** **

** **

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

**FORM 10-Q**

**(Mark One)**

**x**                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the quarterly period ended September 30,2007**

**OR**

**o**                                   TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the transition period from          to        **

**Commission file number 333-40067**

**PLIANT CORPORATION**

(Exactname of registrant as specified in its charter)

| **Delaware**                     | ** ** | **43-2107725**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

**1475Woodfield Road, Suite 700**

**Schaumburg,IL 60173**

**(847)969-3300**

(Addressof principal executive offices and telephone number)

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

Large accelerated filer o      Acceleratedfiler o      Non-acceleratedfiler x

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO REGISTRANTS INVOLVEDIN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Securities Exchange Actof 1934 subsequent to the distribution of securities under a plan confirmed bya court.  Yes x  No o

Asof November 9, 2007 there were 100,003 outstanding shares of the Registrant’scommon stock. As of November 9, 2007, persons other than affiliates of theRegistrant held 49,871, or approximately 49.87%, of the outstanding shares ofthe Registrant’s common stock.  There isno established trading market for the Registrant’s common stock and, therefore,the aggregate market value of shares held by non-affiliates cannot bedetermined by reference to recent sales or bid and asked prices.

 

 

----

 

**PLIANT CORPORATION ANDSUBSIDIARIES**

**TABLE OF CONTENTS**

** **
| PART I. FINANCIAL INFORMATION                                                                                                 | 3  |
|-------------------------------------------------------------------------------------------------------------------------------|----|
| ITEM 1. FINANCIAL STATEMENTS                                                                                                  | 3  |
| CONDENSED CONSOLIDATED  BALANCE SHEETS AS OF SEPTEMBER 30, 2007 (Unaudited) AND DECEMBER 31,  2006                       | 3  |
| CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED  SEPTEMBER 30, 2007 AND 2006 (Unaudited) | 4  |
| CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30,  2007 AND 2006 (Unaudited)           | 5  |
| CONDENSED  CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE NINE MONTHS ENDED  SEPTEMBER 30, 2007 (Unaudited)    | 6  |
| NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)                                                             | 7  |
| ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS                          | 29 |
| ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                           | 42 |
| ITEM 4. CONTROLS  AND PROCEDURES                                                                                              | 43 |
| PART II. OTHER INFORMATION                                                                                               | 44 |
| ITEM 1. LEGAL  PROCEEDINGS                                                                                                    | 44 |
| ITEM 1A. RISK  FACTORS                                                                                                        | 44 |
| ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                          | 44 |
| ITEM 3. DEFAULTS  UPON SENIOR SECURITIES                                                                                      | 44 |
| ITEM 4. SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                  | 44 |
| ITEM 5. OTHER  INFORMATION                                                                                                    | 45 |
| ITEM 6. EXHIBITS                                                                                                              | 45 |

 

 

2

----

 

**PART I.****  ****FINANCIAL INFORMATION**

** **

**ITEM 1.  FINANCIAL STATEMENTS**

** **

**PLIANT CORPORATION ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**AS OF SEPTEMBER 30, 2007 (UNAUDITED)AND DECEMBER 31, 2006**

**(DOLLARS IN THOUSANDS)**

** **

** **
| ** **                                                                                                                                                                                                                                                                            | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                            | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                            |       | $                      | 7,091      |                  | $          | 4,199 |   |
| Receivables, net  of allowances of $3,169 and $3,751, respectively                                                                                                                                                                                                                    |       | 142,748                |       | 140,477               |       |
| Inventories  (Note 2)                                                                                                                                                                                                                                                                 |       | 111,693                |       | 100,103               |       |
| Prepaid expenses  and other                                                                                                                                                                                                                                                           |       | 6,749                  |       | 7,279                 |       |
| Income taxes  receivable, net                                                                                                                                                                                                                                                         |       | 1,115                  |       | 998                   |       |
| Deferred income  taxes                                                                                                                                                                                                                                                                |       | 8,747                  |       | 13,754                |       |
| Total current  assets                                                                                                                                                                                                                                                                 |       | 278,143                |       | 266,810               |       |
| PLANT AND  EQUIPMENT, net                                                                                                                                                                                                                                                             |       | 314,661                |       | 304,443               |       |
| GOODWILL                                                                                                                                                                                                                                                                              |       | 72,526                 |       | 72,257                |       |
| INTANGIBLE  ASSETS, net                                                                                                                                                                                                                                                               |       | 11,599                 |       | 12,389                |       |
| OTHER ASSETS                                                                                                                                                                                                                                                                          |       | 20,356                 |       | 21,858                |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                                          |       | $                      | 697,285    |                  | $          | 677,757 |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                                                                       | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT  LIABILITIES:                                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                    |       | $                      | 1,121      |                  | $          | 975 |   |
| Trade accounts  payable                                                                                                                                                                                                                                                               |       | 98,605                 |       | 81,231                |       |
| Accrued liabilities:                                                                                                                                                                                                                                                                  |       |                   |       |                  |       |
| Interest payable                                                                                                                                                                                                                                                                      |       | 4,249                  |       | 10,055                |       |
| Customer rebates                                                                                                                                                                                                                                                                      |       | 6,859                  |       | 7,403                 |       |
| Other                                                                                                                                                                                                                                                                                 |       | 34,273                 |       | 44,463                |       |
| Total current  liabilities                                                                                                                                                                                                                                                            |       | 145,107                |       | 144,127               |       |
| LONG-TERM DEBT,  net of current portion                                                                                                                                                                                                                                               |       | 758,174                |       | 736,656               |       |
| OTHER  LIABILITIES                                                                                                                                                                                                                                                                    |       | 28,134                 |       | 29,446                |       |
| DEFERRED INCOME  TAXES                                                                                                                                                                                                                                                                |       | 22,948                 |       | 31,287                |       |
| Total  Liabilities                                                                                                                                                                                                                                                                    |       | 954,363                |       | 941,516               |       |
| STOCKHOLDERS’  DEFICIT:                                                                                                                                                                                                                                                          |       |                   |       |                  |       |
| Redeemable  Preferred Stock—Series AA—335,650 shares authorized, par value $.01 per  share, with a redemption and liquidation value of $1,000 per share plus  accumulated dividends, 335,592 shares outstanding at September 30, 2007 and  December 31, 2006 |       | 234,654                |       | 198,899               |       |
| Redeemable  Preferred Stock—Series M—8,000 shares authorized, par value $.01 per  share, 8,000 shares outstanding at September 30, 2007 and no shares  outstanding at December 31, 2006                                                                           |       | —                 |       | —                |       |
| Common stock—par  value $.01 per share; 100,050,000 shares authorized, 100,003 shares  outstanding at September 30, 2007 and December 31, 2006                                                                                                                         |       | 1                      |       | 1                     |       |
| Paid in capital                                                                                                                                                                                                                                                                       |       | 155,341                |       | 154,521               |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                  |       | (633,392               | )          | (598,934              | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                 |       | (13,682                | )          | (18,246               | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                     |       | (257,078               | )          | (263,759              | )          |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                                     |       | $                      | 697,285    |                  | $          | 677,757 |   |

 

Seenotes to condensed consolidated financial statements.

 

3

----

 

**PLIANT CORPORATION ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE THREE AND NINE MONTHSENDED SEPTEMBER 30, 2007 AND 2006 (IN THOUSANDS) (UNAUDITED)**

** **
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                                 | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| NET SALES                                                  |       | $                      | 282,541    |                  | $          | 293,357 |   | $ | 819,969 |   | $ | 880,086 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| COST OF SALES                                              |       | 250,825                |       | 259,356               |       | 718,200 |   | 774,781 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Gross Profit                                               |       | 31,716                 |       | 34,001                |       | 101,769 |   | 105,305 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| OPERATING  EXPENSES:                                       |       |                   |       |                  |       |   |   |   |   |
| Sales, General  and Administrative                         |       | 15,387                 |       | 17,830                |       | 51,438 |   | 53,762 |   |
| Research and  Development                                  |       | 2,438                  |       | 2,193                 |       | 8,639 |   | 6,795 |   |
| Restructuring  and Other Costs (Note 3)                    |       | 5,373                  |       | (685                  | )          | 7,232 |   | (655 | ) |
| Reorganization  Costs (Note 14)                            |       | 320                    |       | 18,427                |       | 1,017 |   | 82,248 |   |
| Other Operating  Costs (Note 12)                           |       | —                 |       | —                |       | 1,101 |   | — |   |
| Total Operating  Expenses                                  |       | 23,518                 |       | 37,765                |       | 69,427 |   | 142,150 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| OPERATING INCOME  (LOSS)                                   |       | 8,198                  |       | (3,764                | )          | 32,342 |   | (36,845 | ) |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| INTEREST EXPENSE  - Current and Long-term Debt (Note 4, 5) |       | (21,709                | )          | (19,996               | )          | (63,842 | ) | (60,336 | ) |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| INTEREST EXPENSE  — Redeemable Preferred Stock        |       | —                 |       | —                |       | — |   | (271 | ) |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| GAIN ON  EXTINGUISHMENT OF DEBT (Note 4, 14)               |       | 32,508                 |       | 398,454               |       | 32,508 |   | 398,454 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| OTHER INCOME  (EXPENSE) — Net                         |       | 75                     |       | 1,923                 |       | 389 |   | 2,060 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| INCOME BEFORE  INCOME TAXES                                |       | 19,072                 |       | 376,617               |       | 1,397 |   | 303,062 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| INCOME TAX  EXPENSE (BENEFIT)                              |       | 429                    |       | (795                  | )          | 812 |   | 446 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| NET INCOME                                                 |       | $                      | 18,643     |                  | $          | 377,412 |   | $ | 585 |   | $ | 302,616 |   |
|                                                            |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

Seenotes to condensed consolidated financial statements.

 

4

----

 

**PLIANT CORPORATION ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOW**

**FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2007 AND 2006 (IN THOUSANDS) (UNAUDITED)**

** **
| ** **                                                                              | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **September 30,**     | ** ** |
| ** **                                                                              | ** ** | **2007**              | ** ** | **2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                  |       |                  |       |   |   |
| Net income                                                                              |       | $                     | 585        |   | $ | 302,616 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation and  amortization                                                          |       | 33,796                |       | 30,135 |   |
| Amortization of  deferred financing costs and accretion of debt discount                |       | 30,806                |       | 28,422 |   |
| Deferred  dividends and accretion on preferred shares                                   |       | —                |       | 271 |   |
| Write off of  deferred financing costs                                                  |       | —                |       | 17,252 |   |
| Write off of  original issue debt discount and premium                                  |       | —                |       | 30,453 |   |
| Deferred income  taxes                                                                  |       | (3,616                | )          | (820 | ) |
| (Gain) / loss on  disposal of assets                                                    |       | 163                   |       | (1,867 | ) |
| Impairment of  fixed assets                                                             |       | 1,501                 |       | — |   |
| Non cash other  operating costs                                                         |       | 664                   |       | — |   |
| Gain on  extinguishment of debt                                                         |       | (32,508               | )          | (398,454 | ) |
| Changes in  assets and liabilities:                                                     |       |                  |       |   |   |
| Receivables                                                                             |       | (266                  | )          | (10,217 | ) |
| Inventories                                                                             |       | (10,233               | )          | (4,369 | ) |
| Prepaid expenses  and other                                                             |       | 574                   |       | (705 | ) |
| Income taxes  payable/receivable                                                        |       | 64                    |       | 1,132 |   |
| Other assets                                                                            |       | (591                  | )          | 6,528 |   |
| Trade accounts  payable                                                                 |       | 16,256                |       | 43,861 |   |
| Accrued  liabilities                                                                    |       | (19,958               | )          | (3,874 | ) |
| Other  liabilities                                                                      |       | 1,921                 |       | (1,773 | ) |
| Net cash  provided by operating activities                                              |       | 19,158                |       | 38,591 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                  |       |                  |       |   |   |
| Proceeds from  sale of assets                                                           |       | 165                   |       | 2,602 |   |
| Capital  expenditures for plant and equipment                                           |       | (36,132               | )          | (29,277 | ) |
| Net cash used in  investing activities                                                  |       | (35,967               | )          | (26,675 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                  |       |                  |       |   |   |
| Proceeds from  issuance of preferred stock                                              |       | 157                   |       | — |   |
| Payment of  financing fees                                                              |       | (1,704                | )          | (10,476 | ) |
| Repayment of  capital leases and other, net                                             |       | (560                  | )          | (1,290 | ) |
| Repayment of prior  revolving credit facility                                           |       | —                |       | (138,842 | ) |
| Borrowings under  Revolving Credit Facilities                                           |       | 21,000                |       | 133,621 |   |
| Repayment of  senior subordinated notes                                                 |       | (22,593               | )          | — |   |
| Proceeds from  issuance of senior subordinated notes                                    |       | 24,000                |       | — |   |
| Net cash  provided by/(used in) financing activities                                    |       | 20,300                |       | (16,987 | ) |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                           |       | (599                  | )          | (2,326 | ) |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                   |       | 2,892                 |       | (7,397 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD                                     |       | 4,199                 |       | 12,802 |   |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                                           |       | $                     | 7,091      |   | $ | 5,405 |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                     |       |                  |       |   |   |
| Cash paid during  the period for:                                                       |       |                  |       |   |   |
| Interest                                                                                |       | 37,629                |       | 37,619 |   |
| Income taxes                                                                            |       | 1,076                 |       | 2,087 |   |
| Supplemental schedule  of non-cash investing and financing activities:                  |       |                  |       |   |   |
| Preferred Stock  dividends accrued but not paid                                         |       | —                |       | 257 |   |
| Plant and  equipment acquired under capital leases                                      |       | 4,998                 |       | — |   |
|                                                                                         |            |                       |            |  |  |  |  |  |  |  |

 

Seenotes to condensed consolidated financial statements.

 

5

----

 

**PLIANT CORPORATION ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT**

**FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2007 (IN THOUSANDS) (UNAUDITED)**

** **

 
| ** **                               | ** ** | ** ** | ** ** | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | ** **  | ** ** | **Accumulated** | ** ** |
|------------------------------------------|------------|------------|------------|----------------------|------------|-------------------|------------|------------|------------|------------|------------|-------------|------------|-----------------|------------|-------------------|------------|-------------|------------|-----------------|------------|
| ** **                               | ** ** | ** ** | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | ** ** | ** ** | **Other**  | ** ** |
| ** **                               | ** ** | ** ** | ** ** | **Series  AA**       | ** ** | **Series M**      | ** ** | ** ** | ** ** | ** ** | ** ** | **Paid In** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** |
| ** **                               | ** ** | **Total**  | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**       | ** ** | **Deficit** | ** ** | **Loss**        | ** ** |
| BALANCE-December  31, 2006               |       | $          | (263,759   | )                    | 335        |              | $          | 198,899    |       | —     |       | $           | —     |            | 100        |              | $          | 1           |       | $               | 154,521    |   | $ | (598,934 | ) | $ | (18,246 | ) |
| Cumulative effect  of adoption of FIN 48 |       | 712        |       |                 |       |              |       |       |       |       |       |        |       |            |       |              |       | 712         |       |            |       |
| Adjusted Balance  January 1, 2007        |       | $          | (263,047   | )                    | 335        |              | $          | 198,899    |       | —     |       | $           | —     |            | 100        |              | $          | 1           |       | $               | 154,521    |   | $ | (598,222 | ) | $ | (18,246 | ) |
| Comprehensive  income:                   |       |       |       |                 |       |              |       |       |       |       |       |        |       |            |       |              |       |        |       |            |       |
| Net income                               |       | 585        |       |                 |       |              |       |       |       |       |       |        |       |            |       |              |       | 585         |       |            |       |
| Foreign currency  translation adjustment |       | 4,564      |       |                 |       |              |       |       |       |       |       |        |       |            |       |              |       |        |       | 4,564           |       |
| Comprehensive  income:                   |       | 5,149      |       |                 |       |              |       |       |       |       |       |        |       |            |       |              |       |        |       |            |       |
| Issuance of  Series M Preferred Stock    |       | 820        |       |                 |       |              |       | 8          |       | —     |       |        |       |            |       | 820               |       |        |       |            |       |
| Preferred stock  dividends               |       | —     |       |                 |       | 35,755            |       |       |       |       |       |        |       |            |       |              |       | (35,755     | )          |            |       |
|                                     |       | $          | (257,078   | )                    | 335        |              | $          | 234,654    |       | 8          |       | $           | —     |            | 100        |              | $          | 1           |       | $               | 155,341    |   | $ | (633,392 | ) | $ | (13,682 | ) |
|                                          |            |            |            |                      |            |                   |            |            |            |            |            |             |            |                 |            |                   |            |             |            |                 |            |  |  |  |  |  |  |  |  |

 

Seenotes to condensed consolidated financial statements.

 

 

6

----

 

**PLIANT CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

**1.****  ****BASIS OF PRESENTATION**

** **

*Theunaudited interim condensed consolidated financial statements of*PliantCorporation and its subsidiaries (collectively “Pliant”, the “Company” or ”we”)*were prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”),*and pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”).  The information reflects all normal recurringadjustments that, in the opinion of management, are necessary for a fairpresentation of the financial position, results of operations and cash flows ofPliant as of the dates and for the periods presented.

Certain information infootnote disclosures normally included in financial statements presented inaccordance with GAAP has been condensed or omitted in accordance with therules and regulations of the SEC. These statements should be read inconjunction with the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006.

*Nature of operations*   TheCompany produces polymer-based (plastic), value-added films for flexiblepackaging, personal care, medical, agricultural and industrial applications.Our manufacturing facilities are located in the United States, Canada, Mexico,Germany and Australia.

*Chapter 11 BankruptcyProceedings and Reorganization*   TheCompany and ten of its subsidiaries filed for protection under Chapter 11 ofTitle 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) inJanuary 2006. On June 19, 2006, the Company filed with the UnitedStates Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”)its Fourth Amended Joint Plan of Reorganization (the “Plan” or “Plan ofReorganization”) which was approved by the Bankruptcy Court on June 23,2006. On July 18, 2006, the Company consummated its reorganization througha series of transactions contemplated in the Plan and emerged frombankruptcy.  We have worked diligently inan effort to analyze each of the claims filed in our Chapter 11 cases, and havealready made significant progress in reconciling such claims with our books andrecords. See Note 14 “Reorganization” to the Financial Statements for moredetailed information on our emergence from bankruptcy.

American Institute ofCertified Public Accountants Statement of Position 90-7, “FinancialReporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”),applies to the Company’s financial statements while the Company operates underthe provisions of Chapter 11. SOP 90-7 generally does not change the manner inwhich financial statements are prepared. However, it does require that thefinancial statements for periods subsequent to the filing of the Chapter 11petition distinguish transactions and events that are directly associated withthe reorganization from the ongoing operations of the business. Expenses,realized gains and losses, and provisions for losses that can be directlyassociated with the reorganization of the business are reported separately asreorganization costs in the statements of operations. Liabilities affected byimplementation of a plan of reorganization are reported at amounts expected tobe allowed, even if they may be settled for lesser amounts. In addition,reorganization related items that significantly impact cash provided by continuingoperations are disclosed separately in the statement of cash flows.

 

 

 

7

----

 

**2.   INVENTORIES**

** **

Inventories are valuedat the lower of cost (using the first-in, first-out method) or market value.Inventories as of September 30, 2007 and December 31, 2006 consisted ofthe following (in thousands):
| ** **      | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished goods  |       | $                       | 54,362     |                        | $          | 45,564 |   |
| Raw materials   |       | 46,267                  |       | 44,656                      |       |
| Work-in-process |       | 11,064                  |       | 9,883                       |       |
| Total           |       | $                       | 111,693    |                        | $          | 100,103 |   |

 

**3.   RESTRUCTURING AND OTHER COSTS**

** **

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

The following tablesummarizes restructuring and other costs for the three and nine months endedSeptember 30 (in thousands):
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **September 30,**                | ** ** | **September 30,**          | ** ** |
| ** **                                         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                               |       |                             |       |                            |       |   |   |   |   |
| **Plant  closing costs:**                          | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Severance                                          |       | $                                | 922        |                            | $          | — |   | $ | 1,157 |   | $ | — |   |
| Leases                                             |       | 306                              |       | —                          |       | 390 |   | — |   |
| Other plant  closure costs                         |       | 4,057                            |       | (685                            | )          | 4,250 |   | (655 | ) |
| **Office  closing and workforce reduction costs:** | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Severance                                          |       | 63                               |       | —                          |       | 1,387 |   | — |   |
| Other                                              |       | 25                               |       | —                          |       | 48 |   | — |   |
| **Total  Restructuring and other costs**           |       | $                                | 5,373      |                            | $          | (685 | ) | $ | 7,232 |   | $ | (655 | ) |

 

 

 

8

----

 

The following table summarizes the roll-forwardof the accruals from December 31, 2006 to September 30, 2007 (inthousands, except for employees): 
| ** **                                           | ** **   | ** **           | ** **   | ** **   | ** **   | **Accruals for the nine months ended  September 30, 2007** | ** **   | ** **    | ** **   | ** **   | ** **   | ** **   | ** **   |
|------------------------------------------------------|--------------|----------------------|--------------|--------------|--------------|------------------------------------------------------------------------------------------|--------------|---------------|--------------|--------------|--------------|--------------|--------------|
| ** **                                           | ** **   | ** **           | ** **   | ** **   | ** **   | ** **                                                                               | ** **   | ** **    | ** **   | **Other**    | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** **   | **12/31/2006**       | ** **   | ** **   | ** **   | ** **                                                                               | ** **   | **Plant**     | ** **   | ** **   | ** **   | ** **   | ** **   | **9/30/2007** | ** ** |
| ** **                                           | ** **   | **# Employees** | ** **   | **Accrual**  | ** **   | **Additional**                                                                           | ** **   | ** **    | ** **   | **Closure**  | ** **   | ** **   | ** **   | **Payments/** | ** ** | **# Employees** | ** ** | **Accrual** | ** ** |
| ** **                                           | ** **   | **Terminated**       | ** **   | **Balance**  | ** **   | **Employees**                                                                            | ** **   | **Severance** | ** **   | **Costs**    | ** **   | **Total**    | ** **   | **Charges** | ** ** | **Terminated** | ** ** | **Balance** | ** ** |
| ***Plant  Closing Costs:***                          | *** *** | *** ***         | *** *** | *** *** | *** *** | *** ***                                                                             | *** *** | *** ***  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Leases                                               |         | —               |         | 2,430        |         | —                                                                                   |         | —        |         | 390          |         | 390          |         | (1,891 | ) | — |   | 929 |   |
| Langley                                              |         | —               |         | —       |         | 120                                                                                      |         | 922           |         | 4,213        |         | 5,135        |         | (4,935 | ) | 7 |   | 200 |   |
| Barrie                                               |         | —               |         | —       |         | 19                                                                                       |         | 235           |         | 37           |         | 272          |         | (253 | ) | — |   | 19 |   |
|                                                 |         | —               |         | $            | 2,430        |                                                                                     | 139          |          | 1,157        |         | 4,640        |         | $            | 5,797 |   | $ | (7,079 | ) | 7 |   | $ | 1,148 |   |
| ***Office  Closing and Workforce Reduction Costs:*** | *** *** | *** ***         | *** *** | *** *** | *** *** | *** ***                                                                             | *** *** | *** ***  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Canada                                               |         | —               |         | —       |         | 7                                                                                        |         | 1,387         |         | 48           |         | 1,435        |         | (1,435 | ) | — |   | — |   |
|                                                 |         | —               |         | $            | —       |                                                                                     | 7            |          | $            | 1,387        |         | 48           |         | $ | 1,435 |   | $ | (1,435 | ) | — |   | $ | — |   |
| **Total  Plant & Office closing**      |         | —               | ** **   | **$**        | **2,430**    | ** **                                                                               | **146**      | ** **    | **$**        | **2,544**    | ** **   | **$**        | **4,688**    | ** ** | **$** | **7,232** | ** ** | **$** | **(8,514** | **)** | **7** | ** ** | **$** | **1,148** | ** ** |
|                                                      |              |                      |              |              |              |                                                                                          |              |               |              |              |              |              |              |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Plant Closing Costs***

***2007***—During the firstquarter of 2007, we announced the closure of our Barrie, Ontario and Langley,British Columbia plants and the restructuring of our Canadian administrativefunctions. Our total estimated costs include $1.3 million of severance costsrelated to our Engineered Films segment, $8.2 million of severance and plantclosing costs related to our Printed Products segment and $0.5 million ofseverance costs related to our Industrial Films segment. Closure of our Barriefacility has been completed and severance and other costs totaling $0.3 millionwere recorded in our Industrial operating segment. Restructuring costsassociated with our Canadian Administration included severance costs in thethird quarter of $0.1 million. Approximately $5.3 million of the total $5.4million in restructuring costs for the third quarter of 2007 related to closureof our Langley facility and the relocation of production equipment and consolidationof product lines into other plants in our Printed Products operating segment.$0.9 million of these costs were severance in nature, $1.6 million wereequipment move related, $1.5 million in fixed asset impairments, $0.2 millionwere lease related and $1.1 million were other restructuring charges. Of the $7.2million restructuring charges to date, $1.0 million relate to our EngineeredFilms segment, $0.8 million relate to our Industrial Films segment and $5.4million relate to our Printed Products segment.

***2006***—During the thirdquarter of 2006, the Company sold its remaining real estate in Merced,California for $2.4 million, recognized a $1.9 million gain on sale within itsIndustrial Films segment and reversed $0.7 million of the $1.0 million environmentalreserve provided in connection with Merced’s previous restructuring activitiesin accordance with the terms of the sales agreement.

***2005***—During 2005, theCompany accrued $1.9 million for the net costs to terminate the remaining leaseagreements associated with its Shelbyville, Indiana facility. During the firstquarter of 2007, payments of $1.5 million were made to complete the buy out ofthe remaining obligations under these leases.

***2003***—During 2003, theCompany accrued the present value of future lease payments on three buildingsit no longer occupied in an amount of $3.3 million. As of September 30, 2007,$0.9 million of these accruals are remaining.

*** ***

*** ***

***9***

----

*** ***

**4.   DEBT**

** **

Debt as of September 30, 2007 andDecember 31, 2006 consists of the following (in thousands):
| ** **                                                                          | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Credit  Facilities:                                                                 |       |                    |       |                        |       |
| Revolving credit  facilities                                                        |       | $                       | 134,579    |                        | $          | 113,579 |   |
| Senior secured notes  due 2009, interest at 11.85% (“Amended 2004 Notes”) |       | 329,740                 |       | 302,382                     |       |
| Senior secured  notes due 2009, interest at 11.35% (“2004 Notes”)         |       | 7,821                   |       | 7,808                       |       |
| Senior secured  notes due 2009, interest at 111/8% (“2003 Notes”)         |       | 250,000                 |       | 250,000                     |       |
| Senior  subordinated notes due 2010, interest at 13% (“2006 Notes”)       |       | —                  |       | 55,101                      |       |
| Senior  subordinated notes due 2010, interest at 18% (“2007 Notes”)       |       | 24,000                  |       | —                      |       |
| Obligations  under capital leases                                                   |       | 13,155                  |       | 8,761                       |       |
| Total                                                                               |       | 759,295                 |       | 737,631                     |       |
| Less current  portion                                                               |       | (1,121                  | )          | (975                        | )          |
| Long-term  portion                                                                  |       | $                       | 758,174    |                        | $          | 736,656 |   |

 

*Revolving Credit Facilities*

 

On July 18, 2006, weentered into (i) a Working Capital Credit Agreement, among the Company, certainof its subsidiaries, the lenders party thereto, Merrill Lynch Bank USA, asadministrative agent, and Merrill Lynch Commercial Finance Corp., as sole leadarranger and book manager (the “Working Capital Credit Agreement”), and (ii) aFixed Asset Credit Agreement, among Pliant Corporation Pty Ltd., PliantCorporation of Canada Ltd., Pliant Film Products GmbH and Aspen Industrial,S.A. de C.V., as borrowers, the lenders party thereto, Merrill Lynch Bank USA,as administrative agent, and Merrill Lynch Commercial Finance Corp., as solelead arranger and book manager (the “Fixed Asset Credit Agreement,” andtogether with the Working Capital Credit Agreement, the “Revolving CreditFacilities”) to replace the amended revolving credit facility dated November21, 2005 (the “Amended and Restated Credit Agreement”) and the Senior Secured,Super Priority, Priming Debtor-in-Possession Credit Agreement dated as ofJanuary 4, 2006 (the “DIP Credit Facility”). The Revolving Credit Facilitiesprovide up to $200 million of total commitments, subject to the borrowing basedescribed below and a required minimum availability amount of at least $10million. The Working Capital Credit Agreement includes a $20 million letter ofcredit sub-facility, with letters of credit reducing availability thereunder,and each of the Revolving Credit Facilities includes sub-limits for loans tocertain of our foreign subsidiaries which are borrowers under the RevolvingCredit Facilities. The Revolving Credit Facilities were funded on July 18,2006, and replaced our prior credit facilities. They are secured by a firstpriority security interest in substantially all of the Company’s and certain ofits subsidiaries’ assets, although the administrative agent has a secondpriority security interest only in certain of the Company’s and itssubsidiaries’ assets consistent with the terms of an intercreditor arrangementwith certain bondholders of the Company, which intercreditor arrangement is acarry-over from our prior credit arrangements.

 

The Revolving CreditFacilities will mature on July 18, 2011. The interest rates for all loansother than those made to our German subsidiary range from, in the case ofalternate base rate loans, the alternate base rate (either prime rate or .50%over the Federal Funds Rate) plus 1.75% to the alternate base rate plus 2.00%and, in the case of eurodollar loans, LIBOR plus 2.75% to LIBOR plus 3.00%, ineach case depending on the amount of available credit. The interest rates forloans made in connection with the loans to our German subsidiary are, in thecase of alternate base rate loans, the alternate base rate plus 5.00% and, inthe case of eurodollar loans, LIBOR plus 6.00%. The commitment fee for theunused portion of the Revolving Credit Facilities is 0.375% per annum.

 

The borrowing base underthe Working Capital Credit Agreement is based on specified percentages of theCompany’s and certain of its subsidiaries’ eligible accounts receivable,finished goods inventory, work in process and raw material inventory minuscertain reserves. The borrowing base under the Fixed Asset Credit Agreement isbased on specified percentages of the Company’s and certain of its subsidiaries’eligible real estate valued at market value plus the net orderly liquidationvalue of eligible machinery and equipment minus certain reserves.

 

The Revolving CreditFacilities contain covenants that will limit our ability, subject to certainexceptions, to, among other things, incur or guarantee additional indebtedness,issue preferred stock or become liable in respect of any obligation to purchaseor redeem stock, create liens, merge or consolidate with other companies,change lines of business, make certain types of investments, sell assets, enterinto certain sale and lease-back and swap transactions, pay dividends on orrepurchase stock, make distributions with respect to certain debt obligations,enter into transactions with affiliates, restrict dividends or other paymentsfrom our subsidiaries, 

 

 

10

----

 

modify corporate and certain material debt documents, cancel certaindebt, or change its fiscal year or accounting policies.

 

The Revolving CreditFacilities also require the Company to comply with a fixed charge coverageratio of 1.00 to 1.00 for the first year of the facility and of 1.10 to 1.00thereafter; provided, that such coverage ratio shall only apply during periodsin which the amount of availability is and remains less than $20,000,000 for aspecified number of days. Once the amount of availability increases and remainsabove $20,000,000 for a specified number of days, such coverage ratio becomesinapplicable. In addition, the amount of availability under the RevolvingCredit Facilities must not be less than $10,000,000 at any time. The loans willautomatically become immediately due and payable without notice upon theoccurrence of an event of default involving insolvency or bankruptcy of theCompany or any of its subsidiaries. In addition, upon the occurrence and duringthe continuation of any other event of default under the Revolving CreditFacilities, by notice given to the Company, the administrative agent may, andif directed by the Required Lenders (as defined in the Revolving CreditFacilities) must, terminate the commitments and/or declare all outstandingloans to be immediately due and payable.

 

The Working CapitalCredit Agreement is secured by a first-priority security interest insubstantially all our inventory, receivables and deposit accounts, capitalstock of, or other equity interests in, our existing and future domesticsubsidiaries and first-tier foreign subsidiaries, investment property and certainother assets of the Company and its subsidiaries and a second-priority securityinterest in fixed assets of the Company and its subsidiaries party to theWorking Capital Credit Agreement. The Fixed Asset Credit Agreement is securedby a first-priority security interest in the fixed assets of certain foreignsubsidiaries of the Company and a second-priority security interest in capitalstock of the fixed asset borrowers and their subsidiaries.

 

*On June 14, 2007, the Company and/or certain of itssubsidiaries entered into Amendment No. 2 to the Working Capital CreditAgreement  to allow for the incurrence ofindebtedness under the 2007 Note Indenture, discussed in detail below,including payment of regularly scheduled interest with respect to suchindebtedness, in replacement of indebtedness under the 2006 Note Indenture.*

As of September 30, 2007,we had borrowings of $134.6 million and $5.9 million in outstanding letters ofcredit under the Revolving Credit Facilities with $51.5 million of availabilitysubject to our borrowing base limitations.

 

*2007 Notes*

 

On June 14, 2007, the Company entered into an Indenture (the “2007Note Indenture”) among the Company and Pliant Corporation International, PliantFilm Products of Mexico, Inc., Pliant Packaging of Canada, LLC, PliantSolutions Corporation, Uniplast Holdings, Inc., Uniplast U.S., Inc. andUniplast Industries Co., as guarantors (collectively, the “2007 Note Guarantors”),and The Bank of New York Trust Company, N.A. (the “2007 Note Trustee”), astrustee, with respect to the issuance on such date of the Company’s 2007 Notesin an aggregate principal amount of $24 million. The 2007 Note Indenture provides that interest willaccrue on the 2007 Notes from the date of issuance at the rate of 18% per annumuntil maturity on July 15, 2012 and will be payable semi-annually on eachJanuary 15 and July 15, commencing July 15, 2007, to holders of record of the2007 Notes on the immediately preceding January 1 or July 1. Pursuant to the2007 Note Indenture, the Company may redeem the 2007 Notes in whole or in partat the applicable redemption price, which in each of the first four years isequal to a de-escalating premium over par, plus accrued and unpaid interest tothe redemption date, as set forth in the 2007 Notes. The 2007 Note Indentureprovides the holders of the 2007 Notes with the right to require the Company torepurchase the 2007 Notes at a repurchase price equal to the then applicableredemption price plus accrued and unpaid interest upon a change of control of theCompany (as defined in the 2007 Note Indenture). The 2007 Note Indenture doesnot provide for a sinking fund with respect to the 2007 Notes. The 2007 NotesIndenture contains customary provisions that may result in an event of default,after notice and expiration of a cure period in certain circumstances, andacceleration of the indebtedness thereunder, including failure to timely payprincipal and interest on the 2007 Notes or comply with the 

 

 

11

----

 

covenants set forth in the 2007 Note Indenture. The Bank of New YorkTrust Company, N.A. also acts as trustee with respect to the Company’s 2006Notes (as defined below).

 

The 2007 Note Indenturecontains various covenants including, among other things, covenants limitingthe incurrence of indebtedness and restricting certain payments, limitingrestrictions on the ability of subsidiaries to make distributions to theCompany, limiting sales of assets and subsidiary stock and the entry intoaffiliate transactions, as well as provisions governing merger and change ofcontrol transactions. The Company may be required under certain circumstancesto offer to repurchase 2007 Notes with the proceeds of certain asset sales.Upon a change of control transaction, holders of 2007 Notes may require theCompany (subject to certain exceptions) to repurchase 2007 Notes at a purchaseprice equal to 101% of the principal amount plus accrued and unpaid interest.The 2007 Notes will automatically become due and payable without notice uponthe occurrence of an event of default involving insolvency or bankruptcy of theCompany or certain of its subsidiaries. In addition, upon the occurrence andduring the continuation of any other event of default under the 2007 NoteIndenture, by notice given to the Company, the Trustee or holders of at least25% in principal amount of the 2007 Notes may declare the principal of andaccrued and unpaid interest on all the 2007 Notes to be immediately due andpayable.

 

*2006  Notes*

 

On July 18, 2006,the Company, certain of its subsidiaries as guarantors and The Bank of New YorkTrust Company, N.A. (the “2006 Note Trustee”), as trustee, entered into anIndenture, dated as of July 18, 2006 (the “2006 Note Indenture”), amongthe Company, certain subsidiary guarantors of the Company (the “2006 NoteGuarantors”) and the 2006 Note Trustee with respect to the issuance on suchdate of the 2006 Notes in an aggregate principal amount of $34.97 million.

 

Pursuant to SFAS 15,*Accounting for Debtors and Creditors for TroubleDebt Restructuring*, on July 18, 2006 the 2006 Notes were recorded ataggregate principal plus interest to maturity of $20.1 million or a total of$55.1 million. On or about July 16, 2007, the entire $39.6 million aggregateprincipal amount of 2006 Notes then outstanding were redeemed in accordancewith the 2006 Note Indenture, for an aggregate redemption price of $20.0million plus accrued interest thereon from July 18, 2006 through the RedemptionDate in the amount of $2.6 million and the difference between this total of$22.6 million and the carrying value of $55.1 million, or $32.5 million, wasrecognized as a gain on extinguishment of debt.

 

 

 

12

----

 

**5.   INTEREST EXPENSE—Current and Long-termdebt**

** **

Interest expense—current and long-term debt inthe statements of operations for the three and nine months ended September 30,2007 and 2006 is as follows (in thousands):
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,**                | ** ** | **September 30,**          | ** ** |
| ** **                                | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest  expense, net                    |       |                             |       |                            |       |   |   |   |   |
| Revolving credit  facilities              |       | $                                | 2,170      |                            | $          | 2,730 |   | $ | 6,619 |   | $ | 7,785 |   |
| 2007 Notes                                |       | 1,080                            |       | —                          |       | 1,272 |   | — |   |
| Amended 2004  Notes                       |       | 9,442                            |       | 8,537                           |       | 27,358 |   | 24,218 |   |
| 2004 Notes                                |       | 222                              |       | 207                             |       | 665 |   | 597 |   |
| 2003 Notes                                |       | 6,953                            |       | 6,953                           |       | 20,859 |   | 20,859 |   |
| 2000/2002  Notes(a)                       |       | —                           |       | —                          |       | — |   | 471 |   |
| Other, net                                |       | 661                              |       | 511                             |       | 3,635 |   | 2,804 |   |
| Interest expense  accrued, net            |       | 20,528                           |       | 18,938                          |       | 60,408 |   | 56,734 |   |
| Recurring  amortization of financing fees |       | 1,181                            |       | 1,058                           |       | 3,434 |   | 3,602 |   |
| TOTAL                                     |       | $                                | 21,709     |                            | $          | 19,996 |   | $ | 63,842 |   | $ | 60,336 |   |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Cash interest  payments                   |       |                             |       |                            |       |   |   |   |   |
| Revolving credit  facilities              |       | $                                | 2,661      |                            | $          | 2,398 |   | $ | 8,204 |   | $ | 8,935 |   |
| 2007 Notes                                |       | 372                              |       | —                          |       | 372 |   | — |   |
| 2004 Notes                                |       | —                           |       | —                          |       | 434 |   | — |   |
| 2003 Notes                                |       | 13,907                           |       | 28,437                          |       | 27,813 |   | 28,437 |   |
| Other, net                                |       | 407                              |       | 83                              |       | 806 |   | 247 |   |
| TOTAL                                     |       | $                                | 17,347     |                            | $          | 30,918 |   | $ | 37,629 |   | $ | 37,619 |   |

 

**(a) The Company’s 13% Senior Subordinated Notes due 2010(the “2000/2002 Notes”) were exchanged in connection with the Company’s Plan ofReorganization. Interest on the 2000/2002 Notes above includes interest for the two days, plus intereston interest, prior to the bankruptcy filing plus interest on theDecember 1, 2005 unpaid interest payment. Interest for the three and ninemonths ended September 30, 2006 at the stated rate of 13% would have been $10.4million and $31.2 million, respectively.**

**6.   INCOME TAXES**

** **

TheCompany adopted the provisions of Financial Accounting Board Interpretation No.48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation ofFASB Statement No. 109 (“SFAS 109”) on January 1, 2007. The interpretationprescribes a recognition threshold and measurement attribute criteria for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The interpretation also provides guidanceon derecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.

TheCompany and its subsidiaries file income tax returns in the U.S. federaljurisdiction, and various state and foreign jurisdictions. With a fewexceptions, the Company is no longer subject to U.S. federal, state and local,or non-U.S. income tax examinations by tax authorities for the years prior to2000.****The Company’s policy is to recognizeinterest and penalties related to unrecognized tax benefits as income taxexpense. Accrued interest and penalties are insignificant at September 30,2007. The Company believes that it has appropriate support for income taxpositions taken or to be taken on its tax returns and that its accruals for taxliabilities are adequate for all open years based on an assessment of manyfactors including past experience and interpretations of tax law applied to thefacts of each matter.

 

 

13

----

 

Thecumulative effect of adopting FIN 48 was a decrease in tax reserves of $0.7million and a decrease in Retained Deficit as of January 1, 2007 of $0.7million. As of January 1, 2007, the amount of unrecognized tax benefits was$2.9 million of which all would, if recognized, decrease our effective taxrate. There may be fluctuations in the amount of the liability, however, thechanges are not expected to be material.

Forthe three months ended September 30, 2007, income tax expense of $0.4 millionwas recorded on pretax income from operations of $19.1 million compared toincome tax benefits of a $0.8 million on pretax income from operations of$376.6 million for the three months ended September 30, 2006. For the ninemonths ended September 30, 2007, income tax expense was $0.8 million on pre-taxincome from operations of $1.4 million compared to income tax expense of $0.4million of pre-tax income of $303.1 million for the nine months ended September30, 2006. Income tax benefits related to net operating losses in the UnitedStates are offset by a valuation allowance as the realization of these taxbenefits is not certain. Therefore, the income tax expense in the statements ofoperations primarily reflects foreign income taxes.

**7.   OTHER COMPREHENSIVE INCOME**

** **

Othercomprehensive income for the three months ended September 30, 2007 and 2006 was$21.6 million and $376.6 million, respectively. Comprehensive income for thenine months ended September 30, 2007 and 2006 was $5.1 million and $302.6million, respectively. The components of other comprehensive income are netincome and foreign currency translation.

**8.   OPERATING SEGMENTS**

** **

Operating segments arecomponents of our business for which separate financial information isavailable that is evaluated regularly by our chief operating decision maker indeciding how to allocate resources and in assessing performance. Thisinformation is reported on the basis that it is used internally for evaluatingsegment performance.

In 2006, the Companyreorganized its Specialty Products Group and separated it into two operatingsegments, Specialty Films and Printed Products. In addition, the Companycombined its prior Performance Films segment with its Engineered Films segment.These changes were in response to a re-evaluation of the Company’s aggregationcriteria. The Company now has four operating segments: Specialty Films, whichmanufactures personal care, medical and agricultural films; Printed Productswhich produces printed rollstock, bags and sheets used to package food andconsumer goods; Industrial Films which manufactures stretch film used tobundle, unitize and protect palletized loads during shipping and storage andPVC films used by supermarkets, delicatessens and restaurants to wrap meat,cheese and produce; and Engineered Films which manufactures film for sale toconverters of flexible packaging and a variety of barrier and custom films forsmaller niche flexible packaging and industrial markets.

 

Segment information inthis report for 2006 has been reclassified to reflect this reorganization.Sales and transfers between our segments are eliminated in consolidation. Weevaluate the performance of our operating segments based on net sales(excluding inter-company sales) and segment profit. The segment profit reflectsincome before interest expense, income taxes, depreciation, amortization,restructuring costs and other non-cash charges and net adjustments for certainunusual items. Our reportable segments are managed separately with separatemanagement teams, because each segment has differing products, customerrequirements, technology and marketing strategies.

 

14

----

Segment profit and segment assets as of and forthe periods ended September 30, 2007 and September 30, 2006 are presented inthe following table (in thousands). Certain reclassifications have been made tothe prior year amounts to be consistent with the 2007 presentation.
| ** **                             | ** ** | **Engineered  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Films** | ** ** | **Printed Products** | ** ** | **Corporate /  Other** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|----------------------|------------|-----------------------------|------------|------------|------------|
| **Three  months ended Sept. 30, 2007** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales to  customers                |       | $                     | 89,981     |                  | $          | 82,565               |       | $                    | 55,443     |                        | $          | 50,652     |       | $ | 3,900 |   | $ | 282,541 |   |
| Intersegment  sales                    |       | 5,246                 |       | 3,293                 |       | 2,368                |       | 644                  |       | (11,551                     | )          | —     |       |
| Total net sales                        |       | 95,227                |       | 85,858                |       | 57,811               |       | 51,296               |       | (7,651                      | )          | 282,541    |       |
| Depreciation and  amortization         |       | 3,734                 |       | 1,685                 |       | 2,577                |       | 2,395                |       | 296                         |       | 10,687     |       |
| Interest expense                       |       | 647                   |       | 179                   |       | 20                   |       | 1,048                |       | 19,815                      |       | 21,709     |       |
| Segment profit                         |       | 10,790                |       | 9,133                 |       | 7,288                |       | 4,205                |       | (6,763                      | )          | 24,653     |       |
| Capital  expenditures                  |       | 4,144                 |       | 673                   |       | 2,296                |       | 2,471                |       | 2,507                       |       | 12,091     |       |
| **Three  months ended Sept. 30, 2006** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales to  customers                |       | $                     | 95,239     |                  | $          | 83,789               |       | $                    | 55,671     |                        | $          | 56,290     |       | $ | 2,368 |   | $ | 293,357 |   |
| Intersegment  sales                    |       | 4,011                 |       | 4,243                 |       | 3,625                |       | 1,009                |       | (12,888                     | )          | —     |       |
| Total net sales                        |       | 99,250                |       | 88,032                |       | 59,296               |       | 57,299               |       | (10,520                     | )          | 293,357    |       |
| Depreciation and  amortization         |       | 2,812                 |       | 1,666                 |       | 2,342                |       | 2,407                |       | 895                         |       | 10,122     |       |
| Interest expense                       |       | 245                   |       | 161                   |       | —               |       | 1,244                |       | 18,346                      |       | 19,996     |       |
| Segment profit                         |       | 11,462                |       | 9,548                 |       | 6,762                |       | 5,568                |       | (7,317                      | )          | 26,023     |       |
| Capital  expenditures                  |       | 2,845                 |       | 1,263                 |       | 3,276                |       | 1,682                |       | 1,847                       |       | 10,913     |       |
| **Nine  months ended Sept. 30, 2007**  | ** ** | ** **            | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales to  customers                |       | $                     | 263,036    |                  | $          | 233,989              |       | $                    | 152,786    |                        | $          | 158,179    |       | $ | 11,979 |   | $ | 819,969 |   |
| Intersegment  sales                    |       | 12,228                |       | 10,840                |       | 9,003                |       | 2,389                |       | (34,460                     | )          | —     |       |
| Total net sales                        |       | 275,264               |       | 244,829               |       | 161,789              |       | 160,568              |       | (22,481                     | )          | 819,969    |       |
| Depreciation and  amortization         |       | 10,124                |       | 5,260                 |       | 7,686                |       | 7,262                |       | 3,464                       |       | 33,796     |       |
| Interest expense                       |       | 2,719                 |       | 543                   |       | 64                   |       | 3,128                |       | 57,388                      |       | 63,842     |       |
| Segment profit                         |       | 37,448                |       | 26,286                |       | 19,406               |       | 11,667               |       | (18,930                     | )          | 75,877     |       |
| Capital  expenditures                  |       | 10,355                |       | 3,497                 |       | 8,265                |       | 6,676                |       | 7,339                       |       | 36,132     |       |
| Segment assets                         |       | 228,911               |       | 118,216               |       | 155,341              |       | 137,503              |       | 57,314                      |       | 697,285    |       |
| **Nine  months ended Sept. 30, 2006**  | ** ** | ** **            | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales to  customers                |       | $                     | 295,408    |                  | $          | 242,613              |       | $                    | 159,921    |                        | $          | 175,959    |       | $ | 6,185 |   | $ | 880,086 |   |
| Intersegment  sales                    |       | 11,601                |       | 12,505                |       | 7,923                |       | 2,606                |       | (34,635                     | )          | —     |       |
| Total net sales                        |       | 307,009               |       | 255,118               |       | 167,844              |       | 178,565              |       | (28,450                     | )          | 880,086    |       |
| Depreciation and  amortization         |       | 8,390                 |       | 5,000                 |       | 6,870                |       | 7,189                |       | 2,686                       |       | 30,135     |       |
| Interest expense                       |       | 1,654                 |       | 273                   |       | —               |       | 4,239                |       | 54,441                      |       | 60,607     |       |
| Segment profit                         |       | 38,352                |       | 23,765                |       | 19,938               |       | 15,994               |       | (21,106                     | )          | 76,943     |       |
| Capital  expenditures                  |       | 4,795                 |       | 3,137                 |       | 10,941               |       | 6,873                |       | 3,531                       |       | 29,277     |       |
| **As of  December 31, 2006**      | ** ** | ** **            | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Segment assets                         |       | $                     | 198,076    |                  | $          | 107,634              |       | $                    | 150,483    |                        | $          | 140,624    |       | $ | 80,940 |   | $ | 677,757 |   |
|                                        |            |                       |            |                       |            |                      |            |                      |            |                             |            |            |            |  |  |  |  |  |  |  |

 

 

15

----

 

A reconciliation of the totals reported for theoperating segments to the totals reported in the consolidated financialstatements for the three and nine months ended September 30, 2007 and September30, 2006 and as of September 30, 2007 and December 31, 2006 is as follows(in thousands) (unaudited):
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                      | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Profit  or Loss**             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total segment  profit           |       | $                                | 24,653     |                            | $          | 26,023 |   | $ | 75,877 |   | $ | 76,943 |   |
| Depreciation and  amortization  |       | (10,687                          | )          | (10,122                         | )          | (33,796 | ) | (30,135 | ) |
| Restructuring  and other costs  |       | (5,373                           | )          | 685                             |       | (7,232 | ) | 655 |   |
| Reorganization  costs           |       | (320                             | )          | (18,427                         | )          | (1,017 | ) | (82,248 | ) |
| Other operating  costs          |       | —                           |       | —                          |       | (1,101 | ) | — |   |
| Interest expense                |       | (21,709                          | )          | (19,996                         | )          | (63,842 | ) | (60,607 | ) |
| Gain on  extinguishment of debt |       | 32,508                           |       | 398,454                         |       | 32,508 |   | 398,454 |   |
| Income before  income taxes     |       | $                                | 19,072     |                            | $          | 376,617 |   | $ | 1,397 |   | $ | 303,062 |   |

 

 
| ** **                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| **Assets**                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Total assets  from reportable segments |       | 639,971                |       | 596,817               |       |
| Other  unallocated assets              |       | 57,314                 |       | 80,940                |       |
| Total  consolidated assets             |       | $                      | 697,285    |                  | $          | 677,757 |   |
|                                   |       |                   |       |                  |       |
|                                        |            |                        |            |                       |            |  |  |

 

 

Net sales and long-livedassets of our US and foreign operations are as follows:

 
| ** **            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **            | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Sales             |       |                             |       |                            |       |   |   |   |   |
| United States         |       | $                                | 233,468    |                            | $          | 239,050 |   | $ | 667,190 |   | $ | 711,990 |   |
| Foreign  countries(a) |       | 49,073                           |       | 54,307                          |       | 152,779 |   | 168,096 |   |
| Total                 |       | $                                | 282,541    |                            | $          | 293,357 |   | $ | 819,969 |   | $ | 880,086 |   |

 

 
| ** **         | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------|------------|-------------------------|------------|------------------------|------------|
| Long-lived  assets |       |                    |       |                   |       |
| United States      |       | $                       | 273,135    |                   | $          | 255,622 |   |
| Foreign  countries |       | 41,526                  |       | 48,821                 |       |
| Total              |       | $                       | 314,661    |                   | $          | 304,443 |   |
|               |       |                    |       |                   |       |
| Total assets       |       |                    |       |                   |       |
| United States      |       | $                       | 587,971    |                   | $          | 561,846 |   |
| Foreign  countries |       | 109,314                 |       | 115,911                |       |
| Total              |       | $                       | 697,285    |                   | $          | 677,757 |   |

 

----

(a)             Foreigncountries include Australia, Canada, Germany and Mexico, none of whichindividually represents 10% of consolidated net sales or long-lived assets.

 

16

----

 

**9.   DEFINED BENEFIT PLANS**

TheCompany sponsors three noncontributory defined benefit pension plans (the “UnitedStates Plans”) covering domestic employees with 1,000 or more hours of service.The Company funds these in accordance with the funding requirements of theEmployee Retirement Income Security Act of 1974. Contributions are intended tonot only provide for benefits attributed to service to date but also for thoseexpected to be earned in the future. We also sponsor a defined benefit plan inGermany (the “Germany Plan”). Periodic pension expense for the Germany Plan wasimmaterial. For information on the Germany Plan please refer to the Company’sAnnual Report on Form 10-K for the year ended December 31,2006. In the second quarter of 2004, the Company redesigned its retirementprograms which led to the curtailment and “freeze” of the pension plan for U.S.salaried employees effective June 30, 2004.

The consolidated net periodic pension expense(benefit) for the three and nine months ended September 30, 2007 and 2006includes the following components (in thousands):
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **United  States Plans**                        | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost-benefits earned during the period |       | $                                                    | 102        |                                                | $          | 111 |   | $ | 302 |   | $ | 333 |   |
| Interest cost on  projected benefit obligation  |       | 1,283                                                |       | 1,278                                               |       | 3,852 |   | 3,772 |   |
| Expected return  on assets                      |       | (1,568                                               | )          | (1,314                                              | )          | (4,706 | ) | (4,082 | ) |
| Other                                           |       | 35                                                   |       | 183                                                 |       | 98 |   | 245 |   |
| Net periodic  pension expense (benefit)         |       | $                                                    | (148       | )                                                   | $          | 258 |   | $ | (454 | ) | $ | 268 |   |

** **

**10.   CONTINGENCIES**

*Litigation*   Weare involved in various litigation matters from time to time in the ordinarycourse of our business, including matters described in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006. In our opinion, noneof such litigation is material to our financial condition or results ofoperations.

**11.   CONDENSED CONSOLIDATING FINANCIALSTATEMENTS**

The following condensedconsolidating financial statements present, in separate columns, financialinformation for (i) Pliant (on a parent only basis) with its investment inits subsidiaries recorded under the equity method, (ii) guarantorsubsidiaries (as specified in the Indenture dated as of May 30, 2003, asamended (the “2003 Indenture”) relating to the 2003 Notes, the FirstSupplemental Indenture with respect to the Amended and Restated Indenturerelating to the 2004 Notes and the Amended 2004 Notes, the 2006 Note Indenturerelating to the 2006 Notes and the 2007 Note Indenture relating to the 2007Notes (the 2003 Indenture, the Amended and Restated Indenture, as amended bythe First Supplemental Indenture, the 2006 Note Indenture and the 2007 NoteIndenture, collectively, the “Indentures”) on a combined basis, with anyinvestments in non-guarantor subsidiaries specified in the Indentures recordedunder the equity method, (iii) direct and indirect non-guarantorsubsidiaries on a combined basis, (iv) the eliminations necessary toarrive at the information for Pliant and its subsidiaries on a consolidatedbasis, and (v) Pliant on a consolidated basis, in each case as ofSeptember 30, 2007 and December 31, 2006 and for the three and nine monthsended September 30, 2007 and September 30, 2006. The 2003 Notes, the 2004Notes, the Amended 2004 Notes, the 2006 Notes and 2007 Notes are fully andunconditionally guaranteed on a joint and several basis by each guarantorsubsidiary and each guarantor subsidiary is 100% owned, directly or indirectly,by Pliant, except that the 2003 Notes are not guaranteed by Uniplast IndustriesCo. and the Amended 2004 Notes are not guaranteed by Pliant SolutionsCorporation (“Pliant Solutions”). Substantially all of the assets of PliantSolutions were sold on September 30, 2004 and the remainder disposed priorto December 31, 2005. There are no contractual restrictions limitingtransfers of cash from guarantor and non-guarantor subsidiaries to Pliant. Thecondensed consolidated financial statements are presented herein, rather thanseparate financial statements for each of the guarantor subsidiaries, becausemanagement believes that separate financial statements relating to theguarantor subsidiaries are not material to investors.

 

17

----

 

**PLIANTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETAS OF SEPTEMBER 30, 2007 (DOLLARS IN THOUSANDS) (UNAUDITED)**
| ** **                                                | ** ** | **Pliant  Corporation** | ** ** | **Combined  Guarantor** | ** ** | **Combined  Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated  Pliant** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | **(Parent Only)**  | ** ** | **Subsidiaries**        | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** ** | **Corporation**          | ** ** |
| **ASSETS**                                                | ** ** | ** **              | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **               | ** ** |
| CURRENT ASSETS:                                           |       |                    |       |                    |       |                        |       |             |       |                     |       |
| Cash and cash  equivalents                                |       | $                       | 93         |                    | $          | 3,474                       |       | $                | 3,524      |                     | $          | — |   | $ | 7,091 |   |
| Receivables, net  of allowances                           |       | 109,982                 |       | 6,762                   |       | 26,004                      |       | —           |       | 142,748                  |       |
| Inventories                                               |       | 98,406                  |       | 3,249                   |       | 10,038                      |       | —           |       | 111,693                  |       |
| Prepaid expenses  and other                               |       | 3,182                   |       | 413                     |       | 3,154                       |       | —           |       | 6,749                    |       |
| Income taxes  receivable, net                             |       | (261                    | )          | 891                     |       | 485                         |       | —           |       | 1,115                    |       |
| Deferred income  taxes                                    |       | 8,434                   |       | 10                      |       | 303                         |       | —           |       | 8,747                    |       |
| Total current  assets                                     |       | 219,836                 |       | 14,799                  |       | 43,508                      |       | —           |       | 278,143                  |       |
| PLANT AND  EQUIPMENT, net                                 |       | 273,134                 |       | 9,100                   |       | 32,427                      |       | —           |       | 314,661                  |       |
| GOODWILL                                                  |       | 57,777                  |       | 13,153                  |       | 1,596                       |       | —           |       | 72,526                   |       |
| INTANGIBLE  ASSETS, net                                   |       | 1,749                   |       | 9,845                   |       | 5                           |       | —           |       | 11,599                   |       |
| INVESTMENT IN  SUBSIDIARIES                               |       | (22,846                 | )          | —                  |       | —                      |       | 22,846           |       | —                   |       |
| OTHER ASSETS                                              |       | 17,140                  |       | —                  |       | 3,216                       |       | —           |       | 20,356                   |       |
| TOTAL ASSETS                                              |       | $                       | 546,790    |                    | $          | 46,897                      |       | $                | 80,752     |                     | $          | 22,846 |   | $ | 697,285 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**  | ** ** | ** **              | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **               | ** ** |
| CURRENT  LIABILITIES:                                     |       |                    |       |                    |       |                        |       |             |       |                     |       |
| Current portion  of long-term debt                        |       | $                       | 1,024      |                    | $          | —                      |       | $                | 97         |                     | $          | — |   | $ | 1,121 |   |
| Trade accounts  payable                                   |       | 82,386                  |       | 4,421                   |       | 11,798                      |       | —           |       | 98,605                   |       |
| Accrued  liabilities                                      |       | 40,588                  |       | 372                     |       | 4,421                       |       | —           |       | 45,381                   |       |
| Due to (from)  affiliates                                 |       | (78,990                 | )          | 63,428                  |       | 15,562                      |       | —           |       | —                   |       |
| Total current  liabilities                                |       | 45,008                  |       | 68,221                  |       | 31,878                      |       | —           |       | 145,107                  |       |
| LONG-TERM DEBT,  net of current portion                   |       | 720,042                 |       | 16,700                  |       | 21,432                      |       | —           |       | 758,174                  |       |
| OTHER  LIABILITIES                                        |       | 21,403                  |       | 1,279                   |       | 5,452                       |       | —           |       | 28,134                   |       |
| DEFERRED INCOME  TAXES                                    |       | 17,415                  |       | 2,744                   |       | 2,789                       |       | —           |       | 22,948                   |       |
| Total  Liabilities                                        |       | 803,868                 |       | 88,944                  |       | 61,551                      |       | —           |       | 954,363                  |       |
| STOCKHOLDERS’  EQUITY (DEFICIT):                     |       |                    |       |                    |       |                        |       |             |       |                     |       |
| Preferred stock                                           |       | 234,654                 |       | —                  |       | —                      |       | —           |       | 234,654                  |       |
| Common stock                                              |       | 1                       |       | —                  |       | 11,916                      |       | (11,916          | )          | 1                        |       |
| Additional  paid-in capital                               |       | 155,341                 |       | 14,020                  |       | 43,822                      |       | (57,842          | )          | 155,341                  |       |
| Retained  earnings (deficit)                              |       | (633,392                | )          | (57,910                 | )          | (33,866                     | )          | 91,776           |       | (633,392                 | )          |
| Accumulated  other comprehensive loss                     |       | (13,682                 | )          | 1,843                   |       | (2,671                      | )          | 828              |       | (13,682                  | )          |
| Total  stockholders’ equity (deficit)                |       | (257,078                | )          | (42,047                 | )          | 19,201                      |       | 22,846           |       | (257,078                 | )          |
| TOTAL  LIABILITIES AND STOCKOLDERS’ EQUITY (DEFICIT) |       | $                       | 546,790    |                    | $          | 46,897                      |       | $                | 80,752     |                     | $          | 22,846 |   | $ | 697,285 |   |

 

 

See notes to condensedconsolidated financial statements.

 

 

18

----

 

**PLIANTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETAS OF DECEMBER 31, 2006 (DOLLARS IN THOUSANDS) (UNAUDITED)**
| ** **                                                | ** ** | **Pliant  Corporation** | ** ** | **Combined  Guarantor** | ** ** | **Combined  Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated  Pliant** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | **(Parent Only)**  | ** ** | **Subsidiaries**        | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** ** | **Corporation**          | ** ** |
| **ASSETS**                                                | ** ** | ** **              | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **               | ** ** |
| CURRENT ASSETS:                                           |       |                    |       |                    |       |                        |       |             |       |                     |       |
| Cash and cash  equivalents                                |       | $                       | 7          |                    | $          | 1,005                       |       | $                | 3,187      |                     | $          | — |   | $ | 4,199 |   |
| Receivables, net  of allowances                           |       | 108,907                 |       | 8,131                   |       | 23,439                      |       | —           |       | 140,477                  |       |
| Inventories                                               |       | 83,007                  |       | 6,703                   |       | 10,393                      |       | —           |       | 100,103                  |       |
| Prepaid expenses  and other                               |       | 3,698                   |       | 445                     |       | 3,136                       |       | —           |       | 7,279                    |       |
| Income taxes  receivable, net                             |       | (792                    | )          | 1,443                   |       | 347                         |       | —           |       | 998                      |       |
| Deferred income  taxes                                    |       | 13,452                  |       | 2                       |       | 300                         |       | —           |       | 13,754                   |       |
| Total current  assets                                     |       | 208,279                 |       | 17,729                  |       | 40,802                      |       | —           |       | 266,810                  |       |
| PLANT AND  EQUIPMENT, net                                 |       | 255,622                 |       | 15,888                  |       | 32,933                      |       | —           |       | 304,443                  |       |
| GOODWILL                                                  |       | 57,777                  |       | 13,153                  |       | 1,327                       |       | —           |       | 72,257                   |       |
| INTANGIBLE  ASSETS, net                                   |       | 2,498                   |       | 9,873                   |       | 18                          |       | —           |       | 12,389                   |       |
| INVESTMENT IN  SUBSIDIARIES                               |       | (17,932                 | )          | —                  |       | —                      |       | 17,932           |       | —                   |       |
| OTHER ASSETS                                              |       | 18,905                  |       | —                  |       | 2,953                       |       | —           |       | 21,858                   |       |
| TOTAL ASSETS                                              |       | $                       | 525,149    |                    | $          | 56,643                      |       | $                | 78,033     |                     | $          | 17,932 |   | $ | 677,757 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**  | ** ** | ** **              | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **               | ** ** |
| CURRENT  LIABILITIES:                                     |       |                    |       |                    |       |                        |       |             |       |                     |       |
| Current portion  of long-term debt                        |       | $                       | 895        |                    | $          | —                      |       | $                | 80         |                     | $          | — |   | $ | 975 |   |
| Trade accounts  payable                                   |       | 65,710                  |       | 3,298                   |       | 12,223                      |       | —           |       | 81,231                   |       |
| Accrued  liabilities                                      |       | 56,078                  |       | 1,779                   |       | 4,064                       |       | —           |       | 61,921                   |       |
| Due to (from)  affiliates                                 |       | (90,702                 | )          | 65,746                  |       | 24,956                      |       | —           |       | —                   |       |
| Total current  liabilities                                |       | 31,981                  |       | 70,823                  |       | 41,323                      |       | —           |       | 144,127                  |       |
| LONG-TERM DEBT,  net of current portion                   |       | 708,404                 |       | 16,700                  |       | 11,552                      |       | —           |       | 736,656                  |       |
| OTHER  LIABILITIES                                        |       | 25,636                  |       | —                  |       | 3,810                       |       | —           |       | 29,446                   |       |
| DEFERRED INCOME  TAXES                                    |       | 22,887                  |       | 4,703                   |       | 3,697                       |       | —           |       | 31,287                   |       |
| Total  Liabilities                                        |       | 788,908                 |       | 92,226                  |       | 60,382                      |       | —           |       | 941,516                  |       |
| STOCKHOLDERS’  EQUITY (DEFICIT):                     |       |                    |       |                    |       |                        |       |             |       |                     |       |
| Preferred stock                                           |       | 198,899                 |       | —                  |       | —                      |       | —           |       | 198,899                  |       |
| Common stock                                              |       | 1                       |       | —                  |       | 11,916                      |       | (11,916          | )          | 1                        |       |
| Additional  paid-in capital                               |       | 154,521                 |       | 14,020                  |       | 43,822                      |       | (57,842          | )          | 154,521                  |       |
| Retained  earnings (deficit)                              |       | (598,934                | )          | (51,983                 | )          | (30,812                     | )          | 82,795           |       | (598,934                 | )          |
| Accumulated  other comprehensive loss                     |       | (18,246                 | )          | 2,380                   |       | (7,275                      | )          | 4,895            |       | (18,246                  | )          |
| Total  stockholders’ equity (deficit)                |       | (263,759                | )          | (35,583                 | )          | 17,651                      |       | 17,932           |       | (263,759                 | )          |
| TOTAL  LIABILITIES AND STOCKOLDERS’ EQUITY (DEFICIT) |       | $                       | 525,149    |                    | $          | 56,643                      |       | $                | 78,033     |                     | $          | 17,932 |   | $ | 677,757 |   |

 

See notes to condensedconsolidated financial statements.

 

19

----

 

**PLIANTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING INCOME STATEMENTFOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 (IN THOUSANDS) (UNAUDITED)**
| ** **                          | ** ** | **Pliant  Corporation** | ** ** | **Combined  Guarantor** | ** ** | **Combined  Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated  Pliant** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **(Parent Only)**  | ** ** | **Subsidiaries**        | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** ** | **Corporation**          | ** ** |
| NET SALES                           |       | $                       | 245,034    |                    | $          | 12,561                      |       | $                | 36,512     |                     | $          | (11,566 | ) | $ | 282,541 |   |
| COST OF SALES                       |       | 216,327                 |       | 12,166                  |       | 33,898                      |       | (11,566          | )          | 250,825                  |       |
| GROSS PROFIT                        |       | 28,707                  |       | 395                     |       | 2,614                       |       | —           |       | 31,716                   |       |
| OPERATING  EXPENSES                 |       | 16,947                  |       | 4,727                   |       | 1,844                       |       | —           |       | 23,518                   |       |
| OPERATING INCOME  (LOSS)            |       | 11,760                  |       | (4,332                  | )          | 770                         |       | —           |       | 8,198                    |       |
| INTEREST EXPENSE                    |       | (20,389                 | )          | (144                    | )          | (1,176                      | )          | —           |       | (21,709                  | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (6,410                  | )          | —                  |       | —                      |       | 6,410            |       | —                   |       |
| GAIN ON  EXTINGUISHMENT OF DEBT     |       | 32,508                  |       | —                  |       | —                      |       | —           |       | 32,508                   |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 1,504                   |       | (777                    | )          | (652                        | )          | —           |       | 75                       |       |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | 18,973                  |       | (5,253                  | )          | (1,058                      | )          | 6,410            |       | 19,072                   |       |
| INCOME TAX  EXPENSE (BENEFIT)       |       | 330                     |       | (222                    | )          | 321                         |       | —           |       | 429                      |       |
| NET INCOME  (LOSS)                  |       | $                       | 18,643     |                    | $          | (5,031                      | )          | $                | (1,379     | )                        | $          | 6,410 |   | $ | 18,643 |   |

 

See notes to condensedconsolidated financial statements.

 

20

----

 

**PLIANTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING INCOME STATEMENTFOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 (IN THOUSANDS) (UNAUDITED)**
| ** **                          | ** ** | **Pliant  Corporation** | ** ** | **Combined  Guarantor** | ** ** | **Combined  Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated  Pliant** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **(Parent Only)**  | ** ** | **Subsidiaries**        | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** ** | **Corporation**          | ** ** |
| NET SALES                           |       | $                       | 251,969    |                    | $          | 17,369                      |       | $                | 36,938     |                     | $          | (12,919 | ) | $ | 293,357 |   |
| COST OF SALES                       |       | 221,827                 |       | 16,770                  |       | 33,678                      |       | (12,919          | )          | 259,356                  |       |
| GROSS PROFIT                        |       | 30,142                  |       | 599                     |       | 3,260                       |       | —           |       | 34,001                   |       |
| OPERATING  EXPENSES                 |       | 35,438                  |       | 558                     |       | 1,769                       |       | —           |       | 37,765                   |       |
| OPERATING INCOME  (LOSS)            |       | (5,296                  | )          | 41                      |       | 1,491                       |       | —           |       | (3,764                   | )          |
| INTEREST EXPENSE                    |       | (18,401                 | )          | (241                    | )          | (1,354                      | )          | —           |       | (19,996                  | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (841                    | )          | —                  |       | —                      |       | 841              |       | —                   |       |
| GAIN ON  EXTINGUISHMENT OF DEBT     |       | 398,454                 |       | —                  |       | —                      |       | —           |       | 398,454                  |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 3,146                   |       | (653                    | )          | (570                        | )          | —           |       | 1,923                    |       |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | 377,062                 |       | (853                    | )          | (433                        | )          | 841              |       | 376,617                  |       |
| INCOME TAX  EXPENSE (BENEFIT)       |       | (350                    | )          | (13                     | )          | (432                        | )          | —           |       | (795                     | )          |
| NET INCOME  (LOSS)                  |       | $                       | 377,412    |                    | $          | (840                        | )          | $                | (1         | )                        | $          | 841 |   | $ | 377,412 |   |

 

See notes to condensedconsolidated financial statements.

 

21

----

 

**PLIANTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING INCOME STATEMENTFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (IN THOUSANDS) (UNAUDITED)**
| ** **                          | ** ** | **Pliant  Corporation** | ** ** | **Combined  Guarantor** | ** ** | **Combined  Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated  Pliant** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **(Parent Only)**  | ** ** | **Subsidiaries**        | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** ** | **Corporation**          | ** ** |
| NET SALES                           |       | $                       | 701,760    |                    | $          | 45,231                      |       | $                | 107,548    |                     | $          | (34,570 | ) | $ | 819,969 |   |
| COST OF SALES                       |       | 612,283                 |       | 42,589                  |       | 97,898                      |       | (34,570          | )          | 718,200                  |       |
| GROSS PROFIT                        |       | 89,477                  |       | 2,642                   |       | 9,650                       |       | —           |       | 101,769                  |       |
| OPERATING  EXPENSES                 |       | 56,333                  |       | 6,747                   |       | 6,347                       |       | —           |       | 69,427                   |       |
| OPERATING INCOME                    |       | 33,144                  |       | (4,105                  | )          | 3,303                       |       | —           |       | 32,342                   |       |
| INTEREST EXPENSE                    |       | (59,893                 | )          | (439                    | )          | (3,510                      | )          | —           |       | (63,842                  | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (9,437                  | )          | —                  |       | —                      |       | 9,437            |       | —                   |       |
| GAIN ON  EXTINGUISHMENT OF DEBT     |       | 32,508                  |       | —                  |       | —                      |       | —           |       | 32,508                   |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 4,823                   |       | (2,517                  | )          | (1,917                      | )          | —           |       | 389                      |       |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | 1,145                   |       | (7,061                  | )          | (2,124                      | )          | 9,437            |       | 1,397                    |       |
| INCOME TAX  EXPENSE (BENEFIT)       |       | 560                     |       | (740                    | )          | 992                         |       | —           |       | 812                      |       |
| NET INCOME  (LOSS)                  |       | $                       | 585        |                    | $          | (6,321                      | )          | $                | (3,116     | )                        | $          | 9,437 |   | $ | 585 |   |

 

See notes to condensedconsolidated financial statements.

 

22

----

 

**PLIANTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING INCOME STATEMENTFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 (IN THOUSANDS) (UNAUDITED)**
| ** **                          | ** ** | **Pliant  Corporation** | ** ** | **Combined  Guarantor** | ** ** | **Combined  Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated  Pliant** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **(Parent Only)**  | ** ** | **Subsidiaries**        | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** ** | **Corporation**          | ** ** |
| NET SALES                           |       | $                       | 746,705    |                    | $          | 58,147                      |       | $                | 109,948    |                     | $          | (34,714 | ) | $ | 880,086 |   |
| COST OF SALES                       |       | 655,964                 |       | 53,754                  |       | 99,777                      |       | (34,714          | )          | 774,781                  |       |
| GROSS PROFIT                        |       | 90,741                  |       | 4,393                   |       | 10,171                      |       | —           |       | 105,305                  |       |
| OPERATING  EXPENSES                 |       | 135,083                 |       | 1,651                   |       | 5,416                       |       | —           |       | 142,150                  |       |
| OPERATING INCOME  (LOSS)            |       | (44,342                 | )          | 2,742                   |       | 4,755                       |       | —           |       | (36,845                  | )          |
| INTEREST EXPENSE                    |       | (54,619                 | )          | (1,639                  | )          | (4,349                      | )          | —           |       | (60,607                  | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (3,676                  | )          | —                  |       | —                      |       | 3,676            |       | —                   |       |
| GAIN ON  EXTINGUISHMENT OF DEBT     |       | 398,454                 |       | —                  |       | —                      |       | —           |       | 398,454                  |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 6,799                   |       | (2,773                  | )          | (1,966                      | )          | —           |       | 2,060                    |       |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | 302,616                 |       | (1,670                  | )          | (1,560                      | )          | 3,676            |       | 303,062                  |       |
| INCOME TAX  EXPENSE (BENEFIT)       |       | —                  |       | (123                    | )          | 569                         |       | —           |       | 446                      |       |
| NET INCOME  (LOSS)                  |       | $                       | 302,616    |                    | $          | (1,547                      | )          | $                | (2,129     | )                        | $          | 3,676 |   | $ | 302,616 |   |

 

See notes to condensedconsolidated financial statements.

 

23

----

 

**PLIANTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (IN THOUSANDS) (UNAUDITED)**
| ** **                                                    | ** ** | **Pliant  Corporation** | ** ** | **Combined  Guarantor** | ** ** | **Combined  Non-Guarantor** | ** ** | ** **       | ** ** | **Consolidated  Pliant** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                                                    | ** ** | **(Parent Only)**  | ** ** | **Subsidiaries**        | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** ** | **Corporation**          | ** ** |
| CASH FLOW  PROVIDED BY (USED IN) OPERATING ACTIVITIES         |       | $                       | 17,713     |                    | $          | (3                          | )          | $                | 1,448      |                     | $          | — |   | $ | 19,158 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                        |       |                    |       |                    |       |                        |       |             |       |                     |       |
| Proceeds from  sale of assets                                 |       | —                  |       | 165                     |       | —                      |       | —           |       | 165                      |       |
| Equipment  transfers                                          |       | (6,414                  | )          | 6,604                   |       | (190                        | )          | —           |       | —                   |       |
| Capital  expenditures for plant and equipment                 |       | (32,068                 | )          | (2,231                  | )          | (1,833                      | )          | —           |       | (36,132                  | )          |
| Net cash used in  investing activities                        |       | (38,482                 | )          | 4,538                   |       | (2,023                      | )          | —           |       | (35,967                  | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                        |       |                    |       |                    |       |                        |       |             |       |                     |       |
| Payment of  financing fees                                    |       | (1,704                  | )          | —                  |       | —                      |       | —           |       | (1,704                   | )          |
| Repayment of  capital leases and other, net                   |       | (502                    | )          | —                  |       | (58                         | )          | —           |       | (560                     | )          |
| Borrowings under  Revolving Credit Facilities                 |       | 11,000                  |       | —                  |       | 10,000                      |       | —           |       | 21,000                   |       |
| Loans (to)/from  affiliates                                   |       | 10,000                  |       | —                  |       | (10,000                     | )          | —           |       | —                   |       |
| Proceeds from  issuance of preferred stock                    |       | 157                     |       | —                  |       | —                      |       | —           |       | 157                      |       |
| Repayment of  senior subordinated notes                       |       | (22,593                 | )          | —                  |       | —                      |       | —           |       | (22,593                  | )          |
| Proceeds from  issuance of senior subordinated notes          |       | 24,000                  |       | —                  |       | —                      |       | —           |       | 24,000                   |       |
| Net cash  provided by/(used in) financing activities          |       | 20,358                  |       | —                  |       | (58                         | )          | —           |       | 20,300                   |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |       | 497                     |       | (2,066                  | )          | 970                         |       | —           |       | (599                     | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS         |       | 86                      |       | 2,469                   |       | 337                         |       | —           |       | 2,892                    |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD           |       | 7                       |       | 1,005                   |       | 3,187                       |       | —           |       | 4,199                    |       |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                 |       | $                       | 93         |                    | $          | 3,474                       |       | $                | 3,524      |                     | $          | — |   | $ | 7,091 |   |

 

See notes to condensedconsolidated financial statements.

 

24

----

** **

**PLIANTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 (IN THOUSANDS) (UNAUDITED)**
| ** **                                                         | ** ** | **Pliant**             | ** ** | **Combined**     | ** ** | **Combined**      | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **Corporation**        | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Pliant**       | ** ** |
| ** **                                                         | ** ** | **(Parent Only)** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Corporation**  | ** ** |
| CASH FLOW  PROVIDED BY (USED IN) OPERATING ACTIVITIES         |       | $                      | 23,314     |             | $          | 24,114            |       | $                | (8,837     | )                | $          | — |   | $ | 38,591 |   |
| CASH FLOWS FROM   INVESTING ACTIVITIES:                       |       |                   |       |             |       |              |       |             |       |             |       |
| Proceeds from  sale of assets                                      |       | 2,602                  |       | —           |       | —            |       | —           |       | 2,602            |       |
| Capital  expenditures for plant and equipment                      |       | (26,756                | )          | (1,441           | )          | (1,080            | )          | —           |       | (29,277          | )          |
| Net cash used in  investing activities                             |       | (24,154                | )          | (1,441           | )          | (1,080            | )          | —           |       | (26,675          | )          |
| CASH FLOWS FROM   FINANCING ACTIVITIES:                       |       |                   |       |             |       |              |       |             |       |             |       |
| Payment of  financing fees                                         |       | (10,476                | )          | —           |       | —            |       | —           |       | (10,476          | )          |
| Repayment of  capital leases and other, net                        |       | (1,151                 | )          | —           |       | (139              | )          | —           |       | (1,290           | )          |
| Repayment of  prior revolving credit facility                      |       | (99,442                | )          | (39,400          | )          | —            |       | —           |       | (138,842         | )          |
| Borrowings under  Revolving Credit Facilities                      |       | 109,542                |       | 16,700           |       | 7,379             |       | —           |       | 133,621          |       |
| Net cash  provided by/(used in) financing activities               |       | (1,527                 | )          | (22,700          | )          | 7,240             |       | —           |       | (16,987          | )          |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |       | (2,485                 | )          | (368             | )          | 527               |       | —           |       | (2,326           | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS              |       | (4,852                 | )          | (395             | )          | (2,150            | )          | —           |       | (7,397           | )          |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD                |       | 4,859                  |       | 1,153            |       | 6,790             |       | —           |       | 12,802           |       |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                      |       | $                      | 7          |             | $          | 758               |       | $                | 4,640      |             | $          | — |   | $ | 5,405 |   |

 

See notes to condensedconsolidated financial statements.

 

25

----

 

**12.   ISSUANCE OF SERIES M PREFERRED STOCK**

**On February 20, 2007, the Company issued 8,000 sharesof Series M Preferred Stock par value $.01 per share (“Series M PreferredStock”) to certain employees pursuant to the Company’s 2006 Restricted StockIncentive Plan (the “Stock Plan”).**

Upon receiving theirawards in February 2007, participants purchased their shares ofSeries M Preferred Stock for $20 per share. The shares were issued for anaggregate purchase price of $160,000. At that time, the fair market value ofthe shares of Series M Preferred Stock (as determined by an appraisal byan independent appraisal firm), was $103 per share. Each participant made anelection under Section 83(b) of the Internal Revenue Code to pay taxat that time on the $83 difference between those amounts; and the Company paida bonus of approximately $138 per share (the tax-grossed-up amount of the $83 difference)to each participant to enable the participant to pay such taxes.

 

In addition, the Companyrecognized the fair market value of $103 per share, less par value of $.01 pershare, as additional paid in capital of approximately $824,000 and has recordedthe cost of the tax-gross-up of $437,000 and the difference between fair marketvalue and purchase price of $664,000 together as other operating costs in theaccompanying condensed consolidated statement of operations.

 

On April 17, 2007 weawarded certain participants rights to purchase an additional 220 shares ofSeries M Preferred Stock, also for $20 per share, after re-purchasing thoseadditional shares from a former named executive officer.

 

**13.   GOODWILL**

**Based upon the 2006 annual impairment test, the Companydetermined that goodwill was impaired in our Specialty Films and PrintedProducts segments and recorded goodwill write-downs totaling $110.0 million.The impairment charge recorded in the financial statements was based onmanagements’ preliminary estimates of fair value of plant, property andequipment and intangible assets. The Company obtained the required valuationsand determined that no additional adjustment to the carrying value of goodwillin the Specialty Films segment reflected in the financial statements for theyear ended December 31, 2006 was necessary.**

 

**14.   REORGANIZATION**

** **

On January 3, 2006,Pliant and ten subsidiaries filed voluntary petitions in the BankruptcyCourt seeking relief under the Bankruptcy Code. Three of the Company’ssubsidiaries with Canadian operations commenced ancillary proceedings in a Canadiancourt to recognize the Chapter 11 bankruptcy proceedings as “foreignproceedings.”  The Company’s operations in Mexico, Germany, and Australiawere not included in the Chapter 11 filing. For additional informationregarding our reorganization, see Item 1 Business — Chapter 11 BankruptcyProceedings and Reorganization and Item 7 — Management’s Discussion andAnalysis of Financial Condition and Results of Operation in the Company’sAnnual Report on Form 10-K for year ending December 31, 2006.

 

On June 19, 2006, wefiled with the Bankruptcy Court our Plan which was approved by the BankruptcyCourt on June 23, 2006. On July 18, 2006, we consummated ourreorganization through a series of transactions contemplated in the Plan and wefiled with the Bankruptcy Court a notice announcing the effectiveness of thePlan.

 

26

----

 

Pursuant to the Plan, onJuly 18, 2006, we effected the following transactions:

•         changed our state of incorporation fromUtah to Delaware;

•         extinguished our Series B Preferred Stock, no parvalue (“Series B Preferred Stock”);

•         issued (i) an aggregate principal amount of$34,967,000 of the 2006 Notes, (ii) 335,592 shares of Series AARedeemable Preferred Stock, par value $.01 per share (“Series AA PreferredStock”), and (iii) 100,003 shares of new common stock, par value $.01 pershare (“Common Stock”) in exchange for (A) all of our 2000/2002 Notes,(B) all of our Series A Cumulative Exchangeable Redeemable PreferredStock, no par value (the “Series A Preferred Stock”), (C) ourexisting common stock, par value $.01 per share (“Old Common Stock”) and (D) warrants to purchase our Old CommonStock;

•         made cash payments to the applicable trustee of(A) $3,200,000 for further distribution to the holders of the 2000/2002Notes and (B) $18,529,375.55 ($4 million of which was a consent fee andthe balance of which was the missed March 1, 2006 interest payment and theinterest owed on that interest payment) for further distribution to the holdersof our 2003 Notes and reinstated the 2003 Notes;

•         reinstated our 2004 Notes and our Amended 2004 Notesand increased the interest rate on the 2004 Notes and the Amended 2004 Notes by..225%;

•         entered into our Revolving Credit Facilities; and

•         entered into a Stockholders’ Agreement dated July 18,2006 (the “Stockholders’ Agreement”) with respect to the Common Stock and aRegistration Rights Agreement dated July 18, 2006 (the “RegistrationRights Agreement”) with respect to the Series AA Preferred Stock.

 

As a result, the priorcredit facilities, the indenture dated May 31, 2000 governing the 2000Notes (the “2000 Indenture”) and the indenture dated April 10, 2002governing the 2002 Notes (the “2002 Indenture”) were terminated, except, withrespect to the indentures, to the extent necessary to permit the trustee undersuch indentures to make distributions to the holders of the 2000/2002 Notesunder the Plan. In addition, on July 18, 2006, the Company’s Deferred CashIncentive Plan (the “Cash Plan”) and Stock Plan became effective.

 

As referenced above, theCompany completed a debt for equity exchange whereby 100% of its outstanding$320 million of 2000/2002 Notes and $24.3 million in accrued interest wereexchanged for 265,123 shares or 79% of its new Series AA Preferred Stock,approximately 30,000 shares or 30% of its Common Stock, $3.2 million in cashconsideration and approximately $35 million in 2006 Notes. Pursuant to SFAS 15,  *Accountingby Debtors and Creditors for Troubled Debt Restructuring*, these$35 million of 2006 Notes were recorded at aggregate principal plus interest tomaturity of $20.1 million or a total of $55.1 million. In addition, 100% of the$ 298.0 million of shares subject to mandatory redemption, including theCompany’s Series A Preferred Stock were also exchanged for shares of itsnew Series AA Preferred Stock and shares of its Common Stock. The fairmarket value of equity received in connection with these exchanges wasapproximately $182.3 million. This resulted in a gain on extinguishment ofdebt of $398.5 million on a combined exchange of $642.3 million of debt andaccrued interest, after accounting for charges associated with outstandingstockholders’ notes.

 

On July 18, 2006,the Company entered into the Stockholders Agreement that is binding on allparties receiving shares of Common Stock, pursuant to the terms of the Plan.The Stockholders’ Agreement provides for certain restrictions on transfer ofthe Common Stock and requires that all transferees of Common Stock become aparty to the Stockholders’ Agreement. The Stockholders’ Agreement also grantsto certain holders of Common Stock the right to purchase their pro rata shareof any new equity securities issued by the Company, subject to exceptions foracquisitions, management equity and certain other transactions. TheStockholders’ Agreement contains “drag-along rights” that require all holdersof Common Stock to participate in and vote in favor of certain sales of theCompany approved by the Board of Directors and certain holders of Common Stock.It further provides that the 5 (out of a total of 7) members of the Board ofDirectors to be elected by the holders of Common Stock will consist of theChief Executive Officer of the Company and 4 members designated by the holdersof a majority of the Common Stock held by persons defined as “permittedholders” under the indentures for the 2003 Notes, 2004 Notes and Amended 2004Notes. Finally, the Stockholders’ Agreement provides that certain holders ofCommon Stock will have demand registration rights after July 18, 2009 andadditional demand and piggyback registration rights following an initial publicoffering of the Common Stock.

 

 

27

----

 

On July 18, 2006,the Company also entered into the Registration Rights Agreement that is bindingon all parties receiving shares of Series AA Preferred Stock, pursuant tothe terms of the Plan. The Registration Rights Agreement requires the Companyto take all actions reasonably required to permit the Series AA PreferredStock to be quoted on the NASDAQ OTC Bulletin Board (“OTCBB”) as soon aspracticable. The Registration Rights Agreement also provides that, at any timeafter the ninth month and prior to the second anniversary of the effective dateof the Plan, certain holders of the Series AA Preferred Stock can requirePliant to register an underwritten public offering of the Series AAPreferred Stock.  On August 1, 2007, theCompany’s Series AA Preferred Stock began to be quoted on the OTCBB.

 

The Company adopted the StockPlan on July 18, 2006, which provides for the issuance to the ChiefExecutive Officer and other officers of the Company of Series M PreferredStock that, when combined with awards under the Cash Plan, will entitle suchofficers to a maximum of 8% of the equity value of the Company, in theaggregate. Participants in the Stock Plan and Cash Plan will only receivedistributions upon the occurrence of certain extraordinary corporatetransactions, such as a sale of all or substantially all of the Company’sassets or a change in control of the Company. The Stock Plan and Cash Plan areadministered by the Compensation Committee of the Company’s Board of Directorscomposed of non-employee directors. On February 20, 2007, the Companyissued 8,000 shares of its Series M Preferred Stock, to certain of itsofficers pursuant to its Stock Plan.

 

The Company incurredprofessional fees and other expenses directly associated with the bankruptcyproceedings. In addition, the Company made certain adjustments to the carryingvalues of certain pre-petition assets and liabilities. Such costs andadjustments are classified as reorganization costs in the accompanyingcondensed consolidated statements of operations for the three and nine monthsended September 30 and consist of the following (in thousands):

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                          | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Debt  subject to compromise:**                                    | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Write-off of  unamortized original issuance, discount, net          |       | $                                | —     |                            | $          | — |   | $ | — |   | $ | 5,856 |   |
| Write-off of  unamortized capitalized financing fees                |       | —                           |       | —                          |       | — |   | 15,777 |   |
|                                                                |       | —                           |       | —                          |       | — |   | 21,633 |   |
| **Manditorily  Redeemable Preferred Stock**                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Write-off of  unamortized original issuance discount                |       | —                           |       | —                          |       | — |   | 24,597 |   |
| **Write-off  of capitalized financing fees on DIP Credit Facility** |       | —                           |       | 1,475                           |       | — |   | 1,475 |   |
| **Bondholders’  consent fee**                                  |       | —                           |       | 4,000                           |       | — |   | 4,000 |   |
| **Emergence  Bonus Plan**                                           |       | —                           |       | 1,567                           |       | — |   | 1,567 |   |
| **Professional  fees and claim settlements**                        |       | 320                              |       | 11,385                          |       | 1,017 |   | 28,976 |   |
| **Reorganization  Costs**                                           |       | $                                | 320        |                            | $          | 18,427 |   | $ | 1,017 |   | $ | 82,248 |   |

 

 

28

----

 

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

The purpose of this section is to discussand analyze our consolidated financial condition, liquidity and capitalresources and results of operations. This analysis should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations contained in our Annual Report on Form 10-Kfor the year ended December 31, 2006. This section contains certainforward-looking statements within the meaning of federal securities laws thatinvolve risks and uncertainties, including statements regarding our plans,objectives, goals, strategies and financial performance. Our actual resultscould differ materially from the results anticipated in these forward-lookingstatements as a result of factors set forth under “Cautionary Statement forForward-Looking Information” below and elsewhere in this report.

**General**

Wegenerate our revenues, earnings and cash flows from the sale of film andflexible packaging products throughout the world. We manufacture these productsat 22 facilities located on 20 sites in the United States, Australia, Canada,Germany and Mexico.

**Overview**

*Chapter 11 BankruptcyProceedings and Reorganization*   TheCompany and ten of its subsidiaries filed for protection under the BankruptcyCode in January 2006. On June 19, 2006, the Company filed with theBankruptcy Court its Plan which was approved by the Bankruptcy Court onJune 23, 2006. On July 18, 2006, the Company consummated itsreorganization through a series of transactions contemplated in the Plan andemerged from bankruptcy.

We have workeddiligently in an effort to analyze each of the claims filed in our Chapter 11cases, and have already made significant progress in reconciling such claimswith our books and records. Moreover, we have been steadily makingdistributions to the holders of many such claims, as well as to creditorsappearing in our schedules, and have filed objections to certain claims asnecessary. To date, we have filed nine omnibus objections to claims, resultingin a reduction to the claims register of more than 111 claims totaling morethan $89.0 million, which were primarily claims made by equity holders whoreceived distributions of new securities according to the Company’s Plan. Inaddition, we have paid more than $47 million to satisfy contract cure amounts,vendor trade agreements, and other unsecured claims. We estimate that there areapproximately $2.0 million in non-litigation claims remaining for processing.See Note 14 “Reorganization” to the Financial Statements for more detailedinformation on our emergence from bankruptcy.

We recorded sales of$282.5 million in the third quarter of 2007 compared to sales of $293.4 millionin the third quarter of 2006. Third quarter 2007 sales measured in pounds were215.7 million, which represents a 2.7% decrease from the third quarter of 2006.Average sales price for the three months ended September 30, 2007 was $1.310per pound as compared to $1.323 per pound for the three months ended September30, 2006.

Total segment profit was$24.7 million for the third quarter of 2007, compared to $26.0 million for thethird quarter of 2006. Segment profit reflects income from continuingoperations adjusted for interest expense, income taxes, depreciation,amortization, reorganization costs, and restructuring charges. The decrease insegment profit  of $1.3 million reflectsthe unfavorable impacts of $2.9 million related to lower sales volume and $1.4million in compression between our average selling price and raw materialcosts, offset by $2.4 million lower selling general and administrative costsand $2.5 million in lower manufacturing costs. In addition, in the thirdquarter of 2006, the Company recorded a $1.9 million gain on the sale of ourremaining real estate in Merced, California.

**RawMaterial Costs**

The primary rawmaterials used in the manufacture of most of our products are polypropyleneresin, polyethylene resin and PVC resin. The long-term prices of thesematerials are primarily a function of the price of crude oil and natural gas.We have not historically hedged our exposure to raw material increases, buthave moved more customers to programs which would allow us to pass through costincreases in raw materials. Raw material costs as a percentage of sales wasapproximately 58% in the third quarters of 2007 and 2006.

Thegap between the speed at which resin price changes are passed on to us and thetime at which we can pass these cost changes on to our customers has an impacton both our results of operations and our working capital needs. To the extentwe are not able to pass along price increases of raw materials, or to theextent any such price increases are delayed, our cost of goods sold wouldcontinue to increase and our gross profit and operating income wouldcorrespondingly decrease. Significant increases in raw material prices thatcannot be passed on to customers could have a material adverse effect on ourresults of operations and financial condition.

 

29

----

 

**Resultsof Operations**

The following table sets forth net sales,operating expenses, and operating income, and such amounts as a percentage ofnet sales, for the three and nine months ended September 30, 2007 and 2006(dollars in millions).
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **                                               | ** ** | **% of**                                           | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                           | ** ** | **$**                                                    | ** ** | **Sales**                                               | ** ** | **$** | ** ** | **Sales** | ** ** | **$** | ** ** | **Sales** | ** ** | **$** | ** ** | **Sales** | ** ** |
|                                 |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Sales                            |       | $                                                        | 282.5      |                                                    | 100.0      | % | $ | 293.4 |   | 100.0 | % | $ | 820.0 |   | 100.0 | % | $ | 880.1 |   | 100.0 | % |
| Cost of sales                        |       | 250.8                                                    |       | 88.7                                                    | %          | 259.4 |   | 88.4 | % | 718.2 |   | 87.6 | % | 774.8 |   | 88.0 | % |
| Gross profit                         |       | 31.7                                                     |       | 11.3                                                    | %          | 34.0 |   | 11.6 | % | 101.8 |   | 12.4 | % | 105.3 |   | 12.0 | % |
| Selling, general  and administrative |       | 15.4                                                     |       | 5.5                                                     | %          | 17.9 |   | 6.1 | % | 51.5 |   | 6.3 | % | 53.8 |   | 6.1 | % |
| Research and  development costs      |       | 2.4                                                      |       | 0.9                                                     | %          | 2.2 |   | 0.7 | % | 8.6 |   | 1.1 | % | 6.8 |   | 0.8 | % |
| Restructuring  and other costs       |       | 5.4                                                      |       | 1.9                                                     | %          | (0.7 | ) | -0.2 | % | 7.2 |   | 0.9 | % | (0.7 | ) | — | % |
| Reorganization  costs                |       | 0.3                                                      |       | 0.1                                                     | %          | 18.4 |   | 6.3 | % | 1.1 |   | 0.1 | % | 82.2 |   | 9.3 | % |
| Other operating  costs               |       | —                                                   |       | —                                                  | %          | — |   | — | % | 1.1 |   | 0.1 | % | — |   | — | % |
| Total operating  expenses            |       | 23.5                                                     |       | 8.4                                                     | %          | 37.8 |   | 12.9 | % | 69.5 |   | 8.5 | % | 142.1 |   | 16.2 | % |
| Operating income  (loss)             |       | $                                                        | 8.2        |                                                    | 2.9        | % | $ | (3.8 | ) | -1.3 | % | $ | 32.3 |   | 3.9 | % | $ | (36.8 | ) | -4.2 | % |
|                                      |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ThreeMonths Ended September 30, 2007 Compared with the Three Months Ended September30, 2006**

*NetSales*

Netsales decreased by $10.9 million, or 3.7%, to $282.5 million for the thirdquarter of 2007 from $293.4 million for the three months ended September 30,2006. The decrease resulted primarily from a 2.7% decrease in our sales volumeand a 1.0% decrease in our average selling prices reflecting lower raw materialprices. See “Operating Segment Review” below for a detailed discussion of salesvolumes and selling prices by segment and division.

*GrossProfit*

Grossprofit decreased by $2.3 million, or 6.8%, to $31.7 million for the thirdquarter of 2007 due to lower sales volume and compression between our averageselling price and raw material costs, offset by favorable manufacturing costs.See “Operating Segment Review” below for a detailed discussion of the marginvariances by segment.

*Selling,General and Administrative*

Selling,general and administrative expenses were $15.4 million for the third quarter of2007, compared to $17.9 million for the third quarter of 2006. This decrease of$2.5 million is primarily attributable to lower employee payroll related costsand to less consulting and outside labor costs.

*Researchand Development Costs*

Researchand development costs were $2.4 million for the third quarter of 2007, comparedto $2.2 million in the third quarter of 2006. This increase of $0.2 million isprimarily attributable to the Company’s innovation programs underway to deliversolutions to existing markets and allow us to access new markets.

*Restructuringand Other Costs*

Restructuringand other costs of $5.4 million for the third quarter of 2007 relate primarilyto the restructuring of our Canadian operations and includes $5.3 million ofseverance, leases, and other restructuring charges associated with the closureof our Langley, British Columbia facility and the relocation of production

 

30

----

 

equipment and consolidation of product linesinto other Printed Products operating segment plants. The 2006 restructuringand other cost net credit of $0.7 million relate to reversal of $0.7 million ofthe $1.0 million environmental reserves related to our Merced, Californiafacilities as the buyer of this property indemnified the Company from futureclaims in excess of $0.3 million.

*ReorganizationCosts*

Reorganizationcosts were $0.3 million for the third quarter of 2007, compared to$18.4 million for the third quarter of 2006. Reorganization costs in thethird quarter of 2007 included $0.3 million of professional fees and courtcosts. Reorganization costs in the third quarter of 2006 included $11.4 millionof legal and financial advisory fees incurred in connection with the Company’sbankruptcy proceedings, $4.0 million in fees paid to bondholders inconsideration for their non-objection to the Company’s Fourth Amended Plan andresolution of disputes pertaining thereto, $1.5 million write-off ofcapitalized financing fees on the DIP Credit Facility and $1.5 million inEmergence Bonus Plan payments.

*Operating Income (Loss)*

Duringthe third quarter of 2007, the Company recorded operating income of $8.2million, compared to an operating loss of $3.8 million for the third quarter of2006.

*InterestExpense*

Interest expense oncurrent and long-term debt increased by $1.7 million to $21.7 millionfor the third quarter of 2007, from $20.0 million for the third quarter of2006. This increase is primarily attributable to $1.1 million of interest on ournewly issued 2007 Notes, increased payment-in-kind interest on our 2004 AmendedNotes and interest on capital leases, offset in part by a decrease in intereston our revolving credit facilities.

Interestexpense associated with dividends and accretion of the original issue discounton the Company’s previously outstanding Series A Preferred Stock pursuantto SFAS 150, was discontinued, effective January 3, 2006.

*IncomeTax Expense*

Incometax expense for the third quarter of 2007 was $0.4 million on pretax income of$19.1 million, compared to income tax benefits of $0.8 million on pretaxincome of $376.6 million for the same period in 2006. Income tax benefitsrelated to net operating losses in the United States were offset by a valuationallowance as the realization of these tax benefits is not certain. The incometax expense in the statements of operations primarily reflects foreign incometaxes.

**Nine Months Ended September 30, 2007 Compared withthe Nine Months Ended September 30, 2006**

 

*Net Sales*

 

Net sales decreased by$60.1 million, or 6.9%, to $820.0 million for the nine months endedSeptember 30, 2007 from $880.1 million for the nine months endedSeptember 30, 2006. The change was primarily due to a 4.4% decrease in ouraverage selling price resulting primarily from lower raw material prices and a2.5% decrease in sales volume.  See “Operating Segment Review” below for adetailed discussion of sales volumes and selling prices by segment anddivision.

 

*Gross Profit*

 

Gross profit decreased by$3.5 million to $101.8 million for nine months ended September 30, 2007,from $105.3 million for the nine months ended September 30, 2006. Thisdecrease is due to the impact of lower sales volume and $3.1 million ofincremental depreciation, partially offset by favorable sales mix and $1.0million in

 

31

----

 

lower freight costs.  See “Operating Segment Review” below for adetailed discussion of the margin variances by segment.

 

*Selling, General and AdministrativeCosts*

 

Selling, general andadministrative costs were $51.5 million for the nine months endedSeptember 30, 2007, compared to $53.8 million for the first nine months of2006. This $2.3 million reduction was primarily attributable to $2 millionlower payroll related costs and $0.4 million less consulting and outside laborcosts.

 

*Research and Development Costs*

 

Research and developmentcosts were $8.6 million for the nine months ended September 30, 2007,compared to $6.8 million for the nine months ended September 30, 2006. Thisincrease of $1.8 million is primarily attributable to the Company’s governmentcontracts and innovation programs underway to deliver solutions to existingmarkets and allow us to access new markets.

 

*Restructuring and Other Costs*

 

Restructuring and othercosts were $7.2 million for the nine months ended September 30, 2007, comparedto a net credit of $0.7 million for the nine months ended September 30, 2006.The 2007 restructuring and other costs relate primarily to the reorganizationof our Canadian operations and includes $5.4 million of severance, leases, andother restructuring charges associated with the closure of our Langley, BritishColumbia facility and the relocation of production equipment and consolidationof product lines into other Printed Products operating segment plants. Inaddition, we incurred $1.4 million associated with restructuring our Canadianmanagement and sales teams and $0.3 million associated with closure of ourBarrie, Ontario facility. The 2006 restructuring and other cost net credit of$0.7 million relate to reversal of $0.7 million of the $1.0 millionenvironmental reserves related to our Merced, California facilities as thebuyer of this property indemnified the Company from future claims in excess of$0.3 million.

 

*Reorganization Costs*

 

Reorganization costs were$1.1 million for the nine months ended September 30, 2007, compared to $82.2million for the nine months ended September 30, 2006. Reorganization costs in2007 include legal and other professional fees. Reorganization costs in 2006included the write-off of $15.8 million of unamortized capitalized financingfees associated with the issuance of our 2000/2002 Notes and our Amended andRestated Credit Agreement, $5.9 million in unamortized original issue discount,net of premiums, associated with the issuance of our 2000/2002 Notes and $24.6million associated with the issuance of our Series A Preferred Stock, and $29.0million of legal and financial advisory fees incurred in connection with theCompany’s bankruptcy proceedings and $4.0 million in fees paid to bondholdersin consideration for their non-objection to the Company’s Fourth Amended Planand resolution of disputes pertaining thereto, $1.5 million write-off ofcapitalized financing fees on the DIP Credit Facility and $1.5 million inEmergence  Bonus Plan payments.

 

*Other Operating Costs*

 

Other operating costs for2007 included $1.1 million of costs associated with the issuance of the Company’sSeries M Preferred Stock pursuant to the Company’s Plan of Reorganization.

 

*Operating Income (Loss)*

 

During the nine monthsended September 30, 2007, the Company recorded operating income of $32.3million, compared to an operating loss of $36.8 million for the nine monthsended September 30, 2006.

 

 

32

----

 

*Interest Expense*

 

Interest expense oncurrent and long-term debt was $63.8 million for the nine months endedSeptember 30, 2007, compared to $60.3 million for the nine months endedSeptember 30, 2006. This increase of $3.5 million between periods is primarilydue to $1.3 million of interest on our newly issued 2007 Notes, increasedpayment-in-kind interest on our 2004 Amended Notes and increased interest oncapital leases, partially offset by lower interest on our revolving creditfacilities and amortization of capitalized financing fees.

 

Interest expenseassociated with dividends and accretion of original issue discounts on theCompany’s Series A Preferred Stock was discontinued effective January 3, 2006.

 

*Other Income (Expense)*

 

Other income was $0.4million for the nine months ended September 30, 2007, compared to otherincome of  $2.1 million for the ninemonths ended September 30, 2006. The other income for the nine monthsended September 30, 2007 included interest income, transaction gains andother nominal amounts. The other income for the nine months ended September 30,2006 included a gain of $1.9 million on the sale of remaining real estate inour Merced, California facility.

 

 

*Income Tax Expense*

 

Income tax expense for thenine months ended September 30, 2007 was $0.8 million on pretax incomefrom operations of $1.4 million as compared to $0.4 million on pretax incomefrom operations of $303.1 million for the same period in 2006. Income taxbenefits related to net operating losses in the United States were offset by avaluation allowance as the realization of these tax benefits is not certain.Therefore, the income tax expense in the statements of operations primarilyreflects foreign income taxes.

 

**OperatingSegment Review**

*General*

We evaluate theperformance of our operating segments based on net sales (excludinginter-company sales) and segment profit. The segment profit reflects incomefrom continuing operations adjusted for interest expense, income taxes,depreciation, amortization, reorganization, restructuring and other costs andother non-cash charges (principally the impairment of goodwill,intangible assets and fixed assets). For more information on our operatingsegments, including a reconciliation of segment profit to income before taxes,see Note 8 “Operating Segments” to the condensed consolidated financialstatements included in this report.

We have four operatingsegments: Engineered Films, Industrial Films, Specialty Films and PrintedProducts. During 2006, the Company reorganized its Specialty Products Group andseparated it into the two operating segments of Specialty Films and PrintedProducts. In addition, the Company combined its prior Performance Films segmentwith its Engineered Films segment. Segment information in this report for 2006has been reclassified to reflect this reorganization.

Summary of segmentinformation (in millions of dollars):
| ** **                                 | ** ** | **Engineered  Films** | ** ** | **Industrial Films** | ** ** | **Specialty  Films** | ** ** | **Printed Products** | ** ** | **Corporate/  Other** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|-----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|-----------------------|------------|------------|------------|
| **Three  months ended September 30, 2007** | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Total net sales                            |       | $                     | 89.9       |                 | $          | 82.6                 |       | $                    | 55.5       |                  | $          | 50.7       |       | $ | 3.8 |   | $ | 282.5 |   |
| Segment profit                             |       | 10.7                  |       | 9.2                  |       | 7.3                  |       | 4.2                  |       | (6.7                  | )          | 24.7       |       |
| **Three  months ended September 30, 2006** | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Total net sales                            |       | $                     | 95.2       |                 | $          | 83.8                 |       | $                    | 55.7       |                  | $          | 56.3       |       | $ | 2.4 |   | $ | 293.4 |   |
| Segment profit                             |       | 11.4                  |       | 9.6                  |       | 6.7                  |       | 5.6                  |       | (7.3                  | )          | 26.0       |       |
| **Nine  months ended September 30, 2007**  | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Total net sales                            |       | $                     | 263.0      |                 | $          | 234.0                |       | $                    | 152.8      |                  | $          | 158.2      |       | $ | 12.0 |   | $ | 820.0 |   |
| Segment profit                             |       | 37.4                  |       | 26.3                 |       | 19.4                 |       | 11.7                 |       | (18.9                 | )          | 75.9       |       |
| **Nine  months ended September 30, 2006**  | ** ** | ** **            | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Total net sales                            |       | $                     | 295.4      |                 | $          | 242.6                |       | $                    | 159.9      |                  | $          | 176.0      |       | $ | 6.2 |   | $ | 880.1 |   |
| Segment profit                             |       | 38.3                  |       | 23.8                 |       | 19.9                 |       | 16.0                 |       | (21.1                 | )          | 76.9       |       |
|                                            |            |                       |            |                      |            |                      |            |                      |            |                       |            |            |            |  |  |  |  |  |  |  |  |  |

 

 

33

----

 

**Threemonths ended September 30, 2007 compared with the three months ended September30, 2006**

*EngineeredFilms*

*Net sales.*   Netsales in Engineered Films decreased by $5.3 million, or 5.6%, to $89.9 millionfor the quarter ended September 30, 2007 from $95.2 million for the thirdquarter of 2006. This change was due to a decrease in average selling prices of2.5%, principally from raw material price decreases and a 3.1% reduction insales volume, mostly in our converter film markets.

*Segmentprofit.*   The Engineered Films segmentprofit was $10.7 million for the quarter ended September 30, 2007, as comparedto $11.4 million for the same period in 2006. This $0.7 million decrease insegment profit was primarily due to a $0.6 million impact of lower sales volumeand $2.3 million unfavorable mix of customer sales, offset in part by $0.5million reduction in waste and $1.7 million favorable manufacturing costs.

*IndustrialFilms*

*Net sales.*   Thenet sales of our Industrial Films segment decreased by $1.2 million, or 1.4%,to $82.6 million for the quarter ended September 30, 2007 from $83.8million for the quarter ended September 30, 2006. This decrease is primarilydue to a decrease in sales volume of 2.5%, primarily in the stretch filmsmarkets, offset by a 1.1% increase in average selling prices.

*Segmentprofit.*   The Industrial Films segmentprofit was $9.2 million for the quarter ended September 30, 2007, ascompared to $9.6 million for the same period in 2006 which included a $1.9million gain on sale of remaining real estate at our Merced, Californiafacility. Excluding this prior year gain, segment profit increased $1.5 millionprimarily due to improved product mix, operational efficiencies andmanufacturing waste and lower selling general and administrative costs offsetby unfavorable volume impact in our stretch films markets.

*SpecialtyFilms*

*Net sales.*    Netsales in our Specialty Films segment decreased $0.2 million, or 0.4%, to $55.5million for the quarter ended September 30, 2007 from $55.7 million for thequarter ended September 30, 2006. This decrease was due to a decrease in salesvolume of 1.7%, primarily in our medical and industrial products markets,partially offset by an increase in average selling prices of 1.3%.

*Segmentprofit.*   The Specialty Films segment profitwas $7.3 million for the quarter ended September 30, 2007, as compared to $6.7million for the quarter ended September 30, 2006. This increase was primarilydue to favorable price/mix, offset by lower volume and higher waste andproduction related costs.

*PrintedProducts*

*Netsales.*   Net sales of our Printed Productssegment decreased $5.6 million or 9.9% to $50.7 million for the quarter endedSeptember 30, 2007 from $56.3 million for the quarter ended September 30, 2006.This decrease was due primarily to a reduction in average selling prices of6.1% reflecting lower raw material costs, unfavorable sales mix impact anddecreased sales volume of 4.1%. Additionally, production capacity wastemporarily constrained during the transition of Langley production assets toother facilities.

*Segmentprofit.*   The Printed Products segmentprofit was $4.2 million for the quarter ended September 30, 2007, as comparedto $5.6 million for the quarter ended September 30, 2006. This $1.4 milliondecline is

 

34

----

 

primarilydue to lower gross margins from compression between our average selling pricesand average raw material costs to contractual customers as well as unfavorablesales mix.

*Corporate/Other*

Corporate/Otherincludes our corporate headquarters and our research and development facilityin Newport News, Virginia. Unallocated corporate expenses decreased by $0.6million to $6.7 million for the quarter ended September 30, 2007, from $7.3million for the quarter ended September 30, 2006. This decrease was primarily dueto a reduction in employee payroll and payroll related bonus and pension costs.

**Ninemonths ended September 30, 2007 compared with the nine months ended September30, 2006**

*EngineeredFilms*

*Net sales.*   Netsales in Engineered Films decreased by $32.4 million, or 11.0%, to $263.0million for the nine months ended September 30, 2007 from $295.4 million forthe nine months ended September 30, 2006. This change was due to a decrease inaverage selling prices of 6.8%, principally from raw material price decreasesand a 4.4% reduction in sales volume.

*Segmentprofit.*   The Engineered Films segmentprofit was $37.4 million for the nine months ended September 30, 2007, ascompared to $38.3 million for the same period in 2006. This $0.9 milliondecrease in segment profit was primarily due to a $4.3 million unfavorable impactof lower sales volume and an unfavorable price/mix of $2.4 million offset inpart by a $1.9 million reduction in waste and $4.0 million in favorablemanufacturing costs and selling, general and administrative costs.

*IndustrialFilms*

*Net sales.*   Thenet sales of our Industrial Films segment decreased by $8.6 million, or 3.5%,to $234.0 million for the nine months ended September 30, 2007 from $242.6million for the nine months ended September 30, 2006. This decrease isprimarily due to a 3.5% decrease in average selling prices as sales volumeremained relatively constant between years.

*Segmentprofit.*   The Industrial Films segmentprofit was $26.3 million for the nine months ended September 30, 2007, ascompared to $23.8 million for the same period in 2006, which included a $1.9million gain on the sale of remaining real estate at our Merced, Californiafacility. Excluding this prior year gain, segment profit increased $4.4 milliondue to improved product sales mix and favorable manufacturing and sellinggeneral and administrative costs offset by unfavorable price/mix in our GermanPVC markets.

*SpecialtyFilms*

*Net sales.*    Netsales in our Specialty Films segment decreased $7.1 million, or 4.4%, to $152.8million for the nine months ended September 30, 2007 from $159.9 million forthe nine months ended September 30, 2006. This decrease was due to lower salesvolume of 3.1% in our low gel and medical markets because of Asian competitionand a decrease in our average selling prices of 1.4% because of lower rawmaterial costs.

*Segmentprofit.*   The Specialty Films segment profitwas $19.4 million for the nine months ended September 30, 2007, compared to$19.9 million for the same period in 2006. This $0.5 million decline includes afavorable sales mix offset by $1.9 million unfavorable volume impact and $1.9million in manufacturing and selling, general and administrative costs increases.

*PrintedProducts*

*Netsales.*   Net sales of our Printed Productssegment decreased $17.8 million or 10.1% to $158.2 million for the nine monthsended September 30, 2007 from $176.0 million for the nine months endedSeptember 30, 2006. This decrease was due primarily to a reduction in averageselling prices of 6.9 % caused by lower raw material costs, in addition to achange in market mix and a decrease in volume of 3.4%. Additionally, productioncapacity was temporarily constrained during the transition of Langleyproduction assets to other facilities.

 

35

----

 

*Segmentprofit.*   The Printed Products segmentprofit was $11.7 million for the nine months ended September 30, 2007, ascompared to $16.0 million for the same period in 2006. This $4.3 milliondecrease includes $3.0 million due to lower volume and $1.3 million due to unfavorableprice/mix and manufacturing costs.

*Corporate/Other*

Corporate/Otherincludes our corporate headquarters and our research and development facilityin Newport News, Virginia. Unallocated corporate expenses decreased by $2.2million to $18.9 million for the nine months ended September 30, 2007, from $21.1million for the nine months ended September 30, 2006. This decrease wasprimarily due to a reduction in employee bonus and pension related costs, asincreased billings on government contracts offset higher research anddevelopment costs of $1.8 million.

**Liquidityand Capital Resources**

*Sourcesof capital*

Our principal sources offunds have been cash generated by our operations and borrowings under ourrevolving credit facilities. In addition, we have raised funds through theissuance of the 2000/2002 Notes, the 2003 Notes, the 2004 Notes and the sale ofshares of our Series A Preferred Stock.

Asof September 30, 2007 our outstanding long-term debt consisted of $134.6million in borrowings under our Revolving Credit Facilities, $329.7 millionunder our Amended 2004 Notes, $7.8 million under our 2004 Notes,$250.0 million under our 2003 Notes, $24.0 million under our 2007 Notesand $13.2 million in capital leases.

*CurrentRevolving Credit Facilities*

 

On July 18, 2006, weentered into the Revolving Credit Facilities. The Revolving Credit Facilitiesprovide up to $200 million of total commitments, subject to the borrowing basedescribed below and a required minimum availability amount of at least $10 million.The Working Capital Credit Agreement includes a $20 million letter of creditsub-facility, with letters of credit reducing availability thereunder, and eachof the Revolving Credit Facilities includes sub-limits for loans to certain ofour foreign subsidiaries which are borrowers under the Revolving CreditFacilities. The Revolving Credit Facilities were funded on July 18, 2006,and replaced our prior credit facilities. They are secured by a first prioritysecurity interest in substantially all of the Company’s and certain of itssubsidiaries’ assets, although the administrative agent has a second prioritysecurity interest only in certain of the Company’s and its subsidiaries’ assetsconsistent with the terms of an intercreditor arrangement with certain bondholdersof the Company, which intercreditor arrangement is a carry-over from our priorcredit arrangements.

 

The Revolving CreditFacilities will mature on July 18, 2011. The interest rates for all loansother than those made to our German subsidiary range from, in the case ofalternate base rate loans, the alternate base rate (either prime rate or .50%over the Federal Funds Rate) plus 1.75% to the alternate base rate plus 2.00%and, in the case of eurodollar loans, LIBOR plus 2.75% to LIBOR plus 3.00%, ineach case depending on the amount of available credit. The interest rates forloans made in connection with the loans to our German subsidiary are, in thecase of alternate base rate loans, the alternate base rate plus 5.00% and, inthe case of eurodollar loans, LIBOR plus 6.00%. The commitment fee for theunused portion of the Revolving Credit Facilities is 0.375% per annum.

 

The borrowing base underthe Working Capital Credit Agreement is based on specified percentages of theCompany’s and certain of its subsidiaries’ eligible accounts receivable,finished goods inventory, work in process and raw material inventory minuscertain reserves. The borrowing base under the Fixed Asset Credit Agreement isbased on specified percentages of the Company’s and certain of its subsidiaries’eligible real estate valued at market value plus the net orderly liquidationvalue of eligible machinery and equipment minus certain reserves.

 

 

36

----

 

The Revolving CreditFacilities contain covenants that will limit our ability, subject to certainexceptions, to, among other things, incur or guarantee additional indebtedness,issue preferred stock or become liable in respect of any obligation to purchaseor redeem stock, create liens, merge or consolidate with other companies,change lines of business, make certain types of investments, sell assets, enterinto certain sale and lease-back and swap transactions, pay dividends on orrepurchase stock, make distributions with respect to certain debt obligations,enter into transactions with affiliates, restrict dividends or other paymentsfrom our subsidiaries, modify corporate and certain material debt documents,cancel certain debt, or change its fiscal year or accounting policies.

 

The Revolving CreditFacilities also require the Company to comply with a fixed charge coverageratio of 1.00 to 1.00 for the first year of the facility and of 1.10 to 1.00thereafter; provided, that such coverage ratio shall only apply during periodsin which the amount of availability is and remains less than $20 million for aspecified number of days. Once the amount of availability increases and remainsabove $20 million for a specified number of days, such coverage ratio becomesinapplicable. In addition, the amount of availability under the RevolvingCredit Facilities must not be less than $10 million at any time. The loans willautomatically become immediately due and payable without notice upon theoccurrence of an event of default involving insolvency or bankruptcy of theCompany or any of its subsidiaries. In addition, upon the occurrence and duringthe continuation of any other event of default under the Revolving CreditFacilities, by notice given to the Company, the administrative agent may, andif directed by the Required Lenders must, terminate the commitments and/ordeclare all outstanding loans to be immediately due and payable. The RevolvingCredit Facilities define “Required Lenders” as those lenders having credit exposureand unused commitments under the Revolving Credit Facilities representing morethan 50% of the sum of the total credit exposure and unused commitments at suchtime.

 

The Working CapitalCredit Agreement is secured by a first-priority security interest insubstantially all our inventory, receivables and deposit accounts, capitalstock of, or other equity interests in, our existing and future domesticsubsidiaries and first-tier foreign subsidiaries, investment property andcertain other assets of the Company and its subsidiaries and a second-prioritysecurity interest in fixed assets of the Company and its subsidiaries party tothe Working Capital Credit Agreement. The Fixed Asset Credit Agreement issecured by a first-priority security interest in the fixed assets of certainforeign subsidiaries of the Company and a second-priority security interest incapital stock of the fixed asset borrowers and their subsidiaries.

 

*On June 14, 2007, the Company and/or certain of itssubsidiaries entered into Amendment No. 2 to the Working Capital CreditAgreement to allow for the incurrence of indebtedness under the 2007 NoteIndenture, discussed in detail below, including payment of regularly scheduledinterest with respect to such indebtedness, in replacement of indebtednessunder the 2006 Note Indenture.*

As of September 30, 2007,we had borrowings of $134.6 million and $5.9 million in outstanding letters ofcredit under the Revolving Credit Facilities with $51.5 million of availabilitysubject to our borrowing base limitations.

 

*2007 Notes*

 

On June 14, 2007, theCompany entered into the 2007 Note Indenture among the Company and PliantCorporation International, Pliant Film Products of Mexico, Inc., PliantPackaging of Canada, LLC, Pliant Solutions Corporation, Uniplast Holdings,Inc., Uniplast U.S., Inc. and Uniplast Industries Co., as guarantors(collectively, the “2007 Note Guarantors), and the 2007 Note Trustee withrespect to the issuance on such date of the Company’s 2007 Notes in anaggregate principal amount of $24 million. The 2007 Note Indenture providesthat interest will accrue on the 2007 Notes from the date of issuance at therate of 18% per annum until maturity on July 15, 2012 and will be payablesemi-annually on each January 15 and July 15, commencing July 15, 2007, toholders of record of the 2007 Notes on the immediately preceding January 1 orJuly 1. Pursuant to the 2007 Note Indenture, the Company may redeem the 2007Notes in whole or in part at the applicable redemption price, which in each ofthe first four years is equal to a de-escalating premium over par, plus accruedand unpaid interest to the redemption date, as set forth in the 2007 Notes. The2007 Note Indenture provides the holders of the 2007 Notes with the right torequire the

 

37

----

 

Company to repurchase the 2007 Notes at a repurchase price equal to thethen applicable redemption price plus accrued and unpaid interest upon a changeof control of the Company (as defined in the 2007 Note Indenture). The 2007Note Indenture does not provide for a sinking fund with respect to the 2007Notes. The 2007 Notes Indenture contains customary provisions that may resultin an event of default, after notice and expiration of a cure period in certaincircumstances, and acceleration of the indebtedness thereunder, includingfailure to timely pay principal and interest on the 2007 Notes or comply withthe covenants set forth in the 2007 Note Indenture.

 

**The 2007 Note Indenture contains various covenants including,among other things, covenants limiting the incurrence of indebtedness andrestricting certain payments, limiting restrictions on the ability ofsubsidiaries to make distributions to the Company, limiting sales of assets andsubsidiary stock and the entry into affiliate transactions, as well asprovisions governing merger and change of control transactions. The Company maybe required under certain circumstances to offer to repurchase 2007 Notes withthe proceeds of certain asset sales. Upon a change of control transaction,holders of 2007 Notes may require the Company (subject to certain exceptions)to repurchase 2007 Notes at a purchase price equal to 101% of the principalamount plus accrued and unpaid interest. The 2007 Notes will automatically becomedue and payable without notice upon the occurrence of an event of defaultinvolving insolvency or bankruptcy of the Company or certain of itssubsidiaries. In addition, upon the occurrence and during the continuation ofany other event of default under the 2007 Note Indenture, by notice given tothe Company, the 2007 Note Trustee or holders of at least 25% in principalamount of the 2007 Notes may declare the principal of and accrued and unpaidinterest on all the 2007 Notes to be immediately due and payable.**

*2006Notes*

 

In connection with thePlan of Reorganization, on July 18, 2006, the Company entered into the2006 Notes Indenture with respect to the issuance on such date of the 2006Notes in an aggregate principal amount of $34.97 million.

 

Pursuant to SFAS 15,*Accounting for Debtors and Creditors for TroubleDebt Restructuring*, on July 18, 2006 the 2006 Notes were recorded ataggregate principal plus interest to maturity of $20.1 million or a total of$55.1 million. On July 16, 2007 the entire $39.6 million aggregate principalamount of 2006 Notes then outstanding were redeemed in accordance with the 2006Note Indenture, for an aggregate redemption price of $20 million plus accruedinterest thereon from July 18, 2006 in the amount of $2.6 million and thedifference between this of $22.6 million and $55.1 million, or $32.5 million,was recognized as a gain on extinguishment of debt.

* *

*Amended2004 Notes*

The Amended 2004 Notesaccreted from the date of issuance through July 18, 2006 at the rate of 11 5/8%,compounded semi-annually on each June 15 and December 15. Inconnection with the Plan of Reorganization, the Company entered into the FirstSupplemental Indenture dated July 18, 2006 amending the Amended and RestatedIndenture to increase the interest rate by .225% per annum with respect to theAmended 2004 Notes, which additional interest will accrue as payment-in-kindinterest. As a result, on July 18, 2006, the interest rate on the Amended 2004Notes was increased to 11.85% per annum. The Amended 2004 Notes are secured ona first-priority basis by a security interest in our real property, fixtures,equipment, intellectual property and other assets other than theSecond-Priority Collateral (the “First-Priority Note Collateral”) and on asecond-priority basis by a security interest in substantially all ourinventory, receivables and deposit accounts, 100% of the capital stock of, orother equity interests in existing and future domestic subsidiaries and foreignsubsidiaries that are note guarantors, 65% of the capital stock of, or otherequity interests in existing and future first-tier foreign subsidiaries,investment property and certain other assets of the Company and the noteguarantors (the “Second-Priority Note Collateral”). The Amended 2004 Notes areguaranteed by our existing and future domestic restricted subsidiaries andcertain foreign subsidiaries.

 

38

----

 

The Amended 2004 Notesmature on June 15, 2009. On or after June 15, 2007, we may redeemsome or all of the Amended 2004 Notes at the following redemption prices(expressed as percentages of the sum of the principal amount, plus accrued andunpaid interest); 111.625% if redeemed prior to June 15, 2007; 108.719% ifredeemed prior to December 15, 2007; 105.813% if redeemed prior toJune 15, 2008; 102.906% if redeemed prior to December 15, 2008; and100.000% if redeemed on or before June 15, 2009.

*2004Notes*

The 2004 Notes mature onJune 15, 2009 and are secured by a first-priority security interest in theFirst-Priority Note Collateral and a second-priority security interest in theSecond-Priority Note Collateral. The 2004 Notes are guaranteed by our existingand future domestic restricted subsidiaries and certain foreign subsidiaries.

The 2004 Notes accretedat the rate of 11 1/8% from thedate of issuance until July 18, 2006, on which date the interest rate wasincreased by .225% to 11.35% in accordance with the Plan. The 2004 Notesaccreted at the rate of 11.35% until December 15, 2006 to an aggregateprincipal amount of $1,000.88 per $1,000 stated principal amount. Commencing onDecember 15, 2006, interest on the 2004 Notes accrues at the rate of11.35% with such incremental interest rate increase of .225% accruing aspayment-in-kind interest and the remaining 111/8%payable in cash semiannually on June 15 and December 15, commencingon June 15, 2007. The 2004 Notes mature on June 15, 2009.

On or after June 15,2007, the Company may redeem some or all of the 2004 Notes at the followingredemption prices (expressed as percentages of the sum of the principal amountplus accrued and unpaid interest):  105.563% if redeemed prior toJune 15, 2008; 102.781% if redeemed on or after June 15, 2008 andprior to June 15, 2009; and 100.00% if redeemed on June 15, 2009.

 

*2003Notes*

The 2003 Notes accruedinterest from the date of issuance through maturity at the rate of 111/8%.The 2003 Notes mature on September 1, 2009 and interest is payable in cashsemiannually on each March 1 and September 1. The 2003 Notes rank equally with ourexisting and future senior debt and rank senior to our existing and futuresubordinated indebtedness, including the 2006 Notes and 2007 Notes. The 2003 Notes are secured by a secondpriority security interest in both the First Priority Note Collateral and theSecond Priority Note Collateral. The 2003 Notes are guaranteed by some of oursubsidiaries.

On or after June 1,2007, we may redeem some or all of the 2003 Notes at the following redemptionprices (expressed as a percentage of principal amount), plus accrued and unpaidinterest: 105.563% if redeemed prior to June 1, 2008; 102.781% if redeemedprior to June 1, 2009; and 100% if redeemed on or after June 1, 2009.

*Preferred stock*

We have 335,592 shares of$1,000 per share stated value of Series AA Preferred Stock outstanding asof September 30, 2007, which accrues dividends at the rate of 13% per annum.The Series AA Preferred Stock is convertible into our Common Stock. If theSeries AA Preferred Stock has not been redeemed or repurchased byJuly 18, 2011, the holders of at least 40% of the outstanding shares ofSeries AA Preferred Stock shall have the right to cause all of theoutstanding class of Series AA Preferred Stock to be converted into anumber of shares of Common Stock equal to 99.9% of the number of fully dilutedshares of Common Stock after giving effect to such conversion (excludingshares, if any, of Common Stock issued to stockholders of the other party to amerger qualifying for the “Merger Exception” as defined in our Amended andRestated Certificate of Incorporation). On August 1, 2007, the Company’s SeriesAA Preferred Stock began to be quoted on the OTCBB.

 

Inaddition, we have 8,000 shares of Series M Preferred Stock with a parvalue of $.01 per share outstanding. During 2006, we adopted the Plan ofReorganization, pursuant to which each participant with shares of Series MPreferred Stock participates in the enterprise value of our Company upon a “liquidationevent” or upon an 80% “redemption” of the Series AA Preferred Stock orupon a public offering, to the extent the proceeds exceed $224.8 million. Aparticipant’s restricted Series M Preferred Stock vests monthly over a 36month period; or upon a liquidation event, redemption, or public offering; orupon certain terminations of employment within a limited period before anaccelerated vesting event.

 

39

----

 

*NetCash Provided by/Used in Operating Activities*

Netcash provided by operating activities was $19.2 million for the nine monthsended September 30, 2007, compared to $38.6 million for the same period in2006. This $19.4 million decrease between years reflects $23.4 millionincremental earnings from operations before non-cash charges, offset by lowerworking capital reductions and other improvements of $42.8 million.  Net working capital requirements for the ninemonths ended September 30, 2007 increased $12.2 million and reflectimprovements of $16.3 million in accounts payable, $1.9 million in otherliabilities, and $0.6 million in prepaid and other expenses which were offsetby reductions in accrued liabilities of $19.9 million and increases ininventories of $10.2 million, other assets of $0.6 million and receivables of$0.3 million. During the first nine months of 2006, net working capitalrequirements decreased $30.6 million. Working capital improved $40.0 milliondue to accounts payable and accrued liabilities attributable to reinstatementof credit terms, $6.5 million reduction in other assets due to write-offs of capitalizedfinancing costs, and income taxes payable of $1.1 million. Partially offsettingthese improvements were increases in accounts receivables, inventories, andprepaid and other expenses of $10.2 million, $4.4 million and $0.7 million,respectively and a decrease in other liabilities of $1.7 million.

*NetCash Used in Investing Activities*

Netcash used in investing activities increased $9.3 million to $36.0 million forthe nine months ended September 30, 2007, from $26.7 million for the ninemonths ended September 30, 2006 due to increased capital expenditures of $6.8million and as 2006 included $2.6 million in proceeds from the sale of ourremaining real estate in Merced, California.

*NetCash Provided by/Used in Financing Activities*

Netcash provided by financing activities were $20.3 million for the nine monthsended September 30, 2007, compared to net cash used in financing activities of$17.0 million for the nine months ended September 30, 2006.  Activity for the nine months ended September30, 2007, includes $24.0 million of proceeds from the issuance of  the Company’s 2007 Notes, $21.0 million ofborrowings under our Revolving Credit Facilities, $0.2 million in proceeds fromsale of the Company’s Series M Preferred Stock, offset by $22.6 million in repurchasesof the Company’s outstanding 2006 Notes, $1.7 million of payments of financingfees and $0.6 million in payments of capital leases. Activity for the firstnine months of 2006 included repayments of the $138.8 million of borrowings andother costs associated with the Amended and Restated Credit Agreement uponemergence from bankruptcy, $10.5 million in financing related fees incurred inconnection with emergence and implementation of the Revolving Credit Facilitiesand payment of arrangement fees and other costs associated with our priorcredit facilities, net borrowings under the Revolving Credit Facilities of$133.6 million and repayments of $1.3 million for capital leases.

***Liquidity***

As of September 30, 2007,we had borrowings of $134.6 million and $5.9 million in outstanding letters ofcredit under the Revolving Credit Facilities with $51.5 million of availabilitysubject to our borrowing base limitations.

 

Asof September 30, 2007, we had $7.1 million in cash and cash equivalents, ofwhich $2.2 million is a compensating balance associated with our Canadianoperations borrowings under our Revolving Credit Facilities. In addition, aportion of our cash and cash equivalents are held by our other foreignsubsidiaries.

TheCompany expects that cash flows from operating activities and availableborrowings under our Revolving Credit Facilities of up to $200 million willprovide sufficient cash flow to operate our business, to make expected capitalexpenditures and to meet foreseeable liquidity requirements.  However, our ability to borrow under ourRevolving Credit Facilities at any time may be subject to the borrowing base ineffect at that time. Our ability to make borrowings under our Revolving CreditFacilities will also be conditioned upon our compliance with other covenants inthese agreements, including financial covenants that apply when our

 

40

----

 

borrowings exceed certain amounts. In addition,the terms of our indentures currently limit the amount we may borrow under ourRevolving Credit Facilities.

*Capital Expenditures*

Ourtotal capital expenditures were approximately $34 million in 2005,$41 million in 2006 and are expected to continue to increase in 2007.These expenditures are focused on projects to lower operating costs, addcapacity for high value products, expand research and development programs, andbring new innovative products to market.

*Raw Material Costs*

Changes in raw materialcosts can significantly affect the amount of cash provided by our operatingactivities, which can affect our liquidity. Over the past two years, we haveexperienced a period of extreme uncertainty with respect to resin supplies andprices. High crude oil and natural gas pricing, have had a significant impacton the price and supply of resins. During the same period, many major suppliersof resin have announced price increases to cover their increases in feedstockcosts. While the prices of our products generally fluctuate with the prices ofresins, certain of our customers have contracts that limit our ability to passthe full cost of higher resin pricing through to our customers immediately.Further, competitive conditions in our industry may make it difficult for us tosufficiently increase our selling prices for all customers to reflect the fullimpact of increases in raw material costs. If this period of high resin pricingcontinues, we may be unable to pass on the entire effect of the price increasesto our customers, which would adversely affect our profitability and workingcapital. In addition, further increases in crude oil and natural gas pricescould make it difficult for us to obtain an adequate supply of resin frommanufacturers affected by these factors.

 

**ContractualObligations**

***There have been no material changes inour contractual obligations and commercial commitments since December 31, 2006arising outside of the ordinary course of business.***

**CautionaryStatement for Forward-Looking Information**

Someof the statements set forth in this report including, but not limited to, thoseunder the heading “Management’s Discussion and Analysis of Financial Conditionand Results of Operation,” are in “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995. Thesestatements relate to analyses and other information that is based on forecastsof future results and estimates of amounts not yet determinable. Thesestatements also relate to our future prospects, developments and businessstrategies. These forward-looking statements are identified by their useof terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,”“intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms andphrases, including references to assumptions. These forward-lookingstatements are not historical facts but instead represent only expectations,estimates and projections regarding future events. These statements are notguarantees of future performance and involve known and unknown risks,uncertainties and other factors that are difficult to predict and may causeactual results to be materially different. These factors include, but are notlimited to, the following:

•      generaleconomic and business conditions, particularly an economic downturn;

•      continuinglosses and charges against earnings resulting from restructuring or theimpairment of assets;

•      industrytrends;

•      risksof high leverage and any increases in our leverage;

•      interestrate increases;

•      changesin our ownership structure;

•      changesin the Company’s composition of operating segments;

•      rawmaterial costs and availability, particularly resin;

•      thetiming and extent to which we pass through resin cost changes to our customers;

 

 

41

----

 

•      the loss of any of our key suppliers;

•      changes in credit terms from oursuppliers;

•      competition;

•      the loss of any of our major customers;

•      changes in demand for our products;

•      new technologies;

•      changes in distribution channels orcompetitive conditions in the markets or countries where we operate;

•      costs of integrating any futureacquisitions;

•      loss of our intellectual property rights;

•      foreign currency fluctuations anddevaluations and political instability in our foreign markets;

•      changes in our business strategy ordevelopment plans;

•      availability, terms and deployment ofcapital;

•      availability of qualified personnel;

•      labor relations and work stoppages;

•      increases in the cost of compliance withlaws and regulations, including environmental laws and regulations; and

•      other risks and uncertainties listed ordescribed from time to time in reports we periodically file with the SEC.

 

Wemay also make additional forward-looking statements from time to time.All such subsequent forward-looking statements, whether written or oral,by us or on our behalf, are also expressly qualified by these cautionarystatements. 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 statementswhich may be made to reflect events or circumstances after the date made or toreflect the occurrence of unanticipated events.

Ourrisks are more specifically described in the “Risk Factors” of Part I, Item 1Aof the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006. If one or more of these risks or uncertaintiesmaterialize, or if underlying assumptions prove incorrect, our actual resultsmay vary materially from those expected, estimated or projected.

**ITEM 3.**                    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The discussion belowdescribes changes in our market risks since December 31, 2006. For additionalinformation regarding our exposure to certain market risks, see Part II, Item7A “Quantitative and Qualitative Disclosures About Market Risk” in the Company’sAnnual Report on Form 10-K for year ending December 31, 2006.

We are exposed tovarious interest rate and resin price risks that arise in the normal course ofbusiness. We regularly evaluate the advisability of entering into interest ratehedging agreements to manage interest rate market risks and commodity hedgingagreements to manage resin market risks. However, significant increases ininterest rates or the price of resins could adversely affect our operatingmargins, results of operations and ability to service our indebtedness.

Our Revolving CreditFacilities are at a variable rate of interest. An increase of 1% in interestrates would result in an additional $1.1 million of annual interest expensebased on our Revolving Credit Facilities balance of $134.6 million as ofSeptember 30, 2007.

Our raw material costsare comprised primarily of resins. Our resin costs comprised approximately 66%of our total manufacturing costs. Market risk arises from changes in resincosts. Although the average selling prices of our products generally increaseor decrease as the cost of resins increases or decreases, the impact of achange in resin prices is more immediately reflected in our raw material coststhan in our selling prices. In prior years,

 

42

----

 

weentered into commodity collar agreements to manage resin market risks. AtSeptember 30, 2007, we did not have any commodity collar agreements outstanding.Prices for resin dropped dramatically during the fourth quarter of 2006 andhave increased throughout 2007 and are currently expected to increase in thefourth quarter of 2007.

Fluctuations in exchangerates may also adversely affect our financial results. The functionalcurrencies for our foreign subsidiaries are the local currency. As a result,certain of our assets and liabilities, including certain bank accounts,accounts receivable and accounts payable, exist in non U.S. dollar-denominatedcurrencies, which are sensitive to foreign currency exchange rate fluctuations.

We enter into certaintransactions denominated in foreign currencies but, because of the relativelysmall size of each individual currency exposure, we have not ordinarilyemployed hedging techniques designed to mitigate foreign currency exposures.Gains and losses from these transactions are immaterial and are reflected inthe results of operations.

Weare exposed to credit losses in the event of nonperformance by the counterpartyto a financial instrument to which we are a party. We anticipate, however, thateach of the counterparties to the financial instruments to which we are a partywill be able to fully satisfy its obligations under the contract.

**ITEM 4.**                    CONTROLS ANDPROCEDURES

**Evaluationof Disclosure Controls and Procedures**

Theeffectiveness of our or any system of disclosure controls and procedures issubject to certain limitations, including the exercise of judgment indesigning, implementing and evaluating the controls and procedures, theassumptions used in identifying the likelihood of future events, and theinability to eliminate misconduct completely. As a result, there can be noassurance that our disclosure controls and procedures will detect all errors orfraud. By their nature, our or any system of disclosure controls and procedurescan provide only reasonable assurance regarding management’s controlobjectives.

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated the designand operation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, orthe “Exchange Act”) as of June 30, 2007. On the basis of this review, ourmanagement, including our Chief Executive Officer and Chief Financial Officer,concluded that our disclosure controls and procedures are designed, and areeffective, to give reasonable assurance that the information required to bedisclosed by us in reports that we file under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in therules and forms of the SEC and to ensure that information required to bedisclosed in the reports filed or submitted under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, in a manner that allows timely decisionsregarding required disclosure.

**Changesin Internal Controls**

Management hasevaluated, with the participation of our principal executive officer and ourprincipal financial officer, changes in the Company’s internal controls overfinancial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the ExchangeAct) during the second quarter of 2007.

There were no changes inour internal controls over financial reporting that occurred during the quarterthat have materially affected, or are reasonably likely to materially affect,the Company’s internal controls over financial reporting.

 

43

----

 

**PART II.****  ****OTHER INFORMATION**

** **

**ITEM 1.**                    LEGALPROCEEDINGS

 As previously disclosed in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006, the Companyfiled a patent infringement complaint against MSC Marketing & Technology,Inc., d/b/a Sigma Stretch Films and Atlantis Plastics, Inc on May 19, 2004,Case No. 04-C-3509 (N.D. Ill.). The Company sells a patented plastic film thatis used to wrap pallet loads. The patent infringement lawsuit was filed toprotect the Company’s exclusive right to this film’s patented features, whichprovide the Company’s product with advantages in this industry. The Company hasentered into a settlement of the lawsuit with each of MSC Marketing &Technology, Inc. and with Atlantis Plastics, Inc., in which each will receive alicense to the patent from the Company.

**ITEM 1A.**           RISK FACTORS

There have been nomaterial changes to the risk factors as disclosed in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006.

**ITEM 2.**                    UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

**ITEM 3.**                    DEFAULTSUPON SENIOR SECURITIES

None.

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

**The Annual Meeting of Stockholders was held on August 23,2007. There were 100,003 shares of common stock and 335,592 shares of Series AAPreferred stock issued and outstanding on the record date and entitled to voteat the annual meeting.  The following matterswere voted upon:**

**1.    The individualsnamed below were elected as Common Stock Directors, by the 53,938 shares ofcommon stock present in person or by proxy at the meeting. Shares voted were asfollows:**
| **NAME**               | ** ** | **FOR**    | ** ** | **WITHHELD** |
|------------------------|------------|------------|------------|--------------|
| **Harold C. Bevis**    | ** ** | **53,829** | ** ** | **109**      |
| **John D. Bowlin**     | ** ** | **53,923** | ** ** | **15**       |
| **Edward A. Lapekas**  | ** ** | **53,923** | ** ** | **15**       |
| **Stephen V. McKenna** | ** ** | **53,923** | ** ** | **15**       |
| **Timothy J. Walsh**   | ** ** | **53,923** | ** ** | **15**       |

** **

**2.    The individualsnamed below were elected as Series AA Preferred Directors, by the 258,101present in person or by proxy at the meeting. Shares voted were as follows:**

 
| NAME            |   | FOR     |   | WITHHELD |
|-----------------|--------|---------|--------|----------|
| Eugene I. Davis |   | 188,185 |   | 69,916   |
| David G. Elkins |   | 257,652 |   | 449      |

 

3.    The appointment of Ernst & Young LLP, asour independent auditors for the year ending December 31, 2007, was ratified bythe shares of common stock present in person or by proxy at the meeting. Therewere 53,912 votes for, 12 votes against, ratification. There were 14abstentions.

 

44

----

 

 

**ITEM5.**                 OTHERINFORMATION HOLDERS

None.

**ITEM 6.**                    EXHIBITS

Theexhibits listed on the accompanying Index to Exhibits are filed or incorporatedby reference as a part of this report and such Index to Exhibits isincorporated herein by reference.

 

45

----

 

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                    | Pliant Corporation                          |
|-------------------------|---------------------------------------------|
|                    |                                        |
|                    |                                        |
|                    | /s/ Joseph J. Kwederis                      |
|                    | JOSEPH J. KWEDERIS                          |
|                    | Chief Financial Officer                     |
|                    | (Authorized Signatory and                   |
|                    | Principal Financial and Accounting Officer) |
| Date: November 13, 2007 |                                        |

 

 

46

----

 

**INDEXTO 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. |

 

 

47

----