**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 September 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 ofregistrant as specified in its charter)

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

 

**1475Woodfield Road, Suite 700**

**Schaumburg,IL 60173**

**(847)969-3300**

(Address ofprincipal executive offices and telephone number)

 

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

 

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

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No ý

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.  On November 21, 2005, therewere 571,711 outstanding shares of the registrant’s Common Stock.

 

 

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**PLIANTCORPORATION AND SUBSIDIARIES**

 

**TABLE OFCONTENTS**

 
| PART I. FINANCIAL INFORMATION |                                                                                                                  |
|------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                  |   |
|                               | ITEM 1. FINANCIAL STATEMENTS                                                                                          |   |
|                               |                                                                                                                  |   |
|                               | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005  AND DECEMBER 31, 2004                       |   |
|                               |                                                                                                                  |   |
|                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 |   |
|                               |                                                                                                                  |   |
|                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED  SEPTEMBER 30, 2005 AND 2004           |   |
|                               |                                                                                                                  |   |
|                               | CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT FOR THE  NINE MONTHS ENDED SEPTEMBER 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 SEPTEMBER 30, 2005 AND DECEMBER 31,2004 (DOLLARS IN THOUSANDS)

 
| ** **                                                                                                                                                                                                                                                                    | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                    | ** ** | **(Unaudited)**             | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                    |       |                        |       |                       |       |
| CURRENT ASSETS:                                                                                                                                                                                                                                                               |       |                        |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                     |       | $                           | 6,949      |                       | $          | 5,580 |   |
| Receivables, net of allowances of $6,088  and $4,489, respectively                                                                                                                                                                                                            |       | 131,320                     |       | 125,395                    |       |
| Inventories                                                                                                                                                                                                                                                                   |       | 91,266                      |       | 94,300                     |       |
| Prepaid expenses and other                                                                                                                                                                                                                                                    |       | 5,023                       |       | 4,032                      |       |
| Income taxes receivable, net                                                                                                                                                                                                                                                  |       | 1,388                       |       | 361                        |       |
| Deferred income taxes                                                                                                                                                                                                                                                         |       | 9,490                       |       | 11,961                     |       |
| Total  current assets                                                                                                                                                                                                                                                         |       | 245,436                     |       | 241,629                    |       |
|                                                                                                                                                                                                                                                                          |       |                        |       |                       |       |
| PLANT AND EQUIPMENT, net                                                                                                                                                                                                                                                      |       | 293,384                     |       | 297,145                    |       |
| GOODWILL                                                                                                                                                                                                                                                                      |       | 182,245                     |       | 182,237                    |       |
| INTANGIBLE ASSETS, net                                                                                                                                                                                                                                                        |       | 15,384                      |       | 17,076                     |       |
| OTHER ASSETS                                                                                                                                                                                                                                                                  |       | 39,855                      |       | 39,005                     |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                                  |       | $                           | 776,304    |                       | $          | 777,092 |   |
|                                                                                                                                                                                                                                                                          |       |                        |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                                                                |       |                        |       |                       |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                          |       |                        |       |                       |       |
| Trade accounts payable                                                                                                                                                                                                                                                        |       | $                           | 101,278    |                       | $          | 96,282 |   |
| Accrued liabilities:                                                                                                                                                                                                                                                          |       |                        |       |                       |       |
| Interest payable                                                                                                                                                                                                                                                              |       | 16,126                      |       | 12,985                     |       |
| Customer rebates                                                                                                                                                                                                                                                              |       | 7,844                       |       | 8,391                      |       |
| Other                                                                                                                                                                                                                                                                         |       | 40,163                      |       | 43,462                     |       |
| Current portion of long-term debt                                                                                                                                                                                                                                             |       | 1,355                       |       | 1,994                      |       |
| Total current liabilities                                                                                                                                                                                                                                                     |       | 166,766                     |       | 163,114                    |       |
| LONG-TERM DEBT, net of current portion                                                                                                                                                                                                                                        |       | 885,630                     |       | 840,354                    |       |
| OTHER LIABILITIES                                                                                                                                                                                                                                                             |       | 28,725                      |       | 26,454                     |       |
| DEFERRED INCOME TAXES                                                                                                                                                                                                                                                         |       | 29,438                      |       | 31,433                     |       |
| SHARES SUBJECT TO MANDATORY REDEMPTION (Note 11)                                                                                                                                                                                                                              |       | 258,908                     |       | 229,910                    |       |
| Total Liabilities                                                                                                                                                                                                                                                             |       | 1,369,467                   |       | 1,291,265                  |       |
| MINORITY INTEREST                                                                                                                                                                                                                                                             |       | —                      |       | 33                         |       |
| REDEEMABLE PREFERRED STOCK – Series B –  720 shares authorized, no par value, 644 and 720 shares outstanding as of September 30,  2005 and December 31, 2004, respectively                                                                           |       | 104                         |       | 117                        |       |
| REDEEMABLE COMMON STOCK – no par value;  60,000 shares authorized; 10,873 shares outstanding at September 30,  2005 and December 31, 2004, net of related stockholders’ notes  receivable of $1,827 at September 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 September 30, 2005 and December 31,  2004                                                                                                                            |       | 103,376                     |       | 103,376                    |       |
| Warrants to purchase common stock                                                                                                                                                                                                                                             |       | 39,133                      |       | 39,133                     |       |
| Accumulated deficit                                                                                                                                                                                                                                                           |       | (727,954                    | )          | (650,974                   | )          |
| Stockholders’ notes receivable                                                                                                                                                                                                                                           |       | (660                        | )          | (660                       | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                          |       | (13,807                     | )          | (11,843                    | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                                              |       | (599,912                    | )          | (520,968                   | )          |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                              |       | $                           | 776,304    |                       | $          | 777,092 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,2005 AND 2004 (IN THOUSANDS) (UNAUDITED)

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                         | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| NET SALES                                                          |       | $                      | 261,973    |                   | $          | 243,160 |   | $ | 784,107 |   | $ | 715,144 |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| COST OF SALES                                                      |       | 229,501                |       | 206,941                |       | 684,750 |   | 603,265 |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross profit                                                       |       | 32,472                 |       | 36,219                 |       | 99,357 |   | 111,879 |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| OPERATING EXPENSES:                                                | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales, General and Administrative                                  |       | 18,573                 |       | 19,345                 |       | 58,162 |   | 59,729 |   |
| Research and Development                                           |       | 2,353                  |       | 1,467                  |       | 6,585 |   | 4,731 |   |
| Restructuring and Other Costs (note 3)                             |       | 351                    |       | 2,166                  |       | 2,433 |   | 2,166 |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total operating expenses                                           |       | 21,277                 |       | 22,978                 |       | 67,180 |   | 66,626 |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| OPERATING INCOME                                                   |       | 11,195                 |       | 13,241                 |       | 32,177 |   | 45,253 |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| INTEREST EXPENSE-Current and Long-term debt  (note 5, 9) |       | (26,734                | )          | (25,098                | )          | (82,362 | ) | (84,261 | ) |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| INTEREST EXPENSE-Redeemable Preferred Stock  (note 11)        |       | (10,041                | )          | (9,003                 | )          | (28,998 | ) | (26,036 | ) |
| OTHER INCOME(EXPENSE) – Net                                   |       | 20                     |       | (15                    | )          | 3,959 |   | (66 | ) |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| LOSS FROM CONTINUING OPERATIONS BEFORE  INCOME TAXES               |       | (25,560                | )          | (20,875                | )          | (75,224 | ) | (65,110 | ) |
| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| INCOME TAX EXPENSE (BENEFIT)                                       |       | (139                   | )          | 933                    |       | 1,196 |   | 3,293 |   |
|                                                               |       |                   |       |                   |       |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS                                    |       | (25,421                | )          | (21,808                | )          | (76,420 | ) | (68,403 | ) |
|                                                               |       |                   |       |                   |       |   |   |   |   |
| DISCONTINUED OPERATIONS                                            |       |                   |       |                   |       |   |   |   |   |
| Loss from discontinued operations                                  |       | —                 |       | (1,862                 | )          | (560 | ) | (7,395 | ) |
| Loss on sale of discontinued operations                            |       | —                 |       | (8,486                 | )          | — |   | (8,486 | ) |
| LOSS ON DISCONTINUED OPERATIONS                                    |       | —                 |       | (10,348                | )          | (560 | ) | (15,881 | ) |
|                                                               |       |                   |       |                   |       |   |   |   |   |
| NET LOSS                                                           |       | $                      | (25,421    | )                      | $          | (32,156 | ) | $ | (76,980 | ) | $ | (84,284 | ) |

 

See notes to condensed consolidated financialstatements.

 

4

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,2005 AND 2004 (IN THOUSANDS) (UNAUDITED)

 
| ** **                                                                                             | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| CASH FLOWS FROM CONTINUING OPERATING  ACTIVITIES:                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                               |       | $          | (76,980    | )          | $          | (84,284 | ) |
| Adjustments to reconcile net loss to net  cash (used in)/ provided by continuing operating activities: |       |       |       |       |       |
| Depreciation and amortization                                                                          |       | 29,955     |       | 31,090     |       |
| Amortization of deferred financing costs  and accretion of debt discount                               |       | 27,624     |       | 27,320     |       |
| Deferred dividends and accretion on  preferred shares                                                  |       | 28,998     |       | 26,036     |       |
| Deferred income taxes                                                                                  |       | 1,579      |       | 1,486      |       |
| Non-cash plant closing costs                                                                           |       | —     |       | 1,960      |       |
| Loss from discontinued operations                                                                      |       | 560        |       | 11,886     |       |
| Write-downs of impaired assets from  discontinued operations                                           |       | —     |       | 3,995      |       |
| Gain on disposal of assets                                                                             |       | (4,167     | )          | (131       | )          |
| Changes in assets and liabilities:                                                                     |       |       |       |       |       |
| Receivables                                                                                            |       | (6,563     | )          | (21,506    | )          |
| Inventories                                                                                            |       | 3,260      |       | (365       | )          |
| Prepaid expenses and other                                                                             |       | (975       | )          | (1,865     | )          |
| Income taxes payable/receivable                                                                        |       | (1,225     | )          | 2,565      |       |
| Other assets                                                                                           |       | 1,395      |       | 2,739      |       |
| Trade accounts payable                                                                                 |       | 4,573      |       | 20,088     |       |
| Accrued liabilities                                                                                    |       | (693       | )          | 2,746      |       |
| Other liabilities                                                                                      |       | 2,554      |       | (3,268     | )          |
| Other                                                                                                  |       | (33        | )          | (236       | )          |
| Net cash (used in) / provided by continuing  operating activities                                      |       | 9,862      |       | 20,256     |       |
|                                                                                                   |       |       |       |       |       |
| CASH FLOWS FROM CONTINUING INVESTING  ACTIVITIES:                                                      |       |       |       |       |       |
| Proceeds from sale of assets                                                                           |       | 5,191      |       | 6,450      |       |
| Capital expenditures for plant and  equipment                                                          |       | (26,422    | )          | (14,974    | )          |
|                                                                                                   |       |       |       |       |       |
| Net cash used in continuing investing  activities                                                      |       | (21,231    | )          | (8,524     | )          |
|                                                                                                   |       |       |       |       |       |
| 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                                                                              |       | (7,643     | )          | (9,354     | )          |
| Repayments of term debt and revolver                                                                   |       | —     |       | (219,575   | )          |
| Repayment of capital leases and other, net                                                             |       | (1,488     | )          | 34         |       |
| Proceeds from revolving debt – net                                                                |       | 24,100     |       | —     |       |
|                                                                                                   |       |       |       |       |       |
| Net cash provided by/(used in) continuing  financing activities                                        |       | 14,959     |       | (3,596     | )          |
|                                                                                                   |       |       |       |       |       |
| CASH USED IN DISCONTINUED OPERATIONS                                                                   |       | (195       | )          | (5,838     | )          |
|                                                                                                   |       |       |       |       |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS                                          |       | (2,026     | )          | 181        |       |
|                                                                                                   |       |       |       |       |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                  |       | 1,369      |       | 2,479      |       |
|                                                                                                   |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE  PERIOD                                                    |       | 5,580      |       | 3,308      |       |
| CASH AND CASH EQUIVALENTS, END OF THE  PERIOD                                                          |       | $          | 6,949      |       | $          | 5,787 |   |
|                                                                                                   |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                                                    |       |       |       |       |       |
| Cash paid during the period for:                                                                       |       |       |       |       |       |
| Interest                                                                                               |       | $          | 59,547     |       | $          | 57,504 |   |
| Income taxes                                                                                           |       | 2,190      |       | 1,571      |       |
| Other non-cash disclosure:                                                                             |       |       |       |       |       |
| Preferred Stock dividends accrued but not  paid                                                        |       | $          | 28,149     |       | $          | 24,579 |   |

 

See notes to condensed consolidated financialstatements.

 

5

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’DEFICIT

**FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2005  (IN THOUSANDS) (UNAUDITED)**

 
| ** **                               | ** ** | **Common Stock** | ** ** | **Warrants  To Purchase  Common Stock** | ** ** | **Accumulated  Deficit** | ** ** | **Stockholders’  Notes  Receivable** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------------------|------------|-------------------------------------------|------------|---------------------------------------------|------------|-----------|------------|
| **Shares**                               | ** ** | **Amount**       |
|                                     |       |             |       |                                    |       |                     |       |                                      |       |                                        |       |      |       |   |   |
| BALANCE,  DECEMBER 31, 2004         |       | 543              |       | $                                       | 103,376    |                     | $          | 39,133                                    |       | $                                           | (650,974   | )         | $          | (660 | ) | $ | (11,843 | ) | $ | (520,968 | ) |
|                                     |       |             |       |                                    |       |                     |       |                                      |       |                                        |       |      |       |   |   |
| Net  loss                                |       |             |       |                                    |       |                     |       | (76,980                                   | )          |                                        |       |      |       | (76,980 | ) |
|                                     |       |             |       |                                    |       |                     |       |                                      |       |                                        |       |      |       |   |   |
| Foreign  currency translation adjustment |       |             |       |                                    |       |                     |       |                                      |       |                                        |       | (1,964    | )          | (1,964 | ) |
|                                     |       |             |       |                                    |       |                     |       |                                      |       |                                        |       |      |       |   |   |
| BALANCE,  SEPTEMBER 30, 2005        |       | 543              |       | $                                       | 103,376    |                     | $          | 39,133                                    |       | $                                           | (727,954   | )         | $          | (660 | ) | $ | (13,807 | ) | $ | (599,912 | ) |

 

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 periods endedSeptember 30, 2005 are not necessarily indicative of results of operationsto 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 the rules andregulations of the Securities and Exchange Commission. These statements shouldbe read in conjunction with the Company’s Annual Report on Form 10-K forthe year ended December 31, 2004. Certain reclassifications have been madeto the condensed consolidated financial statements for the periods ended September 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 September 30, 2005and December 31, 2004 consisted of the following (in thousands):

 
| ** **      | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------|------------|-----------------------------|------------|----------------------------|------------|
|            |       |                        |       |                       |       |
| Finished goods  |       | $                           | 44,545     |                       | $          | 47,259 |   |
| Raw materials   |       | 39,896                      |       | 37,595                     |       |
| Work-in-process |       | 6,825                       |       | 9,446                      |       |
|            |       |                        |       |                       |       |
| Total           |       | $                           | 91,266     |                       | $          | 94,300 |   |

 

**3.       RESTRUCTURING AND 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 ninemonths ended September 30 (in thousands):

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                         | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Plant  closing costs:**                          |       |                   |       |                   |       |   |   |   |   |
| Severance                                          |       | $                      | 56         |                   | $          | 133 |   | $ | 415 |   | $ | 133 |   |
| Relocation of production lines                     |       | —                 |       | —                 |       | — |   | — |   |
| Other plant closure costs                          |       | 295                    |       | 139                    |       | 2,229 |   | 139 |   |
|                                               |       | 351                    |       | 272                    |       | 2,644 |   | 272 |   |
| **Office  closing and workforce reduction costs:** |       |                   |       |                   |       |   |   |   |   |
| Severance                                          |       | —                 |       | —                 |       | (84 | ) | — |   |
| Leases                                             |       | —                 |       | —                 |       | (127 | ) | — |   |
| **Subtotal  Plant and office closing**             |       | —                 |       | —                 |       | (211 | ) | — |   |
|                                               |       |                   |       |                   |       |   |   |   |   |
| **Long  term asset impairments related to plant**  |       |                   |       |                   |       |   |   |   |   |
| **Closings**                                       |       | —                 |       | 1,894                  |       | — |   | 1,894 |   |
| **Total  Restructuring and other costs**           |       | $                      | 351        |                   | $          | 2,166 |   | $ | 2,433 |   | $ | 2,166 |   |

 

7

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

 
| ** **                                          | ** **   | ** **                  | ** **   | **Accruals  for the nine months ended** | ** **   | ** **     | ** **   | ** **                   | ** **   |
|-----------------------------------------------------|--------------|-----------------------------|--------------|-----------------------------------------|--------------|----------------|--------------|------------------------------|--------------|
| ** **                                          | ** **   | **December 31,  2004** | ** **   | **September 30,  2005**            | ** **   | **Payments**   | ** **   | **September 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                                   |         | —         |         | —                       |         | 2,113 |   | 2,113 |   | (1,227 | ) | 8 |   | 1,973 |   |
| Leases                                              |         | —                      |         | 1,614                                   |         | —         |         | —                       |         | — |   | — |   | (396 | ) | — |   | 1,218 |   |
| Rhode  Island                                       |         | 49                          |         | 14                                      |         | —         |         | 139                          |         | 116 |   | 255 |   | (262 | ) | 49 |   | 7 |   |
| Alliant                                             |         | —                      |         | —                                  |         | 19             |         | 276                          |         | — |   | 276 |   | (268 | ) | 19 |   | 8 |   |
|                                                |         | 111                         |         | $                                       | 3,715        |           | 19           |                         | 415          |   | 2,229 |   | $ | 2,644 |   | $ | (2,153 | ) | 130 |   | $ | 4,206 |   |
|                                                |         |                        |         |                                    |         |           |         |                         |         |   |   |   |   |   |   |   |   |   |   |
| ***Office Closing and Workforce Reduction Costs:*** | *** *** | *** ***                | *** *** | *** ***                            | *** *** | *** ***   | *** *** | *** ***                 | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Leases                                              |         | —                      |         | $                                       | 610          |           | —       |                         | —       |   | — |   | $ | — |   | $ | (223 | ) | — |   | $ | 387 |   |
| Severance                                           |         | 114                         |         | 84                                      |         | —         |         | (84                          | )            | — |   | (84 | ) | — |   | 114 |   | — |   |
| Singapore                                           |         | —                      |         | 127                                     |         | —         |         | —                       |         | (127 | ) | (127 | ) | — |   | — |   |   |   |
|                                                |         | 114                         |         | $                                       | 821          |           | —       |                         | (84          | ) | (127 | ) | $ | (211 | ) | $ | (223 | ) | 114 |   | 387 |   |
|                                                |         |                        |         |                                    |         |           |         |                         |         |   |   |   |   |   |   |   |   |   |   |
| **Total Plant & Office closing**           |         | 225                         |         | $                                       | 4,536        |           | 19           |                         | 331          |   | 2,102 |   | $ | 2,433 |   | $ | (2,376 | ) | 244 |   | $ | 4,593 |   |

 

***Plant Closing Costs***

 

***2005 –***During2005, we accrued $2.1 million for the net costs to terminate the remainingequipment lease agreements associated with our Shelbyville, Indiana facility, incurred$0.2 million of security, severance and other plant closure costs associatedwith our Harrisville, Rhode Island facility and incurred $0.3 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.  Substantially all costs associated with thisplant closure have been incurred.

 

***2003 –*** During 2003, we accrued the present valueof future lease payments on three buildings we no longer occupied.  As of September 30, 2005, $1.2 millionof these accruals are remaining.

 

***2002*** – In September 2002, we approved a planto close our production facility in Merced, California and relocate itsproduction lines to our plants in Toronto, Canada and Danville, Kentucky.  The costs associated with the plannedreduction in workforce and relocating the production lines are completed.  As of September 30, 2005, the remainingaccrued reserve of $1.0 million for the Merced restructuring relates toenvironmental remediation.

 

***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 costs wereincurred 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 nine month periods ended September 30, 2004were $7.7 million and $22.6 million, respectively. No tax benefits wererecorded on the losses from discontinued operations or the loss on sale ofdiscontinued operations as realization of these tax benefits is not certain.

 

**5.****                    INTERESTEXPENSE – Current and Long-term debt**

 

Interest expense – current and long-term debt in the statement ofoperations for the three and nine month periods ended September 30, 2005and 2004 are as follows:

 
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                 | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest expense accrued, net                                                              |       | $                      | 25,204     |                   | $          | 23,973 |   | $ | 75,884 |   | $ | 70,789 |   |
| Current and amortized financing fees                                                       |       | 1,530                  |       | 1,125                  |       | 6,478 |   | 3,354 |   |
| Write-off of previously capitalized  financing fees and interest rate derivatives costs(a) |       | —                 |       | —                 |       | — |   | 10,118 |   |
|                                                                                       |       |                   |       |                   |       |   |   |   |   |
| TOTAL                                                                                      |       | $                      | 26,734     |                   | $          | 25,098 |   | $ | 82,362 |   | $ | 84,261 |   |
| Cash interest payments(b)                                                                  |       | $                      | 16,305     |                   | $          | 14,334 |   | $ | 59,547 |   | $ | 57,504 |   |

 

----

(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 nine month period ended September 30, 2005 includes$4.9 million of consent fees paid in connection with our Amended 2004 Notes(see footnote 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 nine months ended September 30, 2005, optionsto purchase 163 and 3,016 shares respectively of our common stock werecancelled in connection with employee terminations.

 

Weapply Accounting Principles Board (APB) Opinion No. 25, *“Accounting for Stock Issued to Employees,”* and relatedinterpretations in accounting for stock-based compensation plans as they relateto employees and directors.  We did nothave compensation expense related to stock options for the three and nine monthperiods ended September 30, 2005 and September 30, 2004.  Had the compensation cost for all theoutstanding options been determined in accordance with SFAS No. 123, *“Accounting for Stock-Based Compensation,”* our net loss forthe three and nine month periods ended September 30, 2005 and 2004 wouldhave been the following pro forma amounts (in thousands):

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                           | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                 |       |                   |       |                   |       |   |   |   |   |
| As reported                          |       | $                      | (25,421    | )                      | $          | (32,156 | ) | $ | (76,980 | ) | $ | (84,284 | ) |
| Pro forma stock compensation expense |       | (251                   | )          | (200                   | )          | (751 | ) | (600 | ) |
| Pro forma                            |       | $                      | (25,672    | )                      | $          | (32,356 | ) | $ | (77,731 | ) | $ | (84,884 | ) |

 

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-valuebased measurement 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 theprospective method as proscribed by SFAS No. 123(R).  This value is recorded over the serviceperiod, which typically is the vesting period. This statement is effective no later than the beginning of the firstfiscal year beginning after June 15, 2005. We are currently evaluating the provisions of SFAS No. 123(R), andthe impact on our consolidated financial position and results of operations.

 

*Restricted Stock*

 

On September 24, 2004, we adopted a 2004 Restricted Stock IncentivePlan, pursuant to which we sold shares of a newly-created, non-voting Series BRedeemable Preferred Stock for a cash purchase price of $162 per share to ourPresident and Chief Executive Officer and selected additional officers of theCompany.  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 September 30, 2005,income tax expense was a benefit of $0.1 million on pretax loss from continuingoperations of $25.6 million as compared to income tax expense of $0.9 millionon pretax loss from continuing operations of $20.9 million for the three monthsended September 30, 2004.  For the ninemonths ended September 30, 2005, income tax expense was $1.2 million onpretax loss from continuing operations of $75.2 million compared to income taxexpense of $3.3 million on pretax loss from continuing operations of $65.1million for the nine months ended September 30, 2004.  Income tax benefits related to net operatinglosses in the United States are offset by a valuation allowance as the realizationof these tax benefits is not certain. Therefore, the income tax expense in the statements of operationsprimarily reflects foreign income taxes.

 

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

 

Other comprehensive income (loss) for thethree months ended September 30, 2005 and 2004 was ($24.5) million and ($32.2)million, respectively. Other comprehensive income (loss) for the nine monthsended September 30, 2005 and 2004 was ($78.9) million and ($83.6) million,respectively. The components of other comprehensive income (loss) are netincome (loss), the change in cumulative unrealized losses on derivativesrecorded in accordance with SFAS No. 133 *“Accountingfor Derivative Instruments and Hedging Activities”* and foreigncurrency translation.

 

10

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

 

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

 
| ** **                                                                                                                   | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Credit Facilities:                                                                                                           |       |                         |       |                        |       |
| Revolving credit facility                                                                                                    |       | $                            | 48,100     |                        | $          | 24,000 |   |
| Senior secured notes, interest at 11 5/8%                                                                                    |       | 262,345                      |       | —                      |       |
| Senior secured discount notes at 11 1/8%,  net of unamortized issue discount                                                 |       | 6,848                        |       | 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) |       | 313,897                      |       | 313,214                     |       |
| Obligations under capital leases                                                                                             |       | 5,795                        |       | 6,778                       |       |
| Insurance financing                                                                                                          |       | —                       |       | 715                         |       |
| Total                                                                                                                        |       | 886,985                      |       | 842,348                     |       |
| Less current portion                                                                                                         |       | (1,355                       | )          | (1,994                      | )          |
| Long-term portion                                                                                                            |       | $                            | 885,630    |                        | $          | 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 and a second-priority security interestin our real property, fixtures, equipment, intellectual property and otherassets.

 

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 third quarter of 2005 was 7.8%.  The commitment fee for the unused portion ofthe 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 $110million and the Fixed Charge Coverage Ratio (FCCR) is less than 1/1, thereduced availability is the borrowing base minus $10 million.  Furthermore, if the FCCR is less than asecond ratio specified in the credit agreement that changes over time, RA isthe lesser of the commitment or the borrowing base minus $15 million.  As of September 30, 2005, we hadapproximately $44.9 million available for borrowing under our revolving creditagreement.  Our FCCR as of September 30,2005 was .84/1.  See footnote 16,Subsequent Events, for recent developments associated with the Company’srevolving credit facility.

 

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

 

On April 8, 2005, Pliant Corporation commenced a consent solicitationrelating to its 11 1/8% Senior Secured Discount Notes due 2009 (the “2004 Notes”)seeking consents, among other things, to (i) eliminate the currentrequirement to pay cash interest on the notes beginning in 2007 and, in lieuthereof, pay non-cash interest in the form of additional notes throughmaturity; (ii) increase the interest rate of the notes for which consentsare received; (iii) increase the redemption prices of the notes for whichconsents are received; and (iv) eliminate certain restrictive covenants asthey 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 of the total $306.0 million aggregate principal amount atmaturity of the 2004 Notes, all of which were accepted by Pliant.  As a result, $250.6 principal amount of theAmended 2004 Notes were outstanding as of May 6, 2005.  On June 15, 2005, we issued anadditional $3.1 principal amount of the Amended 2004 Notes as payment in kindinterest pursuant to the amended and restated indenture (the “Additional Notes”).

 

11

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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.

 

The transaction in which the terms of the 2004 Notes were amended tobecome the Amended 2004 Notes was not registered under the Securities Act of1933, as amended, or any state securities laws. Pursuant to a registration rights agreement, Pliant consummated an exchangeoffer for the Amended 2004 Notes in which the company exchanged the $253.8million aggregate principal amount of the original Amended 2004 Notes foressentially identical notes which are registered under the Securities Act of1933, as amended.  The exchange offer forthe Amended 2004 Notes was completed on September 29, 2005.  The interest rate of the Amended 2004 Notesincreased from 11 1/8% per annum to 11 5/8% per annum.  The Amended 2004 Notes no longer requirepayment of cash interest beginning in 2007. Instead, they require payment of non-cash interest in the form ofadditional notes through maturity.  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.

 

On or after June 15, 2007, we may redeem some or all of the notesat the following redemption prices (expressed as percentages of the sum of theprincipal amount, plus accrued and unpaid interest); 111.625% if redeemed priorto June 15, 2007; 108.719% if redeemed prior to December 15, 2007;105.813% if redeemed prior to June 15, 2008; 102.906 if redeemed prior 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 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 asecurity interest in our real property, fixtures, equipment, intellectualproperty and other assets other than the Second Priority Collateral (the “First-PriorityCollateral”) and on a second-priority basis by a security interest insubstantially all our inventory, receivables and deposit accounts, 100% of thecapital stock of, or other equity interests in existing and future domesticsubsidiaries and foreign subsidiaries that are note guarantors, 65% of thecapital stock of, or other equity interests in existing and future first-tierforeign subsidiaries, investment property and certain other assets of theCompany and the note guarantors (the “Second-Priority Collateral”).

 

*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 that guaranteeindebtedness of the Company.  The 2004Notes were issued under an indenture dated February 17, 2004, among us,the subsidiary guarantors party thereto and Wilmington Trust Company, astrustee.

 

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 a second-priorityinterest in the Second-Priority Collateral, rank equally in right of paymentwith all existing and any future senior obligations of the Company and areeffectively subordinated to all liabilities and preferred stock of eachsubsidiary guarantor.  The 2004 Noteswill mature on June 15, 2009.  On May 6,2005 we completed the consent solicitation relating to our 2004 Notes.  Consents were delivered with respect to$298.2 million aggregate principal amount at maturity of the 2004 Notes.  As a result, $7.8 million aggregate principalamount 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 notes will cease to accrete after such interest paymentdate and (iii) the outstanding principal amount at the stated maturity ofeach note will equal the accreted value of such note 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 notes except as described in the followingparagraph.

 

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

 

13

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**10.****             OPERATINGSEGMENTS**

 

Operatingsegments are components of our business for which separate financialinformation is available that is evaluated regularly by our chief operatingdecision maker in deciding how to allocate resources and in assessingperformance.  This information isreported on the basis that it is used internally for evaluating segment performance.

 

Wehave four operating segments: Engineered Films, Performance Films, IndustrialFilms and Specialty Products Group. Sales and transfers between our segments are eliminated inconsolidation.  We evaluate the performanceof our operating segments based on net sales (excluding inter-company sales)and segment profit.  Segment profitreflects income from continuing operations before interest expense, incometaxes, depreciation, amortization, restructuring costs and other non-cashcharges.  Our reportable segments are separatelymanaged as each segment has differing products, customer requirements,technology and marketing strategies.

 

Segment profit forthe periods ended September 30, 2005 and 2004 and segment assets as of September 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 September 30, 2005** |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Net sales to customers                          |       | $                     | 56,199     |                   | $          | 26,924                |       | $                              | 75,711     |                   | $          | 101,570   |       | $ | 1,568 |   | $ | 261,973 |   |
| Intersegment sales                              |       | 1,080                 |       | 260                    |       | 4,309                 |       | 1,424                          |       | (7,072                 | )          | —    |       |
| Total net sales                                 |       | 57,279                |       | 27,184                 |       | 80,020                |       | 102,994                        |       | (5,504                 | )          | 261,973   |       |
| Depreciation and amortization                   |       | 1,783                 |       | 891                    |       | 1,604                 |       | 4,473                          |       | 1,243                  |       | 9,994     |       |
| Interest expense                                |       | 183                   |       | 6                      |       | 136                   |       | 1,218                          |       | 35,231                 |       | 36,775    |       |
| Segment profit                                  |       | 6,324                 |       | 3,388                  |       | 7,221                 |       | 12,104                         |       | (7,477                 | )          | 21,560    |       |
| Capital expenditures                            |       | 765                   |       | 1,925                  |       | 673                   |       | 4,207                          |       | 2,225                  |       | 9,795     |       |
| **Three  months ended September 30, 2004** |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Net sales to customers                          |       | $                     | 54,223     |                   | $          | 24,378                |       | $                              | 63,642     |                   | $          | 99,310    |       | $ | 1,607 |   | $ | 243,160 |   |
| Intersegment sales                              |       | 1,361                 |       | 839                    |       | 2,332                 |       | 4,809                          |       | (9,341                 | )          | —    |       |
| Total net sales                                 |       | 55,584                |       | 25,217                 |       | 65,974                |       | 104,119                        |       | (7,734                 | )          | 243,160   |       |
| Depreciation and amortization                   |       | 1,776                 |       | 901                    |       | 1,326                 |       | 4,755                          |       | 1,103                  |       | 9,861     |       |
| Interest expense                                |       | 156                   |       | 3                      |       | (7                    | )          | 1,236                          |       | 32,713                 |       | 34,101    |       |
| Segment profit                                  |       | 7,731                 |       | 3,948                  |       | 6,776                 |       | 13,669                         |       | (6,870                 | )          | 25,253    |       |
| Capital expenditures                            |       | 493                   |       | 156                    |       | 2,597                 |       | 740                            |       | 77                     |       | 4,063     |       |

 
| ** **                                     | ** ** | **Engineered  Films** | ** ** | **Performance  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Products  Group** | ** ** | **Corporate /  Other** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|--------------------------------|------------|------------------------|------------|-----------|------------|
| **Nine  months ended September 30, 2005** |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Net sales to customers                         |       | $                     | 174,685    |                   | $          | 77,089                |       | $                              | 221,751    |                   | $          | 304,684   |       | $ | 5,898 |   | $ | 784,107 |   |
| Intersegment sales                             |       | 3,985                 |       | 1,143                  |       | 11,499                |       | 4,413                          |       | (21,040                | )          | —    |       |
| Total net sales                                |       | 178,670               |       | 78,232                 |       | 233,250               |       | 309,097                        |       | (15,142                | )          | 784,107   |       |
| Depreciation and amortization                  |       | 5,300                 |       | 2,597                  |       | 5,089                 |       | 13,551                         |       | 3,418                  |       | 29,955    |       |
| Interest expense                               |       | 514                   |       | 30                     |       | 327                   |       | 3,873                          |       | 106,616                |       | 111,360   |       |
| Segment profit                                 |       | 21,503                |       | 9,782                  |       | 19,143                |       | 39,412                         |       | (21,316                | )          | 68,524    |       |
| Capital expenditures                           |       | 2,252                 |       | 4,234                  |       | 2,883                 |       | 12,872                         |       | 4,181                  |       | 26,422    |       |
| Segment assets                                 |       | 144,115               |       | 73,120                 |       | 104,100               |       | 373,087                        |       | 81,882                 |       | 776,304   |       |
| **Nine  months ended September 30, 2004** |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Net sales to customers                         |       | $                     | 164,785    |                   | $          | 74,475                |       | $                              | 182,294    |                   | $          | 289,245   |       | $ | 4,345 |   | $ | 715,144 |   |
| Intersegment sales                             |       | 4,522                 |       | 1,283                  |       | 4,216                 |       | 11,963                         |       | (21,983                | )          | —    |       |
| Total net sales                                |       | 169,307               |       | 75,758                 |       | 186,510               |       | 301,207                        |       | (17,638                | )          | 715,144   |       |
| Depreciation and amortization                  |       | 5,176                 |       | 2,595                  |       | 3,937                 |       | 14,225                         |       | 5,157                  |       | 31,090    |       |
| Interest expense                               |       | 471                   |       | 10                     |       | (2                    | )          | 3,157                          |       | 106,661                |       | 110,297   |       |
| Segment profit                                 |       | 26,953                |       | 12,649                 |       | 20,441                |       | 39,703                         |       | (21,303                | )          | 78,443    |       |
| Capital expenditures                           |       | 1,187                 |       | 523                    |       | 5,753                 |       | 6,603                          |       | 909                    |       | 14,974    |       |
| **As of December 31,  2004**              |       |                  |       |                   |       |                  |       |                           |       |                   |       |      |       |
| Segment assets                                 |       | 140,799               |       | 68,190                 |       | 105,543               |       | 375,033                        |       | 87,527                 |       | 777,092   |       |

 

14

----

 

Areconciliation of the totals reported for the operating segments to the totalsreported in the consolidated financial statements as of and for the three and ninemonth periods ended September 30 is as follows (in thousands):

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                   | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Profit or Loss**                           |       |                   |       |                   |       |   |   |   |   |
| Total segment profit                         |       | $                      | 21,560     |                   | $          | 25,253 |   | $ | 68,524 |   | $ | 78,443 |   |
| Depreciation and amortization                |       | (9,994                 | )          | (9,861                 | )          | (29,955 | ) | (31,090 | ) |
| Restructuring and other costs                |       | (351                   | )          | (2,166                 | )          | (2,433 | ) | (2,166 | ) |
| Interest expense                             |       | (36,775                | )          | (34,101                | )          | (111,360 | ) | (110,297 | ) |
| Loss from continuing operations before taxes |       | $                      | (25,560    | )                      | $          | (20,875 | ) | $ | (75,224 | ) | $ | (65,110 | ) |

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                           |       |       |       |       |       |                         |       |                        |       |
| Total assets for reportable segments |       |       |       |       |       | 681,269                      |       | 689,565                     |       |
| Other unallocated assets             |       |       |       |       |       | 95,035                       |       | 87,527                      |       |
| Total consolidated assets            |       |       |       |       |       | $                            | 776,304    |                        | $          | 777,092 |   |
|                                      |            |            |            |            |            |                              |            |                             |            |  |  |

 

Net sales andlong-lived assets of our US and foreign operations are as follows:

 
| ** **           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------|------------|------------------------|------------|------------------------|------------|
| ** **           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **           | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Sales            |       |                   |       |                   |       |   |   |   |   |
| United States        |       | $                      | 220,818    |                   | $          | 208,652 |   | $ | 636,763 |   | $ | 578,156 |   |
| Foreign countries(a) |       | 41,155                 |       | 34,508                 |       | 147,344 |   | 136,988 |   |
|                 |       |                   |       |                   |       |   |   |   |   |
| Total                |       | $                      | 261,973    |                   | $          | 243,160 |   | $ | 784,107 |   | $ | 715,144 |   |

 
| ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------|------------|------------|------------|------------|------------|------------------------------|------------|-----------------------------|------------|
| Long-lived assets |       |       |       |       |       |                         |       |                        |       |
| United States     |       |       |       |       |       | 436,038                      |       | 434,645                     |       |
| Foreign countries |       |       |       |       |       | 54,975                       |       | 61,813                      |       |
|              |       |       |       |       |       |                         |       |                        |       |
| Total             |       |       |       |       |       | $                            | 491,013    |                        | $          | 496,458 |   |
|              |       |       |       |       |       |                         |       |                        |       |
| Total assets      |       |       |       |       |       |                         |       |                        |       |
| United States     |       |       |       |       |       | 661,851                      |       | 655,885                     |       |
| Foreign countries |       |       |       |       |       | 114,453                      |       | 121,207                     |       |
|              |       |       |       |       |       |                         |       |                        |       |
| Total             |       |       |       |       |       | $                            | 776,304    |                        | $          | 777,092 |   |

 

----

(a)     Foreign countries include Australia, Canada,Germany and Mexico, of which only Mexico individually represents more than 10%of consolidated net sales or long-lived assets.

 

15

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**11.   SHARES SUBJECT TOMANDATORY REDEMPTION**

 

The Company adopted SFAS No. 150,“*Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity,”*effective January 1, 2004. As a result, the redeemable preferred stock ofthe Company 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 December 31,2003 and the unpaid dividends at the end of each quarter from the date ofissuance through December 31, 2003. In addition, the dividends andaccretion on the preferred shares are included as a part of interest expense inthe statement of operations.  Effective October 1, 2005, the annualdividend rate will increase from 14% per annum to 16% per annum as we did notpay all accrued dividends in cash on September 30, 2005.

 

In addition, as a result of adopting SFAS No. 150,the Company’s redeemable common shares that have been put for redemption by theshareholder were recorded as a liability at fair value. The fair value wascomputed using the agreed upon price of the redemption times the number ofshares put by the shareholder. As required by SFAS No. 150 prior periodswere not restated.

 

The shares subject to mandatory redemption are asfollow (in thousands):

 
| ** **                                                                                                                                                                                                                                                       | ** ** | **As of  September 30  2005** | ** ** | **As of  December 31  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Redeemable  Preferred Shares 167,000 shares authorized, 140,973 shares outstanding as of September 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. |       | $                                  | 252,546    |                              | $          | 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                                                                                                                                                                                                                    |       | $                                  | 258,908    |                              | $          | 229,910 |   |

 

The cash settlement at the redemption date, May 31,2011, (assuming no cash dividends are paid through the redemption date) is$680.6 million for the redeemable preferred shares and $6.4 million (net of thenote receivable of $2.4 million) for the redeemable common shares that havebeen put for redemption by the shareholder.

 

**12.    DEFINEDBENEFIT PLANS**

 

The company sponsors threenoncontributory defined benefit pension plans (the “United States Plans”)covering domestic employees with 1,000 or more hours of service. The companyfunds these in accordance with the funding requirements of the EmployeeRetirement Income Security Act of 1974. Contributions are intended to not onlyprovide for benefits attributed to service to date but also for those expectedto be earned in the future. We also sponsor a defined benefit plan in Germany(the “Germany Plan”). For information on the Germany Plan please refer to theCompany’s Form 10-K for the year ended December 31, 2004.

 

In the second quarter of2004, the Company redesigned its retirement programs which led to thecurtailment and “freeze” of the pension plan for U.S. salaried employeeseffective June 30, 2004.  As a result, a curtailment gain of $1.6million was recognized as income during the quarter ended June 30, 2004.

 

The consolidated accrued netpension expense for the three and nine months ended September 30, 2005 and2004 includes the following components (in thousands):

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **United States Plans**                         |       |                                       |       |                                      |       |   |   |   |   |
| Service cost-benefits earned during the  period |       | $                                          | 104        |                                      | $          | 62 |   | $ | 312 |   | $ | 2,440 |   |
| Interest cost on projected benefit  obligation  |       | 1,195                                      |       | 1,105                                     |       | 3,585 |   | 3,853 |   |
| Expected return on assets                       |       | (1,286                                     | )          | (1,164                                    | )          | (3,858 | ) | (3,374 | ) |
| Curtailment (gain) loss                         |       | —                                     |       | —                                    |       | — |   | (1,563 | ) |
| Other                                           |       | 28                                         |       | 21                                        |       | 84 |   | 389 |   |
| Total accrued pension expense                   |       | $                                          | 41         |                                      | $          | 24 |   | $ | 123 |   | $ | 1,745 |   |

 

16

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**13.    CONTINGENCIES**

 

*Litigation.*  We are involved in various litigationmatters from time to time in the ordinary course of our business, includingmatters described in previous filings. In our opinion, none of such litigationis material to our financial condition or results of operations.

 

**14.    SALE OFALLIANT ASSETS**

 

On April 13, 2005 theCompany sold the intellectual property, working capital, and equipment assetsused in the Alliant operations to an independent third party for a purchaseprice of $6.3 million, subject to certain adjustments, with $4.6 million paidin cash at closing, $1.1 million of additional payments received through September 30,2005, and $0.6 million was placed in escrow.  Of this escrowed amount,$0.3 million was remitted to the buyer as a purchase price adjustment and theremaining $0.3 million will be paid to the Company twenty four months afterclosing.  The Company recorded a gain of $4.1 million on the sale in thePrinted Products Film division of our Specialty Products Group which isincluded in other income in the consolidated statement of operations for thenine month period ended September 30, 2005.  Net sales and net incomefor this business were $0.7 million and $3.5 million, respectively for the ninemonths ended September 30, 2005.    Net sales for the threeand nine month periods ended September 30, 2004 were $0.6 million and $2.0million, respectively.  Net loss for the three and nine month periodsended September 30, 2004 were $0.2 million and $0.6 million, respectively.

 

**15.    CONDENSEDCONSOLIDATING 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 for the 2000/2002 Notes, 2003Notes, 2004 Notes and Amended 2004 Notes (collectively, the “Notes”), on acombined basis, with any investments in non-guarantor subsidiaries specified inthe Indentures recorded under the equity method, (iii) direct and indirectnon-guarantor subsidiaries on a combined basis, (iv) the eliminationsnecessary to arrive at the information for Pliant Corporation and itssubsidiaries on a consolidated basis, and (v) Pliant Corporation on aconsolidated basis, in each case as of September 30, 2005 and December 31,2004 and for the nine months ended September 30, 2005 and 2004.  TheNotes are fully and unconditionally guaranteed on a joint and several basis byeach guarantor subsidiary and each guarantor subsidiary is wholly owned,directly or indirectly, by Pliant Corporation.  There are no contractualrestrictions limiting transfers of cash from guarantor and non-guarantorsubsidiaries to Pliant Corporation, within the meaning of Rule 3-10(h)(1) ofRegulation S-X.  There are no contractual restrictions limiting transfersof cash from guarantor and non-guarantor subsidiaries to PliantCorporation.  The condensed consolidating financial statements arepresented herein, rather than separate financial statements for each of theguarantor subsidiaries, because management believes that separate financialstatements relating to the guarantor subsidiaries are not material toinvestors.

 

17

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2005 (IN THOUSANDS)(UNAUDITED)

 
| ** **                                               | ** ** | **Pliant  Corporation  Parent Only** | ** ** | **Combined  Guarantors** | ** ** | **Combined  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|------------------------------|------------|------------------|------------|---------------------------------------|------------|
| **ASSETS**                                               |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT ASSETS:                                          |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Cash and cash equivalents                                |       | $                                    | —     |                     | $          | 871                          |       | $                | 6,078      |                                  | $          | — |   | $ | 6,949 |   |
| Receivables – net                                   |       | 103,851                              |       | 8,582                    |       | 18,887                       |       | —           |       | 131,320                               |       |
| Inventories                                              |       | 71,809                               |       | 8,272                    |       | 11,185                       |       | —           |       | 91,266                                |       |
| Prepaid expenses and other                               |       | 2,699                                |       | 431                      |       | 1,893                        |       | —           |       | 5,023                                 |       |
| Income taxes receivable                                  |       | (478                                 | )          | 1,159                    |       | 707                          |       | —           |       | 1,388                                 |       |
| Deferred income taxes                                    |       | 10,402                               |       | —                   |       | (912                         | )          | —           |       | 9,490                                 |       |
| Total current assets                                     |       | 188,283                              |       | 19,315                   |       | 37,838                       |       | —           |       | 245,436                               |       |
| PLANT AND EQUIPMENT, Net                                 |       | 244,725                              |       | 15,760                   |       | 32,899                       |       | —           |       | 293,384                               |       |
| GOODWILL                                                 |       | 167,583                              |       | 13,331                   |       | 1,331                        |       | —           |       | 182,245                               |       |
| INTANGIBLE ASSETS, Net                                   |       | 4,243                                |       | 11,099                   |       | 42                           |       | —           |       | 15,384                                |       |
| INVESTMENT IN SUBSIDIARIES                               |       | (37,603                              | )          | —                   |       | —                       |       | 37,603           |       | —                                |       |
| OTHER ASSETS                                             |       | 37,044                               |       | —                   |       | 2,811                        |       | —           |       | 39,855                                |       |
| TOTAL ASSETS                                             |       | $                                    | 604,275    |                     | $          | 59,505                       |       | $                | 74,921     |                                  | $          | 37,603 |   | $ | 776,304 |   |
|                                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)** |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT LIABILITIES:                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
|                                                     |       |                                 |       |                     |       |                         |       |             |       |                                  |       |
| Trade accounts payable                                   |       | $                                    | 83,147     |                     | $          | 7,140                        |       | $                | 10,991     |                                  | $          | — |   | $ | 101,278 |   |
| Accrued liabilities                                      |       | 55,160                               |       | 4,700                    |       | 4,273                        |       | —           |       | 64,133                                |       |
| Current portion of long-term debt                        |       | 1,355                                |       | —                   |       | —                       |       | —           |       | 1,355                                 |       |
| Due to (from) affiliates                                 |       | (134,714                             | )          | 76,012                   |       | 58,702                       |       | —           |       | —                                |       |
| Total current liabilities                                |       | 4,948                                |       | 87,852                   |       | 73,966                       |       | —           |       | 166,766                               |       |
| LONG-TERM DEBT, Net of current portion                   |       | 885,630                              |       | —                   |       | —                       |       | —           |       | 885,630                               |       |
| OTHER LIABILITIES                                        |       | 25,967                               |       | —                   |       | 2,758                        |       | —           |       | 28,725                                |       |
| DEFERRED INCOME TAXES                                    |       | 21,985                               |       | 4,313                    |       | 3,140                        |       | —           |       | 29,438                                |       |
| SHARES SUBJECT TO MANDATORY REDEMPTION                   |       | 258,908                              |       | —                   |       | —                       |       | —           |       | 258,908                               |       |
| Total liabilities                                        |       | 1,197,438                            |       | 92,165                   |       | 79,864                       |       | —           |       | 1,369,467                             |       |
| 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                   |       | 29,303                       |       | (43,323          | )          | 103,376                               |       |
| Warrants to purchase common stock                        |       | 39,133                               |       | —                   |       | —                       |       | —           |       | 39,133                                |       |
| Retained earnings (deficit)                              |       | (727,954                             | )          | (48,120                  | )          | (26,498                      | )          | 74,618           |       | (727,954                              | )          |
| Stockholders’ notes receivable                      |       | (660                                 | )          | —                   |       | —                       |       | —           |       | (660                                  | )          |
| Accumulated other comprehensive loss                     |       | (13,807                              | )          | 1,440                    |       | (7,748                       | )          | 6,308            |       | (13,807                               | )          |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)                |       | (599,912                             | )          | (32,660                  | )          | (4,943                       | )          | 37,603           |       | (599,912                              | )          |
| Total liabilities and stockholders’ (deficit)       |       | $                                    | 604,275    |                     | $          | 59,505                       |       | $                | 74,921     |                                  | $          | 37,603 |   | $ | 776,304 |   |

 

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 NINE MONTHS ENDED SEPTEMBER 30, 2005(IN THOUSANDS) (UNAUDITED)

 
| ** **                              | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                            | ** ** |
| SALES , Net                             |       | $                                      | 657,257    |                                  | $          | 50,363                                    |       | $                | 97,659     |                                  | $          | (21,172 | ) | $ | 784,107 |   |
| COST OF SALES                           |       | 566,243                                |       | 46,608                                |       | 93,071                                    |       | (21,172          | )          | 684,750                               |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| GROSS PROFIT                            |       | 91,014                                 |       | 3,755                                 |       | 4,588                                     |       | —           |       | 99,357                                |       |
| OPERATING EXPENSES                      |       | 56,935                                 |       | 3,924                                 |       | 6,321                                     |       | —           |       | 67,180                                |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| OPERATING INCOME                        |       | 34,079                                 |       | (169                                  | )          | (1,733                                    | )          | —           |       | 32,177                                |       |
| INTEREST EXPENSE                        |       | (106,924                               | )          | (514                                  | )          | (3,922                                    | )          | —           |       | (111,360                              | )          |
| EQUITY IN EARNINGS OF SUBSIDIARIES      |       | (6,555                                 | )          | —                                |       | —                                    |       | 6,555            |       | —                                |       |
| OTHER INCOME (EXPENSE), Net             |       | 3,774                                  |       | (2,186                                | )          | 2,371                                     |       | —           |       | 3,959                                 |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCOME (LOSS) BEFORE INCOME TAXES   |       | (75,626                                | )          | (2,869                                | )          | (3,284                                    | )          | 6,555            |       | (75,224                               | )          |
| INCOME TAX PROVISION                    |       | 794                                    |       | 14                                    |       | 388                                       |       | —           |       | 1,196                                 |       |
| INCOME(LOSS) FROM CONTINUING OPERATIONS |       | (76,420                                | )          | (2,883                                | )          | (3,672                                    | )          | 6,555            |       | (76,420                               | )          |
| LOSS FROM DISCONTINUED OPERATIONS       |       | (560                                   | )          | —                                |       | —                                    |       | —           |       | (560                                  | )          |
| NET INCOME (LOSS)                       |       | $                                      | (76,980    | )                                     | $          | (2,883                                    | )          | $                | (3,672     | )                                     | $          | 6,555 |   | $ | (76,980 | ) |

 

20

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING INCOME STATEMENT

FORTHE NINE MONTHS ENDED SEPTEMBER 30, 2004 (IN THOUSANDS) (UNAUDITED)

 
| ** **                              | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                            | ** ** |
| SALES , Net                             |       | $                                      | 588,571    |                                  | $          | 58,251                                    |       | $                | 90,482     |                                  | $          | (22,160 | ) | $ | 715,144 |   |
| COST OF SALES                           |       | 490,199                                |       | 50,952                                |       | 84,274                                    |       | (22,160          | )          | 603,265                               |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| GROSS PROFIT                            |       | 98,372                                 |       | 7,299                                 |       | 6,208                                     |       | —           |       | 111,879                               |       |
| OPERATING EXPENSES                      |       | 56,708                                 |       | 3,588                                 |       | 6,330                                     |       | —           |       | 66,626                                |       |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| OPERATING INCOME                        |       | 41,664                                 |       | 3,711                                 |       | (122                                      | )          | —           |       | 45,253                                |       |
| INTEREST EXPENSE                        |       | (106,669                               | )          | (471                                  | )          | (3,157                                    | )          | —           |       | (110,297                              | )          |
| EQUITY IN EARNINGS OF SUBSIDIARIES      |       | (16,764                                | )          | —                                |       | —                                    |       | 16,764           |       | —                                |       |
| OTHER INCOME (EXPENSE), Net             |       | (412                                   | )          | (121                                  | )          | 467                                       |       | —           |       | (66                                   | )          |
|                                    |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCOME (LOSS) BEFORE INCOME TAXES   |       | (82,181                                | )          | 3,119                                 |       | (2,812                                    | )          | 16,764           |       | (65,110                               | )          |
| INCOME TAX PROVISION                    |       | 503                                    |       | 1,164                                 |       | 1,626                                     |       | —           |       | 3,293                                 |       |
| INCOME(LOSS) FROM CONTINUING OPERATIONS |       | (82,684                                | )          | 1,955                                 |       | (4,438                                    | )          | 16,764           |       | (68,403                               | )          |
| LOSS FROM DISCONTINUED OPERATIONS       |       | —                                 |       | (15,881                               | )          | —                                    |       | —           |       | (15,881                               | )          |
| NET INCOME (LOSS)                       |       | $                                      | (82,684    | )                                     | $          | (13,926                                   | )          | $                | (4,438     | )                                     | $          | 16,764 |   | $ | (84,284 | ) |

 

21

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (INTHOUSANDS) (UNAUDITED)

 
| ** **                                                    | ** ** | **Pliant  Corporation  (Parent Only)** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Combined  Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** **                                | ** ** | ** **       | ** ** | ** **                            | ** ** |
| CASH FLOWS PROVIDED BY (USED IN) OPERATING  ACTIVITIES        |       | $                                      | 10,707     |                                  | $          | 1,615                                     |       | $                | (2,460     | )                                     | $          | — |   | $ | 9,862 |   |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                         |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Proceeds from sale of assets                                  |       | 59                                     |       | 605                                   |       | 4,527                                     |       | —           |       | 5,191                                 |       |
| Capital expenditures for plant and equipment                  |       | (23,678                                | )          | (778                                  | )          | (1,966                                    | )          | —           |       | (26,422                               | )          |
| Net cash (used in) provided by investing  activities          |       | (23,619                                | )          | (173                                  | )          | 2,561                                     |       | —           |       | (21,231                               | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                         |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Issuance of senior secured notes                              |       | 250,607                                |       | —                                |       | —                                    |       | —           |       | 250,607                               |       |
| Repayment of senior secured discount notes                    |       | (250,607                               | )          | —                                |       | —                                    |       | —           |       | (250,607                              | )          |
| Payment of financing fees                                     |       | (7,643                                 | )          | —                                |       | —                                    |       | —           |       | (7,643                                | )          |
| Repayment of capital leases and other, net                    |       | (1,488                                 | )          | —                                |       | —                                    |       | —           |       | (1,488                                | )          |
| Proceeds from revolving debt, net                             |       | 24,100                                 |       | —                                |       | —                                    |       | —           |       | 24,100                                |       |
| Proceeds from issuance (repurchase) of preferred  stock       |       | (10                                    | )          | —                                |       | —                                    |       | —           |       | (10                                   | )          |
| Net cash provided by financing activities                     |       | 14,959                                 |       | —                                |       | —                                    |       | —           |       | 14,959                                |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH TO DISCONTINUED OPERATIONS                               |       | (195                                   | )          | —                                |       | —                                    |       | —           |       | (195                                  | )          |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH  EQUIVALENTS |       | (1,852                                 | )          | (1,275                                | )          | 1,101                                     |       | —           |       | (2,026                                | )          |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS         |       | —                                 |       | 167                                   |       | 1,202                                     |       | —           |       | 1,369                                 |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF THE  PERIOD         |       | —                                 |       | 704                                   |       | 4,876                                     |       | —           |       | 5,580                                 |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                |       | $                                      | —     |                                  | $          | 871                                       |       | $                | 6,078      |                                  | $          | — |   | $ | 6,949 |   |

 

22

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**PLIANT CORPORATION AND SUBSIDIARIES**

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FORTHE NINE MONTHS ENDED SEPTEMBER 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        |       | $                                      | (10,228    | )                                     | $          | 2,737                                     |       | $                | 27,747     |                                  | $          | — |   | $ | 20,256 |   |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                         |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Proceeds from sale of Solutions’ assets                  |       | 6,450                                  |       | —                                |       | —                                    |       | —           |       | 6,450                                 |       |
| Capital expenditures for plant and equipment                  |       | (9,210                                 | )          | (299                                  | )          | (5,465                                    | )          | —           |       | (14,974                               | )          |
| Net cash used in investing activities                         |       | (2,760                                 | )          | (299                                  | )          | (5,465                                    | )          | —           |       | (8,524                                | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                         |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| Net proceeds from issuance of senior secured  discount notes  |       | 225,299                                |       | —                                |       | —                                    |       | —           |       | 225,299                               |       |
| Payment of financing fees                                     |       | (9,354                                 | )          | —                                |       | —                                    |       | —           |       | (9,354                                | )          |
| Repayment of term debt and revolver                           |       | (195,412                               | )          | —                                |       | (24,163                                   | )          | —           |       | (219,575                              | )          |
| Repayment of capital leases and other, net                    |       | 34                                     |       | —                                |       | —                                    |       | —           |       | 34                                    |       |
| Proceeds from revolving debt, net                             |       | —                                 |       | —                                |       | —                                    |       | —           |       | —                                |       |
| Net cash (used in) provided by financing  activities          |       | 20,567                                 |       | —                                |       | (24,163                                   | )          |             |       | (3,596                                | )          |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH TO DISCONTINUED OPERATIONS                               |       | (3,952                                 | )          | (1,886                                | )          | —                                    |       | —           |       | (5,838                                | )          |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH  EQUIVALENTS |       | (386                                   | )          | (1,194                                | )          | 1,761                                     |       | —           |       | 181                                   |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS         |       | 3,241                                  |       | (642                                  | )          | (120                                      | )          | —           |       | 2,479                                 |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF THE  PERIOD         |       | —                                 |       | 1,192                                 |       | 2,116                                     |       | —           |       | 3,308                                 |       |
|                                                          |       |                                   |       |                                  |       |                                      |       |             |       |                                  |       |
| CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                |       | $                                      | 3,241      |                                  | $          | 550                                       |       | $                | 1,996      |                                  | $          | — |   | $ | 5,787 |   |

 

23

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**16.   SUBSEQUENT EVENTS**

 

On November 4, 2005, the Company entered into aFirst Supplemental Indenture with respect to each of the Indentures, dated May 31,2000 and April 10, 2002, among Pliant Corporation, certain subsidiaries ofPliant Corporation and The Bank of New York, as trustee, governing PliantCorporation’s 13% Senior Subordinated Notes.  The Indentures were amendedto increase the amount of indebtedness permitted to be incurred thereunder by$25 million, which additional indebtedness may be senior to the 13% SeniorSubordinated Notes.  On November 17,2005, we further amended the Indentures to modify the anti-layering covenantand related definition of “senior indebtedness” and to increase the amount ofsenior indebtedness permitted to be incurred under the 2000 Indenture by anadditional $20 million.  Those amendmentsallowed us to enter into the New Credit Facility described below, whichdesignates a portion of the indebtedness incurred thereunder as junior in rightof payment to the balance of such indebtedness, and permit us to utilize themaximum availability thereunder.

 

On November 7, 2005, Pliant Corporation enteredinto an Amendment and Waiver No. 5 with respect to the Credit Agreementdated as of February 17, 2004, as previously amended, among PliantCorporation, certain of its subsidiaries, Credit Suisse, Cayman Branch, asAdministrative Agent, General Electric Capital Corporation, as Collateral Agentand JPMorgan Chase Bank, N.A., as Syndication Agent, pursuant to whichamendment and waiver the lenders parties to the Credit Agreement agreed, forthe period from November 4, 2005 to November 21, 2005, to increasetheir aggregate maximum commitments to make loans and provide letters of creditfrom $100 million to $105 million and, for the period from September 30,2005 to November 29, 2005, to waive the applicability of a fixed chargecoverage ratio that could otherwise limit the aggregate maximum amount ofavailability for loans and letters of credit.  The amendment and waiveralso provides that the aggregate maximum amount of availability during theperiod commencing upon the effectiveness of the amendment and waiver and endingNovember 29, 2005 shall not exceed the borrowing base minus $15 million.

 

On November 21, 2005, the Company entered intoa new revolving credit facility providing up to $140 million of totalavailability (the “New Credit Facility”), subject to the borrowing basedescribed below.  The New Credit Facilityincludes a $25 million letter of credit sub-facility, with letters of creditreducing availability under the New Credit Facility. The New Credit Facilityreplaced the 2004 Credit Facility.

 

The New Credit Facility is secured by a firstpriority security interest in substantially all our inventory, receivables anddeposit accounts, 100% of the capital stock of, or other equity interests in,our existing and future domestic subsidiaries, 65% of the capital stock of, orother equity interests in existing and future first-tier foreign subsidiaries,investment property and certain other assets of the Company and itssubsidiaries and a second-priority security interest in our real property, fixtures,equipment, intellectual property and other assets.

 

The New Credit Facility will mature on May 21,2007.  The interest rates are (i) on$20 million outstanding under the New Credit Facility, LIBOR plus 6.50% orIndex Rate (either prime rate or .50% over the Federal Funds Rate, if higher)plus 5.25% and (ii) on additional amounts outstanding, LIBOR plus 2.75% orIndex Rate plus 1.50%.  The commitmentfee for the unused portion of the New Credit Facility is 0.50% per annum.

 

The borrowing base under the New Credit Facility isbased on specified percentages of our eligible accounts receivable, finishedgoods inventory and raw material inventory minus $10 million and other reserves.  The New Credit Facility requires us to complywith a monthly minimum fixed charge coverage ratio.

 

**ITEM2.               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

The purpose of this section is to discuss andanalyze our consolidated financial condition, liquidity and capital resourcesand results of operations. This analysis should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contained 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 flowsfrom the sale of film and flexible packaging products throughout the world. Wemanufacture these products at 23 facilities located on 21 sites in the UnitedStates, Australia, Canada, Germany and Mexico. Our sales have grown primarilyas a result of strategic acquisitions made over the past several years,increased levels of production at acquired facilities, return on capitalexpenditures and the overall growth in the markets for film and flexiblepackaging products.

 

**Third Quarter Overview**

 

We recorded sales of $262.0 million in the threemonths ended September 30, 2005.  This is a 7.7% increase from salesof $243.2 million for the three months ended September 30, 2004, stated ona comparable basis excluding the results of the Pliant Solutions segment (whichwas sold during the third quarter of 2004 and accounted for as a discontinuedoperation) for both periods.  Third quarter 2005 sales measured in poundswere 221.9 million, which represents a 0.4% increase from the third quarter of2004.  Loss from continuing operations for the three and nine months endedSeptember 30, 2005 were $25.4 million and $76.4 million, respectivelycompared with loss from continuing operations for the three and nine monthsended September 30, 2004 of $21.8 million and $68.4 million, respectively.

 

Total segment profit was $21.6 million for the threemonths ended September 30, 2005, compared to $25.3 million for the threemonths ended September 30, 2004, presented on a comparable basis excludingthe results of the Pliant Solutions segment (which was sold during the thirdquarter of 2004 and accounted for as a discontinued operation) for bothperiods.  Segment profit, presented in accordance with generally acceptedaccounting principles (GAAP), reflects income from continuing operations beforeinterest expense, income taxes, depreciation, amortization, restructuringcosts, and non-cash charges. The major contributing factors to this decrease insegment profit of $3.7 million between periods are discussed in detail in thenext paragraph.

 

Average sales price (“ASP”) for the three monthsended September 30, 2005 was $1.18 per pound as compared to $1.10 perpound for the three months ended September 30, 2004.  This 7.3%increase generated approximately $18 million in incremental sales. However, ourraw material costs, of which 60% are resin related, increased approximately $22million.  In absolute terms our waste declined nearly 24% due to internalwaste reduction programs, contributing $1.7 million to segment profit. The increase in sales volume between periods yielded approximately $1.0 millionmore segment profit. Freight and utility costs increased approximately $1.7million between periods due to suppliers passing along higher energy costs andpackaging costs increased $0.5 million due to a change in product mix and morecomplex customer demands.  Lower production levels, driven by inventoryreduction initiatives, caused $0.9 million in under-absorbed overhead ascompared to 2004.  Sales, general and administrative costs were lower in2005 by $0.7 million compared to 2004 due primarily to payroll relatedexpenses.

 

24

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Raw Material Costs

 

The primary raw materials used in the manufacture ofmost of our products are polypropylene resin, polyethylene resin and PVC resin.The prices of these materials are primarily a function of the price of crudeoil and natural gas liquids. Prices for these commodities have risendramatically over the last year and could continue to rise in the fourthquarter of 2005 and beyond.  We have not historically hedged our exposureto raw material increases.  Raw material costs as a percentage of saleshave increased to 55.0% for the third quarter of 2005, from 51.8% for the comparableperiod of 2004.

 

To the extent we are not able to pass along priceincreases of raw materials, or to the extent any such price increases aredelayed, our cost of goods sold would continue to increase and our gross profitand operating income would correspondingly decrease. Significant increases inraw material prices that cannot be passed on to customers could have a materialadverse effect on our results of operations and financial condition.

 

**Results of Operations**

 

The following table sets forth net sales, operatingexpenses, and operating income, and such amounts as a percentage of net sales,for the three and nine months ended September 30, 2005 and 2004 (dollarsin millions).

 
| ** **                                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **$**                                     | ** ** | **% of  Sales**                          | ** ** | **$** | ** ** | **% of  Sales** | ** ** | **$** | ** ** | **% of  Sales** | ** ** | **$** | ** ** | **% of  Sales** | ** ** |
|                                                     | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                |       | $                                         | 262.0      |                                     | 100.0      | % | $ | 243.2 |   | 100.0 | % | $ | 784.1 |   | 100.0 | % | 715.1 |   | 100.0 | % |
| Cost of sales                                            |       | 229.5                                     |       | 87.6                                     |       | 207.0 |   | 85.1 |   | 684.8 |   | 87.3 |   | 603.2 |   | 84.4 |   |
| Gross profit                                             |       | 32.5                                      |       | 12.4                                     |       | 36.2 |   | 14.9 |   | 99.3 |   | 12.7 |   | 111.9 |   | 15.6 |   |
| Operating expenses before restructuring and other  costs |       | 21.0                                      |       | 8.0                                      |       | 20.8 |   | 8.6 |   | 64.7 |   | 8.3 |   | 64.4 |   | 9.0 |   |
| Restructuring and other costs                            |       | 0.3                                       |       | 0.1                                      |       | 2.2 |   | 0.9 |   | 2.4 |   | 0.3 |   | 2.2 |   | 0.3 |   |
| Total operating expenses                                 |       | 21.3                                      |       | 8.1                                      |       | 23.0 |   | 9.5 |   | 67.1 |   | 8.6 |   | 66.6 |   | 9.3 |   |
| Operating income                                         |       | $                                         | 11.2       |                                     | 4.3        | % | $ | 13.2 |   | 5.4 | % | $ | 32.2 |   | 4.1 | % | $ | 45.3 |   | 6.3 | % |
|                                                          |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

*Net Sales*

 

Net sales increased by $18.8 million, or 7.7%, to$262.0 million for the third quarter of 2005 from $243.2 million for the threemonths ended September 30, 2004. The increase was primarily due to a 7.3%increase in our average selling price and a 0.4% increase in our salesvolumes.  See “Operating Segment Review” below for a detailed discussionof sales volumes and selling prices by segment and division.

 

25

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*Gross Profit*

 

Gross profit decreased by $3.7 million to $32.5million for the third quarter of 2005, from $36.2 million for the three monthsended September 30, 2004. This decrease was primarily due to higher rawmaterial, freight, and energy costs.  See “Operating Segment Review” belowfor a detailed discussion of the margin variances by segment.

 

*Total Operating Expenses beforeRestructuring and Other Costs*

 

Total operating expenses before restructuring andother costs increased $0.2 million, or 1.0%, to $21.0 million for the thirdquarter of 2005 from $20.8 million for the third quarter of 2004. Research anddevelopment costs increased $0.9 million to $2.4 million for the third quarterof 2005 from $1.5 million in the third quarter of 2004, while sales, generaland administrative costs decreased $0.7 million to $18.6 million for the thirdquarter of 2005 from $19.3 million in the third quarter of 2004.

 

# ***Restructuring and Other Costs***

# ** **

Restructuring and other costs decreased by $1.9million from the third quarter of 2004 due primarily to recognition in 2004 of$1.9 million in fixed asset impairment and $0.3 million of severance and othercosts associated with closure of our Harrisville, Rhode Island plant within ourEngineered Films segment.  These costs for the third quarter of 2005include $0.1 million of severance associated with our Rhode Island closure and$0.2 million of property taxes associated with our Shelbyville, Indiana plantclosure within our Specialty Products Group segment.

 

*Operating Income*

 

Operating income decreased by $2.0 million to $11.2million for the third quarter of 2005, from $13.2 million for the third quarterof 2004, due to higher raw material, freight, and energy costs, and greateremphasis on research and development.

 

*Interest Expense*

 

Interest expense on current and long-term debtincreased by $1.6 million, or 6.4%, to $26.7 million for the three months endedSeptember 30, 2005 from $25.1 million for the three months ended September 30,2004. This increase was principally due to incremental interest associated withour outstanding revolver balance and lines of credit.

 

Interest expense on preferred stock reflects thedividends and accretion on the redeemable preferred stock of the Company thatis classified as interest expense in accordance with SFAS No. 150, whichwe adopted effective January 1, 2004.  Effective October 1,2005, the annual dividend rate increases from 14% per annum to 16% per annum aswe did not pay all accrued dividends in cash on September 30, 2005.

 

*Income Tax Expense*

 

Income tax expense for the three months ended September 30,2005 was a benefit of $0.1 million on pretax losses of $25.1 million ascompared to income tax expense of $0.9 million on pretax losses of $20.9million 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 $3.6million to $25.4 million for the third quarter of 2005, from $21.8 million forthe third quarter of 2004, due to the factors discussed above.

 

*Discontinued Operations*

 

On September 30, 2004, we sold substantiallyall of the assets of our wholly-owned subsidiary, Pliant Solutions Corporationand recorded a loss on sale of $8.5 million.  Losses from thesediscontinued operations for the three months ended September 30, 2004 were$1.9 million.

 

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**Nine Months Ended September 30,2005 Compared with the Nine Months Ended September 30, 2004**

 

*Net Sales*

 

Net sales increased by $69.0 million, or 9.6%, to $784.1million for the nine months ended September 30, 2005 from $715.1 millionfor the nine months ended September 30, 2004. The increase was primarilydue to a 11.9% increase in our average selling price resulting primarily fromthe pass through of a portion of the increases in our raw material prices tocustomers offset by a 2.1% decrease in sales volume.  See “OperatingSegment Review” below for a detailed discussion of sales volumes and sellingprices by segment and division.

 

*Gross Profit*

 

Gross profit decreased by $12.6 million to $99.3million for nine months ended September 30, 2005, from $111.9 million forthe nine months ended September 30, 2004. This decrease was primarily dueto higher raw material, freight, and energy costs.  See “Operating SegmentReview” below for a detailed discussion of the margin variances by segment.

 

*Total Operating Expenses beforeRestructuring and Other Costs*

 

Total operating expenses before restructuring andother costs increased $0.3 million, or 0.5%, to $64.7 million for the ninemonths ended September 30, 2005 from $64.4 million for the nine monthsended September 30, 2004. Research and development costs increased $1.9million to $6.6 million for the nine months ended September 30, 2005 from$4.7 million for the nine months ended September 30, 2004, while sales,general and administrative costs decreased $1.6 million to $58.1 million ninemonths ended September 30, 2005 from $59.7 million for the nine monthsended September 30, 2004.

 

# ***Restructuring and Other Costs***

# ** **

Restructuring and other costs increased $0.2 millionto $2.4 million for the nine months ended September 30, 2005 from $2.2million for the nine months ended September 30, 2004.  During 2005,$2.1 million of charges were recorded in connection with our Shelbyville,Indiana facility, consisting of $1.9 million in net costs to terminate theremaining equipment leases and $0.2 million of related property taxes.  Inaddition, $0.3 million of severance costs were incurred in connection with thesale of our Alliant business and $0.2 million of severance costs were incurredin connection with our Rhode Island plant closure.  During 2004, $2.2million of charges associated with closure of our Rhode Island plant wererecorded consisting of $1.9 million in fixed asset impairments and $0.3 millionin severance and other payroll related costs.  Restructuring costsassociated with our Shelbyville, Indiana and Alliant asset sale are reflectedin our Specialty Products Group operating results, while restructuring costs forour Harrisville, Rhode Island plant closure are reflected in our EngineeredFilm segment results.

 

*Operating Income*

 

Operating income decreased by $13.1 million to $32.2million for the nine months ended September 30, 2005, from $45.3 millionfor the nine months ended September 30, 2004, due to higher raw material,freight, and energy costs, and greater emphasis on research anddevelopment.  In addition operating income for the nine months ended September 30,2004 was favorably affected by a curtailment gain of $1.6 million related tothe curtailment of the U.S. salaried pension plan.  (See Note 12 to thecondensed consolidated financial statements).

 

*Interest Expense*

 

Interest expense on current and long-term debtdecreased by $1.9 million, or 2.3%, to $82.4 million for the nine months ended September 30,2005 from $84.3 million for the nine months ended September 30, 2004. Thisdecrease was principally due to continued accretion of the original issuediscount associated with our 2004 Notes, increased interest costs associatedwith our Amended 2004 Notes and our revolving credit facility, offset by acharge in 2004 for the write off of previously capitalized financing fees andlosses related to interest rate derivatives totaling $10.1 million. Inaddition, during 2005, we recorded charges of $2.6 million for underwriting,legal and accounting fees associated with our consent solicitation for our 2004Notes.

 

Interest expense on preferred stock reflects thedividends and accretion on the redeemable preferred stock of the Company thatis classified as interest expense in accordance with SFAS 150, which we adoptedeffective January 1, 2004.  Effective October 1, 2005, theannual dividend rate will increase from 14% per annum to 16% per annum as wedid not pay all accrued dividends in cash on September 30, 2005.

 

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*Other Income (Expense)*

 

Other income was $4.0 million for the nine monthsended September 30, 2005, as compared to expense of $0.1 million for thenine months ended September 30, 2004.  Other income for the ninemonths ended September 30, 2005 included a $4.1 million gain on sale ofAlliant offset by $0.1 million of other less significant items.

 

*Income Tax Expense*

 

Income tax expense for the nine months ended September 30,2005 was $1.2 million on pretax losses from continuing operations of $74.8million as compared to $3.3 million on pretax losses from continuing operationsof $65.1 million for the same period in 2004. Income tax benefits related tonet operating losses in the United States were offset by a valuation allowanceas the realization of these tax benefits is not certain. Therefore, the incometax expense in the statements of operations primarily reflects foreign incometaxes.

 

*Loss From Continuing Operations*

 

Loss from continuing operations increased by $8.0million to $76.4 million for the nine months ended September 30, 2005,from $68.4 million for the nine months ended September 30, 2004, due tothe factors discussed above.

 

*Discontinued Operations*

 

On September 30, 2004, we sold substantiallyall of the assets of our wholly-owned subsidiary, Pliant SolutionsCorporation.  Losses from these discontinued operations for the ninemonths ended September 30, 2005 and September 30, 2004 were $0.6million and $7.4 million, respectively, and a loss on sale of thesediscontinued operations of $8.5 million was recognized in 2004.

 

**Operating Segment Review**

 

*General*

 

We evaluate the performance of our operatingsegments based on net sales (excluding inter-company sales) and segmentprofit.  The segment profit reflects income from continuing operationsbefore interest expense, income taxes, depreciation, amortization,restructuring costs and other non-cash charges.  For more information onour operating segments, including a reconciliation of segment profit to incomebefore taxes, see Note 10 to the condensed consolidated financial statementsincluded elsewhere in this report.

 

We have four reporting segments:  EngineeredFilms, Performance Films, Industrial Films and Specialty Products Group.

 

Summary of segment information (in millions ofdollars):

 
| ** **                                      | ** ** | **Engineered  Films** | ** ** | **Performance  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Products  Group** | ** ** | **Corporate/  Other** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|--------------------------------|------------|-----------------------|------------|-----------|------------|
| **Three months ended September 30,  2005** |       |                  |       |                   |       |                  |       |                           |       |                  |       |      |       |
| Net sales                                       |       | $                     | 56.2       |                   | $          | 26.9                  |       | $                              | 75.7       |                  | $          | 101.6     |       | $ | 1.6 |   | $ | 262.0 |   |
| Segment profit (loss)                           |       | 6.3                   |       | 3.4                    |       | 7.2                   |       | 12.1                           |       | (7.4                  | )          | 21.6      |       |
|                                            |       |                  |       |                   |       |                  |       |                           |       |                  |       |      |       |
| **Three months ended September 30,  2004** |       |                  |       |                   |       |                  |       |                           |       |                  |       |      |       |
| Net sales                                       |       | $                     | 54.2       |                   | $          | 24.4                  |       | $                              | 63.6       |                  | $          | 99.3      |       | $ | 1.7 |   | $ | 243.2 |   |
| Segment profit (loss)                           |       | 7.7                   |       | 3.9                    |       | 6.8                   |       | 13.7                           |       | (6.8                  | )          | 25.3      |       |
|                                            |       |                  |       |                   |       |                  |       |                           |       |                  |       |      |       |
| **Nine months ended September 30,  2005**  |       |                  |       |                   |       |                  |       |                           |       |                  |       |      |       |
| Net sales                                       |       | $                     | 174.7      |                   | $          | 77.1                  |       | $                              | 221.8      |                  | $          | 304.6     |       | $ | 5.9 |   | $ | 784.1 |   |
| Segment profit (loss)                           |       | 21.5                  |       | 9.8                    |       | 19.1                  |       | 39.4                           |       | (21.3                 | )          | 68.5      |       |
|                                            |       |                  |       |                   |       |                  |       |                           |       |                  |       |      |       |
| **Nine months ended September 30,  2004**  |       |                  |       |                   |       |                  |       |                           |       |                  |       |      |       |
| Net sales                                       |       | $                     | 164.8      |                   | $          | 74.5                  |       | $                              | 182.3      |                  | $          | 289.2     |       | $ | 4.3 |   | $ | 715.1 |   |
| Segment profit (loss)                           |       | 27.0                  |       | 12.6                   |       | 20.4                  |       | 39.7                           |       | (21.3                 | )          | 78.4      |       |

 

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

 

*Engineered Films*

 

*Net Sales*.  Net sales in Engineered Filmsincreased by $2.0 million, or 3.7%, to $56.2 million for the quarter ended September 30,2005 from $54.2 million for 2004. This increase was due to an increase in ouraverage selling prices of 6.7%, principally due to the pass-through of rawmaterial price increases and improvements in our sales mix, offset by a 2.9%decrease in sales volume.

 

*Segment profit*.  The Engineered Films segment profitwas $6.3 million for the quarter ended September 30, 2005, as compared to$7.7 million for the same period in 2004.  This decrease in segment profitwas primarily due to lower gross margins from sales volume declines,compression between our average selling price and average raw material costsrelated to contractual customers and the competitive environment withtransactional customers.

 

*Performance Films*

 

*Net sales*.  The net sales of our PerformanceFilms segment increased $2.5 million, or 10.3%, to $26.9 million for thequarter ended September 30, 2005 from $24.4 million for the same period in2004. This increase was principally due to an increase in our average sellingprices of 6.7%, primarily due to the pass through of resin price increases tocustomers, and an increase in sales volumes of 3.5%.

 

*Segment profit*.  Performance Films segment profit was$3.4 million for the quarter ended September 30, 2005, as compared to $3.9million for the same period in 2004.  This decrease in segment profit wasprimarily due to compression between our average selling price and average rawmaterial costs, and higher freight and energy costs.

 

*Industrial Films*

 

*Net sales*.  The net sales of our Industrial Filmssegment increased by $12.1 million, or 19.0%, to $75.7 million for the quarterended September 30, 2005 from $63.6 million for the quarter ended September 30,2004. This increase was due to an increase in sales volumes of value addedproducts of 8.2%, an increase in the mix of our value added stretch films, andan increase in our average selling prices of 9.9% resulting from the passthrough of raw material price increases.

 

*Segment profit*.  The Industrial Films segment profitwas $7.2 million for the quarter ended September 30, 2005, as compared to$6.8 million for the same period in 2004.  This $0.4 million increase insegment profit was due to an increase in sales volumes, partially offset by alag in the pass through of increases in raw material costs to contractualcustomers.

 

*Specialty Products Group*

 

*Net sales*.  The net sales of our SpecialtyProducts Group segment increased $2.3 million, or 2.3% to $101.6 million forthe quarter ended September 30, 2005 from $99.3 million for the quarterended September 30, 2004. This increase reflects an 8.0% increase in ouraverage selling prices, offset by a sales volume decrease of 5.3%.

 

Net sales in our Specialty Films division increased$0.9 million, or 1.9%, to $49.1 million for the quarter ended September 30,2005 from $48.2 million for the quarter ended September 30, 2004. Thisincrease reflects an increase in our average selling prices of 6.0% offset by adecrease in sales volume of 3.8% due to competition and product changes in ouragricultural markets.  Net sales in our Printed Products divisionincreased $1.3 million, or 2.6%, to $52.5 million for the quarter ended September 30,2005 from $51.1 million for the quarter ended September 30, 2004. Thisincrease reflects an increase in our average selling prices of 10.7% offset bya decrease in sales volume of 7.4% largely due to a major customer who filedfor reorganization late last year and the rationalization of marginallyprofitable customer accounts in late 2004.

 

*Segment profit*.  The Specialty Products Group segmentprofit was $12.1 million for the quarter ended September 30, 2005, ascompared to $13.7 million for the quarter ended September 30, 2004. This$1.6 million decrease is primarily attributable to lower sales volume andhigher raw material, freight, and energy costs.

 

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*Corporate/Other*

 

Corporate/Other includes our corporate headquartersin Schaumburg, Illinois and our research and development facility in NewportNews, Virginia. Unallocated corporate expenses increased by $0.6 million to$7.4 million for the quarter ended September 30, 2005, from $6.8 million forthe quarter ended September 30, 2004.  This increase was primarilydue to an increase in payroll related costs.

 

**Nine months ended September 30,2005 compared with the nine months ended September 30, 2004**

 

*Engineered Films*

 

*Net Sales*.  Net sales in Engineered Filmsincreased by $9.9 million, or 6.0%, to $174.7 million for the nine months endedSeptember 30, 2005 from $164.8 million for the nine months ended September 30,2004. This increase was due to an increase in our average selling prices of10.9%, principally due to the pass-through of raw material price increases andimprovements in our sales mix, offset by a 4.5% decrease in sales volume.

 

*Segment profit*.  The Engineered Films segment profitwas $21.5 million for the nine months ended September 30, 2005, ascompared to $27.0 million for the same period in 2004.  This decrease insegment profit was primarily due to lower gross margins from sales volumedeclines, 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 significant customer.

 

*Performance Films*

 

*Net sales*.  The net sales of our PerformanceFilms segment increased $2.6 million to $77.1 million for the nine months endedSeptember 30, 2005 from $74.5 million for the same period in 2004. Thisincrease was principally due to an increase in our average selling prices of9.4%, primarily due to the pass through of resin price increases to customers,offset by a decrease in our sales volumes of 5.4%.

 

*Segment profit*.  Performance Films segment profit was$9.8 million for the nine months ended September 30, 2005, as compared to$12.6 million for the same period in 2004.  This decrease in segmentprofit was primarily due to sales volume declines and its associated operatinginefficiencies and additional bad debt expense.

 

*Industrial Films*

 

*Net sales*.  The net sales of our Industrial Filmssegment increased by $39.5 million, or 21.7%, to $221.8 million for the ninemonths ended September 30, 2005 from $182.3 million for the nine monthsended September 30, 2004. This increase was primarily due to an increasein sales volumes of value added products of 5.2%, an increase in the mix ofvalue added stretch films, and an increase in our average selling prices of15.7% resulting from the pass through of raw material price increases.

 

*Segment profit*.  The Industrial Films segment profitwas $19.1 million for the nine months ended September 30, 2005, ascompared to $20.4 million for the same period in 2004.  This $1.3 milliondecrease in segment profit was due to a significant shift in product mix,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 SpecialtyProducts Group segment increased $15.4 million, or 5.3% to $304.6 million forthe nine months ended September 30, 2005 from $289.2 million for the ninemonths ended September 30, 2004. This increase reflects a 12.5% increasein our average selling prices, offset by a sales volume decrease of 6.4%.

 

Net sales in our Specialty Films division increased$6.9 million, or 5.0%, to $144.8 million for the nine months ended September 30,2005 from $137.9 million for the nine months ended September 30, 2004.This increase reflects an increase in our average selling prices of 10.7%offset by a decrease in sales volume of 5.1% as a result of one of our majorcustomers losing part of its market share.  Net sales in our PrintedProducts division increased $8.5 million, or 5.6%, to $159.8 million for thenine months ended September 30, 2005 from $151.3 million for the ninemonths ended September 30, 2004. This increase reflects an increase in ouraverage selling prices of 15.0% offset by a decrease in sales volume of 8.1%largely due to a major customer who filed for reorganization late last year,and the rationalization of marginally profitable customer accounts in late2004.

 

30

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*Segment profit*.  The Specialty Products Group segmentprofit was $39.4 million for the nine months ended September 30, 2005, ascompared to $39.7 million for the nine months ended September 30, 2004.This $0.3 million decrease is primarily attributable to a $3.9 million increasein gross margin attributable to the pass through of resin price increases,lower sales, general and administrative costs and a $4.1 million gain on saleof Alliant’s assets, offset by increased freight, packaging and labor costs.

 

*Corporate/Other*

 

Corporate/Other includes our corporate headquartersin Schaumburg, Illinois and our research and development facility in NewportNews, Virginia. Unallocated corporate expenses were flat at $21.3 million forthe nine months ended September 30, 2005, and 2004.

 

**Liquidity and Capital Resources**

 

*Sources of capital*

 

Our principal sources of funds are cash generated byour operations and borrowings under our revolving credit facility. In addition,we have raised funds through the issuance of senior debt and the sale of sharesof our preferred stock.  As of September 30, 2005, our outstandinglong-term debt consisted of: $48.1 million of borrowings under our revolvingcredit facility; $262.3 million of our Amended 2004 Notes; $313.9 million ofour 2000/2002 Notes; $250.0 million of our 2003 Notes; and $6.9 million of our2004 Notes.

 

Revolving Credit Facility

 

*2004 Credit Facility*

 

For the three and nine month periods ended September 30,2005, we utilized a revolving credit facility (the “2004 Credit Facility”)providing up to $100 million of availability (subject to the borrowing base andother limitations described below).  The2004 Credit Facility included a $15 million letter of credit sub-facility, withletters of credit reducing availability under the 2004 Credit Facility.

 

The 2004 Credit Facility was secured by a firstpriority security interest in substantially all our inventory, receivables anddeposit accounts, 100% of the capital stock of, or other equity interests in,our existing and future domestic subsidiaries and foreign subsidiaries that arenote guarantors, 65% of the capital stock of, or other equity interests inexisting and future first-tier foreign subsidiaries, investment property andother assets of the Company and the note guarantors and a second-prioritysecurity interest in our real property, fixtures, equipment, intellectualproperty and other assets.

 

The 2004 Credit Facility had a maturity date of February 17,2009.  The interest rates were at LIBORplus 2.5% to 3.0% or ABR plus 1.5% to 2.0%. The average rate on borrowings outstanding during the third quarter of2005 was 7.8%.  The commitment fee forthe unused portion of the 2004 Credit Facility was 0.50% per annum.

 

Our total availability under the 2004 CreditFacility was limited in certain circumstances. Specifically, when our borrowing base was less than $110 million and theFixed Charge Coverage Ratio (FCCR) was less than 1/1, our total availabilitywas reduced to equal the borrowing base minus $10 million.  Furthermore, when the FCCR was less than asecond ratio specified in the credit agreement that changed over time (.90/1 asof September 30, 2005), total availability was reduced to equal the lesserof the commitment or the borrowing base minus $15 million.  The FCCR was measured as of the end of eachquarter and required to be reported to our senior lenders within 45 days afterthe end of each quarter.

 

As of September 30, 2005, we had approximately$100.0 million of total availability, approximately $48.1 million ofoutstanding borrowings and $7.0 million of outstanding letters of credit, andapproximately $44.9 million remaining available for borrowing under the 2004 CreditFacility.

 

*November Amendment*

 

On November 7, 2005, we entered into anamendment and waiver with respect to the 2004 Credit Facility that increased,for the period from November 4, 2005 to November 21, 2005, theaggregate maximum commitments to make loans and provide letters of credit from$100 million to $105 million.  The lenders under the 2004 Credit Facilityalso agreed to a limited waiver of the applicability of the FCCR, so that thereduced availability provisions described above would not apply for the periodfrom September 30, 2005 to November 29, 2005.  The amendment andwaiver also provided that, until November 29, 2005, total availabilityunder the revolving credit facility would not exceed the borrowing base minus$15 million.

 

*New Credit Facility*

 

On November 21, 2005, the Company entered intoa new revolving credit facility providing up to $140 million of totalavailability (the “New Credit Facility”), subject to the borrowing base describedbelow.  The New Credit Facility includesa $25 million letter of credit sub-facility, with letters of credit reducingavailability under the New Credit Facility. The New Credit Facility replaced the 2004 Credit Facility.

 

The New Credit Facility is secured by a firstpriority security interest in substantially all our inventory, receivables anddeposit accounts, 100% of the capital stock of, or other equity interests in,our existing and future domestic subsidiaries, 65% of the capital stock of, orother equity interests in existing and future first-tier foreign subsidiaries,investment property and certain other assets of the Company and itssubsidiaries and a second-priority security interest in our real property,fixtures, equipment, intellectual property and other assets.

 

The New Credit Facility matures on May  21,2007.  The interest rates are (i) on$20 million outstanding under the New Credit Facility, LIBOR plus 6.50% orIndex Rate (either prime rate or .50% over the Federal Funds Rate, if higher)plus 5.25% and (ii) on additional amounts outstanding, LIBOR plus 2.75% orIndex Rate plus 1.50%.  The commitmentfee for the unused portion of the New Credit Facility is 0.50% per annum.

 

The borrowing base under the New Credit Facility isbased on specified percentages of our eligible accounts receivable, finishedgoods inventory and raw material inventory minus $10 million and other reserves.  The New Credit Facility requires us to complywith a monthly minimum fixed charge coverage ratio.

 

Asof November 21, 2005, our borrowing base was approximately $126.8 million andwe had approximately $126.8 million of total availability, approximately $97.4million of outstanding borrowings and $7.0 million of outstanding letters ofcredit, and approximately $22.4 million remaining available for borrowing underthe New Credit Facility.

 

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

 

On April 8, 2005, Pliant Corporation commenceda consent solicitation relating to its 2004 Notes seeking consents, among otherthings, to (i) eliminate the current requirement to pay cash interest onthe notes beginning in 2007 and, in lieu thereof, pay non-cash interest in theform of additional notes through maturity; (ii) increase the interest rateof the notes for which consents are received; (iii) increase theredemption prices 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, Pliant consummated this solicitation asconsents to the proposed amendments were delivered with respect to $298.2million aggregate principal amount at maturity of the 2004 Notes, all of whichwere accepted by Pliant.  As a result, $250.6 million principal amount ofthe Amended 2004 Notes were outstanding as of May 6, 2005.  On June 15,2005, we issued an additional $3.1 million principal amount of the Amended 2004Notes as payment in kind interest pursuant to the amended and restatedindenture (the “Additional Notes”).

 

In addition, $7.8 million aggregate principal amountat maturity of 2004 Notes with respect to which consents were not deliveredremain outstanding.  Pliant, certain of its subsidiaries and the trusteealso executed an amended and restated indenture governing the Amended 2004Notes and the 2004 Notes with respect to which consents were notdelivered.  Pliant, certain of its subsidiaries and J.P. Morgan SecuritiesInc., the solicitation agent for the consent solicitation, executed aregistration rights agreement with respect to the Amended 2004 Notes.

 

The transaction in which the terms of the 2004 Noteswere amended to become the Amended 2004 Notes was not registered under theSecurities Act of 1933, as amended, or any state securities laws. Pursuant to a registration rights agreement, Pliant consummated an exchangeoffer for the Amended 2004 Notes in which the company exchanged the $253.8million aggregate principal amount of the original Amended 2004 Notes foressentially identical notes which are registered under the Securities Act of1933, as amended.  The interest rate of the Amended 2004 Notes increasedfrom 11 1/8% per annum to 11 5/8% per annum.  The Amended 2004 Notes nolonger require payment of cash interest beginning in 2007.  Instead, theyrequire payment of non-cash interest in the form of additional notes throughmaturity.  In addition, the amended and restated indenture eliminatessubstantially all the restrictive covenants contained in the indenture, as theyrelate to holders of the 2004 Notes with respect to which consents were notdelivered.

 

On or after June 15, 2007, we may redeem someor all of the notes at the following redemption prices (expressed aspercentages of the sum of the principal amount, plus accrued and unpaidinterest); 111.625% if redeemed prior to June 15, 2007; 108.719% ifredeemed prior to December 15, 2007; 105.813% if redeemed prior to June 15,2008; 102.906% if redeemed prior to December 15, 2008; and 100.000% ifredeemed on or before June 15, 2009.

 

Prior to June 15, 2007, we may redeem up to amaximum of 35% of the principal amount of the Amended 2004 Notes with the netcash proceeds of certain equity offerings by us at a redemption price equal to111.625% of the sum of the principal amount plus accrued and unpaid interest,provided that after giving effect to such redemption (i) at least 65% ofthe principal amount of the 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 afirst-priority basis by a security interest in our real property,fixtures, equipment, intellectual property and other assets other than the SecondPriority Collateral (the “First-PriorityCollateral”) and on a second-priority basis by a security interest insubstantially all our inventory, receivables and deposit accounts, 100% of thecapital stock of, or other equity interests in existing and future domesticsubsidiaries and foreign subsidiaries that are note guarantors, 65% of thecapital stock of, or other equity interests in existing and future first-tierforeign subsidiaries, investment property and certain other assets of theCompany and the note guarantors (the “Second-Priority Collateral”).

 

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

 

On February 17, 2004 we completed the sale of$306 million ($225.3 million of proceeds) principal at maturity of our 2004Notes. The proceeds of the offering were used to repay and terminate the creditfacilities that existed at December 31, 2003.  The 2004 Notes areguaranteed by the same domestic subsidiaries that guarantee the 2000/2002 Notesand the 2003 Notes and certain of our foreign subsidiaries that guaranteeindebtedness of the Company.  The 2004 Notes were issued under an indenturedated February 17, 2004, among us, the subsidiary guarantors party theretoand Wilmington Trust Company, as trustee.

 

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The 2004 Notes are senior secured obligations of theCompany and are secured by first-priority security interests in theFirst-Priority Collateral, which consists of substantially all the realproperty, fixtures, equipment, intellectual property and all other assets,other than Second-Priority Collateral, of the Company and the subsidiary guarantors,together with the proceeds therefrom and improvements, alterations and repairsthereto, as well as any assets required to be added to the First-PriorityCollateral pursuant to the terms of the indenture or related securitydocuments.  The 2004 Notes are secured by a second-priority interest inthe Second-Priority Collateral, rank equally in right of payment with allexisting and any future senior obligations of the Company and are effectivelysubordinated to all liabilities and preferred stock of each subsidiaryguarantor.  The 2004 Notes will mature on June 15, 2009.  On May 6,2005 we completed the consent solicitation relating to our 2004 Notes. Consents were delivered with respect to $298.2 million aggregate principalamount at maturity of the 2004 Notes.  As a result, $7.8 million aggregateprincipal amount at maturity of 2004 Notes remain outstanding.

 

Unless we elect to pay cash interest as describedbelow, and except under certain limited circumstances, the 2004 Notes willaccrete from the date of issuance at the rate of 11 1/8% until December 15,2006, compounded semiannually on each June 15 and December 15commencing June 15, 2004, to an aggregate principal amount of $1,000 pernote ($7.8 million in the aggregate assuming no redemption or otherrepayments).  Commencing on December 15, 2006, interest on the 2004Notes will accrue at the rate of 11 1/8% per annum and will be payable in cashsemiannually on June 15 and December 15, commencing on June 15,2007.

 

On any interest payment date prior to December 15,2006, we may elect to commence paying cash interest (from and after suchinterest payment date) in which case (i) we will be obligated to pay cashinterest on each subsequent interest payment date, (ii) the notes willcease to accrete after such interest payment date and (iii) theoutstanding principal amount at the stated maturity of each note will equal theaccreted value of such note as of such interest payment date.

 

At any time prior to June 15, 2007, we mayredeem up to 35% of the accreted value of the 2004 Notes with the net cashproceeds of certain equity offerings by us at a redemption price equal to111.125% of the accreted value thereof plus accrued interest, so long as (i) atleast 65% of the accreted value of the notes remains outstanding after suchredemption and (ii) any such redemption by us is made within 120 daysafter such equity offering.

 

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

 

Our 2003 Notes rank equally with our existing andfuture senior debt and rank senior to our existing and future subordinatedindebtedness, including the 2000/2002 Notes. The 2003 Notes are secured by afirst priority security interest in the First Priority Collateral and a secondpriority security interest in the Second Priority Collateral.  The 2003Notes are guaranteed by some of our subsidiaries.

 

The 2003 Notes will mature on September 1,2009.  Interest on the 2003 Notes is payable at the rate of 11 1/8% perannum semi-annually in cash on each March 1 and September 1. Prior to June 1, 2007, we may, on one or more occasions, redeem up to amaximum of 35% of the original aggregate principal amount of the 2003 Noteswith the net cash proceeds of one or more equity offerings by us at aredemption price equal to 111.125% of the principal amount thereof, plusaccrued and unpaid interest.  Otherwise, we may not redeem the 2003 Notesdue 2009 prior to June 1, 2007.  On or after that date, we may redeemsome or all of the 2003 Notes at the following redemption prices (expressed asa percentage of principal amount), plus accrued and unpaid interest: 105.563%if redeemed 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 Notes due 2010 (the “2000/2002Notes”)

 

Our 2000/2002 Notes are subordinated to all of ourexisting and future senior debt, rank equally with any future seniorsubordinated debt, and rank senior to any future subordinated debt. 2000/2002Notes due 2010 are guaranteed by some of our subsidiaries. The 2000/2002 Notesare unsecured.

 

The 2000/2002 Notes mature on June 1, 2010, andinterest on the 2000/2002 Notes is payable on June 1 and December 1of each year.  The 2000/2002 Notes are subordinated to all of our existingand future senior debt, rank equally with any future senior subordinated debt,and rank senior to any future subordinated debt.  The 2000/2002 Notes areguaranteed by some of our subsidiaries.  The 2000/2002 Notes areunsecured.  We may redeem the 2000/2002 Notes, in whole or in part, at thefollowing redemption prices (expressed as percentages of principal amount),plus accrued and unpaid interest:  106.5% if redeemed prior to June 1,2006; 104.333% if redeemed prior to June 1, 2007; 102.167% if redeemedprior to June 1, 2008; and 100% if redeemed on or after June 1, 2008.

 

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The Indentures for the 2000/2002 Notes containcovenants that limit the amount and type of senior indebtedness that we canincur.  On November 4, 2005, weamended each of the Indentures for the 2000/2002 Notes to increase the amountof senior indebtedness permitted to be incurred thereunder by $25 million.  On November 17, 2005, we further amended eachof the Indentures for the 2000/2002 Notes to modify the anti-layering covenantand related definition of “senior indebtedness” and to increase the amount ofsenior indebtedness permitted to be incurred under the indenture for the 2000Notes by an additional $20 million. Those amendments allowed us to enter into the New Credit Facility, whichdesignates a portion of the indebtedness incurred thereunder as junior in rightof payment to the balance of such indebtedness, and permit us to utilize themaximum availability thereunder.

 

Preferred stock

 

We have approximately $253.6 million of Series ACumulative Exchangeable 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 aswe did 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 BRedeemable Preferred Stock outstanding.  During 2004, we adopted a 2004Restricted Stock Incentive Plan, pursuant to which we sold to our President andChief Executive Officer and selected additional officers of the Company, all720 shares of a newly-created, non-voting Series B Redeemable PreferredStock (the “Series B Preferred Stock”) for a cash purchase price of $162per share.  These shares of Series B Preferred Stock were issued inprivate transactions with officers of the Company and therefore were exemptfrom the registration requirements of the Securities Act of 1933.  During2005, 76 authorized shares of Series B Preferred Stock have beenrepurchased from officers for $162 per share.

 

*Net Cash Provided by/Used inContinuing Operating Activities*

 

Net cash provided by continuing operating activitieswas $9.9 million for the nine months ended September 30, 2005, a decreaseof $10.4 million, as compared to net cash provided by continuing operatingactivities of $20.3 million for the same period in 2004.  This decreasewas due primarily to a $12.5 million decrease in gross profit from continuingoperations for the period, offset in part by working capital improvements of$1.4 million.

 

*Net Cash Used in InvestingActivities*

 

Net cash used in investing activities increased$12.7 million to $21.2 million for the nine months ended September 30,2005, from $8.5 million for the nine months ended September 30, 2004. Thisincrease included an increase in capital expenditures from $15 million in 2004to $26.4 million in 2005, along with the difference between $5.2 million in netproceeds from sale of Alliant in 2005 and $6.5 million net proceeds from saleof Solutions in 2004.

 

*Net Cash Provided by FinancingActivities*

 

Net cash provided by financing activities was $15million for the nine months ended September 30, 2005, as compared to netcash used in financing activities of $3.6 million for the nine months ended September 30,2004. The activity for the first nine months of 2005 includes an exchange of$250.6 million accreted value of our 2004 Notes for $250.6 million in Amended2004 Notes, $4.9 million in consent fees and $2.6 million of associatedunderwriter, legal and accountants fees; repayment of $1.5 million inobligations under capital leases and insurance related financing and $24.1million borrowings, net of repayments, under a revolving credit facility. The activity for the first nine months of 2004 includes the net proceeds fromthe issuance of senior secured discount notes of $225.3 million net offinancing fees paid of $9.4 million and the repayment of the old creditfacilities of $219.6 million.

 

*Liquidity*

 

As of September 30, 2005, we had approximately$80.0 million of working capital excluding current maturities of long term debtand approximately $6.9 million in cash and cash equivalents.  A portion ofour cash and cash equivalents are held by our foreign subsidiaries. Repatriation tax rates may limit our ability to access cash and cashequivalents generated by our foreign operations for use in our U.S. operations,including to pay principal and interest on outstanding borrowings.

 

As of September 30, 2005 we had approximately $48million of outstanding borrowings and $7 million of outstanding letters ofcredit, and approximately $41 million of remaining availability under the 2004Credit Facility as limited by our indentures’ covenants.  Daily borrowingsoutstanding under the 2004 Credit Facility averaged $44.5 million during thethird quarter.  Our outstanding borrowings under our revolving creditfacility fluctuate significantly during each quarter as a result of the timingof payments for raw materials, capital and interest, as well as the timing ofcustomer collections.

 

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Our total capital expenditures were approximately$24 million in 2004 and are expected to be approximately $35 million in 2005and $40 million in 2006.  These expenditures are focused on projects tolower operating costs, add capacity for high value products, expand researchand development programs, and bring new innovative products to market.

 

A number of factors had a significant negativeeffect on the Company’s liquidity position during the fiscal quarter ended September 30,2005.   As noted above, increases in raw material, freight, andenergy costs that the Company could not pass on immediately to customersnegatively impacted our results of operations and reduced the cash provided byoperations as compared with prior periods.  The negative impact of thesefactors on the Company during the quarter was exacerbated by the continued highprices of oil (which directly impact the cost of the major raw material inputto our products) and the impact of Hurricane Katrina on the cost and supply ofour raw materials and on the availability and cost of freight for our products.

 

These factors also negatively impacted many of our competitorsand caused concerns for the suppliers of raw materials to our industry, andthey responded by tightening credit terms and conditions to many of theircustomers.  Due to the combination of these conditions and ourhighly-leveraged financial position, many of our key suppliers reduced oreliminated credit terms for the Company’s raw material purchases, in some casesto a greater extent than for the industry as a whole.  Since September 30,2005, the amount of cash that the Company has invested in its working capitalhas increased significantly due to both the higher cost of the raw materialsthat are a major component of our products and these reduced credit terms.

 

The credit rating assigned to the Company’s debt wasdowngraded by Standard & Poors and Moody’s during the early part ofSeptember, 2005.  This downgrade was precipitated in part by the negativeindustry factors noted above and the Company’s highly-leveraged position. This downgrade in part contributed to the continued tightening of credit termsfrom the Company’s suppliers.

 

As a result of this tightening liquidity position,in early September 2005, the Company retained Jefferies & Co., anational investment banking firm, to advise the Company on its financialoptions.  Working with Jefferies, the Company developed and isimplementing a plan to deal with near-term liquidity issues.  The entryinto the New Credit Facility, with its increased availability, was asignificant step forward in the plan and increases the Company’s available cashresources.  Unless industry conditionsworsen from their current state, the Company currently anticipates that cashflow from operations and amounts available under the New Credit Facility shouldbe sufficient to fund ongoing operations and interest payments on the 2003Notes through December 31, 2006.  However,the Company believes that it may not be able to comply with the financialcovenants in the New Credit Facility if it continues to make cash interestpayments on the 2000/2002 Notes.  

 

We are also working with Jefferies to develop andimplement a long-term plan to realign our capital structure and reduce ourleverage and are considering a number of restructuring options.  The goal of that plan is to significantlydeleverage the Company and thereby reduce its cash interest payments andimprove its credit profile.  As part ofthat plan, we have entered into discussions regarding a possible debt forequity conversion with an ad hoc committee of holders of the 2000/2002 Notesthat hold, in the aggregate, a majority of the notes in each series. Those discussions, which have already resulted in the recent amendments to theindentures to increase the permitted senior indebtedness, are currently inprogress.

 

The Company currently does not anticipatethat it will fund the $20.8 million interest payments that will become dueunder its 2000/2002 Notes on December 1, 2005.  If the Company does not make the thoseinterest payments by December 31, 2005, then the Company will be indefault under the 2000/2002 Notes.  A default under the 2000/2002 Noteswould allow the holders of a majority of each of the 2000 and 2002 Notes toaccelerate the maturity of such notes and would result in an event of defaultunder the New Credit Facility. If not cured within 30 days, acceleration of the2000/2002 Notes would result in an event of default under the Amended 2004 Notes,the 2004 Notes and the 2003 Notes.  As previously noted, however, we arein active discussions with an ad hoc committee of the holders of the 2000/2002Notes that hold, in the aggregate, a majority of the notes in eachseries.   Although there can be no assurance that discussions willcontinue, we do not expect those holders to accelerate the 2000/2002 Notes aslong as our discussions are continuing. Although we believe we have a goodrelationship with the lenders under the New Credit Facility, we cannot predictwhat actions they might take if our failure to pay interest on the 2000/2002Notes by December 31, 2005 results in an event of default under the New CreditFacility.

 

If we are unable to successfully conclude atransaction with the holders of the 2000/2002 Notes on a timely basis or if theCompany’s available cash resources are not sufficient to fund our ongoingoperations, then the Company will have to consider other contingency plans thathave been developed, including the possibility of seeking protection affordedby Chapter 11 of the United States Bankruptcy Code and pursuing a plan ofreorganization to allow it to continue operations and minimize disruption toits business.  The Company cannot at this time determine what values,if any, would be ascribed in any out-of-court restructuring or in anybankruptcy case to the holders of the various classes of the Company’ssecurities.

 

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**Cautionary Statement forForward-Looking Information**

 

Certain information set forth in this reportcontains “forward-looking statements” within the meaning of federal securitieslaws.  Forward-looking statements include statements concerning our plans,objectives, goals, strategies, future events, future revenues or performance,capital expenditures, financing needs, plans or intentions relating toacquisitions, business trends, and other information that is not historical information. When used 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 mayalso make additional forward-looking statements from time to time.  Allsuch subsequent forward-looking statements, whether written or oral, by us oron our behalf, are also expressly qualified by these cautionary statements.

 

All forward-looking statements, including, withoutlimitation, management’s examination of historical operating trends, are basedupon our current expectations and various assumptions.  Our expectations,beliefs and projections are expressed in good faith and we believe there is areasonable basis for them.  But, there can be no assurance that management’sexpectations, beliefs and projections will result or be achieved.  Allforward-looking statements apply only as of the date made.  We undertakeno obligation to publicly update or revise forward-looking statements which maybe made to reflect events or circumstances after the date made or to reflectthe occurrence of unanticipated events.

 

There are a number of risks and uncertainties thatcould cause our actual results to differ materially from the forward-lookingstatements contained in or contemplated by this report. These risks include,but are not limited to: general economic and business conditions, particularlyan economic downturn; industry trends; raw material costs and availability,particularly resin; our ability to pass through increased resin costs to our customers;changes in credit terms from our suppliers; our ability to fund under the NewCredit Facility; our ability to comply with covenants under the New CreditFacility; our ability to successfully conclude restructuring transactions withholders of our 2000/2002 Notes and with holders of our preferred stock; increasesin our leverage; interest rate increases; changes in our ownership structure;competition; the loss of any of our significant customers; changes in thedemand for our products; new technologies; changes in distribution channels orcompetitive conditions in the markets or countries in which we operate; costsof integrating any future acquisitions; loss of our intellectual propertyrights; operational difficulties at any of our plants; foreign currencyfluctuations and devaluations and political instability in our foreign markets;changes in our business strategy or development plans; availability, terms anddeployment of capital; availability of qualified personnel; and increases inthe cost of compliance with laws and regulations, including environmental lawsand regulations. These risks and certain other uncertainties are discussed inmore detail in the 2004 Form 10-K.  There may be other factors,including those discussed elsewhere in this report that may cause our actualresults to differ materially from the forward-looking statements.  Anyforward-looking statements should be considered in light of these factors.

 

#### **ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

####  

We are exposed to resin price risks that arise inthe normal course of business.  Significant increases in the price ofresins could adversely affect our operating margins, results of operations andability to service our indebtedness.  We may be limited in our ability topass increases in resin price on to certain of our customers due to provisionsin our contracts with those customers.

 

Since the repayment of $219.6 million of variablerate term debt with the proceeds of our 2004 Notes and borrowings under ourrevolving credit facility on February 17, 2004 our interest rate risk hasdecreased substantially.

 

Our revolving credit facility is at a variable rateof interest.  An increase of 1% in interest rates would result in anadditional $100,000 of annual interest expense for each $10.0 million inborrowings under our revolving credit facility.  We will thus continue tobe exposed to interest rate risk to the extent of our borrowings under therevolving credit facility.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in our filingsunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the periods specified in the rules and forms of theSecurities and Exchange Commission.  This information is accumulated andcommunicated to our management, including our principal executive officer andour principal financial officer, as appropriate, to allow timely decisionsregarding required disclosure.  Our management, including our principalexecutive officer and our principal financial officer, recognizes that any setof controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.

 

Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we conducted an evaluation of our disclosure controls andprocedures as of the end of the period covered by this report.  Based onthis evaluation, our principal executive officer and principal financialofficer concluded that our disclosure controls and procedures are effective inalerting them on a timely basis to material information required to bedisclosed in our periodic filings.

 

**Changes in Internal Controls**

 

There were no significant changes in our internalcontrols during the quarter or in other factors that could significantly affectthese controls subsequent to the date of the evaluation referenced in theforegoing paragraph.

 

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**PART II.  OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

In June 2005, the Company received aninformation request from the U.S. Environmental Protection Agency Region 4 (the“EPA”) relating to the Constitution Road Drum Site (the “Site”).  The EPAstated that the Company may have arranged for disposal of non-hazardous wasteat the former Southeastern Research and Recovery (“SRR”) facility in Atlanta,Georgia.  SRR operated as a RCRA transfer facility and apparentlyabandoned its operations.  The EPA has informally requested that more than100 potentially responsible parties, including the Company, conduct a removalaction at the Site.  No cost estimates or allocation of liability amongthe parties have been developed.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 
| (a)   | The following exhibits are filed with this report.                                                                                                                       |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                     |
| 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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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                                                                                                                                           | PLIANT CORPORATION                                |
|------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------|
|                                                                                                                                           |                                              |
|                                                                                                                                           |                                              |
|                                                                                                                                           | /s/ JOSEPH J. KWEDERIS                            |   |
|                                                                                                                                           | JOSEPH J. KWEDERIS                                |
|                                                                                                                                           | Senior Vice President and Chief Financial Officer |
|                                                                                                                                           | (Authorized Signatory and Principal Financial     |
|                                                                                                                                           | and Accounting Officer)                           |
|                                                                                                                                           |                                              |
|                                                                                                                                           |                                              |
| Date:                    November 21, 2005 |                                              |

 

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**INDEX TOEXHIBITS**

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

 

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