed Charge Coverage Ratio (FCCR) is less than 1.1, the reducedavailability is the borrowing base minus $10,000,000.  Furthermore, if the FCCR is less than thatprescribed in our credit agreement, RA is the lesser of the commitment or theborrowing base minus $15,000,000.  As of June 30,2005, we had approximately $50.2 million available for borrowing under ourrevolving credit agreement.

 

*11 5/8% Senior Secured Notes due 2009 (the “Amended 2004 Notes”)*

 

On April 8, 2005, Pliant Corporation commenced a consentsolicitation relating to its 11 1/8% Senior Secured Discount Notes due 2009(the “2004 Notes”) seeking consents, among other things, to (i) eliminate thecurrent requirement to pay cash interest on the notes beginning in 2007 and, inlieu thereof, pay non-cash interest in the form of additional notes throughmaturity; (ii) increase the interest rate of the notes for which consents arereceived; (iii) increase the redemption prices of the notes for which consentsare received; and (iv) eliminate certain restrictive covenants as they apply tonotes for which consents are not received. On May 6, 2005, Pliant consummated this solicitation as consents to theproposed amendments were delivered with respect to $298.2 million aggregate principalamount at maturity of the 2004 Notes, all of which were accepted byPliant.  As a result, $250.6 million principalamount of the Amended 2004 Notes were outstanding as of May 6, 2005.  On June 15, 2005, we issued anadditional $3.1 million principal amount of the Amended 2004 Notes as paymentin kind interest pursuant to the amended and restated indenture (the “AdditionalNotes”).

 

11

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In addition, $7.8 million aggregate principal amount at maturity of 2004Notes with respect to which consents were not delivered remainoutstanding.  Pliant, certain of itssubsidiaries and the trustee also executed an amended and restated indenturegoverning the Amended 2004 Notes and the 2004 Notes with respect to which consentswere not delivered.  Pliant, certain ofits subsidiaries and J.P. Morgan Securities Inc., the solicitation agent forthe consent solicitation, executed a registration rights agreement with respectto the Amended 2004 Notes.

 

As a result of the amendments approved in the consent solicitation, theinterest rate of the Amended 2004 Notes was increased from 11 1/8% per annum to11 5/8% per annum.  The Amended 2004Notes no longer require payment of cash interest beginning in 2007.  Instead, they require payment of non-cashinterest in the form of additional notes through maturity.  The amendments also increased the redemptionprices of the amended notes.  Inaddition, the amended and restated indenture eliminates substantially all therestrictive covenants contained in the indenture, as they relate to holders ofthe 2004 Notes with respect to which consents were not delivered.  The transaction in which the terms of the2004 Notes were amended to become the Amended 2004 Notes was not registeredunder the Securities Act of 1933, as amended, or any state securities laws andthe Amended 2004 Notes may not be offered or sold in the United States absentregistration or an applicable exemption from the registration requirements ofthe Securities Act and any applicable state securities laws.  Pursuant to a registration rights agreement,Pliant agreed to consummate an exchange offer for the Amended 2004 Notes inwhich the company will exchange up to $253.8 million aggregate principal amountof the original Amended 2004 Notes for essentially identical notes which willbe registered under the Securities Act of 1933, as amended.

 

On or after June 15, 2007, we may redeem some or all of the Amended2004 Notes at the following redemption prices (expressed as percentages of thesum of the principal amount, plus accrued and unpaid interest); 111.625% ifredeemed prior to June 15, 2007; 108.719% if redeemed prior to December 15,2007; 105.813% if redeemed prior to June 15, 2008; 102.906 if redeemedprior to December 15, 2008; and 100.000% if redeemed on or before June 15,2009.

 

Prior to June 15, 2007, we may redeem up to a maximum of 35% ofthe principal amount of the Amended 2004 Notes with the net cash proceeds ofcertain equity offerings by us at a redemption price equal to 111.625% of thesum of the principal amount plus accrued and unpaid interest, provided thatafter giving effect to such redemption (i) at least 65% of the principal amountof the Amended 2004 Notes remain outstanding and (ii) any such redemption by usis made within 120 days after such equity offering.

 

The Amended 2004 Notes are secured, on a first-priority basis by theFirst-Priority Collateral and on a second-priority basis by the Second-PriorityCollateral.

 

*11 1/8% Senior Secured Discount Notes due 2009 (the “2004 Notes”)*

 

On February 17, 2004 we completed the sale of $306 million ($225.3million of proceeds) principal at maturity of 11 1/8% Senior Secured DiscountNotes due 2009.  The proceeds of theoffering were used to repay and terminate the credit facilities that existed atDecember 31, 2003.  The 2004 Notesare guaranteed by the same domestic subsidiaries that guarantee the 2000/2002Notes and the 2003 Notes and certain of our foreign subsidiaries thatguarantees indebtedness of the Company. The 2004 Notes were issued under an indenture dated February 17,2004, among us, the subsidiary guarantors party thereto and Wilmington TrustCompany, as trustee.

 

The 2004 Notes are senior secured obligations of the Company and aresecured by first-priority security interests in the First-Priority Collateral,which consists of substantially all the real property, fixtures, equipment,intellectual property and all other assets, other than Second-PriorityCollateral, of the Company and the subsidiary guarantors, together with theproceeds therefrom and improvements, alterations and repairs thereto, as wellas any assets required to be added to the First-Priority Collateral pursuant tothe terms of the indenture or related security documents.  The 2004 Notes are secured by asecond-priority interest in the Second-Priority Collateral, rank equally inright of payment with all existing and any future subordinated obligations ofthe Company and are effectively subordinated to all liabilities and preferredstock of each subsidiary guarantor.  The2004 Notes will mature on June 15, 2009. On May 6, 2005 we completed the consent solicitation relating to our2004 Notes.  Consents were delivered withrespect to $298.2 million aggregate principal amount at maturity of the 2004Notes.  As a result, $7.8 millionaggregate principal amount at maturity of 2004 Notes remain outstanding.

 

Unless we elect to pay cash interest as described below, and exceptunder certain limited circumstances, the 2004 Notes will accrete from the dateof issuance 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 ($7.8 million in theaggregate assuming no redemption or other repayments).  Commencing on December 15, 2006,interest on the 2004 Notes will accrue at the rate of 11 1/8% per annum andwill be payable in cash semiannually on June 15 and December 15,commencing on June 15, 2007.

 

12

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On any interestpayment date prior to December 15, 2006, we may elect to commence payingcash interest (from and after such interest payment date) in which case (i) wewill be obligated to pay cash interest on each subsequent interest paymentdate, (ii) the 2004 Notes will cease to accrete after such interest paymentdate and (iii) the outstanding principal amount at the stated maturity of eachnote will equal the accreted value of such 2004 Notes as of such interestpayment 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 to June 15,2008; 102.781% if redeemed prior to June 15, 2009; and 100% if redeemed onor after June 15, 2009.  Prior tosuch date, we may not redeem the 2004 Notes except as described in thefollowing paragraph.

 

At any time prior to June 15, 2007, we may redeem up to 35% of theaccreted value of the 2004 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 2004 Notes remains outstanding after such redemption and (ii) anysuch redemption by us is made within 120 days after such equity offering.

 

13

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**10.**          OPERATINGSEGMENTS

 

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.  This information is reported on the basisthat it is used internally for evaluating segment performance.

 

We have fouroperating segments: Engineered Films, Performance Films, Industrial Films andSpecialty Products Group.  Sales andtransfers between our segments are eliminated in consolidation.  We evaluate the performance of our operatingsegments based on net sales (excluding inter-company sales) and segmentprofit.  Segment profit reflects incomefrom continuing operations before interest expense, income taxes, depreciation,amortization, restructuring costs and other non-cash charges.  Our reportable segments are separatelymanaged as each segment has differing products, customer requirements,technology and marketing strategies.

 

Segment profit forthe periods ended June 30, 2005 and 2004 and segment assets as of June 30,2005 and December 31, 2004 are presented in the following table (inthousands). Certain reclassifications have been made to the prior year amountsto be consistent with the 2005 presentation.

 
| ** **                                 | ** ** | **Engineered  Films** | ** ** | **Performance  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Products  Group** | ** ** | **Corporate /  Other** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|--------------------------------|------------|------------------------|------------|-----------|------------|
| **Three  months ended June 30, 2005** |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Net sales to customers                     |       | $                     | 58,887     |                   | $          | 25,137                |       | $                              | 73,245     |                   | $          | 100,287   |       | $ | 1,690 |   | $ | 259,246 |   |
| Intersegment sales                         |       | 1,287                 |       | 325                    |       | 3,813                 |       | 1,478                          |       | (6,903                 | )          | —    |       |
| Total net sales                            |       | 60,174                |       | 25,462                 |       | 77,058                |       | 101,765                        |       | (5,213                 | )          | 259,246   |       |
| Depreciation and amortization              |       | 1,751                 |       | 858                    |       | 1,726                 |       | 4,417                          |       | 1,075                  |       | 9,827     |       |
| Interest expense                           |       | 168                   |       | 18                     |       | 81                    |       | 1,338                          |       | 37,290                 |       | 38,895    |       |
| Segment profit                             |       | 7,040                 |       | 2,750                  |       | 5,527                 |       | 16,024                         |       | (6,130                 | )          | 25,211    |       |
| Capital expenditures                       |       | 693                   |       | 1,056                  |       | 1,030                 |       | 3,372                          |       | 1,522                  |       | 7,673     |       |
| **Three  months ended June 30, 2004** |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Net sales to customers                     |       | $                     | 55,177     |                   | $          | 24,314                |       | $                              | 60,375     |                   | $          | 93,846    |       | $ | 1,473 |   | $ | 235,185 |   |
| Intersegment sales                         |       | 1,715                 |       | 401                    |       | 961                   |       | 4,205                          |       | (7,282                 | )          | —    |       |
| Total net sales                            |       | 56,892                |       | 24,715                 |       | 61,336                |       | 98,051                         |       | (5,809                 | )          | 235,185   |       |
| Depreciation and amortization              |       | 1,737                 |       | 845                    |       | 1,294                 |       | 4,744                          |       | 1,575                  |       | 10,195    |       |
| Interest expense                           |       | 156                   |       | 3                      |       | (18                   | )          | 1,142                          |       | 31,952                 |       | 33,235    |       |
| Segment profit                             |       | 9,336                 |       | 4,288                  |       | 6,889                 |       | 12,632                         |       | (7,450                 | )          | 25,695    |       |
| Capital expenditures                       |       | 358                   |       | 265                    |       | 2,348                 |       | 4,307                          |       | 568                    |       | 7,846     |       |

 
| ** **                               | ** ** | **Engineered  Films** | ** ** | **Performance  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Products  Group** | ** ** | **Corporate /  Other** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|--------------------------------|------------|------------------------|------------|-----------|------------|
| **Six  months ended June 30, 2005** |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Net sales to customers                   |       | $                     | 118,486    |                   | $          | 50,164                |       | $                              | 146,040    |                   | $          | 203,114   |       | $ | 4,330 |   | $ | 522,134 |   |
| Intersegment sales                       |       | 2,905                 |       | 883                    |       | 7,191                 |       | 2,989                          |       | (13,968                | )          | —    |       |
| Total net sales                          |       | 121,391               |       | 51,047                 |       | 153,231               |       | 206,103                        |       | (9,638                 | )          | 522,134   |       |
| Depreciation and amortization            |       | 3,517                 |       | 1,706                  |       | 3,485                 |       | 9,078                          |       | 2,175                  |       | 19,961    |       |
| Interest expense                         |       | 331                   |       | 23                     |       | 148                   |       | 2,655                          |       | 71,428                 |       | 74,585    |       |
| Segment profit                           |       | 15,181                |       | 6,394                  |       | 11,879                |       | 27,308                         |       | (13,798                | )          | 46,964    |       |
| Capital expenditures                     |       | 1,487                 |       | 2,309                  |       | 2,210                 |       | 8,663                          |       | 1,958                  |       | 16,627    |       |
| Segment assets                           |       | 123,780               |       | 69,034                 |       | 99,975                |       | 371,539                        |       | 95,460                 |       | 759,788   |       |
| **Six  months ended June 30, 2004** |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Net sales to customers                   |       | $                     | 110,562    |                   | $          | 50,097                |       | $                              | 118,652    |                   | $          | 189,935   |       | $ | 2,738 |   | $ | 471,984 |   |
| Intersegment sales                       |       | 3,161                 |       | 444                    |       | 1,884                 |       | 7,153                          |       | (12,642                | )          | —    |       |
| Total net sales                          |       | 113,723               |       | 50,541                 |       | 120,536               |       | 197,088                        |       | (9,904                 | )          | 471,984   |       |
| Depreciation and amortization            |       | 3,400                 |       | 1,694                  |       | 2,611                 |       | 9,470                          |       | 4,054                  |       | 21,229    |       |
| Interest expense                         |       | 314                   |       | 7                      |       | (37                   | )          | 1,920                          |       | 73,991                 |       | 76,195    |       |
| Segment profit                           |       | 19,222                |       | 8,701                  |       | 13,604                |       | 26,034                         |       | (14,371                | )          | 53,190    |       |
| Capital expenditures                     |       | 694                   |       | 367                    |       | 3,155                 |       | 5,862                          |       | 832                    |       | 10,910    |       |
| **As of December 31,  2004**        |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Segment assets                           |       | 140,799               |       | 68,190                 |       | 105,543               |       | 375,033                        |       | 87,527                 |       | 777,092   |       |

 

14

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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 and six month periods ended June 30 is asfollows (in thousands):

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Profit or Loss**                            |       |                             |       |                           |       |   |   |   |   |
| Total segment profit                          |       | $                                | 25,211     |                           | $          | 25,695 |   | $ | 46,964 |   | $ | 53,190 |   |
| Depreciation and amortization                 |       | (9,827                           | )          | (10,194                        | )          | (19,961 | ) | (21,229 | ) |
| Restructuring and other costs                 |       | (1,950                           | )          | —                         |       | (2,082 | ) | — |   |
| Interest expense                              |       | (38,895                          | )          | (33,235                        | )          | (74,585 | ) | (76,196 | ) |
| Loss from continuing operations before  taxes |       | $                                | (25,461    | )                              | $          | (17,734 | ) | $ | (49,664 | ) | $ | (44,235 | ) |
|                                               |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------------------|------------|
| **Assets**                           |       |               |       |                   |       |
| Total assets for reportable segments |       | $                  | 664,328    |                   | $          | 689,565 |   |
| Other unallocated assets             |       | 95,460             |       | 87,527                 |       |
| Total consolidated assets            |       | $                  | 759,788    |                   | $          | 777,092 |   |
|                                      |            |                    |            |                        |            |  |  |  |  |

 

Net sales and long-lived assets of our US andforeign operations are as follows:

 
| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Sales            |       |                             |       |                           |       |   |   |   |   |
| United States        |       | $                                | 212,060    |                           | $          | 188,391 |   | $ | 422,555 |   | $ | 380,081 |   |
| Foreign countries(a) |       | 47,186                           |       | 46,794                         |       | 99,579 |   | 91,903 |   |
|                 |       |                             |       |                           |       |   |   |   |   |
| Total                |       | $                                | 259,246    |                           | $          | 235,185 |   | $ | 522,134 |   | $ | 471,984 |   |
|                      |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |

 
| ** **        | ** ** | ** ** |   |   |   | **June 30,  2005** |    | **December  31,  2004** |   |
|-------------------|------------|------------|--------|--------|--------|--------------------|---------|-------------------------|--------|
| Long-lived assets |       |       |   |   |   |               |    |                    |   |
| United States     |       |       |   |   |   | $                  | 434,801 |                    | $      | 434,645 |   |
| Foreign countries |       |       |   |   |   | 55,103             |    | 61,813                  |   |
|              |       |       |   |   |   |               |    |                    |   |
| Total             |       |       |   |   |   | $                  | 489,904 |                    | $      | 496,458 |   |
|              |       |       |   |   |   |               |    |                    |   |
| Total assets      |       |       |   |   |   |               |    |                    |   |
| United States     |       |       |   |   |   | $                  | 649,839 |                    | $      | 655,885 |   |
| Foreign countries |       |       |   |   |   | 109,949            |    | 121,207                 |   |
|              |       |       |   |   |   |               |    |                    |   |
| Total             |       |       |   |   |   | $                  | 759,788 |                    | $      | 777,092 |   |
|                   |            |            |        |        |        |                    |         |                         |        |  |  |  |  |  |

 

----

(a)   Foreign countries include Australia, Canada,Germany and Mexico, none of which individually represents 10% of consolidatednet sales or long-lived assets.

 

15

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**11.   ****SHARES****SUBJECT TO MANDATORY REDEMPTION**

 

The Companyadopted SFAS No. 150, “*Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity,”*effective January 1, 2004. As a result, the redeemable preferred stock of theCompany that contains an unconditional mandatory redemption feature wasrecorded as a liability on the date of adoption at fair market value. Fairmarket value was determined using the value of the securities on the date ofissuance plus accretion of discount from the date of issuance through December31, 2003 and the unpaid dividends at the end of each quarter from the date ofissuance through December 31, 2003. In addition, the dividends and accretion onthe preferred shares are included as a part of interest expense in thestatement of operations.  EffectiveOctober 1, 2005, the annual dividend rate will increase from 14% per annum to16% per annum if we do not pay all accrued dividends in cash on September 30,2005.

 

In addition, as a resultof adopting SFAS No. 150, the Company’s redeemable common shares that have beenput 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 No. 150 prior periods were not restated.

 

The shares subject tomandatory redemption are as follow (in thousands):

 
| ** **                                                                                                                                                                                                                                   | ** ** | **As of June 30  2005** | ** ** | **As of  December 31  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| Redeemable Preferred Shares 167,000 shares  authorized, 140,973 shares outstanding as of June 30, 2005 and December 31, 2004,  designated as Series A, no par value with a redemption value of $1,000 per  share plus accumulated dividends. |       | $                       | 242,505    |                         | $          | 223,548 |   |
|                                                                                                                                                                                                                                         |       |                    |       |                         |       |
| 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                                                                                                                                                                                                |       | $                       | 248,867    |                         | $          | 229,910 |   |

 

The cash settlement atthe redemption date (assuming no cash dividends are paid through the redemptiondate) is $680.6 million for the redeemable preferred shares and $6.4 million (netof the note receivable of $2.4 million) for the redeemable common shares thathave been put for redemption by the shareholder.

 

**12.    DEFINED BENEFIT PLANS**

 

The company sponsors three noncontributory defined benefit pension plans(the “United States Plans”) covering domestic employees with 1,000 or morehours of service. The company funds these in accordance with the fundingrequirements of the Employee Retirement Income Security Act of 1974.Contributions are intended to not only provide for benefits attributed toservice to date but also for those expected to be earned in the future. We alsosponsor a defined benefit plan in Germany (the “Germany Plan”). For informationon the Germany Plan please refer to the Company’s Form 10-K for the year endedDecember 31, 2004.

 

In the second quarter of 2004, the Company redesigned its retirementprograms which led to the curtailment and “freeze” of the pension plan for U.S.salaried employees effective June 30, 2004. As a result, a curtailment gain of $1.6 million was recognized as incomeduring the three months ended June 30, 2004.

 

The consolidated accrued net pension expense for the three and sixmonths ended June 30, 2005 and 2004 includes the following components (inthousands):

 
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| **United States Plans**                         |       |                             |       |                           |       |   |   |   |   |
| Service cost-benefits earned during the  period |       | $                                | 104        |                           | $          | 1,189 |   | $ | 208 |   | $ | 2,378 |   |
| Interest cost on projected benefit  obligation  |       | 1,195                            |       | 1,374                          |       | 2,390 |   | 2,748 |   |
| Expected return on assets                       |       | (1,286                           | )          | (1,105                         | )          | (2,572 | ) | (2,210 | ) |
| Curtailment (gain) loss                         |       | —                           |       | (1,563                         | )          | — |   | (1,563 | ) |
| Other                                           |       | 28                               |       | 184                            |       | 56 |   | 368 |   |
| Total accrued pension expense                   |       | $                                | 41         |                           | $          | 79 |   | $ | 82 |   | $ | 1,721 |   |

 

16

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**13.    CONTINGENCIES**

 

*Litigation*  We are involved in various litigation mattersfrom time to time in the ordinary course of our business, including mattersdescribed in previous filings. In our opinion, none of such litigation ismaterial to our financial condition or results of operations.

 

**14.    SALE OF ALLIANT ASSETS**

 

OnApril 13, 2005 the Company sold the intellectual property, working capital, andequipment assets used in the Alliant operations to an independent third party fora purchase price of $6.3 million, subject to certain adjustments, with $4.6million paid in cash at closing and $1.1 million of additional paymentsreceived through June 30, 2005.  Theremaining purchase price of $0.63 million will be paid in equal installmentstwelve and twenty four months after closing. The Company recorded a gain of $4.1 million on the sale in the PrintedProducts Film division of our Specialty Products Group which is included inother income in the consolidated statement of operations for the three and sixmonth periods ended June 30, 2005.  Netsales and net income for this business were $0.1 million and $3.8 million,respectively for the three months ended June 30, 2005 and $0.7 million and $3.5million, respectively for the six months ended June 30, 2005.    Net sales for the three and six monthperiods ended June 30, 2004 were $0.7 million and $1.4 million,respectively.  Net loss for the three andsix month periods ended June 30, 2004 were $0.2 million and $0.5 million,respectively.

 

**15.    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS**

 

The following condensedconsolidating financial statements present, in separate columns, financialinformation for (i) Pliant Corporation (on a parent only basis) with itsinvestment in its subsidiaries recorded under the equity method, (ii) guarantorsubsidiaries (as specified in the Indentures 2000/2002 Notes, 2003 Notes, 2004Notes and Amended 2004 Notes (collectively, the “Notes”), on a combined basis,with any investments in non-guarantor subsidiaries specified in the Indenturesrecorded under the equity method, (iii) direct and indirect non-guarantorsubsidiaries on a combined basis, (iv) the eliminations necessary to arrive atthe information for Pliant Corporation and its subsidiaries on a consolidatedbasis, and (v) Pliant Corporation on a consolidated basis, in each case as ofJune 30, 2005 and December 31, 2004 and for the six months ended June 30, 2005and 2004.  The Notes are fully andunconditionally guaranteed on a joint and several basis by each guarantorsubsidiary and each guarantor subsidiary is wholly owned, directly orindirectly, by Pliant Corporation.  Thereare no contractual restrictions limiting transfers of cash from guarantor andnon-guarantor subsidiaries to Pliant Corporation, within the meaning of Rule3-10(h)(1) of Regulation S-X.  There areno contractual restrictions limiting transfers of cash from guarantor andnon-guarantor subsidiaries to Pliant Corporation.  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

 

17

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**PLIANTCORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2005 (INTHOUSANDS) (UNAUDITED)

 
| ** **                                               | ** ** | **Pliant  Corporation  Parent Only** | ** ** | **Combined  Guarantors** | ** ** | **Combined  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|------------------------------|------------|------------------|------------|---------------------------------------|------------|
| **ASSETS**                                               |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT ASSETS:                                          |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Cash and cash equivalents                                |       | $                                    | —     |                     | $          | 785                          |       | $                | 3,476      |                                  | $          | — |   | $ | 4,261 |   |
| Receivables – net                                   |       | 97,775                               |       | 7,446                    |       | 19,947                       |       | —           |       | 125,168                               |       |
| Inventories                                              |       | 67,966                               |       | 6,815                    |       | 11,227                       |       | —           |       | 86,008                                |       |
| Prepaid expenses and other                               |       | 1,558                                |       | 334                      |       | 1,510                        |       | —           |       | 3,402                                 |       |
| Income taxes receivable                                  |       | 78                                   |       | 156                      |       | 350                          |       | —           |       | 584                                   |       |
| Deferred income taxes                                    |       | 10,402                               |       | —                   |       | (920                         | )          | —           |       | 9,482                                 |       |
| Total current assets                                     |       | 177,779                              |       | 15,536                   |       | 35,590                       |       | —           |       | 228,905                               |       |
| PLANT AND EQUIPMENT, Net                                 |       | 242,983                              |       | 15,625                   |       | 33,338                       |       | —           |       | 291,946                               |       |
| GOODWILL                                                 |       | 167,583                              |       | 13,331                   |       | 1,295                        |       | —           |       | 182,209                               |       |
| INTANGIBLE ASSETS, Net                                   |       | 4,605                                |       | 11,099                   |       | 45                           |       | —           |       | 15,749                                |       |
| INVESTMENT IN SUBSIDIARIES                               |       | (34,006                              | )          | —                   |       | —                       |       | 34,006           |       | —                                |       |
| OTHER ASSETS                                             |       | 37,875                               |       | —                   |       | 3,104                        |       | —           |       | 40,979                                |       |
| TOTAL ASSETS                                             |       | $                                    | 596,819    |                     | $          | 55,591                       |       | $                | 73,372     |                                  | $          | 34,006 |   | $ | 759,788 |   |
|                                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)** |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT LIABILITIES:                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
|                                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Trade accounts payable                                   |       | $                                    | 74,121     |                     | $          | 5,152                        |       | $                | 11,167     |                                  | $          | — |   | $ | 90,440 |   |
| Accrued liabilities                                      |       | 52,677                               |       | 4,265                    |       | 4,052                        |       | —           |       | 60,994                                |       |
| Current portion of long-term debt                        |       | 1,327                                |       | —                   |       | —                       |       | —           |       | 1,327                                 |       |
| Due to (from) affiliates                                 |       | (128,346                             | )          | 73,093                   |       | 55,253                       |       | —           |       | —                                |       |
|                                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Total current liabilities                                |       | (221                                 | )          | 82,510                   |       | 70,472                       |       | —           |       | 152,761                               |       |
| LONG-TERM DEBT, Net of current portion                   |       | 868,851                              |       | —                   |       | —                       |       | —           |       | 868,851                               |       |
| OTHER LIABILITIES                                        |       | 26,022                               |       | —                   |       | 2,702                        |       | —           |       | 28,724                                |       |
| DEFERRED INCOME TAXES                                    |       | 21,985                               |       | 4,114                    |       | 3,171                        |       | —           |       | 29,270                                |       |
| SHARES SUBJECT TO MANDATORY REDEMPTION                   |       | 248,867                              |       | —                   |       | —                       |       | —           |       | 248,867                               |       |
| Total liabilities                                        |       | 1,165,504                            |       | 86,624                   |       | 76,345                       |       | —           |       | 1,328,473                             |       |
| MINORITY INTEREST                                        |       | —                               |       | —                   |       | —                       |       | —           |       | —                                |       |
| REDEEMABLE STOCK:                                        |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Preferred stock                                          |       | 104                                  |       | —                   |       | —                       |       | —           |       | 104                                   |       |
| Common stock                                             |       | 6,645                                |       | —                   |       | —                       |       | —           |       | 6,645                                 |       |
| Total redeemable stock                                   |       | 6,749                                |       | —                   |       | —                       |       | —           |       | 6,749                                 |       |
| 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)                              |       | (702,533                             | )          | (46,451                  | )          | (24,236                      | )          | 70,687           |       | (702,533                              | )          |
| Stockholders’ notes receivable                      |       | (660                                 | )          | —                   |       | —                       |       | —           |       | (660                                  | )          |
| Accumulated other comprehensive loss                     |       | (14,750                              | )          | 1,398                    |       | (8,039                       | )          | 6,641            |       | (14,750                               | )          |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)                |       | (575,434                             | )          | (31,033                  | )          | (2,973                       | )          | 34,006           |       | (575,434                              | )          |
| Total liabilities and stockholders’  (deficit)      |       | $                                    | 596,819    |                     | $          | 55,591                       |       | $                | 73,372     |                                  | $          | 34,006 |   | $ | 759,788 |   |

 

18

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING BALANCE SHEET

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

 
| ** **                                               | ** ** | **Pliant  Corporation  Parent Only** | ** ** | **Combined  Guarantors** | ** ** | **Combined  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|------------------------------|------------|------------------|------------|---------------------------------------|------------|
| **ASSETS**                                               |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT ASSETS:                                          |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Cash and cash equivalents                                |       | $                                    | —     |                     | $          | 704                          |       | $                | 4,876      |                                  | $          | — |   | $ | 5,580 |   |
| Receivables – net                                   |       | 95,439                               |       | 7,861                    |       | 22,095                       |       | —           |       | 125,395                               |       |
| Inventories                                              |       | 74,672                               |       | 7,411                    |       | 12,217                       |       | —           |       | 94,300                                |       |
| Prepaid expenses and other                               |       | 2,764                                |       | 370                      |       | 898                          |       | —           |       | 4,032                                 |       |
| Income taxes receivable                                  |       | 138                                  |       | 223                      |       | —                       |       | —           |       | 361                                   |       |
| Deferred income taxes                                    |       | 12,741                               |       | —                   |       | (780                         | )          | —           |       | 11,961                                |       |
| Total current assets                                     |       | 185,754                              |       | 16,569                   |       | 39,306                       |       | —           |       | 241,629                               |       |
| PLANT AND EQUIPMENT, Net                                 |       | 240,599                              |       | 17,127                   |       | 39,419                       |       | —           |       | 297,145                               |       |
| GOODWILL                                                 |       | 167,583                              |       | 13,331                   |       | 1,323                        |       | —           |       | 182,237                               |       |
| INTANGIBLE ASSETS, Net                                   |       | 5,328                                |       | 11,692                   |       | 56                           |       | —           |       | 17,076                                |       |
| INVESTMENT IN SUBSIDIARIES                               |       | (28,793                              | )          | —                   |       | —                       |       | 28,793           |       | —                                |       |
| OTHER ASSETS                                             |       | 35,588                               |       | —                   |       | 3,417                        |       | —           |       | 39,005                                |       |
| TOTAL ASSETS                                             |       | $                                    | 606,059    |                     | $          | 58,719                       |       | $                | 83,521     |                                  | $          | 28,793 |   | $ | 777,092 |   |
|                                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)** |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT LIABILITIES:                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
|                                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Trade accounts payable                                   |       | $                                    | 76,515     |                     | $          | 5,848                        |       | $                | 13,919     |                                  | $          | — |   | $ | 96,282 |   |
| Accrued liabilities                                      |       | 56,639                               |       | 3,554                    |       | 4,645                        |       | —           |       | 64,838                                |       |
| Current portion of long-term debt                        |       | 1,994                                |       | —                   |       | —                       |       | —           |       | 1,994                                 |       |
| Due to (from) affiliates                                 |       | (133,109                             | )          | 75,190                   |       | 57,919                       |       | —           |       | —                                |       |
|                                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Total current liabilities                                |       | 2,039                                |       | 84,592                   |       | 76,483                       |       | —           |       | 163,114                               |       |
| LONG-TERM DEBT, Net of current portion                   |       | 840,354                              |       | —                   |       | —                       |       | —           |       | 840,354                               |       |
| OTHER LIABILITIES                                        |       | 23,608                               |       | —                   |       | 2,846                        |       | —           |       | 26,454                                |       |
| DEFERRED INCOME TAXES                                    |       | 24,354                               |       | 3,938                    |       | 3,141                        |       | —           |       | 31,433                                |       |
| SHARES SUBJECT TO MANDATORY REDEMPTION                   |       | 229,910                              |       | —                   |       | —                       |       | —           |       | 229,910                               |       |
| Total liabilities                                        |       | 1,120,265                            |       | 88,530                   |       | 82,470                       |       | —           |       | 1,291,265                             |       |
| MINORITY INTEREST                                        |       | —                               |       | —                   |       | 33                           |       | —           |       | 33                                    |       |
| REDEEMABLE STOCK:                                        |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Preferred stock                                          |       | 117                                  |       | —                   |       | —                       |       | —           |       | 117                                   |       |
| Common stock                                             |       | 6,645                                |       | —                   |       | —                       |       | —           |       | 6,645                                 |       |
| Total redeemable stock                                   |       | 6,762                                |       | —                   |       | —                       |       | —           |       | 6,762                                 |       |
| 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)                              |       | (650,974                             | )          | (45,237                  | )          | (22,767                      | )          | 68,004           |       | (650,974                              | )          |
| Stockholders’ notes receivable                      |       | (660                                 | )          | —                   |       | —                       |       | —           |       | (660                                  | )          |
| Accumulated other comprehensive loss                     |       | (11,843                              | )          | 1,406                    |       | (5,517                       | )          | 4,111            |       | (11,843                               | )          |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)                |       | (520,968                             | )          | (29,811                  | )          | 1,018                        |       | 28,793           |       | (520,968                              | )          |
| Total liabilities and stockholders’  (deficit)      |       | $                                    | 606,059    |                     | $          | 58,719                       |       | $                | 83,521     |                                  | $          | 28,793 |   | $ | 777,092 |   |

 

19

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING INCOME STATEMENT

FOR THE SIX MONTHS ENDED JUNE 30, 2005 (IN THOUSANDS) (UNAUDITED)

 
| ** **                              | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                            | ** ** |
| SALES , Net                             |       | $                                      | 436,261    |                                  | $          | 33,898                                    |       | $                | 66,039     |                                  | $          | (14,064 | ) | $ | 522,134 |   |
| COST OF SALES                           |       | 374,562                                |       | 30,961                                |       | 63,790                                    |       | (14,064          | )          | 455,249                               |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| GROSS PROFIT                            |       | 61,699                                 |       | 2,937                                 |       | 2,249                                     |       | —           |       | 66,885                                |       |
| OPERATING EXPENSES                      |       | 38,184                                 |       | 3,184                                 |       | 4,535                                     |       | —           |       | 45,903                                |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| OPERATING INCOME                        |       | 23,515                                 |       | (247                                  | )          | (2,286                                    | )          | —           |       | 20,982                                |       |
| INTEREST EXPENSE                        |       | (71,598                                | )          | (331                                  | )          | (2,656                                    | )          | —           |       | (74,585                               | )          |
| EQUITY IN EARNINGS OF SUBSIDIARIES      |       | (2,624                                 | )          | —                                |       | —                                    |       | 2,624            |       | —                                |       |
| OTHER INCOME (EXPENSE), Net             |       | (281                                   | )          | 8                                     |       | 4,212                                     |       | —           |       | 3,939                                 |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCOME (LOSS) BEFORE INCOME TAXES   |       | (50,988                                | )          | (570                                  | )          | (730                                      | )          | 2,624            |       | (49,664                               | )          |
| INCOME TAX PROVISION                    |       | 11                                     |       | 644                                   |       | 680                                       |       | —           |       | 1,335                                 |       |
| INCOME(LOSS) FROM CONTINUING OPERATIONS |       | (50,999                                | )          | (1,214                                | )          | (1,410                                    | )          | 2,624            |       | (50,999                               | )          |
| LOSS FROM DISCONTINUED OPERATIONS       |       | (560                                   | )          | —                                |       | —                                    |       | —           |       | (560                                  | )          |
| NET INCOME (LOSS)                       |       | $                                      | (51,559    | )                                     | $          | (1,214                                    | )          | $                | (1,410     | )                                     | $          | 2,624 |   | $ | (51,559 | ) |

 

20

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING INCOME STATEMENT

FOR THE SIX MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS) (UNAUDITED)

 
| ** **                              | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                            | ** ** |
| SALES , Net                             |       | $                                      | 385,362    |                                  | $          | 40,683                                    |       | $                | 58,708     |                                  | $          | (12,769 | ) | $ | 471,984 |   |
| COST OF SALES                           |       | 319,538                                |       | 34,908                                |       | 54,647                                    |       | (12,769          | )          | 396,324                               |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| GROSS PROFIT                            |       | 65,824                                 |       | 5,775                                 |       | 4,061                                     |       | —           |       | 75,660                                |       |
| OPERATING EXPENSES                      |       | 38,130                                 |       | 922                                   |       | 4,596                                     |       | —           |       | 43,648                                |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| OPERATING INCOME                        |       | 27,694                                 |       | 4,853                                 |       | (535                                      | )          | —           |       | 32,012                                |       |
| INTEREST EXPENSE                        |       | (73,967                                | )          | (314                                  | )          | (1,915                                    | )          | —           |       | (76,196                               | )          |
| EQUITY IN EARNINGS OF SUBSIDIARIES      |       | (3,980                                 | )          | —                                |       | —                                    |       | 3,980            |       | —                                |       |
| OTHER INCOME (EXPENSE), Net             |       | (279                                   | )          | (70                                   | )          | 298                                       |       | —           |       | (51                                   | )          |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCOME (LOSS) BEFORE INCOME TAXES   |       | (50,532                                | )          | 4,469                                 |       | (2,152                                    | )          | 3,980            |       | (44,235                               | )          |
| INCOME TAX PROVISION                    |       | 1,596                                  |       | 150                                   |       | 614                                       |       | —           |       | 2,360                                 |       |
| INCOME(LOSS) FROM CONTINUING OPERATIONS |       | (52,128                                | )          | 4,319                                 |       | (2,766                                    | )          | 3,980            |       | (46,595                               | )          |
| LOSS FROM DISCONTINUED OPERATIONS       |       | —                                 |       | (5,533                                | )          | —                                    |       | —           |       | (5,533                                | )          |
| NET INCOME (LOSS)                       |       | $                                      | (52,128    | )                                     | $          | (1,214                                    | )          | $                | (2,766     | )                                     | $          | 3,980 |   | $ | (52,128 | ) |

 

21

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2005 (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        |       | $                                      | 11,310     |                                  | $          | (108                                      | )          | $                | (6,635     | )                                     | $          | — |   | $ | 4,567 |   |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                        |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Proceeds from  sale of assets                                 |       | 38                                     |       | 605                                   |       | 4,527                                     |       | —           |       | 5,170                                 |       |
| Capital  expenditures for plant and equipment                 |       | (14,633                                | )          | (414                                  | )          | (1,580                                    | )          | —           |       | (16,627                               | )          |
| Net cash  (used in) provided by investing activities          |       | (14,595                                | )          | 191                                   |       | 2,947                                     |       | —           |       | (11,457                               | )          |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                        |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Issuance of  senior secured notes                             |       | 250,607                                |       | —                                |       | —                                    |       | —           |       | 250,607                               |       |
| Repayment/  issuance of senior secured discount notes         |       | (250,607                               | )          | —                                |       | —                                    |       | —           |       | (250,607                              | )          |
| Payment of  financing fees                                    |       | (7,507                                 | )          | —                                |       | —                                    |       | —           |       | (7,507                                | )          |
| Repayment of  capital leases and other, net                   |       | (1,374                                 | )          | —                                |       | —                                    |       | —           |       | (1,374                                | )          |
| Proceeds  from revolving debt, net                            |       | 14,800                                 |       | —                                |       | —                                    |       | —           |       | 14,800                                |       |
| Proceeds  from issuance (repurchase) of preferred stock       |       | (10                                    | )          | —                                |       | —                                    |       | —           |       | (10                                   | )          |
| Net cash  provided by financing activities                    |       | 5,909                                  |       | —                                |       | —                                    |       | —           |       | 5,909                                 |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH TO  DISCONTINUED OPERATIONS                              |       | (195                                   | )          | —                                |       | —                                    |       | —           |       | (195                                  | )          |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |       | (2,429                                 | )          | (2                                    | )          | 2,288                                     |       | —           |       | (143                                  | )          |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS         |       | —                                 |       | 81                                    |       | (1,400                                    | )          | —           |       | (1,319                                | )          |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND  CASH EQUIVALENTS AT BEGINNING OF THE PERIOD         |       | —                                 |       | 704                                   |       | 4,876                                     |       | —           |       | 5,580                                 |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND  CASH EQUIVALENTS AT END OF THE PERIOD               |       | $                                      | —     |                                  | $          | 785                                       |       | $                | 3,476      |                                  | $          | — |   | $ | 4,261 |   |

 

22

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 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        |       | $                                      | (29,045    | )                                     | $          | 1,860                                     |       | $                | 26,712     |                                  | $          | — |   | $ | (473 | ) |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                        |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Capital  expenditures for plant and equipment                 |       | (5,623                                 | )          | (328                                  | )          | (4,959                                    | )          | —           |       | (10,910                               | )          |
| Net cash  used in investing activities                        |       | (5,623                                 | )          | (328                                  | )          | (4,959                                    | )          | —           |       | (10,910                               | )          |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                        |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Net proceeds  from issuance of senior secured discount notes  |       | 225,299                                |       | —                                |       | —                                    |       | —           |       | 225,299                               |       |
| Payment of  financing fees                                    |       | (9,327                                 | )          | —                                |       | —                                    |       | —           |       | (9,327                                | )          |
| Repayment of  term debt and revolver                          |       | (195,412                               | )          | —                                |       | (24,163                                   | )          | —           |       | (219,575                              | )          |
| Repayment of  capital leases and other, net                   |       | (1,077                                 | )          | —                                |       | —                                    |       | —           |       | (1,077                                | )          |
| Proceeds  from revolving debt, net                            |       | 16,000                                 |       | —                                |       | —                                    |       | —           |       | 16,000                                |       |
| Net cash  (used in) provided by financing activities          |       | 35,483                                 |       | —                                |       | (24,163                                   | )          |             |       | 11,320                                |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH TO  DISCONTINUED OPERATIONS                              |       |                                   |       | (1,618                                | )          | —                                    |       | —           |       | (1,618                                | )          |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |       | (815                                   | )          | (578                                  | )          | 3,450                                     |       | —           |       | 2,057                                 |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS         |       | —                                 |       | (664                                  | )          | 1,040                                     |       | —           |       | 376                                   |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND  CASH EQUIVALENTS AT BEGINNING OF THE PERIOD         |       | —                                 |       | 1,192                                 |       | 2,116                                     |       | —           |       | 3,308                                 |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND  CASH EQUIVALENTS AT END OF THE PERIOD               |       | $                                      | —     |                                  | $          | 528                                       |       | $                | 3,156      |                                  | $          | — |   | $ | 3,684 |   |
|                                                               |            |                                        |            |                                       |            |                                           |            |                  |            |                                       |            |  |  |  |  |  |  |

 

23

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**ITEM 2.****          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The purpose of this section is to discuss and analyze ourconsolidated financial condition, liquidity and capital resources and resultsof operations. This analysis should be read in conjunction with Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in our Annual Report on Form 10-K for the year ended December 31,2004 (the “2004 10-K”). This section contains certain forward-lookingstatements within the meaning of federal securities laws that involve risks anduncertainties, including statements regarding our plans, objectives, goals,strategies and financial performance. Our actual results could differmaterially from the results anticipated in these forward-looking statements asa result of factors set forth under “Cautionary Statement for Forward-LookingInformation” below and elsewhere 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 23 facilities located on 21 sites in the United States, Australia,Canada, Germany and Mexico. Our sales have grown primarily as a result ofstrategic acquisitions made over the past several years, increased levels ofproduction at acquired facilities, return on capital expenditures and theoverall growth in the markets for film and flexible packaging products.

 

**Second Quarter Overview**

 

We recorded sales of $259.2 million in the three months ended June 30,2005.  This is a 10.2% increase fromsales of $235.2 million for the three months ended June 30, 2004, statedon a comparable basis excluding the results of the Pliant Solutions segment(which was sold during the third quarter of 2004 and accounted for as adiscontinued operation) for both periods. Second quarter 2005 sales measured in pounds were 211.0 million, whichrepresents a 3.3% decrease from the second quarter of 2004.

 

Total segment profit was $25.2 million for the three months ended June 30,2005, compared to $25.7 million for the three months ended June 30, 2004,presented on a comparable basis excluding the results of the Pliant Solutionssegment (which was sold during the third quarter of 2004 and accounted for as adiscontinued operation) for both periods. Segment profit, presented in accordance with generally acceptedaccounting principles (GAAP), reflects income from continuing operations beforeinterest expense, income taxes, depreciation, amortization, and restructuringcosts and non-cash charges. The decrease in segment profit of $0.5 millionbetween periods includes the successful recovery from customers of resin priceincreases to the Company and a gain from the sale of Alliant assets, offset bya decline in sales volume and increased freight and packaging costs.

 

Average sales price (“ASP”) for the three months ended June 30,2005 was $1.228 per pound as compared to $1.077 per pound for the three monthsended June 30, 2004.  This 14.0%increase generated approximately $32 million in incremental sales. However, ourraw material costs, of which 60% are resin related, increased approximately $27million.  Furthermore, while our waste inabsolute terms declined nearly 17.5% due to internal waste reduction programs,waste in dollars increased due to higher resin costs.  The sales volume decline between periodsyielded approximately $3 million less segment profit. Freight and utility costsincreased approximately $2 million between periods due to suppliers passingalong higher energy costs and packaging costs increased $2 million due to achange in product mix and more complex customer demands.  Lower production levels, driven by inventoryreduction initiatives, caused $2 million in under-absorbed overhead as comparedto 2004.  The gain on the sale of Alliantassets was $4 million.

 

On April 13, 2005 the Company sold the intellectual property,working capital, and equipment assets used in the Alliant business to an independentthird party for a purchase price of $6.3 million, subject to certainadjustments. During the second quarter, we received $5.2 million in cash, netof certain adjustments, with the balance of the purchase price of $0.63 millionin escrow, to be paid in equal installments in twelve and twenty four monthsafter closing. Net sales and net loss for this business from April 1, 2005through April 13, 2005 were negligible, while net sales and net loss forthe three months ended June 30, 2004 were $0.7 million and $0.2 million,respectively.

 

On April 8, 2005, Pliant Corporation commenced a consentsolicitation relating to its 11 1/8% Senior Secured Discount Notes due 2009(the “2004 Notes”) seeking consents, among other things, to (i) eliminatethe current requirement to pay cash interest on the notes beginning in 2007and, in lieu thereof, pay non-cash interest in the form of additional notesthrough maturity; (ii) increase the interest rate of the notes for whichconsents are received; (iii) increase the redemption prices of the notesfor which consents are received; and (iv) eliminate certain restrictivecovenants as they apply to notes for which consents are not received.  On May 6, 2005, Pliant consummated thissolicitation as consents to the proposed amendments were delivered with respectto $298.2 million aggregate principal amount at maturity of the 2004 Notes, allof which were accepted by Pliant.  As aresult, $250.6 principal amount of the Amended 2004 Notes were outstanding asof May 6, 2005.  On June 15,2005, we issued an additional $3.1 principal amount of the Amended 2004 Notesas payment in kind interest pursuant to the amended and restated indenture (the“Additional Notes”).

 

24

----

 

In addition, $7.8 million aggregate principal amount at maturity of2004 Notes with respect to which consents were not delivered remainoutstanding.  Pliant, certain of itssubsidiaries and the trustee also executed an amended and restated indenturegoverning the Amended 2004 Notes and the 2004 Notes with respect to whichconsents were not delivered.  Pliant,certain of its subsidiaries and J.P. Morgan Securities Inc., the solicitationagent for the consent solicitation, executed a registration rights agreementwith respect to the Amended 2004 Notes.

 

As a result of the amendments approved in the consent solicitation, theinterest rate of the Amended 2004 Notes was increased from 11 1/8% per annum to11 5/8% per annum.  The Amended 2004Notes no longer require payment of cash interest beginning in 2007.  Instead, they require payment of non-cashinterest in the form of additional notes through maturity.  The amendments also increased the redemption pricesof the amended notes.  In addition, theamended and restated indenture eliminates substantially all the restrictivecovenants contained in the indenture, as they relate to holders of the 2004Notes with respect to which consents were not delivered.  The transaction in which the terms of the2004 Notes were amended to become the Amended 2004 Notes was not registeredunder the Securities Act of 1933, as amended, or any state securities laws andthe Amended 2004 Notes may not be offered or sold in the United States absentregistration or an applicable exemption from the registration requirements ofthe Securities Act and any applicable state securities laws.  Pursuant to a registration rights agreement,Pliant agreed to consummate an exchange offer for the Amended 2004 Notes inwhich the company will exchange up to $253.8 million aggregate principal amountof the original Amended 2004 Notes for essentially identical notes which willbe registered under the Securities Act of 1933, as amended.

 

**Raw Material Costs**

 

The primary raw materialsused in the manufacture of most of our products are polypropylene resin,polyethylene resin and PVC resin. The prices of these materials are primarily afunction of the price of crude oil and natural gas liquids. Prices for thesecommodities have risen dramatically over the last year and could continue torise in the third and fourth quarters of 2005 and beyond.  We have not historically hedged our exposureto raw material increases.,  Raw materialcosts as a percentage of sales have increased to 53.1% for the second quarterof 2005, from 51.2% for the comparable period of 2004.

 

Tothe extent we are not able to pass along price increases of raw materials, orto the extent any such price increases are delayed, our cost of goods soldwould continue to increase and our gross profit and operating income wouldcorrespondingly decrease. Significant increases in raw material prices thatcannot be passed on to customers could have a material adverse effect on ourresults of operations and financial condition.

 

**Results of Operations**

 

The following table sets forth net sales, operating expenses, andoperating income, and such amounts as a percentage of net sales, for the threeand six months ended June 30, 2005 and 2004 (dollars in millions).

 
| ** **                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **$**                                | ** ** | **%****of  Sales**                 | ** ** | **$** | ** ** | **% of  Sales** | ** ** | **$** | ** ** | **% of  Sales** | ** ** | **$** | ** ** | **% of  Sales** | ** ** |
| ** **                                               | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                |       | $                                    | 259.2      |                               | 100.0      | % | $ | 235.2 |   | 100.0 | **%** | $ | 522.1 |   | 100.0 | **%** | $ | 472.0 |   | 100.0 | % |
| Cost of  sales                                           |       | 226.3                                |       | 87.3                               |       | 197.9 |   | 84.2 | ** ** | 455.2 |   | 87.2 |   | 396.3 |   | 84.0 |   |
| Gross profit                                             |       | 32.9                                 |       | 12.7                               |       | 37.3 |   | 15.8 |   | 66.9 |   | 12.8 |   | 75.7 |   | 16.0 |   |
|                                                     |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses before restructuring and other costs |       | 21.7                                 |       | 8.4                                |       | 21.9 |   | 9.3 |   | 43.8 |   | 8.4 |   | 43.7 |   | 9.2 |   |
| Restructuring  and other costs                           |       | 1.9                                  |       | 0.7                                |       | — |   | — |   | 2.1 |   | 0.4 |   | — |   | — |   |
| Total  operating expenses                                |       | 23.6                                 |       | 9.1                                |       | 21.9 |   | 9.3 |   | 45.9 |   | 8.8 |   | 43.7 |   | 9.2 |   |
| Operating  income                                        |       | $                                    | 9.3        |                               | 3.6        | % | $ | 15.4 |   | 6.5 | % | $ | 21.0 |   | 4.0 | % | $ | 32.0 |   | 6.8 | % |
|                                                          |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Three Months Ended June 30, 2005Compared with the Three Months Ended June 30, 2004**

 

*Net Sales*

 

Net sales increased by $24.0 million, or 10.2%, to $259.2 million forthe second quarter of 2005 from $235.2 million for the three months ended June 30,2004. The increase was primarily due to a 14.0% increase in our average sellingprice, partially offset by a 3.3% decrease in our sales volumes.  See “Operating Segment Review” below for adetailed discussion of sales volumes and selling prices by segment anddivision.

 

25

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*Gross Profit*

 

Gross profit decreased by $4.4 million to $32.9 million for the secondquarter of 2005, from $37.3 million for the three months ended June 30,2004. This decrease was primarily due to lower sales volume and mix.  See “Operating Segment Review” below for a detaileddiscussion of the margin variances by segment.

 

*Total Operating Expenses before Restructuringand Other Costs*

 

Total operating expenses before restructuring and other costs decreased$0.2 million, or 0.9%, to $21.7 million for the second quarter of 2005 from$21.9 million for the second quarter of 2004. Research and development costsincreased $0.8 million to $2.2 million for the second quarter of 2005 from $1.4million in the second quarter of 2004, while sales, general and administrativecosts decreased $1.0 million to $19.5 million for the second quarter of 2005from $20.5 million in the second quarter of 2004.

 

# *Restructuring and Other Costs*

# * *

Restructuring and other costs increased by $2.0 million from the secondquarter of 2004 due primarily to recognition in 2005 of $1.9 million in netcosts to terminate the remaining equipment leases associated with ourShelbyville, Indiana facility. No restructuring costs were recorded in thesecond quarter of 2004. During the second quarter of 2005, $0.1 million ofcosts were also recorded for severance and other costs associated with ourHarrisville, Rhode Island plant closure in 2004 and $0.2 million in severancecosts were recorded in connection with the sale of the Alliant assets, offsetin part by reversals to income of $0.2 million of reserves from our previouscorporate relocation and the shutdown of our Singapore operations.Restructuring costs associated with our Shelbyville, Indiana facility and thesale of our Alliant assets are reflected in our Specialty Products Groupresults, while restructuring costs for Harrisville, Rhode Island are reflectedin our Engineered Films segment.

 

*Operating Income*

 

Operating income decreased by $6.1 million to $9.3 million for thesecond quarter of 2005, from $15.4 million for the second quarter of 2004, dueto lower sales volume, unfavorable product mix, additional restructuring costs,and greater emphasis on research and development.  In addition, operating income for the secondquarter of 2004 was favorably affected by a curtailment gain of $1.6 millionrelated to the curtailment of the U.S. salaried pension plan.  (See note 12 to the condensed consolidatedfinancial statements).

 

*Interest Expense*

 

Interest expense on current and long-term debt increased by $4.6 million,or 18.7%, to $29.2 million for the three months ended June 30, 2005 from$24.6 million for the three months ended June 30, 2004. This increase wasprincipally due to a charge of $2.6 million in the second quarter of 2005 forunderwriting, legal and accounting fees associated with consummation of ourconsent solicitation and $2.0 million incremental interest associated with ouroutstanding revolver balance and lines of credit.

 

Interest expense on preferred stock reflects the dividends andaccretion on the redeemable preferred stock of the Company that is classifiedas interest expense in accordance with SFAS No. 150, which we adoptedeffective January 1, 2004. Effective October 1, 2005, the annual dividend rate will increasefrom 14% per annum to 16% per annum if we do not pay all accrued dividends incash on September 30, 2005.

 

*Other Income (Expense)*

 

Other income was $4.1 million for the three months ended June 30,2005, as compared to other income of $0.1 million for the three months ended June 30,2004. The other income for the three months ended June 30, 2005 included a$4.1 million gain on the sale of our Alliant assets in our Specialty GroupSegment.

 

*Income Tax Expense*

 

Income tax expense for the three months ended June 30, 2005 was$0.4 million on pretax losses of $25.5 million as compared to income taxexpense of $0.7 million on pretax losses of $17.7 million for the same periodin 2004. 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 reflects foreign income taxes.

 

*Loss From Continuing Operations*

 

Loss from continuing operations increased by $7.5 million to $25.9million for the second quarter of 2005, from $18.4 million for the firstquarter of 2004, due to the factors discussed above.

 

26

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*Discontinued Operations*

 

On September 30, 2004, we sold substantially all of the assets ofour wholly-owned subsidiary, Pliant Solutions Corporation.  Losses from these discontinued operations forthe three months ended June 30, 2005 and June 30, 2004 were $0.2million and $2.9 million, respectively.

 

**Six Months Ended June 30, 2005 Comparedwith the Six Months Ended June 30, 2004**

 

*Net Sales*

 

Net sales increased by $50.1 million, or 10.6%, to $522.1 million forthe six months ended June 30, 2005 from $472.0 million for the six monthsended June 30, 2004. The increase was primarily due to a 14.4% increase inour average selling price resulting primarily from the pass through ofincreases in our raw material prices to customers offset by a 3.3% decrease insales volume.  See “Operating SegmentReview” below for a detailed discussion of sales volumes and selling prices bysegment and division.

 

*Gross Profit*

 

Gross profit decreased by $8.8 million to $66.9 million for six monthsended June 30, 2005, from $75.7 million for the six months ended June 30,2004. This decrease was primarily due to lower sales volume.  See “Operating Segment Review” below for adetailed discussion of the margin variances by segment.

 

*Total Operating Expenses before Restructuringand Other Costs*

 

Total operating expenses before restructuring and other costs increased$0.1 million, or 0.2%, to $43.8 million for the six months ended June 30,2005 from $43.7 million for the six months ended June 30, 2004. Researchand development costs increased $0.9 million to $4.2 million for the six monthsended June 30, 2005 from $3.3 million for the six months ended June 30,2004, while sales, general and administrative costs decreased $0.8 million to$39.6 million six months ended June 30, 2005 from $ 40.4 million for thesix months ended June 30, 2004.

 

# *Restructuring and Other Costs*

# * *

Restructuring and other costs increased by $2.1 million from the sixmonths ended June 30, 2004 due primarily to recognition in 2005 of $1.9million in net costs to terminate the remaining equipment leases associatedwith our Shelbyville, Indiana facility. No restructuring costs were recorded in the six months ended June 30,2004. During the six months ended June 30, 2005, $0.2 million costs werealso recorded for severance and other costs associated with our Harrisville,Rhode Island plant closure in 2004 and $0.2 million in severance costs wererecorded in connection with the sale of our Alliant business, offset in part byreversals to income of $0.2 million of reserves from our previous corporaterelocation and the shutdown of our Singapore operations as all costs for theseprograms have been incurred. Restructuring costs associated with ourShelbyville, Indiana facility and the sale of our Alliant assets are reflectedin our Specialty Products Group results, while restructuring costs for Harrisville,Rhode Island are reflected in our Engineered Films segment.

 

*Operating Income*

 

Operating income decreased by $11.0 million to $21.0 million for thesix months ended June 30, 2005, from $32.0 million for the six monthsended June 30, 2004, due to lower sales volume, unfavorable product mix,additional restructuring costs, and greater emphasis on research anddevelopment.  In addition operatingincome for the six months ended June 30, 2004 was favorably affected by acurtailment gain of $1.6 million related to the curtailment of the U.S.salaried pension plan.  (See Note 12 tothe condensed consolidated financial statements).

 

*Interest Expense*

 

Interest expense on current and long-term debt decreased by $3.5million, or 6.0%, to $55.6 million for the six months ended June 30, 2005from $59.1 million for the six months ended June 30, 2004. This decreasewas principally due to a charge in 2004 for the write-off of previouslycapitalized financing fees and losses related to interest rate derivatives totaling$10.1 million. Excluding this prior year write-off, interest expense increased$6.6 million due to increased accretion of the original issue discountassociated with our 2004 Notes and increased interest costs associated with ourAmended 2004 Notes. In addition, in the second quarter of 2005, we recordedcharges of $2.6 million for underwriting, legal and accounting fees associatedwith our consent solicitation for our 2004 Notes.

 

Interest expense on preferred stock reflects the dividends and accretionon the redeemable preferred stock of the Company that is classified as interestexpense in accordance with SFAS 150, which we adopted on January 1,2004.  Effective October 1, 2005,the annual dividend rate will increase from 14% per annum to 16% per annum ifwe do not pay all accrued dividends in cash on 

September 30, 2005.

 

27

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*Other Income (Expense)*

 

Other income was $3.9 million for the six months ended June 30,2005, as compared to other expense of $0.1 million for the six months ended June 30,2004. The other income for the six months ended June 30, 2005 included a$4.1 million gain on sale of Alliant offset by $0.2 million of other lesssignificant items.

 

*Income Tax Expense*

 

Income tax expense for the six months ended June 30, 2005 was $1.3million on pretax losses from continuing operations of $50.0 million ascompared to $2.4 million on pretax losses from continuing operations of $44.2million for the same period in 2004. Income tax benefits related to netoperating losses in the United States were offset by a valuation allowance asthe realization of these tax benefits is not certain. Therefore, the income taxexpense in the statements of operations primarily reflects foreign incometaxes.

 

*Loss From Continuing Operations*

 

Loss from continuing operations increased by $4.4 million to $51.0million for the six months ended June 30, 2005, from $46.6 million for thesix months ended June 30, 2004, due to the factors discussed above.

 

*Discontinued Operations*

 

On September 30, 2004, we sold substantially all of the assets ofour wholly-owned subsidiary, Pliant Solutions Corporation.  Losses from these discontinued operations forthe six months ended June 30, 2005 and June 30, 2004 were $0.6million and $5.5 million, respectively.

 

**OperatingSegment Review**

 

*General*

 

We evaluate the performance of our operating segments based on netsales (excluding inter-company sales) and segment profit.  The segment profit reflects income fromcontinuing operations before interest expense, income taxes, depreciation,amortization, restructuring costs and other non-cash charges.  For more information on our operatingsegments, including a reconciliation of segment profit to income before taxes,see Note 10 to the condensed consolidated financial statements includedelsewhere in this report.

 

We have four reporting segments: Engineered Films, Performance Films, Industrial Films and SpecialtyProducts Group.

 

Summary of segment information (in millions of dollars):

 
| ** **                                 | ** ** | **Engineered  Films** | ** ** | **Performance  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Products********Group** | ** ** | **Corporate/  Other** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|--------------------------------------|------------|-----------------------|------------|-----------|------------|
| **Three  months ended June 30, 2005** |       |                  |       |                   |       |                  |       |                                 |       |                  |       |      |       |
| Net sales                                  |       | $                     | 58.9       |                   | $          | 25.1                  |       | $                                    | 73.2       |                  | $          | 100.3     |       | $ | 1.7 |   | $ | 259.2 |   |
| Segment  profit (loss)                     |       | 7.0                   |       | 2.8                    |       | 5.5                   |       | 16.0                                 |       | (6.1                  | )          | 25.2      |       |
|                                       |       |                  |       |                   |       |                  |       |                                 |       |                  |       |      |       |
| **Three  months ended June 30, 2004** |       |                  |       |                   |       |                  |       |                                 |       |                  |       |      |       |
| Net sales                                  |       | $                     | 55.2       |                   | $          | 24.3                  |       | $                                    | 60.4       |                  | $          | 93.8      |       | $ | 1.5 |   | $ | 235.2 |   |
| Segment  profit (loss)                     |       | 9.3                   |       | 4.3                    |       | 6.9                   |       | 12.6                                 |       | (7.4                  | )          | 25.7      |       |
|                                       |       |                  |       |                   |       |                  |       |                                 |       |                  |       |      |       |
| **Six months  ended June 30, 2005**   |       |                  |       |                   |       |                  |       |                                 |       |                  |       |      |       |
| Net sales                                  |       | $                     | 118.5      |                   | $          | 50.2                  |       | $                                    | 146.0      |                  | $          | 203.1     |       | $ | 4.3 |   | $ | 522.1 |   |
| Segment  profit (loss)                     |       | 15.2                  |       | 6.4                    |       | 11.9                  |       | 27.3                                 |       | (13.8                 | )          | 47.0      |       |
|                                       |       |                  |       |                   |       |                  |       |                                 |       |                  |       |      |       |
| **Six  months ended June 30, 2004**   |       |                  |       |                   |       |                  |       |                                 |       |                  |       |      |       |
|                                       |       |                  |       |                   |       |                  |       |                                 |       |                  |       |      |       |
| Net sales                                  |       | $                     | 110.6      |                   | $          | 50.1                  |       | $                                    | 118.7      |                  | $          | 189.9     |       | $ | 2.7 |   | $ | 472.0 |   |
| Segment  profit (loss)                     |       | 19.2                  |       | 8.7                    |       | 13.6                  |       | 26.0                                 |       | (14.3                 | )          | 53.2      |       |

 

28

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**Three months ended June 30, 2005compared with the three months ended June 30, 2004**

 

*Engineered Films*

 

*Net Sales*.  Net sales in Engineered Films increased by$3.7 million, or 6.7%, to $58.9 million for the quarter ended June 30,2005 from $55.2 million for 2004. This increase was due to an increase in ouraverage selling prices of 11.4%, principally due to the pass-through of rawmaterial price increases and improvements in our sales mix, offset by a 4.2%decrease in sales volume.

 

*Segment profit*.  The Engineered Films segment profit was $7.0million for the quarter ended June 30, 2005, as compared to $9.3 millionfor the same period in 2004.  Thisdecrease in segment profit was primarily due to lower gross margins from salesvolume declines, compression between our average selling price and average rawmaterial costs related to contractual customers and the competitive environmentwith transactional customers, and increased bad debt expense relating to thebankruptcy of a single customer.

 

*Performance Films*

 

*Net sales*.  The net sales of our Performance Films segmentincreased $0.8 million, or 3.3%, to $25.1 million for the quarter ended June 30,2005 from $24.3 million for the same period in 2004. This increase wasprincipally due to an increase in our average selling prices of 12.9%,primarily due to the pass through of resin price increases to customers,partially offset by a decrease in sales volumes of 8.4%.

 

*Segment profit*.  Performance Films segment profit was $2.8million for the quarter ended June 30, 2005, as compared to $4.3 millionfor the same period in 2004.  Thisdecrease in segment profit was primarily due to sales volume declines and itsassociated operating inefficiencies.

 

*Industrial Films*

 

*Net sales*.  The net sales of our Industrial Films segmentincreased by $12.8 million, or 21.2%, to $73.2 million for the quarter ended June 30,2005 from $60.4 million for the quarter ended June 30, 2004. This increasewas due to higher sales volumes by 2.7% and an increase in our average sellingprices of 18.2%, primarily from the pass through of raw material priceincreases and higher sales of value added products.

 

* Segment profit*.  The Industrial Films segment profit was $5.5million for the quarter ended June 30, 2005, as compared to $6.9 millionfor the same period in 2004.  This $1.4million decrease in segment profit was due to a significant shift in productmix, higher energy-related freight and utilities costs, and inefficienciesassociated with the introduction of new products.

 

*Specialty Products Group*

 

*Net sales*.  The net sales of our Specialty Products Groupsegment increased $6.5 million, or 6.9% to $100.3 million for the quarter endedJune 30, 2005 from $93.8 million for the quarter ended June 30, 2004.This increase reflects a 15.2% increase in our average selling prices, offsetby a sales volume decrease of 7.2%.

 

Net sales in our Specialty Films division increased $3.7 million, or8.8%, to $45.9 million for the quarter ended June 30, 2005 from $42.2million for the quarter ended June 30, 2004. This increase reflects anincrease in our average selling prices of 14.5% offset by a decrease in salesvolume of 5.0% as a result of one of our major customers losing part of itsmarket share.  Net sales in our PrintedProducts Films division increased $2.7 million, or 5.2%, to $54.4 million forthe quarter ended June 30, 2005 from $51.7 million for the quarter ended June 30,2004. This increase reflects an increase in our average selling prices of 16.9%offset by a decrease in sales volume of 9.9% largely due to a major customerwho filed for reorganization late last year. In addition, the Printed Products Films Division is experiencing adecline in sales volume attributable to an inventory draw-down by our foodindustry customers and Pliant as a result of a regulatory change requiringtransfat labeling.

 

*Segment profit*.  The Specialty Products Group segment profitwas $16.0 million for the quarter ended June 30, 2005, as compared to$12.6 million for the quarter ended June 30, 2004. This $3.4 millionincrease is primarily attributable to a $4.1 million gain on sale of Alliant’sassets, and expanded gross margin due to pass through of resin price increasesoffset by decreased sales volume and increased freight and packaging costs.

 

29

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*Corporate/Other*

 

Corporate/Other includes our corporate headquarters in Schaumburg,Illinois and our research and development facility in Newport News, Virginia.Unallocated corporate expenses decreased by $1.3 million to $6.1 million forthe quarter ended June, 2005, from $7.4 million for the quarter ended June 30,2004.  This decrease was primarily due toa decrease of $1.0 million in payroll related costs.

 

**Six months ended June 30, 2005 comparedwith the six months ended June 30, 2004**

 

*Engineered Films*

 

*Net Sales*.  Net sales in Engineered Films increased by$7.9 million, or 7.1%, to $118.5 million for the six months ended June 30,2005 from $110.6 million the six months ended June 30, 2004. This increasewas due to an increase in our average selling prices of 13.0%, principally dueto the pass-through of raw material price increases and improvements in oursales mix, offset by a 5.2% decrease in sales volume.

 

*Segment profit*.  The Engineered Films segment profit was $15.2million for the six months ended June 30, 2005, as compared to $19.2million for the same period in 2004. This decrease in segment profit was primarily due to lower gross marginsfrom sales volume declines, compression between our average selling price andaverage raw material costs related to contractual customers and the competitiveenvironment with transactional customers, and increased bad debt expenserelating to the bankruptcy of a significant customer.

 

*Performance Films*

 

*Net sales*.  The net sales of our Performance Filmssegment increased $0.1 million to $50.2 million for the six months ended June 30,2005 from $50.1 million for the same period in 2004. This increase wasprincipally due to an increase in our average selling prices of 10.8%,primarily due to the pass through of resin price increases to customers, offsetby a decrease in our sales volumes of 9.6%.

 

*Segment profit*.  Performance Films segment profit was $6.4million for the six months ended June 30, 2005, as compared to $8.7million for the same period in 2004. This decrease in segment profit was primarily due to sales volumedeclines and its associated operating inefficiencies and additional bad debtexpense.

 

*Industrial Films*

 

*Net sales*.  The net sales of our Industrial Films segmentincreased by $27.3 million, or 23.0%, to $146.0 million for six months ended June 30,2005 from $118.7 million for the six months ended June 30, 2004. Thisincrease was due to higher sales volumes by 3.6% and an increase in our averageselling prices of 18.8%, primarily from the pass through of raw material priceincreases and higher sales of value added products.

 

* Segment profit*.  The Industrial Films segment profit was $11.9million for the six months ended June 30, 2005, as compared to $13.6million for the same period in 2004. This $1.7 million decrease in segment profit was due to a significantshift in product mix, higher energy-related freight and utilities costs, andinefficiencies associated with the introduction of new products.

 

*Specialty Products Group*

 

*Net sales*.  The net sales of our Specialty Products Groupsegment increased $13.2 million, or 7.0% to $203.1 million for the six monthsended June 30, 2005 from $189.9 million for the six months ended June 30,2004. This increase reflects a 14.9% increase in our average selling prices,offset by a sales volume decrease of 7.0%.

 

Net sales in our Specialty Films division increased $6.0 million, or6.7%, to $95.7 million for the six months ended June 30, 2005 from $89.7million for the six months ended June 30, 2004. This increase reflects anincrease in our average selling prices of 13.2% offset by a decrease in salesvolume of 5.8% as a result of one of our major customers losing part of itsmarket share.  Net sales in our PrintedProducts Films division increased $7.2 million, or 7.2%, to $107.4 million for thesix months ended June 30, 2005 from $100.2 million for the six monthsended June 30, 2004. This increase reflects an increase in our averageselling prices of 17.1% offset by a decrease in sales volume of 8.5% largelydue to a major customer who filed for reorganization late last year.  In addition, the Printed Products FilmsDivision is experiencing a decline in sales volume attributable to an inventorydraw-down by our food industry customers and Pliant as a result of a regulatorychange requiring transfat labeling and the reduction of sales volume from therationalization of marginally profitable customer accounts late in 2004.

 

30

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*Segment profit*.  The Specialty Products Group segment profitwas $27.3 million for the six months ended June 30, 2005, as compared to$26.0 million for the six months ended June 30, 2004. This $1.3 millionincrease is primarily attributable to a $3.9 million increase in gross marginattributable to the pass through of resin price increases, lower sales, generaland administrative costs and a $4.1 million gain on sale of Alliant’s assets,offset by increased freight, packaging and labor costs.

 

*Corporate/Other*

 

Corporate/Other includes our corporate headquarters in Schaumburg, Illinoisand our research and development facility in Newport News, Virginia.Unallocated corporate expenses decreased by $0.5 million to $13.8 million forsix months ended June 30, 2005, from $14.3 million for the six monthsended June 30, 2004, primarily due to a decrease in payroll related costs.

 

**Liquidity and Capital Resources**

 

*Sources of capital*

 

Our principal sources of funds are cash generated by our operations andborrowings under our revolving credit facility. In addition, we have raisedfunds through the issuance of senior debt and the sale of shares of ourpreferred stock.  As of June 30,2005, our outstanding long-term debt consisted of: $38.8 million of borrowingsunder our revolving credit facility; $254.9 million of our Amended 2004 Notes;$313.7 million of our 2000/2002 Notes; $250.0 million of our 2003 Notes; and$6.7 million of our 2004 Notes.

 

Although our $100 million revolving credit facility is at a variablerate of interest, this facility carries substantially fewer financial covenantsthan our previous credit facilities, thereby substantially reducing ourexposure to covenant default risk.  Inaddition, we have realized greater short-term liquidity and flexibility in ourdebt structure through elimination of a number of the financial and othercovenants in our prior credit facilities, elimination of current requirementsto pay cash interest on our Amended 2004 Notes by requiring payment of non-cashinterest in the form of additional notes through maturity.

 

Revolving Credit Facility

 

On February 17, 2004, we entered into a revolving credit facilityproviding up to $100 million (subject to the borrowing base and otherlimitations described below).  Therevolving credit facility includes a $15 million letter of credit sub-facility,with letters of credit reducing availability under the revolving creditfacility.

 

The revolving credit facility is secured by a first priority securityinterest in substantially all our inventory, receivables and deposit accounts,100% of the capital stock of, or other equity interests in, our existing andfuture domestic subsidiaries and foreign subsidiaries that are note guarantors,65% of the capital stock of, or other equity interests in existing and futurefirst-tier foreign subsidiaries, investment property and certain other assetsof the Company and the note guarantors (the “Second - Priority Collateral”) anda second-priority security interest in our real property, fixtures, equipment,intellectual property and other assets (“First - Priority Collateral”).

 

The revolving credit facility matures on February 17, 2009.  The interest rates are at LIBOR plus 2.5% to3.0% or ABR plus 1.5% to 2.0%.  Theaverage rate on borrowings outstanding during the second quarter of 2005 was7.42%.  The commitment fee for the unusedportion of the revolving credit facility is 0.50% per annum.

 

The borrowings under the revolving credit facility may be limited to areduced availability.  ReducedAvailability (RA) is defined as: if the borrowing base is less than$110,000,000 and the Fixed Charge Coverage Ratio (FCCR) is less than 1.1, thereduced availability is the borrowing base minus $10,000,000.  Furthermore, if the FCCR is less than thatprescribed in our credit agreement, RA is the lesser of the commitment or theborrowing base minus $15,000,000.  As of June 30,2005, we had approximately $50.2 million available for borrowing under ourrevolving credit agreement.

 

31

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11 5/8% Senior Secured Notes due 2009 (the “Amended2004 Notes”)

 

On April 8, 2005, Pliant Corporation commenced a consentsolicitation relating to its 2004 Notes seeking consents, among other things,to (i) eliminate the current requirement to pay cash interest on the notesbeginning in 2007 and, in lieu thereof, pay non-cash interest in the form ofadditional notes through maturity; (ii) increase the interest rate of thenotes for which consents are received; (iii) increase the redemptionprices of the notes for which consents are received; and (iv) eliminatecertain restrictive covenants as they apply to notes for which consents are notreceived.  On May 6, 2005, Pliantconsummated this solicitation as consents to the proposed amendments weredelivered with respect to $298.2 million aggregate principal amount at maturityof the 2004 Notes, all of which were accepted by Pliant.  As a result, $250.6 million principal amountof the Amended 2004 Notes were outstanding as of May 6, 2005.  On June 15, 2005, we issued anadditional $3.1 million principal amount of the Amended 2004 Notes as paymentin kind interest pursuant to the amended and restated indenture (the “AdditionalNotes”).

 

In addition, $7.8 million aggregate principal amount at maturity of2004 Notes with respect to which consents were not delivered remain outstanding.  Pliant, certain of its subsidiaries and thetrustee also executed an amended and restated indenture governing the Amended2004 Notes and the 2004 Notes with respect to which consents were notdelivered.  Pliant, certain of itssubsidiaries and J.P. Morgan Securities Inc., the solicitation agent for theconsent solicitation, executed a registration rights agreement with respect tothe Amended 2004 Notes.

 

As a result of the amendments approved in the consent solicitation, theinterest rate of the Amended 2004 Notes was increased from 11 1/8% per annum to11 5/8% per annum.  The Amended 2004Notes no longer require payment of cash interest beginning in 2007.  Instead, they require payment of non-cashinterest in the form of additional notes through maturity.  The amendments also increased the redemptionprices of the amended notes.  Inaddition, the amended and restated indenture eliminates substantially all therestrictive covenants contained in the indenture, as they relate to holders ofthe 2004 Notes with respect to which consents were not delivered.  The transaction in which the terms of the2004 Notes were amended to become the Amended 2004 Notes was not registeredunder the Securities Act of 1933, as amended, or any state securities laws andthe Amended 2004 Notes may not be offered or sold in the United States absentregistration or an applicable exemption from the registration requirements ofthe Securities Act and any applicable state securities laws.  Pursuant to a registration rights agreement,Pliant agreed to consummate an exchange offer for the Amended 2004 Notes inwhich the company will exchange up to $253.8 million aggregate principal amountof the original Amended 2004 Notes for essentially identical notes which willbe registered under the Securities Act of 1933, as amended.

 

On or after June 15, 2007, we may redeem some or all of the Amended2004 Notes at the following redemption prices (expressed as percentages of thesum of the principal amount, plus accrued and unpaid interest); 111.625% ifredeemed prior to June 15, 2007; 108.719% if redeemed prior to December 15,2007; 105.813% if redeemed prior to June 15, 2008; 102.906% if redeemedprior to December 15, 2008; and 100.000% if redeemed on or before June 15,2009.

 

Prior to June 15, 2007, we may redeem up to a maximum of 35% ofthe principal amount of the Amended 2004 Notes with the net cash proceeds ofcertain equity offerings by us at a redemption price equal to 111.625% of thesum of the principal amount plus accrued and unpaid interest, provided thatafter giving effect to such redemption (i) at least 65% of the principalamount of the Amended 2004 Notes remain outstanding and (ii) any suchredemption by us is made within 120 days after such equity offering.

 

The Amended 2004 Notes are secured, on a first-priority basis by theFirst-Priority Collateral and on a second-priority basis by the Second-PriorityCollateral.

 

11 1/8% Senior Secured Discount Notes due2009 (the “2004 Notes”)

 

On February 17, 2004 we completed the sale of $306 million ($225.3million of proceeds) principal at maturity of our 2004 Notes. The proceeds ofthe offering were used to repay and terminate the credit facilities thatexisted at December 31, 2003.  The2004 Notes are guaranteed by the same domestic subsidiaries that guarantee the2000/2002 Notes and the 2003 Notes and certain of our foreign subsidiaries thatguarantees indebtedness of the Company. The 2004 Notes were issued under an indenture dated February 17,2004, among us, the subsidiary guarantors party thereto and Wilmington TrustCompany, as trustee.

 

32

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The 2004 Notes are senior secured obligations of the Company and aresecured by first-priority security interests in the First-Priority Collateral,which consists of substantially all the real property, fixtures, equipment,intellectual property and all other assets, other than Second-PriorityCollateral, of the Company and the subsidiary guarantors, together with theproceeds therefrom and improvements, alterations and repairs thereto, as wellas any assets required to be added to the First-Priority Collateral pursuant tothe terms of the indenture or related security documents.  The 2004 Notes are secured by asecond-priority interest in the Second-Priority Collateral, rank equally inright of payment with all existing and any future subordinated obligations ofthe Company and are effectively subordinated to all liabilities and preferredstock of each subsidiary guarantor.  The2004 Notes will mature on June 15, 2009. On May 6, 2005 we completed the consent solicitation relating toour 2004 Notes.  Consents were deliveredwith respect to $298.2 million aggregate principal amount at maturity of the2004 Notes.  As a result, $7.8 millionaggregate principal amount at maturity of 2004 Notes remain outstanding.

 

Unless we elect to pay cash interest as described below, and exceptunder certain limited circumstances, the 2004 Notes will accrete from the dateof issuance 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 ($7.8 million in theaggregate assuming no redemption or other repayments).  Commencing on December 15, 2006, intereston the 2004 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 2004 Notes will cease toaccrete after such interest payment date and (iii) the outstandingprincipal amount at the stated maturity of each note will equal the accretedvalue of such 2004 Notes as of such interest payment date.

 

At any time prior to June 15, 2007, we may redeem up to 35% of theaccreted value of the 2004 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 2004 Notes remains outstanding after such redemption and (ii) anysuch redemption by us is made within 120 days after such equity offering.

 

11 1/8% Senior Secured Notesdue 2009 (the “2003 Notes”)

 

Our 2003 Notes rank equally with our existing and future senior debtand rank senior to our existing and future subordinated indebtedness, includingthe 2000/2002 Notes. The 2003Notes are secured by a first priority security interest in the First PriorityCollateral and a second priority security interest in the Second PriorityCollateral.  The 2003 Notes are guaranteedby some of our subsidiaries.

 

Prior to June 1, 2007, we may, on one or more occasions, redeem upto a maximum of 35% of the original aggregate principal amount of the 2003Notes with the net cash proceeds of one or more equity offerings by us at a redemptionprice equal to 111.125% of the principal amount thereof, plus accrued andunpaid interest.  Otherwise, we may notredeem the 2003 Notes due 2009 prior to June 1, 2007.  On or after that date, we may redeem some orall of the 2003 Notes at the following redemption prices (expressed as apercentage of principal amount), plus accrued and unpaid interest: 105.563% ifredeemed prior to 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 Notesdue 2010 (the “2000/2002 Notes”)

 

Our 2000/2002 Notes are subordinated to all of our existing and futuresenior debt, rank equally with any future senior subordinated debt, and ranksenior to any future subordinated debt. 2000/2002 Notes due 2010 are guaranteedby some of our subsidiaries. The 2000/2002 Notes are unsecured.

 

33

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Preferred stock

 

We have approximately $242.5 million of Series A CumulativeExchangeable Redeemable Preferred Stock outstanding. The Series Apreferred stock accrues dividends at the rate of 14% per annum; however, ourboard of directors has never declared or paid any dividends on the Series Apreferred stock. Unpaid dividends accumulate and are added to the liquidationamount of the Series A preferred stock. Effective October 1, 2005,the annual dividend rate will increase from 14% per annum to 16% per annum ifwe do not pay all accrued dividends in cash on September 30, 2005. The Series Apreferred stock is mandatorily redeemable on May 31, 2011.

 

In addition, we have $0.1 million of Series B Redeemable PreferredStock outstanding.  During 2004, weadopted a 2004 Restricted Stock Incentive Plan, pursuant to which we sold toour President and Chief Executive Officer and selected additional officers ofthe Company, all 720 shares of a newly-created, non-voting Series BRedeemable Preferred Stock (the “Series B Preferred Stock”) for a cashpurchase price of $162 per share.  Theseshares of Series B Preferred Stock were issued in private transactionswith officers of the Company and therefore were exempt from the registrationrequirements of the Securities Act of 1933. During 2005, 76 authorized shares of Series B Preferred Stock havebeen repurchased from officers for $162 per share.

 

*Net Cash Provided by/Used in Continuing OperatingActivities*

* *

Net cash provided by continuing operating activities was $4.6 millionfor the six months ended June 30, 2005, an increase of $5.1 million, ascompared to net cash used in continuing operating activities of $0.5 millionfor the same period in 2004.  Thisincrease was due to reductions in working capital items of $14.1 million,offset by increased loss from continuing operations of $4.7 million and gain ondisposal of assets of $4.2 million.

 

*Net Cash Used in Investing Activities*

* *

Net cash used in investing activities increased $0.6 million to $11.5million for the six months ended June 30, 2005, from $10.9 million for thesix months ended June 30, 2005. This increase included an increase incapital expenditures from $10.9 million in 2004 to $16.6 million in 2005,offset by $5.2 million in net proceeds from sale of Alliant.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities was $5.9 million for the six monthsended June 30, 2005, as compared to net cash provided by financingactivities of $11.3 million for the six months ended June 30, 2004. Theactivity for the first six months of 2005 includes an exchange of $250.6million accreted value of our 2004 Notes for $250.6 million in Amended 2004Notes, $4.9 million in consent fees and $2.6 million of associated underwriter,legal and accountants fees; repayment of $1.4 million in obligations undercapital leases and insurance related financing and; $14.8 million borrowings,net of repayments, under a revolving credit facility.  The activity for the first six months of 2004includes the net proceeds from the issuance of senior secured discount notes of$225.3 million net of financing fees paid of $9.3 million and the repayment ofthe old credit facilities of $219.6 million. In addition, we borrowed $16.0million net of repayments under the credit facility for operations and paid$1.1 million for capital leases.

 

*Liquidity*

* *

As of June 30,2005, we had approximately $77.6 million of working capital excluding currentmaturities of long term debt.  As of June 30,2005 we have approximately $46.9 million available for borrowings underour $100.0 million revolving credit facility, with outstanding borrowings ofapproximately $38.8 million and approximately $7.1 million of letters of credit issuedunder our revolving credit facility. The borrowings under the revolvingcredit facility are limited to75% of the lesser of the total commitment at such time and the borrowing basein effect at such time if the fixed coverage ratio defined in the new revolvingcredit facility is less than or equal to 1.10 to 1.00.  Daily borrowingsoutstanding under the revolving credit facility averaged $46.2 million duringthe second quarter.  Our outstandingborrowings under our revolving credit facility fluctuate significantly duringeach quarter as a result of the timing of payments for raw materials, capitaland interest, as well as the timing of customer collections.

 

As of June 30,2005, we had approximately $4.3 million in cash and cash equivalents.  A portion of this amount was held by ourforeign subsidiaries.  Repatriation taxrates may limit our ability to access cash and cash equivalents generated byour foreign operations for use in our U.S. operations, including to payprincipal and interest on outstanding borrowings.

 

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Our total capitalexpenditures were approximately $24 million in 2004 and are expected to beapproximately $33 million in 2005.  Theseexpenditures are focused on projects to lower operating costs, add capacity forhigh value products, expand research and development programs, and bring newinnovative products to market.

 

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

 

In an attempt tomanage our liquidity needs, we and our affiliates are analyzing and formulatingpotential strategic alternatives to reduce our leverage.  In this regard, we or our affiliates mayrepurchase all or a portion of our Notes, through an exchange offer, a tenderoffer or open-market or privately-negotiated purchases, or through acombination of any of these or other alternatives.  The funds for any such repurchases may beraised by selling additional equity, seeking additional capital contributionsfrom our existing equity holders or by other means.  There can be no assurance that any plan toreduce our indebtedness, if commenced, would be successfully completed.

 

Based on ourcurrent level of operations, we believe that cash flow from operations andavailable cash, together with available borrowings under our revolving creditfacility, will be adequate to meet liquidity needs and fund planned capitalexpenditures for the next 12 months.

 

However, ourability to borrow under our revolving credit facility at any time will besubject to the borrowing base in effect at that time (which will vary dependingupon the value of our accounts receivable and inventory).  Our ability to make borrowings under ourrevolving credit facility will also be conditioned upon our compliance withother covenants in our revolving credit agreement, including financialcovenants that apply when our borrowings exceed certain amounts.  In addition, the terms of our indenturescurrently limit the amount we may borrow under our revolving credit facility.

 

Changes in rawmaterials costs can significantly affect the amount of cash provided by ouroperating activities, which can affect our liquidity.  Over the last eighteen months, we haveexperienced a period of extreme uncertainty with respect to resin supplies andprices.  High crude oil and natural gaspricing have had a significant impact on the price and supply of resins.  During the same period, many major suppliersof resin have announced price increases to cover their increases in feedstockcosts.  While the prices of our productsgenerally fluctuate with the prices of resins, certain of our customers havecontracts that limit our ability to pass the full cost of higher resin pricingthrough to our customers immediately. Further, competitive conditions in our industry may make it difficultfor us to sufficiently increase our selling prices for all customers to reflectthe full impact of increases in raw material costs.  If this period of high resin pricingcontinues, we may be unable to pass on the entire effect of the price increasesto our customers, which would adversely affect our profitability and workingcapital.  In addition, further increasesin crude oil and natural gas prices could make it difficult for us to obtain anadequate supply of resin from manufacturers affected by these factors.

 

If (a) we arenot able to increase prices to cover historical and future raw materials costincreases, (b) we are unable to obtain adequate supply of resin, (c) volumegrowth does not continue as expected, or (d) we experience any significantnegative effects to our business, we may not have sufficient available cash andborrowing capacity in the near term to operate our business, make expectedcapital expenditures or meet foreseeable liquidity requirements.  In that event, we would have to seekmodifications to our credit agreements, raise other debt or equity capital,sell assets, or take other steps to create additional working capital.  There is no assurance, however, that theseefforts would be successful and, if they were not, these working capitallimitations could constrain the scope of our business operations and have asignificant negative effect on our business and results of operations.

 

Further, we mayneed to refinance all or a portion of the principal amount of our long-termdebt and/or revolving credit facility borrowings, on or prior to maturity, tomeet liquidity needs in later years.  Ifit is determined that refinancing is necessary, and we are unable to securesuch financing on acceptable terms, we may have insufficient liquidity to carryon our operations and meet our obligations at such time.

 

35

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**Cautionary Statement for Forward-LookingInformation**

 

Certain information set forth in this report contains “forward-lookingstatements” within the meaning of federal securities laws.  Forward-looking statements include statementsconcerning our plans, objectives, goals, strategies, future events, futurerevenues or performance, capital expenditures, financing needs, plans orintentions relating to acquisitions, business trends, and other informationthat is not historical information.  Whenused in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,”“plans,” “intends,” “believes” and variations of such words or similarexpressions are intended to identify forward-looking statements.  We may also make additional forward-lookingstatements from time to time.  All suchsubsequent forward-looking statements, whether written or oral, by us or on ourbehalf, are also expressly qualified by these cautionary statements.

 

All forward-looking statements, including, without limitation,management’s examination of historical operating trends, are based upon ourcurrent expectations 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 thatmanagement’s expectations, beliefs and projections will result or be achieved.  All forward-looking statements apply only asof the date made.  We undertake noobligation to publicly update or revise forward-looking statements which may bemade to reflect events or circumstances after the date made or to reflect theoccurrence of unanticipated events.

 

There are a number of risks and uncertainties that could cause ouractual results to differ materially from the forward-looking statementscontained in or contemplated by this report. These risks include, but are notlimited to: general economic and business conditions, particularly an economicdownturn; industry trends; increases in our leverage; interest rate increases;changes in our ownership structure; raw material costs and availability,particularly resin; competition; the loss of any of our significant customers;changes in the demand for our products; new technologies; changes indistribution channels or competitive conditions in the markets or countries inwhich we operate; costs of integrating any future acquisitions; loss of ourintellectual property rights; operational difficulties at any of our plants;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 2004 Form 10-K.  There may be other factors, including thosediscussed elsewhere in this report that may cause our actual results to differmaterially from the forward-looking statements. Any forward-looking statements should be considered in light of thesefactors.

 

#### **ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

#### ** **

We are exposed toresin price risks that arise in the normal course of business.  Significant increases in the price of resinscould adversely affect our operating margins, results of operations and abilityto service our indebtedness.  We may belimited in our ability to pass increases in resin price on to certain of ourcustomers due to provisions in our contracts with those customers.

 

Since the repaymentof $219.6 million of variable rate term debt with the proceeds of our 2004Notes and borrowings under our revolving credit facility on February 17,2004 our interest rate risk has decreased substantially.

 

Our revolvingcredit facility is at a variable rate of interest.  An increase of 1% in interest rates wouldresult in an additional $100,000 of annual interest expense for each $10.0million in borrowings under our revolving credit facility.  We will thus continue to be exposed tointerest rate risk to the extent of our borrowings under the revolving creditfacility.

 

36

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**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

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 information isaccumulated 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 Internal Controls**

 

There were no significant changes in our internal controls during thequarter or in other factors that could significantly affect these controlssubsequent to the date of the evaluation referenced in the foregoing paragraph.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

None.

 

**ITEM 2. UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5. OTHERINFORMATION**

 

None

 

**ITEM 6. EXHIBITSAND REPORTS ON FORM 8-K**

 
| (a)    |   | The  following exhibits are filed with this report.                                                                                                                                                                                                                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.1   |   | Pliant  Corporation 2005 Management Incentive Compensation Plan (incorporated by  reference to Exhibit 10.1 to Pliant Corporation’s Current Report on  Form 8-K (filed on June 13, 2005)).                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.2   |   | Exhibits to  Pliant Corporation 2005 Management Incentive Compensation Plan for R. David  Corey Plan (incorporated by reference to Exhibit 10.2 to Pliant  Corporation’s Current Report on Form 8-K (filed June 13, 2005)).                                                            |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.3   |   | Exhibits to  Pliant Corporation 2005 Management Incentive Compensation Plan for Paul R.  Frantz Plan (incorporated by reference to Exhibit 10.3 to Pliant  Corporation’s Current Report on Form 8-K (filed June 13, 2005)).                                                            |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.4   |   | Exhibits to  Pliant Corporation 2005 Management Incentive Compensation Plan for Greg E.  Gard Plan (incorporated by reference to Exhibit 10.4 to Pliant  Corporation’s Current Report on Form 8-K (filed June 13, 2005)).                                                              |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.5   |   | Exhibits to  Pliant Corporation 2005 Management Incentive Compensation Plan for Kenneth J.  Swanson Plan (incorporated by reference to Exhibit 10.5 to Pliant  Corporation’s Current Report on Form 8-K (filed June 13, 2005)).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.6   |   | Employment  Agreement, dated June 10, 2005, between Pliant Corporation and R. David  Corey (incorporated by reference to Exhibit 10.6 to Pliant Corporation’s  Current Report on Form 8-K (filed on June 13, 2005)).                                                              |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.7   |   | Amended and  Restated Indenture, dated as of February 17, 2004 (as amended and  restated May 6, 2005) (incorporated by reference to Exhibit 4.26 to  Post-Effective Amendment No. 2 to Pliant Corporation’s Registration  Statement on Form S-4 (File No. 333-114608)). |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.8   |   | Exchange and  Registration Rights Agreement, dated as of May 6, 2005 (incorporated by  reference to Exhibit 4.27 to Post-Effective Amendment No. 2 to  Pliant Corporation’s Registration Statement on Form S-4 (File  No. 333-114608)).                                      |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 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.                                                                                                                                   |

 

38

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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/ HAROLD BEVIS                                        |   |
|                                                    | HAROLD BEVIS                                            |
|                                                    | Chief Financial Officer                                 |
|                                                    | (Authorized Signatory and                               |
|                                                    | Principal Executive, Financial and  Accounting Officer) |
|                                                    |                                                    |
|                                                    |                                                    |
| Date:     August 9,  2005 |

 

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**INDEX TOEXHIBITS**

 
| **Exhibits** | ** ** | ** **                                                                                                                                                                                                                                                                                                |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                      |
| 10.1         |       | Pliant Corporation 2005 Management  Incentive Compensation Plan (incorporated by reference to Exhibit 10.1  to Pliant Corporation’s Current Report on Form 8-K (filed on June 13,  2005)).                                                                                            |
|         |       |                                                                                                                                                                                                                                                                                                      |
| 10.2         |       | Exhibits to Pliant Corporation 2005  Management Incentive Compensation Plan for R. David Corey Plan (incorporated  by reference to Exhibit 10.2 to Pliant Corporation’s Current Report on Form 8-K  (filed June 13, 2005)).                                                           |
|         |       |                                                                                                                                                                                                                                                                                                      |
| 10.3         |       | Exhibits to Pliant Corporation 2005  Management Incentive Compensation Plan for Paul R. Frantz Plan (incorporated  by reference to Exhibit 10.3 to Pliant Corporation’s Current Report on Form 8-K  (filed June 13, 2005)).                                                           |
|         |       |                                                                                                                                                                                                                                                                                                      |
| 10.4         |       | Exhibits to Pliant Corporation 2005  Management Incentive Compensation Plan for Greg E. Gard Plan (incorporated by  reference to Exhibit 10.4 to Pliant Corporation’s Current Report on Form 8-K  (filed June 13, 2005)).                                                             |
|         |       |                                                                                                                                                                                                                                                                                                      |
| 10.5         |       | Exhibits to Pliant Corporation 2005  Management Incentive Compensation Plan for Kenneth J. Swanson Plan  (incorporated by reference to Exhibit 10.5 to Pliant Corporation’s  Current Report on Form 8-K (filed June 13, 2005)).                                                       |
|         |       |                                                                                                                                                                                                                                                                                                      |
| 10.6         |       | Employment Agreement, dated June 10,  2005, between Pliant Corporation and R. David Corey (incorporated by reference  to Exhibit 10.6 to Pliant Corporation’s Current Report on Form 8-K  (filed on June 13, 2005)).                                                             |
|         |       |                                                                                                                                                                                                                                                                                                      |
| 10.7         |       | Amended and Restated Indenture, dated as of  February 17, 2004 (as amended and restated May 6, 2005)  (incorporated by reference to Exhibit 4.26 to Post-Effective Amendment No. 2  to Pliant Corporation’s Registration Statement on Form S-4 (File No. 333-114608)). |
|         |       |                                                                                                                                                                                                                                                                                                      |
| 10.8         |       | Exchange and Registration Rights Agreement,  dated as of May 6, 2005 (incorporated by reference to Exhibit 4.27  to Post-Effective Amendment No. 2 to Pliant Corporation’s Registration  Statement on Form S-4 (File No. 333-114608)).                                      |
|         |       |                                                                                                                                                                                                                                                                                                      |
| 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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