**Table of Contents**

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** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

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**FORM 10-Q**

** **

**(MarkOne)**
| **x**                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                               |
| **For  the quarterly period ended June 30, 2008** |
| ** **                                             | ** ** | ** **                                                                                               |
| **OR**                                                 |
| ** **                                             | ** ** | ** **                                                                                               |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

** **

**Forthe transition period from                 to**

** **

**Commissionfile number 333-40067**

** **

**PLIANT CORPORATION**

(Exact name ofregistrant 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 700Schaumburg, IL 60173(847) 969-3300**

(Address of principalexecutive offices and telephone number)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVEYEARS: Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.  Yes x  No o

 

At August 12, 2008there were 97,348 outstanding shares of the Registrant’s common stock. As of August 12,2008, persons other than affiliates of the Registrant held 47,137, orapproximately 48.42%, of the outstanding shares of the Registrant’s commonstock.  There is no established tradingmarket for the Registrant’s common stock and, therefore, the aggregate marketvalue of shares held by non-affiliates cannot be determined by reference torecent sales or bid and asked prices.

 

 

 

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**Table of Contents**

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**PLIANT CORPORATION AND SUBSIDIARIES**

**TABLE OF CONTENTS**

 
| PART I. FINANCIAL  INFORMATION |                                                                                                |
|-------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                | ITEM 1. FINANCIAL STATEMENTS                                                                        |
|                                |                                                                                                | CONDENSED  CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2008 (Unaudited) AND DECEMBER  31, 2007 | 3 |
|                                |                                                                                                | CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE  30, 2008 AND 2007 (Unaudited) | 4 |
|                                |                                                                                                | CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2008  AND 2007 (Unaudited) | 5 |
|                                |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’  DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2008 (Unaudited) | 6 |
|                                |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited) | 7 |
|                                | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 25 |
|                                | ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 37 |
|                                | ITEM 4T. CONTROLS AND PROCEDURES                                                                    | 38 |
| PART II. OTHER  INFORMATION    |                                                                                                |
|                                | ITEM  1. LEGAL PROCEEDINGS                                                                          | 39 |
|                                | ITEM  1A. RISK FACTORS                                                                              | 39 |
|                                | ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                | 39 |
|                                | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                             | 39 |
|                                | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                        | 39 |
|                                | ITEM  5. OTHER INFORMATION                                                                          | 39 |
|                                | ITEM 6.  EXHIBITS                                                                                   | 39 |

 

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**PART I.   FINANCIALINFORMATION**

 

**ITEM 1.****             FINANCIAL STATEMENTS**

 

**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**ASOF JUNE 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007 (DOLLARS IN THOUSANDS)**

 
| ** **                                                                                                                                                                                                                                                                                                      | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                      |       |                    |       |                        |       |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                 |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                      |       | $                       | 8,032      |                        | $          | 7,258 |   |
| Receivables, net  of allowances of $3,250 and $3,207, respectively                                                                                                                                                                                                                                              |       | 149,485                 |       | 127,590                     |       |
| Inventories                                                                                                                                                                                                                                                                                                     |       | 102,079                 |       | 108,358                     |       |
| Prepaid expenses  and other                                                                                                                                                                                                                                                                                     |       | 5,424                   |       | 6,269                       |       |
| Income taxes  receivable, net                                                                                                                                                                                                                                                                                   |       | 2,055                   |       | 1,884                       |       |
| Deferred income  taxes                                                                                                                                                                                                                                                                                          |       | 6,261                   |       | 9,145                       |       |
| Total current  assets                                                                                                                                                                                                                                                                                           |       | 273,336                 |       | 260,504                     |       |
| PLANT AND  EQUIPMENT, net                                                                                                                                                                                                                                                                                       |       | 299,527                 |       | 311,756                     |       |
| GOODWILL                                                                                                                                                                                                                                                                                                        |       | 72,486                  |       | 72,527                      |       |
| INTANGIBLE ASSETS,  net                                                                                                                                                                                                                                                                                         |       | 10,199                  |       | 11,081                      |       |
| OTHER ASSETS                                                                                                                                                                                                                                                                                                    |       | 17,402                  |       | 20,111                      |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                                    |       | $                       | 672,950    |                        | $          | 675,979 |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                                                                                                 |       |                    |       |                        |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                                              |       | $                       | 504,915    |                        | $          | 1,102 |   |
| Trade accounts  payable                                                                                                                                                                                                                                                                                         |       | 104,760                 |       | 93,178                      |       |
| Accrued  liabilities:                                                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Interest payable                                                                                                                                                                                                                                                                                                |       | 11,917                  |       | 12,079                      |       |
| Customer rebates                                                                                                                                                                                                                                                                                                |       | 6,786                   |       | 8,787                       |       |
| Other                                                                                                                                                                                                                                                                                                           |       | 27,715                  |       | 36,544                      |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                      |       | 656,093                 |       | 151,690                     |       |
| LONG-TERM DEBT,  net of current portion                                                                                                                                                                                                                                                                         |       | 285,442                 |       | 751,465                     |       |
| OTHER  LIABILITIES                                                                                                                                                                                                                                                                                              |       | 19,309                  |       | 22,605                      |       |
| DEFERRED INCOME  TAXES                                                                                                                                                                                                                                                                                          |       | 15,383                  |       | 18,163                      |       |
| Total  Liabilities                                                                                                                                                                                                                                                                                              |       | 976,227                 |       | 943,923                     |       |
| 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, 334,894 and 335,592 shares outstanding at  June 30, 2008 and December 31, 2007, respectively |       | 274,009                 |       | 247,355                     |       |
| Redeemable  Preferred Stock—Series M—8,000 shares authorized, par value $.01 per  share, 8,000 shares outstanding at June 30, 2008 and December 31,  2007                                                                                                                              |       | —                  |       | —                      |       |
| Common  Stock—100,050,000 shares authorized, par value $.01 per share, 97,348 and  100,003 shares outstanding at June 30, 2008 and December 31,  2007, respectively                                                                                                                         |       | 1                       |       | 1                           |       |
| Paid in capital                                                                                                                                                                                                                                                                                                 |       | 155,341                 |       | 155,341                     |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                            |       | (723,062                | )          | (658,163                    | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                           |       | (9,566                  | )          | (12,478                     | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                               |       | (303,277                | )          | (267,944                    | )          |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                                                               |       | $                       | 672,950    |                        | $          | 675,979 |   |

** **

Seenotes to condensed consolidated financial statements.

 

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**FORTHE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (IN THOUSANDS)(UNAUDITED)**

 
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| NET SALES                          |       | $                                               | 287,636    |                                          | $          | 277,036 |   | $ | 573,108 |   | $ | 537,428 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| COST OF SALES                      |       | 265,384                                         |       | 241,418                                       |       | 524,377 |   | 467,374 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Gross Profit                       |       | 22,252                                          |       | 35,618                                        |       | 48,731 |   | 70,054 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| OPERATING  EXPENSES:               |       |                                            |       |                                          |       |   |   |   |   |
| Sales, General  and Administrative |       | 15,843                                          |       | 16,513                                        |       | 31,198 |   | 36,051 |   |
| Research and  Development          |       | 1,612                                           |       | 3,136                                         |       | 3,399 |   | 6,201 |   |
| Restructuring  and Other Costs     |       | 6,619                                           |       | 451                                           |       | 6,672 |   | 1,859 |   |
| Reorganization  Cost               |       | 42                                              |       | 426                                           |       | 131 |   | 697 |   |
| Other Operating  Costs             |       | 112                                             |       | —                                        |       | 112 |   | 1,101 |   |
| Total operating  expenses          |       | 24,228                                          |       | 20,526                                        |       | 41,512 |   | 45,909 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| OPERATING INCOME  (LOSS)           |       | (1,976                                          | )          | 15,092                                        |       | 7,219 |   | 24,145 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| INTEREST EXPENSE                   |       | (22,965                                         | )          | (20,959                                       | )          | (45,459 | ) | (42,133 | ) |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| OTHER INCOME  (EXPENSE) – Net |       | 47                                              |       | (38                                           | )          | 154 |   | 313 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| LOSS BEFORE  INCOME TAXES          |       | (24,894                                         | )          | (5,905                                        | )          | (38,086 | ) | (17,675 | ) |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| INCOME TAX  EXPENSE (BENEFIT)      |       | (565                                            | )          | (295                                          | )          | 159 |   | 383 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| NET LOSS                           |       | $                                               | (24,329    | )                                             | $          | (5,610 | ) | $ | (38,245 | ) | $ | (18,058 | ) |

 

Seenotes to condensed consolidated financial statements.

 

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**PLIANT CORPORATION ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOW**

**FOR THE SIX MONTHS ENDEDJUNE 30, 2008 AND 2007 (IN THOUSANDS) (UNAUDITED)**

 
| ** **                                                                                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                           |       |                                          |       |   |   |
| Net loss                                                                                         |       | $                                             | (38,245    | ) | $ | (18,058 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in)  operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                                   |       | 21,938                                        |       | 23,109 |   |
| Fixed asset  impairment                                                                          |       | 5,506                                         |       | — |   |
| Amortization of  deferred financing costs and accretion of debt discount                         |       | 2,995                                         |       | 2,253 |   |
| Payment-in-kind  interest on debt                                                                |       | 20,111                                        |       | 17,925 |   |
| (Reduction in)  provision for losses on accounts receivable                                      |       | (166                                          | )          | — |   |
| Deferred income  taxes                                                                           |       | 207                                           |       | (3,593 | ) |
| (Gain) / loss on  disposal of assets                                                             |       | 26                                            |       | 32 |   |
| Non-cash other  operating costs                                                                  |       | —                                        |       | 664 |   |
| Changes in assets  and liabilities:                                                              |       |                                          |       |   |   |
| Receivables                                                                                      |       | (19,190                                       | )          | 5,660 |   |
| Inventories                                                                                      |       | 6,480                                         |       | (2,471 | ) |
| Prepaid expenses  and other                                                                      |       | 2,589                                         |       | 1,772 |   |
| Income taxes  payable/receivable                                                                 |       | (766                                          | )          | 42 |   |
| Other assets                                                                                     |       | 63                                            |       | (430 | ) |
| Trade accounts  payable                                                                          |       | 11,173                                        |       | 12,684 |   |
| Accrued  liabilities                                                                             |       | (11,107                                       | )          | (14,404 | ) |
| Other  liabilities                                                                               |       | (3,168                                        | )          | 4,940 |   |
| Net cash  provided by (used in) operating activities                                             |       | (1,554                                        | )          | 30,125 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                           |       |                                          |       |   |   |
| Capital  expenditures for plant and equipment                                                    |       | (14,737                                       | )          | (24,041 | ) |
| Net cash used in  investing activities                                                           |       | (14,737                                       | )          | (24,041 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                           |       |                                          |       |   |   |
| Borrowings under  Revolving Credit Facilities                                                    |       | 18,000                                        |       | — |   |
| Proceeds from  issuance of preferred stock                                                       |       | —                                        |       | 157 |   |
| Payment of  financing fees                                                                       |       | —                                        |       | (1,559 | ) |
| Repayment of  capital leases and other, net                                                      |       | (564                                          | )          | (290 | ) |
| Restricted cash  deposits with trustee                                                           |       | —                                        |       | (22,593 | ) |
| Issuance of  senior subordinated notes                                                           |       | —                                        |       | 24,000 |   |
| Net cash  provided by (used in) financing activities                                             |       | 17,436                                        |       | (285 | ) |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                    |       | (371                                          | )          | (1,307 | ) |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                                       |       | 774                                           |       | 4,492 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD                                              |       | 7,258                                         |       | 4,199 |   |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                                                    |       | $                                             | 8,032      |   | $ | 8,691 |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                              |       |                                          |       |   |   |
| Cash paid during  the period for:                                                                |       |                                          |       |   |   |
| Interest                                                                                         |       | 22,753                                        |       | 20,674 |   |
| Income taxes                                                                                     |       | 1,002                                         |       | 1,000 |   |
| Supplemental  schedule of non-cash investing and financing activities:                           |       |                                          |       |   |   |
| Plant and  equipment acquired under capital leases                                               |       | —                                        |       | 4,998 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ DEFICIT**

**FORTHE SIX MONTHS ENDED JUNE 30, 2008 (IN THOUSANDS) (UNAUDITED)**

 
| ** **                                    | ** ** | ** ** | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Accumulated  Other** | ** ** |
|-----------------------------------------------|------------|------------|------------|--------------------------|------------|-----------------------|------------|------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | **Series AA**       | ** ** | **Series M**     | ** ** | ** ** | ** ** | ** **             | ** ** | **Paid In** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** |
| ** **                                    | ** ** | **Total**  | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares** | ** ** | **Amount**             | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Loss** | ** ** |
| BALANCE-December 31,  2007               |       | $          | (267,944   | )                        | 336        |                  | $          | 247,355    |       | 8                      |       | $ | — |   | 100 |   | $ | 1 |   | $ | 155,341 |   | $ | (658,163 | ) | $ | (12,478 | ) |
| Retirement of  unclaimed shares               |       |       |       | (1                       | )          |                  |       |       |       |                   |       | (3 | ) |   |   |   |   |   |   |   |   |
| Comprehensive  loss:                          |       |       |       |                     |       |                  |       |       |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                      |       | (38,245    | )          |                     |       |                  |       |       |       |                   |       |   |   |   |   |   |   | (38,245 | )  |   |   |
| Change in  unrecognized pension benefit costs |       | 449        |       |                     |       |                  |       |       |       |                   |       |   |   |   |   |   |   |   |   | 449 |   |
| Foreign currency  translation adjustment      |       | 2,463      |       |                     |       |                  |       |       |       |                   |       |   |   |   |   |   |   |   |   | 2,463 |   |
| Comprehensive  loss:                          |       | (35,333    | )          |                     |       |                  |       |       |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Preferred stock  dividends                    |       | —     |       |                     |       | 26,654                |       |       |       |                   |       |   |   |   |   |   |   | (26,654 | ) |   |   |
|                                          |       | $          | (303,277   | )                        | 335        |                  | $          | 274,009    |       | 8                      |       | $ | — |   | 97 |   | $ | 1 |   | $ | 155,341 |   | $ | (723,062 | ) | $ | (9,566 | ) |

 

See notes tocondensed consolidated financial statements.

 

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**PLIANTCORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

** **

**1.            BASIS OF PRESENTATION**

 

The unaudited interim condensedconsolidated financial statements of Pliant Corporation and its subsidiaries(collectively “Pliant”, the “Company” or “we”) were prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”),and pursuant to the rules and regulations of the Securities and ExchangeCommission (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 the rules andregulations of the SEC. These statements should be read in conjunction with theCompany’s Annual Report on Form 10-K for the year ended December 31,2007.

 

We adopted the provisionsof SFAS No. 157,*Fair ValueMeasurements* (“SFAS 157”) on January 1, 2008. SFAS 157 definesfair value, establishes a market-based framework or hierarchy for measuringfair value, and expands disclosures about fair value measurements. SFAS 157 isapplicable whenever another accounting pronouncement requires or permits assetsand liabilities to be measured at fair value. SFAS 157 does not expand orrequire any new fair value measures; however the application of this statementmay change current practice. In February 2008, the Financial AccountingStandards Board (“FASB”) decided that an entity need not apply this standard tononfinancial assets and liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis until 2009.Accordingly, our adoption of this standard in 2008 was limited to financialassets and liabilities and did not have a material effect on our financialcondition or results of operations. We are still in the process of evaluatingthis standard with respect to its effect on nonfinancial assets and liabilitiesand therefore have not yet determined the impact that it will have on ourfinancial statements upon full adoption in 2009. Nonfinancial assets andliabilities for which we have not applied the provisions of SFAS 157 includethose measured at fair value in impairment testing and those initially measuredat fair value in a business combination.

 

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities — Including an Amendmentof FASB Statement No. 115*,(“SFAS 159”), which permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value.  The Company adopted this statementas of January 1, 2008 and has elected not to apply the fair value optionto any of its financial instruments at this time.

 

**2.      INVENTORIES**

** **

Inventoriesare valued at the lower of cost (using the first-in, first-out method) ormarket value. Inventories as of June 30, 2008 and December 31, 2007consisted of the following (in thousands):

 
| ** **      | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished goods  |       | $                       | 54,100     |                        | $          | 56,772 |   |
| Raw materials   |       | 37,619                  |       | 40,507                      |       |
| Work-in-process |       | 10,360                  |       | 11,079                      |       |
| Total           |       | $                       | 102,079    |                        | $          | 108,358 |   |

 

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**3.**                 RESTRUCTURINGAND OTHER COSTS

** **

Restructuring and othercosts include plant closing costs (including costs related to relocation ofmanufacturing equipment), office closing costs and other costs related toworkforce reductions.

 

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

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Plant  closing costs:**                             | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Severance                                             |       | $                                | 46         |                           | $          | 65 |   | $ | 46 |   | $ | 235 |   |
| Other plant  closure costs                            |       | 409                              |       | 255                            |       | 425 |   | 277 |   |
| **Office  closing and workforce reduction costs:**    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Severance                                             |       | 403                              |       | 108                            |       | 439 |   | 1,324 |   |
| Other                                                 |       | 367                              |       | 23                             |       | 368 |   | 23 |   |
| **Fixed  asset impairments related to plant closing** |       | 5,394                            |       | —                         |       | 5,394 |   | — |   |
| **Total  Restructuring and other costs**              |       | $                                | 6,619      |                           | $          | 451 |   | $ | 6,672 |   | $ | 1,859 |   |

 

Thefollowing table summarizes the roll-forward of the accruals from December 31,2007 to June 30, 2008 (in thousands, except for employees):

 
| ** **                        | ** **   | ** **                      | ** **   | ** **   | ** **   | **Accruals for the six months ended  June 30, 2008** | ** **   | ** **    | ** **   | ** **   | ** **   | ** **   | ** **   |
|-----------------------------------|--------------|---------------------------------|--------------|--------------|--------------|-----------------------------------------------------------------------------------------|--------------|---------------|--------------|--------------|--------------|--------------|--------------|
| ** **                        | ** **   | ** **                      | ** **   | ** **   | ** **   | ** **                                                                              | ** **   | ** **    | ** **   | **Other**    | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** **   | **December 31, 2007** | ** **   | ** **   | ** **   | ** **                                                                              | ** **   | **Plant**     | ** **   | ** **   | ** **   | ** **   | ** **   | **June 30, 2008** | ** ** |
| ** **                        | ** **   | **# Employees**            | ** **   | **Accrual**  | ** **   | **Additional**                                                                          | ** **   | ** **    | ** **   | **Closure**  | ** **   | ** **   | ** **   | **Payments/** | ** ** | **# Employees** | ** ** | **Accrual** | ** ** |
| ** **                        | ** **   | **Terminated**                  | ** **   | **Balance**  | ** **   | **Employees**                                                                           | ** **   | **Severance** | ** **   | **Costs**    | ** **   | **Total**    | ** **   | **Charges** | ** ** | **Terminated** | ** ** | **Balance** | ** ** |
| ***Plant  Closing Costs:***       |         |                            |         |         |         |                                                                                    |         |          |         |         |         |         |         |   |   |   |   |   |   |
| Leases                            |         | —                          |         | 920          |         | —                                                                                  |         | —        |         | 20           |         | 20           |         | (37 | ) | — |   | 903 |   |
| Langley                           |         | 6                               |         | 207          |         | —                                                                                  |         | —        |         | 36           |         | 36           |         | (236 | ) | — |   | 7 |   |
| Barrie                            |         | —                          |         | 19           |         | —                                                                                  |         | —        |         | 8            |         | 8            |         | (27 | ) | — |   | — |   |
| South Deerfield                   |         | —                          |         | —       |         | —                                                                                  |         | —        |         | 190          |         | 190          |         | (190 | ) | — |   | — |   |
| Harrington                        |         | —                          |         | —       |         | —                                                                                  |         | —        |         | 91           |         | 91           |         | (91 | ) | — |   | — |   |
| Dalton                            |         | —                          |         | —       |         | —                                                                                  |         | —        |         | 21           |         | 21           |         | (21 | ) | — |   | — |   |
| Newport News                      |         | —                          |         | —       |         | 5                                                                                       |         | 46            |         | 59           |         | 105          |         | (60 | ) | 5 |   | 45 |   |
|                              |         | 6                               |         | $            | 1,146        |                                                                                    | 5            |          | 46           |         | 425          |         | 471          |   | (662 | ) | 5 |   | $ | 955 |   |
| *** ***                      | *** *** | *** ***                    | *** *** | *** *** | *** *** | *** ***                                                                            | *** *** | *** ***  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| ***Workforce  Reduction Costs:*** | *** *** | *** ***                    | *** *** | *** *** | *** *** | *** ***                                                                            | *** *** | *** ***  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| 2008 Workforce  Reduction         |         | —                          |         | —       |         | 44                                                                                      |         | 366           |         | 349          |         | 715          |         | (453 | ) | 17 |   | 262 |   |
| 2007 Workforce  Reduction         |         | 49                              |         | 463          |         | —                                                                                  |         | 73            |         | 14           |         | 87           |         | (481 | ) | 1 |   | 69 |   |
| Canadian  Restructuring           |         | —                          |         | —       |         | —                                                                                  |         | —        |         | 5            |         | 5            |         | (5 | ) | — |   | — |   |
|                              |         | 49                              |         | $            | 463          |                                                                                    | 44           |          | 439          |         | 368          |         | 807          |   | (939 | ) | 18 |   | $ | 331 |   |
| **Subtotal**                      | ** **   | **55**                          | ** **   | **$**        | **1,609**    |                                                                                    | 49           | ** **    | **485**      | ** **   | **793**      | ** **   | **1,278**    | ** ** | **(1,601** | **)** | **23** | ** ** | **$** | **1,286** | ** ** |
| *** ***                      | ** **   | ** **                      | ** **   | ** **   | ** **   | ** **                                                                              | ** **   | ** **    | ** **   | ** **   | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Fixed  Asset Impairments:***   | ** **   | ** **                      | ** **   | ** **   | ** **   | ** **                                                                              | ** **   | ** **    | ** **   | ** **   | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| South Deerfield                   |         | —                          |         | —       |         | —                                                                                  |         | —        |         | —       |         | 446          |         | — |   | — |   | — |   |
| Harrington                        |         | —                          |         | —       |         | —                                                                                  |         | —        |         | —       |         | 895          |         | — |   | — |   | — |   |
| Newport News                      |         | —                          |         | —       |         | —                                                                                  |         | —        |         | —       |         | 4,053        |         | — |   | — |   | — |   |
|                              |         | —                          |         | —       |         | —                                                                                  |         | —        |         | —       |         | 5,394        |         | — |   | — |   | — |   |
| **TOTAL**                         | ** **   | **55**                          | ** **   | **$**        | **1,609**    | ** **                                                                              | **49**       | ** **    | **485**      | ** **   | **793**      | ** **   | **6,672**    | ** ** | **(1,601** | **)** | **23** | ** ** | **1,286** | ** ** |

 

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***Plant Closing Costs***

*** ***

***2008****—*On April 23, 2008, the Company’s Board of Directorsapproved management’s proposed $15 Million Cost Reduction Program &$80 Million Debt Reduction Program (the “Program”), designed to modernizeequipment, improve efficiencies and reduce operating costs. The Programincludes closing four of the Company’s facilities: South Deerfield, MA andDalton, GA in our Engineered Films segment, and Harrington, DE and NewportNews, VA in our Specialty Films segment.  These closings will improveoperating scale at the remaining plants and reduce fixed costs. Furthermore, these plant closures are anticipated to reduce operating costs by$8.9 million following completion of all plant closures.  A reduction inworkforce at other facilities and corporate is also planned to reduce operatingcosts by an additional $6.1 million on an annual basis following completion ofthe reduction in workforce. The Company will incur costs to close the fourplants previously mentioned, including asset impairments on decommissionedassets, $5.4 million of which have been recorded in the second quarter of2008.  The Company will explore the option of selling thisequipment.  There will also be a projected net cash cost of $24.9 million,made up of $19.6 million of infrastructure and relocation capital expendituresand $15.1 million of termination benefits and plan implementation costs, net of$9.8 million of cash expected to be received for selling the four facilities.

 

***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. We incurred $0.3million and $0.1 million relating to severance and other plant closing costs inconnection with the shutdown of the Barrie and Langley facilities, respectivelyand $1.3 million in connection with the restructuring of the Canadian sales andadministrative functions. $0.9 million of these restructuring charges relate toour Engineered Films segment, $0.4 million relate to our Industrial Filmssegment and $0.1 million relate to our Printed Products segment.

*** ***

***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 June 30, 2008,$0.9 million of these accruals are remaining.

*** ***

**4. DEBT**

** **

Debtas of June 30, 2008 and December 31, 2007 consists of the following(in thousands):

 
| ** **                                                                              | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Credit  Facilities:                                                                     |       |                    |       |                        |       |
| Revolving Credit  Facilities                                                            |       | $                       | 136,579    |                        | $          | 118,579 |   |
| Senior Secured  Notes, interest at 11.85% (Amended 2004 Notes)                          |       | 359,378                 |       | 339,276                     |       |
| Senior Secured  Discount Notes, interest at 11.35% (2004 Notes)                         |       | 7,834                   |       | 7,825                       |       |
| Senior Secured  Notes, interest at 111/8% (2003 Notes)                                  |       | 250,000                 |       | 250,000                     |       |
| Senior  Subordinated Notes, interest at 18% (2007 Notes)                                |       | 24,000                  |       | 24,000                      |       |
| Obligations  under capital leases                                                       |       | 12,566                  |       | 12,887                      |       |
| Total                                                                                   |       | 790,357                 |       | 752,567                     |       |
| Less current  portion obligations under capital lease                                   |       | (1,124                  | )          | (1,102                      | )          |
| Less Revolving  Credit Facility, Amended 2004 Notes and 2004 Notes reclassed to current |       | (503,791                | )          | —                      |       |
| Long-term  portion                                                                      |       | $                       | 285,442    |                        | $          | 751,465 |   |

 

*RevolvingCredit Facilities*

 

On July 18, 2006,the Company and/or certain of its subsidiaries entered into (i) a WorkingCapital Credit Agreement, among the Company, certain of its subsidiaries, thelenders party thereto, Merrill Lynch Bank USA, as administrative agent, andMerrill Lynch Commercial Finance Corp., as sole lead arranger and book manager(the “Working Capital Credit Agreement”), and (ii) a Fixed Asset CreditAgreement, among Pliant Corporation Pty Ltd., Pliant Corporation ofCanada Ltd., Pliant Film Products GmbH and AspenIndustrial, S.A. de C.V., as borrowers, the lenders party thereto, MerrillLynch Bank USA, as administrative agent, and Merrill Lynch Commercial FinanceCorp., as sole lead arranger and book manager (the “Fixed Asset CreditAgreement”, and together with the Working Capital Credit Agreement, the “RevolvingCredit Facilities”). The Revolving Credit Facilities provide up to$200 million of total commitments, subject to a borrowing base and arequired minimum availability of at least $10 million. The Working CapitalCredit Agreement includes a $20 million letter of credit sub-facility,with

 

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letters of creditreducing availability thereunder, and each of the Revolving Credit Facilitiesincludes sub-limits for loans to certain of the foreign subsidiaries of theCompany which are borrowers under the Revolving Credit Facilities.

 

The Revolving CreditFacilities will mature on the earlier of (a) July 18, 2011 or (b) onemonth prior to the respective maturity dates of the Company’s senior securednotes if these senior secured notes have not been refinanced in full: May 15,2009 with respect to the Company’s 2004 Notes (as herein defined) and Amended2004 Notes (as herein defined), and August 15, 2009 with respect to theCompany’s 2003 Notes (as herein defined). The interest rates for all loansother than those made to the Company’s German subsidiary range from, in thecase of alternate base rate loans, the alternate base rate (either prime rateor .50% over the Federal Funds Rate) plus 1.75% to the alternate base rate plus2.00% and, in the case of Eurodollar loans, LIBOR plus 2.75% to LIBOR plus3.00%, in each case depending on the amount of available credit. The interestrates for loans made in connection with the loans to the Company’s Germansubsidiary are, in the case of alternate base rate loans, the alternate baserate plus 5.00% and, in the case of Eurodollar loans, LIBOR plus 6.00%. Thecommitment fee for the unused portion of the Revolving Credit Facilities is0.375% per annum.

 

The Revolving CreditFacilities contain covenants that limit the ability of Pliant and itssubsidiaries, subject to certain exceptions, to, among other things, incur orguarantee additional indebtedness, issue preferred stock or become liable inrespect of any obligation to purchase or redeem stock, create liens, merge orconsolidate with other companies, change lines of business, make certain typesof investments, sell assets, enter into certain sale and lease-back and swaptransactions, pay dividends on or repurchase stock, make distributions withrespect to certain debt obligations, enter into transactions with affiliates, permitthe payment of dividends or other payments from the Company’s subsidiaries, modifycorporate and certain material debt documents, cancel certain debt, or changeour fiscal year or accounting policies. The Revolving Credit Facilities alsorequire the Company to comply with a fixed charge coverage ratio of 1.00 to1.00 for the first year of the facility and of 1.10 to 1.00 thereafter;provided that such coverage ratio shall only apply during periods in which theamount 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 ratiobecomes inapplicable. In addition, the amount of availability under theRevolving Credit Facilities must not be less than $10 million at any time.The loans will automatically become immediately due and payable without noticeupon the occurrence of an event of default involving insolvency or bankruptcyof the Company or any of its subsidiaries. Upon the occurrence and during thecontinuation of any other event of default under the Revolving CreditFacilities, by notice given to the Company, the administrative agent of theRevolving Credit Facilities may, and if directed by the Required Lenders (asthat term is defined in the Revolving Credit Facilities) must terminate thecommitments and/or declare all outstanding loans to be immediately due andpayable.

 

The Working CapitalCredit Agreement is secured by a first-priority security interest insubstantially all our inventory, receivables and deposit accounts, capital stockof, or other equity interests in, our existing and future domestic subsidiariesand first-tier foreign subsidiaries, investment property and certain otherassets 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.

 

As of June 30, 2008,the Company had borrowings of $136.6 million under our $200 millionRevolving Credit Facilities, and availability of $53.6 million subject toour borrowing base limitations and $5.9 million in outstanding letters ofcredit, along with $8.0 million in cash.

 

*Amended2004 Notes*

 

As of June 30, 2008,the Company had $359.4 million aggregate principal amount of 11.85%(formerly 115/8 %) Senior Secured Notes due 2009 (the “Amended2004 Notes”) outstanding. The Amended 2004 Notes accrued payment-in-kindinterest at the rate of 115/8 %from the date of issuance until July 18, 2006, on which date the interestrate was increased by .225% to 11.85%. Such incremental interest rate increaseof .225% also accrues as payment-in-kind interest. The Amended 2004 Notesmature on June 15, 2009 and interest is payable semiannually on each June 15and December 15.

 

The Amended 2004 Notesare secured on a first-priority basis by a security interest in our realproperty, fixtures, equipment, intellectual property and other assets otherthan the second-priority collateral (the “First-Priority Note Collateral”) andon a second-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 thatare not note guarantors, investment property and certain other assets of theCompany and the note guarantors (the “Second-Priority Note Collateral”). TheAmended 2004 Notes are guaranteed by the Company’s existing and future domesticrestricted subsidiaries and certain foreign subsidiaries.

 

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On or after June 15,2008, the Company may redeem some or all of the Amended 2004 Notes at thefollowing redemption prices (expressed as percentages of the sum of theprincipal amount plus accrued and unpaid interest); 105.813% if redeemed on orafter June 15, 2008 and prior to December 15, 2008; 102.906% ifredeemed on or after December 15, 2008 and prior to June 15, 2009;and 100.000% if redeemed on June 15, 2009.

* *

*2004Notes*

 

As of June 30, 2008,the Company had $7.8 million of 11.35% (formerly 111/8 %) Senior Secured Discount Notes due2009 (the “2004 Notes”) outstanding. The 2004 Notes accreted at the rate of 111/8% from the date of issuance until July 18, 2006, onwhich date the interest rate was increased by .225% to 11.35%. 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 began accruing at the rateof 11.35% 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.

 

The 2004 Notes aresecured by a first-priority security interest in the First-Priority NoteCollateral and a second-priority security interest in the Second-Priority NoteCollateral. The 2004 Notes are guaranteed by the Company’s existing and futuredomestic restricted subsidiaries and certain foreign subsidiaries.

 

On or after June 15,2008, 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): 102.781% if redeemed on or after June 15,2008 and prior to June 15, 2009; and 100.00% if redeemed on June 15,2009.

 

*2003Notes*

 

As of June 30, 2008, theCompany had $250 million of 111/8%Senior Secured Notes due 2009 (the “2003 Notes”) outstanding. The 2003 Notesaccrue interest at the rate of 111/8%through the date of maturity. The 2003 Notes mature on September 1, 2009 andinterest is payable in cash semiannually on each March 1 and September 1.

 

The 2003 Notes rankequally with the Company’s existing and future senior secured debt and ranksenior to its existing and future subordinated indebtedness. The 2003 Notes aresecured by a second-priority security interest in both the First-Priority NoteCollateral and the Second-Priority Note Collateral. The 2003 Notes areguaranteed by some of the Company’s subsidiaries.

 

On or after June 1,2008, the Company may redeem some or all of the 2003 Notes at the followingredemption prices (expressed as a percentage of the sum of the principal amountplus accrued and unpaid interest): 102.781% if redeemed on or after June 1,2008 and prior to June 1, 2009; and 100% if redeemed on or after June 1,2009.

 

*2007Notes*

 

On June 14, 2007,the Company 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, and the Bank ofNew York Trust Company, N.A., as trustee (the “2007 Note Trustee”) with respectto the issuance on such date of the Company’s 18% Senior Subordinated Notes due2012 (the “2007 Notes”) in an aggregate principal amount of $24 million (the “2007Note Indenture”).

 

As of June 30, 2008,the Company had $24 million in 2007 Notes outstanding.  The 2007 Notesaccrue interest from the date of issuance at the rate of 18% per annum untilmaturity on July 15, 2012 with interest payable semiannually on each January 15and July 15 to holders of record of the 2007 Notes on the immediatelypreceding January 1 or July 1. Pursuant to the 2007 Note Indenture,the Company may redeem the 2007 Notes in whole or in part at the applicableredemption price, which in each of the first four years is equal to ade-escalating premium over par, plus accrued and unpaid interest to theredemption 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 ofthe Company (as defined in the 2007 Note Indenture). The 2007 Note Indenturedoes not provide for a sinking fund with respect to the 2007 Notes. The 2007Note Indenture contains customary provisions that may result in an event ofdefault, after notice and expiration of a cure period in certain circumstances,and acceleration of the indebtedness thereunder, including failure to timelypay principal and interest on the 2007 Notes or comply with the covenants setforth in the 2007 Note Indenture.

 

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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 2007 Note Trustee or holders ofat least 25% in principal amount of the 2007 Notes may declare the principal ofand accrued and unpaid interest on all the 2007 Notes to be immediately due andpayable.

 

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

** **

Interestexpense—current and long-term debt in the statements of operations for thethree and six months ended June 30, 2008 and 2007 is as follows (inthousands):

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest  expense, net                    |       |                             |       |                           |       |   |   |   |   |
| Revolving Credit  Facilities              |       | $                                | 2,377      |                           | $          | 2,235 |   | $ | 4,957 |   | $ | 5,492 |   |
| 2007 Notes                                |       | 1,061                            |       | 192                            |       | 2,141 |   | 192 |   |
| Amended 2004  Notes                       |       | 10,100                           |       | 9,002                          |       | 20,102 |   | 17,916 |   |
| 2004 Notes                                |       | 222                              |       | 222                            |       | 444 |   | 443 |   |
| 2003 Notes                                |       | 6,953                            |       | 6,953                          |       | 13,906 |   | 13,906 |   |
| Other, net                                |       | 779                              |       | 1,174                          |       | 959 |   | 1,931 |   |
| Interest expense  accrued, net            |       | 21,492                           |       | 19,778                         |       | 42,509 |   | 39,880 |   |
| Recurring  amortization of financing fees |       | 1,473                            |       | 1,181                          |       | 2,950 |   | 2,253 |   |
| TOTAL                                     |       | $                                | 22,965     |                           | $          | 20,959 |   | $ | 45,459 |   | $ | 42,133 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Cash interest  payments                   |       |                             |       |                           |       |   |   |   |   |
| Revolving Credit  Facilities              |       | $                                | 2,491      |                           | $          | 2,838 |   | $ | 5,077 |   | $ | 5,543 |   |
| 2004 Notes                                |       | 435                              |       | 434                            |       | 435 |   | 434 |   |
| 2003 Notes                                |       | —                           |       | —                         |       | 13,906 |   | 13,906 |   |
| 2007 Notes                                |       | —                           |       | —                         |       | 2,160 |   | — |   |
| Other, net                                |       | 581                              |       | 172                            |       | 1,175 |   | 791 |   |
| TOTAL                                     |       | $                                | 3,507      |                           | $          | 3,444 |   | $ | 22,753 |   | $ | 20,674 |   |

 

**6.**                 INCOME TAXES

** **

The Company and itssubsidiaries file income tax returns in the U.S. federal jurisdiction, andvarious state and foreign jurisdictions. With a few exceptions, the Company isno longer subject to U.S. federal, state and local, or non-U.S. income taxexaminations by tax authorities for the years prior to 2000.****The Company’s policy is to recognize interest and penaltiesrelated to unrecognized tax benefits as income tax expense. Accrued interestand penalties are insignificant at June 30, 2008. The Company believesthat it has appropriate support for income tax positions taken or to be takenon its tax returns and that its accruals for tax liabilities are adequate forall open years based on an assessment of many factors including past experienceand interpretations of tax law applied to the facts of each matter.

 

For the three monthsended June 30, 2008, income tax benefits of $0.6 million were recorded onpretax losses from operations of $24.9 million compared to income tax benefitsof $0.3 million on pretax loss from operations of $5.9 million for the threemonths ended June 30, 2007. For the six months ended June 30, 2008,income tax expense was $0.2 million on pre-tax loss from operations of $38.1million compared to income tax expense of $0.4 million of pre-tax loss of $17.7million for the six months ended June 30, 2007. Income tax benefits relatedto net operating losses in the United States are offset by a valuationallowance as the realization of these tax benefits is not certain. Therefore,the income tax expense in the statements of operations 

 

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primarily reflectsforeign income taxes. The income tax benefit for the three months ended June 30,2008 reflects a decrease in income tax reserves due to the favorable resolutionof income tax examinations during the quarter.

 

**7.**                 OTHERCOMPREHENSIVE LOSS

** **

Other comprehensiveincome (loss) for the three months ended June 30, 2008 and 2007 was($23.4) million and ($3.2) million, respectively. Comprehensive income (loss)for the six months ended June 30, 2008 and 2007 was ($35.3) million and($16.5) million, respectively. The components of other comprehensive loss arenet loss, changes in unrecognized pension benefit costs, and foreign currencytranslation.

 

**8.**                 OPERATINGSEGMENTS

** **

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.

 

The Company has fouroperating segments: Specialty Films, which manufactures personal care, medicaland agricultural films; Printed Products, which produces printed rollstock,bags and sheets used to package food and consumer goods; Industrial Films,which manufactures stretch film used to bundle, unitize and protect palletizedloads during shipping and storage and PVC films used by supermarkets, delicatessensand restaurants to wrap meat, cheese and produce; and Engineered Films, whichmanufactures film for sale to converters of flexible packaging and a variety ofbarrier and custom films for smaller niche flexible packaging and industrialmarkets.

 

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Weevaluate the performance of our operating segments based on net sales(excluding inter-company sales) and segment profit. Sales and transfers betweenour segments are eliminated in consolidation. 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.

 

Segmentprofit and segment assets as of and for the periods ended June 30, 2008and June 30, 2007 are presented in the following table (in thousands):

 
| ** **                                 | ** ** | **Engineered  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Films** | ** ** | **Printed  Products** | ** ** | **Corporate /  Other** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|-----------------------|------------|-----------------------------|------------|-----------|------------|
| **Three  months ended June 30, 2008** |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Net sales to  customers                    |       | $                     | 81,298     |                  | $          | 91,284               |       | $                     | 54,341     |                        | $          | 59,594    |       | $ | 1,119 |   | $ | 287,636 |   |
| Intersegment  sales                        |       | 7,737                 |       | 741                   |       | 2,012                |       | —                |       | (10,490                     | )          | —    |       |
| Total net sales                            |       | 89,035                |       | 92,025                |       | 56,353               |       | 59,594                |       | (9,371                      | )          | 287,636   |       |
| Depreciation and  amortization             |       | 3,242                 |       | 1,791                 |       | 2,391                |       | 2,329                 |       | 1,364                       |       | 11,117    |       |
| Interest expense                           |       | 405                   |       | 136                   |       | 17                   |       | 949                   |       | 21,458                      |       | 22,965    |       |
| Segment profit                             |       | 5,911                 |       | 7,254                 |       | 3,477                |       | 3,942                 |       | (4,623                      | )          | 15,961    |       |
| Capital  expenditures                      |       | 1,472                 |       | 478                   |       | 1,185                |       | 633                   |       | 618                         |       | 4,416     |       |
| **Three  months ended June 30, 2007** |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Net sales to  customers                    |       | $                     | 89,313     |                  | $          | 78,196               |       | $                     | 49,348     |                        | $          | 56,224    |       | $ | 3,955 |   | $ | 277,036 |   |
| Intersegment  sales                        |       | 3,311                 |       | 3,075                 |       | 2,999                |       | 1,388                 |       | (10,773                     | )          | —    |       |
| Total net sales                            |       | 92,624                |       | 81,271                |       | 52,347               |       | 57,612                |       | (6,818                      | )          | 277,036   |       |
| Depreciation and  amortization             |       | 3,048                 |       | 1,798                 |       | 2,532                |       | 2,416                 |       | 1,762                       |       | 11,556    |       |
| Interest expense                           |       | 682                   |       | 181                   |       | 21                   |       | 1,038                 |       | 19,037                      |       | 20,959    |       |
| Segment profit                             |       | 13,266                |       | 8,956                 |       | 6,096                |       | 3,595                 |       | (4,426                      | )          | 27,487    |       |
| Capital  expenditures                      |       | 3,017                 |       | 946                   |       | 3,527                |       | 2,777                 |       | 2,371                       |       | 12,638    |       |
| **Six months  ended June 30, 2008**   |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Net sales to  customers                    |       | $                     | 168,795    |                  | $          | 173,541              |       | $                     | 113,279    |                        | $          | 114,613   |       | $ | 2,880 |   | $ | 573,108 |   |
| Intersegment  sales                        |       | 15,453                |       | 2,065                 |       | 4,997                |       | 1                     |       | (22,516                     | )          | —    |       |
| Total net sales                            |       | 184,248               |       | 175,606               |       | 118,276              |       | 114,614               |       | (19,636                     | )          | 573,108   |       |
| Depreciation and  amortization             |       | 6,409                 |       | 3,560                 |       | 4,954                |       | 4,680                 |       | 2,335                       |       | 21,938    |       |
| Interest expense                           |       | 840                   |       | 297                   |       | 36                   |       | 1,962                 |       | 42,324                      |       | 45,459    |       |
| Segment profit                             |       | 13,783                |       | 14,750                |       | 9,305                |       | 7,883                 |       | (9,495                      | )          | 36,226    |       |
| Capital  expenditures                      |       | 4,202                 |       | 827                   |       | 2,105                |       | 6,562                 |       | 1,041                       |       | 14,737    |       |
| **As of  June 30, 2008**              |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Segment assets                             |       | $                     | 222,725    |                  | $          | 117,963              |       | $                     | 141,391    |                        | $          | 144,502   |       | $ | 46,369 |   | $ | 672,950 |   |
| **Six  months ended June 30, 2007**   |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Net sales to  customers                    |       | $                     | 173,055    |                  | $          | 151,424              |       | $                     | 97,343     |                        | $          | 107,526   |       | $ | 8,080 |   | $ | 537,428 |   |
| Intersegment  sales                        |       | 6,981                 |       | 7,547                 |       | 6,635                |       | 1,745                 |       | (22,908                     | )          | —    |       |
| Total net sales                            |       | 180,036               |       | 158,971               |       | 103,978              |       | 109,271               |       | (14,828                     | )          | 537,428   |       |
| Depreciation and  amortization             |       | 6,390                 |       | 3,574                 |       | 5,109                |       | 4,866                 |       | 3,170                       |       | 23,109    |       |
| Interest expense                           |       | 2,072                 |       | 364                   |       | 44                   |       | 2,081                 |       | 37,572                      |       | 42,133    |       |
| Segment profit                             |       | 26,658                |       | 17,153                |       | 12,118               |       | 7,462                 |       | (12,167                     | )          | 51,224    |       |
| Capital  expenditures                      |       | 6,211                 |       | 2,824                 |       | 5,969                |       | 4,205                 |       | 4,832                       |       | 24,041    |       |
| **As of  December 31, 2007**          |       |                  |       |                  |       |                 |       |                  |       |                        |       |      |       |
| Segment assets                             |       | $                     | 218,945    |                  | $          | 117,056              |       | $                     | 145,705    |                        | $          | 137,680   |       | $ | 56,593 |   | $ | 675,979 |   |

 

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Areconciliation of the totals reported for the operating segments to the totalsreported in the consolidated financial statements for the three and six monthsended June 30, 2008 and June 30, 2007 and as of June 30, 2008and December 31, 2007 is as follows (in thousands) (unaudited):

 
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                          | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Profit  or Loss**                                                                 |       |                             |       |                           |       |   |   |   |   |
| Total segment  profit                                                               |       | $                                | 15,961     |                           | $          | 27,487 |   | $ | 36,226 |   | $ | 51,224 |   |
| Depreciation and  amortization                                                      |       | (11,117                          | )          | (11,556                        | )          | (21,938 | ) | (23,109 | ) |
| Restructuring  and other costs                                                      |       | (6,619                           | )          | (451                           | )          | (6,672 | ) | (1,859 | ) |
| Reorganization  costs                                                               |       | (42                              | )          | (426                           | )          | (131 | ) | (697 | ) |
| Other operating  costs                                                              |       | (112                             | )          | —                         |       | (112 | ) | (1,101 | ) |
| Interest expense                                                                    |       | (22,965                          | )          | (20,959                        | )          | (45,459 | ) | (42,133 | ) |
| Loss before  income taxes                                                           |       | $                                | (24,894    | )                              | $          | (5,905 | ) | $ | (38,086 | ) | $ | (17,675 | ) |
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| ** **                                                                          | ** ** | **June 30,**                | ** ** | **December 31,**          | ** ** |
| ** **                                                                          | ** ** | **2008**                         | ** ** | **2007**                       | ** ** |
| **Assets**                                                                          |       |                             |       |                           |       |
| Total assets  from reportable segments                                              |       | $                                | 626,581    |                           | $          | 619,386 |   |
| Other  unallocated assets                                                           |       | 46,369                           |       | 56,593                         |       |
| Total  consolidated assets                                                          |       | $                                | 672,950    |                           | $          | 675,979 |   |
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| Net sales and  long-lived assets of our U.S. and foreign operations are as follows: |
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                          | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Sales                                                                           |       |                             |       |                           |       |   |   |   |   |
| United States                                                                       |       | $                                | 235,450    |                           | $          | 223,655 |   | $ | 470,725 |   | $ | 433,722 |   |
| Foreign  countries(a)                                                               |       | 52,186                           |       | 53,381                         |       | 102,383 |   | 103,706 |   |
| Total                                                                               |       | $                                | 287,636    |                           | $          | 277,036 |   | $ | 573,108 |   | $ | 537,428 |   |
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| ** **                                                                          | ** ** | **June 30,  2008**          | ** ** | **December 31,  2007**    | ** ** |
| Long-lived assets                                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| United States                                                                       |       | $                                | 260,661    |                           | $          | 271,263 |   |
| Foreign  countries                                                                  |       | 38,866                           |       | 40,493                         |       |
| Total                                                                               |       | $                                | 299,527    |                           | $          | 311,756 |   |
|                                                                                |       |                             |       |                           |       |
| Total assets                                                                        |       |                             |       |                           |       |
| United States                                                                       |       | $                                | 558,878    |                           | $          | 565,794 |   |
| Foreign  countries                                                                  |       | 114,072                          |       | 110,185                        |       |
| Total                                                                               |       | $                                | 672,950    |                           | $          | 675,979 |   |
|                                                                                     |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

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**9.  DEFINED BENEFIT PLANS**

** **

The Company sponsorsthree noncontributory defined benefit pension plans in the United Statescovering domestic employees with 1,000 or more hours of service. The Companyfunds these in accordance with the funding requirements of the EmployeeRetirement Income Security Act of 1974. Contributions are intended to not onlyprovide for benefits attributed to service to date but also for those expectedto be earned in the future. We also sponsor two defined benefit plans in Canadaand one defined benefit plan in Germany.

 

Theconsolidated net periodic pension expense (benefit) for the three and sixmonths ended June 30, 2008 and 2007 includes the following components (inthousands):

 
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| Service  cost-benefits earned during the period |       | $                                               | 130        |                                          | $          | 197 |   | $ | 308 |   | $ | 424 |   |
| Interest cost on  projected benefit obligation  |       | 1,424                                           |       | 1,428                                         |       | 2,869 |   | 2,790 |   |
| Expected return  on assets                      |       | (1,707                                          | )          | (1,843                                        | )          | (3,486 | ) | (3,330 | ) |
| Other                                           |       | 32                                              |       | 38                                            |       | 64 |   | 71 |   |
| Net periodic  pension expense (benefit)         |       | $                                               | (121       | )                                             | $          | (180 | ) | $ | (245 | ) | $ | (45 | ) |

 

**10.  CONTINGENCIES**

** **

*Litigation* We areinvolved in various litigation matters from time to time in the ordinary courseof our business, including matters described in previous filings. In ouropinion, none of such litigation is material to our financial condition orresults of operations.

 

**11. CONDENSEDCONSOLIDATING FINANCIAL STATEMENTS**

** **

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) guarantor subsidiaries(as specified in the Indenture dated as of May 30, 2003, as amended (the “2003Indenture”) relating to the 2003 Notes, the First Supplemental Indenture withrespect to the Amended and Restated Indenture relating to the 2004 Notes andthe Amended 2004 Notes, and the 2007 Note Indenture (the 2003 Indenture, theAmended and Restated Indenture, as amended by the First Supplemental Indenture,and the 2007 Note Indenture, collectively, the “Indentures”) on a combinedbasis, with any investments in non-guarantor subsidiaries specified in theIndentures recorded under the equity method, (iii) direct and indirectnon-guarantor subsidiaries on a combined basis, (iv) the eliminationsnecessary to arrive at the information for Pliant and its subsidiaries on a consolidatedbasis, and (v) Pliant on a consolidated basis, in each case as of June 30,2008 and December 31, 2007 and for the three and six months ended June 30,2008 and June 30, 2007. The 2003 Notes, the 2004 Notes, the Amended 2004Notes, and the 2007 Notes are fully and unconditionally guaranteed on a jointand several basis by each guarantor subsidiary and each guarantor subsidiary is100% owned, directly or indirectly, by Pliant, except that the 2003 Notes arenot guaranteed by Uniplast Industries Co. and the Amended 2004 Notes are notguaranteed by Pliant Solutions Corporation (“Pliant Solutions”). Substantiallyall of the assets of Pliant Solutions were sold on September 30, 2004, theremainder disposed prior to December 31, 2005 and Pliant Solutionsdissolved as of December 27, 2007. There are no contractual restrictionslimiting transfers of cash from guarantor and non-guarantor subsidiaries toPliant. The condensed consolidated financial statements are presented herein,rather than separate financial statements for each of the guarantorsubsidiaries, because management believes that separate financial statementsrelating to the guarantor subsidiaries are not material to investors.

 

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**PLIANTCORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**ASOF JUNE 30, 2008 (DOLLARS IN THOUSANDS) (UNAUDITED)**

 
| ** **                                          | ** ** | **Pliant  Corporation  Parent Only** | ** ** | **Combined  Guarantors** | ** ** | **Combined  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|--------------------------|------------|------------------------------|------------|------------------|------------|---------------------------------------|------------|
| **ASSETS**                                          |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT ASSETS:                                     |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Cash and cash  equivalents                          |       | $                                         | 7          |                     | $          | 3,547                        |       | $                | 4,478      |                                  | $          | — |   | $ | 8,032 |   |
| Receivables, net  of allowances                     |       | 113,149                                   |       | 5,567                    |       | 30,769                       |       | —           |       | 149,485                               |       |
| Inventories                                         |       | 87,828                                    |       | 2,604                    |       | 11,647                       |       | —           |       | 102,079                               |       |
| Prepaid expenses  and other                         |       | 1,972                                     |       | 157                      |       | 3,295                        |       | —           |       | 5,424                                 |       |
| Income taxes  receivable, net                       |       | (172                                      | )          | 1,155                    |       | 1,072                        |       | —           |       | 2,055                                 |       |
| Deferred income  taxes                              |       | 6,237                                     |       | 22                       |       | 2                            |       | —           |       | 6,261                                 |       |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Total current  assets                               |       | 209,021                                   |       | 13,052                   |       | 51,263                       |       | —           |       | 273,336                               |       |
| PLANT AND  EQUIPMENT, net                           |       | 260,661                                   |       | 8,383                    |       | 30,483                       |       | —           |       | 299,527                               |       |
| GOODWILL                                            |       | 57,777                                    |       | 13,153                   |       | 1,556                        |       | —           |       | 72,486                                |       |
| INTANGIBLE  ASSETS, net                             |       | 1,183                                     |       | 9,016                    |       | —                       |       | —           |       | 10,199                                |       |
| INVESTMENT IN  SUBSIDIARIES                         |       | (22,394                                   | )          | —                   |       | —                       |       | 22,394           |       | —                                |       |
| OTHER ASSETS                                        |       | 12,334                                    |       | —                   |       | 5,068                        |       | —           |       | 17,402                                |       |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| TOTAL ASSETS                                        |       | $                                         | 518,582    |                     | $          | 43,604                       |       | $                | 88,370     |                                  | $          | 22,394 |   | $ | 672,950 |   |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ (DEFICIT)**   |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT  LIABILITIES:                               |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Current portion  of long-term debt                  |       | $                                         | 465,694    |                     | $          | 16,700                       |       | $                | 22,521     |                                  | $          | — |   | $ | 504,915 |   |
| Trade accounts  payable                             |       | 87,465                                    |       | 3,941                    |       | 13,354                       |       | —           |       | 104,760                               |       |
| Accrued  liabilities                                |       | 42,429                                    |       | (143                     | )          | 4,132                        |       | —           |       | 46,418                                |       |
| Due to (from)  affiliates                           |       | (77,925                                   | )          | 64,622                   |       | 13,303                       |       | —           |       | —                                |       |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Total current  liabilities                          |       | 517,663                                   |       | 85,120                   |       | 53,310                       |       | —           |       | 656,093                               |       |
| LONG-TERM DEBT,  net of current portion             |       | 281,262                                   |       | —                   |       | 4,180                        |       | —           |       | 285,442                               |       |
| OTHER LIABILITIES                                   |       | 11,337                                    |       | 763                      |       | 7,209                        |       | —           |       | 19,309                                |       |
| DEFERRED INCOME  TAXES                              |       | 11,597                                    |       | 872                      |       | 2,914                        |       | —           |       | 15,383                                |       |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Total  liabilities                                  |       | 821,859                                   |       | 86,755                   |       | 67,613                       |       | —           |       | 976,227                               |       |
| STOCKHOLDERS’  (DEFICIT):                      |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Preferred Stock                                     |       | 274,009                                   |       | —                   |       | —                       |       | —           |       | 274,009                               |       |
| Common stock                                        |       | 1                                         |       | —                   |       | 11,916                       |       | (11,916          | )          | 1                                     |       |
| Paid-in capital                                     |       | 155,341                                   |       | 14,020                   |       | 43,822                       |       | (57,842          | )          | 155,341                               |       |
| Retained  earnings (deficit)                        |       | (723,062                                  | )          | (59,250                  | )          | (35,455                      | )          | 94,705           |       | (723,062                              | )          |
| Accumulated  other comprehensive loss               |       | (9,566                                    | )          | 2,079                    |       | 474                          |       | (2,553           | )          | (9,566                                | )          |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Total  stockholders’ (deficit)                 |       | (303,277                                  | )          | (43,151                  | )          | 20,757                       |       | 22,394           |       | (303,277                              | )          |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ (DEFICIT) |       | $                                         | 518,582    |                     | $          | 43,604                       |       | $                | 88,370     |                                  | $          | 22,394 |   | $ | 672,950 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**PLIANT CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**AS OF DECEMBER 31, 2007 (DOLLARS IN THOUSANDS)(UNAUDITED)**

 
| ** **                                          | ** ** | **Pliant  Corporation  Parent Only** | ** ** | **Combined  Guarantors** | ** ** | **Combined  Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated  Pliant  Corporation** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|--------------------------|------------|------------------------------|------------|------------------|------------|---------------------------------------|------------|
| **ASSETS**                                          |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT ASSETS:                                     |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Cash and cash  equivalents                          |       | $                                         | 7          |                     | $          | 3,609                        |       | $                | 3,642      |                                  | $          | — |   | $ | 7,258 |   |
| Receivables, net  of allowances                     |       | 97,400                                    |       | 5,216                    |       | 24,974                       |       | —           |       | 127,590                               |       |
| Inventories                                         |       | 93,152                                    |       | 3,407                    |       | 11,799                       |       | —           |       | 108,358                               |       |
| Prepaid expenses  and other                         |       | 2,296                                     |       | 670                      |       | 3,303                        |       | —           |       | 6,269                                 |       |
| Income taxes  receivable                            |       | (295                                      | )          | 1,093                    |       | 1,086                        |       | —           |       | 1,884                                 |       |
| Deferred income  taxes                              |       | 9,156                                     |       | 9                        |       | (20                          | )          | —           |       | 9,145                                 |       |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Total current  assets                               |       | 201,716                                   |       | 14,004                   |       | 44,784                       |       | —           |       | 260,504                               |       |
| PLANT AND  EQUIPMENT, net                           |       | 271,263                                   |       | 8,885                    |       | 31,608                       |       | —           |       | 311,756                               |       |
| GOODWILL                                            |       | 57,777                                    |       | 13,153                   |       | 1,597                        |       | —           |       | 72,527                                |       |
| INTANGIBLE  ASSETS, net                             |       | 1,470                                     |       | 9,611                    |       | —                       |       | —           |       | 11,081                                |       |
| INVESTMENT IN  SUBSIDIARIES                         |       | (23,719                                   | )          | —                   |       | —                       |       | 23,719           |       | —                                |       |
| OTHER ASSETS                                        |       | 15,377                                    |       | —                   |       | 4,734                        |       | —           |       | 20,111                                |       |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| TOTAL ASSETS                                        |       | $                                         | 523,884    |                     | $          | 45,653                       |       | $                | 82,723     |                                  | $          | 23,719 |   | $ | 675,979 |   |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ (DEFICIT)**   |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| CURRENT  LIABILITIES:                               |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Current portion  of long-term debt                  |       | $                                         | 987        |                     | $          | —                       |       | $                | 115        |                                  | $          | — |   | $ | 1,102 |   |
| Trade accounts  payable                             |       | 78,846                                    |       | 2,771                    |       | 11,561                       |       | —           |       | 93,178                                |       |
| Accrued  liabilities                                |       | 53,072                                    |       | 657                      |       | 3,681                        |       | —           |       | 57,410                                |       |
| Due to (from)  affiliates                           |       | (83,364                                   | )          | 65,741                   |       | 17,623                       |       | —           |       | —                                |       |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Total current  liabilities                          |       | 49,541                                    |       | 69,169                   |       | 32,980                       |       | —           |       | 151,690                               |       |
| LONG-TERM DEBT,  net of current portion             |       | 713,367                                   |       | 16,700                   |       | 21,398                       |       | —           |       | 751,465                               |       |
| OTHER  LIABILITIES                                  |       | 14,614                                    |       | 1,296                    |       | 6,695                        |       | —           |       | 22,605                                |       |
| DEFERRED INCOME  TAXES                              |       | 14,306                                    |       | 973                      |       | 2,884                        |       | —           |       | 18,163                                |       |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Total  liabilities                                  |       | 791,828                                   |       | 88,138                   |       | 63,957                       |       | —           |       | 943,923                               |       |
| STOCKHOLDERS’  (DEFICIT):                      |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Preferred Stock                                     |       | 247,355                                   |       | —                   |       | —                       |       | —           |       | 247,355                               |       |
| Common stock                                        |       | 1                                         |       | —                   |       | 11,916                       |       | (11,916          | )          | 1                                     |       |
| Paid in capital                                     |       | 155,341                                   |       | 14,020                   |       | 43,822                       |       | (57,842          | )          | 155,341                               |       |
| Retained  earnings (deficit)                        |       | (658,163                                  | )          | (58,440                  | )          | (34,662                      | )          | 93,102           |       | (658,163                              | )          |
| Accumulated  other comprehensive loss               |       | (12,478                                   | )          | 1,935                    |       | (2,310                       | )          | 375              |       | (12,478                               | )          |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| Total  stockholders’ (deficit)                 |       | (267,944                                  | )          | (42,485                  | )          | 18,766                       |       | 23,719           |       | (267,944                              | )          |
|                                                |       |                                      |       |                     |       |                         |       |             |       |                                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ (DEFICIT) |       | $                                         | 523,884    |                     | $          | 45,653                       |       | $                | 82,723     |                                  | $          | 23,719 |   | $ | 675,979 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**PLIANT CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING INCOME STATEMENT**

**FOR THE THREE MONTHS ENDED JUNE 30, 2008 (INTHOUSANDS) (UNAUDITED)**

 
| ** **                          | ** ** | **Pliant**             | ** ** | **Combined**     | ** ** | **Combined**      | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Corporation**        | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Pliant**       | ** ** |
| ** **                          | ** ** | **(Parent Only)** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Corporation**  | ** ** |
| NET SALES                           |       | $                      | 245,943    |             | $          | 10,227            |       | $                | 41,959     |             | $          | (10,493 | ) | $ | 287,636 |   |
| COST OF SALES                       |       | 228,037                |       | 10,160           |       | 37,680            |       | (10,493          | )          | 265,384          |       |
| GROSS PROFIT                        |       | 17,906                 |       | 67               |       | 4,279             |       | —           |       | 22,252           |       |
| OPERATING  EXPENSES                 |       | 21,855                 |       | 450              |       | 1,923             |       | —           |       | 24,228           |       |
| OPERATING INCOME  (LOSS)            |       | (3,949                 | )          | (383             | )          | 2,356             |       | —           |       | (1,976           | )          |
| INTEREST EXPENSE                    |       | (21,833                | )          | (91              | )          | (1,041            | )          | —           |       | (22,965          | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (172                   | )          | —           |       | —            |       | 172              |       | —           |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 1,213                  |       | (389             | )          | (777              | )          | —           |       | 47               |       |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | (24,741                | )          | (863             | )          | 538               |       | 172              |       | (24,894          | )          |
| INCOME TAX  EXPENSE (BENEFIT)       |       | (412                   | )          | (777             | )          | 624               |       | —           |       | (565             | )          |
| NET INCOME  (LOSS)                  |       | $                      | (24,329    | )                | $          | (86               | )          | $                | (86        | )                | $          | 172 |   | $ | (24,329 | ) |

 

See notes to condensedconsolidated financial statements.

 

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**PLIANT CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING INCOME STATEMENT**

**FOR THE THREE MONTHS ENDED JUNE 30, 2007 (INTHOUSANDS) (UNAUDITED)**

 
| ** **                          | ** ** | **Pliant**             | ** ** | **Combined**     | ** ** | **Combined**      | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Corporation**        | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Pliant**       | ** ** |
| ** **                          | ** ** | **(Parent Only)** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Corporation**  | ** ** |
| NET SALES                           |       | $                      | 234,492    |             | $          | 16,474            |       | $                | 36,906     |             | $          | (10,836 | ) | $ | 277,036 |   |
| COST OF SALES                       |       | 204,022                |       | 15,302           |       | 32,930            |       | (10,836          | )          | 241,418          |       |
| GROSS PROFIT                        |       | 30,470                 |       | 1,172            |       | 3,976             |       | —           |       | 35,618           |       |
| OPERATING  EXPENSES                 |       | 16,234                 |       | 1,476            |       | 2,816             |       | —           |       | 20,526           |       |
| OPERATING INCOME                    |       | 14,236                 |       | (304             | )          | 1,160             |       | —           |       | 15,092           |       |
| INTEREST EXPENSE                    |       | (19,647                | )          | (147             | )          | (1,165            | )          | —           |       | (20,959          | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (3,023                 | )          | —           |       | —            |       | 3,023            |       | —           |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 3,231                  |       | (1,743           | )          | (1,526            | )          | —           |       | (38              | )          |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | (5,203                 | )          | (2,194           | )          | (1,531            | )          | 3,023            |       | (5,905           | )          |
| INCOME TAX  EXPENSE (BENEFIT)       |       | 407                    |       | (742             | )          | 40                |       | —           |       | (295             | )          |
| NET INCOME  (LOSS)                  |       | $                      | (5,610     | )                | $          | (1,452            | )          | $                | (1,571     | )                | $          | 3,023 |   | $ | (5,610 | ) |

 

Seenotes to condensed consolidated financial statements.

 

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**PLIANT CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING INCOME STATEMENT**

**FOR THE SIX MONTHS ENDED JUNE 30, 2008 (INTHOUSANDS) (UNAUDITED)**

 
| ** **                          | ** ** | **Pliant**             | ** ** | **Combined**     | ** ** | **Combined**      | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Corporation**        | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Pliant**       | ** ** |
| ** **                          | ** ** | **(Parent Only)** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Corporation**  | ** ** |
| NET SALES                           |       | $                      | 493,247    |             | $          | 21,120            |       | $                | 81,263     |             | $          | (22,522 | ) | $ | 573,108 |   |
| COST OF SALES                       |       | 452,577                |       | 20,994           |       | 73,328            |       | (22,522          | )          | 524,377          |       |
| GROSS PROFIT                        |       | 40,670                 |       | 126              |       | 7,935             |       | —           |       | 48,731           |       |
| OPERATING  EXPENSES                 |       | 36,745                 |       | 878              |       | 3,889             |       | —           |       | 41,512           |       |
| OPERATING INCOME  (LOSS)            |       | 3,925                  |       | (752             | )          | 4,046             |       | —           |       | 7,219            |       |
| INTEREST EXPENSE                    |       | (43,079                | )          | (211             | )          | (2,169            | )          | —           |       | (45,459          | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (1,602                 | )          | —           |       | —            |       | 1,602            |       | —           |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 2,524                  |       | (813             | )          | (1,557            | )          | —           |       | 154              |       |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | (38,232                | )          | (1,776           | )          | 320               |       | 1,602            |       | (38,086          | )          |
| INCOME TAX  EXPENSE (BENEFIT)       |       | 13                     |       | (967             | )          | 1,113             |       | —           |       | 159              |       |
| NET INCOME  (LOSS)                  |       | $                      | (38,245    | )                | $          | (809              | )          | $                | (793       | )                | $          | 1,602 |   | $ | (38,245 | ) |

 

Seenotes to condensed consolidated financial statements.

 

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**PLIANT CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING INCOME STATEMENT**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007 (INTHOUSANDS) (UNAUDITED)**

 
| ** **                          | ** ** | **Pliant**             | ** ** | **Combined**     | ** ** | **Combined**      | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Corporation**        | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Pliant**       | ** ** |
| ** **                          | ** ** | **(Parent Only)** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Corporation**  | ** ** |
| NET SALES                           |       | $                      | 456,725    |             | $          | 32,670            |       | $                | 71,036     |             | $          | (23,003 | ) | $ | 537,428 |   |
| COST OF SALES                       |       | 395,954                |       | 30,423           |       | 64,000            |       | (23,003          | )          | 467,374          |       |
| GROSS PROFIT                        |       | 60,771                 |       | 2,247            |       | 7,036             |       | —           |       | 70,054           |       |
| OPERATING  EXPENSES                 |       | 39,386                 |       | 2,020            |       | 4,503             |       | —           |       | 45,909           |       |
| OPERATING INCOME                    |       | 21,385                 |       | 227              |       | 2,533             |       | —           |       | 24,145           |       |
| INTEREST EXPENSE                    |       | (39,504                | )          | (294             | )          | (2,335            | )          | —           |       | (42,133          | )          |
| EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (3,028                 | )          | —           |       | —            |       | 3,028            |       | —           |       |
| OTHER INCOME  (EXPENSE)—Net    |       | 3,319                  |       | (1,741           | )          | (1,265            | )          | —           |       | 313              |       |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | (17,828                | )          | (1,808           | )          | (1,067            | )          | 3,028            |       | (17,675          | )          |
| INCOME TAX  EXPENSE (BENEFIT)       |       | 230                    |       | (518             | )          | 671               |       | —           |       | 383              |       |
| NET INCOME  (LOSS)                  |       | $                      | (18,058    | )                | $          | (1,290            | )          | $                | (1,738     | )                | $          | 3,028 |   | $ | (18,058 | ) |

 

Seenotes to condensed consolidated financial statements.

 

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**PLIANT CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**

**FOR THE SIX MONTHS ENDED JUNE 30, 2008 (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         |       | $                      | (3,162     | )                | $          | 622               |       | $                | 986        |             | $          | — |   | $ | (1,554 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                        |       |                   |       |             |       |              |       |             |       |             |       |
| Capital  expenditures for plant and equipment                 |       | (13,864                | )          | (641             | )          | (232              | )          | —           |       | (14,737          | )          |
| Net cash used in  investing activities                        |       | (13,864                | )          | (641             | )          | (232              | )          | —           |       | (14,737          | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                        |       |                   |       |             |       |              |       |             |       |             |       |
| Repayment of  capital leases and other, net                   |       | (511                   | )          | —           |       | (53               | )          | —           |       | (564             | )          |
| Loans (to) from  affiliates                                   |       | 5,000                  |       | —           |       | (5,000            | )          | —           |       | —           |       |
| Borrowings under  Revolving Credit Facilities                 |       | 13,000                 |       | —           |       | 5,000             |       | —           |       | 18,000           |       |
| Net cash  provided by/(used in) financing activities          |       | 17,489                 |       | —           |       | (53               | )          | —           |       | 17,436           |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |       | (463                   | )          | (43              | )          | 135               |       | —           |       | (371             | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS         |       | —                 |       | (62              | )          | 836               |       | —           |       | 774              |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD           |       | 7                      |       | 3,609            |       | 3,642             |       | —           |       | 7,258            |       |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                 |       | 7                      |       | 3,547            |       | 4,478             |       | —           |       | 8,032            |       |
|                                                               |            |                        |            |                  |            |                   |            |                  |            |                  |            |  |  |  |  |  |

 

Seenotes to condensed consolidated financial statements.

 

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**PLIANT CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007 (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         |       | $                      | 22,109     |             | $          | 6,122             |       | $                | 1,894      |             | $          | — |   | $ | 30,125 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                        |       |                   |       |             |       |              |       |             |       |             |       |
| Capital  expenditures for plant and equipment                 |       | (20,927                | )          | (1,566           | )          | (1,548            | )          | —           |       | (24,041          | )          |
| Net cash used in  investing activities                        |       | (20,927                | )          | (1,566           | )          | (1,548            | )          | —           |       | (24,041          | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                        |       |                   |       |             |       |              |       |             |       |             |       |
| Payment of  financing fees                                    |       | (1,559                 | )          | —           |       | —            |       | —           |       | (1,559           | )          |
| Repayment of  capital leases and other, net                   |       | (255                   | )          | —           |       | (35               | )          | —           |       | (290             | )          |
| Proceeds from  revolving debt                                 |       | (10,000                | )          | —           |       | 10,000            |       | —           |       | —           |       |
| Loans (to)/from  affiliates                                   |       | 10,000                 |       | —           |       | (10,000           | )          | —           |       | —           |       |
| Proceeds from  issuance of preferred stock                    |       | 157                    |       | —           |       | —            |       | —           |       | 157              |       |
| Restricted cash  deposits with trustee                        |       | (22,593                | )          | —           |       | —            |       | —           |       | (22,593          | )          |
| Issuance of  senior subordinated notes                        |       | 24,000                 |       | —           |       | —            |       | —           |       | 24,000           |       |
| Net cash  provided by/(used in) financing activities          |       | (250                   | )          | —           |       | (35               | )          | —           |       | (285             | )          |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |       | (932                   | )          | (2,087           | )          | 1,712             |       | —           |       | (1,307           | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS         |       | —                 |       | 2,469            |       | 2,023             |       | —           |       | 4,492            |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF THE PERIOD           |       | 7                      |       | 1,005            |       | 3,187             |       | —           |       | 4,199            |       |
| CASH AND CASH  EQUIVALENTS, END OF THE PERIOD                 |       | $                      | 7          |             | $          | 3,474             |       | $                | 5,210      |             | $          | — |   | $ | 8,691 |   |

 

Seenotes to condensed consolidated financial statements.

 

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

** **

Thepurpose of this section is to discuss and analyze material change in ourconsolidated financial condition, liquidity and capital resources and resultsof operations as of the second quarter of 2008. 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-K forthe year ended December 31, 2007. 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 for Forward-LookingInformation” below and elsewhere in this report.

 

**General**

** **

Wemanufacture and sell a variety of plastic films and flexible packagingproducts. Our products serve customers in a variety of flexible packagingmarkets, including the food and beverage, retail, pharmaceutical, medical,personal care, household, industrial and agricultural film markets, as well assecondary packaging and non-packaging end use markets. We manufacture theseproducts at 21 facilities located in the United States, Australia, Canada,Germany and Mexico. The Company has four operating segments: Engineered Films,Industrial Films, Specialty Films and Printed Products, each discussed herein.

 

**Overview**

** **

On April 23,2008, the Company’s Board of Directors approved management’s proposed $15Million Cost Reduction Program & $80 Million Debt Reduction Program(the “Program”), designed to modernize equipment, improve efficiencies andreduce operating costs.

 

TheProgram includes closing four of the Company’s facilities: South Deerfield, MA,Dalton, GA, Harrington, DE and Newport News, VA.  These closings willimprove operating scale at the remaining plants and reduce fixed costs. The effect would be a projected increase to EBITDA of $8.9 million followingcompletion of all plant closures.  A reduction in workforce at otherfacilities and corporate is also planned which will increase projected EBITDAby an additional $6.1 million on an annual basis following completion of thereduction in workforce.

 

TheProgram also includes an $80 million debt reduction plan which will come from aproposed $40 million sale/leaseback of facilities program, a planned $9 millionoperating lease on certain equipment, and a $31 million inventory reductionprogram.  The $80 million debt reduction program coupled with the $15million of EBITDA improvements mentioned above will help bring the Company’spro-forma leverage to 6.5x upon completion of the Program.

 

Sincethe Program began, the Company leased $4.5 million worth of equipment in thesecond quarter of 2008 and completed a sale-leaseback for $12.1 million worthof equipment in the third quarter of 2008. The Company has reduced inventory by25.6 million pounds during the second quarter of 2008 which equated to $17.5million. If resin prices had remained constant with the March 31, 2008pricing, inventory would have been reduced by $28.6 million. At August 14,2008 the Company has completed 43% of its debt reduction program, whichaccounts for the $15 million reduction in borrowings under our Revolving CreditFacilities during the second quarter of 2008. The Company will continue todeleverage by leasing selected equipment, completing sale-leasebacks ofbuildings and equipment, and reducing inventory levels.

 

TheCompany will incur costs to close the four plants previously mentioned,including asset impairments on decommissioned assets, $5.4 million of whichhave been recorded in the second quarter of 2008.  The Company willexplore the option of selling this equipment.  There will also be aprojected net cash cost of $24.9 million, made up of $19.6 million ofinfrastructure and relocation capital expenditures and $15.1 million oftermination benefits and plan implementation costs, net of $9.8 million of cashexpected to be received for selling the four facilities.

 

Werecorded sales of $287.6 million in the second quarter of 2008 compared tosales of $277.0 million in the second quarter of 2007. Second quarter 2008sales measured in pounds were 203.1 million, which represents a 6.2% decreasefrom the second quarter of 2007 and is discussed in further detail in the “OperatingSegment Review” presented later in this section. Average sales price for thethree months ended June 30, 2008 was $1.416 per pound as compared to$1.279 per pound for the three months ended June 30, 2007 and is discussedin further detail in the “Operating Segment Review” presented later in thissection.

 

ProForma EBITDA was $18.9 million for the second quarter of 2008, compared to$27.5 million for the second quarter of 2007. Pro Forma EBITDA reflects incomefrom continuing operations adjusted for interest expense, income taxes,depreciation,

 

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amortization,reorganization costs, and restructuring charges. We believe that Pro FormaEBITDA information enhances an investor’s understanding of our ability tosatisfy principal and interest obligations with respect to our indebtedness andto utilize cash for other purposes. This information eliminates items that haveless bearing on our operating performance, thereby highlighting trends in ourcore business which may not otherwise be apparent when relying solely on GAAPfinancial measures. It also provides an assessment of controllable expenseswhich are indicators for management to determine whether current spendingdecisions need to be adjusted in order to meet financial goals and achieveoptimal financial performance. The decrease in Pro Forma EBITDA of $8.6 millionreflects $5.1 million in compression between our average selling price and rawmaterial costs, $2.6 million impact from reduced volumes, $0.4 million inincremental freight, packaging, utilities and other energy related costs,offset by lower selling, general and administrative and research anddevelopment costs. During the second quarter of 2008, the Company also reported$5.2 million in additional costs associated with the Company’s decision toreduce inventory levels. If resin prices and inventory quantities would haveremained constant with the first quarter levels, our Pro Forma EBITDA wouldhave been $29.2 million.

 

**MarketConditions**

** **

Theprimary raw materials used in the manufacture of most of our products arepolypropylene resin, polyethylene resin and PVC resin. The long-term prices ofthese materials are primarily a function of the price of crude oil and naturalgas which have increased significantly in recent years. During the secondquarter of 2008, many of our suppliers announced dramatic price increases forthese raw materials, for which the delay in our ability to pass along throughselling price increases, negatively affected our operating results. To combatthis impact, we have moved more customers to programs which allow us to passthrough cost increases in raw materials on a more timely basis in the future.

 

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**Resultsof Operations**

** **

Thefollowing table sets forth net sales, operating expenses, and operating income,and such amounts as a percentage of net sales, for the three and six monthsended June 30, 2008 and 2007 (dollars in millions).

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | ** **                                          | ** ** | **% of**                                     | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                           | ** ** | **$**                                               | ** ** | **Sales**                                         | ** ** | **$** | ** ** | **Sales** | ** ** | **$** | ** ** | **Sales** | ** ** | **$** | ** ** | **$** | ** Sales** | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  Sales                           |       | $                                                   | 287.6      |                                              | 100.0      | % | $ | 277.1 |   | 100.0 | % | $ | 573.1 |   | 100.0 | % | $ | 537.4 |   | 100.0 | % |
| Cost  of sales                       |       | 265.4                                               |       | 92.3                                              | %          | 241.5 |   | 87.2 | % | 524.4 |   | 91.5 | % | 467.4 |   | 87.0 | % |
| Gross  profit                        |       | 22.2                                                |       | 7.7                                               | %          | 35.6 |   | 12.8 | % | 48.7 |   | 8.5 | % | 70.0 |   | 13.0 | % |
| Selling,  general and administrative |       | 15.8                                                |       | 5.5                                               | %          | 16.5 |   | 5.9 | % | 31.2 |   | 5.5 | % | 36.0 |   | 6.7 | % |
| Research  and development costs      |       | 1.6                                                 |       | 0.6                                               | %          | 3.1 |   | 1.1 | % | 3.4 |   | 0.6 | % | 6.2 |   | 1.2 | % |
| Restructuring  and other costs       |       | 6.6                                                 |       | 2.3                                               | %          | 0.5 |   | 0.2 | % | 6.7 |   | 1.1 | % | 1.9 |   | 0.3 | % |
| Reorganization  costs                |       | 0.1                                                 |       | —                                            | %          | 0.4 |   | 0.2 | % | 0.1 |   | — | % | 0.7 |   | 0.1 | % |
| Other  operating costs               |       | 0.1                                                 |       | —                                            | %          | — |   | — | % | 0.1 |   | — | % | 1.1 |   | 0.2 | % |
| Total  operating expenses            |       | 24.2                                                |       | 8.4                                               | %          | 20.5 |   | 7.4 | % | 41.5 |   | 7.2 | % | 45.9 |   | 8.5 | % |
| Operating  income                    |       | $                                                   | (2.0       | )                                                 | (0.7       | )% | $ | 15.1 |   | 5.4 | % | $ | 7.2 |   | 1.3 | % | $ | 24.1 |   | 4.5 | % |
|                                      |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ThreeMonths Ended June 30, 2008 Compared with the Three Months Ended June 30,2007**

** **

*NetSales*

* *

Netsales increased by $10.5 million, or 3.8%, to $287.6 million for the secondquarter of 2008 from $277.1 million for the three months ended June 30,2007. The increase resulted primarily from a 10.7% increase in our averageselling prices reflecting increases in raw material prices partially offset bydecreases in sales volume of 6.2%. See “Operating Segment Review” below for adetailed discussion of sales volumes and selling prices by segment anddivision.

 

*GrossProfit*

* *

Grossprofit decreased by $13.4 million to $22.2 million for the second quarter of2008 primarily due to compression between our average selling price and rawmaterial cost caused by raw material increases at rates greater than ourability to pass along increases to customers. See “Operating Segment Review”below for a detailed discussion of the margin variances by segment.

 

*Selling,General and Administrative*

* *

Selling,general and administrative expenses were $15.8 million for the second quarterof 2008, compared to $16.5 million for the second quarter of 2007. Thisdecrease of $0.7 million is primarily attributable to lower sales commissionsand lower employee bonus and pension related costs.

 

*Researchand Development Costs*

* *

Researchand development costs were $1.6 million for the second quarter of 2008,compared to $3.1 million in the second quarter of 2007. This decrease of $1.8million is primarily attributable to the impact of the Company’s 2007 and 2008reduction in workforce initiatives and less government contract relatedresearch and development activities.

 

*Restructuringand Other Costs*

* *

Restructuringand other costs of $6.6 million for the second quarter of 2008 relate primarilyto $5.4 million in fixed asset impairments related to plant closings, andrestructuring cost related to workforce reductions and plant closing costs of$0.7 million and $0.5 million, respectively. Restructuring and other costs of $0.5 million for the second quarter of2007 relate primarily to the reorganization of our Canadian operations andincludes severance and other plant closing costs of $0.2 million associatedwith the closure of our Barrie, Ontario facility, $0.1 million of other plantclosing costs associated with the closure of our Langley, British Columbiafacility and $0.1 million associated with the restructuring of the Canadianmanagement and sales teams.

 

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*ReorganizationCosts*

* *

Reorganization costs were $0.1 million for the secondquarter of 2008, compared to $0.4 million for the second quarter of 2007.Reorganization costs in the second quarter of 2008 reflect court costs and inthe second quarter of 2007 included $0.4 million of court costs and legal and otherprofessional fees.

 

*Operating Income (Loss)*

* *

Duringthe second quarter of 2008, the Company recorded an operating loss of $2.0million compared to operating income of $15.1 million for the second quarter of2007.

 

*InterestExpense*

* *

Interestexpense on current and long-term debt increased by $2.0 million to$23.0 million for the second quarter of 2008, from $21.0 million for thesecond quarter of 2007. This increase is primarily attributable to increasedpayment-in-kind interest on our Amended 2004 Notes and interest on our 2007Notes, offset in part by a decrease in interest on our capital leases.

 

*IncomeTax Expense*

* *

Incometax expense for the second quarter of 2008 reflected benefits of $0.6 millionon pretax losses of $19.5 million, compared to income tax benefits of lessthan $0.3 million on pretax losses of $5.9 million for the same period in 2007.Income tax benefits related to net operating losses in the United States wereoffset by a valuation allowance as the realization of these tax benefits is notcertain. The income tax expense in the statements of operations primarilyreflects foreign income taxes. In July 2006, the FASB issued Statement ofFinancial Accounting Standards Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes–An Interpretation of FASB Statement No.109*(“FIN48”). The income tax benefits in the second quarter of 2008 reflect thedecrease in our FIN 48 reserves due to the favorable resolution of income taxexaminations during the quarter.

 

**SixMonths Ended June 30, 2008 Compared with the Six Months Ended June 30,2007**

 

*NetSales*

 

Netsales increased by $35.7 million, or 6.6%, to $573.1 million for the six monthsended June 30, 2008 from $537.4 million for the six months ended June 30,2007. The increase was primarily due to a 12.1% increase in our average sellingprice resulting primarily from increases in our raw material prices, offset inpart by a 4.9% decrease in sales volume.  See “Operating Segment Review”below for a detailed discussion of sales volumes and selling prices by segmentand division.

 

*GrossProfit*

 

Grossprofit decreased by $21.3 million to $48.7 million for the six months ended June 30,2008, from $70.0 million for the six months ended June 30, 2007. Thisdecrease was due primarily to compression between our average selling pricesand raw material costs caused by raw material increases at rates greater thanour ability to pass along increases to customers. See “Operating Segment Review”below for a detailed discussion of the margin variances by segment.

 

*Selling,General and Administrative Costs*

 

Selling,general and administrative costs were $31.2 million for the six months ended June 30,2008, compared to $36.0 million for the first six months of 2007. This decreasewas primarily due to lower sales commissions, employee bonuses and pensionrelated costs.

 

*Researchand Development Costs*

 

Researchand development costs were $3.4 million for the six months ended June 30,2008, compared to $6.2 million for the six months ended June 30, 2007.This decrease of $2.4 million is primarily attributable to the Company’s 2007and 2008 reduction in workforce initiatives and lower government contractrelated research and development activities.

 

*Restructuringand Other Costs*

 

Restructuringand other costs were $6.7 million for the six months ended June 30, 2008,compared to $1.9 million for the six months ended June 30, 2007.Restructuring and other costs in 2008 related primarily to $5.4 million infixed asset impairments

 

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related to plantclosings, and restructuring costs related to workforce reductions and plantclosings costs of $0.8 million and $0.5 million, respectively.  Restructuring and other costs in 2007 relateprimarily to the reorganization of our Canadian operations and includeseverance cost of $0.2 million associated with the closure of our Barrie,Ontario facility, $0.1 million of other plant closing costs in both our Barrie,Ontario and Langley, British Columbia facilities and $1.3 million associatedwith restructuring of our Canadian management and sales teams.

 

*ReorganizationCosts*

 

Reorganizationcosts were $0.1 million for the six months ended June 30, 2008, comparedto $0.7 million for the six months ended June 30, 2007. Reorganizationcosts in both 2008 and 2007 relate primarily to legal and other professionalfees.

 

*OtherOperating Costs*

 

Otheroperating costs for 2008 include a $0.1 million fixed asset impairment and in2007 included $1.1 million of costs associated with the issuance of the Company’sSeries M Preferred Stock, par value $.01 per share (“Series MPreferred Stock”) pursuant to the Company’s Fourth Amended Joint Plan ofReorganization.

 

*OperatingIncome*

 

Duringthe six months ended June 30, 2008, the Company recorded operating incomeof $7.2 million, compared to operating income of $24.1 million for the sixmonths ended June 30, 2007.

 

*InterestExpense*

 

Interestexpense on current and long-term debt was $45.5 million for the six monthsended June 30, 2008, compared to $42.1 million for the six months ended June 30,2007. This increase of $3.4 million between periods is primarily due toincreased payment-in-kind interest on our Amended 2004 Notes and increasedinterest on our 2007 Notes, partially offset by lower interest on our RevolvingCredit Facilities and capital leases.

 

*OtherIncome (Expense)*

 

Otherincome was $0.2 million for the six months ended June 30, 2008, comparedto other income of $0.3 million for the six months ended June 30, 2007.Other income in both years includes interest income, transaction gains andother insignificant amounts.

 

*IncomeTax Expense*

 

Income tax expense for the six months ended June 30,2008 was $0.2 million on pretax losses from continuing operations of $38.1million as compared to $0.4 million on pretax losses from continuing operationsof $17.7 million for the same period in 2007. Income tax benefits related tonet operating losses in the United States were offset by a valuation allowanceas the realization of these tax benefits is not certain. Therefore, the incometax expense in the statements of operations primarily reflects foreign incometaxes. The income tax expenses for the six months ended June 30, 2008reflect the decrease in our FIN 48 reserves due to the favorable resolution ofincome tax examinations during the period.

 

**OperatingSegment Review**

** **

*General*

* *

Weevaluate the performance of our operating segments based on net sales(excluding inter-company sales) and segment profit. The segment profit reflectsincome from continuing operations adjusted for interest expense, income taxes,depreciation, amortization, reorganization, restructuring and other costs andother non-cash charges (principally the impairment of goodwill, intangibleassets and fixed assets). For more information on our operating segments,including a reconciliation of segment profit to income before taxes, see Note 8to the condensed consolidated financial statements included in this report.

 

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Wehave four operating segments: Engineered Films, Industrial Films, SpecialtyFilms and Printed Products. A summary of segment information (in millions ofdollars) is as follows:

 
| ** **                                | ** ** | **Engineered  Films** | ** ** | **Industrial  Films** | ** ** | **Specialty  Films** | ** ** | **Printed  Products** | ** ** | **Corporate /  Other** | ** ** | **Total**  | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-----------------------|------------|----------------------|------------|-----------------------|------------|-----------------------------|------------|------------|------------|
| **Three months ended June 30, 2008** |       |                  |       |                  |       |                 |       |                  |       |                        |       |       |       |
| Total  net sales                          |       | $                     | 81.3       |                  | $          | 91.3                 |       | $                     | 54.3       |                        | $          | 59.6       |       | $ | 1.1 |   | $ | 287.6 |   |
| Segment  profit                           |       | 5.9                   |       | 7.3                   |       | 3.5                  |       | 3.9                   |       | (4.6                        | )          | 16.0       |       |
| ** **                                |       |                  |       |                  |       |                 |       |                  |       |                        |       |       |       |
| **Three months ended June 30, 2007** |       |                  |       |                  |       |                 |       |                  |       |                        |       |       |       |
| Total  net sales                          |       | $                     | 89.3       |                  | $          | 78.2                 |       | $                     | 49.3       |                        | $          | 56.2       |       | $ | 4.0 |   | $ | 277.1 |   |
| Segment  profit                           |       | 13.3                  |       | 9.0                   |       | 6.1                  |       | 3.6                   |       | (4.5                        | )          | 27.5       |       |
| ** **                                | ** ** | ** **            | ** ** | ** **            | ** ** | ** **           | ** ** | ** **            | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Six months ended June 30, 2008**   |       |                  |       |                  |       |                 |       |                  |       |                        |       |       |       |
| Total  net sales                          |       | $                     | 168.8      |                  | $          | 173.5                |       | $                     | 113.3      |                        | $          | 114.6      |       | $ | 2.9 |   | $ | 573.1 |   |
| Segment  profit                           |       | 13.8                  |       | 14.7                  |       | 9.3                  |       | 7.9                   |       | (9.5                        | )          | 36.2       |       |
| ** **                                |       |                  |       |                  |       |                 |       |                  |       |                        |       |       |       |
| **Six months ended June 30, 2007**   |       |                  |       |                  |       |                 |       |                  |       |                        |       |       |       |
| Total  net sales                          |       | $                     | 173.1      |                  | $          | 151.4                |       | $                     | 97.3       |                        | $          | 107.5      |       | $ | 8.1 |   | $ | 537.4 |   |
| Segment  profit                           |       | 26.7                  |       | 17.1                  |       | 12.1                 |       | 7.5                   |       | (12.2                       | )          | 51.2       |       |

 

**Threemonths ended June 30, 2008 compared with the three months ended June 30,2007**

** **

*EngineeredFilms*

* *

*Net sales.* Net salesin Engineered Films decreased by $8.0 million, or 9.0%, to $81.3 million forthe quarter ended June 30, 2008 from $89.3 million for the second quarterof 2007. This change was due to a decrease in sales volume of 17.1% which waspartially offset by an increase in average selling prices of 9.8%.

 

*Segment profit.* TheEngineered Films segment profit was $5.9 million for the quarter ended June 30,2008, as compared to $13.3 million for the same period in 2007. This $7.9million decrease in segment profit was primarily due to a decrease in salesvolume and compressed gross profit as a result of higher raw material costscombined with customer pricing pass through lags with contractual accounts.This decrease is partially offset by favorable manufacturing efficiencies andselling, general and administrative costs.

 

*IndustrialFilms*

* *

*Net sales.* The netsales of our Industrial Films segment increased by $13.1 million, or 16.7%, to$91.3 million for the quarter ended June 30, 2008 from $78.2 millionfor the quarter ended June 30, 2007. This increase is primarily due to a2.9% increase in sales volume in both our PVC and Stretch Films markets, and a13.5% increase in average selling prices.

 

*Segment profit.* TheIndustrial Films segment profit was $7.3 million for the quarter ended June 30, 2008,as compared to $9.0 million for the same period in 2007. This $1.7 millionreduction in segment profit was primarily due to compressed gross profit as aresult of higher raw material costs combined with customer pricing pass throughlags with contractual accounts. This decrease is partially offset by improvedmanufacturing efficiencies and favorable selling, general and administrativecosts.

 

*SpecialtyFilms*

* *

*Net sales.*  Net sales in our Specialty Films segmentincreased $5.0 million, or 10.1%, to $54.3 million for the quarter ended June 30,2008 from $49.3 million for the quarter ended June 30, 2007. This increasewas primarily due to an increase in our average selling prices of 10.6%.

 

*Segment profit.* TheSpecialty Films segment profit was $3.5 million for the quarter ended June 30,2008, as compared to $6.1 million for the quarter ended June 30, 2007.This $2.6 million reduction in segment profit was primarily due to higher rawmaterial, freight, and utility costs and was partially offset by favorableoperational and selling, general and administrative costs. Additionally, as aresult of the announced plant restructuring plan, a number of products havebeen relocated from this segment.

 

*PrintedProducts*

* *

*Net sales.* Net salesof our Printed Products segment increased $3.4 million or 6.0% to $59.6 millionfor the quarter ended June 30, 2008 from $56.2 million for the quarterended June 30, 2007. This increase was due to a positive sales mix and an 

 

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increasein average selling prices of 10.8% because of higher raw material costs,partially offset by lower sales volume of 4.4% between periods primarily in ourtortilla bag markets.

 

*Segment profit.* The PrintedProducts segment profit was $3.9 million for the quarter ended June 30,2008, as compared to $3.6 million for the quarter ended June 30, 2007.This $0.3 million increase is primarily due to a positive sales mix impact, anda reduction in headcount, offset in part by higher raw material costs.

 

*Corporate/Other*

* *

Corporate/Otherincludes our corporate headquarters and our research and development facilityin Newport News, Virginia. Unallocated corporate expenses were $4.6 million forthe quarter ended June 30, 2008, versus $4.5 million for the quarter endedJune 30, 2007.

 

**Sixmonths ended June 30, 2008 compared with the six months ended June 30,2007**

** **

*EngineeredFilms*

* *

*Net sales.* Net salesin Engineered Films decreased by $4.3 million, or 2.5%, to $168.8 million forthe six months ended June 30, 2008 from $173.1 million for the six monthsended June 30, 2007. This change was due to a 12.2% reduction in salesvolume, primarily in our converter and industrial film markets, offset with anincrease in average selling prices of 11.2% principally due to raw materialprice increases.

 

*Segment profit.* TheEngineered Films segment profit was $13.8 million for the six months ended June 30,2008, as compared to $26.7 million for the same period in 2007. This $12.9million decrease in segment profit was primarily due to a 12.2% decrease insales volume and compressed gross profit as a result of higher raw materialcosts combined with customer pricing pass through lags with contractualaccounts. This decrease is partially offset by favorable manufacturingefficiencies and selling, general and administrative costs.

 

*IndustrialFilms*

* *

*Net sales.* The netsales of our Industrial Films segment increased by $22.1 million, or 14.6%, to$173.5 million for the six months ended June 30, 2008 from $151.4million for the six months ended June 30, 2007. This increase is primarilydue to an increase in average selling prices of 16.2% principally due to rawmaterial price increases, offset by a 1.4% reduction in sales volume, primarilyin our Stretch Films market.

 

*Segment profit.* TheIndustrial Films segment profit was $14.7 million for the six months ended June 30, 2008,as compared to $17.1 million for the same period in 2007. This $2.4 millionreduction in segment profit was primarily due to compressed gross profit as aresult of higher raw material costs combined with customer pricing pass throughlags with contractual accounts. This decrease is partially offset by improvedmanufacturing efficiencies and favorable selling, general and administrativecosts.

 

*SpecialtyFilms*

* *

*Net sales.*  Net sales in our Specialty Films segmentincreased $16.0 million, or 16.4%, to $113.3 million for the six months ended June 30,2008 from $97.3 million for the six months ended June 30, 2007. Thisincrease was due to increased sales volume of 5.2% and an increase in ouraverage selling prices of 10.7% because of higher raw material costs.

 

*Segment profit.* TheSpecialty Films segment profit was $9.3 million for the six months ended June 30,2008, compared to $12.1 million for the same period in 2007. This $2.8 milliondecline primarily occurred in the second quarter of 2008 due to higher rawmaterial costs, freight, and utility costs and was partially offset byfavorable operational and selling, general and administrative costs. Themajority of contracts have resin pass through dynamics that delay resin costrecovery. In addition, this segment continues to work to offset customerproduct platform changes that result in volume and profit loss.

 

*PrintedProducts*

* *

*Net sales.* Net salesof our Printed Products segment increased $7.1 million or 6.6% to $114.6million for the six months ended June 30, 2008 from $107.5 million for thesix months ended June 30, 2007. This increase was due primarily to anincrease in average selling prices of 10.7% caused by higher raw materialcosts, in addition to a change in market mix and a decrease in volume of 3.7%,largely in the tortilla bag market.

 

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*Segment profit.* The PrintedProducts segment profit was $7.9 million for the six months ended June 30,2008, as compared to $7.5 million for the same period in 2007. This $0.4million increase was due to a positive product price mix, a reduction inheadcount, offset in part by higher raw material costs.

 

*Corporate/Other*

* *

Corporate/Otherincludes our corporate headquarters and our research and development facilityin Newport News, Virginia. Unallocated corporate expenses decreased by $2.7million to $9.5 million for the six months ended June 30, 2008, from $12.2million for the six months ended June 30, 2007. This decrease was primarilydue to a reduction in employee bonus and pension related costs, and to lowerU.S. Government funded research and development activity.

 

**Liquidity and Capital Resources**

 

*Sources of Capital*

 

Ourprincipal sources of funds have been cash generated by our operations andborrowings under Revolving Credit Facilities. In addition, we have raised fundsthrough the issuance of senior secured and subordinated notes and the sale ofshares of preferred stock.

 

As of June 30,2008 our outstanding long-term debt consisted of $136.6 million in borrowingsunder our Revolving Credit Facilities, $359.4 million of our Amended 2004Notes, $7.8 million of our 2004 Notes, $250.0 million of our 2003Notes, $24.0 million of our 2007 Notes and $12.6 million in capital leases.

 

*Current Credit Facilities*

 

On July 18,2006, we entered into our Revolving Credit Facilities. The Revolving CreditFacilities provide up to $200 million of total commitments, subject to theborrowing base described below and a required minimum availability amount of atleast $10 million. The Working Capital Credit Agreement includes a $20 millionletter of credit sub-facility, with letters of credit reducing availabilitythereunder, and each of the Revolving Credit Facilities includes sub-limits forloans to certain of our foreign subsidiaries which are borrowers under theRevolving Credit Facilities. The Revolving Credit Facilities were funded on July 18,2006, and replace our prior credit facilities. They are secured by afirst-priority security interest in substantially all of the Company’s andcertain of its subsidiaries’ assets, although the administrative agent has asecond-priority 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.

 

TheRevolving Credit Facilities will mature on the earlier of (a) July 18,2011 or (b) one month prior to the respective maturity dates of theCompany’s senior secured notes if these senior secured notes have not beenrefinanced in full: May 15, 2009 with respect to the Company’s 2004 Notesand Amended 2004 Notes, and August 15, 2009 with respect to the Company’s2003 Notes. The interest rates for all loans other than those made to ourGerman subsidiary range from, in the case of alternate base rate loans, thealternate 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 Eurodollarloans, LIBOR plus 2.75% to LIBOR plus 3.00%, in each case depending on theamount of available credit. The interest rates for loans made in connectionwith the loans to our German subsidiary are, in the case of alternate base rateloans, the alternate base rate plus 5.00% and, in the case of Eurodollar loans,LIBOR plus 6.00%. The commitment fee for the unused portion of the RevolvingCredit Facilities is 0.375% per annum.

 

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Theborrowing base under the Working Capital Credit Agreement is based on specifiedpercentages of the Company’s and its subsidiaries’ party thereto eligibleaccounts receivable, finished goods inventory, work-in-process and raw materialinventory minus certain reserves. The borrowing base under the Fixed AssetCredit Agreement is based on specified percentages of the Company’s and itssubsidiaries’ party thereto eligible real estate valued at market value plusthe net orderly liquidation value of eligible machinery and equipment minuscertain reserves.

 

TheRevolving Credit Facilities contain covenants that limit our ability, subjectto certain exceptions, to, among other things, incur or guarantee additionalindebtedness, issue preferred stock or become liable in respect of anyobligation to purchase or redeem stock, create liens, merge or consolidate withother companies, change lines of business, make certain types of investments,sell assets, enter into certain sale and lease-back and swap transactions, paydividends on or repurchase stock, make distributions with respect to certaindebt obligations, enter into transactions with affiliates, restrict dividendsor other payments from our subsidiaries, modify corporate and certain materialdebt documents, cancel certain debt, or change our fiscal year or accountingpolicies.

 

TheRevolving Credit Facilities also require the Company to comply with a fixedcharge coverage ratio of 1.00 to 1.00 for the first year of the facility and of1.10 to 1.00 thereafter; provided, that such coverage ratio shall only applyduring periods in which the amount of availability is and remains less than $20million for a specified number of days. Once the amount of availabilityincreases and remains above $20 million for a specified number of days, suchcoverage ratio becomes inapplicable. In addition, the amount of availabilityunder the Revolving Credit Facilities must not be less than $10 million at anytime. The loans will automatically become immediately due and payable withoutnotice upon the occurrence of an event of default involving insolvency orbankruptcy of the Company or any of its subsidiaries. In addition, upon theoccurrence and during the continuation of any other event of default under theRevolving Credit Facilities, by notice given to the Company, the administrativeagent may, and if directed by the Required Lenders (as defined in the RevolvingCredit Facilities) must, terminate the commitments and/or declare alloutstanding loans to be immediately due and payable.

 

TheWorking Capital Credit Agreement is secured by a first-priority securityinterest in substantially all our inventory, receivables and deposit accounts,capital stock of, or other equity interests in, our existing and futuredomestic subsidiaries and first-tier foreign subsidiaries, investment propertyand certain other assets of the Company and its subsidiaries and asecond-priority security interest in fixed assets of the Company and itssubsidiaries party to the Working Capital Credit Agreement. The Fixed AssetCredit Agreement is secured by a first-priority security interest in the fixedassets of certain foreign subsidiaries of the Company and a second-prioritysecurity interest in capital stock of the fixed asset borrowers and theirsubsidiaries.

 

As of June 30,2008, we had borrowings of $136.6 million under our $200 million RevolvingCredit Facilities, and availability of $53.6 million subject to our borrowingbase limitations and $5.9 million in outstanding letters of credit, along with$8.0 million in cash.

 

*Amended 2004 Notes*

 

TheAmended 2004 Notes accreted from the date of issuance through July 18,2006 at the rate of 115/8%, compounded semiannually on each June 15 and December 15.On July 18, 2006, the interest rate on the Amended 2004 Notes wasincreased to 11.85% per annum. The Amended 2004 Notes are secured on afirst-priority basis by a security interest in the First-Priority NoteCollateral and on a second-priority basis by a security interest in theSecond-Priority Note Collateral. The Amended 2004 Notes are guaranteed by ourexisting and future domestic restricted subsidiaries and certain foreignsubsidiaries.

 

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TheAmended 2004 Notes mature on June 15, 2009. On or after June 15,2008, we may redeem some or all of the Amended 2004 Notes at the followingredemption prices (expressed as percentages of the sum of the principal amount,plus accrued and unpaid interest); 105.813% if redeemed on or after June 15,2008 and prior to December 15, 2008; 102.906% if redeemed on or after December 15,2008 and prior to June 15, 2009; and 100.000% if redeemed on June 15,2009.

 

*2004 Notes*

 

The2004 Notes mature on June 15, 2009 and are secured by a first-prioritysecurity interest in the First-Priority Note Collateral and a second-prioritysecurity interest in the Second-Priority Note Collateral. The 2004 Notes areguaranteed by our existing and future domestic restricted subsidiaries andcertain foreign subsidiaries.

 

The2004 Notes accreted at the rate of 111/8% from the date of issuance until July 18, 2006, onwhich date the interest rate was increased by .225% to 11.35%. 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 began accruing at the rateof 11.35% 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,commencing on June 15, 2007. The 2004 Notes mature on June 15, 2009.

 

On orafter June 15, 2008, the Company may redeem some or all of the 2004 Notesat the following redemption prices (expressed as percentages of the sum of theprincipal amount plus accrued and unpaid interest): 102.781% if redeemedon or after June 15, 2008 and prior to June 15, 2009; and 100.00% ifredeemed on June 15, 2009.

 

*2003 Notes*

 

The2003 Notes accrue interest from the date of issuance through maturity at therate 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 rankequally with our existing and future senior debt and rank senior to ourexisting and future subordinated indebtedness. The 2003 Notes are secured by asecond-priority security interest in both the First-Priority Note Collateraland the Second-Priority Note Collateral. The 2003 Notes are guaranteed by someof our subsidiaries.

 

On orafter June 1, 2008, we may redeem some or all of the 2003 Notes at thefollowing redemption prices (expressed as a percentage of principal amount),plus accrued and unpaid interest: 102.781% if redeemed prior to June 1,2009; and 100% if redeemed on or after June 1, 2009.

 

*2007Notes*

 

The2007 Notes accrue interest from the date of issuance at the rate of 18% perannum until maturity on July 15, 2012 with interest payable semiannuallyon each January 15 and July 15, to holders of record of the 2007Notes on the immediately preceding January 1 or July 1. Pursuant tothe 2007 Note Indenture, the Company may redeem the 2007 Notes in whole or inpart at the applicable redemption price, which in each of the first four yearsis equal to a de-escalating premium over par, plus accrued and unpaid interestto the 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 ofthe Company (as defined in the 2007 Note Indenture). The 2007 Note Indenturedoes not provide for a sinking fund with respect to the 2007 Notes. The 2007Note Indenture contains customary provisions that may result in an event ofdefault, after notice and expiration of a cure period in certain circumstances,and acceleration of the indebtedness thereunder, including failure to timelypay principal and interest on the 2007 Notes or comply with the covenants set forthin the 2007 Note Indenture.

 

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The2007 Note Indenture contains various covenants including, among other things,covenants limiting the incurrence of indebtedness and restricting certainpayments, limiting restrictions on the ability of subsidiaries to makedistributions to the Company, limiting sales of assets and subsidiary stock andthe entry into affiliate transactions, as well as provisions governing mergerand change of control transactions. The Company may be required under certaincircumstances to offer to repurchase 2007 Notes with the proceeds of certainasset sales. Upon a change of control transaction, holders of 2007 Notes mayrequire the Company (subject to certain exceptions) to repurchase 2007 Notes ata purchase price equal to 101% of the principal amount plus accrued and unpaidinterest. The 2007 Notes will automatically become due and payable withoutnotice upon the occurrence of an event of default involving insolvency orbankruptcy of the Company or certain of its subsidiaries. In addition, upon theoccurrence and during the continuation of any other event of default under the2007 Note Indenture, by notice given to the Company, the 2007 Note Trustee orholders of at least 25% in principal amount of the 2007 Notes may declare theprincipal of and accrued and unpaid interest on all the 2007 Notes to beimmediately due and payable.

 

*PreferredStock*

 

As of June 30,2008 we have outstanding 334,894 of $1,000 per share stated value of Series AARedeemable Preferred Stock par value $.01 per share (the “Series AAPreferred Stock”), which accrues dividends at the rate of 13% per annum. The Series AAPreferred Stock is convertible into our common stock, par value $.01 per share(the “Common Stock”). If the Series AA Preferred Stock has not beenredeemed or repurchased by July 18, 2011, the holders of at least 40% ofthe outstanding shares of Series AA Preferred Stock shall have the rightto cause all of the outstanding class of Series AA Preferred Stock to beconverted into a number of shares of Common Stock equal to 99.9% of the numberof fully diluted shares of Common Stock after giving effect to such conversion(excluding shares, if any, of Common Stock issued to stockholders of the otherparty to a merger qualifying for the Merger Exception as that term is definedin our Amended and Restated Certificate of Incorporation).

 

Inaddition, we have 8,000 shares of Series M Preferred Stock outstanding. 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. The Series MPreferred Stock vests monthly over a 36 month period; or upon a liquidationevent, redemption, or public offering; or upon certain terminations ofemployment within a limited period before an accelerated vesting event.

 

*NetCash Provided by/Used in Operating Activities*

* *

Netcash used in operating activities was $1.6 million for the six months ended June 30,2008, as compared to cash provided by operations of $30.1 million for the sixmonths ended June 30, 2007. This difference between years reflects areduction in earnings from operations before non-cash charges of $10.0 million,an increase in working capital requirements of $13.7 million, and an $8.0million decrease in other long term liabilities. For the six month period endedJune 30, 2008, receivables increased $19.2 million due to higher averageselling price, which in turn were driven by higher resin prices. During thesame period, inventories increased by $6.5 million, again due to higher resinprices as quantities on hand were down between periods, and accounts payableincreased $11.2 million. Accrued liabilities decreased $11.1 million from December 31,2007 due to $16.4 million in interest payments and the payout of the 2007 yearend bonus accruals. For the six months ended June 30, 2007, receivablesincreased $5.7 million due to higher average selling prices, while inventorydeclined $2.5 million as the impact of the company’s inventory reductionprograms exceeded resin price increases. Accounts payable increased $12.7million during the same six month period due to resin price increases, whileaccrued liabilities decreased $14.4 million due to payment of $13.9 million ininterest and the 2006 year end bonuses. Long term liabilities decreased $3.2million during the six months ended June 30, 2008 due to $2.1 million inpension plan contributions and adjustments and a $1.1 million decrease to taxreserves, as compared to an increase of $4.9 million in 2007 related toadditional tax reserves associated with the adoption of FIN 48.

 

*Net Cash Used in Investing Activities*

* *

Netcash used in investing activities decreased $9.3 million to $14.7 million forthe six months ended June 30, 2008, from $24.0 million for the six monthsended June 30, 2007 due to decreased capital expenditures of $9.3 million.

 

*NetCash Provided by/Used in Financing Activities*

* *

Netcash provided by financing activities was $17.3 million for the six monthsended June 30, 2008, as compared to net cash used in financing activitiesof $0.3 million for the six months ended June 30, 2007. Activity for thesix months ended June 30, 

 

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2008,includes borrowings under Revolving Credit Facilities of $18.0 million andrepayments of capital leases and other of $0.6 million. Activity for the sixmonths ended June 30, 2007, includes $24.0 million of proceeds from theissuance of  the Company’s 2007Subordinated Notes, $0.2 million in proceeds from sale of the Company’s Series MPreferred Stock, offset by $22.6 million in cash deposited with a trustee forthe repurchase of the Company’s outstanding 2006 Subordinated Notes, $1.6million of payments of financing fees and $0.3 million in payments of capitalleases.

 

***Liquidity***

** **

Asof June 30, 2008, we had $136.6 million of borrowings under our $200million Revolving Credit Facilities, and $53.6 million of availability subjectto our borrowing base limitations and $5.9 million in outstanding letters ofcredit, along with $8 million in cash.

 

Asof June 30, 2008, we had $8.0 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 borrowingsexceed certain amounts. In addition, the terms of our indentures currentlylimit the amount we may borrow under our Revolving Credit Facilities.

 

*Capital Expenditures*

 

Ourtotal capital expenditures were approximately $41 million in 2006,$43 million in 2007 and are expected to be $25-30 million in 2008. Theseexpenditures are focused on projects to lower operating costs, add capacity forhigh value products, expand research and development programs, and bring newinnovative products to market.

 

*Raw Material Costs*

 

Changesin raw material costs can significantly affect the amount of cash provided byour operating activities, which can affect our liquidity. Over the past twoyears, we have experienced a period of extreme uncertainty with respect to resinsupplies and prices. High crude oil and natural gas pricing have had asignificant impact on the price and supply of resins. During the same period,many major suppliers of resin have announced price increases to cover theirincreases in feedstock costs. While the prices of our products generallyfluctuate with the prices of resins, certain of our customers have contractsthat limit our ability to pass the full cost of higher resin pricing through toour customers immediately. Further, competitive conditions in our industry maymake it difficult for us to sufficiently increase our selling prices for allcustomers to reflect the full impact of increases in raw material costs. Ifthis period of high resin pricing continues, we may be unable to pass on the entireeffect of the price increases to our customers, which would adversely affectour profitability and working capital. In addition, further increases in crudeoil and natural gas prices could make it difficult for us to obtain an adequatesupply of resin from manufacturers affected by these factors.

 

**ContractualObligations**

** **

***There have been no material changes inour contractual obligations and commercial commitments since December 31,2007 arising 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 Operations,” are in “forward-looking statements” withinthe meaning 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 often not historical facts but instead represent onlyexpectations, estimates and projections regarding future events. These statementsare not guarantees of 

 

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futureperformance and involve known and unknown risks, uncertainties and other factorsthat are difficult to predict and may cause actual results to be materiallydifferent. These factors include, but are not limited to, the following:

 

·  general economic and businessconditions, particularly an economic downturn;

·  continuing losses and chargesagainst earnings resulting from restructuring or the impairment of assets;

·  industry trends;

·  risks of high leverage andany increases in our leverage;

·  interest rate increases;

·  changes in our ownershipstructure;

·  changes in the Company’scomposition of operating segments;

·  raw material costs andavailability, particularly resin;

·  the timing and extent towhich we pass through resin cost changes to our customers;

·  the loss of any of our keysuppliers;

·  changes in credit terms fromour suppliers;

·  competition;

·  the loss of any of our majorcustomers;

·  changes in demand for ourproducts;

·  new technologies;

·  changes in distributionchannels or competitive conditions in the markets or countries where weoperate;

·  costs of integrating anyfuture acquisitions;

·  loss of our intellectualproperty rights;

·  foreign currency fluctuationsand devaluations and political instability in our foreign markets;

·  changes in our businessstrategy or development plans;

·  availability, terms anddeployment of capital;

·  availability of qualifiedpersonnel;

·  labor relations and workstoppages;

·  increasesin the cost of compliance with laws and regulations, including environmentallaws and regulations; and

·  otherrisks and uncertainties listed or described from time to time in reports weperiodically 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 1A of the Company’s Annual Report on Form 10-K for the year ended December 31,2007. If one or more of these risks or uncertainties materialize, or ifunderlying assumptions prove incorrect, our actual results may vary materiallyfrom those expected, estimated or projected.

 

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

** **

Thediscussion below describes changes in our market risks since December 31,2007. For additional information regarding our exposure to certain marketrisks, see Part II, Item 7A “Quantitative and Qualitative DisclosuresAbout Market Risk” in the Company’s Annual Report on Form 10-K for theyear ending December 31, 2007.

 

Weare exposed to various interest rate and resin price risks that arise in thenormal course of business. We regularly evaluate the advisability of enteringinto interest rate hedging agreements to manage interest rate market risks andcommodity hedging agreements to manage resin market risks. However, significantincreases in interest rates or the price of resins could adversely affect ouroperating margins, results of operations and ability to service ourindebtedness.

 

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**Interest**

 

Our Revolving CreditFacility is at a variable rate of interest. An increase of 1% in interest rateswould result in an additional $1.4 million of annual interest expense based onour Revolving Credit Facility balance of $136.6 million as of June 30,2008.

 

**RawMaterial Costs**

 

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, we entered into commodity collaragreements to manage resin market risks. At June 30, 2008, we did not haveany commodity collar agreements outstanding. Prices for resin increaseddramatically during the fourth quarter of 2007 and the first six months of2008.

 

**ExchangeRates and Foreign Currency**

 

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.

 

**OtherMarket Risk**

 

We are exposed to creditlosses in the event of nonperformance by the counterparty to a financialinstrument to which we are a party. We anticipate, however, that each of thecounterparties to the financial instruments to which we are a party will beable to fully satisfy its obligations under the contract.

 

**ITEM4T.**            CONTROLS ANDPROCEDURES

** **

**Evaluation of DisclosureControls and Procedures**

** **

The effectiveness of ouror any system of disclosure controls and procedures is subject to certainlimitations, including the exercise of judgment in designing, implementing andevaluating the controls and procedures, the assumptions used in identifying thelikelihood of future events, and the inability to eliminate misconductcompletely. As a result, there can be no assurance that our disclosure controlsand procedures will detect all errors or fraud. By their nature, our or anysystem of disclosure controls and procedures can provide only reasonableassurance regarding management’s control objectives.

 

Under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, we evaluated the design and operation ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, or the “ExchangeAct”) as of June 30, 2008. On the basis of this review, our management,including our Chief Executive Officer and Chief Financial Officer, concludedthat our disclosure controls and procedures are designed, and are effective, togive reasonable assurance that the information required to be disclosed by usin reports that we file under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC and to ensure that information required to be disclosed in thereports filed or submitted under the Exchange Act is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, in a manner that allows timely decisions regarding requireddisclosure.

 

**Changes in InternalControls**

** **

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) ofthe Exchange Act) during the second quarter of 2008.

 

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.

 

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**PART II. OTHERINFORMATION**

** **

**ITEM1.**                    LEGALPROCEEDINGS

** **

None.

 

**ITEM1A.**           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, 2007.

 

**ITEM2.**                    UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

** **

None.

 

**ITEM3.**                    DEFAULTSUPON SENIOR SECURITIES

** **

None.

 

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

 

The Annual Meeting ofStockholders was held on May 15, 2008. There were 97,348 shares of Common Stockand 334,894 shares of Series AA Preferred Stock issued and outstanding onthe record date and entitled to vote at the annual meeting.  The followingmatters were voted upon:

 

1.    Theindividuals named below were elected as directors by the holders of 63,550shares of Common Stock present in person or by proxy at the meeting. Sharesvoted were as follows:

 
| **NAME**                  | ** ** | **FOR** | ** ** | **WITHHELD** | ** ** |
|---------------------------|------------|---------|------------|--------------|------------|
| Harold C. Bevis |       | 63,525  |       | 25           |       |
| John D. Bowlin            |       | 63,544  |       | 6            |       |
| Edward A.  Lapekas        |       | 63,530  |       | 20           |       |
| Stephen V.  McKenna       |       | 63,544  |       | 6            |       |
| Timothy J. Walsh          |       | 63,544  |       | 6            |       |

 

2.    Theindividuals named below were elected as directors by the holders of 265,872 ofSeries AA Preferred Stock present in person or by proxy at the meeting. Sharesvoted were as follows:

 
| **NAME**        | ** ** | **FOR** | ** ** | **WITHHELD** | ** ** |
|-----------------|------------|---------|------------|--------------|------------|
| Eugene I. Davis |       | 263,167 |       | 2,705        |       |
| David G. Elkins |       | 263,167 |       | 2,705        |       |

 

**3.    Theappointment of Ernst & Young LLP, as our independent auditors for theyear ending December 31, 2008, was ratified by the shares of Common Stockpresent in person or by proxy at the meeting. There were 63,548 votes for, 0votes against, ratification. There were 2 abstentions.**

** **

**ITEM 5.**                 OTHERINFORMATION

** **

None.

 

**ITEM6.**                    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.

 

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**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                            | PLIANT CORPORATION                             |
|----------------------------|------------------------------------------------|
|                       |                                           |
|                       |                                           |
|                       | /s/ THOMAS C.  SPIELBERGER                     |
|                       | THOMAS C. SPIELBERGER                          |
| * *                   | *Chief Financial Officer*                      |
| * *                   | *(Authorized Signatory and*                    |
| * *                   | *Principal Financial and  Accounting Officer)* |
|                       |                                           |
| Date: August 14, 2008 |                                           |

 

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**INDEXTO EXHIBITS**

 
| 10.1 |   | Employment Agreement,  dated June 11, 2008, by and between Pliant Corporation and Thomas C.  Spielberger (incorporated by reference to Exhibit 99.1 to the Current  Report on Form 8-K/A filed by Pliant Corporation on June 16, 2008).                 |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 |   | Stock Appreciation  Rights Agreement, dated June 11, 2008, by and between Pliant Corporation  and Thomas C. Spielberger (incorporated by reference to Exhibit 99.2 to  the Current Report on Form 8-K/A filed by Pliant Corporation on  June 16, 2008). |
| 10.3 |   | Amended and Restated  Employment Agreement, dated June 11, 2008, by and between Harold C.  Bevis and Pliant Corporation.                                                                                                                                               |
| 10.4 |   | Amended and Restated  Employment Agreement, dated July 11, 2008, by and between R. David Corey  and Pliant Corporation.                                                                                                                                                |
| 10.5 |   | Letter Agreement,  dated June 11, 2008, by and between Stephen T. Auburn and Pliant Corporation.                                                                                                                                                                       |
| 10.6 |   | Letter Agreement,  dated June 13, 2008, by and between Kenneth J. Swanson and Pliant  Corporation.                                                                                                                                                                     |
| 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.                                                                                                    |
| 99.1 |   | Reconciliation of  income from continuing operations before income taxes and EBITDA(R) or  Segment Profit and Pro-Forma  

Adjusted EBITDA.                                                                                                                            |

 

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